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Qudian Inc. (NYSE:QD)
Q3 2018 Earnings Conference Call
Nov. 21, 2018, 7:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Qudian Incorporated Third Quarter 2018 Earnings Conference Call. At this time, all parties are in a listen-only mode. There will be a presentation followed by a question and answer session, at which time, if you wish to ask a question, you will need to press *1 on your telephone. I must advise you that this conference is being recorded today, Wednesday, 21st of November, 2018. I would like to hand the conference over to your first speaker today, Ms. Annie Huang, Director of Capital Markets for Qudian Incorporated. Thank you. Please go ahead.

Annie Huang -- Director of Capital Markets

Hello, everyone, and welcome to Qudian's Third Quarter 2018 Earnings Conference Call. The company's results were issued via newswire services earlier today and were posted online. You can download earnings press release and sign up for the company's distribution list by visiting our website at ir.qudian.com. Mr. Min Luo, our Founder, Chairman, and CEO, and Mr. Carl Yeung, our CFO, will start the call with their prepared remarks.

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

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

Min Luo -- Founder, Chairman, and Chief Executive Officer

Thank you, Annie. I want to first thank all the investors, analysts, and media who have taken an interest to join today's call. I'd like to walk you through some of the key factors in our business performance before turning it over to Carl. We had a record quarter, with RMB747 million of non-GAAP net income excluding [inaudible] operating charges.

Since the end of 2017, the market has helped sponsor our business, including regulation, partnerships, and users, and while our recent share price has reflected this [inaudible] sentiment, I'm proud to see that our operating performance since the end of 2017 has disproved this. Instead, we had [audio cuts out] not one, not two, but three strong financial [audio cuts out]. We sold in 2Q and 3Q 30 million cars. In a moment, I will let Carl and Annie talk you through this.

On users, we are happy to report we had more than 70 million registered users and 29.1 million credit-approved users at the end of this quarter, and while we have [audio cuts out] Alipay [audio cuts out], we were still able to [audio cuts out] 518,000 new active borrowers by providing a better service and a certain cost to borrowers at the regulatory [audio cuts out] and competitive rates. With the 70 million registered users and 29 million credit-approved users that we already have, we simply have too much users to sell our captive managing and are taking a more conservative approach to our business. So, we recently launched a credit referral channel for RAF for excess user traffic to supplement our [inaudible] of balance and off-balance sheet operations.

In a short time, we've partnered with 10 leading financial service platforms to offer our [inaudible] users a broader range of financial products and services. This is simple [inaudible]. First, we are blessed with too much accounts, and our better service marketing approach works. Second, these are high-quality users and have reputably expected many partners to join. On Dabai, investors have been concerned about the potential cash drain and asset-heavy nature of auto lending. Although we have [audio cuts out] we have further filled this business comp with [inaudible] adjusted for feasibility.

Now, to what really matters to me and my team: We recently moved our headquarters to Xiamen [inaudible] provide better work environment for our team to succeed. We saw [audio cuts out] media, but let me give you some background. 1). For key and qualified employees that must stay in Beijing, we have an office there. 2). Less than 4% of our employees departed because of location, while all the middle and senior management came to Xiamen because they believe in the future with Qudian. 3). We have more than fairly compensated our departed staff. Finally, our company will continue to offer highly competitive, if not most competitive, pay packages to attract and retain the most talented people in the world.

Finally, we are humble, but we are focused and driven to succeed. With a stable team, massive user base, a proven financial track record, and a strong financial position, we have never been more confident about our future. As such, we have bought back USD $240 million worth of stock as of today. That's true commitment. I want to thank the board for their support in assuring real action by extending our USD $300 million share buyback program for another year. With that, I will now hand the call over to our CFO, Carl, who will discuss more about our operations.

Carl Yeung -- Chief Financial Officer

Thank you, Min, and hello, everyone. First, I'd like to touch base on a couple highlights for the quarter. We continue to deliver solid results and improved profitability with lower funding and marketing costs. After excluding a non-recurring foreign exchange loss of RMB52.8 million, we would have recorded a non-GAAP net income of RMB747.1 million this quarter, a new record for Qudian.

