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Qudian Inc. (QD) Q2 2019 Earnings Call Transcript

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Qudian Inc. (NYSE: QD)
Q2 2019 Earnings Call
Aug 16, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by for Qudian Inc. Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question-and-answer session. Today's conference call is being recorded. I will now turn the call over to your host, Ms. Annie Huang, Director of Capital Markets for the Company. Annie, please go ahead.

Annie Huang -- Director of Capital Markets

Hello, everyone, and welcome to Qudian's second quarter 2019 earnings conference call. The Company's results were issued via Newswire services earlier today and were posted online. You can download the earnings press release or -- and sign up for the Company's distribution list by visiting our website at ir.qudian.com. Mr. Min Luo, our Founder, Chairman and Chief Executive Officer, and Mr. Carl Yeung, our Chief Financial Officer will start the call with their prepared remarks.

Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the Company's results will be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the Company's 20-F as filed with the US Securities and Exchange Commission. The Company does not assume any obligation to update any forward-looking statements, except as required under applicable law.

Please also note that Qudian's earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Qudian's press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. We also posted a slide presentation on our IR website, providing details on our results in the quarter. We will reference those results in our prepared remarks, but will not refer to specific slides

during our discussion.

I will now turn the call over to our CEO, Mr. Min Luo. Please go ahead.

Min Luo -- Chairman and Chief Executive Officer

Thank you, Annie. I want to first thank all the investors, analysts and the media, who have taken an interest to join today's call. I'd like to walk you through some of our key factors in our performance before handing it over to Carl, who will take you through more details.

Another record breaking quarter in terms of user growth and net income. Our strength in earnings is not just about the scale and the growth trajectory. Since we launched open platform last year, we are enjoying substantially earnings quality improvement as a larger and larger portion of our quarter's earnings are generated from our risk-free open platform, our referral revenue.

Before we tap into the results, I would like to use the moment to help the community understand what is really driving the business. The early adoption of technology across our business has enabled us to develop a highly cost efficient and user-friendly platform for 100 plus licensed financial founding partners to sell the under-penetrated consumption credit market in China by a bounding laws to follow us on our platform.

Our loan book, which is a product of our credit tax, we developed using AI and big data is driven by an industrial-leading RMB220 billion and growing worth [Phonetic] of accumulated transaction. This gives us a technology advantage in data analytics that is leading the industry. These areas of big data application include customer behavior pattern, complex networks, adjust analytics, OBSC [Phonetic] information, biometric recognition, small title forms of machine learning, smart collection and a real time credit performance-based risk strategy.

We are able to use these technology tools to grow our loan book responsibly, which was at RMB28.7 billion at the end of second quarter. To put volume in perspective, we are leveraging over [Indecipherable] and efficient comp-based server and are handling over 100 terabytes of transactional data per day. This massive volumes of data create a solid foundation for our big data analytics capability. In previous quarter, we have experienced that we do not need costly method to drive user growth. We pride ourselves in having a competitive regulatory compliance fee and a one-stop seamless user experience welcomed by the young mobile centric and other banking [Phonetic] population. Our scalable and profitable platform allows us to consistently test the new and domestic users using MPO [Phonetic], allowing us to have an organic based user growth.

After the end of the second quarter 2019, our registered user base grew [Indecipherable] to 76 million. And the total outstanding borrowers reached 6.1 million, both high in operating history of our company. Our risk-free referral open platform, years of technology integration with license to financial institution has fueled a liable infrastructure with low cost, high speed and high accuracy for credit data processing, disbursement and the transaction clearly affect that our financial service partners of our risk-free referral open platform can rely on technology investment we have made to make credit decisions faster and better.

Clear transactions in near real time and access our quality user base with no [Indecipherable] in the first quarter, we had one bank partner operating under long referral program on our risk-free referral open platform. And now this has increased to eight to date. Signifying the chart they played in our technology infrastructural with a similar user interface and experience. The borrowers also continue to find our customer -- our consumer interface a great way to get a faster service and cost. As such, also others users that are qualified to draw loan again in open platform in the second quarter. The repeat ratio was 70% showing the overall substantial ability and user stickiness of this initiative.

With the consumer lending industry in China excited at over RMB8 trillion, I continue to be excited by our prospects. Like we said in the past quarter, we are committed and the focused on this consumer credit opportunity at both the loan book and open platform approaches are making strong in loans with our maximum [Indecipherable] based user base.

At the same time, we are fielding a distributed traffic ecosystem by partnering with third-party mobile Internet platform across different verticals empowering them within embedded in ATT consumer finance solution for the users. This distributed traffic ecosystem is another value add to our founding partners to supplement our existing maximum under-served user base, leveraging the latest HTML 5 technology.

Our solution are well equipped to deliver the similar and the customized credit solutions within the third-party apps. We make a great and steady investment allows the quarter and now making greater progress on new verticals with new partnerships to close soon.

