Q3 2019 Earnings Call
Relating to future performance of the company. These statements are within the meaning of the safe Harbor provisions of the U.S. Private Securities Litigation Reform Act such statements are not guarantees of future performance and are subject to certain risks uncertainties assumptions and other factors some of this.
Beyond the companies come true and could cause actual results to differ materially.
From those mentioned in todays press release, and this discussion a general discussion of the risk factors that could affect Jim plus business and financial results is included in certain filings of the company with the Securities and Exchange Commission. The company does not undertake any obligation to update the forward looking information, it's an excel.
As required by law during today's call management were also discuss certain non-GAAP financial measures for comparison purposes, only for a definition of the non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results. Please see our third quarter 2019 earnings press release issued earlier today, we are wire services and.
Also posted in the Investor Relations section of our web.
Website as a reminder, this conference is being recorded a live webcast and the replay of this conference call will be available on Jim who website, Ed I'll jump without a on joining us today on the call from Gimpel Senior managements, Ami stellar year co founder chairman and CEO and Mr. often sales.
No.
I will now turn the call over to Mr., Yu, who will provide an overview of the company as well as performance highlights of the third quarter Mr. Chen will then provide details on the Companys financial results and the business outlook before opening the call for questions.
Yes. Please go ahead.
Thank you Jim Hello, everyone. Thank you for joining us on our call. Today. We are pleased to report another record aligning with our mission to become everyone's financial partner.
This quarter, Jim who has beaten guidance, we have exceeded our guidance for the past nine consecutive quarters since our IPO amidst the challenging macroeconomic environment.
Certainties in China retail financial industry.
The 18 loans loan trade disputes has heightened as a result.
Economic slowdown so growth of China has cooled down to over 20 year alone.
No slowdown from macro economy, Hi, Andy could the tightening continues to put downward pressure on consumer on as the media Landon.
According to Pwc, so central bank so the growth.
Retail consumer loans significantly slowed down in the first half of 2019.
The incremental loaning less than 30% over the second half of 2018.
Licensed nonbank financial companies or Nbfcs noon on disbursement in Q3 was almost flat with 0.02%.
Increase compared to Q2.
Over the increase.
For short term loan disbursement by meeting and a small sized banks increased only 1.4%, which is significantly lower than the same period last year.
The same time, so growth of critical revolving balance also slowed down sequentially in the third quarter.
The tech enabled retail financial services industry in China today is entering a new era of transformation and the reset.
As a financial service providers are accelerating their digital adoption.
The online lenders funding source, a moving towards better regulated the institutional funding.
The increasing protection of personal financial information you specialty on how the data is utilized shared on the distributed.
Moreover, some over aggressive or you properly collection practices by third party data collection agencies have caused widespread concern on the became a rising challenge in the short term for all players you in financial services industries.
Last year in recent months regulatory authorities across a range of juries jurisdictions have issued quite a few new rules regulations and guidance, including Andrews regulating personal consumer finance, where you find good in Shelby diagram youre going to.
Intelligence.
Guidelines regulating cooperation between commercial banks and the Fintech companies.
Referring Colliers June could you confirm what sort of concern.
Guidelines for protecting.
Personal financial data and information couldn't genome sheep, our coupon far and the guidelines for transitioning into the lenders into a macro lending companies well and then she she joins year Trenching Charlotte Douglas Adams.
Which we can see that the current the trend of for industry regulation ratification continually hi, doing so overcrowded moment.
We want to our investors to be aware of these industry regulatory policy change on the reform.
Under mountain regulatory pressure, so industry entered into a relatively tightening cycle, which consequently has the impact on the supply of financial products being listed on our platform. However, our strong technological capabilities industry no.
Now on the Indepth relationship with financial institutions, well position us as we tackle and the comfort onto the new regulatory challenges.
For the third quarter, our credit card business businesses remains resilient.
There could you kind of volume for recommendation services increased 60% year over year, you continue to work.
As the largest the platform of owner user acquisition for a major banks and the credit card issuers.
We have actually strengthened our market position in spite of these turbulent market environment.
So far we hope the close to 30.
Largest a bank credit card issuers.
And then you should more than 50 million Cody cards cumulatively.
In addition, we're striving to deepen our cooperation with banks by exploring new each new initiatives of launching their wealth management and the deposits product and the next morning, then to improve their digital marketing risk management and a technological capabilities.
