Image source @ Visual China
Wen 丨 Number Science Society, author 丨 柠溪
Q3 earnings report just landed, doubts rose and fell. After the listing of Waterdrop Company ("Waterdrop"), the road to business does not seem to be so smooth.
On November 30, Waterdrop announced its third quarter 2021 financial report. According to the financial report, The net revenue of Waterdrop in the third quarter of 2021 was 779.3 million yuan, down 9.7% from 863.0 million yuan in the same period of 2020. Net loss attributable to the company for the third quarter of 2021 was 477 million yuan (about $74 million), a significant narrowing from the previous quarter. This is an increase of 242% over the same period last year.
Although Waterdrop disclosed in the just-released third quarter of 2021 financial report, the first year premium (FYP) of the waterdrop insurance platform in the first three quarters increased by 37.5% year-on-year to 14.464 billion yuan, which has exceeded the annual first year premium of 2020. The ratio of sales and marketing expenses in the quarter fell by 37.2%, showing the company's control over marketing expenses, with an operating loss of 513 million yuan, a sharp decrease of 37.1% compared with the second quarter; and although the company's senior management continues to export the concept that the company has long-term value; but the market value has shrunk by nearly 80% in about half a year since the listing, the status quo has caused many investors to have some doubts -
A listed company under the banner of insurance technology, insurance brokerage business revenue accounts for nearly 90% of the perennial year, what is the difference between that and insurance intermediaries? How does an insurtech company that has been losing money for years and relies on "burning money" to drive revenue growth support the valuation of nearly $5 billion? What kind of story can the water droplets that cannot significantly boost the investment sentiment of the market tell in the capital market?
Although the market value of the water drop is shrinking, when judging whether a listed company has investment value, it is still necessary to return to the basics and return to the level of commercial essence, that is, to examine the profit model and commercial feasibility of the listed company through the financial report/prospectus.
The third quarter financial report shows that the current revenue composition of Waterdrop mainly comes from two major business segments: Waterdrop Chip and Waterdrop Insurance. Previously, it undertook a certain amount of traffic conversion and business income to help each other. Among them, the well-known serious illness crowdfunding water drop fund is equivalent to a "public welfare" cause, which cannot contribute any income to the company, but can be regarded as the "traffic pool" of the company to obtain users; while water drop insurance mainly bears the bulk of the company's operating income, and is also the main platform for the company to maintain and retain users.
According to the information disclosed by the company, insurance-related income includes insurance brokerage income and technical service income. Insurance brokerage income represents brokerage commissions received from insurance companies, and technical service income comes from the provision of technical services to insurance companies, insurance brokerage companies and agency companies, including customer relationship maintenance, customer complaint management, claims review and user referral services.
According to the financial report, in the nine months ended September 30, 2021, the first-year premium (FYP) generated through the droplet insurance market reached 14.464 billion yuan (US$2.245 billion), surpassing the FYP for the whole year of 2020 and increasing by 37.5% year-on-year.
Although, according to the financial report, Waterdrop's net revenue for the third quarter of 2021 decreased by 9.7% year-on-year, from 863 million yuan in the same period of 2020 to 779.3 million yuan (US$120.9 million), mainly due to a decrease in insurance-related revenue. Insurance-related revenue was RMB758.6 million (US$117.7 million), down 9.4% from RMB837.3 million in the third quarter of 2020, mainly due to lower insurance brokerage revenue. But overall, insurance brokerage revenue is still the main force of the company's revenue.
Looking back at the contents of the prospectus, from 2018 to 2020, the cumulative number of insurance users purchased by Waterdrop was about 1.7 million, 8.8 million and 19.2 million, respectively, and FYP revenue was 973 million yuan, 6.668 billion yuan and 14.426 billion yuan, respectively. The commissions generated from this premium alone, i.e. the insurance brokerage income of $122 million, $1.308 billion and $2.695 billion, respectively, accounted for 51.3%, 86.6% and 89.1% of the total revenue.
