OneConnect Financial Technology Co., Ltd (NYSE:OCFT) Q2 2020 Earnings Conference Call August 4, 2020 9:00 AM ET
Patricia Cheng – Head-Investor Relations
Ye Wangchun – Chairman and Chief Executive Officer
Michael Fei – Chief Executive Officer-SME Banking
Jacky Lo – Chief Financial Officer
Conference Call Participants
Elsie Cheng – Goldman Sachs
Hans Chung – KeyBanc
Yang Liu – Morgan Stanley
Emerson Chan – Bank of America
Alex Yao – JPMorgan
Ladies and gentlemen, and welcome to OneConnect Second Quarter 2020 Earnings Conference Call. At this point, I’d like to turn the call over to Ms. Patricia Cheng, OneConnect Head of Investor Relations. Please proceed.
Hello, everyone. Thank you for attending the second quarter results briefing. Some housekeeping notes before we begin. First, you can download the results presentation from our IR website. Second, our remarks today will include forward-looking statements, which involve a number of risks and uncertainties that could cause actual results to differ materially. For further information, please refer to the earnings press release, which is also available on the IR website.
Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements except as required under applicable law. During this call, we may present both IFRS and non-IFRS financial measures. A discussion of the limitations of non-IFRS measures and the reconciliation to IFRS is included in the earnings press release.
Now let me introduce the management team on the call today: Chairman and CEO, Mr. Ye Wangchun; CEO of SME Banking, Michael Fei; and CFO, Jacky Lo. I would like to turn the call over to Mr. Ye. His remarks will be in Chinese followed by translation in English. Ye, please.
[Foreign Language] Thank you, Patricia. Hello, everyone. I’m very pleased to announce another strong set of operating results. Our revenue grew by 48.4% year-on-year in the second quarter, an acceleration from the first quarter. Gross profit gain was even stronger. Supported by gross margin pickup of 8.9 percentage points, gross profit went up by over 93% year-over-year.
[Foreign Language] OneConnect strives to be a leading TaaS company for financial institutions globally, providing end-to-end solutions to meet their technology and business needs. As a young company, we have established a broad customer base, build a rich product suite and gained the recognition for our transaction-based revenue model.
During the second quarter, our virtual bank in Hong Kong began a pilot launch. I would like to highlight that all the IT systems of PAOB will develop in-house. I don’t know anyone else who would be ambitious enough to attempt this or who would have the technology know-how to make it happen. Looking further afield, in the first half of the year, we won the mandate from the Abu Dhabi financial regulator, exporting our Gamma O technology to support its supervision of financial institutions. It’s another baby step in our expansion, but this is no big deal a business that is not yet five years old.
[Foreign Language] However, this is not the time to rest on our laurels. The impact from COVID-19 is still being felt across all industries. The macro environment is rapidly evolving as are the needs of financial institutions. Since the IPO, we have shown our ability to innovate and adapt to changing needs. There is still a lot more we need to do to further enhance our solutions and extent our all-round support to financial institutions. The potential from digital infrastructure is immense, and we believe there is no one better place than OneConnect to take advantage of it. It’s great to speak to you again, and thank you for joining us today.
Thank you, Chairman, Ye. Next, our CFO, Jacky Lo, will go through the financial results in more detail. Please go ahead, Jacky.
Thank you, Patricia. Good day, everyone. It’s my pleasure to be here today to give you an update on our business performance. We are proud of our achievements in the first half of the year. Despite interruptions from COVID-19, as Chairman Ye mentioned, revenue rose by over 48% year-on-year to RMB 774 million in the second quarter.
After the increase of 30% we achieved in the first quarter, this takes the revenue growth for the first six months of the year to almost 40%. On top of that, other key metrics, such as gross margin, gross profit growth and operating leverage also improved quarter-on-quarter.
