[NYSE: YRD] - Yirendai Q1 2016 Earnings Conference Call 8:00a.m. U.S. Eastern Time, Thursday, May 12, 2016 Presenters Mr. Matthew Li, Director of Investor Relations Ms. Yihan Fang, CEO Mr. Dennis Cong, CFO Mr. Ning Tang, Executive Chairman (Q&A only) Mr. Huan Chen, Director of Yirendai & Chief Strategy Officer of CreditEase (Q&A only) Analysts Dan Jo, Credit Suisse Mayank Tandon, Needham & Co. Richard Xu, Morgan Stanley Polar Zhang, BOCI Sarah Tian, CICC Presentation Operator Good day, and welcome to the Yirendai first quarter 2016 earnings conference call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note, today's event is being recorded. I would now like to turn the conference over to Matthew Li, Director of Investor Relations. Please go ahead, sir....... Matthew Li Director of Investor Relations Thank you. And welcome to Yirendai's first quarter 2016 earnings conference call. Our earnings press release and supplemental presentation slides are now available on our website. Hope you all had a chance to review the materials by now. Today's call features presentations by our Chief Executive Officer, Ms. Yihan Fang, and our Chief Financial Officer, Mr. Dennis Cong. Our Executive Chairman, Mr. Ning Tang, and our Director and Chief Strategy Officer of CreditEase, Mr. Huan Chen, will join the presenters in the Q&A session. Before beginning, we would like to remind you that discussions during this call contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Such statements are subject to risks, uncertainties, and factors that may cause actual results to differ materially from those contained in any such statement. Further information regarding potential risks, uncertainties, or factors is included in Yirendai's filings with the US Securities and Exchange Commission. 1 / 10
Yirendai does not undertake any obligations to update any forward-looking statements, except as required under applicable law. During this call, we will be referring to several non-gaap financial measures as supplemental measures to review and assess our operating performance. These non-gaap financial measures are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with US GAAP. For information about these non-gaap measures and reconciliation to GAAP measures, please refer to our earnings release. With that, I will turn the call over to our CEO. Yihan, please begin. Yihan Fang Chief Executive Officer Thanks, Matthew, and thank you all for joining the call today. We're pleased to begin 2016 with strong financial results during what is typically a seasonally low quarter for us. Sequential loan facilitation volume grew while our loan portfolio credit performance remained solid. Our strong Q1 results reflect continued robust demand for our products and services. We feel highly rewarded and motivated by the market's widespread recognition of the Yirendai brand. While Q1 is usually considered a seasonal slow quarter for our business, we successfully achieved the sequential growth by leveraging Yirendai's powerful brand name in China's consumer finance market. We facilitated 535 million US dollars worth of loans, representing a quarter-over-quarter increase of 5% and year-over-year increase of 110%. As of March 31st, 2016, the cumulative principal amount of loans facilitated on our online marketplace reached $2.4 billion. We served more than 50,000 borrowers and 203,000 investors during the quarter, of which 50% (sic - 55% see slide 14) of the borrowers and 100% of the investors were acquired through online channels. On last quarter's earnings conference call, we mentioned a number of strategies that we believe will drive sustainable growth of our business in years ahead. These strategies include providing our target customers with a better user experience and enhanced products and services, partnering with other Internet players and industry verticals that service our target customers with consumption scenarios, enhancing credit underwriting and risk management capabilities, and diversifying our funding sources to build a balanced mix of individual and institutional investors. During the quarter, we strengthened our commitment to prime urban salary workers by addressing their specific financing needs and improving the user experience. For example, we developed a new term loan product which takes personal data from the applicant's Housing Provident Fund account that can be accessed directly online. We continue to work on improving the user experience by creating faster and easier to use mobile applications. We are actively working with various partners in the Internet space such as Baidu and Qihoo 360, to develop online consumer financing solutions that leverage their massive user bases and the vast amounts of online data and traffic. 2 / 10
