OneConnect Financial Technology Co Ltd (OCFT) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to OneConnect Fourth Quarter and Full Year 2020 Earnings Conference Call. At this point, I'd like to turn the call over to Ms. Patricia Cheng, OneConnect's Head of Investor Relations. Ma'am, please proceed.

Hello, everyone. Thank you for joining OneConnect's results presentation. Before we begin, let me go through some housekeeping notes first. The earnings press release and presentation are available on the IR website. And our remarks today will include forward-looking statements, which involve a number of risks and uncertainties that could cause actual results to differ materially. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements, except as required under applicable law.

During this call, we may present both IFRS and non-IFRS financial measures. A discussion of the limitations of non-IFRS measures and the reconciliation to IFRS is included in the earnings press release.

Now let me introduce the management team today. Mr. Ye Wangchun, our Chairman and CEO; Jacky Lo, CFO; and Michael Fei is our CEO of SME Banking; Bin Ru Tan is our CEO of Southeast Asian operations.

I will pass it over to Chairman Ye. His remarks will be in Chinese, translation in English will follow. Chairman, Ye, please.

[Interpreted]

Hello, everyone. It's my honor to speak to you again. It's probably an understatement to say that 2020 was an unusual year. The sudden arrival of the COVID-19 in the first half of the year caused some interruptions to our marketing efforts and project implementation. Then second half of the year saw more regulatory tightening, forcing some of our customers to adjust their business, which prolonged some of the impact on us, hurting especially the business origination segment. Despite all these difficulties, we achieved revenue growth of 42.3% and net margin expansion of over 30 percentage points. This was no mean feat.

The pandemic has accelerated the digitalization demand of financial institutions. We have continued to upgrade existing products and grow our new ones, laying out an offering set that's vertically penetrated and horizontally integrated. The results reflect our ability to meet the diverse needs of our customers.

While our fifth anniversary was met with unprecedented challenges, I'm proud to say that our team did an amazing job. Our relentless commitment to innovation and diversification, together with the capability in execution, has been a driving force of our performance. And this will -- and this focus will continue into 2021, notably our focus on customers.

The potential from digital transformation is immense. We will continue to reinforce our products and sales as well as further solidify our position, fulfilling our mission of supporting financial institutions to grow efficiently and turning challenges into future success.

Thank you for your attention. I wish everyone great health and fortune in the Year of the Ox.

Thank you, Chairman, Ye. Next our CFO, Jacky, will go through the financial results. Please go ahead, Jacky.

Thank you, Patricia. Good day, everyone. I'm delighted to report that in spite of the difficult year just gone, our strategy to reinforce products and sales has proven fruitful to both the top and bottom lines.

Beginning with our top line, for the full year, revenue increased by 42.3% year-over-year to CNY 3.31 billion. Operation support and cloud services platform were the biggest contributors. The former post 82.1% revenue growth in the period, the latter was newly launched during the year and only had its first full quarter in the third quarter.

As we explained on the last earnings call, the cloud business allow us to move from the solution level and penetrate first the platform and then the infrastructure layer.

Sales from our diverse systems will continue to be the main driver. But we do see the opportunity to broaden our offerings and build deeper relationships with our customers, which will allow us to provide for clients' infrastructure needs and more efficiently manage vertical integration. The inroads that we made in the first year were tremendous, with the segment accounting for 17.7% of the total revenue in the fourth quarter and 9.5% for the full year.

Operation support requires no introduction. The business line aims at helping financial institutions improve operational efficiency, thereby, better managing risk, cost as well as customer experience. Products like the AI customer service and roadside assistance continued to gain traction. Revenue for the full year rose 82.1% to CNY 1.06 billion, or 32% of the total revenue. It's the first business segment to cost the CNY 1 billion revenue mark.

For risk management, revenue increased by 10.8% to CNY 363 million for the full year. There was a meaningful recovery in the final month, with growth surpassing 104% year-over-year in the fourth quarter, thanks to rising demand for fast claims and pre-lending credit checks.

The strong performance towards the year-end helped reverse a drop experienced in the previous quarters. The segment's contribution to total revenue rebound to 10.5% in the fourth quarter 2020 from 7.1% a year earlier.

Business origination, nonetheless, remained affected by a combination of internal and external factors, revenue fell by 21.4% to CNY 606 million for the year. This revenue contribution fell from 33.1% to 18.3%.