Let me guide you through the key drivers in more detail, beginning with the top line. By business line, operation support made another leap in the second quarter with revenue surging 171% to RMB 288 million. Like in the first quarter, much of the increase came from AI customer service and roadside assistance for auto insurance, a testament to the demand from financial institutions for solutions that enable contactless interactions with customers and help them better manage cost and efficiency. However, business origination and risk management were both a bit soft in the second quarter.
Pro forma fell 19% year-on-year and the latter by 23%. These few segments are dominated by banking customers. With everyone still on high alert for COVID-19 and facing a challenging macro outlook, sales management initiatives have inevitably been affected, with loan volume that goes through our lending systems and pre-lending check both decreasing.
There has been a significant change in our business mix. Operations support account for 37% of total revenue in the quarter. It was only 20% a year ago and 28% in the quarter before this one. This make it the biggest revenue contributor now. This is origination for the first time lost the top spot, with revenue contribution falling to 19% in the second quarter from 35% a year ago. Risk management also fell to 9% from 18%.
This shift reflects a change in priority by financial institutions as they seek to adapt to a different macro environment. As a TaaS company’s servicing financial institutions, OneConnect has been working to ensure that our technology can also adapt to their changing needs. With our solutions spanning three verticals and penetrating front, middle and back-office functions, our revenue base has shown its resilience across economic cycles.
Next, let’s look at the customer base. By customer group, Ping An Group was the biggest contributor in the second quarter, posting revenue growth of 68%. As you may recall from our previous earning calls, we talk about the delay in recognition of some contracts due to strict internal compliance after we became a listed company. As both companies are listed and Ping An Group is regulated – it’s in a regulated industry, all related party transactions have to go through a more rigorous review and approval process. Some recognition as a result of these contracts negotiated earlier came through during the second quarter, deeply among solutions in AI customer service and roadside assistance management.
Over at Lufax, revenue went up by 44% to RMB 95 million, driven by operation support. Again, AI customer service was the biggest contributor. Revenue from third-party customers went up by 29% to RMB 287 million. It’s a remarkable result taking into account the macro situation we are in.
The impact of COVID-19 is still being felt across all industries in China and globally, and it’s no exception at OneConnect. Our operations in Southeast Asia, they fall behind because of the various degrees of lockdown. Both business development and implementation have suffered. But the quarter-on-quarter pickup in revenue in the second quarter clearly demonstrates the strength of our business. Retail loan volume processed by our system reached RMB 21 billion in the second quarter, up from RMB 13 billion in the first quarter. There was also a rebound in SME loan volume to RMB 8 billion from RMB 6 billion. And the number of fast claims in the same period went up to over RMB 1.4 million from RMB 995,000.
Next, on the gross margin. Quarter-on-quarter gross margin also grew to 38.4%, representing an expansion of 3.6 percentage points. The main drivers were lower channel fees and labor costs. The former reflecting a drop in business origination and the latter reflecting our efforts in increasing product standardization. On a non-IFRS basis, that is stripping out all the noncash impact. Gross margin was 47.5%, also higher quarter-on-quarter, although to a lesser extent because of the change in business mix. Risk management products enjoyed higher margins, and revenue was soft in the quarter. We are confident in that as the overall transaction activities returned to normal coupled with our organization effort, gross margin trends for our various products will continue to improve.
Moving on to operating leverage. Another focus of ours in this journey, the results there are also encouraging. Operating loss as a percentage of revenue improved to 46.6% in the second quarter from 67.8% a year ago. This is the lowest level we have seen, reflecting the significant progress OneConnect has made in growing the business and strengthening operational efficiency. Sales and marketing expenses as a percentage of revenue fell to 21.4% from 31.8% in the period under review.
General and administrative expenses as a percentage of revenue were also lower at 25% as opposed to 29.4% in the same period last year. Optically, research and development expenses as a percentage of revenue appeared to have deteriorated, going up to 37.3% from 33.4%. As I explained on the last earnings call, we have delayed some project launches as a result of interruptions from COVID-19 in the first quarter, so it makes more sense to look at the first and second quarters combined. And here, the ratio improved to 39% from 45.7% year-on-year. Needless to say, combining the first two quarters, all three main expense items i.e., R&D, sales and marketing and G&A expenses improved year-on-year.
