Yirendai Ltd. (NYSE: YRD)
Q1 2016 Earnings Call Transcript
[NYSE: YRD] - Yirendai Q1 2016 Earnings Conference Call
8:00a.m. U.S. Eastern Time, Thursday, May 12, 2016
Presenters

Mr. Matthew Li, Director of Investor Relations

Ms. Yihan Fang, CEO

Mr. Dennis Cong, CFO

Mr. Ning Tang, Executive Chairman (Q&A only)

Mr. Huan Chen, Director of Yirendai & Chief Strategy Officer of CreditEase (Q&A only)
Analysts

Dan Jo, Credit Suisse

Mayank Tandon, Needham & Co.

Richard Xu, Morgan Stanley

Polar Zhang, BOCI

Sarah Tian, CICC
Presentation
Operator
Good day, and welcome to the Yirendai first quarter 2016 earnings conference call. All participants will be in
listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask
questions. (Operator Instructions)
Please note, today's event is being recorded.
I would now like to turn the conference over to Matthew Li, Director of Investor Relations. Please go ahead,
sir.
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Matthew Li – Director of Investor Relations
Thank you. And welcome to Yirendai's first quarter 2016 earnings conference call. Our earnings press
release and supplemental presentation slides are now available on our website. Hope you all had a chance
to review the materials by now.
Today's call features presentations by our Chief Executive Officer, Ms. Yihan Fang, and our Chief Financial
Officer, Mr. Dennis Cong. Our Executive Chairman, Mr. Ning Tang, and our Director and Chief Strategy
Officer of CreditEase, Mr. Huan Chen, will join the presenters in the Q&A session.
Before beginning, we would like to remind you that discussions during this call contain forward-looking
statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of
1995. Such statements are subject to risks, uncertainties, and factors that may cause actual results to differ
materially from those contained in any such statement.
Further information regarding potential risks, uncertainties, or factors is included in Yirendai's filings with the
US Securities and Exchange Commission.
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Q1 2016 Earnings Call Transcript
Yirendai does not undertake any obligations to update any forward-looking statements, except as required
under applicable law.
During this call, we will be referring to several non-GAAP financial measures as supplemental measures to
review and assess our operating performance. These non-GAAP financial measures are not intended to be
considered in isolation or as a substitute for the financial information prepared and presented in accordance
with US GAAP. For information about these non-GAAP measures and reconciliation to GAAP measures,
please refer to our earnings release.
With that, I will turn the call over to our CEO. Yihan, please begin.
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Yihan Fang – Chief Executive Officer
Thanks, Matthew, and thank you all for joining the call today.
We're pleased to begin 2016 with strong financial results during what is typically a seasonally low quarter for
us. Sequential loan facilitation volume grew while our loan portfolio credit performance remained solid.
Our strong Q1 results reflect continued robust demand for our products and services. We feel highly
rewarded and motivated by the market's widespread recognition of the Yirendai brand.
While Q1 is usually considered a seasonal slow quarter for our business, we successfully achieved the
sequential growth by leveraging Yirendai's powerful brand name in China's consumer finance market.
We facilitated 535 million US dollars worth of loans, representing a quarter-over-quarter increase of 5% and
year-over-year increase of 110%.
As of March 31st, 2016, the cumulative principal amount of loans facilitated on our online marketplace
reached $2.4 billion. We served more than 50,000 borrowers and 203,000 investors during the quarter, of
which 50% (sic - 55% see slide 14) of the borrowers and 100% of the investors were acquired through
online channels.
On last quarter's earnings conference call, we mentioned a number of strategies that we believe will drive
sustainable growth of our business in years ahead. These strategies include providing our target customers
with a better user experience and enhanced products and services, partnering with other Internet players
and industry verticals that service our target customers with consumption scenarios, enhancing credit
underwriting and risk management capabilities, and diversifying our funding sources to build a balanced mix
of individual and institutional investors.
