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OneConnect Financial Technology Co., Ltd. (NYSE:OCFT)
Q3 2020 Earnings Call
Nov 4, 2020, 8:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, welcome to OneConnect's Third Quarter 2020 Earnings Conference Call. At this point, I'd like to turn the call to Ms. Patricia Cheng, OneConnect's Head of Investor Relations. Please proceed.

Patricia Cheng -- Head of Investor Relations

Hello, everyone. Thank you for joining OneConnect's third quarter presentation. Let me start with some housekeeping notes.

First of all, you can download the earnings press release and presentation from the IR website. Second, our remarks today will include forward-looking statements, which involve a number of risks and uncertainties that could cause actual results to differ materially. 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 measures is included in the earnings press release.

I'm joined on the call today by our Chairman and CEO, Mr. Ye Wangchun; CFO, Jacky Lo; CEO of SME Banking, Michael Fei; and CEO of Gamma, Ricky Ou. Chairman Ye will make his prepared remarks in Chinese. Translation in English will follow. Chairman, Ye, please.

Wangchun Ye -- Chairman of the Board of Directors and Chief Executive Officer

[Foreign Speech]

Hello, everyone. It's great to speaking with you again. I'm pleased to see the continuous progress made in our business in terms of growth, efficiency and visibility [Phonetic]. We have achieved over 50% revenue growth alongside margin expansion of over 4 percentage point. Our ability to combine technology with business insights lies at the core of our success.

To further sharpen our competitive edge as a tech company, we have been introducing more end-to-end solutions. Our suite of products has expanded from front, middle to back-office, covering sales, risks as well as operational needs of financial institutions. The latest launch, the cloud services platform allows us to penetrate the infrastructure level, offering all around support to financial institutions. In short, OneConnect is at the position of strength to guide financial institutions in the journey of digital transformation.

[Foreign Speech]

Finally, I would like to share with you two milestones we made in the third quarter. Ping An OneConnect Bank officially opened for business on September 29. We are excited about the opportunities of using cutting-edge technology to facilitate everyday needs of SMEs and individuals. The second was further breakthrough in overseas market. We have broadened our collaboration with leading banks in Southeast Asia and signed an agreement with [Indecipherable] in Europe. Our partnership with Global leaders is further testament to OneConnect's technological capabilities and unique business model.

[Foreign Speech]

We have a clear goal to be leading TaaS company globally. The potential of the TaaS market is immense. There is a lot more we can do. It's my honor to have you with us on the journey. Thank you for your trust and support.

Patricia Cheng -- Head of Investor Relations

Thank you, Chairman, Ye. Next, our CFO, Jacky Lo will go through the financial results in more detail. Please go ahead, Jacky.

Lo Wei Jye Jacky -- Chief Financial Officer

Thank you, Patricia. Good day, everyone. As Chairman, Ye said, the demand for digitalization had been a major driver for the TaaS market. And it is encouraging to see the success of OneConnect reflected in the numbers.

In the third quarter, total revenue grew by 50.7% to RMB881 million. By customer group, revenue of Ping An Group increased by 105.3% to RMB491 million or 55.7% of the total revenue. Operation support performed strongly in the quarter. The newly launched cloud services platform also gave an additional push and temporarily skewed the mix.

At Lufax, revenue went up by 61.2% to RMB88 million or 10% of total revenue, largely due to the base effect. For third party customers revenue grew 3.9% in the quarter and revenue contribution fell to 34.3% from 49.8% following changes undertaken in the business origination segment. I'll go into a bit more detail on this.

By segment, revenue from business origination fell 38.2% to RMB130 million. As a percentage of revenue, it dropped to 14.8% from 36%. While there was some temporary slowdown, I can assure you that it is proof of our healthy development.

OneConnect has been prioritizing further optimization since our IPO. We have taken the strategic decision to shift away from legacy solutions that do not fit the TaaS focus. Business origination has been the focal point of our attention. We started a firm wide review of our entire suite of offerings last year. Those that did not meet our strategy -- strategic goals or meet return requirements have come under review. Our product development team and our sales team work closely together to identify the problems and find a solution. In some cases the best solution is to start offering some products.

Change is never an easy decision. To execute unchanged is an even more daunting task. So as a listed company, we need to look at the long term and think carefully about how to establish and run a sustainable and profitable business. Volatility during any reshuffle is unavoidable. This year also saw the spread of COVID-19. It made everyone rethink their IT strategy and has been driving long-term demand for cloud-based solution. We are excited about the opportunities from the digitalization trend. Nonetheless, near term macro conditions have come under pressure and the operating environment has become more challenging for financial institutions.

Some of the transaction activity suffer as a result. In addition, the signing of some contracts got held up, but we are gradually getting there. It's fair to say that a combination of internal and external factors has meant that performance of business origination has slowed to a level below our expectations. And during this process, third party customers have been undoubtedly the most affected. By the way, adjusting for the impact of further optimization, third-party customer revenue growth will be higher than total revenue growth in the first nine months.

