Huize Holding Limited (HUIZ) Q2 2020 Earnings Call Transcript

Huize Holding Limited  (NASDAQ: HUIZ) Q2 2020 earnings call dated Aug. 20, 2020

Corporate Participants:

Harriet Hu — Investor Relations Manager

Cunjun Ma — Chairman and Chief Executive Officer

Ronald Tam — Chief Strategy Officer

Li Jiang — Director and Chief Operating Officer

Analysts:

Michelle Ma — Citigroup — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by and welcome to Huize Holding Limited’s Second Quarter 2020 Earnings Call. [Operator Instructions] Today’s conference call is being recorded and a webcast replay will be available. Please visit Huize’s IR website at ir.huize.com, under the Events & Webcasts section.

Now, I’d like to hand the conference over to your speaker host today, Ms. Harriet Hu, Huize’s Investor Relation Manager. Please go ahead, Harriet.

Harriet Hu — Investor Relations Manager

Thank you, Rose. Hello, everyone, and welcome to our second quarter 2020 earnings conference call. The financial and operating results were released earlier today and are currently available on our IR website as well as on Newswire.

Before we continue, I would like to refer you to our Safe Harbor statements in our earnings press release, which also applies to this call, as we will be making forward-looking statements. Please also note that we will discuss non-GAAP measures today, which are more thoroughly explained in our earnings release and filings with the SEC.

Joining us today are our Founder and CEO, Mr. Cunjun Ma; COO, Mr. Li Jiang; CFO, Mr. Minghan Xiao; and CSO, Mr. Ronald Tam.

Mr. Ma will start the call by providing an overview of the company’s performance and operational highlights for the second quarter of 2020. Mr. Tam will then provide details on the financial results for the period, before we open up the call for questions.

Now, I will turn the call over to Mr. Ma.

Cunjun Ma — Chairman and Chief Executive Officer

[Foreign Speech] Hello, everyone, and thank you all for joining Huize Holding Limited second quarter 2020 earnings conference call. For the second quarter, we delivered solid operational and financial results, as a go-to online insurance platform for the younger generation in China.

During the quarter, the global COVID-19 pandemic continued to cause significant downward pressure on people’s disposable income and consumer spending and the overall development of China’s insurance industry. Despite these challenges, we were able to sustain our growth trajectory and deliver strong double-digit GWP growth, capturing additional market share as a result of our focus on transforming long-term life and health insurance distribution for the industry, which is driven by the depth and breadth of our core technology and data-driven online platform model.

During the quarter, total GWP facilitated on our platform, increased by 51% year-over-year to reach RMB596 million, while total operating revenue went up to RMB235 million, exceeding the high end of our previously announced guidance.

I would now like to review some of our key competitive advantages in detail. This should help to provide everyone with a better understanding of how we managed to both sustain our growth trajectory as well as outpace our more traditional industry peers during the second quarter.

On the one hand, the combination of our long-term life and health insurance strategies and online business model has served to expand our economic moats and enhance our resilience during the economic downturn.

During the second quarter, long-term life and health GWP accounted for 93% of our total GWP, marking the third consecutive quarter in which this ratio has remained above 90%. More importantly, our GWP for long-term life — long-term health insurance grew by 40% year-over-year to RMB399.9 million.

During the second quarter, we have maintained the 13th and 25th month persistency ratios, both at over 94% for long-term life and health insurance products, which we believe ranks our platform among the leading industry peers. The outstanding persistency ratio metrics are a demonstration of the quality of the customers acquired from our online concentrated marketing channels and further underscores a high level of customer retention.

On the other hand, our integration of artificial intelligence, big data analysis and other innovative technologies, have continued to fuel our platforms competitive advantages. During the quarter, we leveraged its capabilities to further optimize our platform features and introduce new smart insurance applications. Such work has not only led to stronger capabilities of product customization and risk management for our insurer partners and smoother service experience for our customers, but will contribute to better and more efficient customer conversion and increase customer lifetime value in the long run.

