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360 Finance Inc (QFIN) Q1 2019 Earnings Call Transcript

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360 Finance Inc (NASDAQ: QFIN)
Q1 2019 Earnings Call
May 21, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the 360 Finance First quarter 2019 Earnings Conference Call. All participants will be in a listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I would like to now turn the conference over to George Shao, Head of Investor Relations. Please go ahead.

George Shao -- Head of Investor Relations

Hello everyone and welcome to our first quarter of 2019 earnings conference call. Our results were issued earlier today and can be found on IR section of our website. Joining today on the call are Mr. Jun Xu, our CEO; Mr. Haisheng Wu, our President; with Mr. Alex Wu, our CFO; Mr. Yan Zheng, our Vice President; and Fan Zhang, our General Counsel.

Before we begin our prepared remarks, I would like to remind you of the Company's Safe Harbor statement in connection with today's conference call. Except for any historical information, the material discussed on this conference call may contain forward-looking statements. These statements are based on our current plans, estimates and projections. And therefore, you should not place undue reliance on them.

Forward-looking statements involve inherent risks and uncertainties. We caution that a number of important factors could have caused actual results to differ materially from those contained in any forward-looking statement. For more information about the potential risks and uncertainties, please refer to the Company's filings with the SEC including its registration statement.

In addition, this call will also include discussions of certain non-GAAP financial measures. Please refer to our earnings release which contains a reconciliation of the non-GAAP measures to the most directly comparable GAAP measures. Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in renminbi.

So with that, I will now turn the call over to our CEO, Mr. Xu.

Jun Xu -- Chief Executive Officer & Director

All right. Thank you George and thank you all for joining us today. We're pleased to report another strong quarter, and I will cover full aspects of the business. First, we keep setting new records in terms of growth. We originated RMB41 billion of loan and the outstanding balance reached RMB53 billion widening our leadership in the sector. We continue to invest heavily in the future. We added 3.5 million new users with credit line and ]2.2 million (ph) of borrowers, both a new record for the Company.

We will continue the growth strategy for the next couple of years. We have less than 1% of the consumer lending market in China and the headroom for growth is immense. The return on investment for new customer acquisition remains very attractive. We don't want to be a niche player. Our aspiration is to be a leading platform and serve most of the Chinese households with borrowing needs over time.

We believe, in our sector, growth is a privilege for leading platform rather than a choice. It requires a platform to possess the ability to source new customers at scale, to secure sufficient funding and to manage credit risk as well simultaneously. Therefore, we have been seeing the markets become increasingly concentrated in the last 18 months and we anticipate the leading platform will continue to grow faster than the industry average.

Secondly, I'll talk about our credit quality. in spite of the faster growth, we continued to lead the industry credit quality. 90-day plus delinquent ratio was 0.94% as of March 31st 2019. The annualized vintage loss rates, which is the ultimate metric we look at continued to be within our expected rates and the native industry in line with our aspiration to serve most of Chinese households with borrowing needs over time, and then leveraging our improved credit risk management skills, we proactively extended the services to users with different risk-adjusted returns. Although these near-prime segments carry higher charge-off rates, they generate higher risk-adjusted returns netting the effect of higher APRs and the risk costs.

In addition to serving more near-prime segment customers, we're also working on improving activities and the thickness of the super prime segments. We created a dedicated team for it to make sure we provide more credit lines and pricing for our best customers. We hope this will become another important source of growth for us going forward.

Thirdly, I'll comment on the funding situation. In Q1, we substantially increased the number of funding partners. Most of the additions are National Financial Institutions that can do business across the country. I think from what we can see our need for the year are multiple times covered by the National Financial Institutions by now.

Through our internal stress testing, even the rumored restriction on regional banks ability to disperse loans nationally came into effect immediately, our funding availability and the funding costs shouldn't be adversely affected. We're very pleased to report that on February 1st, we issued our first ABS at Shanghai Stock Exchange at a funding cost of approximately 5%.

