Waterdrop Inc. (WDH) Earnings Call Transcript & Summary

Good morning, everyone. This is [ Tracy Li ] from Waterdrop Investor Relations. It's my pleasure to welcome everyone to Waterdrop's Second Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. Please note that discussion today will contain forward-looking statements made under the safe harbor provision of U.S. Private Securities and the Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but not limited to, those outlined in our public filings with the SEC. The company does not undertake any obligation to update any forward-looking statements, except as required under applicable law. Also, this call includes discussion of certain non-GAAP measures. Please refer to our earnings release for a reconciliation between non-GAAP and GAAP. Joining us today on the call are Mr. Shen Peng, our Founder, Chairman and CEO; Mr. Ran Wei, Director and GM of Insurance Business; Mrs. Xu Xiaoying, Head of Finance Department; and Mrs. Jasmine Lee, Corporate Secretary. We'll be happy to take some of the questions in the Mandarin line at the end of the conference call.

Good morning, everyone. This is Shen Peng. In the second quarter, we are pleased to see the integration of AI with the insurance and health care sectors began to deliver satisfying results. Revenue growth accelerated further with quarterly revenue reaching CNY 840 million, up 23.9% year-on-year. Powered by AI, the company has improved operational efficiency significantly, driving an 85.9% year-on-year increase in operating profit and lifting the operating margin by 3.9 percentage points. Our InsurTech business leveraged technological innovation to bring inclusive protection for more users. Our Waterdrop Guardian AI application suite has been rolled out across customer acquisition, sales, underwriting, customer service, quality assurance and other key process. With that, FYP in Q2 increased 80% year-over-year and productivity per capita improved significantly. Waterdrop Medical Crowdfunding platform has also upgraded its risk assessment system by integrating large language model capabilities in case authenticity and transparency. As of 30 June, it has raised Medical Crowdfunding medical funds for 3.54 million patients. With the market rebounding, the number of patients enrolled in our E-Find Platform also reached a historical high with nearly 1,000 patients were enrolled in the second quarter of 2025, where operations remain robust and improving. We keep improving our AI technology stack. Our self-development multi-agent collaboration framework can be reused a lot. They help us quickly build different types of agent chatbot and let AI agents collaborate within milliseconds. Thanks to this, we can provide more stable AI agents to handle more and more complex situations. We also created proxy reward models and added the GRPO algorithm. This allows agents to break away from fixed scripts and change their communication strategies according to what customers do. To fix the slow responding issue when making AI agent calls, we use a distributed P-value cache. It significantly speed up the inference of the first token. As of June 30, the company has submitted 60 patent applications related to large language models with 9 of them filed outside international. Our AI-driven business innovations were recently included in Harvard Business School's case collection, receiving recognition from the world renowned academic institutions. Based on these technologies, we will continue to expand the use of AI in our insurance and health care sectors, constantly creating value for our business and the industry. The company also actively engaged in social return initiatives. As of June 30, 2025, our Waterdrop Welfare Platform has collaborated with 118 public charitable organizations. It has initiated over 15,500 public welfare projects. In July, it participated in the relief efforts for the flood disease in North China, providing assistance to the affected people through monetary and material donations. This year marks our ninth anniversary of the company's established. We are very grateful for the continuous support from our shareholders and investors over time. The company has actively conducted share repurchase in the open market for 4 consecutive years. To keep repaying shareholders' trust, our Board recently approved 2 new initiatives. On one hand, we are pleased to announce that our Board has recently approved an enhanced cash dividend of $10.9 million, representing a 50% increase over the previous dividend. The dividend per ordinary share was $0.03 and the dividend per ADS will be $0.03. The Board has also authorized a fifth annual share repurchase plan. Since our first share repurchase program was launched in 2021, we have repurchased approximately 55.7 million ADS for $109 million as of August 31, 2025. Looking ahead, we will build on the current performance and make further efforts to achieve the business goals for the year of 2025 in the medium and long-term business development, striving to create more value for our stakeholders. Next, I will now pass to Ran Wei to introduce the development of insurance business in Q2.

