Sos Ltd (SOS) 2017 Q4 法說會逐字稿

Good day, everyone, and welcome to the China Rapid Finance Q4 and Full Year 2017 Earnings Conference Call. (Operator Instructions) And please note that today's event is being recorded. I would now like to turn the conference over to Joseph Wang, Chief Strategy Officer and Head of Investor Relations. Please go ahead.

Thank you, operator. Welcome to China Rapid Finance's Fourth Quarter and Full Year 2017 Earnings Conference Call. Today's call is being webcast and is accompanied by a slide presentation which is also available on our website. With us today are Dr. Zane Wang, our Chairman and CEO; and Mr. Kerry Shen, our CFO. Following management's prepared remarks, we will conduct a Q&A session.

Before we begin, I will refer you to the safe harbor statements in our earnings release, which also applies to the conference call today as the company will make forward-looking statements. These forward-looking statements involve inherent risks and uncertainties that may cause actual results to differ materially from our current expectations. Further information regarding these and other risks is included in our reports filed with or furnished to the SEC.

All forward-looking statements that we'll make on this call speak only as of the date hereof and are subject to change at any time. China Rapid Finance has no duty to update these forward-looking statements.

With that, I would now turn the call over to Dr. Zane Wang. Zane, please proceed.

Thank you, Joseph, and hello, everyone. Thank you for joining our earnings results conference call today. I'm proud to report to you outstanding performance in our first year as a public traded company. Our team executed against all of the objectives we presented during and after the IPO last spring. I will first review our operating performance in 2017 and then discuss both opportunities and the challenges we foresee in 2018 and beyond.

Over the course of 2017, we did the most important thing a business can do: generate cash. After the IPO, we had a cash balance of $74 million. We finished the year with a cash of $95 million. The source of cash was operations. We generated positive operating cash flow in the past 2 quarters, including a healthy $15.8 million in Q4. We did this by hitting the financial targets we set forth after the IPO. We expect to post total gross billings of over $120 million for the year. In fact, we did $137 million. We also expect to achieve profitability in the first quarter. Today, we're reporting non-GAAP adjusted profit before income tax of $1.1 million for Q4.

Of course, financial results are driven by a thriving market of borrowers and lenders and we are attracting both to our platforms in increasing numbers. At the IPO, we indicated that we expect to add between 2.5 million and 3 million new borrowers this year. We added 2.9 million, an outstanding result considering that we started the year with only 1.4 million. You don't have borrowers without lenders, of course, and we did equally well in attracting investors. During the year, we add 13,000 new investors, including approximate 10,000 in Q4 alone, bringing our total to approximately 23,000. These new participants pouring into our marketplace create a robust level of activity.

In Q4, a year ago, our platform facilitated 2.5 million loans. In the last quarter, we facilitated [6.2] million, nearly triple the volume (corrected by company after the call). Dollar value more than tripled, with over $1 billion of our loans in Q4, our second billion plus quarter. The loan growth is nearly our sum of consumption loans, which are a great fit for the needs and the resources of our core borrowing group.

We believe that the vibrance of our marketplace validates our low and grow strategy. We start new borrowers at a manageable loan size, which enable us to evaluate borrowers' behavior while creating an environment for success. Repayment of our manageable loans create confidence both for lenders and for borrowers as they expand their use of credit. The low and grow approach, combined with our advanced analytics tools, promotes solid creditworthiness which shows up in our low loss rates -- low loss ratio. The annualized loss ratio in 2017 were 3.7%. This is slightly higher than the 2% we experienced last year. The increase in delinquency happened mostly near year-end, which leads us to believe it was a function of the uncertainty around the changes in regulations. This spike in delinquencies subsided in January, and the loss ratio is now back to the level we were experiencing earlier in 2017.

A vibrant marketplace that serves our borrowers and investors also promotes our financial objectives. We have 2 levers to drive growth and the profit.

