OneConnect Financial Technology Co., Ltd. (NYSE:OCFT) Q3 2024 Earnings Call Transcript

OneConnect Financial Technology Co., Ltd. (NYSE:OCFT) Q3 2024 Earnings Call Transcript November 14, 2024

Operator: Ladies and gentlemen, thank you all for standing by and welcome to OneConnect’s Third Quarter 2024 Earnings Call. Currently, participants are in a listen-only mode. We will be facilitating a question-and-answer session at the end of today’s call. [Operator Instructions] Please note this event is being recorded. Now, I would like to hand the conference over to your speaker host today, Mr. Rick Chan, the company’s Head of Investor Relations. Please go ahead, Mr. Chan.

Rick Chan: Thank you, operator. Hello, everyone, and welcome to our 2024 third 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 Chongfeng, who will give opening remarks and business highlights. Afterwards, our CFO, Mr. Michael Lin, will go over a closer look into our financials. And then we will have a question-and-answer session. Our management team will be available to you and we have our CTO, Mr. Li Jie [Indiscernible]. In today’s conference, our management team will present in both Mandarin and 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 shall prevail.

Let me quickly cover the Safe Harbor statement before we start. As we will make forward-looking statements, which involve a number of risks and uncertainties that could cause actual results to be defer materially. Please note that we may present both IRFS and non-IFRS financial measures. With that, I am now pleased to turn our call to our Chairman and CEO, Mr. Shen Chongfeng. Mr. Shen, please.

Shen Chongfeng: [Foreign Language] Hello everyone, I’m Shen Chongfeng. Thank you for taking the time to join OneConnect’s 2024 third quarter earnings release. On behalf of OneConnect, I would like to extend my warm welcome to all investors, analysts, and friends from media who are with us today. It’s a great pleasure to take this opportunity to share with you OneConnect’s earnings results in 2024 Q3. The People’s Bank of China highlighted in its Q3 meeting that it is important to deepen the structural reform of the financial supply side and build an institutional mechanism for finance to effectively support the real economy. The Central Bank aims to guide large banks to become the key players to leverage financial services for the real economy, focus small and medium-sized banks on their main responsibilities and businesses, support banks to increase capital, and jointly maintain the stable development of the financial market.

The meeting also encourages the development of five major articles, namely technology innovation in finance, green finance, financial inclusion, pension finance, and digital finance. On top of that, the meeting also promotes increased support in key areas and weak links, promote faster development of new quality productive courses and meet reasonable consumer financing needs in a more targeted manner. With digitalization becoming ever more relevant, financial institutions and the large SOEs are facing many challenges. OneConnect closely monitors policy and market development and continue to leverage the unique advantages of technology plus business to improve its product capabilities in our three major business segments, namely digital banking, digital insurance, and Gamma platform, so as to empower financial institutions to achieve digital transformation and contribute to the development of new quality productive courses in the financial industry.

Q&A Session

Since 2024, the company’s profitability has further improved and overseas business has continued its strong momentum. Net loss from continuing operations attributable to shareholders improved to RMB30 million from RMB51 million in the same period last year, a significant year-on-year decrease of 41.9%. In addition, revenue from third-party overseas customers increased by 23.4% year-on-year in the first nine months of this year. Our solid performance is attributable to OneConnect’s efforts in product portfolio adjustment, deepening customer engagement, continued expansion of domestic and overseas markets disciplined cost control and improving resource allocation efficiency, which also laid a solid foundation for us to achieve profitability in the medium term.

Committed to our business philosophy of value win cooperation and quality development, we achieved significant progress in three core priorities, namely product upgrade, customer expansion, as well as overseas expansion. At this stage, we are accelerating export of Ping An Group Technology and upgrade of self-developed products and aggregating resources on high-value products. On top of that, OneConnect has also ramped up efforts in overseas market, meeting international market demand by continuously improving our products based on the needs and preferences of local market. At present, we are in the critical period of Stage 2 strategy of broadening customer engagement. The company will continue to focus on financial institution customers by integrating and optimizing our products and services and improving product capabilities in three main business segments that is digital banking, digital insurance, and Gamma platform, so as to empower financial institutions to improve quality and efficiency and successfully achieve digital transformation.

