Jianpu Technology Inc.
Q2 2019 Earnings Call Transcript

Published: 26 Aug 2019

[Operator:]

Hello and welcome to Jianpu Technology Inc. Second Quarter 2019 Earnings Conference Call. Today's conference call is being recorded.At this time, I would like to turn the conference over to Liting Lu, Jianpu's Investor Relations. Please go ahead.

[Liting Lu:]

Thank you, operator. Please note the discussion today will contain forward-looking statements relating to future performance of the company. These statements are within the meaning of the Safe Harbor provisions of the US Private Securities Litigation Reform Act. Such statements are not guarantees of future performance and are subject to certain risks and uncertainties, assumptions and other factors. Some of these risks are beyond the company's control and could cause actual results to differ materially from those mentioned in today's press release and this discussion.A general discussion of the risk factors that could affect Jianpu's business and financial results is included in certain filings of the company with the Securities and Exchange Commission. The company does not undertake any obligation to update this forward-looking information, except as required by law.During today's call, management will also discuss certain non-GAAP financial measures, for comparison purposes only. For a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results, please see our first quarter 2019 earnings press release issued earlier today via wire services and also posted in the Investor Relations section of our website.As a reminder, this conference is being recorded. A live webcast and the replay of this conference call will be available on the Jianpu website at ir.jianpu.ai.Joining us today on the call from Jianpu's senior management are Mr. David Ye, Co-Founder, Chairman and Chief Executive Officer, and Mr. Oscar Chen, Chief Financial Officer.I will now turn the call over to Mr. Ye, who will provide an overview of the company as well as performance highlights of the second quarter. Mr. Chen will then provide details on the company's financial results and business outlook before opening the call for your questions.Mr. Ye, please go ahead.

[Daqing Ye:]

