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LexinFintech (NASDAQ: LX)
Q2 2023 Earnings Call
Aug 29, 2023, 10:00 p.m. ET


Prepared Remarks Questions and Answers Call Participants

Prepared Remarks:


Hello and welcome to the LexinFintech second quarter 2023 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. [Operator instructions] Please be advised that today’s conference is being recorded.

It is now my pleasure to introduce our IR director, Mandy Dong.

Mandy DongDirector, Investor Relations

Thank you. Hello, everyone. Welcome to Lexin’s second quarter 2023 earnings conference call. Our results were issued earlier today and can be found on our IR website.

Joining me today are our CEO, Jay Xiao; president, Jared Wu; and CFO, James Zheng. Before we get started, I’d like you to remind you of our safe harbor statement in our earnings press release, which also applies to this call. During the call, we may refer to business outlook and the forward-looking statements, which are based on our current plans, estimates, and projections. The actual results may differ materially, and we undertake no obligation to update any forward-looking statements.

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Unless otherwise stated, all figures mentioned are in RMB. Jay will first provide an update on our overall performance. James will cover the financial results in more details. And lastly, Jared will then discuss risk management.

I will now turn the call over to Jay. His remarks will be in Chinese, and the English translation will follow.

Jay XiaoFounder, Chairman, and Chief Executive Officer

[Foreign language] Hello, everyone. It’s my pleasure to share with you our performance for the second quarter of 2023. In the current macroeconomic environment, we have achieved another strong quarterly results by adopting a prudent business approach. Loan volume for the second quarter was RMB 63.9 billion, up 30% year over year, once again exceeding the high end of our guidance.

Loan balance reached RMB 114.1 billion, up 32% year over year. Revenue was RMB 3.1 billion, up 27% year over year. Net profit was RMB 356 million, up 112% year over year. [Foreign language] In the second quarter, we adhered to the two main focuses of risk and data, pushed forward more refined operations, iteratively upgraded user risk identification system, and improved the quality of new assets.

The e-commerce business grew rapidly, and the synergies with the main consumer finance business got further enhanced. We have achieved solid business growth for the five consecutive quarters, with profitability and cash flow improving significantly. In addition, we attached great importance to compliance capability-building and successfully completed the stage-by-stage credit reform, which was to disconnect with financial institutions, in Chinese [Foreign language] as scheduled in accordance with the June 30 end day compliance requirements. [Foreign language] There were three highlights of the second quarter results.

[Foreign language] First, we further refined operations to optimize asset structure and increase the proportion of high-quality customer segments. In the second quarter, we continued to iterate and hone our models to strengthen our risk identification capabilities and to improve the accuracy of user identification. In terms of existing customer operations, thanks to our improving capabilities, marketing efficiency reached a higher level. In the second quarter, marketing efficiency increased by 16%, while telemarketing costs decreased by 39% sequentially.

In terms of the operation of settled users, the order rate of the reapproved user in the same month increased from 40% to 90%, and day one delinquency rate decreased by 20%, which manifested our notable operational improvement. In terms of new customer operations, the number of new active users increased by 14.9% in the second quarter compared to Q1, while customer acquisition cost remained basically flattish. Continued refinement of operations also brought us a steadily improvement in asset quality. The proportion of new loans contributed by high-quality users rose to 92% from 80% in the second quarter of last year, while the day one delinquency rate in the second quarter fell by nearly 10% on a quarter-over-quarter sequential basis.

Although the asset quality of existing loans fluctuated slightly due to a specific industry event and the macro environment, we believe overall asset quality will continue to improve as we acquire more and more high-quality users. [Foreign language] Secondly, we saw the rapid growth of our e-commerce business and then further enhanced the synergies among different business segments in our Lexin consumption ecosystem. In the second quarter, the e-commerce business achieved a transaction volume of RMB 1.49 billion, up 31.6% Q on Q and 34.5% year over year, exceeding the 10.7% year-over-year growth rate of total retail sales of consumer goods, and the e-commerce business achieved a 44% year-over-year growth rate of transaction volume during the June 18th shopping festival period. The number of users also grew substantially.

