Jianpu Technology Inc. (NYSE:JT) Q3 2019 Results Earnings Conference Call December 9, 2019 8:00 AM ET
Liting Lu – Investor Relations Manager
Daqing Ye – Co-Founder, Chairman and CEO
Oscar Chen – CFO
Conference Call Participants
John Cai – Morgan Stanley
Julie Hou – UBS
Wendy Chen – Goldman Sachs
Hello and welcome to Jianpu Technology Inc.’s Third Quarter 2019 Earnings Conference Call. Today’s conference call is being recorded.
At this time, I would like to turn the conference over to Luting Liu, Jianpu’s Investor Relations. Please go ahead.
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 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 these discussions. 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 the forward-looking information, except as required by law.
During today’s call, management will also discuss certain non-GAAP financial measures for comparison purpose only. For a definition of the non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results, please see our third 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 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 CEO; and Mr. Oscar Chen, CFO.
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 third quarter. Mr. Chen will then provide details on the company’s financial results and the business outlook before opening the call for your questions. Mr. Ye, please go ahead.
Thank you, Liting. Hello, everyone, and thank you for joining us on our call today. We are pleased to report another quarter aligning with our mission to become everyone’s financial partner.
This quarter, Jianpu has beaten guidance, and we have exceeded our guidance for the past 9 consecutive quarters since our IPO, amidst the challenging macroeconomic environment and uncertainties in China’s retail financial industry.
As the 18 month law on trade disputes has heightened the risk of an economic slowdown, the growth of China has cut down to over 20 year low. Overall slowdown of macro economy and credit tightening continues to put downward pressure on consumer and SME lending.
According to PBOC, the central bank, the growth of retail consumer loans significantly slowed down in the first half of 2019, with incremental volume less than 30% of the second half of 2018. The licensed non-bank financial companies, or NBFC, new loan disbursement in Q3 was almost flat with 0.02% increase compared to Q2.
Moreover, the increase of short term loan disbursement by medium and small sized banks increased only 1.4%, which is significantly lower than the same period last year. At the same time, the growth of credit card revolving balance also slowed down sequentially in the third quarter.
The tech-enabled retail financial services industry in China today is entering a new era of transformation and reset, as financial service providers are accelerating their digital adoption. The online lenders funding sources are moving towards better regulating the institutional funding with the increasing protection of personal financial information, especially on how the data is utilized, shared and distributed.
Moreover, some overaggressive or inappropriate collection practices by third-party debt collection agencies have caused widespread concern and became a rising challenge in the short term for all players in financial service industries.
Last, in recent months, regulatory authorities across a range of jurisdictions have issued quite a few new rules, regulations and guidance, including rules regulating personal consumer finance [Foreign Language] guidelines regulating cooperation between commercial banks and the FinTech companies [Foreign Language] guidelines for protecting personal financial data and information [Foreign Language] and guidelines for transitioning peer-to-peer lenders into macro lending companies [Foreign Language], which we can see that the current trend of industry regulation ratification continually tightening the overall credit environment.
We want our investors to be aware of this industry regulatory policy change and reform and mounting regulatory pressure. The industry entered into a relatively tightening cycle, which consequently has a impact on the supply of financial products being listed on our platform.
However, our strong technological capabilities, industry know-how and in-depth relationship with financial institutions well position us as we tackle and conform to the new regulatory challenges.
For the third quarter, our credit card businesses remains resilient with the credit card volume for recommendation services increased 60% year-over-year. We continue to work as the largest platform of owner and user acquisition for major banks and credit card issuers.
We have actually strengthened our market position in spite of this turbulent market environment. So far, we helped close to 30 largest bank credit card issuers, helped them issued more than 15 million credit card cumulatively.
In addition, we are striving to deepen our cooperation with banks by exploring new initiatives of launching their wealth management and deposits product and enabling them to improve their digital marketing, risk management and technological capabilities.
To seize the evolving opportunity in the new area of digital financial service industry, we continue to invest in technology and our people that help to advance new segments of our businesses.
We will further leverage cutting-edge technologies, such as AI, data science, cloud computing and digitalization to optimize our operation, including user acquisition and engagement, data analytics, security, sales and marketing and partner engagements.
In the past three quarters, we have deployed 20% of our research and development and other resources and efforts into new businesses, which we believe will fuel our growth moving into next year and beyond.
Going forward, we will remain focused on these new initiatives, better positioning ourself to capture medium and a long-term growth opportunity in the digital financial services sector in China and globally.
With that, I will now turn the call over to our CFO, Oscar Chen, who will discuss our financial results.
