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Waterdrop Inc. (WDH) Q2 2021 Earnings Call Transcript | The Motley Fool

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Waterdrop Inc. (NYSE:WDH)
Q2 2021 Earnings Call
Sep 08, 2021, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and thank you for standing by for Waterdrop, Inc.’s second-quarter 2021 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. As a reminder, today’s conference call is being recorded.

I will now like to turn the meeting over to your host for today’s call, Ms. Xiaojiao Cui. Please proceed, Ms. Cui.

Xiaojiao CuiInvestor Relations

Thank you, operator. Hello, everyone. Thank you for joining Waterdrop second-quarter 2021 earnings conference call. Please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S.

Private Securities and the Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include but are not limited to those outlined in our public filings with the SEC. The company doesn’t undertake any obligation to update any forward-looking statements except as required under applicable law.

Also, this call includes discussions of certain non-GAAP measures. Please refer to our earnings release for a reconciliation between non-GAAP and GAAP. Joining us today on the call are Mr. Shen Peng, our founder, chairman, and CEO; Mr.

Yang Guang, co-founder, director,  and the general manager of insurance marketplace; and Mr. Kangping Shi, our CFO. We will be available for a Q&A session after the remarks. Now I would like to turn the call over to our CEO, Mr.

Shen Peng. Please go ahead.

Shen PengFounder, Chairman, and Chief Executive Officer

[Foreign language]

Xiaojiao CuiInvestor Relations

Hello, everyone. Thank you for joining us on our quarterly earnings conference call today. In the second quarter of this year, we were successfully listed on the New York Stock Exchange and became the first Chinese insurtech company publicly listed in the U.S. This marked a key milestone since our founding five years ago.

At the same time, we delivered very excellent results for the second quarter. Despite China’s lag in the health insurance market, only posting single-digits year over year during the quarter, our premium and operating revenue continued to grow strongly, driven by the strong demand from the lower-tier cities where our business is focused on. Our first-year premiums have grown — rates have grown up by 94%, which is RMB 5,357 million for the second quarter. Our net operating revenue for the second-quarter reached RMB 939 million, up 44.4 year over year on a comparable adjusted basis, which is an outstanding performance in the overall insurance industry.

Shen PengFounder, Chairman, and Chief Executive Officer

[Foreign language]

Xiaojiao CuiInvestor Relations

Our long-established infrastructure and organizational capabilities create solid foundation for the sustainable development of Waterdrop. The industry is currently entering a period of transformation with Waterdrop and other leading players focusing on higher-quality operations and a continued improvement in customer satisfaction. Hence, we will not adopt a low-quality growth model only to pursue short-term results. We firmly believe that we have clear competitive advantages in terms of customer base, business mode, and the brand recognition, where we benefit more against our competitors during the current transformational cycle.

However, I know that our stock price has been under pressure post-IPO due to the market concerns over several external uncertainties but I believe that the current stock price has deviated far away from our fundamental performance. As an organization, we have industry-leading organizational management capabilities. Our core management team are highly experienced youth under age 35, and all of our business segments are growing in a steady and orderly manner. We firmly believe we will continue to sustain our leading position against the current backdrop of a challenging industry.

We also want to take the opportunity during this earnings release to update you about our business performance and strategies. I would like to start by talking about our three main commitments.

Shen PengFounder, Chairman, and Chief Executive Officer

[Foreign language]

Xiaojiao CuiInvestor Relations

Our first commitment is to actively embrace regulation, adhere to compliance, and continuously improve user satisfaction. At our inception, the origin of our company’s name, Waterdrop, came from our vision that says leveraging technology to make insurance protection more inclusive and accessible to the public and achieve common prosperity for everyone. Waterdrop symbolizes our belief that little drops of water constructs the mighty oceans and a simple drop of water in good days should help the Pacific Ocean in bad days. Or as the Chinese proverb goes, a drop of water in need will be repaid by a spring indeed.

As a technology platform, we will actively connect our partners in the ecosystem, facilitate the national third distributor drive with the diversified offerings of our Waterdrop Medical Crowdfunding, Waterdrop Insurance Marketplace, and Waterdrop health platforms to achieve common prosperity for everyone. We believe that with our leading technology, we can help to make donations out of love more transparent and our society, more giving.

