Yongtao Luo; Chief Financial Officer, Secretary of the Board, Chief Actuary; Shanghai OneConnect Technology Co Ltd
Judy Zhang; Analyst; Citi
Presentation
Operator
Ladies and gentlemen, thank you for standing by, and welcome to OneConnect second quarter 2024 earnings call. (Operator Instructions) Thank you. Please note, this event is being recorded. Now, I would like to hand the conference over to your speaker host today, Mr. Rick Chan, the company's Head of Investor Relations. Please go ahead, Mr. Chan.
Rick Chan
Thank you, operator. Hello, everyone, and welcome to our 2024 second quarter earnings conference call. Our financial and operating results were released earlier today and currently available on our IR website. Today, you will hear from our Chairman and CEO, Mr. Shen Chongfeng, who will give opening remarks and business highlights. Afterwards, our CFO, Mr. Luo Yongtao, will cover a closer look into our financials. And then in question-and-answer question, our management team will be available to you. In today's conference, our management team will make statements in Mandarin or in English. For those in Mandarin, a consecutive translation will be provided. In case of any discrepancy between the Mandarin version and the English version, our statement in the original language shall prevail. Let me quickly cover the safe harbor statement before we start. We will be making forward-looking statements, which involve a number of risks and uncertainties that could cause actual results to differ materially. Please note that we may present both IFRS and non-IFRS financial measures. With that, I'm now pleased to our the call to our Chairman and CEO, Mr. Shen Chongfeng. Mr. Shen, please.
Chongfeng Shen
(interpreted) Hello, everyone. I'm Shen Chongfeng. Thank you for taking the time to join OneConnect's second quarter and first half of 2024 earnings release. On behalf of OneConnect, I would like to extend a warm welcome to all investors, analysts and the media friends who are with us today. I'm very pleased to take this opportunity to share with you our achievements in this quarter and the first six months of 2024. The Central Economic Work Conference has put forward nine key tasks for this year's economic development. The construction of a modernized industrial system led by technical innovation, which is a top priority among the nine tasks also points out the direction for the development of the financial industry. At the same time, after the five major articles namely rigorously developing technology innovation in finance, green finance, financial inclusion, pension finance and digital finance were unveiled at the Central Financial Work Conference. The National Financial Regulatory Administration followed up with the guidance on banking and insurance industries to implement the five major financial initiatives, a document that maps out systematically implementation of the five major articles. The guidance points out that digital finance ought to focus on efficiency and security. In the next five years, the banking and insurance industries are expected to make strides in digital transformation. With the digital operation and management system basically completed digital services to widely popularized and the digital regulatory framework and process in place. With digitalization becoming ever more relevant, financial institutions and the large SOEs are facing many challenges. OneConnect closely monitors policy and market development and continues to leverage the unique advantages of technology plus business to improve its product capabilities in our three major business segments, namely digital banking, digital insurance, and Gamma platform, for us to help financial institutions and enterprises to improve their digital operation and service capabilities through digital transformation and strengthen business management, improve service quality, reduce service costs, and empower the development of new quality productive forces in the financial industry. In the first half of 2024, profitability has further improved and overseas business continues to maintain strong growth momentum. Net loss from continuing operations attributable to shareholders improved to CNY70 million in the first half from CNY114 million in the same period last year, a significant year-on-year decrease of about 38%. Both gross profit and margin and adjusted gross profit margin remained healthy at 37.1% and 39.4%, respectively. In addition, third-party revenue from overseas customers increased by 14.8% year on year. Our solid performance is attributable to OneConnect's efforts in product portfolio adjustments, deepening of customer cooperation, continuous expansion of domestic and overseas markets, disciplined cost control and resource allocation and efficiency improvement, which has also -- which has also laid a solid foundation for us to achieve profitability in the medium term. Next, please move on to page 4 of our slide. Committed to our business philosophy of value, win-win cooperation and quality development, we achieved significant progress in three core priorities, namely product upgrade, customer expansion as well as overseas expansion in the first half of 2024. At this stage, we are accelerating export of Ping An Group Technology and upgrade of self-developed products and aggregating resources on high-value products. At the same time, the company has boosted the productivity of its sales team, expanded pipeline and increased third-party revenue growth to further optimize revenue structure. On top of that, OneConnect has also ramped up efforts in overseas markets, meeting international market demand by continuously improving our