Jianpu Technology Inc.
Q3 2017 Earnings Call Transcript

Published: 13 Dec 2017

[Operator:]

Good day and welcome to the Jianpu Technology Third Quarter 2017 Earnings Conference Call. Today's conference call is being recorded. At this time I would like to turn the conference over to Choya Chen, Jianpu's Investor Relations manager, please go ahead.

[Choya Chen:]

Thank you, operator. Please note the discussion today will contain forward looking statements relating to future performance of the Company. They're within the meaning of the Safe Harbor provisions of the U.S. 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 then 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 its 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 non-GAAP to GAAP financial results, please see the 2017 third quarter earnings news release issued earlier today via wire services and is also posted in the Investor Relations section of our website. As a reminder, this conference is being recorded. Webcast replay of this conference call will be available on Jianpu's website at ir.jianpu.ai. Joining us today on the call from Jianpu's senior management is Mr. David Ye, Co-founder, Chairman and Chief Executive Office; and Mr. Oscar Chen, Chief Financial Officer. I will now turn the call over to Mr. Ye who'll provide an overview of the Company as well as performance highlights of the quarter. Mr. Chen will then provide details on the Company's financial results and business outlook before opening the call for your questions. I will now turn the call over to our CEO, Mr. David Ye, please go ahead.

[David Ye:]

Hello everyone and thank you for joining our quarterly earnings conference call today. First of all I want to thank and welcome our new shareholders who supported our successful listing on the New York Stock Exchange in November. Today marks another milestone for Jianpu, we are pleased to present robust financial and operating results to our first quarterly reporting as a public company. As the leading independent open platform for discovery and recommendation of financial product in China and a market leader in our industry, we continue to experience growing demand from our users for financial products and financial service providers for our solution in the services in the third quarter. This is clearly demonstrated our solid third quarter results as the number of loan applications on our platform increased 496% year-over-year to 28.2 million and our credit card volume reached approximately 1.1 million, up 197% year-over-year. During the third quarter, Oscar Chen, our CFO later will also provide you with guidance on our Q4 financials. Our business model is to connect users with financial service providers. We believe our ability to leverage our strong data and technological expertise to gain the foothold across the value chain is our core competency and positions us where to capture the growing market opportunity in our industry. Our third quarter results continue to demonstrate our robust growth trajectory. We noticed the recent regulatory developments in respect to cash loan in China and we believe regulatory framework with more clarity will benefit both consumers and financial service providers in the long run. Our view is that the tightening regulation has not intend to irradiate the cash loan industry entirely, but aims to better regulate it set high barriers to entry and prevent systematic financial and social risk. As an independent open platform, we think of ourselves as everyone's financial partner. Jianpu does not offer its own financial product and does not take any credit, liquidity or market risk. This enables us to provide impartiality and transparency to our users in the financial service providers. Thus, we take a constructive view on the changes in directory involvement and believe our established market leadership will better position us to serve market participants by helping them improve sales and marketing efficiency and enhance data and risk management capabilities and consequentially benefit us in the long run. In summary, we have shown belief in Jianpu's business model and a strong network of financial service providers. The online consumer finance market in China remains underpenetrated with significant growth potential in the long run. It is our strategy to evolve our offering within the regulatory framework while at the same time providing our customers is the world's best-in-class service, which will enable us to fully unlock our potential and maximize long-term shareholder value. With that, I will now turn the call over to our CFO, Oscar Chen, who will discuss our financial results.

[Oscar Chen:]