In the second quarter, the number of active users in the e-commerce business grew 24.2% Q on Q and 36.4% year over year. The e-commerce business has been focusing on high-quality and high-growth young consumer groups who fancy new trendy goodies. Therefore, we continued to introduce high-quality merchants such as fashion sports and international like luxury brands that are more suitable for installment consumption. With more merchants and product categories introduced on our e-commerce platform, a large number of existing users have been revitalized, resulting in the synergy between e-commerce and the consumer finance business.

During the June 18th shopping festival period, the significant growth in the e-commerce consumer traffic led to a rise in the number of quality active users in the consumer finance business, with an increase of approximately 4% in June compared to April. At the same time, the active user in consumer finance business have further stimulated the e-commerce consumption, resulting in a mutually reinforced loop in the business ecosystem. We have seen further reinforced synergies between e-commerce platform and consumer finance in terms of acquiring new customers and boosting existing users’ activities, attributing to our unique Lexin consumption ecosystem. In July, we won the award of Best Digital Customer Ecosystem Initiative in China by the industry-renowned Asian Bankers.

[Foreign language] Thirdly, we have successfully delivered five consecutive quarters of solid business growth and a strong cash flow. In the second quarter, our net margin rose to 11.6%, a 4.7 percentage increase on a year-over-year basis. Cash flow remained strong and increased by 30.2 compared to the year-end of fiscal year 2022. We have always taken a firm stance to implement a two-wheel drive strategy of risk and data, which essentially fueled the turnaround of our business since the nadir in the Q2 of 2022.

The second quarter in 2023 is the fifth growing quarter in a row, and we expect the momentum to continue. Taking the above-mentioned into consideration, the board approved and decided to distribute recurring cash dividends, aiming to improve return to our shareholders and express our full confidence in the business prospects in the long run. Starting from the second fiscal quarter of 2023, we will distribute a recurring cash dividend semiannually at an amount equivalent to approximately 15% to 30% of the company’s net profit in the previous six-month period or as otherwise authorized by the board. In Q3, we will distribute a dividend of U.S.

dollar 5.8 cents per ordinary share or U.S. dollar 11.6 cents per ADS for the six-month period ended June 30, 2023, representing approximately 20% of net profit for the period of the first half 2023. [Foreign language] It is our continuous implementation of a two-wheel drive strategy that effectively bolstered the steady growth of our business. On the front of technology investment, in Q2, research and development expenses reached RMB 120 million, maintaining the industry-leading level.

It’s worth noting that we accelerated the development of the use case of AI large language models in finance sector. This model has been incorporated into our chat robots that are used in the daily operation of tele-sale, smart customer service, and operation inspection. Thanks to the application, we saw ongoing improvements in our operational efficiency and the refined user experience. For example, in terms of customer service application, percentage of cases solved without human intervention increased to 91.5%, which got 8.2% higher on a year-over-year basis.

Regarding the use case in smart assistant service, in addition to coding assistant tools and initiative of design we talked about in last quarter, we further applied through data analysis the design and optimization of risk management database, which boosted the analysis efficiency and then reduced employees’ workload. [Foreign language] Last but not least, let me give you an update on our progress in social responsibility. Since we launched small store-supporting project focusing to facilitate the financing needs of SMEs, we have helped over 100,000 SME owners in over 300 cities and 30 provinces. In addition, on the front of customer protection, we worked together with regulators, the police, lawyer, and the industry association, and the financial institutions.

Our capability in terms of data security got further recognition from national-level institutions such as the China Academy of Information and Communications Technology and the China Cybersecurity Industry Alliance. [Foreign language] Looking ahead, in the face of the complex and uncertain macro environment, we will remain the prudent business approach, continuously push ahead strategies of risk management integrating and customer base upgrading, and to deliver higher quality growth. [Foreign language] Next, I will pass to our CFO, James, for financial updates.

