Pintec Technology Holdings Ltd

NASDAQ:PT

Earnings Call Transcript 2020-Q4

[Operator]

Good day and welcome to the Pintec Full Year 2020 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded.

I would now like to turn the conference over to Joyce Tang. Please go ahead.

[Joyce Tang, Director of Investor Relations]

Thank you, operator. Hello, everyone, and welcome to Pintec's 2020 full year earnings conference call. The company's financial and operational results were issued earlier today and are posted online. You can also view the earnings press release by visiting the IR website at ir.pintec.com. A replay of the call will be available on the IR website in a few hours. Participants on today's call will be Mr. Victor Li, CEO of Pintec; and Mr. Steven Sim, CFO of Pintec. Management will begin with the prepared remarks and the call will conclude with a Q&A session.

Before we continue, please note that today's discussion will contain forward-looking statements made under the Safe Harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the company's risk factors and other public filings as filed with the U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements except as required under applicable laws. Please also note that Pintec's earnings press release and this conference call include discussions of unaudited financial information as well as unaudited non-GAAP financial measures. Pintec's press release contains a recalculation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures.

I will now turn the call over to our CEO. Mr. Victor Li, please go ahead.

[Victor Li, Chief Executive Officer]

Okay. Thank you, Joyce. Hello, everyone and thanks for joining today's call. Before I start, I wish you and your families are staying safe and healthy.

In today's call, I will first review our 2020 performance. Then I will discuss some updates of our strategic initiatives in delivering long-term value. As expected, 2020 was probably the most challenging operating environment in the history of Pintec as we were affected by an unprecedented global pandemic. However, 2020 was also a pivotal year in which we initiated our business transformation in eliminating legacy services, optimizing product mix and a corporate structure, controlling operating expenses and reducing risky assets. As we recorded in 2020, Pintec's business [ph] has been restructured into digital technical services and digital operations services. And our long-term strategy is to augment the revenue and profitability of digital technical services by increasing recurring revenue, while stabilize digital operations services by refining asset quality.

Given this backdrop, for full year 2020 while our revenue has been significantly impacted by a decline of 71% compared to 2019, we are [indiscernible] execution allow our defined strategy, and I would like to mention a few of our achievements and wins in demonstrating our technical advancements and Pintec's partnerships.

Firstly, for digital technical services business which includes digital retail credit management, corporate credit process management, intelligent wealth management, financial robotic process automation, and the digital banking transformation. We now have over 400 corporate clients in further diversifying our revenue sources. In addition, we are focused on revamping our revenue model from the traditional loan facilitation transaction driven nature to recurring revenue of our software services and the infrastructure sales.

For 2020, we are pleased to report this recurring revenue contribution has increased from RMB5.6 million to RMB21 million in 2020; increased close to three times comparing to 2019. Although it is still in early stage, but we showed the good momentum, and we believe it will continue to drive the growth.

As our revenue model evolves, our intention is to continue to deepen contractual services with the existing and large corporate partners while expanding our services to small and medium regional financial institutions. We are seeing some early success as we leverage our core AI capabilities and retail loan expertise in empowering clients in their digital transformation efforts and the channel expansion.

For example, for domestic clients such as China Telecom Bestpay, who has been our long-term partner, we initially began our relationship is installment loan; now we have significantly expanded our collaboration into risk analysis and management, as well as various software model and system designs and implementation.

We also gained a few new mandates from domestic companies in 2020 such that Industrial and Commercial Bank of China has accepted our SME risk and account management solutions for it's micro and SME lending business. We partnered with Aspire, a subsidiary of China Mobile, in enabling is intelligent FinTech solutions and digitization, especially for 5G applications. We also completed the phase one digitization of the supply chain and financing operation for China Daily Group, who is one of the largest agricultural product wholesalers in China. For overseas expansion, we successfully partnered with Janko and WizPay [ph], respectively in launching next-generation online lending platform, leveraging our end-to-end modern arised digital lending capabilities to offer unsecured loans quickly and efficiently in Australia.