Thank you, Shen Peng. In Q2, our Insurance business delivered robust growth. The first year premium reached CNY 3.2 billion, up 80.2% year-over-year and 53.1% quarter-over-quarter. Insurance-related revenue was about CNY 740 million, up 28.7% year-over-year and 12.2% quarter-over-quarter. Operating margin improved to 23.1%, up by near 2 percentage points year-over-year, driving our -- driven by our deeper AI integration. For [ short-term ] products, we increased investment in customer acquisition and technology, representing FYP to CNY 2.43 billion, up 95% year-over-year and 62.1% quarter-over-quarter. In customer acquisition, we continuously tap into AI capabilities, iterate on user outreach and recommendation AI models and drive continuous breakthrough in customer acquisition from the public domain. We are increasingly applying AI tools to enhance the production speed and the quantity of marketing materials to support front-end customer acquisition efforts. At the same time, we utilized AI to facilitate better conversion of different scenarios. For example, our new AI Pro insurance model on the app and the mini program use large language model for real-time matching and convert nearly 50% better than the traditional advertisement slot. In the voice service scenario, AI medical insurance experts continue to improve efficiency. In Q2, it assisted in achieving a 155% increase in the scale of insurance premiums compared to the Q1 and plan to continue expanding in the second half of the year. In WeCom scenario, AI medical insurance experts launched as of end of March and by June lifted FYP per lead 58% compared to that in May. On products, we expanded our portfolio. We have new long-term medical plans such as [indiscernible], Xin Yi Bao, which requires no health declaration and guarantee renewal for 5 years. We also rolled out Huiminbao, a mid- to high-end plan with 0 deductible and nationwide eligibility and version 6.0 of our maternity insurance, “Jiehaoyun. We are the first in the market to accept expected mother with pre-existing conditions. Our products for people with preexisting conditions contributing a quarterly premium of CNY 300 million, a year-on-year increase of 146.6%. In terms of long-term insurance, we actively explore the efficiency improvement of AI tools for online sales consultants and planners, which contributed to the long-term FYP reaching CNY 770 million, a year-on-year increase of 45.4% and sequential increase of 30.5%. With the assistance of AI tools, the productivity of traditional online sales team has achieved a double-digit growth both year-on-year and quarter-on-quarter and Shenlanbao independently contributed FYP of CNY 210 million. We've given online sales consultants and planners and insurance product knowledge-based query tool called Life Planner Copilot. It's based on large language model. The model base has information on about 7,000 insurance products. It helps consultants search for relevant insurance contract terms in real time. In total, it has handled 300,000 insurance product-related consultations. After months of internal testing, we launched KEYI.AI at the end of August. Think of it as an insurance-focused DeepSeek. It delivers expert underwriting answers for every in-force product with industry-leading accuracy. And we plan to open the platform to our partners to accelerate AI adoption across the industry value chain. Besides tools for agents, we have launched an AI super presales assistant, WeCom. It can receive customer consultation 24/7. It can figure out what customers' insurance needs and their intention to buy insurance on its own, match suitable products based on customers' situations and make an appointment with the most appropriate salesmen for them. According to the data since its launch, the AI assistant is more efficient than human assistance and has effectively improved the team's work efficiency. On the supply side of long-term products, we keep pushing health insurance innovation. We kept refining our critical units line with EV health declaration and introduced the cost-effective [indiscernible] unit plan and rolled out no health declaration income protection insurance product. Besides disability insurance crossed over -- crossed CNY 100 million in quarterly FYP for the first time, underscoring a strong user acceptance. Since its rollout at the end of March, our AI customer service agent has scaled rapidly, a voice support alongside text. In June alone, it handled 250,000 service sessions, leading first contact resolution rate. Online insurers now achieved 100% AI coverage. Meanwhile, in Q2, our AI quality control assistance boosted Q&A efficiency by 94% compared with traditional manual way. This concludes the insurance business update. Now I will hand over to our Board Secretary, Jasmine, to review our -- review Q2 progress in Waterdrop Crowdfunding and health care sectors.