To seize the involving opportunity in the new era of digital financial services industry, We continue to invest in technology and our people not to have to advance new segments of our businesses.
We are further leverage cutting edge technology, such as AI data science cloud computing, and a digital organization to optimize our operation, including user acquisition and engagement data analytics security sales and marketing on the part on engagements.
In the past the three quarters, we have deployed 20% of our our research and development and other resources.
On efforts into new businesses, which we believe will fuel our growth moving into next year and beyond.
Going forward, we will remain focused on these new initiatives better positioning our sales to capture medium to long term growth opportunity in the digital financial preservative.
Services sector in China, and a globally with that I'll now turn the call over to our CFO , Oscar Chen who will discuss our financial results.
Thank you, David and Hello, everyone.
Outperformance in the third quarter reflects our efforts in optimizing the business and the tablets Sutherland's operating environment as a result of our continued efforts to actively evolve our business.
In meeting the needs of the digital financial services industry revenues from banks and the license for financial institutions contribute a larger percentage in the past quarter.
Healthy gross margin.
Growth improving too.
92% in the third quarter of 29 team.
From 89% in the same period of trying to 18.
We strive to continue our balance the strategy.
And the stable foundation of sustainable operation of the business in maintaining our leadership in retail financial service sector, we are well positioned to move up with the market as demand for recommendation services under the capability to fulfill demand normalizes within the boundaries of the new regulatory.
Funds that are meant to standardize online retail financial services and protect consumers.
The boys.
Davies financial highlights for the quarter operationally credit card volume for recommendation services was up poker approximately 1.8 million, representing an increase of approximately 6%.
From the same period of today team the average FICO credit card or recommendations services increased to RMB.
One of nine in the third quarter of 29 team from RMB, one hour fits in the same period of 218.
As a results revenues from recommendation services for credit costs increased by nearly 7% to RMB 195.6 million in the fourth quarter upturn in 19 from RMB 183.5 million in the same period trying to 18.
Also encouragingly gross margin improved to 92% in the third quarter of 219.
For the third quarter, we reported total revenues of approximately RMB 324 million, a decrease of 27% year over year and a non-GAAP adjusted net loss of nearly R&D.
101 million.
Total recommendation services revenues decreased by 24% year over year to RMB 282 million in the third quarter.
Due to 53 year over year decrease in loan recommendation revenues.
[noise] offset by a nearly 7% year over year increase in credit card recommendation service revenues.
Revenues from advertising and marketing services and other services decreased by 44% to RMB.
38 million in the third quarter of 29 team from RMB 66, or 7 million in a same period of 218.
Since the company's slowed down the pace of certain advertising business.
Given the lower efficiency and missed the challenging micro.
Economy in environments.
Sales and marketing expenses decreased by 4.4 hundred 6% to RMB 325.3 million in the third quarter of 2019 from RMB.
Three 341 million in the same period alternate team. The decrease was mainly due to the cut down our traffic acquisition costs.
R&D expenses increased by 4.84 different increased by four point.
4.7% to RMB.
67 million in the third quarter I'll turn the 19 from RMB.
63.5 million in the same period of 2018, primarily due to the increase in the payroll costs incurred for the new business initiatives.
Our general expenses decreased.
Bye.
That is expert [noise].
Is that.
For the 6.8% to RMB 31 million in the third quarter.
RMB 48 million in the same period of 218.
As a result, non-GAAP adjusted net loss was RMB 101 million in the third quarter I'll turn the 19 at the same time non-GAAP adjusted EBITDA was a loss.
Maybe.
93 million compared with a loss of.
13 million during the year ago periods.
In response to the challenging microenvironment, the management has implemented certain measures to maintain and enhance.
Our operating efficiencies, including.
Cut down marketing and other direct costs to offsetting the negative impact from supply sides of our platform.
And also launched cost optimization program to enhance productive productivity, perhaps however, due to the lagging effect of such measures, we expect margin improvement.
Not in Poland toward first half of next year.
At the same time, we want to shareholder we want our stakeholders to be aware of.
The current call an extensive structure also contains certain upfront investments on new business initiatives. The expenses incurred in this area was around RMB 200 million in the third quarter and around RMB 35 million in the first nine months.
The vandermeer strongly believe that such investment will fuel our future growth and create shareholder value in a long runway.
