LexinFintech Holdings Ltd. (LX) Q2 2022 Earnings Report, Transcript and Summary

Thank you all for standing by, and welcome to the LexinFintech Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. And I would now like to hand the conference over to your speaker, Ms. Echo Yan, IR Director of LexinFintech. Thank you. Please go ahead.

Thank you, operator. Hello, everyone. Welcome to Lexin's second quarter 2022 earnings call. With us on the line today are our CEO, Jay Xiao; CFO, Sunny Sun, and CRO, Jayden Qiao. Before we get started, I'd like to remind you that the call and presentation contain business outlook and forward-looking statements, which are based on assumptions as of today. The actual results may differ materially, and we undertake no obligation to update any forward-looking statements. Jay will first provide an update on our performance, Sunny will cover the financial results in more detail and lastly, Jayden then will discuss risk management. I'll now turn the call over to Jay. His remarks will be in Chinese, and English translation will follow. Jay, please?

Hello, everyone. It is my pleasure to talk to you again and share our second quarter 2022 earnings performance. In the second quarter, total loan originations reached RMB49.1 billion, up 13.9% quarter-over-quarter. Total operating revenue was RMB2,410 million, up 40.9% quarter-over-quarter. Net profit was RMB167 million, up 105.5% quarter-over-quarter. Number of both active users and new active users were higher than those were in the first quarter. Funding cost continued to decrease and risk indicators remain stable. Our CFO and CRO will provide more details later. The growth in the second quarter was mainly due to the recovered performance of our business in June. In June, the company delivered RMB18.4 billion loan originations. The contribution percentage of loan originations from low risk trading customers increased by 15 in June compared with that number in March. While the risk of new loans was continued to be improved, by the end of the second quarter the percentage of 24 weeks was over 80% and we are capable to meet our relevant compliance rules and regulations. The data in June has shown that we have returned to a steady growth trajectory and growth trends will continue. The growth in June is mainly due to the timely adjustment of our business strategy. In the first five months of this year, with the resurgence of the pandemic and associated macroeconomic pressure, we did not only pay attention to the sale of, but adopted a more prudent business strategy. At the end of May with adjustment of pandemic prevention policies and social and economic recoveries, we gradually have adjusted our strategy and fully restored the credit potential of our existing high-quality customers. Based on our huge user base, we achieved notable results. The specific business strategy adjustments can be summarized as three major initiatives. The first is to increase the proportion of high-quality customers while decreasing high risk customers. In the past few months, especially in April and May, when the pandemic was severe and macro economy was under pressure, we were prudent in loan originations and took the initiative to control the scale. Although, the impact of the pandemic was in fact greater in the second quarter than in the first quarter, our risk performance was generally stable and quality of new loan originations was better. 90 days delinquency rate was 2.63%. The overall day-one delinquency rate has continued to decrease since last December. And in July, it dropped 11% compared with the average number in the first quarter. The 30-day collection rate was consistently above 90% compared with May early indicators of new loan originations in June have decreased by over 15%. In fact, we further improved the quality of customer acquisition. Number one, we have large targeted high-quality customer acquisition programs for young professionals, modern youth and urban white collars. Number two, Lexin and Puhui team has leveraged the strength of its offline test to attract more high-quality customers for micro-loan with that product. Number three, we have upgraded the core modeling capabilities with partner institutions to further improve the quality of our applicants. And at the same time, we have introduced more high-quality data sources to strengthen our ability to identity first platform users. Number four, we have adjusted the customer acquisition spend based on demographic differences in – the impact of pandemic resurgence. These are the main measures that we respond to the COVID resurgence and have made us better prepared to cope with challenges in the future. Third, we strengthened the segmentation operation of existing high-quality customers. Based on the user data accumulated by Lexin and external data sources, we divided customer into several segments and have conducted several benches of AB technique to fully validate the effectiveness of the operation strategy of the sub customer groups, which helped us to significantly improve operating efficiency. For example, the per capita contribution of the premium customer groups was 60% higher and ARPU was 20% higher. The specific initiative include, number one: In terms of date, we have comprehensively strengthened the coverage and application of the PBOC credit modeling through which we were able to establish a new model that contains more complex labeled dimensions and an improved accuracy of identifying high-quality customers by more than 25%. Number two; in terms of technology, we have improved our user identification capabilities and operational efficiencies through various models. We upgraded our profitability of before risk model and thanks to more precise customer segment managements, also optimization and the introduction of more data sources, the accuracy of model identification was improved by more than 20%. We expanded the applications of external data with financial institutions in various ways. [Technical Difficulty] federated learning and joint model and improve the identification ability of late bucket customers group through model integration and strategy application. [Technical Difficulty] of developed user building these models, marketing strategy model et cetera become more accurately identify high willingness and high-quality users, thus we were able to save advertising costs by 60% while achieving same loan volumes. The business strategy of adjustment improved was with good results, mainly due to the four core capabilities we have accumulated in the past nine years. First, user operation capability is mainly reflected in our accurate identification of high-quality customers and segmentation operation, which allows us to meet them at different stages through different products and services. Second, the ability of risk control is mainly reflected in our ability to continuously improve our user identification and operation. We have introduced a more high-quality external data further analyzed internal user behaviors iterates the risk control model at a pace and continuously improve the efficiency and accuracy of hypothetical testing. Third, the ability of funding is reflected in our funding cost control and partner expansion. The current funding costs continue to decrease since February this year and over the past one-year, a number of our financial partners have continued to expand. Currently, we have cooperated with more than 130 financial institutions. Finally, I would like to elaborate on data and technology capabilities. Lexin's R&D investments has been industry leading. In the second quarter, we invested RMB150 million in R&D, up 18.5% year-over-year. We have integrated the technical capabilities we have accumulated over the years and upgraded them into Lexin's smart business engines. It not only provides a full set of intelligent analyze and the decision-making team, but also helps the business to back rapid operations and iteration and greatly improve the efficiency of decision making and business operation. Smart business engine has already taken effect in our daily operations. New addition to the aforementioned customer segment operation strategy, [Technical Difficulty] has also brought operating efficiency improvement to our offline Puhui team. With help of the digital operation tools of the engine, the contribution of each employee of our Puhui team has increased by 30% and scale of SMEs has increased by 50%. Note these trends in consumption scenarios customer segment and full profitability are integrated into our business, which forms a self reinforcing loop that required Lexin's echosystem. Lexin's unique high frequency and high repeat rate consumption scenarios such as Sentinel and Maiya, our installment payment ecommerce platforms put Lexin's in the advantage of having more high-quality customers. Our high-quality customer base will continue to increase the scale and process of Lexin's core business. The increase in scale and process of core business allow – to data launch thus to improve the model and technical capabilities. The advanced technology and risk control capabilities allow Lexin to further provide services to our financial institutions and merchants. Sharing capabilities with financial institution partners and merchants than allow us interconnect with more funding pools and scenarios. The advantage of abandoned scenarios allow us to gain more high-quality customers and the cycle starts again. This is also our unique and long-term competitive advantage. We are confident in our business strategy and long-term development. The company and management teams share repurchase programs will remain in execution; therefore, we will provide more details later. Finally, I would like to talk about Lexin's corporate social responsibility initiative. In response to the pandemic resurgence in the second quarter, we launched a specific program, to help SMEs to deal with their cash liquidity challenges. In the second quarter, the amount of small and micro-loans was RMB5.4 billion. For SMEs, more affected by the pandemic resurgence will also took a number of matters to help them hide over the difficulties. Looking at the recovery in June, it continued in Q3, and our loan origination guidance in Q3 will be RMB53 billion all above. This guidance reflects the company’s current expectation which is subject to change. Let me now hand over the call to our CFO for financial update. Thank you.

