Waterdrop Inc.

Good morning, ladies and gentlemen, and thank you for standing by for WaterDrop, Inc. second quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question and answer session. As a reminder, today's conference call is being recorded. I will now like to turn the meeting over to your host for today's call, Ms. Xiaojue Kuei. Please proceed, Ms. Kuei.

Thank you, operator. Hello, everyone. Thank you for joining WaterDrop Second Quarter 2021 Earnings Conference Call. Please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities and the Litigation Reform Act of 1996. Forward-looking statements are subject to risks and uncertainties that may cause true results to differ materially from our current expectations. Potential risks and uncertainties include but are not limited to those outlined in our public findings with the SEC. The company doesn't undertake any obligation to update any forward-looking statement except as required under applicable law. Also, this call includes discussion of certain non-GAAP measures, please refer to our earnings release for a reconciliation between non-GAAP and GAAP. Joining us today on the call are Mr. Shen Peng, our founder, chairman, and CEO, Mr. Yang Guang, co-founder, director, and the general manager of the insurance marketplace, and Mr. Kevin Hsu, our CFO. We will be available for a Q&A session after the remarks. Now I would like to turn the call over to our CEO, Mr. Shen Peng. Please go ahead.

Hello. Thank you all for participating in the press conference of ShuiDi. In the second quarter of this year, ShuiDi was launched in New Jersey. The company became the first Chinese insurance technology to be listed in the United States. It has become an important milestone since its start. At the same time, our performance in the second quarter has also been very strong. In the second quarter of this year, the Chinese insurance market has increased by the same number in various numbers. The price of our central trading market has always shown a positive demand pattern. Our insurance fees and business income have also maintained a strong growth. The annual insurance fee reached 535.7 billion this year, which increased by 94.1%. The net income reached 9.39 billion RMB, which increased by 44.4% after adjustment. This result is very prominent in the market.

Hello, everyone. Thank you for joining us on our quarterly earnings conference call today. In the second quarter of this year, we were successfully listed on the New York Stock Exchange and became the first Chinese insured tech company publicly listed in the U.S. This marked a key milestone since our founding five years ago. At the same time, we delivered very excellent results for the second quarter, Despite China's lack in the health insurance market only posting single digits year over year during the quarter, our premium and operating revenue continue to grow strongly driven by the strong demand from the lower tier cities where our business is focused on. Our first year premiums have grown by 94% with RMB 5,000 $5,357 million for the second quarter. Our net operating revenue for the second quarter reached RMB $939 million, up 44.4 year-over-year on a comparable adjusted basis, which is an outstanding performance in the overall insurance industry.

Our long-term basic investment ability is the foundation for the development of the water company. The current industry is in a transitional period, and water supply companies and relatively excellent suppliers are focusing on business operations that seek higher standards and continue to improve user satisfaction. Therefore, we will continue to pursue low-quality business operations in the short term. We have seen obvious advantages in terms of water supply users, business barriers, and brand awareness. In the transition cycle, it can gain greater benefits compared to other companies, and the relative advantage is more obvious. However, after the water drop went up, due to many external uncertainties, it caused market concerns and caused the stock price to continue to drop. But we believe that the current stock price of the water drop is far away from our basic chain performance. The water drop market capacity of the water drop market is leading in the industry, and most of the core executives of the company are 85s with rich experience. Our long-established infrastructure and organizational capabilities create solid foundation for the sustainable development of water jobs

The industry is currently entering a period of transformation, with Waterdrop and other leading players focusing on higher quality operations and a continuous improvement in customer satisfaction. Hence, we will not adopt a low-quality growth model only to pursue short-term results. We firmly believe that we have clear competitive advantages in terms of customer base, business modes, and brand recognition. where we benefit more against our competitors during the current transformational cycle. However, I know that our stock price has been under pressure post-IPO due to the market concerns over several external uncertainties. But I believe that the current stock price has deviated far away from our fundamental performance. As an organization, we have industry-leading organizational management capabilities. Our core management team are highly experienced youth under age 35, and all of our business segments are growing in a steady and orderly manner. We firmly believe we will continue to sustain our leading position against the current backdrop of a challenging industry. We also want to take the opportunity during this earnings release to update you about our business performance and strategies. I would like to start by talking about our three main commitments.