The year 2020 was especially challenging for the business. The softness in the first half continued into the second half. Internally, our optimization exercise continues. Products that don't meet our internal return threshold have been placed under review. We are also reexamining our relationships with customers, with some having ended as a result.

There has been a temporary impact to revenue and the net expansion rate, but this is a critical step that we have to take to ensure we are on track to meet midterm targets in gross margin and to breakeven.

Externally, the segment continued to face headwinds. As a technology company and a white label technology provider, we are not directly affected by any change in the macro environment of regulations. However, given our revenue model centers on usage and transaction volume, we are indirectly exposed. This have led to some softness in loan volume processed by our system, which I'll explain more later in the slide on transaction activities.

By customer group, the mix has also been affected. The decline in business origination has had a bigger impact on third-party customers as the third-party ratio tends to be higher for more mature products. Revenue increased by 20.1% to CNY 1.24 billion for third-party customers for the full year. As a percentage of total revenue, it went down to 37.5% from 44.4% year-over-year. It was a temporary impact given the changes in business origination.

Quarter-over-quarter, third-party customers post 27% revenue growth in the fourth quarter, stronger than overall and other groups.

At Ping An Group, revenue increased by 73.6% to CNY 1.72 billion last year. The mix went up to 52.1% of the total from 42.7%. The cloud services platform provides strong support. For this new segment, most of the revenue came from Ping An Group as we are its preferred it vendor under a strategic cooperation agreement. The temporary skew to mix will revert as we introduce the cloud offerings to more third-party customers.

Revenue from Lufax rose by 14.8% to CNY 343 million, or 10.4% of total revenue. While the pace of growth still trials the other 2 customer groups, it's a solid result given the macro environment that we are in. Lufax is a single entity, and our areas of cooperations are not as diverse as third-party customers of Ping An Group, which comprise entities from diverse backgrounds.

Our most valuable customers are premium customers. This group is made up of Lufax and third-party customers that generate over CNY 100,000 in revenue per year. In year 2020, the number of premium customers rose to 594 from 473. The net expansion rate, which measures the revenue momentum of the same cohort of premium customers, was 84% for the full year. It was below 100% because of the drop in business origination revenue that I explained earlier.

The transaction activities will offer more color on this front. The number of fast claims increased by 16% year-over-year to 5.9 million. This part feeds into risk management and is a key driver of the segment. Continuous softness, however, was seen in loan volume, which affects both business origination and risk management, but, to a greater degree, the former.

Retail loan volume processed by our systems fell by 23% and CNY 70 billion last year. Even though there was a 7.1% growth in SME loan volume to CNY 41.9 billion, it was not enough to offset the decline in retail. Together, it was a drop of 14%. This is the main drag on business origination.

Next, I would like to draw your attention to gross margins. The metric went up by 4.6 percentage points to 37.5% last year. On a non-IFRS basis, it moved from 46.4% to 46.7%. Getting rid of low-margin products certainly helps boost our margin. There were some zigzags in the quarterly trend with a dip in the fourth quarter.

The cloud business, due to its infancy, had a lower margin than average. The shift in revenue mix weighs on blended margin. The full year trend smooths out some of these nuances and offers a clear picture of the progress we made in product optimization. There was some compromise at the top line in the short term, but we have achieved much better underlying quality and margin expansion.

Moving on to operating expenses. Operating margin improved to 44.4% from 73.1% year-over-year as our operating loss narrowed to CNY 1.47 billion from CNY 1.7 billion. The 3 main expense items: R&D, sales and marketing, along with G&A, all reported a drop in ratio. R&D expenses rose 22.7% to CNY 1.17 billion. As a percentage of revenue, it went down to 35.4% from 41.1%. Sales and marketing expenses fell slightly by 1% to CNY 629 million, or to 19% of total revenue from 27.3%. G&A expenses rose 10.3% to CNY 835 million, representing 25.2% of revenue, down from 32.5% a year ago.

We have been reviewing our spending alongside products. Moreover, the economies of scales we have been enjoying has also boosted profitability. Net loss went down to CNY 1.35 billion from CNY 1.66 billion as a result. As a percentage of revenue, net loss ratio improved by 30.5 percentage point to 40.9% for the full year. For the fourth quarter, net loss ratio dropped by 46.2 percentage points to 33.9%. The year-over-year improvement was greater than the numbers suggest.

PAOB, which is our virtual bank in Hong Kong, only started operations in the final 3 months of the year, and the revenue contribution was very small. Taking out the investment made in our virtual bank, the progress made at our core technology business was even more obvious.