Shen PengFounder, Chairman, and Chief Executive Officer

[Foreign language]

Xiaojiao CuiInvestor Relations

And so technology innovative company with strong social responsibility and a close connection to people’s livelihood, we pro-actively respond to the regulatory guidelines and requirements. Tapping into customers satisfaction, we have adjusted and updated our business operations in advance and engaged in taking the lead to improve industry reputation. In the short term, there might be fluctuations in quarterly results or challenges in our operations but our determination to remain compliant has never changed.

Shen PengFounder, Chairman, and Chief Executive Officer

[Foreign language]

Xiaojiao CuiInvestor Relations

Secondly, we have further refined our operations since September. Our management are committed and are confident in delivering higher quality operations and results. The company was previously in a period of rapid expansion as the insurance protection and health needs of the billions of users in lower-tier cities were under served, which had a vast potential. We positioned ourselves to serve both users and the belief is it was important for us to build our brand awareness and expand our user base at the beginning.

Hence, we pursued rapid business growth during initial stages. With our continuous development, we have now achieved a leading position in terms of business scale in the industry. In the future, we will gradually switch in to a stage of enriching the range of our services and enhancing user value. We believe the refinement of operations is inevitable way to both adapt to the current market environment and achieve our long-term goals.

We are confident in balancing between optimizing customer acquisition and the premium’s volume growth going forward so as to achieve higher-quality growth.

Shen PengFounder, Chairman, and Chief Executive Officer

[Foreign language]

Xiaojiao CuiInvestor Relations

The serve commitment is on technological innovation and empowerment of the entire business chain by technology. In the second quarter, we continued to explore new technological applications and have completed several breakthroughs. With our intelligent sales system, we can precisely match up our sales person with a single potential customer through proprietary algorithms analysis. Through search optimization, productivity increased by a range of 20% to 45%, enhancing the sales efficiency.

Shen PengFounder, Chairman, and Chief Executive Officer

[Foreign language]

Xiaojiao CuiInvestor Relations

For our intelligent, underwriting, and verification process, we outlined an LP algorithm model to inscribe, summarize, and refine the policies from insurance companies, and are combined with actual online reputation data. Based on the — based on these enhanced process, we designed our prerequisite decision model. Through the integration into CRM system, it provides supporting decision capability for LP’s verification process. So our LP can rapidly and the precisely makes decisions on policies available to specific customers.

Simultaneously, this is can more accurately create additional sales leads to a more precise screening process. Our interactive QA system is now able to cover 97% of common diseases that online users inquire about.

Shen PengFounder, Chairman, and Chief Executive Officer

[Foreign language]

Xiaojiao CuiInvestor Relations

In terms of our online marketing services. Under the concept needs-based service, we designed our system tools and improve users’ awareness of service quality to increase sales conversion. Through our live interactive tool, our sales and the service personnel can share screen remotely with users, which helps build users’ pass and provides them with a lot smoother experience in understanding and purchasing the policy, especially in lower-tier cities. Leveraging our real time intelligence sales service assistant tools, driven by algorithm features, and a user experience, we are able to provide users with a more professional and a higher quality of services.

Shen PengFounder, Chairman, and Chief Executive Officer

[Foreign language]

Xiaojiao CuiInvestor Relations

We continue to increase our investment in research and development, and have attracted nearly 100 new talents with experience in data and algorithms. More technologically innovation will come in the future. We hope to enhance the up, mid, and downstream talents in the in-store industry chain to continuously iterate and update existing intelligent solutions to meet more personalized, customized, and diversified insurance protection and health needs of users.

Shen PengFounder, Chairman, and Chief Executive Officer

[Foreign language]

Xiaojiao CuiInvestor Relations

We are convinced that Waterdrop’s entrepreneurial solutions [Inaudible] to leverage technology for the interest of public and a common prosperity, business philosophy, and consistent commitment to doing right things will have long-term positive value and contribution to Chinese society. As at the end of the second quarter, a total 372 million users of our crowdfunding platform have made donations of more than RMB 42.8 billion to 2.1 million patients. This is not just a few numbers but hope for survival of those who have suffered from serious illnesses or accidents, a spontaneously transfer of love among the people and a meaningful supplement to this country’s policy on income primary distribution and the redistribution. As the largest online medical crowdfunding platform assisting people with serious illnesses to seek help from the public, we expect to contribute more in this income third distribution.

