Yiren Digital Ltd. (YRD) Q4 2016 Earnings Report, Transcript and Summary

Good morning and welcome to the Yirendai Fourth Quarter and Full-Year 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Matthew Li. Please go ahead.

Thank you. And welcome to Yirendai's fourth quarter and full-year 2016 earnings conference call. Our earnings press release and the supplemental presentation slides are now available on our website. Hope you all had the chance to review the materials by now. Today's call features presentations by our Chief Executive Officer Ms. Yihan Fang, and our Chief Financial Officer Mr. Dennis Cong. Mr. Huan Chen, Director of Yirendai and Chief Strategy Officer of CreditEase and Mr. Yang Cao, our Chief Operating Officer and Chief Technology Officer will join the presenters in the Q&A session. Before beginning, we would like to remind you that discussions during this call contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Such statements are subject to risks, uncertainties and factors that may cause actual results to differ materially from those contained in any such statements. Further information regarding potential risks, uncertainties or factors is included in Yirendai's filings with the U.S. Securities and Exchange Commission. Yirendai does not undertake any obligation to update any forward-looking statement, except as required under applicable law. During this call, we will be referring to several non-GAAP financial measures as supplemental measures to review and assess our operating performance. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with U.S. GAAP. For information about these non-GAAP measures and reconciliation to GAAP measures, please refer to our earnings press release. With that, I will turn the call over to our CEO. Yihan, please begin.

