Earnings Call: Q1 2021

Jun 17, 2021

Earnings release

Good morning, ladies and gentlemen, and thank you for standing by for Waterdrop Inc. 1st Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. After the management's prepared remarks, there will be a Q and A session. As a reminder, today's conference call is being recorded. I would now like to turn the meeting over to your host for today's call, Ms. Shao Tuo. Please proceed, Ms. Tuo. Thank you. Thank you, operator. Hello, everyone. Thank you for joining Waterdrop's 1st quarter 2021 earnings conference call. Please note that the discussion today will contain forward looking statements made under the Safe Harbor provisions 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. 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 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. Sheng Peng, our Founder, Chairman and CEO Mr. Yan Zhuang, Co Founder, Director and General Manager of the Insurance Marketplace and Mr. Kevin Shi, our CFO and Mr. Tian Zhang, our Head of Group Strategy. They will all be available for a Q and A session after their remarks. Now, I would like to turn the call over to our CEO, Mr. Sheng Peng. Please go ahead. Hello, everyone. Thank you for joining us our Q1 2021 earnings conference call today. We are pleased to report strong quarterly results in our first earnings release at the company. Our net operating revenue reached over RMB880 1,000,000 in Q1, representing an adjusted comparable growth rate of 43.2 percent year over year. Our solid results reflected the advantages of our operational efficiencies. Since our inception in 2016, we have benefited from the robust industry development and achieved a sub industry growth and have become a leading integrated insurtech and healthcare service technology platform in China. Before I talk about the key highlights of the quarter, I want to briefly summarize our positioning and strategy and emphasize 3 keywords that represent our business, inclusivity, efficiency and technological innovation. In recent years, the health insurance industry has enjoyed a favorable policy support and with the implementation of new regulations on Internet insurance businesses, we expect the industry to continue prospering in a healthier environment. The COVID-nineteen pandemic has broadly increased people's demand for healthcare services and raised the awareness for health insurance. While on a macro level, we at Waterdrop have also created multidimensional scenarios for insurance awareness education. We position ourselves as an important external force that submits the government social medical insurance system and aspires to bring insurance and healthcare services to billions of people through technological innovations. OrderDrop is fully committed to the realization of the social impact and the commercial value of insurance for all, providing our customers with pre illness insurance coverage through our Waterdrop Insurance Marketplace and post illness crowdfunding support through our Waterdrop medical crowdfunding platform. We continue to leverage all of our platforms to support the fight against the COVID-nineteen pandemic and to promote inclusive insurance programs throughout the industry. With a recent call from Chinese regulators to broaden health insurance products that contain wider coverage and better quality, our competitive advantages and influence as inclusive online insurance provider allowed us to rapidly roll out a series of upgraded products that give ordinary people affordable choices for their health insurance needs. Our Waterdrop Medical crowdfunding as an online platform efficiently connects the patients who are seeking help to cover significant medical costs and the people who are willing to help. However, Verterdrol medical crowdfunding itself does not contribute any revenue to us. As of March 31, 2021, through our Waterdrop medical crowdfunding platform, approximately 360,000,000 people donated an aggregate of over RMB 40,000,000,000 to nearly 1,900,000 patients. The second keyword is efficiency. Our overall growth performance is driven by the advantages created by our platform's efficiencies, and we are pleased to see the contribution by Rotterdam to the overall improvement of efficiency of the industry. 1 of our core advantages is that we can interact with customers directly online, which allows us to accumulate a massive amount of user profiles through the customer account, capture safety and dynamic data and gain invaluable insights into their behavior and demand. This also enables us to satisfy their needs more precisely by presenting the most relevant insurance products, while conducting product integrations and upgrades accordingly. Our big data and the customized intelligent marketing system has allowed us to enjoy a competitive customer acquisition cost and operating efficiencies from our economies of scale. Next keyword is technological innovation. I want to talk about how we utilize technologies to on our technology empowerment. We utilized our proprietary intelligent marketing system, intelligent user growth system, intelligent online marketing and the telemarketing system based on machine learning and deep learning algorithms to take an EBITDA into customer insights. We designed and developed a series of algorithms that personalize user experiences and provide targeted matches that best suit our users' needs across marketing, growth conversion and online marketing scenarios. We constantly build and optimize our user profile that currently contains roughly 3,000 tags to further boost efficiency for personalized precision matching. We also developed an intelligent chatbot platform based on natural language processing technology. Our intelligent robot for policy renewal can carry out multi long interactions with users powered by various AI technologies, including semantic analysis, ASR and TPS. These significantly enhances our renewal rates and operational efficiencies. Our AI plus big data powered water drop rate assembles users' essential attributes, behaviors data and medical records to