The first and the most obvious is increasing transaction volume from a large market, which I just discussed. The second is improving economics for each individual borrowers, which is also major results of our low and grow model. We view each borrower from a lifetime value perspective. The initial acquisition cost is earned back with revenue associated with the first few loans and then future loans drive a growth stream of revenue and profit. This is a classic recurring revenue model which demonstrates economics of our scale that can get better as our marketplace grows. We measure our success in driving these individual borrowers economics in a couple of ways: the amount of the repeat business and average loan size.

Our repeat borrowing rate grew to 76% in Q4 from 67% a year ago. The average size of our consumption loan grew by 1/3 during the year, hitting $144 in the latest quarter. More importantly is the average loan size by cohort. Over time, we want to see each new incoming group borrowing more and more often. As one example, look at the new borrowers that joined in the first quarter of 2016. That group started borrowing an average of $75. It's now up to $326. For each entry cohort, we see the same pattern. The loans start in genders, success and confidence, and then loans grow with the needs and the income of the borrowers. We measure our progress in seasoning each cohort by the time it takes to reach breakeven. And on this metric, we are very pleased with the performance of our sequential cohorts. As each individual crossed breakeven, they become a net positive contributor to our financial results. Take the first quarter of 2016 cohort, for example, this was the largest borrowing cohort in 2016. And its time to breakeven was 2.5 quarters, compared with the earlier cohorts, breakeven period in 2015 was 6 quarters, while in 2016 was 4.6 quarters.

Summarizing our operating performance, you should be satisfied that our strategy is effective and we're executing. All key metrics continue to trend in the right way, indicating more growth of our marketplace and the positive economics for individual borrowers. We are confident that we are building a strong foundation for high-quality growth and a profit in the years ahead.

Of course, no business is without its challenges, and you're all aware that we and our industry are managing through meaningful changes in our regulatory environment. Let me touch on this now.

Reg leaders have properly stepped in to bring some orders to the peer-to-peer lending market, which has grown explosively over the past couple of years. We believe the regulators' intention is to create a new regulatory framework that supports qualified online lending platforms to have a long-term and a sustainable growth and helps borrowers to have affordable credit access and investors to have a transparent investment opportunities. In the short-term, this might increase the compliance costs, but in the long run, this will truly bring prosperity to the industry. The short-term impact includes that the compliance cost will increase and we will need to make certain pricing adjustments. The compliance cost issue is easy to understand. The pricing adjustment results from a cap on the fee charged to borrowers.

CRF's strategy has been to provide affordable credit access to the EMMA population. Our consumption loan take rate was basically in line with credit card companies' cash advance rate. With the new regulatory requirements, we'll see a one-time reset to the new lower fee level which will impact our financial results in 2018. This may extend the breakeven time on all-in CAC for consumption loans and created pressure on our first quarter results but will not change the long-term effectiveness of our model. There's little impact on our lifestyle loan. The long-term impact of the new regulation framework is actually very promising.

First, the credit quality of the P2P industry will improve greatly. As clearly indicated by the central credit reporting agency as a newly established nonbanking-oriented credit reporting agency, all qualified P2P players will participate and have full access to the government-backed credit reporting agency. We anticipate that prevalence of over limit borrowing from multiple platforms will be greatly reduced and the cost of delinquency will be greatly increased. This will result in a much better credit quality for the entire industry. CRF is well positioned to leverage credit reporting systems to formulate underwriting and portfolio management strategies, and we believe our core competence will benefit from such trends.

Second, the funding cost will be greatly reduced. With the fewer players in the space and a clear and more transparent operation model guided by the government, more lenders will be attracted by the investment opportunities and institutional investors will also have compelling reasons to invest as well. CRF has been developing a diversified lending strategy, and we expect to greatly benefit from such an environment with lower funding costs and a sustainable lending capital supply sources. With these very positive trends, we believe that our marketplace will grow rapidly and our low and grow strategy-driven individual borrowing economics will continue to grow as a model.