We do enjoy tremendous leverage in our model. As transaction activities and usage continue to increase, we are confident about our growth outlook. Together with our cost discipline, OneConnect is steadily progressing towards our mid-term target of breakeven.
And finally, to run off the presentation, let me discuss the way forward. In terms of customers, we’ll step up cross-selling and strengthen strategic relationships with the objective of further boosting revenue streams. As for products, we aim to further improve and upgrade solutions and invest in core competency, therefore, diversifying and optimizing our business mix.
And finally, on our people. We will optimize the organization structure and enhance operational efficiency. All of which will help us effectively achieve our vision. That is to be the trusted partner of financial institutions globally in their journey of digitalization.
Thank you. I’ll turn it back over to Patricia.
Thank you, Jacky. We’ll now open up to your questions. As the management are dialing in from different locations, after you ask a question, I’ll direct it to the relevant team member. Operator, over to you.
Thank you. [Operator Instructions] Your first question will come from Elsie Cheng with Goldman Sachs. Please proceed.
[Foreign Language] Thank you management for taking my questions, and congratulations on the strong quarter. My first question is referring back to our business revenue by nature. Looking back, our operational support is already taking the largest share as shared by Jacky just now. I just wanted to follow up on going forward, what this portion of the revenue continue to increase. And also, can management share a little bit more details in terms of the project that is related to this part of the revenue?
And the second question is related to the Ping An Group. The revenue has been picking up. Some of the delayed projects were booked into this quarter as well. Going forward, can we take it as a post-COVID-19 and normalized business environment? And how should we look at growth? Thank you so much.
Thank you, Elsie. We will direct the first question to Jacky. And then the second one on Ping An Group to Michael.
Yes. Thank you for the question, Elsie. On your question on operation support, I think if you look at the overall situation, I mean, the COVID-19 is an unprecedented challenge to the global macro. And – but also it is a wake-up call, I think, to everybody. And so for the financial institutions, I think they have been rethinking their IT strategies. And also, we see a stronger demand in terms of like expediting their whole digital transformation. So all these financial institutions, they realize the importance of moving their products online. So that’s very critical to their business.
So in terms of operation support, I think all these financial institutions, they try to look for ways to actually reduce their cost, for example, like middle and back-office costs and improve efficiency at the same time. So that’s why it’s reflected in our operation results in the first half. So I think if you recall in the first quarter, our operations support revenue went up by about 148%. And in this quarter, it also year-over-year went up 171%. So this is actually a shift in customers’ demand. They are actually focusing more on just improving efficiency and reducing cost. And in terms of the products, the two key products are AI customer service and also for us is the roadside assistance management modules. So we continue to see demand in these two products.
Michael, can you talk about the Ping An Group contribution?
Yes. Sure. Okay. Well, first of all, thanks for your comment. I think you have pointed about correctly that the increase of Ping An Group revenue in the second quarter was partially because of delayed project that was supposed to happen in the fourth quarter last year. That all got finalized, okay? That is a good contribution to our increasing revenue for the Ping An Group.
Now looking forward, I think, as Jacky has mentioned, and I’m seeing kind of call for everyone, including Ping An Group. Generally, we have seen a trend across data and the financial institutions continue to focus, actually more and more focus on technology investments, okay? This is the same for the Ping An Group, which means that we will be seeing more opportunities – Ping An Group, our largest customer going forward, okay?
Secondly, as we had during our IPO – but the Ping An Group is one of our strategic partners, which means whenever we have a new product launch, we will always go to that group as the first client or our type of client, okay? This is also true for many of the new products that we – for example, some of our support products, Jacky has mentioned it before, was actually first piloted in Ping An Group. That explains the increase in both our core revenue as well as Ping An Group revenue. So going forward, we will still see Ping An Group as one of our most strategic customer, and we’ll continue to focus on diversifying our brand offering for both Ping An Group as well as third-party customers.