Shen PengFounder, Chairman, and Chief Executive Officer

[Foreign language]

Xiaojiao CuiInvestor Relations

In conclusion, we are firmly confident in the strong and sustainable development of our business going forward. Today, with the earnings, we announced the share repurchase program, in which we may repurchase up to USD 50 million worth of our ADS over the next 12 months. This is a decision that was made based on the judgment of the company’s current value and our confidence in our long-term sustainable development. Meanwhile, we plan to reserve — repurchased shares for share incentive plan, which will further improve the long-term incentive mechanisms and align the interest of our employees with the growth of our company.

We will adhere to the company’s mission, vision, and the users’ real needs, always to work as day one and a strive to become the preferred platform for health protection in the minds of the people.

Shen PengFounder, Chairman, and Chief Executive Officer

[Foreign language]

Xiaojiao CuiInvestor Relations

I will pass to Mr. Yang Guang to give an update on the development of the Waterdrop insurance business.

Yang GuangFounder, Chairman, and Chief Executive Officer

Thanks, Peng. Hello, everyone. I’m going to walk you through key highlights of the quarter and some recent developments in our interest marketplace business. Let’s start with the product side.

The number of interest product we offer has further increased from 240 in the previous quarter to 275. In addition to upgrading of the existing products, we have also developed new products that are totally aligned with the current marketing demands, including vaccine-related, flat-related, and other [Inaudible] interest products. We continue to uphold the contract of serving the general public with insurance coverage, developing products, the service that are suitable for different customer groups, and promoting supply side innovation. For instance, our cancer insurance products are available up to the age of 80 and can be upgraded to include general medical insurance for broader coverage if the customer could pass physical examination.

Furthermore, our emergency outpatient and insurance product could address the rigid users and are highly cost effective, making it possible for general public to obtain more practical insurance coverage at — cost-effectively. We also cooperated with reinsurance companies to develop the industry’s first online, non-standardized CA insurance products covering patients with [Inaudible] chronic diseases such as hypertension, diabetes, hepatitis B, and hypolipidemia. These interest product help address the difficulties of the sub-optimal health scope in obtaining insurance coverage and [Inaudible] address the insurance needs of people with medical disease or abnormal health indicators. So now with technology co-innovations and — that being said, disease modeling in premium low and a scenario optimization, each disease can be evaluated by answering three to six questions, which greatly improve the convenience for individuals with sub-optimal housing shifts to get interest coverage.

The share of our short-term CI products has increased from 14.9% in Q1 to 17.3% in Q2. We also saw more than 60,000 newly launched outpatient insurance products in Q2, showing our progress in diversifying product offering. On the next slide, let me talk about our user growth and channel development. Regarding our user base in the second quarter, there were 4.2 million customers buying insurance products through our platform, up 53% year over year, resulting in the outstanding growth in our FYP of 94%.

As of June, the cumulative number of insurance customers of Waterdrop have exceeded 102 million people, among which 24.9 million were paying customers. On top of the rapid increase in the number of customers, about one-third of this paying customers in the second quarter are repeat buyers. In Q2, the FYP per customer reached RMB 1,276 compared to RMB 1,165 in Q1. And the overall repeat purchase rate of short-term insurance has increased to the range between 50% to 60%.

As supported by our effective management of our existing customers, we have seen positive results in policy repurchase and renewal. Moving on to the channels of customer acquisition. Firstly, rate increase investment in third-party traffic channels on the back of our prediction that external facts would be relatively abundant in the second quarter, the periodic increase in new user acquisition from external channels has somewhat lead to a decline in retention rates. However, at the same time, we have also applied intelligent applications and automatizing service tools to our — as placements, which has improved our customer acquisition efficiency.

So the user AI algorithm, we have been building our big data models, which are used to assess the impact as placement on user clicks, user conversion, retention rate, and [Inaudible]. The system we use may estimate the potential license that each user request could bring to what a job and get the real-time API to give accurate bidding price for acquiring new users. Such process could improve our return on investments that will filter out the low — lower-quality traffic and facilitate acquisition or higher-quality traffic with our specific bidding mechanics on various customer segments. Currently, our system has been connected to major media RTAs and the new strategy has boosted our premium ROI by 8% to 9 — 8% to 10%.

