Q1 2023 OneConnect Financial Technology Co Ltd Earnings Call
Participants
Chong Feng Shen; Chairman of the Board & CEO; OneConnect Financial Technology Co., Ltd.
Unidentified Company Representative
Yiming Fei; CEO & Executive Director; Ping An OneConnect Bank (Hong Kong) Limited
Yongtao Luo; CFO; OneConnect Financial Technology Co., Ltd.
Chenyueya Lin; Research Associate; Morgan Stanley, Research Division
Keith Tsang
Timothy Zhao; Research Analyst; Goldman Sachs Group, Inc., Research Division
Unidentified Analyst
Presentation
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the OneConnect First Quarter 2023 Earnings Call. (Operator Instructions) Please note this event is being recorded. Now I'd like to hand over the conference to your speaker host today, Mr. [Rick Chan], the company's Head of Investor Relations. Please go ahead, Mr. Chan.
Unidentified Company Representative
Hello, everyone, and welcome to our 2023 first quarter earnings conference call. Our financial and operating results were released earlier today and currently is available on our IR website. Today, you'll hear from our Chairman and CEO, Mr. Shen Chong Feng, who will give opening remarks and business highlights. Afterwards, our CFO, Mr. Luo Yongtao, will offer a closer look into our financials. And then in question-and-answer session, our management team will be available to you. We have our CTO, Mr. Li Jie; Head of Digital Banking, Ms. [Ellen Jia]; and Deputy General Manager of Strategy and Products Division, Ms. (inaudible); and Chief Executive of Ping An OneConnect Bank, Mr. Michael Fei.
In today's conference, our management team will make statement in Mandarin or in English. For those in Mandarin, the consecutive translation will be provided. In case of any discrepancy between the Mandarin version and the English version, our statement in the original language should prevail.
Let me quickly cover the safe harbor statement before we start. As we will be making forward-looking statements, which involve a number of risks and uncertainties that could cause actual results to differ materially. Please note that we may present both IFRS and non-IFRS financial measures. With that, I'm now pleased to turn our floor to our Chairman and CEO, Mr. Shen Chong Feng. Mr. Shen, please.
Chong Feng Shen
[Interpreted] Hello, everyone, I'm Shen Chong Feng. Thank you for taking the time to dial in OneConnect's 2023 Q1 earnings call. Against complexities, broadband momentum changes never seen in the last 100 years and the pandemic of the century, OneConnect strives to progress while maintaining stability, remaining innovative and delivered a solid performance under the guideline of increasing revenue, reducing costs, optimizing structure, improving products.
We carried out key initiatives, including product standardization, sales and marketing standardization and delivery standardization to continue to execute our Stage 2 strategy of broadening customer engagement.
In Q1, operating loss narrowed by 67.5% or RMB 240 million. Net loss attributable to shareholders reduced by 65.7% or RMB 210 million. While gross margin at 37.1% saw an improvement of 2.8 percentage points. As a result of our approach for quality development and proactively adjusting business structure, revenue registered a small dip compared to Q1 2022.
During our Stage 2 development, we phased out low gross margin and high customization projects, for example, reducing the scale of some customer acquisition products. These business structure adjustments despite the temporary top line impact will no doubt benefit the quality and sustainability of our revenue over the long term and build a solid foundation for OneConnect's sustainable quality and healthy development.
Next, I'll update you on OneConnect business highlights this quarter. Please go to Page 3 and 4 of our slides. 2023 remains a key year in our Stage 2 strategy of broadening customer engagement where we focused on one body, two wings; that is focusing on financial institutions while expanding ecosystem and overseas.
Next, on Page 5. This quarter saw continued customer base expansion and improved customer recognition in our 3 major segments as a part of our Stage 2 strategy. OneConnect announced its all-around strategic collaboration with the largest life insurer and comprehensive financial group in South Africa Old Mutual plc, leading to faster corporation in life insurance, digital transformation.
We kicked off our cooperation last year with an omnichannel Asian solution project. The first phase of which has been successfully delivered in 2022. In Q1, we completed the signing for Phase 2 projects and are now working on the delivery of Phase 2 and landing of Phase 3.
In addition, we also launched index cooperation with a major state-owned bank, contributing to approach for self-control technology and empowering the bank in digital transformation and delicacy in management.
Next, on Page 6. We continued product improvements in digital banking, digital insurance and Gamma platform. Digital lending products in the banking segment equipped with over 30 new plugins can better empower managers in fixed business scenarios and improved business development efficiency. Omnichannel agent solution in life insurance has been further updated and experienced significant improvement in standardization.
