LexinFintech Holdings Ltd. (NASDAQ:LX) Q4 2022 Earnings Call Transcript

LexinFintech Holdings Ltd. (NASDAQ:LX) Q4 2022 Earnings Call Transcript March 14, 2023

Operator: Good day, and thank you for standing by. Welcome to LexinFintech’s Fourth Quarter and Full-Year 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. And I would like to turn the conference over to your first speaker today, Ms. Jamie Wang, IR Manager. Thank you. Please go ahead.

Jamie Wang: Thank you. Hello, everyone. Welcome to Lexin’s fourth quarter and full-year 2022 earnings conference call. With us on the line today are our CEO, Jay Xiao; President, Jared Wu; and CFO, James Zheng. Before we get started, I’d like to remind you that the call and presentation containing business outlook and forward-looking statements, which are based on the assumptions as of today. The actual results may differ materially, and we undertake no obligation to update any forward-looking statements. Jay will first provide an update on our overall performance, James will cover the financial results in more detail and lastly, Jared will then discuss risk management. I’ll now turn the call over to our CEO, Jay. His remarks will be in Chinese, and the English translation will follow. Jay?

Jay Xiao: Good morning, and good evening, everyone. It’s my pleasure to speak with you again. In the fourth quarter of 2022, the COVID situation in China underwent a major turning point, bringing considerable pressures to the Chinese economy. But despite such pressure, we were able to achieve satisfactory results by rigorously adhering to a strategy of prioritizing risk management, making data-driven decisions, and continuously focusing on improving and refining our operations. Our loan originations for the past quarter reached RMB56.1 billion, representing an increase of 29% year-over-year with total outstanding loan balance reaching RMB99.6 billion as of December 31, 2022, representing an increase of 16% year-over-year. Total revenue reached RMB3.1 billion, representing an increase of 38.7% year-over-year with net income reaching RMB301 million, representing an increase of 17.9% year-over-year.

Our asset quality continues to steadily improve. And in addition, funding costs decreased to 6.8% from 7.0% in the third quarter. Our net profit margin increased substantially from 4.8% in the first quarter of 2022 to 9.9% this past quarter. From our fourth quarter numbers, we can see that Lexin has clearly produced three consecutive quarters of steadily improving profitability, realizing a V-shaped recovery. To be more specific, there were three main highlights for the past quarter. First, the continued improvement in asset quality; second, the ability of our installment e-commerce platform service business to deliver growth against a weak backdrop and breakthroughs in our tech-empowerment service sector, which achieved its first quarterly profit; and third, notable results in reducing operating costs and in increasing efficiency.

On asset quality, although we were affected by the COVID outbreaks, Lexin was able to continue our stable and upward trajectory in asset quality, which was accomplished through our focus on continuous improvements to our risk management capabilities and our progress in refining our operations, and this can be seen from our existing and our new customers. For existing customers, we took the following two steps. First, we improved our ability to identify prime customers from our data and through deeper data mining of the information available with Lexin’s ecosystem. We refined our ability to identify different customer segments. In particular, we continue to data-mine and obtain valuable information from the PBOCs credit data. This allowed us to more deeply and comprehensively to improve our customer risk assessment related profiles in multiple dimensions, including customer risk profile, income level information, asset information, and existing customer liability.

In the application of our models, we were able to finalize the joint modeling of over 10 data loops, building an accurate ROI evaluation framework in the progress. Improvements in our ability to identify prime customers allowed us to dedicate greater resources towards serving this customer segment, while also expediting the reduction of high risk segments. Second, we applied our policy, which refines our operating strategy by improving our ability to identify different customer groups and segments via more accurate segmentation capabilities, enabling us to dig deeper to meet and satisfy the needs of different customer cohorts and improve our customer satisfaction rates and customer retention. In the fourth quarter, loan contributions from our prime customers increased by 60% year-over-year, while loan contributions from our high risk customers increased by 13%.