I very much look forward to continue to deliver exciting developments in a near future. Carl is there [Phonetic] for more details.

Carl Yeung -- Chief Financial Officer

Thank you, Min, and hello, everyone. First, I'd like to touch base on a couple highlights from the second quarter. Well, officially, we've joined the quarterly net income above RMB1 billion company. Coming off a record first quarter of 2019, we started this year with another milestone, achieving another record non-GAAP net income of RMB1.16 billion, up 57.1% year-to-year. This came as a result of continuing to ramp up our risk-free open platform initiative and successfully growing our loan balance, while managing risk appropriately. Particularly, our loan book grew by 91.8% year-on-year, demonstrating overwhelming user demand and ample institutional funding.

As Min discussed, we have been continuing the activation of our dormant user base by effective credit trial programs. Instead of purchasing high cost traffic to our app, our credit assessment model identifies specific user cohorts to which we extend very small criticized for a short duration to quickly gauge their credit behavior data and thereby can extrapolate risk profiles for multiple clusters of the test user group, gradually adding qualified users to our core user group. Through this effort, our new active borrowers increased by 108.2% from the last quarter, and approximately RMB500 million was provisioned in the quarter to bring on more outstanding borrowers to reach over 6 million on our own loan books in the second quarter, growing the outstanding borrower base on the loan book by 12% in one single quarter.

Our M1+ vintage delinquency rates would have decreased by 0.5%, excluding users in these trial programs. Owning to a massive under-tapped user base and highly evolved distributor traffic ecosystem, our open platform initiative continued to prove its strong potential to become a key growth driver, generating RMB398.1 million in revenues for the second quarter, compared to RMB158.7 million in the first quarter. That's 150% growth in one single quarter. The number of outstanding borrowers under the loan referrals business also increased to 415,000 from 135,000 in the first quarter, driving total outstanding borrower base to our entire platform to 6.1 million.

Since 2019, we have made effective efforts to address evolving regulation and partnership landscapes, and our share price performance has performed well to reflect the more positive sentiment. With solid second quarter results driven by strong momentum in our open platform initiative and better-than-expected loan book growth, we have raised our original guidance of RMB3.5 billion by 28.6% to RMB4.5 billion on a non-GAAP net income basis. And our second quarter earnings have again exceeded the Street consensus by 32.7%.

In addition to delivering strong financial results, we also have a long-standing commitment to delivering value to our shareholders. We seized the market window to raise $345 million via a convertible bond issue in June, including a fully exercised green shoe and at 1% coupon for seven years and further entered a capped call transaction to increase the effective conversion premium to 75%. More importantly, given still the visible disconnect between the Company value and fundamentals versus the share price, the majority of this proceeds are earmarked for share buyback in the next one to two years. The deal not only makes sense financially, but has brought us access to more large global investors. Enhancing the quality of our stakeholder base.

Now let me share with you some key financial results. In the interest of time, I will not go through over line item by line item. For more details, discussions of our second quarter results, I invite you to read our official earnings press release. Our total non-GAAP net income continued to set new records, increasing by 57.1% to RMB1.16 billion year-on-year, driven largely by attractions on the open platform business.

Referral service fees, which relate to traffic referral services and transaction referral services provided by open platform, substantially increased to RMB398.1 million from nothing in the same period last year. Our operating efficiency continues to improve as we achieved larger scale. Cost of revenues decreased by 69.8% to RMB286.1 million from RMB947.8 million for the second quarter of 2018. And sales and marketing expenses decreased by 51.6% to RMB77.7 million from RMB160.6 million for the second quarter 2018. To improve our credit assessment models and activate the existing dormant user base, we started to conduct credit trials in the third quarter of 2018 by extending credit to cohorts of non-core borrowers identified by our AI base algorithms, which may not have met our strictest credit standards and were placed prior to such trials were initiated.

Approximately additional RMB500 million was provisioned in the quarter and the outstanding borrower base from that effort on the loan book side increased by 12% to reach 6 million in one single quarter. We continue to be conservative on our provisioning and operations. The M1+ delinquency coverage ratio for this quarter was 1.3 times for the whole loan book as equity reaches RMB12.3 billion and outstanding loan balance also increased to RMB28.7 billion. The leverage ratio stands at only 2.3 times. Lowest among our peers/

In addition, we had cash and cash equivalents and restricted cash of RMB3.4 billion. We believe our low leverage model and sufficient cash reserve will help sustain our long-term growth.

Finally, again on guidance, we remain fully confident in our growth prospects given sufficient funding, strong user demand and ramp up of our open platform. Therefore, as mentioned, we are reaffirming our previously issued guidance and expect our total non-GAAP net income for the full year of 2019 should be greater than RMB4.5 billion, which will basically mean a 76.5% increase from RMB2.5 billion in 2018. Now, this above outlook is based on current market conditions and reflects the Company's preliminary expectations as to market conditions as regulatory and operating environment, as well as cost of demand. All of which are subject to change.