And Secondly, for internal traffic, Waterdrop medical crowdfunding is no longer simply an aid-seeking platform for critical illness or a stand-alone influence conversion platform, but also a multi-functional conversion scenario for healthcare and medical and in-patient management services, thereby enhancing our capabilities to launch more house care services for user. We will continue to reserve traffic and scenario to grow new business trials. At the same time, considering the long-term and the robust developing of our platform, we will balance various factors, including our compliance requirements and the customer experience, and the push forward steadily instead of pursuing aggressive businesses conversion. Thirdly, let me talk about our participation in the government-backed housing insurance of [Inaudible].

Leveraging the competitive advantage of our online insurance platform, we have actively acquired a new consumers, so the government-backed health insurance in [Inaudible]. Given that it provides a relatively lower entry barrier for individuals to purchase health insurance products, under this scheme, Waterdrop is positioned as a one-stop insurtech platform, which can provide services such as product design, platform setup, marketing, including settlement, pharmacy benefit and management, and the patient services. Moreover, by leveraging our sophisticated technology and [Inaudible] insurance intermediary licensing, we could help our partners to develop influence infrastructure, personal account payment system for their customer distribution system, or the insurance claims set system and a one-stop settlement system that are fit for [Inaudible]. At the same time, [Inaudible] also constitutes an emerging channel for acquiring new users in markets supplement to our commercial housing insurance.

Now regarding our sales model upgrade. Considering the abundance of our product offering to enhance the — in order to enhance the interest awareness of our users and the protection quality of our products, we plan to upgrade our sales strategy gradually in the near term.Especially we will replace the medical products, which target first-time buyers by first month premiums discount with other products that have lower premiums, higher cost-effectiveness, and a slight monthly payment. This will help enhance the retention and the repurchase rate or our users, thereby increasing the overall LTD per user. Despite that, the upgrade may have some short-term impact on conversion rate for online sales.

This could significantly improve customer retention and satisfaction, as well as reducing the reliance on expensive external channels. And we will continue to engage in call center activities with existing customers. Leveraging our experience in online operations and the customer database, we believe that we will lead the industry in the upgrading of the short-term interest marketing model, further improving our user economics and delivering more healthy and sustainable growth. Now onto our claims settlement services.

Our claim efficiency is enhanced through our technology combined with personal interactions to improve overall customer experience and satisfaction. Our self-developed AI intelligent claims settlement system could assist customers throughout the entire process. From the moment that they submit claim applications online to the closure of settlement, our intelligent adjustment system could support regional configuration, monitoring the product changes in the market, and supplement — and update the flows or claims accordingly on a real-time basis. The system also adapts the entitled and data analysis to automatically proceed the calculation in each claiming case, thus avoiding manual errors.

It only takes the system milliseconds from the start of a model calculation to generating a claim decision. The latest claims accuracy rate of the system has now reached 99.78%. In addition, we launched our claims bottler service to provide one-on-one personal assistance services across the entire claim process. And this includes the consultation and upload of claim materials, case progress tracking, interpretation of our claim conclusion and assist in the dispute settlement.

Customer can communicate directly with our claims settlement team through the enterprise WeChat account. As of June 30 this year, the 24-hour closure rate for quick settlement cases has reached 98.6%. We also collaborated with our partners to cover other claim settlement-related services such as house consultation, convenient access to hospitals, advanced payment, full process claim assistant and drug purchase discounts. I think with that, we will now turn over the call to Kangping, our CFO, to discuss our second-quarter financial performance.

Kangping ShiChief Financial Officer

OK. Thanks, Yang Guang. Before I go into details on the financial performance, please be reminded that all the number quoted here will be in RMB and please refer to our earnings release for additional information on all of our comparative financial performance on a year-over-year basis. In the second quarter of 2021, our first-year premiums have grown by 94% to RMB 53 — 57 million.

Our net operating revenue increased by 38% year over year to RMB 939 million from RMB 681 million, primarily fueled by the growth in our insurance brokerage income. Our comparable basis without seeking to account for management fee income for our mutual aid business we have already achieved in the first quarter, which no longer contributed to our revenue in the following quarters. Our adjusted net operating revenue achieved a strong year-on-year sales rate of 44.4%, significantly outperforming the industry barriers. Our insurance-related income was RMB 899 million, including insurance commission and the technical income, increased by 38.3% from RMB 650 billion in quarter 2 last year.We calculated our take rate by dividing year-related income to FRT of the same period.