A drop of water can be used as a spring water. A drop of water can be used as a spring water. As a technology platform, WaterD company will actively use technology to connect with partners in all sectors of the society. Through WaterD Waste, WaterD Treasure, WaterD Health, and other multi-faceted business combinations, we will support the third generation of wealth. We will help the whole nation to achieve the function of wealth. And through technology, we will help Aisin to become more transparent. We will help this society to become more loving.

Our first commitment is to actively embrace regulation, adhere to compliance, and continuously improve user satisfaction. At our inception, the origin of our company's name, WaterDrop, came from our vision that says leveraging technology to make insurance protection more inclusive and accessible to the public and achieve common prosperity for everyone. WaterDrop symbolizes our belief that little drops of water constructs the mighty ocean, and save a drop of water in good days to have the Pacific Ocean in bad days. Or as the Chinese proverb goes, a drop of water in need will be repaid by a spring indeed. As a technology platform, we will actively connect our partners in the ecosystem, facilitate the national third distribution drive with the diversified offerings of our water drop medical crowdfunding, water drop insurance marketplace, and the water drop health platforms to achieve common prosperity for everyone. We believe that with our leading technology, we can help to make donations out of love, more transparent, and our society more giving.

As a family, we have a strong sense of social responsibility, and we are committed to the innovation of technology related to people's livelihoods. We actively support and monitor the expectations and demands, and we use customer satisfaction as the core, and we adjust and update in advance, and we promote the reputation of the industry.

As a technology innovative company with strong social responsibility and a close connection to people's livelihood, we proactively respond to the regulatory guidelines and requirements. Tapping into customer satisfaction, we have adjusted and updated our business operations in advance and engage in taking the lead to improve industry reputation. In the short term, there might be fluctuations in quarterly results or challenges in our operations, but our determination to remain compliant has never changed.

The company is in the process of rapid expansion. Because of the large number of users, insurance, insurance, and health needs, there is no better place to live. Because of the potential of the network, we are self-sufficient in the market. The initial establishment of a comprehensive knowledge and expansion of customer cooperation is more beneficial to us. So in the previous period, the company has been pursuing high-speed development. As the company continues to develop, we have achieved relatively good results on the scale. The future will gradually enter the stage of enriching the industry and improving the value of users. Organizational operation is to adapt to the current market environment to meet the company's long-term development goals. The company is confident that in the coming time, it will be more meticulously controlled and the balance between the expansion of the air-to-air ratio will also achieve high-quality development.

Secondly, we have further refined our operations since the September. Our management are committed and confident in delivering higher quality operations and results. The company was previously in a period of rapid expansion as the insurance protection and health needs of the billions of users in lower tier cities were underserved, which had vast potential. We positioned ourselves to serve those users and believe it was important for us to build our brand awareness and expand our user base at the beginning. Hence, we pursued rapid business growth during initial stages. With our continuous development, we have now achieved a leading position in terms of business scale in the industry. In the future, we will gradually switch into a stage of enriching the range of our services and enhancing user value. We believe the refinement of operations is the inevitable way to both adapt to the current market environment and achieve our long-term goals. We are confident in balancing between optimizing customer acquisition and the premium volume growth going forward so as to achieve higher quality growth.

Third, we use technology to innovate and make full use of our business. In terms of technology, we continue to dig deeper and make breakthroughs. The third commitment is on technological innovation and empowerment of the entire business chain by technology. In the second quarter, we continue to explore new technological applications and complete several breakthroughs.

With our intelligent sales system, we can precisely match up a salesperson with a single potential customer through proprietary algorithms analysis. Through such optimization, productivity increased by a range of 20% to 45%, enhancing the sales efficiency.

through the model of air-cooled RFP algorithm to extract and recalculate the equipment. At the same time, the model of water-based green nuclear protection is designed based on the online real-water nuclear protection data. By connecting with the SEM system, it provides RFP nuclear protection and decision-making capabilities. It can quickly locate the user and report the product and information. At the same time, it can provide more accurate user and sales clues through selection.

