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Edited Transcript of XRF.N earnings conference call or presentation 15-Aug-18 12:00pm GMT

Q2 2018 China Rapid Finance Ltd Earnings Call

SHANGHAI Sep 4, 2018 (Thomson StreetEvents) -- Edited Transcript of China Rapid Finance Ltd earnings conference call or presentation Wednesday, August 15, 2018 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gary Dvorchak

* Junqing Shen

China Rapid Finance Limited - CFO

* Zhengyu Wang

China Rapid Finance Limited - Founder, Chairman & CEO

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Conference Call Participants

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* Daphne Poon

Citigroup Inc, Research Division - Associate

* John Hecht

Jefferies LLC, Research Division - Equity Analyst

* Matthew Larson

* Ran Xu

Morgan Stanley, Research Division - MD

* Ryan Clifford Roberts

MCM Asia Limited, Research Division - Senior Research Analyst

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Presentation

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Operator [1]

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Welcome to China Rapid Finance's Second Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note that this event is being recorded. Now I would like to turn the call over to your host for today's conference, Gary Dvorchak, Managing Director of the Blueshirt Group. Mr. Dvorchak, you may proceed.

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Gary Dvorchak, [2]

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Thank you, Allison. Welcome to China Rapid Finance's Second Quarter 2018 Earnings Conference Call. Today's call is being webcast and is accompanied by a slide presentation, which is also available on our website. With us today are Dr. Zane Wang, our Chairman and CEO; and Mr. Kerry Shen, our CFO.

Following management's prepared remarks, we will conduct a Q&A session. Before we begin, I'll refer you to the safe harbor statement in our earnings press release and on Slide 1, which also applies to the conference call today, as the company will make forward-looking statements. These forward-looking statements involve inherent risks and uncertainties that may cause actual results to differ materially from our current expectations. Further information regarding these and other risks is included in our reports filed with or furnished to the SEC. All forward-looking statements that we make on this call speak only as of the date hereof and are subject to change at any time. China Rapid Finance has no duty to update these forward-looking statements. With that, I'll turn the call over to Dr. Zane Wang. Zane, please proceed.

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Zhengyu Wang, China Rapid Finance Limited - Founder, Chairman & CEO [3]

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Thank you, Gary, and hello, everyone. Thank you for joining the call today. As you all know, the P2P lending business in China is undergoing significant change. This is driven by regulators intention to establish a healthy environment for the long-term growth of the industry, while guiding the orderly exit of problematic platforms. These changes present an opportunity for China Rapid Finance to show the robustness of our model to demonstrate our ability to be fully compliant and to build towards profitability and the rapid growth by offering attractive services to our lenders and the borrowers.

Our confidence in our future is manifested in the $20 million share repurchase program we announced today. Let me first discuss recent developments in the regulatory environment, showing on Slide 3. These new developments are critical to the industry, because they promote a healthy environment for P2P platforms to provide services to other financially underserved population. In early August, regulatory authorities issued the compliance guidance that encouraged the healthy development of our P2P lending businesses by allowing compliant platforms to continue operations and to apply for registration in due course. Around the same time, 50 major P2P lending platforms, including China Rapid Finance, made a public commitment to compliance through -- declaration through -- declaration made on the official channels of the Beijing and the Shanghai Internet Finance Associations. This is an important differentiator considering that there are over a thousand platforms now included in this group. With this recognition, the regulatory authorities, our lenders and our shareholders can see that we are among the top platforms determined to be fully compliant and are prepared to thrive in the years ahead. The second important development is that regulatory authorities have now included P2P lending platforms and the reporting entities to the National Credit-Reporting System. China Rapid Finance responded to the request to report our delinquent borrower data and submit our first batch of data in early August. Our data was among the first to be listed on a recent notice by the regulatory authorities, which create a significant repayment pressure on borrowers as a whole. This National Credit-Reporting System is critical for the P2P industry. Borrowers who are delinquent may face negative consequences, such as not being able to get the loans from any other platforms or financial institutions. If they're committed, even small amount can lead to meaningful penalties. For instance, they might not be able to use a public transportation, check into hotels or be accepted for many other common daily activities. The connection to the National Credit-Reporting System helps to adjust a key issue for our industry. They're all protecting our source of funds, the lenders with money we help to invest. The foundation of lender trust is the belief that you will be paid back. The connection to the National Credit-Reporting System can quickly stabilize and strengthen our industry by providing strong incentives to borrowers to repay. Beyond government support, CRF is taking swift action to sustain the confidence of our lender community. Our wealth management staff is in regular, direct communication with our lenders, while keeping them informed of our risk management approach and the strong results we're achieving. The delinquency rate of our consumption loans remains low and are well within the range that we model for our loan packages. The loan delinquency rate is a function of our credit scoring algorithms, which are among the most sophisticated in the industry and effectiveness of our low and grow approach to extending credit. We can see investors' confidence in key metrics we track.