With this big picture in mind, we supported regulators to propose and implement a variety of protections for borrowers and lenders. We are fully cooperating in amending our internal procedures, marketing strategies and any other practice that come under regulatory review. Because we have operated at the highest standard of our practice since our founding of 1.5 decades ago, we do not believe that these operation changes will be disruptive to our business.

The industry is being regulated at a local and a district level first, then at a provincial level, guided by the central policy at the national level. We are in the process of registration now. Once all the new regulations are finalized and the registration process are behind us, we will focus on business growth as we have done in the past.

To further prepare for the new regulation environment, we are testing several new loan products that we believe will be attractive to our borrowers and investors. The value proposition to borrowers of this new product is affordability, while adhering to the interest rate cap. Innovation is at the core of what we do. It's one of our competitive advantages. While we always seek to introduce new products and services, this period is especially fluid due to the opportunities for inspiring new ideas and new products presented by the regulatory changes.

With that, I will now turn the call to our CFO, Kerry, to cover financial results.

Thank you, Zane, and good day, everyone. Before getting to my part, I'll first correct a verbal error in Zane's speech. Total loan facilitated in the fourth quarter was 6.2 million, all right, instead of 7.2 million.

Okay, our press release and supplemental slides have contained all the figures and comparisons you need, so I'm not going to repeat all the numbers. Instead, we're going to focus on the analysis or the factors that influenced results.

As Zane mentioned, we executed to plan in our first year as a public company. We hit our targets on all key operating metrics as well as all key financial objectives. We are proud of the outstanding performance delivered by the PR team and believe we can execute with equal vigor in the year ahead.

Let me cover the fourth quarter first. Most importantly, as Zane highlighted, we generated substantial cash from operations, which is USD 15 million. This was due to more and more of our marketplace participants crossing over the breakeven point and starting to borrow larger sized loans with higher transaction fees. We can't emphasize enough the importance of repeat business. We invest in acquiring customers and once they have paid back their CAC, they are very profitable for us. The benefit is evident when you look at the profitability of any particular cohort.

The growth in gross billings was driven by the larger market, more repeat business and higher average loan sizes. This was offset slightly by a reduction in our origination fees late in the quarter due to regulatory changes.

Net revenue grew faster than gross billings as the offsetting customer acquisition incentives grew more slowly. We were able to reduce servicing expenses on an absolute basis. We reduced headcount in our data execution centers as we are able to operate at far higher efficiency now due to improved interacting efficiency using more data and new technology.

We've continued to invest in growing the size of our marketplace. Sales and marketing expenses was up meaningfully but well below the growth rate in revenue. We expect to see similar levels of operating leverage in the quarters ahead as repeat business drives our growth.

General and administrative expense grew as the business grew, but the rate was less than revenue growth. This also demonstrates the inherent operating leverage we are starting to achieve.

We are now breaking out the product development expenses so that you can see our commitment to innovation. Product development investments grew aggressively while still well below the growth rate of our revenue. We've continued to invest in our data lab in Silicon Valley. The team there has developed new algorithms that enabled us to acquire large volumes of new borrowers while keeping flat the all-in CAC. This shows our commitment to smart investments. We want to continue to drive innovation, but also control spending in a way that creates operating leverage.

We were profitable on an adjusted non-GAAP basis. Like nearly all companies, we adjust by eliminating [non-cash] (edited by company after the call) stock-based compensation. We also adjusted to remove the impact of the provision for discretionary payments, which we view as a nonrecurring cost of doing business and is fully reflected in our GAAP numbers.

We ended the quarter with a strong balance sheet due to the solid cash generation. As Zane mentioned, we generated positive cash in the last 2 quarters. Our growing cash balance does 2 things. First, it instills confidence in our investor community that CRF will be around for the long-term. Investors need to have no doubt about our viability before they will commit their hard earned funds. Secondly, we have a financial cushion to ride out any disruptions from unsettled regulatory environment while still funding our key growth initiatives.

