OneConnect [OCFT] Conference call transcript for 2022 q1
2022-05-26 04:19:03
Fiscal: 2022 q1
Operator: Ladies and gentlemen, thank you for standing by. And welcome to OneConnect's First Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. After the management's prepared remarks, we will have a question-and-answer session. Please note, this event is being recorded. Now, I'd like to hand the conference over to your speaker host today, Ms. Danielle Gao, the company's Head of Investor Relations. Please go ahead, Ms. Gao.
Danielle Gao: Thank you very much. Hello, everyone and welcome to our first quarter 2022 earnings conference call. Our financial and operating results were released earlier today. The results of today's presentation is currently available on our IR website. In this conference we have our Chairman, Mr. Ye Wangchun joining, you will hear from our CEO, Mr. Shen Chong Feng for his opening remarks and Q1 business highlights, afterwards our CFO, Mr. Luo Yongtao okay, sorry, in this conference we have our Chairman, Mr. Ye Wangchun joining, you will hear from our CEO, Mr. Shen Chong Feng for his opening remarks and Q1 business highlights, afterwards our CFO, Mr. Luo Yongtao will offer a closer look into our financials. And then in Q&A session, our Board Secretary Mr. Michael Fei; and our Chief Technology Officer, Mr. will be available too. Before we joining, I would like to refer you to our safe harbor statement in our earnings press release as we will be making forward-looking statements, which involve a 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 as well as adjusted profit margins. A discussion of the limitation of non-IFRS measures and the reconciliation to IFRS measures is included in the earnings press release. With that, I'm now pleased to pass the call to our CEO, Mr. Shen Chong Feng.
Shen Chong Feng: Good morning, everyone. I'm Shen Chong Feng. Thank you for taking the time to join OneConnect's 2022 first quarter earnings release. In the first quarter, the global economy experienced greater uncertainties due to instability and COVID outbreaks. Nevertheless, OneConnect overcame these difficulties and kicked off 2022 with solid performance. Total revenue reached RMB1.02 billion in the first quarter representing a year-on-year growth of 24.3%, a RMB340 million. Third-party revenue was up by 10.5% year-on-year. Adjusted net loss ratio was near double-digit improvement narrowed to 27.6%. Our strong results in Q1 came from effective execution and implementation of second stage strategy and the concerted efforts of everyone at OneConnect. In addition on the sale repurchasing plan, we announced on February 24 this year, OneConnect has purchased 4.2 million ADRs, which amounts to $5.85 million as of the end of April. We plan to use these shares for employee incentive plan. And on our Hong Kong system, we have maintained close communications with Hong Kong Stock Exchange after submitting our A1 filings on February 28. Our listing plan was executed mostly per our schedule. These efforts involving OneConnect and the management's commitment to sustained and healthy development in the capital market as well as our confidence in OneConnect's future. Of course, we do recognize that there are increasing economic uncertainties in China due to recent COVID outbreaks. But we believe the negative impact is on the way and are continuously focused on diversified product development and the shift to a more stable revenue model which charges on stock volume will also benefit. Over the long-term, the potential of the financial technology industry remains immense, the total term of banking IT solutions in China will reach RMB127 billion by 2024 or CAGR of 25% according to IDC estimates, we therefore remain extremely positive about the development of the industry. Looking forward, OneConnect will continue to embrace our vision of technology to create value through expertise, and focus on transformation breakthrough and high quality development, which is our theme for operations in 2022. We will further improve third-party revenue, sustainable revenue and profitability through persistent efforts in provision and ultimately generate value for our customers and returns to our investors. Next I will give you an update of OneConnect's development in the first quarter. You can go to the Page 3 of our slides. As previously mentioned there are increasing uncertainties in economies across the world, as an important leverage for macro adjustments will have a bigger role to play. Financial technology, a driver for development in the financial industry has naturally become an important focus for the Chinese government. The government has introduced a number of policies supporting the FinTech industry this year, FinTech Development Plan issued by PBOC for example maps our top level design for a new stage of FinTech development, and sets the targets and direction in the coming four years. A new document from CBIRC this January, the guidance on digital transformation and digital sectors had placed strategic importance