Yiren Digital Ltd. (NYSE:YRD) Q4 2023 Earnings Call Transcript

Yiren Digital Ltd. (NYSE:YRD) Q4 2023 Earnings Call Transcript March 21, 2024

Yiren Digital Ltd.  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by, and welcome to the Yiren Digital fourth quarter and fiscal year 2023 earnings conference call. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Ms. Keyao He, IR Officer. Please go ahead.

Keyao He: Thank you Operator. Good morning and good evening everyone. Today’s call features a presentation by the Founder, Chairman and CEO of CreditEase, our CEO, Mr. Ning Tang. Our SVP, Ms. Mei Zhao will join us in the Q&A session after the prepared remarks. Before beginning, we would like to remind you the discussions during this call contain forward-looking statements made under the Safe Harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Such statements address risks, uncertainties and factors that can cause actual results to differ materially from those contained in any such statements. Further information regarding future risks, uncertainties or factors is included in our filings with the U.S. Securities and Exchange Commission.

We do not undertake any obligation to update any forward-looking statements as required under the relevant laws. During this call, we will be referring to certain non-GAAP financial measures and supplemental measures to review and assess our operating performance. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with U.S. GAAP. For information about those non-GAAP measures and reconciliations to GAAP measures, please refer to our earnings press release. I will now pass it on to Ning for opening remarks.

Ning Tang: Thank you all for joining our earnings conference call today. In a year of global economic uncertainties, we wrapped up 2023 stronger than ever, showcasing the strength and the resilience of our business. The year also marked a pivotal moment for us as we firmly established ourselves as a pioneering, AI-driven financial and lifestyle services platform. Through the strategic re-categorization of our business lines, we streamlined our operations, focusing on the most significant growth drivers. Our proactive integration of AI into our daily operations catalyzed a significant shift, propelling our business forward amid a dynamic economic landscape. This strategic embrace of technology not only optimized our efficiency, minimized labor costs and enhanced our customer service, but also underscored our dedication to innovation and strategic advancement.

Our achievements in developing and deploying AI highlight our ability to adapt and excel, setting new benchmarks for operational excellence and resilience. First, our financial services business segment, the fourth quarter witnessed continued robust growth with total loan volume reaching RMB 11.6 billion, a 72% increase year-over-year, marking the fourth consecutive quarter of double-digit growth. The number of borrowers served rose to 1.4 million, a 59% increase year-over-year, highlighting our eight consecutive quarter of growth. The MAU of our Yixianghua ATP increased from 2.9 million last quarter to more than 3.5 million this quarter, presenting an impressive annual growth rate of 77%, demonstrating the app’s growing popularity and user engagement.

This growth is underpinned by our advanced and continuously evolving AI system. For instance, in the fourth quarter, our AI telemarketing robot assisted over 10 million borrowers, facilitating more than RMB 1 billion in loans. Regarding our international financial services business, we achieved a 49% increase in loan volume facilitated in the Philippines in the fourth quarter compared to the third quarter of 2023. With the automation of information review processes driven by our AI LLM, we expect accelerated growth and expansion into additional overseas markets in 2024. Another operational highlight that I would like to address is our strategic shift to the RTA, or real time analysis customer acquisition model. This approach integrates risk screening at the customer acquisition stage, attracting higher quality customers and improving our customer mix.

As a result, the proportion of new high quality borrowers served this quarter increased by four percentage points compared to the previous quarter. Turning to asset quality, the fourth quarter saw a slight increase in 15 to 89 days delinquency rates to 3.5% due to industry-wide credit quality fluctuations. However, with the ongoing optimization to our customer mix and the fine tuned risk control standards empowered by AI analysis, we’ve observed a 15 basis point decline in our RPD 30-plus delinquency rate in the fourth quarter from prior quarter, along with a further downward trend going into the first quarter 2024. On the funding front, we are glad to see a continued decline in our funding costs by another 20 basis points compared to the prior quarter.

As our institutional funding partnerships continue to expand nationwide, we expect a further 60 basis point decrease in the funding cost in 2024 compared to 2023. Now shifting to our insurance brokerage business, the year of 2023 saw continued strong growth in our business volume with total premiums reaching nearly RMB 4.9 billion, representing a 24% annual increase, significantly outperforming the industry average of 9.1%. The full year insurance commission revenue reached nearly RMB 1 billion, a 32% year-over-year increase; however, in the fourth quarter alone, due to new pricing regulations capping product returns at 3%, life insurance premiums saw a 24% decline year-over-year, nearing the broader industry trend. This was partially offset by a 26% annual growth in our property insurance premiums for the fourth quarter of 2023.

As we’ve previously discussed, our strategic focus remains on agent development, product innovation and digitization. For life insurance products, we will continue to enhance our capabilities in serving high net worth groups via our growing leads team. In 2023, there was a notable 45% rise in the number of large ticket life insurance policies with premiums of RMB 3 million per policy, as well as a 70% increase in policies exceeding RMB 10 million. Currently, we are expanding our elite agent team and getting ourselves fully prepared for the rebound in the life insurance market, which is expected to occur in the second or third quarter of this year as the industry fully adjusts to the new regulations and product changes. On property insurance, we will continue to focus on higher margin business through product innovation and channel partnerships in health and medical care, engineering and construction, and travel and transportation.