Earlier in 2021, we also found a strategic partnership with Judo Bank of Australia in order to provide cloud-based intelligent credit installment solutions with upgraded credit process management. Our other collaboration with the Swiss Bank, UOB Bank and Toyota Finance continue to be on-track as we expand throughout Europe, Oceania and Africa. These overseas market penetrations are strong testaments of our capabilities in competing and winning against global players.

Next for digital operations services business which mainly includes our traditional licensed loan origination and facilitation. As we mentioned in the last call in 2020, we continue to actively prioritize asset quality or asset quantity, reduce risk-taking collaboration, enhance profit-sharing model, partner with high caliber industry leaders, and expand the market to incorporate more of our digital technical services and solutions. This strategic decision has resulted in our total revenue decline for 2020, primarily because our total facilitated loan volume decreased by 83% year-over-years to RMB1.8 billion. However, the risk of free loan facilitation has significantly increased to about 50% of the total loan volume in 2020 compared to 30% in 2019, which means we are on-track in enhancing our risk profile. In the long-term, we are confident that this will allow us to redeploy resources, strengthen our core digital technical services business, and enhance the quality of revenue composition.

For some updates, our micro lending company, Kenzo ISM [ph] is now formally interfaced into Bank of China's credit data center, which with full scale access to real-time credit data reports and inquiries. Kenzo ISM [ph] is the very first internet micro loan company in Jiangsu province to be linked directly into Bank of China. Towards the end of 2020 we have also started to focus on the expansion of our insurance brokerage business, leveraging our insurance brokerage license and exploring new channels.

Now, let me provide some updates on our broader array of strategic initiatives and outlook into 2021, but please be reminded that there are still some uncertainties from a global pandemic. Firstly, on macro level, the global pandemic and the increasingly stringent regulatory oversights from Chinese governments are actually accelerating digitalization from financial institutions in order to fulfill the demand from customers. It is estimated that in 2020, FinTech investment in China was about US$30 billion, representing an annual growth of 14% compared to 2019 according to our research. Therefore, we see immense potentials of digital transformation from these disruptions which are over -- which are our opportunities as we are all well positioned in this sector with long proven track records of all-round innovation and execution.

Secondly, we'll continue to invest into our technical talents and advancements, especially for AI, big data, machine learning, in order to enhance our capabilities in digital transformation, and stay at the forefront of the FinTech industry. Our target is to better enable our partners in a more integrated, automated and faster operation with reduced costs and risks [ph]. This drives our focus on product and service advancement and optimization, as well as further overseas the expansion in order to capture global growth opportunities.

Now, specifically for digital technical services business. We'll continue to leverage our domain expertise and technical innovation, the optimizing and standardized modules, and collaborating with partners to customize the module developments in order to provide end-to-end fully digitized solutions of retail SMEs, SME loan origination, servicing, funding, collection, risk analysis and customer management for both, existing and potential corporate clients. In terms of further business expansion, we are open to collaboration with local government entities in establishing big data platform and empowering SMEs for funding and risk management. We're also excited about duplicating our retail loan successes overseas, as we deepen our partnership in order to upsell and cross-sell to our other services such as wealth management.

Next, for digital operation services business. We'll continue to leverage our internet micro loan license to originate and facilitate retail loans in compliance to regulations and to our internally more stringent risk profile. We expect this business revenue to continue to stabilize. Our data analysts and engineering mine this data was cutting edge AI techniques and machine learning to continuously refine and optimize risks and underwriting terms. So we will continue to leverage this business in building proprietary software and systems to deliver seamless, highly automated and broaden access to retail credit with unique customer experiences. In addition, we are extending this data and technology advantages into our insurance business for 2021.