And looking at cash flow. On average, our cash burn per month in 2020 was less than half of the level a year ago. Our operations are on track to break even in the medium term. And the other 2 medium targets -- medium-term targets that we set at the time of IPO, in terms of the number of premium customers and gross margins, have remained unchanged as well.

Finally, I would like to touch on the outlook for 2021. The year 2020 threw up some of the biggest headwinds that we have ever experienced. It looks like the year 2021 will bring similar challenges. You might have noticed that, once again, for the earnings call today, we have had to dial in from different locations.

For our first briefing, which was the full year 2019 results last year, we thought it would be a one-off. But a year later, the COVID situation remains fluid, and the pandemic continues to be a major headwind. And also the uncertainty in the macro environment is still a risk, and there's also regulatory risk.

Over the past few months, there has been a further tightening of the regulatory regime, especially in relations to online activities. The operating environment for financial institutions and their partners has become more challenging. While we do anticipate difficult moments ahead, opportunities also abound. The need to invest in IT, proper IT has never been greater, be it to replace an outdated system or to adopt the first ever cloud-based solution.

Chinese regulators have put their weight behind technology and technology companies. There are strong policy initiatives for digital infrastructure.

As the market becomes more competitive, all players have to explore new ways to do business, capture new revenue opportunities, increase efficiency and improve customer experience. This is exactly what OneConnect aims at achieving. This is why we are confident that revenue growth rate in 2021 will be no less than the past year. With continuous cost discipline, our net loss will further narrow. We expect improvement in the net loss ratio this year to be in the double-digit percentage.

Let me talk more about what we have been doing to drive the business further. OneConnect's mission has always been to be the top -- the one-stop shop for financial institutions. We started at the application level. The different applications like car components in the auto analogy we put in the slide, were then connected and turned into a total package, like car manufacturing. This represents our end-to-end approach, which enhances our value propositions to customers. The rollout of the cloud services platform in 2020 completed the picture, picking us from SaaS applications, through middle office services into core systems, and finally penetrating down to the cloud.

The depth and breadth of our solutions are unparallel, giving us a unique edge in the TaaS market. We are able to couple the full cycle needs of financial institutions, starting from sales and marketing to product development, risk management, operation management and infrastructure. This diversification allow us to meet the needs of financial institutions across different macro scenarios, ensuring also the resilience of our performance through cycles.

Products and customers are like the twin engines that power our business. At the product level, we have reinforced life cycle management and monitoring. This is part of the optimization exercise. Resource allocation and assessment criteria are set according to the stage of development of our product.

Sales strategy is a thread linking products to customers. We have adopted a differentiated sales approach. The needs of a nationwide bank are not the same as those of a regional player. The scale of asset, complexity of products and customers' profile, risk appetite and availability of internal resources can be miles apart. Customer segmentation and more proactive pipeline management enable us to more effectively upsell and cross-sell.

One of the results from the ramping up of sales and solution is our digital bank in a box. The different modules offered are supported by the infrastructure backbone and our expertise. Financial institutions can mix and match, depending on their stage of development and needs. Of course, ticking up the whole package, we view the best performance.

In Southeast Asia, we just signed a contract with a leading regional bank to provide such all-around digital support. For that particular client, our offering spend from core banking to mobile banking, open banking, lending platforms and data platforms. Our virtual bank in Hong Kong, PAOB is another example showcasing our all around capability.

In insurance, we have also moved from modules to an integrated approach. Sitting at the core is the smart claim solution, comprising different modules. The contract size goes up as our customers upgrade from single modules to end-to-end system as well as service. The new customers added this year showed the potential.

So far, our insurance offerings are mostly domestic. Our focus in Asia has been to export banking solutions first. As we move to export insurance solutions, we can certainly get one more new revenue stream from new markets.

Our wins in overseas markets build on our experience and track record in China and prove that OneConnect is able to compete with and win against global companies.

Let me recap some of our overseas achievements. We won the mandate to support the development of the digital platform for the Abu Dhabi Global Market. A bit further west, we entered into a partnership with Swiss Re to introduce AI imaging for auto claims systems in Europe. Back in Asia, multiple deals with leading banks in Malaysia and Thailand have been reached to support them in areas such as digital banking and mobile banking. And our virtual bank in Hong Kong, PAOB, has also officially launched in the last quarter in 2020.