Our FRT has grown faster than that of latter revenue, mainly due to the decrease in our take rate by 6.8% — percentage points from 23.6% in second quarter of 2020 to 16.8% in second quarter of 2021. And this was a temporarily outcome caused by the fast expansion of our customer base through external traffic channel as we still see strong demand from our potential customer groups and customer base. It’s key to our business developments. We are confident in that we will be able to be able to maintain our take rate relatively stable going forward as we can keep personalized interaction with our customers and the provide tailored and [Inaudible] services to them after their first purchase from our platform and the explore and they realized higher LTV for each customer gradually.

Our operating cost and the expenses for quarter 2 increased by 160% to RMB 1,755 million. To break it down, the operating costs were RMB 260 million, mainly due to RMB 38 million increase in personnel costs as we rapidly expand our consultants and the insurance agents team to support the business growth. We also incurred a RMB 56 million increase in person — professional and off-source customer service fees. Sales and the marketing expenses increased by 270% year over year to RMB 1,245 million, primarily due to the increase in marketing expenses to third-party channels because of our upsetting rigid business expansion and the branding promotions due in the variable marketing window for online traffic in quarter 2.

As some traffic was released across sectors, we also have seen intensified competition from tiers in acquiring new customers, firming up our COC. We have adjusted our crediting plans for further control expenses in third-party traffic, so more refined operational management and a strict cost control. In the third quarter, we expect to materially reduce such expenses. G&A expense increased by 21.8% in the quarter 2 to RMB 149 million, primarily due to the increase in professional service fees and personnel costs.

R&D expense increased by 80.4% to RMB 100 million and excluding share-based compensation, the adjusted R&D expenses will be RMB 90 million, implying an increase of 72.1%, mainly driven by the increase in R&D personnel costs as our research and development team continues to expand — to enhance our competitive capabilities in technology. We incurred a net loss of RMB 656 million GAAP basis and an adjusted net loss of RMB 570 million. This adjusted net margin was negative 68.7% for quarter 2. The expanded negative margin was mainly driven by the increase in sales and marketing expenses as discussed above.

For the third quarter of 2021, we expect our FYP to be in the range of RMB 4.3 to 4.6 billion. And to reduce our sales and marketing expenses maturely comparative to this quarter. Such outlook is based on the current market conditions and reflects our preliminary view and estimates, which are all subject to change. This concludes our prepared remarks.

I will now hand over to the operator to open the call for the Q&A session. Operator, we are ready to take questions. Thank you.

Questions & Answers:

Operator

We will now begin the question-and-answer session. [Operator instructions] The first question comes from Michael Lee with Bank of America. Please go ahead.

Michael LeeBank of America Merrill Lynch — Analyst

[Foreign language]We noticed that in the [Inaudible] that the CBR issued document number 87 on Internet Insurance and that raised a lot of concerns at the requirement on the internet insurance companies. So can you tell us to — what kind of requirements you will need to — I mean fix your previous issues? And what kind of impact will be on your future operation and the results?[Foreign language]Before the IPO, we talked about the development of healthcare services, which is an important part of our overall business. So may I know that the latest growth or strategy — the progress of this healthcare services? Thank you.

Yang GuangFounder, Chairman, and Chief Executive Officer

Thank you for the question, Michael. This is Yang Guang speaking. I will answer the first question. I think the rectification campaign you mentioned is a follow-up initiative to implement the regulatory matters on Internet insurance business, which were actually announced in December last year then officially took effect in February this year.

I think the regulatory matters aim to promote the healthy development for internet insurance business, not to restrict these developments. So we believe it will benefit the development of compliance and licensed quality institutions for the long run. I think the relevant requirements of the rectification campaign generally follow the basic framework of the regulatory matters on Internet insurance business well with more detailed reminders and no significant changes in the general policies. So before this campaign was actually launched, we have already been proactively adjusting our business in compliance with the new regulations.

And after the detailed reminders came out, we have continued our efforts and we have complete self-inspection and make necessary adjustments accordingly by September 30 this year. This will either have a material impact our current business model through tax and a material compliance risk. Adjustment for certain process is expected to affect our conversion efficiency in the short term. But in the long term, we believe it is beneficial for our business quality improvements as well as the compliance in the standardization of the whole industry.

Hopefully, that answers your question well and I will leave your second question to Mr. Shen Peng.

Shen PengFounder, Chairman, and Chief Executive Officer

[Foreign language]

Xiaojiao CuiInvestor Relations

In the second quarter of this year, we continue to explore new growth opportunities across various subsegments of our healthcare business. So Waterdrop health, which targets healthy customers, we continue to extend the categories of our consumer healthcare services and enrich our product and service offerings, etc. These include the launch of new healthcare consumption products, genetic testing services, and early screening for cancer services. We also developed our underwriting risk control function and the empowered transaction processes to assist insurance carriers in matching qualified customers.

