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OneConnect Financial Technology Co., Ltd. (NYSE:OCFT)
Q4 2019 Earnings Call
Feb 18, 2020, 8:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, welcome to OneConnect's fourth-quarter and full-year 2019 earnings conference call. At this point, I'd like to turn the call over to Ms. Patricia Cheng, OneConnect's head of investor relations. Please proceed.

Patricia Cheng -- Head of Investor Relations

Thank you. Hello, everyone. Thank you for joining OneConnect's fourth-quarter and full-year 2019 earnings conference call. Before we begin, I would like to remind you that our results presentation is available on our IR website for you to follow along.

Our remarks today will include forward-looking statements. They involve a number of risks and uncertainties that could cause actual results to differ materially. For more information, please refer to today's earnings press release. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements except as required under applicable law.

During this call, we may present both IFRS and non-IFRS financial measures. A discussion of the limitations of non-IFRS measures and a reconciliation to IFRS is included in today's earnings press release. Joining us on today's call are chairman and CEO, Mr. Ye Wangchun; Co-GM and head of retail banking, Hannah Qiu; CEO of SME banking, Michael Fei; CFO Jacky Lo.

At this time, I would like to turn the call over to Chairman Ye. His remarks will be in Chinese. Translation will follow. Ye-do, please.

Wangchun Ye -- Chairman and Chief Executive Officer

[Foreign language] Good morning, everyone. Thank you for joining us today. I'm very delighted to report our first earnings as a public company. Our IPO in December was an important milestone to our vision.

[Foreign language] OneConnect's first set of results demonstrates the successful execution of our strategy. We added 252 premium customers in 2019, representing a surge of 114%. This conversion from basic to premium marks a significant advancement in the adoption of our technology solutions by financial institutions. Recognition from third-party customers continued to rise, with revenue surging over 107% year on year in 2019, much faster than the overall revenue growth of 65%.

Gross profit rose 97% last year as we further strengthened our product mix. It's an exceptional achievement, and I'm very proud of our team's efforts. [Foreign language] As we head in 2020, macro challenges remain. The outbreak of coronavirus is causing short-term disruptions, but over the long term, we firmly believe awareness for online business management and cloud solutions will continue to grow rapidly.

The financial institutions' demand for digital transformation has never been greater. OneConnect is well-positioned to capture the massive market opportunity with its unique business model and cutting-edge TaaS platform. As China's financial service industry continues to evolve, we strive to stay at the forefront, helping our clients to stay ahead in an increasingly competitive market. Thank you.

Patricia Cheng -- Head of Investor Relations

Thank you, Ye-do. Next, Michael Fei, our CEO of SME Banking, will go through the business highlights. Michael, please?

Michael Fei -- Chief Executive Officer, SME Banking

Good morning, everyone. It is a great pleasure to be here today and speaking with you about our business highlights and a fantastic growth opportunity in front of us. Now to begin with, on Page 6, I'd like to take this opportunity to state a few key points about our business model. As a leading Technology as a Service platform for financial institutions, we provide cloud-native solutions and combined with a deep [Inaudible] to serve thousands of financial institutions throughout China.

Our diverse products help banks, insurance companies and asset managers to better manage their risk, generate new revenues, improve efficiency, enhance service quality, as well as reduce costs. On Page 6, about our value proposition -- Page 7, about our value proposition. This is a massive market with over 9,000 public customers. It is a market that has been underserved and attractively understand our technology solution in a 21st-century-connected world.

Our platform is distinctive in terms of comprehensive coverage and the ease of scalability. Our business model is unique with our three-step approach and a transaction-based revenue model. We lead our competition in technology service and apply AI and blockchain technology extensively in real-life scenarios. Additionally, we have begun to see some initial success in overseas markets, which we serve 47 customers in 14 countries and regions.

On Page 8, as you can see, technology service for financial institutions is a huge market. China has the second largest financial service industry in the world with USD 47 trillion in assets. But the largest Chinese banks are only spending about 2% of their revenue on IT spending, about one quarter the level of the U.S. banks.

The total addressable market for third-party technology solution providers in China alone may reach USD 56 billion by 2023. Also, there is another big market in the rest of Asia, bringing another USD 64 billion of target addressable market. Next page is about the overview of the solutions we offer. We are probably the only player in the market that is able to provide a full scope of solutions across all three major verticals: banking, insurance and asset management.