Looking at the full year, we fulfilled every goal we set forth during the IPO. Total gross billings easily exceeded our guidance, which we raise as the year progressed. We told you that consumption loans will be the driver of the growth. Consumption loan volume now grew 8x during the year. We also managed our costs effectively. We kept the rate of growing NCI below that of billings, driving solid net revenue growth. We also controlled operating expenses, cutting in more than half the ratio of the OpEx to loan volume. We believe we can continue to show more operating leverage going forward.

For the full year, operating cash flow was negative, mainly due to the results for the fourth quarter prior to our IPO. I would like to reemphasize though that we generated positive cash flows in the last 2 quarters.

Let me now turn the call back to Zane for comments on our outlook and guidance. Zane?

Thanks, Kerry. As I alluded earlier, we have proactively reduced loan originations until we have a clearer view of the coming regulatory changes. We are in the middle of implementing compliance measures with many of the new regulations, but there are still enough uncertainty that we need to wait before resuming more rapid growth. Therefore, we're currently revisiting our growth projections and expect that the impact of the slower growth and the reduced fees will negatively impact first quarter. When regulators -- regulations are published and our registration is completed, we intend to resume our aggressive rate of growth and should be in a better position to offer full year guidance.

Now we are ready to open the call to Q&A. And operator, please proceed.

(Operator Instructions) And our first questioner today will be Richard Xu with Morgan Stanley.

I have 2 questions. One is, we're actually seeing the gross fee rate on consumption loans increased quite a bit in fourth quarter. The pace of increase seems to be outpacing the pace of loan size increases. Can you comment a little bit on what was driving that increase? And also, under the new regulatory regime, what that consumption loan rates will approximately be? Secondly, Kerry mentioned there's a provision for discretionary payments. Could you elaborate a little bit what that's for? That's it.

Richard, thank you. It's Joseph. I think the question is 2 parts. One is the fee gross billing fees for consumption fourth quarter and second is around the discretionary spending. So I will turn over the question to Kerry.

Richard, as you realized, the -- our transaction and service fee rates on consumption loans is in an increasing mode. It was roughly 3% in Q3 and 4% in Q4. And then the overall fee rates on an annual basis for the entire 2016, it was 1.6%, while that for the entire 2017 was 3.1%. This is mainly due to the low and grow model as we discussed that before. The average size of the loan continues to grow. And now with the regulatory changes, we are now revising the products' model, and we are also testing new products. Now currently, all the fee rates are now within the regulatory requirement. There will be some adjustments in the fee model, but we don't think the overall low and grow model will be changed. And regarding your second question, there's a one-off provision made. This is because of the change in regulatory environment. We made certain contingency payments to business partners to ensure the investment program will sustain. And under U.S. GAAP, for prudence purpose, we made a provision against these payments. So that causes a one-off charge-off. Does that answer your question, Richard?

Sure. On the business payment, what type of business payment were those payments? If you could just elaborate a little more on the discretionary payments to what type -- what kind of business partners are you referring to?

Okay, these are certain institutional investors. After the regulatory change, we made some contingency payments to ensure the investment programs they participated in will continue to sustain. It would not be interrupted by any regulatory changes so that these payments to these business partners.

And our next questioner today will be Mike Del Grosso with Jefferies.

I guess the first one is on the borrower acquisition costs. It looked like those ticked up a bit this quarter. I know you're not providing guidance for '18 right now, but could you talk about some of the influences that drove that in the fourth quarter?

Sure, Mike. I think our CFO, Kerry, will answer your question regarding the customer acquisition cost.

Mike, I think in the fourth quarter, we particularly toward the end of the year, we strategically reduced the loan origination to new borrowers. So that will be a combination of marketing expenses and CAI. So the total cost of CAI in the fourth quarter increased a little bit because of the lower approval rates we offered to new borrowers. And looking at the full year, the all-in CAC, including -- which includes marketing expenses and CAI, the all-in CAC is $17 per borrower, which is very consistent with that of prior year, also USD 17. So with the much larger size of new borrower acquired, this year, we acquired 2.9 million new borrowers versus 60 -- 700,000. So under a large scale customer acquisition model, the average all-in CAC was kept flat during the 2 years.