James ZhengChief Financial Officer

Thank you, Jay. I will now provide more details on our financial results. Please note that all numbers are in RMB unless otherwise stated. The second quarter marked our fifth consecutive quarter of rebound since we bottomed out from the trough in Q1 of last year.

We delivered another quarter of healthy growth, both in overall operating and financial numbers. This is not an easy achievement amid the relatively mild consumption recovery in the second quarter, thanks to our continuous efforts on reconstructing risk management capabilities, upgrading to a better customer base, refining the operations, and cost optimization initiatives. We believe we have planted the right seeds by undertaking the above-mentioned strategies and expect to reap more benefits of such improvements in the coming quarters. First, please let me elaborate at a high level on what happened in this quarter as compared with the same quarter of 2022.

Total loan originations for the quarter reached 63.9 billion, an increase of 30.1% year over year, beating the high end of Q2 guidance we gave earlier. Revenue grew by 26.6% year over year to reach around 3.1 billion for the quarter, which was mainly driven by the GMV growth and the increased loan balance, which reached 114 billion. As a result of our customer base upgrading, better-quality customers usually generate larger ticket-sized loans, hence contributing the GMV growth. The strong revenue growth was achieved despite the fact that the weighted average APR fell below 24% in Q2, around 1% point lower than a year ago.

Loans with APR and the 24% now made up over 86% of all loans, more than 5% higher than one year ago. Another contributing factor was the funding cost, which stood at 6.6% during this quarter, a decrease from 7.2% a year ago. As the corporations with new funding partner banks continue to roll out, we expect lower funding costs in the coming quarters. In addition, the loan tenure was 14.7 months, versus 12.8 months in Q2 last year, also contributing to the revenue growth.

However, amid the increased macro uncertainties, we have started to optimize the tenure structure earlier this year to reduce the potential exposures. We continue to sharpen our focus on iterating and refining risk management capabilities in the second quarter, upholding risk management as our top business priority. Asset quality steadily trended better. For instance, day one delinquency rate got lower.

We also further improved accuracy of credit profiling and risk management efficiency. Due to the short-term turmoil in the post-loan collection industry caused by some certain company-specific incident, our 30-day-plus delinquency rate and the 90-day-plus delinquency rate fluctuated a bit, but still better than one year ago, standing at 2.59% and a 4.61%, respectively, versus 2.63% and a 4.85%. In Q2, as we continue to push ahead cost efficiency initiatives, total operating-related costs and expenses, including processing and servicing costs, sales and marketing, R&D, and G&A as a percentage of average loan balance, dropped notably to 1.01%, versus 1.43% in Q2 of last year, indicating a 42 basis point of cost reduction. On a going-forward basis, we are fully committed to continue the cost optimization initiatives as one of the long-term strategies.

As a result of the aforementioned, we are able to report a net income of 356 million, an increase of 112% year over year. The net margin improved to 11.6%, versus 6.9% in Q2 last year. We have seen substantial improvements in operational efficiency and profitability compared to one year ago, which clearly serves as a strong testament of our ability to sustain the V-shaped rebound. Apart from the above year-over-year analysis, I would also like to share some perspectives through our quarterly comparison.

In Q2, total [Technical difficulty] 63.9 billion, an increase of 4.9% quarter over quarter, as we maintained a prudent growth approach considering the wary consumer spending. It’s worth mentioning that we fully leveraged our Lexin consumption ecosystem and well captured the growth opportunity during the June 18th shopping festival. As a result, we were able to deliver a faster-than-expected 31.6% quarter-over-quarter GMV growth on the e-commerce platform. We also expanded product offerings and introduced more high-margin SKUs in order to boost the gross profit of the e-commerce business line.