Thank you, David, and hello everyone. We are delighted that our strong third quarter results continue to affirm our market leadership and support our gross business. We had a 384% year-over-year revenue growth for third quarter of 2017 and the revenues from our core recommendation services grew by 429%. Within that, revenue from our loan recommendation services increased by 477% while revenues from credit card services grew by 251 year over year. On the bottom line, our net loss decreased by 52% year-over-year to RMB17 million or about $2.5 million for the third quarter of 2017. Our strong performance gives us the confidence that we are on track to execute our business strategy and realize our growth potential. Now, I'd like to walk you through more details on our third quarter 2017 financial results. Our total revenues in the third quarter of 2017 reached RMB468 million compared to RMB97 million in the third quarter of 2016, largely due to the increase in total revenues from recommendation services driven by a huge increase in loan applications on our platform. Total revenues for the third quarter of 2017 increased by 384% to RMB468 million from RMB97 million for the prior year period, primarily due to the increase in revenues from recommendation services. Total revenues from recommendation services increased by 429% to RMB438 million in the third quarter of 2017, from RMB83 million in the prior year period. Revenues from recommendation services for loans increased by 477% to RMB377 million in the third quarter of 2017 from RMB65 million in the prior year period, primarily due to the significant increase in the number of loan applications on our platform. The number of loan applications was approximately 28 million in the third quarter of 2017, representing an increase of approximately 496% from the prior year period. Revenues from recommendation services for credit cards increased by 251% to RMB62 million in the third quarter of 2017 from RMB18 million in the third quarter of 2016, due to an increase in the credit card volume. Credit card volume for recommendation services reached approximately 0.7 million in the third quarter of 2017, representing an increase of approximately 188% from the prior year period. Our average fee per credit card increased from RMB74 in the third quarter of 2016 to RMB90 in the third quarter of 2017. Revenues from advertising and marketing services and other services increased by 114% to RMB29 million in the third quarter of 2017 from RMB14 million in the prior year period, primarily due to an increase in revenues from big data and risk management solutions as well as an increase in the credit card volume for advertising services. Cost of revenues increased by 212% to RMB42 million in the third quarter of 2017 from RMB13 million in the prior year period. The increase was primarily attributable to the increase in traffic acquisition costs related to advertising and marketing services, data acquisition costs and short message service fees. Gross profit increased by 412% to RMB426 million in the third quarter of 2017 from RMB83 million in the prior year period. Gross margin was 91% in the third quarter of 2017, compared with 86% in the prior year period. This increase was primarily attributable to our revenues from recommendation services continuing to grow more rapidly than our revenues from advertising, marketing and other services, as the former has higher gross margin than the latter. Sales and marketing expenses increased by 613% to RMB388 million in the third quarter of 2017 from RMB94 million in the prior year period. This increase was mainly due to growth in marketing and other expenses and a payroll related cost which was in turn attributable to the rapid development of recommendation services. Research and development expenses increased by 78% to RMB35 million in the third quarter of 2017 from RMB20 million in the prior year period, primarily due to the increase in payroll costs, general and administrative expenses increased by 268% to RMB15 million in the third quarter of 2017 from RMB4 million in the prior year period, primarily due to the increase in professional fees as the Company prepared for its IPO. Loss from operations decreased to RMB12 million in the third quarter of 2017 from RMB34 million in the prior year period. Income tax expenses were RMB5 million in the third quarter of 2017 compared with nil in the prior year period. Net loss decreased by 52% to RMB17 million in the third quarter of 2017 from RMB34 million in the prior year period. Non-GAAP adjusted loss which excluded share based on compensation expenses from net loss decreased by 51% to RMB15 million in the third quarter of 2017 from RMB33 million in the prior year period. Non-GAAP adjusted EBITDA which excluded share based on compensation expenses. Depreciation and amortization an income tax expenses from net loss for third quarter of 2017 was a loss of RMB10 million representing a decrease of 69% from a loss of RMB32 million for the prior year period. Net cash provided by operating activities was RMB18 million for third quarter of 2017 compared with net cash used in operating activities of RMB5 million for the prior year period. As of September 30, 2017, the Company had cash and cash equivalents of RMB319,000 and working capital of approximately RMB67 million, as of November 13 2017, the Company had cash and cash equivalent of RMB1.8 billion including IPO proceed and cash received from [indiscernible] as part of capital contribution. Our network is highly diversified and comprised of many institutions including large investable commercial banks that are already fully licensed and the smaller consumer finance and other CBRC licensed institutions. Most of these groups should see a minimal to no impact from the proposed regulatory change. We are the only fin-tech company in China that holds strong positions across all product segments and this is now clear differentiation from other market participants. The majority of our revenue comes from our recommendation services and we believe the proposed regulation will offer new opportunities to extend our credit card business as some consumers will shift from cash loans to alternative source of financing. We believe the revenues would change will also help being -- help to increase the number of users that are attracted to our independent and open platform. Finally, we are actively analyzing market change to launch additional products and services to meet the evolving needs of our users. We have continued the growth in the fourth quarter. We expect to see fourth quarter revenue to be around RMB545 million representing a year-over-year growth of 379%. While we do anticipate we will deal with short term tailwinds, we remain well positioned to capitalize on the new market opportunities. As such, we're confident in our long-term outlook for both industries and our company. Despite the near term pressure, we are prudently monitoring shifting market trend and will provide you with additional updates as our progress. One final note is that our quarterly progression during the year reflects some seasonality in our business. With our first quarter historically representing the fastest quarter of the year, the result follows the Chinese New Year where many banks and other financial service providers are closed for one to two weeks during the China New Year, national holiday, and the most consumers are on leave. With that, I conclude our remarks. We will now open our call to the questions. Operator, please go ahead.

