Q4 2016 Yirendai Ltd Earnings Call
Mar 16, 2017 AM EDT
YRD - Yirendai Ltd
Q4 2016 Yirendai Ltd Earnings Call
Mar 16, 2017 / 12:00PM GMT
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Corporate Participants
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* Matthew Li
Yirendai Ltd - IR
* Yihan Fang
Yirendai Ltd - CEO
* Dennis Cong
Yirendai Ltd - CFO
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Conference Call Participants
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* Richard Xu
Morgan Stanley - Analyst
* Eric Wen
Blue Lotus - Analyst
* Ryan Roberts
MCM Partners Limited - Analyst
* Patricia Cheng
CLSA Limited - Analyst
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Presentation
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Operator [1]
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Good morning and welcome to the Yirendai fourth quarter and full year 2016 earnings conference call. (Operator Instructions). Please note, this event is being recorded. I would now like to turn the conference over to Matthew Li. Please go ahead.
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Matthew Li, Yirendai Ltd - IR [2]
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Thank you and welcome to Yirendai's fourth quarter and full year 2016 earnings conference call. Our earnings press release and the supplemental presentation slides are now available on our website. I hope you've all had the 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. Mr. Huan Chen, Director of Yirendai, and Chief Strategy Officer of CreditEase, and Mr. Yang Cao our Chief Operating Officer and Chief Technology Officer, 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 statements.
Further information regarding potential risks, uncertainties or factors is included in Yirendai's filings with the US Securities and Exchange Commission. Yirendai does not undertake any obligation to update any forward-looking statement, 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 the US GAAP. For information about these non-GAAP measures and reconciliation to GAAP measures, please refer to our earnings press release.
With that, I will turn the call over to our CEO. Yihan, please begin.
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Yihan Fang, Yirendai Ltd - CEO [3]
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Thanks, Matthew, and thank you all for joining the call today.
2016 was a milestone year for the online lending industry in China. The overall industry continued to grow at a remarkable rate, despite increased regulation and further market consolidation, as the number of functional players continues to fall. We have also observed more online platforms shifting towards serving lower-quality borrowers with small, short-duration loans.
We have clearly positioned Yirendai differently, as the go-to platform for prime borrowers, with our products and services targeting urban salaried workers with a credit card.
We had another strong quarter with loan origination volume increasing by 19% sequentially, and 102% year-over-year, to RMB6.7 billion. Our full year 2016 loan origination volume increased by 112% year-over-year, to RMB20.3 billion, bringing our accumulated loan origination volume to RMB32.3 billion, and outstanding loan balance to RMB20.8 billion.
During the quarter we facilitated loans to more than 110,000 qualified borrowers, 57% of these borrowers were acquired through online channels, accounting for 37% of loan origination volume during the quarter. 99% of the loan volume acquired through online channels was facilitated through mobile.
As of December 31, 2016 we had cumulatively served more than 500,000 borrowers through our online marketplace.
During the quarter, we served close to 200,000 investors, all of which invested through our online channels, with 85% of them using our investor mobile application.
We executed a number of initiatives throughout the year to drive the strong growth momentum of our business. I'm proud to say, we made remarkable achievements on many fronts, such as the credit underwriting, risk management in a product environment.
Over the past year, we further strengthened our credit underwriting and risk management capabilities by expanding the amount of data sources we use in our analytic systems, and turning our risk policies and decision-making [on deals] and enhancing our anti-fraud systems. We upgraded our hash tag 1.0 product by using credit card payments directly from banks, which significantly reduces the possibility of fraud.
In 2016 we also launched several new products, to cater to the rapidly-changing needs of our expanding customer base and increase our geographic reach, including housing problem front, life insurance and repeat environment products.
On investor side, our targeted market is the massive online population of mass affluent. As of the end of 2016 we have accumulatively served close to 900,000 investors. In December 2016, we began cross-selling third party wealth management products on our investor mobile app. Supplied a expanded array of investment options to investors. We believe this is an important initiative to retain customers for their asset allocation needs.
We've seen concrete progress made in terms of regulatory developments and industry consolidation since the issuance of the interim measures on August 24, 2016. The regulatory framework is expected to be established as one measure plus three guidelines, which includes guidelines for recordation and registration as well as custody arrangements for online lending information intermediary institutions, which is already in place.
We expect the regulators to issue further guidelines for information disclosure practices, going forwards. We believe these regulations will create a rapidly-growing, more rational and a healthier online lending marketplace in China.