As of September 30.
2019, we maintained a strong balance sheet with cash and short term liquidity of RMB 1.1 billion.
Regarding the outlook the company anticipates, the external environment to remain uncertain and the challenge and consequently.
The financial products available on our platform may continue to decline in upcoming quarters.
Based on the current activates the company expects total revenues for the fourth quarter funding 19 to be approximately RMB 240 260 million.
With that I will conclude our prepared remarks, we will now open call two questions. Operator. Please go ahead.
Thank you we will now begin the question and answer session.
Good question you May Press Star then one on your Touchtone phone, if you're using speakerphone. Please pick up your handset before pressing keys to withdraw your question. Please press Star then too.
For the benefit of all participants on todays call. If you wish to ask your question to management in Chinese. Please immediately repeat your question in English.
This time, we'll pause momentarily to assemble our roster.
So first question today comes from John Hi of Morgan Stanley . Please go ahead.
Hi, Thank you.
Taking my questions. So I.
I think my questions is.
More related to the.
The sector or correlations obviously.
Mentioned that the plant in activities, it's been actively impacted by the regulatory type and then just wonder.
If this.
And the outlook on that we expanded to.
Cool.
Next year and.
And also.
Right and we mentioned about investment into new business.
Any color on tax rate also don't ask questions is about a reason.
In regulatory sandbox approach.
Button.
On release in the news.
A few days ago so.
With that help.
In any way you some.
Of our business. Thank you very much.
Thank you John This is David I would I would try to take a stab on your question.
So.
The first part regarding.
Regulatory environment going forward.
We would expect a tightening in lending markets.
The revenue trend.
Probably we will continue.
After the Chinese new year, which will have in the end of January .
And.
We believe the retail financial services industry sectors or.
Certainly well the.
Quarter away, but we definitely we all expect a mall.
Visibility yeah, you after Chinese new year, which is almost a good early Q2 off next year.
And operationally, we believe as a business will slowdown.
Because the end of year and also January's, that's 70, Chinese new year, but a expected bins take off after.
After February so operating environment will be challenging but.
We also we have seen that at the competitors. So similar business models. The that's you're in a much hotter positions.
Due to San revenue raising and also there operation reason and also liquidity problems.
And also for US the advantage of being the independent and the open platform, we will have a huge benefits because as soon as the market.
Takeoff, we've been able to capture.
The scalability and that our light asset model, we will we are gains in market the growth and advantage and also keep in mind. We are the allied asset platform, we don't own take any risk.
I don't have any and quite a liquidity or any market risk. So this put us in a relatively stronger position.
That's the first part a second part I believe John you asking about the sandbox.
The regulatory.
And we'll just lost the bye bye bye Bye Bye Bye peoples bank of China, The Central Bank.
On December 15, just a few days ago, so as far as we we understand the after it had some dialogue with the regulator just a few days ago me.
There are about a 40 40 546 project there is gonna be part of the.
Sandbox, so basically the purpose of.
Put in Beijing, as the testing city for them for the for the so called the Fintech.
Innovation under supervision Sandbox is a two viewed the fintech.
Superior supervision and regulation basic rules and framework because so far.
We know ended up in the past due to a couple of quarters, we have rules regulations from different.
Hi, Raptor bodies, but this is the first time to Central Bank, saying, Hey, Paging go ahead of viewed as a base because loose in the framework for financial supervision and that's the first the purpose so they're going to propose explore exploring more like transparency of whom inflammation and a more.
Product demonstration and the more supervision from from far far relevant bodies I ended the third one they tried to do them more inclusive and a more prudent.
Fintech.
Innovating and I'm the under supervision tools, they tried to improve and enhanced financial regulatory agencies professionalism.
And also tried to increase transparency.
The standardization, which is very important. So so we believe were more clarity and transparency standardization and a more more professional which will be available via we feel we ought be benefit the sector in a short term each one of course in long term.
Hi into finally Indian turns out.
The.
Then ted or supervision sandbox.
A couple of we have seen probably initiatives are there have launched basically the one too.
There are more more more project of intercompany get assisting connection into the into the testing moment on test in bad debt.
Given the more more more illumina foreclosure more closure Fronda financial institution financial.
Service provider side, no wonder some product registration undergo disclosure and so you're not case, we believe we we position that as a tech enabled the open platform on we are able to walk up is that will probably authority.
