Waterdrop Inc. (NYSE:WDH) Q2 2023 Results Conference Call September 7, 2023 8:00 AM ET

Company Participants

Shen Peng - Founder, Chairman & Chief Executive Officer

Yang Guang - Co-Founder, Director, SVP and GM of International Business

Zetao Zhu - GM of Crowdfunding and Pharmatech Business

Chen Richard - Board Secretary

Conference Call Participants

Unidentified Company Representative

Good morning everyone. This is [Yee Hui Ching] from Waterdrop Investor Relationships. It's my pleasure to welcome everyone to Waterdrop's Second Quarter 2023 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 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 and 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 and applicable law.

Also, this call includes a 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. Yang Guang, Co-Founder, Director, SVP and GM of International Business; Mr. Zhu Zetao, GM of Crowdfunding and Pharmatech Business; Mr. Chen Richard, Board Secretary.

And we will be happy to take some of the questions in the mandarin line at the end of the conference call.

Shen Peng

Hello, everyone. This is Shen Peng. Thank you for joining our second quarter 2023 earnings conference call. With the second quarter, in insurance and pharmaceutical industry with the gradual enforcement of regulation, transparency and acceleration have significantly improved, effectively enhancing user experience and satisfaction. This has also led compliance user insurance companies in breaking new growth opportunities.

In this setting, the Company's proactively consensus regulatory trends, responds actively to market demand, continually innovates product and optimize service and solidifying a leading edge in these sectors. Regardless of the challenging external environment, the management firmly convinced the adhering to long-term value and maintaining a user-centric approach with secure greater market space.

And in the second quarter of 2023, the Company continues to focus on creating value for our users' capability healthy development. The financial performance remains robust with our revenue reached RMB679 million, carrying over an upward trend for the last five quarters, the net profit reached RMB21.7 million, demonstrating the sustainable and high-quality development of the Company's operations.

With the same cost of net profit, the Company maintains ample cash reserves as of the end of June. The Company had a total of RMB3.4 billion in cash, cash equivalents and short-term investments. The abundant cash reserves helped the Company to face uncertain environment with more confidence and support long-term trend and layout for the future growth. All of our business models achieved strong performance indicators and consolidating our leading position and influence in the industry.

First of all, Waterdrop Insurance Marketplace reached new [heights] and an enhanced business vitality. While exploring diversified customer acquisition channels, we also take the product innovation, thanks to the efforts what we call both SIP and revenue made sequential growth and it continued to contribute stable net profit to the Company.

In terms of digital clinical trial solution business due to our excellent performance, the E-find platform gains recognition from both domestic and international partners. We continue to expand the lead time and accelerating drug development for pharmaceutical and we'll also made significant progress in CRO in Q2. Digital clinical trial solution income was RMB29.4 million and achieving a significant year-on-year growth of 167%.

In addition, by iterating algorithms capabilities and risk management mechanism, our Waterdrop Medical Crowdfunding platform firmly adhered to parent operations and led us to any compassion. Meanwhile, we enhanced product quality propel our service oriented business model and embodies the principle of users first service mode. Along with business development, the Company continued to invest in research and development.

In Q2, the Company continued to upgrade technologies like intelligent chatbot deploying AI in various sectors, including operations, sales improving. We strongly accelerated operational efficiency and the Company persists a fast-growing technology to empower the industry. In the complex and ever changing macro environment, the Company performed strong while actively operating CSR. As of June 30, 2023, the Waterdrop Charity platform has collaborated with about 110 public charitable organizations to carry out project in various areas of business, emergency and disaster relief and education support. The program has raised about RMB1.3 billion and raised the contribution from more than 65 million donors.

We also continue to decline ESG initiatives and strive to achieve mutual sustainable development between the Company and the society. We benchmark domestic and international ESG standards to establish a compound framework and publish the 2022 ESG report. The report summarizes our company's management and performance in areas like company's governance participation in multilevel medical support system, technology innovation, green and low-carbon initiatives and public welfare.

We demonstrate the Company's commitment to high quality and sustainable development in terms of share repurchase as of the end of August 2023. The Company has cumulatively repurchased 37.5 million ADSs shares in the open market with cash for a total consideration of approximately $86.1 million.