So prime customers as a percentage of loan increased from 72% in the fourth quarter of 2021 to 82% in the fourth quarter of 2022. For our new customers, we continue to expand our dataset and the use of our models. We have built a complete end-to-end RTA processing model, which has significantly improved our post customer acquisition conversion rate by over 50%. We have improved the efficiency and accuracy of our customer identification capabilities by 20% through pre-lending and in-lending channel model iterations. We have also constructed a new operational metrics to continuously increase and improve the retention rate and the activity rate for both new and existing customers. In the fourth quarter, the percentage of new prime customers with approved credit lines increased by 18.2% with average ticket sizes for new customers increasing by 16.7% quarter-over-quarter.

Online advertising cost to convert credit lines into active borrowers from the time of granting of the credit line to the time of the use of credit decreased by 25.9% quarter-over-quarter for prime customers. The second highlight was the ability of our installment e-commerce platform service business to deliver growth against a weak backdrop and outbreaks in our tech-empowerment service sector, which achieve its first quarterly profit. Our installment e-commerce platform service business under a weak backdrop of poor overall consumption throughout the year last year was able to achieve 1.4 billion in GMV for the fourth quarter, an increase of 40.2% year-over-year. Younger more fashion-focused non-electronic device consumption scenarios such as cosmetics, apparel, and footwear favored by younger demographics became our main driver, demonstrating notable increases in growth and further enhancing our competitive advantages in consumption scenarios and consumer demographics in the process.

For the year 2022, our e-commerce platform total number of merchants grew by a 103% year-over-year with average tickets prices increasing by 39% year-over-year. In addition, our tech-empowerment service business is designed for small and medium sized banks, has also made significant progress. Our service enables the digital transformation of our financial institutional partners by providing five core services: Product development, customer acquisition channel for building, joint risk management, customer lifecycle management and intelligent customer services, enabling our partners to achieve breakthroughs in their businesses. Our partners have been steadily grown wherever the corporation has come online and all new launches in the fourth quarter has progressed to scale, enabling our tech-empowerment service business to achieve profitability for the quarter.

These two businesses are both critical components of our ecosystem, forming a mutually reinforcing cycle and linking with our main credit facilitation business. Each business has also achieved its own respective breakthroughs in the fourth quarter and can be expected to be new growth driver in the future. Lexin’s ecosystem, which is integrated with different businesses in various consumption scenarios as well as technological capabilities will in time become our core competitive advantage, differentiating ourselves from our competition and establishing our sustainable long-term core competitive advantages. The third highlight is related to the notable results in reducing operating costs and increasing efficiency. Operational expenses for the fourth quarter were RMB660 million, down 2.1%, sequentially.

In particular, G&A expenses decreased by 7% quarter-over-quarter to about RMB97 million. Total expenses as a percentage of the outstanding loan balance has continued second quarter of 2022. In addition, in the fourth quarter, we reconstructed some functions and downsized the headcount to further stimulate the overall vitality of the company and to improve organizational efficiency. Behind the aforementioned operational achievement is the continued enhancement of our data and technological capabilities. R&D expenses for the fourth quarter was approximately RMB136 million, which represents a leading position in the industry. Lexin’s unique smart business engine has integrated digital and intelligent capabilities into every key aspect of our daily operation and enterprise.

Specifically, in terms of system capabilities, we further applied the indicator variation and intelligent attribution systems to the core notes of our transaction and risk management systems. We built a unified event management platform, covering all internal and external events related to products and technology, greatly improving our data efficiency and accuracy. In terms of model applications, we continue to improve our lifecycle models and have developed and iterated more than 30 targeted marketing models, among which our model metrics of customer intent and customer reaction is able to cover scales of 10 million users per month and has achieved meaningful results. For specific customer groups, after using our models, order rates have increased by 30% with ARPU and profit increasing by over 50%.

Finally, I would like to update you on Lexin’s corporate social responsibility initiatives. In the first half of 2022, we launched a specific program called to help relieve small and micro enterprise with their cash liquidity problems. In the fourth quarter, we continue to provide consistency, enabling the total amount of small and micro loans to reach RMB5 billion for the quarter. In February of this year, a follow-up program called was launched, which aims to promote a recovery in consumption through our nine initiatives and three directives, promoting individual consumption, facilitating merchant growth, and enabling the recovery of small and micro type business. In addition to better protect customers, we are currently instituting a 24/7 customer protection hotline, which will also further enhance our customer satisfaction rates.

