U.S. Markets closed

360 Finance Inc (QFIN) Q2 2019 Earnings Call Transcript

Motley Fool Transcribers, The Motley Fool
Logo of jester cap with thought bubble.

Image source: The Motley Fool.

360 Finance Inc (NASDAQ: QFIN)
Q2 2019 Earnings Call
Aug 23, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello and welcome to the conference call entitled 360 Finance Announces Second Quarter 2019 Unaudited Financial Results. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Matthew Li of 360 Finance. Please go ahead.

Matthew Li -- Investor Relations

Thank you, operator. Hello, everyone, and welcome to our second quarter 2019 earnings conference call. Our results released earlier today and can be found on our IR website. Joining me today on the call are Mr. Haisheng Wu, our CEO and Director; Mr. Alex Wu, our CFO; and Mr. Yan Zheng, our Vice President.

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 face undue reliance on them.

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

With that, I would turn the call over to our CEO, Mr. Xu. Please begin.

Haisheng Wu -- President and Co-Founder

Okay. Thanks, Matt, and thank you, everyone, for joining our call today. This is Wu Haisheng, and we are sorry that Mr. Xu is not able to join us today since he has to leave the company for personal and family reasons. We would like to thank him for his extraordinarily services to 360 Finance as our Co-Founder and the CEO. Our business fundamentals are very strong. We will continue to execute our strategy to building our company into a financial technology company.

Our core team members have been working together very well, and we expect the transition process will be very smooth. We believe our advantage are structural and systematic. We have established a solid foundation for our business in China. We believe our structure advantage will not be impacted by the change of one management member.

Now, I will go back to my prepared remarks. We are pleased to further solidify our leading position in the industry with another solid quarter. As of June 30th, 2019, we have cumulatively it originated RMB217 billion of loans through our platform with outstanding loan balance of RMB51.3 billion. Our cumulative registered users reached 109 million. Users with credit line reached 19.2 million and cumulative borrowers with successful drawdown reached 12.5 million. We are very proud of getting such a huge user base and the business figures [Phonetic] in just three short years since we founded the company.

In the second quarter, we acquired 14.2 million registered users credit line to 3.2 million borrowers, and we have 2.1 million borrowers with successful drawdown. Our loan origination volume increased by 127% year-over-year and 17% from the previous quarters to RMB48.1 billion. While we continue to grow our business quickly and consistently, we have been able to efficiently manage our borrowers' credit risk. Our market-leading risk management capabilities is well recognized by our institutional funding partners. It has enabled us to obtain sufficient institutional funding at competitive rates and offer more affordable credit products to our users.

As of June 30th, we have established partnerships with 62 financial institutions. We believe this achievement strongly demonstrates our leading position in terms of scale, growth and risk management. Our strong business development is primarily driven by our base funding user base and the continued investment in advanced technologies such as big data and artificial intelligence.

We have also vigorously invested in brand promotion and user acquisition to quickly to build up our huge user base. In less than three years, we have been able to acquire more than 100 million registered users. We firmly believe that our spending and user acquisition is the long-term investment for revenue and profit generation in the future. We have clearly demonstrated that we can continue to benefit from our collective user acquisition strategy in the long run, same-store [Phonetic] earnings from borrowers drawdown, enough to cover the related acquisition cost, leveraging our user acquisition system that is driven by big data. We are working with nearly 100 third-party channels to acquire higher quality users. Through the application [Phonetic] of machine learning techniques, we are able to assess the borrowers' credit profile and their willingness to borrow, which helps us achieve more precise user targeting, and improve our overall user acquisition capabilities.

In the second quarter, we stopped investing in some channels [Indecipherable] to lower quality borrowers and improved our overall user quality and acquisition efficiency. We also launched several new acquisition initiatives in the quarter. For example, we made our strategy investment in a social e-commerce platform with strong growth momentum. We also established an offline salesforce to promote our products and services to customers without further diversifying our user acquisition channels in the future.