Moving on to segmental breakdown. Operation support was a major driving force in the third quarter. Revenue jumped 126.1% year-over-year to RMB340 million. It now accounts to 35.7% of total revenue, up over 11.9 percentage points. Within the segment, AI customer service is the biggest in terms of both growth rate and size. Risk management posed a rebound this quarter, with revenue up by 3.8% year-over-year. It was a modest increase, because of the drop in retail loan volume processed by our solutions, which was about 40% drop. And as you know, also beat the business origination segment, but the softness in retail lending has been offset by SME and the number of past claims also continue to improve.

Implementation also did well. Revenue there increased by 87.5%, led by an uptick in core systems. In short, we have successfully built a diversified revenue base that ensures resilience of revenue performance, while going through a product review and uncertainty in the macro environment. We are confident in reiterating our second half guidance. That is, we expect our overall revenue growth in the second half of 2020 to be higher than the first half.

Going below the revenue line is where the success of our optimization process becomes more evident. Gross margin increased by 4.1 percentage point to 42.7% year-over-year, benefiting from the change in product mix. Less business origination revenues means less related fee. Continuous strengthening of existing solutions also allows us to be more efficient in labor costs. Gross profit went up by 66.6% as a result. Gross margins are also better on a quarter-on-quarter basis, up by 4.3 percentage points. At the non-IFRS level the gain was similar.

Next, I would like to talk about operating expenses. Alongside the review of our products, we have also been reviewing our spending. R&D expenses are still the biggest ticket item. This is core for a technology company. It goes hand in hand with our product upgrade and it's not something that will be to go about. The absolute amount was higher year-over-year, increasing to RMB296 million from RMB199 million. As a percentage of revenue, the ratio was 33.5%. The benefit from operating leverage is even more noticable in other operating lines.

Sales and marketing expenses dropped 20% to RMB154 million. As a percentage of revenue, it fell to 17.5% from 32.9%. General and administrative expenses rose 36.2% to RMB201 million, reflecting the increase in staff costs related to our expansions overseas. I'll return to overseas in a minute. As a percentage of revenue, G&A improved to 22.7% from 25.2%. The growth of our business coupled with cost discipline meant at OneConnect saw a drop in operating loss to RMB250 million from RMB305 million. Net loss also narrowed to RMB243 million from RMB286 million a year ago.

As a percentage of revenue, net loss ratio improved by 21.4 percentage points to 27.6%. Both the net loss amount and net loss ratio went down for all three quarters this year. Needless to say, we also significantly reduced our cash burn. In fact, the drop in net loss would have been even greater if we strip out the impact of Ping An OneConnect Bank, our 100% consolidated virtual bank in Hong Kong.

As the bank was in preparation most of the year and only opened officially on September 29, the losses were not meaningful. For both the third quarter and the first nine months, its losses accounted for over 10% of our total net loss. On overseas, we are seeing encouraging signs for new pipelines. As Chairman Ye said earlier, we signed a few agreements in the quarter, exporting our solutions in digital financing, digital trade, e-KYC and fast claims to regional, as well as global financial institutions.

We are excited about the opportunities in front of us. Not just China, we have firmly made our entry into global TaaS market. This is also why we have been driving hard with business optimization. Nobody has infinite resources, we need to make sure that our resource allocation aligns with our strategic focus. That is to support financial institutions in the journey of digitalization and to strengthen our position as a leading TaaS company. And of course, to continue to deliver on growth and profitability to our shareholders. We are proud of our achievements and we are confident about keeping all the mid-term targets unchanged.

Thank you for attention. I'll turn it back over to Patricia.

Patricia Cheng -- Head of Investor Relations

Thank you, Jacky. We'll now open up for your questions. Our management team are calling in from two different locations. So after you ask a question, I'm going to direct it to the relative member to respond. Operator, please open the line.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Your first question comes from the line of Hans Chung from KeyBanc Capital Markets. Your line is open.

Hans Chung -- KeyBanc Capital Markets -- Analyst

Hi, good morning. Thank you for taking my question. So first question, can you give us more color about the performance in business origination segment. How much impact from low-value product is our versus the caution in lending activities due to the weak macro. And then -- and how should we think about these business lines, I mean, in fourth quarter and next year?

And then second question is about, just -- recently there have been some changes involving in regulation environment. So just -- if possible, can you share with your view about any potential implications to the changing environment to our business or to our customer. Particularly on the new regulation on the interest cap or the recent one about the microloan and the business.

And last one is about cloud services. Just wanted to know what kind of gross margin profile of the business, I mean, compared to the corporate average? And how big it could be in terms of the percentage of revenue, let's say, in next one to two years? Thank you.

Patricia Cheng -- Head of Investor Relations

Yeah. Thank you, Hans. Jacky is going to take your first question about business origination, about the impact. And he can also talk about the margin profile of the cloud business. And then, actually, we have our cloud group, Ricky on the call as well, and he can give you a bit more color on the business itself. And then finally Michael will take your question about the regulatory environment. So Jacky, first.