Paging municipal government and also the Beijing, the Internet Finance, Fintech associations, and China, Fintech Internet Finance Association, which would be in the past the six seven years, we have Oh, we have partnership we have a corporation and we also have selected initiative with the realm bodies will be part of that.
General and trying to engage with the PRC endorse the Beijing, Fintech innovation and supervision sandbox.
Who joined the answer your question, especially second part second half.
Yes so.
Oh, just to follow up on the new business initiative for us.
Hurt that there's some investment in that area.
This any color there can be provided.
Helpful. Thank you.
Sure John I think Oh.
Our new business in the initiatives or be a I think you know.
Probably two categories, one as a category expansion in terms of financial product.
To leverage our platform advantage for cross selling and also.
The geographic.
Expansion.
On average our.
Acknowledge.
And industry know how to penetrate into the other markets.
So I think we can share more probably next quarter something but.
One thing I want to emphasize is that management.
As and well be very disciplined in terms of the spending on the new business in initiatives.
Thank you Oscar that's helpful.
Again, if you have a question. Please press Star then one.
Your next question today comes from Chile Hall of you'd be at please go ahead.
Yeah, Good model, David and Alphacat. Thank you for taking my question I have two questions. The first one is all the grab your break down until two revenues declined by 11% quote unquote I wonder what Instagram.
So from banks like us financial institutions, and licensed Lantus Hodges compared to previous quarters.
Seven a question, yes, I would you see quota as advocacy Parliament application war cementing E. Bush's aging RMB seven quota what are the key drivers behind the decline and how should we think about get into fourth quarter.
Also on the credit cost side.
We still expect on increasing I would you see part quite easily.
Fourth quarter, Todd as was the case in previous years. Thank you very much.
Yeah, I think thank you Julie I think in terms of the revenue Oh.
Revenue contribution from the bank banks and other.
Licensed companies, where we are seeing.
Slight increase.
In terms of revenue contribution percentage.
From a last quarter.
Given.
Given the you know the girls and credit card and also the shrinking in the.
The lending.
The loan recommendation services, we are seeing you know more revenues from the from the banks HM.
I think it's a it's a two to three percentage point.
Increase compared to the last quarter a in terms of the you know a revenue contributions from the banks and other non bank license the financial manager institutions regarding your second question.
About the the alone recommendation.
There's a yes, yes, there was a slight increase a slight decrease in terms of the ASP, but looking through the.
Thing look into the you know.
Loan recommendation breakdown, it's a it's almost the same Uh huh.
I think the slight decrease also.
It is also an evidence of the you know a last.
Financial less financial products available our platform that that means you know the.
The reducing demand.
From the financial service providers in terms in terms of borrowers acquisition.
So that's a I think thats fairly reflective of change.
Great that the that the answer question.
Yes, and how about fourth quarter guidance, Oh My God.
Yes, Keith.
The for the good examples are the fourth quarter is he I think in terms of the people for bowls and credit card and the loan recommendation. We we would expect a credit card we may see slide.
Increase in terms of the.
The per car issued a four of our loans given you know a given the challenging environment and the declining trend of the product available on platform.
So we would oh, we would expect or another slide decrease in terms, but but not that not much maybe one R&D also.
Uh huh.
In terms of low ASP.
I hope that also.
Yeah. Yeah. Thank you also asked a question on R&D expense.
You mentioned that there is a sequential decline.
R&D expense due to cut in payroll costs. So do you have employee turnover in this quarter and aster. So we'll continue to leverage technology to improve business, how should we project R&D expense going forward. Thank you.
Julie I, Yeah, first I want to clarify, but yeah I'm, what we meant a what I mentioned is that we cut down the acquisition costs in terms of traffic acquisition.
But for R&D as the year over year trend is ER.
I think it's increasing trends.
<unk> increased by around.
5% year over year, but we will we may also want to mention that amount that R&D costs. So we are we're trying to improve R&D efficiency for the existing business and the shifting.
Shifting around 20% as Dave mentioned, R&D efforts and the resources to our new business initiatives.
So overall, the R&D cost Inc.
Yes. Thank you.
[noise] next question today comes from Linda Chen of Goldman Sachs. Please go ahead.
[noise] hi.
Thank you Michael.