Thank you, Ran Wei. As of the end of June 2025, around 480 million people cumulatively donated CNY 70 billion to about 3.54 million patients through our Waterdrop Medical Crowdfunding platform. Guided by [indiscernible], we again increased R&D investment on our personal medical crowdfunding risk controls. For case level risk, large language model metrics can now identify 15 high-risk scenarios like suspected identities, abnormal spending or ethical violations. It does this by analyzing every word in the campaign's contact, comments and hidden clues, which greatly improves the detective accuracy. For fund level risk, a dynamic monitoring algorithm checks the diagnosed time line, commercial insurance payouts and the fundraising speed. If anything wrong with fund, it will automatically limit or pause the campaign. Then many review will be carried out within minutes. To address malicious promotion activities, we have developed an abnormal behavior recognition model. We incorporated crucial factors such as donation conversion rate, information dissemination patterns and assess characteristics. This model shows the top accuracy in the industry. This model can detect and stop the malicious campaign in real time. On 27 May, we partnered with Guangzhou Civil Affairs Bureaucracy to launch the Waterdrop Co-Help. It is the first project under our new designation as a government endorsed platform that integrates social and public welfare resources. This project ensures that welfare resources can accurately reach the target population by integrating the system with [indiscernible]. At the same time, in place like Guangzhou Co-Help space and hospitals, the platform keeps improving its serviceability and actively responds to and explore the government enterprise collaboration innovation model. Turning to our healthcare business. We continue to advance on steady and upward trajectory. Digital clinical trial business has entered a phase of rapid scale-up, coupled with efficiency gains. E-Find platform expanded its collaboration to 198 pharmaceutical and contract research organizations. Meanwhile, we initiated service for 114 new programs. The number of patients enrolled about reached -- also reached a historic high with 999 patients enrolled in Q2 of 2025, representing a 34.2% year-over-year revenue growth. Our digital omnichannel marketing business also accelerated. We renewed our 3-year contract with a leading global multinational pharmaceutical. Through the application of AI in patient services and health education management, we achieved a 105% increase in productivity per capita, representing a substantial enhancement in our service capability. Looking ahead, we will deepen our LLM capabilities and algorithmic precision to unlock further growth as healthcare digitalization vision accelerates. Now I will hand over to Xu Xiaoying, our Head of Finance Department to discuss our financial performance in this quarter.

Thank you, Jasmine. Hello, everyone. I will now walk you through our financial highlights for the second quarter of 2025. Before I go into details, please be reminded that all numbers quoted here will be in RMB, and please refer to our earnings release for detailed information on our financial performance on both the year-over-year and quarter-over-quarter basis, respectively. On the basis of steady growth in the previous quarter, the company has further achieved significant year-on-year and quarter-on-quarter growth in both revenue and profit this quarter. As Shen Peng and Jasmine just mentioned, the further development of company's AI application will improve the efficiency of our business operation in multiple aspects, including customer acquisition, sales, service and quality control, providing strong motivation for the performance growth in the second quarter. In Q2, Waterdrop achieved remarkable financial results with both -- with the total revenue amounted to RMB 838 million, representing a year-on-year increase of 23.9% and a quarter-on-quarter increase of 11.2%. By segment, the insurance business contributed RMB 739 million, showing a year-on-year increase of 28.7%. The corresponding service fees generated RMB 67.4 million, remaining stable on year-on-year. The digital clinical trial solutions yielded RMB 27.7 million with a year-on-year increase of 34.2%. Meanwhile, the company has been making its operation more efficient. In second quarter, the total operating costs and expenses were around RMB 741 million, which is about 18.7% higher than the same period last year as the growth rate of the costs and expenses was lower than that of the revenue. This quarter, the operating cost was RMB 416 million, a 30.5% increase from last year. This was mainly because the cost of referral and service fee went up by about RMB 73.4 million this quarter. Also during this quarter, the company made additional efforts in Medical Crowdfunding to assist and have more users. Moreover, as the company has been enhancing its AI capability to attract more users during this quarter, it acquired users while consuming both efficiency and user experience. The sales and marketing expenses amounted to RMB 199 million, representing a 26.3% increase compared to last year. This is primarily due to an increase of RMB 44.3 million in marketing expenses for third-party traffic channels. General and administrative expenses decreased by 21.9% year-over-year to RMB 73.4 million for the second quarter of 2025. This was primarily because the company tightened its operational control and the allowance for credit losses were RMB 13.4 million less than the last year. The R&D expenses were RMB 51.9 million, remaining stable for the same period of last year. In the future, we will continue to pool resources to accomplish major cost adjust -- the internal structure of R&D expenses and allocate more resources to the AI capabilities building. In terms of the operating profit in Q2, the company's operating profit reached RMB 97 million, showing a high year-on-year growth of 85.9%. The operating profit margins of the company as a whole and the insurance business has both further improved. Net profit attributable to the company's ordinary shareholders reached RMB 140 million, up 58.7% year-over-year. As of 30 June 2025, we held RMB 3.4 billion in cash reserves with operating cash flow remaining -- operating cash flow remained positive, providing a solid foundation for continued growth and strategic investment. In conclusion, Waterdrop's excellent performance in this quarter further demonstrates its robust operational capability and the effective synergy among its diverse business segment. Looking ahead, we will continue to leverage technology and AI to expand our user base. At the same time, we will optimize our operations to enhance efficiency, thereby facilitating the stable growth of business revenue and profits. Additionally, we will persist in creating long-term value for shareholders and society. And ladies and gentlemen, with that, we will conclude today's conference call. We do thank you for joining. Have a good time. [Statements in English on this transcript were spoken by an interpreter present on the live call.]