For example, in May 2020, we launched our AI Proposal application, driven by the utilization of algorithms, big data analysis and machine learning technologies. The AI Proposal application can quickly process customer inputs to not only identify and recommend those products which are the most suitable to customers, but also shorten the waiting period to just minutes.

Our consultants are now able to spend the time previously reserved for product recommendation research on providing customers with more in-depth explanation regarding specific guarantee classes, policy features and other relevant product details, and serving more customers. As a result, the launch of AI Proposal has not only boosted our consultant efficiency and productivity, but also immensely enhanced the service experience for our customers.

Second, in June, recognizing the importance of product innovation and quality, risk management, we announced our partnership with Southwestern University of Finance and Economics, through which we have jointly established a research laboratory, dedicated to the application of innovative technologies in the insurance sector, including big data and knowledge graph construction.

For example, in a context of insurance, properly developed knowledge graphs integrate all data related to the policy holders and the beneficiaries to produce more accurate forecast and further avoid the risk of adverse selection. The Institute of big data of Southwestern University of Finance and Economics is quite accomplished in this area.

Looking ahead, we aim to continue developing valuable partnerships to both refine our technical capabilities and further develop a leadership in insurtech space.

In summary, we once again delivered a solid financial and operating results in the quarter, further showcasing the resilience of our business model and technical synergies. As a data and technology-empowered insurance distribution platform, we believe that the business model that we have developed and continue to optimize is the core to better serve our customers and drive customer lifetime value.

Going forward, we plan to continue investing in technology, such as data analytics and machine learning, to further improve our capabilities in the areas of risk management, product customization, customer experience and operating efficiencies.

Every crisis is an opportunity. We believe that the outbreak of COVID-19 has forced the education of the market and accelerated the offline-to-online transition in consumer behavior, and that this trend is here to stay. We believe Huize is participating in the most attractive segments of the online insurance market with a clear focus on transforming the distribution of long-term life and health insurance products, which is expected to deliver higher than industry average growth rate.

Over the long term, as the epidemic [Phonetic] gradually dissipates and the economy recovers, we believe we are very well positioned to capture the industry response and benefit from the growing opportunities.

This concludes my prepared remarks for today. I will now turn the call over to our CSO, Mr. Ronald Tam. He will provide an overview of our key financial highlights for the quarter.

Ronald Tam — Chief Strategy Officer

Thank you, Mr. Ma. Thank you, Harriet, and hi, everyone. It’s Ron here. In summary, I think that we are — our second quarter results have shown the market that our business model online is very resilient. And again, we delivered robust double-digit GWP and top line revenue growth despite the continued challenging macroeconomic environment, as well as continued bottom line profitability for the ninth straight quarter.

For the second quarter, GWP facilitated was RMB596 million, which was up 51% year-over-year, I think outpacing average industry growth rates in the period. Although COVID-19 has gradually been brought under control in China; however, recurring outbreak in various pockets of the country continue to reemerge, for example, recently in Beijing, Shanghai, Shenzhen. And the pandemic continues to have a large dampening effect on consumers’ willingness to spend money on discretionary and financial products, particularly relatively higher ticket sized long-term life and health insurance policies, which is our products key strategic focus.

In terms of gross written premium breakdown, first year premiums accounted for RMB319.7 million, which represents a 12.5% year-over-year growth. Renewal premiums accounted for RMB276.3 million, which represents 1.5 times year-over-year growth.

Our strong continued renewal premiums growth demonstrates the quality of the customer acquisition to our content-driven marketing channels online; and as Mr. Ma has touched upon earlier, we have achieved industry-leading 20th month [Phonetic] and 25th month persistency ratios for long-term policies, due for renewal during the quarter.

Renewal premiums accounted for 46.4% of our total GWP in the quarter, as compared to 28% in the same period of last year. Our strong renewal premiums growth will continue to drive better visibility to our revenue line and provide a stable and recurring stream of revenues going forward; and on the business side, provide a current and potential insurance company partners with further positive reassurance of the quality of our online customer acquisition abilities.