Now, this concludes our prepared remarks. I will now open the call to questions. Operator, please kindly go ahead.

Questions and Answers:

Operator

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] First question comes from the line of Alan Kuang from Aletheia Capital. Please go ahead.

Alan Kuang -- Aletheia Capital -- Analyst

Hi, this is Alan from Aletheia. Thank you for taking my question and congratulations on a great results. I have two questions. My first question is on the traffic ecosystem. Can you give us some color on Qudian's investment plan in building that traffic ecosystem? And how much strategic or minority stake investments have you made so far and how much more do you plan to spend for the rest of the year or maybe even next year? If you can give us some guidance.

My second question is on user acquisition costs? We saw in the press release, they should have added about 2.3 million with respect to user in 2Q '19. Can you give us some colors on how many of these new users are from the third-party app ecosystem and how much cheaper it is to acquire new users from this ecosystem versus other channels? Thank you.

Carl Yeung -- Chief Financial Officer

Thank you, Alan. Appreciate the question. First of all, on the current status of the traffic ecosystem, again, we made a great strategic investment in the last quarter in one of the leading karaoke apps. So far, the conversion rate is pretty decent, It's well above 1% of the initial model that we've built to support that investment thesis. But so far, we still are in the optimization phase. In terms of where the placement of the icon would make the best exposure. So the contribution to this quarter's revenues or user base is not significant. But we are very excited that, as Min mentioned, we are closing several more partnerships now.

These may not necessarily mean we have to take a strategic stake, given the first step we've taken to build that system out more and more leading Internet platforms are seeing this as a way to really provide a great service to their user base. So we're working with at least two to three pretty large platforms, which we hope to close in the next few months from just a servicing perspective, and we probably would not need to take a stake in them. It's hard to quantify the amount of dollar we would spend on these strategic stake relationships because one of the difficult tasks that we have to be responsible for is make sure purely strictly from a financial sense that the investment makes sense, that the investment is cheap and reasonable and we expect to make a good investment return in that period. So these are rare, but we are excited that our ecosystem, potential partners are seeing beyond just us being a stakeholder and seeing great value in the technology platform we can provide.

So looking out ahead, in the next few months, we could be announcing some exciting partnerships. On the user acquisition costs, on the second question. Thank you for observing, adding about 2 plus million registered users, none of which came from sales and marketing spend. Again, a material amount of it comes from our traffic ecosystem for now. We continue to have a very, very large, massive proprietary sort of app-based user base and I think that will be able to support a great open platform growth for the next few quarters already.

The open platform initiative is really just building something for the next two to three years when eventually at some point our massive user base gets used up. So again, no marketing spend there and open platform in terms of users is not contributing material amounts yet, but we are very excited of the prospects.

Great, thank you, Alan. Does that answer the question?

Alan Kuang -- Aletheia Capital -- Analyst

Yeah, that answered the question. Do you mind if I ask a follow up questions as well?

Carl Yeung -- Chief Financial Officer

Please.

Alan Kuang -- Aletheia Capital -- Analyst

I believe you have mentioned in the credit trial program that you are targeting some of the non-core borrowers right now. Could you give us some borrower profiles on those kind of borrowers you are targeting in the credit trial program?

Carl Yeung -- Chief Financial Officer

Sure. So if we look at the big data, about 76 million registered users and around 30-plus-million approved users. So we have actually have a fairly large gap about 40 million potential customers that we've just been conservative on. Logically, speaking the default rate cannot be 50%. So what we're doing is we're using AI to identify sort of the next level of risk that we may not understood before and issue them RMB500 or RMB1,000 ticket sizes, and these would be much more blind-sided testing. And we're able to absorb these provision costs because we have such large net income that can support us to do so. That's why you see in the second quarter, our loan duration has dropped from the previous quarter of 9.9 to now around eight months. That reflects a part of our loans going out, being much shorter duration, much smaller ticket size.

So I think that's a step we're taking. I cannot give you the specifics of the so-called user profile because that is a highly trade secret, what we're doing, but the numbers are great because we've essentially added 700,000 outstanding borrowers in one single quarter from Q1 to now Q2.

Alan Kuang -- Aletheia Capital -- Analyst

Yeah. Thank you, that's very helpful.

Carl Yeung -- Chief Financial Officer

Thank you, Alan.

Operator

Your next question comes from the line of John Cai from Morgan Stanley. Your line is now open.

John Cai -- Morgan Stanley -- Analyst

Hi, thank you for taking my questions and congratulations on the strong results, in particularly the gross momentum of the users. So my first question is -- do we see this momentum to continue in the second half? And related questions about the costs. I think the credit trial program led to a certain increase in the provision. So I just wonder -- because I see -- in the second quarter, the provision went up on a quarter-on-quarter basis. Just wondering if the management can provide some break-down on how much is it related to the new acquisitions of -- new users acquisitions. So that's the first one.

