OneConnect Financial Technology Co., Ltd. (NYSE:OCFT) Q1 2023 Earnings Call Transcript

OneConnect Financial Technology Co., Ltd. (NYSE:OCFT) Q1 2023 Earnings Call Transcript May 22, 2023

OneConnect Financial Technology Co., Ltd. misses on earnings expectations. Reported EPS is $-1.2 EPS, expectations were $-0.53.

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the OneConnect First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the management prepared remarks, we will have a question-and-answer session. [Operator Instructions] Please note this event is being recorded. Now I’d like to hand over the conference to your speaker host today, Mr. Rick Chan, the Company’s Head of Investor Relations. Please go ahead, Mr. Chan.

Rick Chan: Hello, everyone, and welcome to our 2023 first quarter earnings conference call. Our financial and operating results were released earlier today and 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 the business highlights. Afterwards, our CFO, Mr. Luo Yongtao, will offer a closer look into our financials. And then, in question-and-answer session, our management team will be available to you. We have our CTO, Mr. Li Jie; Head of Digital Banking, Ms. Ellen Jia; and Deputy General Manager of Strategy and Products Division, Ms. [indiscernible]; and Chief Executive of Ping An OneConnect Bank, Mr. Michael Fei. 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. In case of any discrepancy between the Mandarin version and the English version, our statement in the original language should prevail. Let me quickly cover the Safe Harbor statement before we start. 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. With that, I’m now pleased to turn our call to our Chairman and CEO, Mr. Shen Chong Feng. Mr. Shen, please.

Shen Chong Feng: [Foreign Language] [Interpreted] Hello, everyone. I’m Shen Chong Feng. Thank you for taking the time to dial in OneConnect 2023 Q1 earnings call. Against complexities brought by momentous changes never seen in the last 100 years and the pandemic of the century, OneConnect strives through a progress while maintaining stability, remained in innovative and delivered a solid performance under the guideline of increasing revenue, reducing costs, optimizing structure, improving products. We carried out key initiatives, including product standardization, sales and marketing standardization and delivery standardization to continue to execute our stage two strategy of broadening customer engagement. In Q1, operating loss narrowed by 67.5% or ¥240 million.

Net loss attributable to shareholders reduced by 65.7% or ¥210 million, while gross margin at 37.1% saw an improvement of 2.8 percentage points. As a result of our approach for quality development and proactively adjusting business structure, revenue registered a small dip compared to Q1 2022. During our stage two development, we phased out low gross margin and high customization projects, for example, reducing the scale of some customer acquisition products. These business structure adjustments, despite their temporary topline impact, will no doubt benefit the quality and sustainability of our revenue over the long-term and build a solid foundation for OneConnect sustainable quality and healthy development. Next, I’ll update you on OneConnect business highlights this quarter.

Please go to Page 3 and 4 of our slides. 2023 remains a key year in our stage two strategy of broadening customer engagement, where we focus on One Body, Two Wings, that is focusing on financial institutions while expanding ecosystem and overseas. Next on Page 5. This quarter saw continued customer-based expansion and improved customer recognition in three – in our three major segments as a part of our stage two strategy. OneConnect announced its all-around strategic collaboration with the largest life insurer and comprehensive financial group in South Africa, Old Mutual Plc, leading to faster cooperation in life insurance digital transformation. We kicked off our cooperation last year with an omni-channel Asian solution project, the first phase of which has been successfully delivered in 2022.

In Q1, we completed the signing for phase two projects and are now working on the delivery of phase two and the landing of phase three. In addition, we also launched index cooperation with the major state-owned bank contributing to its push for self-control technology and empowering the bank in digital transformation and delicacy management. Next on Page 6. We continued product improvements in digital banking, digital insurance and Gamma Platform. Digital lending products in the banking segment equipped with over 30 new plugins can better empower managers in six business scenarios and improve business development efficiency. Omni-channel Asian solution in life insurance has been further updated and experienced significant improvement in standardization.

AI customer service from Gamma Platform has been tailored into seven smart sub applications, with three AI middle platforms, the offering comes with over 50 operation services and over 4,000 financial scenario templates. Aside from product improvement, to make sure our efforts will reflect on our financial results, we also strengthen internal operations and management. We released delivery management standardization Framework 2.0 to improve standards, metrics and measures for internal management. OneConnect’s first operation and maintenance framework has been launched to issue standard operation and maintenance sales contract and improve revenue from operation and maintenance. On the other hand, to achieve better P&L management, timely warning and improvement for projects, we introduced a dynamic project P&L management plan based on operating target, which gives us a clear insight into all of our projects and improves overall efficiency within our organization.