Shen PengFounder, Chairman, and Chief Executive Officer

[Foreign language]

Xiaojiao CuiInvestor Relations

For Waterdrop Medicine, as of the end of Q2, we have around 150,000 members and established cooperation with more than 1,500 pharmacies. We continue to expand our cooperation with pharmaceutical companies, insurance institutions, and pharmacies. Leveraging commercial insurance medicine for public welfare, pharmacy insurance, and innovative payment services, we help our pharmacy partners enhance their competitiveness and the customers stickiness and reduce patients’ out-of-pocket expenses for medicine.

Shen PengFounder, Chairman, and Chief Executive Officer

[Foreign language]

Xiaojiao CuiInvestor Relations

For our patient management platform, we focus on providing full lifecycle of patient management services outside the hospital service — system to patients with critical diseases after surgery. We have built up key services capabilities in this platform, providing our patients with services such as adverse reaction prevention and management, reminder of hospital revisits, medical report interpretation, prescription as well as supplying medicine and the nourishment. We strive to become a high-value healthcare platform benefiting doctors, patients, and pharmacies.

Shen PengFounder, Chairman, and Chief Executive Officer

[Foreign language]

Xiaojiao CuiInvestor Relations

And I hope all of you could continue to take an intention into our three segments. Thank you.

Shen PengFounder, Chairman, and Chief Executive Officer

[Foreign language]

Xiaojiao CuiInvestor Relations

OK. Next question.

Operator

Thank you. The next question comes from Thomas Wang with Goldman Sachs. Please go ahead.

Thomas WangGoldman Sachs — Analyst

[Foreign language]Let me translate my question. The first one is on FIT. So can we have a breakdown between the long-term and short-term product, the growth rate. And secondly, on the increasing acquisition, sales, and marketing expenses.

Can you give us a little bit color on why the timing of this increase? And also comparing to the FIT growth, expense versus [Inaudible], how should we think about that on a quarter basis? Do we — should we cite faster FIT growth next quarter? Thank you.

Yang GuangFounder, Chairman, and Chief Executive Officer

Thanks for the question, Thomas. For this quarter, our sales for long-term insurance have grown although with a slower growth rate and that of the overall as FIT. We [Inaudible] online consultation team. And traditionally March and April are the high time pay marketing salespeople would switch their jobs after the Chinese New Year, so it led to temporary decrease in our sales force.

Moreover, after our IPO, we let go some of our partnering and the in-house sales force that did not meet our requirements in service quality and the efficiency. Although the number of our online consultancies was lower than that — last year, our overall service efficiency and premium retention both went up. So the growth slowdown was mainly due to the momentary adjustment we made to our sales team. And due to the aggressive scale expansion or short-term insurance business and the relatively shortage in the sales workforce for long-term insurance products, the sales leads for short-term insurance products were not fully utilized.

And besides that, due to the rapid scale-up of our short-term insurance business driven by external traffic, the quality of our newly slightly went down and had an adverse impact on our long-term insurance business. So due to the reasons mentioned above, the growth of long-term interest products slowed down but it was only temporary and mostly a result of our own choice. So the improvement of our service quality and customer satisfaction, our long-term goal, the take rate of our long-term insurance product is going to be improved as a result. So going forward, we view actively develop our sales team and further expand our hiring channels and step up our recruitment efforts.

Meanwhile, we have also adjusted our general rules and incentive mechanism and optimized our team compensation. In the current marketing environment, we believe we will be able to onboard more outstanding sales staff and external institutions, and then we will continue to optimize this margin and improve our conversion efficiency. Our algorithm-based this matching system has improved — increased the FIT per lead by 20% this quarter. So given the rapid growth of our short-term insurance products in Q2, the great amount of accumulated lease for our long-term insurance will gradually reach more sales potential as we replenish our workforce.

And for the second question regarding the marketing expense, I’ll hand it over to Kangping, our CFO, to answer the question. Thank you.

Kangping ShiChief Financial Officer

OK. Thanks, Thomas. Thank you for your question regarding sales and marketing expenses. The increase in sales and marketing expenses was mainly due to the increase in the marketing expense for user acquisition and brand building.