In addition, we worked with a number of partners that have consumption scenarios, including the purchase of second-hand cars, travel, and special elective medical procedures. Furthermore, we worked closely with a few players to jointly develop products by utilizing datasets that are customized for our partnership. We invested a considerable amount of resources into developing tools and the credit-related services to further expand Yirendai's exposure to a broader Internet user base. We have always considered risk management as a core focus for us. While we work hard to expand our business, we remain focused on generating sustainable and disciplined growth. In Q1, we further strengthened our risk policies and fine-tuned our risk-based pricing models. The credit performance of our product portfolio continues to improve over time, something our CFO, Dennis, will elaborate more on later. Lastly, as a strategic initiative to build a diversified and balanced mix of funding sources from individual and institutional investors, we extended loans with total principal amount of RMB250 million for a trust set up by a fund. The RMB250 million loans were taken as the underlying asset for the same amount of asset-backed securities, which were successfully listed on China's Shenzhen Stock Exchange in late April. With that, I turn over to Dennis to walk you through our Q1 2016 financial results. Dennis Cong Chief Financial Officer Thanks, Yihan. I will now go over our first quarter financial results. Overall, we had a very strong quarter in Q1 2016. We facilitated $535 million worth of loans, an increase of 110% year over year from Q1 2015. This quarter, we also achieved a milestone by crossing the $2 billion mark in loan origination. As of March 31st, 2016 we have facilitated $2.4 billion loans since our inception. We billed a total of $130 million in fees, an increase of 159% when compared with Q1 2015. Transaction fees from borrowers accounted for 93% of total fees billed. Net revenue in Q1 was a record $85 million, an increase of 187% year over year and 20% on a sequential basis. This increase was primarily driven by the growth in loan origination volume due to strong customer demand for our product and services. Looking at our revenue mix, we recognized $82 million for loan origination services provided upfront, and $3 million for post-origination services. We deferred $3 million for post-origination services for future periods in Q1 2016. $42 million in fees billed associated with risk reserve fund were net included in our income statements. In terms of our loan product portfolio during the quarter, 84% of our new loans facilitated were product D, with a 28.2% average transaction fee rate. And the product volume mix for Product A, B, and C were 5.5%, 3%, and 7.5%, respectively, with transaction fee rate ranging from 5.6% to 26.4%. On the investor side, we started to introduce lower yield products. Our 12-month Yidingying average investment yield on our platform in Q1 2016 is about 9%, down from 9.3% in Q4 2015, as we continue to benefit from decreasing interest rate environment as well as strong investor demand for high-quality assets on our platform. 3 / 10
To further diversify our funding sources, we successfully completed issuance of our first RMB250 million asset-backed securities of loans facilitated through our platform, a significant milestone, and the first in China's online marketplace lending industry. Turning onto operating expense, sales and marketing expense were $39 million for the quarter or 7% of loan origination volume, compared with 8% in Q4, due to lower investor acquisition cost, as we saw seasonal strong investor demand during holidays. Origination and servicing costs were $6 million for the quarter or 1% of loans facilitated, similar to that in Q4 last year. Our G&A costs were $9 million for the quarter or 11% of net revenue, compared to $7 million or 10% of net revenue in Q4 2015, as a result of our recent move into a new office building while temporarily preserving the previous workspace. Our profitability further improved in Q1 2016, with EBITDA at $32 million or a 37% EBITDA margin, compared with $6 million in Q1 2015 and a 20% EBITDA margin. Net income during the quarter was $20 million with a 24% net income margin, compared with $4 million and a 15% margin during the same period last year. This is attributable to the increase in net revenue and timing of revenue recognition due to product mix, and also seasonal lower customer acquisition cost. We continue to see solid credit performance from our portfolios. The recent delinquency rate and vintage charge-off performance are well within our expectation. And charge-off performance for 2015 vintage loans have shown improving trends, which demonstrate our capabilities in credit underwriting and risk management. Specifically, as of March 31, 2016, the overall delinquency rate for loans that are 15 to 89 days past due was 1.8%, compared to 1.3% as of December 31st, 2015. The increase reflects seasonality and is within our expectation. The charge-off rate for loans originated in 2015 was 2.6% as of Q1 2016, compared to 1.5% as of Q4 2015, as the loans further mature. The charge-off rates for each vintage from Q1 to Q4 2015 is improving as indicated in the Cumulative M3+ Net Charge Off Rate curve on Slide 25 of the Q1 2016 management presentation uploaded on our IR website, indicating strong credit performance of all our products in our loan portfolio. As of March 31st, 2016, the outstanding balance of liabilities from risk reserve fund guarantee is at 6.5% of remaining principal of performing loans, up from 6.1% in Q4 2015. We believe the risk reserve fund liability balance is sufficient to cover expected future payouts and do not plan to fund additional cash in the near term. We also intend to maintain the 7% cash reserve ratio in Q2 2016 with respect to new loan origination. We expect the solid credit performance to continue as we further refine our risk pricing model, expand our product portfolio into high quality asset and improve delinquency management. On the balance sheet side, we had a very strong cash position with about $172 million in cash and cash equivalents. Additionally, we also had $101 million in restrict cash in our risk reserve fund account and trust account. We also booked $31 million in loans at fair value as a result of consolidating the trust. Our liabilities were mainly comprised of two items, $112 million in liabilities from risk reserve fund guarantee and $40 million payable to fund at fair value as a result of consolidating the trust. 4 / 10