We also want to announce the expansion of the repurchase plan, which has received approval from all our directors. Within the next 12 months, the Company will repurchase shares in the open market for an amount not exceeding $50 million. This decision is based on the Company's strong confidence in our own value and long-term sustainable development.

Meanwhile, this share repurchase will be used for ESOP, which will further motivate our employees. That is a brief review of our business performance in Q2, although facing the challenging macro environment stay fully confident in our healthcare industry.

Moving forward to the remaining half of this year, our strategies include business driven by a long and digital transformation. Insurance systems will continue to be [indiscernible] striving to achieve long-term healthy and stable development. Meanwhile, we will continue to enhance key initiatives solidifying the business foundation and provide users with professional and software service.

Secondly, the core funding business will continue to [indiscernible] in the first and iterating service model, giving the industry towards high-quality development. We will also adhere to transparent operations and inclement with risk management while actively fulfilling CSR. Thirdly, leveraging big data, the pharmaceutical business will continue to increase industry penetration globally and activate for a new model in order to construct a new long-term growth engine.

Fourthly, the Company will make use of its ample cash reserves and take operations and investment opportunities around insurance and healthcare sector. Last but not least, the Company will accelerate technology empowerment and it has AI ability to build core technology competitiveness, thereby supporting the implementation of long-term strategies and inherent industries.

The Company will make use of ample cash reserves and take operation and investment opportunity around insurance and healthcare sector. In the current rate, the Company will continuously derive long-term inspire to calibrating user value, strengthening their facility and organic growth and company is running responsibly. We'll continue to bring insurance and healthcare best service to bring to technology.

And now let me give you an update on our insurance business. In the second quarter, in order to enhance service experience and enhancements, the Company committed to use eccentric and high-quality development and continue to explore new service models. During Q2, we achieved RMB219.7 million in [indiscernible] and margins, a 30% sequential growth. Insurance related revenue reached RMB597 million, reflecting 11% Q-o-Q for us.

Short-term insurance achieved FYP of RMB1.6 billion, marking a 30% sequential growth. On one hand, the Company further developed our content base either activation capability. In Q2, we increased our brand exposure via client relation and spreading high-quality content across medical platforms leading to a sequential growth in the number of end users. On the other hand, we kept accelerating our existing customer base, leveraging AI ability.

The Company continues to improve the quality of users to over 90% of short-term insurance renewal rate. Long-term insurance achieved a FYP of RMB590 million, representing a 29% sequential growth. The long-term insurance operating income increased by 38% sequentially. As long-term insurance products continue to expand, the proportion of life insurance premiums within the long-term segment has risen to 57%.

During this quarter, the [indiscernible] of long-term insurance need potentially leveraging the insurance were company elevated service model focused on common domains narrowed and intensified user education, which led to a 33% of FYP from private domain operations. The Company also is experiencing called into our policy insurance leading to the sustained improvement in the first year retention rates for marketing product.

In Q2, Waterdrop continues to explore new growth channels to facilitating sustainable business growth. For our online brokerage channel, FYP experienced a 113% sequential growth with the decline in interest rates. The Company developed a new insurance, which is focused on illness insurance and life insurance to the younger users in the first and second-tier cities. Sequentially, the number of users for segment insurance grew by 206% and high-quality content and segment proceedings.

The [indiscernible] decreased by 25%. Moreover, the team improved the service process and now can control is the first time response within 20 minutes. This leads to a 2Q increase of 49% in productivity per lead and 30% in productivity capital. In terms of offline agents and some market rebound and the team matured, we achieved a remarkable 206% Y-o-Y growth in FYP.

We continue to enhance product offering and operational capability. We further upgraded our PD system define functioning models and optimizing the experience for both agents and clients. We elevated recruiting standards and talent in new developments and actively explore agent IP. The average productivity per active agent increased by 201% Y-o-Y, the average number of long-term insurance policy per active agent increased by 48% Y-o-Y.

During the second quarter, Waterdrop Insurance Marketplace continued to enrich its product offering and similar product targeting the basic user growth. Taking regular interest in long-term production and innovation in medical treatment, we launched the BlueOcean Lifetime Health Insurance. It has allows users to take access over these medical service at an affordable price and quickly provide an option for users to transport from shopping medical insurance directly to a 20-year long-term medical insurance thereby maiming the user coverage, targeting elderly, we introduced the [indiscernible]. This product is the first in China to cover many common serious illnesses among the elderly including malignant tumors, that was listed and the annual product innovation list by 2023 China insurance industry is both ranking. For healthy individual, we continue to iterating our Blue Ocean series, which is the first domestic health insurance leading healthcare declaration.

