Waterdrop, Inc. (NYSE:WDH) Q4 2023 Earnings Conference Call March 26, 2024 8:00 AM ET

Company Participants

Peng Shen - Chairman & Chief Executive Officer

Conference Call Participants

Unidentified Company Representative

Good morning, everyone. This is Tracy Lisang [ph], Investor Relations, required to welcome everyone to Waterdrop's Fourth Quarter and Fiscal Year 2023 Earnings Conference Call. As a reminder, today's conference call is being recorded.

Please note the discussion today will contain forward-looking statements within the Safe Harbor provisions of the U.S. Private Securities and the Litigation Reform Act of 1985. Forward-looking statements are subject to risks and uncertainties and the comps actual results differ materially from our current expectations. [indiscernible] 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 and applicable law. Also, this call includes discussion of certain non-GAAP measures. Please refer to our earnings release for a compilation between non-GAAP and GAAP. Joining us today on the call are Peng Shen, our Founder, Chairman and CEO; Mr. Yang Bang Kobander [ph], Director, SVP and GM of the International business; [indiscernible], and we'll be happy to take some of the questions in Mandarin line at the end of the conference call.

Peng Shen

Hello, everyone. This is Shen Peng. Let's talk about our industry development first. Looking back in 2023, thanks to the various economy stimulus targets, the Chinese economy shows a gradually stable and recovery trend. With setback [ph], the regulation of the personal insurance industry remains cautious, as it is continue to evolve towards high-quality development.

So as we saw challenges and opportunities, we firmly relate with the clear guidance and gradual implementation of new regulation policies that helped in vision stability and sustainability of the industry will improve further in the future. Market participates with brand and technological advantages are more likely to stand out, as such, we will build up new quality productivities with improved technologies and innovative business models, leading our industry to its transformation and upgrading.

We'll feel the confidence about this. In terms of financial performance, in Q4 of 2023, the company continues to uphold its entrepreneurial spirit and pursue healthy business development, which was adapted by stable and resilient financial results. Total revenue reached about 659 million since Q1 of 2022, we have continuously recorded stable profitability for every quarter.

In the fourth quarter, the front line performance further improved with GAAP net profit attributable to the company reaching about 59.1 million, representing a 61% Q-on-Q [ph] growth. Official year 2023, the GAAP net profit attributed to the company is about 167 million. In the meantime, we saw consistent cash inflow from operations, building up our cash balance. As of the end of 2023, the cash, cash equivalents and short-term investments totaled about 3.39 billion, an 8% increase from last quarter.

Our MI cash reserves strengthened our foundation for carrying out steady business development plan; good enough for our long-term growth initiatives and enabling us to embrace industry changes with confidence and technology competitiveness. From a business perspective, in Q4, all business segments maintained stable and healthy development, continuously solidifying our leading position in the industry.

For life insurance market place despite difficult industry situation, we actively developed the new products and models with our insight and [indiscernible] and continuously generated steady growth. We remain committed to our [indiscernible] user first service promote. Continuously particularly in development of multi-level medical support system. We consistently improved its transparency and operational efficiency while in the segment was reduced compared to last quarter.

We continuously enhance its service capability through business upgrade. In Q4, the number of empowering clients increased significantly, making good growth in our cooperation with both domestic and foreign comfortable [ph] company. For the full year, this segment recorded year-over-year revenue growth of nearly 70% [ph].

For R&D, as a technology-driven company, we maintained substantial investment in R&D and applied some of those in AI large land remodel, OM patents. In the fourth quarter, our stock development LLM were artificial and completed internet test and embraced external application to intermodal cases which brought efficiency improvements throughout the entire insurance services.

Now, I will touch upon our charity and ESG initiative. We do actively incorporate ESG principles into various effect of our operations, environmental protection, talent in the community investment tightly integrated ESG values with our corporate DNA. The latest ESG ratings involves Waterdrop in China's leading ESC institution tribute [ph]. It shows that our ESG ratings have recently been upgraded to A, the leading score among players in the insurance sector.

So, without charity perform, we remain gallant with our CSR. We [indiscernible] medical support information system, which have affected most assessment security critical unit assurance, medical assistance and charity in finance risks [ph]. Upon its launch in August 2023, it has assisted the government in establishing provincial level medical support platform. By year-end, nearly [indiscernible] on this platform. These projects have been honored with the [indiscernible].