Understood. And then one follow up on the regulatory environment. I know you mentioned that you expect some increase in regulatory costs going forward. My assumption is that that's going to be a kind of recurring dollar amount per quarter and not rolled into the customer acquisition cost. Is that a fair assumption? I mean, basically saying it's not going to be on a per borrower basis or per loan basis. How do you anticipate that expense flowing through?

Yes, regarding this regulatory changes and costs associated, and Zane will provide the answer.

Mike, this is Zane. I think you mentioned correctly. As the regulatory environment changes, actually the compliant cost will increase. Those costs elements, including like system interface, the data reporting, the data formatting and also the -- when you do changes on the internal process and change into certain procedure, establish a certain new system interface with external regulatory systems. We make some sort of the connections to help them to dictate all the business activities, et cetera. So those are the compliant costs. Some of those are one-time issue, just like established, and then ongoing it's just maintenance cost, some actually are ongoing. For instance, some sort of the reporting disclosure might be ongoing. So that's what we mean by the so-called compliant cost, which I think would be easy to understand. One of the major compliant costs right now is going through the registration process because the government does require -- we'll have to work with external third party companies like auditing firms, law firms, to come up the detailed special auditor report and also special legal due diligence to such that the government really rely on those professionals to have a thorough understanding of the business from A to Z, completed checklist. So that process also, you can imagine some sort of cost environment and the company as a whole have to work end to end work with those external parties to make sure government has a thorough understanding of the business scope for all those companies that are interested in getting to the registration process. So this is probably the one area of the issue you probably are interested in, which is how this so-called compliance cost is related. Did that address your questions, Mike?

Yes, it sounds like it's -- that expense should run through G&A as opposed to the customer acquisition cost, if I'm understanding correctly.

Yes, that's the compliant cost mostly in the G&A area, yes.

And our next questioner today will be Ryan Roberts with MCM Partners.

I just have a couple. My first one is kind of a follow up on the incentives that were mentioned earlier about the incentive paid to the institutional investors. So I think before we talked about kind of the pass-through model where you passed risk on through to the investors. So it sounds like perhaps there was a change in credit performance during the quarter, which kind of -- which necessitated making these payments to investors to kind of keep the funding continuing, I think Kerry, that's what you said. Can I get a sense of what happened credit quality wise in December and maybe some color on what's happened since? That's my first question.

Okay, Ryan, it's a very good question. And Zane will answer the question.

Ryan, I think this is a very important question. As we know, when government come out with the new regulatory framework changes, they sequentially come out with several important document, talk about like online lending, online microcredit company, cash loan, et cetera. So they sequentially come out with a set of regulations in very short period. And so the market probably have a difficult time to really understand what that means. And that created some sort of the almost chaotic situation for lenders also for borrowers during November, December, even January, during that period. So as a result, what I was trying to say, created some sort of a credit cycle event because the U.S. market people always talk about how do you deal with the credit cycle. When credit cycle hits, it not really matters how good your so-called prediction, your scoring, your risk prediction, how good they are. It's really a matter of how resilient, how robustness your overall approach is. Everybody probably would be impact. All portfolios will be impact. So this is our overall estimate. So you mentioned total credit quality. I would think starting from November, late November and getting to December particularly, but also extend to January, during that period, the credit portfolio all suffered from some sort of the irrational kind of the credit cycle event, triggered by the regulatory change. So because of that, so we do see some delinquent numbers started picking up. So some institutional lenders get concerned because they worry, say, what will happen because they don't have experience, they don't understand what's the credit cycle might look like. They don't even know what is the fact, how bad the thing could be. With that kind of situation, a lot of institutional lenders, trust funds, some companies, decide to pull out of the market. If that thing continues to do other than the credit risk pose to the industry, another risk which is liquidity risk, will hit the industry immediately. So to control the risk, not only control the credit risk, also control the so-called liquidity risk, so we are -- we extended discussions with some institution lenders trying to help them to understand what is the nature of this so-called credit cycle. And we come up with some sort of the solution to help them to understand the nature of the credit cycle. We also come up some sort of the contingent payment to help them to mitigate credit risk such that they can stay in the course without fully exposure to the future loss. So they feel like now we are in the same boat. We are helping those institutional lenders helping us. In our side, we can control the liquidity loss -- liquidity risk. On the other hand, they also feel like they're staying the course, such that they can watch almost like a tornado come in and gradually, tsunami comes out. So that was what really happened. So luckily, we observed the overall -- those kind of the trending credit cycles start to come down after Chinese New Year period. So we did observe a major credit cycle in the last quarter industry wise, but we are lucky enough we are able to work with some institutional lenders work with our investors to get them through this process.