We had a net funding inflow in the second quarter. Our lender headcount was unchanged at 18,000, also a strong signal that investors trust our marketplace. It's important some institutional investors that exit in the first quarter are now returning to our marketplace and are actively seeking new investment opportunities.

With these positive regulatory developments, as a backdrop, let's now turn our attention to specific actions taken by XRF in the second quarter.

Across the entire organization, our efforts in the first half focused on 2 priorities, as we detailed on Slide 4: first, we are finding new ways to serve the lifetime financial needs of our best customers with the product services and the privileges that extend far beyond our basic loan products. We establish long-term relationships with the customers, both lenders and the borrowers. Those relationships position us to more effectively identify and satisfy customers' needs.

I will elaborate on our product innovation success in a moment. Our second priority was to streamline and optimize our operations. Our objective was not simply to reduce our expense base, although that did happen. We reorganized the company into business units that we expect to be far more responsive and effective in addressing the needs of our customers. Across all aspects of our customer interaction, we believe, we can deliver a better experience more efficiently at a lower cost. In a moment, I will offer some details on the specific actions we completed.

So let me first discuss our success in product and the service innovation. Our focus has always been the customer relationship and how we can better serve their financial needs. Because regulators have asked all industry participants to reduce their growth, we turn our focus to offering more to our best existing customers. You can see the effect of this in our higher take rate, higher average loan size and a low level of new borrower additions. We expanded our offering of lifestyle loans creating a new light category with a smaller loan size and a shorter duration. Lifestyle light loans have a duration of 3, 6 and 12 months. And the loan size filled the gap between consumption loans and the larger traditional lifestyle loans.

Our goal was to create more choice across the continuum of the loan size and the duration that better match customer need with available products. We also introduced adjacent products that are experiencing an exciting level of early interest. For example, borrowers have the option of joining our membership program for a small fee, which unlocks a number of valuable benefits. While adding to this family of benefits, on a regular basis, steadily increasing the value to our best members. We modeled this innovation on many similar, widely understood programs offered in the West. For instance, many of our listeners will be familiar with the credit cards that offer an escalating level of benefits that can be accessed depending on which category of a card you choose. Beyond membership, while introducing other adjacent products, related to e-commerce, in general, you should expect a steady flow of our innovation from our product development teams. The initial success of our new product effort is regularly apparent in our financial results. Even with the loan volume down by design, gross billings and the net revenue grows significantly. You can also see the effectiveness of our effort to increase the value to our customers. Net revenue as a percent of the loan volume and insightful measure of our value added, increased every month in the quarter, producing a meaningful jump in our take rate.

Now let me turn to our second priority. The streamlining of our operations. Our objective was not simply to lower expenses. We designed and implemented a business unit organizational structure that can better understand customer needs and more quickly respond to those needs across the full spectrum of the customer experience.

Let me give you one example. We've accelerated the automation of the data verification function for new borrowers, improved the customer experience, we're fast at turnaround on the application to enter our marketplace, a heavy by-product in this case was a substantial reduction in expense. We reduced the headcount by 15% and closed more than 20 offline data verification centers locations. Another example is the migration of our lifestyle loans to 100% online fulfillment. Their ongoing effort makes the origination of our lifestyle loans far more borrower-friendly, while allowing us to close certain loan origination storefronts. Across the whole business, efforts like this, drove improved service delivered and lower expense, the proof is in the results. We reduced the run rate of our quarterly operating expenses by $4.2 million or 11%. Operating expense declined every month in the quarter. In fact, we have lowered our breakeven point such that we can make money at the loan volumes way below the level we averaged in 2017. This is important because we cannot sustain long-term customer's confidence unless we operate profitably. Our second quarter results demonstrate significant progress towards achieving this objective. Barring any increased turbulence in our market, we expect to be operating profitably before year-end. Furthermore, we do not believe that our stock market valuation adequately reflects these bright prospects. Because of that, we are initiating a $20 million share repurchase program. With that, I will now turn the call over to our CFO, Kerry, to cover financial results in more details. Kerry?