AI customer service from Gamma platform has been tailored into 7 small sub applications. With 3 AI middle platforms, the operating comes with over 50 operation services and over 4,000 financial scenario templates.
Aside from product improvements to make sure our efforts will reflect on our financial results, we also strengthened internal operations and management. We released delivery management standardization framework 2.0 to improve standard metrics and measures for internal management.
OneConnect's first operation and maintenance framework has been launched to issue standard operation and maintenance sales contracts and improved revenue from operation and maintenance. On the other hand, to achieve better P&L management, timely warning and improvements for projects, we introduced a dynamic project P&L management plan based on operating targets which gives us clear insight into all of our projects and improved overall efficiency within our organization.
Please go to the next page. Overseas business sustained its rapid growth into this quarter. In Hong Kong, PAOB is the first virtual bank to be involved into Hong Kong MA business Data Connect initiative. As we have been expanding partnerships and business scenarios, revenue increased by 51.6% year-over-year in Q1. At the same time, lighter fintech products such as EKYC achieved breakthroughs in Hong Kong and established cooperation with multiple banks, which will enable local businesses to open accounts online.
Next, please go to Page 8. Turning to Southeast Asia. We introduced a digital banking solution highly tailored for Southeast Asian market. The offerings stemming from our projects with the top digital bank, covers products, including but not limited to onboarding, deposits, spending, marketing, customer service, virtual debit cards and payments.
We have also fostered a new business collaboration model where we grow with our customers and share value added in their businesses, which means we not only collect the implementation revenue but also receive license fees, share revenue from increased business volumes as well as charges, operation and maintenance fees. This model ties OneConnect and our customers together and encourages win-win growth.
Next, on Page 9. We also published our first ESG report in 2022 under the listing rules in Hong Kong, introducing OneConnect's ESG practices and achievements in 4 areas: namely supporting self-controlled technology, serving real economy, accelerating digital transformation in financial industry and empowering small and medium-sized enterprises.
As a commercial technology service provider for financial institutions, OneConnect is committed to innovative applications of technology in the industry, empowering digital transformation in financial industry with technology and supporting the development of green finance with our practices as well as achieving sustainable development for the industry and OneConnect.
Next page. This quarter, OneConnect and our products have been awarded by multiple institutions, including KPMG's 2022 leading fintech of (inaudible) leading fintech enterprises top 50 and best 2022 fintech supplier in China award, to name just a few.
Looking forward, challenges and opportunities come hand-in-hand. Development of financial technology will undoubtedly remain relevant, both at home and abroad as financial institutions continue to aim for improved revenue and efficiency, reduce costs and risks. Understandably, they are now more prudent with their IT spending over the short term against downward economic pressure and narrowed the net interest margin.
For fintech service providers, this means higher requirements for product value and bigger challenges. At OneConnect, we are fortunate enough to see this coming. Over the past several years, we continue to improve our products and introduce high value offerings. We are confident that we will land our Stage 2 strategy of broadening customer engagement where our customers were more focused and our engagement with them continue to deepen.
Next, our CFO, Luo Yongtao will go over our financial results. Thank you.
Unidentified Company Representative
Thank you, Mr. Shen. Next, our CFO, Mr. Luo Yongtao will go through the financial results in more detail. Mr. Luo, please.
Yongtao Luo
Okay. Thank you. Good evening, everyone. Despite an uncertain macro environment, we recorded satisfactory first quarter results. Just as Mr. Shen said, we delivered revenue of RMB 926 million in the first quarter of 2023, decreased by 9.1% compared to the same period last year.
Revenue generated from third-party customers decreased by 6.9% to RMB 318 million in the first quarter. Revenue decline reflects our decision to adopt quality growth strategy and to reduce customized projects with low margin. We are encouraged to see that gross margin for the quarter improved by 2.8 percentage points year-over-year to 37.1% because of this strategy and non-IFRS gross margin increased 1.6 percentage points to 40.4%.
Net loss attributable to shareholders was RMB 109 million, and the corresponding net loss ratio to shareholders improved substantially by 19.4 percentage points on a year-over-year basis to negative 11.8%. Now, let's turn to our revenue mix. In the first quarter, our revenue mix by customer type maintained relatively stable.
Our third-party revenue decreased by 6.9% to RMB 318 million compared to Q1 last year, contributing 34.3% of total revenue in Q1 2023. The uncertain macro environment and the strategic adjustment did have an impact on our revenue, which mainly reflected in a decreased revenue from business origination services and risk management in the first quarter.
