OneConnect Financial Technology Co., Ltd. (NYSE:OCFT) Q3 2022 Earnings Conference Call November 10, 2022 7:00 AM ET
Company Participants
Danielle Gao – Head-Investor Relations
Shen Chong Feng – Chairman and Chief Executive Officer
Luo Yongtao – Chief Financial Officer
Tan Bin Ru – Head-Southeast Asia Business
Michael Fei – Chief Executive-Hong Kong Virtual Bank
Conference Call Participants
Timothy Hsia – Goldman Sachs
Operator
Hello everyone and welcome to the OCFT 2022 Q3 Earnings Release. My name is Emily and I’ll be coordinating your call today. [Operator Instructions]
I will now turn the call over to our host, Danielle Gao, Head of Investor Relations. Please go ahead.
Danielle Gao
Thank you. Hello everyone and welcome to our third quarter 2022 earnings conference call. Our financial and operating results were released earlier today and are currently available on our IR website. Today you will hear from our Chairman and CEO, Mr. Shen Chong Feng, who will give opening remarks and Q3 business highlights; afterwards our CFO, Mr. Luo Yongtao, will offer a closer look into our financials and then in question-and-answer session all management team will be available. We have our Head of Southeast Asia Business, Ms. Tan Bin Ru; and Chief Executive of Hong Kong Virtual Bank, Mr. Michael Fei; and our Head of Strategy and Product, [indiscernible].
In today’s conference, our management team will make statements in Mandarin or in English. For those in Mandarin, a consecutive translation will be provided. If any discrepancy, management statement in original language will prevail. Unless otherwise stated growth rate of all the matrices referred to the year-over-year growth versus the same period of last year and the currency is an RMB. Before we start, let me quickly cover the safe harbor statements. As we will be making forward-looking statements, which will involve the number of risks and uncertainties, that could cause actual results to differ materially. Please note that we may present both IFRS and non-IFRS financial measures.
With that, I am now pleased to turn the call to our Chairman and CEO, Mr. Shen Chong Feng. Shen Chong, please.
Shen Chong Feng
[Foreign Language] Hello, everyone. I’m Shen Chong Feng. Thank you for taking the time to dial-in OneConnect’s 2022 Q3 earnings release. [Foreign Language] Before I begin, I’d like to announce the personnel change first. During today’s board meeting, the board approved Dr. approved Ye Wangchun’s resignation as the Executive Director and appointed Ms. Fu Xin, the Chief Operating Officer as Director of the Strategic Development Center of Ping An as a Non-Executive Director. The board thanks and appreciates Dr. Ye’s contribution to the company during his tenure as Executive Director.
[Foreign Language] International complexities, implications from COVID and macro uncertainties perpetuated into the third quarter. Despite these challenges, OneConnect team overcame difficulties when all out and achieved solid performance in Q3. Revenue in the first nine months up by 13% reached RMB3.22 billion. [Foreign Language] Macro economics and the pandemic continue to weigh on the growth of parts of our business, including some implementation projects and usage or volume based products. In other words, we see declining usage in lending products and auto insurance ecosystem products.
[Foreign Language] Other than this product, we did note the robust development from other solutions. For example, offerings from Gamma platform, especially AI customer services, maintain this strong growth momentum in the first half of 2022 in both customer number and revenue. Overseas business, which includes Ping An OneConnect Bank in Hong Kong registered a growth rate more than double last year’s.
[Foreign Language]
As an important initiative, in our stage two strategy, OneConnect has continued product integration and upgrade by launching new offerings. In digital insurance, we released a digital management platform for life insurance agents and [indiscernible] corporation with a global top 60 insurance company applying our products to its business in South Africa. As for digital banking, we have integrated retail and SME lending systems and built a native platform based on a unified technology architecture. On top of that, we proactively adjusted our product portfolio phasing out projects with heavy customization and low RI, as well as improving product standardization.
Over the short term this is at the expense of some projects and growth rate. But looking forward, this efforts will further cement OneConnect’s competitiveness in our core products and generate valuable returns.
[Foreign Language]
Next, I’ll brief you on business development in this quarter.
[Foreign Language]
So please come to Page 3 of our slide.