identify categories of claims settlement documents, recognize various certificates and collect standardized and digital data based on our proprietary knowledge base. We conduct intelligent risk management powered by big data and decision making models to enable automatic claim verification, manage costs, insurance adjustments and empower other staff throughout the claim settlement process. This enables us to shorten the claim and increase our efficiency by 30%. Meanwhile, the accumulated claim data also facilitates our product design and enhances our actuarial capabilities. In a nutshell, we believe our trusted brand, comprehensive product offerings and innovative technologies will allow us to maintain our position as the leading technology driven insurance platform in China. We will continue to expand our user diversify our service offerings and deepen our partnerships with healthcare institutions to build up a larger health ecosystem. Now let me touch to Guang, who will discuss some of our key developments in our insurance marketplace business. Thanks, Peng. Hello, everyone. I'm going to go through our key highlights and some of the recent developments in our interest market based business. I will start with the product side where we continue to launch more interest products on our platform during the quarter, increasing the number to 2 40 at the end of March from 200 at the end of 2020. Over 90% of our FIP was contributed by customized insurance products and we continue to enrich our product attributes on top of our existing product offerings and provide all cycle coverage for broader range of people. We have enhanced coverage for specific groups such as children, the elderly and to groups with chronic disease and increased or updated the input coverage for the customers. In the Q1, the new definition of quick build units was officially put into expire. Prior to its implementation, we have upgraded and designed our product offering according to the new definition of critical business. We move early to better cater to customer needs rather than speculating CIE products under the whole definition or simply pursuing short term incremental model. At YPO, CAI influence increased by 132% in quarter 1 year over year, primarily contributed by the design and sales of products under the new definition of Kwaiting Units. We did forward looking research information disclosure in order to comply with the new regulatory departments and improve our customer experience. We also penetrated other categories such as inpatient medical products and the same types of life insurance products as necessary accompaniment to cater to customers' needs. In terms of long term interest, we kept strengthening our customer service capabilities and provide necessary online consultation support to enhance user stickiness. As WeChat Groups, live streaming educational courses and 1 on 1 AI supported consultation services. Through more accurate user matching, more attractive product offering and fiber service capabilities, our long term difference in retention increased and our business quality has further improved. In terms of our operational management, we optimized the team structure and onboard more tenants. We also explore the opportunity of collaborating with other industry players and distribution channels to offer wider retail coverage to an extended customer base. Next, let me talk about the development of our channels. In the Q1, our external customer acquisition and the the conversion of repeat purchase both saw continuous improvement. Excluding the mutual aid business, capital IP generated from internal traffic, 3rd party traffic channels and the network traffic and repeat purchases increased by 65.2%, 51.6% and 48.4% year over year, respectively. For internal traffic, we saw higher conversion rate from our awarded our medical call funding to insurance sales. We exposure of marketing. For macro traffic and repeat purchase, we continue to diversify the Pinterest product categories for repeat purchase and enhance our cross selling efforts. Our brand awareness continuously improved thanks to our precession marketing and our good reputation. During the Q1, we got deeper into our business needs. We developed a membership system to increase our user retention and upgraded our product offering strategy orders to promote cross selling. For external channels, we enjoyed a competitive customer acquisition cost among industry players attributable to our competitive advantage including firstly more diversified services business with same customers, as in a jointly built smart marketing model for customization with the sub party distribution channels to improve our efficiency. And thirdly, repeat purchase penetration and fourthly, our back end operation and after sales service insurance and industry leading user experience and the renewal rate. Meanwhile, we also explored new traffic opportunities, including live streaming, multichannel network and customer acquisition cost by content. Now regarding our service capabilities, we continue to educate insurance users through multiple short video and live streaming accounts, which broadcast interesting and informative content that address users' questions on choosing insurance online. We also leverage the WeChat enterprise tools, so our sales consultant can frequently interact with the users to ensure a smooth online transaction process, enhance our user stickiness during the wholesale process and provide new opportunity for improving the LTV of a paying new consumer. During the mutual claim process, our intelligent input system Currently, the system supports more than 90% Currently, the system supports more than 90% of the prefectural and municipal levels public hospitals in China. The entire computing process until releasing a final payout conclusion can be completed at the meeting setting level. The accuracy with the Boardwalk Smart claims has reached over 99.7%, speeding up the claims process from the previous per day per hour or even per week, I want to briefly about our initiatives in healthcare services. For