Waterdrop Inc

NYSE:WDH

Earnings Call Analysis

Insurance Marketplace Drives Steady Growth Amid Challenges

In the face of a complex environment, the company managed to increase its active agents by 108% year-over-year (YoY), while insurance product sales went up by 8% YoY. The synergy with Shenlanbao led to CNY 102 million in contributions. An innovative focus remained, with the E-Find Platform, which covers preexisting conditions, spearheading health insurance growth. Artificial Intelligence (AI) initiatives streamlined operations, taking on 90% of human broker work. Despite a 3% decrease in net operating revenues YoY to CNY 659 million, the digital clinical trial segment saw a substantial 69% YoY revenue increase. Costs increased by 13.5% YoY, while net profit stood at CNY 59.1 million. The company's cash position grew by 8%, enabling a special dividend of approximately USD 15 million, or $0.04 per American Depositary Share (ADS).

Resilience in a Regulated Environment: Fourth Quarter Performance

Amid the cautious regulatory environment, our company managed to continue its growth trajectory. Total revenue for Q4 2023 reached approximately 659 million CNY displaying stability and adaptability. Our GAAP Net profit saw a substantial quarterly increase of 61%, hitting 59.1 million CNY, while the annual figure for net profit settled at around 167 million CNY. As a cornerstone of financial health, our cash balance, including short-term investments, grew by 8%, resulting in a robust reserve of 3.39 billion CNY by year-end.

Strategic Business Segments: Solidifying Market Leadership

Our business maintains a stable development across all sectors, constantly reinforcing our industry dominion. Specifically, our Waterdrop Insurance Marketplace deftly navigated the turbulent industry landscape, producing steady profits, and our E-Find Platform saw a significant uptick in client acquisition, both domestically and internationally.

Innovations and Charitable Initiatives

The company actively intertwines ESG principles within our operations, cementing our commitment to sustainability and corporate responsibility. This dedication has led to our ESG rating being upgraded to 'A', placing us at the forefront in the insurance sector. Additionally, our AI-driven technology has enabled increased efficiency across insurance services, signifying our role as a leading technology innovator within the industry.

Financial Health and Investor Confidence

The Board of Directors has sanctioned a special cash dividend of roughly 15 million USD, reflecting our strong financial health and intent to generate value for our shareholders. This move also demonstrates our confidence in the company's long-term prospects.

Operational Efficiencies and Cost Management

Operating costs experienced a moderate increase of 4.3% YoY for the Q4 due to the financial consolidation of Shenlanbao, but we managed to decrease costs and expenses by 8.1% from the previous quarter as part of our strategic adjustments. This prudent management showcases our ability to maintain profitability while investing in growth opportunities.

Focus on Continuous Profitability and Growth

With profitability achieved in each quarter of 2023, we met our financial targets. The forward-looking statement for 2024 underlines our commitment to driving shareholder value through sustained healthy growth and profitability. We are poised to leverage our cash reserves and strategic acumen to thrive in the evolving market landscape.

Earnings Call Transcript 2023-Q4

[Unknown Executive]

Good morning, everyone. This is Tracy [indiscernible] Investor Relations. It is our pleasure to welcome everyone to Waterdrop's Fourth Quarter and Fiscal Year 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 provisions of the U.S. Private Securities and the Litigation Reform Act of 1985. Forward-looking statements are subject to risks and uncertainties and may cause actual results 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 reconciliations between non-GAAP and GAAP.

Joining us today on the call are Mr. Shen Peng, our Founder, Chairman and CEO; Mr. Yang Guang, Co-Founder, Director, SVP and GM of International Business; Mr. Zhu Zetao, GM of Medical Crowdfunding and Pharmatech Business Director, GM of Insurance Technology business; Mr. Zhu Zetao GM of Crowdfunding and Pharmatech business; [indiscernible], Board Secretary. And we'll 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. Let's talk about our industry development first. Looking back in 2023, thanks to [indiscernible] economy stimulus target, the Chinese economy shows a gradually stable and recovery trend. Despite that, the regulation of the personnel insurance industry remains cautious, as it is continued to evolve towards high-quality development.