[Foreign Language]
This year we are still at the second stage of our development that is broadening customer engagement where we focus on Ping An Group and financial institution customers, as well as integrate products and build Gamma Platform.
[Foreign Language]
Now we are at Page 4. We remain committed to “One Body and Two Wings” in stage two, which means we continue to focus on financial institution customers while expanding ecosystem and overseas business.
[Foreign Language]
In Q3, total revenue reached RMB 1.07 billion. Premium plus customers increased by nine year-over-year to 163. Operation efficiency improved significantly. Margin of net profit attributable to shareholders narrowed markedly by 13 percentage points to negative 12.4%.
[Foreign Language]
Next turn to Page 5. As “One Body and Two Wings” strategy takes root OneConnect achieved greater coverage of financial institution customers in the first three quarters.
[Foreign Language]
Digital banking products, including digital lending, AI Banker App, deepened our engagement with Huaxia Bank, Bank of Ningbo, Bank of Suzhou and many other customers enabling them in their digital infrastructure and accelerating application of home developed technology.
[Foreign Language]
In digital insurance, we initiated a relationship with many insurers in the first nine months DaJia Property & Casualty Insurance, Liberty Mutual, Tk.cn Insurance, and JinTai Insurance to name just a few. These brand names demonstrate our growing penetration among insurance companies.
[Foreign Language] In terms of Gamma platform, upgraded eight products including AI customer services continue to make new market breakthroughs as you can see from projects with Bank of Qingdao, Bank of Beijing and Bank of Chongqing, et cetera.
[Foreign Language] Standardization of high growth margin products is the key to OneConnect’s future as a business and service provider. As you can see on Page 6, AI customer services leveraging OneConnect’s unique advantage of business plus technology and incorporating diverse financial scenarios and leading technologies now spans a wide range of functions including smart customer service, smart loan application, smart marketing and a robust platform. Find knowledge base 1600 AI service scenarios, over 200 quality assurance models and over 3 million AI sales groups underpin the product, boosting AI adoption rate to as high as 94%.
[Foreign Language] By the end of September, third-party revenue growth in AI customer service doubled on a year-over-year basis. Premium-plus customers also expanded significantly, it’s customers are also quite seeking, net expansion rate for premium-plus customers in the first three quarters exceeded over 100%.
[Foreign Language] Next, please go to Page 7. Overseas business remains a key initiative in our one body two win strategy as we continue to strengthen international presence in Hong Kong and the Middle East.
[Foreign Language] Senior OneConnect Bank is the first virtual bank in Hong Kong to focus on SMEs services. We are also the only one to use alternate data for modeling, which means similar and more precise, long approvals for SMEs and won as recognition from Hong Kong MA and Hong Kong MC. POB is committed to digital financial inclusion. Account opening can be done online and within one day. Of the customers, we serve, 30% are first timer, loan applicants. Revenue growth in 2021 ranked first among virtual banks in Hong Kong and revenue continue to show strong growth momentum in the first nine months of 2022, increasing by twofold year-over-year.
POB also enjoys great brand name in the industry, evidenced by awards from renowned financial news outlets including Asia Money, Euro Money, and Hong Kong Economic Journal. The bank ranked 45th in the Global Top 100 Digital Only banks ranking, top 1 in Hong Kong.
[Foreign Language] Our credit reference service – a services agency in Hong Kong, Ping An OneConnect CRA also went well and we officially received a license for CRA business this week. The company is expected to launch business in 2023 to provide three types of products and services, namely traditional credit reference services, innovative credit reference services, and cross-boundary services, for example, issuing cross-boundary credit reports. As always, we aim to deliver differentiated, diverse and accessible credit reference products and service models contributing to the establishment and improvement of credit reference system in the Greater Bay area.
[Foreign Language]
At the same time, we have broadened our presence in the Middle East. On September, we announced our collaboration with Abu Dhabi Global Market to empower the development of the SME Financing Platform. The platform aims to promote financial inclusion in the region, improve transparency and lower operating costs for SMEs.
We officially launched our UAE subsidiary in Abu Dhabi Global Market this October to provide digital services with leading technologies such as cloud computing, artificial intelligence to empower financial institutions in the Middle East and North Africa in their digital transformation journey.