microservices provided to people with disease, we continue to expand our partnership with pharmaceutical companies and hospitals and have started to develop a coordination mechanism for health management, physical examination, online consultation and treatment and pharmaceutical sales. As of March, our pharmacy benefit management service, WaterJao Medicine, has served more than 144,000 members our cooperation with more than 1400 pharmacies over 200 cities in China. We launched a platform named Waterdrop Health to provide services to healthy consumers where we have also explored health management services such as consultation, physical examination, dental cleaning and quick pass to medical services, etcetera, taken into various quick lead enhanced management. With that, I will now turn over the call to Ken, our CFO to discuss our Q1 financial performance. Hello, everyone. I will walk you through our financial highlights. Please please remind you that phone numbers quoted here will be in RMB. And please refer to our earnings release for detailed information of our comparative financial performance on a year over year basis. In the first quarter of 2021, our net operating revenue increased by 35.1 percent to RMB883 1,000,000 from RMB654 1,000,000 for the same period of 2017, primarily driven by the growth of insurance brokerage income and technical service income. There has been a major business adjustment in the Q1 of 2021, which is a potential of our Woodstock Mutual Aid business, which has already been disclosed in full in our IPO prospectors. In subject to certain procedural requirements and eligibility criteria that would have formally been covered by the 5th mutual aid plan. In addition, we also offered a 1 year complementary health insurance policy to each participant with a similar coverage. As a result, we medical expenses and the insurance coverage, among which around RMB20 1,000,000 was accounted for as a reduction of maximum fee revenue, which has been recognized for each participant. To the extent of cumulative amounts earned until March 26, 2021. And around RMB77 1,000,000 was recorded as an expense. After this change, the corresponding management fee income from B2A business, which contributed less than 5% of our total revenue in 2020, will no longer be a revenue stream for us. So on a more comparable basis, excluding the management fee income, our adjusted net operating revenue has a year on year growth rate of 43.2%. Our operating costs and expenses for quarter 1 increased by 75.7 percent to RMB13 44,000,000. To break it down, the operating costs were around RMB301 1,000,000, mainly driven by the one off cost of RMB77 1,000,000 incurred in relation to the succession of Wolf's new phone ASICs I just mentioned above. And also attributable to labor costs as our insurance agents and consultants payout the investigation and customer service team directly expanded to support the business growth. Sales and marketing expenses increased by 67.7 percent year over year to RMB837 million, primarily due to the increase in marketing expenses to third party tech channels as a result of our business expression and the branding promotion. G and A expenses increased by 87.2 percent in quarter 1 to RMB121 1,000,000. While excluding share based compensation expenses, the adjusted G and A expenses would be RMB59 percentage, representing an increase of 25.1%, primarily due to the increase in professional fees and the labor costs. R and D sales increased by 25.6 percent to RMB84.7 million. And if excluding hair based compensation, the adjusted R and D expenses would be RMB78.7 million, an increase of 19.4 percent mainly driven by the increase in R and D labor costs and the remaining expenses as our R and D team continues to expand to enhance our competitive capabilities and technology. We incurred a GAAP net loss of RMB370.2 million and a net loss of RMB203 million. The adjusted net margin was negative 23.0 percent for Q1. For the Q2 of Q1, we expect our our preliminary view and estimates, which are all subject to change. This concludes our prepared remarks. Thank you. We will now begin the question and answer session. Your question in Chinese first, followed by the English transition by yourself? Thank you. At this The first question today comes from Jenny Zhang with Morgan Stanley. Please go ahead. Hi, Hi, management. This is Jenny from Huizeng Family. First of all, congratulate on the successful IPO and thank you for giving us this question to meet with management and then talk about your results again. So 2 very simple questions from me. The first one is about acquisition cost. We noticed that some of the education segment has not been doing very well because of some policy changes. I remember that management mentioned before that this sort of our key sort of competitor for online traffic in the past. So given this backdrop, have you start to see some of the decline in the online acquisition costs? Do we think this is going to be sustainable? Is that going to be very positive to our business going forward? Second question is about the sort of strategic like in the health area, what kind of new strategy we're planning to implement in the future? I know Yang Guang mentioned a few progress in the first quarter. Can you give us a little bit more update after Q1, I think in April May, what we have done to continue to push for an expansion in the Healthcare? Thank you. Yes. Thanks, Jamie, for the question. This is Yanbong speaking. I will answer the first question regarding the marketing expense. I think our business is still at an expansion stage with the proportion of external traffic increasing. So with our continuous exploring customer needs after we acquire yogurt, I think the effects of revenue enhancement begin to show. And we will further increase the investment with the customer acquisition costs as long as the customer acquisition costs can be covered by the lifetime value of our customers and continue to expand our customer base through some party user acquisition channels. I think currently sales and marketing expense