Thank you, Liting. Hello, everyone. And thank you for joining us on our call today as we continue to accomplish our mission to become everyone's financial partner. We feel positively about the long-term outlook of the digital transformation of China's retail financial services industry.To balance this perspective over the short and medium term, China's retail financial services industry is currently being shaped by a mix of uncertain macroeconomic environment, tightening regulatory policies, the rapid pace of digitalization in the society and an increasing demand for access to financial products and services by consumers and SMEs.As the largest independent open platform, with discovery and recommendation of financial products in China, Jianpu's mission is to become everyone's financial partner by empowering users to make smarter and better choices and enabling financial institutions to make better digital marketing, big data and risk management, and integrated solutions.This is very important as Jianpu's open platform model is well positioned to capture this macro trend and secular growth to serve both consumers/SMEs and financial service providers, who provide a [full spectrum] [ph] of financial products and services.To give the market a sense of what's happening in China's retail financial services industry, we'd like to provide a macro view of what we are seeing and why Jianpu's businesses is at the forefront of driving transformation to better serve Chinese consumers and SMEs.China's economy grew at a lower pace amid uncertain global macro environmental factors. From the supply side of the retail financial services sector, liquidity remains weak for consumers and SMEs. As financial institutions tightening their credit policies and the risk management practices, access to financial products and services is getting harder for consumers and SMEs in some credit segments, demographics and geographical areas.For the first half of this year, some of the top 20 credit card issuers tightened their credit policy, slowed down acquiring new customers, only extending the credit to existing customers or add organic customers and peer-to-peer lenders follow regulatory guidance by switching from retail individual funding to wholesale institutional investor funding. Top P2P lenders slowed down new acquisition and market expansion.For the mortgage sector, tier 1 cities such as Shenzhen, Shanghai, we have seen mortgage rates have declined recently. However, most of the tier 2 cities such as Suzhou, Dalian, Hangzhou, Wuhan, Changsha, mortgage rates are increasing. We have seen personal mortgage applications are not growing as fast as before. It is more difficult for potential homeowners to get mortgage approved by banks in some cities.On the other hand, demand from consumers and SMEs remain strong in this uncertain economic environment. Total number of credit cards and bank cards issued as of the end of Q1 reached 690 million and the average number of credit cards reached 0.49 and we expect this trend to continue in the future.We do see rising demand in SME financing, auto financing, wealth management and insurance sectors.The government authorities are tightening grip in some financial regulations, but relaxing other sector regulations. Since the government announced and clarified P2P rules and guidance last quarter, the P2P industry consolidation has been intensified and will be expedited in the next two quarters.By the end of July, number of P2P platforms has concentrated down to 997 platforms. Top P2P lenders with diversified funding sources, supported by wholesale institutional investors, will be less impacted and they will recover their businesses rapidly.On the other side of the regulatory environment, the government is pushing for interest rate liberalization, increasing liquidity to small and medium-size enterprises.We also have seen government increasing liquidity to SME/consumers and they also want to support the real economy, encouraging competition among financial institutions.Also, they are loosening rules and regulations for foreign investors to set up lending, payment, insurance and other domestic financial service entities. Notably, recent launch of LPR, loan prime rate, by China's central bank will enable lenders set interest rates more freely. It is a very good move, expected to bring borrowing costs lower at a time when the economy needs a boost.Most recently, the central government promulgated new guidance to nurture digital platform economy in China, highlighting the important role of digital platform in stimulating economic growth.In this uncertain period, not all financial institutions share the same view in terms of risks or have similar risk appetite. To mitigate risk and uncertainty in the short term and capture the industrial growth in the medium to long run, we are seeing increased investment and spending by banks, licensed financial service providers and fin tech players who are relying on artificial intelligence, data science, digital cloud computing to enhance the growth and improve risk management capabilities of the retail banking businesses.Last year, large commercial banks increased their investments in technology to RMB 112 billion, of which RMB 42 billion was invested in fin tech applications. Long-term prospects for industry remain extremely promising as JT is uniquely positioned, supported by technology, data assets and FSP network to capturing on the growth of the digital financial services industry.Moving to our quarterly performance summary, we saw strong credit card revenue growth of 25% year-over-year, outpacing peers, even though the credit card market was relatively slower first half of this year compared to the second half of 2018.Credit card volume from both recommendation services and advertising reached approximately RMB 1.9 million in Q2. This growth reaffirms our capabilities to capture the evolving dynamics of the market.As we look into the drivers behind the growth in the credit card recommendation businesses, from the bank, the credit card issuer standpoint, the number of bank partnerships increased to 28 in Q2 from 25 in Q1. We are now partnering with 16 out of 18 largest state-owned banks and joint stock commercial banks nationwide in total.The average number of cards issued