Our end-to-end solutions enable financial institutions to accelerate their digital transformation and create new business opportunities, and we will continue to roll out new solutions as we further invest in R&D to broaden our portfolio. So next, I will give you some examples of the solutions and highlights we offered the last year. One great example on Page 10 is the core banking systems solution we offered last year. This solution is cloud-based and can operate in parallel with the customer's legacy system, making the usual painful migration process very smooth and fast.

As you can see on this chart, this system can also be integrated easily with the other solutions we offer, such as sales and marketing, risk management and product development, etc. We have signed up 16 banks last year, including some banks in Southeast Asia, not only Southeast Asia, as well as PAOB, the Ping An OneConnect virtual bank, our own virtual bank in Hong Kong. Page 11 is about our SME financing and service solution trade example. We launched the first blockchain-backed SME financing platform in Guangdong province at the end of last year.

The platform is connected to 28 government entities with 219 data sources. It provides enterprise profiling, risk management tools and a credit appraisal support to facilitate SME financing in the Guangdong province. Next page is about the AI customer service solutions we offer. We have strengthened our solution last year.

We added a new module, such as the AI virtual assistant. With our advanced AI technology, we are able to achieve an accuracy ratio over 95%, last year this solution already signing up 15 banks to help them to reduce manpower and costs. Lastly on Page 13. We also added the smart rescue module last year to enhance our auto insurance solution.

We connected P&C insurance companies direct to service providers to better serve the car owners. Our platform covers end-to-end auto rescue process and use technology to improve the customer experience, as well as improve efficiency and quality control. Page 14. I think many of you will be interested in the impact of coronavirus.

As Chairman Ye had mentioned in the opening, the outbreak of the coronavirus has impacted our business. We have experienced a delay in client interactions and project implementation. Uncertainties surrounding the duration of the government's extended ban and travel restriction remains. However, we also see opportunities.

We have been proactively working with existing and new customers to support their shift to online services, such as online sales, risk management and claims solutions. We also doubled our efforts for AI customer service solutions. You have seen one example earlier about our virtual assistant tools. So we've received a very positive feedback.

In addition, we quickly launched a smart office solution. This solution helps employees in financial institutions to work from home. We believe the massive impact of the virus will be short term. In the long run, financial institutions will realize the importance and urgency of digitalization and they will be more receptive to our cloud-based service models.

Page 15. As you know, we have a three-step customer adoption strategy. We use simple hook products such as APIs to onboard the customers that they become our basic customers. And we will deepen the relationship by offering our high-value models of solutions and migrate them to premium customers.

Finally, as we cross-sell, they become more integrated in our platform. At the end of 2019, we had onboarded over 3,700 institutional customers, within which 473 are premium customers who use multiple products from us. If you will turn to Page 16. In early 2019, we switched our strategic focus from customer position to deepen our relationships with existing customers.

In doing so, as you can see on this chart, the number of premium customers more than doubled compared with the previous year. In 2018, end of 2018, we had 221 premium customers. By end of 2019, we have 473 premium customers. This illustrates the attractiveness of our business model and also our strong ability to strategically execute our business plans.

To expand on this, an important aspect of our business is the transaction-based fee model. As you can see on Page 17, last year, 72% of our revenue was generated from transaction-related services. It is either volume-based, usage-based or product-based. We choose this model purposefully as it lowers the threshold for customers to adopt to our service and create greater growth potential for both our company and our customers.

The interest of our customer in OneConnect are fully alive. It also allows us to tap into the much larger business budget of these financial institutions. On Page 18, as you can see, we saw a significant uptick in customer usage and transaction volume last year. Our retail loan volume process by our banking solutions grew by over 128%.

Growth in SME loan volume went even stronger at almost 300%. On the insurance side, the number of fast claims grew 315% and the number of the P&C insurance customers using our fast claim solutions increased by 70% year over year. The rapid growth of our transaction volume is a good manifestation of the effectiveness of our solution and it creates a solid fee-based product. Page 19.

As a technology service provider, we continue to invest in R&D. Last year, we were certified as CMMI Level-5. This is the highest possible level for software companies in the world. We made 1,893 new IP applications last year, of which 406 were overseas applications.

Lastly, on Page 20, our solution has been gaining recognition beyond China. We have expanded into 14 markets and now have 47 overseas customers. Our joint venture with SBI in Japan started operation in December last year. The JV will bring our AI product and solutions to regional banks in the Japanese market.