In Q2, this product series achieved FYP over RMB100 million. Additionally, we actively explore multichannel sales of maternity and inflammation and insurance covering medication in the operations and emergency. We saw a sequential increase in FYP. In terms of users with pre-existing conditions, we continue to lean in product supply innovation. For example, we designed a Waterdrop Carefree series, which can cover recurrence and the FYP of existing series. Of the role in cancer and recurring leukemia, we are expert in the industry, receiving high recognition from patients.

In terms of surgical accident insurance, we offer solution across 5,000 departments in 32 hospitals, which help patients against post hospital recovery. As a technology company, we continue to develop our insurance technology.

In the second quarter, we increased AI investments, enhancing the team and upgraded our AI-empowered dialogue chatbot insurance service scenario. The chatbot can now communicate with users for more than 20 minutes. We have integrated the chatbot into various business scenarios, including operations, sales and claims. This integration has effectively accelerating service product and saved human cost.

In terms of technology export, we continue to strive for excellence with exporting enhancement solutions. We improved the capable and usability and the configurability of both wealth management and wealth tool model. Additionally, we collaborated with three new partners to accelerate the industry transformation towards digital intelligence.

This concludes my briefing on the insurance business. So let me hand over to Zetao for an update on our Medical Crowdfunding and Digital Clinical Trial Solution Business.

Zetao Zhu

Thank you, Shen Peng. As of June 30, 2023, accumulated total of 439 million people donated more than RMB60 billion to over 2.95 million patients through Waterdrop Medical Crowdfunding platform, both in-house users and crowdfunding continue to grow. This quarter, in the operational transparency committee focused on the authenticity of a claim in crowdfunding cases. Continuously enhance the governance and transformation of consultant service.

In terms of asset authenticity in order to reduce the risk of an inaccurate financial situation of crowdfunding patient families, the committee established a special live achieve a better control which introduced the concept of core family and the net worth of asset and income in the description of patient's family financial situation.

We upgraded a more accurate assessment of the reasonable target crowdfunding amount, not only adding application information and more convincing content, but also incorporating AI capability to identify both information with further improvement of its controllability, moreover, this approach allows for better communication between the crowdfunding services and the donors, which shows the platform's commitment to authenticity.

The committee also initiated a specialized governance targeting crowdfunding consulting behavior. We kept strengthening non-compliance conduct, such as increasing handling for valuation implementing a nationwide self-inspection in the panel, combining the ability targeting higher risk scenarios.

Meanwhile, we introduced consulting service principles such as for principal of service system and in terms of service, the strength and proactive service awareness of consultant and help them better addressing patient needs establishing accordingly service standards throughout the entire process of crowdfunding for the patients' withdrawal and fund utilization.

Additionally we introduced a new consulting service evaluation system based on our user satisfaction. In terms of the transformation of offline commitment service we successfully piloted and expanded service-oriented growth model in [indiscernible] resulting in a significant increase in Net Promoter Scores within hospitals.

We established a candidate partnership with several hospitals in service-oriented consultancy to provide assistance to both emerging sales and solutions. On one hand, our consulting system using staff with administration tech such as [indiscernible] and providing a motion port to workflow of merging enabling them to offer sudden medical care to patients.

On the other hand, before patient, the role of consultant extends to a wider range of activity like providing general advice during hospitalization, offering guidance and a commonly interpreting and implying for medical insurance policy of [indiscernible] business and charitable care initiatives and so on.

To embody the concept of [indiscernible]. In terms of digital clinical trial digital solutions, the business continued to show strong growth leveraging its outstanding performance capability, the E-find platform successfully enrolled over 900 patients in Q2, marking a sequential growth of 33%, collaborative with 132 pharmaceuticals and CRO globally, made an increase of 11 partners sequentially.

These figures and core recognition by our clients as the platform's interim goal is continued to strengthen collaboration with domestic pharmaceutical while thickening the partnership with leading multination from digital worldwide. In Q2, the platform launched about 80 new products. While the proportion of projects with MNC increased, the platform also achieved cooperation intention with two top 20 MNC pharmaceuticals, officially kick off the supply process and expect to launch products in Q4.