Going forward, we see an accelerated pace of recovery for domestic consumption and improved macroeconomic environment. So we remain cautiously optimistic about the prospect for business growth this year. In 2023, we will make sustainable profitability, which is Lexin’s main objective. For concrete steps, which will take towards this goal are: first, is to continue to strengthen our risk management systems and build our core capabilities further improving our asset quality in the process. Second, is to focus on refining our customer operations by improving our ability to identify and manage our prime customers from our existing ones, adjusting policies for our new customers based on the economic conditions, capturing the opportunities presented by the consumption recovery through investing in customer acquisition at the opportune times, continuing to both improve our customer quality and quantity and improving asset quality in the process.

Third, is to strengthen Lexin’s unique business ecosystem, including online consumer finance, offline €“ installment e-commerce platform service, tech-empowerment service and more, allowing our multiple and diverse businesses to become mutually supportive and mutually reinforcing, generating a virtuous cycle. Fourth is to continue to reduce cost and improve efficiency, increasing our ability to generate sustainable profits in the process. In the first quarter of 2023, our total loan balance exceeded RMB100 billion, marking another milestone in a company’s growth and development with the exception of the beginning of the first quarter, which was negatively impacted by the tail end of the COVID outbreak. All risk management-related metrics have started to recover since February and we expect both our loan originations and profitability for the first quarter of 2023 to improve from levels achieved in the fourth quarter of 2022.

In addition, we expect to continue double-digit growth in both our loan originations and net profit for the year 2023. Let me now hand over the call to our CFO for the financial update. Thank you.

James Zheng: Okay. I will now provide more details on our financial result. Please note that all numbers are in RMB terms unless otherwise stated. In the fourth quarter, we continued our third consecutive quarter of recovery, both in our overall business and in our financial numbers. This was in spite of the impact of COVID and the weaker economic conditions. Our continued recovery was the result of the management’s continuous efforts in overhauling our risk management, focusing on better quality user segments, upgrading our technology and operational capabilities as well as our new cost restructured initiatives. First, please let me explain at high level what happened in the quarter as compared to the same quarter of 2021. Total loan originations for the quarter reached RMB56.1 billion, an increase of 29% year-over-year in spite of the COVID outbreak and meeting the high-end of our guidance.

Revenue grew by 38.7% year-over-year to reach RMB3.1 billion for the quarter, which was mainly driven by the GMV growth. The weighted average APR stood at approximately 24% for the fourth quarter, close to 2 percentage point lower than a year-ago. Loans with APR under 24% now make up more than 83% of all loans. Partially offsetting the negative impact from the lowered APRs on our loans was a decrease in our cost of funding from 7.7% a year-ago to 6.8% in the fourth quarter. Loan tenures increased to 13.9 months versus 10.3 months a year-ago. Importantly, we have been relentless in our focus on overhauling our risk management. This includes a focus on better credit user segments and rebuilding the team, the systems and the infrastructure. Jared will elaborate more on this shortly.

The improved results from our efforts can be partially seen in our 90-day+ delinquency rate, which was at 2.53% in the fourth quarter as compared to 2.66% in third quarter. The 30-day+ delinquency rate was at 4.62%, basically remaining stable as compared to third quarter, in spite of the rapidly deteriorating COVID situations in December. At the same time, we have launched a new initiative to restructure our cost by benchmarking against the industry. We have seen some early improvements to operating expenses, specifically processing and servicing cost, sales and marketing, research and development, and G&A expense combined as a percentage of average loan balance are at about 1.2% as compared to 1.3% in the third quarter. G&A expense as a percentage of average loan balance stood at a 0.1% versus 0.12% in Q3.

Of course, we realized this is only a very small start, but we will be sure to fully explore all the opportunities to improve our operational efficiency in the future. As a result of the aforementioned, we are able to report net income of RMB301 million, an increase of 18% year-over-year. This is not an easy achievement in light of the severe impact of the COVID outbreak and weak macroeconomic conditions. Apart from the above year-over-year analysis, I would also like to elaborate a little bit more on the progress achieved through some quarterly comparisons. Total GMV was RMB56.1 billion, almost flat from Q3 as we have generally taken a more prudent approach towards scale in terms of the uncertainty around COVID for all of 2022. However, total Q4 revenue grew 13.4% quarter-over-quarter due to an improved take rate of 2.59% versus 2.55% in Q3.