In Q1, we gained approval for RMB10 billion of such securities in 2019 at both Shanghai and Shenzhen Stock Exchange. Thanks to the stimulating financial and liquidity environment in China, we observed downward trend in funding costs with our financial institution partners and we believe the trend will materialize into noticeable funding cost reduction in Q2 and the rest of the year.

Lastly, I want to comment on the strategy of shifting to financial technology platform. The percent of loans we don't take credit risks has risen significantly in Q1 and we expect this will further increase significantly over the rest of the year. We referred over 3 million customers to banks, consumer finance companies and other lending platforms in Q1 where we do not take any credit risks.

We launched four financial technology products and covered credit scoring propensity to borrowing scores, credit hungry scores, and a blacklist checking. This is a part of our effort to open our capabilities to third-party lenders. Fifteen institutions are testing the products at the moment including banks like ICBC.

So with that, I'll pass the call over to Alex Wu, our CFO, to give an update on the financial situation.

Jiang Wu -- Chief Financial Officer

Thank you, Jun. Hopefully, you all have had a chance to take a look at our earnings release already. So I will try to keep my comments short, so we have more time for the Q&A's. As Jun just mentioned, we saw 235% growth on our top line on a year-over-year basis, 303% growth in operating income, and 335% growth in our non-GAAP operation income, 340% growth in our net income, and 382% growth in our non-GAAP net income.

So not only are we growing extremely quickly, we are also gaining more operating leverage as we continue to scale our business. Breaking this down a little bit more, our total net revenue was mainly driven by loan facilitation services which increased 248% compared with the first quarter of 2018. The rise was mainly due to an increase in loan origination facilitated by our platform which increased 179% for the same period last year and increased 25% from last quarter.

In terms of the cost structure, it mainly includes three items, origination servicing, sales, marketing and the G&A expenses. Given all the numbers disclosed in the report, let me just give you a little bit more flavor on the details. The percentage of the operating and servicing expense obviously excluding share-based compensation over revenue was 10.6% compared to 14.1% last quarter and the percentage of G&A expense excluding SBC over revenue was 2.4% compared to 2.7% last quarter. This speaks to our increasing operating efficiency. While the percentage of sales and marketing expense excluding share-based compensation expense over revenue was 34.3% compared to 30.1% last quarter. The increase of these percentage was due to -- was because we view our sales and marketing expense more of a long-term investment since each new customer to our platform would continue to our business -- contribute to our business on an ongoing basis.

In terms of margins, our non-GAAP operating margin in the first quarter was 46.2%, which is a solid improvement from 35.6% in the first quarter of last year. Our net margin in the first quarter was 35.8%, which was higher than the 27.3% level we hit in the same quarter last year. On the non-GAAP base, when we take out the share-based compensation that I mentioned earlier, our net margin goes up to 39.3% for the first quarter. Again, these numbers speak to not only the greater economics of scales, we -- as we grow our business but also the hard work we have put in to streamline our operations and improve efficiency.

And finally, moving over to the balance sheet, our total cash stands at RMB3.4 billion including cash restricted -- cash and the security deposits prepaid to the third parties. Our total cash increased 20% compared with the number by the end of 2018 which provides a solid foundation for -- to our growing business and daily operation.

One other item -- line item that I'd like to point out is our loan receivables, this jumped from RMB888 million at the end of the year to RMB1.9 billion by the first quarter of this year. This was mainly because we increased our cooperation with (inaudible) and issued ABS to diversify our funding source as Jun just mentioned. And we do plan to issue more ABS in the future.

All-in-all, we'd believe we have a very solid financial performance that gives us both a substantial cushion and significant firepower as we expand our business. With that, I will conclude our prepared remarks and we will be happy to take your questions now.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question today comes from Joey Cheung (ph) with Morgan Stanley. Please go ahead.

Joey Cheung -- Morgan Stanley -- Analyst

Hello management. Thanks for taking my questions. I basically have three questions. The first one is regarding to the cash management, I noted a decrease of RMB106 million cash balance in the first quarter. Does the management see some further decline maybe in the next few quarters? Or does the company have a internal mandate cash ratio as a percentage of total loan balance or something like that?