In digital retail banking, we continue to empower smart operations in retail businesses by enhancing digitalization of customers, products, and channels through our strategies in three key aspects that is comprehensive customer group management, accurate product recommendation, and intelligent channel operation. In terms of comprehensive customer group management, OneConnect emphasizes operation by segment. By grouping customers with standard indicators, we are able to unify operation perspectives. The company also uses customer portions to gain in-depth insight into customer needs and preferences to achieve precision marketing. Our customer journey — our customers’ journey strategy map can lock in business objectives and ensure that marketing strategies are closely aligned with the customer journey, providing customers with a personalized service experience and helping them find the most suited products.

With regard to the application of AI large models, we have helped improve the quality and efficiency in sales and marketing through the in-depth application of a series of tools such as AI outbound assistant, AI sales assistance, AI process QAs, and AI asset distribution. As for credit lending digital banking, the company strives for financial inclusion by building intelligent credit management capabilities through the application of a lightweight credit management system and the construction of an out-of-the-box inclusive financial platform. One of the leading Internet banks we serve, which offers mainstream credit services covering retail, small and micro enterprises, corporate credit, et cetera, has achieved loan approval and release by second for their standardized businesses, improving review and approval efficiency by 50%.

We also noted growing advantages and opportunities in foreign banks as we have become partners with a number of such customers. For example, we continued long-standing operation with CMC as we jointly innovated our cooperation model to co-develop personalized products and to improve customer experience. SBF, another OneConnect’s important overseas customers, have launched our core banking system and our SLP credit system, which has greatly improved the efficiency and effectiveness of the customer credit process. In addition, we have maintained a good partnership with TP Bank and further deepened our engagement this year. On top of that, we have established strategic cooperation with leading foreign banks operating in China at both business and operation level and provided software and technical services in account opening, signature, and small and micro credit projects through OneConnect’s digital credit products, which helps banks to — which helps banks improve customer experience, innovate credit products, and digitalize their systems.

Turning to digital insurance, the company has been working on several end-to-end SaaS deployment employment [ph] cooperation benchmark cases. This includes providing a state-owned P&C insurer with an end-to-end P&C insurance system to solve the pain points of claims settlement, underwriting and servicing, helping customers reinforce risk control for claim settlement, enhance underwriting quality, and improve customer experience. In addition, we are also accelerating transformation to online for our customers in Hong Kong. The ecosystem platform we provided for large and medium-sized insurance company in Hong Kong has been fully put into use. Onboarded over 100 brokerage firms and more than 1,000 agents, the platform helps insurers cover a broader range of markets and drives faster business growth.

After the launch, average utilization rate of ecosystem among different channels of the insurance company exceeded 80%, which fully demonstrates that the system has been widely used and recognized within the insurance company. Policyholders can save up to 50% of the time for them to submit online insurance applications, which has significantly improved the efficiency of buying insurance online and the customer experience. This is further proof of our ability to create high-quality digital products and truly serve and meet the demand of our customers. Gamma platform, OneConnect continues to deepen the financial government and large enterprise customer market, while vigorously expanding overseas potential and remain committed to empowering digital decision-making, business and management scenarios.

With the comprehensive upgrade of Gamma Vision, which is a risk management and verification platform, we have effectively harnessed cutting-edge AI technologies such as device fingerprint identification and micro expression analysis, which have significantly enhanced anti-fraud capabilities and improved financial security. Utilizing 20-plus AI capabilities such as visual risk control, digital human, and OCR recognition. The company has successfully launched AI interview robot English version to provide efficient and accurate risk and identification services for financial institutions in key scenarios such as remote banking and online lending and effectively campaign overseas group-based fraud. At the same time, OneConnect has also launched the E-KYC Hong Kong ID single-angle verification product, which has halved user operation time by optimizing user operation process, improving user experience, and enhancing counterfeit card risk identification rate by more than 10%, providing strong support for institutions to quickly identify and respond to fraud.