So as we saw the challenges and opportunities, we firmly relate with the clear guidance and gradual implementation of new regulation policies to help in working capabilities and sustainability and the industry will improve further in the future. Market participates with brand and technological advantages are more likely to stand out, as such, we will build up new quality productivities with improved technologies and innovative business models, leading our industry to its transformation and upgrading.

We feel really confident about this. In terms of financial performance, in Q4 of 2023, the company continues to uphold its entrepreneurial spirit and pursue healthy business development, which was adapted by stable and resilient financial results. Total revenue reached about CNY 659 million. Since Q1 of 2022, we have continuously recorded stable profitability for every quarter.

In the fourth quarter, the front line performance further improved with GAAP net profit attributable to the company reaching about CNY 59.1 million, representing a 61% Q-o-Q growth. For the fiscal year 2023, the GAAP net profit attributable to the company is about CNY 167 million. In the meantime, we saw consistent cash inflow from operations, building up our cash balance. As of the end of 2023, the cash, cash equivalents and short-term investments totaled about CNY 3.39 billion, an 8% increase from last quarter.

Our [indiscernible] cash reserves strengthened our foundation for carrying out steady business development plan [indiscernible] in our long-term growth initiatives and enabling us to embrace industry changes with confidence and technology competitiveness. From a business perspective, in Q4, all business segments maintained stable and healthy development, continuously solidifying our leading position in the industry.

For Waterdrop Insurance Marketplace, despite difficult industry situation, we actively developed the new products and models with our [indiscernible] and then continuously generate steady profit. For Waterdrop Medical Crowdfunding, we remain committed to our principle of [indiscernible]. Continuously, particularly in development of multi-level medical support system, we consistently improved its transparency and operational efficiency while in the segment was reduced compared to last quarter.

For E-Find Platform, we continuously enhance its service capability through business upgrade. In Q4, the number of aspiring clients increased significantly, making good growth in our cooperation with both domestic and foreign pharmaceutical companies. For the full year, this segment recorded year-over-year revenue growth of nearly [indiscernible].

For R&D, as a technology-driven company, we maintained substantial investment in R&D and applied for more than 10 AI large language model, LLM patents. In the fourth quarter, our first development in LLM [indiscernible] completed [indiscernible] its application to intermodal cases, which brought efficiency improvements throughout the entire insurance services.

Now I will touch upon our charity and ESG initiative. We do actively incorporate ESG principles into various aspects of our operations, environmental protection [indiscernible] community investment. Tightly integrate ESG values with our corporate DNA. The latest ESG rating results [indiscernible] leading ESG institution [indiscernible] shows that our ESG ratings have recently been upgraded to A, the leading score among players in the insurance sector.

So [indiscernible] charity perform, we remain [indiscernible] our CSR. We [indiscernible] medical support information system, which [indiscernible] security [indiscernible] medical assistance and charity in finance service. Upon its launch in August 2023, it has assisted the government in establishing a provincial level medical support platform. By year-end, nearly a 1000 patients have applied for [indiscernible] on the platform. These projects have been honored with the [indiscernible].

In December 2023, in response to [indiscernible] earthquake [indiscernible]. And I would also like to update everyone with our actions taken in the Capital Market. Regarding the share buyback, as of the end of February 2024, the company has cumulatively repurchased about 39.7 million ADSs on open market at a total nearly $88.8 million, which affirms our confidence in our business value and its long-term effect.

Furthermore, the repurchased shares will be used for ESOP to motivate our challenging [indiscernible]. Moreover, Waterdrop continues to uphold our commitment to our shareholders. Our Board of Directors have approved a special cash dividend plan totaled about $15 million with $0.04 per ADS.

On the healthy financial performance of the company and its commitment to shareholder value, the company is pleased to initiate its first dividend program, and we will try to continue to return value to shareholders in the future. This is a recap of our development in Q4 [indiscernible] our business outlook [indiscernible] industry.

Looking into 2024, our strategies are -- for Insurance Marketplace is that we are here [indiscernible] as core principle committing to providing the back-end service to [indiscernible]. Meanwhile, we would develop more customized, better useful money. And that is the money insurance product through technological innovation to target various [indiscernible].

For Medical Crowdfunding, we continue taking advantage of our scaling technological capabilities to ensure sustainable development while fulfilling CSR and user needs.