Operator, can we have the next question, please?
Your next question will come from Hans Chung with KeyBanc. Please proceed.
Hi, good morning management team. Thank you for taking my question. So just – my first question is related to the third-party – the revenue from third-party premium customer. And it seems like the growth rate deteriorated quite significantly this quarter. And although it’s still up 28%, but I just wonder, is that related to the decline in the business origination and risk management? Or it’s related to maybe its lower momentum adding a new customer. Just give me some color around the dynamic here.
And then my second question is, if we look at the industry data, we think like the – for the overall industry, the short-term – the household consumption loan, which includes the mortgage. It seems that grew 20% in the second quarter. And so it seems like there is a disparity between our loan origination versus the industry. And just wonder can you help me understand what’s the dynamic here. Why there is sort of the disparity between our performance and versus the industry? Thank you.
Thank you, Hans. Jacky will take your first question about the third-party revenue, and then Michael will follow-up on the industry dynamics.
Yes. Hans, thank you for your questions. In terms of the third-party revenue, if you look at this quarter, the revenue growth was 29%. It’s a very solid result, considering the situation macro that we are facing. But indeed, if you compare to Q1, it’s a little bit softer. So obviously, COVID impact is still being felt. And as I mentioned, like the loan volume process on our systems, it went down in the second quarter versus last year. And so it actually led to a drop in our business origination as well as risk management revenue, because these two go hand in hand. So basically, the – in terms of risk management is the pre-lending credit check.
So if the loan volume from business originations went down, it also caused the risk management revenue to go down. Yes. But on top of that, I think we also mentioned Southeast Asia is still being locked down. So – and also some of the contracts will fall behind in terms of signing the contracts and in terms of implementation projects for our customers. And also, we have been talking about like optimizing our product offerings in the last two earnings calls. So this exercise actually continued in the second quarter.
So we have been phasing out some low-value products. So – and then also some products that don’t really match with our long-term strategy. So in the process, we actually gave out some – or keep out some revenue. So all these contributed to the like – compared to Q1, that seems to be like a slow growth, yes. But these are all the reasons actually behind that.
Yes. But I think in the longer-term, I think it’s still – if you look at the business, I think all these companies, they actually realized like how critical it is to have like business solutions online. And so – and if you look at OneConnect, we are at a position of strength to capture all these opportunities in the future. And I’ll turn it over to Michael for the second question.
Yes. Okay. Just to add on what Jacky has mentioned that because we have – as we said, we have continued to optimize our product portfolio that was actually an impact on the kind of slightly softer growth for third-party customers. If you look at the general trend, I still see a very positive trend. First of all, I think from industry-wide, as we have mentioned before, most of the financial institutions we met actually have continued focus, actually much more focus on technology investment. We see it as a very good sign.
Secondly, if we look at the transaction volumes, as we have shown on our results presentation, we actually see in the second quarter compared with the first quarter, quarter-on-quarter, both retail SME and interest, we have seen volume growth. Quite volume – quite solid volume growth actually. So generally, I think this is in line with the trend we have seen you have just mentioned. So I will still be confident about the second half that we’ll see continued third-party revenue growth.
Hey Hans, this is Jacky. I just want to add one more point. Yes, so in terms of the revenue, I mean if you look at the COVID situation, it’s only putting like temporary strain on our business. But I mean we have a very strong pipeline. And as Michael mentioned, we expect the second half growth will be stronger than the first half.
Your next question will come from Yang Liu with Morgan Stanley. Please proceed.