Okay so it sounds like you were either helping them buy insurance or alternatively you were maybe taking some -- doing something to kind of keep them more happy -- sorry, more comfortable rather with what's happening in the -- kind of in that Q4 downturn. Am I understanding your interpretation -- sorry, am I interpreting your explanation correctly?

Yes, yes. Actually so this is not a normal circumstances kind of decision. This is really like an urgent situation when you do compare what is the most difficult, what is the most risky area, such that we want to prevent in the community, also prevent in some sort of credit risk.

Okay. Just to follow up on that, just so in terms of where the credit was kind of performing, contrary to the expectations of your -- of the investors in question, was that more on the new borrower side or alternatively was that more on the more seasoned borrower side?

This is a question actually we also give a lot of thought. Obviously, we see the new borrowers is more risky. This is true because when those kind of the tsunami hits, most lenders during the November, December period, they start to shut down their door. So leave a lot of borrowers, leave -- those borrowers live on some of their short-term credit to support their life. They find it as no way to go so they actually all come through like those platforms are still open. [Textiles] is the platform we never shut down ourselves -- we never shut down to our borrowers, so we keep our open so you can see a large amount of borrowers hitting our platform. So obviously, they create a huge underwriting pressure. The total credit quality during that period was difficult. It was worse than the normal circumstances. So this is the one issue which is for existing borrowers -- I mean, for new borrowers. For existing borrowers, for our existing seasoning borrowers, for the borrowers who stay our course for quite some time, overall their quality is better than new borrowers for sure. However, the total quality compared with, let's say, the same, let's say the -- people stay our course for more than 6 months or more than a year, compare those borrowers 6 months ago or 12 months ago, we do observe a total credit quality even for seasoning borrowers, their performance also getting worse. So that's why we say this has nothing to do with so-called your risk category, your risk prediction. This is merely driven by the macroeconomy, driven by the so-called macro credit event. This credit cycle driven by the regulatory change. The direct impact will be under regulatory change some borrowers might think, hey, you guys might run into trouble. I might not have to pay you. So this has nothing to do borrowers' capability, has nothing to do with the borrowers' income level. It's not like that they are hitting by some economic event, purely driven by seems like it's okay not paying back, that's why industry wise, drive high delinquency numbers. But this is a very short period. This is a very short period. It's almost like a tsunami, comes quick and goes quickly as well.

And our next questioner today will be Stephanie Poon with Citi.

So I've got a question regarding our Safeguard Program. So we see there's a tightening also regarding P2Ps with these arrangements. So wondering whether that has been affecting our Safeguard Program arrangement. And you see some maybe some other peers that have introduced third party insurance and guarantee companies to do the risk reserve. So whether we have any similar arrangement as well?

Daphne, our CFO, Kerry will address this question.

Daphne, the Safeguard Program is only related to the lifestyle loans. While lifestyle loan is now only roughly 10% -- 10% to 11% of total loan volume, and the lifestyle loan is not hit by the regulatory changes. The performance of the loans are just as usual and normal, so there's no particular changes in this program. And regarding your next question, whether we cooperate with certain insurance companies or reform it to a different type, we are not. We have some model changes in the Safeguard program due to the regulatory change, but overall, there's no impact from this -- from the so-called credit cycle that Zane mentioned.

