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OneConnect Financial Technology Co., Ltd. (OCFT) Q1 2020 Earnings Call Transcript

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OCFT earnings call for the period ending March 31, 2020.

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OneConnect Financial Technology Co., Ltd. (OCFT 0.70%)
Q1 2020 Earnings Call
May 05, 2020, 9:00 p.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Ladies and gentlemen, welcome to OneConnect's first-quarter 2020 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, operator. Hello, everyone. Thank you for joining OneConnect's first-quarter 2020 results briefing. Some housekeeping notes before we begin.

First of all, you can download the results presentation from the IR website. And secondly, 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 the 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 on the limitation of non-IFRS measures and the reconciliation to IFRS is included in the press release. Let me introduce the management team today.

Chairman and CEO, Mr. Ye Wangchun; UGM and head retail banking, Hannah Qiu; CEO of SME banking, Michael Fei; and CFO, Jacky Lo. At this time, I would like to turn the call over to Mr. Ye.

His remarks will be in Chinese, and translation will follow. Ye-Do, please.


[Foreign language] Hello, everyone. Thank you for joining us today. To begin, I would like to say thank you to our entire team of hardworking and dedicated employees. Without your devotion during these difficult times, our strong performance would not have been possible.

Looking back at the last quarter, like many other Chinese companies, we were concerned about the unknown impact of the coronavirus. Due to its rapid spread, many countries, not just China, have implemented restrictions such as lockdowns and social distancing. The full impact on the economy depends on when the pandemic can be effectively controlled, and unfortunately, it remains unknown at this point. A silver lining from this period is an increase in demand from financial institutions for contactless interactions.

We have been marketing five solutions to help them more vitally and conveniently service their clients anywhere, anytime and on any device. We believe this trend is only going to accelerate after we return to our new normal business environment. So far, our results have demonstrated the strength and the resilience of our platform under these difficult circumstances. We achieved revenue growth of 30% year over year, even though we believe we could have had stronger performance in the absence of the coronavirus.

The pandemic has forced more financial institutions to reimagine and redesign their IT strategies and better plan for any upcoming disruption. This is now accelerating demand for digitalization and greater interest in our cloud-based solutions as evidenced by our strong third-party customer growth of 48%, which again beat our overall rate. Looking out at the coming years, the situation remains highly fluid, but we will evolve with it. We are optimistic that our team will continue to deliver strong support to our customers, as well as strong results to our shareholders.

Thank you for joining us.

Patricia Cheng -- Head of Investor Relations

Thank you, Ye-Do. Next up is CFO, Jacky Lo. Jacky will go through the financial results in more detail. Please go ahead, sir.

Jacky Lo -- Chief Financial Officer

Thank you, Patricia. Good day, everyone. Getting into the financials. Even though this was our seasonally slow quarter and we have been facing an unprecedented pandemic, we were still able to grow our top line by 30%.

More importantly, we continue to drive gross margin expansion to 34.8%, and gross profit increased by 58% to CNY 202 million. Operating loss narrowed, and operating loss ratio improved from 103% to 77%. Net loss remained largely flat at CNY 415 million. On a per share basis, it narrowed to CNY 0.40 from CNY 0.44.

Let us look at the segments one by one. By customer type, third-party customers were the biggest driver in the quarter. The segment posted revenue growth of 50%, much ahead of the overall growth of 30%. Its contribution to total revenue rose to 46% from 40% a year ago.

The strong performance was a result of the new increase in premium customers last year. Just to quickly recap. Last year, our premium pool expanded by 114%. These customers have been ramping up the use of our solutions.

This was exemplified by the growth in implementation revenue, which increased by 48% to CNY 139 million. As we have discussed before, the importance of this is that it's the first level of engagement with new clients and often leads to strong transaction-based revenue in future quarters. In terms of our biggest single customer, Ping An Group and its subsidiaries, revenue rose 11.1% in the quarter to CNY 228 million, the equivalent of about 39% of total, down from 46% in the same period last year. Over at Lufax, revenue grew at 30.5%, and its weighting was unchanged at around 14%.

We maintain a constant dialogue with all of our customers, but the focus here clearly is the continuous uptrend in contribution from third-party customers. Moving on to revenue breakdown by business type. The biggest driving force was operation support. Revenue from the segment went up by 148% to CNY 164 million.

The increase was led by AI virtual assistant in banking, as well as Smart Rescue in insurance. As to the biggest business line, that is business origination, its revenue rose 2% year over year to CNY 181 million, accounting for 31% of total revenue. There was some softness in the first quarter as the macro environment was not the most conducive for consumers and SMEs to take up more financial products. The risk management line also experienced a slowdown, with revenue down by 5% to CNY 82 million.