In terms of recurring disease, the platform is further expanded in the state of chronic disease in addition to diseases like psoriasis, atopic dermatitis and asthma. It is due to urticaria, hepatitis B, uterine adenomyosis and rheumatoid arthritis. Both ensuring product quality, the platform's fulfillment capabilities continue to grow. In Q2, the platform CRO business achieved significant progress by signing our [indiscernible] CRO project.

The project provides comprehensive clinical trial service encompassing data insight, medical sales, data management, statistical analysis, project management, patient to the board, patient to recruitment, patient management and their pharmacoeconomic analysis. This achievement underscores the platform's visibility for end-to-end operations in clinical trials. Meanwhile, the problem is actually exploring patient operation, leveraging its online operationability partnership in optimizing patient filtering, patient education, medication management and patient data research insights and other operational activities.

Regards to R&D in medical area, we continue to upgrade our medical data center, which is now capable of completing first level structuring for 10 different types of medical materials adding approximately 600 new medical sales category and the level of extracting gross information such as for liver cancer, the system is now capable of automatically extracting information as disease staging, clinical staging, TNM staging and other relevant videos provide a strong data foundation for better customer service. Thank you for listening.

I will now hand over to Yang Guang to discuss our second quarter financial performance.

Yang Guang

Thank you, Zetao. Hello, everyone. I will now walk you through our financial highlights for the second quarter. Before going into detail, please be reminded that all numbers given here will be in RMB. And please refer to our earnings release for future information on our financial performance on both the year-over-year and quarter-over-quarter basis, respectively.

In the second quarter, all business lines were steadily responding demonstrating strong business resilience. The Company's revenue was RMB679 million, slightly lower compared to RMB711 million in Q2 of 2022, an increase by 12% comparing to RMB606 million for the Q1 of 2023.

Among them, insurance-related income was RMB597 million, representing a sequential increase of 11.4%. Crowdfunding service fees were $44.7 million, representing a sequential increase of 6.4%. Digital clinical trial solution income was RMB29.4 million. It has increased by 28.9% sequentially and achieved a significant year-on-year growth of 167%.

The Company's overall premium cost and expenses have increased by 32.1% Y-o-Y and decreased by 20.9% Q-o-Q. Operating cost increased by 36.2% year-over-year to RMB333 million for Q2 of 2023, compared with RMB245 million for the Q2 of 2022, which were probably driven by two OpEx. RMB74.2 million increased in capable results experienced fee and RMB8.9 million increase in cost of patient recruitment consulting fees.

On a quarter-on-quarter basis, operating costs increased by 34.3% in this quarter, primarily due to RMB60.9 million increased in cost of referral and service fees. S&M expense increased by 41.6% to RMB205 million in this quarter as compared with RMB144 million over Q2 of 2022 and increased by 18% compared with RMB173 million for first quarter of 2023. Both Y-o-Y and Q-o-Q increase were primarily due to the increase in third-party traffic channels.

G&A expenses were RMB96 million in this quarter, which remains stable on a quarter-on-quarter basis. R&D expense increased by 23.1% to RMB86.7 million year-over-year and increased by 10.2% on a quarter-on-quarter basis. Both the Q-o-Q and Y-o-Y increase are mainly due to the increase in R&D costs of human resources. In this quarter, the Company introduced segment reporting information for the first time, bringing down our revenue and profitability into three segments: insurance, core funding and others.

In summary, the insurance segment had an operating profit of RMB99.8 million, while the core funding segment incurred RMB64.1 million operating loss and the other segment incurred a RMB47.9 million, operating loss. It is worth noticing that the Company's overall profit is only driven by the insurance segment. Adjusted profit attributed to Waterdrop in Q2 was RMB50.3 million, with GAAP net profit was RMB21.7 million, and we have generated GAAP profit over the past six quarters.

As of the end of June 2023, the Company had combined cash, cash equivalents and short-term investment of RMB3.4 billion, indicating sufficient cash reserves. Overall, the business performance in Q2 was stable. Looking ahead, we will continue to focus on user value and sustainable high-quality development.

Question-and-Answer Session

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