During the quarter, we strengthened our commitment to prime urban salary workers by addressing their
specific financing needs and improving the user experience. For example, we developed a new term loan
product which takes personal data from the applicant's Housing Provident Fund account that can be
accessed directly online.
We continue to work on improving the user experience by creating faster and easier to use mobile
applications.
We are actively working with various partners in the Internet space such as Baidu and Qihoo 360, to develop
online consumer financing solutions that leverage their massive user bases and the vast amounts of online
data and traffic.
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Q1 2016 Earnings Call Transcript
In addition, we worked with a number of partners that have consumption scenarios, including the purchase
of second-hand cars, travel, and special elective medical procedures.
Furthermore, we worked closely with a few players to jointly develop products by utilizing datasets that are
customized for our partnership. We invested a considerable amount of resources into developing tools and
the credit-related services to further expand Yirendai's exposure to a broader Internet user base.
We have always considered risk management as a core focus for us. While we work hard to expand our
business, we remain focused on generating sustainable and disciplined growth.
In Q1, we further strengthened our risk policies and fine-tuned our risk-based pricing models. The credit
performance of our product portfolio continues to improve over time, something our CFO, Dennis, will
elaborate more on later.
Lastly, as a strategic initiative to build a diversified and balanced mix of funding sources from individual and
institutional investors, we extended loans with total principal amount of RMB250 million for a trust set up by
a fund. The RMB250 million loans were taken as the underlying asset for the same amount of asset-backed
securities, which were successfully listed on China's Shenzhen Stock Exchange in late April.
With that, I turn over to Dennis to walk you through our Q1 2016 financial results.
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Dennis Cong – Chief Financial Officer
Thanks, Yihan. I will now go over our first quarter financial results. Overall, we had a very strong quarter in
Q1 2016. We facilitated $535 million worth of loans, an increase of 110% year over year from Q1 2015.
This quarter, we also achieved a milestone by crossing the $2 billion mark in loan origination. As of March
31st, 2016 we have facilitated $2.4 billion loans since our inception. We billed a total of $130 million in fees,
an increase of 159% when compared with Q1 2015. Transaction fees from borrowers accounted for 93% of
total fees billed.
Net revenue in Q1 was a record $85 million, an increase of 187% year over year and 20% on a sequential
basis. This increase was primarily driven by the growth in loan origination volume due to strong customer
demand for our product and services.
Looking at our revenue mix, we recognized $82 million for loan origination services provided upfront, and $3
million for post-origination services. We deferred $3 million for post-origination services for future periods in
Q1 2016. $42 million in fees billed associated with risk reserve fund were net included in our income
statements.
In terms of our loan product portfolio during the quarter, 84% of our new loans facilitated were product D,
with a 28.2% average transaction fee rate. And the product volume mix for Product A, B, and C were 5.5%,
3%, and 7.5%, respectively, with transaction fee rate ranging from 5.6% to 26.4%.
On the investor side, we started to introduce lower yield products. Our 12-month Yidingying average
investment yield on our platform in Q1 2016 is about 9%, down from 9.3% in Q4 2015, as we continue to
benefit from decreasing interest rate environment as well as strong investor demand for high-quality assets
on our platform.
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Yirendai Ltd. (NYSE: YRD)
Q1 2016 Earnings Call Transcript
To further diversify our funding sources, we successfully completed issuance of our first RMB250 million
asset-backed securities of loans facilitated through our platform, a significant milestone, and the first in
China's online marketplace lending industry.
Turning onto operating expense, sales and marketing expense were $39 million for the quarter or 7% of loan
origination volume, compared with 8% in Q4, due to lower investor acquisition cost, as we saw seasonal
strong investor demand during holidays.
Origination and servicing costs were $6 million for the quarter or 1% of loans facilitated, similar to that in Q4
last year.
Our G&A costs were $9 million for the quarter or 11% of net revenue, compared to $7 million or 10% of net
revenue in Q4 2015, as a result of our recent move into a new office building while temporarily preserving
the previous workspace.