Thank you, Jay. Good morning, and good evening, everyone. It's my pleasure to speak to you again. Our business was under pressure due to unforeseen regional COVID surge in April and May, but thanks to the determination and effective measures taken by the government and the society as a whole. The pandemic has been contained gradually. In addition, we are also encouraged and inspired by multiple macro stimulus adapted by various government bodies that will boost consumption and credit business. We stay committed to our strategic priorities of enhancing and diversifying the revenue structure while strengthening operational efficiency and optimizing our risk assessment capabilities. Our sustained efforts on technology innovation and digital transformation have shown more visible results this quarter. Let me now go through some key financial performance of the second quarter. I'm delighted to report that total loan origination in the second quarter was RMB49.1 billion, representing a 13.9% increase quarter-over-quarter. The outstanding loan balance stood at RMB86.6 billion, representing a 3.3% increase compared with last quarter. While the management team is not completely satisfied with this topline result, we are encouraged by the positive momentum. Total operating revenue was RMB2.4 billion, representing a 40.9% increase quarter-over-quarter. Revenue from new consumption-driven location-based services was RMB538 million, an increase of 69% from the first quarter of 2022 and an increase of 32.2% from the same period of 2021. Revenue from technology-driven platform services was RMB436 million, representing a 12.3% decrease quarter-over-quarter. Revenue from credit-driven platform services was RMB1.4 billion, representing a 60.4% increase quarter-over-quarter. As you might have noticed, we reorganized our revenue segmentation since Q1 this year. This is a better reflection of the quality of our revenue and the diversified nature of our businesses. The contribution from noncredit-driven services was more than 40% of the total revenue this quarter at RMB974 million, having grown at 19.4% quarter-over-quarter. This is in line with our long-term strategic goal of building up a more risk tolerant and high-quality revenue structure. In compliance with government guidance, loan pricing in Q2 continue to fall and got closer to 24%. Through the end of June, mix within 24% APR reached 81.1%, a 3.3% increase quarter-over-quarter. Let me move on to the expense side of the second quarter. Sales and marketing expenses increased by 32.5% quarter-over-quarter, but decreased by 3% year-over-year to RMB477 million. As you know, in Q1 guided by our quality over quantity operational priority, we scaled back our advertising costs, especially in areas that were likely affected most by COVID. This quarter together with gradual improvement of the macro environment and the containment of COVID situation, we increased our marketing promotion expenses at certain level compared with previous quarter to drive future growth, but still stay [Technical Difficulty] overall spending. Research and development increased by 1.3% quarter-over-quarter and 18.5% year-over-year to RMB155 million, reflecting our continuous investments in upgrading of our technology capabilities. G&A expenses went down by 3.3% quarter-over-quarter and 6.4% year-over-year to RMB130 million. Just like the first quarter, it went down both year-over-year and quarter-over-quarter demonstrating the continuous improvement of our operational efficiency. Net profit was RMB167 million in the second quarter. This is 105% increase quarter-over-quarter. Since we have taken a more prudent approach to reflect risk in the first quarter by stepping up the day-one provision based on the current external situation, we expect that our profit will continue to follow an upward trend in the second half of this year. Next, quick updates on our share repurchase program. On March 16, 2022, the company’s Board of Directors authorized a US$50 million share repurchase program. As of June 30, 2022, the company had repurchased approximately 13 million ADSs for approximately US$31 million under this program. The share repurchase program demonstrated our confidence in certain long-term potential and the management team remains open-minded about expanding the share buyback program in the future, should we deem appropriate and as a way of giving back to shareholders. I'd like to emphasize our unwavering determination to see through both the current execution and the long-term strategy of adequate investment in technology and operational optimization as priorities to drive long-term sustainable business development. Finally, as we mentioned earlier, and also mentioned by Jay, even though we have experienced some headwinds in the first few months this year due to the resurgence of COVID, we never stopped our efforts of advancing our capabilities in better serving our customers and advancing our business models. Looking ahead, based on the current information at hand, we are cautiously optimistic about the performance of second half. We expect the loan originations for the third quarter to reach RMB53 billion. We will continue to pursue a sustainable and resilient business approach and will also be alert of any material signs of external changes that might impact our business and well reflect – and well react quickly and responsibly. With that, I will turn the call over to our CRO, Jayden. Jayden, please.