Our opportunities are not just confined to the domestic Chinese market. The potential market in Asia is just as big. Our overseas revenue growth was multiple times higher than the overall level. While the smaller base does help, we do see the above-average growth continuing.

Our Southeast Asia CEO, Bin Ru, is also with us on the call today. She can certainly give you a lot more on the grand color. Of course, we can never be content with the present. To ensure our success in a future flow of challenges, we need to continue to reinforce our products and sales. This strategic focus is what's going to drive growth and profitability as well as to take OneConnect to the next level in these interesting times. Thank you. I'll turn back over to Patricia.

Thank you, Jacky. We'll open the line for questions. Operator, we are ready to bring the Q&A.

(Operator Instructions) Your first question will come from the line of Ms. Camille Xu from Morgan Stanley.

Congratulations on a very good result. My question is about the cloud service. The revenue growth looks very strong. And it will be very helpful if you can share with us some more detail about whether we have gained some third-party customers so far after our very successful launch with Ping An? And what kind of services on this cloud platform is gaining very strong demand?

Thank you, Camille. Michael, will take your question on cloud.

Yes. Let me very briefly introduce our cloud. Unfortunately, our CEO for the cloud services is not with us today. If you want more details, Patricia can arrange further communication for more detailed information.

So our financial cloud, we have been offering to over 30 customers, within which 8 was Ping An Group subsidiaries, or Ping An Group entities and doesn't offer non-Ping An Group customers. So our cloud services, we offer to our -- first of all, we offer our customers the bundle service with our SaaS and patch products and solutions. So this is an end-to-end solution that we naturally offer to our customer as a total solution. And also because we have multiple years of experience of running the Ping An cloud, serving the Ping An Group and its subsidiaries, we also provided this cloud services to external customers.

Your next question will come from the line of Ms. Elsie Cheng from Goldman Sachs.

(foreign language)

Elsie, we cannot hear you very well. Can you please speak up?

Is it better?

Yes, a lot better now.

[Interpreted]

I have 3 questions here. First one is on the net expansion rate. Jacky previously mentioned that it's about 84%, but if we exclude the legacy products and then business originations revenues impact, I'm just wondering what would be the net expansion rate taking out those 2 segments.

And the second question is on the premium customer growth. It's a solid 26% year-on-year percent. Just want to understand a little bit more about the new premium customers were at -- who are they? And maybe some of the details, if any? And if possible, what's the sort of the paying ratio in 2020 as we're looking at right now?

And the last small question is really just on the loan origination and risk management. I noticed that it's actually the first quarter we are looking at these 2 lines together, recording a positive growth. So can we actually expect some sort of recovery trend going to 2020, maybe at least on a sequential basis, we can start to see stable growth for these 2 businesses lines?

Yes. Thank you, Elsie. I'm going to first pass it to Jacky to take your questions, and then we'll see if Michael has any additional color.

Yes. Elsie, thanks for the questions. I guess, like all 3 your questions, we can actually look at it collectively. I mean, if you look at the overall picture, if you look at the trend in 2020, for third-party revenue growth, our net expansion rate and also the premium customers number, they are all affected by one common denominator, which is the business origination segment. And as you know, we talk about this. We have been just phasing out some of our products internally. Most of that actually came in the business origination segment because business origination is our first business segment launched in prior years. And so our third-party customer ratio, also our premium customer ratios in this segment will tend to be higher.

And then -- so if you look at the business origination numbers for the full year, it was down about 21% year-over-year. But for third-party customers, it was down about 47%. So that magnitude is higher for third-party customers.

And also, I talked about this earlier. If you look at the transaction activities, the loan volume also processed on our system fell about 14% year-over-year.

So these all affected the overall like business origination business. And led to like the -- some of the unusual trend you see in, for example, third-party revenue growth, net expansion rate, premium customers' numbers.

And also, if you look at the macro -- so even though there's -- we are -- we have seen some recovery in economic and also social activities in the second half, but the impact from COVID still has some lingering effects. And also we talk about like the regulation tightening. So overall regulatory environment that's getting tighter as well. So -- but if we adjust like all these products that we phase out from business origination, mainly, for example, our third-party revenue growth for the full year, it will be higher than the overall revenue growth rate of 42% for the company.