And the second one is about the proceeds of CB issuance. I think in the previous press release -- you also mentioned that there would be some strategic investment. And now it seems that there weren't any change to basically share buyback. And I think that there would be over the next one to two years framework. So I just wonder, what do we plan to use? Were we haven't identified any strategy investment yet. And obviously the share buyback can cannot be done over the next months. So I just wonder any plan on the cash?

And the final question is about some balance sheet items. I noticed there is a new balance sheet item called risk assurance liabilities? And I just wonder what's that? And then there's also some pickup in the long term contract assets. So just wonder if there's any colors on that as well? Thank you very much.

Carl Yeung -- Chief Financial Officer

Thank you, John. So for the first question, the second half momentum, I think will continue to be strong. I don't see any sort of data or trends pointing otherwise. So if you add up the first two quarters that we just completed, the first quarter's our non-GAAP net income was RMB970 million. We just did RMB1.16 billion. So we were north of RMB2 billion already. So I think that's -- reaffirming my guidance. So I expect in the second half total combined Q3 and Q4, we should be able to deliver, around the numbers that can get us across the guidance line with good confidence.

So I don't think there are any factors that point toward a specific slowdown yet. And I think that demand continues to be strong. But I think, we have to be mindful that this is an evolving industry. We are a responsible company in terms of taking on risk, like what we've done in the first quarter of 2018 when industry risk was not at the right place. We wanted we would bring down our loan book. We rather make for in less money and make sure that risk do not get out of control. So we continue to be responsible in such regards, but delivering the numbers seems to be well on track now.

You mentioned about the cost on provisions. So, again, this is a way that we activate our user base approximately around RMB500 million on plus off balance sheet over the loan book that we had to provision in the second quarter was used to bring on more active borrowers. So I think this is something that we continue to monitor. The objective follows this kind of path. We first do a work around in terms of thinking about where our target net income numbers are because that's my guidance and even have room in such quarter to drive more users then we would lend more sort of higher risk loans out to drive more borrowers. So it's a bottom-up approach and we continue to manage that responsibly, so that we can deliver both earnings growth as well as a good consistent user growth.

And then on the proceeds on the convertible issuance, yes, that the proceeds are earmarked for mainly two things. Number one is strategic investments that add value to the Company, and more specifically, perhaps on the open platform side. And then because we still see the Company as significantly undervalued, we hope to buy more shares back. So that will be used for that.

Now, in terms of priority, again, it's hard to specifically pinpoint or identify strategic investments because they do come when they come. So as far as we can see, a direct value add that we can provide to our shareholders is to first buyback. And given that some of the investments can be done onshore [Phonetic], we believe we have ample money onshore. As such, we now have RMB3.4 billion of sitting cash balance that we can make the right investments onshore already.

So that I think a large portion of that proceeds from the CB would be earmarked for buybacks. Now buybacks will be subject to different price and volume limitations, but we would do so in a view to enhance shareholder value. Time frame wise, we're saying one to two years. But we could be more aggressive if the price is right. We can be more conservative, if the price is right, I don't know. But we hope to deliver what we did this quarter.

If you look at our EPS from one year ago, our earnings grew by about 50% from a year ago. But our EPS grew by close to 80%. That's largely thanks to buybacks and share counts. Our share count as of today is as of the earnings, is only 279 million. So, again, that's real good shareholder value add.

We continue to -- we think we'll continue to do so. Now, you mentioned about one extra balance sheet item. We started to introduce asset management company models to pick up the fees that are in excess of something that the banks would be happy to charge, but still remaining under the legal limit framework of 36%.

And by going through these AMC companies, asset management companies, we have to assess just like the off-balance sheet model, how much we have to provision on the day that the transaction happens. And that's why you see a new line item in our P&L as well, covering these so-called guarantees on asset management models. We actually made a gain of around RMB30 million in the second quarter. That's because we were slightly too conservative on the provisions we were making when we started to do this with these asset management company partners.

Okay. And then long-term contract. I'm looking up some of the numbers. Perhaps I'll add to that at the end of the conversation. Does that answer most of your questions, John?

John Cai -- Morgan Stanley -- Analyst

Yes. Helpful. So just one clarification on the asset management company. Does that -- is that off-balance sheet or on-balance sheet?

Carl Yeung -- Chief Financial Officer

That's off-balance sheet.

John Cai -- Morgan Stanley -- Analyst

Okay. Thank you very much.

Carl Yeung -- Chief Financial Officer

That's why the accounting is exactly the same as off-balance sheet where we book it off balance sheet and then we only account that for the guarantee sort of potential loss part.

John Cai -- Morgan Stanley -- Analyst

Got it. Thank you.

Carl Yeung -- Chief Financial Officer

Thank you.

Operator

Your next question comes from the line of Tian Hou from T.H. Capital. Your line is now open.