2017 will be a crucial year for the online lending industry in China, as interim measures and the guidelines are implemented. As a market leader, we're in close communication with various regulatory bodies, to demonstrate and educate others with our best practices, ensuring that full compliance with regulatory requirements and obtain certification as early as possible.
At the same time, we'll devote significant resources to increase our brand awareness and the recognition to make Yirendai the brand of choice for the massive online population of mass app and investors, and the prime customers with a borrowing need.
The continued consolidation of the industry provides enormous growth opportunities for leading platforms, such as Yirendai. We'll continue to drive the growth of our existing products and develop new technology-driven ones, to achieve future business opportunities.
We're developing a new product for borrowers, acquired from offline channels. This new product will offer a mass [AT] collection schedule. We believe this new product will further improve our user experience and significantly enhance our competitive advantage.
We'll focus on partnership expansion in 2017. We're actively working in collaboration with the consumption verticals and the industry solution providers, to offer our services to target customers on platforms.
In addition, we recently launched the Yirendai enabling platform, which allows partner companies to leverage our financial technology capabilities, such as data collection, anti-fraud intelligence and the customer acquisition techniques. By leveraging the Yirendai enabling platform to offer our services to partners, will not only further optimize (technical difficulty) technology, but also add additional revenue stream.
Furthermore, we're actively negotiating with several banks to diversify our funding sources and reduce funding costs.
We are transitioning to a comprehensive online financial services platform that offers diversified portfolio of services to cater to various customer needs, regardless of what stage in life they're at.
Yirendai has served over 1 million borrowers and investors with financial transactions. There are in fact, many more users that have approached us, but weren't able to take advantage of our services, due to segmentation and the transaction nature of our services.
Going forward, we will actively enhance customer engagement by offering more products, features and tools, provided through Yirendai and its select partners to attract new users and increase user stickiness.
With our [foreign] strategy just in place, we're confident that we'll be able to maintain a strong growth momentum, our business -- and further enhance our market leadership.
Finally, I'd like to take this opportunity to introduce a new member of our senior management team. Earlier today, we announced the appointment of Dr. Yichuan Pei as Chief Credit Officer, who'll be responsible for the overall management with our credit department.
Dr. Pei brings over him with 26 years of experience in the financial industry, from consumer lending risk management, credit product marketing management, asset-backed securities valuation in the United States. We warmly welcome Dr. Pei to join our team. With him assuming the new role, we're very confident to further enhance our market-leading capabilities of credit underwriting and risk management.
Dr. Pei will also work closely with our Chief Risk Officer, Ms. Yiting Pan, to manage the risk management department. Ms. Yiting Pan is expected to transit from her current position as Yirendai's Chief Risk Officer, into a new role, with CreditEase, and relocate to the US at the end of Q2 2017, due to personal reasons.
Dr. Pei will take over the full responsibilities of risk management and assume the Chief Risk Officer position at end of the transition period. We'd like to express our sincere appreciation to Ms. Yiting Pan for her outstanding contributions by risk management, during her tenure. We wish her all the success for the new role with CreditEase in the US.
I now hand the call over to our CFO, Dennis, to discuss our Q4 and full year 2016 financial results.
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Dennis Cong, Yirendai Ltd - CFO [4]
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Thanks, Yihan. Hello, everyone. Now I will go over our fourth quarter and full year 2016 results and provide our business guidance for 2017.
We're pleased to conclude full year 2016 with another strong quarter. In Q4 2016 we facilitated RMB6.7 billion loan during the quarter, an increase of 102% when compared with previous year. Resulting total 2016 full year loan origination of RMB20.3 billion, that exceeds our target.
Now looking more closely into our fourth quarter performance, total revenue in Q4 2016 was RMB1.1 billion, representing an increase of 137% year-over-year and 22% on sequential basis. Due to both strong seasonality event at end of the year and further expansion of the market leadership.
In Q4 2016, 57% of our borrowers are acquired from online channels, contributing to 37% of the loans facilitated in this quarter, compared to 41% in the previous quarter. The decrease of percentage of loans generate from online channels was mainly due to our tightened risk policy of the online channels after the automized fraud incidents in Q3.
As we continue to strengthen our capabilities of online customer acquisition and the risk management, we expect loan origination from our online channels will reach 50% in total volume by end of 2017.
In terms of our loan product portfolio during the quarter, 87.8% of our new loans facilitated were product B, as we continue to see strong credit performance of this price group. The product volume mix for product A, B and C were 4.3%, 3.2% and 4.7% respectively.