on Jianpu's platform per month reached over 600,000. Currently, more than 40% of the credit card volume are generated through social media MCN, or multichannel network marketing, initiatives, leveraging short video content, Weixin mini program and other strategic partners with technology-driven financial products such as China UnionPay mobile QuickPass.We have seen more and more users coming from second, tertiary, fourth tier or less affluent cities and new urbanizing areas. The economy of those lower tier or less affluent cities actually grow faster than the major metro cities. Consumptions are stronger.From a credit risk perspective, less affluent cities have more affordable houses, consumer finance burden is lower and consumers' ability of servicing their debt are much better compared to those customers living in major metro cities.Financial institutions, such as credit card issuers, actually are capturing this secular trend by providing innovative digital banking products to less affluent cities and younger generation Y and generation Z.Another big secular trend in China's retail financial services sector is the adoption of big data, artificial intelligence, cloud computing and digital. And, in the future, 5G will transform how financial service providers are communicating and marketing to their consumers, managing risk and servicing them.We have been investing in those areas in the last couple of years and have seen strong growth into the second quarter, continuing to deliver triple-digit year-over-year growth. We expect that the growth momentum will continue in the future.SkyKey, [indiscernible], our branded big data and risk management service is deployed on a software-as-a-service model, tailored for demand across different type of financial service provider with a wide range of needs, from credit decisioning, fraud detection, risk modeling and other risk management decisionings.At present, there are more than 1,000 paying financial service providers within our SkyKey platform. FSPs can adopt SkyKey's full solution or choose one or several specific modules to meet their sales and marketing, risk management and decisioning needs.Given the strong demand for our services, we have enjoyed high growth. We have seen the ramping up of average spending per financial institution. We have also seen high retention rate among financial institutions.But at the same time, we have actively developed a more diversified data ecosystem through the exploration of deep financial and non-financial data analytics, continuously optimizing our proprietary technology and further improving upon our risk management products and better improving credit risk models.As of current, SkyKey, we have just achieved ISO 27001 certification and the CMM i3 [ph] certification, validating our commitment to implementing effective security to protect consumers and personal information and data.We are dedicated to helping customers mitigating risk while providing industry-leading products and services to better serve the evolving and challenging needs in this environment.Before we go into the financials, we just want to continue our update following the san yao wu event and the subsequent mobile application relaunch, as of the end of last week, our mobile apps are available on all app store now.We took the time to conduct a comprehensive internal review and continuously drive certain self-imposed improvement in terms of internal process regarding to FSP onboarding procedures and ongoing monitoring and supervision.We have implemented the necessary risk control to better protect users from participating in products that are out of the scope in terms of industry standard.Being the leading player in this market, we have also been invited by the regulators to participate in developing industry standards and promote industry best practices, including defining guidance for digital financial platforms, corporate responsibility and product standard as well as consumer rights protection.However, the event did have a big impact last quarter due to our mobile apps weren't available for a long period of time. Our loan recommendation businesses were handicapped with disappointing results. That may also impact the coming quarter, given the later-than-expected relaunching schedule, as well as time for us to recover before we can fully optimize our scale and efficiency.For the second half of 2019, we will continue investing in our capabilities and infrastructure of technology, data science, AI capabilities and our people to better serve banks and other financial service providers.We will focus on our balanced operational strategy, striving to achieve better operating efficiency or smart scale, including optimizing user acquisition strategy, deep cultivating relationships with banks and other financial service provider as well as streamline our organization.As we shared in previous earnings calls, we are committed in exploring the new initiatives in terms of financial product category expansion and global opportunities.Leveraging our strong technological capabilities and strong relationship with financial service providers, we are exploring and testing market segments related to wealth management, financial content and tools.Recently, we acquired a Hong Kong-based loan and credit card recommendation platform. We plan to use the Hong Kong platform as a starting point to explore cross-border opportunities. We can share information about our cross-border plan in the next one to two quarters.There is a huge untapped potential in China's retail financial service industry as artificial intelligence, data science, cloud computing, digital and 5 generation of telecommunication transforming the financial service industry and potentially changing hundreds of millions of people's lives in China and worldwide.We strongly believe that Jianpu is well positioned and remains a leader and innovator in this industry, with strong technical capabilities, massive volume of valuable data and a unique open platform model, connecting over 100 million consumers and 2,000 financial institutions.Our team maintain our positive view toward the end of the year and in the medium to long run.With that, I'll now turn the call over to our CFO, Oscar Chen, who will discuss our financial results.