Pre-lending credit risk assessment was affected the most, and loan volume processed by our SME banking solutions went down in the quarter. A more diversified revenue mix is key to addressing customers' needs in this evolving market. Operation support services have become invaluable to our financial clients during this time of social distancing and quarantines. As Chairman Ye mentioned in his opening speech, we have been actively marketing five solutions during the outbreak.

I would like to highlight a few notable ones in operation support. First of all, the AI virtual assistant. A main goal of OneConnect is to reshape retail operations of Chinese banks, to help them increase efficiency and interaction with their end customers anytime, anywhere, while managing cost and risk. The modules include chat box, interactive voice response, speech analytics and several other options.

They are customizable and can be quickly implemented. The second solution that demonstrates our all-round support to financial institution is in smart collection. COVID-19 has weighed on asset quality, and banks have greater needs to step up their post-lending management. Our digital platform connects all the parties involved in the debt collection process, maximizing its impact.

And most of all, moving all the steps online and installing a digital framework ensures that rogue behavior or misdemeanor that's quite often associated with loan collection gets eliminated. In insurance, the Smart Rescue module targeting roadside assistance is also built on the same premise. Our strategy is also to build an ecosystem providing end-to-end support. We started with intelligent fast claim.

Some of you have visited our lab in Shanghai and have seen the demo. For the past year, the team has been moving into claim-related service management, such as Smart Rescue and auto parts platform. These value-added services are becoming increasingly important to driving revenue, as well as customer stickiness. Revenue contribution from operation support has expanded steadily, from 9% in 2017 to 22% in 2018, 25% in 2019 and 28% in the latest quarter.

By contrast, business origination's weighting has been going down. It made up 78% of total revenue in 2017 and now down to 31% in the first quarter of this year. While the contribution from risk management was lower in the first quarter year over year, it has made steady increase over the years from almost nothing in 2017. Overall, we are seeing a more even representation of product usage as we continue to innovate and penetrate into different pockets of demands of our premium relationships.

The macro challenges caused by the pandemic has reinforced our confidence in the strategy to diversify business mix. This will ensure that we meet the needs of financial institutions in different scenarios, which will in turn help make our revenue growth more resilient during turbulent times. In terms of quarter-on-quarter trend, we see the typical seasonality associated with our first quarter. The seasonal dip was exacerbated by the coronavirus this year.

The retail loan volume processed by our systems in first -- in the quarter rose to CNY 12.7 billion from CNY 10.1 billion. The transaction performance was supported by the new premium customers added in the second half of last year. For SME loans processed, the amount went down to CNY 5.7 billion from CNY 7.9 billion. As I mentioned earlier, the softness in lending activities does affect our business origination and risk management solutions.

Providing more support to Chinese SME has been another of our undertaking. The blockchain-backed SME financing platform in the Guangdong province achieved good results in the first quarter, actually also its first full quarter, and we have recently signed an agreement with China Merchants Port Group to build a blockchain-backed port logistics network to extend our support to SMEs in the Greater Bay Area. We are optimistic about a rebound in transaction volume on the SME front in the rest of the year. Over in auto insurance, the number of fast claims checks carried out in the quarter was 995,000, similar to the level last year.

Against the backdrop of travel restrictions and the stay-at-home policy, it was an encouraging outcome. Even during this tumultuous quarter, we continue to expand gross margin. Gross margin improved to 34.8% from 28.5% year over year. The end of the amortization of intangible assets injected at inception by the Ping An Group in the third quarter last year has certainly been a big help.

But we would like you to focus on our ongoing exercise to optimize business mix and phase out low-margin products. This focus on quality growth alongside our cost discipline is what's going to propel OneConnect toward profitability. Focusing on our profitability goals, our operating leverage continued to improve. R&D spend went down to 46.2% of revenue from 65.9% as project investment and launch got delayed due to the coronavirus.

Sales and marketing increased slightly to 26.8% of revenue from 25.3% due to additional head count following the sales buildout, as well as hiring to address our overseas expansion, such as the virtual bank in Hong Kong. For the same reasons, G&A expenses also went up slightly year over year to 33.2% from 31.1%. Because of the timing of these head count increases, there could potentially be some further year-over-year impact in the relevant expenses in the next quarter. And given our transaction-based model, our revenue in the short term may continue to be affected by COVID-19.

While the recovery in China has begun, the reality is the rest of Asia, Europe and the U.S. are still under different degrees of lockdown. Let me say a few words on our overseas presence here. We made a couple of breakthroughs in the first quarter.