Our ultimate goal is to become the world's leading technology and service company for financial institutions, and I hope you will be with us on this journey. Now thank you. This is my part, and I will turn back to Patricia.

Patricia Cheng -- Head of Investor Relations

Thank you, Michael. Next up is our CFO Jacky Lo. Jacky will go through the financial results in more detail. Jacky, please go ahead.

Jacky Lo -- Chief Financial Officer

Thank you, Patricia. Good day, everyone. I would like to start by saying that it's very exciting times for all of us here at OneConnect. We appreciate your interest in following us, and I really look forward to working with all of you as we grow as a publicly traded company.

We're proud of our achievements in 2019. Beginning with our top line, we had strong growth in revenue both in the fourth-quarter and for full-year 2019. For the quarter, revenue increased by 51.3% to CNY 773 million. For the full year, revenue grew by 64.7% to CNY 2.3 billion.

This solid performance was primarily the result of an increase in third-party customers, a key measure of our client diversification. Revenue from third-party customers grew by over 107% last year, driving up its contribution to 44% from 35%. It's now the largest customer group. This strong surge was due to the expansion of our premium customer pool to 473 from 221.

For the fourth-quarter 2019, third-party revenue, which represents revenue from customers who contribute less than 5% of our revenue, increased by 98% compared to the same period in the prior year and accounted for 44% of total revenue. Revenue from Ping An Group and Lufax collectively posted 28% growth in the period. With a strong number of products, it's modest relative to our third-party momentum. Their combined contribution went down to 56% for the quarter from 66% a year ago.

Ping An Group remains an important customer and partner of OneConnect. As one of the largest financial conglomerates in China, it has tremendous demand for AI solutions. Revenue growth there will stay strong, but more importantly, revenue growth from third-party customers will be even stronger. When we break the revenue down by business nature, you can see continuous diversification there as well.

For the full year, all of our business lines, including implementation, business origination, risk management, operation support and post-implementation, all full strong gains with most in excess of 50%. Implementation revenue jumped the most by 93%. Its revenue contribution improved to 25% in 2019 from 21% in 2018. This came on the back of strong increase in new premium customers.

As you know, this is our first level of engagement with clients, and it will be recurring revenue streams down the road. Recurring revenue driven by transaction activities rose almost 60% last year. A proportion of business originations went down to 33% from 39%, reflecting our penetration into the middle and back office of financial institutions. It's always easier to target solutions that generate new revenue to onboard customers.

As our relationships and trust develop, we move into other pockets of demand, like risk management and operation support. Our strategy is very clear: to focus on deepening our relationships with premium customers, increasing transaction volumes, cross-selling our high-value solutions and further integrating onto our platforms. Recurring business enjoys much higher margins. The change in business mix is the main driver for our margin expansion.

For the full year, gross profit increased by 97% to over CNY 767 million, while gross margins expanded to 32.9% from 27.5%. This increase reflects the phasing out of low-value products and strengthening of our solutions in terms of raising standardization and better expense control. In this process, net expansion rate for premium customers went down from 167% to 84% last year. Revenue decline in Lufax due to regulatory changes also affected this number.

We'll continue the phase-out of low-value products, and we are confident that the uptrend in gross margins will continue. The new premium customers that we acquired last year provide a much healthier base for growth. The strong increase in premium customers, however, temporarily skewed some metrics, such as the decrease in average revenue per customer from CNY 3.9 million to CNY 2.8 million and average number of products per customer from three to 2.7. First year premium customers start from a low base and will have an impact on average contribution, but they will grow over time.

Over the longer term, we expect transaction-based revenue to lead as financial institutions add more solutions and run more business through our platform, whether it's deposits, loan, AI, customer service, auto claims or credit assessment. The list goes on. This cross-selling opportunity and growth will result in the strengthening of our long-term potential and stickiness with each client. This is why we have embraced the transaction-based revenue model.

On the non-IFRS basis, gross margin increased from 43.6% to 46.4% in full-year 2019. The difference between IFRS and non-IFRS basis is due to noncash adjustment in amortization of intangible assets, depreciation of property and equipment and share-based compensation. Let's move on to our expenses. Research and development is our biggest expense.

It's our biggest investment and represents our commitment to innovation. R&D expenses for the quarter were CNY 314 million, as compared with CNY 210 million in the prior-year period as we continue to develop new products and improve our existing portfolio of product offerings. The macro and regulatory environment is constantly evolving and the needs of financial institutions change in response. We need to keep innovating in order to stay ahead of the curve.