Thanks, Matthew, and thank you all for joining the call today. 2016 was a milestone year for the online lending industry in China. The overall industry continue to grow at a remarkable rate, despite increased regulation and further market consolidation as the number of functional players continues to fall. We have also observed more online platforms shifting towards serving lower quality borrowers with small short-duration loans. We have clearly positioned Yirendai differently as the go-to platform for prime borrowers, with our products and services targeting urban salaried workers with credit cards. We had another strong quarter with loan origination volume increasing by 19% sequentially and 102% year-over-year to RMB 6.7 billion. Our full-year 2016 loan origination volume increased 112% year-over-year to RMB 20.3 billion. Meanwhile, accumulated loan origination volume to RMB 32.3 billion and outstanding loan balance to RMB 20.8 billion. During the quarter, we facilitated loans to more than 110,000 qualified borrowers, 57% of these borrowers were acquired through online channels, accounting for 37% of loan origination volume during the quarter. 99% of the loan volume acquired through online channels was facilitated through mobile. As of December 31, 2016, we have cumulatively served more than 500,000 borrowers through our online marketplace. During the quarter, we served close to 200,000 investors, of which invested through our online channels with 85% of them using our investor mobile application. We executed a number of initiatives throughout the year to drive the strong growth momentum of our business. I'm proud to say we made remarkable achievements on many fronts, such as credit underwriting, risk management and product development. Over the past year, we further strengthened our credit underwriting and risk management by expanding the amount of data sources we use in our analytical systems, fine-tuning our risk policies and decision-making endings [ph], and enhancing our anti-fraud systems. We upgraded our FastTrack 1.0 product by using credit card payments directly from banks, which significantly reduces the possibility of fraud. In 2016, we also launched several new products to cater to the rapidly changing needs of our expanding customer base and increase our geographic reach, including housing provident fund, life insurance and repeated volume products. On investor side, our targeted market is the massive online population of mass affluent. As of the end of 2016, we have cumulatively served close to 900,000 investors. In December 2016, we presented cost saving third-party wealth management products on our investor mobile app to provide the extended array of investment options to investors. We believe this is an important initiative to retain customers for their asset allocation needs. We've seen concrete progress made in terms of regulatory developments and industry consolidation, since the issuance of the interim measures of 2016. The regulatory frameworks is expected to be established as one measure plus three guidelines, which include guidelines where recordation and registration as well as the Fund Custody Arrangements for Online Lending Information Intermediary Institutions, which is already in place. We expect regulators to issue further guidelines, for information disclosure practices going forward. We believe these regulations will create a rapidly growing more rationale and healthier online lending marketplace in China. 2017 will be a crucial year for the online lending industry in China. [Technical Difficulty] compliance with regulatory requirements and obtain certification as early as possible. At the same time, we'll devote significant resources to increase our brand awareness and recognition to make Yirendai the brand of choice for the massive online population of mass affluent investors and the prime customers with borrowing needs. The continued consolidation of the industry provides enormous growth opportunity for leading platforms such as Yirendai. We will continue to drive the growth of our existing products and develop new technology driven one to seize future business opportunities. We are developing our new products for borrowers acquired from offline channels. This new product will offer a monthly fee collection schedule. We believe this new product will further improve our user-experience and significantly enhance our competitive advantage. We will focus on partnership expansion in 2017. We are actively working in collaboration with consumption verticals and industry solution providers to offer our services to target customers on platform. In addition, we recently launched the Yirendai Enabling Platform, which allows partner companies to leverage our financial technology capabilities such as data collection, anti-fraud intelligence and customer acquisition techniques. By leveraging the Yirendai enabling platform to offer our services to partners, we'll not only further optimize anti-fraud technology, but also add additional revenue streams. Furthermore, we are actively negotiating with several banks to diversify our funding sources and reduce funding costs. We are transitioning into a comprehensive online financial services platform that offers diversified portfolio of services to cater to various customer needs regardless of what stage in life they're at. Yirendai has served over 1 million borrowers and investors with financial transactions. There are in fact many more users that have approached us but weren't able to take advantage of our services due to segmentation and the transaction nature of our services. Going forward, we'll actively enhance customer engagement by offering more products, features, and tools provided through Yirendai and its select partners to attract new users and increase user stickiness. With our solid strategy in place, we're confident that we'll be able to maintain a strong growth momentum of our business and further enhance our marketing leadership. Finally, I like to take this opportunity to introduce a new member of our senior management team. Earlier today, we announced the appointment of Dr. Yichuan Pei as Chief Credit Officer, will be responsible for the overall management with our credit department. Dr. Pei brings with him over 26 years of experience in the financial industry, from consumer lending risk management, credit product marketing management, asset-backed securities valuation in the United States. We warmly welcome Dr. Pei to join our team. With him assuring the new role, we're very confident to further enhance our market leading capabilities of credit underwriting and risk management. Dr. Pei will also work closely with our Chief Risk Officer, Ms. Yiting Pan to manage the risk management department. Ms. Yiting Pan is expected to transit from her current position as Yirendai's Chief Risk Officer into a new role with a CreditEase and relocate to the U.S. at the end of Q2 2017 due to personal reasons. Dr. Pei will take over the full responsibilities of risk management and assume the Chief Risk Officer position at end of the transition period. We like to express our sincere appreciation to Ms. Yiting Pan for her outstanding contribution for risk management during her tenure. We wish her all the success for the new role with CreditEase in the U.S. I'll now hand the call over to our CFO, Dennis, to discuss our Q4 and full year 2016 financial results.