We secured our first customer in Abu Dhabi to build a digital lab for the financial regulator there. It affirms OneConnect's technological edge that we are fully capable of competing with global companies. We also signed our very first deal in India, making a solid first step into an enormous market. These new wins bring our presence to 16 markets in total.

But there has been some pullout in our overseas business as a result of travel ban and lockdown implemented in the region. Some of these restrictions are likely to remain and affect our operations in the second quarter. The situation is still fluid, and the overall impact of COVID-19 on economic activities remains to be seen. But we believe that this will be short term and doesn't distract us from our midterm goal of achieving profitability and long-term vision of becoming a leading TaaS platform for financial institutions globally.

Looking forward at the full-year 2020. Our focus remains consistent. We'll drive premium client engagement by cross-selling more solutions and deepening our integration with their platforms. In addition, we will further optimize our product mix to expand margins, increase transaction volume through our products and maintain disciplined cost control in this volatile macroclimate.

We enjoy a tremendous amount of leverage in our model. What we are experiencing now is just a hiccup. We firmly believe that our cloud-based technology is going to be at the top of the priority list for financial institutions, and government policy of new infrastructure will further drive demand for our solutions. New infrastructure is not the traditional infrastructure that of roads and bridges, while it does encompass the upgrade of traditional infrastructure.

But to our industry, its significance lies, most of all, in digital infrastructure, opportunities coming from 5G network, data center, artificial intelligence, etc. Financial institutions have no time to lose in their transformation. This is also the direction of some of our R&D initiatives. With the customers and experience we have accumulated over the years, we are at a position of strength to support the industry in its journey of digitalization.

And in our own journey, there will be difficult periods like this one we are going through right now. But you can see, even in this unprecedented period, we delivered 30% revenue growth and continuous improvement in operating results. We are confident that the devotion of our team and the resilience of our business will enable us to sail through any storm and reach our midterm and long-term goals. Thank you.

With that, I'll turn the call back over to Patricia.

Patricia Cheng -- Head of Investor Relations

Thank you, Jacky. We'll now open up to your questions. Chairman Ye and Jacky will be joined by Hannah Qiu and Michael Fei. Since all of us are calling in from four different locations, once you ask a question, I will direct it to the relevant member of management to respond.

Please do bear with us for any delay in this process. I will now pass it to the operator.

Questions & Answers:


[Operator instructions] Your first question comes from Elsie Cheng with Goldman Sachs. Your line is open.

Elsie Cheng -- Goldman Sachs -- Analyst

Hi. Thank you management for taking my questions. I have three questions here. I think the first is we noticed that there is a faster shift of revenue mix from Ping An Group and Lufax to third-party customers, and we actually have very healthy growth at the third-party side.

So, just wanted to understand a little bit more how should we think about revenue from Ping An Group for the rest of the year and what's the recovery growth track going to be looking like there? And secondly is beyond Ping An. Can you share more color on the driver of the 50% growth from third party? Was it more about premium customer number expansion or ARPU on the back of new product lines? And by client type, how can we think of the virus impact to big banks, SMEs and insurance companies? And when we look at the non-IFRS gross margin, it improved significantly Q-on-Q as well. Is it related to the revenue mix shift? And the third question is related to overseas expansion. We noticed quite a few exciting projects in various parts of the world.

I just want to understand a bit more about our priority overseas and if we are on track for the monetization time line.

Patricia Cheng -- Head of Investor Relations

Thank you, Elsie. There are actually a few more questions, more than, a bit, than three. Let us start with the revenue side. Maybe I'm going to ask Jacky to answer the questions on the third-party revenue drivers, and then Michael will take your questions on the Ping An Group, adding a bit more color on what's driving the business there and the outlook for rest of the year.

So, let us get through the two questions first, and then we'll move on to your other questions about the SME margins and overseas. Let's do the two first. Jacky, please.

Jacky Lo -- Chief Financial Officer

Sure. Yes. So, I would say, on your questions on the drivers behind the 50% growth for our third-party customers, well, first of all, the coronavirus is an unprecedented challenge to the global macro. But I think the outbreak has made our customers, especially those financial institutions, realize the importance of online services and the need to accelerate their digital transformation.

And the two key drivers behind our third-party customers are basically the implementation as far as operation support. So, if you look at the implementation growth, overall for the -- for OneConnect, it's, as I've said, 48% year-over-year growth. But for our third-party customers, it's actually over 100%. And if you recall, we actually added over 250 premium customers last year, especially toward the second half of the year.