Third-party revenue growth remains a key focus of our second-stage strategy. Once macro pressures subside and as we continue to advance our initiatives, we believe revenue from the third party will improve. We are also glad to see that our implementation and overseas business continued strong momentum in the first quarter, making up the shortfalls of temporary reduced demand for certain products and services.
In the first quarter, revenue from Lufax decreased 44.7% to RMB 71 million and contributed 7.7% of our total revenue. The revenue decline from Lufax was mainly due to Lufax's business operation optimization, resulting in lower demand for our business origination services and risk management services.
Revenue from Ping An Group decreased 2.2% to RMB 537 million and contributed 58% of our total revenue. Revenue from Ping An Group was essentially stable. As always, OneConnect regards Ping An Group as our most important flagship client. The services provided to Ping An are core technology solutions, which have been deeply embedded into Ping An Group's daily operations. Our services to Ping An Group also have a proven record of success. Therefore, we expect our revenue from Ping An Group to maintain a steady momentum.
Moving on to revenue mix by business type. Implementation revenue increased by 22.3% on a year-over-year basis to RMB 210 million mainly due to expanding demand for insurance system products and Gamma data middle platform system products in the first quarter. Revenue from business origination services decreased by 57.3% year-over-year to RMB 49 million, primarily due to declined transaction volumes in channel marketing products and business origination modules under digital radio banking solutions.
Revenue from risk management services decreased by 27.3% year-over-year to RMB 78 million, mainly due to reduced transaction volume in lower risk analytics solutions because of lower-than-expected demand into the challenging macro environment in the first quarter.
Revenue from operation support services decreased by 12.8% on a year-over-year basis to RMB 223 million, which was primarily caused by a reduced demand for customer services, operation products and auto ecosystem services in the first quarter.
Revenue from cloud services platform was RMB 292 million, decreased by 1.2% on a year-over-year basis and relatively stable compared with RMB 296 million in the first quarter last year, reflecting the benefits of our continued transformation efforts. Revenue from cloud services platform continued taking up the biggest chunk of our revenue, and we believe that cloud services platform would see improved demand and continued strong performance.
Revenue from post-implementation support and other services decreased by 20.6% year-over-year to RMB 42 million in the first quarter. The decline was primarily due to lower demand for auto ecosystem services.
PAOB continued the strong growth momentum from our virtual banking business in Hong Kong in the first quarter 2023. Its revenue increased by 51.6% to RMB 32 million as compared to the first quarter last year. We will continue to capture the growing overseas demand for digital transformation and seize the opportunities that arise. As you can see, our businesses are diverse, and we are developing more solutions around technology infrastructure. We will remain committed to diversifying our product mix and adopting a stable and sustainable stock-based charging model.
Let's turn to revenue mix by product sectors. Gamma platform sector, the focus of product innovation in recent years contributed the biggest chunk of our revenue and recording 7.5% growth in the first quarter 2023 and accounting for 49.5% of our total revenue.
Digital banking sector which accounted for 27.9% of total revenue, reduced by 33.2% on a year-over-year basis. This was mainly caused by a reduction in transaction volume of our business origination services and risk management services, which were related to our initiatives to phase out lower-value products and unfavorable macro circumstances.
Digital insurance sector, which accounted for 19.1% of total revenue decreased by 4% on a year-over-year basis, mainly because decreased demand in auto ecosystem services. In addition, our virtual banking sector as I have just mentioned before, saw continued expansion, accounting for 3.5% of total revenue in the first quarter.
Let's now take a look at the customer numbers. The number of Premium Plus customers slightly decreased to [3373] as compared with 74 for the same period last year, mainly due to macro pressures and our pursuance for quality growth strategy, as aforementioned. We believe as we continue to advance our initiatives, we expect our customer base to further expand and more Premium Plus customers using our products and services.
Now let's look at gross margin for the quarter. We are very glad to see our gross profit reached RMB 343 million in the first quarter 2023. Gross margin improved 2.8 percentage points to 37.1% supported by quality growth strategy and benefiting from product standardization. Our non-IFRS basis, gross margin was 40.4%, compared with 38.8% in the prior year.
As Mr. Shen mentioned, in the first quarter of 2023, the continued efforts in product integration and delivery efficiency, together with execution on quality growth helped to improve our gross profit margin. We will stick to the strategy and continue the endeavor of achieving profitability.
Moving on to our expenses and the net loss attributable to shareholders. You can see that we are well on track to our breakeven midterm target. First of all, our research and development expenses came down to RMB 288 million from RMB 363 million in the same period of last year. As a percentage of revenue, it decreased to 31.1% compared with 35.6% in the prior year.
