Credit East's Q2 revenue rises 10.4% year-over-year, driven by AI strategy and 57% loan volume increase, despite regulatory headwinds.

OPERATOR - (00:02:15)

Good day ladies and gentlemen and welcome to the Yiren Digital second quarter 2025 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal an operator by pressing Star and then zero. After today's presentation, there will be an opportunity for questions. To ask a question, you may press Star and then one on your touchtone phone. To withdraw your question, please press Star and then two. Please note that this event is being recorded. I will now turn the conference over to Kyo, IR Officer of Yiren Digital. Please go ahead Ma'.

UNKNOWN - (00:02:59)

Am.

Kyo - Investor Relations Officer - (00:03:01)

Thank you Operator. Good morning and good evening everyone. Today's call features the presentation by our founder Chairman and CEO of CreditEase, our CEO Mr. Ning Tiang and our CFO Mr. William Hui. There will be a Q and A session after the prepared remarks. Before beginning, we'd like to remind you that discussions during this call contain forward looking statements made under the Safe harbor provision of U.S. private Securities Litigation Reform act of 1995. Such statements accepted risks, uncertainties and factors that can cause actual results to differ materially from those contained in statement. For the information regarding future risks, uncertainties or factors is included in our filings for the U.S. Securities and Exchange Commission, we do not undertake any obligation to update any forward looking statements as required in the relevant rules. During the call, we will be referring to certain non GAAP financial measures and supplemental measures to review and assess our operating performance. These non GAAP financial measures are not intended to be considered in expectation or as a substitute for the financial information prepared and presented in accordance with the US gaap. For information about this non GAAP benefit measures and reconciliation to GAAP measures, please refer to any press release. I will now pass it to Ning for opening remarks.

Ning - (00:04:21)