So, that actually set up a very strong foundation for this year. And so, we see -- and we always talk about the implementation is our first level of engagement with our customers, especially the new premium customers. So, -- and then we see a strong performance in these new premium customers we added last year as they sign up more new solutions. And then for business origination, another interesting thing we noticed is that because of this current situation, there's a stronger demand for operation support.

So, for example, like the AI virtual assistance, also we talked about during the prepared remarks, the roadside assistance, these are all like operation support. So, we see a strong uptake despite the macro backdrop. And so, -- because ultimately the companies, they realize the importance they need to accelerate the digital transformation. And more importantly, they pay more attention to cost control and also -- to increase their operation efficiency.

And so, we added a lot of new products last year. And so, that's why, for operation support, you also see a year-over-year increase of 148% overall, even higher for our third-party customers. So, that's basically the key drivers behind the third-party growth of 50% in revenue.

Patricia Cheng -- Head of Investor Relations

Michael, can you talk a bit about Ping An Group?

Michael Fei -- Chief Executive Officer of SME Banking

Yeah. Sure. So, for Ping An Group, I think, as we explained during the IPO, Ping An Group is actually our largest customer and also our important strategic partner. So, first of all, I want to reiterate that our relationship with Ping An Group is unchanged, OK? They are still our largest customer and our strategic partner.

Within Ping An Group, P&C insurance and then the Ping An Bank are still our two largest customers followed by life insurance and etc. Our group has a different product side. But similar to the overall trend we have observed and you have seen in the results, the customer -- business origination and the risk management revenues are relatively small in the first quarter. Operation support was very strong.

This is the main driver for revenue growth in the first quarter with Ping An Group. So, looking forward, we still expect the revenue from Ping An Group to grow healthily. We expect Ping An Group to remain our largest customer in the coming several quarters. And more important, I think, is our cooperation with the Ping An Group.

Ping An Group has provided with a testing ground for our innovation and give us access to the real-life scenarios to refine our product. This relationship remains unchanged and still one of our biggest advantage over our competitors.

Patricia Cheng -- Head of Investor Relations

Michael, Elsie has two other questions related to revenue. One is about the SME side, the impact from coronavirus on SME. And I think the other one is about the overseas expansion. So, can you talk about these two aspects first? And then we'll go to margins for Jacky at the end.

Michael Fei -- Chief Executive Officer of SME Banking

Sure. On SME, I think, as explained by Jacky, also you have seen in the results, is the SME loan volume, we have seen over a 20%, about 28% drop in the first quarter. I think that actually correlates very well with the GDP results you have seen. The GDP contribution from private companies actually dropped by 11%, a decrease of 11%.

So, it's natural that in the first quarter because of the coronavirus, we have seen very difficult times for the SME companies. But I would say that in April, we see that volume starting to decline. The government is pushing very hard for the banks and for the financial institutions to provide support to the SME company, trying to stimulate the growth of the SME -- overall SME market. So, we have seen that these policies actually do deliver some impact.

Banks are actively trying to lend out to the SME companies, so the volume is starting to pick up, and we expect to see continued growth for the SME business in the coming quarters. On the overseas business, I think our focus remain unchanged. We will continue to focus on Southeast Asia. OK.

We will continue to focus on exporting our mature products to the Southeast Asian banks and Southeast Asian clients. And we will still continue to focus on the big clients in Southeast Asian countries. So, these strategies continue unchanged. As to your question on the monetization of our product in Southeast Asia, I think first quarter is a bit difficult.

You have seen in Singapore, Malaysia, Indonesia, they have travel bans, they have lockdowns, so we do have some delay of our projects. The Abu -- Dubai project, the Indian projects, we have seen in the first quarter -- actually, started negotiations in the first quarter last year, and income materialized this -- in the first quarter. So, we do expect some difficulties for the overseas business in the coming several months. It remains to be seen whether -- when these Southeast Asian countries will again open their border and allow us to do more business in the region.

Jacky Lo -- Chief Financial Officer

Yeah. Elsie, this is Jacky. I'll answer your questions on the non-IFRS gross margin. So, if you look at the numbers, it was 49.4% in Q1 last year, and it's dropped to 46% in the first quarter this year.

So, you can look at it from three different factors. The first factor is the implementation revenue. It's a lower-margin revenue stream. It increased by 48% year over year.

And the mix actually increased -- it was higher, from 21 to 24%. So, that has some negative impact on the gross margin. Also, the higher-margin risk management revenue stream, you noticed it fell 5% year over year. And also, the mix went down from 19 to 14%.

So, these two combined, they have some negative impact on our gross margin. But there's also some -- partially offset by some positive impact from our significant increase in operation support. The revenue stream went up 148%. And overall, the mix increased from 15 to 28%.

