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Huize Holding Limited (HUIZ -1.68%)
Q3 2020 Earnings Call
Nov 19, 2020, 7:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, thank you for standing by, and welcome to Huize Holding Limited's Third Quarter 2020 Earnings Call. [Operator Instructions]
Now I'd like to hand the conference over to your speaker host today, Ms. Harriet Hu, Huize's Investor Relations Director. Please go ahead, Harriet.
Harriet Hu -- Investor Relations Director
Thank you, operator. Hello, everyone, and welcome to our third quarter 2020 earnings conference call.
The financial and operating results were released earlier today and are currently available on our IR website as well as on Newswires.
Before we continue, I would like to refer you to our Safe Harbor statements in our earnings press release which also applies to this call as we will be making forward-looking statements. Please also note that we will discuss non-GAAP measures today, which are more thoroughly explained in our earnings release and filings with the SEC.
Joining us today are our Founder and CEO, Mr. Cunjun Ma; COO, Mr. Li Jiang; CFO, Mr. Minghan Xiao; and Co-CFO, Mr. Ronald Tam. Mr. Ma will start the call by providing an overview of the Company's performance and operational highlights for the third quarter of 2020. Mr. Tam will then provide details on the financial results for the period before we open up the call for questions.
Now I will turn the call over to Mr. Ma.
Cunjun Ma -- Chairman and Chief Executive Officer
[Foreign Speech]
Hello, everyone, and thank you, all, for joining with our third quarter 2020 earnings conference call.
As China gradually recovers from the COVID-19 epidemic, the year-over-year growth rate of per capita disposable income reversed from negative to positive in the third quarter of 2020 according to the National Bureau of Statistics. At the same time, we continue to observe a steady increase of people's insurance awareness as well as increasing adoption of online purchase of insurance products by consumers. In light of the industry's and broader economy's recovery trends, we continue to focus on executing our unique long-term insurance product strategies as well as our leading digital development capabilities.
As a result, we achieved double-digit year-over-year growth in both total GWP and total operating revenue, hitting quarterly highs. During the -- during the quarter, total GWP facilitated on our platform increased by 41.2% year-over-year to RMB779 million, while total operating revenue increased by 22.9% year-over-year to RMB348 million, once again exceeding the high end of our previously announced guidance range. Such growth and profitability during the period of uncertainty continue to showcase the viability of our business model as well as the efficacy of our strategic focus on transforming the distribution of long-term life and health insurance products.
[Foreign Speech]
Before providing additional updates on our quarterly business progress, I would like to first discuss why we focus on long-term insurance products. During the third quarter, long-term life and health GWP accounted for 92.9% of total GWP, a ratio which has stayed above 90% for the past four consecutive quarters. At the same time, GWP for long-term health insurance increased by 47.1% year-over-year to RMB649 million. Our ability to maintain such strong rates is largely driven by our first-mover advantage in the online long-term insurance space where we have formed many competitive strengths in brand influence and professional capabilities which we believe are also difficult for other industry players to replicate.
Our focus on long-term insurance products has a number of advantages. On the one hand, long-term insurance products generate higher commission rates as well as recurring revenues via policy renewals. On the other hand, our long-term product focus enable us to form more long-standing relationships with clients and grants better client loyalty. Our persistency ratio for long-term life and health insurance in the 13th and 25th months of the policy remains stable at 94%, a relatively high level in the industry. The high client retention rate provides us an opportunity to maximize customer lifetime value as we are able to explore and serve the evolving protection needs of clients in different stages of life.
[Foreign Speech]
In line with our focus on developing long-term insurance products, we also concentrate on building our core competencies. As a pioneering insurance e-commerce platform in China, we have accumulated a massive amount of multidimensional client data and transaction data over the past 14 years. By harnessing our superior data resources, we have been able to develop more comprehensive client portraits [Phonetic], employ more precise risk management practices and deepen our understanding of client-specific insurance needs, product design mechanisms and risk-adjusted pricing to provide clients with more valuable and customized insurance products. For example, we officially launched a critical illness insurance product referred to as Darwin 3. Soon after its launch, this product became extremely popular. In September, Darwin 3 won the Popular Health Insurance Product of 2020 award. This was the sixth time that our Darwin critical illness series of insurance products has won such an award in the industry, further illustrating the series' exceptional reputation as well as our first-rate product design capabilities.