product based on the demands and preferences of local market. Next page. We now remain at a key year in our Stage 2 strategy of broadening customer engagement. We will continue to focus on our financial institution customers, integrate and optimize our products and services to continuously improve our product capabilities around the three major business segments, digital banking, digital insurance, and Gamma platform, set to empower financial institutions to improve quality and efficiency and successfully achieve digital transformation. We will also strengthen cooperation with enterprises and industry partners around the world. In addition to the Mainland market, we will also expand presence in regions including Hong Kong, China, Southeast Asia, South Africa and the Middle East. Next, moving on to page 6. In retail digital banking, OneConnect has comprehensively upgraded its product with customer-centered, data-driven and AI-assisted products to drive intelligent operations in retail banking. Based on data and AI, the company helps retail banking customers, refine customer operations, achieve accurate target customer segmentation and asset allocation suggestions through tools such as customer stratification and wealth health diognosis and so as to help improve their product quality. At the same time, OneConnect has also synergized channel operations for banks customers group operation using APP+AI+T+W, which means the synergized strategy of App, AI, telephone and website to design and develop AI corpus, model operation and other tools. These products are well received by our banking customers and have been successfully adopted by many banks, including a top five city commercial bank and a foreign bank operating in China. Next, on page 7. In credit lending digital banking, OneConnect is vigorously promoting the export of smart credit system, which has already been proven by the domestic market. We see great potential in this solution. We noted that as development of digital economy accelerates, demand from overseas customers for credit lending digitalization is increasingly robust, and the willingness to pay is relatively higher, especially for customers in the Southeast Asian market. So to capitalize the strong overseas market demand, the company has developed an international version of smart credit system, combined with data and risk control product capabilities, we have built an end-to-end easily configurable and iterative smart credit system, which engages overseas banking customers through retail business and SME credit lending risk management. The system has been widely used in the Southeast Asian market, improving loan processing efficiency by 40%. The AI automated risk control capabilities by 50% and iteration efficiency with configurable modules by 30%. The development of digital banking retail systems and credit -- and smart credit systems come from the support and application of technology. OneConnect has, therefore, established a unified technology platform to continuously improve our competitiveness and market share and further optimize our systems. In the future, the company will continue to ramp up R&D and application efforts to empower more intelligent and convenient financial services for our customers. Next on page 8. In digital insurance, the company has been working on several end-to-end SaaS deployment cooperation with benchmark cases. This includes providing a state-owned P&C insurer with an end-to-end P&C insurance system to solve the pain point of claim settlement, underwriting and servicing, helping our customers to reinforce risk controls for claim settlements, enhance underwriting quality and improve customer experience. By setting a benchmark for multiproduct cooperation, we were able to enhance customer stickiness and also achieve continuous customer expansion. So far OneConnect has successfully landed more than 10 cases and significantly benefit our customers. We believe that these benchmark cases will improve market reputation for OneConnect and open up more potential. Next page. In Gamma platform, OneConnect has successfully leveraged AI in all business links aiming to empower scenarios such as smart risk management and operational efficiency enhancement. Through a variety of AI technologies, including computer vision, ASR, TTS and graph computing, our solution helps financial institutions manage risks and improve efficiency in scenarios, including remote account registration, insurance dual registration and loan application review. For instance, the application of AI interview robot has achieved automatic loan approval of more than CNY1 billion, and has substantially reduced the cost of human agents, saving a total of over CNY2 million. At the same time, our e-KYC solution overseas has incorporated 10-plus anti-counterfeiting technologies with top interception rate in the industry, providing more than 100,000x of account opening services for banks in Hong Kong every year. The product has been successfully implemented in over 10 overseas governments and financial institutions. Next page. Overseas business saw strong momentum and registered a remarkable growth in the first half of 2024. Revenue contribution from overseas customers has increased to 21.2% of total third-party revenue. OneConnect overseas strategy has successfully delivered as we see our products are well received by overseas customers and over CNY100 million worth of cooperation with overseas customers is in the pipeline in the first half of 2024. The company continued to leverage product and technology advantages to deepen customer engagement and expand cooperation. For example, the company further deepened