Sos Ltd (SOS) 2018 Q1 法說會逐字稿

Good day, and welcome to the China Rapid Finance First Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note this 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 First Quarter 2018 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 the 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 press 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 the call today. I will first discuss some updates regarding our business and outlook. Kerry will then give you financial details.

In the first quarter, our top priority was to reorganize our business to deliver profitable growth towards the end of this year and beyond. The company is now organized into 3 business units, each of which has direct responsibility for its own P&L, marketing strategy, new product development, new borrower acquisition and the strategies to address competition.

The organization was designed to accomplish 3 goals: first, we create more responsive and adaptive teams that can better address changes in the market; second, we have a suite of new loan products now under development that will more effectively address the lifetime needs of our core customers; third, we streamlined operations, which improved the efficiency of many corporate functions and reduced our costs.

Let me elaborate on each of these goals. A key competitive advantage for XRF is our ability to understand and satisfy the lifetime financial needs of the emerging middle-class mobile customer in China. This massive population of over 500 million people is still underserved, with inadequate access to affordable credit.

Our new structure assigns different business units to address the different needs of different customer segments, which can span from small loans [about] $100 over a few weeks to larger loans about $10,000 over months or years. Each unit develops their own marketing strategies, product range, risk pricing and underwriting technologies. Each business unit is responsible for operating profitability.

The new org structure strongly supports our low and grow strategy, which drives increasing average loan size over time. This makes us a more adaptive and competitive company.

The second benefit of the reorganization is the new product that address the changing market environment. To respond to regulatory changes, particularly on the interest cap, we made changes to our product line. Some of these changes included: first, the introduction of value-added services to customers that we have identified as high-quality borrowers; second, offering to existing borrowers what we called consumption loan plus, a larger line of credit; third, extending short-duration loans from 14 to 30 days to 2 to 3 months, which are providing to be very popular in our testing; fourth, the introduction of what we call lifestyle-like loans, which have a duration of 3, 6 and 12 months. Lifestyle-like loan sizes fill the gap between consumption loans and the larger lifestyle loan -- lifestyle loans. And fifth, the introduction of a new apps to work with more channel partners and fill more borrower categories. These products will be released soon.

The third benefit of our reorganization is to streamline our operations and cut costs. The reorg accelerate many operating changes that were already in the works. This now improves our ability to deliver our products and services at a lower cost. For instance, we accelerated our transition to automated personal information verification of new borrowers, making the process faster, more accurate and more secure. New borrowers benefit from the streamlined process. Lenders benefit from the greater accuracy, and the company benefits from reduced costs.

Similarly, we've accelerated the ongoing transaction to an online marketplace, eliminating many physical locations that are no longer necessary. The reorg drove this and many other efficiency improvements. The financial benefits will be evident starting in the third quarter, and I expect it to have a substantial and long-lasting positive impact on our business.

While we were implementing the new organization, we also finished all tasks necessary for registration in China as an online marketplace under the current guidelines. As new requirements emerge, we will also be well positioned to meet them. We feel very confident that we can manage whatever final actions we may need to take.

We believe the results of our first quarter actions will be twofold: first, once the regulatory environment stabilizes, we anticipate an acceleration of our growth in gross billings and revenue as our average loan size increases; second, combining this with a reduced and more efficient cost structure mean that we believe we can become profitable towards the end of the year.

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

Thank you, Zane, and good morning to everyone, and good evening to people in Asia. You can find all the figures and comparisons you need from our press release and supplemental slides.

I'm not going to repeat all the numbers. Rather, I'm going to focus on the analysis of the factors that influenced our financial results.

Keep in mind that during my discussion, unless I say otherwise, we are referring to Q1 2018, and all comparisons are to the first quarter of 2017.

In Q1, our top and bottom lines were impacted both by the reorganization that positions us to thrive in the months and years ahead and by nonrecurring and noncash charges and adjustments. I'll clarify which of these 2 categories impacted each line item as we analyze our income statement and balance sheet.

Before we discuss the Q1 results, I want to address an accounting policy change, which affected our revenue and net profit for the first quarter. On January 1, we adopted a new revenue recognition policy, ASC 606. This rule guides how companies recognize revenue from contracts with customers. It impacted us with regards to certain transaction fees received for certain loan products. Typically, ASC 606 impacts timing of recognition, and that was the case with us, netting out multiple adjustments around $4.5 million of revenue that would otherwise have been recognized in Q1 was moved to Q4 2017. This is reflected in the adjustment to returned (sic) [retained] earnings.

Now let's turn to the income statement starting with the top line. One measure of the health of our business is gross billings. Solid gross billing growth means that demand for our loan products is robust and that we are effectively managing our marketplace. We nearly doubled our gross billings, which was driven mostly by consumption of gross billings, which nearly tripled.

Throughout the quarter, we focused our efforts on repeat borrowers. We decided to mainly extend loans to proven borrowers that have been on the marketplace for some time. You saw the effects of this in the jump in our average loan size, which completely offset the anticipated decline in the number of loans. Our loan volume was equal to last year. Our gross billings and total revenues grew, and quality and size of loans in our marketplace both increased.

Now turning to total revenue. On an operating basis, its growth was slightly higher than gross billings growth. On a GAAP basis, with the accounting change, total revenue growth was lower than the gross billing growth.

In Q1, we had one adjustment that reduced net revenue. Due to regulatory changes, we agreed to a nonrecurring expense associated with the discontinuation of a funding program. As of this time, we do not anticipate any more provisions of this nature.