For our intelligent underwriting and verification process, we applied an NLP algorithm model to extract, summarize, and refine the policies from insurance companies and combine with actual online verification data. Based on this enhanced process, we designed our pre-verification decision model Through the integration into CRM system, it provides supporting decision capability for LP's verification process, so our LP can rapidly and precisely make decisions on policies available to specific customers. Simultaneously, this system can more accurately create additional sales leads through a more precise screening process. Our interactive QA system is now able to cover 97% of common diseases that online users inquire about. In terms of our online marketing services, under the concept needs-based service, we design our system tools and improve users' awareness of service quality to increase sales conversion. Through our live interactive tool, our sales and service personnel can share screen remotely with users which helps build users' trust and provides them with a lot smoother experience in understanding and purchasing the policy, especially in lower tier cities. Leveraging our real-time intelligent sales service assistant tool, driven by algorithm features and user experience, we are able to provide users with more professional and higher quality services.

We continue to increase our investment in the development of technology. We have attracted more than 100 experts in the industry in terms of data and algorithms. Now we will continue to explore more. We also hope to be able to combine the insurance industry chain with the upper-middle and upper-middle-middle-middle-middle-middle-middle-middle-middle-middle-middle-middle-middle-middle-middle-middle-middle-middle-middle-middle

We continue to increase our investment in research and development and have attracted nearly 100 new talents with experience in data and algorithms. More technological innovation will come in the future. We hope to join hands with up, mid, and downstream partners in the insurance industry chain to continuously iterate and update existing intelligent solutions to meet more personalized, customized, and diversified insurance protection and health needs of users.

We are committed to promoting the innovation and innovation of SMEs and the determination to keep doing the right thing. We have long-term positive value and contribution to the Chinese society. We have established our water supply chain since the end of the second quarter of this year. We have 3.72 billion users and 2.1 million patients on the platform. We have provided a total of more than 4.28 billion donations. This is not a simple number of numbers. Behind it is the hope to revive the lives of those who have been seriously ill or have been suffering from illness for a long time. It is the heart of the people to play a part in the spread of the disease. It is also the first and second time of the country to distribute it and to supplement it again. As the largest Internet health and safety platform in the country, we expect to make more efforts in the third time.

We are convinced that Waterjob's entrepreneurial vision, being to leverage technology for the interest of public and common prosperity, business philosophy, and consistent commitment to doing right things, will have long-term positive value and a contribution to Chinese society. As at the end of the second quarter, a total of 372 million users of our crowdfunding platform have made donations of more than RMB 42.8 billion to 2.1 million patients. This is not just a few numbers, but hopes for survival of those who have suffered from serious illnesses or accidents, a spontaneous transfer of love among the people, and a meaningful supplement to the country's policy on income primary distribution and redistribution. As the largest online medical crowdfunding platform assisting people with serious illnesses to seek help from the public, We expect to contribute more in the income third distribution.

At the same time, the return of shares will be used in the shareholding plan to further strengthen the company's long-term management system, promote the internal ability of the company, and grow with the employees. We will stick to the mission and vision of the company, the real needs of the users, and continue to innovate, and strive to become the health and security priority platform in the hearts of the people.

In conclusion, we are firmly confident in the strong and sustainable development of our business going forward. Today, with the earnings, we announced the Share Repurchase Program, in which we may repurchase up to $15 million U.S. dollars worth of our ADS over the next 12 months. This is a decision that was made based on the judgment of the company's current value and our confidence in our long-term sustainable development. Meanwhile, we plan to reserve repurchase shares for share incentive plans, which will further improve the long-term incentive mechanisms and align the interests of our employees with the growth of our company. We will adhere to the company's mission and the user's real needs, always work as day one, and strive to become the preferred platform for health protection in the minds of the people. I will pass to Yang Guang to give an update on the development of the water drop insurance business.