So, net-net, overall, there's a slight decline in our gross margin. But we talked about we continue to -- our strategy is to upgrade our products. We have been phasing out some low-margin products, also some low-value products that actually don't -- that's not in line with our overall strategy. And also, we have been optimizing our business mix.

So, I think quarter-to-quarter, there may be some fluctuations in our gross margins but -- although we are very confident there will be a continued uptrend. And also, if you look at quarter over quarter, the non-IFRS gross margin was 41.1% in Q4 last year and increased to 46%. So, that also -- yes, we are quite confident that the improvement will continue. And overall, we are quite confident overall about our midterm target of profitability.

Thank you. This is really helpful.


Next question comes from Hans Chung with KeyBanc Capital. Your line is open.

Hans Chung -- KeyBanc Capital Markets -- Analyst

Good morning. Thank you for taking my question. So, I have a couple of questions. So, one, can you give us some color around the recent trend about transaction-based revenue and the underlying drivers, such as the year-over-year growth in April or recent weeks, compared to March, given that I think the China -- the situation in China seems to be getting better after the March when people get back to work.

And then follow-up question would be just the -- maybe just some color about the dynamic for the banking clients, their business performance, for example, like the trend for the delinquency rate or the loan approval rate, number of applications, etc. And that will be great if we can break down by SME and consumer loan. And then, I guess, to maybe add one more question, just the -- in terms of the revenue growth from the Lufax in the first quarter, it seems that it's pretty good, close at 30% year-over-year growth. And I just wonder what the driver behind that is.

And then is that year-over-year growth sustainable throughout the rest of the year?

Patricia Cheng -- Head of Investor Relations

Hans, so I'm going to get Hannah and Michael to give a bit of underlying colors about your first two questions. And then the question about Lufax will be taken by Hannah. So, Michael, do you want to start first? Michael? OK. There's been some -- OK.

Michael Fei -- Chief Executive Officer of SME Banking

Sorry. Sorry. I was on mute. Hans, so on your question about the transaction volumes, as I said in my earlier, previous question, on the SME side, we do see a very good recovery of the loan volume in April, compared with March and also generally in the first quarter.

I think that's a very good indication of the recovery of the business activities of SMEs in China. And also on your question on the loan performance of the SME loans we have seen for our clients, I would say, generally, we do have seen some difficult times for these SME vendors in the first quarter. But I would say the regulators have taken very proactive action to address these problems. You're probably also reading the news that the regulators are encouraging the banks to prolong the loans, to extend the loans, etc.

And all the customers we serve, all the banks we serve are actually following the regulated guidance to prolong or extend, to take the measures to address these problems. So, probably you don't see the numbers of the delinquency ratio to go up in the short term. I would say you probably wait for another quarter or two before you can see the impact of this virus.

Patricia Cheng -- Head of Investor Relations

Hannah, can you share with us about your experience on the retail banking side?

Hannah Qiu -- UGM and Head Retail Banking

Sure. Yes. So, in retail banking, I think it's pretty much similar to what happens for SME as well. Most of our banks see a big impact during the virus period because of the lockdown.

So, that's difficult for them to do the lendings, especially to the retails. So, that's what we see. So, most of the banks will see kind of a big drop in terms of the lending volume in first quarter. But starting from April, we do see a big recovery since things are getting better in China.

So, that's why we see a big -- kind of very good trend. But it's still too early to say since we are only at April here, and we only see the result of April. And also in terms of the quality of lendings, I think it's still too early to say. But the only thing we can say is what we will see in the future is definitely things are getting better, compared to first quarter.

So, that's what we see. And the other thing I want to emphasize is we are not doing the lending. But, well, since we are the system provider, tech provider, a lot of the banks during first quarter, while they feel the impact of the coronavirus, they are starting to realize how important it is to have more advanced systems. So, that's why, yes, although the volume of the lendings from the bank is dropping, a lot of the banks are paying more and more, emphasized attention to building up new systems to enable them to serve the customers remotely.

So, that's what we see in the first quarter. And then you actually see -- that's why we -- our revenue's very strong. And also in -- banks also realize it's important for them to -- actually customer service, to do customer service more intelligently. So, it's why the revenue contributed by our new products in the operation side actually is very strong.

Patricia Cheng -- Head of Investor Relations

There's also a question on Lufax. Can you address that one as well?

Hannah Qiu -- UGM and Head Retail Banking

Yeah. Lufax, you see, actually, the number -- the revenue growth for Lufax is something like 30% year to year. Actually, we see this is a different number. The reason -- I think the main reason is that Lufax is doing business transformation.