[Yilü Chen:]

Thank you, David. And hello, everyone. Our results in the second quarter clearly reflect the challenges and uncertainties we are facing, as well as our efforts and performance.The performance varies among business lines. Impacted by the voluntary suspension of app downloads since mid-March, our loan recommendations suffered a significant year-over-year decrease in the second quarter. However, our credit card recommendation and big data and risk management services were less impacted.We are pleased that the credit card business remains strong as we keep up with the optimization of our product operating mix for current conditions. We're also confident that our big data and risk management services are in strong demand by the banks and other financial services providers.As discussed in the last earnings conference call, and as a result of our voluntary suspension of mobile app downloads for our internal review since mid-March, we expected a massive impact on our financial results.For the second quarter, we reported total revenues of approximately RMB 362 million, a decrease of 26% year-over-year, and a non-GAAP adjusted net loss of approximately RMB 57 million as compared to an adjusted net loss of RMB 29 million in the year-ago period.Total recommendation services revenues decreased by 32% year-over-year to RMB 300 million in the second quarter due to a 65% year-over-year decrease in loan recommendation services, offset by a 32% year-over-year increase in credit card recommendation revenues.Combining the credit card business from both recommendation services and advertising, we recorded credit card volume of approximately 1.9 million in the second quarter of 2019, representing a year-over-year increase of approximately 19%.The average fee per credit card increased to RMB 107 from RMB 99 in the second quarter of 2018. As a result, revenue for credit cards for recommendation and advertising services in the second quarter increased by 25% to RMB 202 million from RMB 162 million in the year-ago period.Among the revenues generated from advertising and marketing services and other services, our big data and risk management services remain in strong demand among financial service providers, growing 139% year-over-year to RMB 50 million as this segment of customers seek us out for our big data and the risk management services.In the past quarter, given the weak sentiment of top line, which were negatively impacted by the voluntary suspension of app downloads and other industry dynamics, we conducted a couple of adjustments, aiming to maintain our operational efficiency, including organizational change, cutting of low efficiency business, et cetera. However, such adjustments have certain lagging effects, the benefit of which may kick in in later quarters.At the same time, we continued our commitment in exploring new initiatives, as David mentioned earlier, which resulted in some upfront investment in people and technology. As such, our efficiency level measured by various expense line items as a percentage of revenue were not performing well in the second quarter of 2019.We stuck to maintaining a balanced strategy with profitability and margins in mind. Gross margin increased to 93% in the second quarter of 2019.Sales and marketing expenses, excluding share-based compensation, as a percentage of revenues, was 87% in the second quarter of 2019 compared with 85% in the year-ago period.Our R&D expenses, excluding share-based compensation, increased by 46% year-over-year to RMB 68 million. R&D expenses as a percentage of revenue rose to 19%.Our G&A expenses, excluding share-based compensation, increased to RMB 20 million in the second quarter from RMB 50 million in the same period of 2018. G&A expenses as a percentage of revenue rose to 6%.As a result, our non-GAAP adjusted net loss, which excludes share-based compensation, was RMB 57 million in the second quarter of 2019 and the net loss was RMB 85 million. At the same time, non-GAAP adjusted EBITDA was a loss of RMB 51 million compared to a loss of RMB 36 million in the year-ago period.As of June 30, 2019, we maintained a strong balance sheet and cash position with cash and cash equivalents, restricted time deposits and short-term investments of approximately RMB 1.2 billion and working capital of approximately RMB 1.2 billion.A quick review of our share repurchase program. Starting from August 2018, our board approved a share repurchase program with a total authorization of $30 million. As of August 25, 2019, the company had repurchased approximately $29.7 million of shares under this program.And last, for the guidance, the company anticipates the external environment to remain uncertain and challenged in the third quarter.Although our app has been fully relaunched and available in all app stores, the impact from the warranty suspension may also have some lagging effect into the coming quarter. Based on the company's current estimates, we expect our total revenues for the third quarter of 2019 to be approximately RMB 300 million to RMB 320 million.With that, I will conclude our prepared remarks. We will now open the call to questions. Operator, please kindly go ahead.

[Operator:]

Thank you. [Operator Instructions]. The first question today comes from John Cai with Morgan Stanley. Please go ahead.

[John Cai:]

Hi, management. Thank you for taking my questions. So, I have three questions. The first one is on the guidance. Since this revenue guidance seems to imply quarter-on-quarter decline, so just wonder what sort of external environment uncertainty that will lead to that? Do we see weakening lending activities from financial institutions and lenders? It seems that you already relaunched the app, it should express certain increase on a sequential basis in terms of the revenue.And my second question is about second quarter sales and marketing. I think, most of the second quarter, our app is not available. Just wonder why this still over RMB 300 million sales and marketing expense here. The ROI, obviously, deteriorated. I think can management share more colors about the portion of organic users and customer acquisition costs and the conversion rates and how do we see that in the second half?The final question is about cash. It seems we have some [indiscernible] of cash and also David mentioned some investments. Just wonder – and based on the revenue, it seems the third quarter could also be a challenging quarter. So, just wonder how you see the cash position going forward. Thank you very much.

