Waterdrop Inc

NYSE:WDH

Earnings Call Analysis

Waterdrop Q3: Stable Growth and Product Innovation

In Q3, Waterdrop introduced groundbreaking health insurance products, like outpatient and emergency insurance for lower-level hospitals, cancer recurrence insurance, and unit-linked insurance. These innovations address underserved markets and improve customer experience. Waterdrop's technology also saw enhancements with AI enhancing pre-sales efficiency by 20%. The firm's financials displayed a slight revenue growth to RMB 686 million from RMB 679 million last quarter, with insurance-related income up by 3.7%. Thanks to cost optimizations, the adjusted net profit stood at RMB 74.8 million. The company's commitment to user value and sustainable high-quality development persists with continued focus into the future.

Lifecycle Services and Technological Advancements Spur Growth

In the face of turbulent market conditions, the company leveraged its innovative service models and advanced technology to drive growth. A significant 23% sequential growth was achieved in the First Year Premium (FYP) of private domain operations, bolstered by an expansion of the life insurance user base and a renewed focus on life planning services, contributing to a near 2% increase in the first-year renewal rate. The integration of high-tech solutions, such as AI, for pre-sales efficiency improved operations by 20%, while new insurance products addressed specific market demands, including the unique Waterdrop outpatient and emergency insurance, catering to those with pre-existing conditions.

Operational Enhancements and Community Trust Amplify Crowdfunding Efforts

Waterdrop's Medical Crowdfunding platform demonstrated its significant social impact, mobilizing 445 million donors to aid over 3 million patients, resulting in a substantial RMB 61.3 billion raised. The commitment to transparency and user engagement - culminating in the first Waterdrop consultant service month - led to a marked increase in user certification to 98% and a Net Promoter Score (NPS) improvement from 55% to 70%. The emphasis on service-oriented consulting and establishing open communication channels with users reaffirms the company's dedication to trust and efficiency.

Robust Profitability Against Product Assessment Pressures

During a quarter characterized by product evaluations, the company exhibited strong profitability with revenue of RMB 686 million, a slight quarter-over-quarter increase from RMB 679 million. Notably, the insurance-related segment saw a 3.7% quarter-over-quarter increase to RMB 619 million. Additionally, Waterdrop's clinical solution income surged by an impressive 60.7% year-over-year to RMB 27.6 million, signaling a robust growth trajectory. The company adjusted its advertising strategy resulting in a substantial decrease in marketing expenses, which, along with the consolidation of Shenlanbao, led to a sequential decrease in Sales and Marketing (S&M) expenses by 8.2%. Despite increases in General and Administrative (G&A) expenses, largely from the Shenlanbao consolidation, the company achieved an adjusted net profit of RMB 74.8 million and sustained a positive GAAP net profit for over seven quarters.

Future Outlook: Commitment to User Value and High-Quality Development

With a stable quarter behind them and a solid cash reserve of RMB 3.1 billion, the company is poised to maintain a trajectory of sustainable, high-quality development. The focus for the future is firmly on enhancing user value and leveraging technological innovation to foster growth while securing profitability in a challenging market landscape.

Earnings Call Transcript 2023-Q3

[Unknown Executive]

Good morning, everyone. This is [indiscernible] from Waterdrop Investor Relations. It's my pleasure to welcome everyone to Waterdrop 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 safe harbor provision of 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 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 discussion of certain non-GAAP measures. Please refer to our earnings release for a consideration 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. [indiscernible], Board Secretary; and I will be happy to take some of the questions in the mandarin line at the end of the conference call.

[Peng Shen, executive]

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. Our risk factors, including adjustments in product policies have temporarily impacted the life insurance business. With the improvement in industry transparency [indiscernible] of new product policy in market. The company believes that the life insurance industry is entering a new development stage facing both opportunities and challenge. The company actively respond to regulatory direction, striving to enhance business health and efficiency.

For advertising user certification, the company leveraged its key insight into user needs to solidify either service and product innovation stability, embracing industry chain with an efficient and dynamic approach.

In the third quarter, the company continued to focus on creating value for users, achieving a resilient financial performance with approximately RMB 6.9 billion in the revenue maintaining a profitable trend for the past 7 quarters. [ GAAP profit ] reached RMB 36.3 million, showing a Q-over-Q growth of 67% and demonstrating the 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 still maintained a robust cash reserves and the ability to organic growth. The combined cash, cash equivalent and short-term investments are about RMB 3.1 billion, providing flexibility and stability for the company to navigate uncertainties and support long-term growth. All these business models of the company performed well in the third quarter consolidating our leading position in the industry.

Firstly, Waterdrop Insurance Marketplace focused on enhancing business health, optimizing the product metrics through excellent demand insights and the quality improvement and it continued to contribute stable net profit.