For E-Find Platform, we will continue to [indiscernible] advantage, actually [indiscernible] innovative [indiscernible]increase our network penetration, established service capabilities in multiple diverse categories, increase a new growth engine for long-term growth.

With abundant cash reserve, the company will continue to seek cooperation and investment opportunities around insurance and health care sectors. As for technology, we will accelerate technological environment by enhancing our AI capability and with core technological mode, which will support long-term development based on nearly 8 years of the business accumulation, our self-developed LLM [indiscernible] has significantly improved internal efficiency and with a further [indiscernible]. Now I will pass to [indiscernible] to discuss our Insurance Marketplace business.

[Unknown Executive]

In the fourth quarter, the growth of personnel insurance [indiscernible] experienced slowdown. Against this backdrop, we focused efforts on user value creation and long-term development and continuously optimize the operations for existing users. Meanwhile, we actively explored new product offering and models, expanding customer acquisition channels being the [indiscernible] for advanced high-quality business [indiscernible]. In the fourth quarter, FYP reached CNY 1.53 billion. Insurance-related income reached [ CNY 588 million ], and operating profit reached CNY 128 million. For the full year of 2023, the FYP reached a CNY 7.11 billion. Insurance-related income reached CNY 2.34 billion and operating profit reached CNY 528 million. In the fourth quarter, FYP of short-term insurance products reached over CNY 909 million. During this quarter, the company strengthened [indiscernible] management for users, enhancing policy service and optimizing user engagement, resulting in increased customer certification -- satisfaction.

The number of users rose steadily with number of policies per user [indiscernible] for 2 quarters in row and the renewal rate of short-term insurance remain at a level of 95%. We were acquiring users from [indiscernible], enhancing the quality and the product choice on media channels. As a result, [indiscernible] increased by 68.6% Q-o-Q, leading to 34.5% sequential increase in premium. As we further diverse our product offerings, the FYP of long-term insurance policy reached CNY 530 million in the fourth quarter, an increase of 22.9% Y-o-Y.

Among the [indiscernible] insurance premiums increased 116.2% Y-o-Y. During this quarter, we improved the [indiscernible] quality for long-term insurance users, strengthen partnerships with insurance companies to launch more customized products. Showing the removal of high interest products in the third quarter, we saw both opportunities and challenges in our industry. In terms of online worker channels, we emphasize on the integrated capability of our product portfolio, ensuring a better user experience. At the same time, we cooperate with high-quality stock media channels to grow a high-quality user base. On online book response, we the [indiscernible] program in this quarter. Offline brokerage [indiscernible] resources to better serve those high net worth customers. This initiative is in cooperation with industry partners aim to build a one-stop platform encompassing insurance, pension planning and wealth succession as well as in talented team of high-quality bookers. During the fourth quarter, we [indiscernible] top performance agents from [indiscernible]. The number of active agents increased by 108% Y-o-Y and product [indiscernible] of long-term insurance products rose by 8% Y-o-Y. In the fourth quarter, Waterdrop Insurance Marketplace enhanced our synergy with Shenlanbao. While Shenlanbao continue to maintain independent operations, the 2 teams deepen the cooperation on [indiscernible], including R&D, content marketing and product offerings. Shenlanbao contributed of CNY 102 million in the first quarter. The policy quality remains as the industry-leading level with a renewal rate remaining above 90%.

In the fourth quarter, we continued to deepen our innovative capabilities across health insurance and [indiscernible] insurance. Regarding health insurance, we launched various innovative products to address the need of a broader user base. Among this, the Shenlanbao health insurance essentially covers all groups with chronic disease, critical illnesses and [indiscernible]. Through our entire underwriting capability, users with preexisting conditions can also buy insurance online reliable. On top of regular health insurance plans, we also launched a product called E-Find Platform. This product is the first online long-term [indiscernible] insurance plan that covers users with preexisting conditions. Moreover, we develop service and [indiscernible] of each of the demographic groups. We launched a [indiscernible], the industry first maternal and infant insurance designed to cover the entire pregnancy [indiscernible] product has been widely recognized by users. In terms of saving insurance products, we launched a monthly [indiscernible] insurance products. Different from the traditional [indiscernible] products in market, the monthly payment plan is more flexible for users with lower [indiscernible]. This is an important practice for us to serving diversified [indiscernible] across different marketing segments.