Starting from organic growth exclusion for both of our business units, we are also actively engaged in mergers and acquisitions in order to accelerate our growth plan, especially under the current environment. Our M&A strategy to broaden our overall offerings, pioneer advanced technology, build deeper relationships in fulfilling client in product and the software needs, as well as geographical expansion with complimentary market penetration. So recently, as you can refer to our press releases, we are very excited to have added a new partner of the talented teams with proven operating capabilities, product diversification and intense technology know-how; this will further accelerate our capabilities in servicing our corporate partners in order to drive growth and shareholder value.

Finally, having discussed all these strategic initiatives while I want to emphasize that we have and will continue to be very disciplined on our cost containment and liquidity protection, the order to minimize the overall impact on our business fundamentals which Steven will discuss further later.

So in summary, 2020 was a challenging year in many aspects. We worked very hard as a company in revamping business models in relating a stronger business foundation, and in navigating those challenges to continue to deliver differentiated values to our clients. We now see great opportunities as people change the way they live, work and consume. We remain committed and are focused on executing our clear strategy of innovation and scalability in order to deliver long-term shareholder value. We greatly appreciate the dedication from our employees, as well as the continued trust and support from our partners and shareholders.

With that, I'll turn the floor over to our CFO, Steven Sim to review our financial results in more details.

[Steven Sim, Chief Financial Officer]

Thank you, Victor. Hello, everyone. I'd like to begin by echoing Victor's sentiments, that all of you and your families stay safe and healthy. Before I start the full year 2020 financial discussion, I would like to make some comments.

Firstly, as already mentioned by Victor, the unprecedented pandemic and our internal business transformation in 2020 significantly impacted our top and bottom lines. However, as we intensely review and layout our business foundations, we believe these uncertainties are short-term.

Second, given the macroeconomic headwind and the domestic PRC regulatory tightening of the financial markets, we had to undertake several onetime write-offs, including impairments for goodwill, intangibles and investments totaling RMB85.3 million, which represents about 30% of our net losses for 2020. We do not expect any future financial impact from these items. Thirdly, as part of our business transformation, we made a difficult decision to aggressively cut our expenses where necessary. So unfortunately, we had to reduce headcount by 39%, and all other associated costs in 2020. However, we will focus on continued investment into our core talents and capabilities, discipline cost management, as well as enhance our balance sheet and liquidity position which can be demonstrated by our successfully -- successful RMB400 million financing in 2020.

Finally, mergers and acquisition will be another pillar of growth driver for our future development as demonstrated by our recent announced acquisition of Riche Bright, which is a licensed security brokerage firm, and Jishengtai, which is a securities technology firm, which is the core technological background of Riche Bright. We believe in the value that these two acquisitions will create going forward, they will lay the foundation of our wealth management business in the future. We are focused on long-term synergistic values in terms of business model, management philosophy, technical empowerment, hidden talents, while we are also very prudent in reviewing financial averages and growth potentials.

Now, turning over to our financial results for 2020. And as usual, please note that all numbers stated in the following remarks are in RMB terms, and all comparisons are for year-over-year basis, unless otherwise specified. Total revenues for our full year 2020 decreased by 70.6% year-over-year to RMB378.3 million. In terms of revenue breakdown; technical services service fees for 2020 decreased by 69.3% to RMB330.7 million, mainly due to the decrease in our balance sheet loss facilitated during the period. The front [ph] of our business changes in activity minimizing our risk bearing loans. The total loan volume for station was RMB1.8 billion in 2020, compared with that of RMB1.1 billion -- sorry, compared with that of RMB11 billion in 2019. However, the risk free loans facilitator was increased from 30% in 2019 to 50% in 2020. Revenues from installments services in 2020 declined by 77.2% to RMB42.7 million. This decrease was mainly due to reduction of installment loan volume due to the COVID-19 outbreak, and was in line with our ongoing strategy to optimize our portfolio structure.