Beyond [Technical Issues] value and positioning also continued to gain recognition in the third quarter. For example, in September, Huize was included in Hurun's China Digital Insurance Agencies 2020 list and was grouped among the first-tier level of companies in terms of innovation capabilities and market performance throughout the past two years. Going forward, we firmly believe that the market will increasingly understand the importance of online insurance products and their service channels as well as the steady trend of separation between insurance underwriting and distribution in the industry as China's insurance market matures. As such, we are eager to capitalize on these opportunities and enhance [Phonetic] our development with the wind at our back.
[Foreign Speech]
I would also like to talk about our future development strategies. Many of the insurance clients we have served come from families in first and second-tier cities with high customer lifetime value potential. We will be rolling out offline service centers in select first and second-tier cities in order to better serve their differentiated demand for higher-quality products and premium insurance services in order to maximize these customers' lifetime values. Over the next three years, we will take the opportunity to invest in a comprehensive, strategic upgrade for the core Huize platform as we evolve into the post-COVID era where consumers demand further innovation in insurance products and digital transformation of their insurance purchase and service experience.
By targeting to build an insurance product and service cloud platform incorporating core technologies such as cloud computing, big data analytics and artificial intelligence, we envisage the upgraded platform will accelerate the integration of online and offline channels, further empower upstream and downstream partners in our ecosystem with data and technology and ultimately enable the industry as a whole to reach insurance clients in all scenarios and provide them with a fuller range of personalized insurance products and services throughout their entire lifecycle more efficiently.
[Foreign Speech]
This concludes my prepared remarks for today. I will now turn the call over to our CFO, Mr. Ronald Tam, who will provide an overview of our key financial highlights for the quarter.
Ronald Tam -- Co-Chief Financial Officer and Chief Strategy Officer
Thank you, Mr. Ma and Harriet, and hello, everyone.
In summary, our third quarter results show a very clear recovery trend in China's insurance industry as a whole, and in particular, a pickup in underlying growth momentum as shown in the quarter-on-quarter growth across the long-term and short-term product spectrum as economic activity resumed and domestic travel activity picked up steam following the successful containment of COVID in the country. In particular, during the quarter, we have achieved record quarterly highs for both total GWP facilitated as well as our total operating revenue.
For Q3, we added 259,000 new insurance customers, taking our total accumulated insurance clients to 6.7 million. GWP facilitated during the quarter totaled RMB779 million, which was a record quarter, up 41.2% year-over-year and 30.7% [Phonetic] on a sequential basis. GWP contribution from our two largest product segments, long-term health and long-term life, grew by 47.1% and 49.4% respectively year-over-year. In particular, in terms of first year premiums, long-term health, our largest product segment, increased by 68.1% quarter-on-quarter, amounting to RMB250 [Phonetic] million, which account for 70% of total first year premiums of RMB358 million for the quarter. The strong sequential growth is primarily attributable to our latest hot-selling critical illness product, Darwin 3, which we have co-developed with [Indecipherable] Life Insurance.
[Indecipherable] product launch also helped contribute significant growth in GWP for co-developed insurance products with our insurer partners, which increased by 65% to RMB436 million and accounting for 56% of our total GWP facilitated during the quarter. This metric continues to demonstrate the deepening engagement we have with our upstream insurance companies partners as we continue to deliver strong persistency ratios from our long-term insurance customers, with 13th month and 25th month persistency ratios averaging 94% during the quarter.
Now turning to our revenues. Total operating revenue for Q3 was RMB348.5 million, again, a record quarterly high, which was up by 22.9% year-over-year and outperformed our guidance previously given to the market in our Q2 results. The increase in revenue was primarily driven by the increase in brokerage income due to the 41.2% increase in total GWP facilitated during the quarter.
Cost of revenue for Q3 increased by 24% year-over-year to RMB234.7 [Phonetic] million, primarily due to increased service fees paid to user traffic channel partners which were generally in line with our revenue growth.
Selling expenses for the quarter increased by 43.9% year-over-year to RMB57.9 million, which was primarily attributable to the increase in our sales and marketing headcount during the past 12 months as well as an increase in advertising and marketing spend during the third quarter which increased by 78% year-over-year as we looked to increase spend in line with the improving industry fundamentals along with overall recovery in the economy. G&A expenses for the quarter decreased by 0.6% year-over-year to RMB30.5 million. This decrease was primarily due to the decrease in share-based compensation expenses, which amounted to RMB2.8 million in the third quarter as compared to RMB10.5 million in the previous year. Excluding the effect of SBC from our G&A in Q3, G&A expenses grew by 37.1% year-over-year to RMB27.6 [Phonetic] million.