Such data reveals a very obvious signal, that is, since 2019 and in this quarter, the revenue share of the water drop insurance brokerage business has continued to increase, and for a long time it has been close to 90%.
In other words, if Waterdrop Chip cannot contribute any revenue to the company only as a source of traffic, and the company has previously mentioned that the upgraded Droplet Mutual Aid will serve users through commercial health insurance, then from a commercial point of view, Waterdrop is more like an insurance intermediary platform that mainly earns commissions.
According to the analysis of business logic of Waterdrop's initial product matrix, "burning money" customer acquisition - traffic realization - secondary conversion - secondary realization, this set of standard Internet monetization model for Waterdrop has brought a perfect business ecological closed loop. This is also a big reason why water drops have obtained high valuations before, because the premium space that the market or values more is not insurance brokerage business, but points to the middle and front end of the water drop chip and water drop mutual aid.
However, whether active or passive business adjustments are made, the current basic disk of Waterdrop is actually no different from Huixuan (NASDAQ: HUIZ), which has the "first share of insurance e-commerce", and is nothing more than a volume or a larger size. Referring to the total market value of WiseChoice currently less than $100 million, it is not difficult to understand why the market value of Waterdrop has been greatly reduced after the listing, and only 20% of the IPO market value is left.
The trend of water droplets has also become an inevitability from a certain point of view, and the long-term downward trend is neither malicious short-selling nor nonsense withdrawal, but a reasonable judgment made by people based on their own capabilities after seeing more and more clearly the "background" of a listed company.
As an important source of traffic for the company, can Waterdrop Chip take on the responsibility of boosting investor confidence? I'm afraid it's a little harder. Because according to the financial report, although the net loss attributable to the company in the third quarter of 2021 was 477 million yuan (about $74 million), which was significantly narrower than the previous quarter, but it was 242% larger than the third quarter of last year. It should be known that during the several years from 2018 to 2020, the cumulative loss of water droplets is only about 1.2 billion yuan.
The large losses incurred were mainly due to the sharp increase in the company's costs and expenses, far exceeding the increase in revenue.
During the third quarter, Waterdrop's total operating costs and expenses increased by RMB309.7 million, an increase of 31.5% year-on-year, from RMB982.6 million in the same period of 2020 to RMB1,292.3 million (US$200.6 million) in the third quarter of 2021.
Operating costs increased by 49.2% year-on-year to RMB296.3 million (US$46 million), compared to RMB198.7 million in the third quarter of 2020, mainly due to the rapid expansion of the team of consultants and insurance agents, an increase of RMB60.3 million in personnel costs, an increase of RMB41.3 million in professional and outsourced customer service fees, and a decrease of RMB3.8 million in expenditure investigation expenses due to the cessation of mutual assistance business. Operating costs increased by 13.8% compared to the quarter, mainly due to increased personnel costs and professional and outsourced customer service expenses.
In addition, sales and marketing expenses increased by 24.3% year-on-year to RMB781.7 million (US$121.3 million), compared to RMB628.7 million in the third quarter of 2020. The increase was primarily due to an increase of RMB130.2 million in expenses for outsourced sales and marketing services provided to third parties and an increase of RMB22.9 million in salaries and related expenses for employees involved in sales and marketing functions, offset by a decrease of RMB7.5 million in marketing expenses provided to third-party transportation channels.
It is not difficult to infer that a large part of the flow of water droplets comes from external third-party channels, so behind the "surface prosperity" is bound to be accompanied by high losses.
More importantly, as far as the existing survival and development experience of Internet companies is concerned, once a company falls into the vortex of "burning money and obtaining customers", it may be difficult to get out in the short term. This point, the online education track that has been in the melee before the "double subtraction", is an excellent evidence.
