OneConnect Financial Technology : First Quarter 2023 Transcript

OneConnect Financial Technology Co., Ltd.

NYSE:OCFT SEHK:6638

Earnings Call

Monday, May 22, 2023 1:00 PM GMT

CALL PARTICIPANTS	2
PRESENTATION	3
QUESTION AND ANSWER	8

ONECONNECT FINANCIAL TECHNOLOGY CO., LTD. FQ1 2023 EARNINGS CALL MAY 22, 2023

Call Participants

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EXECUTIVES

Chongfeng Shen

Chairman of the Board & CEO

Yongtao Luo

Chief Financial Officer (CFO)

Michael Fei

Chief Executive of PingAn OneConnect Bank

Jie Li

Chief Technology Officer (CTO)

Rick Chan

Head of Investor Relations

ANALYSTS

Timothy Zhao

Goldman Sachs Group, Inc., Research Division

Keith Tsang

DBS, Research Division

Laura Li

CGS CIMB, Research Division

Lydia Lin

Morgan Stanley, Research Division

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ONECONNECT FINANCIAL TECHNOLOGY CO., LTD. FQ1 2023 EARNINGS CALL MAY 22, 2023

Presentation

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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.

Rick Chan

Head of Investor Relations

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 Chongfeng, 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 Chief Executive of Ping An OneConnect Bank, Mr. Michael Fei, CTO, Mr. Li Jie; Head of Digital Banking, Ms. Ellen Jia; and Deputy General Manager of Strategy and Products Division, Ms. Jessie Shen.

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 Chongfeng. Mr. Shen, please.

Chongfeng Shen

Chairman of the Board & CEO

[Interpreted] Hello everyone, I'm Shen Chongfeng. Thank you for taking the time to dial in OneConnect's 2023 Q1 earnings call. Against complexities brought by momentous changes never seen in the last 100 years and the pandemic of the century, OneConnect strived to progress while maintaining stability and remaining innovative and delivered solid performance under the guideline of "increasing revenue, reducing costs, optimizing structure and improving products". We carried out key initiatives including product standardization, sales and marketing standardization and delivery standardization to continue to execute our stage two 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 two development, where we deepen engagement with customers, we phased out low gross margin and high customization projects, for example, reducing the scale of some business origination 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's business highlights this quarter. Please go to Page 3 and 4 of our slides. 2023 remains a key year in our stage two strategy of broadening customer engagement, where we focus 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 three major segments as a part of our stage two strategy of deepening customer engagement. OneConnect announced its all-round strategic collaboration with the largest life insurer and comprehensive financial group in South Africa, Old Mutual plc, leading to faster cooperation in life insurance digital transformation. We kicked off our corporation last year with an Omni-channel Agent Solution project, the first phase of which has been successfully delivered in 2022. In Q1, we completed the signing for phase 2 project and are now working on the delivery of phase 2 and the execution of phase 3. In addition, we also launched in-depth corporation with a major state-owned bank, contributing to approach for self-controlled technology and empowering the bank in digital transformation and delicacy management.

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ONECONNECT FINANCIAL TECHNOLOGY CO., LTD. FQ1 2023 EARNINGS CALL MAY 22, 2023

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 6 business scenarios and improve business development efficiency. Omni-channel 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 smart sub-application. With 3 AI middle platforms, the offering comes with over 50 operation services and 4,000+ financial scenario templates.

Aside from product improvement, 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 standards, 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 improve 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 clearer insights to all of our projects and improves 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 HKMA's 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 Asia market. The offering, stemming from our project with a top digital bank, covers products including but not limited to onboarding, deposit taking, lending, 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 implementation revenue, but also receive license fees, share revenue from increased business volume, as well as charges and 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, 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 rewarded by multiple institutions, including KPMG 2022 Leading Fintech Top 50, 01 Caijing Leading Fintech Enterprises Top 50, 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 improving revenue and efficiency and reducing costs and risks. Understandably, they are now more prudent with their IT spending over the short term, against downward economic pressure and narrowed net interest margin. For fintech service providers, this means higher requirements for product value and bigger challenges.

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ONECONNECT FINANCIAL TECHNOLOGY CO., LTD. FQ1 2023 EARNINGS CALL MAY 22, 2023

At OneConnect, we are fortunate enough to see this coming. Over the past few years, we continue to improve our products and introduce high value offerings. We are confident that we will land our stage two strategy of broadening customer engagement, where our customers were more focused and our engagement with them continue to deepen.

Next, our CFO, Mr. Luo Yongtao will go over our financial results. Thank you.

Rick Chan

Head of Investor Relations

Thank you, Mr. Shen. Next, our CFO, Mr. Luo Yongtao will go through the financial results in more detail. Mr. Luo, please.

Yongtao Luo

Chief Financial Officer (CFO)

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 by 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 services in the first quarter. Third- party revenue growth remains a key focus of our stage two 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 demands 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 58.0% 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 retail 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 loan risk analytics solutions because of lower-than-expected demand amid 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.

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