Thanks. Hello, everyone. I'm going to walk you through key highlights of the quarter and some recent developments in our interest market business. I'll start with the product side. The number of interest products we offer has further increased from 240 in the previous quarter to 275. In addition to upgrading the existing products, we have also developed new products that are closely aligned with the current marketing demands, including vaccine-related, flood-related, and other scenario-based interest products. We continue to uphold the concept of serving the general public with insurance coverage, developing products and services that are suitable for different customer groups, and promoting supply-side innovation. For instance, our cancer insurance products are available up to the age of 80 and can be upgraded to include general medical insurance for broader coverage if the customer could pass physical examination. Furthermore, our emergency outpatient insurance products could address the region users and are highly cost-effective, making it possible for the general public to obtain more practical insurance coverage in a cost-effective way. We also cooperated with reinsurance companies to develop the industry's first online non-standardized CI insurance products covering patients with dozens of common chronic diseases such as hypertension, diabetes, hyper-TITIS-B, and hyperlipidemia. This interest product helps address the difficulties of the suboptimal health group in obtaining interest coverage and fully address the interest needs of people with multiple disease or abnormal health indicators. Through our technological innovations, that being said, disease modeling, premium loading, and scenario optimization, each disease can be evaluated by answering three to six questions, which greatly improve the convenience for individuals with suboptimal health issues to get interest coverage. The share of our short-term CEI products has increased from 14.9% in Q1 to 17.3% in Q2. We also sold more than 60,000 newly launched outpatient insurance products in Q2, showing our progress in diversifying product offering. Next, let me talk about our user growth and channel development. Regarding user base, in the second quarter, there were 4.2 million customers buying insurance products through our platform, up 53% year over year, resulting in the outstanding growth in our FYP of 94%. As of June, the cumulative number of insurance customers awarded jobs have exceeded 102 million people. among which 24.9 million were paying customers. On top of the rapid increase in the number of customers, about one-third of these paying customers in the second quarter are repeat buyers. In Q2, the FRP per customer reached RMB 1,276 compared to RMB 1,165 in Q1. And the overall repeat purchase rate of short-term insurance has increased to the range between 50% to 60%. As supported by our effective management of existing customers, we have seen positive results in policy repurchase and renewal. Moving on to the channels of customer acquisition. Firstly, we increased investment in third-party traffic channels. On the back of our prediction that external traffic would be relatively abundant in the second quarter, the periodic increase in new user acquisition from external channels has somewhat lead to a decline in retention rate. However, at the same time, we have also applied intelligent applications and automated service tool to our ad placements, which has improved our customer acquisition efficiency. Through the use of AI algorithms, we have been building our big data models, which are used to assess the impact of ad placement on user clicks, user conversion, retention rate, and complaint out. The system will then estimate the potential value that each user request could bring toward a job and get the real-time API to give accurate bidding price for acquiring new users. Such process could improve our return on investment through filtering out the lower quality traffic and facilitate acquisition of higher quality traffic with specific bidding mechanism for various customer segments. Currently, our system has been connected to major media RTAs, and the new strategy has boosted our premium ROI by 8% to 10%. Secondly, for internal traffic, WaterDrop Medical Crowdfunding is no longer simply an aid-seeking platform for critical illness or a standalone insurance conversion platform, but also a multifunctional conversion scenario for healthcare, medical, and patient management services, thereby enhancing our capabilities to launch more healthcare services for users. We will continue to reserve traffic as scenario to run new business trials At the same time, considering the long-term and robust development of our platform, we will balance various factors, including compliance requirements and customer experience, and push forward steadily instead of pursuing aggressive business conversion. Thirdly, let me talk about our participation in the government-backed health insurance of Huiminbao. Leveraging the competitive advantage of our online insurance platform, we have actively acquired new consumers through the government-backed health insurance scheme, Huiminbao, given that it provides a relatively lower entry barrier for individuals to purchase health insurance products. Under this scheme, Waterjob is positioned as a one-stop insurtech platform. which can provide services such as product design, platform setup, marketing, clean settlement, pharmacy benefit management, and patient services. Moreover, by leveraging our sophisticated technology and full insurance intermediary licensing, we could help our partners to develop insurance infrastructure, personal account payment system, for their customer distribution system or the insurance claim set system and a one-stop settlement system that are fit for Huiminbao. At the same time Huiminbao also constitutes an emerging channel for acquiring new users in markets supplement to a commercial health insurance. Now regarding our sales model upgrade. Considering the abundance of our product offering, in order to enhance the interest of our users and the protection quality of our products, we plan to upgrade our sales strategy gradually in the near term. Especially, we will replace the medical products, which target first-time buyers, by a first-month premium discount. with other products that have a lower premium, higher cost effectiveness, and a flat monthly payment. This will help enhance the retention and the repurchase rate of our users, thereby increasing the overall LTV per user. Despite that, the upgrade may have some short-term impact on conversion rate for online sales. This could significantly improve customer retention and satisfaction. as well as reducing the reliance on expensive external channels. And we will continue to engage in cross-siting activities with existing customers, leveraging our experience in online operations and customer database. We believe that we will leave the industry in the upgrading of the short-term interest marketing model, further improving our user economics and delivering more healthy and sustainable growth. Now onto our claim settlement services. Our claim efficiency is enhanced through our technology, combined with our personal interactions to improve overall customer experience and satisfaction. Our self-developed AI intelligent claim settlement system could assist customers throughout the entire process. from the moment that they submit claim applications online to the closure of settlement. Our intelligent adjustment system could support video configuration, monitor the product change in the market, and update the rules of claims accordingly on a real-time basis. The system also adopts the intelligent data analysis to automatically proceed the calculations in each claim case, such as evolving manual arrows. It only takes the system milliseconds from the start of a model calculation to generate a claim decision. The latest claims accuracy rate of the system has now reached 99.78%. In addition, we launched our Claims Butler Service to provide one-on-one personal assistance services across the entire claim process. This includes the consultation and upload of claim materials, case progress tracking, interpretation of a claim conclusion, and assistance in dispute settlement. customers can communicate directly with our claims settlement team, so the enterprise of WeChat account. As of June 30th this year, the 24-hour closure rate for quick settlement cases has reached 98.6%. We also collaborated with our partners to cover other clean settlement related services, such as health consultation, convenient access to hospitals, CEI advance payment, full process clean assistance, and drug purchase discounts. I think with that, we will now turn over the call to Kevin, our CFO, to discuss our second quarter financial performance.