[Yilü Chen:]

Okay. Thank you, John. I'll take a crack on – to answering your questions first. So, yeah, I think regarding the guidance we provided for the third quarter, it's still a bit, I think, disappointing, but we do see some uncertainties and challenges in terms of the external environment.So, as we mentioned in our last conference call, we expected that the second quarter, given our mobile apps were not online, so we would suffer a decrease in terms of the top line. But we also mentioned that, entering into the third quarter, when we got our apps relaunched, we still need to spend quite some effort to optimize our acquisition strategy, our operating strategy to achieve balance between the scale and efficiency.So, firstly – I think, firstly, I can give an update on our app relaunch. So, the app relaunch is almost 1 month behind our schedule. So, we got our apps relaunched in iOS in May, in the mainstream medias like Tencent, Baidu and Toutiao in June and the OEM app stores in through July to August. So, firstly, I think the relaunch schedule is a bit – the relaunching is a bit behind our schedule. So, that may have some impact on the third quarter performance.And also, I think in terms of the optimization of our acquisition and operational strategy, we are seeing the external market challenges and uncertainties. So, that translates into – even though we want to burn some cash to scale up our business, but it may not be justifiable. So, we still want to keep a balance between the scale and efficiencies.And in addition, I think the challenges and uncertainties is more at macroeconomic and regulatory environment. So, with this observation, so we will have to weigh on more efficiency than scale in the second half of this year.I think David already talked about some challenges we are seeing into the market, including tightening of credit policy from the financial service providers and the overall liquidity. I think the social liquidity level is slow than we – [indiscernible] slower than we expected.So, I think this is what impact us in the short term, particularly in the third quarter, but we are more optimistic in the medium to long run given our resilient business model and the robust technology infrastructure.

[Daqing Ye:]

Hi, John. This is David. I'd like to answer your first and third question just to add a little bit of – to what Oscar has said. So, cash position, we have about RMB 1.2 billion. That's roughly the number. We had a lost quarter, right? We burned around RMB 50 million, RMB 60 million last quarter, right? That's why our strategy for Q3 is smart growth. Smart scale, right?If you look at the three segments, the big data, risk management, we're going to have a strong growth. However, last segment only accounted for roughly 20% of the revenue line. 15% to 20%. So, we have high double-digit growth. That doesn't add much.The credit card business, we believe, is going to have a good Q3. However, we do see some – a little bit of summer slow for one of the two big banks. So, the challenge, of course, last quarter was loan recommendation businesses. We did not achieve the operating efficiency we'd like to. We lost the money mostly in that segment.That's why, in Q3, our strategy is really optimizing of our efficiencies. Just think, we have a car, we shut down for a couple of months, we restarted the engine, right? We need to achieve the optimal fuel efficiencies, right? We are not going to try to get the revenue scale and losing money. So, that's why the management, we made a decision, we want to further improve the operating efficiency in the loan recommendation businesses. We lost some revenue, but, of course, we're going to reduce the income kind of impact. So, that's the add-on for question one and three. It answered your question three as well, right?

[John Cai:]

I think I have questions about ROI. I think on the second quarter, seems the sales and marketing is still big, given that our app is not available for the majority of the quarter. So, just wonder why is that, in terms of ROI, organic traffics and conversion rates, customer acquisition costs, et cetera? And also, David mentioned about efficiency improvement. Just wonder how we see the ROI in the second half. Thank you.

[Yilü Chen:]

Yeah. Thank you, John. I think, to your question, although our apps were not available for download during the second quarter, but you see we still grow our credit card business relatively nicely in the second quarter.So, for this business line, firstly, I think there were also some impact from the san yao wu. So, in that sense, we got a quick relaunch and the recovery of the banks' relationships to get the credit card product back online. In that sense, we may not be able to get the best price. Although you are seeing a year-over-year unit price increase, but we don't think it's the best price we can get for now, particularly under the current environment. So, for credit card business, I think the ROI is – to quickly recover this business, I think the ROI is a bit lower than we expected.For the loan recommendation, of course, your guess is correct. We have repeat users. We have our – although the app is not online, but we still have the users who have already had our app who can submit the loan application through our platform.Firstly, the repeat user, because of the san yao wu, the app is not available. I don't think the data can tell – the data itself can tell the story. We have the repeat users. We have relatively high ROIs from the loan recommendation. But, again, to keep the scale as it is, we still need to spend some marketing dollars to do the user acquisition through the mobile web or through the PC channels to keep the user activities and also to keep the scale of our business. So, regarding the percentage of free traffic, I think it's higher than any quarter before. But I don't think the number here is relevant to telling the stories of the future.And also, for the conversion rate, we are seeing the conversion rate from the active users to the number of applications, that's a bit lower than the previous quarters because app is not online and we're also – after san yao wu, we also put on more stringent financial service provider onboarding rules. This makes our loan product less than before. So, in that sense, if you look into the conversion rate of our business, I think it's 2 to 3 percentage points lower than the previous quarter.