Secondly, our Waterdrop Medical Crowdfunding platform continue to improve our service and risk control mechanism accumulatively serving over 3 million patients, emphasize on fund transparency and credibility, actively demonstrating the company's commitment to authenticity. The company adhered to be [indiscernible] consistently enhancing service quality and allocating for the transformation of service-oriented consultants with the principle of [ users first service promote ] in terms of digital clinical trial solution business. The E-Find Platform continued to deepen the collaboration with well-known domestic and international pharmaceutical, expanding the range of recruited disease type, leveraging technological advantages. We continue 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 virus effects of the product, operations and services. With the implementation of our technology, the company will also seek the export opportunity to empowering industry. Meanwhile, the company continued to prioritize and enhance its ESG efforts, striving to deal with sustainable development of the company and society, virus initiatives related to environmental protection, employee right, corporate governance [indiscernible] advantage. In September, the company collaborated with IIGF to initiate the online insurance industry ESG white paper contributing to the practice and development of ESG information disclosure of the industry.

In addition to business development, the company actively fulfilled the CSR in August due to the flood in Beijing [indiscernible] public welfare platform collaborated with well-known charitable foundation to assist the [indiscernible] area. The platform launched as a topic on our homepage and we donated many suppliers to the [ Beijing use ] development foundation.

As of September 30, 2023, the platform has collaborated with 112 public charitable organizations in areas such as serious illness assistance, emergency [ rapid release ] and education support, raising a total of over RMB 1.3 billion with over [indiscernible].

Leveraging our business and technology advantage, we actively participate in the construction of multilevel medical system, implementing [indiscernible] telephone and so on 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 spending over USD 87.4 million. This reflects the company's strong confidence in our value and long-term sustainable development. The repurchase shares will continue to be used for ESOP to enhance internal dynamic and promote mutual growth with our employees.

[indiscernible] a brief review of business performance in Q3. Although facing the challenging in micro environment, we're still fully confident in our results and the industry. Looking forward to the last quarter of this year, our strategies include firstly driven by online and digital preformation. The insurance business will continue to be user centric, striving to achieve long-term healthy and stable development. Meanwhile, we will continue to enhance team efficiency, consolidate by the business foundation and provide users with professional and stock for service.

Secondly, the crowdfunding business will continue to adhere user first and [ ease of doing ] service model, leading the industry towards high-quality development. We will also adhere to transparent operations and implement strict risk management, will actively fulfilling CFR. Thirdly, leveraging big data. The pharmaceutical business will continue to increase industry penetration globally in order to construct a long-term growth engine.

Fourthly, the company will make use of [indiscernible] cash reserves and seek cooperation and investment opportunities around insurance and healthcare sectors. Last but not the least, the company will accelerating 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 prioritize user value, focusing on high-quality development. And we're advancing business synergy and organic growth constantly expanding business boundaries to better bring insurance and healthcare service to [indiscernible] technology.

And next, I will pass to [indiscernible] development of our insurance business in this quarter.

[Unknown Executive]

In the first 3 quarters, the growth rate of life insurance go down against the backdrop, the FYP reached RMB 16.95 billion in this quarter, with 38% long-term insurance propulsion. Insurance-related income reached RMB 6.2 billion, and the operating profit reached RMB 1.5 billion. Among them, the FYP of short-term insurance business reached [ RMB 10.5 ] billion.

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 [indiscernible] model to enhance content production capabilities, driving a significant increase [ in the chat channel views ] with a sequential growth of 16% in the following numbers.

The company also continued to upgrade the intelligent dialogue chat bot, driving a sequential increase of 6% in the renewal rate for short-term insurance and is remaining above 90%.

Long-term insurance business is further developed in the third quarter, achieving our FYP of RMB 640 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 adheres 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.

The platform's long-term insurance products offerings further expanded the proportion of life insurance users increased sequentially, driving an almost 2% increase in the first year renewal rate. In the third quarter, the company demonstrated resilience in developing new service models like in our life planning segment market with declining interest rates, the company continued to build content capabilities and online planning service around the combination of life planners and in insurance. The team continues to grow achieving a new monthly FYP record despite the challenging market conditions.

In 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 15% year-over-year. Regarding Shenlanbao, what is our insurance marketplace in Shenlanbao, preliminary core business synergy, significantly enhancing content marketing capability. The monthly FYP [indiscernible] a new high during this quarter.

In Q3, the company optimized its insurance products to meet the rising demand. In the health insurance sector, the company introduced Waterdrop [ Launching Outpatient and Emergency insurance ]. It is a ground breaking product and is first in industry that cover medical expenses in the -- in below secondary level community hospitals and township hospitals, which drives the shortcomings of existing product in the market, targeting users with preexisting condition.

The company upgraded its service by introducing Waterdrop Ai Wuyou Cancer Recurrence Insurance. This product provides comprehensive coverage with high coverage amount of flexible options for a wide range of users. Additionally, the company launched Waterdrop Blue Ocean number 3 series unit insurance, further enhancing the experience for [indiscernible] users.

The company also responds to public product policy shift in savings insurance by offering diverse options tailored to different segmental [indiscernible]. In Q3, Waterdrop continued to enhance its insurance technology capabilities, investing in a large model and AI technology to empower our business and deliver high-quality insurance service. The company utilized algorithms and AI to automatically identify potential intention in the presales process, significantly improved efficiency by 20% with the assistance of AI technology. Salesmen were able to achieve more refined user segmentation, is actively engaged with other users.