Our profitability further improved in Q1 2016, with EBITDA at $32 million or a 37% EBITDA margin,
compared with $6 million in Q1 2015 and a 20% EBITDA margin.
Net income during the quarter was $20 million with a 24% net income margin, compared with $4 million and
a 15% margin during the same period last year. This is attributable to the increase in net revenue and
timing of revenue recognition due to product mix, and also seasonal lower customer acquisition cost.
We continue to see solid credit performance from our portfolios. The recent delinquency rate and vintage
charge-off performance are well within our expectation. And charge-off performance for 2015 vintage loans
have shown improving trends, which demonstrate our capabilities in credit underwriting and risk
management.
Specifically, as of March 31, 2016, the overall delinquency rate for loans that are 15 to 89 days past due was
1.8%, compared to 1.3% as of December 31st, 2015. The increase reflects seasonality and is within our
expectation. The charge-off rate for loans originated in 2015 was 2.6% as of Q1 2016, compared to 1.5% as
of Q4 2015, as the loans further mature.
The charge-off rates for each vintage from Q1 to Q4 2015 is improving as indicated in the Cumulative M3+
Net Charge Off Rate curve on Slide 25 of the Q1 2016 management presentation uploaded on our IR
website, indicating strong credit performance of all our products in our loan portfolio.
As of March 31st, 2016, the outstanding balance of liabilities from risk reserve fund guarantee is at 6.5% of
remaining principal of performing loans, up from 6.1% in Q4 2015.
We believe the risk reserve fund liability balance is sufficient to cover expected future payouts and do not
plan to fund additional cash in the near term.
We also intend to maintain the 7% cash reserve ratio in Q2 2016 with respect to new loan origination. We
expect the solid credit performance to continue as we further refine our risk pricing model, expand our
product portfolio into high quality asset and improve delinquency management.
On the balance sheet side, we had a very strong cash position with about $172 million in cash and cash
equivalents. Additionally, we also had $101 million in restrict cash in our risk reserve fund account and trust
account. We also booked $31 million in loans at fair value as a result of consolidating the trust.
Our liabilities were mainly comprised of two items, $112 million in liabilities from risk reserve fund guarantee
and $40 million payable to fund at fair value as a result of consolidating the trust.
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Yirendai Ltd. (NYSE: YRD)
Q1 2016 Earnings Call Transcript
Cash flows in Q1 2016 were also very healthy. We generated $49 million in cash from operating activities,
which was mainly generated from transaction fees charged to borrowers, $6 million used in investing
activities, which was mainly related to the purchase of short-term investments, and $3 million used in
financing activities to pay off IPO-related cost.
With that, let me go over our guidance for the second quarter and full year 2016. We expect loan origination
volume for the second quarter of 2016 to be in the range of $640 million to $650 million, and net revenue in
the range of $95 million to $100 million, and second quarter EBITDA in the range of $20 million to $25
million.
Our full year 2016 projections remain unchanged from our previous guidance. Loan origination volume is
expected to be in the range of $2.8 billion to $2.9 billion, full-year net revenue in the range from $400 million
to $410 million, and EBITDA from $100 million to $105 million.
That concludes my remarks. I'd now like to turn the call back to operator for the Q&A session.
Questions and Answers
Operator: Thank you. We will now begin the question-and-answer session. (Operator Instructions) Dick
Wei of Credit Suisse.
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Dan Jo: This is [Dan Jo] calling on behalf of Dick Wei. I have two questions. Could you give more updates
on our ABS product and what's our long-term strategy in the securitization?
Dennis Cong: Sure. Yes. ABS is a strategy in terms of funding diversification to connect with institution
fundings. That'll be a long-term strategy in terms of funding sources.
The first ABS is a small volume at RMB250 million. And we expect to continue to conduct ABS throughout
the years. But the volume is probably not going to be very significant to start with. We probably will
continue to do each quarter, but in a controlled pace.
