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spk03: Good morning, ladies and gentlemen, and thank you for standing by for Water Drops Inc.' 's third quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the management's prepared remarks, there will be a question and answer session. As a reminder, today's conference is being recorded. I would now like to hand the conference over to your host for today's call. Ms. Quee, please go ahead.
spk04: Thank you, operator. Hello, everyone. Thank you for joining WaterDrop's third quarter 2021 earnings conference call. Please note that the discussion today will contain forward-looking statements made under the safe harbor provision of the US Private Securities and the Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to, those outlining our public findings with the SEC. The company does not undertake any obligation to come to any conclusion, 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 general manager of the insurance marketplace, Mr. Hu Yao, co-founder, director, and general manager of medical crowdfunding and healthcare, and Mr. Kevin Shi, 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.
spk01: Hello. I would like to thank all of you for attending the press conference of Shiba Inu. The capital market has been fluctuating since the third quarter of this year. At the same time, the insurance industry has dropped to a certain extent due to the adjustment of the structure. The company faces opportunities and challenges, which are a little different from the situation before the listing. But no matter how the market changes, we will do our best to do our business with customers as the center.
spk04: Hello everyone, thank you for joining our quarterly earnings conference call. Since the beginning of the third quarter, the capital markets have experienced an increase in volatility and the growth of the insurance industry has softened. The opportunities and challenges faced by our company were also quite different from those prior to our IPO. Now with standing this, we continue to strive to be a customer-centric company that focuses on the development of our business and creating sustainable shareholder value.
spk01: In our last earnings release, we announced a one-year share repurchase plan during the third quarter
spk04: We have pragmatically commenced the plan under the relevant compliance framework. Since September 8, the announcement date of the repurchase plan to the end of the third quarter, we have repurchased a total of nearly 500,000 ADS and we will continue to implement as deemed appropriate. We plan to use these repurchased ADS for our shared incentive plans in the future.
spk01: In addition, based on the firm confidence of the company's prospects and the long-term development of the company's investment and the firm choice to safeguard the interests of the general public investors, I, including myself, have a total of more than 30 core executives. Before we went public, we promised that at least within 18 months after the end of this month, we would not sell or dispose of stocks or securities owned by water-based companies, and continue to strengthen our stability. In addition, before IPO, our core management team of more than 30 executives including myself
spk04: have already voluntarily undertaken not to sell or dispose shares or options of water jobs in another at least 18 months since the expiry of our IPO lock-up in this November, continuing to strengthen strategic stability and keeping focused on business development. This was based on our united confidence in the company's prospects and our support for its long-term sustainable development. It also demonstrates our long-term commitment to safeguarding the interests of our investors. Despite the entire industry having encountered various challenges throughout the past few months, we see it as an optimal time for us to enhance our fundamental operations. We collectively and firmly believe in the long-term positive trend in the Chinese healthcare market and a better future for Wonderdog. We have confidence in the future and remain patient in the present.
spk01: Over the past year, new regulatory rules and industry policies have been put forward to promote the regularization of the industry and healthy development, which has long-term benefits to the integration of the industry. As a listed company, WaterD is committed to monitoring the trend, actively monitoring and maintaining good communication, and actively updating the business model to ensure the return of our company's finance. This time, for the industry change in Internet insurance sales, Since the beginning of the year, several new regulatory guidelines and industry policies were released, aiming to promote the healthy development and consolidation of the industry in the long term.
spk04: As a listed company, WaterDog has proactively responded to new regulatory guidance and have maintained good communications with the regulators. We also took the initiative to pivot our business model to ensure that we are in compliance with the new rules. This round of rectification on the online insurance bills does not only amend the problems from the past to comply with the new guidance, but also provide a clearer direction to the future development of the industry. WaterJob is actively cooperating with regulators and engaging in self-inspections and rectification. Going forward, we will continue to proactively promote the healthy development of the industry.
spk01: WaterJob's unique position is to provide universal protection and mutual benefit, in line with the direction of supervision. At the same time, through product capacity, technology innovation capacity, and unique partner structures, we have built a strong infrastructure. In the industry adjustment stage, we will show sufficient business flexibility and stability. Especially in the near future, with the rapid growth of the pandemic, I believe that the needs of the future national security will continue to improve, and will be more inclined to reverse the online channels. For online platforms such as SuiDi, In the face of short-term challenges, we will continue to strengthen the control and optimization of costs and profits, and continue to advance on the correct path of high-quality development.