[Operator:]

Thank you, Mr. Ye and Mr. Chen. We will now begin the question-and-answer session. [Operator Instructions] The first question will come from Piyush Mubayi of Goldman Sachs. Please go ahead.

[Piyush Mubayi:]

I have two quick questions. Could you talk about the revenue split for Jianpu between banks, non-banks, non-banking license FSPs and the non-license ones? And how the regulations might impact these three revenue sources? I realize you don't -- you might not be prudent to be specific, but any color you could give us around how that mix is being? And how that might change in 2018 that would be helpful? And also any feedback you may have gotten from the FSPs that are on your platform with regards to the timeframe of the compliance would be most helpful for us to understand how the business is proceeding?

[David Ye:]

Piyush, I will answer your question first. Regarding the revenue split, according to the new regulation published on September 1st, we do some -- we did do some analysis of our revenue composition particularly for recent months. So, we would like to share -- we would like to share a little bit information regarding our revenue composition. So from revenue we see, our revenue is just like term distribution following the overall China financial services landscape. At the top part, there will be the -- there're other banks and also other CBRT regulated financial institutions. And the second part will be the licensed -- non-banking licensed financial institutions that including the consumer finance company, the trust company and also the micro-lending companies, micro-lending licensed company. This cutoff can be split into two categories, one is a local -- the one with local micro-lending licenses who are doing business in a certain region, and the other part will be the Internet micro-lending companies, which can extend loans through Internet to nationwide. And the third part as a bolt-on opportunity will be the non-licensed financial providers this including the P2P companies and also other non-licensed financial institutions. Currently, based on our understanding of the regulatory evolving, we view P2P will get registered in the near future. So, this part of the revenue -- this part of the financial institution can also be deemed as part, you know kind of licensed company. It's a registration process that P2P companies will go through when the register the Company -- when they get registered from the provisional on the list of local financial offices they can continue doing the lending business and also on a lending products. So, I think the bottom part of the other non-financial institutions, non-licensed financial institutions probably will be the most risky part that will impact our revenue in the future. So we did some analysis on November -- revenue of November. We found that that part is around 12% of our total revenue in November. So, if these non-licensed financial institutions cannot directly get their license or find a way to cooperate with other licensed financial institutions in the future probably this part will be materially negatively impacted for them just down the road. For the -- if you read the regulation, you may find there could be some potential impact for the P2P companies and also the Internet and micro-lending companies. The P2P companies, for P2P guys firstly we want emphasize at the end we are working with top P2P companies in China to provide lending products to our users. So for the P2P companies, the adjustments probably they need to do is to offer the lending products online lower than the 36% APR. So -- and for the Internet micro-lending companies probably you know just as there's a new resolution came out yesterday. So there's a suspension of granting new Internet micro-lending license to their suspension there for the existing ones, probably the central -- the CBRC will do a round of a review of existing license. So the impact of these two categories I think for P2P guys, they probably need to address their products. For the micro-lending -- Internet micro-lending companies, probably they need to go through the review conducted by the CBRC and the local financial offices. And also at the same time, they need to go through the review by the government. So, for these two parts, there will be some short-term impact down the road. But given that for the financial -- for the Internet finance, the new regulation that will be a grace period from the beginning of December probably to the mid-next year, so during that period there will be some short-term pressure to us, beyond that we still -- we're still confident of the overall consumer finance industry and the Internet lending costs in the long run. I am not sure -- does that answer your question?

[Piyush Mubayi:]

That's very clear. And if you could just talk about any feedback you may have from the FSPs on our platform so far?

[David Ye:]

