Waterdrop Inc. (NYSE:WDH) Q2 2024 Earnings Conference Call September 4, 2024 8:00 AM ET

Company Participants

Tracy Lisang - IR
Peng Shen - Founder, Chairman and CEO
Ran Wei - Director and GM of Insurance Business
Xu Xiaoying - Head of Finance Department
Jasmine Li - Board Secretary

Tracy Lisang

Good morning, everyone. This is Tracy Lisang with Waterdrop Investor Relations. It's my pleasure to welcome everyone to Waterdrop's Second Quarter 2024 Earnings Conference Call. All participants are in a listen-only mode in our English line. As a reminder, today's conference call is being recorded.

Please note that the discussion today will consist forward-looking statements made under the Safe Harbor provision of the 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. Certain risks and uncertainties include, but are 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 reconciliations 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; Xu Xiaoying, Head of Finance Department; and Jasmine Li, Board Secretary.

We will be happy to take some of the questions in the Mandarin line at the end of the conference call.

Peng Shen

Hello, everyone. This is Shen Peng. In May 2024, we celebrated Waterdrop's 8th anniversary. Over these years, we have continuously [indiscernible]. Particularly over the past two years, faced with a complex and changing environment, the company has proactively transformed its business. We have greater emphasis on delivering value, pursuing healthy operations and ensuring sustainable growth. As a technology company amid the new wave of AI, we are actively exploring the application of large language models Shuishou LLM in the industry to build the company's core competitiveness for the next stage.

In Q2, our business continued to advance with existing strategies, achieving robust financial performance. The company's overall revenue reached a total of RMB676 million. Our net profit attributable to ordinary shareholders was nearly RMB88.3 million, reflecting a year-over-year increase of over 300%. Waterdrop has maintained profitability for 10 consecutive quarters since Q1 of 2022. This quarter, Waterdrop consolidated its leading position in the industry. Firstly, our insurance business quarterly FYP reached RMB1.78 billion with an operating profit margin increasing 21%.

In April, we initiated a quality service upgrade year, offering good service, good product in new claims to users to further build our brand influence to also achieve the first export of customized solutions, exploring the broader application of the LLM with issuers.

Secondly, with the Medical Crowdfunding actively participants in the multi-level medical security business offering services in bilingual language and including users churn, our operational efficiency improved and the segment loss was reduced continually.

Thirdly, in health care-related business, our patient recruitment platform E-Find cooperation with computables. Moreover, we achieved a high-quality deliverable in CRO and the digital marketing with our clients.

In addition, we are committed to social responsibility and sustainable development. In June, the company won annual charity project and annual charity model at the [24 charity gala]. By the end of June, Waterdrop Charity platform had partnered with 112 public charity organizations and onboarded with more than 15,500 projects. This concludes the recap of our Q2 performance.

Currently, the industry is adapting to new policies, which may cause more -- some challenges in the short-term. However, we are confident in the long-term benefit from high-quality development and will actively seek industry opportunities. This year, the company remains committed to its financial guidance, targeting double-digit revenue growth while maintaining robust profitability. We are grateful for the ongoing support of our shareholders and investors and for [indiscernible] shareholders' interest and investment returns, the company has been actively repurchasing shares in the open market for three consecutive years, since 2021 and announced in August that we have cumulatively repurchased 49.2 million ADSs for over $100 million.

Recently, our Board has approved a new share repurchase program. Also rising the company repurchased up to $50 million within the next 12 months. The repurchased shares will be used for ESOP, encouraging our employees and the company to grow together.

In addition to what we actually purchased, in March, relating to our full year results of 2023, the company announced its first special cash dividend [indiscernible] based on the strong profitability of 2023, which was paid in Q2.

Moving forward, if our business remains healthy and has been profitable, we plan to distribute dividends at least once a year to reward the support of our shareholders and the investors. We are pleased to announce the approval the company will soon launch its second special cash dividend on the first half 2024 operating results. The total dividend amounts to about $7.5 million with $0.02 per ordinary share and $0.02 per ADS. The shareholders of ordinary shares and ADS as of the closing date of October 12 -- or October 11, 2024 U.S. entitled to dividends.

I will now turn to Ran Wei to discuss our insurance business in Q2.

Ran Wei

Thank you, Peng Shen. In Q2, the insurance business generated about RMB1.78 billion FRP, a Q-o-Q increase of 1.4%. Insurance related income was about RMB570 million and the operating profit was about RMB120 million. Operating profit margin maintained at a level of more than 21%. During the quarter, the short-term insurance FYP hit RMB1.25 billion, up 8.2% quarter-over-quarter.