As I mentioned earlier, we have established a huge user base of 109 million registered users. We have only served 12.5 million of them with our existing products and services. It tells us that we still have huge opportunities to tap into our existing user base and increase conversions. We will further address the various needs of our huge user base by providing them with more diversified products and services. In addition to our strong presence in the domestic market, we are actively exploring opportunities to extend our fintech services to select international markets in Southeast Asia and South Asia.

Our firm commitment to investing in big data and artificial intelligence have enabled us to aggregate a massive amount of data and due to extremely strong data processing capabilities. For example, our social network system covers 2 billion regional news [Phonetic] and 90.2 billion regional that we are able to refresh our system every three seconds and analyze 1.5 terabytes of data on a daily basis.

Meanwhile, we have made significant progress on data mining and the risk modelling. For its applicant, we collect more than 4,000 basic [Indecipherable]. From this, more than 1,000 [Indecipherable] are derived and 200 [Indecipherable] calculated by our trained machine learning model. With this [Indecipherable] is now composed of over 10,000 branches. It is built to perform a dedicated risk evaluation, and each applicant can coordinate -- be allocated with the most appropriate credit and pricing [Phonetic].

By applying cutting-edge AI technology, we have really set ourselves a path with our industry leading risk management and have helped us ensure higher asset quality. In addition, we have deployed a robot in various operational functions to improve the standardization of our operations and to reduce operational risk and labor cost. As of June this year, 75% of our collection work, 77% of our telemarketing work and 99% of customer service work have been performed by our AI robot. The remaining work of collection, marketing and customer service is performed by humans, though we actually use AI robot as well for quality inspection.

So, you can see, we have made great effort in technology and research this year as of June 30th. We have submitted applications for 139 patents for our financial technologies. We have also joined hands with Shanghai Jiao Tong University to establish a lab to study the most cutting-edge AI algorithm for applications in our risk management and marketing management strategies, which we have further strengthened our team's technique capabilities.

Based on our [Indecipherable] technology capabilities, we are focused more on providing technology services to our partners. They have significantly increased our loan origination under capitalized model for our institutional funding partners to make that this trend to continue in the coming quarters.

With that, I would turn the call over to our CFO, Alex, to discuss our financial results.

Alex Wu -- Chief Financial Officer

Thank you, Haisheng. Since our operational and financial results were released early today, I will only comment on a few highlights. Our Q2 financial results continue to be very solid as our total net revenues increased by 128% year-over-year and 11% from the previous quarter to RMB2.2 billion. This brings our total net revenues in the first six months of this year to RMB4.2 billion, which means that we have already accomplished about 50% of our full year revenue guidance of RMB8 billion to RMB8.5 billion.

The momentum is very strong in the forseeable future and we remain very confident in achieving our full year results provided in our guidance. In addition to driving the steady growth of our business, we also optimized the mix of loans facilitated under different models. During the second quarter, we originated RMB3.8 billion of loan under capital-light model, which brings zero credit risk to our company.

Loans originated under the capital light model account for approximately 8% of the total loan origination during the second quarter, which is significantly higher than -- less than 1% in the previous quarter. We expect this trend will continue as we focus on providing technology services to our Institutional funding partners.

In the second quarter, we also originate RMB3.5 billion on balance sheet loans through consolidated charge, which increased by 70% from previous quarter and accounted for 7.5 of law origination volume in Q2. The on-balance sheet loans generate financing income and better match revenue recognition with the cash flow. As we are seeing a decline in channel funding cost from charts [Phonetic], we plan to originate more on-balance loan through consolidated trust in the coming few quarters. Well, most of the cost items are launched in line with the growth of our business.