Lastly, revenues from wealth management service in 2020 decreased by 75.7% to RMB4.9 million, primarily as a result of our insurance brokerage business growing slower than we previously expected. During this period, we implemented a series of optimization initiatives to refine our insurance brokerage business model, and terminate the cross-selling with retail consumer financed products. However, towards the end of 2020, we completed the revamping of our insurance brokerage business and we expect rapid growth of this business under the new market oriented model in 2021.

Total revenue for the full year of 2020 decreased by 62.9% to RMB285.8 million from RMB769.7 million in the same period of 2019. This decrease was mainly attributable to several factors, including the decrease in origination and service fee from reduced user acquisition costs, as a result loan volume facilitation declined. Also, the decreased costs on guarantee liability for off balance sheet loans, as we purposely and gradually stopped providing any guarantee in 2020 in order to significantly enhance our asset quality. And lastly, the decrease in service costs charged by the related party because the company's original cooperation model, under which the related party used to provide credit enhancements for the borrowers since the beginning of 2019, resulting to a further decrease of the loan balance and related costs under such model in 2020. All these efforts led to the significant improvement of the delinquency rate since the second quarter of 2020.

We will continue to reduce our risk bearing loan business in 2020 as costs on guarantee liabilities and the service costs, mainly related to the legacy business; there was almost no new loans facilitated under the guarantee of risk sharing model. In fact, we only provide guarantees for our financial services which we operate with our own licenses, while all other loans that we facilitate will gradually switch to a profit sharing model without any guarantee services, minimizing the overall volatility and profitability in the future.

Gross profit in 2020 decreased to RMB92.5 million; this represents a gross margin for full year of 2020 of 24.5% compared to 40.1% in the same period of 2019. This is a reflection of the lower margin, higher quality, less risk-bearing business. Going forward, as we focus on a subspace digital technology services, we expect gross margin to improve in 2020 -- sorry, in 2021. Total operating business in the full year of 2020 decreased by 75.9% to RMB299.3 million from RMB1.2 billion in the same period of 2019. We have continued to optimize and refine our organization structure, marketing strategies and product portfolio since the beginning of 2020.

Let's now review the specific operating expenses, and I'm pleased to report that we have aggressively reduced every cost category. Sales and marketing expenses in 2020 decreased by 35.8% to RMB44.7 million from RMB69.6 million in same period of 2019, primarily driven by the decrease of promotional expenses from the reduction of online advertisement and a decrease in staff costs from corporate structure. General and administrative expense in the full year of 2020 declined by 86.5% to RMB147.8 million from RMB1.1 billion in the same period of 2019. This decrease was primarily driven by decreases in the reduction of bad debt acquisition expenses related to loans under the related party agreement from RMB890.7 million in 2019 to RMB7.8 million in 2020 due to the decrease in loans; and also stock costs and professional expenses decreased by approximately RMB31.9 million due to personnel structure optimization and reduction in consulting expenses.

Research and development expenses in 2020 decreased by 52.6% to RMB37.5 million from RMB79.1 million in the same period of 2019; primarily driven by the decrease in staff costs from personnel structure optimization and as part of our business transformation. Impairment of goodwill and intangible assets in 2020 increased by -- increased to RMB69.4 million from new in the same period of 2019; primarily due to RMB37.6 million in impairment for goodwill and RMB31.8 million in impairment loss for intangible assets associated with a license to operate the smaller business owned by Ganzhou Aixin Network Micro Finance Companies considering the tightening regulation and changing market environment, however, the company expects no future impact.

As a result, operating loss in the full year of 2020 was RMB206.8 million. Tax expense increased to RMB49 million, compared to only RMB2 million in the same period of 2019; primarily due to the deferred tax expense of RMB46.9 million caused by the increase in the valuation allowance for deferred tax expense of RMB87.3 million in the year 2020 as management determined that the deferred tax asset will less likely be utilized in the future while it was deferred tax benefit of RMB70.3 million in the year 2019. Therefore, net loss and adjusted net loss for 2020 were RMB296.1 million and RMB284.2 million respectively. However, excluding above mentioned one-off one-time write-offs and the impact of the decrease in deferred tax asset balance, our net loss and adjusted net loss for the year of 2020 should be RMB147.2 million and RMB135.3 million respectively. The net loss was mainly due to the legacy business and it was well decreased -- it has well decreased in the second half of 2020 as compared with the first half of 2020. Diluted GAAP and diluted non-GAAP adjustments suffered [ph] net loss for ordinary shares in 2020 were RMB0.99 and RMB0.96 respectively.