Okay, thanks, Jianguo. Before I go into details on financial performance, please be reminded that all the numbers coded here will be in R&D, and please refer to our earnings release for detailed information on our comparative financial performance on a year-over-year basis. In the second quarter of 2021, our first-year premiums have grown by 94% to RMB 5,357 million. Our net operating revenue increased by 38% year-over-year to RMB 939 million from RMB 681 million, primarily fueled by the growth in our insurance brokerage income. On a comparable basis, which means without taking into account the minimum fee income for our mutual aid business, we have a very big case in the first quarter, which no longer contributed to our revenue in the following quarters. Our adjusted net operating revenue achieved a strong year-on-year growth rate of 44.4%, significantly outperforming the industry growth. Our insurance-related income was RMB 899 million, including insurance commission and technical income, increased by 38.3% from RMB 650 billion in quarter two last year. We calculated our take rate by dividing insurance-related income to FIP of the same period. Our FIP has grown faster than that of net revenue. mainly due to the decrease in our ticket rate by 6.8 percentage points from 23.6% in second quarter of 2020 to 16.8% in second quarter of 2021. This was a temporary outcome caused by the fast expansion of our customer base through external traffic channel. as we still see strong demands from our potential customer groups and customer base, is key to our business development. We are confident that we will be able to maintain our take-away relatively stable going forward, as we can keep personalized interaction with our customers and provide tailored and all-rounded services to them after their first purchase from our platform. and explore and realize higher LTV for each customer regularly. Our operating costs and expenses for Quarter 2 increased by 160% to RMB $1,755 million. To break it down, the operating costs were RMB $260 million. mainly due to a RMB 38 million increase in personnel cost as we rapidly expand our consultants and the insurance agent team to support the business growth. We also incurred a RMB 56 million increase in professional and off-source customer service fees. Sales and marketing expenses increased by 270% year-over-year to around $1,245 million, primarily due to the increase in marketing expenses to third-party traffic channels because of our accelerated business expansion and the branding promotions during the favorable market window for online traffic in Quarter 2. As some traffic was released across sectors, We also have seen intensified competition from peers in acquiring new customers, framing up our CAC. We have adjusted our budgeting plan to further control expenses in third-party traffic through more refined operational management and a strict cost control. In the third quarter, we expect to maturely reduce such expenses. T&A expense increased by 21.8% in quarter two to RMB 149 million, primarily due to the increase in professional service fees and personnel cost. R&D expense increased by 80.4% to RMB 100 million, and it's excluding share-based compensation. The adjusted R&D expenses would be RMB 90 million, implying an increase of 72.1%, mainly driven by the increase in RMD personnel cost as our research and development team continues to expand to enhance our competitive capabilities in technology. We incurred a net loss of RMD 656 million gas bases and an adjusted net loss of RMD 570 million The adjusted net margin was negative 60.7% for Q2. The expanded negative margin was mainly driven by the increase in sales and marketing expenses as discussed above. For the third quarter of 2021, we expect our FYP to be in the range of RMB 4.3 to 4.6 billion. and the reviews of sales and marketing expenses maturely compared to this quarter. Such outlook is based on the current market conditions and reflects our preliminary view and estimates, which are all subject to change. This concludes our prepared remarks. I will now hand over to the operator to open the call for the Q&A session. Operator, we are ready to take questions. Thank you.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. please limit yourself to two questions at a time so others can get their question in as well. In addition, for those who speak Chinese, would you please ask your questions in Chinese first, followed by the English translation by yourself? At this time, we will pause momentarily to assemble our roster. The first question comes from Michael Lee with Bank of America. Please go ahead.