[Foreign Language]
Also on Page 8, additionally, we are also happy to announce that our brand new life insurance product made advances in the international market as well with the new digital and efficient all-in-one platform for life insurance agents, which spans a wide range of insurance services, from digital advisor experience and sales assistant to customer insights. We formed a strategic partnership with a global top-50 insurer to empower the digital transformation of its life insurance agents in South Africa.
[Foreign Language]
On Page 9, as I mentioned in the opening remarks, the future of OneConnect life in product standardization, during the first nine months, we continue to improve our products by standardizing functions and completed over 60 updates. In digital banking, we integrated retail and SME lending systems and built a middle platform based on a unified technology architecture.
Upgrades in Gamma platform includes data middle platform improvement, and the AI capability improvement in AI customer services. We’re confident that standardized products will boost OneConnect’s overall profitability.
Another part of our efforts to execute this key initiative in Stage 2 strategy, i.e., product integration and upgrade is to proactively adjust our products – of our projects. We face our projects with heavy customization and low ROI, as a result, we see improved ROI in Q3.
[Foreign Language] While COVID outbreak resurges across China, we are only one month away from the end of 2022. For OneConnect, the macro environment and pandemic as current business growth under pressure. However, this does not undermine our confidence in our future, which stems from recognition by the market and our customers who still product competitiveness and the growth in financials that our team has worked hard to deliver. We believe this external challenges are only temporary. As a young tech company, we will remain agile and remain committed to improving third party revenue and becoming profitable.
[Foreign Language] Next, our CFO, Luo will give you a detailed update on our financials in Q3 and the first nine months. Luo, please.
Luo Yongtao
Okay. Thank, Shen Chong. Good evening everyone. Next I will give you an update on our financial results in Q3. Total revenue in third quarter reached RMB1.07 billion, and the third party revenue remains steady at RMB0.35 billion. Premium plus customers or customers with revenue contribution over RMB1 billion – over RMB1 million was up by nine customers to 163. Net loss this quarter was RMB0.13 billion with the net profit margin at negative 12.4%, which improved significantly for 13 percentage points from negative 25.3% in Q3 2021.
Let’s start it from the top line. Revenue remained stable at RMB1.07 billion in the third quarter and increased by 13% to RMB3.22 billion in the first nine month of 2022. In Q3, the revenue increase was driven by operation support implementation and others. However, this was offset by the revenue drop from business origination and risk management without from pandemic curves and our continuous phase out of low value projects as a core initiative in our second stage strategy.
I will give you more colors on revenue growth drivers later. Revenue mix by customer tax remains rapidly same in this quarter compared to the same time period last year. Revenue from third party customers reached to RMB351 million, same as Q3 last year and accounted for 33% of total revenue.
Due to COVID impact, revenue from business origination, auto insurance, claim products and domestic implementation business strength phase out of low value products also reduced our revenue. Other than the businesses mentioned above, we still achieved stable improvements. Contributions from Lufax grew slightly by 5.2%, from RMB113 million to RMB180 million, representing 11% of total revenue.
Operating support business contributed most of the revenue growth. Revenue from Ping An Group reached RMB599 million in the third quarter, and made up 56% of the total revenue. The overall contribution from Ping An Group remained steady. The usage volumes of some transaction based products decreased, for example, P&C claim related products and banking lending products. This was offset by customer service support business and new launched projects to meet the business requirements.
Moving to revenue mix by business type. Implementation revenue accounted for 19% of total revenue reached RMB202 million from RMB189 million in the same time period last year, which was driven by the ongoing digital transformation in Ping An Group and our new overseas life insurance business expansion.
On the other hand, implementation revenue from domestic third-party customers dropped due to the pandemic travel restrictions and our continuous phase out of low value projects with high customer customized requirements.
Revenue from business origination was RMB94 million compared to RMB115 million for the same period in last year, primarily due to the decreased loan volumes as a result of pandemic curbs and macro economy.
Revenue from risk management was RMB105 million this quarter versus RMB113 million for the same period last year, primarily due to the decreased usage volumes of PUC insurance claim related products that are more susceptible to COVID control measures.