As a percentage of revenue, R&D expenses remained flat at 41% in the fourth quarter. Adding capitalization, R&D spending as a percentage of revenue went down from 63% to 49%. We believe we have reached an inflection point. For the full year, R&D expenses increased to CNY 956 million from CNY 459 million in the prior year.

R&D spending, after factoring in capitalization, fell to 49% from 58% as a percentage of revenue year over year. We are committed to investing into future growth. Good technology will have no use without a capable sales team. We set up four regional centers to better serve financial institutions locally.

Although our solutions are cloud-based, the first step is local business development and product proposal and implementation, but we do need people on the ground. And for the full year, selling and marketing expenses grew from CNY 442 million to CNY 636 million. As a percentage of revenue, it went down from 31% to 27%. For the fourth quarter, selling and marketing expenses dropped to CNY 164 million from CNY 224 million.

As a percentage of revenue, it majorly decreased to 21% from 44%. We remain prudent in cost control. And of course, the majority of the hiring era is also behind us. Over to general and administrative expenses.

For the full year, G&A expenses reached CNY 757 million from CNY 520 million. It's higher on an absolute basis, but as a percentage of revenue, it also experienced a downtrend to 33% from 37%. For the quarter, G&A expenses were CNY 317 million, up from CNY 226 million in the prior-year period primarily due to IPO-related expenses, as well as general management and back-office employee costs. Looking at our operating leverage, you can see that our operating loss as a percentage of revenue has been narrowing to 75% in the fourth quarter from 105% a year ago.

Overall, due to the strong growth and diversification of our revenue, as well as solid cost controls in all areas of our business, we continue to see improving operating leverage in our financials. For the full-year 2019, net loss attributable to OneConnect shareholders per diluted share was CNY 1.77, up from CNY 1.29 in the prior year. Net loss per share was CNY 0.65 in the fourth-quarter 2019 versus CNY 0.66 the same period a year ago. Our target is to break even over the midterm.

We aim to achieve this by keeping a diligent eye in cost control while growing revenue from premium customers. This is especially true this year as we focus on boosting contract size of premium customers. We will also step up our cross-selling efforts and increase transaction volume with existing customers all while maintaining our discipline in cost. The outbreak of the coronavirus had caused short-term disruption.

As you've heard from Michael just now, we have been proactively working with existing and new customers and we have seen a greater demand for online solutions such as AI customer service, AI sales, AI risk management, smart office and smart claims. We believe that our long-term growth remains strong. Thank you again for your time and attention for our first earnings call. With that, I will now turn the call back over to Patricia.

Patricia Cheng -- Head of Investor Relations

Thank you, Jacky. Our management team are actually calling in from three different locations due to the travel restrictions in China. So apologies for any sort of like delay in response. So once you ask your question, I'm going to direct a relevant member of management to respond.

We greatly appreciate your patience during this process. And we'll now open up for your questions. Operator?

Questions & Answers:


Operator

[Operator instructions] Your first question comes from the line of Yang Liu. Your line is open.

Yang Liu -- Analyst

Good morning, management. Thanks for the opportunity to ask questions. I have two questions here. The first one is about the revenue growth from existing customers.

We noticed that the overall revenue growth is pretty fast, but how about the revenue from existing premium customer compared with one year ago? That's my first question. The second one is about the -- I noted that in fourth quarter last year, the back-office-related business, like operational support, takes an even bigger revenue pipeline than business origination. I would like to ask whether that will change the long-term strategy of the company, whether mid- and back-office applications will be more important than business origination for front office. I think these two questions are mainly for Fei-do or Michael.

Patricia Cheng -- Head of Investor Relations

Thank you, Liu Yang. Let me direct the first question about net numbers to Jacky first, and then Michael is going to provide additional color.

Jacky Lo -- Chief Financial Officer

Sure. Thanks, Liu Yang. Maybe I'll address your question on revenue. So for the full year, I mean, we already talked about revenue grew by 65%.

But for our third-party customers, the percentage was much higher at 107%. But I mean I briefly touched on the net expansion rate during the earnings call. And we talk about the margin expansion because our focus for 2019 was to phase out some of the low-value products. And also Lufax, its revenue contribution dropped by about 23%.