Hello, Mr. Lee. I am Michael Lee, an analyst from Bank of America. Thank you for the detailed introduction. I see that our performance in the second quarter has improved considerably. I have two questions. The first question is about supervision. We noticed that at the beginning of August, the Bank of America issued an article on Internet security on August 17. We noticed that in the beginning of August, the CBIRC issued document number 87 on internet insurance. and raised a lot of concerns and requirements on internet insurance companies. So can you tell us what kind of requirements you will need to fix your previous issues and what kind of impact will be on your future operation and results? The second question is about the strategy and latest progress in developing health service businesses. Because before the listing, Mr. Shen and Mr. Yang have already mentioned that we want to do a big health, and then we want to develop this health service business. So I would like to ask, up to now, we have had a few months since the listing, and then has there been any change in the strategy of this business, or what kind of progress do we have? Let me translate it into English. Before the IPO, we talked about the development of health care services, which is an important part of our overall business. So may I know the latest growth or strategy and the progress of these health care services? Thank you.

Thank you for the question, Michael. This is Yangbao speaking. I will answer the first question. I think the rectification campaign you mentioned is a follow-up initiative to implement the regulatory measures on Internet insurance business, which were actually announced in December last year and officially took effect in February this year. I think the regulatory measures aim to promote the healthy development of Internet insurance business not to restrict its development. So we believe it will benefit the development of compliant and licensed quality institutions for the long run. I think the relevant requirements of the rectification campaign generally follow the basic framework of the regulatory measures on internet insurance business, while with more detailed measures and no significant changes in the general policies. So before this campaign was actually launched, we have already been proactively adjusting our business in compliance with the new regulations. And after the detailed measures came out, we have continued our efforts and will complete self-inspection and make necessary adjustments accordingly by September 30th this year. This will neither have material impact on our current business model nor put-outs, and material compliance risk. Adjustment for certain processes is expected to affect our conversion efficiency in the short term, but in the long term, we believe it is beneficial for our business quality improvements, as well as the compliance and standardization of the whole industry. I hope this answers the question well, and I will leave the second question to Mr. Shenpeng.

um um In order to serve the health community, we are continuing to expand the category of consumer medicine, enriching products and services, including health consumer products, gene testing, cancer screening, and so on. At the end of the insurance company, we will expand the function of health insurance and control, and the energy-saving transaction process will help to match more qualified users.