Revenue from operation support rose to RMB294 million from RMB280 million for the same period in the prior year, primarily benefiting from the increasing product usage charged by stock-based fees, especially various types of business for customer services.
Revenue from cloud services platform remains steady this quarter with revenue contribution of RMB294 million, slightly dropped from – sorry RMB297 million slightly dropped from RMB303 million in the same period last year. As mentioned in previous earnings release, our Cloud Services business has entered into a stock stage and the revenue is remained at a stable level, which is subject to actual usage volumes of our clients.
Third quarter’s revenue is in line with company’s expectation. Both implementation and other revenue was up by 19.2% to RMB78 million from RMB65 million this quarter accounted for 7% of total revenue. Such improvement was mainly driven by the robust growth of virtual bank business in Hong Kong as a key part to our strategy in the Great Bay area and overseas. POB revenue kept improving multiple times faster than our overall business.
Let’s turn to the revenue mix by product type. Gamma Platform, a strategic focus for innovation or the biggest chunk of our revenue, which accounted for 49% of total revenue in the third quarter. AI customer service, core banking systems and other initiative businesses kept presenting remarkable growth. Revenue growth from Overseas Insurance business contributed to the increase of digital insurance revenue with an approximate of 21%.
Meanwhile, digital banking makes up 28% of total revenue, and the POB accounted for 2%. For the revenue mixed by product types in the nine month of 2022, digital banking, digital insurance, Gamma Platform and the POB contributed 28%, 19%, 51% and 2% of total revenue respectively. This quarter, we continue to commit to our stage two strategy where we focus on potential from Premium Plus customers. The total number of Premium Plus customers continued to grow this quarter by nine customers to 163 with most of them being our existing customers, the increase also testifies our success in keeping engagement with existing customers. We are happy to see that more and more Premium Plus customers are using multiple products from a different product lines.
Gross profit was RMB375 million in the third quarter, and our gross margin of 35.1% remains about the flat level at the same period last year. On non-IFRS basis, gross margin was 38.4% compared to 42.2% in prior year. This was a mixed result caused by different factors on one hand with product integration and upgrade being a key initiative in our stage two. We continue to optimize our product strategy, improving ROI and product standardization and proactively phase out projects requiring heavy customization.
On the other hand, usage volume of products with relatively higher growth margin such as P&C claim related products and loan products in risk management decreased due to the intense macro circumstances. We are pleased to see that we are well on track to our breakeven target as we made good progress in loss reduction this quarter. First of all, our research and development expenses came to RMB287 million from RMB323 million.
As a percentage of revenue it amounted to 26.9%, compared with 30.4% in the prior year. We continued to implement our second stage strategy on products integration. Our products on overall point of view, a more and more mature gradually. At the same time, we commit to improve our development efficiency by optimizing our trailing structures.
Looking forward, we’ll keep spending most resources on research and development to upgrade and develop products to strengthen our competitiveness in the market. Sales and marketing expenses for the third quarter of 2022 decreased to RMB94 million, compared with RMB131 million in the prior year. The percentage of revenue decreased to 8.8% from 12.3%. The improvement was benefited from enhanced sales capability and efficiencies. We managed to further reduce our total sales label cost while remaining revenue growth. Meanwhile, highly communication, marketing and travel related expenses also decreased compared with the same period of 2021 partially due to the COVID true policy.
Regarding general and administrative expenses, they came to RMB167 million meaning from RMB170 million in the same period in last year. As a percentage of revenue is decreased to 15.7% from 15.9%. Notwithstanding some one-off expense included. We manage to decrease general and administrative expenses by various stringent cost control measures. Benefited from all of us, our net loss narrowed to RMB133 million from RMB270 million in a same period last year, and the margin improved by 12.9 percentage points from negative 25.3% to 12.4% continue to deliver double digit improvements.
On this page you can find a comparison of costs in the past three years and the first nine months in 2022, which shows clearly the path towards breakeven by midterm. We will continue to implement higher ROI product requirements and phase out products, which are missing our standards. We will also maintain stringent cost discipline to cut the expenditures. With all these measures we are confident about breakeven with regard to our business plan.