spk04: Waterdrop is uniquely positioned to provide inclusive insurance, which is in line with the regulatory guidance. At the same time, we have established a solid business infrastructure through our product development capabilities. technological innovations, and unique synergies among our business segments. These helped us demonstrate our resilience and stability during this transitionary period in the industry. Especially at present, along with the unstable situation of the pandemic, it is believed that the demand for insurance protection will continue to rise in near future, and people will be more inclined to turn to online channels, which implies an opportunity to online players like us Despite facing short-term challenges, we are committed to strengthening our cost control and optimizing profitability, ensuring that we are on the right track to a quality development in the years ahead. I'll pass to Yang Guang to discuss the development of the water job insurance business.
spk06: The main theme of this quarter is the transformation and upgrade of our online user acquisition model so as to better comply with the new regulatory guidance and evolving industry trends. Since the beginning of this year, the growth of the insurance industry has also entered into an adjustment period. According to the stats from CBIRC, the growth rate and premium of the health insurance sector only increased by 5% year-over-year in the first three quarters of this year, while the growth rate was minus 3% year-over-year for Q3. and the net profit of major listed insurance companies declined by about 36% year-over-year on average during this quarter. Our growth has also been affected under this operating environment. However, we are still outperforming the industry. Our FYPs for the first three quarters increased by 37.5% year-over-year to RMB 14.46 billion, exceeding the total FYPs for the whole year or last year. And despite the negative growth of the industry, our FYP during the quarter remained flat and positive growth We also significantly improved our cost efficiency with net loss in Q3 narrowed by 27.3% on a quarter-over-quarter basis. Over the past two years, products of monthly pay with first-month low premium has stimulated strong market demand, driving a rapid expansion in new users across the online income sector. However, since the beginning of this year, along with the reduction in the reaching out efficiency of this model, the benefits of online traffic followed by this model have gradually faded. This was directly manifested by the decline in both the new user conversion rate and retention rate. In addition, the increased customer acquisition cost brought about by intensified competition has also gradually weakened the competitiveness of this model. Meanwhile, in order to ensure the industry's healthy development, regulators especially made a reminder for consumer complaints potentially brought by the first-month low premium model, discouraging prominent promotion of these products via online insurance platforms. and rather the regulators advocate interest companies to leverage their product innovation and technology innovations to enhance insurance protection for the public from the supply side and the service side. So in order to align with the guidance and to comply with the new regulatory requirements and the evolving industry trends, we have taken the lead to upgrade and optimize the online customer acquisition model since the third quarter. We hope to promote an enhancement in the short-term interest marketing model of the entire industry and further improve our user economics, thereby achieving a healthier and a more sustainable development. So after we eliminated the first month discount, since the end of August and switched the focus of our online user acquisition channels from third-party sources back to internal channels, our quality indicators have improved significantly. The monthly tick rate of our short-term insurance products increased by 5% from July to September. The recovery in tick rates was mainly driven by the significant improvement in retention rates. And in the third quarter, the LTV of new customers have also improved on a sequential basis, with LTV for September increased by 75% month-on-month, resulting in a significant improvement in ROI, the return on investment. In the meantime, we continue to increase our investment in new technologies and leverage technology to improve our retention and sales force productivity. Based on our data platform, voice platform, and NLP platform, we have explored building a large-scale semantic search engine. And we also applied the MyNewPlus machine labeling and future reinforcement learning, FRL technology, to enhance data collection and strategic machine learning capabilities to build an intelligent outbound calling system for the entrance retention and renewal. We continue to synergize information from our CRM system, outbound calling system, voice platform, and dialogue robots to set up different script templates for different types of consumers. so we can fully get users' intentions and provide customized product solution. Our system supports various functions such as automated reporting, call recording, and the intelligent statistical analysis and provides suitable outbound calling strategy and script considering different operation scenario. This helps improve our customer renewal efficiency, reduce the workload of data reporting, provide tailor-made solutions to reach out to customers and further improve our customer retention. And benefiting from the optimization of this technology, the renewal rate in the third