The uptake rate is a result of an overall improvement in asset quality and lower funding costs, which has continued to improve since the beginning of the year. Operating expenses declined by 2.1% quarter-over-quarter as a result of our cost restructuring initiatives, and this in turn led to a sequential growth in net income of 9.3%. In summary, we have made great progress during the fourth quarter of past year from both a year-over-year and a quarter-over-quarter perspective. If you take a look at the full-year 2022 numbers, total GMV was RMB204.6 billion, a decrease of only 4.3% year-over-year with the total loan balance reaching RMB99.6 billion, an increase of 15.9% year-over-year. Total revenue was RMB9.9 billion, a decline of 13.3% year-over-year.

Obviously, like most other companies, we have been negatively impacted by the weak macro environment. However, since hitting the lowest point in earning in first quarter of 2022, we have since seen a continuous recovery in profitability and the fourth quarter represents the third consecutive quarter of this recovery. This demonstrates the resilience and the sustainability of our business. We fully realized that in our turnaround, we still have a long way to go, but the fourth quarter of 2022 to mark the end of three years of macro-related uncertainty with ending sounding on a bit of positive note. Next, let’s take a detailed look at the financials. As mentioned, our total operating revenue for the fourth quarter was RMB3.1 billion, representing an increase of 13.4% quarter-over-quarter and a 38.7% year-over-year.

Revenue from credit facilitation service was approximately RMB2.0 billion, representing a 17.9% increase quarter-over-quarter, and an over 71.4% increase year-over-year. Revenue from tech-empowerment service was RMB430 million, representing a 17.4% decrease quarter-over-quarter and 34.6% year-over-year, which was mainly due to the COVID impact where both the volume and the rev share percentage were lowered. Revenue from installment e-commerce platform service was RMB674 million, representing an increase of 28.4% from the last quarter and an increase of 59.3% year-over-year, which can be attributed to a strong Singles Day Shopping Festival. Moving on to the expense side of this quarter. Sales and marketing expense decreased by 0.4% quarter-over-quarter, which was mainly due to our scale down approach to new user acquisition in a time of macro uncertainty.

Recently, however, we have noticed an improvement in user credit quality as well as improved economic activity. We will continue to closely monitor this and other macro indicators and will be sure to seize down the right opportunities to invest in new user acquisitions when conditions are favorable. Research and development expenses decreased by 3.5% quarter-over-quarter, and it decreased 17.1% year-over-year to RMB136 million. General and administrative expenses decreased by 7% quarter-over-quarter and 17.9% year-over-year to RMB97 million. While our topline revenue continued a promising upward trajectory this year, G&A expenses remained very stable and decreased on a quarter-over-quarter basis for three consecutive quarters, demonstrating the continuous improvements to our operating efficiency, which we expect to continue in the future.

Net profit was approximately RMB301 million in the fourth quarter, a 9.3% increase quarter-over-quarter, and a 17.9% year-over-year in line with our expectation. Next, some updates on our share repurchase program and our convertible notes. First, on our share repurchase program. In March 2022, the company’s Board authorized a US$50 million shares/ADS repurchase program. And in addition, in November 2022, the company’s Board authorized a second share repurchase program under which the company could purchase up to an aggregate of US$20 million of its shares/ADS over the next 12 months. As of December 31, 2022, the company had repurchased a total of approximately 22 million ADS for about US$48 million. Lexin’s management remains open to making further repurchases in the future.

Separately, on our convertible notes. We have entered into an amendment agreement with PAG regarding our existing convertible notes in the amount of US$300 million. According to the original payment schedule, the company was potentially expected to pay the principle plus interest in one lump-sum in September, 2023. With the amendment, we are able to begin the repayment ahead of the original schedule and complete the installment payment plan over a 14-month period ending in April 2024. The notes remain convertible into fully paid Class A ordinary shares of the company or ADS at original conversion price of US$14 per ADS at the Holder’s option. At the end of 2022, the company had cash position of RMB4.1 billion on hand and a net equity position of RMB8.6 billion.