Please go to the next page. Overseas business sustained its rapid growth into this quarter. In Hong Kong, PAOB is the first virtual bank to be involved into Hong Kong MA business data connect initiative. As we have been expanding partnerships and business scenarios, revenue increased by 51.6% year-over-year in Q1. At the same time, lighter fintech products such as EKYC achieved breakthroughs in Hong Kong and established cooperation with multiple banks, which will enable local businesses to open accounts online. Next, please go to Page 8. Turning to Southeast Asia. We introduced the digital banking solution highly tailored for Southeast Asian market. The offering stemming from our project with the top digital bank covers products, including but not limited to, onboarding deposit spending, marketing, customer service, virtual debit card and payments.

We have also fostered a new business collaboration model, where we grow with our customers and the share value added in their businesses, which means we not only collect the implementation revenue but also receive license fees, share revenue from increased business volume as well as charges, operation and maintenance fees. This model ties OneConnect and our customers together and encourages win-win growth. Next, on Page 9. We also published our first ESG report in 2022 under the listing rules in Hong Kong, introducing OneConnect ESG practices and achievements in four areas, namely supporting self-control technology serving real economy, accelerating digital transformation in financial industries and empowering small and medium-sized enterprises as a commercial technology service provider for financial institutions.

OneConnect is committed to innovative applications of technology in the industry, empowering digital transformation in financial industries with technology and supporting the development of green finance with our practices as well as achieving sustainable development for the industry and OneConnect. Next page. This quarter, OneConnect and our products have been awarded by multiple institutions, including KPMG’s 2022 leading fintech, top 50 Tier 1 Caijing leading fintech enterprises top 50 and the best 2022 fintech supplier in China award to name just a few. Looking forward, challenges and opportunities come hand in hand. Development of financial technology will undoubtedly remain relevant both at home and abroad as financial institutions continue to aim for improved revenue and efficiency, reduce cost and risk.

Understandably, they are now more prudent with their IT spending over the short-term against downward economic pressure and narrow the net interest margin. For fintech service providers, this means higher requirements for product value and bigger challenges. At OneConnect, we are fortunate enough to see this coming. Over the past several years, we continue to improve our product and introduce high-value offerings. We are confident that we will land our stage two strategy of broadening customer engagement, where our customers grow more focused and our engagement with them continue to deepen. I would like to hand over to our CFO, Luo Yongtao, to go through our overall financial results. Thank you.

Rick Chan: Thank you, Mr. Shen. Next, our CFO, Mr. Luo Yongtao, will go through the financial results in more detail. Mr. Luo, please.

Luo Yongtao: Okay. Thank you. Good evening, everyone. Despite an uncertain macro environment, we recorded satisfactory first quarter results. Just as Mr. Shen said, we delivered revenue of RMB926 million in the first quarter of 2023, decreased by 9.1% compared to the same period last year. Revenue generated from third-party customers decreased by 6.9% to RMB318 million in the first quarter. Revenue decline reflects our decision to adopt quality growth strategy and to reduce customized projects with low margin. We are encouraged to see that gross margin for the quarter improved by 2.8 percentage points year-over-year to 37.1% because of this strategy and non-IFRS gross margin increased 1.6 percentage points to 40.4%. Net loss attributable to shareholders was RMB109 million and the corresponding net loss ratio to shareholders improved substantially by 19.4 percentage points on a year-over-year basis to negative 11.8%.

Now let’s turn to our revenue mix. In the first quarter, our revenue mix by customer type maintained relatively stable. Our third-party revenue decreased by 6.9% to RMB318 million compared to Q1 last year, contributing 34.3% of total revenues in Q1 2023. The uncertain maro environment and the strategic adjustment did have an impact on our revenue, which mainly reflected in a decreased revenue from business origination services and risk management in the first quarter. Third-party revenue growth remains a key focus of our second strategy – second stage strategy. Once macro pressures subside and as we continue to advance our initiatives, we believe revenue from the third-party will improve. We are also glad to see that our implementation and overseas business continued strong momentum in the first quarter, making up the shortfalls of temporary reduced demands for certain products and services.