Thanks for the opportunity to ask questions. I’ll ask two questions here. First one is implementation. So that this part of revenue is also growing pretty fast, which is quite different from other software companies, which is heavily impacted by COVID on some of their product delivery and the implementation. Could you please share about – or how can OneConnect – or what kind of secret behind this kind of very strong implementation revenue because I think it needs certain level of on-site labor-intensive work, which should be impacted by the COVID pretty severe.
The second question is, I think, Jacky just mentioned the second half growth will be either higher than first half. Do you refer to the third-party revenue or the transaction volume or the overall company revenue growth? Thank you.
Thank you, Liu Yang. Jacky will take the two questions.
Yes. Well, in terms of the implementation, I think if you look at the first quarter, we actually talked about this a long time. Some of our projects, it was actually delayed. And so we are catching up in the second quarter. So – and that’s reflected in the year-over-year growth in terms of implementation revenue.
Also, at about 250 premium customers last year, most of them actually came in, in the second half. So that said, a very strong foundation for us heading into this year. And so actually, and always implementation is our first level of engagement with our new customers. And because we more than doubled our premium customers last year, so they actually start signing up for like more solutions in the first half. Especially in Q2, we are catching up some of these projects. So yes, I mean it’s just because of the timing, some of them shift to Q2.
In terms of second half, I think it’s both – well, I mean, the COVID situation is still very fluid. But if you look at the transaction volume, Q2 versus Q1, we already see some sequential recovery. So – and then with the situation continues to improve, we expect the second half in terms of transaction volume should be better than the first half. And also that would reflect in our revenue growth as well. So that’s why – yes, if you look at the first half, growth rate was about 40%. And so we are quite confident the second half will be higher than the growth rates we have seen in the first half.
Your next question will come from Emerson Chan with Bank of America. Please proceed.
Hi, thank you management. I have three questions. My first question is regarding the government recently calling for reducing the legally protected selling of lending rates for consumer lending. So I wonder would there be any impact to the company as well as to the fintech sector.
My second question is about the demand to our product after the virus outbreak. How should we look at our growth in a post-COVID environment? Overall, are we seeing demand for our product going fast to the pre-COVID level where we see a sustainable demand that will stay above the pre-COVID level in the future?
And for my last question, which is regarding our risk management revenue. It has been slowed down quite a bit in first half. So how should we expect the growth into second half when the virus spread continues to ease? Will we see improved demand for our risk management product from the customers to protect their lending risk if the macro remains weak in the second half? Thank you.
Thank you, Emerson. Michael will take your first two questions, and then Jacky will take the third one. Michael, over to you.
Yes. So on the first question, for the new regulation, I think generally, we believe this is a positive sign for the company. Because if you look at – the major impact was actually our most of the so-called fintech company or the Internet financial company that is doing those unsecured consumer finance, okay? They used to charge very, very high interest rates, and these loans will now be regulated by the new regulation. While on the banking side, the majority of the bank, for their lending – for their consumer finance to their customers, they are charging actually a much lower rate. Actually, it’s below the current – limit set by the regulator, yes. So in short, we see limited impact on the banking customers we serve.
And also because we are a TaaS company, our product service was mainly on the technology solutions or business solutions that we provide to our customers, in that we don’t take any credit risk for the services. So also, I think the regulation will have limited impact on our business. So that combined, we see a positive sign for the company going forward. Of course, this is our internal view. The actual result – the actual impact on the industry is still yet to be seen. We keep on observing the market.
Now the second question on the demand for product growth post-COVID-19 situation, I think this – we remain very positive on the post-COVID-19 situation because many of the financial institutions during this virus period, they have seen the importance of technology. Yes. So we’re in the period that people cannot go out. So we’re in the period of people cannot have much face-to-face contact, so technology solution become more and more important.
And also in this economic difficult times, cost control is also very, very important. So many of the financial institutions, they’re trying to improve their management of the overall business and also the operational efficiency. Management efficiency contributed to the increase in technology solutions from these customers. So based on the recent quarter, all the meetings we had with our customers, with the potential customers, we have seen an increased demand of technology solutions. And Jacky, over to you.