Our loan book grew steadily by 17.7% year over year to RMB15.3 billion, while risks were being managed appropriately. The data we accumulated during last year's credit crunch period provided significant enhancement to our credit assessment model. Our asset quality didn't experience much impact from recent industry headwinds, illustrated by our stabilized delinquency rate. The provision to on-balance loan facilitation amounts remained at around 2% for loans generated this year. We will continue to monitor asset quality and adjust our credit assessment model to navigate changing environments.

Meanwhile, we saw limited impact from the termination of paid marketing channel on Alipay, and our user base continues its solid growth. Notably, our marketing costs were further reduced by 36.1% year over year. At the same time, our funding sources remained stable, and costs further decreased year over year by 29% as a result of our compliance, existing institutional funding sources, and sufficient cash reserves.

During this quarter, we entered into new funding arrangements with six regulated and licensed institutional funding partners. Looking ahead, we believe our strong asset quality and cash position will help us sustain future growth. Particularly, we will focus on exploring emerging opportunities to further monetize our massive user base, as Min discussed. We have operated an on-plus-off-balance-sheet approach to the credit-underserved, but in fact, we have been underserving our own users because our target delinquency rates are set to very conservative standards.

Therefore, there is a visible opportunity to further monetize this massive 70 million and growing user base by offering credit referral services to other qualified financial service providers. We are excited about this opportunity, as this on-plus-off-balance-sheet plus referral service model offers an additional risk-free way for us to address the credit demands of our massive user base.

Going to the fourth quarter, we expect the general macroeconomic situation to remain challenging and uncertain, yet, as demonstrated by our solid track record, our technology base and data-driven approach will continue to allow us to navigate the evolving environment and keep credit quality within a managed range. Therefore, we should expect our outstanding loan balance to grow healthily and meet [audio cuts out] our non-GAAP net income target of RMB2.5 billion excluding non-recurring costs and charges.

Again, given the visible disconnect between the company's share price and our fundamentals, we continue to purchase shares in the open market. As of now, we have purchased approximately USD $240.9 million under the repurchase plan announced last December. Now, I'd like to turn the call to our Director of Capital Markets, Annie Huang, to discuss our detailed financial results for the third quarter of 2018. Annie?

Annie Huang -- Director of Capital Markets

Thanks, Carl. Total revenues were RMB1.9 million, an increase of 32.9% from RMB1.5 million for the same quarter of 2017, mainly driven by growth of revenues from sales income generated by Dabai Auto business and loan facilitation income and others, partially offset by a decrease in revenue from sales commission fees. Financing income totaled RMB960.2 million, a decrease of 8.9% from RMB1.1 million for the same quarter of 2017, due to a decrease in on-balance sheet transactions. Loan facilitation income and others substantially increased to RMB337.9 million from RMB100.8 million for the same quarter of 2017 as a result of a substantial increase in off-balance sheet transactions and the adoption of ASC 606, effective January 1, 2018. The adoption of ASC 606 resulted in an increase of RMB122.6 million in loan facilitation income for this quarter.

Sales income was RMB586.1 million compared to nil in the third quarter of 2017 as a result of the launch of new Dabai Auto business. Sales commission fees decreased by 87.9% to RMB35.7 million from RMB294.8 million for the same quarter of 2017 as a result of a decrease in the GMV relating to the merchandise credit business. Total operating costs and expenses increased by 52.8% to RMB1.2 million from RMB757.5 million for the same quarter of 2017. Cost of revenues increased substantially to RMB698.5 million from RMB258.9 million for the same quarter of 2017, primarily due to costs incurred by the Dabai Auto business, partially offset by a decrease in funding costs associated with our core online consumer finance businesses.

Sales and marketing expenses decreased by 36.1% to RMB120.1 million from RMB187.9 million for the third quarter of 2017. The decrease was primarily due to a significant decrease in sales and marketing expenses for our core online small consumer credit businesses as a result of a significant increase in repeated transactions directly on our apps and termination of paid marketing through Alipay's dedicated channel, partially offset by an increase in expenses associated with the new Dabai Auto business.

General and administrative expenses were RMB48.2 million, essentially flat from RMB51.1 million for the third quarter of 2017. Research and development expenses decreased by 21.7% to RMB41.2 million from RMB52.7 million for the third quarter of 2017. Provision for loan principal, financing service fee receivables, and other receivables increased by 73.7% to RMB292.4 million from RMB168.4 million for the third quarter of 2017. The increase was primarily due to an increase in the loan balance and M1+ overdue loan principals and financing services fees receivables.