In the first quarter, revenue from Lufax decreased 44.7% to RMB71 million and contributed 7.7% of total revenue. The revenue decline from Lufax was mainly due to Lufax business operation optimization, resulting in lower demands for our business origination services and risk management services. Revenue from Ping An Group decreased 2.2% to RMB537 million and contributed 58% of our total revenue. Revenue from Ping An Group was essentially stable. 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 Group’s daily operations. Our services to Ping An Group also have a proven record of success. Therefore, we expect our revenue from Ping An Group to maintain a steady momentum.

Moving on to revenue mix by business type. The implementation revenue increased by 22.3% on a year-over-year basis to RMB210 million, mainly due to expanding demands for insurance the system products and the gamma data middle platform’s system products in the first quarter. Revenue from business origination services decreased by 57.3% year-over-year to RMB49 million, primarily due to decline in transaction volumes in channel marketing products and business origination modules under digital retail banking solutions. Revenue from risk management services decreased by 27.3% year-over-year RMB78 million, mainly due to reduced transaction volume in lower risk analytics solutions because of lower than expected demands into the challenging macro environment in the first quarter.

Revenue from operation support services decreased by 12.8% on a year-over-year basis to RMB223 million, which was primarily caused by a reduced demand for customer services operation products and auto ecosystem services in the first quarter. Revenue from cloud services platform was RMB292 million, decreased by 1.2% on a year-over-year basis and relatively stable compared with RMB296 million in the first quarter last year, reflecting the benefits of our continued transformation efforts. Revenue from cloud services platform continued taking up the biggest chunk of our revenue and we believe that cloud services platform would see improved demand and continue the strong performance Revenue from post implementation support and other services decreased by 20.6% year-over-year to RMB42 million in the first quarter.

The decline was primarily due to lower demand for auto ecosystem services. PAOB continued the strong growth momentum from our virtual banking business in Hong Kong in the first quarter 2023. Its revenue increased by 51.6% to RMB32 million as compared to the first quarter last year. We will continue to capture the growing overseas demand for digital transformation and see the opportunities that arise. As you can see our businesses are diverse and we are developing more solutions around technology infrastructure, we will remain committed to diversifying our product mix and adopting a stable and sustainable stock-based charging model. Let’s turn to revenue mix by product sectors. Gamma Platform sector, the focus of product innovation in recent years, contributed the biggest chunk of our revenue and recording a 7.5% growth in the first quarter 2023 and accounting for 49.5% of our total revenue.

Digital banking sector, which accounted for 27.9% of total revenue, reduced by 33.2% on a year-over-year basis. This was mainly caused by a reduction in transaction volume of our business origination services and risk management services, which were related to our initiatives to phase out lower value products and the unfavorable macro circumstances. Digital insurance sector, which accounted for 19.1% of total revenue, decreased by 4% on a year-over-year basis, mainly because decreased demands in auto ecosystem services. In addition, our virtual banking sector, as I have just mentioned before, saw continued expansion accounting for 3.5% of total revenue in the first quarter. Let’s now take a look at the customer numbers. The number of premium-plus customers slightly decreased to 33, 73 as compared with 74 for the same period last year, mainly due to macro pressures and our pursuance for quality growth strategy.

As aforementioned, we believe as we continue to advance our initiatives, we expect our customer base further expand and more premium-plus customers using our products and services. Now let’s take a look at the gross margin for the quarter. We are very glad to see our gross profit reached RMB343 million in the first quarter 2023. Gross margin improved to 2.8 percentage points to 37.1%, supported by quality growth strategy and benefiting from product standardization. Our non-IFRS basis, gross margin was 40.4% compared with 38.8% in the prior year. As Mr. Shen mentioned, in the first quarter of 2023, the continued efforts in product integration and the delivery efficiency, together with execution on quality growth, helped to improve our gross profit margin.

We will stick to the strategy and continue the endeavor of achieving profitability. Moving on to our expenses and the net loss attributable to shareholders. You can see that we are well on track to our break-even mid-term target. First of all, our research and development expenses came down to RMB288 million from RMB363 million in the same period of last year. As a percentage of revenue, it decreased to 31.1% compared with 35.6% in the prior year. In the first quarter, we continued implementing our phase two strategy that focus on product integration. As our products were upgraded and integrated, we further improved our product delivery efficiency. Looking ahead, we will keep investing in research and development at a more measured and reasonable pace to enhance our product competitiveness in the market.