Dan Jo: Yes. Thank you. And last question, how do you see the competitive landscape in China's P2P
market? And can you share with us your view on the likely regulation going forward? Thanks.
Huan Chen: So you were asking about regulatory framework as well as competition?
Dan Jo: Yes. Right.
Ning Tang: Yes. On the regulation front, the CDRC [Debt Alliance] and specific rules are not officially out
yet. They are still being reviewed, as we understand. But, and actually, industry associations and
companies are actually operating under the spirit of such rules and guidelines.
For example, Beijing P2P Association is organizing companies to do self review and peer review, which we
believe are quite helpful. And so we believe that we are in full compliance.
On the competitive landscape, yes, front, we expect that the market will become more and more competitive,
and we see that there are more and more companies trying to do online lending. And last year there were
already such companies, and this year we see more coming.
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Q1 2016 Earnings Call Transcript
And so we continue to strengthen our market leadership by doing further R&D on data sources,
strengthening our risk management (inaudible), so on. And we believe we have a lead in the market.
Dan Jo: Okay. Thank you very much.
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Operator: Mayank Tandon of Needham and Company.
Mayank Tandon: Dennis, I just wanted to ask you about some of the financials. You obviously beat
expectations pretty comfortably relative to what you had said back in March. But you aren't flowing through
the upside into the full-year guidance. So if you could comment on that, one.
And secondly, also, just in terms of the second-quarter EBITDA coming down on a sequential basis, is that
just a function of increased marketing and higher customer acquisition costs or is there something else that's
driving that lower versus the first quarter performance?
Dennis Cong: Sure. Yes. Thanks. I think first, in terms of full-year guidance, right now we're only in May.
Of course we'll continue to see strong demand of our business, both from the borrower side as well as the
investor side.
However, from a management perspective, it's still a bit early to give us a good, solid transparency or
confirmation on the full-year financial performance. So at this moment, we maintain our full-year guidance,
even though we continue to see good demand on our business on both sides.
I think in terms of the margin guidance, as we mentioned, Q1, we actually see a benefit of the seasonal
strong investor demand. So the [customer] acquisition for the investor has actually come down quite
significantly.
While in terms of our business operation, I think our business will continue, it's still in a very fast growth
stage. And there's a huge market ahead of us and many, many new product developments that we will
focus on.
So I think we will maintain our guidance full-year EBITDA margin around 25% as our operating guidance.
So that's why Q2, we'll continue to guide with that, and Q1 more or less is seasonal strong investor demand
causing the benefit of lower customer [acquisition] cost that is a high margin for that particular quarter.
Mayank Tandon: Great. And then just a follow-up question in terms of the delinquency rates and the
charge-off rates. I think I heard you, you said seasonality has a lot to do with the uptick relative to the fourth
quarter. But if you could just provide some more color and thoughts behind what is driving the higher
delinquency rates and the charge-off rate on a sequential basis. Then what should we expect going forward
through FY16?
Dennis Cong: Yes. I think first, the delinquency, as well as the charge-off performance is within our
expectation. However, usually in Q1, because the holiday seasons, the collections and then our [sales]
usually slow down -- collection activity slows down a bit.
So usually from seasonality perspective, you'd see slight uptick of the delinquencies or the charge-offs. And
also, the other reason is that loan volume growths usually slow down sequentially in the first quarter as well.
And that's just some granularity on the business performance. But the overall delinquency rate, as well as
the current charge-off performance continue to be in our expectation.
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Yirendai Ltd. (NYSE: YRD)
Q1 2016 Earnings Call Transcript
And I think the key thing really to look at are overall credit performance of our loan portfolio is really the
charge-off curves that shows in our management presentation on slide 25, that you can see for the 2015
vintages. Q1, Q2, Q3, Q4, the vintage curve is actually showing a very healthy continued improving trend.
So that is a very good confidence in terms of our overall asset performance and what the delinquency or
charge-off performance is going to be through the 2016.