Thank you, Sunny. Good morning and good evening, everyone. Let me elaborate more on the risk management front. In this quarter, we remain cautious on our credit risk approach with several major cities and their surroundings hit by COVID for the first half of the quarter. On our customer acquisition side, we have prioritized the quality over quality tactic by adopting a more comprehensive and robust monitoring system, which allowed us to adjust our strategy in response to COVID more dynamically throughout the process from acquisition to portfolio management. We have been seeing positive results from such action as our risk level was controlled to a rather small right compared with our peers. The overall day-one delinquency rate has been down for seven consecutive months and down by 11% compared with the first quarter this year. Our customer portfolio has grown stronger as the 24% adjustment progress. Moreover, as Jay mentioned earlier, the enhancement in customer segmentation and risk assessment models enabled us to focus on high-quality customer segments and increased loan volume contribution from lower risk borrowers. The 30-day collection rate has recovered since May from a modest decline in March and April as the impact of the COVID hit subsided. We have been making advancements in our customer behavior analysis model to provide higher collection efficiency, while simultaneously carrying on with the practice of a more spread out collection team to reduce impact brought by potential regional COVID surges in the future. We are in a solid position to respond more rapidly and accurately with fewer possible obstructions. Increasing 30-plus delinquency was within the range of expectation to [4.85%] versus 4.4% at the end of March. It was mainly due to the impact of COVID-related circumstances in April and May, and the more prudent credit policy leading to modest growth of the outstanding loan balance compared with the fourth quarter. But as Jay mentioned earlier, we are putting more effort and resources into existing customers of whom we have a clearer credit performance record. To strengthen our resilience, early indicators have already demonstrated that our risk level on new loans has been lowered by over 15% as the trend expected to continue in August. We expect the 30-plus delinquency to have peaked in the second quarter. Finally, I would like to stress that we have evolved with a more sophisticated risk management system from our experience dealing with the COVID outbreaks and economic fluctuations. We are now better prepared for any external uncertainty and complexity that should happen in the future. Thank you.