Now, let's turn over to our balance sheet. As of December 31, 2020, we had combined cash and cash equivalents, short-term and long-term restricted cash of RMB522.3 million as compared to RMB180.9 million as of December 31, 2019. Total net financing receivable including short-term and long-term receivable decreased by 83.6% to RMB73.6 million as of December 31, 2020 from RMB449.5 million as of December 31, 2019, mainly due to the lower volume of our own book loan business.

In conclusion, we are very proud of what the team has collectively achieved during the transition period under the COVID-19 outbreak and we are very excited about what we could achieve in the years to come. Looking ahead, we will focus on ramping up volumes -- ramping up revenues in our digital and technical service business, which we expect to be our key revenue driver in the long-term. We also continue to refine our asset quality for digital operating services, as well as our licensed financial services, and we optimized our risk profile. Despite these short-term impacts, we are confident that these changes will bring solid foundation and sustainable development for the future.

This concludes our prepared remarks for today. Operator, we are now ready to take questions.

[Operator]

Thank you [Operator Instructions] Our first question is from Ling Tan from ICDC [ph] International. Please go ahead. Hello Ling, is your line muted?

[Unidentified Analyst]

Thank you management for taking my questions. I have two questions regarding the Riche Bright and Jishengtai acquisition. My first question as what revenue contribution do you foresee from this acquisition? And was there margin profile changes from this acquisition? And the second question is, how will you integrate this acquisition into your wealth management services? And could management give us some color under wealth management revenue growth target for the next three to five years? Thank you.

[Steven Sim, Chief Financial Officer]

Thank you, Ling. This is Steven. I'll take the second part of the question first. I think in terms of the integration into the current wealth management as mentioned in today's remarks, and also in our press release, the wealth management has not met it's target in the past whereas we expect for 2021 in line with the insurance brokerage business will have significant growth organically, and potentially also looking at opportunities in the market for potential M&As. And in terms with Riche Bright, we expect that they will be collectively integrated into our technological innovation in terms of not just operating license brokerage business, which -- which it is licensed in Hong Kong; we think that -- we feel that it has a significant technological advantage and difference in terms of how it's able to penetrate the B2B market that differentiates itself from what's the current offering out there. And we feel that this digital brokerage business is already well understood and well received by investors in the market; we feel that it will add to a very good part of our portfolio. And we've known the team for some time before completing the acquisition; so we think in terms of the business and other aspects of integration, it should go smoothly.

Now, in terms of your -- the first part of your question; I think we expect Riche Bright to be contributing in the normal course of their business normal margins. And in fact, we believe that since it is not operating on a purely B2C type business model, whereas a small B2B2C business model, it should have higher traditional take rate as compared to other businesses in the market. As an example, we understand that potentially you have certain players in the market that we have to factor in cost of having acquisition; whereas in our case our business will be mainly driven by large corporate customers in which case in targeting the users and the players that are customers of this corporate, we think the cost of having acquisition will be much lower, therefore, giving us a better takeaway. At the same time, we feel that it's also able to offer other non-traditional brokerage business to other business -- other corporates as well. In that way, you will increase our opportunities to have more income from these sources. Thank you.

[Operator]

[Operator Instructions] There are no more questions in the queue. This concludes our question-and-answer session. I would like to turn the conference back over to Victor Li for any closing remarks.

[Victor Li, Chief Executive Officer]

Okay. Thanks, operator. And again, thanks, everyone for joining today's call. We wish you a good day, and we'll see you next time. Thank you.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.