Thank you all for joining our earnings conference call today. We are pleased to report another strong quarter driven by the continued success of our AI powered strategy. Our advanced AI capabilities have delivered quantifiable results, more personalized customer engagement, enhanced risk management with predictive analytics and fraud detection and improving service efficiency with compliant tailored solutions. This robust AI foundation enables us to innovate faster, exceed customer expectations and optimize operational performance. Our growth is further fueled by three strategic priorities. My three strategic priorities AI innovation, geographic expansion and operational excellence. These initiatives are accelerating momentum across our core business while unlocking new opportunities through our proprietary AI platform. By executing on this strategy, we are well positioned to sustain long term success. Here are some of our successes Our AI sales agent executes over 1,700 personalized marketing tasks which results in a higher customer response rate. The AI capital manager completes the capital deployment optimization process in 10 minutes versus one week by six employees in the past. The AI risk manager detects and blocks over 30,000 high risk identity documents daily, resulting in the prevention of over RMB180 million of loss from fraud annually. Most of our AI agents are monitored 24. 7 by our supervisor. AI model for quality Checks and the System Integrity before we get into details of our operating results, I would like to address the recent loan facilitation regulation announcement. While the full impact on industry on industry take rates and business operations is yet to be seen until the regulations take effect on October 1, we have noticed that credit risk and capital cost have increased slightly. We believe the more regulated environment and the market conditions will trigger industry consolidation as smaller platforms exit the market and heighten the entry barrier. This will benefit established platforms like us. We are exploring different risk sharing models with our partners to mitigate potentially higher risk. Now let me go through our business highlights for this quarter. First on our financial services business, which accounts for over 90% of our revenue in the second quarter of 2025, loan volume facilitated reached RMB 20.3 billion in Q2, representing a 34% increase quarter over quarter and a 57% growth year over year. The robust growth is mainly driven by increasing repeat borrowing which rose to 77% in the second quarter of this year, up 3 percentage points from the prior quarter and 21 percentage points from the same period last year. As we reiterated previously, driving up repeat borrowing rate and improving the long term. Trust and stickiness among our higher quality borrowers are our key focus as we have notably upgraded our customer base by attracting those with stronger repayment capabilities and better credit performance. AI innovation and application have played a pivotal role in driving our key objectives of boosting repeat borrowing rates and elevating service. In Q2 2025, we launched AI marketing system 2.0, extensively personalizing marketing content using generative AI. By the end of June, this system was conducting personalized Marketing for over 600,000 users daily using AI generated outreach strategies 30 times the output of the 1.0 version in the prior quarter. This expansion facilitated more meaningful and efficient interactions, with the average number of customer engagement rounds rising from 7.1 in Q1 to 8.3 in Q2, further enhancing sales conversion rates. Additionally, intention recognition accuracy surpassed 80%, enabling more precise and effective engagements. On the quality assurance front, our AI-powered inspection system underwent critical algorithm upgrades, now covering the entire telemarketing segment, it performs real time quality checks on over 2 million sales records daily with accuracy jumping from 75% to 92%. This advancement has increased labor productivity by 50% while ensuring consistently high service standards. Now let's turn to the funding aspect. In Q2 2025, our funding costs declined by 80 basis points year over year though with a slight quarter over quarter increase. While new regulations in the loan facilitation business have introduced a sector wide fluctuation in funding supply, we anticipate manageable capital costs for the remainder of the year supported by our strong liquidity management. Regarding our asset quality, our overall risk performance remained stable quarter over quarter though we did see some early delinquency increase in June, but the delinquency improved in July as we tightened our credit measures. As of June 30, our 1 to 30 day delinquency rate was 1.7% up 10 basis points from the previous quarter. Meanwhile, our 31 to 60 day and 61 to 90 day delinquency rates actually improved, coming in at 1.1% and 1.0% respectively. That's 10 and 20 basis points lower than where we were at the end of first quarter. We have made substantial progress in strengthening our risk management framework, recognizing industry wide trends. In the first half of this year, we overhauled our risk rating system, implementing a more granular eight level classification model with more strict assessment criteria. Under this enhanced system, we selectively switched the system to decline lowest tier borrowing application. This upgrade has effectively contained the delinquency increase in May and June and reversed the trend in July. We will continue to monitor the market conditions to maintain our loan portfolio performance. Speaking of our asset quality management, AI has also played a pivotal role particularly in loan collection. In the second quarter of 2025, our AI collection robot handled 81% of D1 delinquency cases and started to cover D31 to 60 cases in the domestic market. This automation realized average labor cost savings of RMB 2.7 million per month, a 42% increase from first quarter's monthly average of RMB 1.9 million savings. Besides cost saving, our customer experience improved substantially with borrower complaint rate decreasing by a further 80% quarter over quarter. Now let's look at our overseas business which continues to demonstrate strong momentum. In the second quarter of 2025, our loan volume in the Philippines reached nearly RMB200 million, representing a 54% growth compared to the first quarter of 2025. Our Indonesia pilot operation has begun and is expected to accelerate growth in Q4 this year and in 2026 following continued refinements to its data models, AI remains central to our strategy beyond our current applications. We are exploring the development of a fully autonomous AI agent platform that will integrate and automate the entire operational process planning, marketing, customer service, risk control, compliance and quality assurance. Once implemented, this platform is expected to significantly enhance operational efficiency and reduce costs. We look forward to sharing more exciting developments in the near future. Moreover, our insurance brokerage business showed gradual recovery with total premiums reaching approximately RMB 850 million in the quarter, a 6% increase quarter over quarter. Meanwhile, our digital insurance business has leveraged our existing customer acquisition channels to sell digital insurance products. It achieved 103% quarter over quarter growth in gross premiums, reaching RMB 8.3 million in Q2 this year. This demonstrates the adaptability of our customer acquisition algorithm and infrastructure for monetization from a new category regarding our consumption and lifestyle service. As communicated in Q1, we decided to wind down this segment to concentrate on our core financial services. To better reflect this strategic priority and ensure more clear financial reporting, we have refined our segment revenue categorization in this quarter's financials. William will provide further details on these adjustments during his remarks. Additionally, we are pleased to announce another round of cash dividend. Under our current semiannual dividend policy, the Company will distribute a cash dividend for the first half of 2025, amounting to US$0.22 per American depository share, which is expected to be paid on or about October 15, 2025 to holders of the Company's ordinary shares and ADS of record as of the close of business on September 30, 2025, based on Hong Kong Time and the New York Times respectively. In closing, our financial services customer acquisition platform has matured into a powerful monetization engine as demonstrated by the strong performance of our digital insurance business, which we foresee sustaining its high growth for the next few quarters. By harnessing advanced AI, we've gained deeper insights into customer behavior, boosting conversion rates, extending customer lifetime value, and unlocking monetization opportunities from previously untapped traffic. Despite the regulatory headwinds and changing market environment, our business has shown greater resilience. With that, I'll pass it to William, who will go through the financial performance for this quarter.