So that actually impact our net expansion rate. But overall, if you exclude those, if you exclude the low-value products and also if you exclude impacts from our net expansion rate, it's actually way above 100%. So what that means is actually, our revenue growth is very strong, like for the customers' pool that we had from a year ago. Consciously, we make the decision to improve our gross margin.

We actually phase out those low-value products. And if you look at the premium customers, we have increased it by over 114%. Right now, we have 473 premium customers. So that provide a very strong base for our future growth.

And so we are pretty confident in terms of our net expansion rates, we're going to rebound in 2020.

Patricia Cheng -- Head of Investor Relations

Michael, would you like to add some additional color?

Michael Fei -- Chief Executive Officer, SME Banking

Yeah. Maybe on the growth of the existing customers, I think Jacky has already provided there a very good answer, a very comprehensive answer. I would like to address the second one, OK, on the growth of operational revenues. It's very [Inaudible] impressive number.

Fourth quarter last year, the operational revenue was 35% versus business organization, 26%. I think there's two reasons. One is that in the fourth quarter, we have actually launched several new solutions that is in the operation support segment. For example, the virtual assistant module we discussed earlier in the presentation was actually largely launched at fourth quarter, as well as the smart rescue module service.

We also discussed just now -- was also largely launched in the fourth quarter. So these newly launched inclusion of support modules and services mainly contributed to the growth of the operational revenue in the fourth quarter last year. Now looking into the medium term, we still believe business organization will be the most important revenue contributor for us in the next two to three years, OK? But we do add more aspects of operational services there because we see asset, financial institutions, they become more and more advanced. And as we grow into more larger events, larger insurance companies or larger financial institutions, operational services will be our main value proposition for us to serve them, and we will continue to enhance our offering in this segment.

Patricia Cheng -- Head of Investor Relations

Thank you, Liu Yang. Before we move to the next question, we would like to add one reminder here. Before you ask your question, please state your name and the organization that you work for. Thank you.

Operator

Your next question comes from the line of Hans Chung from KeyBanc Capital. Your line is open.

Hans Chung -- KeyBanc Capital Markets -- Analyst

Hi. Good morning. Thank you for taking my question. This is Hans Chung from KeyBanc Capital Markets.

So I have a couple of questions. One, just can you provide more quantitative color about the impact from the coronavirus? We have some disruption in business operation and it's hard to predict. But I mean just give us a sense about like what kind of impact could be for the Q1. And then over time, is there any increasing risk in, let's say, SME loan origination in the whole industry? Because assuming SME now is facing tough situation because of the impact.

And how do we view the risk for the industry over time, at least in near to mid-term? And then following that question would be just any -- can you give us some color about the average revenue for new customer we acquired in 2019? It seems that we have a big increase in new customer in terms of premium customer. And then what's the average revenue for the new customer?

Patricia Cheng -- Head of Investor Relations

We will have Mr. Ye to talk about the impact of coronavirus first. And then Michael will address the question on the impact on SME. Ye-do, please.

And then lastly, Jacky will talk about the question about the revenue for our new premium customers.

Wangchun Ye -- Chairman and Chief Executive Officer

[Foreign language] Here, I would like to share some observations over the coronavirus outbreak. Firstly, the outbreak has caused some impact in China. So far, 60,000 cases have been confirmed, 8 times the number of SARS. Secondly, we see that the Chinese government is taking measures to address the outbreak.

Outside Hubei, number of new cases has been decreasing for 14 consecutive days. And certainly, we believe that the virus will cause some impact on our business. The impact remains short term. And number four, after the outbreak of -- the impact, we have been proactively seizing market opportunities.

The financial institutions, including regulators, have shifted their position to online business management and cloud-based solutions. For that, we have launched 10 online products to reduce human-to-human interactions in financial business. So we believe over the long term, the virus will not cause huge impact on us.

Michael Fei -- Chief Executive Officer, SME Banking

[Foreign language] Thank you, Mr. Ye-do. So on the question about the SME, the impact on SME companies, we do see a very big impact. As Mr.

Ye said, on the SME business especially due to the travel restriction, etc., many SMEs find it difficult to have the right employees in place to open their business, OK? But in the meantime, we also see that the government is taking a lot of actions to rectify the situation. We are very actively involved in this. For example, on the Guangdong SME financing platform we just discussed, we're actually very actively helping the government to support the SME companies. Other platform, last week, we have opened a special page for antivirus services.