And also, if you look at net expansion rate, the reported number was 84%, but if we adjust out all these phased out products, it will be higher than 100%. And on premium customers, yes, the year-over-year number increase was modest. We only in that increased about 120 premium customers. But as I mentioned, most of the premium customers from prior year, because we launched business origination like in the earlier stage, so during the process, when we phased out these products, we lost close to about 70 customers, premium customers from the 2019 pool from the phase out of these products.

So if you add that number, it will be closer to the 200 net gain a year that we typically see for our premium customers growth. So that's basically -- and then if you look at the premium customers' numbers, the base is actually getting healthier. For example, the ARPU versus 2019 for our premium customers is more or less the same. But if you look at the top 10, it's actually -- we have seen significant growth there. So for the top 10 in 2019, it was over CNY 20 million per premium customers. But for 2020, the ARPU for the top 10 premium customers was much higher than the CNY 20 million.

Yes. So but overall, I think this is the product optimization exercise. That's the right things to do. Internally, as management, we are very delighted to see the progress. So -- and we're doing this for the long-term health of the business. So despite all these phase out product impact, we achieved very strong revenue growth of 42%. And more importantly, I think you see the results reflected in gross margin, which was up 4.6 percentage points, and our profitability improved by 30 percentage points.

And so I think, heading into 2021, we have built a very strong base for future growth. So -- and also as the external environment eases, we will enjoy tremendous upside, not only from the rebound in business origination and also from risk management because as you point out, they go hand in hand.

And also, the product optimization is ongoing process. So -- but I mean, we'll continue to focus on that. But the key here is, for 2020, we have set up a very healthy premium customer base and also a very diverse product offerings. And now -- so under any circumstances, we feel very confident our product offerings will bring like good results to our performance.

And so in terms of business origination and also risk management, I think, as you point out, Q4, we have seen some rebound in the risk management. We see especially demand in the insurance side, the fast claims, and pre-lending credit checks. So -- and also in Q4, we have seen quarter-over-quarter for our third-party customers, this -- the growth rate was already higher than the overall sequential growth rate for -- versus Q3. So I think heading into 2021 with a very strong base that we have set up, we feel very confident we will see continuous sequential improvement in all of our business segments.

Yes, I'll see if Michael has anything to add.

No, that's very -- already very comprehensive.

Your next question will come from the line of Mr. Carson Lo from HSBC.

So I just have one question on the overseas market opportunities. So we have signed a few landmark deals in 2020. So just wondering, does management have any target or KPI regarding the overseas business, such as the target overseas revenue contributions in medium term, 3 to 5 years or other operating KPI that management is looking after regarding the overseas expansion?

Thank you, Carson. Our CEO of Southeast Asia, Bin Ru, is to take your questions.

Thank you very much for the question. So for Southeast Asia, I think we are seeing a lot of potential and upside. With the COVID situation, there are multiple opportunities. And I think Jacky mentioned one, which is an opportunity to cross finding synergy between our products. He mentioned digital banking-in-a-box, and this is the trend that, in Southeast Asia currently, several countries are issuing new digital bank licenses from Singapore, Malaysia, Philippines. So these are the growth markets that we saw in 2020. It give us the opportunity to put several products across business lines into one solution simply because for digital banks, it was hard -- we realized from our own experience in Hong Kong that it is hard to find the right solution for greenfield digital bank. You -- due to a shortage of fintech solutions out there that could cross certain width of solutions. So when we put everything together, we could then fulfill the one-stop shop that we wanted to be. Instead of going after one single product and upselling them, we could actually bundle everything together and give the customer an option to choose what he wants to offer.

Right now, we are building -- not counting our own Hong Kong virtual bank. We're building the third digital bank for Southeast Asia. Singapore, Malaysia, Philippines as well as Vietnam has a lot of potential and a lot of discussions. That in general, maybe a little bit of a slowing down in Indonesia, but we see that picking up this year, definitely. With the COVID situation, there was a bit of a slowdown, tightening of budget maybe in the quarter 2 middle or quarter 3, but overall, from quarter 3 onwards, we see definitely an increase, not necessarily in the IT spend per se, but a much shorter deal cycle, faster decisions due to the urgency to digitize. The other opportunity that I think will go way beyond digital banks is the incumbent banks, the traditional banks. The traditional banks have also seen them an urgency to do something. So they may not need the entire tech stack, but then our solutions give them the option to opt out what they do not need and it really help them with their digital arm. So that's maybe in a nutshell for Southeast Asia.