Yes. Emerson, on your third question on risk management. Yes, if you look at the year-over-year, it was dropped by about 23%, but this has to do with the loan volume. So we already talked about for the retail loan process on our system, it was down about 7%. And on our SME loan, it was down about 22%, 23%. So, because risk management goes hand-in-hand with our transaction volume, so that had some impact on the risk management revenue.
Yes, but like I said, the COVID-19 is only – is temporary. And so we already have seen some recovery in terms of volumes sequentially, Q1 versus Q2. And also, if you look at our risk management revenue, the two key products, the pre-lending check. So that’s impacted by the loan volume. But the second is the fast claim for insurance. So we have already seen a recovery in terms of the usage.
So yes – so I mean, I guess the key for us is just continue to diversify our product mix, continue to improve our – like margin, improve the value of our product. So – and digital transformation is a trend. That’s not – yes, it has no impact. It is a trend moving forward, and it’s regardless of whether it’s COVID or not. And so I think if you look at OneConnect, we invest a lot in R&D, and we are in a position of strength to capture this opportunity going forward.
Your next question will come from Alex Yao with JPMorgan. Please proceed.
Hi, good morning, management. Thank you for taking my question. The first one is to follow-up with the second half outlook. You guys mentioned the business trends are improving and recovering as the underlying market and the macro come out of the COVID-19 impact. So how should we think about the second half revenue growth outlook? Particularly, how should we think about kind of the mix between the operational support to revenue versus origination and the risk management’s revenue? Secondly, how should we think about the Ping An-related revenue growth outlook versus third-party revenue growth outlook?
And then the second question is regarding the operational support business. Should we think of the step-up in revenue contribution in the first half, that’s just a one-off by nature because of the COVID-19? Or it will take one to two years for you? Do you guys expect the revenue mix will continue to shift towards business support – business support? Are you guys focusing increasingly more on the financial institutions’ IT spending migration rather than facilitate more transaction-based business for these guys? Thank you. I’ll stop here.
Thank you, Alex. Jacky will take your first question. And then the second one goes to you, Michael.
Yes. Alex, thanks for the question. I guess in terms of the revenue mix trend in the second half, I think we talk about this because of COVID, it’s a wake-up call for everybody. And I guess especially for the financial institutions, we see stronger demand for like a middle and back office products. So for example, we talk about AI customer support, also the roadside assistance. These are the two products that have been driving our revenue. And so we expect this trend to continue. Like at least for operation support, this will be the key growth drivers for us in the second half.
And in terms of the mix, I think it’s very difficult to say that we have been like diversifying our products. The key is to address different customers’ needs in like an unpredictable situation. So – but overall, I think as the operation support will continue to be the key drivers and then for business origination and also risk management gradually to recover. So that gives us a very – a high level of confidence the second half revenue growth will be better than the first half.
And in terms of the growth from Ping An Group and also third party, I think for Ping An Group, I think Michael mentioned this at the beginning when he answered the first question from Elsie. If you look at Ping An Group, it’s actually – we always have – when we have new products, we tested out at Ping An Group. And so – and that’s why if you see like, for example, the AI customer service, we actually support Ping An Group company before we actually export a to third party. So that’s going to be key drivers for our Ping An Group revenue in the second half.
But for the third parties, we already talked about some of the reasons for the softer growth in the second quarter. But like I said, COVID is only a temporary situation. And right now, Southeast Asia is being lock down in the region. But when the – all these countries, we start to be able to sign contracts, business – like a – be a service. The revenue will recover and also the transaction volume, we expect to pick off in the second half. All this will contribute to our third-party revenue growth as well.
Yes. But overall, I think we maintained a very confident, in terms of the second half, outlook. The growth rate should be higher than the first half. Yes. And the second question, maybe Michael can answer the IT spending.