New policy premiums surged near 20% sequentially. We advanced our customer acquisition of the platforms through like Redbook, TikTok, WeChat videos and so on, we were able to gain further insight and provide more actually product recommendations via AI technology, driving the number of new users up by 15.8% Q-o-Q.

We also focused on our synergy and efficiency, further increasing premiums from existing customers. Moreover, our short-term product range has expanded with more offerings meeting diverse needs and raising average premiums by 7.7%.

In April, we initiated a quarter service upgrade year, introducing initiatives like direct claims line, claims within 24 hours and service star program to enhance our customer satisfaction, maintaining a high renewal rate with a sequential increase. The long-term insurance FYP reached RMB530 million and Y-o-Y and Q-o-Q performance was pressured by high-based figures and [collections unchanged] from few facing challenges. The company restructured its service teams, phasing out our low-digit operations and expanding the high-yield teams, which lead to a 1.7% rise in quarterly per-capita premium.

To enhance our content metrics of life planner approach, increasing life planner premium contribution, emphasizing private domain operations for online sales, we leveraged holiday promotions to post the user engagement, resulting in a 22% increase in insurance domain premium. We also reached our product line-up with our disability insurance product premiums reaching RMB80 million in Q2. To increase user experience, we introduced an upgraded membership service, upgrading health management and other corporate benefits, expanding our brand visibility.

During the quarter, the company continued building its offline brokerage business, completing team upgrades and improving services. We also strengthened cooperation with insurance carriers and improved product competitiveness. Shenlanbao the team consolidating its advertise – its good preventive in either acquisition and premium per lead increased steadily.

Waterdrop and Shenlanbao continue to strengthen synergy as insurance technology, explore the application of AI in the planner model and improve user acquisition efficiency. In Q2, the company promoted innovation and customization in insurance products, including upgrades in cancer protection insurance, return on child insurance and inclusive insurance.

In terms of health insurance based on the deep insight into users, the company has intensively upgraded with cancer insurance products, providing a combination of reimbursement and fix payments for cancer patients and improve their ability to cope with the risk, providing users with loans and protection.

The series of maternal insurance should help us continue to lead the industry. This product has been upgraded to volume 3.0 and we have launched with the parent child critical illness insurance and [indiscernible] brand, saying our coverage to meet protection needs after the child's birth.

In the field of insurance for preexisting conditions, our inclusive insurance, life insurance, chronic disease insurance and hospital based scenario insurance products have been highly praised by a large number of customers with related premiums at scale exceeding RMB100 million.

In Q2, we continued R&D investment pioneer LLM and application in medical critical illness and so other insurance products. Towards the end of Q2, we secured five and filed over 30 more patents related to LLM. Our R&D is now focused on self-service scenarios, developing a full-process AI insurance component platform. This application can replicate the human voice and accurately identify customer intention, setting a new standard in the insurance industry.

Our medical insurance service now features an AI consultant team, which has already met the average performance of human consultants in certain scenarios with an operational cost of just 10% of the human equivalent. Leveraging our AI technology, we have signed a strategic partnership with insurers -- one of the top insurers in this quarter, making our first external empowerment of a customized commercial AI consultant solution.

Another LLM application, the AI co-pilot Shenlanbao is applied to multiple scenarios of our insurance business. Shenlanbao can help the explanation of terms and policies, collect a compilation of product recommendation and underwriting system. It effectively creates efficiency and improves user experience. It has assisted more than 60% of our human consultants, so insurance program hundreds of thousands times. Next June, we'll introduce the development of the company's cofounding and health-related business.

Back to you, Shen.

Peng Shen

Thank you, Ran Wei. As of the end of Q2 2024, around 461 million people cumulatively donated RMB65.1 billion to about 3.25 million patients through our Waterdrop Medical Crowdfunding. In Q2, adhered to the user-first service where most critical, we continue to optimize our business process and provide users with more personalized service.

For infants in regions populated by ethnic minorities, our platform now supports bilingual fundraising, aiding in the spread of cases for the local communities and bolstered by AI-assisted bilingual case verification to minimum fraud.

Further enhancing our reputation and credibility, we actually participated in the construction of [indiscernible] as a multi-level medical security platform. Thanks to this project and our charitable initiatives, in June, the company won the annual charity project and annual charity model at the 2024 [Charity Gala]. In the future, the company will continue leveraging its user insight and service capabilities to create more social value.