I would like to reiterate our view on sales and marketing expenses. In order to sustain our growth in the long run, we continue to invest vigorously in brand promotion and customer acquisition. As Haisheng just mentioned, we strongly believe that the user acquisition is a long-term investment instead of a short-term expense. In the second quarter, our sales and marketing expense were RMB839 million despite the increase of user acquisition cost due to competitive market conditions. The return on investment of our borrowers remain attractive. Based on our calculations, the earnings from the borrowers' first drawdown are enough to cover all the costs. And on a daily basis, we closely monitor this parameter to drive our customer acquisition business.

Turning to the balance sheet. At the end of Q2, we have a total cash of RMB4.2 billion, including cash and cash equivalents, restricted cash and security deposit prepaid to third-party guaranteed companies. Our total cash increased by 49% from the end of June 2018 and 25% from the first quarter. Our strong operating performance is well recognized by renouned financial institutions, and we were able to obtain short-term loans of RMB1.4 billion in the second quarter to further enhance our working capital. We believe we have a very strong cash position to support our business growth and daily operations.

Finally, I would like to mention a little bit about our upsized public filing -- public offering of more than 11 million ADS in late June. All the ADS sold were secondary shares from several of our early stage financial investors. We would like to thank the current shareholders for their support in the past, and we sincerely welcome the new investors. The fundamentals of our company are very strong and we are confident that we are able to create sustainable value for all shareholders in the future.

With that, I will conclude our prepared remarks and open the floor for questions. Thank you.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from John Cai of Morgan Stanley. Please go ahead.

John Cai -- Morgan Stanley -- Analyst

Hi. Thank you, management, for taking my questions, and congratulations on the continued strong growth momentum for this quarter. So, my first question is about the capital light model. Can the measurement share more details on the economics of capital light model as compared to our traditional funding models? And also, what portion or percentage do we see this capital light funding trend in the future, for example, toward the end of the year? What percentage of the loan facilitation would come from this capital light model?

And my second question is about the cash. I think I'm looking at the free cash of RMB1.8 million there. So, it increased on a year-on-year -- sorry, on a Q-on-Q basis. I think, as our loan book continue to grow, obviously our cash flow on a monthly basis will continue to increase. So just wonder what we see is free cash trend, in particular given we have some plan to invest in the conventional [Phonetic] market.

And the final question is about cost. So, I think -- I actually have two questions -- two more questions. The first one is about the origination cost. It seems it increase on a Q-on-Q basis. Just wondered if there's more color on that. And the final one is about the delinquency rate. It edged up a little bit to 1% for the 90-days delinquency, so if there's any colors on that would be great as well? Thank you very much.

Alex Wu -- Chief Financial Officer

Okay. Thank you, John. Let me answer your first three questions. I will turn that question -- turn the last question to our CEO. I'm talking about the delinquency rate, OK. So, for the capital light model, it's essentially just we don't take any credit risk. We just transfer all the economics to the financial institutions, our partners. The economic will be a little bit lower compared with the traditional model -- facilitation model obviously. But it's manageable for us, and we think that it will help us to build up a healthy, more healthy loan book in the long run.

In terms of percentage, as I just mentioned, we see 8% loan origination in the last quarter, and the percentage will continue to go up. It really depends on the interaction between the customized financial institution partners and not our risk model. We can't give a specific number, but we are very confident to see that percentage would go up to double-digit -- more double-digit by the end of this year. So that's the first question.

The second one for the cash, I think that's -- you are correct that this cash position is highly correlated with our business model. So, given that we see our business very solid in the coming few quarters, the cash position will continue going up.

And for the third question, the origination. I think, the key reason is, we increased on-balance sheet loan, the financing cost for the on-balance sheet loan will be a record under that line item. So it increased a little bit more. So that means that if we continue to increase on-balance sheet loans, these so-called origination and servicing fees will continue to go up. But that's primarily driven by the on-balance sheet loans financing cost. That's the third question.

So, for the last question, let me just turn to our CRO [Phonetic].