As of September 30, 2018, the total balance of outstanding principal and financing service fee receivables for on-balance-sheet transactions for which any installment payment was more than 30 calendar days past due was RMB435.5 million, and the balance of allowance for principal and financing service fee receivables at the end of the period was RMB515.7 million, for a M1+ Delinquency Coverage Ratio of 1.2x.

Income from operations was RMB702.8 million, flat from the third quarter of 2017. Net income attributable to Qudian's shareholders increased by 5.1% to RMB683.8 million, or RMB2.13 per diluted ADS, compared to RMB650.7 million, or RMB2.20 per diluted ADS, for the third quarter of 2017. Non-GAAP net income attributable to Qudian shareholders increased by 4.7% to RMB694.3 million, or RMB2.17 per diluted ADS, compared to RMB663.3 million, or RMB2.24 per diluted ADS, for the third quarter of 2017.

We incurred a foreign exchange loss of RMB52.8 million after [audio cuts out] non-recurring charges. Our non-GAAP income compared to the same period last year would have increased by 12.6% to RMB747.1 million. As of September 30, 2018, the Company had cash and cash equivalents of RMB2.8 million and restricted cash of RMB1.2 million.

For the third quarter of 2018, net cash provided by operating activities was RMB1.4 million. Net cash provided by investing activities was RMB643.4 million, mainly due to proceeds from collection of loan principal of RMB9.1 million. Net cash used in financing activities was RMB2.5 million.

We maintain our guidance and expect our total non-GAAP net income for the full year of 2018 will be greater than RMB2.5 billion after excluding non-recurring costs and charges. The above outlook is based on current market conditions and reflects the company's preliminary expectations as to market conditions, its regulatory and operating environment, as well as customer demand, all of which are subject to change. This concludes our prepared remarks. We will now open the call to questions. Operator, please go ahead.

Questions and Answers:

Operator

Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press *1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press #. Please note there may be a short pause as the questions are being collated. We thank you for your patience. Our first question comes from the line of Alice Li from Credit Suisse. Please ask your question.

Alice Li -- Credit Suisse -- Analyst

Hi. Thanks for taking my questions. I have two questions. The first one is on the loan balance outlook. We see the growth in the outstanding loan balance slow down in the third quarter compared to the second-quarter level, so what are the main reasons? Is this mainly due to the funding side -- some limitations? What's the latest share and the outlook of the loan balance? My second question is on the partnership with other financial service platforms. As you mentioned, you have cooperated with 10 other financial service platforms. So, which platforms you have cooperated and which types of borrowers you would like to refer to the other platforms? And, in the third quarter, what percentage of loan volume is from the referral model? Thank you very much.

Carl Yeung -- Chief Financial Officer

Hi, Alice. This is Carl. Thank you for your two questions. Regarding loan balance, you saw slower growth from our second quarter to third quarter. This is mainly because of a bit more constraint, to be very frank, on the funding side because our funding partners were a little bit more conservative during the third quarter due to the many noises surrounding the overall P2P industry, which is unrelated to us, but people are yet a bit more conservative.

If you ask me about going to the outlook for this loan balance growth, we expect that loan balance to grow healthily going forward. I have my loan balance number today, but again, I can't disclose that given that it's not fair disclosure. But, we should expect at least another 5-10% growth into the fourth quarter given that most of the P2P concerns have been easing in the market, and our assets continue to be one of the most attractive asset classes among things that our funding partners can invest in. So, that's the loan balance outlook.

And then, regarding the very keen observation of our partnership with other lenders, we just recently -- almost two weeks ago -- opened our own lending platform, a lending referral channel, just because we have way too much users. This is very clear evidence of us -- given the conservative risk level that we want to do, we just have excess users that we simply are not able to serve right now. Who are these platforms? These are mainly the platforms you would have heard of. We mainly work with either listed companies or companies who comply with regulatory requirements.

Mainly, we do some background check and make sure they don't charge over 36% APR across to our borrowers. So, these are the kind of platforms that we're serving. Right now, we don't have any financial results to share yet, but we are quite keen that this will be one of the interesting drivers because frankly, our business was born out of helping to serve the credit underserved, but because of our conservative risk management, there is a lot of room -- namely, over 60 million users that we can tap, and we're willing to open that to our partners.