Lo Wei Jye Jacky -- Chief Financial Officer

Okay. Yeah. Hans thank you for your questions on business origination. Maybe I'll answer that together with the third parties as well, because they go hand in hand basically, in this quarter. As I explained during my prepared remarks. So for the business origination, if you look at the quarter, it went down by about 38% year-over-year and also for third party customers, the drop is actually more -- is much higher than that. So -- but for third party customer, it was offset by the strong double-digit growth in risk management and also the triple-digit growth in operation support. So overall, we still see a revenue growth for our third party customers, but mainly the drop came from business origination.

And there are actually two reasons behind the drop. So first of all, if you look at the external, so we still see the impact from COVID-19, and also if you considered the macro environment together with the regulatory change, so all these transaction activities, actually, they have been affected. So specifically on retail loan volume processed on our platform, it went down by about 40% year-over-year. So that's the external factor that impacted business origination.

And so, internally we talked about this extensively on the previous earnings call as well. So I started about a year ago we have been optimizing our product mix top order offerings. So this is a strategic shift away from those low margin or low-value product, like products that won't really fit into in our long-term strategies as a TaaS company. So that came mainly in the business origination business or the customer acquisition. So this is an ongoing exercise. So -- and also for this -- in the last few quarters, we have also put in place margin requirements for products and customers. So for those that do not meet the requirements will be direct resources to other areas.

So if you adjust the impact on the product optimization, so if you look at the first nine months, overall third party customers grow over by 24%. But if we adjust the impact on these business origination, the products that we phase out, the growth rate will be, actually, more than double that rate and also it will be higher than the total revenue growth rate of 44% in the first nine months. And so, the impact on this product optimization, particularly on business origination, it has a temporary impact, but it's a necessary change, we feel that it's the more efficient way to allocate our resources to create or achieve a more sustainable, profitable long-term business.

But I encourage you to look at the overall picture. So there is some impact on our business origination revenue growth and also on our third-party revenue growth. But overall, the profitability has improved significantly. So first of all, if you look at gross margin. If you recall, in the first quarter it was about 35% and in the third quarter it improved to 43%, so it's over an 8 percentage point improvement just from this product optimization.

And in terms of net loss, our first quarter operating margin was negative 71% and it actually improved to a negative 28% in the third quarter. And so we are just doing this like for the long-term health of the business.

Patricia Cheng -- Head of Investor Relations

Do you want to talk about cloud margin as well.

Lo Wei Jye Jacky -- Chief Financial Officer

Yeah, sure. So if you look at the cloud business, in our third quarter it represent about 15% of our total revenue, for the first nine months, it was about 7%, because the cloud services platform business was only launched in the later part of the second quarter. And so the third quarter was only the full quarter with revenue from this product line.

And as you know, whenever we have new products, we will provide to the Ping An Group first to address that before we export to external customers. And considering the -- and usually typically for new product, in the initial years the gross margin will be lower compared to the overall level. So for cloud solutions platform, since this is relative new, only in the later second part of the second quarter. So we expect the revenue mix will remain roughly about the same as you see in this quarter next year or in the fourth quarter, it will be roughly about 15% or so. But gradually as we -- as the products become more mature we will export to external parties, external customers, that's the strategy we have been undertaking over the years.

Patricia Cheng -- Head of Investor Relations

Now over the to you, Ricky, about the cloud business itself.

Ricky Ou -- Chief Executive Officer of Gamma

Thanks. Thank you. This is Ricky. I think for those that kind of read by kind of experience then, I was the leader for the Ping An Cloud business at Ping An Tech. So as Jackie mentioned, since 2013 we actually have been developing cloud extensively within the group. And at this point up to 85% of the core system has been on Ping An Cloud. So this product platform has been well tested within the group.

Now as Jackie mentioned, we are moving that part of the capability as part of our overall TaaS. As Chairman Ya mentioned, we aspire to be the leading TaaS provider. And with the inclusion of the cloud platform, then it will -- we will be able to provide a much more M2M and full stack solution to our customer. Thank you.

Patricia Cheng -- Head of Investor Relations

Finally, Michael, can you take the question on regulatory environment.

Michael Fei -- Chief Executive Officer of SME Banking

Sure. Happy to do that. On the regulatory environment, actually, we don't think this is a surprise to -- at least to us. Okay. We have seen this kind of trend for the past 12 months or even longer. It has been anticipated. And we have been proactively optimize our business, optimize our product in response -- in response to these trends. Again, I think we remain very positive in the mid to long term, we will see more demand from licensed financial institutions. We will see more demand on digitalization. OneConnect, again, is very uniquely positioned in the market to provide end-to-end solution to banks, to licensed financial institutions. So we think, actually, this is a very positive sign to us in the medium to long term,

Of course, in the short term, there will be certain impact, because, as you know, our fee mechanism is based on transaction. Yeah. There will be some hit on the transaction volume, so there will be some impact on us. But I think Jacky has already explained that in previous question. So yeah, I don't want to dwell too much time on -- to repeat that again.

Patricia Cheng -- Head of Investor Relations

We can now move to the next question operator.