Our sales and marketing expenses for Q1 decreased 41.2% to RMB64 million compared with RMB109 million in the first quarter of 2022. As a percentage of revenue, sales and marketing expenses decreased to 6.9% from 10.7%. The improvement in sales and marketing expenses, mainly benefited from enhanced sales capability and marketing efficiency. Our general and administrative expenses decreased 49.3% to RMB107 million from RMB211 million in the prior year. As a percentage of revenue, it decreased to 11.6% from 20.7%. The decline in general and administrative expenses was due to lower the cost associated with operational efficiency improvements and ongoing transformation initiatives. It is worth mentioning again that under a challenging business environment, our net loss attributable to shareholders improved substantially to negative RMB109 million from negative RMB318 million in the same period last year.

And the corresponding net loss ratio to shareholders improved significantly by 19.4 percentage points from negative 31.2% to negative 11.8%. The next page demonstrates the trend of our net loss ratio to shareholders improvement in the past three years and the first quarter of 2023. From this page, you can see a clear trajectory overall path to profitability over the years. We will continue our product integration efforts and strive to improve operating efficiency and margin. We are confident about break-even by mid-term. Looking forward to the rest of the year. Although we continue to see a degree of unpredictability in the market, our focus remains on improving third-party revenue. We will continue to enhance gross profit margin, focus on cost control and improve operational efficiency to stay on our path to profitability.

Next page, we listed the key financial metrics of the first quarter 2023. Lastly, we summarized the adjustments in non-IFRS gross margin for reference. Thank you. Back to your, Rick.

Rick Chan: Thank you, Mr. Luo. Operator, we are ready for questions. Please open the line.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Timothy Zhao from Goldman Sachs. Your line is open.

Timothy Zhao: [Foreign Language] Thank you, management, for taking my question. I have two questions here. First is regarding your strategy to turn down the low-margin product. I was wondering if management can help quantify the impact on revenue for each product line and between the revenue from Ping An and third parties. And from which quarter that we should be able to see a cleaner base to support the future revenue growth? And secondly, as we see a very good execution in reducing the operating loss for the first quarter of this year, just wondering if management can give any guidance on the full-year operating expenses and any guidance on the [indiscernible] will be appreciated. Thank you.

Rick Chan: Question. Mr. Luo would take.

Luo Yongtao: [Foreign Language] [Interpreted] We may need to figure out low gross margin and low added technology value product. Examples can be found in all business segments. Projects with high customization, low potential and unsustainable revenue will also shut down. The impact of which can be found in the slow down growth in our first quarter. Improving revenue quality and upgrading products are crucial initiatives in our stage two strategy. We have also – we have so far seen promising results. We will keep on this effort to continuously improve revenue quality and gross margin. Some product upgrades and development efforts to maintain upward revenue train over the long-term. In Q1, you can see strong momentum and solid growth in revenue from implementation overseas and technology infrastructure.

Sales and marketing and general and administrative expenses have been reduced by a big margin as a result of head optimization and cost reduction. The stringent cost control measures, mainly by firstly being more efficiency – is being more efficient with resources and improving ROI. Secondly, focusing on resources on R&D keeping – keep developing and upgrading products to make sure we remain competitive. All comes down to achieving sustainable business development, which means we will maintain effective use of our resources going forward. Thank you.

Timothy Zhao: Thank you.

Operator: [Operator Instructions] We now turn to [Keith Ng ph from DBS]. Your line is open.

Unidentified Analyst: [Foreign Language] So the first question is when is the company’s financial cloud license ready? And what’s the progress now? And the second question is in the future, what’s the company’s third-party revenue growth potential? Thank you, management.

Rick Chan: Thank you for your question. And the first question related to the financial cloud will be taken by Mr. Li Jie; and the second one regarding third-party revenue will be taken by Mr. Shen.

Li Jie: [Foreign Language] [Interpreted] We are closely following up the financial cloud registration process. So far, the application is going well. We are cautiously optimistic about our application but can commit to a clear timeline. Next to your question regarding the growth drivers for our third-party revenue. Firstly, we will remain committed to our stage two strategy of broadening customer engagement. And at the same time, prioritize product integration and upgrade. We aim to deepen engagement and expand customer base by continuing to polish and cross-sell our products. Secondly, if you look at the growth drivers by segments, we noted promising trends. Thanks to our ongoing product innovation efforts. We expect to see growth drivers from all three segments: life insurance from digital insurance, AI customer service and financial cloud from Gamma Platform and overseas. In addition, developing self-control technology also shows a lot of potential.

Operator: Our next question comes from [Laura Lee] from CGS-CIMB. Your line is open.

Unidentified Analyst: [Foreign Language]

Rick Chan: For your question. And for the first question related to cost control will be taken by Yongtao and the second one would – Michael Fei take the second question, please. And first of all, [indiscernible] first question.