its cooperation with a leading bank in Vietnam and successfully signed over RMB10 million product subscription service contracts in the first six months of 2024, lending another benchmark case of overseas cooperation and fully demonstrating customer recognition and trust in our products. Next page. OneConnect won nine awards from third-party institutions and renowned media outlets in H1, bringing the total number of honors to 314, fully reflecting industry recognition for our products as well as technical strength and influence. These honors include KPMG China's leading Fintech 50 and Emerging 50, top 50 overseas service agencies for Chinese enterprises by Cailian Press, annual leading financial services platform by the economic observer, and excellent solution in risk control and compliance by the financial innovation achievement in the Greater Bay Area. As we go further into 2024, technology and industry revolution continues to evolve. New quality productive forces with artificial intelligence as the core is accelerating to lead the high-quality development of industries. We firmly believe that the financial industry has the best use cases for artificial intelligence plus and will be a strategic focus for new quality productive forces. OneConnect will continue to empower the upgrade and transformation of the financial industry with technological innovation. In addition to optimizing high-quality offerings such as AI voice assistant, omnichannel agent solution and smart credit lending system, we will also leverage our sufficient cash reserves to invest in R&D of cutting-edge technology products to satisfy the core demand of financial institutions for various business productivity improvements by supporting them to improve efficiency, optimize services, reduce costs and risks and ultimately empower the upgrade and transformation of the financial industry. And lastly, thank you for your attention and support. Next, I will hand it over to Mr. Luo to give you a detailed introduction of OneConnect's financials in Q2 and the first half of 2024.
Yongtao Luo
Okay. Thank you. Good evening, everyone. As previously reported, we completed the disposal of our Virtual Banking Business to Lufax for a consideration of HKD 933 million in cash on April 2, 2024. As a result of the disposal, the historical financial results of our Virtual Banking Business segment have been reflected as the discontinued operations for the first half of 2024 and for the comparative period in 2023. On the other hand, the historical financial results of the remaining business have been reflected as a continuing operations. The financial information we will soon cover is presented on a continuing operations basis, unless otherwise especially stated. Since the start of this year, our focus on improving resources and capital allocation efficiency has generated solid results. We delivered revenue from continuing operations of RMB1.416 billion in the first half of 2024, a decrease of 22.8% compared to the same period last year. Revenue generated from third-party customers decreased by 15.9% to RMB480 million in the first half. But it's worth mentioning that revenue contributed by overseas customers during the first half year increased by 14.8% year over year, a testament to the effectiveness of our overseas market expansion strategy. Our top line decrease reflects our decision to adopt quality growth strategy and reduce low-margin customized projects. We are encouraged to see that the gross margin for the first half remained relatively stable at 37.1% because of this strategy and non-IFRS gross margin was 39.4%. In the second quarter, we completed the sale of our Virtual Banking Business to refocus resources on our core business, resulting in a onetime gain recognized from the disposal in the amount of RMB260 million. This contributed to our net profit from continuing and discontinued operations attributable to shareholders of RMB139 million compared to a net loss of RMB190 million for the same period of the prior year. And the corresponding net margin improved by 20.2 percentage points year over year to 9.8%. Now let's turn to our revenue mix. Our third-party revenue contributed 34.2% of total revenue in Q2 2024, an increase from 33.6% in Q1 2024 and 30.4% in Q2 last year. The uncertain macro environment and the strategic adjustment of our revenue structure did have an impact on our revenue, which was mainly reflected in a decrease in revenue from business origination and operation support services in the second quarter. Third-party revenue growth remains a key focus of our second-stage strategy. Once macro pressures subside and as we continue to advance our leadership initiatives, we believe revenue from third-party will improve. We're also glad to see that our overseas business sustained its strong momentum in the second quarter, making up for the shortfalls of the temporary reduced demand for certain products and services domestically. In the second quarter, revenue from Lufax decreased by 25.5% to RMB54 million and contributed 7.9% of our total revenue. The revenue decline from Lufax was mainly due to Lufax business operation optimization, resulting in lower demand for our business origination, risk management and implementation services. Revenue from Ping An Group decreased by 30.9% to RMB401 million and contributed 57.9% of our total revenue. As always, OneConnect regard Ping An Group as our most important flagship customer. Our services to Ping An Group also have a proven record of success. For example, in the area of AI technology services, Ping An Group has enabled AI agents through our AI technology to optimize and transform business