account for a major part of our expenses, which is in line with our current strategy. In short term, our priority is to grow customer base. The criteria for sales and marketing cost control are seriously lower than LTV to match cost and benefit and the LTV per user is also increasing phosphate. For customers with higher LTV, we could set higher acquisition costs. I think the recent market dynamics, as you just mentioned, are favorable to control the increasing pace of the CEC and further expand our user base. Meanwhile, we will continue to enrich our product offering and improve our service capabilities to promote repeat purchase and attract metro traffic? And for the second question regarding the house business, I will hand it over to our CEO, Sun Peng, to answer that question. We as Waterdrop are providing members with cost effective quality medical and healthcare services. Our healthcare and medical services focus on customer needs, offering different values for 2 types of customers. Our Waterdrop Health Business serves healthy people with basic healthcare management services. Packaging with existing insurance products, we provide a range of services including consultation, telephone doctors, healthcare products, physical examination, basic drug, etcetera. This has generated synergies with our insurance business and the health the insurance business increased the differentiated value of users, accumulating more healthcare data and enhance risk control capabilities. At present, we have more than 5,000,000 healthcare members and nearly 1,000,000 users of our healthcare app. Our Water Dog Medical business mainly serves patients, especially those with critical illness. Our long term strategic goal is to build core competencies in the medical and pharmaceutical industry chain based on our medium vacation customers. Our current medical business is mainly divided into 2 segments. The first segment is our PBM service. Our Waterdrop Medicine enables patients' acquisition, retention and conversion. The number of new members for Waterdrop Medicine in the Q1 exceeded 70,000, bringing the total cumulative number of the members to around 140,000. So far, we have established cooperation with 1040 pharmacies. The second segment is our patient management platform. We have established a patient management platform outside the hospital system to help underserved patients with critical illness who need to be on medicine long term after surgery. This platform works with Internet hospitals to provide patients with a range of services, including prescription, healthcare management, medicine purchase and the nutrition supplies. With a community of 100 of 1000 patients, the platform already has the basic functions and service capabilities of an Internet hospital. Meanwhile, we are testing the platform's commercial value on a small scale. In the Q1, Waterdrop has made substantial progress and expected to provide more information in the 2nd quarter earnings disclosure. The next question comes from Michael Li. And as a reminder, please for those who speak Chinese, would you please ask your question in Chinese first, then followed by the English transition. The next question comes from Michael Li from BOA. Please go ahead. Thank you. Thanks, management. This is Michael Li from Bank of America Securities. So I have two questions. My first question is about the growth of FYP. So we noticed that this year is very challenging for all of the insurers in China and the growth of health insurance decelerated to about 16% in the 1st 5 months this year. So water drops about 40% of FYP growth is definitely a better result than sector also in terms of the sector growth, what are the reasons behind this kind of deceleration? And do you see any turning points? The second thing is about product mix. So, Waterdrop improved the product mix in the past 2 years with higher mix of long term insurance? And can you give us some breakdown of long term versus short term in Q1 this year? And also the outlook of the product mix changes in the next few quarters? Thanks. Thank you, Michael. Very important question. I'll try to answer your questions about the industry as well as the growth of water gel and Ms. Jiang Wang will address your second question. First, I assume the recent slowdown in the Chinese health insurance market may be attributed to several factors, first of which the ongoing challenge facing the expanding the expansion of traditional agency force in the fuselage and also intensified competition in Tier 1 and Tier 2 cities in China. And maybe also the speculative marketing OCI policies onto new regulatory definition in the Q1 that have distorted the pace of sales of health insurance products throughout China in the Q2, maybe even into the Q3 of 'twenty one. About ourselves, first, I want to hide the fact that our health insurance business segment delivered very strong growth throughout fiscal year 2020 and also in the Q1 of 2021. We believe that the Chinese health insurance market has huge growth potential as always, especially in lower Tier 3, where an efficient distribution model and attractive product offerings are also lacking. Also, I want to address that so far based on what we have seen, there has been no signs in weakening demand for health insurance protection products in China. And about reasons why Waterdrop managed to grow faster than it appears, It seems the biggest reason is because we have a far more technologically advanced and efficient business model. Based on data insights and strong knowledge of operation know how, we're able to distribute insurance policies completely online, so that we have access to the mass market in China in a cost efficient way. Although we first did relentless on lower tier cities, which have huge growth potential for insurance protection products, especially the health protection, but at the same time, often on the served by existing insurance players. I would also like to hide the fact that we always focus on delivering the true value to our customers, which really will help us to grow our customer base in the