quarter improved by more than 20% compared to the same period last year. And our business resilience is certified on top of our large customer base, especially during the slowdown in the industry. Compared to the initial rapid growth stage of our company, we are now placing more emphasis on existing customer and the service quality enhancement. We provide comprehensive interest protection plans that cover vertically the left cycle of our users and horizontally their family members. By analyzing our user profile and left cycle, We empower our online service team with enterprise vChat to provide users with flexible, dynamic, and comprehensive protection solutions, thereby maximizing the LTV of users. In terms of the repeat purchase, critical units probably more in the sub-quarter. In Q3, the number of short-term CEI repeat repurchase policies within 35 days increased more than 30% over Q2. Our monthly repurchase rate increased significantly month over month, with the 35-day repurchase rate stood at around 33% in the sub-quarter. Our three-year repurchase rate and renewal rate for customer group in the third quarter increased further by 10% compared to Q2. The share of long-term influence in our total LTV per user reached 40% in Q3, up by 15% over Q2. And in Q3, the premiums per customer continued to increase, driven by our effective management of existing customers and the increase in repurchase. The number of policies per customer increased by 10% quarter-by-quarter. At the same time, our efforts in private demand traffic are starting to deliver results with 130% increase in the number of enterprise WeChat contacts in Q3 compared to Q2 and a 70% quarter-over-quarter increase in conversion. Moreover, we continue to make further progress with our offline brokerage business. As we brought in more industry veteran to our management team, we have gained a deeper foothold in offline brokerage business. We created new general rules for our brokerage team and adopted an innovative organizational structure, which is totally different from the traditional pyramid structure in the insurance industry. We also empowered our brokerage team with professionalism and digitalization through our system, including the digital operating system, product system, training system, and marketing system. For example, the digital operating system helps our brokers with customer segmentation, digitalizing the customer engagement process, and improving the refinement and effectiveness of marketing systems. And since the beginning of this year, we have explored and launched our SaaS solution to allow insurance companies to leverage our capabilities in underwriting reviews, insurance claims, user operations, risk measurement, product customization, and actual pricing. Compared with traditional brokerage model, those in-depth system integration enable us to have a closer collaboration with our insurer insurance company partners in system establishment so as to engage in insurance industry chain more deeply. It also allows us to manage our resources more effectively to better serve insurance companies while simultaneously gaining more first-hand user knowledge and business insight. At the same time, our role in assisting insurance companies with claim decisions also enable us to improve our risk identification capabilities and accumulate risk-related data. Going forward, our technology exports will also be aligned with the evolving value-added needs from insurance companies. Here, let me give you an example on the user operations service we provide to our insurance company partners. This service leverages our online customer management capabilities, our core InfraSystem, and a SaaS-based CRM system to help Infra's company analyze the needs of their existing customers in various scenarios. Infra's company can adopt Waterdrop's CRM system to either co-develop the user resource from Waterdrop platform or manage their existing consumers by leveraging our online operation mechanism. Our service will enable the insurance company to realize a higher LTV for their existing customers while helping us enrich our customer acquisition scenarios and further penetrate into the existing users of the insurance market. Above is the update on the insurance business. And let me hand over to Mr. Huyao for the update on our technology, medical crowdfunding, and healthcare business. Okay.
spk05: In the next session, I will update our progress of R&D and technology innovation, medical crowdfunding, and healthcare business. In terms of technology innovation, adhering to our user-centric principle, we at Waterjob aspire to
spk04: bring insurance and health care service to billions through technology. We leverage our technologies to improve the efficiencies of key business processes, such as online marketing, credit marketing, insurance underwriting, policy renewal, and claim settlement, thereby resolving the key business pain points and improving our service efficiencies.
spk05: Regarding the online marketing and key business processes, we have developed an AI matching project for external service personnel and users. We have developed an AI-powered matching tool between the sales team and users
spk04: Under a traditional online marketing and telemarketing business model, service staff essentially reach out to users on a random basis. However, leveraged by AI analysis plus considering LP's historical service data and the user group they are good at serving, we can match the most appropriate staff to provide services for each user. This substantially improves our user satisfaction and enhances the efficiency of our entire service system.