Cash flows in Q1 2016 were also very healthy. We generated $49 million in cash from operating activities, which was mainly generated from transaction fees charged to borrowers, $6 million used in investing activities, which was mainly related to the purchase of short-term investments, and $3 million used in financing activities to pay off IPO-related cost. With that, let me go over our guidance for the second quarter and full year 2016. We expect loan origination volume for the second quarter of 2016 to be in the range of $640 million to $650 million, and net revenue in the range of $95 million to $100 million, and second quarter EBITDA in the range of $20 million to $25 million. Our full year 2016 projections remain unchanged from our previous guidance. Loan origination volume is expected to be in the range of $2.8 billion to $2.9 billion, full-year net revenue in the range from $400 million to $410 million, and EBITDA from $100 million to $105 million. That concludes my remarks. I'd now like to turn the call back to operator for the Q&A session. Questions and Answers Operator: Thank you. We will now begin the question-and-answer session. (Operator Instructions) Dick Wei of Credit Suisse. Dan Jo: This is [Dan Jo] calling on behalf of Dick Wei. I have two questions. Could you give more updates on our ABS product and what's our long-term strategy in the securitization? Dennis Cong: Sure. Yes. ABS is a strategy in terms of funding diversification to connect with institution fundings. That'll be a long-term strategy in terms of funding sources. The first ABS is a small volume at RMB250 million. And we expect to continue to conduct ABS throughout the years. But the volume is probably not going to be very significant to start with. We probably will continue to do each quarter, but in a controlled pace. Dan Jo: Yes. Thank you. And last question, how do you see the competitive landscape in China's P2P market? And can you share with us your view on the likely regulation going forward? Thanks. Huan Chen: So you were asking about regulatory framework as well as competition? Dan Jo: Yes. Right. Ning Tang: Yes. On the regulation front, the CDRC [Debt Alliance] and specific rules are not officially out yet. They are still being reviewed, as we understand. But, and actually, industry associations and companies are actually operating under the spirit of such rules and guidelines. For example, Beijing P2P Association is organizing companies to do self review and peer review, which we believe are quite helpful. And so we believe that we are in full compliance. On the competitive landscape, yes, front, we expect that the market will become more and more competitive, and we see that there are more and more companies trying to do online lending. And last year there were already such companies, and this year we see more coming. 5 / 10
And so we continue to strengthen our market leadership by doing further R&D on data sources, strengthening our risk management (inaudible), so on. And we believe we have a lead in the market. Dan Jo: Okay. Thank you very much. Operator: Mayank Tandon of Needham and Company. Mayank Tandon: Dennis, I just wanted to ask you about some of the financials. You obviously beat expectations pretty comfortably relative to what you had said back in March. But you aren't flowing through the upside into the full-year guidance. So if you could comment on that, one. And secondly, also, just in terms of the second-quarter EBITDA coming down on a sequential basis, is that just a function of increased marketing and higher customer acquisition costs or is there something else that's driving that lower versus the first quarter performance? Dennis Cong: Sure. Yes. Thanks. I think first, in terms of full-year guidance, right now we're only in May. Of course we'll continue to see strong demand of our business, both from the borrower side as well as the investor side. However, from a management perspective, it's still a bit early to give us a good, solid transparency or confirmation on the full-year financial performance. So at this moment, we maintain our full-year guidance, even though we continue to see good demand on our business on both sides. I think in terms of the margin guidance, as we mentioned, Q1, we actually see a benefit of the seasonal strong investor demand. So the [customer] acquisition for the investor has actually come down quite significantly. While in terms of our business operation, I think our business will continue, it's still in a very fast growth stage. And there's a huge market ahead of us and many, many new product developments that we will focus on. So I think we will maintain our guidance full-year EBITDA margin around 25% as our operating guidance. So that's why Q2, we'll continue to guide with that, and Q1 more or less is seasonal strong investor demand causing the benefit of lower customer [acquisition] cost that is a high margin for that particular quarter. Mayank Tandon: Great. And then just a follow-up question in terms of the