on digital transformation. The next three years is expected to be the crucial window where financial institutions become competitive digitally. And today, we see high level growth in the industry. Data shows that between 2016 and 2020, ROE in the banking industry has been declining and by an increasing margin. To break this pattern, banks want to empower their business through technology. And we can see from numbers that those with growing technology input do maintain a relatively high ROE. Technology investment in the banking industry is expected to grow at a CAGR of 24% and that sets a great opportunity for OneConnect's development. And now please go to Page 4. OneConnect is currently at Stage two of development which focuses on customer upgrade. As the financial technology industry in China has established the basic framework and is now on its way to transform financial services, OneConnect has also wrapped up the customer acquisition stage and embarked on our second stage development of customer upgrade and product integration. Next on Page 5. We opened last year, when we announced our second stage strategy, we talked about customer upgrades and product integration. In first quarter, we are delighted to report that we have made some breakthroughs in both banking solutions and the relatively new Gamma Platform. In the banking division, we continue to deepen engagement with the customers and won more high value customers. We also see new products from Gamma Platforms including core banking, AI customer service, gain more market share. Next on Page 6. Next I want to talk about our product integration and upgrade efforts, especially how our mature products are expanding to high value customers. Digital Financial Inclusion platform is the business to our technology integrated product designed by OneConnect for small and medium sized banks. It includes a data layer and the credit lending core covering the whole lending process, from customer acquisition to loan application and incorporates comprehensive solutions of marketing risk management and scenarios. This platform has been used by over 2 million SMEs. In Q1, the product have successfully upgraded 2 trillion AUM joint-stock bank, Shanghai Pudong Development Bank and Bank to premium plus customers with contract value reaching as much as RMB10 million. One of our customers doubled its SME loan volume within six months of using our platform. Next please go to Page 7. On this page, you'll see another example of one of our mature products, retail banking. With product integration in retail banking, we have now formed smart marketing, smart management and smart wealth management. Smart marketing is an end-to-end online management tool for bank managers with 100% coverage of their daily work. This tool can boost efficiency of retail customer acquisition. Smart management is the mid-office platform covering eight functions including customers, products and marketing built on micro services and with everything componentized and configurable, the technology system also enjoys higher flexibility. Smart wealth management serves both investors and advisors in wealth planning portfolio recommendation, advisory and so on and so forth. The product empowers wealth management to become more digitalized and smarter. In Q1, this solution has successfully procured 2 trillion AUM banks. That's one joint stock and a one major rural commercial with contract value approaching RMB10 million. Our solution has achieved 100% coverage of their relationships managers empowering up to 10,000 managers. We are also happy to know that it is thanks to constant cross sell and upsell that we were able to make progress with large financial institutions. Customers started with single modules and gradually adopted more and more modules. And now they use our integrated solutions and multiple products, which means higher ARPU and their customer stickiness for OneConnect. And next we go to Page 8. Next I'll give you an update on some of our new products core banking system. As the power engine of banking systems core banking system upgrade is an inevitable step in transport in information its infrastructure upgrade and digitalization of banks. OneConnect have developed a cloud native core system that supports the three core businesses of banks, namely lending core, deposit core and the payment platform. With only one single platform customers can access multiple scenarios with merchant onboarding efficiency improved by 60%. In terms of system structure, the system is decoupled support the configuration at individual customer level and can be deployed within one week, which is very rare in the industry. Since its launched last year, we have already sold the product to over 10 bank customers. Core banking system also generate higher value from customers in Q1 alone, three have become our high value customers with the use of core banking system. And on Page 9. And on Page 9 you see another case of our new products AI customer service. expertise in financial services, our AI customer