On the investor side, our annual (inaudible) average investment yield on the platform in Q4 2016 was 8.2%, down from 8.7% in the previous quarter, as we'll continue to benefit from strong investor demand for high quality asset on our platform. In order to better meet our investors' demand for product and more diversified investment asset class, we have started cross-selling third party wealth management products on our (inaudible) type mobile apps in December 2016.
In addition to generating more revenue opportunity, we believe this initiative will help us to build deeper relationship with our investors and capture business opportunities in the large wealth management market.
Turning to operating expenses, sales and marketing expenses were RMB538 million for the quarter, or 8.1% of loan origination volume, increased from 7.5% in the previous quarter. The increase of sales and marketing expenses were mainly due to higher customer acquisition costs from the online channels, due to a tightened risk policy.
Origination and servicing costs were RMB58 million for the quarter, or 0.9% of loans facilitated, increased from 1.1% in the previous quarter. Our G&A expenses were RMB80 million for the quarter, or 7.4% of total net revenue, decreased from 12.3% in the previous quarter, and if we exclude the impact of the one-time expense of RMB81 million related to the fraud incident.
The decrease of G&A expenses at percentage of total net revenue was primarily attributable to the improving operating leverage as we grow our business.
In terms of profitability, our adjusted EBITDA in Q4 2106 was RMB401 million, representing adjusted EBITDA margin of 37%, increased from 25% in the previous quarter. Net income in Q4 2016 was RMB380 million, representing net income margin of 35%.
Now, on to our credit performance. First, in order to present a more accurate reflection of the credit default cost, we adjusted the calculation formula of cumulative M3 plus net charge off rates in this quarter. For details, please refer to slide 28 of our management presentation.
As we look into our overall asset portfolio performance, the recent delinquency rate and the vintage charge out performance are trending well and are within our expectation. And charge out performance for 2015 and the first three quarters of 2016 vintage loans have shown stable trends, which demonstrate our capability in credit underwriting and risk management.
Specifically, as of December 31, 2016, the overall delinquency rate for loans that are 15 days to 89 days past due was 1.7%, slightly decreased from 1.9% as of September 30, 2016. The decrease of delinquency rate was primarily due to the increase of total loan balance and more efficient risk management.
The cumulative M3 plus net charge off rate for loans originate in 2015, was 6.6% at the end of Q4 2016, compared to 5.2% at the end of Q3 2016, as the loans further matured. The charge off rate for each vintage, from Q1 2015 to Q3 2016 are showing a general improving trend, as indicated in the cumulated M3 plus net charge off rates curve on slide 27 of the management presentation.
As of December 31, 2016, the outstanding balance of liabilities from risk reserve fund guarantee is at 7.3% of remaining principal of foregoing loans covered by risk reserve fund.
On the balance sheet side, as of Q3 -- as of Q4 2016, we had about RMB968 million in cash and cash equivalents, compared to RMB1.1 billion as of Q3 2016. The decrease was due to the increase of available for sale investments, to end the return of our cash management. As of Q4 2016, balance of available for sale investments was RMB1.2 billion, increased from RMB298 million as of Q3 2016.
Additionally, we had RMB1.2 billion of restricted assets in our risk reserve fund account and trust account. We also booked the RMB371 million in loans at fair value, as a result of our consolidating the trust and ABS.
Our liabilities were mainly comprised of two items, RMB1.5 billion in liabilities from risk reserve fund guarantee and RMB419 million payable to investors at fair value, as a result of consolidating the trust and ABS.
With that, let me go over our guidance. For the first quarter of 2017 we expect loan origination volume to be in the range of RMB6.4 billion to RMB6.5 billion. Total net revenue to be in the range of RMB900 million to RMB930 million. Adjusted EBITDA to be in the range of RMB280 million to RMB300 million.
For the full year of 2017 we expect loan orientation volume to be in the range of RMB33 billion to RMB35 billion. Total net revenue to be in the range RMB 4.4 billion to RMB4.6 billion, and adjusted EBITDA margin to be in the range of 23% to 26%.
As you may have noticed the guided net revenue take rate and adjusted EBITDA margin for full year 2017 is lower than our 2016 level. Which is mainly due to our strategic plan of launching more customer friendly products with monthly fee collections schedule starting middle of 2017.
Given our revenue reclamation policy, under this fee collection schedule we evenly recognize revenue each month throughout the long term. Thus would defer our revenue to future months.
We believe this product could potentially increase our unit economic profit and enhance our financial profile stability and earning visibility given the recurring nature of the monthly fee.
That concludes my remarks. I'd now like to turn the call back to the operator for the Q&A session.