William - (00:19:33)

Thank you, Ning. Hello everyone. I will be walking you through our financial performance for the second quarter this year. Please refer to our earning release and our IR deck for further details, both available on our website. We are pleased to report a continued strong performance in the second quarter with the total revenue growing by 10.4% year on year to 1.65 billion RMB. The growth was mainly driven by 75% revenue growth from the financial services segments, partially offset by decline in revenues from the insurance brokerage and the consumption and lifestyle segment which we decided to scale down. Our net income rebounded to 358 million RMB in the second quarter which represents 44.5% increase quarter on quarter and a 12.7% decrease year on year. But it reversed our 5 declining trend on the net income in the financial services segment. Total loan facilitation volume increased by 57% year over year to 20.3 billion RMB in the second quarter. The increase was driven by the strong demand for our small revolving loan product and the growth of repeat borrowers which accounts for 77% by loan volume in the second quarter this year up from 56% a year ago. The revenue from this segment increased by 75% year on year to 1.5 billion RMB in the second quarter. This segment contributes to about 90% of the total net revenue of the company. Our non guaranteed services also saw a significant growth. The revenue reached 317 million RMB in the second quarter up nearly 3.6 times year over year as we complete almost one full guarantee cycle period and higher amounts of deferred revenue from past few quarters is being recognized as revenue because of that. The contribution margin for the entire financial service improved some 9.5% in the second quarter of 2024 to 30.2% in in the second quarter of this year. In the insurance segment, our gross written Premium declined by 20% year over year to 850 million RMB in the second quarter 2025 primarily due to a regulatory driven commission rate compression that began in the second half of 2024. For our traditional brokerage line, however, the GROSS Premium was up 6% compared to the first quarter of this year. The total revenue from insurance line in Q2 was 58 million RMB. In September last year we launched a digital insurance line using our existing acquisition channels from the financial services segment with virtually no additional customer acquisition cost in the second quarter the gross premium from the digital insurance line was 8 million RMB and that represents 103% growth quarter to quarter. So we expect this growth momentum will continue in the next few quarters. Now one thing to highlight is that the margin for digital insurance line is much higher than the traditional line because of a lower customer acquisition cost and it has a much bigger opportunity to scale. So we expect the digital line will relieve some of the profit pressure from the decline of the traditional line. On the expense side, sales and marketing expenses in the second quarter increased by 21% year over year to 345 million RMB driven by higher loan facilitation volume in the second quarter and investment in acquiring high quality borrowers. Research and development expenses grew by 93% year over year to 108 million RMB. So that reflects our increased focus on AI and engineering talent to drive innovation. Origination, servicing and other operating costs decreased by 35% year over year to 161 million RMB because of a lower commission cost from the insurance brokerage business and ongoing operational efficiencies. General and initiative expenses for the quarter increased by 15% year over year to 79 million RMB primarily due to increase in personnel related costs to support the growth of the overseas business and improved compliance practice. The allowance for contract assets and receivables in August for a quarter increased by 74% year over year to 215 million RMB. So that's driven by higher facilitation loan volume from our overseas business and the loans funded by our own balance sheet provisions for contingent liability this year increased by 38% year over year to 386 million RMB because of the higher growth of our capital intensive guarantee business. The net income for the second quarter was 358 million RMB or $4.11 RMB per shares or $0.57 US per ADR share. That represents 44% growth from the first quarter of this year and a 12% decrease from the same period last year. The net margin improved from 16% in first quarter of this year to 22% for this quarter. The net cash flow from our operation in the second quarter was 411 million RMB and our balance sheets remain robust with the total cash equivalents and restricted cash of 4.5 billion RMB. So given our strong cash position as Ning mentioned, we are pleased to announce that our board has approved a quarterly dividend of $0.22 US per share. This dividend is payable on October 15, 2025 to shareholders of a record as of September 30, 2025. So this marks our third consecutive 70 annual dividend payment. So reflecting our strong financial performance and a commitment to delivering value to our shareholders. So looking ahead, we remain cautiously optimistic about our business. While we anticipate slightly higher volatility, the credit and regulatory risk environment, our more disciplined credit policies and enhanced risk management capabilities and adaptive risk revenue model will Position us well in this market environment. Our international business and digital insurance segments are expected to drive more revenues and margin growth in the next few quarters. For the third quarter of 2025, we are projecting the revenue to be in the range of 1.4 billion RMB to 1.6 billion RMB, reflecting our disciplined approach to growth and risk management. Thank you very much.