Next, let me brief you about our development of AI. We apply our insurance-focused [indiscernible] our commitment to safeguard the user health with AI technology. Currently [indiscernible] already covered [indiscernible] including [indiscernible] and rightly claim for [indiscernible] customer service and more, it can support multiple professional service such as answering fundamental questions, consulting on insurance policy tariffs, offering underwriting patents and coinsurance service. We can also [indiscernible] 2 major applications, the AI insurance consultants and [indiscernible]. Both of them are based on the [indiscernible] model. The AI insurance consultant act as a smart agent that is equipped with lots more technology. [indiscernible] communicate with customers in real time. It can recommend insurance policy, a product tailored to the customer's specific needs, utilize that amount of insurance knowledge to better understand, we believe -- it has been [indiscernible] medical insurance [indiscernible]. In this context, the AI insurance consultants can [indiscernible] dialogue for up to 40 minutes and are taking 90% of work for an average human broker. The second application, the superefficient [indiscernible] for aiding human agents. For example, based on the competition between [indiscernible] and the users, it displayed a real-time [indiscernible] for insurance real questions, recommend more suitable product -- more suitable products for each user [indiscernible] explained best in a way that it is easy for users to understand and improve insurance service efficiency while increasing customer satisfaction Currently [indiscernible] has been launched [indiscernible]. In the development [indiscernible], we have opportunities [indiscernible] accumulating more than [indiscernible] models. In the future, we will continue to adhere to the path of technology and talent in the industry, bringing high-quality insurance [indiscernible] based on [indiscernible] AI [indiscernible] update on our medical [indiscernible].

Thank you, [indiscernible]. As of Q4, 2023, a cumulative total of 450 million people donated more than CNY 52.6 billion to over 3.1 million patients through Waterdrop Medical Crowdfunding [indiscernible]. In Q4, our [indiscernible] established [indiscernible] which provides [indiscernible] for extremely poor people. Moreover, our offline [indiscernible] offering additional [indiscernible] service to hospitalized patients. In the fourth quarter, we saw [indiscernible] and recruitment platform advisers from public to communicate [indiscernible] and fund review. [indiscernible] can randomly check the cost [indiscernible] of any [indiscernible] and supervise the entire underwriting process. While we continue the value [indiscernible], we keep optimizing the service exchange to make critical [indiscernible] better and more accurate and efficient. We have continuously participated in the establishment of our multilevel medical support system, actively responding to the amendment of [indiscernible] law in China. In Q4 is amended version of [indiscernible] into its provision.

Furthermore, on December 21, our [indiscernible] medical support system project [indiscernible] awarded hosted by people saving online. In the fourth quarter, [indiscernible], our digital clinical trial solution business maintained steady and healthy development. Revenue was about CNY 20.8 million. For the full year, revenue was CNY 100 million with an increase of 69% Y-o-Y.

In Q4, the E-Find Platform collaborate with 167 pharmaceutical companies and CROs. We made great progress on collaborating with more leading MNCs. During this quarter we successfully, we joined the supply lease of 2 of the top 5 global MNCs and [indiscernible] and more projects are expected to officially launch in 2024.

Additionally, the E-Find Platform [indiscernible] with one of the top 3 global [indiscernible] and officially initiated patient recruitment. In Q4, the platform signed with 2 new projects. With the rapid development of innovative drug R&D for chronic disease in China, the E-Find Platform continue to improve our ability accordingly. Through efficient view of operation and capabilities and AI-driven matching, we enrolled in a record number of patients and projects. Our project cover categories, including dermatology, respiratory, cardiovascular, immunology [indiscernible]. In terms of [indiscernible] diseases, leveraging the [indiscernible], we successfully secured a [indiscernible] project in the rare disease [indiscernible] cell therapy, providing more [indiscernible] comprehensive digital service -- such as the data insight, medical [indiscernible], product management, clinical simulation, engineer recruitment and [indiscernible] and so on. Regarding patient service, the platform continues to deepen the cooperation with the leading global MNC in the patient health management of chronic disease. By integrating technologies such as [indiscernible] model, it significantly enhanced patient service experience and efficiency, gaining high recognition from customers. We also signed contracts with multiple leading domestic MNCs for medical patient operations, patient education and data insight, continuously expanding the number of -- and service scope of cooperation with clients. And we continue to strive for technological empowerment for patients having [indiscernible] operations [indiscernible] by integrating AI [indiscernible] technology into our platform, intelligently identifying keywords and interaction and intention from the conversation with users, allowing medical assistant to generate quick and reliable judgment. But such as education, where we improve the service quality compared to traditional methods That's all from me. I will now hand over to Guang Yang to discuss our financial performance.