spk05: After the development of the previous quarter, we conducted a certain amount of testing of AI intelligence matching between external service providers and users in this quarter. In the test, the algorithm was collected and treated more than 30 times, and absorbed more advanced algorithms, improving the logic of intelligent matching, combining the traditional machine learning of GBDT with the deep network model of DeepFM, and being able to use other algorithms and the changes in the data characteristics of G2LP and clues Following the system development in Q2, we conducted some pilot tests on the AI-powered matching tool for sales team and users
spk04: and users' deep quotients. During these pilot tests, we leveraged cutting-edge algorithms to constantly improve our intelligent matching logics through more than 30 round iterations. We also established a more intelligent matching system by combining the traditional GBDT machine learning model with a deep FM network, enabling self-adaptive adjustments in model metrics based on changes in LPs leads and data features through a heuristic algorithm Number of forecasts in the algorithm reached over 1 billion per day. Among our major users, the system efficiency improved by 20 to 40%, resulting in an increase in insurance premiums of tens of millions RMB level this quarter. Meanwhile, we have also obtained several key intellectual property rights in this space.
spk05: The AI-powered matching tool has formed a core technological advantage in Waterdrop's smart insurance marketing service system.
spk04: Technology has become the core driver in promoting the transformation of insurance business. We have made positive progress in terms of our insurance digitalization and intelligence transformation and are striving to establish more digital competitive strengths.
spk05: Regarding the medical knowledge map of the water machine, we have created the TANF medical knowledge map, which covers more than 99% of the clinic, medical insurance, and more than 98% of the hospitals and health institutions in the country. At the same time, the disease and drugs that often appear in the various situations of the water machine are classified and processed, forming more than 30 million unified and complete standard data, and forming hundreds of thousands of nodes.
spk04: Our proprietary confluence medical knowledge graph was built upon real cases and covers 99% of the diagnostic database and medical insurance catalog library and more than 98% of hospitals and disease identification institutions nationwide. We have also standardized names of drugs and diseases that frequently occur in our daily operation, generated over 30 million uniform codes, and integrated hundreds of thousands of nodes and over a million entity relationships. At Waterdrop, we have applied the knowledge graph in various business scenarios.
spk05: First of all, in the business environment of patient recruitment, we have upgraded the traditional recruitment model under the premise of ensuring safe integration. With an open online platform, we have opened up the information connection between the patients, and we have relied on our more powerful smart system medical map and medical data center. With the deep structural patient data, treatment data, and external data, we have used multi-mode learning algorithms under the integration framework. The model combines the information of the patient's medical material with the picture and text, and the exact classification of the patient's material. Then, based on the classification, the medical material uses BORT and CRF pre-treatment method structure to perform comprehensive structural processing of the patient's information. In the comprehensive consideration of the patient's benefit, the distance between the patient's location and the research center, and other relevant factors, the patient is recommended the most suitable clinical trial project.
spk04: In scenario of patient recruitment for clinical trials, under the compliance framework, we have upgraded the traditional recruitment model and provided a direct connection between doctors and patients through our online open platform. Leveraging our powerful intelligence system, medical knowledge graph, and medical data center, we fully take advantage of our deeply structured patient data, treatment data, and the data outside the hospital system to determine the right trial patients. Within the compliance framework, we firstly apply multi-modal learning algorithms to provide precise patient segmentation by integrating picture and text materials. Within segmentation, we leverage the cutting-edge algorithm architecture BIRF plus CRF to carry out comprehensive structured data analytics and fully consider the patient's convenience and the distance between the patient's location and the research center. And then we recommend the most suitable clinical trial project to patients, thereby expecting to improve the recruiting efficiency and the matching rate.
spk05: In the scenario of auditing for medical crowdfunding business,
spk04: we adopted YOLOv5's target detection algorithm to mask off, desensitize, and de-identify information such as ID card, hospitalization number, cell phone, home address, infectious disease, et cetera, to protect user privacy, while automatically entering information in the crowdfunding application files into the audit process to control fraud risk and improve the effectiveness of the audit.