Yes. To the second part of your question, I think overall, our strategy remain unchanged. Our major business is still to provide technology and business solutions to financial institutions. And this remains unchanged. The situation is a bit different in this quarter is because of the COVID-19 situation, because of this economic slowdown that financial institutions start to think about how to improve the efficiency, okay? Probably, this is some time the banks looking more focused on improving the efficiency of their business, of their operations rather than growth, okay?
So this actually, I think it explains the increase in demand for operations support revenues. But going forward, I think risk management and business growth will continue to be a major part of our solutions because this is still a major focus of many of the financial institutions in China. So I think going forward, this will have the mix. I don’t think there’s a fundamental change in our business, in our portfolio, we will continue to provide the technology and business solution. It’s just that the focus of this solution could be on growth, risk management, operation, et cetera.
Now secondly, and on the transaction revenue, actually many of the operational support normally – this is also based on transactions because we are helping, for example, our AI call center services. This could be based on the per sheet basis or on per call basis, yes. These are still a transaction-based type of revenue, yes. So which we don’t see – we also don’t see a change in our revenue model, we still stick to our transaction-based revenue model.
Okay. You do have a follow-up question from Elsie Cheng with Goldman Sachs. Please proceed.
Thank you, management for taking my follow-up question. So if I look at the transaction activities of retail loan and SME loan side together, the growth recovery has been robust. And if I look at the recovery in the transaction-based revenue, even if I take out the operational support growth, it is still recovering faster than the transactional activity we have in terms of loan served side. So can I read it into as for the same amount of transaction we facilitate during this period of time, we’re also incrementally penetrating into the sort of services we provide to these transactions? Can we read it as that?
And second question is really about when we break down the per customer spending, ARPU on number of customers, can management share a little bit more color on – so is this a period of time where you see bigger driver to be ARPU or customer adds? Thank you. Thanks.
Thank you, Elsie. I will hand your questions over to you, Jacky.
Yes. Elsie, maybe I’ll answer the question on ARPU first. So I mean we do not disclose ARPU for the quarter, but we do track that internally. And because we look at it as an annual metric. But if you look at our top 10 customers, the ARPU actually increased like in the first half versus prior year. So – and we are seeing – as we mentioned, we – our priority for this year is to continue to cross-sell more and convert more customers from data to premium and then cross-sell more products. Yes.
But for the full year, we have to actually look at the new customer – new premium customers as well as the existing ones because they kind of have different impact on the ARPU. So for the existing ones, usually, we cross-sell more high-value products, we see the ARPU going up, and also they subscribe to more products. But at the same time, when we convert like basic to premium, the new premium customers, they have lower ARPU.
So that will actually have negative impact on the ARPU. So that’s what we have seen in last year. The ARPU actually slightly decreased year-over-year because of the number of new customers we converted. But so far, if we look at just the top 10 customers, we see the ARPU significantly increase in the first half. Yes, and on your second question. Michael can answer, yes.
Yes, I can help. I think, first of all, the increase of the transaction-based revenue is faster than – our loan volume growth is from two aspects. One is that our transaction-based revenue is not just our own, okay? As I said, some operation activities, some of the wealth management activities or other activities also contributes to our transaction-based revenue, okay? We are seeing that and the vast reliance on loan business. This is number one.
The second reason is that we are actually gradually phasing out some of the low-margin business. For example, some – previously, we had some long referral business that is including the business organization but with very, very low margin, but we continue to optimize our portfolio with the aim to improve our margin, so we phase out these low-margin business. That also explains why our loan transaction growth is actually slower than the transaction revenue growth.
Got it. Thank you.
At this time, there are no further questions. And with that, I would now like to turn the call back over to Patricia Cheng for closing remarks.
Yes. Thank you. Thank you for – thank you, everyone, for joining us today. Thank you for your interest in OneConnect. We’re going to wrap up here. If you have any follow-up questions, please do get in touch with us. We look forward to continuing our conversation. Stay safe, and have a good day. Thank you.
Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.