Growing overseas market is especially important to OneConnect and the Southeast Asian region has become a strong growth engine. In the first three quarters of 2024, thanks to product upgrades and integration as well as deepening customer engagement, revenue of third-party overseas customers increased by 23.4% year-on-year, of which the Southeast Asia business has seen remarkable growth momentum. In Q3, we successfully launched the SLP Product Upgrade project, which gave customers stronger business development capabilities and improve their operational efficiency. The SLP Upgrade has successfully improved the customer experience and received customers’ strong recognition and high appreciation, fully demonstrating OneConnect’s technical strength and product value.

At present, our products have been applied in many fields overseas and benchmark cases cover regional banks, digital banks, and finance companies, so on and so forth. We will target the — we will also target the six ASEAN countries in the future and leverage our product capabilities and technical strength to further expand influence overseas. In the third quarter of 2024, OneConnect won four awards from third-party institutions and renowned media outlets. Totaling for 318 awards, these honors fully reflect social and industry recognition of our products as well as our technical strength and influence. Major awards in this quarter include IDC China Emerging FinTech 50, Forbes China FinTech Influential Enterprises Top 50, Forbes China FinTech ESG Practice Enterprises Top 10, and the fourth NIFD-DCITS FinTech Innovation case by the National Finance & Development Laboratory.

As we go further into 2024, technology and industry revolution continues to evolve. New quality productive forces with artificial intelligence at the core is accelerating to lead the high-quality development of different industries. We firmly believe that the financial industry has the best use cases for artificial intelligence plus and will be a strategic focus for new quality productive courses. OneConnect will continue its focus on product upgrades and quality services driven by technology innovation, remain committed to improving efficiency and services, reducing costs and risk, and provide core solutions for financial institutions and enterprises to satisfy their diverse demand in business development. Thank you again for your attention and support.

Next, I’ll hand it over to Mr. Lin to give you a detailed introduction of OneConnect’s financials in Q3 2024.

Michael Lin: Thank you, Chairman Shen, and good evening, everyone. My name is Michael Lin, Chief Financial Officer of OneConnect. In this session, I’ll walk you through some financial results of OneConnect. As previously reported, we completed the disposal of our virtual banking business to Lufax for consideration of HKD933 million in cash on April 2nd, 2024. As a result of this disposal, the historical financial results of the Virtual Banking business segment have been reflected as discontinued operations for the third quarter of 2024 and for the comparative period in 2023. On the other hand, the historical financial results of the remaining business have been reflected as the continued operations. The financial information cover is presented on a continuing operation basis, unless otherwise specifically stated.

In the third quarter of 2024, we delivered revenue of RMB417 million, decreased by 48.3% compared to the same period last year, primarily due to our strategic decision to phase out cloud service business. Revenue generated from third-party customers decreased by 12.4% to RMB236 million in the third quarter. But it’s worth mentioning that revenue contributed by overseas third-party customers in the past three quarters increased by 23.4% year-over-year, a proof to the effectiveness of our overseas market expansion strategy. Gross margin of continuing operations was 32.7% compared to 36% in the prior year. The decrease in gross margin of continuing operations was mainly due to reduction in economy of scale caused by decrease in revenue. Non-IFRS gross margin of continuing operations was 35.6% compared to 40.7% in the prior year.

Net loss from continuing operations attributable to the shareholders was RMB30 million compared to RMB51 million during the same period last year. Net margin of continuing operations to shareholders was minus 7.1% compared to minus 6.3% during the same period last year. Net profit for the period to shareholders was RMB110 million compared to minus RMB281 million during the same period last year. Net margin for the period for shareholders was 6.6% compared to minus 10.7% during the same period last year. Moving to our expenses and net loss. We can see that we are on track to reach our breakeven midterm target. First of all, our R&D expenses from continuing operations were RMB70 million in the third quarter of 2024 compared to RMB230 million during the same period last year.

The decline was mainly due to the company’s proactive adjustment of its business structure and its return on investment-driven approach to manage R&D projects. As a percentage of revenue, R&D expenses from continuing operations decreased to 6.7% from 28.5% in the prior year. Our sales and marketing expenses from continuing operations were RMB46 million in the third quarter of 2024 compared to RMB66 million during the same period last year. The decline was mainly due to a decrease in personnel costs associated with the enhancement of sales efficiency and capabilities. As a percentage of revenue, sales and marketing expenses from continuing operations slightly increased to 10.9% from 8.2% in the prior year. Our G&A expenses from continuing operations were RMB75 million in the third quarter of 2024 compared to RMB68 million during the same period last year.