spk05: In the business environment of insurance compensation, we have carried out a high-level analysis of the product calculation rules of nearly 10,000 medical insurance companies on the market, and formed nearly 100 core rules and models to support the automatic calculation of various products. At the same time, based on medical knowledge and application technology, the case of predicting the high or low risk of compensation will increase the accuracy of compensation, and the risk cost rate will be reduced by more than 20%.
spk04: In insurance claims processing scenario, we refined the claim settlement rules for nearly 10,000 medical insurance products in the market and formed nearly 100 core engine models to support automatic calculation of various products. Also, we predict high to low risk cases based on medical knowledge mapping to improve the accuracy of claims and reduce the risk cost rate by more than 20%.
spk05: In the field of smart health insurance, WaterD Health Health Insurance has covered more than 10,000 international diseases, basically covering the health abnormalities of most users, and can recommend many health insurance products based on the actual situation of the user. As our business develops, the health insurance rules of diseases will continue to accumulate, combined with the analysis of AI algorithm of high-quality and product documents.
spk04: In smart underwriting scenario, currently our proprietary database for insurance underwriting covers more than 10,000 worldwide diseases and the major unhealthy conditions of our users. Based on each user's specific health conditions, the system also makes intelligent insurance product recommendations. As our business grows, we will keep upgrading our insurance underwriting system. This, coupled with our AI analytics on the questionnaires related to health conditions and insurance products, will enable our intelligent insurance underwriting platform to integrate complex underwriting logics and undertake extensive business volumes.
spk05: Next, let's talk about the situation of our water-fueling business. Let me talk about our medical crowdfunding business update.
spk04: In spite of the fluctuations in the market in third quarter, our water job medical crowdfunding business has grown well, which further reinforced its market-leading position during this quarter. As of the end of Q3, the number of donors reached 383 million, helping 2.23 million patients and pushing the cumulative funds rate amount to over RMB 45.7 billion.
spk05: From the perspective of its internal role in business segment interactions,
spk04: WaterDrop Medical Crowdfunding is not only acting as an aid-seeking platform for critical illness or a standalone scenario for insurance conversion, but also a multifunctional conversion scenario for patient management services, WaterDrop Medicine, and patient recruitment for clinical trials. Thereby, WaterDrop Medical Crowdfunding is a fundamental incubator to launch more healthcare business to help customers with critical illnesses.
spk05: First of all, in terms of our foreign business cooperation and system building, we have done a deep cooperation with the local government to develop a new model of multi-layered medical insurance and multi-layered medical assistance for our country. For example, we have done a cooperation with the Medical Insurance Bureau of Jinyun County, Zhejiang Province, to promote the medical insurance prevention project, Jinqing Bang. to create a multi-layered health and safety prevention system through the joint efforts of the local government, health insurance, public health, health care, and charity organizations to establish and open a platform for multi-department information and form an effective integration of housing resources. to assist the local government to establish a long-term mechanism to prevent and resolve the spread of the disease, to accurately save the people, and to further meet the needs of our people's diversified health insurance. The number of people and the amount of people saved during the half-year of the Jinxingbang project is far more than the effect of the whole year of 2020.
spk04: In terms of external business cooperation and medical system building, we assisted local governments to tap into multi-level medical insurance and medical assistance systems to support common prosperity. For example, we have cooperated with Jingyun County Healthcare Security Administration of Zhejiang Province to launch the Jingyun Project, a project to build up a one plus two plus four multi-level system of medical insurance for poverty alleviation. By working with local government, health care security administration, civil affairs department, health commission, and the charity organization, we have established a multi-department information platform with integrated poverty relief resources. The initiative will help government establish a long-term mechanism for precise medical assistance that will prevent poverty caused by diseases. further meeting the diversified health insurance needs of the public. Following a half year of its launch, CRIM project makes the number of people who obtained assistance and the number of medical aid funds both exceed those in 2020.
spk05: And another case here on this ground
spk04: Waterdrop upgraded the Jiyun project to offer Sibo Qi Hui Bao or Sibo Inclusive Medical Insurance Program to meet the needs of the Sibo Healthcare Security Administration within the reimbursement of Hui Ning Bao with charity medical aid funds to some rare diseases and the related drugs. This will effectively support poverty prevention and promote the development of Sibo's multi-level medical insurance system.