In the first quarter, we continued implementing our Phase II strategy that focus on product integration. As our products were upgraded and integrated, we further improved our product delivery efficiency. Looking ahead, we will keep investing in research and development at a more measured and reasonable pace to enhance our product competitiveness in the market.
Our sales and marketing expenses for Q1 decreased 41.2% to RMB 64 million compared with RMB 109 million in the first quarter of 2022. As a percentage of revenue, sales and marketing expenses decreased to 6.9% from 10.7%. The improvement in sales and marketing expenses mainly benefited from enhanced sales capability and marketing efficiency. Our general and administrative expenses decreased 49.3% to RMB 107 million from RMB 211 million in the prior year. As a percentage of revenue, it decreased to 11.6% from 20.7%.
The decline in general and administrative expenses was due to lower costs associated with operational efficiency improvements and ongoing transformation initiatives. It is worth mentioning again that under a challenging business environment, our net loss attributable to shareholders improved substantially to negative RMB 109 million from negative RMB 318 in the same period last year.
And the corresponding net loss ratio to shareholders improved significantly by 19.4 percentage points from negative 31.2% to negative 11.8%. The next page demonstrates the trend of our net loss ratio to shareholders improvement in the past 3 years and the first quarter of 2023. From this page, you can see a clear trajectory of our path to profitability over the years.
We will continue our product integration efforts and strive to improve operating efficiency and margin. We are confident about breakeven by midterm. Looking forward to the rest of the year, although we continue to see a degree of unpredictability in the market, our focus remains on improving third-party revenue.
We will continue to enhance gross profit margin, focus on cost control and improve operational efficiency to stay on our path to profitability. Next page, we listed key financial metrics of the first quarter 2023. Lastly, we summarized the adjustments in non-IFRS gross margin for reference. Thank you. Back to you.
Unidentified Company Representative
Thank you, Mr. Luo. Operator, we are ready for questions. Please open the line.
Question and Answer Session
Operator
(Operator Instructions) Our first question comes from Timothy Zhao from Goldman Sachs.
Timothy Zhao
[Interpreted] I have 2 questions here. First is regarding your strategy to turn down the low-margin products. Just wondering if management can help quantify the impact on revenue for each product line and between the revenue from Ping An and third parties. And from which quarter that we should be able to see a cleaner base to support a future revenue growth.
And secondly, as we see a very good execution in reducing the operating loss for the first quarter this year, just wondering if management can give any guidance on the full year operating expenses and any guidance on the probability will be appreciated?
Unidentified Company Representative
Mr. Luo will take the question.
Yongtao Luo
[Interpreted]
We mainly phased out low gross margin and low added technology value products. Examples can be found in all business segments. Projects with high customization, low potential and unsustainable revenue will also shut down. The impact of which can be found in the slowdown growth in our first quarter.
Improving revenue quality and upgrading products are crucial initiative in our Stage 2 strategy. We have also -- we have so far seen promising results. We will keep on this effort to continuously improve revenue quality and gross margin.
Some product upgrades and development efforts to maintain upward revenue trend over the long term. In Q1, you can see strong momentum and solid growth in revenue from implementation overseas and technology infrastructure. Sales and marketing and general and administrative expenses have been reduced by a big margin as a result of headcount optimization and cost reduction.
Stringent cost control measures mainly by, firstly, being more efficiency -- being more efficient with resources and improving ROI; secondly, focusing on resources on R&D, keeping -- keep developing and upgrading products to make sure we remain competitive. All comes down to achieving sustainable business development, which means we will maintain effective use of our resources going forward.
Operator
(Operator Instructions) We now turn to Keith Tsang from DBS.
Keith Tsang
[Interpreted] So the first question is, when is the company's financial cloud license ready? And what's the progress for now? And the second question is in the future, what's the company's third-party revenue growth potential?
Unidentified Company Representative
Thank you for your question. The first question related to the financial cloud will be taken by Li Jie and the second one regarding our third-party revenue will be taken by Mr. Shen.
Chong Feng Shen
[Interpreted] We are closely following up the financial cloud registration process. So far, the application is going well. We are cautiously optimistic about our application, but can't commit to a clear time line. .
Next, your question regarding the growth drivers for our third-party revenue. Firstly, we will remain committed to our Stage 2 strategy of broadening customer engagement, and at the same time, prioritize product integration and upgrades. We aim to deepen engagement and expand customer base by continue to polish and cross-sell our products.
Secondly, if we look at the growth drivers by segment, we noted promising trends, thanks to our ongoing product innovation efforts. We expect to see growth drivers from all 3 segments: life insurance from digital insurance, AI customer service and financial cloud from Gamma platform and overseas. In addition, developing self-control technology also shows a lot of potential.