service solution has evolved from customer service to diverse applications covering smart collection and smart marketing, which translates to reduce cost and increase revenue for customers. So far over 30 party customers have used this solution. In the first quarter three major customers including trillion AUM joint stock banks and the regulator customers have started to use this solution, applying it to scenarios including customer service and marketing. Our solution has boosted productivity of customer service representatives by 20% and achieved an extensive AI model coverage rate of 94%. And please go to Page 10. Lastly, I would like to share with you some of our thoughts on COVID outbreak relapses. In the first quarter a small part of our business have been affected by COVID outbreak and we expect our business to be influenced in two ways this year. Firstly, on the implementation type business due to travel restrictions, contract signing and the implementation will be delayed. Secondly, transaction volume based business is likely to be affected as a result of limited business activities on our customers side. For instance, banks couldn't carry out offline lending, auto insurance claims and current ecosystem volume in EV China limited, because of TDY lockdown. We have proactively taken measures to counter these influences. For example, we focus more on operation and conversion of volume from our existing customers and have launched electric vehicle jumpstart services on our car ecosystem platform. We will also activate contract signing and delivery of implementation projects after restrictions are eased. Part of volume based business is expected to experience a surge as business delayed by COVID outbreaks resumed and will taper off to average level. Despite impact from COVID outbreak on parts of our business. We're not too concerned as we have a diverse portfolio with risk management services operations support and crowd and so forth, which has been added into financial institutions everyday businesses charge on volume of stock business and therefore are more resilient. And with that, I'll hand it over to CFO, Luo Yongtao to bring on our financial performance in the first quarter. Luo Yong, please?
Luo Yongtao: Okay, thank you, Shen Chong. Good morning everyone. Now I will introduce the initials into the first quarter, I would do my part in English. Despite of the COVID impact, we recorded the satisfied Q1 results. Just as , said we have achieved 24.3% year-over-year top-line revenue growth to RMB1.22 billion from RMB820 million in the same period of last year. Revenue generated from third party customers reach the 10.5% growth to RMB341 million from RMB309 million in Q1 2021. The net loss to shareholders for the first quarter was RMB318 million. Our adjusted net profit margin, excluding an one-off Hong Kong listing spends in this quarter achieved an improvement of 9.6 percentage points year-over-year to negative 27.6%. On Page 13, looking into the revenue breakdown by customer type, you can see that we have maintained a relatively stable customer mix in the first quarter. Our third party revenue contributed 33.5% of total revenue in Q1, which was 10.5% year-over-year. Third party revenue growth was largely driven by increased demands for risk management and operational support services, which are key focuses of our second stage of strategy. However, the COVID lockdown did have an impact on our third party customer revenue, which was reflected in a decrease implementation revenue in the first quarter. Looking forward, we believe such impact is limited and the business will recover soon after the lockdown to be lifted in major cities. In the first quarter, Lufax contributed 12.7% of our total revenue this revenue rose 71.9% year-over-year to RMB129 million from 75. The growth was largely driven by cloud services, risk management, and a new project implementations. Ping An Group contributed 54% of our total revenue. Revenue from Ping An Group rose 25.9% year-over-year to RMB549 million from RMB436 million in Q1 last year. The growth was mainly driven by the increasing demand for operational support and cloud services. Looking forward, OneConnect will continue to play a critical role in Ping An Group's financial technology ecosystem. As always, OneConnect regards Ping An Group as our most important flagship client. The services provided to Ping An Group are core technology solutions, which have been deeply embedded into Ping An Groups daily operations. Our services to Ping An Group also have a proven record of success. For example, in the area of AI technology services Ping An Group has enabled AI agents through our AI technology to optimize and transform business processes to improve operational efficiency and the customer experience. On preparation of the Ping An Group are robust and highly sustainable, evidenced by that in Q1. The majority of the revenue are generated from operations support, risk management, and cloud services, which largely charged on stock business volume. Therefore, we