Alice Li -- Credit Suisse -- Analyst

Thanks very much. May I have a follow-up question?

Carl Yeung -- Chief Financial Officer

Please go ahead, Alice.

Alice Li -- Credit Suisse -- Analyst

On your partnership, for those platforms you partner with, they may provide supplementary loan products compared to our current loan products -- say, if we mainly focus on the small-ticket-sized loans, they mainly provide the large-ticket-sized loans, or we do not have such criteria for the partnership.

Carl Yeung -- Chief Financial Officer

We are very relaxed about the partnership product structure, as long as it's regulatory compliant. So, I think it provides significantly larger loans, I think it provides shorter loans, smaller loans -- there's no restriction, as long as it's regulatory compliant. We mainly transfer the users -- we show the users on our platform that we simply do not have a credit rating for yet, and we show the referral page to them.

Alice Li -- Credit Suisse -- Analyst

Okay. Thank you very much.

Carl Yeung -- Chief Financial Officer

Thank you, Alice.

Operator

Your next question comes from the line of Anderson Cha from BNP Paribas. Please ask your question.

Anderson Cha -- BNP Paribas -- Analyst

Hi. Thanks for your detailed presentation, and also, thank you for taking my questions. I have three questions. First of all, you've mentioned that you've tightened credit standards for the quarter, so can you provide some more specific color on that? And, can we expect for lower delinquencies in the coming quarters on the back of these strengthened credit standards going forward? The second question is with regards to your capital management, do you have any plans for another round of share buybacks or share repurchase from your IPO investors or dividend payout in the near future? Lastly, with regards to your credit referral business, how much of extra earnings are you expecting from that in 2019 and more into the mid-term? Thank you?

Carl Yeung -- Chief Financial Officer

Thank you, Anderson. I really appreciate you joining the call and the questions. To be specific, on the first question, regarding credit tightening, in fact, we have lowered our daily credit line approval rate from 21.2% in second quarter to 18.2% in the third quarter of 2018. If you just look at the average daily approval rate, it's gone down slightly, from 51% in the second quarter to 41% in the third quarter. This is our credit model working. We learned a lot in last year's credit cycle what a multiple-stacking borrower means, and we have been using these models quite well into the third quarter, so that's why we mentioned we tightened our credit policies a little bit for our third quarter.

Should we expect delinquencies to go down further? I think if you do a comparable basis of so-called "annualized loss" versus just looking at the so-called "M1+ vintage" across time for our past, you would find that our delinquency would remain very stable. We have a somewhat targeted delinquency rate that we want to operate in, so it should be pretty stable. I don't think there's room for going down because that way, we would be basically saying no to too many users. So, that's credit tightening.

Secondly, on capital management, again, our board has shown support again. We have approved a $300 million buyback program last year. We haven't used up all of it yet. We've used $240 million. The board has kindly extended this program another year, so please expect us to continue to be in the market at appropriate price levels to help support the share price and really show our confidence in our future. We don't have any dividend plans yet. If there is anything that is approved by the board, we will make the appropriate disclosures. And then, on the...question...

Anderson Cha -- BNP Paribas -- Analyst

Credit referral program -- how much of extra earnings are you expecting?

Carl Yeung -- Chief Financial Officer

We are quite keen on this credit referral program. We expect a material add to the 2019 numbers, given this large user base that we have, but we have not yet given 2019 guidance. We will do so at the appropriate time, so, look forward to that. Anderson, does that answer your question? We would like to give you an update as soon as we have a bit more detail in terms of the charges we're charging our partners. We're still in the exploratory stage right now. It's been open for two or three weeks, so it's early stages.

Anderson Cha -- BNP Paribas -- Analyst

Okay, thank you.

Carl Yeung -- Chief Financial Officer

Thank you.

Operator

Your next question comes from the line of Victor Wang from CICC. Please ask your question.

Victor Wang -- China International Capital Corporation -- Analyst

Thank you for taking my question, Carl. The first one is for the first time in my memory, you disclosed the data of newly acquired active users in the third quarter, which is 580,000. Very impressive. Can you share with us the same data for the previous few quarters so that we can make a longer-term serious comparison to see the new trend of customer acquisitions with and without the partnership with Alipay? This is my first question.