And the second one is regarding to the take rate we -- our calculated take rates show some improvement in the first quarter as the management admission it's because of the higher facility and service fee and post origination service fee and et cetera. I just want to ask if there is any change on the product pricing, funding cost or credit cost front?

And the third one is on the acquisition front -- customer acquisition front, we noticed a RMB700 million sales and marketing expenses in the first quarter. And just want to check if the management's outlook on the customer acquisition going forward both on the cost and acquisition channel fronts. Thank you.

Jun Xu -- Chief Executive Officer & Director

Okay. So, on the cash position, Alex, would you like to take that?

Jiang Wu -- Chief Financial Officer

Sure. Thanks Joey. This is a very good question. Actually, we want to address that. As I mentioned in our remarks, when you read our cash position, you should look at the three items. First -- the first item is the cash and cash equivalents. The other one is the restricted cash. And the third one is the security deposit prepaid to third-party guarantee companies. Basically, all these three items are our cash. The reason they are put in the different category, just because our business nature -- in the rough sense for $100 loan origination, we need to put in $5 as some kind of a deposit to the institution working with us. So it's not a cash position decreased, it being in past quarter, it's in total actually increased by 20%. It's just most of the cash went into the restricted cash and the security deposit prepaid to third-party guarantee companies.

Hopefully this will answer your question?

Jun Xu -- Chief Executive Officer & Director

Yeah. On the take rates and the pricing, funding cost, credit cost, overall the pricing and the funding cost has remained quite stable compared to the previous quarter. The credit cost actually has improved over the previous quarter and it's below our expectations for Q1. But net-net we see the APR has been stable, funding cost as I mentioned earlier is trending down and we will see some noticeable numbers in Q2 and the rest of the year hopefully. And the credit costs were positive, will stay stable and remain well below our internal budget. I'll pass to our President Haisheng to address your question on customer acquisition.

Haisheng Wu -- President

(foreign language)

George Shao -- Head of Investor Relations

Our General Counsel, Zhang, will translate for Mr. Wu.

Fan Zhang -- General Counsel

We are within this enormous consumer credit market, we have potentially billions of users and right now we are only in the position of acquired over 10 million users. Honestly, we still think we are in a early stage of development, and as our CEO mentioned, our headroom for growth is immense. Our return on investment and customer retention is looking very good. What we believe is our current expenses, spending on marketing is a long term investment for the future. And our -- to our outlook for costs -- costs from new customer acquisition. I think we are going to -- our future spending is going to be in line which we just mentioned in our belief in the future.

As to new channels we are -- we are exploring different new channels on the basis of utilizing our current channels. We are keeping a very open minded and right now we are exploring several new channels, some of which looking very promising, for example, our experiments with Kuaishou (ph) and Tencent channels have become very effective. Also, we are exploring in the e-commerce platform.

Operator

Our next question comes from Jiang Zhang with China Renaissance. Please go ahead.

Jiang Zhang -- China Renaissance -- Analyst

Hey guys. Good evening and congrats on a good quarter. So there are two questions. One is regards to the mix at the institutional funding partners. So within that, how much of that is national and how much of that is regional financial institutions?

And the second question I have is, can you just provide more color on the ABS products, give us a sense of what kind of scale are you guys are looking to achieve in the next two years to three years? Thanks.

Jun Xu -- Chief Executive Officer & Director

Okay. Thanks. In terms of institutional funding what we look at is not the actual composition, what we're focused on is among all the funding partners working with us now how many of them are national, how many of them are regional. As I said earlier, from what we can see now, our demand for funding this year are multiple times covered by national FIs who have relatively lower cost of funding.