Consumer finance take rate fell slightly to 2.3% from 2.5% of last quarter. The slight fluctuation in take rate is the combined results of the lowered APR, which stood at 23.6%, versus 24.4% in Q1; and more bookings of provisions due to the overall market uncertainty and the shortened tenure. The tenure is now at 14.7 months, versus 15.1 months of the previous quarter. Consequently, the total operating revenue for Q2 booked an increase of 2.4% quarter over quarter.

Among which, revenue from tech-empowerment service registered a 6.5% increase quarter over quarter, and the revenue from the installment e-commerce recorded an increase of 5.5% quarter over quarter. The e-commerce revenue growth was lower than GMV growth due to the increased platform service, or pop business, instead of the company directly sourcing and selling the merchandising. Therefore, more revenue is booked on the net basis. Overall operating expenses stayed almost flat despite 3% growth in sales and marketing-related costs driven by the user growth.

Offsetting the sales and marketing cost increase is the decrease in G&A and R&D expense due to efficiencies. Therefore, we achieved a sequential growth in net income of 8.6% and further enhanced the net margin to 11.6% from 11% in the last quarter. To conclude, we have registered a strong improvements during the second quarter from both year-over-year and a quarter-over-quarter perspective. This solid result was achieved under the current macro uncertainties and the slowing economic recoveries.

At the end of the second quarter, the company had a cash position of around 5.5 billion on hand and net equity position of 9.4 billion. In view of the healthy cash flow situation, the board approved the semiannual dividend plan. The cash flow from operations is improving and robust to sustain a future growth, thanks to increasing profitability, more efficient guaranteed deposit required for the loan facilitation business. This also demonstrates our confidence in the overall business to continuously produce shareholder returns.

Finally, I would like to update our outlook for the second half of 2023. Based on the company’s preliminary assessment of the current market conditions and the macro situation, the company reaffirms the early of-the-year guidance of annual GMV amount of 245 billion to 255 billion, which represents a 20% to 25% year-over-year growth. Therefore, for the second half of the year, we’re expecting the high single-digit to mid-teens percentage growth year over year. These estimates reflect the company’s current expectations, which is subject to change.

In [Technical difficulty] second quarter results represented the fifth consecutive quarter of continued rebounding, both in operating metrics and the financials, and further solidifies our commitment to continue the turnaround journey despite possible headwinds from the macro uncertainties. 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 WuPresident

[Foreign language] In the second quarter, we continued to promote our strategies of focusing on risk management and upgrading customer growth and had achieved notable results in several aspects. The overall day one delinquency rate continued to drop, down nearly 10% compared to Q1. The 30-days and 90-days delinquency rates were effectively stabilized within a manageable range. [Foreign language] In terms of data mining and the model iteration, we continued to increase the utilization of PBOC’s data, third-party data, and internal data from our Lexin consumption ecosystem and upgraded the model matrix of each business line.

As a result, we managed to improve the accuracy of identifying user risk levels and the credit needs. [Foreign language] On the front of IT infrastructures, we successfully developed a simulation system for operational decision-making, empowered by AI technology. The system can generate operation decisions for monthly order within one minute, with over 95% accuracy, which essentially bolstered our business decision-making through big data and AI models. [Foreign language] To pursue and optimize the balance between risk and return, we started to adjust our tenure structure of overall portfolios and the generation plan for long-tenured loans.

Thus, the average tenure of new loans steadily declined, and we expected to trend shorter in Q3. [Foreign language] In the aspect of post-loan collection operations, due to the turmoil in the loan collection industry and the impact from anti-collection criminal groups, our asset quality metrics related to post-loan performance got impacted to some extent. Thanks to our prompt carrying out of countermeasures, the impact is gradually fading out. [Foreign language] We have continuously honed our fundamental risk management capabilities this year.