delinquency rates and the charge-off rates. I think I heard you, you said seasonality has a lot to do with the uptick relative to the fourth quarter. But if you could just provide some more color and thoughts behind what is driving the higher delinquency rates and the charge-off rate on a sequential basis. Then what should we expect going forward through FY16? Dennis Cong: Yes. I think first, the delinquency, as well as the charge-off performance is within our expectation. However, usually in Q1, because the holiday seasons, the collections and then our [sales] usually slow down -- collection activity slows down a bit. So usually from seasonality perspective, you'd see slight uptick of the delinquencies or the charge-offs. And also, the other reason is that loan volume growths usually slow down sequentially in the first quarter as well. And that's just some granularity on the business performance. But the overall delinquency rate, as well as the current charge-off performance continue to be in our expectation. 6 / 10
And I think the key thing really to look at are overall credit performance of our loan portfolio is really the charge-off curves that shows in our management presentation on slide 25, that you can see for the 2015 vintages. Q1, Q2, Q3, Q4, the vintage curve is actually showing a very healthy continued improving trend. So that is a very good confidence in terms of our overall asset performance and what the delinquency or charge-off performance is going to be through the 2016. And in terms of overall risk management, we continue to be very focused in terms of our risk pricing policies, product development, and delinquency management through 2016. And we expect the overall performance of our credit will continue to be solid. Mayank Tandon: Great. And one final question. In terms of the breakdown of the four category loan types, A, B, C, D, how do you see that evolving over time? Obviously, D is a very high percentage. But longer term, how does that mix evolve based on what is going on in China in terms of the demand for P2P lending? Dennis Cong: Yes. I think, first, we serve the urban salary workers in China with the product from A to D, which we see strong demand for each different products. And we would expect that even our funding costs coming down we'll be more available to serve higher quality borrower space in China. So we would expect our A, B, C type of products the percentage to increase as we're going through the year. And also, we will be working with more partnerships and more channels to tap in more high-quality assets in China. So overall, we would expect the product mix shift to [work] A, B, C. But however, D type of product, loans performing very, very well. Profitability is also very, very good. So we'll continue to see that as a major part of business in 2016. Mayank Tandon: All right. If I can just squeeze one more in. The take rate, at least based on my calculation, went up to 15.9% in the first quarter, up from 14% in the fourth quarter. Is that tied to the mix shifting more toward D in the short term? Then how should we think about the take rate going forward? Dennis Cong: Actually, the reason is more due to the trust. In Q4 2015, we had RMB250 million (inaudible) trust. And that trust revenue recognition is actually amortized. It's not up front. If we recognize those trusts up front, we will actually see our revenues increase in the mid-15 range, 15.5 range. So in terms of the revenue take rate actually from product mix as well as online/offline product percentage, there is not a significant change. It's more due to the revenue recognition of the trust back in Q4 2015. Mayank Tandon: Okay. Got it. Thank you. Operator: Richard Xu of Morgan Stanley. Richard Xu: Two quick questions. One is this year actually a lot of banks are also trying to extend their credit card businesses and obviously probably potentially raise their credit lines for some of the existing credit card users. Are you seeing any competition, any potential competition on the rate that you're offering? 7 / 10
Secondly is, in terms of the evolving business model, are you thinking about cooperating with some of these Internet firms and trying to actually get referrals from these channels and then also help you to understand better where the funds are actually being used going forward? Thank you very much. Ning Tang: Richard, the first question is about the competition from banks. The second question is about the cooperation with Internet companies. Is that a correct understanding? Richard Xu: Yes. Ning Tang: Okay. So regarding competition from banks, all the so-called banks going downstream, our observation is that that kind of offering is mainly for a different credit segment, yes, not the segment we serve, yes. And so what we do is actually complementary to bank offerings. And also, I think more and more banks will like to partner with us by becoming lenders on our platform for the segments that they cannot serve with their existing infrastructure. On the Internet company cooperation front, our view is that in the future there will be more and more cooperation between Internet companies and Internet finance, FinTech companies like Yirendai. However, as you may well know, China market is highly dynamic and many Internet companies try to do finance on their own. Of course we are in talks with several Internet companies as Yihan has mentioned, yes. And so we will see strategically more and more cooperation