Now let's turn to expenses. Servicing was basically flat due to loan volume being unchanged. Similarly, sales and marketing was also unchanged due to the low customer acquisition costs, offset by higher promotional spending in wealth management. General and administrative and product development expenses scaled in line with the growth in gross billings and total revenue.

This infrastructure was built to support much larger loan volume. As loan volume returns to second half of 2017 levels, these expenses will be well covered. Also, we did incur extra costs for collection services in 2018 Q1 but this related to the spike in delinquencies at the end of last

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As delinquencies return to normal levels, this cost should decline. Product development expenses will continue to grow as we invest in new product innovations as Zane has described. These are intended to help us drive rapid growth when regulation stabilizes.

Innovation is our top priority, and we will continue to invest to improve our products, our credit analysis tools and our platform. In Q1, we invested in all 3 of these categories.

Now let's look at the balance sheet. We drew down $23 million of cash during the quarter. This was due to the operating loss as well as approximately $8 million in nonoperating payments. These nonrecurring payments were for the discontinuation of the funding program and extra collection expenses.

Our cash balance was equivalent to that after the IPO and is quite sufficient to fund our current operations and invest in growth initiatives. So far in second quarter, we have seen a significant improvement in operating cash flow. As Zane mentioned, we expect noticeably improved operational performance, including achieving profitability towards the end of the year.

Now let me return the call to Zane. Zane?

Thanks, Kerry. Despite the regulatory volatility, we believe the consumer credit market is still in its infancy in China, and we remain fully focused on this opportunity. We believe that this is one of the largest market opportunities anywhere in our industry around the world.

XRF was the pioneer in identifying the emerging middle-class mobile consumer and is still a leading innovator in meeting the lifetime financial needs of this customer. We pioneered big data-enabled underwriting and are pleased to see the scalability of our approach as we rapidly grow our marketplace. Our solid operating metrics in the face of significant market uncertainty reinforced the strength of our approach.

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

(Operator Instructions) The first question comes from Richard Xu of Morgan Stanley.

One quick question on the cost. You mentioned certainly, there's a cost structure program coming up. So what do you think the costs will go down by? What are -- any assessment on the impact, say, this year, next year? Any target? Secondly, could you talk about some of these credit quality trends in the first quarter? And then what do you expect in the second quarter? And number three is -- there's a onetime provision, and certainly a little bit higher than the first quarter. You certainly described the situation for the first quarter. Could you explain a little bit more on this $9 million for the second quarter -- for the first quarter?

Richard, this is Kerry. Thank you for the questions. I hear 3 questions: one is on the total expense, and second is on the default rates of consumption loans, and third is regarding the discretionary payments. For the first question, in terms of total expenses, they were $37.8 million in the first quarter. If you look at the breakdown, servicing has always been stable, and sales and marketing this quarter was comparable to the first quarter of 2017, but $3 million lower compared to Q4 2017. This is mainly due to the slowdown in new borrower acquisition. And G&A, generally, they are higher than the first quarter of 2017, as the total scale of the business is much bigger. But compared with Q4 of last year, G&A expense is also stable. When we expect to reaccelerate the business in the second half, we do expect sales and marketing expense to increase a little bit. But generally, the expenses will not grow in the same pattern as loan volume, gross billings or revenue. Regarding the second question on default rates of loans, the Q1, as of March 31, default rate for consumption loan was 4.8%. It's higher than what we reported a quarter ago of 3.7%. This is -- this reflects the increased delinquency since the end of last year due to the regulatory changes. Since the middle of Q1, we see delinquency rates go down to before the regulatory change level. And it's back to normal now. Regarding your third question on discretionary payments, let me give you some key elements of these payments. It is unrelated to the payments made last quarter. One institutional investor chose to terminate an investment program in the first quarter due to regulatory changes. They incurred losses because most of the loans are newly initiated and not profitable yet. The value to lender built over time by repeat borrowing of higher loan amounts, and we voluntarily agreed to compensate the lender for the losses due to the early termination because of the regulatory change. As of this point of time, we do not foresee any similar payments to be made further. So I hope I answered 3 of your questions, but is that all right?

Yes.

(Operator Instructions) The next question comes from John Cai of Morgan Stanley.

I have two. One is to follow up on the previous questions about the institutional funding. Just curious how much of our funding is from institution at the moment? The second question is on the customer acquisition costs. Just wonder what's the per-customer acquisition cost in the second quarter.

For the institute investments, it's trust funds-type of structured funding program. And as of this point of time, we have no similar programs anymore. So this was a pilot funding program that we want to test. I hear you ask about customer acquisition cost for Q2. It depends on the new borrower acquisition plan, which we have not disclosed yet. We expect to reaccelerate new borrower acquisition and the loan origination in the second half, and we will disclose all-in CAC per borrower in the second quarter, in next quarter.

(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Dr. Zane Wang, CEO, for any closing remarks.

Thank you, operator. Allow me to make a closing remarks to conclude the call. Today's announced reorganization into business units is about positioning us for long-term growth and increased operational efficiency. Our new customer-centric business units will focus our resources on deeply understanding our customer and providing creative solutions to address their emerging needs and preferences. Our new structure will allow our organization to unlock and scale innovation while unifying processes and opportunities critical to our future. I'm confident that our new structure will enable us to benefit from many new extraordinary opportunities. There's tremendous energy and creativity at XRF. With our new customer-focused business unit structure and a talented team, I'm excited about our future.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Thank you.