Operator

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

Carson Lo -- HSBC -- Analyst

Hello. Thanks management for taking my question. So my quick -- I have two questions. So the first one is on -- is about the cloud business. So it seems like our product offering is kind of the infrastructure related products. Then how -- what do management saying is our key advantages versus other infrastructure player in the market, like the Ali Cloud and Tencent Cloud [Phonetic]. So I think -- I mean, they are more -- yeah, so I would like to understand more about the key differentiator or the key advantages in the view of management on this front.

And then the second is about the -- I just want to follow-up about the regulatory aspect. So we see that there is a impact on the transaction volume in Q3, right? So there are around 40% decline in the retail loan volume we process. So what is the management estimation now that the -- such temporary impact will be normalizing and phase out. So when we will be in a inflection that we see the volume is going to pick back up from licensed financial institutions. Thanks.

Patricia Cheng -- Head of Investor Relations

Thank you, Carson. Ricky will take your first question and then Michael will take the second one.

Ricky Ou -- Chief Executive Officer of Gamma

Yeah. As related to the cloud, I think as you mentioned the other cloud players. I think they focus on providing a low cost and large scale cloud surface that's suited for everyone's need. However, for Ping An Cloud, we only focus on the financial sector. As in the financial sector the requirement will be focused on security, the stability and also the know-how in the industry. So as I mentioned earlier, we have been using Ping An Cloud between the group since 2013. As such, that we know the regulator's requirement deeply. As such, we could help the other financial institutions embark in their digital transformation under the full compliance of the regulator.

Michael Fei -- Chief Executive Officer of SME Banking

Yeah. On the second question about the transaction volume. We actually don't disclose the exact transaction volume due to business optimization. But I can share with you that, if we taken out the impact of our product optimization, our third-party revenue actually increase more than double compared with our last year. Our increase of third-party revenue is actually faster than the company's average. I think that give a indication of the impact from the transaction volume. And we remain positive on the fourth quarter, we believe, our overall revenue growth and third party revenue growth will remain positive in the fourth quarter.

Ricky Ou -- Chief Executive Officer of Gamma

Yeah, Carson, I'll just add one point to what Michael said. So in terms of the retail loan volume, the drop was due to the reasons I explained earlier. So part of it is because we phase out certain products in business origination, but also it's because of the macro environment. And so, as the macro environment improves, we believe this will recover. But how that is going to turn out? It remains to be seen. But in terms of like business, the product optimization is an ongoing process as well. Yeah. So there will be like some fluctuation going forward.

Operator

Your next question comes from the line of Alex Yao from JP Morgan. Your line is open.

Alex Yao -- JP Morgan -- Analyst

Good morning, management. Thank you for taking my question. My first question is regarding the latest regulatory introduction on the micro lenders. Is it fair to say the business model for the micro lenders with the co-lending business model needs to be significantly restructured. While the business model for loan facilitator or loan referral will be hardly affected? And can you -- can you guys perhaps talk about your revenue exposure to these two business models? And also given the change in the regulatory environment, what do you expect the change in the -- on general online lending market?

The second question is on the cloud services. Given that you guys are actually building up a cloud service on the Ping An Cloud, is it fair to say Ping An Cloud is more of IS, infrastructure clouds where you guys are building out the SaaS services and perhaps other TaaS services on top of the Ping An Cloud. And can you give us a few examples of the key revenue generative cloud service product? Thank you very much.

Patricia Cheng -- Head of Investor Relations

Thank you, Alex. Michael will take the first question and then Ricky would do the second one.

Michael Fei -- Chief Executive Officer of SME Banking

I'll let Ricky talk first I need to think about the first question. Ricky will talk about the cloud presentation.

Ricky Ou -- Chief Executive Officer of Gamma

Sure. Yeah. So as related to the cloud platform, so this is -- we will actually be inclusive of both underlying IS service, but however, our focus would be on the TaaS layer. In particular for the TaaS layer we will be focused on the data platform, the AI platform and the cloud management platform.

Michael Fei -- Chief Executive Officer of SME Banking

Okay. On the first question, the short answer is, yes. We believe there will be change in the business cooperation model between financial institutions and those Internet platform. But as I said earlier, this change we had been anticipated for actually much longer time, starting from last year or even earlier, there have been very clear sign that the regulator is pushing forward to reform the current model we have seen in the market. And there is no surprise. And this actually also corresponds to the change of the business model or the product optimization of our strategy, of our business. So if you look at our business in particular, and as you know very well that we are a technology service provider, we provide the financial institutions, especially banks with system, infrastructure, as well as tools for them to better assess the risk, for them to better manage their customers, etc. So this will actually be a boost to our business model.

Now in the medium to long term, as I said, I think the demand is still there. The economy of China is still growing and we will still see the online kind of digital wise business model is a trend. The banks themselves are even actually following this type of model. The banks are also investing heavily to build a platform themselves or to build online to offline business models to develop the business. So again, I think this will change the cooperation between banks and the other Internet platforms, but it will not change the fundamental trend of people going digital.

Alex Yao -- JP Morgan -- Analyst

Thank you very much.

Operator

Your next question comes from the line of Yang Liu from Morgan Stanley. Your line is open.