So unless something dramatic happens to the overall financial liquidity situation in China where we're pretty positive about our funding availability and funding costs for the rest of the year, as I said earlier, the funding costs are trending down. And we will be able to report actual numbers going forward. In terms of ABS, for this year, we've gained approval for RMB10 billion ABS issuance with Shanghai and Shenzhen Stock Exchange where we're also in the meantime discussing a ABNs, now ABN is another form of ABS that's issued on the interbank market. So for this year, we're looking at at least RMB10 billion and going forward we'd like to make ABS a much more important source of funding as our assets become more well known to institutional investors. So we do anticipate ABS as a source of funding will become much more important for the next two or three years.

Jiang Zhang -- China Renaissance -- Analyst

Okay, great. Thank you very much, guys. And congrats, again.

Jun Xu -- Chief Executive Officer & Director

Thank you.

Operator

(Operator Instructions) Our next question today comes from Daphne Poon with Citi. Please go ahead.

Daphne Poon -- Citigroup Inc -- Analyst

Hi. Thanks for taking my questions. So first, I'd like to -- actually I have a follow-up on the sales and marketing expense. So if we look at it on a per new user basis we see that actually it has gone now close to RMB200 for new user based on our calculations. So I'm wondering if that is -- you see that it's more of an industry trend because of increasing competition or is more because you're doing a more aggressive customer acquisition as in auto. And second is on the vintage delinquency rate. So if we look at the vintage loss rate for the 2Q 2018 cohort, while we actually see the curve has gone up a little bit steeper, while we see the long duration, it's actually pretty stable. So I'm wondering like how should we interpret that or any particular reasons behind?

And third -- lastly is on the -- other than the last quarter, we've talked about our new initiatives on the SME lending, like primary (inaudible) so I was wondering if there's any update on the progress on that front? Thank you.

Jun Xu -- Chief Executive Officer & Director

Okay. I'll start then with the first two and I'll ask Alex Wu, our CFO, to answer your third question. On customer acquisition cost, yes that's going up a little bit, It's within our budget, it's also in line with our observation of the rising acquisition cost across the market, and in particular this year as funding situation has improved for the sector, we see more competition on the CapEx front. But again, if you look at the return on investment, we're still very, very positive about this kind of spending. And this is actually below our internal budget in terms of customer acquisition cost -- unit cost.

On the delinquency rate, it's not that our risk has deteriorated. It's driven by the shifting mix of our portfolio as I mentioned, as we gained more confidence and experiences with our credit model, we increased the share of near-prime customers where we price them close to 36 APRs as a percentage of the portfolio. And as I mentioned, although their charge-off rates is a little bit higher, but APRs more than offset that effect. So if you look at the same pricing cohort, as I mentioned earlier, the credit cost actually has improved in Q1 compared to the previous quarter. And Alex, can you take the SME question?

Jiang Wu -- Chief Financial Officer

Yeah, so in the past quarter, we were still testing this product. We basically focus -- right now, we have the focus on the existing borrowers. We will check their behaviors and see whether they are more like SME or more like the individual. That is our key pilot product at this moment. At the meantime, we are trying to find more scenarios and to get more familiar with different scenarios and help the small SMEs in that specific scenario to increase their business scales.

Overall -- given that there is no numbers disclosed in our quarterly report, we can't disclose any details, but what we can say is in this small business -- SME business is on the right track. We will give you more updates when it's mature enough to show its individual status.

Operator

(Operator Instructions). There are no further questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to George Shao for any closing remarks.

George Shao -- Head of Investor Relations

Okay. That concludes our call for today. So thank you all for joining this conference. So please don't hesitate to reach out to us directly if you have any further questions. So thank you all.

Jun Xu -- Chief Executive Officer & Director

Thank you.

Operator

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

Duration: 31 minutes

Call participants:

George Shao -- Head of Investor Relations

Jun Xu -- Chief Executive Officer & Director

Jiang Wu -- Chief Financial Officer

Haisheng Wu -- President

Fan Zhang -- General Counsel

Joey Cheung -- Morgan Stanley -- Analyst

Jiang Zhang -- China Renaissance -- Analyst

Daphne Poon -- Citigroup Inc -- Analyst

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