Tian Hou -- T.H. Capital -- Analyst

[Foreign Speech]

So just really want to get some clarification on the referrals business. I want to -- would like to know how many and who are they that you guys do business with. And how exactly the service fee collected? Is that percentage of the loan you guys facilitate it? Or is it a flat fee? So how do you get this service fee? And also, who are the guys you cooperate with? And we saw some issues with very local banks. Do you guys have any measurements to control such a potentially risky co-op -- partnership? Thank you.

Carl Yeung -- Chief Financial Officer

Thank you, Tian. Really great to hear from you and great insights on some of the questions. I like to first quickly address the last part of John's question, which is the long-term contract assets that are sitting on my balance sheet. That's basically receivables as longer term receivables, because under the off balance sheet arrangements, we have a longer term receivables from our bank partners and that sits inside there. It's basically through that, that we continue to do.

Now, Tian to answer your great questions. Number one, on the open platform, the way we do this is again, we do a risk-free business model where I just refer a majority of it is referring of transactions to my bank partners. We had a concentration risk in the first quarter because there was only one bank partner supporting basically the entire open platform on the transaction side. But that increased to four partners in Q2. And now, as Min mentioned, there are eight partners, supporting this open platform initiative. So I think the concentration risk has essentially gone away.

Now how this really works is, we take a referral fee and that's based on a percentage of the transaction dollar that we introduce. So in Q1, that was 8%, in Q2, if we back out that math, it's coming close to about 10%. But again this is just the early stage of this business. I think over the longer period of time, the takeaway should be closer to 5% to 6% as more and more partners join and we become much more competitive in pricing to attract more partners.

So the revenue recognition just to get more details out of the community is exactly the same as our off balance sheet model where we recognize the transactions, our revenue in day one. But the good thing is, we do not need to take any guarantee liabilities at all. And the cash flow is collected when the loans are repaid over time for my bank partners.

Secondly, on the risks surrounding industry, that's something we continue to focus on. I also answer some of the first part of the first question, whom are these partners. These partners are essentially licensed Internet banks or licensed consumer finance companies, whom have nationwide license to do business everywhere in China. We do not essentially deal with localized banks. We have one or two partners, but they don't contribute a significant amount of our or even material amount of our business.

So some of the names you mentioned that blown up in the past few months have no impact to us at all because the bank partners that we work with are in a very different league. These would be names that every household name -- household would know these would be your -- I'm not at the discretion to disclose the names, but they are fantastic names.

Tian Hou -- T.H. Capital -- Analyst

That's very helpful. Thank you, Carl. That's pretty much all my questions. Thank you.

Carl Yeung -- Chief Financial Officer

Great. Thank you, Tian. Appreciate it.

Operator

Your next question comes from the line of Martin Ma from Nomura. Please go ahead.

Martin Ma -- Nomura -- Analyst

[Foreign Speech]

Thank you for taking my question. My first question is on Dabai Auto business. As announced by a company that the new business will be sold from mainly this year. And just want to understand what is the size of current inventory and how would you can handle that inventory. And the second question is on regulation. Recently there was a regulation introduced by CBRC that requires all the lending platforms to stop filing accident insurance policies. And just want to see whether that will have any influence on our company's profitability and what is the size of insurance for that sold on our platform, and how is that booked in our P&L? Thank you.

Carl Yeung -- Chief Financial Officer

Great. Thank you, Martin, for the questions. Great set of new questions. And on Dabai Auto, we winded it up basically, we stopped selling new vehicles since May of 2019, from our first quarter earnings announcement date. And back then, we still have a few thousand cars, but right now as of today, we have less than 500 cars in inventory. So we are quickly getting rid of that inventory to avoid exposure and having to markdown inventory and anything that's already still remaining in this 500 cars or less is already well provisioned for. So you don't have to worry about any potential impact to our P&L going forward.

So I think that's basically a final sort of finishing up of Dabai Auto. We will -- for full disclosure purpose, we will continue to collect cars as some of the delinquency will continue to happen under the old portfolio. But again, that will have immaterial impact to a net income base of RMB1 billion plus per quarter going forward. So I don't think we need to -- I think we can call it a day for that.

Insurance, yes, thank you for observing the recent regulation on CBRC preventing insurance company to participate in so-called cash lending. We did explore that as part of a product enhancements in the fourth quarter last year and partially in the first quarter of 2019. But we had the foresight to not get close to so-called regulatory sort of fringes. We stay away from anything that's acceptable to regulatory change. So essentially, there are no insurance fees or income in second quarter 2019.

We are one of the earliest companies in the sector to explore this and we're the earliest of the companies to basically stop that, and way ahead of the potential regulation came -- when that came in I think June. So there are essentially immaterial, nothing in Q2.

Does that help answer the questions, Martin?

Martin Ma -- Nomura -- Analyst

Yeah. That is very helpful. Thank you.

Carl Yeung -- Chief Financial Officer

Thank you.