Two questions first one I'm not following up on comical that we have caught a topic acquisition costs for the quarter. Just wondering how much are coming from let's say that Chico cry, keeping your advertising market or versus Oh, we actually with mom it depends on our that it could be lower lumber.
For the quarter on the my second question, Bob That's who we modified our nation.
Now I'll turn the discussion offline ATP from a two hour Oh, well watch how do we feel good financial institution.
Yes, Oh I'm sure it's.
Thanks very much.
HM Okay. Thank you Wendy.
Let me answer your second question first.
Oh, sorry, if is fully were launch so.
Oh, we're seeing you know or the number of financial service providers our platform.
You know is remains stable the number remains a finish institutions remain stable, but you know we're seeing you know are less supply.
Off the financial products, mainly because the you know a the increasing tightening credit environment and an awful.
Yeah, no both credit card issuers and credit card issuers, the banks and other known.
Financial and I know on nonbank financial decisions like.
There are there enhance their quite a policy in terms of the you know a use acquisition. So this is or how are you know.
It did a their demand in terms of the you know.
The activities on our platform I still active but in terms of volume or the number of financial products available Oh platform. It's a it's a declining trend I because they are changing the they're shifting there.
They are tightening the credit policy there just.
Financial service providers are just the their funding source.
From the no like Peter piece.
They're shifting away from the retail funding onto the institutional funding.
ER and and and also [noise].
Some other or some other impact.
In in the market also have some.
Impact on the other activities Oh platform.
So regarding the.
The traffic cost.
In terms of the unit.
Traffic costs of the of the U.S acquisition for example.
For example, the the APV downloads, we're seeing a declining trend.
Oh.
For instance, a one OEM at store we are seeing.
The acquisition costs is Oh, it was hop off the one half of the you know.
Standing compared to the one quarter ago. The overall you know.
The traffic acquisition costs I think in the retail financial services sector.
May decline a in the past quarter, but to our case is that [noise].
So all cases that.
You know.
This this also impacted.
The supply side of our.
Of all of our platform.
That means the.
You know a less of a number of finished products available on platform. So.
We we were still folks on the you know return of investment of our business model, but given the tightening credit policy.
Given the.
You know less demand from the financial service providers in terms of will use acquisition. So oh, it impacted our monetization capability. So although the unit cost of ER abuse acquisition is declining.
Got you know.
Given the scale and that given the efficiency level we have.
That's a you know you can see the number of our you know.
Sales marketing efficiency.
Okay.
So when do you I believe was the last part of your question is about as is the HBP you realistically you may gap stores.
Right I endeavor.
We are only most of my abbey's resumed.
Listing in apples to other other OEM map allografts too.
End of Q2 and of course, the fully launched and you could three and that's that's that's what happened however.
Among the whole.
China mobile sectors.
Yes, I knew you still going on like for October 26.
There is a there is a ATP is governance looking growth initiative, which is.
Mostly under the supervision by converting Bull Richards industrial and the information Ministry.
Basically there have new you'll see in turns out how mobile applications. So ATP collector personal information.
In terms of for mobile payment to online.
Wealth management and lending.
And also even for some general general applications.
We know we know as of last week.
So I wouldn't go away piece the go to the delisted by the that by the this ATP special governance looking group.
Including thousands of.
Thanks, We know massive last week, one is a top 10 bank major beauty Colin discussed as well. So so we are we off our PBB is not impacted by this new new governing new new especial governance initiative about that but in the meantime, we also helping our Oh financial.
The institution partners that banks and credit card issuers on as we know sometimes there are small banks have Luna commercial bank or CD commercial bank said, they also trying to figure out how to fully compliant.
Vis vis the reason that EVP governance initiative. So so so we're working with some of the banks in terms of will help him then to enable into too many there.
Privacy and data governance, better and helping them to relaunch that digital marketing initiative. So so yet Devon, even do some sounds like shorten the impact, but we believe as well as our financial institution partners.
And manage their ATP digital marketing data privacy high end and a information security better we are able to help heading into two to better grow their digital businesses that next year.
Great. Thanks, very much else can go that far helpful.
That concludes the question and answer session I would like to turn the conference back over to management for any additional for closing remarks.
Okay.
Thank you once again, Virginia today, if you have a any further questions. Please contact us as I am afraid they see dot com. Thank you for your attention. We hope you have a wonderful day.
Thank you. Thank you everyone.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.