Thanks, Yihan. Hello, everyone. Now, I will go over our fourth quarter and full year 2016 results and provide our business guidance for 2017. We're pleased to conclude full-year 2016 with another strong quarter. In Q4, 2016, we facilitated RMB 6.7 billion loan during the quarter, an increase of 102% when compared with previous year, resulting total 2016 full-year loan origination of RMB 20.3 billion that exceeds our target. Now, looking more closely into our fourth quarter performance, total revenue in Q4 2016 was RMB 1.1 billion representing an increase of 137% year-over-year and 22% on a sequential basis, due to both strong seasonal demand at end of the year and further expansion of market leadership. In Q4 2016, 57% of our borrowers are acquired from online channels, contributing to 37% of the loans facilitated in this quarter, compared to 41% in the previous quarter. The decrease of percentage of loans generated from online channels was mainly due to our tightened risk policy of the online channels after the organized fraud incidents in Q3. As we continue to strengthen our capabilities of online customer acquisition and risk management, we expect loan origination from our online channels will reach 60% in total volume by end of 2017. In terms of our loan product portfolio during the quarter, 87.8% of our new loans facilitates with Product C. As we continue to see strong credit performance of this [price range] [ph]. The product volume mix of Product A, B and C were 4.3%, 3.2% and 4.7% respectively. On the investor side, our annual Yidingying average investment yield on the platform in Q4 2016 was 8.2%, down from 8.7% in the previous quarter, as we continue to benefit from strong investor demand for high quality asset on our platform. In order to better meet our investor's demand for broader and more diversified investment asset class, we have started cross-selling third party wealth management product on our Yirendai mobile apps in December 2016. In addition to generating more revenue opportunity, we believe this initiative will help us to build deeper relationship with our investors and capture business opportunities in the large wealth management market. Turning to operating expenses, sales and marketing expenses were RMB 538 million for the quarter or 8.1% of loan origination volume increased from 7.5% in the previous quarter. The increase of sales and marketing expenses were mainly due to higher customer acquisition cost from the online channels due to tightened risk policy. Origination and servicing costs were RMB 58 million for the quarter for the quarter or 0.9% of loans facilitated decreased from 1.1% in the previous quarter. Our G&A expenses were RMB 80 million for the quarter or 7.4% of total net revenue, decreased from 12.3% in the previous quarter. And if we exclude the impact of the one-time expense of RMB 81 million related to the fraud incident, the decrease of G&A expenses as a percentage of total net revenue was primarily attributable to the improving operating leverage as we grow our business. In terms of profitability our adjusted EBITDA in Q4 2016 was RMB 401 million representing adjusted EBITDA margin of 37%, increased from 25% in the previous quarter. Net income in Q4 2016 was RMB 380 million representing net income margin of 35%. Now on to our credit performance, first, in order to present a more accurate reflection of [our credit forecast] [ph], we adjusted the calculation formula of Accumulated M3+ net charge-off rates in this quarter. For details, please refer to Slide 28 of our management presentation. As we look into our overall asset portfolio performance, the recent delinquency rate and vintage charge off performance are trending well and within our expectation. And charge-off performance for 2015 and first three quarters of 2016 vintage loans have shown stable trends, which demonstrate our capability in credit underwriting and risk management. Specifically, as of December 31, 2016, the overall delinquency rate for loans that are 15 to 89 days past due was 1.7%, slightly decreased from 1.9% out of September 30, 2016. The decrease of delinquency rate was primarily due to the increase of total loan balance and more efficient risk management. The cumulative M3+ net charge-off rate for loans originated in 2015 was 6.6% at the end of Q4 2016 compared to 5.2% at the end of Q3 2016, as the loans further mature. The charge-off rate for each vintage from Q1 2015 to Q3 2016 are showing a general improving trend as indicated in the cumulative M3+ net charge-off risk curve on Slide 27 of the management presentation. As of December 31, 2016, the outstanding balance of liabilities from risk reserve fund guarantee is at 7.3% of remaining principal of performing loans covered by risk reserve fund. On the balance sheet side, as of Q3 - as of Q4 2016 we had about RMB 968 million in cash and cash equivalents compared to RMB 1.1 billion as of Q3 2016. The decrease was due to the increase of available-for-sale investments to enhance the return of our cash management. As of Q4 2016, balance of available-for-sale investments was RMB 1.2 billion increased from RMB 298 million as of Q3 2016. Additionally, we had RMB 1.2 billion of restricted assets in our risk reserve fund account and trust account. We also booked RMB 371 million in loans at fair value as a result of our consolidating the trust and ABS. Our liabilities were mainly comprised of two items, RMB 1.5 billion in liabilities from risk reserve fund guarantee and RMB 419 million payable to investors at fair value as a result of consolidating the trust and ABS. With that, let me go over guidance. For the first quarter of 2017, we expect loan origination volume to be in the range of RMB 6.4 billion to RMB 6.5 billion. Total net revenue to be in the range of RMB 900 million to RMB 930 million. Adjusted EBITDA to be in the range of RMB 280 million to RMB 300 million. For the full-year of 2017, we expect loan origination volume to be in the range of RMB 33 billion to RMB 35 billion. Total net revenue to be in the range of RMB 4.4 billion to RMB 4.6 billion and adjusted EBITDA margin to be in the range of 23% to 26%. As you may have noticed the guided net revenue take rate and adjusted EBITDA margin for full-year 2017 is lower than our 2016 level, which is mainly due to our strategic plan of launching more customer-friendly products with monthly fee collection schedule starting mid of 2017. Given our revenue recognition policy, under this fee collection schedule, we evenly recognized revenue each month throughout the long-term, such would defer our revenue [to treat for lantus] [ph]. We believe this product could potentially increase our unit economic profit and enhance our financial profile stability and earning visibility given the recurring nature of the monthly fee. That concludes my remarks. And now I'd like to turn the call back to the operator for the Q&A session.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Richard Xu with Morgan Stanley. Please go ahead.