For example, the 2023 full year premiums of our overseas construction insurance product increased by 13% year-over-year. Moreover, we have also strengthened our cooperation with high quality social platforms such as Little Red Book. Since the start of the fourth quarter of 2023, we’ve closed nearly 100 high end medical insurance policies on that platform, marking an efficient new acquisition approach. On consumption and lifestyle services, the growth momentum continued as the fourth quarter saw another 23% quarterly increase in our total GMV to RMB 693 million. The number of transactions reached 3.4 million, up 13% from the previous quarter. The robust growth reflects our continued effort to address our customers’ non-financial needs and our commitment to enhancing their overall quality of life, which in turn improves user engagement and stickiness, creating a reinforcing cycle within our ecosystem.

Looking forward, there will be more attractive lifestyle and entertainment products and services driven by AI and high tech coming onto our shelves. Last but not least, I would like to emphasize our AI strategy atop our long term strategic direction. Through our AI lab initiative, we have been training and fine-tuning our large language models and developing our own large language model operations, or the so-called LLM ops platform. This endeavor will firstly deepen AI integration across our operational spectrum, boosting efficiency and enhancing customer experience. Secondly, we aim to expand our AI expertise beyond the fintech verticals to more select sectors, empowering both B2B and B2C clients and partners with advanced technological capabilities.

Moreover, we have recently encountered high quality AI companies and plan to expand our AI ecosystem through strategic partnerships and investments. The horizon is brimming with exciting prospects. Originally, our CFO was scheduled to participate in this meeting. Due to unexpected travel commitment, she is currently on the road and unable to join us online. In her absence, I will be taking the lead to share the prepared remarks with everyone. For this part, I will only focus on the key financial highlights. Please refer to our earnings release and IR deck for further details. First of all, we are glad to report a solid full year of 2023 with both our top line and bottom line realizing double-digit annual growth, beating our previous guidance.

Specifically in the fourth quarter of 2023, our total revenue reached RMB 1.3 billion, representing a 17% increase year-over-year. For the year of 2023, total volume reached RMB 4.9 billion, up 43% year-over-year. Now on financial services, we saw a continued healthy growth with total loans facilitated this quarter reaching RMB 11.6 billion, representing a 72% growth over prior year. Revenue from this segment reached RMB 781.3 million for the fourth quarter, representing an increase of 22% year-over-year. On insurance, gross written premiums reached RMB 1.2 billion, representing a 9% decrease year-over-year and a 15% decrease from the prior quarter. This decrease was mainly due to the new regulations capping life insurance returns at 3%, down from previous 3.5%.

With sales peaking for legacy products in the second and third quarters of 2023, the market responded to the newly priced products with low interest; consequently, we saw a substantial decline in the first year premiums of life insurance products, therefore revenue from insurance brokerage services in the fourth quarter decreased by 51% year-over-year to RMB 98.2 million. Given that first year premiums overall have a higher commission rate as compared to renewal premiums, the decline in revenue was greater than that of the premiums. As mentioned earlier, we expect a gradual recovery in the second or third quarter of 2024, meanwhile our property insurance remained solid with the fourth quarter premium increasing by 26% year-over-year. On consumption and lifestyle services, total GMV for the quarter reached RMB 692.7 million, increasing 23% from prior quarter.

The customers for this segment come from our existing users across all business lines. The growth rate of GMV is aligned with the increase in the number of our combined customers across diverse business segments. On the expense side, sales and marketing expense increased 99% year-over-year to RMB 205.7 million, mainly due to the intensified promotional activities as we see a continued growth in our financial services business volume. Research and development expenses increased 44% year-over-year to RMB 47.6 million as we persist in ramping up our investments in AI and technological innovation throughout the company. Originations and servicing costs decreased to 13% year-over-year to RMB 184.7 million, mainly driven by a decrease in originations and servicing costs related to our insurance brokerage sector amid the currently regulatory headwinds.

G&A remained stable year-over-year at RMB 50.5 million. Allowance for contract assets and receivables was RMB 98.7 million for the quarter, translating into 0.8% of loan facilitated, 10 basis points lower than prior quarter. Onto our bottom line, we continued to deliver a strong profit of RMB 571.3 million this quarter, increasing 18% from prior year. We generated approximately RMB 417.2 million non-cash from operations in the fourth quarter, a decrease of 12% from prior year. On the balance sheet side, our balance sheet remained strong with total cash and cash equivalents of RMB 5.8 billion by the end of this quarter, providing a sufficient buffer for us to respond to any business opportunities in institutional operations, international expansion, and the strategic AI deployment.