Now on this page, we launched an online survey to better understand the needs of SME customers. This survey has already received over 5,000 results, which helped the government to better set up a policy required to support SME companies. And also, we put antivirus special type of loans out of this page. The recent number I got is that last week, we have already distributed 98 cases of antivirus loans from various financial institutions to the SME company in the Guangdong province.

Now we have also developed the wide risk over 10,000 companies, SME companies, that for the government and the financial institutions that are in need of support. And then we use our virtual assistant using our AI tools to proactively call out to the owners of these SME companies on a wide risk to ask if they need any financial support in the short term. So as Mr. Ye said earlier, I think in the short term, given that the virus is still developing, given that the restructuring is there, it's still very difficult for us to accurately assess the impact of the virus, OK? But we also see very positive feedback.

We have seen very positive actions from the government and the financial institutions to help the SME companies. And we are closely monitoring the situation, and we are very deeply involved in helping the government and FIs actually address the problem.

Jacky Lo -- Chief Financial Officer

And Hans, this is Jacky. I'll take your second questions on the average revenue from our premium customers. So I touched on this briefly during the prepared remarks as well. So back in 2019, the average revenue per premium customers or ARPU was about CNY 3.9 million, and it dropped to about CNY 2.7 million in 2019.

And there are three main reasons behind that. So first of all, Lufax is one of our largest premium customers, and I mentioned earlier the revenue actually dropped by about 23% in 2019. That's one reason that affects the ARPU. And also, we talk about our efforts to actually phase out low-value products to expand our gross margin.

So that's another reason. And so when we phase out some of these low-value products, it impacts the revenue from some of the premium customers. And also, the last thing is because of the number of new premium customers that we add. So usually, in the first year, the usage will be lower versus the existing premium customers, and in 2019, we actually increased our premium customers by over 114%.

So these are the three main reasons behind the decrease in the ARPU in 2019. But looking at 2020, I think our focus, obviously, we have already set up a very strong premium customers' pool. And so our effort will be on increasing the contract size of these premium customers and especially the high-value premium customers. And so I guess for 2020, you can look at it from two different angles.

The first angle is the existing premium customers. We will continue to drive their usage and actually work with them to increase the modules and solutions that they purchased from us. So we expect a steady growth in the ARPU from this group. But at the same time, we will also continue to focus on converting customers from basic to premium.

And as I mentioned, because the first year is usually the usage rate will be lower. So that would kind of offset a little bit of the ARPU increase from the existing premium customers group. But overall, we expect there will be some increased improvement in the ARPU in 2020.

Michael Fei -- Chief Executive Officer, SME Banking

Lastly, I'd add one more point. Considering that we have more than doubled our premium customer last year despite the drop in ARPU, I think we actually see this as a very positive sign, which means that the new premium customers we are getting in 2019 are actually seeing very good revenue contributions for us, actually higher than the new premium customers we acquired in 2018.

Operator

Your next question comes from the line of Binnie Wong from HSBC. Your line is open.

Binnie Wong -- HSBC -- Analyst

Hi, good morning, Ye-do, Fei-do, Michael and also Jacky and Patricia. Thank you for taking my question here. First of all, I hope everyone is well and safe during this virus situation we are facing. So I guess the first question is for Ye-do and Michael on the strategy side.

I understand that the virus is presenting quite some challenges, and thank you for walking us through. But would you also see that there could be some opportunities from here, right? Because there's more reason for digitalizing operations or using less people, more contactless operations, measures that a lot of your clients, your financial institutional customers were also facing. So would you also see that, besides the challenges, there could be some opportunities we saw? And also second question is to Jacky, a follow-up on the strategy side, that you see that there will be increasing opportunities to grow the high-value premium customers, right? So I guess the question is how, right? Like how are we going to increase the ARPU from these premium customers? And of course, the follow-on is how we convert the basic customers to our premium customers.

Patricia Cheng -- Head of Investor Relations

Well, I think Binnie has already assigned the questions that you have. So Michael, why don't you take the first question? And then Jacky, you will do the second one.

Michael Fei -- Chief Executive Officer, SME Banking

Yeah. Thank you, Binnie. I think the question on the virus challenge, that's a very good question. I think as you said earlier in your question actually, the virus totally is a challenge to us in the short term, but we also see very positive feedback from our customers, very positive development in the need of our solutions, in the need of our services.