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Junqing Shen, China Rapid Finance Limited - CFO [4]

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Thank you, Zane, and hello, everyone. You can find all the figures and comparisons you need from our press release and supplemental slides. As I review our financials, keep in mind that during my discussion, unless I say otherwise, we are referring to Q2 2018, and all comparisons are to the second quarter of 2017. I'm going to focus on key highlights and analysis of the factors that influenced our financial results. Zane already elaborated on the significant reorganization efforts put in by everyone in our company. The efforts involved a lot of work and sacrifice from our employees, who we think are among the best in the industry. We appreciate their efforts and are excited that we can already see immediate progress in our financial performance. Slide 6 shows the key points as you study our financial results. Net revenue and gross billings grew substantially and maturely lower operating expenses put us on track to operate profitably before the end of the year. We still have plenty of cash.

We have more than enough to fund our operations, new growth initiatives and to execute our share repurchase program. So let's look at revenue. As Zane emphasized, the effectiveness of our first half reorganization efforts appears in our top line results. As you can see on Slide 7 and 8, gross billings and net revenue grew meaningfully, a function of an effective strategy and strong execution. We focused on offering the most value possible to our highest quality repeat borrowers. We did this through an upgraded product lineup, tailored to their needs. The higher value was demonstrated in our growing take rate, which improves our economics as well.

Building on revenue growth was effective cost control, as highlighted in Slide 9. Operating expenses were down 11% sequentially, driven by a significant cut in G&A. More important is the run rate shown on Slide 10. As you would imagine, each month of the quarter got better and the impact was felt from our growth initiatives. We exited the quarter with an operating expense run rate of $4 million, lower than the start of the quarter.

For the month of June, for example, operating expenses were under $10 million, which is 22% below the average monthly OpEx in Q1. Importantly, we are not cutting the functions that are our lifeblood. Marketing product development and servicing were intact in the quarter relative to the first quarter. Our reorganization really did focus on better operations, not smaller operations. A key element of both the better revenue take rate and the lower operating expense was our focus on existing customers.

Slide 11 shows the trend. Our new borrower additions were 1/10 of the rate of last year, lowering our CAC and other marketing expenses, yet net revenue was over 15% -- 50% higher. By focusing on our highest quality repeat borrowers, we are leveraging our low and grow approach. As detailed on Slide 12, average loan size continued to increase, as the most seasoned customers borrowed larger amounts, yet our delinquency rates were firmly under control, because we're able to accurately assess the creditworthiness of these seasoned borrowers. In fact, the 30-day delinquency rate for loans originated in the second quarter of 2018 improved by more than 1/3, compared with that for loans originated in the previous 2 quarters.

This combination of more effective operations with higher productivity is how we lowered our breakeven point so meaningfully, and is what sets us up to swing to profitability barring any negative developments in our markets. The key is really more productive spending. Slide 13 illustrates this.

At this time last year, we needed nearly $48 of loan originations to generate $1 of its net revenue. By reducing spending for new borrowers and by focusing on higher value products for our best customers, our spending is far more productive. We can now generate $1 of net revenue with only $17 of loan originations. This is productivity in its purest form and is a function of all the changes we implemented in the first half. With spending this productive, and getting more so, we are confident that we can swing to profitability if markets and regulation remain stable.

Now let's turn our attention to the balance sheet on Slide 14. We drew down $12 million cash during the quarter, leaving us with a very healthy cash balance of $59 million. This is more than adequate to fund our operations, growth initiatives and more. The drawdown was mainly due to the operating losses. We anticipate crossing breakeven in the second half assuming no negative developments in our market environment. Because of our strong cash position and expectation of profitability, assuming a stable market environment, we're very comfortable with the decision to start a share repurchase program. The board authorized the company to purchase up to $20 million of our ADRs in open market purchases. As Zane noted, this repurchase program really underscores our confidence in our outlook. Now we will open the call to your questions. Operator, please proceed.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today will come from John Hecht of Jefferies.

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John Hecht, Jefferies LLC, Research Division - Equity Analyst [2]

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So clearly, there's been a more of a shift to lifestyle loans and you guys gave a range of terms. Can you, maybe just for modeling purposes, give us what's the average term, the average size and the average interest rate on a lifestyle loan?

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Junqing Shen, China Rapid Finance Limited - CFO [3]

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John, you're asking the lifestyle loan only right? This is Kerry.

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John Hecht, Jefferies LLC, Research Division - Equity Analyst [4]

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Correct. The lifestyle loan only.

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Junqing Shen, China Rapid Finance Limited - CFO [5]

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Okay. The lifestyle loan, the average size was 10,900 in Q2 versus 10,500 in Q2 last year. And then the average tenor is pretty similar, still between 20 to 22 months.