expect our revenue from Ping An Group to maintain steady momentum. Page 14 moving to revenue mix by business types. Cloud services remained as a biggest driver of our revenue growth, accounting for 29% of total revenue. It achieved a 63.9% year-over-year growth to RMB296 million in the first quarter this year, compared to RMB181 million in the same period last year. Benefiting from Ping An Group ongoing digital transformation, more and more subsidiaries, and affiliates are adopting our cloud services, including Lufax. And such services charge on deigning IP operation volume, we expect to see steady revenue growth from cloud services in the future. As one of the key strategic focuses risk management services contributed 10% of the total revenue and achieved a 7.7% year-over-year growth to RMB107 million in the first quarter of 2022 from RMB99 million in the fourth quarter last year. Both solutions in our digital banking and the digital insurance contributed to the growth. Revenue generated from Lufax and the third party customers were both showing growing demands. Moving to operation support business, largely benefiting from AI customer service solutions and auto insurance services. Operation support contributed 25% of our total revenue and achieved by 20.2% year-over-year growth to RMB255 million from RMB212 million in the same period of last year. Implementation revenue contributed 17% of total and achieved 1.8% year-over-year growth to RMB172 million from RMB169 million in Q1 2021. The lockdowns in major cities resulted a temporary drop in our third party customer. Meanwhile, the implementation revenue from Ping An Group were tend to growth in the fourth quarter, which averagely led to a slight increase in this sector. Benefited from our second stage strategy, other services were developing well, especially in overseas business and auto insurance ecosystem. It contributed 6% of our total revenue and achieved 130% year-over-year growth to RMB63 million in the first quarter of 2022 from RMB27 million in the same period of last year. And you can see our business are diverse and well balanced. And we're establishing more solutions in technology infrastructure. Although the COVID outbreak this year has indeed brought uncertainties to the macroeconomy. We remain committed to diversifying our products and continuing to adopt stock based charging model which is highly stable and a sustainable to more businesses. Next page, I would like to discuss the revenue mix by business segments. We maintained a stable revenue mix by segments Gamma platform was the biggest contributor. On top of the cloud services newly developed products, such as core banking system, also posted in the fourth quarter, contributing to Gamma platform growth. For other segments, digital banking accounted for 31% of our total revenue. Digital insurance accounted for 18% and the virtual banking business accounted for 2%. Page 16 is our premium plus customer. In our second stage strategy, we focus on higher volume premium class customers. In the first quarter, our premium class customers reached to 74 with a 16% growth on a year-over-year basis. Most of them are from our existing customers, which demonstrate the effect of our intensive farming strategy. And the newly acquired premium class customers are mainly from digital banking and Gamma platform. Next page, let us look at its gross margin. In the first quarter, on the IFRS basis, gross margin slightly increased by 0.3 percentage points year-over-year to 34.3%. Well, our non-adverse gross margin dropped by 4.7 percentage points to 38.8%. We saw that on mature products are actually making progress improving gross margin, for example, SME banking as a new digital banking and insurance products. However, the newly launched products usually have lower gross margin. Also in Q1, some of the implementation revenue was delayed due to the COVID outbreak, while relevant to cost capture occurring resulting in a lower margin in implementation sector. Those factors checked down the total gross margin level. As a young technology company, we are still heavily investing in research and development and utilizing capitalization. So it is more suitable to look at non-IFRS margin when compared to other competitors who have already been established for longer time period. Next page we will take a look at expenses. In the first quarter, we kept spending our research and development to strengthen our technological capabilities, product upgrades and enhancements, their research and development expense rose to RMB363 million in the first quarter 2022 from 281, meaning in the same period of last year. It accounted for 75.6% of our revenue this quarter, which was 1.3% percentage points higher than Q1 2021. Next, the sales and marketing expense reduced to RMB109 million in the first quarter 2022 from RMB167 million last year accounting for 10.7% with 9.7 percentage points improvement. The COVID impact is one of the reasons we travel less and spend less on marketing activities during the lockdowns. For general