spk05: In the third part, I will introduce the medical business situation. It is thanks to our interoperability with Shui Li Chou and Shui Li Bao. Our medical business has developed from the beginning and has the ability and foundation that other companies do not have, including the large number of patient resources that have been accumulated over the years, hospital network, and drug-related cooperation. Each of our business segments is in a different stage of development. At present, Shui Li Chou and Shui Li Bao already have the advantage of leading in the industry. The medical industry has gradually gained momentum since the beginning of last year. At present, several business units
spk04: And I will introduce our healthcare business in the third part. Benefiting from the synergies from Waterdrop Medical Crowdfunding and Waterdrop Insurance Marketplace, we have been able to develop healthcare business with capabilities that other companies do not have. That being the huge patient resources, hospital networks, and the cooperation with pharmaceutical companies accumulated over years. Our business segments are at different stages of development, but several have already begun to take shape. For instance, both WaterDrop Medical Crowdfunding and WaterDrop Insurance Marketplace have enjoyed industry-leading competitive advantages, while our healthcare business has gained growth momentum gradually since the initial exploration last year.
spk05: Besides our PBM business, which is our medicine and patient management business, as we discussed before, next I will provide an introduction to the business and the prospects of our patient recruitment for clinical trials. We help patients raise funds to solve the most basic medical payment problems. But we find that many patients are not only short of funds, but some patients have a tendency to produce drugs that are now on the market or want to adopt newer treatment methods, but are unable to bear high medical costs. Then this part of the patient will take the initiative to consult with us about this new drug clinical trial project. Hope to be able to get the chance to use the drug for free through this clinical trial project. Then in order to solve this type of very real pain in the patient, our patient this recruitment of this digital platform also came to life. We can help patients find the most suitable clinical trial project in a very convenient way, open new channels, and quickly and accurately complete the clinical trial project. There is a chance to get a chance to get a chance to get a chance to get a chance to get a chance to get a chance What about medical crowdfunding services helps patients raise funds to solve their problems for medical payments?
spk04: On top of that, we also found some patients have developed resistance to existing drugs in the market or wish to take new treatments but cannot afford the high cost. These patients may inquire about the new drug clinical trial programs hoping to receive free access to new drugs through these programs. To address this pain point for patients, we are developing the digital platform for patient recruitment. The platform helps patients find the best matches for clinical trials and access new drugs and frontier innovative therapies while reducing their financial burden from treatment costs. The ability to directly and accurately reach a wide range of patients who are willing to and receptive to participate in clinical trials is also one of our key advantages, which will enable us to stand out from other patient recruitment platforms in China.
spk05: From the perspective of pharmaceutical companies in the medical industry chain,
spk04: New drug R&D has always been regarded as high risk and high reward. The market has long said that developing a new drug could take 10 years and cost a billion dollars, of which the patient recruitment cost would account for approximately 10% from clinical CRO. Hence, a faster patient enrollment could drive an efficient completion of clinical trials. It would help save the cost and speed up the process of new drug development and the product launch, which has remarkable commercial value and social significance.
spk05: At this time, through the preliminary research of the team, it is expected that at the end of this year, there will be more than 100 patients who will successfully enter the group every month with the most compatible clinical trial projects. The areas involved include lung cancer, liver cancer, gynecological tumor, digestive tumor, and other areas of the new drug clinical trial. At the same time, Shui Li is also exploring and using clinical recruitment to continue to focus on more clinical CIO services, and to dig up more high-value new drug development services.
spk04: Through our team's initial exploration, we expect to have over 100 patients enrolled in the clinical trial projects per month by the end of the year. These cover clinical trials of new drugs for lung cancer, liver cancer, gynecological tumors, and gastrointestinal tumors. We are also exploring expansion of our CRO services through clinical recruitment and provide more high-value new drug development services.
spk05: Although the medical sector is still limited in terms of overall sales, we can see the progress of each sector. The future progress will be updated to the market. Next, let's have our CFO, Kevin, to introduce our third quarter's financial performance.