During the quarter, our health care-related income was RMB26.4 million, up 4.2% quarter-over-quarter. We collaborated with a total of 185 pharmaceuticals and CROs. Moreover, we engineered services for 88 new programs during Q2. We've been focused on digital trends in clinical trials and in multi-channel marketing solutions to serve a broader client base from this angle.

The health care-related business has been established for over two years and has quickly risen to the top lead. This year, we will continue to maintain our competitive position in the industry. At the same time, we will place more emphasis on the balance between the good growth and operational efficiency, assess the investment and promote the balanced development of business.

In Q2, our robust patient network and AI technology, the E-Find platform enrolled over 820 patients, bringing the total to over 8,600 in the partnership for an E-Find with a leading MSC, if you targeted online media and patient community to enroll 145 patients in less than eight months, planning treatment of option for patients and applies for clients.

Moreover a key CRO project finished enrollment in less than four months surpassing client’s expectation. With our outstanding visibility, our cooperation with both domestic and international leading pharmaceuticals has continued to expand. This quarter, in cooperation with one of the global supply consumable the platform won this for three consecutive claims that trial project because of our good reputation.

In addition, the orders in-hand continued to accumulate. We also formally reached cooperation with a number of leading MSCs this quarter, and it is expected to start cooperation in the second half of 2024. The E-Find platform is committed to empower the industry with student realization and actively participate in [indiscernible] relative academic standards. This quarter, the platform joined with DCT practice case and analysis project initiated by China’s Society for Drug Regulation. And we shared AI-enabled cases in the intelligent subject recruitment model with hundreds of experts and followers, we gain extensive recognition and trust.

In terms of digital multi-channel marketing business, the platform has embedded AI capabilities in multiple business needs, such as reporting -- report interpretation knowledge-based construction and this patient management Q&A in the process of patient management projects with a leading MSC. With our help, the patient return rate and the customer satisfaction has been significantly improved.

Thank you for listening. I will now hand over to Xu Xiaoying to discuss our financial performance.

Xu Xiaoying

Thank you, Shen. Hello, everyone. I will now walk you through our financial highlights for the second quarter. Before I go into detail, please be reminded that all numbers quoted here will be RMB, and please refer to our earnings release for detailed information on our financial performance on a year-over-year and quarter-over-quarter basis, respectively.

In Q2, despite industry challenges, the company's overall performance remains stable. The company achieved net operating revenue of RMB676 million stable year-over-year but down 4.1% quarter-over-quarter. The insurance-related income amounted to RMB574 million, down RMB5.4 million sequentially, while funding service fees amount to RMB69.3 million, up 2.9% quarter-over-quarter, while health care-related income was RMB26.4 million, up 4.2% sequentially.

Regarding operational costs and expenses, the company continued to focus on improving operational efficiency. In the second quarter, the company's overall operating costs and the expenses were RMB624 million, representing a decrease on both a Y-o-Y and quarter-over-quarter basis.

Operating costs fell from RMB333 million in the second quarter of 2023 to RMB319 million in this period. This is inclusive of the scope of consolidation, operating costs increased by RMB11.5 million in personnel costs year-over-year, partially offsetting the RMB12.9 million decrease in cost of referral and service fees and a RMB8.6 million decrease in cost of patient recruitment teams. And in the combined influence, operating costs decreased by 4.2% compared with the same period last year.

On a quarter-over-quarter basis, operating costs decreased by 3.7%, mainly due to a decrease in the cost of referral and service fees. S&M expenses were RMB157 million, decreased by 23% year-over-year and 13.6% quarter-over-quarter. This is mainly due to the decrease in marketing expenses to third-party traffic channels and personnel costs in this quarter.

G&A expenses were RMB94 million, decreased by 2.1% year-over-year, mainly due to the decrease in personnel costs because of the team adjustment. On a quarter-over-quarter basis, it increased by 5.6%, mainly due to the combined impact of increasing allowance for stock [indiscernible] comps and the reduced professional service fee.

R&D expenses were RMB53.3 million, down 38.5% year-over-year and 4.8% quarter-over-quarter due to the decrease in personnel costs and share-based comprehensive expenses.

In the second quarter, the company retained stable operations. Net profit attributable to the company's ordinary shareholders increased by 307% from RMB21.7 million in Q2 2023 to RMB88.3 million in the current period. Operating cash inflow remains positive for the quarter with a net inflow of RMB15 million. Looking ahead, we will continue focusing on operational quality, optimizing financial performance and maintaining healthy business development.

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

Question-and-Answer Session

End of Q&A