In the second quarter of this year, we continue to explore new growth opportunities across various sub-segments of our healthcare business. For Waterdrop Health, which targets healthy customers, we continue to extend the categories of our consumer healthcare services and enrich our product and service offerings, et cetera. These include the launch of new healthcare consumption products, genetic testing services, and early screening for cancer services. We also developed our underwriting risk control function and empowered transaction processes to assist insurance carriers in matching qualified customers.

and covered more than 1,500 households. We are continuing to cooperate with pharmaceuticals, health insurance agencies, and pharmaceuticals. Through commercial health insurance, public medical use, and pharmaceutical insurance, we have created a new way to improve the competitiveness and customer relationship of pharmaceutical cooperation. In the end, in order to help patients reduce the cost of drugs,

For Water Drop Medicine, as of the end of Q2, we have around 150,000 members and established cooperations with more than 1,500 pharmacies. We continue to expand our cooperation with pharmaceutical companies, insurance institutions, and pharmacies. Leveraging commercial insurance, medicine for public welfare, pharmacy insurance, and innovative payment services, We help our pharmacy partners enhance their competitiveness and customers' pickiness and reduce patients' out-of-pocket expenses for medicine.

In terms of the patient management platform, we focus on providing patients with severe illness with comprehensive and comprehensive care management. We build bad reactions to prevention and management. We review, review, check, remind, and report on the diagnosis. For our patient management platform, we focus on providing full life cycle of patient management services outside the hospital system to patients with critical diseases after surgery. We have built up

key services capabilities in this platform, providing our patients with services such as adverse reaction prevention and management, reminder of hospital visits, medical report interpretation, prescription, as well as supplying medicine and nourishment. We strive to become a high-value healthcare platform benefiting doctors, patients, and pharmacists.

And I hope all of you could continue to take an intention into our three segments. Thank you. Okay, next question.

Thank you. The next question comes from Thomas Wong with Goldman Sachs. Please go ahead. .

So. Thank you for the manager. Let me, let me translate my question. The first one is on FIP. So can we have a breakdown between the long-term and product growth rate? And secondly, uh, on the increasing acquisition sales and marketing expenses, um, can, can you give us a little bit color on why the timing of this increase and also comparing to the FIP growth, the expense goes faster. Um, how can we think about that on a quarterly basis? Do we, should we expect faster FIP growth next quarter? Thank you.

Thanks for the question, Thomas. For this quarter, our sales of long-term insurance have grown, although with a slower growth rate than that of the overall FIP. Because we mainly sold our long-term insurance products to our online consultation teams. Traditionally, in March and April, the high-time Thai marketing salespeople would switch their jobs after the Chinese New Year, so it led to a temporary decrease in our sales force. Moreover, after our IPO, we let go some of our partnering and in-house sales force that did not meet our requirements in service quality and efficiency. Although the number of our online consultancies was lower than that in the last year, our overall service efficiency and premium retention both went up. So the growth slowdown was mainly due to the voluntary adjustment we made to our sales team. And due to the aggressive scale expansion of short-term insurance business and the relatively shortage in the sales workforce for long-term insurance products, The sales leads for short-term insurance products were not fully utilized. And besides that, due to the rapid scale-up of our short-term insurance business driven by external traffic, the quality of our new leads slightly went down and had an adverse impact on our long-term insurance business. So due to the reasons mentioned above, the growth of our long-term insurance products slowed down, but it was only temporary and mostly a result of our own choice. So the improvement of our service quality and the customer satisfaction are our long-term goals. The takeaway of our long-term insurance product is supposed to be improved as a result. So going forward, we will actively develop our sales team and further expand our hiring channels and step up our recruitment efforts. Meanwhile, we have also adjusted our general rules and incentive mechanism and optimized our team composition. In the current marketing environment, we believe we will be able to onboard more outstanding sales staff and external institutions. And we will continue to optimize these matching and improve our conversion efficiency. Our algorithm-based leased matching system has increased the FYP per lead by 20% this quarter. So, given the rapid growth of our short-term insurance products in Q2, the great amount of the accumulated leads for our long-term insurance will gradually unleash more sales potential as we replenish our workforce. And for the second question regarding the marketing expense, I will hand it over to Kevin of CFO to answer the question. Thank you.