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John Hecht, Jefferies LLC, Research Division - Equity Analyst [6]

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And what about the interest rate on that loan?

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Junqing Shen, China Rapid Finance Limited - CFO [7]

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It remains unchanged. The interest rates is generally between 15% to 18%. And we charge service fees to borrowers for lifestyle loans. The take rate in the second quarter for the lifestyle -- on the gross billings for the lifestyle loan is 21.6%. And in the second quarter last year, it was 13.6%. And then the increase in take rate is generally because of the risk-based pricing that we charge to borrowers were passed off to the investors.

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John Hecht, Jefferies LLC, Research Division - Equity Analyst [8]

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Okay. That's very helpful. Appreciate that. And then on the investors, it sounds like you had a very fairly stable amount of investors, but do you have any information on the inflows and outflows? And the type of investor that you are attracting at this time?

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Zhengyu Wang, China Rapid Finance Limited - Founder, Chairman & CEO [9]

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John, this is Zane. The -- our overall lenders, overall base was pretty stable, as we've said, about 18,000 lenders and this number pretty much unchanged. And we had a positive net inflow in the second quarter. So that pretty much reflects the current status of our lender community.

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John Hecht, Jefferies LLC, Research Division - Equity Analyst [10]

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Okay. And then you guys talk about the loan productivity, which is -- that's a good trend in terms of the amount of volume required for $1 net revenue. Is that productivity impacted by changes in fees? Or just really reductions in expenses? Or is it a combination of both?

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Junqing Shen, China Rapid Finance Limited - CFO [11]

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John, this is -- in terms of the loan volume needed to generate revenue, it's just a result of gross billings that are not connected to expenses. And then the main reason behind that is -- number first, is better product design. We introduced consumption loan plus and lifestyle Lite, which are longer-term larger-sized, longer duration loans to our borrowers, whose take rates are generally higher than the short duration, small amount loans. And secondly, this is also partly due to more effective product mix management. We have now multiple loan products to meet the needs of our borrowers and then we manage the product mix quite well and quite effectively. And certainly, this is also partly due to our focus on our repeat seasoned borrowers by reducing new borrower acquisitions and focus on high quality repeat borrowers, who generally are loyal to our platform and have much lower delinquency rates. So based upon the above 3 key aspects, we are now able to generate a much higher net revenue on the same loan amount or on the other way to generate the same $1 net revenue, we need less than half of the loan origination.

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Operator [12]

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Our next question will come from Richard Xu of Morgan Stanley.

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Ran Xu, Morgan Stanley, Research Division - MD [13]

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Couple of quick questions. Just want to understand the lifestyle loan billing a bit more. So basically -- you're saying this -- basically, 18% interest and 20% fee. Will there still be a lifeguard program for that? What's the aggregate total sort of IRR for the lifestyle loan? Because I do see the gross billings jumped quite a bit, even though the volume similar to third quarter of last year. And secondly, as you know, in terms of the operating expenses, some nice progress there. So what's the plan? $10 million a month now, like, are you still trying to cut it more? Where does it get later on? And in terms of breakeven or profitable second half, any assumptions on both revenue and expenses? Sort of like any guidance on loan volumes and billings, et cetera, to get to the profitability in the second half?

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Junqing Shen, China Rapid Finance Limited - CFO [14]

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Richard, this is Kerry. And let me take the questions and Zane may add afterwards. For the lifestyle loans take rate, actually, there's no Safeguard Program anymore. It was dissolved. Well, and then in Q2, what we did is that we charged borrowers the risk-based pricing, charged borrowers more gross billings, such that we generated more gross billings. And we passed on these additional charges directly to investors, such that investors take the ultimate credit losses. We gave investors CAI for both consumption loans and lifestyle loans. So it's a pass-through model that result -- or the financial impact is that we are able to generate some more gross billings and the CAIs were increased accordingly and almost no impact on net revenue. And in terms of expenses, I understand your question is what drove down the expenses and how it may look like in the second half of the year? Actually, Zane explained that we went through a reorganization in the second quarter, one of the key objectives or initiatives is to streamline the operations. What we did included cutting off more than 20 nonproductive DVC offices and we removed more than 500 redundant staff. And we also established rigid cost control policies and procedures, particularly in managing office expenses, travel expenses, outsourcing expenses, et cetera. At the same time, we also increased our spending on hiring more talent in product design, product development in IT and risk management, particularly in algorithms and data analytics. And we also spent more dollar on R&D, including AI in algorithms, intelligent customer services, upgrading loan management systems, investment in block chain technologies and other new loan products. So we did spend a little bit more in other areas. And the result of our efficient -- our more efficient operation is that we're able to reduce the run rate by more than $4 million a quarter. And then going into the third quarter, I understand that the expenses will be stabilized. We do not anticipate to have -- continue to have more significant cost-cutting or other significant spending, generally the OpEx will be stabilized in the third quarter or even fourth quarter. So did I answer all your questions? Did I miss any of your question?

