Waterdrop, Inc. (NYSE:WDH) Q3 2023 Earnings Conference Call December 7, 2023 7:00 AM ET

Company Participants

Peng Shen - Chairman, Chief Executive Officer

Zetao Zhu - General Manager, Crowdfunding and Pharmatech Business

Guang Yang - Director and VP, President, Finance, General Manager, International Business

Conference Call Participants

Unidentified Company Representative

Good morning, everyone. This is from Waterdrop Investor Relations. It's my pleasure to welcome everyone to Waterdrop's Third Quarter 2023 Earnings conference call. [Operator Instructions]. As a reminder, today's conference call is being recorded.

Please note that the discussion today will contain forward-looking statements made under the Safe Harbor provision of the US Private Securities 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 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 statement except as required by any 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. Yang Guang, Co-Founder, Director, Finance VP, 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.

Peng Shen

Hello, everyone. This is Shen Peng. Thank you for joining our third quarter 2023 earnings conference call.

This quarter, the domestic economy in China is still in the recovery process. Primary factors, including adjustments in product policies have temporarily impact the life insurance business. With the improvement in industry transparency and generation coupled with gradual acceptance of new product policy in the market, the company believes that the life insurance industry is entering a new development stage.

Facing both opportunities and challenges, the company actively respond to regulatory direction, striving to enhance business health and efficiency. For our having either certification, the company leveraged its keen insight into user needs to qualify either service and product innovation capabilities, embracing industry change with any vision and dynamic approach.

In the third quarter, the company continued to focus on creating value for users, achieving a resilient financial performance with approximately RMB6.9 billion in revenue maintaining a profitable trend for the past seven quarters. Cash profit reached RMB36.3 million, showing our Q3 growth of 67% and demonstrating this event sustainable and high-quality development. With sustainable net profit and positive operating cash flow at the end of September in the context of continuous share repurchase and acquisition of Shenlanbao, the company is to maintain our robust cash reserve and ability to organic growth.

The combined cash, cash equivalents and short-term investments, RMB3.1 billion, providing flexibility and stability for the company to navigate uncertainties and support long-term growth.

Our business models of the company performed well in the third quarter, consolidating our leading position in the industry. Thankfully, we've got insurance marketplace focused on enhancing; this is help in optimizing the product metrics through excellent demand insights and quality improvements, and it continued to contribute stable net profit.

Secondly, our Medical Crowdfunding platform continued to improve our service and risk control mechanism accumulating each serving of over 3 million patients with Waterdrop and Crowndfunding's transparency and credibility actually demonstrating the company's commitment to authenticity. The company adhered to the user-centric consistently enhancing service quality and advocating for the transformation of service-oriented consultants with the principle of users first service remote.

In terms of digital clinical trial solutions business, the E-Find Platform continue to deepen the collaboration with well-known domestic and international pharmaceuticals, expanding the range of recruited disease type, leveraging technological advantages, we're continuing to explore innovative opportunities in pharmaceutical field.

In addition, we continue to invest in R&D to empower business development. In the third quarter, the company iterated and upgraded our AI technology across various effects of the product operations and services. With the implementation of our technology, the company will also seek the export opportunity to empower the industry.

Meanwhile, the company continues to prioritize and enhance its ESG efforts, striving to deal with sustainable development of the company and society. Various initiatives relating to environmental protection, employee rights, corporate governance are systematically advancing. In September, the company collaborated with IIGF to initiate the online insurance industry ESG directly contributing to the practice and developments of ESG information disclosure of the industry.

In addition to business development, the company actively conform with the CSR. In August due to the flood in Beijing, Waterdrop Public Welfare Platform collaborated with well known charitable foundations to assist the flooded area. The platform launched -- it's a topic on our homepage, and we've donated many supplies to the Beijing Youth Development Foundation. And as of September 30, 2023, the platform had collaborated with 112 public charitable organizations in areas such as serious illness assistance, emergency disaster relief, and education support, raising a total of over RMB1.3 billion with over 70 million participants.

Leveraging our business and technology advantage, we actively participate in the construction of multilevel medical systems implementing one-stop of system tools such as as the one in many cities.

In terms of share repurchase, as of November 30, 2023, the company has cumulatively repurchased about 38.5 million ADSs from the open market spanning over at USD87.4 million. This reflects the company's strong confidence in our value in long-term sustainable development. The repurchased shares will continue to be used for ESOP to enhance internal dynamic and promote mutual growth with our employees.

The above is a brief review of business performance in Q3, although facing the challenging micro environment we're fully confident with the result in the industry. Looking forward to the last quarter of this year, our strategies include, firstly, driven by online and digital transformation. The insurance business will continue to the user-centric striving to achieve long-term, healthy, and stable development. Meanwhile, we will continue to enhance team efficiency consolidated by the business foundation and provide users with professional and self-service.