[Guang Yang, executive]

Thank you, [indiscernible]. Hello, everyone, and we now [indiscernible] on our financial highlights for the fourth quarter. Before I go into details, please be reminded that all [indiscernible] will be RMB. And please refer to our earnings release for detailed information on our financial [indiscernible] year-on-year and quarter-on-quarter basis, respectively. For the fourth quarter, I mean, complicated environment or commitment to pursue steady and healthy development. Net operating revenues decreased by 3% Y-o-Y, about CNY 659 million. The full year net operating revenue reached about CNY 2.63 billion. Among that, insurance-related income amounts to about CNY 2.34 billion with [indiscernible] decrease of 8.5% Y-o-Y. Crowdfunding service fees amount to CNY 162 million, representing an increase of 4.4% Y-o-Y. Digital clinical trial solution income amounts to CNY 100 million, representing an increase of nearly 70% Y-o-Y. About operating costs and expenses, on Y-o-Y basis, since the last quarter, we consolidated the financial results of Shenlanbao. For full year, the operating costs and expenses increased by 13.5% Y-o-Y to CNY 2.64 billion.

For the full year, operating costs and expenses increased by -- just the Q4, it increased by 4.3% Y-o-Y to CNY 633 million. On a quarter-on-quarter basis, the operating costs and expenses decreased by 8.1% as we adjusted our outstanding pay to adapt to change to [indiscernible]. For Q4, operating costs were about CNY 202 million, increased by 8.5% year-over-year and decreased by 3.2% Q-o-Q. The crucial decrease is primarily due to [indiscernible] a decrease of CNY 5.8 million in costs of referral and service fees. And secondly, a decrease of CNY 2.3 million in the costs of patient recruitment consultants team.

For Q4, S&M expenses has increased by 26.9% Y-o-Y to CNY 175 million. The increase was primarily due to: firstly, consolidation of Shenlanbao, which generated S&M expenses of CNY 39 million; and secondly, an increase of CNY 15.8 million on third-party traffic channel fees, partially offset by a decrease of CNY 21.1 million in personnel costs and share-based compensation expenses. On Q-o-Q basis, it decreased by 6.9%, primarily due to a decrease of CNY 11.3 million in sales and marketing personnel costs and share-based compensation expenses.

G&A expenses were CNY 96 million, a decrease of 19.1% and 16.3% Y-o-Y and Q-o-Q. The decrease was mainly about personnel costs and share-based compensation expenses and the professional service fee.

R&D expenses was CNY 59.8 million, a decrease of 16.6% Y-o-Y and 19.1% Q-o-Q, respectively. This decrease was primarily about personnel costs and share-based compensation expenses.

For Q4, net profit attributable to the company’s ordinary shareholders was CNY 59.1 million. Adjusted net profit attributable to the company’s ordinary shareholder was CNY 74.7 million, for Q1 [indiscernible].

The company has achieved -- from Q1 2022, the company has achieved GAAP net profit for 8 consecutive quarters. As for year-end 2023, cash, cash equivalents and short-term investments amounted to CNY 3.39 billion, an 8% increase from last quarter. The abundant cash reserves positioned as well to focus on long-term development priorities. To better reward shareholders and boost investors' confidence, our Board of Directors has approved a special cash dividend totaled approximately USD15 million with $0.004 per ordinary shares and $0.04 per ADS to the shareholders of ordinary shares and ADS as of the closing date of April 19, 2024 [indiscernible] time are entitled to the effect.

In summary, we met our financial guidance to the market as we will achieve the profitability in each quarter of 2023. By 2024, we will continue to create shareholder value with healthy growth and profit.

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

[Operator]

The conference has now concluded. We thank you for attending today's presentation, and you may now disconnect your lines.