The company also launched large module technology to create an insurance assistance based on our Waterdrop insurance knowledge big data. This assistant can answer questions related to insurance application claims, coverage responsibilities, premiums and so on, assisting our salesmen to promptly addressing to users concerns.

Additionally, the company successfully launched an intelligent copywriting assistant with content production capabilities to assist our salesmen in addressing more accurate and professional, personalized content. This is launched. Over 1000 salesmen has utilized this tool, significantly improved our efficiency.

The above was about insurance business performance in Q3. [indiscernible] of Waterdrop crowdfunding and digital clinical trial solutions.

[Unknown Executive]

Thank you, [indiscernible]. As of the end of Q3, Waterdrop Medical Crowdfunding platform has simulated 445 million donors, assisted over 3 million patients and raised over RMB 61.3 billion, both yielding [ members and fund raising amounts ] continue to grow. In Q3, Waterdrop Operating Transparency Committee further enhanced platform [indiscernible] information displayed page with 4 different models like information disclosures, platform verification, public combination and [indiscernible].

This provide a more comprehensive representation of key details and to enhance consultant service. We conduct the first Waterdrop consultant service month in August. We standardized our consulting operations with the release of [ Service Handbook ] and improved overall service quality and risk awareness. As a result, overall user certification rose to 98% and the NPS for [ fundraising ] increased from 55% to 70%.

In Q3, we continued the transition to service-oriented consultants in 45 strategic hospitals nationwide. This approach was received high praise from both hospitals and patients. The platform will further improve the efficiency of service-oriented consultants while maintaining service quality.

We prioritized user experience hosting the first donor and fundraiser Open Day in September with the same [indiscernible]. The company's CEO, Shen Peng and [indiscernible] with donors and fundraisers to have deep communication on fundraising service experience on transparency and case [indiscernible]. The company will continue to listen to user feedback, focused on technology innovation to enhance their efficiency and transparency will honor the trust of every user.

Digital clinical trial solutions business showed stable and healthy development in this quarter, with the quarterly revenue of about RMB 27.6 million, representing a year-on-year growth 60.7%. During Q3, the E-Find Platform expanded its collaboration with over 135 pharmaceutical and CRO, signing over 90 new projects with a rapid expansion [indiscernible] excellent ability of recruitment and top project management, cooperations with leading MNCs really given this quarter. The platform entered into an exclusive participate recruitment patients with psoriasis clinical trial product with one of the worlds top 5 MNC. Additionally, supply process were initiated with 2 top 5 MNCs with formal collaboration expected in Q4.

The E-Find Platform continues to expand the application of cutting edge technology to accelerating new drug development, leveraging big data and structured information from clinical tire projects. The platform used AI-driven matching system to enhance efficiency in connecting patients with suitable projects. In patient service due to [indiscernible] 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 service such as patient action, medication management, medical service, innovative payment solutions and data insight and so on, providing the 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 and now I pass to Yang Guang for the next part.

[Guang Yang, executive]

Thanks, [indiscernible]. Hello, everyone. I will now walk you through our financial headlines 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 a robust profitability. The company revenue was RMB 686 million, a slightly Q-o-Q increase from RMB 679 million. From segment report, it is the first quarter that we started to consolidate in the financial results of Shenlanbao and reported that -- the results and the insurance-related segment. Our insurance-related income was RMB 619 million, showing a 3.7% Q-o-Q increase. Crowdfunding service fees were RMB 36 million. The clinical solution income was about RMB 27.6 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 Q-o-Q. Operating costs decreased by 8.5% year-over-year to RMB 313 million, mainly due to, firstly, a RMB 19.5 million decrease in the cost of 1-year health insurance coverage related to termination of mutual aid plan, which was occurred in the same quarter last year.

Second reason will be -- was a RMB 9.4 million decrease in costs of referral and service fee. S&M expenses increased by 36.1% year-over-year to RMB 187.7 million, and it was primarily due to, firstly, the consolidation of Shenlanbao, which generated S&M expense of RMB 28.1 million. Secondly, RMB 14.4 million increase in marketing expenses to third-party traffic channels. And thirdly, RMB 9.1 million increase in personnel costs and share-based comprehensive expenses.

In this quarter, the company perpetually adjusted certain advertising strategies. There was a RMB 41.3 million major decrease in marketing expenses to third-party traffic channels, partially offset by the consolidation of Shenlanbao, S&M expenses decreased by 8.2% sequentially. G&A expenses increased by 39.7% year-over-year to RMB 114.6 million and increased by 19.4% sequentially. Both Q-o-Q and Y-o-Y [indiscernible] due to the consolidation of Shenlanbao and the increase in professional service fees.

R&D expenses decreased by 5.7% year-over-year to RMB 73.9 million. The decrease was primarily due to personnel costs and share-based comprehensive expenses. Adjusted net profit attributed to the company in Q3 was RMB 74.8 million. The GAAP net profit was RMB 36.3 million and we have generated GAAP profit over the positive 7 quarters.

As of the end of September 2023, the company had combined cash, cash equivalents and short-term investments of RMB 3.1 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 development.

[Unknown Executive]

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

[Statements in English on this transcript were spoken by an interpreter present on the live call.]