processes to improve operational efficiency and the customer experience. Our products and services provided to the Ping An Group are robust and comprehensive. Moving on to revenue mix by business type. Implementation revenue decreased by 27.7% year over year to RMB169 million, mainly due to a decline in demand for implementation of financial services system domestically. Revenue from business origination services decreased by 69% year over year to RMB10 million, primarily due to a decline in transaction volume from loan origination systems and their digital credit management solutions. Revenue from risk management services decreased by 15.9% year over year to RMB61 million, mainly due to a decline in transaction volumes from banking-related risk analytic solutions. Revenue from operation support services decreased by 47.3% year over year to RMB131 million, which was primarily due to a shift in business model for a number of auto ecosystem service providers where we transmission from acting as a contractor to a platform provider. Revenue from cloud services platform was RMB289 million, a decrease of 10.3% year over year in the second half -- in the second quarter of last year, mainly due to decreased transaction volumes of cloud services. Revenue from post-implementation support services and others increased by 8.2% to RMB32 million. As you can see, our businesses are diverse, and we are developing additional products and services around the core technology for business solutions in the financial service industry. We remain committed to diversifying our product mix. Let's turn to revenue mix by product segment. Gamma Platform segment revenue accounted for 67.2% of our total revenue decreased by 9.4% year over year in the second quarter 2024, primarily due to reduced demand of our cloud services. Digital banking segment revenue, which accounted for 14.5% of total revenues reduced by 57.4% year over year, mainly due to a decline in transaction volume from business origination and risk management services, reflecting our continued effort to face out lower-value products. Digital insurance segment revenue, which accounted for 18.4% of total revenue decreased by 33.3% year over year, primarily due to the change of business model in auto ecosystem, as I just mentioned. Let's now take a look at customer numbers. Premium-plus customers decreased to 93 compared to 121 for the same period last year. Despite the decrease in the short term, we believe the further advancement of our initiatives will help attract more Premium-plus customers to use our products and services in the long [roadmap]. Now let's take a look at the gross margin for the quarter. Our gross profit reached RMB253 million in Q2 2024 with gross margin decreasing slightly year over year by 0.9 percentage points to 36.6%. On non-IFRS, the gross margin was 38.8%. We do stick to quality growth strategy and we continue our efforts to achieve our profitability target for our continuing operations. Moving on to our expenses and net loss. You can see that we are well on track to reach our midterm target of profitability. First of all, our research and development expenses came down to RMB186 million from RMB252 million in the prior year. In the second quarter, we continued implementing our Stage 2 strategy that focuses on product integration as we upgraded and integrated our products, we further improved our product delivery efficiency. Looking ahead, we will keep investing in research and development at a more measured and reasonable pace to enhance our product competitiveness in the market. Our sales and marketing expenses for Q2 decreased to RMB42 million (sic, -see slide 20, "RMB44 million") compared with RMB57 million in the prior year. The decrease in sales and marketing expenses mainly benefited from our enhanced sales capability and marketing efficiency. Our general and administrative expenses decreased to RMB66 million from RMB93 million in the prior year. As a percentage of revenue, it decreased to 9.5% from 9.9%. As a result, our net loss from continuing operations attributable to shareholders narrowed significantly by 59% year over year to RMB17 million for this quarter. And the profit margin improved by 2 percentage points. Including the discontinued operations, we achieved net profit attributable to shareholders of RMB243 million in Q2 2024 as we recognized the gains from the sales of our Virtual Banking Business, as I just mentioned. We are very glad that the company achieved profitability for the first time in its history during the first half of this year. While this includes a onetime gain from the sale of the Virtual Banking Business is still an integral part of our operations, and it is a significant milestone for our company. Now looking forward to the rest of the year, we continue to see a degree of unpredictability in the market. Meanwhile, as previously announced, we started to phase out our cloud services gradually from July and expect the discontinuation will impact our top line performance for the second half and full year of 2024. Besides that, our focus remains on improving third-party revenue by strengthening the competitiveness of our products and services. We will continue to enhance our gross margin, focus on cost controls and expand overseas markets to stay on our path to achieving midterm profitability. Next two pages, we listed key financial metrics of the second quarter of 2024, including the figures from discontinued operations, the Virtual Banking Business in Hong Kong. Lastly, we summarized the adjustments in non-IFRS gross margin for your reference. That concludes our prepared remarks. Thank you. Back to you, Rick.