Hi, thank you for the thorough introduction. I just have a question regarding the borrower mix from online and offline channels. I understand that there are some mix change in fourth quarter after the fraud case in second quarter. Just wondering, what was your target for the next - I guess, for next year or for the medium term, and what will be the actions taken to gradually increase the online portion again? Thank you very much.

Okay. Thanks, Richard. For the 2015, as we continue to ramp up our online acquisition capability and risk management, and developing more channels, we expect our online business to grow faster than our overall portfolio growth. So the expected loan mix for the online channels will grow 40% in the early part of the year to close to 50% or even more than 50% by the end of the year. So overall, volume mix for the 2017, we expect the online portion to be close to 48% or 47% of the total year of volume.

Our next question comes from Eric Wen with Blue Lotus. Please go ahead.

Hi, good evening, [indiscernible] Yihan, Dennis, and merci for taking my question. Good night [ph] and congratulations on the good result. My question is on your guidance. As your well - 2017 loan origination growth is very robust, your revenue take-rate and EBITDA margin are both down. Dennis, you mentioned this is because you are adopting a new accounting policy to spread out the revenues. I just wonder two questions. Number one is will this lead to an increase of your deferred revenue account or any kind of customer advance account. My second question is if you are deferring more revenue to future periods, where cost is booking the current period that supposedly should lead to higher profit margins in the later period. But it looks like your guidance for this year, your EBITDA margin is actually declining as well. I just wonder why that is. Thanks.

Yes. Okay. So thanks, Eric, and I will answer your question, maybe the second part first and then we'll address the first part. So in terms of this new product we're introducing, which is a monthly collection fee schedule, it's actually very important for us from a competitive dynamic perspective, because this actually would need the platform to have a very strong cash flow capability to be able to offer this product. And also the user experience, customer experience is going to be strong and our unit economic profitability is actually better. So there are many benefits for us to introducing this. In terms of the impact of our profitability, we are going to start introducing this product mid of this year due to the revenue recognition scheduling. So you're actually going to have - seeing more of the revenue being recognized through the rest of the loan life, while the customer acquisition cost is actually recognized upfront. So near-term, we're actually going to see a negative impact in terms of margin profile, but longer-term, given that the lifetime unit economic profits is actually potentially increasing, so net-net for the lifetime of the loan you're actually going to see improving profitability, but it will actually spread out through two year or three year, whatever the term of the loan is going to be. So I guess near-term, may have some compression on margin, but longer-term it is a matter of the revenue and cost recognition schedule matching. And also as I mentioned in our remarks, given that the recurring and the visibility of the future revenue recognition and also given that most of the cost has been recognized upfront most of these future revenue are actually highly profitable revenues will actually improve our financial profile and earning visibilities. So in terms of whether this will actually change our deferred revenue numbers that we're reporting as a non-GAAP item, it's actually not going to have much an impact from there, because this is not part of our deep-built [ph] so it's completely deferred into the future.

Understand, thanks, very helpful.

Sure.

[Operator Instructions] Our next question comes from Ryan Roberts with MCM Partners. Please go ahead.