Thank you, David. And hello, everyone. Our performance in the third quarter reflects our efforts in optimizing the business and the turbulent operating environment as a result of our continuing efforts to actively evolve our business, in meeting the needs of the digital financial services industry.
Revenues from banks and the licensed financial institutions contributed large percentage in the past quarter, with healthy gross margin growth improving to 92% in the third quarter of 2019 from 89% in the same period of 2018. We strive to continue our balanced strategy and stable foundation of sustainable operation of the business.
In maintaining our leadership in retail financial services sector, we are well positioned to move up with the market as demand for recommendation services and the capability to fulfill that demand normalizes within the boundaries of the new regulatory actions that are meant to standardize online retail financial services and protect consumers.
To bolster David’s financial highlights for the quarter, operationally, credit card volume for recommendation services was approximately 1.8 million, representing an increase of approximately 6% from the same period of 2018.
The average fee per credit card for recommendation services increased to RMB109 in the third quarter of 2019 from RMB106 in the same period of 2018. As a result, revenues from recommendation services for credit cards increased by nearly 7% to RMB195.6 million in the third quarter of 2019 from RMB183.5 million in the same period 2018. Also, encouragingly, gross margin improved to 92% in the third quarter of 2019.
For the third quarter, we reported total revenues of approximately RMB324 million, a decrease of 27% year-over-year, and non-GAAP adjusted net loss of nearly RMB101 million.
Total recommendation services revenues decreased by 24% year-over-year to RMB282 million in the third quarter due to a 53% year-over-year decrease in loan recommendation revenues, offset by nearly 7% year-over-year increase in credit card recommendation services revenues.
Revenues from advertising and marketing services and other services decreased by 44% to RMB38 million in the third quarter of 2019 from RMB67 million in the same period of 2018 since the company slowed down the pace of certain advertising business, given the lower efficiency amidst the challenging microeconomic environment.
Sales and marketing expenses decreased by 4.6% to RMB325.3 million in the third quarter of 2019 from RMB341 million in the same period of 2018. The decrease was mainly due to the cut down of traffic acquisition costs.
R&D expenses increased by 4.8 – increased by 4.7% to RMB67 million in the third quarter of 2019 from RMB63.5 million in the same period of 2018, primarily due to the increase in the payroll costs incurred for the new business initiatives.
Our G&A expenses decreased by 36.8% to RMB31 million in the third quarter from RMB48 million in the same period of 2018. As a result, non-GAAP adjusted net loss was RMB101 million in the third quarter of 2019. At the same time, non-GAAP adjusted EBITDA was a loss of RMB93 million compared with a loss of RMB13 million in the year ago period.
In response to the challenging macro environment, the management has implemented certain measures to maintain and enhance our operating efficiencies, including cut down marketing and other direct costs to offset the negative impact from the supply side of our platform, and also launched cost optimization program to enhance productivity per head.
However, due to the lagging effect of such measures, we expect margin improvement towards first half of next year. At the same time, we want our shareholders – we want our stakeholders to be aware of the current cost and expenses structure also contains certain upfront investment for our new business initiatives.
The expenses incurred in this area was around RMB20 million in the third quarter and around RMB35 million in the first 9 months. The management strongly believes that such investment will fuel our future growth and create shareholder value in the long run.
As of September 30, 2019, we maintained a strong balance sheet with cash and short-term liquidity of RMB1.1 billion.
Regarding outlook, the company anticipates the external environment to remain uncertain and challenged, and consequently, the financial product available on platform may continue to decline in the coming quarters.
Based on the current estimates, the company expects total revenues for the fourth quarter 2019 to be approximately RMB240 million to RMB260 million.
With that, I will conclude our prepared remarks. We will now open call to questions. Operator, please go ahead.
Thank you. [Operator Instructions] The first question today comes from John Cai of Morgan Stanley. Please go ahead.
Thank you for taking my questions. So I think my question is more related to the sector and the regulations. Obviously, you mentioned that the lending activity has been negatively impacted by the regulatory tightening. Just wonder if there’s any outlook on that? Do we expect it to improve next year? And also I think we mentioned about investment into new business. Is there any color on that as well?
So the last question is about the recent Beijing regulatory sandbox approach that was released in the news a few days ago. So would that help in any ways of our business? Thank you very much.
Thank you, John. This is David. I would try to take a stab on your questions. So the first part regarding the regulatory environment going forward, we would expect the tightening in lending markets and the relevant trend probably will continue after the Chinese New Year, which we have in the end of January.
And we believe the retail financial services industry sector, the uncertainty will be quarter away, but we definitely will expect more visibility in – after Chinese New Year, which is almost early Q2 of next year.