[Daqing Ye:]

Yeah. So, John, I want to just add one point. The sales and the marketing cost, including traffic acquisition costs, TAC, as well as the staff/human costs related to the sales and marketing function, that's – keep in mind, we do have the fixed costs from Q2 to Q1. Relatively, right? If you look at our TAC, traffic acquisition costs, divided by sales and marketing, we do see some efficiency increase optimized as well as, of course, the efficiency slowdown due to the delisting of the app. I just want to share with you one number. Our repeat, returning customer, we have seen the number slightly increasing in certain segments. So, that's why you don't want to look at the number on average in terms of the ROI. We do see that – there's some decreasing factor as well as some increasing factor.

[Yilü Chen:]

And also, to your third question about the cash balance decrease, I think a couple of ways we deployed cash in the last two quarters. Firstly, I think the usage included the share repurchase and also a couple of investments we conducted in the last two quarters. And, of course, as David mentioned, the operational cash flow is outflow given our loss made in the second quarter.I think, John, I hope these answers your three questions.

[John Cai:]

Yes, it's very helpful. Thank you very much.

[Daqing Ye:]

Thank you.

[Operator:]

The next question today comes from Wendy Chen with Goldman Sachs. Please go ahead.

[Wendy Chen:]

Hello. Hi, David, Oscar and Liting. Thanks very much for taking my question. I actually got three question here. First, on our third quarter guidance, wondering that how do we see the different contribution on the third quarter from loan and credit card because, in the second quarter, we actually see credit card business still record some year-on-year growth and, of course, loan business got more impacted by the san yao wu incident. So, just wondering how is our view for the contribution in the third quarter.Second question is about loan recommendation price. We noticed that in the second quarter also our loan application number got impacted a lot by the download suspension. But we still recorded quite a valid growth for loan CPA. So, just wondering for interest that can have with the macro headwinds we are seeing and probably need to recover from the app suspension, whether we'll see this loan price increasing trend change in the second half.And the third question probably more on management view for the timeline. Like, when do we see the full recovery of our business, especially in the loan application business post this app download suspension? Thanks.

[Yilü Chen:]

Okay. Thank you, Wendy, for your questions. So, let me answer the question. Firstly, I think about the loan application unit price, yeah, we see a healthy rise of the loan application CPA. So, the reason is mainly, we are seeing, as we discussed in earlier this year, we are seeing the loan product available in the market has larger ticket size, longer duration including the loan product offered by the banks, consumer finance companies, and also the P2P companies, loan assistance model, micro lending companies. Across the board, we are seeing larger ticket size, longer duration. So, this is why we are happy to see a price increase starting from the first quarter this year and continue into the second quarter.So, in the second quarter, if you want a breakdown of the loan application volume, so we are seeing over 50% of our loan application volume with a ticket size over RMB 10,000, and over 30% of the loan application volume with a ticket size over RMB 50,000, and the remaining the loan size below RMB 10 million.So, through the breakdown of the loan size of the applications we hosted on our platform, you're seeing a natural shifting towards the larger ticket size and the longer duration. It is why the CPA, the unit price increased. But we do believe that this price trend will continue into the second half of this year.And then, back to your question regarding the contribution of – between the various business lines, so I think we are seeing challenging, uncertain external environments. So, in that sense, we are more willing to provide relatively conservative guidance in this regard.So, for credit card business, we would estimate a volume on par compared to the second quarter this year. So, probably you may ask why is that. Because entering into the second quarter, we observed a so-called summer slowdown in the credit card business.So, in terms of the delinquency rate of the credit card, I think from the public views, from the public reports published by the central bank, it's not worse. It's almost – the delinquency rate also becomes healthier at least in the first quarter of this year. But different bank has different strategies. Among the 28 credit card issuing banks we are working with, we are seeing most of them are still – grow their credit card business, but we also see a number of the credit card issuers, they have more conservative strategy. And entering into the second half, they may pull back the scale of their credit card user acquisition. So, this is why we would estimate the credit card volume would be on par sequentially compared to the second quarter.So, for the big data and the risk management services, I think we would see continued growth, although it's still a small part of our business, but we would like to see a sequential growth entering into the third quarter.The most uncertain part is the loan recommendation business. So, we just want to put a very conservative number here. So, we see the uncertainties. We need to deal with the uncertainties. So, from a guidance perspective, we want to be as conservative as we can. So, that's pretty much the breakdown we estimated for the third quarter guidance.