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Zhengyu Wang, China Rapid Finance Limited - Founder, Chairman & CEO [15]

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Richard, I might add one point here is we are focused on the customer experience. So not only we just optimize our overall cost of structure, but more importantly, we are focused on the -- we try to be more responsive and effective to serve the customers' needs in terms of the processing, in terms of customer experience on our platform, our app, such that our lifestyle loan and consumption loan can drive a better business results. So our current customer loyalty, current credit quality and the longevity of our platforms, all those metrics moving the right direction. So that's why also another driver to cut down the cost and increase the profitability.

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Ran Xu, Morgan Stanley, Research Division - MD [16]

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In terms of the revenue -- sort of guidance for the second half into breakeven, so you -- what type of loans you will focus on in the second half, any volume targets?

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Zhengyu Wang, China Rapid Finance Limited - Founder, Chairman & CEO [17]

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We originally said, overall -- in the beginning of the year we said, probably we're going to have a certain amount of the growth towards the second half. Right now, the new borrower acquisition mechanism seems to be -- stabilized. So we actually -- right now the second quarter results are showing the -- our existing borrowers show tremendous potential in terms of the customer loyalty and the way to generate our take rate -- generate our gross billing. So the second half, probably, we're going to keep our low and grow strategy to save our existing customers' needs, move them to even the higher range and also focus on a customer -- the value-added services. And also we would do customer acquisitions as well.

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Junqing Shen, China Rapid Finance Limited - CFO [18]

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Richard, let me perhaps give you more color on the breakeven loan volume needed, even though, we do not provide guidance on the second half in terms of loan volume. Our total current OpEx per quarter is like $33 million. And then in June, it was down to $10 million a month. So let's just assume our running OpEx is between $30 million to $35 million. And based on our current product design and take rates, the loan volume needed to breakeven is less than $500 million. In the second half of last year, each quarter, we are able to generate $1 billion loan originations. That is why we think, currently we need less than half of the loan volume to breakeven.

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Operator [19]

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Our next question will come from Daphne Poon of Citi.

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Daphne Poon, Citigroup Inc, Research Division - Associate [20]

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So -- and as -- first question is I want to understand more about the change in terms of your gross billings. So I saw that in second quarter like the lifestyle loan's gross billing was up quite a lot. And if we look at the gross fee rate, you also jumped like almost doubled versus first quarter, while on the consumption loan side, the gross billings, that was down and also the fee rate is down like from about 4.7% last quarter to this quarter it's only 1.5% if my calculation is right. So can you help explain more about the reason behind?

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Junqing Shen, China Rapid Finance Limited - CFO [21]

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Daphne, this is Kerry. The -- if you look at the lifestyle loan, gross billings of lifestyle loan was $25.7 million. If you divide this by the loan volume of lifestyle, you would reach at a gross take rate at 21% -- 21.6%. And then out of that, we paid the risk-based pricing to the investors directly, which is roughly 9.5% to 10%. And then the net of this is our net take rate. So our net take rate for lifestyle loan is about 10.5%, which is pretty much consistent with the previous quarter or previous years. And then in terms of consumption loan, if you look at for the gross billings, it was $9.4 million, if you divide it by the consumption loan volume, you arrive at a gross billing rate of 3.5%. And then because of the reduced new borrower, we are now paying much less CAIs to investors. So total amount of CAI paid to consumption loan investors in this quarter is less than $2 million. So in that case, we are able to generate net revenue for consumption loan at a rate of roughly 3%. So these combined efforts increased our capability in monetization and allowed us to generate not only more gross billings, but also more important, generates more net revenue.

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Daphne Poon, Citigroup Inc, Research Division - Associate [22]

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Okay, okay. That's very clear. And also, I'm wondering if you can also give us more color about like what is the all-in APR for -- currently for the lifestyle loan and the consumption loans, respectively? And also what is their current like average loan duration for the new product like the lifestyle Lite and also the consumption loan plus?

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Zhengyu Wang, China Rapid Finance Limited - Founder, Chairman & CEO [23]

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Right now, as Kerry just discussed, our lifestyle loans overall charging rates are pretty much consistent compared with a year or 2 years ago. So the overall still is in the range of the 25%. Overall, all fees and the interests are included, so overall, it is 25% to 28% range. Our consumption loans is slightly higher in the range of the 30%, maybe 35%. So that's the current overall charging rate. And that we understand the rate cap and that we're operating under the full compliant status.