I would like to reiterate the key focuses of OneConnect in 2022. Third party revenue growth and cost discipline towards path to profitability. Due to the current circumstances, we are still facing pressure on both total and third-party revenue growth. However, we do believe that the growth will recover once the COVID control measures ease and micro situation depart. We can also see the product integration and optimization will further improve our revenue growth and profit improvement.
Lastly, we summarize key financial metrics in the third quarter and the first nine month, as well as adjustments in gross margin for references. Thank you.
Danielle Gao
Thank you. Operator, we are ready for questions. Please open the line.
Question-and-Answer Session
Operator
Thank you. Our first question today comes from Timothy Hsia with Goldman Sachs. Please go ahead.
Timothy Hsia
[Foreign Language]
I have two questions. The first one is about industry. Can management share some color on how the management team looks at the IT spending of the financial industry including Ping An and third-party customers. And also in that bigger industry context, how should we look at the industry IT spending into next year? And how that will impact our revenue growth?
And secondly, on the overseas business, I see that our overseas business has progressed in different business lines and in different regions. Can management share our strategy in terms of our expansion on a high level and how should we think about revenue contribution for next year? Thank you.
Danielle Gao
Thank you, Timothy. Shen Chong take your first question and Michael and Luo Yongtao [ph] take your second question. Shen Chong, please.
Shen Chong Feng
[Foreign Language] So I’ll answer your question about the development of financial institution and the industry.
[Foreign Language] The market environment and the pandemic have put the business development of banks under pressure. So over the short term, some financial institutions may cut their IT investment to lower costs and improve efficiency.
[Foreign Language] Looking forward, over the mid to longer term, we do see market demands from banks. So banks are under business pressure and need to boost their operating – operational efficiency, mainly from risk management and operation support.
[Foreign Language] And we see great digital transformation demand from the following areas.
[Foreign Language] So firstly, banks have demands in risk management capabilities from technology applications, digital operations, data security and adoption of home developed technologies.
[Foreign Language] And these are also the key focuses of our R&D investment in digital banking and Gamma Platform
[Foreign Language] During economic downturn, medium and small-sized banks are more in need of a head to [ph] digital transformation.
[Foreign Language] And that means small and the medium sized banks need business plus technology solutions.
[Foreign Language] Thank you.
Danielle Gao
[Foreign Language] We can hear you. Yes, we can hear you.
Tan Bin Ru
Yes, okay. I’ll take the question on the Southeast Asia or the overseas question. Right. So I think Southeast Asia, we have positioned as a region that has more than $2 billion growth potential and in Southeast – in the next two years with the economic entering into potentially recession. Actually you see Southeast Asia as the one bright spot that has the highest GDP growth or that region having 5% – more than 5% GDP growth. So we continue to be very bullish about Southeast Asia growth. Today, we are servicing more than a 100 customers and over 20 countries. The revenue ticket size is very positive because the sales is in U.S. dollars, and the ability to price the same solution in U.S. dollars is brings us much more profit. And then going into Q3, in fact, in Q3 this year we started two collaboration.
One is the PISMO collaboration, so that we combine what is good from the East with what is good from the West in terms of [indiscernible] banking. So in this collaboration, we started launch in Q3, we’re foreseeing good results coming potentially next year. And in Q3, we also launched the ADGM entity. We actually had the entity earlier on. It’s just that we did the product and the actual entity launch with the Dry Tech event, which is the FinTech event in Abu Dhabi last quarter.
So at this moment, I think we’re seeing good enough growth. Q3 growth is very good for us. We double Q3 compared to year-on-year. For percentage of revenue, I remember we started off initially in the earlier year single-digit to the revenue, and then we were in the early teens. As of this quarter we are about 20% of external revenue of OneConnect and we continue to see the growth – continue the growth.
Michael Fei
All right thanks. Let me talk about the Hong Kong business, I think the overseas business for OneConnect we have two parts. One is the Southeast Asia, which Shen just described, and then the Hong Kong. In Hong Kong, we actually have three different settlements. One is the technology services for financial institutions in Hong Kong. I think that’s very similar to, we get to describe the market, our competitive ag et cetera. So I will not repeat that. The other two supplements of our business, one is the virtual bank, the other is the quite reference agency business. We have two very variable license in Hong Kong. So for POB, I think, Mr. Shen had already introduced in his main presentation that we continue to be one of the best performing virtual banks among the eight. I think the reason for that was that first of all, we have a very different positioning. We are different from the rest of seven that we dedicated to serve SME.