And operationally, we believe the business will slowdown because the end of the year and also January, that’s early Chinese New Year, but expect business takeoff after February.
So operating environment will be challenging, but we also – we have seen that the competitors, or similar business models, they’re actually in a much harder positions due to same regulatory reasoning and also their operational reasoning and also liquidity problems.
And also, for us, the advantage of being an independent and open platform, we will have huge benefits because as soon as the market takeoff, we would be able to capture the scalability and our light asset model, we have gained the market growth and advantage.
And also, keep in mind, we – as a light asset platform, we don’t take any risk. We don’t have any credit or liquidity or any market risk. So this put us in a relatively stronger position, okay? That’s the first part.
Second part, I believe, John, you asked about the sandbox, the regulatory framework just launched by People’s Bank of China, the central bank, on December 6th, just a few days ago. So as far as we understand, we actually had some dialogue with the regulator just a few days ago. I mean, there are about 45, 46 projects that is going to be part of the sandbox.
So basically, the purpose of putting Beijing as the testing city for the so-called FinTech innovation and supervision sandbox is to build the FinTech supervision and regulation basic rules and framework because so far we know in the past couple of quarters, we have growth regulations from different revenue bodies. But this is the first time the central bank say, hey, Beijing, go ahead and build the basic rules and framework for financial supervision. That’s the first purpose.
The second purpose is exploring more like transparency of information and more product demonstration and more supervision from relevant bodies. And the third one, they try to build more inclusive and more prudent FinTech innovation and supervision tools that try to improve and enhance financial regulatory agencies professionalism and also try to increase transparency and standardization, which is very important. So we believe more clarity, transparency, standardization and more professionalism, which will benefit the sector in the short term, mid term, of course, in the long term.
And finally, in terms of the FinTech supervision sandbox, the couple of – we have seen a couple of initiatives they have launched. Basically, they want to make sure more project of inter-company get a system connection into the testing environment or testing bed. They want more loan foreclosure or more closure from the financial institution or financial service provider side, they want some product registration and disclosure.
And so in that case, we believe we positioned as a tech-enabled open platform, and we are able to work with the public authority in Beijing Municipal government and also the Beijing Internet Finance – FinTech Association, The China FinTech — Internet Finance Association, which we – in the past 6, 7 years, we have a partnership, we have cooperation, and we also have some RegTech initiative with the relevant bodies, who will be part of the partnering, trying to engage with the PBOC-endorsed Beijing FinTech innovation and supervision sandbox. So John, does that answer your question, especially the second part, second half?
Yes. So I think just to follow-up on the new business initiatives, I think I heard that there is some investment in that area. If there’s any color that can be provided would be very helpful? Thank you.
Sure, John. I think, yeah, our new business initiatives will be, I think, probably two categories: One is category expansion in terms of financial products to leverage our platform advantage for cross-selling, and also the geographic expansion to leverage our technology and industry know-how to penetrate into the other markets.
So I think we can share more probably next quarter something. But one thing I want to emphasize is that the management is and will be very disciplined in terms of the spending on the new business initiatives.
Thank you, Oscar. That’s helpful.
[Operator Instructions] The next question today comes from Julie Hou of UBS. Please go ahead.
Hi. Good morning, David and Oscar. Thank you for taking my questions. I have two questions. The first one is on revenue breakdown. Total revenues declined by 11% quarter-on-quarter. I wonder what is the revenue contribution from banks, licensed financial institutions and unlicensed lenders, how does it compare to previous quarters?
And my second question is on average fee. The third quarter average fee per loan application was RMB17 versus RMB18 in second quarter. What are the key drivers behind decline? And how should we think about it in the fourth quarter?
Also on the credit card side, can we still expect an increase in average fee per credit card issued in the fourth quarter as was the case in previous years? Thank you very much.
Yes. Thank you, Julie. I think in terms of the revenue contribution from the banks and other licensed companies, we are seeing a slight increase in terms of revenue contribution percentage from last quarter, given the growth in credit card and also the shrinking in the lending, the loan recommendation services. We are seeing more revenues from the banks.
So I think it’s a 2 to 3 percentage point increase compared to the last quarter in terms of the revenue contributions from the banks and other non-bank licensed financial institutions.
Regarding the second question about the fee per loan recommendation, there is – yes, there was a slight increase – a slight decrease in terms of the ASP. But look the loan recommendation breakdown, it’s almost the same.
I think the slight decrease also – is also an evidence of the less financial products available on platform. That means the reducing demand from the financial service providers in terms of borrowers acquisition. So that’s – I think that’s fairly reflected the trend. Julie, does that answer your question?
Yes. And how about the fourth quarter guidance on credit card ASP?