Okay, so maybe just a follow-up, so what -- I understand from the regulators that they are actually not allowing P2Ps to keep their own risk reserve funds, but you mentioned earlier that your Safeguard Program is still running okay. So does it mean that actually, like based on your communication with the regulator, they're actually happy with that?

Daphne, this is Zane. And what Kerry mean by with comply with the regulatory change is actually we dissolved the Safeguard Program. So with the new regular -- regulation to come, as you said, as you mentioned clearly, the government does not want platforms to keep a Safeguard Program. So we follow exactly the government requirements. That's why we actually dissolved the Safeguard program so all the existing Safeguard programs get back to the investors and, going forward, investors are going to eat up their own credit -- so-called credit loss. So with our platform as of today, there's no such thing as a Safeguard Program anymore.

And our next questioner today will be Alice Li] with Credit Suisse

I have one question. As I see that in your guidance, you mentioned that you partially subsidized the interest rates on loans to certain established long-term borrowers. I would like to know is this -- there is a mismatch between the interest rates as well as the [repo] of the investors because of, say, the tighter regulation or because of they're now turned more cautious on the P2P assets? And I would like to know whether this will be a long-term trend or you expect the return expectation of the investors will -- gradually goes down.

This is Joseph. Sorry, the question was a bit long. Could you restate so I can clearly get your question?

Yes, my question is that I saw in your guidance that you need -- you partially subsidized the interest rates to certain borrowers. I would like to know the reasons as well as do you expect this to be a long-term trend or it will be some one-off things in the tighter regulations and the credit cycle now.

Daphne, this is Kerry. The so-called subsidizing is actually not any incentive. Actually we, for the best quality borrowers, we even offer them lower interest rate than 36%. So 36% for the small amount, short duration loan is already considered to be low, but for the best quality borrowers, repeat borrowers, who have existed on our marketplace for quite some time, we offer them even more attractive rates. So that's what we meant -- what we mean here.

(Operator Instructions) And our next questioner today will be [Matthew Larson] with Wells Fargo.

I got to say that most of the callers in from other firms, they're analysts, I'm not. I'm an investor. They had cautionary questions. I take the other side, that I invested in a competitor of yours, Yirendai 2 years ago and I made 10x my money. And I look at your firm as an opportunity to invest alongside the consumer in China. There's a number of ways to do that, Alibaba, JD and then in the finance area. And if you bought MasterCard 6 years ago you made 5x your money. So the point being is this, is that there's a short-term issue about the regulatory environment that everybody's questioning, all right, and that's probably a good thing for established people like yourself, well-capitalized. You got $94 million in the bank, that's almost 30% of your market cap. And here's my question, is that I read that there was about 2,000 different lenders, it's a Wild West type of situation as far as lending short-term to people and the government rightly decided to regulate it a little bit. Do you feel that, long-term, that's going to be a positive for you and for QD, LX, PPDF, I mean all these other companies that have become public. I mean, to me that's a positive but there's a short-term maybe pinch on your earnings. Is that a correct analysis from my point of view?

Thanks for the question. Zane will take this question.