Regarding the performance of Waterdrop, Shen Peng, founder and CEO of Waterdrop Group, said, "In recent months, the volatility of the capital market has intensified, and the insurance industry has experienced a period of transformation. Nonetheless, we strive to be customer-centric and focused on consolidating our core foundation. We have built a solid business foundation through our customer base and network, product innovation capabilities, technological advantages, and unique synergies between business units. This allows us to remain resilient and adapt to all changes. Based on our confidence in the company's prospects, we pragmatically implemented the one-year share repurchase program announced in September. Prior to our IPO, our core management team committed that it would not sell its shares for 18 months following the expiration of the 180-day IPO lock-up period on November 180 this year and would continue to focus on strict compliance and stable sustainable business development. ”
Waterdrop's stock repurchase program is nothing more than hoping to drive and boost the investment sentiment of the market to strengthen external optimism about its long-term value. However, it is lamentable that this major positive has not directly pulled the stock price of the water drop, and it is still unable to "stop the decline" a few days after the news is released. At present, the stock price has not rebounded significantly.
In fact, a company's stock price movements largely reflect two things: first, the degree to which most investors recognize the business story they describe; and second, the degree of expectation of its future growth.
According to this logic, the first day of the listing of the water drop broke, reported at $9.70 / share (down 19.17% on the day, the issue price of $12 / ADS), to the current price of $1.51 per share (as of the close of November 29, EST), the listing so far, the market value of the water drop has shrunk by nearly 80%, and there is still no obvious sign of inflection point.
It seems to have become apparent at some point that the market has not chosen to "pay" for the water droplets and the business blueprints it describes. Even stock buyback programs can't even incentivize the market's investment enthusiasm, so the question is, is there anything else to look forward to in water droplets?
Science and technology, sinking, big medical and other aspects, there may be opportunities to tap greater value.
Waterdrop also mentioned artificial intelligence and big data several times in the prospectus and financial report, but it seems that Waterdrop's scientific and technological strength is more inclined to assist sales, such as strong and targeted promotion, user potential demand analysis, and provide some user and product suggestions and strategies to cooperative insurance companies.
Although such functions have been widely used in thousands of industries, so the scientific and technological embodiment of water drops is not a very innovative and topical existence, but for water drops that stand up to the "first share of insurance technology", improving the ability to improve scientific and technological capabilities has always been of great help to valuation remodeling.
In terms of broadening the commercial value of the sinking market, the long-term unprofitable water drop chip has helped the water drop to have a "name" in many sinking cities under the laying of the previous years.
However, an objective fact is that it is easy to help the business, it is not easy to convert the payment, although many of the sinking people recognize the value of insurance and the brand of the water drop through the water drop chip, but it must be admitted that there is still a big gap between people "being educated" and "willing to pay".
Finally, the vision of the future of Waterdrop also includes the imagination of building the entire health care ecosystem based on insurance, including online medical diagnosis, health consultation, online pharmacies and so on. In every way, this is indeed a larger, more imaginative story.
But some industry observers said that on the one hand, if the water droplet wants to build an insurance-based health care ecology, then at most it will take the first few steps of the long march; on the other hand, if the ultimate goal of the water droplet is big medical treatment, does this also mean that the basic disk of the water droplet is destined to shift?
The development of water droplets caters to such a theory - marginal innovation. Compared with the group customers and high-net-worth people favored by insurance giants, users and younger Internet users in sinking cities may not be well covered, for companies such as Waterdrop, the advantage is that their needs are real and sufficient, and the difficulty is that their insurance awareness is weak and the upfront investment is large.
At that time, "public welfare" became a "sharp weapon" for water droplets to pry open the market, but unfortunately, this "initial intention of entrepreneurship" has now become a "way of operation". This can be confirmed from the previous public opinion that water droplets and competitors have fought each other to grab orders, from being suspected of fraudulently selling insurance, illegal sales of insurance have been punished, etc., which may also be the root of water droplets' reluctance to mention any topics related to "public welfare".
When a business begins to make a profit or profit expectation, the "original intention" may no longer matter.
It can be seen that the water drop is still doing traffic business, not user business, and whether it is its own traffic, or buying traffic from a third party, the "traffic business" itself is doomed to the weakness of the enterprise moat. For water droplets, if you want to achieve long-term development, you still have to think more about the "user core".