The second question is referencing the listing from QD, we have seen the management being very active in trying to explore new business. One of the stories that people talked about was the merchandise channel, and afterwards, QD tried the budget car business -- the Dabai Auto brand -- but it seems that it has been not really delivering material revenue stream for the business. So, what is the overall resource allocation strategy if QD is about to focus only on the core cash loan business? Does that mean that the CapEx demand going forward will be much more limited, and as a result, is it potentially possible for you to spend more money either to directly pay back to shareholders or to expand the scale of the current share buyback program? That's my two questions. Thanks.

Carl Yeung -- Chief Financial Officer

Thanks. I'll answer the first question, and I'll actually let Luo Min chime in on the second question and ask one of my team members to translate the second question to Min. So, regarding your first question, thank you for the keen observation. Yes, we added 580,000 new active borrowers in the quarter. This is a way for us to really provide more information, as we know there has been a lot of concern surrounding the Alipay marketing channel contract termination.

Now, let me roll back this number a couple quarters. In the second quarter, we added about 600,000, in the first quarter, we added about 530,000, so it's a pretty same rate. The reason this number is so consistent is because we have actually been promoting our app not [audio cuts out] we've actually been promoting our app as early as November 2017, and moved that traffic and user experience to our app last year.

So, all that concern regarding the Alipay termination has been completely absorbed -- not for one quarter, but actually for our three past historical financial reports, our quarterly reports. So, this is just a way for people who are not familiar with our company to get to know more about our real marketing strategy by providing a better service, fitting our costs more competitively than [audio cuts out] regardless of where they accessed it, either in the app store or in a cashless payment environment. Now, on the second question regarding our new business [audio cuts out] overall, I'll have Min say a few words for us.

Min Luo -- Founder, Chairman, and Chief Executive Officer

[Speaking Mandarin]

Carl Yeung -- Chief Financial Officer

Okay. I'll translate to English. So, Victor, thank you very much for the question and observation about the new things that we have been testing and attempting. Core to this company's value is innovation and creation, and let me share with you that the core consumption credit business will remain a focus, and we believe it will [audio cuts out] succeed as well. Yes, we continue trying new things to keep our entrepreneurial spirit at heart and execute it on a daily basis. This lets us be tapped in and evolving in the marketplace, but more importantly, it allows us not to be confined by technology progress and allows us [audio cuts out] by employees to keep us at the cutting edge of innovation overall. This ends my part of Min's translation.

As the CFO, we actually have a very disciplined approach for financial [audio cuts out] on investing and trying new things. As you know, our core consumption credit business maintains a very strong and sustainable cash flow and earnings. We'll ensure our core cash flows and earnings or final financial results deliver substantial growth year over year, and any excess of that growth will [audio cuts out] to fund these new things [audio cuts out] our values to keep this entrepreneurial approach.

Min Luo -- Founder, Chairman, and Chief Executive Officer

[Speaking Mandarin]

Carl Yeung -- Chief Financial Officer

Luo Min would like to emphasize further that regarding our core consumption credit business, it will continue to do well and it's proven to do well, but we really want to maintain this... Whether it's doing RMB2.5 billion of net income this year or whatever next year, the cumulation of technology data, knowhow, and the users has really started to pay dividends from an operation perspective. The users that we have accumulated are such a massive size beyond what we can serve ourselves. We are now inviting other technology consumption credit companies to join this platform and share these users with them, and on a paid basis, no less -- on a CPC basis, no less. So, the partners we have attracted are well-recognized and leading brand names, and they are keen to participate in this high-quality user base that we have. This is first of all.

Now, about the new things that we do -- again, technology and our business environment will continue to change, and we'll always use a very small and agile team of elite staff to test these new things -- again, to keep the entrepreneurial spirit at heart being executed. As you know, the company is only founded for four years, but most of the staff in general only basically saw our company going from 1 to 10, but didn't get to experience the 0-to-1 stage.

So, this agile team that we test new things allows the entire company's other staff, who may be focused on the existing business or stable business, to experience these interesting 0-to-1 opportunities and keep growing themselves, and therefore, we can continue to grow a more and more competitive staff base. This is the fundamental difference between us being an entrepreneurial and agile organization versus a large, boring workplace. That's the translation of Min's second part of adding to Victor's question. Thank you, Victor.