Unidentified Speaker

(Foreign Language)

Matthew Li -- Investor Relations

Hey, John. This is Matthew. I have a translator for Mr. Xu [Phonetic]. So, although we see a slight increase so far, [Indecipherable] we show in the second quarter to 1.02%. So we believe this is still industry-leading [Indecipherable] if you compare with other players. So, we think, when we look at our risk performance of our loans, by vintage the numbers makes more sense. So, if you look at the vintage performance of our M6+ delinquency rate, we also included that in our earnings release. So, the loans, we facilitate that in the recent quarters are actually performing better than the ones we've facilitated in Q2 of last year. So, we're seeing an improving trend of our risk management.

John, I hope all this answered your questions.

John Cai -- Morgan Stanley -- Analyst

Yes. It's very helpful. Thank you and congratulations.

Matthew Li -- Investor Relations

Thank you.

Operator

The next question comes from Stephen Chen of Haitong International. Please go ahead.

Stephen Chen -- Haitong International -- Analyst

Good evening, management. This is Stephen Chen of Haitong. Three questions for me. First of all, if my calculation is correct, I think that your take rate for the traditional loan facilitation business has been declining in Q2 compared with Q1. And I would like to know what's the rationale behind, is that because of higher guarantee cost, lower lending rate or higher funding cost? So that's my first question.

Second question. Going back to the capital light model, you mentioned that you're targeting double-digit toward the end of the year. Do you have any medium-term targets for these capital light model? And I would also like to know whether -- because I suppose this would be some gray area from the regulators point of rules, because the regulators may not even encourage microfinance company to use ABS or whatever. So, I'm not sure how large these proportion could grow. So, could you give us medium term targets, three to five years time, wWhat's the proportion you're expecting that to reach?

And finally, about the acquisition cost, my rough calculation is that it has increased further from Q1's around 200 now to around 260 if my calculation is correct. So, I just want to know how much more you can afford to be raised on this acquisition -- customer acquisition cost. So basically these three questions.

Alex Wu -- Chief Financial Officer

Thank you, Stephen. Variety of questions. Let me just answer first and see if you have any further points to add. Just for the take rate, you are correct. If you just used a lump-sum number to calculate the take rate, the gross take rate will decrease a little bit in the second quarter. The key reason is not because of the guarantee liability or the cost. That's because what I just mentioned, we originate -- we have used this capital light model to -- that will decrease the economic a little bit. We are more -- the whole book is more healthy. So, if you take that capital light model out, the traditional model take rates are relatively stable, OK. And actually, it's slowly going up a little bit.

To answer your second question, first of all, a big capital light model is not ABS, OK. It's just -- it's a pure -- for us it's a pure technology services. We're basically health of the financial institution to find the customers, do the preliminary risk analysis and help them do the post-origination collections and other services. The only difference between capital light model and the traditional model is, we don't take any credit risk and the financial institution would take all the credit risk, OK. So it's not a ABS issue. So, we don't see any regulation hurdle for that portion. So going forward, in the long run, we don't have a number yet, but we are very confident to increase that portion significantly as long as the financial institutions are willing to take that.

For the third question, acquisition cost, yes, it continues to grow up -- growing up. As I just -- in my remark, I just mentioned that primarily due to the competition landscape, but we still see that as a long-term investment. And as long as the return on investment for the customers are sound and attractive, we will continue to do that. And as I just mentioned, for the first long drawdown, we can easily breakeven for all the cost. So, we don't see any reason to stop there. This is a long-term investment. And maybe Haisheng wil have something to add on the previous questions.

Haisheng Wu -- President and Co-Founder

(Foreign Language) Matt?

Matthew Li -- Investor Relations

Hi, Stephen. This is Matthew.

Stephen Chen -- Haitong International -- Analyst

Yeah. Can I have two follow-up on that, yeah. First of all...

Alex Wu -- Chief Financial Officer

Stephen?

Stephen Chen -- Haitong International -- Analyst

Yeah. Sorry for that. Yeah.

Alex Wu -- Chief Financial Officer

All right.