Yes, Carson, this is Jacky. In terms of your question on the mix going forward, well, I mean, if you look at the overseas business, we only started in 2018. And if you look at 2019, overall revenue growth for OneConnect was about 65%. And for Southeast Asia, even though the base was low, but the growth rate was multiple times higher than the 65%. The same for 2020. Our overall revenue growth was 42%. And before our Asia business, overseas business, it's multiple times higher than this growth rate. So -- but even though the mix right now is low single digit, we expect like each year, the mix will continue to increase. And in the medium term, the expectation is to get to like high single digit or low teens in that range.

Your next question will come from the line of Hans Chung from KeyBanc Capital Markets.

So I have one question about the 2021 outlook. Can management elaborate more or provide more color like segment by segment? As we expect the revenue growth will be at least 42% and then the net loss ratio could be in the double-digit range negative. So just trying to understand more in terms of the segment and also -- perhaps also by the customer type.

Thank you, Hans. We'll direct this question to Jacky.

Yes. Hans, thank you for your question. Well, as you know, as you can appreciate, year 2020 was an exceptional year. And also, there's many unusual things on the front. And so some of these factors that we talk about extensively, they are temporary, but we do expect many of them will continue to affect the operating environment into 2021. So for example, like the COVID situation, it's still very fluid, just overall macro environment, the regulatory environment, et cetera. So -- but, nonetheless, we see that the industry is full of potentials and opportunities. So we talk about digital transformation needs for financial institutions. We see very strong demand in that area. And also, I think the national policy is also very supportive of the development of technology companies. And so -- and we talk about like all the initiatives that we have undertaken in 2020 to strengthen our base for future growth. So if you look at the diversification of our offerings, all our solutions, end-to-end solutions that we offer, we have a very solid base for growth in 2021. But nonetheless, there's still uncertainties in the macro environment.

So that's why we gave the guidance. Our revenue growth will be no less than the growth rate in 2020. Yes, but also, you factor in like the cloud adoption, the potential in that area, also the overseas expansion opportunities. Yes, so I think that gives -- that set up the base together with our products and sales efforts to give -- for us to provide this guidance. And also, we talk about the net loss ratio. That's another guidance that we provide for 2021. We expect we'll continue to see improvement in that area in the bottom line. And we expect double-digit percentage point improvement. So as you have seen in 2020, we spent a lot of effort just setting up a very strong cost management discipline. So that's reflected in the numbers. Like for the full year, the net loss ratio improved by 30 percentage points. And if you look at Q4, it was actually improved by like 46 percentage points. So we are definitely on the right track to achieve our midterm targets to breakeven.

Yes Michael, would you like to give us some additional underground color?

Yes, Hans, just to answer your question, on the outlook for our growth, I think overall, we remain very committed to our original strategy that is to provide end-to-end technology solution to financial institutions. You know that we had a very good coverage of the customers of the financial institutions. So the next phase focus for us is really to cross-sell, upsell more solutions to our customers to make sure each of our premium customer, especially the financial institution premium customer, to use multiple products, multiple solutions with us so that we can generate more revenue from a single customer. And in the meanwhile, we continue to diversify our product offerings. As you can see during the presentation that we'll be able to offer everything starting from the IaaS to PaaS to SaaS and from the marketing to risk management, operations, customer service, et cetera, et cetera. So that's real, I think, our strategy for the next year will continue to be on the product side, to be more diversified offering end-to-end solutions. And on the customer side, we try to penetrate more to deepen our relationship with those premium customers.

Our next question will come from the line of Mr. Ethan Wang from CLSA.

Three questions from me. My first question is on revenue mix. So if my understanding is correct, although for our cloud service, although we have 30 customers and 8 of them are from Ping An Group, actually, a majority of the cloud service revenue is still from the group. If that's the pace, then we could ad it into a time of the total revenue mix, should we expect Ping An Group contributing a major part of the revenue in the short term? And Jacky actually mentioned the decrease in third-party customers' contribution to the total revenue is temporary. So how should we think about this? Are we expecting some pickup in other services? So that's my first question.

And my second question is on R&D expense. So we understand that we have the operating leverage, and our OpEx is on a downward trend if you look at the expense as a percentage of revenue ratio. But for R&D, there is also this nuance of capitalization. So if we -- so how should we think about it because if we do capitalization, then we may have amortization in the future and maybe different intangible product at a different amortization schedule. So if we like take this into consideration, is that going to change our understanding of the decrease of R&D expense in the future? That's my second question.