and administrative, excluding one of listing expense, we saw a significant improvement in the ratio. The adjusted G&A expense dropped to RMB175 million first quarter 2022 and accounted for 17.2% of our total revenue, which was 4.9 percentage points improvement on a year-over-year basis. Moving to operating margin on the right hand side. In the first quarter, our operating loss slightly rose to RMB355 million from RMB346 million in the same period of last year. The operating margin improved to negative 34.8% in the first quarter by 7.4 percentage points from negative 42.2%. If we take out one-off expenses, the adjusted operating loss ratio dropped to negative 31.2%, which improved by 11 percentage points on a year-over-year basis. In respect of net profit margin in the first quarter, our net loss to shareholders goes to RMB318 million from RMB305 million in the same period of last year. The net profit margin improved to negative 31.2% in the first quarter from negative 37.2% in the same period of last year, which was a six percentage points improvement. Again, if we exclude the listing expense, the adjusted net loss ratio dropped to 27.6% improving by 9.6 percentage points on a year-over-year basis. This year, we will focus on three key financial metrics, which are also of benefit to our investors, their third-party revenue growth, sustainable revenue growth and the path to profitability. In previous session, our CEO has elaborated on the first point. For the second point, we remain committed to diversifying our products to return this sustainable growth and gradually moving to adopt stock based charging model to more businesses. For example, AI customer service offering support for both banks and issuance and cloud services. Given the nature of the revenue model, they're highly stable and sustainable. On the third point, let's look at the next page. Path to profitability comes from multi-effects. First of all is gross margin, when we improve gross margin by ongoing product standardization. At the same time, our professional sales team will help our customers to design more standardized solutions to minimize customization requirements. We will continue to invest in research and development resources on technology and the core products as we believe it lays a foundation for future competitiveness. However, we will only allocate resources in our core technology products with a higher investment return. We do regular performance review and the phase out of those products which do not fulfill the requirements. We will strengthen our sales teams capabilities and improve their per capita productivities for general operation expenses, we will keep following the stringent cost control measures and expect to continuing downward change in a revenue ratio in the future. We summarize the key financial metrics as well as non-IFRS reconciliation details in the following two slides for your reference. Now, I will hand back over to Danielle.
Danielle Gao: Thank you, Luo Yongtao. Operator, we are ready for questions. Please open the lines.
Operator: The first question is from the line of Timothy Zhao with Goldman Sachs. Please proceed.
Timothy Zhao: Yes, thank you management. Two question from my end. First, I think from the product or revenue contribution perspective with the cloud service has become the largest revenue contributor in the first quarter, for the first time, could management share some color on the gross margin revenue performance of platform services, and how should we look at third-party revenue contribution in terms of ? And my second question is on the virtual banking case studies first time to disclose the revenue contribution, could management share color on how we should look at the revenue contribution from the overseas business and what is the detailed plan ahead? Thank you.
Luo Yongtao: This is CFO, Luo Yongtao, I will answer your first question -- answer your first question. On cloud, the business nature of cloud is actually different due to higher percentage of hardware in business, in cloud, the gross margin is different from our other products. The financial cloud, mainly serve financial institutions and that means higher requirements on security and data protection. And as the financial institutions are going through digital transformation, most of our staff and applications are based on financial cloud infrastructure. On third-party revenue contribution in financial cloud, we do see flat growth in the first quarter. And that has something to do with our late previously, the year-on-year, the revenue contribution from in financial cloud grew year-on-year by seven times. The absolute amount remains low however. And our license for group cloud business is still being reviewed. That means we can officially launch financial services. The growth in third-party revenue contribution in financial cloud do demonstrate our spend in this product and we are proactively preparing for future business development. The second question is about overseas business, Michael Fei will take your question.