During the quarter, we continued to execute on our focus on long-term life and health insurance distribution with long-term life and health products accounting for 93% of total GWP facilitated in the quarter, marking a third consecutive quarter for this metric to come in above 90%.

Our long-term health segment continues to demonstrate strong growth momentum with grossed up — GWP increasing by 40% year-over-year to RMB400 million.

Now, turning to our revenue line. Total operating revenue for the quarter was RMB235 million, which was up by 17.6% year-overs-year and exceeding our previous guidance given to the market in the first quarter. The increase in revenue was primarily driven by the increase in brokerage income due to the 51% increase in GWP, which we mentioned before.

Turning to the cost items. Cost of revenue for the quarter increased by 10.7% year-over-year to RMB139.8 million, primarily due to the increased personnel costs paid to our insurance consultants and service fees paid to our user traffic channel partners, which is generally in line with our overall revenue growth.

As a percentage of total revenues, total cost of revenues declined to 59.5% in the quarter from 53.2% in the same period of 2019, which translates roughly to 3.7 percentage points improvement in gross margins year-over-year and that also demonstrates the operating leverage that we are able to achieve in the quarter.

Selling expenses for the quarter increased by 42.7% year-over-year to RMB48.1 million, which was primarily attributable to the increase in our sales and marketing headcount during the last 12 months as well as an increase in share-based compensation, and to a lesser extent an increase in advertising and marketing expenses in comparison to last year.

G&A expenses decreased year-over-year by 44.5% to RMB43.5 million. The decrease was primarily due to a one-off share-based expense in the same period last year, and then the decrease amounted to RMB15.5 million — to the RMB15.5 million, compared to RMB61.8 million in the last year.

If we strip out the effect of SBC from G&A in the quarter, G&A expenses grew by 70.3% year-over-year to RMB28 million from RMB15.5 million and accounting for 11.9% of our revenues as compared to 8.2% last year.

R&D expenses; we continue to invest heavily in R&D, as explained before, in our AI applications and also in beefing up our R&D headcount. For the quarter, R&D expenses grew by 41.9% year-over-year to RMB10.6 million, which is primarily attributable to the increase in headcount, as we continue to invest in technology enhancements throughout our business, procedures.

During the second quarter, net loss of RMB3.7 million, while non-GAAP net profit for the quarter was RMB14.1 million, which again represents our ninth consecutive profitable quarter on a non-GAAP basis. We continue to exercise financial discipline and prudence in light of the current challenging macro environment and maintain a relatively strong liquidity and healthy financial position.

As of quarter-end, we had a combined balance of cash and cash equivalents of approximately $63 million. Going forward, this robust liquidity position will allow us to undertake more aggressive growth strategies in the second half of the year and capitalize on potential attractive investment opportunities.

Now, turning to our Q3 outlook. With regard to the Q3 revenue, we expect total operating revenue to be in the range of RMB310 million to RMB340 million. This forecast obviously only reflects the current and preliminary views on the market and operational conditions, and are subject to change caused by various uncertainties, including those relating to the ongoing COVID-19 pandemic.

With that, it concludes our prepared remarks for today, and we would like to open up the call for Q&A. Thank you, all. Thank you, operator.

Questions and Answers:

Operator

Thank you so much. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] All right. And your first question comes from the line of Michelle Ma from Citigroup. Michelle, your line is now open.

Michelle Ma — Citigroup — Analyst

[Foreign Speech].

Cunjun Ma — Chairman and Chief Executive Officer

[Foreign Speech]

Michelle Ma — Citigroup — Analyst

[Foreign Speech] So, my first question is on the operating revenue guidance. So, for the third quarter this year, the guidance is RMB310 million to RMB340 million, which looks like a very substantial increase versus second quarter. And Ron just mentioned that the strong cash position allows Huize to conduct more aggressive strategy. So, I was wondering how aggressive the strategy will be to enable this very strong quarter-over-quarter revenue growth? That’s my first question.

And the second is on our competitor. So, for our new products launched in June, those were very well received by the market. We noticed that our competitors launched a very similar product like Super Mario series. So, how does management think of the overall competition environment and how we can differentiate? [Foreign Speech].