Therefore, we effectively improved our capability in credit profile identification and efficiency in risk management. As a whole, we are seeing essential progress in risk management capabilities and the steady improving trend in asset quality. We remain in full confidence that every endeavor we make today will certainly bear more fruits in the coming quarters and lead to our qualitative leap forward on the front of risk management and asset quality.

Mandy DongDirector, Investor Relations

This concluded our prepared remarks. Operator, we can now open the floor for questions.

Questions & Answers:


Thank you. [Operator instructions] And our first question comes from the line of Frank Zheng with Credit Suisse.

Frank ZhengCredit Suisse — Analyst

[Foreign language] Thank you, management, for giving me the opportunity to ask questions. I have two questions. The first one is on the outlook for various operating metrics in the third quarter, as well as in the second half. How is the credit demand in July and August in view of the macro headwinds? And the second question is on asset quality.

As mentioned previously, due to the change in loan collection industry, there are some fluctuation in asset quality. What’s the impact so far? And also, can management share more update on future outlook of asset quality? Thank you very much.

Jay XiaoFounder, Chairman, and Chief Executive Officer

[Foreign language]

James ZhengChief Financial Officer

[Foreign language] I’d like to add a little bit more. Basically, in view of the uncertainties in the macro situation, we’re going to stick to our original early of-the-year guidance of 245 billion to 255 billion GMV growth. That represents 20% to 25% year-over-year growth. As a matter of fact, while we have completed the first half of the year already, if you look at the numbers, we have achieved 35% year-over-year growth up to this point.

So, that means if we look at the whole year of 20% to 25%, for the second half, we’ll be looking at basically a GMV growth of high single-digit to probably mid-teens growth in terms of GMV. And really, this is because we are adopting a very prudent kind of approach in terms of the business growth. We would like to kind of a more of looking at the stabilize the overall scale, the overall GMV growth, but really put the risk management and also the net income, the overall profitability as the first priority when we go with our operations for the second half.

Unknown speaker

OK. So, Frank, I’ll do the translation for Jay. For the first question, we do — like James said, we expect the full year guidance to maintain within the range of 245 billion to 255 billion. And I think this year, as of right now, the macro recovery is not too optimistic as we were hoping to or expecting for the — earlier this year.

And then we’re actually consciously controlling the — our increase in pace. And right now, depending on the macro environment, right now, we’re taking a more prudent business approach. We’re focusing more on profitability as our priority. And for the second half, the increasing pace of our business expansion really depends on the macro recovery conditions.

And for the companies — from the company’s operational level, the demand growth in July and August is more or less similar to the second quarter, and we don’t see a very strong recovery trend. So, the third quarter will be more on regional growth, again focusing more on profitability, and it will remain more or less stable.

Jay XiaoFounder, Chairman, and Chief Executive Officer

[Foreign language] In terms of your second question, as I mentioned before, with the macro economy being down a little, it did put some pressure on our asset quality. In the second quarter, with the known industry impact from the collect — certain collection issue having with a certain collection company, we did bear some burden. It did impact our collection rate or 30-day collection rate, but we are having — putting on more efforts improving on our new assets — asset quality. As we mentioned earlier in our script, the overall asset quality for our new assets are actually improving.

And then it, in turn, reflected on a lower 30-day collection rate. And it kind of evened out the overall data. In the future, with the macro not being in the recovery we were kind of hoping to, there will still be some challenge on our risk level. But we’re confident, as we input or taking in more good-quality new assets, the overall asset quality will get better.

I hope that answers your question, Frank.


Thank you. One moment, please, for our next question. And our next question comes from the line of Alex Ye with UBS.

Alex YeUBS — Analyst

[Foreign language] So, my first question is on the e-commerce business line. So, management has mentioned in the remarks that the business line has grown rapidly in Q2. Can you elaborate a bit more on the drivers and your future plans on this business? Second, there is some mentioning about the e-commerce business line being a part of the Lexin ecosystem. Could you — can we also get some color on the update on Lexin consumption ecosystem as a whole? Thank you.