Actually, if you read the latest reference rate guidance issued by the CBIRC and PBOC, it actually calls for the financial institutions to actively adopt more digitalization tools to provide online or remote services, for example the sales tools, the risk management solutions, the collection services, the current services for the insurance companies, etc. Now this is actually -- we have also seen the increasing demand from our customers by the number of inquiries we have brought for the past two months. I'll give you one very expansive example. We have a tool that is a collection tool that will allow people to do collection calls at home, OK? Previously, the concept, you have these fixed-line telephones and you have to skip in the office to do these collection calls, OK? Now because of this virus, many people cannot get back to work and they are stuck in a home, OK? They have only to be able to work from home, OK? So we were able to offer this kind of a virtual assistant, as well as virtual line tools to the collectors so that they will be able to do collection calls at home.

I think in the past two weeks, we received more than 30 inquiries from our customers and we have signed more than four, OK? So all these four companies are already using this collection system, collection tools to do collection for their employees at home. So this is just one small example of the opportunities that has been brought to us by this virus. As also I just mentioned earlier, the smart office tools we offer, earlier response has also received a very positive feedback. We already arranged multiple demos for our customers through video conference, through teleconference, etc.

So these are the new opportunities we have seen. Also in the longer term, we see more respective attitude of the financial institutions toward cloud-based solutions as they have experienced this and they realize the importance and the urgency to using digitalization tools and cloud-based services. These are all the long-term, positive trends we have as well.

Jacky Lo -- Chief Financial Officer

Binnie, on your second question, in terms of how do we increase the ARPU or how to convert basic to premium, I think if you look at the numbers in 2019, the revenue growth from our third-party customers was much faster than our overall revenue growth. So from a third-party customer, it was 107% versus overall is about 65%. So that's growing much faster. And this strong revenue growth from our third-party customers is basically in recognition of our technology and our solutions capabilities.

And we talk about this customer development strategy. We have a very clear strategy, a three-step process that is adopt, deepen and integrate. So usually, we sell like whole products to our basic customers. And then once we establish the relationship with them, we actually showcase our technology capabilities, we are able to actually convert from basic to premium.

And then during that process, we will cross-sell more high-value products as well, which will drive up our ARPU. So last year, we talked about the increase in our premium customers from 221 to 473. So for 2020, we'll continue to focus on this, just executing our three-step process. And from our existing pool, we'll convert more to premium.

And from the existing premium, we'll cross-sell more high-value products so that we'll be able to lead to a higher ARPU.

Operator

Your next question comes from the line of Bill Liu from Goldman Sachs. Your line is open.

Bill Liu -- Goldman Sachs -- Analyst

Good morning, management. Thank you for the opportunity to ask a question. I have a question on the transaction-based revenue. So first of all, congratulations on the multiple growth on the retail loan and SME loan balance.

I wonder given the current situation when a lot of the SMEs are under pressure and some of the third-party banks have a larger share of customer from SME, do you see any pricing pressure potentially at this point going forward especially for those loan-balance-driven revenue? And secondly, I want to follow up on the gross margin profile, if you can share some more color on that especially on the fastest-growing operation support services segment.

Patricia Cheng -- Head of Investor Relations

We're going to hand the first question to Michael to talk about the trend in SME. And I think Hannah can also talk about the trend in the retail side as well. And then the question of gross margin, we then go to Jacky.

Michael Fei -- Chief Executive Officer, SME Banking

OK. Thank you. I think on the transaction-based revenues, now frankly speaking, I think for the past several weeks, we do see a job in the transaction volumes we have facilitated. Now however, this has coincided with the Chinese Spring Festival, OK? So this is actually the same as the pages we have seen for the past several years that in the first quarter, especially in the Chinese Spring Festival, the transaction volume will usually jump, OK? So it is very difficult to evaluate the real impact of the virus, the transaction volume at this stage.

I think after several weeks where we will be in a better position, we'll have more information to judge on the impact of the virus.

Hannah Qiu -- Co-General Manager and Head of Retail Banking

Yeah. From a retail side, I think the first of the quarter, especially, what, January and February were still kind of a drop because of the -- well, Michael mentioned that there are those effect from the virus and also the Chinese New Year. Normally, we will see in the past few years that quarter one is normally the transaction volume will be lowest during the whole year. So this year, I think it definitely will follow the same trend.