Michael Fei: On our business, here you only see disclosure titled PAOB and that actually includes our revenue contribution in Southeast Asia from digital banking and Gamma platform. Together these two solutions have contributed over 10% of our revenue contribution from third-parties and that is quite significant. And in overseas business, we have very clear proposition. We are one of the very few players who can provide end-to-end solutions to our customers and we see great potential in overseas. And PAOB is one of our good example of exporting products in the last year. Different from others that -- other seven virtual banks in Hong Kong our strategic focus is on serving SMEs and we are using OneConnect's SME lending solutions to serve small and medium sized enterprises in Hong Kong. In 2021 30% -- 26% of small and medium sized enterprises were experienced their first time in securing a loan from a bank and that's provided by PAOB and the quality of these loans are actually very good. And we only saw one non-performing loan last year. Overall we remain positive about our development in overseas.
Operator: Thank you, Mr. Zhao. The next question is from the line of with Orient Sec. Please proceed.
Unidentified Analyst: Thank you. Congratulations on financial results. And thank you for taking my question. And I have one question about the Hong Kong listing plan. And could you please update us on the Hong Kong listing plan. Thank you.
Danielle Gao: Yes, thank you, Zhou. Michael Fei will take this question.
Michael Fei: I think the progress is that we're on track where they have two rounds of communication with the Hong Kong exchange and FSC hopefully in the short term, we will achieve our targets.
Danielle Gao: Thank you. Operator we can have the next question.
Operator: Thank you. The next question is from the line of Yang Liu with Morgan Stanley. Please proceed.
Yang Liu: Hi, guys Let me translate the question briefly. The first one is about the cloud platform. We see that a very, as we see very strong year-on-year growth by the Q and Q as it has been staying at around RMB300 million for three quarters. Could management help us to understand more about the seasonality of this business. And which growth year-on-year or Q and Q should be more indicative for future? And the second question is about non-IFRS gross margin with some decline year-on-year. Is it due to the cloud platform has the low R&D capitalization or amortization expense or something else? And the third reason is operating cash flow because we see stable net loss and narrowing net loss margin, but the operating cash flow in first quarter is weak. Is it due to some cash collection issue at the end of March because of the Shanghai lockdown or anything else? Thank you.
Danielle Gao: Shen Chong Feng will take your question.
Shen Chong Feng: On your cloud question. In Q1, we believe that Q and Q number will be a better metric, because in the next in the latter half of next year, we see a lot of new business units for example Lufax started to use its product and that means we experienced some increase from our stock and existing customers. And therefore if you want to have a better look at the growth potential Q and Q would be a better metric. There are two factors contributing to low, relatively low non-IFRS gross margin. The first is that with the launch of new products, like for banking, we did experience lower gross margin in early stages. And secondly, due to the lockdown measures and traveling restrictions, the implementation projects have been delayed and that means our revenue growth couldn't support the increase from our delivery costs. On cash flow, overall the cash operating cash flow remains at an average level. But we did the higher amounts of receivables at the end of Q1. The slight mismatch between cash flow and profit and loss is mainly due to mismatch in receivable collections due to COVID reasons. And we also see expansion of VV business in PAOB and that has led to some cash outflow. But at the end of Q1 our cash and cash equivalents amounted to RMB2.2 billion and looking forward our cash roll performance do match our long-term profit and loss expectation. In the future we will continue to improve profitability, improve increase our revenue growth and be more of this will end with cost reduction so as to achieve a narrowing of that net loss. We will also prioritize our target of breaking even. And so far we see that our cash is enough insufficient to support us until we break even.
Yang Liu: Thank you.
Operator: Thank you, Mr. Liu. That concludes the question-and-answer session. Now, we'll turn the call over to Danielle Gao for closing remarks.
Danielle Gao: Thank you everyone for joining the call today. If any questions just feel free to check us out to our IR team. We appreciate your interest in following us and looking forward to speaking with you again. Thank you.
Operator: That concludes today's call. Thank you for your participation. You may now disconnect your lines.