R&D expenses for the quarter grew by 41.7% year-over-year to RMB11.5 million as we continue to increase our headcount in areas of data analytics and AI related R&D efforts.
During the third quarter, we achieved a GAAP net profit of RMB14.7 million while non-GAAP net profit for the quarter was RMB20.4 million.
We continue to maintain robust liquidity and a strong financial position. During the quarter, we recorded a net operating cash flow of RMB72 million, and as of the quarter end, we had a combined balance of cash and cash equivalents of approximately $65.7 million.
Now, with regard to our Q4 outlook, we currently expect total operating revenue to be in the range of RMB330 million to RMB350 million. This forecast reflects the Company's current and preliminary views on the market and operational conditions which are subject to change caused by various uncertainties, including those related to the ongoing COVID pandemic globally.
This concludes our prepared remarks for today. We will now open up the call to Q&A. Thank you. Operator?
Questions and Answers:
Operator
[Operator Instructions] Your first question comes from Ishan [Phonetic] Kafu [Phonetic] from Citigroup. Your line is open.
Ishan Kafu -- Citigroup -- Analyst
Thank you.
[Foreign Speech]
So three questions, primarily. The first one is, we would like to ask management regarding the guidance on the FYP profile [Indecipherable] especially regarding annuities and health insurance. And related to that, we would also like to know whether growth or profit generation will be Huize focus for 2021. And also I'm interested to know what are your arrangements or preparations regarding the exits of your pre-IPO principal shareholders since we understand the lock-up period [Indecipherable]. Thank you.
Ronald Tam -- Co-Chief Financial Officer and Chief Strategy Officer
Okay. Thanks for the questions. And I think there are three questions here. I think I'll take the first question first regarding the full-year outlook for I guess the first year premium for the business. I think that what we've seen overall in the first half [Indecipherable] acceleration in terms of overall industry growth, and as a result, I think the business has also shown consistent trend along with the industry. I think in the second half of the year, you can see that sequentially there was a relatively strong rebound in terms of new business in the third quarter. And then fourth quarter, I think that despite being a seasonally weak -- a traditionally, seasonally weak season, we are still seeing relatively good momentum going through the fourth quarter as general market conditions rebound. So overall, I think that for the full year, I think we will be relatively flat versus last year in first year premium, but obviously [Indecipherable] how the industry dynamics have been improving in the second half of the year.
The second question was regarding the growth focus for next year. I think that the question was really on whether we will be prioritizing in the overall top line growth versus in the profitability. I think that for us I think the next year will be a year for us for -- not just continue to execute on our existing business strategy on our long-term product, which again we'll see definitely improvement next year given the market conditions have been rebounding. We will also be going to new product segments, and as we have noted in the remarks, that we'll be scaling up our annuities or savings related products business in the next year and we'll be looking to target a contribution from this new product vertical approximately 20% of our total FYP for next year from savings within the product and particularly annuities products which we've seen also a very sharp focus from the insurance companies as a whole in terms of the New Year product launch initiative.
And the third question is regarding the IPO -- pre-IPO investors' intentions post the lock-up. Obviously, we, as a company, we focus on our business execution. But we maintain good and consistent dialogs with our existing shareholders, particularly the largest shareholders, and we believe that both of the shareholders have been indicating to us that they are -- they remain very confident in our long-term growth potential and they will be -- there would be opportunities for maybe monetization for -- for some of the shareholders as and when they [Indecipherable]. So I think we'll be in close dialog with investors, and should there be any opportunities, we'll be in close coordination with investors and make sure that there'll be an orderly market for the potential monetization [Indecipherable].
Ishan Kafu -- Citigroup -- Analyst
Thank you very much, Ron.
Operator
[Operator Instructions] As there are no further questions at this time, I'd like to hand the conference back to our management for closing remarks.
Ronald Tam -- Co-Chief Financial Officer and Chief Strategy Officer
Okay. Thanks for joining the call today, and we look forward to sharing our results in the next time. And during the period, be safe and healthy, everyone. Thank you very much.
Operator
[Operator Closing Remarks]
Duration: 28 minutes
Call participants:
Harriet Hu -- Investor Relations Director
Cunjun Ma -- Chairman and Chief Executive Officer
Ronald Tam -- Co-Chief Financial Officer and Chief Strategy Officer
Ishan Kafu -- Citigroup -- Analyst