Good morning, management - actually good evening, management. Thank you for taking my question. Just a quick one for me actually also kind of a follow-up on the guidance, you mentioned that new kind of long tail, the monthly payment product is going to launch I think you said sometime in the middle of the year. And I'm just kind of curious what some of your assumptions are kind of for Q? It looks like that revenue take rate slips from about 16 down about 14, but if these are midpoint, which is kind of curious, if you could kind of give us some color on that.

Okay. I think for the first quarter of 2017 most of the - the product mix that is actually similar to the 2017. However, as we mentioned that we're getting a very strong traction in term of our online business growth, online customer acquisition, we actually expect our online percentage for the loan volume to increase in 2017 first quarter. So that's where you see a slight dip of our revenue take rate. It's due to the increase in percentage of the online channel products. Even for that, the decrease of the revenue take rate is also part of the deferred revenue into the future. It's not that the revenue that's being missed.

Got it. Thanks. That's very helpful. If I could just ask a quick kind of a - a quick second question, just about some of the new wealth management products, we're showing to sell to some of the investors in the platform. I'm just kind of curious could you give us some more detail on kind of where those come from, who they're partnering with, just kind of what kind of needs we're trying to meet for investors? And kind of how we see that business kind of shaping up, let's say into the end of 2017 and maybe kind of beyond?

Yes. On our investor mobile app we are currently offering some online insurance products as well as some fast loans product. And all of those are selected by us. We are not offering a receipt [ph] market, but we select, very selectively good products that we think completes our customer needs.

Okay. Thank you very much. Thank you.

Our next question comes from Patricia Chang with CLSA. Please go ahead.

Yes. Hi, good evening management. I have a couple of questions. One is a follow-up on the new product that you mentioned just now and the other one on the guidance. For the new product, can you give us some idea of like who - with what kind of customers are you targeting? Are you targeting existing customers or like sort of like a product features? And how much loan facilitation do you think the new product can generate? And on the full-year guidance for loan facilitation, your full-year target is more than four times higher than the target for the first quarter. So does it have anything to do with this new product launch in the middle of the year or like what are your plans are in the acceleration of the loan facilitation in the second half of the year? Thank you.

Sure. I think the new product indeed we'll actually introduce through certain channels, certain type of customer acquisitions. Basically, we will introduce in this type of products for the customer who own cars, who actually already have properties. So they are slightly different from our current product offering. And then the volume that we expect this product is probably in the 7% or 8% of our business volume in 2017, and it's going to start mid of this year. And then, in terms of our 2017 overall loan volume guidance, of course Q1 has been strong. And usually we see a sequential growth quarter-over-quarter throughout the year. So if you look at the kind of trajectory that we usually follow, you probably - not too difficult to come with the overall total volume for the year. So usually Q1, Q2, Q3, Q4 is tend to be a sequential growth through the year as we see our business opportunities unfold.

Thank you.

[Operator Instructions] This concludes our question-and-answer session. Hold on for one second, we do have another question from Ryan Roberts. Please go ahead.

Sorry management, thank you for indulging me. I just want to ask a quick question about YEP, just kind of how you guys are looking at that as kind of being contributor to the overall results, and kind of how you see that kind of growing for the company in the future?

Hi. Thank you, Robert. This is Yang. And our Yirendai Enabling Platform is of three components, one is for data acquisition and data management, and the other is for anti-fraud, and the final one is for sharing user acquisition. So we have a few key reasons to release that. One is to enable the industry to be more efficient, so because we have the most advanced user-authorized [ph] data technology. So we would like to help partners to be very - in the better way to acquire the data. B:

And do you think that rollout is going to happen first half, second half, or kind of when should we look for that?

It's already happening. And in the path, so we are rolling out, and we're already in process rolling out the partners. And we should be able to see some results in like Q3, Q4 timeframe.

Fantastic. Look forward to hearing about it. Thank you very much.

All right. Thank you.

This concludes our question-and-answer session. And also concludes our conference. Thank you for attending today's presentation. You may now disconnect.