Yang Liu -- Morgan Stanley -- Analyst

Thank you for the opportunity to ask questions. And the first question from my side is also on the cloud service platform. Could you please elaborate more of the business model here? Is it a volume based or usage base? Or is it still transaction based business model or pricing scheme?

The second question is related with the implementation business. If I remember correctly, implementation usually generate gradually low gross margin, but we saw a pretty fast increase of the implementation revenue contribution, but also pretty fast increase of gross margin. Can management elaborate more about the margin profile for implementation in third quarter or generally in 2020 the margin profile of this business?

The third question is, we saw a pretty big negative impact from the foreign currency translation. So I would like to update in term of company's strategy on the FX risk going forward? Yeah. That's pretty much my questions. Thank you.

Patricia Cheng -- Head of Investor Relations

Thank you, Yang. The first question, it goes to Ricky, and then Jacky will take your second and third question.

Ricky Ou -- Chief Executive Officer of Gamma

So as related to the cloud Service, I think there is two approach. One approach is to augment our existing SaaS capability, so that we can provide a full step end-to-end solution to our customers. So there is kind of a sell without the other SaaS capability. Now the other approach that we finding is, there are major cooperation that's embarking the journey of digitization. And Ping An has been the early leader for the digitalization and have been well regarded within the industry for their experience and our leadership. So as such that there are financial institution now looking to us to help them for the full digital transformation. And therefore, we will also provide a full solution around that and cloud would be very much a big part of the basic infrastructure to help them to set up.

Now as related to the fee model, this will be a little bit different from the public cloud, as those would be based on usage primarily, but our business model would be primarily based on the value-driven, so we will be used as public solution to increase the efficiency for the corporation and also low the cost. So as such, that we will extract the -- our fee based on the value generated on that.

Lo Wei Jye Jacky -- Chief Financial Officer

On your second questions related to gross margin, let me just tell you, the overall improvement in our gross margin first, like the reasons behind that. So, year-over-year it was improved by 4.1 percentage points. So part of that is actually because the business origination, business that we have been gradually phased out. So, because as I explained in my prepared remarks, less business origination revenue means, actually, less business origination related costs. So -- and I think, we talked about this before. For business origination usually the margin is actually lower than the overall company level as well. So by phasing that out and optimizing our product mix, that helps to improve the overall margin.

And the second is, as you know, implementation is our first level of engagement with our customers. And over the last couple of years we have launched a lot of new products. But as the product become more standardize and more mature, we are able to shorten the implementation time, and therefore lower the labor cost. So -- and for implementation specifically, I think ever since 2018 quarter after quarter we have seen improvement in the margin. And so, implementation right now has actually approached the overall company's level, just because from standardization, and also from maturity of the products. But as we launch new products, for example, like this year the AI customer service and also the cloud services platform, so that will partially offset the overall margin, but for implementation, I guess whenever we have new products that will have some offsetting impact, but overall because of the full suite of products we launch in prior years. So we have seen the margin for implementation going up quarter after quarter.

And on your questions on foreign currency strategy. So if you look at our prospectus, you can see our annual report. You can see we have entered into, actually, a currency swap. But on top of that, we actually -- we have foresee like the currency -- the renminbi will appreciate, so we have actually moved some of our cash offshore back to onshore in the first quarter of this year. So -- and you can see we have actually lowered the amount of cash flow, like just from the offshore patch onshore alone that's because we are just part of another strategy to actually mitigate the impact from foreign currency fluctuation.

Yang Liu -- Morgan Stanley -- Analyst

Sure. A quick follow-up on the cloud platform business. Ricky, you mentioned, its pricing scheme is based on value generation. So that assume that the value to the customer is recurring rather than just compare their hardware cost, etc, which is, let's say, a one-off equation, which is the mainstream of the pricing scheme when we think about the value generation for customers?

Patricia Cheng -- Head of Investor Relations

Ricky?

Ricky Ou -- Chief Executive Officer of Gamma

I think the case, it would be different from each customer. Now, in general, I think I've give example. For example, the data -- the data platform that we are offering as part of our platform services. So many companies today have a legacy system. So their data -- I'm not sure, the data sent are not consistent and therefore it will be very difficult for them to form a companywide kind of data profile and database. And as such, that our data platform will be able to grab that necessary data for other various different system consolidated and be able to trend and provide a standard course to the different system. And as such, that once the data profile is created then we will be able to develop more value-added capability on top of those data platform. So those would be the value that will be extracted from the system transformation as part.

Now, obviously, every company has a different profile and therefore the value extracted would be different. So this -- we'll be looking on it on a case-by-case basis in terms of helping them on the digital transformation.

Lo Wei Jye Jacky -- Chief Financial Officer

Yeah. I think probably looking may not directly answer your question. I would suggest we arrange a time after the call that we can give you probably more color on the fee mechanism we had on the cloud platform, on the cloud service.

Yang Liu -- Morgan Stanley -- Analyst

That's great. Thank you.

Operator

Your next question comes from the line of Ethan Wang from CLSA. Your line is open.