In December 2023, in a response to against an earthquake, [indiscernible] and emergency team launched fundraising project to [indiscernible]. And I would also like to update everyone with our actions taken in the capital market. Regarding the share buyback, as of the end of February 2024. The company has cumulatively repurchased about 39.7 million on open market at a total nearly 88.8 million which affirms our confidence in our business value and its long-term perfect. Furthermore, we repurchased shares will be used for ESOP to motivate our challenging employees. Moreover, Waterdrop continues to uphold our commitment to our shareholders; our Board of Directors have approved a special cash dividend signed to a whole of about $15 million, $3 million with $0.04 per ADS [ph].

On the healthy financial performance of the company and its commitment to shareholder value. The company is pleased to bring in effect it’s first dividend program, and we will try to continue to return value to shareholders in the future. This is a recap of our development in Q4 [indiscernible] our business outlook within the industry.

Looking into 2024, our strategies are -- for insurance metrics base business, we were here to use at first the core principals committing to providing the back-end service to emerging new leaders. Meanwhile, we would develop more customized, better useful money -- and that is the money insurance product through technological innovation to target various [indiscernible].

For medical performance, we are continuously take advantage of our [indiscernible] technological capabilities to ensure sustainable development while fulfilling CSR and ESG [ph]. For eFan [ph] platform, we will continue to leverage capabilities to our advantage actually employ more invasive models which will definitely increase our network communication and create a new growth engine for our long-term.

With abundant cash reserve, the company will continue to stay in cooperation and investment opportunities around insurance and health care sectors. As for technology, we will accelerate technological retirement by enhancing our AI capability and to the core technological note, which is for the long-term development based on nearly 8 years of the business accumulation, our self-developed LLM has significantly improved internal efficiency and with a further [indiscernible].

Now I will pass [indiscernible].

Unidentified Company Representative

In the fourth quarter, the growth of personal insurance financing industry is very still down [indiscernible] efforts on new and valid equation and the long-term development and continuously optimize operations. Meanwhile, we actively explored new product offering and platforms expanding customer acquisition channels gaining information for advanced high-quality business segment.

In the fourth quarter, FRP reached RMB1.53 billion. Insurance-related income reached RMB588 million, and operating profit reached RMB128 million. For the full year of 2023, the FYP reached about RMB7.11 billion [ph]. Insurance related income reached about RMB2.34 billion and operating profit reached RMB528 million. In focus of our FRP of short-term insurance products reached over RMB990 million. During this quarter, the company strengthened operational management for users, enhancing policy service and optimize user engagement. As a result, it increased customer certification and satisfaction.

The number of users has increased with number of policies per user increased by 2-to-1 [ph] and the renewal for the short-term insurance remains at a level of RMB0.25. We were at client users production enabling the quality and the product choice on leading channels. As a result, it increased premium by 68.6% QoQ, leading to 34.5% sequential increase in premium. As we further strengthened our business offline, the long-term insurance policy reached RMB530 million, an increase of 22.9% YoY. Among these, life insurance premiums include 115.2% YoY.

During this quarter, we improved the quality for long-term insurance users to strengthen policy shift with insurance companies to advance more capitalized [ph]. Showing the renewal of high interest products in the third quarter, we established [indiscernible] in our industry. In terms of online worker channels, we emphasized on the integrated capability of our product portfolio, ensuring a better user experience. At the same time, we cooperate with high-quality stock media channels to grow a high-quality user base.

Our offline growth response, we launched the World One [ph] program in this quarter. Offline growth rate for all high resources to better serve those high net worth customers; this initiative in cooperation with industry partners introduced a one-stop platform in comparison to insurance [indiscernible]. As well as, empowered the team of high quality workers. During the fourth quarter, we spoke to people -- the top performance agents from the team. The number of active agents increased by 108% YoY and products with parallel of long-term insurance products rose by 8% YoY.