[Daqing Ye:]

Hi, Wendy. This is David. So, as in my closing remarks, our team, we definitely will be maintaining a positive view towards the end of the year and in the medium to long run. We started the business almost seven-and-a-half years ago. If we are using one or two words to characterize the growth of the industry or the company, we as a platform, in some thing, we represent the growth of the whole, either we call, fin tech sector or we call digital retail financial sector in China. One or two words I would want to characterize are spiral rise, spiral growth.And we actually in the last two quarters – last couple of years, we have seen – we are actually in – I would say in intersection of two spiral rise or declines. Of course, one of the spiral are the – from the consumer driven, right, the digitalization and also the big secular trend of leveraging data and AI, digital transformation by more and more financial institutions to better serve the customer and manage digital marketing, risk management better. That's the positive, I call, like with spiral.Of course, on the flipside of the coin are the downward spiral. We have seen the macroeconomy with uncertainty – will be maybe uncertain for the next quarter. Hopefully, not longer. And we have seen tightening regulation. In my overview, we have talked about some negative, like regulation side, right? Of course, there's some positive side. So, to be honest, it's hard for us to give a very accurate projection given the spiral rise or spiral declines. Or sometimes growth are there, but we are on the wrong side of the spiral, we can't see it.Oscar, myself and the team, we always give a very conservative guidance. We have maintained our policy and we are maintained our appetite. So, that's our appetite. We wanted to provide conservative guidance.And if you look at our data in the last five or six years, which have meaningful quarterly seasonality data, I can share with you, in 2017 and 2018, even 2015 and 2016, in some good years, in Q4, we can do around the 35%, 38%. In one year, we did about 39% of the businesses. That's the seasonality. We are not saying this seasonality will show up, will appear again this year. We would hope so, but we'd rather provide conservative guidance. And as you may know, the national holiday is coming in about five or six weeks and we would definitely hope things will be better in Q4. But, of course, we haven't factored in those potential upside trends yet.So, that's tough. This is a very tough quarter to give any guidance, frankly speaking. We have been building this business in the last seven, eight years. And I was in the business world for close to two decades, right? I have seen two economic crises in US, the Internet bubble and the financial crisis in New York City. And this time, it's different. But Oscar and INR team would rather be conservative.

[Yilü Chen:]

Yeah. I think, Wendy, regarding the seasonality, I would also provide a couple of data. Definitely, this third quarter, we provided lower guidance. But, normally, looking to the historical data, normally, because of the seasonality, from third quarter to fourth quarter, there will be a sequential growth naturally into our business because of the more borrowers activities and the financial providers KPI-driven initiatives entering into the fourth quarter. So, in coming years, we can grow the business sequentially by around 30%. For the highest year, we also grow the business by 50%, 60% quarter-over-quarter. So, I think we hope for the best, but so far, because of the uncertainties and challenges we are observing, so we may not be able to give a very clear timeline in terms of so-called full recovery.

[Wendy Chen:]

Thanks very much.

[Yilü Chen:]

Thank you, Wendy.

[Daqing Ye:]

Thank you.

[Operator:]

[Operator Instructions]. Our next question today comes from George Yei [ph] with J.P. Morgan. Please go ahead.

[Unidentified Participant:]

Hi, management. Thank you for taking my question. I'm George from J.P. Morgan. So, I have two questions. My first one is on the split of our institutions. Could you share with us the loan application volume in terms of the financial institutions, namely banks, consumer finance companies or some of the P2Ps and how does the trend compare to the last quarter?And my second question will be on our profitability. So, I think the last two quarters, we do register some of the profits. But in this quarter, we turn into loss again. So, how do we think about our profitabilities and earnings in the second half and in 2020? Thank you.