And there's a lot of new requirements raised because of the things -- new business transformation. And also you can see things we are doing there -- their transactions, their volumes are getting back. So, I think that also contributes a lot of revenues.

Jacky Lo -- Chief Financial Officer

Yeah. Hans, this is Jacky. Maybe I'll just elaborate on what Hannah just said. So, I think we don't provide like specific guidance on one particular customer.

But overall, I think the increase in our revenue growth, we expect that to continue in the rest of the year. Yeah. But we don't specifically talk about one customer. As Hannah mentioned, like Lufax is a very important customer, and we have been very -- working very closely with them to explore like cooperation opportunities to help them with their transformation.

Hans Chung -- KeyBanc Capital Markets -- Analyst

OK. Thank you.


Next question comes from Yang Liu with Morgan Stanley. Your line is open.

Yang Liu -- Morgan Stanley -- Analyst

Thanks for the opportunity. I have two questions here. The first one is related with implementation revenue, which we saw very strong year-on-year growth, quite different from other software and IT service companies' situation in first quarter, most of them, implementation is a very big drop. Could you please share more about how can we deliver such strong implementation revenue growth, especially if it requires some on-site work together with customers, IT people, etc.? The second question, could management share about the monthly recovery trend of the transaction-based revenue, especially March, compared with January, February and also maybe April, compared with March?

Patricia Cheng -- Head of Investor Relations

OK. The first question will go to Jacky, and the second question about the monthly transaction performance, I think Jacky can talk about that one first. And then our business units may -- if they have additional comments apart from what they said earlier, they can chime in. Jacky?

Jacky Lo -- Chief Financial Officer

Yeah. Well, I think on your question on implementation, as I mentioned previously, we have added over 250 premium customers last year. And so, if you recall, we had 473 premium customers at the end of last year -- like for 2019. So, that actually set up a very strong foundation, set up a very strong base for our business this year, and this -- because implementation is always our first level of engagement with our new customers.

And so, yes, it's correct, because of the COVID-19 situation, there were some project delays. We were not able to go on site. But at the same time, it actually expedited the digital transformation of our customers. And it helped them to realize the importance of having online solutions.

So, that's why we see a very strong performance from especially those newly added premium customers from 2019. They actually signed up for new solutions. So, that's basically the reason behind the growth in our implementation in the first quarter. And as I mentioned earlier, overall, it was 48% although our third-party customers was way over 100% year-over-year growth.

Hannah Qiu -- UGM and Head Retail Banking

I can share some more information about the implementation side. Other than the on-site implementation, we also have some remote implementation. So, that actually helps a lot in terms of the implementation charge we can track during the coronavirus period.

Jacky Lo -- Chief Financial Officer

Yeah. In terms of the second question, I think Michael addressed this already. So, we see a gradual recovery in our transaction-based volume. And so, we do see some like continuous increase in April versus March or February.

So, it's a gradual recovery in China. But there's -- just overall, there's still some uncertainty around the rest of the world. So, that's why we are trying to be cautious with the second quarter.

Yang Liu -- Morgan Stanley -- Analyst

Thank you.


Our next question comes from Carson Lo with HSBC. Your line is open.

Carson Lo -- HSBC -- Analyst

Hi. Thanks management for taking my question. So, I have two questions here. The first one is about the trend in transactional-based revenue.

I want to follow up on that. So, I understand that the -- in April, the transaction volume has been picking up. So, I just wonder, if we compare it to April last year, how does the volume goes? How is the trend? And the second question is about the margins for 2Q. I understand that we are quite confident on the long-term margin expansion on gross margin side and operating margin side.

But in 2Q, are we seeing a similar trend as 1Q as we see the implementation revenue likely to continue to have a higher contribution because of the increasing sign-up of new solutions from the new premium customer we have added in the second half last year? So how do you see -- how management see the trend or the trend for the gross margin in the second quarter?

Patricia Cheng -- Head of Investor Relations

So we'll get Michael and Hannah to take your first question about transaction activity. So, Michael can talk about the SME side and Hannah on the retail side. And then Jacky will take the question on margins.

Michael Fei -- Chief Executive Officer of SME Banking

OK. On the question about the April number, compared with last year, on the SME side, I will say the answer is, yes, we have a better result for April, compared with last year. I will not be able to disclose more detailed numbers, but we see positive growth.

Hannah Qiu -- UGM and Head Retail Banking

Yeah. This is for the first quarter, and we don't have the exact number for April yet. So, what we can say so far is we see kind of a growth, compared to first quarter. And we will discuss more detailed information in our second-quarter number release.