And my third question is on the risk management services. So we had a strong fourth quarter for risk management services. Just want to understand -- so what is the current breakdown of these services into insurance and lending? If we cannot give the numbers, maybe just some idea of which part is larger is also helpful.

Thank you, Ethan. All very number-driven questions, and we're going to hand them to Jacky first.

Yes, Ethan, well, on your first question, in terms of the revenue mix for cloud, if you look at the numbers, it was about 18% in the last quarter. So -- and as Michael mentioned, we have right now about like 30 customers. But yes, you rightly point out, like most of the revenues came from Ping An Group. Because we talked about -- we only launched this business in the later part of the year, second quarter last year. And so third quarter last year was only the first full quarter. And so -- and as the preferred vendors for Ping An Group, our focus is on like serving the financial institutions with Ping An Group first for the cloud services platform business. And then -- but we are also looking for export to third-party customers in 2021. But I guess in terms of the mix, it will stay between like 15% to 20% of our total revenue. That's the expectation right now because our goal is to serve the Ping An Group first as we -- as the product is still very new and as the preferred brand that's our focus right now.

But in terms of third-party revenue, I guess if you look at the overall, not just for cloud, we expect gradual like sequential improvement. And as I already pointed out, in Q4, you have seen the growth rate -- like the quarter-over-quarter growth rate for third-party customers was already the highest. So it was above the overall company growth rate and also above the Ping An Group revenue growth rate. So that's indication that we are moving in the right direction because there was some temporary impact on the phase out of products in 2020. I mean, the intensity was the highest in the second quarter last year. So -- and actually, we actually terminated -- phased out some of the business origination as well as other products, especially in Q2 in 2020. So that's the impact that we have seen. And so -- and then -- but as the numbers indicate, Q4, we already see a recovery in third-parties growth, and we expect this trend will continue in 2021.

And in terms of your R&D question, if you look at the total spending, in terms of absolute dollar amount, we expect that number will continue to go up because we are only a 5-year-old technology company. And so to stay competitive, to launch innovative products, that all requires like investment in R&D. So in terms of the dollar amount, we expect that number will continue to go up. But as a percentage of revenue, the spending, so that's the expense plus the capitalized amount, we expect that ratio will continue to decline. And so -- and I think, over the last year or so, you have seen like quarter-after-quarter, the R&D ratio as a percent of revenue has gone down. So I think we are actually moving in that direction to achieve like operating leverage and to move to our midterm target of breakeven.

And also, it's true like when we capitalize R&D costs, when we amortize that, it will impact expense, but it also will go -- some of it will go into cost of revenue. So it really depends on the nature of the capitalized R&D. And so that will also impact the margin. Yes, but overall, as I said, we expect the ratio will continue to go down. And on your third question, sorry, can you repeat that?

So it's about risk management services. Do you have a breakdown of the service into insurance and lending related? Just wanted to get idea which part is larger right now.

Yes. So I guess the trend you've seen in Q4, it's mainly come from like the insurance side, the fast claim. Yes, because there's still some softness in the lending activities, but nonetheless, we see an increase in uptake in terms of like pre-lending credit check. But the rebound in Q4, that's mostly on the insurance side, the fast claims.

Your next question will come from the line of Mr. Emerson Chan from BofA Securities.

I have 2 questions. My first question is about the growth slowdown in the operating revenue in Q4, which is up 9% year-on-year and declined Q-on-Q. The gross margin also in Q4 declined sequentially. So just wondering what are the reasons behind. And my second question is, how should we look at our net expansion rate this year? And what level we have assumed in our revenue guidance for this year, which is a little less than of last year?

Thank you, Emerson. We'll let Jacky handle your question first.

Yes. Well, I think, Emerson, if you look at the operation support, we actually launched this business in Q4 last year. So if you look at the quarterly growth, it was very strong starting from Q4 2019 all the way to Q3 2020. And in this quarter, it was actually a lap over the -- because it's already reflected in the Q4 base, so we are -- it's not really a slowdown, but it's because of the base. It's lapping the base from 2019 Q4. And so -- and -- but I mean, we still see very strong demand in terms of AI customer service, also like the roadside assistance as part of the insurance side. So the demand is still very strong. But in terms of the percentages, it's just because of the base effect in Q4.