Now, the second advantage is that we had OC at our bank. So we had a lot of the technologies, we had a lot of the lendings that we can actually borrow from OC and [indiscernible] as that increment in the Hong Kong market.
I think as a next step, we will continue to focus on the SMEs. We will continue using leading technology to help SMEs in the Hong Kong market and gradually to expand to a broader supplement on the supply chain around the GBA Area. We will partner with more and more partnerships to using alternative data to fill the SMEs. If you were in the FinTech Week last week, you would have noticed that during the Hong Kong MA formal launch of CDI, Commercial Data Interchange, POB is actually one of the first, actually we are the largest contributor of CDI usage in Hong Kong. So we expect to continue to move on. We continue to grow very rapidly. Our revenue continue to improve our bottom-line.
The second license, valuable license we had is by the reference agency. We are one of the three companies that brought the license earlier. We formally received the license earlier this week from Hong Kong Banking Association. So we are starting to do the initial data loading, which means we will get all the data from the various banks and we estimate to launch our formal services in the second half next year. I think this is also very – we were very optimistic about this one because, I think, given the more and more closer connection between DBA between Mainland China and Hong Kong for OneConnect, I think, one of the mainland based companies that has a license in Hong Kong, we are uniquely positioned to leverage our strong technology leadership and our experience in the mainland and try to connect the private information in Mainland China with Hong Kong. So that we can provide more holistic, I had to reference AI report to the banks. And also I think our technology advantage with RR not just to providing reports, but we will also be able to provide risk service, risk of management services, [indiscernible] services, et cetera, to the banks or the financial companies using our report. I think as a whole, we are very, very optimistic about the growth of our business in Hong Kong.
Timothy Hsia
Thank you.
Operator
Our next question comes from Tien [indiscernible] with Orion Securities. Please go ahead.
Unidentified Analyst
[Foreign Language] I will also do the translation. The first one is the finance question about the cash and what’s our current cash position? And second one is after [indiscernible], what’s the biggest change during the last one year? Thank you.
Shen Chong Feng
Yes, thank you, Tien, and our CFO, Luo Yongtao will take your first question.
Luo Yongtao
[Foreign Language] I will answer your question about our cash position. So as of the end of September, we now have around 23.7 billion of cash, around 420 million is at virtual bank PAOB and the rest is with our other entities.
[Foreign Language]
And we see significant improvement in our cash control measures. Firstly, we have narrowed our losses remarkably, and this has benefit our cash position
[Foreign Language]
Secondly, we also improve, increased our efforts in the collection of account receivables. As a result, we see decreased date of account receivables and shortened account age.
[Foreign Language]
At the same time, our other mergers in cash management have all paid off.
[Foreign Language]
So with sufficient cash position and sound business operation, we are confident that this cash will be enough to sustain us to midterms. That is when we reach breakeven.
[Foreign Language]
So I’ll answer your second question about what has changed over the past year.
[Foreign Language]
I have three main messages. The first is that our products are more focused.
[Foreign Language]
The second is that we have broadened engagement with our customers.
[Foreign Language]
The third change is that we see lowered the cost and improved efficiency. As a result, we see significant improvements in our operational efficiency.
[Foreign Language]
Looking forward, we remain committed to our second stage strategy that is broadening customer engagement.
[Foreign Language]
And achieve product standardization, sales standardization, as well as delivery standardization.
[Foreign Language]
So that OneConnect will remain committed to our target of business, of achieving business plus technology.
[Foreign Language]
Thank you.
Operator
Those are all the questions we have time for today. So I will hand back to the management team for any concluding remarks.
Danielle Gao
Thank you everyone for joining this call today. Is there any question, please feel, feel free to contact our IR team. We appreciate your interest in following us and looking forward to speaking with you again. Thank you.
Operator
Thank you everyone for joining us today. This concludes our call. You may now disconnect your lines.
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