Jacky Lo -- Chief Financial Officer

Carson, on your questions on the gross margin expectation in Q2. Well, I think if you look at first quarter, if you just look at the gross margin, it actually improved over six points, percentage points. And as we explained, the main reason is because of the end of the amortization of the intangible assets injected by Ping An Group at inception. So, that was fully amortized in the third quarter last year.

So, if you look at just the reported gross margin year over year for Q2, we expect it will continue to improve. But at the same time, we talked about we are -- our strategy is to continue to optimize our business mix and to upgrade our product portfolio. So, we have been phasing out some low-margin products but, at the same time, some low-value products that may be high margin at the same time but doesn't really like, yes, match with our overall strategy. So, we have been gradually phasing out those.

So, like I think over the next few quarters, for the gross margin, there will be some volatility, some fluctuations. But overall, we feel very confident it's going to continue to trend up. And even if you look at the quarter-over-quarter, the sequential of our gross margin, Q4, like it's an apple-to-apple comparison. We don't have the amortization impact of the intangible assets.

It actually improved from 33.6% in Q4 last year to 34.8%. So, it was about -- 1.2 percentage point increase. So, that's why we are quite confident, overall, our margin will continue to improve. And so, -- and especially Q2, just because of the impact of the amortization of the intangible assets, there will be an improvement year over year.

Thank you.


Question comes from Emerson Chan with Bank of America. Your line is open.

Emerson Chan -- Bank of America Merrill Lynch -- Analyst

Hi. Thank you management. I have three questions. My first question is regarding our revenue exposure to blockchain.

I understand that we have a pretty strong capability on blockchain, which we have applied to many of our products and projects. So, I just want to get a sense at how much percentage of our revenue is blockchain-related, whether this revenue is more project-based or product-based? And how do we look at our revenue exposure, let's say, in the next three to five years? That is my first question. My second question is blockchain network as a service. I just wonder how this product is different from the blockchain as a service offered by the tech giants like Alibaba, Microsoft and IBM.

And do we see this product to be the key revenue contributors in the future? And for my last question, which is regarding the adoption of digital renminbi by the government. I wonder whether it will have any impact for indication -- on the company and the overall impact that has in China, whether it will bring any opportunities or disruptions. Any color would be very helpful.

Patricia Cheng -- Head of Investor Relations

Thank you, Emerson. We're going to get Michael and Hannah to address your questions. Michael, maybe can you talk about the digital impact from the digital RMB? And then Hannah, can you maybe share our initiatives in the blockchain side with the group?

Michael Fei -- Chief Executive Officer of SME Banking

OK. First of all, on the digital currency scheme, you have read a lot of news in the newspaper, we -- it's the same for us, OK? We read a lot of news in the newspaper. But so far, we haven't seen any formal document. We haven't seen anything formal from the regulators.

So, I would tend to not speculate anything that is not formally published, OK? But from what we have seen or what we have heard in the market that this is a digital currency scheme, it's actually not, I would say, very different from what we have seen in the blockchain-based currency in the other countries, as well as I think it's more a platform that can be built and -- can be integrated with the blockchain technology. But the digital currency itself, it's a digital currency, OK? It's not a bitcoin -- it's not a blockchain-based currency.

Hannah Qiu -- UGM and Head Retail Banking

Yeah. In terms of blockchain, blockchain is similar to other technologies as AI, big data and so on and so forth. It's more underlying technologies. We normally don't separate, calculate the revenues generated from these underlying technologies because we're more focused on the solutions.

In terms of provider service to the customers, we need to bundle a lot of different underlying technologies. For example, we mentioned a lot of -- the virtual assistant, which actually contributed a lot of the revenue during the first quarter. It actually -- we used a lot of the AI, blockchain, so on and so forth, to be able -- to provide this kind of service. Currently, we are providing blockchain in different scenarios.

For example, you probably already know that's in the cross-border trading and also in terms of some of the personal credit assessment solutions. We're using the blockchain technologies in supporting our solutions. So, that's what we are doing. And in the future, we will see there will definitely be more and more scenarios where we apply blockchain technologies.

We will definitely see growth in terms of the revenues that can be generated from these underlying technologies. But again, as I said, it is -- we normally don't calculate the numbers generated from one specific underlying technology because it's normally in the solutions bundles with a lot of other things. So, that's what we see. Yes.

I think that's my response to the blockchain, yes.

Emerson Chan -- Bank of America Merrill Lynch -- Analyst

This is very helpful. Just a follow-up on my second question related to our blockchain network as a services. I just wonder how this is different from blockchain as a services offered by the tech giants like Alibaba and IBM. Because what they are offering is just blockchain rather than blockchain network.