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Daphne Poon, Citigroup Inc, Research Division - Associate [24]

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Okay. And lastly, can I also get an update about, maybe, I think it's your funding situation over the past few weeks, because the -- I think on the industry level, we see there has been a lot of platforms shutting down and there has been some funding outflows. So I guess -- also want to get an update on your funding situation, maybe in July and also in August so far? Like whether we also see any outflow on the investor fundings?

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Junqing Shen, China Rapid Finance Limited - CFO [25]

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Okay. Daphne, let me take your question. Zane previously discussed that in Q2, our funding remains resilient. Our number of investors accounted for at 18,000. And our overall funding for the second quarter is net-net positive, actually positive about $30 million. And in July, as you see, that more and more P2P platforms, many of them aren't legal, went out of business. And there is a certain level of unease in the investor community, which we have observed. Our business model is that we have a very small number of high net worth individual investors provide lending capital to a large diversified borrower-base. And now you can see the beauty of this business model, we have more than 250 wealth management's customer representatives. They have the capacity to reach out directly to our investors and communicate with them on a regular basis. We keep them informed of our risk management approach. The performance of our underlying assets and the results we are achieving. So in the second quarter, in the earnings release, you see we had a positive annualized loss rates of 4.9%. But because we define loss as 90-day delinquent, so loans originated in Q2 were not included as these loans have no chance to generate any 90-day above delinquency. However, the early delinquency rate we just discussed, for example, for 30-day delinquent show that loans issued in Q2 is 30% better compared with previous 2 quarters. We communicate this information with our investors and then these effective communications and also our long-term relationship with our high net worth individual investors earns their confidence. So therefore, even though getting into July and August, we do have some pressure from investors, however, since we're a marketplace and we do not provide liquidity, and as I've discussed, our communications with investors are very effective. And the performances of our underlying assets are very strong and solid. So far, at least as of date of this earnings release, we do not see material impacts on the overall lending capital.

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Operator [26]

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And our next question will come from Ryan Roberts of MCM partners.

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Ryan Clifford Roberts, MCM Asia Limited, Research Division - Senior Research Analyst [27]

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A couple of questions from me. Number one, kind of on the cash flow side, looks like the operating cash flow is kind of the burn is continuing. So I'm kind of curious in terms of the outlook for profitability. Is that on a GAAP basis or non-GAAP basis in the future? And as a follow-on to that, what do you see in the market that is giving you confidence to forecast a profitable turn of events in the year and kind of -- and more to the past interest in most of the market, is that going to mean next year you're going to be profitable?

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Junqing Shen, China Rapid Finance Limited - CFO [28]

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So first, let me answer your questions in financial perspectives. And then I'll have Zane add more color from the markets and strategy perspectives. What gives us confidence that we will operate profitably towards the end of this year? So let me answer this question from a few aspects: first of all, I think Zane just discussed that we went through our reorganization, which we think is very effective. It's now business unit-led organizational structure, where the BU leaders are now innovative and market responsive. We identified internally a number of talents, who have both business sense and strong P&L management experience and promoted them to leadership roles. So they're leading the product designs, product selections, marketing competitions very well. And secondly, as I have provided information in answering Morgan Stanley's Richard's question, we streamlined our operations and made it to be more efficient and effective. Other than cutting down our nonproductive offices and expenses, we also canceled loan payback products. And we introduced well-designed new products like consumption loan plus and lifestyle Lite to the well-established customers. And third, from a financial perspective, let me share some data with you. We have already seen immediate changes in the second quarter. In Q2, from April to June, we showed in a slide that our operating expenses is in a continuous down trend, $12.3 million in April, $11.4 million in May and $9.8 million in June. So you can see the trend very clearly, it's in a down trend. And in response to that revenue -- net revenue is increasing very fast. Net revenue for April, May and June is $6.8 million, $7.8 million and $8.4 million, respectively. Because of these effects, if you look at the net loss on monthly basis, the trend is minus $5.5 million in April, minus $3.6 million in May and minus $1.4 million in June. So the trend is pretty good that shows we're on the right path towards profitability. And also previously, we said that, because of the effective product designs and product mix management, the -- low origination needed to generate $1 net revenue has greatly reduced from $48 to $17. So with these changes, the management is the quite confident that we can achieve profitability towards the end of the year if the funding situation and the market condition remain stable. Yes, Zane, you may add more color.