This concludes our prepared remarks. Operator, we are now ready to take questions, please.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Yada Li at CICC. Please go ahead.

[Foreign Language] Okay. Then I will do the translation part. So the first one is about our new consumption services, and I was wondering how to view the development so far in 2Q 2022 and going forward. And could you please give us more color about the business model of Maiya? And I'd like to know like how much it will contribute to our total revenue in the future? And the second question is about the change of our operational data disclosure, for example, the total GMV. And I was wondering if you could elaborate more about it and what are the main drivers of sales management?

[Foreign Language]

Let me try to translate. In the first half of this year, it was very true that we experienced some headwinds of the COVID, which definitely brings some pressures to the new consumption business. However, meanwhile in the first half months with our investment and strategy adjustments, we actually drive our new consumption business quite well, and we can see that either under some pressure, our [indiscernible] and Maiya business have delivered some quarter-over-quarter – both quarter-over-quarter and year-over-year increase. Especially during the mid-year promotion of June 18 compared with the same period last year, our performance actually increased by 30% to 40%. So with our continued investment and in-time adjustment of our strategies to this new consumption business, we definitely see our performance increased gradually. And if we look at our Maiya offline business, we have not only provided services offline to the stores and we actually issued and launched our – to help with brand as well. And in the second quarter, our Maiya APP after it was launched, it was well received. And with this both offline and online capabilities, we can provide more diversified and better services to our merchant account. And we can see that – after the launch of our Maiya APP, over 50% of our transactions have been delivered by online, and we are also seeing that this model is well welcomed by our current customers. And we can meanwhile also see that witness of paying is also very encouraging. And actually, we can charge a 30% take rate. And with the current progress, we are fully of confidence with our new consumption business rolls in the future.

[Foreign Language] So let me translate this myself. I think the question earlier was about the new disclosure approach towards the GMV – e-commerce GMV. And this is a reflection of our reorganization of our revenue and this new disclosure approach reflects only our new consumption-driven LBS services. So GMV and also our revenue exposure, the adjustments are the same and the approach are the same.

Thank you, operator. Next question, please.

Certainly. Our next question comes from Alex Ye from UBS. Please go ahead, Alex.

[Foreign Language] I'll translate for my question. First one is on the sales and marketing expense. So the new borrower sales and marketing expense has increased quite significantly compared to the previous two years almost at a doubling growth. So I'm wondering what are the key drivers behind. Is it more due to the fierce competition or due to a tightened credit approval, or is there any other more of one-off reasons, and looking ahead what should be the kind of a normalized level we should expect? And second question is on asset quality. So the company has been focusing on quality for a while, and management has mentioned about some improvement in day-one delinquency, but so far, we haven't seen much improvement from the vintage curve or your disclosed FPD everyday plus delinquency chart. So I'm wondering when could we start to see this kind of asset quality improvement starting to be reflected into your financials, including your take rate and your topline? Thank you.

[Foreign Language]

Let me take the first question in terms of the sales and marketing acquisition costs. There are mainly two reasons of the increase of customer acquisition costs. The first one is definitely the macro economy pressure associated with the COVID resurgence. During the period, we were taking a prudent approach to control the scale and be more prudent in terms of the approval rate thus we can further improve and manage the quality of our newly originated loans. And the second is, as you all know, we are adjusting our pricing from 36% to 24%. And during the process, we are in the progress of optimize our model and RTA, and first, in the certain period of the process, the acquisition cost also increased.