In the fourth quarter, one of our insurance package enhanced our [indiscernible] but two things within the cooperation of our setback; including R&D, marketing and product offering. [Indiscernible] contributed the FRP of RMB102 million in the fourth quarter. The policy quality remains as the industry-leading level with a renewal rate remaining above 90%. In the fourth quarter, we continued to deepen its innovative capabilities across health insurance and saving insurance. Regarding health insurance, we launched various of innovative products to our broader user base. Among this, the [indiscernible] health insurance essentially covers all groups with chronic disease, critical disease and illnesses and minor alignment. Through our entitled environment stability users with pre-existing conditions can also buy insurance online reliably.

On top of regular health insurance plans, we also launched a product called [indiscernible]. This product is the first online long-term critical units insurance plan that covers users with pre-existing conditions. Moreover, we developed further this service and collected [indiscernible]. In terms of saving insurance products, we launched a product -- the industry first maternal and in fact insurance combined to cover the entire pregnancy period. This product has been widely recognized by users. In terms of saving insurance products, we launched a monthly life insurance product, different from the traditional endowment [ph] or other products being marketed, the monthly payment plan is more flexible for users with lower foothold. This is an important practice for us to serving diversified needs across different market segments.

Next, let me brief you about our development of AI. We apply our insurance focus on [indiscernible]. Currently we already covers more growth in the industry including conversion and rider claims perfecting customer service and more agent records, professional service such as end-to-end requirements consulting on the insurance policy terms and clearing confusions to be sorted. We can also [indiscernible] about two major applications; the AI insurance conversion and the user-aid [ph] business. Both work on EBITDA on the threshold model where AI insurance conversion acts as smart agent that is equipped with less modern technology, typical of emergency communication with customers in real-time. It can recognize insurance policy and product appearing to the customers as per their needs. It can materialize a record amount of insurance knowledge better as we believe. In this context, the AI insurance can mature including dialogue for opportunity for [indiscernible] it. And we are taking into effect the work we are saving over for an average human worked.

The second application with super system can be an entirely co-piloted systems for aiding human agents. For example, based on the conversation between AM and users, it can play a real-time professional kit for insurance reality patterns and recognize more similar products for each converting their time into fine output in a way it’s easier for users to understand and approve insuring the services that patients require in creating customer satisfaction. Concurrently, an assistant has been internally launched at every job [ph]. In the development process, we have opportunity in patterns in accumulating multiple patterns related to the last model. In the future, we will continue to hear the path of technology in the industry where the high quality insurance is similar. This concludes my AI insurance model [ph].

I will now turn it over to [indiscernible].

Unidentified Company Representative

Thank you. As of Q4 2023, accumulated total of RMB450 billion [ph] donated more than RMB52.6 billion to over 3.1 million patients; so medical [indiscernible].

I Q4, our platform established with valuable clients which provides [indiscernible] with over our offline and high operating additional further to hospitalize patients. In the first quarter, the platform service improvements placed a reminder from public to communicate the frequent blow of patients and fund reviews. The problem with revivers can run them and check the notes of any infection, and supervise the entire running process.

By continuously comparing or optimizing the process [ph] to make a the critical units of patient more accurate and efficient; we have continuously communicated in the establishment of our medical sales force unit actively responding to the amendment of charitable law in China. In Q4, the amended version of [indiscernible] have passed and incorporated in the events into its probation. Furthermore, on Dec 21 [ph], our medical support to the same project has been awarded [indiscernible] hosted by the people saving our lives.

In the fourth quarter, the eFin [ph], our clinical trial patients have maintained steady and healthy investment. We have deals worth of about RMB20.8 million [ph]. From the full year revenue, it was up by RMB100 [ph] with an increase of 6.9% YoY. In Q4, the collaboration was one measured in 67 from similar companies and CROs. We made great progress on partnering with more legitimacy during this quarter with perfectly joined with supplier leads of two of the Top 5 global entities. And finally, the kick-off projects were welcome and more projects are expected to officially launch in 2024.

Additionally, the events performed by us were operational during this refinancing with Top 3 global FCSRs [ph] and officially initiated patient recruitment. In Q4, the company signed 82 new projects. With the rapid development of various drives with R&D, the [indiscernible] in China. The infant clause platform continues to improve our ability of quality insurance. So, efficient operation and capabilities and AI-driven message enrolled record number of patients and projects. Our project categories including dermatology, respiratory, cardiovascular, immunology, diverse diseases in for line. In terms of CROs, we are acknowledging the experienced operation with perfectly secured inclusive high projects [indiscernible] providing more partners with more enhancements such as the insights of medical affairs, product management, product innovation, patient recruitment and mathematics and statistics, and so on.