Ethan Wang -- CLSA -- Analyst

Thank you. Thank you management and congratulations for another strong set of quarterly results. I have three questions. I know we will keep coming back for this cloud service platform, but just want to make things crystal clear. So are we now offering Ping An Cloud under OneConnect, so are we moving that business under that. Or OneConnect is providing some sort of, like, more application level data management platform, this level of services. I just want to make it clear there. And maybe Jacky and Ricky have mentioned that before and I missed it. Just wondering, the gross margin for the cloud services when we compare that with other revenue, is it high-margin service or is it in the middle? That's the first question.

And my second question is on business origination service. So for the lending-related business origination service, what's our strategy going forward? So are we thinking -- do we plan to maybe abandon the service -- our lender service completely, because it's low margin regulation risk and investors keep asking whether we are seeing calendar or not. So maybe from a long-term benefit for the company, is it a good idea to abandon that business. Just want to hear management's thoughts on it?

And my third question is on sales and marketing expense. It's a very impressive expense line in this quarter. So we understand there is some operating leverage there, but on a decrease -- the extend of decrease is still quite large. And so, I just want to have some more color on that, so we can get a better understanding of the trend going forward? Thank you.

Patricia Cheng -- Head of Investor Relations

Thank you, Ethan. Ricky, you are very popular today, so please take the first question on cloud. And then the second one on business originations, Michael, I'm going to pass it to you. And then finally, Jacky is going to talk about sales and marketing expenses.

Ricky Ou -- Chief Executive Officer of Gamma

Yeah. As related to the cloud business model, I think the fee structure -- right now, we are focused on providing the private cloud installation. So initially the fee were coming from the deployment of the public cloud, and obviously along with the infrastructure there will be an annual maintenance fee, obviously, associated with that. That's the basic model. However, we will be focusing on, like I said earlier, some of the value generating capability. So once we will be -- once we are able to help the customer to set up their data platform and AI capability, we will then be able to tie some of their more revenue-generating business along with our capability -- along with our other SaaS capability. Such that, then we can drive a more continuous revenue stream out of the customer's business growth in there.

Michael Fei -- Chief Executive Officer of SME Banking

Yeah. On the second question of business origination or lending related business origination. I think the short answer is, we will still have this service part of our overall solution provided to our customers. If you look at the optimization we have done, we actually have kept those business origination service as a part of the total solution. This is one of our -- actually our overall strategy as we explained earlier that, we want to provide end-to-end total solution to our customers. Yeah. And then as a part of the total end-to-end solution business organization will be -- will be a part of the total solution. We provide that as additional service to the systems, we provide it -- to the risk management service we provide it.

What we have phased out or optimized are those that the pure kind of a channel business origination type of services where we have a very, very low margin.

Lo Wei Jye Jacky -- Chief Financial Officer

And on your questions on the cloud margin. So as I explained, this product was only launch in the latter part of the second quarter. So, third quarter was the only full quarter we have this business. And so -- and similar to other products that we launched in the past, in the initial stage usually the margin will be lower. So right now for cloud services platform margin is slightly lower than the overall margin level for the company. So -- but this is normal for any new products. And so as I explained, the product becomes more mature than the revenue -- the margin will gradually improve.

And on your questions on sales and marketing. Yeah. So, I mean, if you look at the third quarter, the percentage -- as a percentage of revenue it actually went down quite significantly to 17.5% and this is actually within our expectation. I mean, we always talk about -- for our mid-term target we have a breakeven target. So -- and for all the operating expenses as a percentage of revenue they will gradually go down. So this trend is actually within our expectation.

And as you point out, part of that actually came from economies of scale. And another reason is, for the first quarter we have -- we see some decline in -- for example, marketing expenses. And also we have been streamlining our operations and also we have some initiatives to actually tighter control in terms of cost. But I think for the fourth quarter, we're going to increase our sales and marketing activities in the last quarter of the year just to solidify the pipeline going into 2021. So we expect there will be some fluctuations quarter-on-quarter for sales and market expense, but overall the trend will continue to improve, as a percent of revenue, it will go down. That's our return target.

Ethan Wang -- CLSA -- Analyst

Thank you, that's clear.

Patricia Cheng -- Head of Investor Relations

Let's move to next question please operator. [Indecipherable] Sorry, do you have any follow up. Yeah. Please go to the next question, sorry.

Operator

Certainly. Your next question comes from the line of Elsie Cheng from Goldman Sachs. Your line is open.

Elsie Cheng -- Goldman Sachs -- Analyst

Thank you management for taking my questions. And I have a few smaller follow up. The first question is about the retail lending, SME lending trend. Especially on the retail side, in terms of loan volumes, while we think about 4Q, our excuse some of the conservativeness in our banking partners to give out loans into 4Q on a sequential basis. And then a follow-up to that is, now that the SME loan sizes of similar size versus retail, would it -- what does it mean for our tax fees that's generated from these two segment of the business? That's one.

And second question is also about the loan side. With third-party revenue, I think, Jacky, you mentioned that it would have doubled this quarter if we take out this historical legacy products. So going into the 4Q, when we think about the legacy products revenue contribution in 4Q last year, how much roughly that could be? And when can we see a wash out of this legacy products impact in the overall OCFT's businesses.