Okay, so Piyush I will talk about the feedback from the financial service providers. So let me first summarize what's happened last two weeks in terms of people spend of china, China Banking Regulatory Commission basically, they basically suspended the issuing of Internet micro-finance license. They also had a joint release in December 1st in terms of replication of the cash long business in couple of categories. The first one is basically licensing is required for the lending activities. And number two is basically is an annual percent rate cap on loans for all durations. And there are a couple of other ones basically are like mutations on the funding sources -- institutional funding sources and also PBOC and CBRC requires, order loan. Consumer loan needs to have a specific purpose during the underwriting process. So, that's and also the other -- couple of other ones like the production practices, data security status, so there is a couple of the minor ones. So the feedback from the financial service providers, we definitely have seen in the last week -- two weeks, we have seen; number one, for the licensed institutions or registered institutions like P2P, they have changed their product. They're basically -- they're lengthening or extending the loan durations to lower the APR rate. And also we have seen in FSPs, they're -- now, they start requesting the borrower to state the purpose of the loan upon either the draw downs sometimes even before the underwriting in the process. We also have seen some of FSPs introducing third-party guarantee company or third-party insurance agencies to basically to fully in compliance with the law, if they don’t have a license. So, there are ways -- there are a couple of ways to companies that FSPs adopting those changes. And also we do expect that the actual interpretation and the implementation of those rules and regulations will be handled at provincial level from an info level. Keep in mind the rules and regulations are from essential from the head hunters from Beijing or from the central government which is PBOC and CBRC. So that showed execution in limitation or interpretation will be handled by a local in our case it could be a city or municipal finance office so with the provincial finance office so in that case we do expect some grace period for this tightened regulatory process. So this process is similar to what happened in the peer-to-peer lending in P2P companies like a year and a half ago, like a year and a half ago, there's also the PBOC and CBRC, they offered a one year grace period for P2P companies to fully be in compliance with the law actually late last year and this August -- this August PBOC and CBRC also expanded as the P2P company compliance to one more year toward August of 2018. So as Oscar just said, we do expect a period of one quarter maybe two quarters short or longer in some provinces to fully in comply with the key rules and regulations we just mentioned. So overall we have seen some of FSPs not impacted at all like the credit card company, consumer finance company and the licensed like banks, no impact at all. Some of the middle tier micro finance company or using micro-finance company either has adjusted their product IPO duration or they may have some pressure on the funding side. But again give them some time they will be able to have some ways to get fundings and also, lastly we actually found it's interesting these rules and regulations actually have less impact for peer-to-peer lenders compared to the micro finance company or Internet micro finance companies because P2P company there are funding sources from the retail like the investors basically they have unlimited leverage all into the funding source. They don't have to comply with the funding like the leverage ratio of two or three or maybe five micro lenders. So that's actually some good -- that's a good news for peer-to-peer lender. This is the part actually better than we expected compare to two or three weeks ago. So lastly, we do found out that closed to 200 Internet micro finance companies have been issued in about 10 companies in the past, actually more than we said month ago, like month ago because understand now across the 200, but again CBRC issued notice yesterday, they're going to review licenses to make sure the licenses -- the companies need license will be fully compliant with that. So there are some -- it'll be a more clearer on that part, but in that case we actually found -- we're actually -- that's the news last few days, we found a couple of no licensed companies that actually got license, just a month or two months before the shutdown of licensing. So actually the number of licensed companies will be more than we just thought. And it's good news that it's top ones top 30 or 50 is into the micro finance company also are lenders. We actually find the most of them actually they already have license, right. So issue for them is just the product or also required the users to stand the purpose. They need to be in the regulator compliant cost, but that's manageable. So that's last feedback from the FSPs what we have since we have heard although they have taking actions in the last two weeks.

[Operator:]

And the next question will come from Richard Du of Morgan Stanley. Please go ahead.

[Richard Du:]

I have two questions. First of all, obviously, there's a lot of cleanup going on with the some of these all-in lenders. Given that situation, will that impact you I guess the client acquisition plan or the marketing plan? Over the next several quarters, are you going to basically continue to acquire borrowers at the similar pace? Or are you probably will take a slight pause in some quarters? And in addition whether the acquisition costs will be impacted as well assuming a lot -- there's a lot of these online lenders are exiting the market, maybe they're not as competitive? That's question number one. And then the two, obviously there's still news indicating sort of giving a timetable of some of these for example cleanup. By January, they want to finish the review of some of these issues with the online lenders impact by Match. Coming in the news, they want to basically have all the online lenders violating current regulations exiting the market. Do you have any updates on your financial institutions, talking about the timetable at the moment because that could be slightly different grace period than the previously cleanup efforts?

[David Ye:]

The first question is about the acquisition -- acquisition costs overall. I will answer that. So as a platform, we connect users Internet users with financial service providers, so 38% of our traffic are organic of course no impacting on other parts. So among the paid traffic, over 60%, we actually have seen overall acquisition cost going down in the last two weeks, as you guess now the marginal lenders have a higher API actually have paid -- actually have distorted market. They're actually paying a higher cost for credit or pay a higher price for the acquisition costs. So, we actually have seen some of the channels, the cost per application, cost per lead has decreased 58% to 60%. We have some decent channels, but that's some of the performance based channels. But we do have some channels it’s either paid by quarterly or by annually, so in that case we do -- you take us some time to scale the back, so the speed of scale back, the warning is not as fast as we would expect it because we do need to say let the contract expire at the end of the quarter or the end of the year. So, overall, we do have seen the cost for acquisition has gone down. And also, we actually have found the less lenders actually paying for traffic for loans. We actually have seen our credit card, credit card loaning has gone up and also there's a cost for credit card classification and also for approval has gone down in the last few weeks. So the hedging -- the hedging from the acquisition to sales, right, that’s from the source of the acquisition to sales that's one type of hedging. The second type of hedging is, oh, I have to call it diversification right, the less paying less competitors in the loans that loans size, they actually we benefit in our credit card as well. So that's a situation. So at the end of the day, our marketing strategy is that we're buying the traffic as margin. So if our ROI, return on investment, which is defined as our sales revenue divided by traffic acquisition cost before our service revenues divided by acquisition cost is above 120% or 125% for loans or about 125% for credit card, we grow as fast as we can. So, we've definitely seen some headwinds for the sales revenue size, but we will be able to scale back our acquisition costs and will receive the benefit from that national hedging and also diversification and overall. So that's the way we manage the lender operation in last week and half two weeks, we on a going forward, we keep optimizing in the -- and monitoring position and optimizing our acquisition and strategy, we further improve that over time.