longer term. For instance, we didn't do the speculative marketing of only CI policies in January, even though most of our peers did. Instead, we switched to the new KI policies along with forward and compensate set up by the regulators because we believe that new products offered better value to our customers. I hope that address your questions and Mr. Yanbo will address the other question. Thanks, Tian. I think with respect to the product mix, our long term credit bill business insurance grew 132% year over year in Q4 with the growth coming mainly from under the new definition for CIF products. As mentioned by Mr. Pingtan, we didn't participate in the while we continue to diversify and scale up our product offering. And most of our products have been exclusive and customized products. I think in the short term, we still mainly focus house, life annuity, accidental and etcetera. Specific product competition may change at any time according to the changing needs of users. In the future, we do not exclude experimenting with other types of insurance as a property. The next question comes from Thomas Wang with Goldman Sachs. Please go ahead. Yes. So two questions from my side. First one, relatively simple restricted cash balance increased quite a bit versus full year position. Just I'm trying to understand why what's driving that increase. And secondly, policy retention rate in the Q1, can you give a little bit color how does it look versus year on year versus last year Q1 and Q on Q versus Q4 2020? Thank you. I'll take my questions. Regarding your first question, our restricted cash primarily consists of premiums collected by us from the interest consumers in a capacity until disbursed the insured carriers. The balance of restricted cash really increased in line with the increase of FYP, and the relevant balance of payable was recorded as insurance premium payable in our balance sheet. The settlement period of short term and long term insurance brokerage income is generally N+1 and N+ 2, respectively. And in terms of your question regarding our about our retention rates, There was some change in our user acquisition channels mix for the full premium insurance products in the Q1, where our investment in the external user acquisition channels increased and the retention rates slightly dropped accordingly as our user base expanded. We expect the retention rate of long term products to keep stable. There might be some fluctuations in near term, but it depends on the quality and the scale of our users. But we expect the retention rate for long term to be stable. The next question comes from Jin Jing Mei with CICC. Please go ahead. Hi, management. This is Jingjing Mao from CICC. Thanks for taking my questions. Firstly, congrats to the robust performance this quarter. I have two questions. For the first one, I would like to know the company's future development strategy of long term products. For the second one, could you please share more information about the remainder of management fee income in Q1 and the total expenses incurred in relation to the compensation of mutual mutual aid? Thank you. Thanks, Tianjin. Very good question. I think we have achieved very strong growth in long term interest and the short term interest business, respectively. And then I think our strategy to promote the future growth of our long term interest is that we will provide users with more valuable products by continuing to enrich the categories of long term interest product offering, including innovating product portfolios and cooperating with some new interest carriers, especially for those large brands like interest companies in China. We also plan to reach a large number of existing users, which is close to 100,000,000 users to our online channels to convert them to long term interest card users. And also by leveraging our massive user data to intelligently match user and relevance through our algorithm. We keep improving the conversion rate of long term interest business. We started the initiative in April and we've gone our test in May and we expect to see the results in the Q2. And we have also we also have technology in power online sales consultants improve the quality of customer service so as to improve the efficiency of long term interest conversion. We are also testing the business model of promoting the long term interest product by interest brokerage from O2O from online to offline channels. Hopefully, by doing all these kind of implications, we are able to further expand our long term insurance business. And regarding the to the mutual aid program, I will hand it over to Kevin to answer your question. Yes, thank you for your question. Regarding your question about the minimum fee, please explain the remainder of minimum fee income in quarter 1. In connection with the situation, mutual aid, we more than certainly recover mutual aid participant bank expenses arising from condition diagnosed by March 31, 2021 that would have been covered by the cease mutual aid plan. In addition, we offer a 1 year complementary health referral policy to each participant with a similar coverage as a participant's original military plan. And as of April 30, 2021, a total of 2,720,000 people has applied for this complementary health insurance policy. The estimated medical expenses and 1 year health insurance coverage will be partly accounted for as a reduction of management fee income that was previously recognized for each participant to the extent of the cumulative amount earned in the NTO March 26, 2021. In quarter 1, we recorded RMB2.7 million of management fee income. Well off costs amounted to RMB 90 6,700,000, including 2 parts. The first part is related medical expenses are expected to RMB15 1,000,000 and the cost of 1 year complementary health insurance policies are expected to be RMB81.7 million. And as of March 26, 2021, the deducted cumulative net income was RMB19.9 million and the related costs recognized in the Q1 was RMB76.8 million. We are now approaching the end of our conference call. Thank you for your participation in today's conference. You