The guidance on the fourth quarter ASP, I think in terms of ASP for both credit card and the loan recommendation, we would expect: credit card, we may see a slight increase in terms of the fee per card issued, for loans, given the challenging environment and the declining trend of the product available on platform.
So we would expect another slight decrease in term — but not much, maybe RMB1 also per – in terms of loan ASPs. I hope that answered your question.
Yes. Thank you. Can I also ask a question on R&D expense? You mentioned that there is a sequential decline in R&D expense due to cut in payroll costs. So do you have employee turnover in the third quarter, and as such, will continue to leverage technology to improve business, how should we project R&D expense going forward? Thank you.
Julie, yes, first of all, I want to clarify a bit. I – what we meant – what I mentioned is that we cut down the acquisition cost in terms of the traffic acquisition. But for R&D, the year-over-year trend is – I think, it’s an increasing trend, increased by around 5% year-over-year.
But we may also want to mention that among that R&D costs, we are trying to improve R&D efficiency for the existing business and the shifting around 20%, as David mentioned, R&D efforts and the resources to our new business initiatives. So overall, the R&D cost increased in the third quarter. Yeah, thank you.
The next question today comes from Wendy Chen of Goldman Sachs. Please go ahead.
Hi. Thanks management for taking my questions. I have two questions. First one and following up on the commentary that we have a cut in acquisition costs for the quarter, just wondering how much of this is coming from, let’s say, by the cheaper price due to the muted advertising market or versus have we actually reduced demand because of our relatively lower loan growth for the quarter?
And my second question is about the demand by financial institute. So after the re-listing of our app from – to all the app stores, how do we see the financial institutes activeness on our app after it’s coming back? Thanks very much.
Okay. Thank you, Wendy. I think, let me answer your second question first. So after our app is fully re-launched, so we are seeing the number of financial service providers on our platform is – remain stable. The number remains – our financial institutions remain stable. But we are seeing less supply of the financial product, mainly because of the increasing tightening of credit environment.
And for — both credit card issuers, the banks and other non-financial – non-bank financial institutions, they enhanced their credit policy in terms of the user acquisition. So this is how – the demand in terms of – their activities on our platform are still active.
But in terms of volume or the number of financial products available on platform, it’s a declining trend because they are changing — they are shifting their – they are tightening the credit policy, they adjust – some financial service providers adjusted their funding source from the – like P2Ps, they’re shifting away from the retail funding to the institutional funding and also some other impact in the market also have some impact on the activities on our platform.
So regarding the traffic costs, you know, in terms of the unit traffic costs of the user acquisition, for example, the app download, we are seeing a declining trend. For instance, on one OEM app store, we are seeing the acquisition cost is – was half of the standing compared to the one quarter ago. The overall – the traffic acquisition cost, I think in the retail financial services sector may decline in the past quarter.
So although the unit cost of user acquisition is declining, but given the scale and given the efficiency level we have that you can see the number of our sales and marketing efficiency.
So Wendy, I believe, the last part of your question is about the app re-listing in major app stores, right? And we – most of our apps resumed listing in Apple Store – other OEM apps like App Store, end of Q2 and, of course, fully launched in Q3, that’s what happened.
However, among the whole China mobile sectors, there is a new initiative going on, like as of October 25th, there is an app, governance working group initiative, which is mostly under supervision by [indiscernible] which is Industrial and Information Ministry.
Basically, they have new rules in terms of how mobile applications or app collect personal information in terms of mobile payment, online wealth management and lending, and also even for some general applications.
We know, as of last week, thousands of apps got de-listed by this app special governance working group, including thousands of banks. We know, as of last week, 1 of the top 10 bank major app got de-listed as well. So we are fine. Our app is not impacted by this new governing — new special governance initiative.
But in the meantime, we are also helping our financial institution partners, banks, credit card issuers. We know some of the small banks, rural commercial banks or city commercial banks, they’re also trying to figure out how to fully comply with the recent app governance initiative.
So we are working with some of the banks in terms of helping them to enable them to manage the privacy and data governance better and helping them to relaunch their digital marketing initiative.
So yes, definitely, we do see some short-term impact. But we believe, as our financial institution partners manage the app, digital marketing, data privacy and information security better, we are able to help them to better grow their digital businesses next year.
Great. Thanks very much, Oscar and Daqing. Its helpful.
That concludes the question-and-answer session. I would like to turn the conference back over to management for any additional or closing remarks.
Thank you once again for joining us today. If you have any further questions, please contact us at email@example.com. Thank you for your attention. And we hope you have a wonderful day. Thank you.
Thank you, everyone.
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.