Operator

Your next question comes from the line of Jacky Zuo from Deutsche Bank. Please ask your question.

Jacky Zuo -- Deutsche Bank -- Vice President

Hi, good evening, management. I have three questions, if I may. The first one is can you give us an update of the auto lending business? I saw that on the balance sheet, the auto loans balance was actually very changed quarter on quarter in the third quarter, so are we also doing some off-balance-sheet lending for the auto loans? And also, are we charging any credit costs for the auto loans so far? And, with the offline showroom or the offline stores we have now, what's the plan going forward? I don't know if you can provide any outlook for next year in terms of the auto loan business.

The second question is a housekeeping one. Regarding the active borrower number in the quarter, what is the loan tenure and credit size of our cash loan business? Lastly, what's the MAU number for the Qudian app? And, last question is regarding our e-commerce business, I saw the sales commission fees actually drop a lot in the third quarter. Just wanted to understand what's our strategy on this part of business, and what's the GMV number, and what's the outlook going forward? Thank you.

Carl Yeung -- Chief Financial Officer

Thank you, Jacky. I'll answer all three of these questions. So, a bit more update on the auto business. You saw the balance sheet numbers. Thank you for that. We actually do off-balance-sheet arrangements where some of these autos are generated in terms of sales, and they're directly funded by our third-party funding partners. We intend to have one thing on focus only: To ensure that, on a risk-adjusted basis, we continue to run a profitable auto lending business. So, 170 stores for us was a little bit too much in terms of requiring us to reach a much bigger scale to be profitable. We did the calculation, and about 30 stores makes a lot more sense in terms of homing in on the profitability.

In November, again, we are profitable for Dabai Auto on the stand-alone operating financial statements, so we're happy that it's going that way. In terms of the outlook for next year, I unfortunately cannot give any outlook anymore because that's not one of our focuses in terms of growth, but we can provide one outlook, which is that we continue to maintain Dabai Auto network to serve our users who have this need, but we are going to do it profitably, so that's the only guidance that I can give.

In terms of the several housekeeping issues, the active borrower base -- or, so-called "outstanding borrower base" -- in the third quarter was 4.9 million. It's about 200,000 active borrowers less than second quarter. The reason is very simple. I just mentioned we lowered our daily credit approval rate by 10%. This has nothing to do with less business. We grew our auto registration by 2.2 million in the third quarter with no marketing, so this is more about tightening credit standards.

And, in the quarter, our average tenure was 10.2 months. It's increased a little bit more from 7.4 months, but the average size was still RMB1,400.00, which means we continue to lower the [inaudible] burden for our customer base in an effort to help maintain our credit quality under control. So, at these rates, our users are paying just about RMB200 a month on principal and for service fees, and these kinds of repayment sizes on a monthly basis, regardless of what happens to the environment, will be fine because it's only RMB200 a month for any average Joe. It's just too small a number. So, that's kind of the second housekeeping part.

Regarding e-commerce, we have always had an ambition to do e-commerce. It's always something that has carried a higher margin, but it's not something that we want to focus on in the near term given that there is still a lingering residual risk of overall market environment. So, we know from our data that e-commerce installment delinquency is slightly higher than cash lending, so we want to stay in the lower-risk part of [audio cuts out]. If it returns to a more acceptable level, we're more than happy to get back on the horse and ride it very, very fast. GMV-wise, we don't disclose that number. It's not material. As long as it's something that we remain profitable, we're happy to [audio cuts out].

Jacky Zuo -- Deutsche Bank -- Vice President

Thank you, Carl. Thank you for your answers.

Carl Yeung -- Chief Financial Officer

Thank you, Jacky.

Operator

Your next question comes from the line of Linda Sun-Mattison from Bernstein. Please ask your question.

Linda Sun-Mattison -- Sanford C. Bernstein -- Analyst

Hello, Carl and Mr. Luo. I have one very quick question. Regarding the RMB2.5 billion net income, I noticed in your press release you mentioned that you are still maintaining that guidance, but regarding the caveat of extraordinary one-off items, can you just specify what could be in the extraordinary one-off items? I guess FX -- this quarter you got RMB52 million FX losses, so I guess that's one item. I want to hear from you what could happen below the line. Thank you.