Ronald Tam — Chief Strategy Officer

[Foreign Speech] So, thanks, Michelle, for the question. I mean, for the first question on the cash position in our Q3 guidance, and obviously I think the Q3 revenue outlook is a lot stronger than the previous two quarters, which we have seen, which is quite clearly affected by the challenging economic environment.

I think going into the third quarter, I think we are still seeing continued pressure in the economy, but we are still — we’re also seeing some signs of moderate recovery in our business. And that’s why we have been able to give out this guidance in terms of a quarter-on-quarter growth of 30% to 45%, which is quite substantial in the latest — in a few quarters.

And in terms of the strategy that we can undertake, obviously from the IPO proceeds, we have been quite prudent. And as we have been announcing, well, we saw for last two quarters, we have not really deployed capital into marketing or aggressive promotional programs.

I think in the third quarter, what we are able to expect, I guess, from a market perspective is that we will probably be able to undertake a little bit more aggressive in the incentive campaigns, for example, with our channel partners. That’s one thing. And also, you can also invest more resources into our own organic traffic. For example, SEO marketing on search engine and so forth; and advertising marketing spend will be increased.

We can probably look at the second half marketing and advertising expenses to be increasing by, say, 50% over the first half, as we are becoming more confident on the overall economy and people’s willingness to spend money on purchasing protection insurance online. So, I think that’s the answer to first question. [Foreign Speech]

Li Jiang — Director and Chief Operating Officer

[Foreign Speech]

Ronald Tam — Chief Strategy Officer

Okay, thanks. Let me translate here quickly. So, it was our COO, Mr. Jiang Li, responding to the second question.

For the past few years, since 2015, I think our company has been quite successful and leading industry in terms of customized products with co-branding with our insurance company partners. And we have developed a few very successful branded products, [Foreign Speech]. So, all these products have been quite successful and also obviously this will lead to market participants and the industry to follow.

And I think what Michelle has alluded was one of the competitors that have been following the business model that we have established. I guess we can comment that as a clear leader in this space, we believe that our market share is way ahead of the second, third and fourth competitors combined. And so, I think we still hold a very clear leadership in these product segments.

And also, since the last — fourth quarter of last year, you can see that from our results, we have been diversifying into other products as well; like, for example, annuity products, which we believe will be one of the more important products to distribute in the second half this year, as we see people preferring maybe a bit more on savings-related products over protection product. So again, we have developed a business plan on that regard, and hopefully in the second quarter — I’m sorry, in the second half this year, we can deliver a stronger distribution of additional products to the product mix.

So, also in terms of the new definition of critical illness products in the China regulatory regime, we will be releasing a new product in the fourth quarter. And I think this is also a testament to the ability of our in-house product customization and co-branding capabilities with our insurance company partners. And I think this will also be a competitive advantage over some of the smaller competitors that we see in the market right now.

Cunjun Ma — Chairman and Chief Executive Officer

[Foreign Speech].

Ronald Tam — Chief Strategy Officer

So, I think that Mr. Ma just mentioned a couple of additional points. In terms of new product innovation, we believe that we have always been the innovator in the industry and has been followed by other competitors, but we have always been able to hold onto our lead in this new product innovation perspective.

And I think the two main elements to maintaining our strong leadership is in terms two — one, the accumulated database that we have accumulated over the last 14 years of operating history. We have proprietary data, intelligence data as to our client base, and also in the past purchasing history and past underwriting and also claims processing related data points. So, that’s number one. And number two is our strong user base. We have 6.5 million effective users accumulated at this point. So, these are the two strong element that will enable us to hold on to this leadership.

Michelle Ma — Citigroup — Analyst

[Foreign Speech].

Operator

Thank you so much. [Operator Instructions] As there are no further question at this time, I’d like to hand the conference back to our management for closing remarks. Please go ahead.

Ronald Tam — Chief Strategy Officer

Okay, thanks, everyone, for joining the call today and we look forward to sharing our results for the third quarter. See you next time and take care. Thank you.