Matthew Li -- Investor Relations

Yeah. So -- yeah. Let me finish the translation first. So, as Alex mentioned, under our current customer acquisition cost that we are still able to cover the borrower's acquisition cost at the initial drawdown of the loans, and our repeat [Phonetic] borrower contribution keeps increasing in this quarter. So, we believe the ROI, the return on investments of our sales and marketing expenses is still very attractive, and we think long-term investments. And currently we have very sufficient funding from many of our institutional funding partners. And we continue to see very strong demand from our users -- from our borrowers. And at the same time, we have been performing very solid risk management of our assets. So that's why we believe the spending on sales and marketing is a long-term investment instead of a short-term expense.

In terms of numbers, our CEO Haisheng mentioned our large user base earlier. Even we stop spending for new customer acquisitions and focus our existing users, our loan transaction volume will still be very large. So, in Q2, our total loan facilitation volume was RMB48.4 billion and our repeat borrower contribution was about 70%, which translate to RMB33.8 billion loans. So, as you can see, as our repeat borrower contribution continue to increase, we'll still be able to achieve a very large transaction volume. So that's why we're focusing more on the future benefits instead of the short-term income or revenues.

Stephen Chen -- Haitong International -- Analyst

Thank you. Can I have two more follow-up question on the previous question?

Alex Wu -- Chief Financial Officer

Yeah, sure. Sure. Please go ahead.

Stephen Chen -- Haitong International -- Analyst

Yeah. First of all, I think, I mix up the capital light with the on-balance sheet. So, indeed my question should be for the ABS or trust scheme should be more related to the on-balance sheet because we are seeing a very substantial rise in the on balance sheet loan. So how much larger are we foreseeing for that part to grow into in the coming years?

And second, follow up question is, I think, a lot of the investors -- I missed a lot of the investors, they have a big concern about the capital light return. So, could you give us some guidance about the safe example? Maybe you've used a take rate, the take rate of the capital light model compared with the traditional model. How much lower Just a rough idea -- How much lower would that be?

Alex Wu -- Chief Financial Officer

Yeah. So, for the on-balance sheet as such, It's basically -- it's primarily accounting treatment, OK. Structure wide, it's same as to off-balance sheet loan. S,o there is no -- if there is some hurdle from regulation on this business, there'll be a hurdle on the [Indecipherable] loan as well. It doesn't really matter, OK.

For the second question, the take rate, given that we didn't publish all these details, I can't give you the exact numbers, but it really depends on the assets we offload. For example, if we offload the asset with APR 36, that means the take rate will -- the differential of the take rate will be very large. Well, compared with offload assets with APR, they are a little bit lower to say, for example, 24%, then the take rate difference would be quite small.

Hope I answered partial of your questions, Stephen?

Stephen Chen -- Haitong International -- Analyst

So, you mean that's the take rate for the capital light model?

Alex Wu -- Chief Financial Officer

Yes.

Stephen Chen -- Haitong International -- Analyst

Okay. Thanks.

Alex Wu -- Chief Financial Officer

It's basically just -- the models use the APR. Just take a percentage of the APR as our technology studies. That's it. Then we don't deduct any credit cost. We don't got any financing costs.

Stephen Chen -- Haitong International -- Analyst

Okay. Thanks.

Operator

[Operator Instructions] The next question comes from Alex Ye of UBS. Please go ahead.

Alex Ye -- UBS -- Analyst

Hi. Good evening, management. Thanks for taking my question. So, I also have a follow-up on your capital light models. So I wonder -- In terms of the new partners, they have utilized this model with you. I wonder what type of that funnel are? So, are they like the regional banks or national banks? And what is the -- your cooperation with them like? So, that does take a long time of relationship between you and defending partners before the more comfortable to do this capital light model with you. So -- and also, are there any particular type of APR range that they are more comfortable to take on iwhen they do this model? So that's my first question.