Carl Yeung -- Chief Financial Officer

Thank you, Linda. It's very simple. In this quarter, there is only one non-recurring charge that we had to explain, and really, you should add back on that RMB52 million of FX charge, but this came about because in the beginning of the year, we converted most of our USD base to RMB to be aligned with our financial statements. But, as we experienced further and further share price drop and we were excluding our USD buyback program, we had to unfortunately convert some of that back to USD, also at a loss, but it's fine because our stock prices were low and we were generating value from it anyway.

So, we experienced some foreign exchange changes because RMB [audio cuts out] quite a bit in this period. Again, this has nothing to do with operations. Our core earnings were RMB747 million. Now, that's one thing. That's the only thing [audio cuts out]. Going to the future quarter, you'll probably just see these one-time non-operating-related stuff -- for example, ForEx.

Linda Sun-Mattison -- Sanford C. Bernstein -- Analyst

Thank you.

Operator

Your next question comes from the line of Jon Sai from Morgan Stanley. Please ask your question.

Jon Sai -- Morgan Stanley -- Analyst

Hi. Good evening, management. Thanks for taking my questions. My question would be a follow-up on the user side. So, I think we have nice organic growth in terms of the registered users, cumulative borrowers, and also, the users referral credit line, but we've also seen a continued decline in terms of the outstanding borrower based on the quarter number, so I think -- can the management provide some reconciliation between these two trends? Also, on the new user side or the new active borrower side, I think the Alipay agreement is terminated at the end of August, so, maybe entering into September and October, do you see any different trends in terms of the number of active borrowers on a monthly basis?

The final question is on the segmentation of the 70 million registered users. I think we have now different strategies of on-balance-sheet, off-balance-sheet, and referral business to this group of users, so how do you segment it? And, for the referral business, do we only refer those registered users without approved credit, or do we also refer those with approved credit from our products? That's my questions.

Carl Yeung -- Chief Financial Officer

Great. Thank you so much, Jon. So, regarding the several numbers that Jon wanted to discuss, we had 70 million registered users -- that's an increase of about 2.2 million users from the previous quarter. Our credit-approved users were 29.1 million. That increased by about 900,000 from the previous quarter. And then, in terms of the outstanding borrower base, it was 4.9 million versus 5.1 million, so that dropped about 200,000.

To reconcile that [audio cuts out] attract users, we think we're doing a good job in terms of providing better service and cost, but what drove these directions in their different ways was really because we lowered our daily credit approval rate from 51.5% in the second quarter to 41.2%, so we gave less credit in terms of approval rate in the third quarter. This is basically in response to certain changes in the P2P landscape. We just wanted to be safe than sorry. For us, regardless of all the things we said, risk management is No. 1 in our company, so that's the reconciliation.

Now, regarding the active new borrower, this quarter, it was 580,000. Last quarter was 630,000. The Alipay contract essentially ended in August. Now, in September, October, and November, we haven't seen much change in numbers. It's been pretty stable. But, the reason being we've had to move a lot of transactions off of Alipay since November of last year. It's basically [inaudible]. I might be a little bit ahead of ourselves, but we should see the outstanding borrowers actually increase into the fourth quarter, given that we're quite confident in terms of where the credit model is heading.

So, in terms of the segmentation of the 70 million users, it's going to be a combination of on-balance-sheet plus off-balance-sheet plus referral service. First of all, we have a target delinquency rate. We like the so-called 2% M1 users, so we would first of all use our own plus our partners' off-balance-sheet funding to provide a credit to them. Obviously, between that 5 million and 70 million -- there's 65 million people who we're not serving.

All of that is available for our partners to serve to. That includes not just people that we have maybe rejected, but includes people who have an approved credit line, which is 29 million, minus 5 million, which is 24 million, who have not been drawing down the credit from us. The reason may be because they want a credit size that's too big for us to handle right now. We still prefer a smaller credit size. So, that's available to my partners too. We have no near-term intentions to significantly increase our average ticket size. Does that answer the questions, Jon?

Jon Sai -- Morgan Stanley -- Analyst

Yeah, it's very helpful. So, I just have one quick follow-up -- a small qualitative. So, for the new borrowers you acquired organically, for this group of new borrowers, do you observe any different level of activeness in terms of the number of borrowers in the quarter versus those you get from the Alipay channel?