As a percentage of revenue, general and administrative expenses from continuing operations increased to 7.9% from 8.4% during the same period last year. As a result, our operating loss from continuing operations was RMB50 million in the third quarter of 2024 compared to RMB56 million during the same period last year. Operating margin of continuing operations was minus 12.1% compared to minus 6.9% in the prior year. Now, looking forward to the rest of the year, we continue to see a degree of volatility and uncertainty in the market. Meanwhile, as previously announced, we started to phase out our cloud service gradually from July and expect the discontinuation will impact our top line performance of 2024. Despite that, our focus remains on improving customer experience by strengthening the competitiveness of our products and services.

We will continue to enhance our product offerings, focus on cost controls, and expand overseas market to stay on our path to achieving midterm profitability. That concludes our prepared remarks. Thank you very much.

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

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] We have a question on the line from [Indiscernible] with CGS International. Please go ahead.

Unidentified Analyst: [Foreign Language] Let me translate my two questions. So, firstly, based on the recent announcement, we see that the payment received — payment to and from the Ping An Group, this ratio has fall by 10 percentage points versus the past three years. So, does that mean that OCFT is planning to improve the profit margin? And secondly, what’s the latest overseas expansion efforts in terms of the hiring and staffing, in which section of business can we expect more focus on the overseas expansion? Thanks.

Rick Chan: Thank you for your question. For the first question will be taken by Mr. Li about the change of revenue mix as well as the profitability outlook. And the second question, I believe Mr. Shen can share with you some highlights as to our overseas update.

Michael Lin: [Foreign Language] I’ll translate that in English just to repeat my answer to that question. So, first of all, I want to emphasize that our Ping An Group is still our most important partner and shareholder and the most important third-party — non-third-party customer. And also, I want to emphasize that OneConnect is the sole FinTech exporter within the group. We will continue to play a very key role in Ping An Group’s transformation. So, if you look at our business, we are eventually phased out our low gross margin products. We continue to pivot towards COVID earnings by proactively phasing out our low cost — low gross margin, high customization business. This is our overall strategy. And if you look at the EGM security [ph] release this month, the cap we set on amount of transactions related to the purchase of company’s products and services for Ping An Group has taken into account different factors, including the historical transactions amounts of both parties and changes in our future business requirements.

Also, you can see that the proposed upper limit will decrease year-over-year starting from 2025. That reflects that the recovery of the whole financial industry and the Ping An Group’s main core business. So, we expect that the Ping An Group’s overall demand of our products and services will eventually increase from year 2025 onwards. Thank you.

Shen Chongfeng: [Foreign Language] Next, Mr. Shen will address your question about overseas recruitment and staffing. We will allocate resources and recruitment strategies based on the progress and needs of our overseas business and make sure that our development is in line with our strategy. Our main offerings to overseas include core banking, SLP platform, and E-KYC as well as our omnichannel agent platform for life insurance business. As well as AI large models and AI voice assistant. Our main target markets include Middle East, South Africa, Hong Kong, China, and ASEAN countries. So far, we have equipped ourselves with capabilities in sales and marketing solutions, research and development, as well as implementation. As our presence continue to expand overseas, we intend to further increase our team in solutions, R&D as well as delivery.

Our recruiting strategy includes recruiting from local markets, develop ecosystem partners in overseas, as well as deploy our teams at home to overseas offsets. Thank you.

Operator: Thank you. [Operator Instructions] We have no further questions currently. So, I would like to hand it back to Rick for any closing remarks.

Rick Chan: Yes. Thank you, operator. Thanks, everyone, for joining the call today. If you have any questions, feel free to contact us and contact our IR team. I appreciate your interest and time in following us and look forward to speaking with you again. Thank you very much. Have a good day.

Operator: Thank you for joining. I can confirm that does conclude today’s call. Please enjoy the rest of your day and you may now disconnect.