Arvika - (00:29:07)

Thank you, Arvika. We are now open for Q&A.

OPERATOR - (00:29:13)

Thank you. Ladies and gentlemen. We will now be conducting the question and answer session. To ask a question, you may press star and then one. On your touchtone phone, we ask that you please pick up your handset to ask a question. If at any time your question had been addressed and you would like to withdraw your question, you may press star and then two, you may need to pick up your handset to register the star keys. We will pause a moment while we wait for the question queue to build. Our first question comes from Bruce Oren of Black Lab Fund. Please go ahead.

Bruce Oren - (00:30:01)

Yes, hello, and congratulations on another strong quarter. Crypto assets have risen substantially this quarter. Does Yiren Digital intend to continue to increase crypto investment? Thank you.

Ning - (00:30:23)

Yes. And. Yes, William, you want to take a crack?

William - (00:30:30)

Go ahead.

Ning - (00:30:33)

Okay. Yeah, crypto is, gaining momentum and we believe a good part of it represents the future. fintech. Yeah. As a fintech player, we pay close attention to innovation frontier. And so we will continue to work on this emerging asset class. And once we have more news to share, we will be happy to announce, and I do expect that, we will do more in this very important sector. William, you have anything to add?

William - (00:31:44)

Yeah, I just want to add we increase our crypto position in the first quarter of this year initially for the purpose of just treasury management, but as the stablecoins and the other crypto related business in the market have matured and we are exploring different ways of using the crypto or blockchain to support our core business. But it's still too early to share more details. But we are still in the exploration stage right now.

Ning - (00:32:29)

Yeah, it's a key part of our strategic discussion and also, strategic implementation going forward, I believe.

Bruce Oren - (00:32:44)

Thank you. Do you hedge the risks of investing in crypto?

Ning - (00:32:52)

Right. Do I actually, we have a long term view. Yeah, we have a long term view.

William - (00:33:04)

Thank you. Yeah. So I think. Okay, great.

Ning - (00:33:09)

Do you have anything to add? I'm sorry?

William - (00:33:14)

Oh, no, no, no. I'm just saying I think the simple answer is we do not hedge because it's really. We do not hedge directly on the crypto asset that we have but I think we see the as you see in the market that the crypto asset price has been trending up so which is also our long term view of the crypto price and also the reason we are another reason we are holding on those crypto assets is for the strategic purpose which we are still exploring. So we will update you as we make some progress on that front.

Bruce Oren - (00:34:07)

Okay thank you very much.

William - (00:34:10)

Thank you.

OPERATOR - (00:34:15)

Ladies and gentlemen just a further reminder if you like to ask a question you're welcome to press star and then one to place yourself in the question queue. It appears we have no further questions in the question queue. I will now hand over to management for closing remarks.

Arvika - (00:34:48)

Thank you Operator. Now that concludes our earning conference call and if you have any questions please welcome to contact our team. Thank you thank you thank you.

OPERATOR - (00:35:03)

That concludes this conference thank you for attending today's presentation You may now disconnect your lines Bye bye.