Although Lexin has a strong balance sheet and sufficient cash reserves to meet the original terms of the convertible notes agreement, we see the new arrangement as more beneficial for the company as it will allow us to smooth out the cash flow impact from the repayment as opposed to a single lump-sum payment. This will give us more time and flexibility to efficiently plan and utilize capital in pursuing business growth opportunities. Finally, I would like to discuss our outlook for the first quarter of 2023. Based on the company’s preliminary assessment of the current market conditions, total loan originations for the first quarter of 2023 are expected to be around RMB60 billion, representing an increase of 39% on a year-over-year basis. These estimates reflect the company’s current expectation, which is subject to change.

For 2023, as Jay mentioned earlier, we remain cautiously optimistic about China’s macroeconomic recovery, consumption outlook and stabilized regulatory environment. Currently, we can see that our turnaround is well underway. As we continuously improve and revamp ourselves to be able to better meet the new challenges, address new opportunities ahead. We are looking forward to establishing a more solid and sustainable foundation help follow our future growth and profitability. With that, I would like to turn the call over to our President, Jared Wu, who will discuss our risk management. Jared, please go ahead.

Jared Wu: Thank you, James. Good morning, and good evening, everyone. It’s my great pleasure to speak with all of you again. So I will elaborate more on our risk management measures and related progress. The impact of the COVID outbreak in December brought some pressure on our risk management, which in turn led to some short-term deterioration in our early risk metrics. But thanks to our continuous focus on stable risk policies and prudent customer acquisition, as well as the use of our previously built COVID risk monitoring system and refined management mechanisms, we were able to mitigate the short-term impact. At the end of the fourth quarter, we were able to hold our 30-plus day delinquency rate flat. Compared to the first quarter at 4.62% with our 90-plus day delinquency rate continuing a steady decrease to 2.53% down 13 basis point quarter-over-quarter as a result of the trend that we are observing right now.

With a recovery in China’s social and economic activities after the Chinese New Year, we are seeing all our credit metrics recurring to normal levels and continue on a positive trajectory. In the fourth quarter, increasing the overall percentage of our prime customers was our top priority. With our focus on the score throughout the past year, we have worked on continuously improving our overall risk management in those following areas. First, we focus on our prime customers by restricting our user-tiering system. This new system enables us to target the prime customer group in a more focused manner. Second, to further improve our core risk management capabilities, we invested heavily in the acquisition and utilization of complaint external data sources, and have substantially improved our ability to data-mine such data to further segment users with different risk profiles.

In particular, we put heavy emphasis on the credit data from PBOC with our mining and usage of this data increasing dramatically. Third, due to the improvement on our capacity to handle data, we are able to more quickly perform higher iterations of our user identification models to target different customer segments, and we have made significant strides in user risk recognition. As a result of the above improvement, we are seeing notable increases in the rate of new improvement in our asset quality, which is being demonstrated in our fourth quarter and in our first quarter risk performance metrics of 2023. Since the beginning of the year, we have noticed that our day-one delinquency rate has followed a downward trend. On the basis of our continuous investment and the current trend, we are confident that in 2023, our risk management capabilities will make additional improvements and breakthroughs.

2022 was a challenging year, but was also a year we actively raised our risk management capability to another level and rapidly implemented a more refined risk management system. Going forward, as mentioned both by Jay and James, while we are encouraged by the improving macroeconomic conditions and trends, we will remain cautiously optimistic, adhering to a policy of putting risk management first and focusing on laying a solid ground for the healthy, sustainable, long-term and balanced growth of the company. Thank you. This concludes our prepared remarks. Operator, we are now ready to take questions.

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Q&A Session

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Operator: Thank you. First question comes from Yada Li from CICC. Please go ahead.

Yada Li: Then I would do the translation. Hello, management. This is Yada from CICC, and thanks for taking my question. My question is from the user demand side after the COVID. Currently, are we experiencing a notable recovery, and I was wondering, what’s the guidance on loan growth in the coming quarters and the full-year 2023 and 2024? That’s all. Thank you.