Carl Yeung -- Chief Financial Officer

No, not really. We haven't seen much significant difference. Again, since November, I can tell you the transaction volume by channel on our app for the first quarter was 94%, for second quarter was 94%, for the third quarter was 94%, so it's been very stable. We haven't seen any change.

Jon Sai -- Morgan Stanley -- Analyst

Okay, thank you very much.

Carl Yeung -- Chief Financial Officer

Thank you.

Operator

Your next question comes from the line of Daphne Poon from Citi. Please ask your question.

Daphne Poon -- Citi Research -- Analyst

Hi. Thank you for taking my question. So, first question is regarding the asset quality trend and outlook. So, you actually have touched on that earlier as well. So, when you talk about the tightening of loan approval in 3Q, do you see some more temporary tightening due to the industry shock on the P2P side, or you also see that as potentially related to the rising macro uncertainty, and looking ahead, would you remain relatively more conservative on the loan approval going into 4Q or next year? And so, this is the first question.

And, the second question is on the funding side -- so, looking on the balance sheet, the loan receivable balance, it seems like there is a decline in the on-balance-sheet funding while shifting more to the off-balance-sheet funding. So, does that mean that there's increasing -- declining contribution from the trust companies while increasing contribution from the banks? What will be the funding mix outlook going forward?

Carl Yeung -- Chief Financial Officer

Thank you, Daphne. Regarding the asset quality, the credit tightening in the third quarter where we lowered the approval rate was more a temporary situation. We were observing much more P2P turmoil, specifically in June, July, and August, and basically, by September/October, this has quieted down a little bit. You just asked me a little about outlook. I think this will actually relax a lot more into the fourth quarter. That's why I just explained that we should expect to see a higher number of outstanding borrowers into fourth quarter. That's kind of where we should be in the fourth quarter.

Now, anything beyond that, I think it's too complex and too forward-looking for me to make an assessment now, but at any rate, we have some targets in terms of delinquency, and we'll discuss that very thoroughly. If the actual delinquency or expected delinquency moves beyond that, we'll have to tighten. Risk management is No.1. There's no discussion about that. And, if the delinquency comes down, we would relax our credit approval. So, fourth quarter, we should see a higher number of outstanding borrowers. Next year, given the trends, we're quite comfortable, we're quite upbeat, but we will always adjust to change.

Now, in terms of the balance sheet, yes, we have a smaller percentage of so-called on-balance-sheet contribution. That's mainly because of most of the on-balance-sheet was funded -- which is not our own money -- is funded by external trust structures, and we had a large concentration of trusts that came to the end of their lifecycle while we had a bigger contribution of off-balance-sheet -- namely banks, who were willing to provide us money at cheaper rates, so we took advantage of that. That's why you saw a 29% decline in cost of funding in our third quarter.

Now, regarding the mix, we're going to manage that very carefully. It will be a mix of owned capital through assisted loans, plus a trust structure of many trust partners, plus the off-balance-sheet. I think just a rough estimate should be about 30-30-30%. We'll keep things flexible and agile. Thank you, Daphne.

Daphne Poon -- Citi Research -- Analyst

Okay, thanks.

Operator

Once again, if you wish to ask a question, please press *1 on your telephone. There are no further questions at this time. I would like to hand the conference back to today's presenters. Please continue.

Annie Huang -- Director of Capital Markets

Thank you once again for joining us today. If you have other questions, please feel free to contact Qudian investor relations department with the contact information provided on our website.

Carl Yeung -- Chief Financial Officer

Thank you, everyone. Have a good day.

Annie Huang -- Director of Capital Markets

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

Duration: 65 minutes

Call participants:

Annie Huang -- Director of Capital Markets

Min Luo -- Founder, Chairman, and Chief Executive Officer

Carl Yeung -- Chief Financial Officer

Alice Li -- Credit Suisse -- Analyst

Anderson Cha -- BNP Paribas -- Analyst

Victor Wang -- China International Capital Corporation -- Analyst

Jacky Zuo -- Deutsche Bank -- Vice President

Linda Sun-Mattison -- Sanford C. Bernstein -- Analyst

Jon Sai -- Morgan Stanley -- Analyst

Daphne Poon -- Citi Research -- Analyst

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