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Zhengyu Wang, China Rapid Finance Limited - Founder, Chairman & CEO [29]

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Yes, actually, Ryan, this is a very important question. Actually, I want to add a couple of more points. Why we feel confident we can drive our profitability towards the year-end and beyond. One very important aspect is the regulatory's religious efforts. They're making tremendous efforts to stabilize the overall market condition. They will help the industry grow in a healthy and long-term way. The second is the regulators, they make great effort to help establish a nationwide credit-reporting system. They include P2P companies into these reporting systems. That probably we'd consider the most -- single most important factor to help the industry to grow, because they will cut down the delinquent rate, make the borrowers to pay back, they will help to lower the overall risk level for the entire industry. And China Rapid Finance with our analytical power and our long-term operating history in the consumer credit area would benefit the most in this journey. And then also we discuss about our products, services and privileges we provide to our customers. So we're going to be a much more diversified, expand to the customer service metrics. This would give another strong so-called revenue generating engine to help the growth. And also, as Kerry discussed, so-called, we have stabilized, so-called the lender base. And more importantly, we also observed some institutional lenders, who are actually coming back to our platform seeking for opportunities to working with us. So with our fundings towards the second half of the year and year beyond, we'll be very confident, they will help. So all those the -- factors adding together, so the -- on the strategic level and on the operational level, we feel confident the second half looks promising and also the year beyond, we should be able to operate to give the long-term perspective.

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Ryan Clifford Roberts, MCM Asia Limited, Research Division - Senior Research Analyst [30]

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Got you. If I could stick in a follow-up to that one. Given the confident outlook and kind of how you're seeing things kind of shifting in kind of in your favor, the $20 million buyback is a pretty aggressive number given your cash balance roughly $60 million -- let's call it, $60 million. Given your confidence, how expressive should we see that buyback? Should we see that buyback happening in the next 12 months, kind of -- or probably faster if you're outlook is that strong? When should we see that being expressed in the market?

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Zhengyu Wang, China Rapid Finance Limited - Founder, Chairman & CEO [31]

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Overall, the way we look at -- as we discussed, the way we look at the current market condition, we think the stock is obviously undervalued based on what we discussed, based on our confidence to the growth and based on the current operation status. So that's why we feel is the -- it would be very good create a tremendous shareholder value by pursuing some sort of the -- such kind of the share repurchase program. At the board level, we are very confident, we should be able to -- by doing this show our confidence in the company and give the confidence to the market. On the other hand, we're also trying to emphasize the stock buyback program is not just technical. It does say the long run we have a fully confidence to be able to generate the operating cash flow. So the way we're -- or confident we can generate operating cash flow, as Kerry just discussed. And for the second quarter, we have the month by month improvement in our cash position, in our income revenue position, so -- going into the third quarter and the second half of the year. We feel like our overall operating revenue, operating cash flow will get even more stronger. So based on all those kind of assessments, we find that this is good thing to do and we hope would give this market, give our customers confidence, give our shareholders confidence and also going to help company in the long run.

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Operator [32]

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Our next question will come from [Robbie Li]of Generation Capital.

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Unidentified Analyst, [33]

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Just a very quick question. As you have said in the announcement, the setup of National Credit-Reporting System will benefit industry as well as your company. So I'm just curious, so after this kind of National Credit-Reporting System setting up, what's your competitive advantage versus the peers? Because I am assuming, previously, your loan growth strategy or those kind of credit kind of control matters can set you guys apart from the competitors. And now with this kind of National Credit System setting up, what will be your unique advantage versus others?

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Zhengyu Wang, China Rapid Finance Limited - Founder, Chairman & CEO [34]

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Yes, Robbie, thank you for asking, this is a very important question. As we said before, the National Credit-Reporting Systems is one of the key driving factor going to help the industry grow in the long term, healthy environment. And China Rapid Finance, when we started 17 years ago, the first mission was to help People's Republic of China to help them to establish the nationwide credit bureau. So we are very experienced, we know how credit bureau work and how the credit reporting function works. And how -- then later on, we help more than 50% of nationwide banks help their credit card centers using credit bureau data to develop the credit scoring and the credit divisioning capability. So 17 years ago, almost all of those P2P names you heard today, does not even exist yet. So we have the longest operating history in this sector to not only understand the credit bureau data, not only to use credit bureau data, but also we help banks to develop credit data-driven underwriting strategy, life management strategy and the consumer credit overall business model. So the history, our capability, our competitive edge really helped us to stand up. So those are the -- in terms of our operating history. In terms of our scoring power and analytical capabilities and our working experience with so many nationwide credit card issuers, so many banks, we're helping them to issue consumer credit. So that's the confidence, where it comes from, compare with the other -- compare with the peers in this industry, we feel we should be able to benefit the most by adopting so-called the current credit-reporting systems. So we are -- we think the regulators really doing a great thing to help this industry. And as we keep saying, this would probably be the one of the most important step the regulators helped the industry to go the long way and the China Rapid Finance would be able to benefit the most in this move.