And in terms of overall risk management, we continue to be very focused in terms of our risk pricing policies,
product development, and delinquency management through 2016. And we expect the overall performance
of our credit will continue to be solid.
Mayank Tandon: Great. And one final question. In terms of the breakdown of the four category loan types,
A, B, C, D, how do you see that evolving over time? Obviously, D is a very high percentage. But longer
term, how does that mix evolve based on what is going on in China in terms of the demand for P2P lending?
Dennis Cong: Yes. I think, first, we serve the urban salary workers in China with the product from A to D,
which we see strong demand for each different products. And we would expect that even our funding costs
coming down we'll be more available to serve higher quality borrower space in China.
So we would expect our A, B, C type of products the percentage to increase as we're going through the year.
And also, we will be working with more partnerships and more channels to tap in more high-quality assets in
China.
So overall, we would expect the product mix shift to [work] A, B, C. But however, D type of product, loans
performing very, very well. Profitability is also very, very good. So we'll continue to see that as a major part
of business in 2016.
Mayank Tandon: All right. If I can just squeeze one more in. The take rate, at least based on my
calculation, went up to 15.9% in the first quarter, up from 14% in the fourth quarter. Is that tied to the mix
shifting more toward D in the short term? Then how should we think about the take rate going forward?
Dennis Cong: Actually, the reason is more due to the trust. In Q4 2015, we had RMB250 million (inaudible)
trust. And that trust revenue recognition is actually amortized. It's not up front.
If we recognize those trusts up front, we will actually see our revenues increase in the mid-15 range, 15.5
range.
So in terms of the revenue take rate actually from product mix as well as online/offline product percentage,
there is not a significant change. It's more due to the revenue recognition of the trust back in Q4 2015.
Mayank Tandon: Okay. Got it. Thank you.
……………………………………………………………………………………………………………………………….
Operator: Richard Xu of Morgan Stanley.
Richard Xu: Two quick questions. One is this year actually a lot of banks are also trying to extend their
credit card businesses and obviously probably potentially raise their credit lines for some of the existing
credit card users.
Are you seeing any competition, any potential competition on the rate that you're offering?
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Yirendai Ltd. (NYSE: YRD)
Q1 2016 Earnings Call Transcript
Secondly is, in terms of the evolving business model, are you thinking about cooperating with some of these
Internet firms and trying to actually get referrals from these channels and then also help you to understand
better where the funds are actually being used going forward? Thank you very much.
Ning Tang: Richard, the first question is about the competition from banks. The second question is about
the cooperation with Internet companies. Is that a correct understanding?
Richard Xu: Yes.
Ning Tang: Okay. So regarding competition from banks, all the so-called banks going downstream, our
observation is that that kind of offering is mainly for a different credit segment, yes, not the segment we
serve, yes.
And so what we do is actually complementary to bank offerings. And also, I think more and more banks will
like to partner with us by becoming lenders on our platform for the segments that they cannot serve with
their existing infrastructure.
On the Internet company cooperation front, our view is that in the future there will be more and more
cooperation between Internet companies and Internet finance, FinTech companies like Yirendai. However,
as you may well know, China market is highly dynamic and many Internet companies try to do finance on
their own.
Of course we are in talks with several Internet companies as Yihan has mentioned, yes. And so we will see
strategically more and more cooperation with Internet companies. And our view is that finance is beyond
most Internet companies' comfort zone and capabilities.
Richard Xu: Thank you very much.
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Operator: Polar Zhang of BOCI.
Polar Zhang: This is Polar from BOCI. My question is how do you think the supply side reform will impact
our asset quality? Will our risk model be able to identify if a potential client actually will become [employee
of] (inaudible)? Thank you.
Operator: Hello? Speakers, I believe your line may be on mute.
Huan Chen: Yes. I think taking our offering to our borrowers, many of our (inaudible) have already
identified with industries and their profession. So we're also double checking during our underwriting
process.