Secondly, the corresponding business will continue to adhere to users first and integrated service model, leading the industry to towards high-quality development. We will also adhere to transparent operations and implement strict risk management proactively fulfilling sales on.

Thirdly, leveraging big data. The pharmaceutical business will continue to increase industry penetration globally in order to construct a long-term growth engine. Hopefully, the company will make use of its ample cash reserves and seek corporation and investment opportunities around insurance and health care sectors.

Last but not least, the company will have a celebrating technology empowerment and enhance AI abilities to build core technology competitiveness, thereby supporting the implementation of long-term strategies and empower the industry.

In summary, the company will continue to put our ties to the value focusing on high-quality development, and advancing the facility and organic growth, constantly expanding business boundaries to better bring insurance and health care service to billions through technology, and that's our path to run rate to introduce the development of our insurance business in the quarter.

In the first three quarters, the gross rate of life insurance was down against the backdrop. The FYP reached RMB16.95 billion in this quarter with 38% long-term insurance propulsion. Insurance-related income reached RMB6.2 billion; and the operating profit reached RMB1.5 billion. Among them, the FYP of short-term insurance business reached the . During this quarter, the company actively utilized the AI technology to enhance user acquisition capabilities and the service quality.

On the customer acquisition side, the number of new users increased by 20% year over year. The company actively developed lots of security using the last model to enhance content production capabilities driving a significant increase in recent channel views with a sequential growth of 16% in the following members. The company also continued to upgrade the Intelligent Dialogue Robot, driving a sequential increase of 6% in the renewal rate for short-term insurance and its remaining above 90%.

Long-term insurance business further developed in the third quarter, achieving our FYP of RMB640 million, an increase of 17% year-over-year and 9% quarter-over-quarter. The average premium per policy increased by 43% year-over-year and 4% sequentially. Brokerage income increased by 11% year-over-year and 18% sequentially. The company here to improving the capability of long-term insurance service team and continuously optimizing the service quality, achieving a sequential increase of 23% in FYP of private domain operations.

Apart from long-term insurance product offerings further expanding, the proportion of life insurance users increased sequentially driving up almost 2% increase in the first year renewal rate. In the third quarter, the company demonstrated its resilience in developing new service models like in our life planners segment market with declining interest rates. The company continued to build content capabilities and online planning service around the combination of life planners and insurance.

The team continues to grow, achieving a new multi-FYP record despite the challenging market conditions. In the online brokerage sector, the company continued to enhance the functionality of our app advancing towards industry-leading tools. In this quarter FYP of offline brokerage increased by 7% year-over-year, and the average productivity per capita improved by 16% year-over-year.

Regarding Shenlanbao, one of insurance marketplace in Shenlanbao preliminary export business synergy, significantly enhancing content marketing capability. The most recent FYP of Shenlanbao posts a new high during this quarter. In Q3, the company optimized its insurance product to meet the rising demand. In the health insurance sector, the company introduced Waterdrop lounge in outpatient and emergency insurance. That is a groundbreaking product; and it is the first thing in the industry to cover medical expenses in the below secondary level community hospitals and township hospitals, which address the shortcomings of existing product in market.

Targeting users with pre existing condition, the company upgraded service by introducing Waterdrop Cancer Recurrence insurance. This product provides comprehensive coverage with high coverage amongst offering flexible options for a wide range of users. Additionally, the company launched the Blue Ocean 3 insurance further enhancing the experience for the top healthy users.

The company also respond to public product policy shifts in saving in insurances by offering diverse options tailored to different segmental population and seniority. In Q3, Waterdrop continued to enhance its insurance technology capability investing large portion in AI technology to empower our business and deliver high-quality insurance service.

The company in light of everyone and AI to automatically identify potential intention in the presell process, significantly improving efficiency by 20%. With assistance of AI technology salesmen were able to achieve more refined user segmentation, effectively engage with our users. The company also leverage our large module technology to create an issuance assistant based on our orders of insurance knowledge of Big Data. This assistance can answer questions relating to insurance education, claims, coverage responsibility, premiums and so on assessing our development to probably interacting to either of your concern.

Additionally, the company successfully launched an intelligent copy writing assistance with content production capabilities to assist our development in crafting more accurate and professional personalized content. Since it's launch over solving 1,000 development has utilized this tool significantly improved our efficiency. The above most of our insurance business performance in Q3 now before we introduce the product afforded a corresponding and digital handed version.

Zetao Zhu

Thank you, And that's enough for Q3. Waterdrop Medical Crowdfunding platform has accumulated 445 million donors and specific over 3 million patients and raised over RMB61.3 billion. Both user numbers and underwriting amounts continue to grow.