[Foreign Language]

I'd like to take the opportunity to share the trend and several approaches we are going to take in the future. First of all, we will definitely increase our capabilities of the filtration and the pre-recognition of our customers. And we continuously increased our RTA model. First, we can more accurately to identify our customers quality and behaviors. And second, through our segmentation management of our customers, we can provide better services to our high-quality customers. And as we just mentioned that we have divided more precisely of our current customers into several such as the town use, the urban white collars and as well as comparatively speaking, these customer groups, their quality is good while the competition environment is relevantly stable. So it will also help us to control the cost.

[Foreign Language]

The second initiative we are taking is to leverage our offline Puhui team. Currently, each offline Puhui team employee can – in average bring one or two customers. And if we calculate the cost per person, the cost is actually lower than the online cost. And the third, besides continued optimization of our online investment, we also seek the opportunities to develop some non-standardized channels to acquire traffic and this non-standardized of non-traditional channels to get traffic is not that much impacted by the abating policies. Short-term, the increase of our customer acquisition cost is still mainly due to our modeling adjustment to better understand customers and to pursue the high-quality customers. From the long-term perspective, after we opt – together with our process of optimizing every relevant model and approaches, we believe our customer acquisition cost will decline in the future.

[Foreign Language] Okay. I am going to translate what I just said. As Jay mentioned in his presentation, all our early indicators towards the end of the second quarter, especially in June and August – July and August have indicated downward trend. So basically all the early indicators of the risk performance indicators have pointed to an improving credit quality. However, for these early indicators to translate into a longer term more stable indicator, it takes time. For example, what we released in our FPD30 indicator is with the number that has full performance period only showed the performance in May. If you look at the May performance compared with March – end of March, the improvement is around 10%. But if you look at the June performance, even though the FPD30 has not yet fully reviewed, the improvement is close to 18%. So what I'm saying is for the FPD30 indicator and the vintage loss numbers to fully reflect our recent quality improvement, it takes time. So in the next one or two quarters, you can see – you can expect to see the improvement. Thank you.

Next question, please.

That's good for me. Thank you.

Thank you. Our next question comes from Hans Fan of CLSA. Please go ahead, Hans.

[Foreign Language] So I got two questions regarding the regulation. The first one is on the APR cap. Management just mentioned that the APR less than 24% already counts for more than 80%, which is good. But just wondering when are we targeting to achieve full compliance in terms of all the existing loans priced below 24%? So that's first question. And second question is more about the decoupling of direct link, I mean, the data feeds from launching to the banks. The progress we learned from peers looks like it's pretty slow. So just wondering what's our plan and when do we expect to complete, or at least have some kind of practice regarding the decoupling of direct link and how's the regulator viewing our plan? That's our question. Thank you very much.

[Foreign Language]

Talking about the 24 pricing policy, we do say it's rather a guidance from government instead of requirements of loans. Currently, the difference in local authorities have different deductions in terms of this policy. And you can see that in the second quarter, we have already have had more than 80% of our pricing is within 24%, which demonstrate our capabilities to adjust our pricing further. Currently, we still keep a small amount of the business pricing above 24%, is still due to some local demands. So as we just mentioned that the company is capable enough to further adjust pricing to 24% or within 24%. But currently, we have no targeted timeline of that. And in terms of the impact to the take rate, I have to say, there is no much difference of the performance of above 24% or below 24%. And the impact to profit is also kind of similar. In Q2, our pricing is already very close to 24%. And in the future, we definitely have the capabilities to further adjust to 100%, but currently, we have no timeline for that.

[Foreign Language]

The regulation in terms of the disconnection, I want to emphasize is that our progress is actually very fast and in pace is now slower than our peer companies in the industry. And to be honest, as everybody knows that there are two partners or bureaus can provide relevant cooperation with us. We actually already have – already have cooperation with them and have a different plan ready to connect it if the official requirement is issued. However, if we have looked after the recent issue, the 14 documents, but authorities actually – the discussion – these connection policies actually being extended for more than one year, and we actually interpret this policy as a positive signal. To be honest, currently, there is no official requirement or instructions have been issued by authorities. We believe that the authorities and the relevant government or bureaus are also considering this kind of requirements seriously, and considering the impact to the players in the industry, especially the medium and small banks as well as the impact to the economies of China, especially during such a special period. However, as I just mentioned, we integrate this policy from a positive perspective and we are fully prepared to corporate with the partners in the future. And our current pricing policies are actually ready in place to go if the specific requirement is issued.

Thank you. That's all the time we have for questions today. I will hand back to management for closing comments. Thank you.

Thanks, again, everyone, for joining us today. If you have further questions, please contact us offline. Our contact information is available on our website. Thank you.