Operator

Your next question comes from the line of Shenghao Yu from Needham. Your line is now open.

Shenghao Yu -- Needham & Company -- Analyst

Hi, Min and Carl. Thanks for taking my question. Congrats on the quick quarter. My question is still on about -- the first question on the open platform. So in the first quarter, we -- if we divide the revenue made in open platform by the user report, it's about RMB930 revenue per user and this quarter is about RMB954 [Phonetic] revenue per user. So should we expect to continue to grow per user revenue. And if it is going to grow, is it driven by our take rates or driven by the size of the loan offered by the partner and what the ceiling average per user revenue and my second question is about how the funding partner. How many funding partners we have for now and how long it takes for them to on board to our [Indecipherable] Thank you.

Carl Yeung -- Chief Financial Officer

Thank you, Shenghao. Again, open platform is something we focus on. So great questions to help everyone get more details. Again, thanks for observing the revenue take rate per user. That is a function of the loan transaction size and the take rate that we can get. So in the first quarter, the loan transaction size was around RMB13,000 that's relatively stable into Q2. And the takeaway was 8% in Q1 and takeaway was about 10% in Q2.

There is no ceiling. So if my funding partners determine that the user I set send [Phonetic] deserves a half a million, then obviously we take a certain percentage of the half a million on some pre-agreed rates. So there is no ceiling. It depends on the risk that my funding partners willing to take on that. So that number will vary, but I think the overall trajectory is that we think from a absolute revenue perspective, we continue to see at least another few quarters of growth. Because to answer your second question, we had one partner in Q1 contributing to the open platform. We had four partners in Q2 and as Min mentioned as of today we now have eight. So this has become a very proven value proposition across the regulated license financial institutions to tap into a brand new market that they couldn't access before.

Does that help, Shenghao?

Shenghao Yu -- Needham & Company -- Analyst

Yeah, thanks.

Operator

Your next question comes from the line of Daphne Poon from Citi. Your line is now open.

Daphne Poon -- Citi -- Analyst

Hi. Thanks for taking my questions. So my first question on the asset quality side, we observed on the vintage delinquency rate. So vintage continue to trends up like, for example, on the 2Q 2018 cohorts. So I'm wondering like where should we expect like set to stabilize in the longer term? And also because you mentioned earlier, you are having this credit trial program, which means you're essentially increasing your risk appetite. So going forward, is there any comfortable level on the annualized incentive rate that you expect and -- like when should we expect -- where should we expect kind of cost to like stabilize of going forward?

And the second question is about the identity -- outlook for the cash loan business [Indecipherable] open platform business. So on the cash loan, we look at that, the loan balance assuming your presentation slide that actually came off a little bit in July. So I'm not sure if that is because you're intentionally shifting the focus more toward the open platform business. And in that sense, is there any target in terms of the revenue mix between these two like for the referral service fee versus the core cash on business contribution? Thank you.

Carl Yeung -- Chief Financial Officer

Great, thank you, Daphne. Again, great questions. Number one, all new questions from today, from everybody else. Number one delinquency rate. Yes, the Q2 number has ticked up to now slightly over 4% in terms of M1 and slightly over 2%, closer to 3% on the M6 charge off rate. It is higher than previous quarters, but that just means the highest vintage is sitting there. The other vintages are still below that.

Now, because what we're doing is on a bottom-up approach, if we can deliver the same bottom line, we'd like to activate more users. So we will continue to use that as a priority and see how much provisioning we can spend in each quarter and activate how much users. If the delinquency trends accelerate beyond that, then we have to pull our loan book back. That's kind of how we think about it. I cannot tell you the exact sort of longer term rates, but I can tell you basically the trend is it has to go up for three main reasons. Number one, I think the overall economic profile, the macro side, continues to be deteriorating over a relative period from last year. It's still a very strong Chinese economy, but on a relative basis, it has slowed down.

Number two that there are more and more players that are going past, which means some of the people who could -- who are able to refinance couldn't refinance. That's kind of driving delinquency rate up as well. Number three, we are proactively doing this so called NPL marketing method.

And if we were to take out the NPL for marketing purpose. I think the delinquency rate on some of the back calculations we've done would have been just around 3.7% on M1+. And then just around 2.1% on the M6 charge-off. So pretty much stable like before. That's kind of how we think about it. I'm trying very hard to see if we can in the next few quarters be able to separate that delinquency by vintage into what is really the core business and what is really for sales and marketing purpose. So everybody can have a better comparison in terms of how we spend money on our prime uses versus others. So that's one thing we're working on. But overall, the trend has to go up.

On the cash loan business versus referral business mix, thank you for observing the daily charge that we post online. So you see blips and troughs. We are carefully managing that so-called trajectory so that we meet our guidance numbers carefully. If you have to ask us as a company and you've I think asked most investors, I think the preference is if we can generate 100% of net income from referral with no risk, why not? Because that's a better, higher multiple business.