spk04: Although the contribution from the medical business to overall revenue is modest as of now, we have seen promising progress across the sub-segments. We will provide updates on this business regularly in the future. With that, we will now turn over the call to Kevin, our CFO, to discuss our third quarter financial performance.
spk07: Okay. Thank you, Huyao. Before I go into details on the financial performance, please be reminded that all the numbers quoted here will be in RMB. and please refer to our earnings release for detailed information on our comparative financial performance year-over-year basis. In the third quarter of 2021, our first-year premium reached RMB $4,639 million, and we managed to achieve stable and positive growth in FYP on a relatively high basis during the period of industry transformation. Our net operating revenue decreased by 9.7% year-over-year to RMB $779 million from RMB $863 million and decreased by 7.3% on a comparable basis, i.e., without taking into account the minimum fee income from mutual aid business we already seized in the first quarter. The decline in revenue was due to a substance trend in FIP and a decrease in our take rate compared to this last year, which was caused by the fast expansion of our customer base compared to this last year. In recent months, we have seen our take rate stabilize and begin to pick up, resulting from the improvement in our business quality. Operating costs and expenses for Q3 increased by 31.5% year-over-year to RMB $1,292 million. However, our quarter-over-quarter basis is decreased by 26.4% compared with last quarter, showing other measures on cost control have taken effect. To break this down, The operating costs were on the 296 million, an increase by 49.2% year-over-year, mainly driven by the increase in labor costs as our consultants and the insurance agents team expanded directly compared to the last year, and the increase in professional and outsourced customer service fees. Sales and marketing expenses increased by 24.3% year-over-year, to RMB 782 million for the third quarter of 2021. The increase was primarily due to an increase in the outsourced sales and marketing service fees to third parties and the increase in payroll and related expenses for employees involved in sales and marketing functions. As we announced in last earnings call, we will reduce such expenses materially and we managed to deliver the results this quarter. On a quarter-over-quarter basis, sales and marketing expenses decreased by 37.2% from last quarter. Along with the sales model upgrade, we have reduced reliance on third-party traffic through more refined operational management and strict cost control. G&A expenses increased by 9.4% in quarter three to RMB $111 million year-over-year. and decreased by 25.3% quarter-by-quarter. R&D expenses increased by 92.9% to RMB 103 million year-over-year, and increased by 2.6% quarter-by-quarter. We uphold the technology-driven innovation and continue to invest in R&D in a disciplined manner. In third quarter, we incurred a net loss of RMB 437 million gap basis and adjusted net loss of RMB 454 million decreased by 27.3% and the 20.4% respectively compared with last quarter. For the first quarter of 2021, following the cost counter plan in the third quarter, we expect to further materially reduce our sales and marketing expenses, as well as total operating costs and expenses 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 Q&A. Operator, we're ready to take questions. Thank you.
spk03: Thank you. If you wish to ask a question at this time, please press star 1 on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. Please limit yourself to one or two questions at a time so others can get their questions in as well. In addition, for those who speak Chinese, would you please ask your question in Chinese first, followed by the English translation by yourself. Thank you. As a reminder, to ask a question, please press star 1. We will now take our first question from Michael Lee from Bank of America. Please go ahead.
spk00: Thank you. Thank you for giving me this opportunity to ask a question. I'm Michael, an analyst from the U.S. Bank of America. My question is mainly about cost. Because we saw that the market sales cost and cost of the second and third quarter have decreased significantly compared to the second quarter. This is also consistent with our guidance in the half-year report. Then I saw that we said that the 4th quarter has a relatively large-scale decline compared to the 3rd quarter. I would like to ask how much of this decline should be due to seasonal factors, because the 3rd quarter and the 4th quarter are obviously relatively weak quarters. How much is due to our entire strategic adjustment? Because the entire market is now Thanks, management. This is Michael Lee from Bank of America Securities. My question is about cost. So we see that third quarter cost and the marketing expenses dropped quite significantly from second quarter in line with our previous guidance. And I also see that in the announcement that we forecasted that in fourth quarter we will continue to see material reduce of our cost and marketing expenses. So my question is whether this kind of cost is because of seasonality because third quarter and fourth quarter are usually weaker quarter compared with first quarter and second quarter. Or this is about our strategy changes in the current challenging environment. We want to control cost and control pace of expansion and to make more balanced growth and focusing more on profitability. Thank you.