[Oscar Chen:]

Richard, your second question is about the new regulations issue just yesterday about my core lending cost. During the last two weeks from December 1st regulation came out, we keep very close interaction with the financial providers working with our lending parts, our line of secured lending parts. So far given that regulation is just come out yesterday we haven't caused anything new around that cost. So our goal is that to keep very close indication with these lenders fort the past the potential impact our platform, so as we said currently, we see some short-term pressure. We'll keep you guys posted as appropriate down the road.

[Operator:]

[Operator Instructions] Your next question will come from Ella Ji of China Renaissance. Please go ahead.

[Ella Ji:]

I have some quick follow-up questions. The first one, you mentioned there's some pressure on the funding side. Can you elaborate on that? Is it the funding sources? Is it from financial institutions? Or is it from trust companies? Or are you referring to the individual investors or high net worth investors on the P2P platform? And then secondarily, I just want to clarify that given or the some cash flow has kind of lowered their APR to be compliant. And so should we expect their -- the average fee that you can charge on your platform for long execution? Is that average fee also going to see some pressure in the near term?

[David Ye:]

I'll answer the first question. We talk about the numbers for the same question. So in terms of the funding pressure and again the more detailed interpretation or clarification from PBCO or from CBRC, we would expect more from them. But that's what I will mention it based on our interpretation and also what FSPs have shared with us. So, in a couple of categories, the first one is about the P2P or individual investors for the P2P wealth management platform, is our understanding and also P2P FSPs, they're not impacted by the funding constraint. The P2P or market based lenders they can still attract funds from individual investors and will use funding to match the loans to continue the lending activity. So that's the less impacted. Once the impact is more than the ABS, so now the asset backed security was one of the licensed lending cum licensed to micro finance company, now the regulation state now the -- when they calculate their leverage ratio, they still want to move their off balance sheet ABS owned balance sheet, which were definitely -- which were limited the fundings for some of the micro lending companies that’s the ABS. And the second thing is CBRC where we're tightening very strongly enforced the leverage ratio for micro finance company. So if we say, it raises capital for micro finance company, 500 million, then they may have ratio of 2x or 3x maybe a couple of x, which for some micro finance company or Internet micro finance company, they will have limited growth. They either have to increase the paid in capital or maybe reduce the growth. So that's what we have heard from the industry and our interpretation for the regulation in the three categories.

[Oscar Chen:]

And I will take your second question. I think your question is about the average fee we chartered for the loan recommendation. The average fees we charted up is based on the application basis so firstly we happen to be in a downward turn in the last two weeks, although you know the lenders are under the pressure to adjust their products to have the total APR below the 6%. So with that firstly they need to adjust their products and also adjust the risk model to adapt to the regulatory change. But what we are seeing is we already had some financial providers they launched their loans and 36% in care product our platform so with that what we observed for now is that they need to have more targeted potential borrowers, they need to, so what we are doing we can help them to do pre qualification pre screening to help them to target certain population of the potential borrowers. So we are seeing our value through these financial service providers, so at least for now we don’t see encouragement for all, up to the loan order types.

[David Ye:]

And I want to add one more thing about the funding source, I just didn't mention is a bank, banks are now banned from investing in the cash loan product for the micro finance company and also the P2P companies, P2P companies are also prevented from providing capital to micro finance companies so this actually usually hurt micro finance companies access to funding so that's of the points I just omitted I just want to clarify that.

[Operator:]

And ladies and gentlemen, this will conclude our question-and-answer-session. I would like to turn the conference back over to management for any additional or closing comments.

[Choya Chen:]

Thank you once again for joining us today. If you have any further questions, please contact us at [e-mail] or typically Investor Relations at [e-mail]. Thank you for your attention and we hope we have a wonderful day.