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Questions and Answers
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Operator [1]
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We will now begin the question and answer session. (Operator instructions) At this time we will pause momentarily to assemble our roster. Our first questions comes from Richard Xu with Morgan Stanley. Please go ahead.
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Richard Xu, Morgan Stanley - Analyst [2]
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Hi, thank you for the thorough introduction. I just have a question regarding the borrowing mix from online and offline channels. I understand that there's some mix change in the fourth quarter after the fraud case in second quarter.
Just wondering what was your target for the mix I guess for next year or for the medium term. And what will be the actions taken to gradually increase the online portion again? Thank you very much.
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Dennis Cong, Yirendai Ltd - CFO [3]
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Okay, thanks Richard. For the 2015 as we continue to ramp up our online acquisition capability and risk management and developing more channels we expect our online business to grow faster than our overall portfolio growth.
And so the expected loan mix for the online channels will grow 40% in early part of the year to close to 50% or even more than 50% by the end of the year. So overall volume mix for the 2017 we expect the online portion to be close to 48% or 47% of the total year of volume.
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Operator [4]
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Our next question comes from Eric Wen of Blue Lotus, please go ahead.
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Eric Wen, Blue Lotus - Analyst [5]
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Hi, good evening Yihan and Dennis and Matthew for taking my question. Good night and congratulations on the good result. My question is on your guidance. As you're -- well 2017 loan origination growth is very robust, your revenue take rate and EBITA margin are both down. Dennis you mentioned this is because you are adopting a new accounting policy to spread out the revenues.
I just wonder -- two questions. Number one is will this lead to an increase of your deferred revenue account or any kind of customer advance account?
My second question is that if you are deferring more revenue to future periods, where cost is booked the current period, that supposedly should lead to higher profit margins in the later period. But it looks like your guidance for this year your EBITDA margin is actually declining as well. Just wonder why that is, thanks.
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Dennis Cong, Yirendai Ltd - CFO [6]
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Yes, okay so thanks Eric and I will answer your question maybe the second part first and then will address the first part. So in terms of this new product we're introducing which has a monthly collection fee schedule.
Well actually -- it's actually very important for us from a competitive dynamic perspective. Because this actually would need the platform to have a very strong cash flow capability to be able to offer this product.
So -- and also the user experience -- customer experience -- is going to be strong. And our unit economic profitability is actually better. So there is many benefits for us to introducing this.
In terms of the impact of our profitability. We are going to start introducing this product middle of this year. Due to the revenue reclamation scheduling -- so you're actually going to have -- see more of the revenue being recognized through the rest of the loan life. While the customer acquisition cost is actually recognized up front.
So the near term we're actually is going to see a negative impact in terms of margin profile. But longer term given that the lifetime unit economic profit is actually potentially increasing. So net -- net for the lifetime of the loan you're actually going to see improving profitability.
But it will actually spread out through two year or three year or whatever the term of the loan is going to be. So I guess near term may have some -- a compression on margin. But longer term it's just a matter of the revenue and cost reclamation schedule matching.
And also as I mentioned in our remarks, even that the recurring and the visibility of the future revenue and reclamation and also given that most of the cost has been recognized front. Most of these future revenue are actually highly profitable revenues will actually improve our financial profile and our earning -- our visibilities.
So in terms of whether this will actually change our deferred revenue numbers that we're reporting as a non-GAAP item -- it's actually not going to have much impact from there. Because this is not part of our fees billed. So it's completely deferred into the future.
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Richard Xu, Morgan Stanley - Analyst [7]
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I understand, thanks, very helpful.
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Dennis Cong, Yirendai Ltd - CFO [8]
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Sure.
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Operator [9]
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(Operator instructions) Our next question comes from Ryan Roberts with MCM Partners, please go ahead.
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Ryan Roberts, MCM Partners Limited - Analyst [10]
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Good morning management -- excuse me -- good evening management and thank you for taking my question. Just a quick one from me actually also as a follow up on the guidance. You mention the -- that new long tail -- the monthly payment product is going to launch I think it was -- you said sometime in the middle of the year.
But I'm just curious what some of your assumptions are for the -- for Q1. Because it looks like the -- that revenue take rate slips from about [16%] down to about [14%] by fees and midpoint. Just curious if you could give us some -- just some color on that.
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Dennis Cong, Yirendai Ltd - CFO [11]
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Okay, I think for the first quarter of 2017 most of -- the product mix is actually similar to the 2017. However, as we mentioned that -- we're getting a very strong traction in terms of our online business growth -- online customer acquisition.