And my second question is just to -- can I get a update on your average APR on the -- On your total loan originataion [Phonetic] in the past quarter, has it changed much from the around 50% from the last quarter? Thank you.

Alex Wu -- Chief Financial Officer

Thank you, Alex. A very good question. For the capital light, the partners are, to be honest, are all long-term partners. They know our asset, they know our operation, they know our risk analysis capability. So, that includes all these regional banks, consumer finance companies and even national banks. In terms of what kind of assets we offload to them, it really depends on the commercial discussion and negotiation. So, as of today, we primarily offload high APR assets to the financial institution partners. And to be honest, this model is not new. We did that last year. We did that in the first quarter as well. We just want to highlight that for the second quarter as well.

For your second question, APR actually -- the average APR dropped down a little bit. In the first quarter, the average APR for the whole loan book is 29.3%, now it's 29%. And we see that APR continuing to go down a little bit.

Alex Ye -- UBS -- Analyst

Thanks, Alex. Can I just have a (Technical Difficulty).

Alex Wu -- Chief Financial Officer

Sure. Sure.

Alex Ye -- UBS -- Analyst

So, I run like I thought of your over 60 funding partners, how many of them are doing this capital light model with us currently?

Alex Wu -- Chief Financial Officer

Currently only a few single-digit right now. We are talking to a lot of partners in the past few months.

Alex Ye -- UBS -- Analyst

Okay, great. Thank you.

Operator

The next question comes from Daphne Poon of Citibank. Please go ahead.

Daphne Poon -- Citibank -- Analyst

Hi. Thanks for taking my question. So, just one quick follow-up on the cost management side. So, you mentioned about the sales and marketing cost, you will continue to invest in that. So, I see your point about seeing that as a long-term investment. But in terms of the maybe more near-term margin outlook, so do expect the operating margin to continue to decline because of the higher sales and marketing costs? And also, any guidance or outlook for the customer acquisition cost level maybe for the next two quarters? Thank you.

Alex Wu -- Chief Financial Officer

Thank you, Daphne.You've raised a very good question. Yes, the margin will continue -- from that perspective, the margin will drawdown a little bit in the coming few quarters, given that acquisition cost will continue to go up as we see the competition is going up a little bit, but we have more channels in own discussion to mitigate that cost. So, I think that that's a -- it's a very dynamic mechanism. It's a little bit difficult for us to foresee what exactly the number will be for the third quarter and fourth quarter. Then to be honest, in the third quarter, what we can't see now, the acquisition cost actually draw down a little bit. So let's wait and see, but we will monitor that parameter on a daily basis.

And our CEO, Haisheng, may add a few points on that. Okay. I think that's pretty much it for your question. Hope that answers your question. Daphne?

Daphne Poon -- Citibank -- Analyst

Yeah. So, would you have any target on the operating margin or [Indecipherable]?

Alex Wu -- Chief Financial Officer

From the operating margin that we receive, it would be quite stable between around 40%. That's a non-GAAP bais, and net margin would be around 30% to 35%.

Daphne Poon -- Citibank -- Analyst

Okay, that's great. Thank you.

Alex Wu -- Chief Financial Officer

Yeah.

Operator

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Matthew Li for any closing remarks.

Matthew Li -- Investor Relations

Thank you, operator. And thank you everyone for joining us today on the call. So, should you have any further questions going forward, please do not hesitate to contact us. Have a good day.

Operator

[Operator Closing Remarks]

Duration: 43 minutes

Call participants:

Matthew Li -- Investor Relations

Haisheng Wu -- President and Co-Founder

Alex Wu -- Chief Financial Officer

Unidentified Speaker

John Cai -- Morgan Stanley -- Analyst

Stephen Chen -- Haitong International -- Analyst

Alex Ye -- UBS -- Analyst

Daphne Poon -- Citibank -- Analyst

More QFIN analysis

All earnings call transcripts

AlphaStreet Logo

More From The Motley Fool

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

Motley Fool Transcribers has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com