Regarding patient service, the opportunity to cooperation and leading the global pool in the patient health management of chronic disease by interpreting technologies that has live models significantly enhances patients service experience and efficiencies, getting higher recognition from customers who also signed contracts with minimum permitting domestic against the entities for medical patient operations, patient application and data insights continuously expanding the number of end service scope of cooperation point.

And we continue to strive for technological empowerments while patients having done operations, the integrated AI-driven technology is well performed intelligently and in finding keywords and into action its intention from the conversation with users, allowing the patient to generate single click and reliable segments. Such an application will quickly improve the service quality compared to traditional methods. Reports can be handed over to their young ones to do special financial performance.

Unidentified Company Representative

Thank you, everyone. And we will now move to our financial highlights for the fourth quarter. 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 the detailed information on our financial performance on both, year-over-year and quarter-over-quarter basis, respectively.

For the fourth quarter, our complicated -- our commitment to presume steady and healthy development non-operating revenues decreased by 3% YoY about RMB659 million. The full year insurance revenue reached about RMB2.63 billion. Among that insurance related income amounted to about RMB2.34 billion, with a nominal decrease of 8.5% YoY. Compounding service fees amounted to RMB162 million with an increase of 4.4% YoY. Critical points of high operation income amounted to RMB100 million, representing an increase of nearly 70% [ph] YoY.

Our operating cost and expenses, on YoY basis against the last quarter we consolidated financial results of [indiscernible] with full year the operating cost and expenses increased by 13.5% YoY to RMB2.64 billion. For the full year, operating cost and incentive increased by -- for Q4 it increased by 4.3% YoY to RMB633 million. On quarter-on-quarter basis, the operating cost and incentives increased by 8.1% as the adjusted to same page to adapt to changes to -- in the external environment.

For Q4, operating cost were about RMB202 million, increased by 8.5% year-over-year, and decreased by 3.2% in the QoQ. The sequential decrease is primarily due to the decrease of RMB5.8 million in service fees. And secondly, a decrease of RMB2.3 million in the cost of patient including compounding fee for Q4 economic sense has increased by 26.9% YoY to RMB175 million [ph]. The increase was primarily due to the consolidation of [indiscernible] for generating expenses of RMB39 million. And secondly, an increase of RMB15.8 million on third-party traffic channel fee, personally offset by a decrease of RMB21.1 million in personnel costs and share-based comprehensive expenses.

On Q3 basis, it decreased by 6.9%, primarily due to a decrease of RMB11.3 million in reference marketing, personnel costs and share-based comprehensive expenses. G&A expenses were RMB96 million, a decrease of 19.1% and 16.3% YoY and QoQ. The decrease was mainly about personnel costs and share-based comprehensive expenses, and professional service fee. R&D expenses was RMB59.8 million, a decrease of 13.6% YoY and 19.1% QoQ respectively. The decrease were mainly about personnel costs and share-based comprehensive expenses.

For Q4, net profit attributed to the company was RMB59.1 million or GAAP net profit attributes for the company’s shareholders was RMB74.7 million. For Q1 2022 [ph], the company has achieved from Q1 2022 we have achieved GAAP net profit for eight consecutive quarters, as well year net income, cash, cash equivalents, and short-term investments amounted to RMB3.39 billion, an 8% increase from the last quarter. The abundant cash reserves positioned us well to focus on our long-term development priority.

To finally reward shareholders and investors’ confidence, our Board of Directors has approved a special test dividend to approximately RMB15 million with RMB0.4 for ordinary shares and RMB0.4 for ADS [ph]. The shareholders of ordinary shares and ADS [ph] of the recorded date of April 19, 2024 U.S. at same time are entitled to receive it [ph].

In summary, we made our financial guidance to the market as we achieved the profitability in each quarter of 2023. By 2024, we will continue to create shareholder value with healthy growth and profit.

And ladies and gentlemen, that will conclude today's conference call. We do thank you for joining. Have a good time.

Question-and-Answer Session

End of Q&A

The conference has now concluded. We thank you for attending today's presentation. And you may now disconnect your lines.