Rick Chan
Thank you. Thank you, Mr. Shen. Thank you, Mr. Luo. Operator, we are open for questions. Please open the line.
Question and Answer Session
Operator
(Operator Instructions) Judy Zhang, Citigroup.
Judy Zhang
(spoken in foreign language) Let me translate. I have two questions. The first question is we thought the company has already realized the profit -- has already made profit in first half. So I may ask like whether the company have the dividend payment -- dividend payout plan? And secondly, it's regarding the overseas business. Can management share with us the strategy for the overseas business? And also, is there any like overseas business revenue growth target this year?
Rick Chan
Thank you, Judy. For the first question about the dividend, Mr. Luo will take the first one. And the second question as to the strategy of our office expansion, Mr. Shen take this question. Mr. Luo, please.
Yongtao Luo
(interpreted) I'll answer your first question on dividend payout plan. We are very pleased to see that the company has achieved positive earnings for the first time in history. Although this includes one-off contributions from the sale of PAOB, it nevertheless is an integral part of our operations and making profit is a significant milestone to us. At the same time, we are glad to note that net loss from continuing operations attributable to shareholders improved to CNY70 million, a significant year-on-year decrease of about 38%, which means we are another step closer to our midterm profitability target. As we believe we are still at a crucial stage of development, we can generate higher value for shareholders through sustainable and healthy development if we focus more on third-party revenue, R&D and innovation as well as overseas expansion. We will take into account all these development needs, financial position, regulatory requirements and the rewards for our shareholders when we consider dividend payout plans. And we will also keep the market updated if there are any new developments.
Chongfeng Shen
(interpreted) Next, I'll answer your question about our overseas business. Revenue from overseas customers increased by 14.8% and share of third-party revenue and its share of third-party revenue exceeded 20% in H1. Growth momentum in Hong Kong, China, Southeast Asia and South Africa is very strong as we actively expand overseas market, sales network, customer engagement as well as innovate cooperation model. We, therefore, remain confident about double-digit growth in overseas revenue. For our future overseas development, we mainly focus on markets such as Southeast Asia, Hong Kong, China, South Africa and the Middle East. Business-wise, our first focus would be for banking solutions. We successfully landed a top Philippines bank in H1. That is our strategic customer, CIMB. And then for our next move, we will expand markets such as the Philippines and Thailand to export the -- to export our smart credit lending system overseas. For insurance business, based on our successful experience with Old Mutual, we were able to land Well Link Insurance, replicating our omnichannel agent projects. For Hong Kong market, in addition to broadening customer engagement, we will also expand to financial industry and government partners on top retail banks, life insurers and small lending companies are among our target customers. We will also tap into Hong Kong headquarters through foreign banks operating in China. For our next step, we will develop deeper insights into the demands of overseas market and form integrated solutions of our offerings. For instance, we will focus -- we will try to export P&C solutions, auto financing solutions, AI voice assistance, our eKYC products and so on and so forth. Thank you.
Operator
(Operator Instructions) e currently have no further questions. So I would like to hand it back over to Rick for any closing remarks.
Rick Chan
Thank you, operator. Thank you, everyone, for joining the call today. And if you have any questions, feel free to contact IR team, and we appreciate your interest in following us and look forward to speaking with you again. Thank you. Have a good night.
Operator
Thank you for joining today's conference call. I can confirm this has now concluded. Thank you again for joining, and you may now disconnect your lines.
Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the company sponsoring this event.