There were a few industry factors behind the increase to our sales and marketing expenses in quarter 2. Traffic resources across industries fairly [Inaudible] in quarter 2, so — which is favorable for the user acquisition. Amidst these environments, we maximized our user acquisition efforts while maintaining a relatively healthy ROI. The increase in external traffic investment will naturally lead to a frequently interest in our [Inaudible] and compromise in efficiency metrics.

Meanwhile, we also foresaw that regulations in our industry will be heightened. Therefore, we have also demanded compliance matters on our marketing side in order to [Inaudible] strike a balance among business growth, operating efficiency, and the costs. Although our marketing expenses increased significantly in quarter 2, our CSC was still at a relatively low level among the industry. In terms of our customer acquisition efforts, we conducted bulking algorithms with external platforms, which has started to show positive effect on our ROI since quarter 2.

In addition, we will take relevant numbers. We will have a lower marketing budget [Inaudible] output, efficiency marketing ROI and use stricter criteria to select strategy — acquisition platforms. We will also leverage our AI in powered platform to conduct more intelligence and targeted marketing. We are now currently doing a number of different marketing strategies and have seen some good results.

So I hope these addresses your questions, Thomas. Thank you.

Operator

The next question comes from Kui Ma with CICC. Please go ahead.

Ma KuiCICC — Analyst

[Foreign language]My question is about Huhuibao, our government-backed health insurance. What’s the impact of the development of Huhuibao on your strategy in response to the development of it, as well as the potential computation? Thanks.

Yang GuangFounder, Chairman, and Chief Executive Officer

Thanks, [Inaudible], for the question. I think since last year, we have made explorations in attempts in the garment bag health insurance area. So far, we participated in 18 inclusive medical insurance program designated by Beijing Municipal Medical Insurance Bureau and supervised by Beijing banking and the Insurance Regulatory Bureau and have made solid progress. Also, we have undertaken the government-backed health insurance program as the operating platform for [Inaudible] of Shendong province and other cities in this year.

Meanwhile, we kept a frequent and a good communication with major interest companies who joined the government-backed health insurance program, as well as with many local medical insurance bureaus. We participate in government-backed health insurance program. You already called it Huhuibao due to the following consideration. I think firstly, the demand of consumers as the existing products can now meet the demand of some customers.

We always want to use our resources to restore new ways to serve the users. And I think secondly, by leveraging our advantage on insurance technology, product design, claim settlement, and the DTP service as well as healthcare management, we are able to help medical insurance institutions and insurance companies save costs and improve efficiencies. For ourselves, joining Huhuibao will connect the products with our insurance payment tools and healthcare services, establishing meaningfully pilot version of the united health. And studying from the government’s perspective, many local medical insurance authorities have clarified the position of government-backed health insurance as a commercial supplementary medical insurance, which can significantly reduce greater than self-pay ratio or medical expenses.

For the insurance industry and — that also helps educate people about insurance and the raise the awareness of insurance protection. And it is also conducive to exploring customers potential insurance needs. And from the [Inaudible] product design, a government-backed health insurance programs introduced DTP service, the direct-to-patient service, which provide protection beyond medical social insurance scope and expand the coverage of commercial insurance. To sense — some expands helps solve the problem of poverty due to illness, so both patients and the elderly can participate in the programs which forms a complementary solution for product supplies.

So in the short-term, I think the government-backed health insurance program will have a certain impact on the sales, our meeting medical insurance product, [Inaudible]. It may that takes some time for people to know these two products. And given to the credit in those by the government, to government-backed health insurance product, are easier gain trust, which will have certain substitution effect on meeting medical insurance products. I think going forward in the long run this two should be a positioned as differentiated products.

And the government-backed health insurance attracts more patients in older people while meeting medical insurance is more positioned to catching the younger generation in the [Inaudible], offering a wider coverage outside the medical insurance [Inaudible]. Accordingly, the two products are more supplementary rather than substitution. Thank you. That’s all for the question.

Operator

[Operator signoff]

Duration: 66 minutes

Call participants:

Xiaojiao CuiInvestor Relations

Shen PengFounder, Chairman, and Chief Executive Officer

Yang GuangFounder, Chairman, and Chief Executive Officer

Kangping ShiChief Financial Officer

Michael LeeBank of America Merrill Lynch — Analyst

Thomas WangGoldman Sachs — Analyst

Ma KuiCICC — Analyst

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