Okay. Thanks so much. Thank you for your question regarding sales and marketing expenses. The increase in sales and marketing expenses was mainly due to the increase in the marketing expense for user acquisition and the branding building. There were a few industry factors behind. behind the increase in our sales and marketing expenses in Q2. Traffic resources across industries started to pick up in Q2, which is favorable for the user acquisition. Amid this environment, we maximized our user acquisition efforts while maintaining a relatively healthy ROI. The increase in the external traffic investment will naturally lead to a subsequent increase in our CSD and a compromise in efficiency metrics. Meanwhile, we also foresaw that the regulations on the overall industry will be tightened. Therefore, we have also implemented compliance measures in advance on our marketing side in order to strike a balance among business growth, operating efficiency, and costs. Although our marketing expenses increased significantly in Q2, our CSE was still at a relatively low level among the industry. In terms of our customer acquisition efforts, we conducted stocking algorithms with external platforms, which have started to show positive effects on ROI since Q2. In addition, we will take relevant measures. We will have a lower marketing budget, focus more on per capita output efficiency and marketing ROI, and use stricter criteria to select traffic acquisition platforms. We will also leverage our AI-empowered platform to conduct more intelligent and targeted marketing. We are now testing a number of different marketing strategies and have seen some good results. So I hope this addresses your questions, Thomas. Thank you.

The next question comes from Kling Kling Mao with CICC. Please go ahead.

Okay, thank you for the opportunity to ask me a question. I am Mao Qingqing, an analyst at Zhongjing. I would like to ask about the problem of Huiminbao. I would like to ask about the impact of Huiminbao on the company's business and whether the company has any strategy to deal with the potential of Huiminbao. I will simply translate it. My question is about Huiminbao, our government-backed health insurance. What's the impact of the development of Huiminbao and your strategy in response to the development of it, as well as the potential computation? Thanks.

Thanks, Qingqing, for the question. I think since last year, we have made explorations and attempts in the government-backed health insurance area. So far we participated in Beijing inclusive medical insurance program designated by Beijing municipal medical insurance bureau and supervised by Beijing banking and insurance regulatory bureau and have made solid progress. Also we have undertaken the government backed health insurance program as the operating platform for of Shandong Province and other cities in this year. Meanwhile, we kept frequent and good communication with major insurance companies who joined government-backed health insurance program, as well as with many local medical insurance bureaus. We participated in the government-backed health insurance program, which you already called Huiminbao. Due to following consideration, I think firstly the demand of consumers. As the existing products cannot meet the demand of some customers, we always want to invest our resources to explore new ways to serve the users. I think secondly, by leveraging our advantages on insurance technology, product design, claim settlement, and the DTP service as well as healthcare management, we are able to help medical insurance institutions and insurance companies save costs and improve efficiencies. For ourselves, joining Hui Minbao will connect the products with our insurance payment tools and health care services, each packaging munisipality version of the UnitedHealth. Based from the government's perspective, many local medical insurance authorities have clarified the position of government-backed health insurance as a commercial, supplementary medical insurance which can significantly reduce residents' self-pay ratio of medical expenses. For the insurance industry, it also helps educate people about insurance and raise the awareness of insurance protection. And it is also conducive to exploring customers' potential insurance needs. And from the perspective of product design, government-backed health insurance programs introduced DTP service, direct-to-patient service, which provide protection beyond medical social insurance scope and expand the coverage of commercial insurance. To some extent, it helps solve the problem of poverty due to illness. So both patients and the elderly can participate in the programs, which forms a complementary solution for product supply. So in the short term, I think the government-backed health insurance program will have a certain impact on the sales of a median medical insurance product by the EDL campaign. It may take some time for people to know these two products. And given to the credit endorsed by the government, the government-backed health insurance products are easier to gain trust, which have a certain substitution effect on median medical insurance products. I think going forward in the long run, these two should be a position as differentiated products. And the government-backed health insurance attracts more patients and older people, while meaning medical insurance is more a position to catching the younger generation and the healthy people, offering a wider coverage outside the medical insurance catalog. Accordingly, the two products are more supplementary rather than substantial. Thank you. That's all for the question.

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