spk07: Michael, thank you for the question. I think it's a great question. Actually, the main reason is is a change of our strategy on the cost control side and also the seasonality. If we compare with last year, the year-over-year increase in total cost and expenses was mainly due to the increase in operating costs and R&D expense. And total operating costs and expenses increased by 310 million year-over-year, mainly due to the increase in labor costs. But comparing with quarter two, our total operating costs and expenses reduced significantly this quarter. The decrease of RMB 462 million in total cost and expenses quarter over quarter was mainly due to the decrease of RMB 460 million in marketing expenses to the third party credit channels. And the increase in RMD expenses was mainly due to the increased RMD investment as planned. to strengthen the infrastructure and the functionality, as well as the technology empowerment to the insurance companies and other partners. And actually, we have a lot of specific standards to control costs and expenses in quarters three and quarter four. In terms of sales and marketing expenses, our measures include Number one, we have lower the marketing expenditure and use stricter criteria to select traffic acquisition platforms. And number two, we are also leveraging our AI-empowered platform to conduct more intelligent and targeted marketing. We have seen good results from the tested strategies. In terms of operating costs, Specific matters include, number one, reviewing key tasks and the old business procedures to identify where and how to optimize. And number two, integrating organizational functions with high synergies. And number three, strengthening control over selection of suppliers. And number four, merging certain offices or moving to areas with more reasonable rents. And considering the industry is currently in a period of transition, all the players will somewhat adjust business strategy and the competitive landscape will also undergo some changes. Platforms with more aggressive but non-compliant business practice are expected to be greatly shadowed by the new regulation, which is good for a water drop in the long run. In terms of the probability, actually, we originally planned to break even in 2023, but as market environments change, we have increased our efforts to control costs and expenses. Marketing expenses, which used to be our largest expense item, have been significantly reduced in the third quarter, and we expect this trend will continue in the fourth quarter. So our goal is that Our mature business will break even by a certain amount earlier than 2023. Hope that addresses your question, Michael. Thank you.
spk00: Thank you.
spk03: We will now take our next question from from CICC. Please go ahead.
spk02: Could you please talk a little bit about the advantages of your commission system compared with traditional insurance companies? And what would you do to promote offline growth in the new cycle? That's all for me.
spk06: Thank you, Qingxin, for the question. This is Yanwa speaking. I will answer your question. And I think our national head of O2O team has already been on board in last quarter. And he previously served in the innovation-oriented insurance guides, such as AIA and Allianz Life Insurance. And after several months of research and experience-based review, we physically formulated the preliminary plan and the general rules for our offline brokerage team. And as mentioned earlier, different from the traditional pyramid structure in the insurance industry, we decrease the sales organizational structure to two layers only in order to save more incentive for the direct sales team and increase the recruitment competitiveness. We replace the traditional measurement layers with AI-driven system and online tools to provide more efficient training, customization, and operation measurement support. And we are currently working on the construction of infrastructure and the recruiting. And we will probably pilot the innovating model in three to five cities. And especially speaking, we will adopt a more productive model as well as measurement and control mechanism. I think going forward, we will continue to strengthen our capabilities in several aspects. I think firstly, to further diversify our customer source, both online from our platform and offline from our Salesforce. And secondly, to make more efficient distribution and use of Salesforce based on the accurate identification of user needs and the data treatment operation. And thirdly, to be more user-centric, to further increase our product offering and deepen the service level by leveraging the offline Salesforce. And fourthly, to equip the offline Salesforce with online user operation know-how, CRM system, and online tools, and further assist the Salesforce to build up personal IP through social media and internet platforms. For our management and control mechanism, we will focus on productivity and efficiency of our offline team and develop corresponding organizational structure, training system, incentive mechanism, and management model, which hopefully will inspire the team's sales potential. Meanwhile, we will continue to explore different offline models for different customer groups in the future.
spk01: Hope that answers our question. Thank you.
spk03: Due to time constraints, the call will end now. Thank you for your participation in today's conference call. You may now disconnect.
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