In Q3, Waterdrop Operating Transparency Committee further enhanced platform interference and far from we've done in the underwriting information display page with four different models like inflammation discovery, platform verification, public confirmation, and the bank discovery. These provide a more comprehensive representation of key details and doing enhanced the consultant surveys. We conduct the first one around consulting service month in August with our consulting operations with the release of the retained book and improved overall service quality and risk awareness. As a result, overall user certification rose to 98% and the NPL for funding either increased from 55% to 70%.

In Q3, we're continuing the transition to service-oriented consultants in 45 strategic hospitals nationwide. This approach will receive high praise from both hospitals and patients. The platform will further improve the efficiency of service-oriented consultant while maintaining service quality. We put our enhanced user experience hosting the first the donor and a fundraiser open date in September. We've seen open and more transparency, guarantee and trust.

The company's CEO, Shen Peng and myself, together with donors and fundraisers to have deep communication on underwriting service experience, more transparency, and authenticity. The company will continue to listen to user's feedback focused on technology innovation to enhance service efficiency and transparency; we will honor the trust of every individual.

With the clinical trials and dimension business showed stable and healthy development in the quarter with a quality revenue of about RMB27.6 million, representing a year-on-year growth of 16.7%. During Q3, the E-Find Platform expanded its collaboration with over 135 pharmaceutical and CRO signing over 90 new projects with a rapid expansion. With a very excellent ability of recruitment and the top project management collaborations with leading MNCs is what really drove this quarter. The platform entered into are exclusive participation in recruitment finished with a psoriasis clinical trial project with one of the world's top five MNC. Additionally, supply process were initiated with two top five MNCs with full formal collaboration expected in Q4.

The E-Find Platform continues to expand the application of cutting-edge technology to accelerate new drug development, leveraging big data and structured information from clinical trial projects. The program use AI-driven matching system to enhance efficiency in connecting patients with suitable credits. In patient service, due to our wireless serious unit patient base, we have developed an efficient private domain platform about patient management and core expertise in medical service. The platform offers patient management and integrated services such as patient selection, medication management, medical service, innovative payment solutions, and data insight and so on, providing that digital marketing solution covers the entire product life circle

In Q3, formal collaboration has been commenced with a leading MNC focused on the health management of chronic disease patients. And that's all in now I come to Yang Guang for the next part.

Guang Yang

Thanks Zetao. Hello, everyone. I will now walk you through our financial highlights for the third 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.

In Q3, despite a unique period of product assessment, the company demonstrated robust profitability. The company revenue was RMB686 million, a slightly Q-o-Q increase from RMB679 million. Waterdrop reports that it is in the first quarter that was starting to consolidate the financial results of Shenlanbao and the results and the insurance liability segments. Our insurance-related income was RMB619 million, showing a 3.7% Q-o-Q increase. Compounding service fee for RMB36 million. The clinical solution income was about RMB27.6 million with a remarkable 60.7% year over year growth.

Operating cost and expenses increased by 7.6% year over year decreased by 4.4% in Q2. Operating costs decreased by 8.5% year over year to RMB313 million, mainly due to firstly, a RMB19.5 million decrease in the cost of one year health insurance coverage related to termination of mutual aid plans, which what occurred the same quarter last year. Second reason would be the RMB9.4 million decrease in cost of referral and service fee.

S&M expenses increased by 36.1% year over year to RMB187.7 million, and it was primarily due to firstly, the consolidation of Shenlanbao, which generated S&M expense of RMB28.1 million; secondly, a RMB14.4 million increase in marketing expenses to third-party traffic channel; and thirdly, a RMB9.1 million increase in personnel costs and share-based comprehensive expenses. In this quarter, the company proactively adapt certain advertising strategies. It was up RMB41.3 million major decrease in marketing expenses to third-party traffic channels, partially offsetted by the consolidation of Shenlanbao. S&M expenses decreased by 8.2% sequentially.

G&A expenses increased by 39.7% year over year to RMB114.6 million and increased by 19.4% sequentially, both Q-o-Q and Y-o-Y as due to the consolidation of Shenlanbao and the increase in professional service fees.

R&D expenses decreased by 5.7% year over year to RMB73.9 million. The decrease was primarily due to personnel costs and share-based comprehensive expenses.

Adjusted net profit attributed to the company in Q3 was RMB74.8 million. The GAAP net profit was RMB36.3 million and we have generated GAAP profit over the past seven quarters. As of the end of September 2023, the company have combined cash, cash equivalents, and short-term investments of RMB3.1 billion, indicating sufficient cash reserves.

Overall, the business performance in Q3 was stable. Looking ahead, we will continue to focus on user value and sustainable high quality developments. And ladies and gentlemen, with that, we would conclude today's conference call. We do thank you for joining. Have a good time.

Question-and-Answer Session

End of Q&A