Yes, thank you. For this, actually it's a great question. We think this issue quite a lot. As you clearly mentioned, thousands of companies out there, and they're all driven by a strong belief, the market opportunity is huge and also the demand, the fundamental demand it is strong which is not being covered by traditional banking society so because of that, drives thousands of companies into this space. And that's why you can see a Wild, Wild West kind of situation because the market opportunity is huge. When government stepped in because the government also see some sort of an irrational, some sort of the things may be out of control in terms of some companies charge very high rate, some companies might not play by the rules, that's why government stepped in. So like any other regulatory change, we always create some sort of the compliance costs. I discussed this earlier. Also, not only the increased compliance cost, also we have to change our market practice. For instance set up some sort of the ceiling for the fees for the numbers that can change. So your point is absolutely correct. So in short-term, I think the industry, XRF included, will have some impact because of this market condition change. However, I truly believe this represents a long-term growth opportunity. So when government stepped in, when new regulatory framework in place, obviously first outcome will be there'll be much fewer -- a lot fewer players in the space which the -- will be -- the competition will be rationalized, will not be like thousand companies competing for the very small sector. Instead there's very few companies developing in the large space. The second issue is, when government sets a ceiling number also reach out to establish nationwide credit reporting services, also provides for qualified players or grant them full access to central credit bureau access. Those will greatly increase the quality about the so-called credit quality of those platforms. When you have a good credit quality, your overall loss or your overall customer acquisition cost, in our case, the customer acquisition cost in total, will be greatly reduced, which obviously this will give almost like a jump start for the business like what we are doing. So that's the second, which is better credit quality. The third important is, when you have less competitor, when you have a more rationalized environment, investors could have an easy time to make a choice. Investors now know the good guys are there. Almost all of them are backed by the governments, reviewed by government's registration process, so they will feel like now they have a much smaller choice set, much better companies to work with, so I will assume the funding costs, the institution participation and the retail investors' participation will be higher, drive down the funding costs. So those also are very positive dynamic. The fourth is that because now, after the registration, the so-called first-tier companies, most of those first-tier companies are well-capitalized, so they can take advantage of the most recent cutting-edge technology like you say the cloud computing, deep learning, artificial intelligence, even blockchain. And all those cutting-edge technology could be adopted by those well-capitalized company, XRF included. So with those kind of technology advantage, with those kind of the environment change, I would think government really create a good environment to bring long-term prosperity to this industry. So overall in the long run, I'm hopeful. I think the industry is facing a bright future, but in the short term, we have to make adjustment. The compliant cost would be a real issue. The change, change in your model maybe, change in your pricing structure, change in the way you're looking for your target audience, those things might cause some sort of short-term impact. So that's the way I look at it. I don't know if, Matthew, I addressed your question, but this is...

Actually, you did. I mean, it's kind of how I look at it. Your stock is below $5. You became public at $6, you got as high as $12, but that was prior to some of the regulatory overtures by the government put in effect in December. But my view, and you're kind of confirming that, I guess, is that the lending business was kind of out of control. There was thousands of companies just lending people money only short-term. They couldn't pay it back maybe. And so the stronger well-capitalized companies like, hopefully yourself and I mentioned a few of your competitors, will be the ones who have the ability to address the regulatory requirements and that at the end of the day, it's just about participating with the consumer in China who wants what they want in America. And if you had invested in any sort of lending operation in the U.S. 20 years ago, you would've -- it would've been a wise decision is all I'm saying. And so that's why I just thought I would chime in here. Maybe I'm talking my book a little bit here, but I'm quite astute because I own a number of other companies in the sector and anyway, I appreciate your response, and this conference call has been very instructive to me.

And this will conclude our question-and-answer session. I would now like to turn the conference back over to Zane Wang for any closing remarks.

Thank you, operator. Allow me to make a few closing remarks then we will conclude the call.

We are proud of the solid results we reported today. Our team delivered against all of the objectives we set forth during and after our IPO. Most importantly, we generated a meaningful amount of the cash from our operations in each quarter since our IPO, ensuring that we have a solid foundation under our business. This cash cushion will enable us to manage the impact from the current regulatory uncertainty as well as fund the initiatives that will drive our long-term growth. Despite the temporary reset in our path to sustainable profitability, we're highly confident that the market opportunity we are pursuing remains large. Middle-class Chinese are just starting to tap the consumer credit market, so we see years of growth ahead. We operate one of the safest and the most vibrant marketplace for both borrowers and lenders. Our technology and practice ensure that borrowers are qualified and they use credit in a reasonable responsible manner, and that they are treated fairly in their all-in cost of borrowing. Our technology and practice also ensure that the lenders will experience fair return with appropriate managed and disclosed level of risk. When both borrowers and lenders have satisfied experience in our platform, we all win and the business grows.

Thank you, everyone, for joining us today. We're grateful for the long-term support of our shareholders. You may all now disconnect.

Thank you.

Thank you.