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Operator [35]

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Our next question will come from Matthew Larson of Wells Fargo.

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Matthew Larson, [36]

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Confidence is a critical factor I guess in your business, as investors, I have read, pulling their money as a funding source from a lot of peer-to-peer lenders and consumer online lenders, as a number have shut down. What do you think the fact that you're publicly traded here in the U.S. has helped you as far as delivering confidence to your investors?

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Zhengyu Wang, China Rapid Finance Limited - Founder, Chairman & CEO [37]

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Matthew, actually, probably -- this is the probably one of the most important issues we're facing, because our lenders have a trust on us, believe actually, their investment will be able to pay back. And as you mentioned, they obviously know, China Rapid Finance is a public company, listed in the U.S., compare with the space -- with the thousands of companies out there, just handful number of public companies, so which really put us in the so-called a stand-up position. And not only we are just a public-traded company, also more importantly, we have a longest operating history, as I said earlier, we help banks to using credit behavior data, help banks to improve their credit analytical skills, help banks to develop underwriting strategy and the line manager strategy, et cetera. So our lenders understand we not only have a status of a public company, also we have a longest operating history. And more importantly, we have a transparent -- because we are working with the regulators on regular basis, we respond to regulators' requirements. And in the first quarter of this year, we finished all the requirements to be able to submit our application to complete the registration. So we're transparent, compliant and win the trust of our lenders. So with all those factors together, that's why we see when others -- other platforms might experience some sort of difficulties, we still have net inflow of our lending capital in the second quarter. And also, going forward, we're confident that we should be able to maintain the trend and even though, the market have some sort of the uncertainty, where others are facing difficulties, but we think, as with issues we said earlier, regulators and also the government really try to create environment -- let compliant platforms to continue operation and to apply for registration. That will give our lenders confidence. CRF is going to be the winner of all this journey.

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Matthew Larson, [38]

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Great. And I'll say this, I've really seen so many callers have an interest in being involved in a conference call on a company with $100 million market cap. I think it's because you all are the first company to report in your space and give some guidance and some insight into the state of the market. It sounds to me, just -- for what it's worth that it's very difficult, but sounds like you're going to be a survivor. And any other company that will survive at this juncture should do quite well. So anyway, appreciate your transparency. You've been very, at least for me, very informative on what's going on over there in the PRC. It's difficult from here in the U.S. to get a sense of the level of panic or the level of just sorting out of the companies, but I appreciate your insight and good luck going forward.

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Zhengyu Wang, China Rapid Finance Limited - Founder, Chairman & CEO [39]

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Matthew, thank you for your compliment statements. We try our best. It takes a little bit courage to be the first to report in this kind of the market. But we're confident this is the right thing to do. I think we really delivered the right message, not only for the company, but also for the industry as a whole. Thank you for the comments.

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Junqing Shen, China Rapid Finance Limited - CFO [40]

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Yes, we also appreciate the confidence of our shareholders, many of whom are on this call in our company. We appreciate your confidence.

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Operator [41]

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And ladies and gentlemen, at this time, I will conclude the question-and-answer session. And I'll turn the conference back over to Dr. Wang for any closing remarks.

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Zhengyu Wang, China Rapid Finance Limited - Founder, Chairman & CEO [42]

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Thank you, operator. I will now make some closing remarks to conclude the call. Our management team and board remains optimistic about the future of our marketplace and lending in China. The market opportunity is unchanged, demand is huge and our mission remains to serve this demand. In our 17 years of operations, we have navigated all sorts of external challenges by focusing on how we can serve our best customers across many dimensions of their financial lives. We believe, we can continue to grow and thrive no matter how our market evolves. Our lenders trust that we will bring them high-quality borrowers and they continue to lend. Our borrowers trust in the value we bring to their financial lives. Regulators and the market are making great efforts to establish a healthy environment for the long-term growth of the industry. As our market stabilizes, we anticipate emerging as one of the leading platforms with operations that are solidly profitable and rapidly growing. We thank you all our employees, lenders, borrowers and shareholders for your confidence and the support. Thank you.

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Operator [43]

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