Jay Xiao:

Jamie Wang: Okay. We’re actually €“ we can feel for ourselves the fast recovery of the consumption of the entire nation, actually, especially on individual consumption. Say for example, offline restaurants, touring spots, you can see people lining up for restaurant waiting. And me, myself, for the past three years during the COVID time, while I myself was driving, there never was much of the traffic even in Shenzhen. But right now, we’re seeing traffic jams literally everywhere. As for our company , for the ticket side of our scale, we were not terribly affected by the overall consumption scenario. Our risk alone was actually better alongside with the recovery of the consumption. Especially after Chinese New Year, we’re seeing a better risk indicators with the macroeconomic revival and recovery of the entire nation.

So as far e-commerce platform, as we mentioned earlier, actually saw a growth a little bit against the overall e-commerce trend as our nation’s economy not being a little bit hit by the overall COVID restrictions and all the policies all that for the past several years, especially past year, the credit needs actually grew. And for us, we are a little bit different from other e-commerce platforms. We are still mostly, mainly credit-driven. So when the €“ in a way when the macro economy is not as good as before, our credit need was actually €“ it actually went higher. So for the full-year guidance for 2023, well, overall our €“ we are confident on the recovery of the overall consumption of the country, but like we said before, we are continuously to remain prudently optimistic.

We still put sustainable development, especially on the profitability first. And we are €“ we will take actions when the time is right to invest in S&M, and we actually do believe it will be a good year for Lexin to develop. Especially after last year, which was 2022, we had a turnaround. We had a strategic adjustment of the company. In terms of the full-year loan guidance, we expected as of right now under current situation on our speculation, it should be around RMB245 billion to the topline of RMB255 billion. And also this year our installment e-commerce platform services as well as tech-empowerment service business will be both of our other two growth drivers as well. Thank you.

Operator: Next question is from Alex Ye of UBS. Please go ahead.

Alex Ye: So I have two questions. First one is on asset quality. Management has mentioned that various indicators have shown that notable improvement beginning of the year. I’m wondering if you can share any color on what’s the expectation in 2023 in terms of the magnitude of improvement versus last year, for example, in terms of the vintage charge-off rate and the annualized credit cost perspective. Second question is on the loan pricing and funding cost. I’m wondering to what extent do we expect them to decline in this year and their implication for our take rate outlook? Thank you.

Jay Xiao:

Jamie Wang: Okay. In terms of the asset quality, for the year 2023, as I mentioned earlier, we’re still confident in the macro environment. We are still confident in putting our risk management as one of our priority and also the optimization of our customer segmentation as well as the mixing of the metrics and modeling. We expect to continue our risk indicator to continue to decrease in risk level, especially with our new €“ the percentage of our prime customers in our new loan continue to increase. And we target to expedite to shrink down the size of the , which are less higher risk customers on the new loan. As the new loan structure gets better, the overall structure gets utilized and optimized. The overall structure of the outstanding loan gets better, our risk management can show a very prominent size of degrees.

In terms of APR, for this quarter, we already have over 80% mix within 2024 and for this quarter, our pricing is actually indefinitely close to 24%. And in the near future, we expect to see the pricing level to be around this range. In terms of take rate, as our risk level gets better, like I mentioned earlier, the funding cost continues to decrease. As you might have heard earlier in my script, we mentioned that this quarter €“ for the fourth quarter of 2022, our funding cost actually lowered comparatively, sequentially, even quarter-over-quarter. And we are for this quarter, first quarter of 2023, seeing also lowered funding cost. Of these two factors together, we actually expect our take rate to continue to increase and we are seeing for the past couple of months take rates for over 3%.

Thank you. Hope that answers your question, Alex.

Operator: Thank you for the questions. Next we have from CLSA. Please ask your question.

Unidentified Analyst: And I will do the translation. Thank you for taking my question. This is from CLSA. So the first question regarding the , and we are wondering when we can €“ targeting to achieve the full compliance in terms of all the existing loan, 24%. And second was our business strategy between capital-light and capital-heavy model going forward? Thank you.

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