This quarter, we deployed US $1.9 million to buy back shares in the public market. As of fourth quarter end, the company has cumulatively deployed close to US $7.4 million for its share repurchase program. We remain optimistic about the core strength and the future growth opportunities of our company. Given our evaluation of the current state of our business and market trends, we expect our 2024 full year revenue to stand between RMB 5.8 billion and RMB 6.8 billion, with a healthy net profit margin. This reflects our current and preliminary view, which is subject to change and uncertainty. With that, we conclude our remarks. Operator, we are now open for questions. Thank you.

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Q&A Session

Operator: Thank you. [Operator instructions] Your first question comes from Marco Zhang with Water Tower Research. Please go ahead.

Marco Zhang: Hi, congrats on your strong Q4 and 2023 results. My first question is your AI strategy. What are your specific AI strategies for each business line, and regarding the development of an AI ecosystem, as mentioned in your remarks earlier, could you elaborate on the latest progress, and are there any specific investments or collaborations with other technology companies that you can disclose? Thanks.

Ning Tang: Thank you. First of all, we are utilizing AI in our fintech businesses, including credit tech and insurance tech and lifestyle consumption services. For example, in our risk management, we use AI to do collections and we use AI for our international businesses’ quality control, like in the Philippines and in Mexico. We can monitor from remote how teams in those markets conduct business according to local regulations through AI translation and intelligence. For our insurance tech business, for example, we are helping clients analyzing their insurance policies from us and from other insurance companies and agents, and for example we are developing AI content for our lifestyle and consumption services. To be exact, we are developing models for each of our fintech business lines through open source base large language models, plus each business lines’ our proprietary data and business know-how.

Through this process, we’ve developed strong capabilities, in our view, to tweak and fine-tune the model, and this capability is very–in high demand in the market, so we are now working closely with strategic partners on building a product for this model, large language model training capability, so this LLM ops platform will go live soon. On that platform, we can continue to train our models while others can come train theirs, so we welcome customers from all sectors to come train their models. We will offer open source functions to them, but for those who are interested in further developing their models and if they need our help, we can provide additional help on a paid basis, so this will be our new business in AI, part of our new AI business.

At the same time, we are leveraging this AI capability to try and work with industry leaders in legal, in psychology, social companion, such sectors who have great data and great business know-how for their respective verticals, but don’t have great AI capabilities, so we will try and work with them strategically, bringing AI capability to their businesses. We are in the process of closing a number of strategic investments and partnerships in AI and when the time is right, when we close each of those initiatives, we will make additional announcements.

Marco Zhang: Got it, that’s good to hear. My second question is a little bit broader, regarding your international business. What are your expansion plans for 2024 regarding your international business, and what is the expected growth rate for loan facilitations overseas?

Ning Tang: Let me first offer my more strategic–more macro view, and then colleagues may–and colleagues, please add to it. Our international expansion strategy is key to our future growth, and we’ve made very solid progress so far but a long way to go, because the base is still quite small, and so any new business on top of that will likely represent very high growth rate, but we will continue to grow our international business. We are doing work in Southeast Asia, first in the Philippines but more countries to go in Southeast Asia. We’ve got started in Latin America with Mexico to be the first, so we are very hopeful about that market. Subsequently, I hope–and we do have a plan to explore Africa, but start with that. Can Mei please provide more details?

Mei Zhao: Yes, just like Ning mentioned, our overseas geography is very key. In the last year, our objective was to understand the overseas market and to build up our teams, and I think we have successfully met the targets in last year. For 2024, I think we’re going to target our international business to double in the 2024. I think we have great confidence on this year because we have very solid foundation on the international business, just like Ning said, when we leverage the AI capabilities and we already built up our international team, and they’re very localized, so I think we have very confidence on this year on international business. Thank you.

Marco Zhang: Okay, thanks. My third question is regarding your loan facilitation business, not just overseas but also domestic in the total. For 2024, what’s your expected growth drivers for this business in 2024, and can you offer any guidance on the growth rate for new loan volumes for the year of 2024? Thanks.

Ning Tang: Can Mei please take that question?

Mei Zhao: Sure, yes. Okay. For 2024, I think overall it’s [indiscernible] landscape. I think although we have very optimism, but it’s cautious for this year, so we have to balance our business function and our asset quality. Our target for this year is the growth is about 13%, I think that’s for the 2024 year is our target growth rate. Meanwhile, I think we have to keep optimized our risk capabilities, and this is to refine our customer acquisition strategy and also our credit score modeling, so on and so forth, and also enhance our AI capabilities as well. Although I think we have some very confidence on this year, but we are still very cautious on assets and business helping asset quality. Thank you.

Marco Zhang: Got it. Congrats again on your strong results. Operator, I don’t have any more questions.

Operator: Thank you. Your next question comes from Bruce Oren [ph] with Black Lab Fund [ph]. Please go ahead.

Bruce Oren: Yes, hello. Congratulations on another successful year, especially the increase in overseas loans and their great future potential. I have two questions. The first is concerning the life insurance segment. Can you further address the 17.1% drop and how you plan to adjust to the new regulations; and secondly, if you further plan to have share repurchases. Thank you.