Luo Yongtao: Regarding to the question about the cost control methods, as I’ve mentioned before, over the past year, our – the reduction mainly came from the optimization of our headcounts, upgrading of our product as well as expensive reduction. And as a result, our R&D, S&M and G&A expenses have been lower significantly, which further contributed to the narrowing of our losses.

Unidentified Company Representative: Questions about the cost control measures. Looking forward, we’ve been asking ourselves the same question,. And I believe the – in the future, cost control can be down mainly in two – by two aspects. Firstly, we will maintain a strict and stringent cost control discipline. And secondly, we will make sure that our resources are utilized more effectively. And that’s number one, being more efficient with our resources and improving ROI. And the number two, focus our resources more on R&D expenses, that is to develop new products and upgrading our existing products to make sure we remain competitive. Two is only a handle for internal management. And it ultimately comes down to contributing to the sustainable development of our business overall. Therefore, we will maintain the discipline going forward.

Michael Fei: So I will take the the next question, which is essentially three sub questions. One is about the funding cost, the second is about their loan growth, and third one is about the loan quality. Yes. In the past 12 months, the rising funding, the Fed rate increase did have a impact on our funding cost. So we react from two aspects. So first of all, we work very closely about the market development and we make swift adjustments if there’s any market development trend about our deposit rate. And we’re using our deposit very effectively, efficiently and maintain our loan to deposit ratio at a acceptable optimized level. And on the other hand, we also try to improve our loan pricing. Actually, the average loan interest rate in the first quarter compared with the last last quarter will increase about 40 basis point.

And on the loan growth rate according – well, given the impact of the Hong Kong economic slow down as well as the impact for slow down. The loan growth in the first quarter did also slow down. To tackle the challenges, I think on one hand, we introduced a more new product. If you follow us, probably you will notice that in May, we actually launched a cooperation with Octopus. We will be able to use Octopus data for us to do alternative data credit assessment. And also given the connection between the Hong Kong [indiscernible] connection between Hong Kong and China, as well as the opening up of the Hong Kong market, I think we are cautiously optimistic about the growth outlook in Q2 and the following quarters. Considering we only launched our business in the third quarter of 2020 and we started a very small phase with high growth.

I think it’s natural for NPOs to increase. Compared with our peers participating also in the SME banking business, we actually see a very good quality, a very good ratio compared with our peers. In addition to that, considering the fact that over 80% of our loan exposure is actually under the SFGS program, which is the Hong Kong government, SMB loan lending guarantee program. So our actual loss ratio as of now is actually lower than 0.3%.

Operator: Our next question comes from Lydia Lin from Morgan Stanley. Your line is open.

Lydia Lin: [Foreign Language] So my first question is how do we quantify the impact on the first quarter revenue from compressing the low-margin product line? [Foreign Language] So my second question is how is the pace of lowering the mix of low-margin product in lowering the OpEx in the next three quarters compared to the first quarter of this year? Thank you.

Rick Chan: Question. I think both questions will be taken by Mr. Luo.

Luo Yongtao: [Foreign Language] For the – building out our low gross margin product, we mainly close the low gross margin and low tax value product. And these examples can be found in all of our business segments. In addition, projects with higher customization and low potential and unsustainable revenue will also phase out. And if we were to quantify the impact, we can observe that in the decrease in our topline as well as third-party revenue in Q1. However, our business still demonstrates huge potential end of the year phasing out project also delivered promising results. To specific, we notice the pick up from delivery revenue, revenue from overseas as well as the revenue from technology infrastructure, which is a flagship product from our Gamma Platform.

Question on the progress of gross margin and the loss reduction initiative. As we have – as you may probably notice, we have been carrying out these efforts over the past several quarters. And this year, these initiatives will carry on full-year. And the results have demonstrated that we are well on track to our mid-term target that is to break-even soon, which means that with our loss reduction efforts will continue and the results will continue to reflect on our financial metrics.

Operator: This concludes our Q&A. I’ll now hand back to Mr. Rick Chan for any final remarks. I will hand back to Mr. Rick.

Rick Chan: Sorry that we offer in a little bit today. And thank you very much for joining the call today. If any questions, please feel free to contact our IR team. We appreciate your interest in following us and look forward to speaking with you again. Thank you.

Operator: Ladies and gentlemen, today’s call is now concluded. We’d like to thank you for your participation. You may now disconnect your lines.