And the last one, sorry, smaller ones. In the cloud business, I know we talk about value add and the business model in terms of the charging model. Right now it's category as transaction based. Going forward, just wondering, what's the timeline to launch it to the third party customers? And by then can we expect a subscription model or because of the nature of its as a financial cloud product, we're are still probably looking at a transaction based monetization method when we launch it to the third party customers. Thank you. That's all. Thanks.

Patricia Cheng -- Head of Investor Relations

Thank you, Elsie. Michael please address the first one about the retail and SME transaction trend. And then Jackie will take the second one on third party revenue. And finally Ricky would elaborate a bit more on the cloud business.

Michael Fei -- Chief Executive Officer of SME Banking

Yeah. Hi, Elsie. On the transaction volume, if you look at the SME side, I think we -- I remain positive on the volume in the fourth quarter. You actually see a very good trend quarter-on-quarter starting from the -- starting from this year. So I think this is also corresponded to the overall macro economy where the government and the regulators are pushing forward to provide a better financing -- access to finance -- to financial services for SME companies.

Now on the retail side, we would just see that there will be short-term fluctuation, especially all those questions you asked about the regulatory trend, especially those new regulations being issued earlier, I mean, at this week. Although, as I said, this has been anticipated. But there will be some banks, they will review that business model, their cooperation with the channels with the third party. So yeah, in the fourth quarter, I think there is some uncertainties. We still anticipating increased volume.

Lo Wei Jye Jacky -- Chief Financial Officer

Yeah. Elsie, I'll answer your second questions on the third-party revenue trend. So let me just clarify one point first. So for the first nine months of the year, our third-party revenue growth rate was 24%. And we were saying earlier, if we adjust for the impact from all these product optimization, the products that we phase out impact. The growth rate for our third party customers would more than double this 24%. So it's not just this quarter, but for the first nine months.

And then, so -- but as I explained earlier the product optimization, that's an ongoing exercise. So there will be ongoing impact into the fourth quarter, but right now, we do see some pickup in the pipeline and also sequential improvement in our third-party customers. So we fully expect the third-party growth rate for the fourth quarter versus the third quarter, it will be better.

Operator

Your next question comes from the line of Daphne Poon from Citi. Your line is open.

Patricia Cheng -- Head of Investor Relations

Sorry, Jason. Can you please hold it. We still have one more question to be answered.

Operator

My apologies.

Patricia Cheng -- Head of Investor Relations

Sorry, Ricky can you talk about cloud?

Ricky Ou -- Chief Executive Officer of Gamma

Yeah. Well, I think subscription model, obviously, would be the optimal model for the cloud services. However, in China, I think most of the financial institution they would may rather conservative in terms of using cloud service using a subscription model. However, we have been -- had some good success in selling product to cloud service, such as our facial recognition. Majority of our facial recognition revenue is actually based on the subscription usage based model. However, for the other deeper infrastructure like, particularly the IS layer, I think our customer at the moment still prefer a private installation. So as such that this -- we will go with what the customer needs, and hopefully we will be leading the market once they're changing the appetite for consuming the service change to a subscription model, then we are ready to serve.

Operator

And your next question comes...

Patricia Cheng -- Head of Investor Relations

Daphne should be next

Operator

Certainly. Your next question comes from the line of Daphne Poon from Citi. Your line is open.

Daphne Poon -- Citigroup -- Analyst

Hi. Good morning. Management. Thanks for taking my questions. So I think just first is a follow-up in terms of the margin outlook. So in this quarter we do see very meaningful improvement in terms of, I think, both your gross margin and your operating margin. And as you mentioned, especially, thanks to the product optimization. Just wondering in terms of sustainability do you expect like both the gross margin and operating margin continue to improve? And especially, I guess, when thinking about when you expand your new solutions to more third party customers will that a check maybe to your operating margins?

And then second is just a small question regarding the Ping An OneConnect Bank. So you mentioned that there is some meaningful net loss number here. So just wondering whether you have any, I guess, timeline in terms of when it will hit breakeven, any internal target. I know it's still very early stage, but anything you can share would be helpful. Thank you.

Patricia Cheng -- Head of Investor Relations

Thank you, Daphne. Jackie would take both of the questions.

Lo Wei Jye Jacky -- Chief Financial Officer

Hi, Daphne. Thank you for your questions. First, let me answer the questions on margin, both the gross margin and operating margin trend. So I would like to reaffirm our mid-term guidance. So we talk about mid-term we want to achieve a gross margin on a non-IFRS basis of 50% to 52%. So that target remains unchanged. And also we have a mid-term target to breakeven. So also that remains unchanged. And obviously, I think based on the numbers you have seen today, we are moving into that direction. And -- but I guess over the quarter, there will be some quarterly fluctuation. So overall, the guidance for mid-term remains unchanged. So for example, gross margin, it will come from -- the expansion will come from continuous product optimization and also from standardization of our more mature products, but that will, like -- but also at the same time we are launching new products in the process. So there'll be some offsetting in fact. For example, the cloud services platform, I talked about.