Jay XiaoFounder, Chairman, and Chief Executive Officer

[Foreign language] So, fully — we’ve been focusing on high-quality and potential users. And for the last quarter, we have — we continue to expand our categories and introduce high-quality merchants, as well as increasing our category to fit better to our target audience. And also, we’ve been leveraging on the 618 e-commerce shopping festivals, and we’ve increased our operational efforts and our promotional range that which resulted a very remarkable result. And a more fundamental reason is that we actually rooted [Technical difficulty] back to the day, we’re rooted in the consumer genes of the Lexin group.

We have created a consumer ecosystem that’s centered around good quality, high potential users. And the synergy between e-commerce and business and our consumer finances have been further strengthened, and they mutually encourage each other. And specifically, our e-commerce platform actually helps us when it comes to customer acquisition, as well as revitalizing the already settled customers that are creating such synergies between two platforms and business. [Foreign language] So, Lexin started from the installment e-commerce business.

We’ve gradually built up Lexin from outside segment consumer ecosystem, which includes consumer finance as the main business, accompanied by the installment e-commerce business [Inaudible] offline customer acquisition finance business, the SaaS business for financial — for providing services to financial institutions and innovative business, which is a multibusiness line and all-round ecosystem of providing credit services to customers. And as we just introduced prior the progress of our e-commerce business in the second quarter, our SaaS business for financial institutions and [Inaudible] offline team business are developing steadily, as expected and accordingly to our plan. And we believe that we will have a more scalable and more notable business, more significant results to actually share with you in the future. I hope that answers your question, Alex.

Alex YeUBS — Analyst

Sure. Thank you.


Thank you. One moment please for our next question. Your next question comes from the line of Yada Li with CICC.

Yada LiCICC — Analyst

[Foreign language] Then I’ll do the translation.

Jay XiaoFounder, Chairman, and Chief Executive Officer


Yada LiCICC — Analyst

Hello, management. Thank you for taking my question. My question is about can the management elaborate more about the reasons on approving the dividend policy under current circumstances. And are there potential impacts on the company’s cash flow? That’s all.

Thank you.

James ZhengChief Financial Officer

OK. I’ll take this question. In view of the macroeconomic uncertainties, obviously, we are maintaining a very prudent approach in terms of business growth. So, we are basically trying to look at more stabilized — stabilizing the overall kind of scale, but really put the focus on risk management and profit.

So, basically, if you put more focus on risk management and profit, this will actually generate more profit. So, we continue to see the growth in profit opportunities. Plus, we continue to take cost optimization initiatives as one of our long-term initiatives. This will also lead to higher profitability down the road.

So, basically, the cash flow from operation is sufficient and robust to support future business expansion. And as we announced earlier of the year, we also have kind of restructured our original convertible bond with PAG. So, the payment to the PAG, actually, is not an issue for us anymore. As a matter of fact, we have paid half of the original convertible bond amount.

So, its cash is sufficient, and we feel that dividend really is a more direct and tangible way to reward the shareholders at this time. So, that’s why the board has approved our plan to start giving out the dividend on the semiannual basis in the range of 15% to 30% of the net income. That’s as a recurring policy. So, really, this underscores the overall management’s confidence in the operations of the business.

So, hopefully, this answers your question, Yada.

Yada LiCICC — Analyst

Well, thank you very much.


Thank you. I’ll now hand the call back for any closing remarks.

Mandy DongDirector, Investor Relations

OK. Thank you, everyone, again for joining us today. If you have further questions, please contact us via our contact information available on our IR website. Thank you, everyone.


[Operator signoff]

Duration: 0 minutes

Call participants:

Mandy DongDirector, Investor Relations

Jay XiaoFounder, Chairman, and Chief Executive Officer

James ZhengChief Financial Officer

Jared WuPresident

Frank ZhengCredit Suisse — Analyst

Unknown speaker

Alex YeUBS — Analyst

Yada LiCICC — Analyst

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