So, I just wonder, what is the difference between our blockchain, BNaaS versus the BaaS offered by the tech giants?

Michael Fei -- Chief Executive Officer of SME Banking

Yeah. Perfect -- let me try to take this question, and then Hannah can add on. So, there is similarity, OK? The similarity is that on the BNaaS offered by us, you can use blockchain to create your own applications, create your own network chain, base and network, OK? This is similar. But what might be different is that on our BNaaS, we actually try to put on the scenarios or the applications we have developed also onto that platform and make it open to other clients, other banks, financial institutions, to choose and enjoy the scenario.

Yes. I think going back to Hannah's previous question, we see blockchain not just as a tool, and we more apply that in different scenarios, OK? So once we have this scenario, we will also put this application scenario onto this BNaaS network. So, what the participants see is not just a tool for you to create your own scenario, own network, but you also see the application scenarios that have been created by others so that you can choose to join these real-life scenarios.

Hannah Qiu -- UGM and Head Retail Banking

Yeah. We will not be able to comment on the blockchain technologies provided by our friends. But what I can say is our blockchain technologies are more focused on the financial industry. As I mentioned, what we are trying to do is, well, bundle different technologies, AI, blockchain, big data, so on and so forth, together with our business understanding of the financial industry.

So, that's why you can see the solutions we provide is actually, well, adopted into the industry's practice. For example, we mentioned virtual assistant, just now, it's in -- we use a lot of NLP, natural language processing. So, it's -- there's a lot of other companies also providing a similar NLP technologies. But to understand the normal chatting is different from understanding kind of, well, experts talking in the financial industry.

So, that's what we are trying to do, and blockchain similarly. For example, we're trying to do the personal credit assessment. And this is very important to understand different type of data, different type of information in the financial industry, especially in the personal credit area. So, we need to do a lot of adoption in terms of technologies to make it work in this scenario.

So, I think that's what we are more -- focused on. So, on the -- well, it would be very difficult to compare, saying that what's the difference between our technology versus other technology. I think it's better if you can more focus on the business impact instead of the technology there.


Next question comes from Andre Chang with JP Morgan.

Andre Chang -- J.P. Morgan -- Analyst

Thank you, management. Just one quick question from me. The surge of operation support revenue in the first quarter, after we -- looking to the data in April and, so far, in May, have we noticed any of this surge of new revenue has been more like a short term, i.e., the banks shifting the solution to online, then after the economies return to normal, they stop using that service or that we can see that as a more recurring and lasting revenue flow into second quarter? So will that change our overall revenue mix in the second quarter so far as we can see?

Patricia Cheng -- Head of Investor Relations

Yeah. I'm going to direct this question actually to Jacky.

Jacky Lo -- Chief Financial Officer

Yeah. Well, Andre, I think the -- moving into Q2, I think the -- because the situation is still fluid, and I think the -- because the outbreak actually helped our financial institution customers realize the importance of online service. And especially, they pay more attention to our cost control and operational efficiency. So, we expect the trend to continue especially like, for example, AI virtual assistant.

I think this one is -- during a tough time like this, I think our customers will continue to actually invest in this area and use our service. So, in terms of the mix, we expect operation support will continue to gradually increase in terms of revenue mix. And so, I don't know if Hannah has any additional comment on like virtual assistant in this area.

Hannah Qiu -- UGM and Head Retail Banking

Sorry, I'm on mute. So, on the virtual assistant and the revenues in the -- during the first quarter, we generated a lot of positive revenues because actually during the coronavirus, a lot of large banks want to serve their customers more remotely and also intelligently. So, this is kind of the, I mentioned just for now, is a solution bundled with technology, and together with business understanding.


No further questions at this time.

Patricia Cheng -- Head of Investor Relations

OK. If there's no further questions at this stage, we shall wrap up here. Thank you, everyone, for joining today. We appreciate your interest in OneConnect.

If you have any follow-up questions, please do not hesitate to contact me. Stay safe, and have a wonderful day. Bye-bye.


[Operator signoff]

Duration: 58 minutes

Call participants:

Patricia Cheng -- Head of Investor Relations


Jacky Lo -- Chief Financial Officer

Elsie Cheng -- Goldman Sachs -- Analyst

Michael Fei -- Chief Executive Officer of SME Banking

Hans Chung -- KeyBanc Capital Markets -- Analyst

Hannah Qiu -- UGM and Head Retail Banking

Yang Liu -- Morgan Stanley -- Analyst

Carson Lo -- HSBC -- Analyst

Emerson Chan -- Bank of America Merrill Lynch -- Analyst

Andre Chang -- J.P. Morgan -- Analyst

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