So -- but we excluded fact, like, it will gradually improve, get to the mid-term target that we set. And in terms of the operating margin. So we fully expect -- the R&D expenses, selling and marketing expenses and also G&A expenses, as a percentage of revenue, they will continue to go down, but obviously there will be quarterly fluctuation as I explained earlier on the questions regarding sales and marketing. So, especially in the fourth quarter, we will wrap up some activities to solidify the pipeline heading into next year.

But for R&D expenses, we expect the ratio will continue to decline. But in absolute dollar amount, it will go up, because we are still very young technology company, we will invest in our research and development to actually continue to launch innovative products to ensure we are staying ahead and we keep our leadership position in the TaaS markets.

And for G&A expenses. Again, the ratio will go down because of economies of scale. And also we have been looking at how to optimize our organizational structure, improve our efficiency at the same time. So, yeah, just to wrap up, I mean, we fully expect we will achieve the mid-term target that we set, that remains unchanged.

And in terms of PAOB, it is only launched pretty much on the last day of this quarter. So it is still a little bit early. But we talked about in terms of net loss impact for both the first nine months, as well as the third quarter, there loss actually make up more than 10% of our total loss. So we are still in a investment stage, but going back to the overall company target, we have set this mid-term target to breakeven and that's unchanged. And obviously the Ping An OneConnect bank will be part of it.

Operator

Your final question comes from the line of Emerson Chan from Bank of America. Your line is open.

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

Two questions. My first question is regarding the outlook for next year. How should we think about the trend of top line growth in this year. I wonder whether our growth will accelerate from this year level, given there should be no COVID impact the next year and less impact from the product optimization. And particularly our implementation revenue growth was accelerating, so does this suggests a better growth on the recurring revenue going forward? Even normally, it takes some time for customer to [Indecipherable] new stage of recession.

And lastly, also on the cloud business. I wonder if both our infrastructure and platform major will be mainly deployed on private cloud or the public? And how should we look at the long-term gross margin when it is getting more mature we also serve these non-financial company in the future? Thank you.

Patricia Cheng -- Head of Investor Relations

All right. Jacky would take your first question about outlook. And then Ricky will take the final one.

Lo Wei Jye Jacky -- Chief Financial Officer

Yeah. Emerson, on your question on outlook. So as you look at it, I mean, we talked about this a few times. Like the product optimization it is an ongoing process, so it has some ongoing impact as well. But we have already seen like a heading into fourth quarter we see some pickup in the pipeline, we see sequential improvement. Yeah. But nonetheless, it's an ongoing process. And so we will continue to optimize our product offerings, especially business origination. But I think another focus of us just for this year and also next year, that will be on the premium customers. So we set the mid-term target to get to a 1,000 premium customers so that target also remain unchanged. So our focus for next year will be to improve or to continue to increase the number of premium customers, and also improve the ARPU from these premium customers. So that remain unchanged.

But in terms of guidance. Yeah, I think we intend to follow other listed companies in providing guidance, but as you can appreciate, 2020 is an exceptional year. So -- and you see a lot of, like, listed companies they have to end up withdrawing their guidance or they have to cut down on their guidance. So right now we just -- it's a little bit early to talk about, like, whether we will provide guidance specifically for next year. So we'll just wait and see how the -- especially, on the corporate front, how that's going to shape out. And so, but...

Patricia Cheng -- Head of Investor Relations

Ricky, over to you.

Ricky Ou -- Chief Executive Officer of Gamma

Yeah. As I said earlier, right now the financial customer, they will prefer a private installation of the cloud. So that would be much more the private cloud. Even for the private cloud, we will be focused on the more higher value capability, such as our cloud management platform, our container platform and our micro services platform. However, going forward, we would very much like to work with the regulators to provide a dedicated cloud for the financial services, so that the smaller banking and insurance Institute, they can consume cloud services using a much more industry cloud model as such.

Operator

And with that, I'll turn -- My apologies, go ahead, Mr. Cheng.

Patricia Cheng -- Head of Investor Relations

Sorry, Jason. Yeah, I think this is all the time that we have for our Q&A. I think we're going to wrap up here. Thank you everyone for joining us today. We look forward to speaking with you again.

Operator

[Operator Closing Remarks]

Duration: 64 minutes

Call participants:

Patricia Cheng -- Head of Investor Relations

Wangchun Ye -- Chairman of the Board of Directors and Chief Executive Officer

Lo Wei Jye Jacky -- Chief Financial Officer

Ricky Ou -- Chief Executive Officer of Gamma

Michael Fei -- Chief Executive Officer of SME Banking

Hans Chung -- KeyBanc Capital Markets -- Analyst

Carson Lo -- HSBC -- Analyst

Alex Yao -- JP Morgan -- Analyst

Yang Liu -- Morgan Stanley -- Analyst

Ethan Wang -- CLSA -- Analyst

Elsie Cheng -- Goldman Sachs -- Analyst

Daphne Poon -- Citigroup -- Analyst

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

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