with Internet companies. And our view is that finance is beyond most Internet companies' comfort zone and capabilities. Richard Xu: Thank you very much. Operator: Polar Zhang of BOCI. Polar Zhang: This is Polar from BOCI. My question is how do you think the supply side reform will impact our asset quality? Will our risk model be able to identify if a potential client actually will become [employee of] (inaudible)? Thank you. Operator: Hello? Speakers, I believe your line may be on mute. Huan Chen: Yes. I think taking our offering to our borrowers, many of our (inaudible) have already identified with industries and their profession. So we're also double checking during our underwriting process. And the reason we (inaudible) system (inaudible) have done economic slowdown. But according to our [message] based on our previous [risk] performance, they could see many big changes for our risk performance (inaudible) and our (inaudible), yes. Dennis Cong: And I think also, just add on top of that, we are taking precautious measures in terms of our risk policies from direct geographic and industry perspectives. And also, in our credit modeling scores, we do have a scoring for preferred professionals to capture those industry or their professional risk. Polar Zhang: Okay. Thank you. 8 / 10
Operator: Sarah Tian of CICC. Sarah Tian: My question is about the competition landscape and the customer finance market in China as well. Earlier on you talked about the competition against the bank's credit card business. So my question is really on the rest competitors here. I know that in China we have customer finance, offline customer finance companies as well as some ecommerce platforms which offer purchase on credit as well. So from management perspective you know like we see these offline customer [company] that haven't really grown up in China over the past decades. So what's the reason they haven't grew up, given that the consumer (inaudible) growth in China is pretty strong? And what's the restrictions there? And how can Yirendai overcome them going forward, because we're targeting the same market here as well? Thank you. Unidentified Company Representative: So the question is about competitive landscape and why consumer finance hasn't picked up in the past years? Sarah Tian: Yes. And what's -- Ning Tang: Consumer finance company -- Sarah Tian: -- the restrictions -- yes. Ning Tang: Yes. So Yihan and I will try and answer this question. And competitive landscape is surely becoming more and more dynamic. There are banks and FinTech companies, also consumer finance companies, and also those are drawing to Internet companies trying to do finance in some ways. And our view is that different players have different strength, different angles, and serve strategically different purposes. Yes. For example, we talked about banks' strategy utilizing their current like a credit card basis. And Internet companies doing finance to serve their ecosystems, yes, to do better businesses. And also, there have been more consumer finance companies in the, yes, competitive landscape. And they have like partnerships with like retailers, so on, and some have acquired some scale, yes. And our view is that it's about different credit segmentation covered by different players. For example, like [Wei] Bank, yes, it's consumer segment is below like credit card, like 18% rate APR, and their expected loss rate is below, well below 1%. So that's a very different credit segment from ours. So I think different companies have their own credit segments to cover and develop proprietary capabilities to do that, yes. Yihan, you have anything to add, please? Yihan Fang: Yes. I just want to add a point that because Yirendai has been doing like end-to-end online using technology lending for years and we accumulated experience in terms of like authorizing online, using the data online with technology. So we have a benefit of handling those Internet companies to do the consumer financing needs like for online purchases and we see a unique advantage, especially for like a big (inaudible) assumption [lien], and we're already making progress in those areas. Ning Tang: Yes. To add to that, the reason we believe consumer finance in the past decade probably didn't take off big time is mainly because China's credit infrastructure is still in early stage, quite poor, still there isn't a credit bureau system. We cannot report our data to Central Bank and cannot receive data from Central Bank. And data sharing mechanism among industry players is still weak. 9 / 10
So as a result, is not easy to do consumer finance risk management. And I think that's where, yes, we've built our edge, yes. Yirendai's parent company, CreditEase, is one of the first starting to do consumer finance, non-bank finance from 10 years ago doing, yes, offline and online, yes. And Yirendai specializing in online was also among the first, yes, started four years ago when most the players were focusing on offline. So I think our early mover advantage is quite clear. And although, on the credit infrastructure, the big infrastructure is still quite early, quite weak, we have built our own proprietary risk management model based on the biggest credit database in the industry. And we believe that gives us quite some edge. Sarah Tian: Very good. Thank you. Operator: And showing no further questions, we're going to conclude today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day. 10 / 10