But normally, the transaction volume will come back in the second quarter and will pick up to the peak at quarter four. So that's what we see in the past, and we think this year, we will still see the trend. In long-term trend, we will still be very positive because most of the Chinese banks starting to -- they have finished on retail lending only recently. Before that, we mentioned before, they're more focused on the mortgage.

And at this pace, we have more lending production for individual customers so that -- we see this is a long-term trend in at least following years. So in long term, we say you will still see the volume and also on the balance of individual consumer lending will increase in most of the Chinese banks.

Bill Liu -- Goldman Sachs -- Analyst

Can you confirm that the --

Jacky Lo -- Chief Financial Officer

Just on gross margin -- oh, go ahead.

Bill Liu -- Goldman Sachs -- Analyst

Sorry, if I can quickly verify that. So the transaction-based revenue as a percentage of loan balance has remained relatively stable although the volume may decline because of seasonal reasons. I just want to clarify that.

Hannah Qiu -- Co-General Manager and Head of Retail Banking

Yeah. Current application, we have a long-term contract in the bank. Normally, the contract is three years on the contract. So normally, we don't adjust the fee ratio during the period.

Bill Liu -- Goldman Sachs -- Analyst

OK. Sorry, please go ahead.

Michael Fei -- Chief Executive Officer, SME Banking

Yeah. So just to clarify on the question, I think your question is on the first quarter or on last year.

Bill Liu -- Goldman Sachs -- Analyst

No. Because I noticed that your retail loan almost doubled from '18 to '19, and then SME loan also almost grew 3x. So I wonder, during that process, the pricing on the loan. For example, you track X percent as the loan balance as a transaction-based revenue.

So I wonder if that percentage has changed as you grow in size. All that has remained the same, as Hannah mentioned, that it's a stable contract of three years so it won't change.

Michael Fei -- Chief Executive Officer, SME Banking

I think --

Hannah Qiu -- Co-General Manager and Head of Retail Banking

Yeah, this is so stupid.

Michael Fei -- Chief Executive Officer, SME Banking

Yeah, this is the same. So we will have different products for different loan types, yes? I think as we explained earlier, for a credit loan without guarantee versus a mortgage loan, we will charge different price for a different type of loan.

Wangchun Ye -- Chairman and Chief Executive Officer

[Foreign language]

Michael Fei -- Chief Executive Officer, SME Banking

[Foreign language] I think Mr. Ye has said that we have different fee [Inaudible] for new addition loans and existing loans, OK? So for these new additional loans, we will actually charge higher than the existing loans.

Patricia Cheng -- Head of Investor Relations

OK. Let's move on to the question about gross margins.

Jacky Lo -- Chief Financial Officer

Bill, on your question on gross margin, thank you for that question. So maybe I'll provide some additional colors on the commentary. So if you look at 2019, our gross margin increased by about 5.4 percentage points. And so I think business mix definitely played a key role in the gross margin expansion.

So we talked about -- well, first of all, our products are becoming more diversified, and then we make the effort to phase out some low-value products. So that helps to expand our margin. And also, if you look at our operation support as a percent of revenue, it's actually increasing, and actually, this part of the product has actually had a higher gross margin versus, for example, business origination. So that does also contribute to the increase in our gross margin.

But also, if you look at our implementation service, it makes up about one fourth of our business. And the key for us is we continue to standardize our product, and so it's going to shorten the implementation time. And so overall, I mean if you're looking at going forward, we are quite confident the gross margin will continue to expand just because we will continue to work on optimizing our product mix and also standardize our products.

Operator

That concludes Q&A. I'll turn the call back to the presenters for closing comments.

Patricia Cheng -- Head of Investor Relations

Thank you, everyone, for joining our first-ever conference call. We appreciate very much your interest and attention in OneConnect, and we look forward to working with you going forward. If you have any questions following this call, please do not hesitate to contact me. Have a wonderful day.

Thank you.

Operator

[Operator signoff]

Duration: 58 minutes

Call participants:

Patricia Cheng -- Head of Investor Relations

Wangchun Ye -- Chairman and Chief Executive Officer

Michael Fei -- Chief Executive Officer, SME Banking

Jacky Lo -- Chief Financial Officer

Yang Liu -- Analyst

Hans Chung -- KeyBanc Capital Markets -- Analyst

Binnie Wong -- HSBC -- Analyst

Bill Liu -- Goldman Sachs -- Analyst

Hannah Qiu -- Co-General Manager and Head of Retail Banking

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