And the reason we (inaudible) system (inaudible) have done economic slowdown. But according to our
[message] based on our previous [risk] performance, they could see many big changes for our risk
performance (inaudible) and our (inaudible), yes.
Dennis Cong: And I think also, just add on top of that, we are taking precautious measures in terms of our
risk policies from direct geographic and industry perspectives. And also, in our credit modeling scores, we
do have a scoring for preferred professionals to capture those industry or their professional risk.
Polar Zhang: Okay. Thank you.
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Yirendai Ltd. (NYSE: YRD)
Q1 2016 Earnings Call Transcript
Operator: Sarah Tian of CICC.
Sarah Tian: My question is about the competition landscape and the customer finance market in China as
well. Earlier on you talked about the competition against the bank's credit card business. So my question is
really on the rest competitors here.
I know that in China we have customer finance, offline customer finance companies as well as some
ecommerce platforms which offer purchase on credit as well.
So from management perspective you know like we see these offline customer [company] that haven't really
grown up in China over the past decades. So what's the reason they haven't grew up, given that the
consumer (inaudible) growth in China is pretty strong? And what's the restrictions there? And how can
Yirendai overcome them going forward, because we're targeting the same market here as well? Thank you.
Unidentified Company Representative: So the question is about competitive landscape and why consumer
finance hasn't picked up in the past years?
Sarah Tian: Yes. And what's -Ning Tang: Consumer finance company -Sarah Tian: -- the restrictions -- yes.
Ning Tang: Yes. So Yihan and I will try and answer this question. And competitive landscape is surely
becoming more and more dynamic. There are banks and FinTech companies, also consumer finance
companies, and also those are drawing to Internet companies trying to do finance in some ways.
And our view is that different players have different strength, different angles, and serve strategically
different purposes. Yes. For example, we talked about banks' strategy utilizing their current like a credit
card basis. And Internet companies doing finance to serve their ecosystems, yes, to do better businesses.
And also, there have been more consumer finance companies in the, yes, competitive landscape. And they
have like partnerships with like retailers, so on, and some have acquired some scale, yes.
And our view is that it's about different credit segmentation covered by different players. For example, like
[Wei] Bank, yes, it's consumer segment is below like credit card, like 18% rate APR, and their expected loss
rate is below, well below 1%. So that's a very different credit segment from ours.
So I think different companies have their own credit segments to cover and develop proprietary capabilities
to do that, yes.
Yihan, you have anything to add, please?
Yihan Fang: Yes. I just want to add a point that because Yirendai has been doing like end-to-end online
using technology lending for years and we accumulated experience in terms of like authorizing online, using
the data online with technology. So we have a benefit of handling those Internet companies to do the
consumer financing needs like for online purchases and we see a unique advantage, especially for like a big
(inaudible) assumption [lien], and we're already making progress in those areas.
Ning Tang: Yes. To add to that, the reason we believe consumer finance in the past decade probably
didn't take off big time is mainly because China's credit infrastructure is still in early stage, quite poor, still
there isn't a credit bureau system. We cannot report our data to Central Bank and cannot receive data from
Central Bank. And data sharing mechanism among industry players is still weak.
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Q1 2016 Earnings Call Transcript
So as a result, is not easy to do consumer finance risk management. And I think that's where, yes, we've
built our edge, yes. Yirendai's parent company, CreditEase, is one of the first starting to do consumer
finance, non-bank finance from 10 years ago doing, yes, offline and online, yes. And Yirendai specializing in
online was also among the first, yes, started four years ago when most the players were focusing on offline.
So I think our early mover advantage is quite clear. And although, on the credit infrastructure, the big
infrastructure is still quite early, quite weak, we have built our own proprietary risk management model
based on the biggest credit database in the industry. And we believe that gives us quite some edge.
Sarah Tian: Very good. Thank you.
Operator: And showing no further questions, we're going to conclude today's conference call. We thank
you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
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