So we're constantly tracking the development of open platform, if that can help us cross our goals and contribute a bigger percentage of net income contribution, we will take down our loan book, so that we would have less exposure to risk period. So that's kind of how we think about it. Regarding the specific mix, this is function of how quickly we can grow open platform revenue, the provisions we are making and how effective we can bring users on board to take them through the loan book program and eventually filter them into the open platform business.

So it's a dynamic process, but our goal is to be -- a majority of our net income contribution coming from open platform. I think we've made great progress. In the first quarter, roughly 15% or around 15% of net income can kind of attribute to open platform. In the second quarter, I think given the net income of RMB1.16 billion and we had a we had a just under RMB400 million referral fees, that's just under 40%, around 38%. Hopefully, in the next quarter or so -- next two quarters maybe, that risk-less net income can be over 50%. So that's kind of how we like that. Does that help with the two questions, Daphne?

Daphne Poon -- Citi -- Analyst

Yes, that's helpful. And actually I would like to follow up, understand more about the as asset quality or the risk control perspective. I guess I can see that from 2019 earnings perspective, you have pretty strong buffer to take on more risk. But you can still meet your full-year guidance of RMB4.5 billion. But I guess the question is if we look beyond -- for the long term, say, in 2020, if you continue to take on higher risk and you can see high credit costs, while because the APR is capped at 36%. So that essentially means lower net revenue tailwind, also lower profitability. So is there any bottom line profitability that you'll be targeting as? So that's the follow up question.

Carl Yeung -- Chief Financial Officer

Yes. Thanks, Daphne. As of today, we hope to have annualized take rate of at least 10%. That's kind of where we see a good position of buffer. And that may change depending on how quickly we can go open-platform.

It means that we take on more risk in the delinquency side and have a lower take rate on the loan book. But we can grow open-platform maybe 4, 5, 10 folds. It might make sense to do so, but we haven't seen that yet. We're just doubling every quarter right now, on open-platform. So the 10% kind of average take rate on the loan book is something we are kind of comfortable with for now.

Daphne Poon -- Citi -- Analyst

Okay. Thanks.

Operator

Your next question comes from the line of John Cai from Morgan Stanley. Please go ahead.

John Cai -- Morgan Stanley -- Analyst

Thank you for taking my questions again. So I have two questions. The first one is on the 70% repeat ratios on the open-platform. So I think, yeah, it shows user returning, but I just wonder. So that means most of the revenue from the second quarter is actually repeat forwards. And any -- what should we expect for this repeat ratio going forward?

And secondly is actually a follow-up on the mix between open platform and our order book. And if any of you if I look at the funding side for the risk business -- the funding now we're sourcing especially going to AMC social, so just wondering there's more kind of on the funding cost there as compared to the banks and then if I look at the open platform, we are actually able to add eight banks now. So it seems -- they are more interested in doing open platform. So how should you think about that as well. So obviously they get more revenues, so that's probably the driver, but is there any long-term threat in terms of customers retention? Thank you very much.

Carl Yeung -- Chief Financial Officer

Thank you, John. Again, the following up. Two questions, the first one, 70% repeat ratio. I threw that number in after careful analysis, because people who may not have used our app think that once our borrower through our open platform gets referred to a bank, it's a one way road. They don't come back. They worry the sustainability of our open platform, so I want to put some numbers to help them understand that the customers recognize that the consumer interface is us, not the banks, so that they keep coming back.

Now, to put numbers in perspective, in the first quarter, we had about 140,000 open platform outstanding loan borrowers and the second quarter, that's about 440,000, so again, most of them are new. That 70% comes from a pool of borrowers whom we paid enough from Q1 that they can have a loan drawdown capacity in Q2. So not -- it doesn't mean that 70% of the borrowers in Q2 are repeating. That means that if the qualified ones are drawing down again from our platform again. So some of them may not need a loan anymore, I suspect. Some of them who need a loan who may have the capacity drawdown again, they come back to my platform.

So it really is there to help people alleviate the concern that once you refer that transaction to a bank, it goes away. It still comes back to dense ecosystem. So that's kind of the repeat racial metric. We've made a very careful definition in our earnings release what that means, basically who has capacity draw down again -- they draw down again in our platform. But people who don't -- who may not draw down, don't have the capacity. They just stay there. And then in terms of the mix of open-platform and loan book, again, our AMC model, it's a model to supplement what the interest rate the bank can directly charge. And I think the fee we're paying there is less than 1%.

Because, again, we're picking still the risk up. AMC companies really do not account for being a funding partner, but rather as a regulatory compliant way to collect that fee. And we would give them a very, very small revenue share for their troubles.

And then the mix up open-platform and loan book. Your question really comes from the funding side's preference. I think the funding partners enjoy both types of business because it's really about the user cohorts for the really micro lending stuff that they don't have the capability on, I think they still want to stick with a loan book business, that we provide a underwriting service for. But for risk that they begin to understand, especially for larger ticket size, I think that they are happy to go with the open-platform model.