And in terms of gross margin, I think if you look at the overall for the full year, we have achieved like 4.6 percentage points improvement. It went about 33% a year ago to about 38% this year. This was the result of the, obviously, the upgrade in our products, optimization of our business by phasing out some of those low-value, low-margin products. So -- and I already talked about this extensively. Most of them came in the business origination segment. And also, we have -- yes gradually -- every year, we increase the standardization of our products. So that will lower the labor cost. And also the reduction in the business origination segments mix, it lowers the channel fee that we pay as well. So all these contribute to the gross margin improvement.

And actually, if you look at the gross margin for all our revenue segments, they have all seen an uptrend. But in terms of Q4, it was a little bit lower than Q3. The reason -- I guess, you have to look at the trend. So it's the same trend in 2019. Q4 2019 was about 34%. And for Q3 2019, it was like 39%. So it was also a decline. But the reason is twofold, there are 2 reasons behind it. First of all, we -- because of the change in mix, as you know, we launched the cloud business in the middle of 2020, especially the first full quarter was in Q3, and also the revenue has gone up in Q4 quarter-over-quarter by 96% in the cloud business. So -- but the margin right now is actually lower than our overall level. And so -- and to put it into perspective, the gross margin for, for example, cloud was about 20 percentage points lower than risk management, which is the highest for us.

So the change in mix in Q4 that contributed to the drop in the quarter-over-quarter margin. And the second reason is, every year-end in the Q4, there will be some intangible assets impairment. So when we actually -- for example, this year, we phased out a lot of these products. So when we actually record impairment, it will go -- some of that will go into cost of revenue. So that also impact like the -- that will cause like fluctuation in the gross margin in the last quarter. But overall, like for 2021, I think, it's more meaningful to look at the full year 2020 gross margin as a reference point. So 38% and over 4 percentage points improvement over the prior year, that's the reference point for 2021.

And then obviously, we'll continue to build on our product optimization, standardization of our products to expand margin. And also, we expect, as the macro environment improves, risk management mix will also improve or rebound. So that will also contribute to margin expansion. But nonetheless, the cloud business continues to grow, and that change in the mix will partially offset the margin expansion. Yes, but I encourage you not -- like for 2021 just to look more at the full year 2020 gross margin as a reference point.

In terms of NER outlook, so as you know, the phase out of product is a dynamic process. But as I mentioned, the intensity was the highest in the second quarter in 2020. So -- but I mean, 2021, we will still phase out, but the magnitude will not be as substantial as 2020. So we expect NER will improve upon this year's number. And the focus this year is just continue to upgrade our products, focus on the -- all the sales initiatives that we discussed during the prepared remarks and just focus on increasing the ARPU for our customers, cross-selling more products to our customers, both the existing and new customers. So that will contribute to a net expansion rate improvement in 2021.

And for your last question, we have Alex Yao.

So in Jacky's prepared remarks, I think you talked about 2021 remain challenged from a regulatory environment perspective. Can you talk what are the recent development in trend of the financial and the fintech regulatory environment? And also what could be the new development in 2021? How would those changes affect China's financial and fintech base? And how are you guys reacting to these changes?

Thank you, Alex. We will direct this question to Michael.

As you know, there has been a lot of change in the regulatory environment last year. As you know, we -- as a technology service provider, we are actually not subject to any regulations directly on us. However, because of the regulatory change and our customer, that is these banks or financial institutions, will have to constantly review their business model and adjust their business model to be more compliant with all those new regulations. And that will indirectly have some impact on us because a lot of our revenue is transaction-based. So any change in the business model of the financial institutions will have impact on the business volume and will have indirect impact on our revenue. So of course, it is very difficult to forecast the overall trends on the regulation, but 2 things, I'm sure. One is that we will keep our strategy to be the technology service provider to the financial institutions, and we will constantly review our business model to make sure that we are compliant, and we help our customers to be compliant with all those regulatory requirements.

Now secondly is that I think these -- the government continue to encourage the use of new technologies, to continue to encourage investment in IT infrastructure to make sure these financial institutions will be able to provide better service, more efficient service to both the retail customers as well as the SME customers. Yes, I think this is the general trend that will keep unchanged, and that's a very positive trend for the overall fintech development in China.

Thank you. This is about the time that we have for the call. We will now wrap up the call. Thank you, everyone, for joining us today. We appreciate your interest in following us, and look forward to speaking with you again. Keep well, and see you soon.

Thank you, ma'am. Thank you so much presenters. And again, thank you, everyone, for participating. This concludes today's conference. You may now disconnect. Stay safe and have a lovely day.