[Yilü Chen:]

Okay. Thank you, George. So, quick answer to your questions. Regarding the breakdown of the loan application volume between – I think during the second quarter, I don't think – because of the volume decreased a lot year-over-year and quarter-over-quarter, I don't think this may be meaningful or have a lot of implication to predict the future. But, anyway, the rough breakdown is that the loan recommendation revenue only accounts for less than one-third. I think 30% of my total revenue. So, among that, I think the majority, around 50% or 60% contributed by the license players. That's the banks and the consumer finance companies. And the remaining 40% contributed by the P2P and the loan assistance [indiscernible]. But if you look through the [indiscernible] loan assistance model, the funding behind that is also the licensed institutional funding. But, again, I think it's just the number for the past two quarters.And your second question is about the profitability. Okay. Yes, thank you. We always keep efficiency and profitability in our mind. I think, particularly under the current market environment, I think efficiency matters more to us. This is why we conducted some, to quote David's comment, that's smart growth or smart scale entering into the second half of the year. So, this means we prioritize efficiency and profitability over the scale, considering the uncertainties and the challenges we are facing in the current market environment.But if you look into our business model, particularly the profitable quarter in the fourth quarter last year and the first quarter this year, you may notice that, if you want to achieve profitability, both scale and efficiency matters. So, given the – I hope you can understand what I'm saying here. So, now, we will focus on efficiency over the scale, but to achieve the full profitability, we also need to scale. So, yeah.

[Daqing Ye:]

Yeah. Mr. Yei, David here. Profitability is not a goal. It's a natural result. As we scale our platform, as we maintain the operating efficiency, the profitability will come as a natural result. So, that's simple. We maintain a high margin rate, right? Fixed costs are here. You have seen the profitability before. We can easily achieve that once we scale and grow again, smart, of course.

[Unidentified Participant:]

Okay, thank you.

[Operator:]

The next question today comes from Julie Hou with UBS. Please go ahead.

[Julie Hou:]

Good morning, David and Oscar. Thank you for taking my question. I have one question. You mentioned you took some initiative in last quarter such as organizational change and quite a lot in efficiency department. Could you elaborate more on this? Thank you.

[Yilü Chen:]

Yeah, sure. The organizational change here means, firstly, we formally deployed the deal structure into our business, which will – we can have a more clearer goal for the team to achieve for different business lines because behind the different business lines, the logic, the mindset, the skill set are quite different. I think the deal structure maybe will support our business down the road for the next three to five years. And also, because of the new initiatives in terms of category expansion we discussed in earlier this year, we shuffled our internal resources a bit. So, for example, like loan recommendation, given that we are – the scale is not there, so we may have redundancy in terms of the manpower. So, we – but R&D guys are very valuable in this market. So, given we also have some new projects, new initiatives, so we allocated the R&D resources among the various business lines. I think we don't want to – although we will keep the efficiency as much as we can, but we don't want to lose the future opportunities. So, we also want to invest in people and technology. Now, the better way is to organize and then reshuffle internally to get more resources to the future growth. So, this is how we mentioned the – why we called it organizational change.And also, about the cutting off the low efficiency business, as you're aware – as you may notice that, although our – advertising, marketing and other services, this revenue line grow a bit, but the major contribution was from the big data and the risk management. And our advertising – pure advertising business was slowed down year-over-year and quarter-over-quarter. So, I think, as analysts, you also observed the overall online advertising – the weak sentiment of the online advertising market. So, in that sense, we also controlled the pace, our pace into this market – into this business. So, this business, particularly in this market environment, the ROI is not that huge. So, we slowed down the pace and cut off the size of this business update. So, I hope this answers your questions.

[Julie Hou:]

Yes. Thank you.

[Daqing Ye:]

Thank you, Julie.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

[Liting Lu:]

Thank you once again for joining us today. If you have any further questions, please contact us at [e-mail] or TPG investor relations at [e-mail]. Thank you for your attention. And we hope you have a wonderful day.

[Operator:]

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