If you look at the transaction ticket size, again on the open-platform, it's like RMB13,000, versus on the loan book, it's still even in the second quarter just under RMB2,000 per transaction. So there is still a very good user cohort, sort of different pool setting there going on.

So I think most of my partners like to do both, depending on the right user cohort.

John Cai -- Morgan Stanley -- Analyst

Thank you, Carl. So just a quick follow up. How many banks are you working with under loan book of the risk business? Thank you.

Carl Yeung -- Chief Financial Officer

We work with just under 30 active license financial institutions. Some of them are banks. Some of them are consumer finance companies. Some of them are trust companies. But TrustPay, very, very small partner, has [Indecipherable] just banks and consumer finance companies. So on the risk taking side around 30. So hopefully we can turn eight at some point to 30.

John Cai -- Morgan Stanley -- Analyst

Got it. Thank you very much.

Carl Yeung -- Chief Financial Officer

Thank you, John. I appreciate the questions.

Operator

Next question comes from the line of Tian Hou from T.H. Capital. Your line is now open.

Tian Hou -- T.H. Capital -- Analyst

Carl, I have a question. So in the past, for a long time, you guys was misunderstood as a P2P. So you guys are not P2P. Would you please give us some kind of insight or clarification, what are the applicable law for you and what are some applicable laws for P2P so that we can have some much more clear distinction between you guys and the P2P vendors? Thank you.

Carl Yeung -- Chief Financial Officer

Okay. Thank you for the question, Tian. It can help us clear a really big question for a lot of people who talk to us for the first time. The strictest definition of P2P is peer-to-peer, basically a private individual whom is an investor lending to a private individual, whom is the borrower. And the platform sits in the middle, just acts as the intermediary to bring these people together.

Now, the risk there is that the private individual whom is the investor may not fully appreciate or understand and be able to underwrite that risk that they're taking, lending. So we understand that this may not be the best approach for an emerging market such as China. So we have never adopted the P2P approach. We have adopted a purely institutional approach where the funding of these loans are made strictly by licensed financial institutions whom their core business is to understand risk. These would be your banks and financial -- consumer finance companies. So there's a big difference in the way we get the funding into the hands of the borrowers.

And in our case, we've taken this to an even further step by not touching the loan in itself. So if you look at the regulation that applies in this transaction structure, we are a Internet technology company. We have a proper ICP license to allow us to run our apps, run the technology platform, manage the traffic on behalf of the banks.

The banks have a proper lending license so that the lending relationship happens between the borrower and the bank. We don't touch that money. Just don't. And when that transaction goes through [Technical Issues] the bank pays us a service fee. Now, that can be recorded as a financing income if it's our capital that is being invested through a bank, or a loan facilitation income if that capital happens to be bank's own capital.

Now, the difference on open-platform versus a loan book is, at the same time on the loan book side, we're providing an underwriting service to the bank if that loan goes bad. And we have a proper finance guarantee license to allow us to provide a guarantee. If we don't have the license, the bank cannot take my guarantee. That's the [Phonetic] regulatory compliance. But on the open-platform side because we don't take any risk at all, we don't need a license at all to do so. That's purely a traffic business and it can -- all we need is a proper Internet ICP license.

The P2P regulation and the legal framework is beyond me, beyond my understanding, because the P2P institutions are somewhat mixed in the bag of helping investors price risk.

So I think there are -- that whole segment is still evolving. And the are rumors of registration process, eventually registration to licensing process. But none of that applies to us.

Tian Hou -- T.H. Capital -- Analyst

Okay. Carl, thanks. It really helps.

Carl Yeung -- Chief Financial Officer

Did that make sense?

Tian Hou -- T.H. Capital -- Analyst

Yes, it makes sense. Clear to me. So, thank you.

Carl Yeung -- Chief Financial Officer

Thank you, Tian.

Operator

There are no further questions at this time.

Carl Yeung -- Chief Financial Officer

Great. I would like to thank the global investor community, the media and our stakeholders for joining our second quarter earnings. We continue to deliver very strong numbers. It proves the resilience of our Company. We look forward to deliver -- continue to deliver strong numbers going forward.

So again, thank you, everyone, and have a good night and have a good day.

Operator

[Operator Closing Remarks]

Duration: 71 minutes

Call participants:

Annie Huang -- Director of Capital Markets

Min Luo -- Chairman and Chief Executive Officer

Carl Yeung -- Chief Financial Officer

Alan Kuang -- Aletheia Capital -- Analyst

John Cai -- Morgan Stanley -- Analyst

Tian Hou -- T.H. Capital -- Analyst

Martin Ma -- Nomura -- Analyst

Shenghao Yu -- Needham & Company -- Analyst

Daphne Poon -- Citi -- Analyst

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