Operator
Our next question comes from [Laura Lee] from CGS CIMB.
Unidentified Analyst
(foreign language)
Unidentified Company Representative
[Interpreted] Thank you for your question. For the first question related to cost control will be taken by Luo Yongtao. And the second one, Michael Fei takes the second question please. And first of all, it will also answer the first question.
Yongtao Luo
[Interpreted]
Regarding to your question about cost control methods, as I've mentioned before, over the past year, the reduction mainly came from the optimization of our headcount, upgrading of our products as well as expensive reduction. And as a result, our R&D, S&M and G&A expenses have been lowered significant, which further contributed to the narrowing of our losses.
Question about the cost control measures looking forward, and we have been asking ourselves the same question. And I believe in the future, cost control can be down mainly in 2 assets. Firstly, we will maintain a strict and stringent cost control discipline. And secondly, we will make sure that our resources are utilized more effectively. And that's number one, being more efficient with our resources and improving ROI; and number two, focus our resources more on R&D expenses. That is due to develop new products and upgrading our existing products to make sure we remain competitive.
(inaudible) is only a handle for internal management. And it ultimately comes down to contributing to the sustainable development of our business overall. Therefore, we will maintain the discipline going forward.
Yiming Fei
[Interpreted] So I will take the next question, which is essentially 3 sub questions. One is about the funding cost, the second is about the loan growth and the third one is about the loan quality. Yes, in the past 12 months, rising funding the fed rate increase did have a impact on our funding cost. So we react from 2 aspects.
So first of all, we watched very closely about the market development, and we make swift adjustments if there's any market development trend about our deposit rate. And we're using our deposits very effectively, efficiently and maintain our loan-to-deposit ratio at an acceptable optimized level.
And on the other hand, we also try to improve our loan pricing. Actually, the average loan interest rate in the first quarter compared with the last quarter will increase about 40 basis points. Given impact of the Hong Kong economic slow down as well as the input cost slowdown, the loan growth in the first quarter did also slow down.
To tackle the challenges, I think on one hand, we introduced more new products. If you go to (inaudible), probably you would notice that in May, we actually launched a cooperation with Octopus. We will be able to use Octopus data for us to do alternative data product assessment. And also given the connection between the Hong Kong -- closer connection between Hong Kong and China as well as the opening up of the Hong Kong market, I think we are cautiously optimistic about the growth outlook in Q2 and the following quarters.
Considering we only launched our business in the third quarter of 2020 and we started a very small base with high growth, I think it's natural for our NPLs to increase. Compared with our peers participating also in the SME banking business, we will see a very good quality, very good ratio compared with our peers.
In addition to that, considering the fact that over 80% of our loan exposure is actually under the SFGS program, which is the Hong Kong government lending guarantee program. So our actual loss ratio as of now is actually lower than 0.3%.
Operator
Our next question comes from Lydia Lin from Morgan Stanley.
Chenyueya Lin
[Interpreted] So my first question is how do we quantify the impact of the first quarter revenue from compressing the low-margin product line. So my second question is, how is the pace of lowering the mix of low-margin products and lowering the OpEx in the next 3 quarters compared to the first quarter of this year?
Unidentified Company Representative
Thank you for your question. I think both questions will be taken by Mr. Luo.
Yongtao Luo
[Interpreted] So for the phasing out of low gross margin products, we mainly close the low gross margin and low tax value product and these examples can be found in all of our business segments. In addition, projects with higher customization and low potential and unsustainable revenue will also phase out. And if we were to quantify the impact, we can observe that in the decrease in our top line as well as third-party revenue in Q1.
Remember, our business still demonstrates huge potential and the phasing out project also delivered promising results. To be specific, we noticed the pickup from delivery revenue, revenue from overseas as well as the revenue from technology infrastructure, which is a flagship product from our Gamma platform.
Question on the progress of gross margin and loss reduction initiatives. As we have -- as you may probably noticed, we have been carrying out these efforts over the past several quarters. And this year, these initiatives will carry on full year. And the results have demonstrated that we are well on track to our midterm target and is to breakeven soon, which means that our loss reduction efforts will continue, and the results will continue to reflect on our financial metrics.
Operator
This concludes our Q&A. I'll now hand back to Mr. [Rick Chan] for any final remarks.
Unidentified Company Representative
Sorry that we (inaudible) a little bit today. And thank you very much for joining the call today. If any questions, please be free to contact our IR team. We appreciate your interest in following us and look forward to speaking with you again. Thank you.
Operator
Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.
[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]