We actually expect our online percentage of total loan volume to increase in 2017 first quarter. So that's where you see a slightly dip of our revenue take rate. It's due to the increasing percentage of the online channel products.
Even for that, the decrease of the revenue take rate is also part of the deferred revenue into the future. It's not that -- the revenue that's been missed.
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Ryan Roberts, MCM Partners Limited - Analyst [12]
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Got it, thanks, that's very helpful.
If I could just ask you a quick follow -- so a quick second question. Just about some of the new wealth management products we're trying to sell to some of the investors on the platform.
I'm just curious, could you give us some more detail on where those come from, who they're partnering with? Just what kind of needs we're trying to meet for investors and how we see that business shaping up let's say into the end of 2017 and maybe beyond?
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Yihan Fang, Yirendai Ltd - CEO [13]
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Yes, our investor mobile app we are currently offering some online insurance products as well as some (inaudible) product and a lot of selected apps. We're not offering as a supermarket but we select very selectively good products that we think can meet our customer needs.
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Ryan Roberts, MCM Partners Limited - Analyst [14]
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Okay, thank you very much. Thank you.
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Operator [15]
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Our next question comes from Patricia Cheng with CLSA, please go ahead.
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Patricia Cheng, CLSA Limited - Analyst [16]
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Yes, hi, good evening management. I have a couple of questions. One is a follow up on the new product that you mentioned just now. And the other one on the guidance.
For the new product can you give us some idea of who -- what kind of customers are you targeting? Are you targeting existing customers or the -- sort of like the product features? And how much loan facilitation do you think the new product can generate?
And on the guidance -- full year guidance for loan facilitation. Your full year target is more than four times higher than the target for the first quarter. So does it have anything to do with this new product launch in the middle of the year? Or what are your plans in the acceleration of the loan facilitation in the second half of the year? Thank you.
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Dennis Cong, Yirendai Ltd - CFO [17]
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Sure, I think the new product indeed we'll actually introduce through certain channels -- certain type of customer acquisitions. Basically we will -- introducing these type of products for the customer who own cars or who actually already have properties. So they are slightly different from our current product offering.
And then the volume that we expect this product is probably in the 7% or 8% of our business volume in 2017. And it's going to start middle of this year.
And then in terms of our 2017 overall loan volume guidance. Of course Q1 has been strong and usually we see a sequential growth quarter over quarter through the year. So if you look at the kind of trajectory that we usually follow you probably -- not too difficult to come with the overall -- total volume for the year.
So usually Q1, Q2, Q3, Q4 is -- tend to be a sequential growth through the year as we see our business opportunities unfold.
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Patricia Cheng, CLSA Limited - Analyst [18]
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Thank you.
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Operator [19]
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(Operator instructions) This concludes our question and answer session. Hold on for one second, we do have another question from Ryan Roberts, please go ahead.
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Ryan Roberts, MCM Partners Limited - Analyst [20]
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Oh sorry management, thank you for indulging me. I just want to ask a quick question about YEP. Just how you guys are looking at that as being a contributor to the overall results. And how you see that growing for the Company in the future.
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Matthew Li, Yirendai Ltd - IR [21]
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Thank you operator and (inaudible). And our Yirendai Enabling Platform is -- has three component. One is for data acquisition and data management and the other is for anti-fraud. And the final one is for sharing user acquisitions.
So we have a few key reasons to release that. One is the -- excuse me -- to enable the industry to be more efficient. So because we have the most advanced user authorized data technology. So we would like to help partners to be a very -- in a better way to acquire the data.
And for the user acquisition we do have a lot of capability to call the user but now not all of them are our users we can serve. So sharing with the selected partners will make a user experience better.
In terms of business results. This year we would like to see some revenue come from that. But we would not be able to estimate the actual number until we start growing all the product with partners.
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Ryan Roberts, MCM Partners Limited - Analyst [22]
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And do you think that rollout's going to happen first half, second half? Or when should we look for that?
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Matthew Li, Yirendai Ltd - IR [23]
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It's already happening and in the past they've already (inaudible) -- partners and we should be able to see some results in Q3, Q4 timeframe.
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Ryan Roberts, MCM Partners Limited - Analyst [24]
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Fantastic, look forward to hearing about it. Thank you very much,
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Matthew Li, Yirendai Ltd - IR [25]
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Thank you.
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Operator [26]
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This concludes our question and answer session and also concludes our conference. Thank you for attending today's presentation, you may now disconnect.
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Dennis Cong, Yirendai Ltd - CFO [27]
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Okay, thank you.
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