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Waterdrop Inc. (WDH) Q3 2022 Earnings Call Transcript

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Call Start: 07:00 January 1, 0000 8:06 AM ET

Waterdrop Inc. (NYSE:WDH)

Q3 2022 Earnings Conference Call

December 6, 2022 07:00 ET

Company Participants

Shen Peng – Founder, Chairman & Chief Executive Officer

Hu Yao – Co-Founder, Director & Vice President

Guang Yang – Co-Founder, Director & Vice President

Conference Call Participants

Edwin Liu – CLSA

Thomas Wang – Goldman Sachs

Operator

Good morning, ladies and gentlemen and thank you for standing by for Waterdrop Inc.’s Third Quarter 2022 Earnings Conference Call. [Operator Instructions]. As a reminder, today’s conference call is being recorded.

I would now like to turn the meeting over to Ms. JJ [ph]. Please proceed.

Unidentified Company Representative

Thank you for joining Waterdrop’s third quarter 2022 earnings conference call.

Please note that the discussion today will contain forward-looking statements made under the Safe Harbor provision of the U.S. Private Securities and Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties may include but are not limited to, those [indiscernible] on our public filings with the SEC. The company does not undertake any obligation to update any forward-looking statements, except as required under applicable law. Also, this call includes discussion of certain non-GAAP measures. Please refer to our earnings release for a reconciliation between non-GAAP and GAAP.

Joining us today on the call are Mr. Shen Peng, our Founder, Chairman and CEO; Mr. Yang Guang, Co-Founder, Director and VP; Mr. Hu Yao, Co-Founder, Director and VP; [indiscernible], Partner and the General Manager of the Insurance Markets Day [ph]; Mr. Cui Xiaojiao [ph], Partner and General Manager of Medical Crowdfunding and Patient Services; Mr. Richard Chen [ph], Board Secretary and VP. They will be available for a Q&A section after the remarks.

Now, I would like to turn the call over to our CEO, Mr. Shen Peng. Please go ahead.

Shen Peng

Hello, everyone. Thank you for joining our third quarter 2022 earnings conference call.

During the third quarter, we have seen increasing downside risks in the global economy as well as uncertainty regarding the domestic economic recovery. Nonetheless, the recovery in domestic demand has recently gained momentum and we believe that the fine tuning of COVID control measures will unleash a rebound in private consumption, providing solid support to revive the domestic economy. This trend will enable the insurance industry to return to our value growth cycle and improve the business outlook for the medical and pharmaceutical industry. Against this backdrop, Waterdrop continued to exhibit strong resilience and adaptability and maintain good business momentum in the third quarter, with revenues increasing by 10.1% on a quarter-over-quarter basis. Following our turnover — following our turnaround in the final quarter of last year, we have managed to achieve a healthy level of profitability in every quarter of this year.

In the third quarter, our GAAP net profit reached RMB170 million, confirming that our business has entered into a phase of steady profitability. As of the end of September, our cash and cash equivalents and short-term investments increased to RMB3.6 billion, even taking into account our share repurchases. We were able to generate a positive cash inflow of RMB300 million in the third quarter. Our ample cash reserves and our ability to generate positive cash flow put us in a strong position to withstand the changing external environment.

Our remarkable operating results and evolving business trends over the past 3 quarters demonstrate that we have entered into a phase of happier and more sustainable business growth, establishing a solid foundation for future business development. Our operating efficiency and business quality have also improved steadily. As such, we have delivered on our commitment to achieve healthy and sustainable profitability ahead of schedule based on the time line we set at the beginning of this year. This reflects management’s determined strategic planning and efficient execution.

Looking into the fourth quarter and beyond, we will continue to pursue steady progress in our business development efforts, deepen reform of our business and make appropriate investments in new businesses while proactively exploring new business models to achieve healthy growth. Through these efforts, we aim to achieve top notch and a sustainable long-term business growth.

As a leader in the medical crowdfunding industry, our subsidiary, Waterdrop Medical Crowdfunding, is committed to maintaining disciplined operations and driving the healthy development of the ecosystem. In this quarter, we continue to collaborate with the judiciary hospitals and industry partners to crack down unauthorized fundraising activities at the end of August.

Waterdrop once again worked closely with the police in Shandong province to crack down on our case of fundraising fraud perpetrated by malicious intermediaries. Through our stringent review process, together with the big data algorithms and AI technologies developed by our Risk Management team, we have developed a system that can identify unauthorized fundraising activities instantly and effectively. After several months of investigations and on-site visits, we collected a large volume of evidence which successfully helped the police to solve the case and take legal action. Following various effective crackdown measures, there has been no malicious unauthorized fundraising activity detected on our platform for several consecutive months.

In the third quarter, we deepened our efforts to reform the business strategy for our Waterdrop Insurance marketplace. As a result, we improved our business quality and continue to upgrade our product and service offerings while further accelerating our pace of technological innovation. This strategy adjustments enabled us to achieve higher quality operating results.

We are also proactively pursuing broader innovation opportunities in the medical and health care industry. We continue to expand our outreach by leveraging the strength of existing businesses, including our high-performing patient recruitment business and our nascent CRO business which we continue to explore and develop. Through these efforts, we aim to provide our users with lifetime products and service coverage to enrich our ecosystem.

In the third quarter, we carried out our share repurchase program firmly. We repurchased approximately 1.09 million ADSs in total and we are continuing to execute the program prudently. As of the end of September 2022, we had cumulatively repurchased approximately 5.8 million ADSs from the open market, for a total consideration of approximately US$8.5 million.

We will continue to focus on the interest of our shareholders. In this September, we announced the 1-year extension of our repurchase program, with the maximum repurchase amount increased to US$80 million. This demonstrates our strong confidence in our corporate value and our long-term sustainable development.

To conclude, we will continue to maintain ample cap [ph] liquidity regardless of the industry environment. We continue to have a confidence and the patient outlook on the industry and our own development. We will remain committed to our mission, stay focused on user value, solidify our business fundamentals and pursue continuous advancements, thereby building up our strengths to enter a new phase of development.

I will pass to [indiscernible] to discuss the development of the Waterdrop Insurance business for Q3.

Unidentified Company Representative

Thank you, Shen Peng. Hello, everyone. Let me give you an update on our insurance business development.

In the third quarter, the market for life and health insurance in China remain [indiscernible] with no significant improvement in premium growth, the continued resurgence of COVID-19 and most business pension and policy reform in the life and health insurance industry. At the same time, the demand for protection-type products remain soft which imply that both the demand and supply side of the market are somewhat subdued. Meanwhile, future volatility in equity market and insurance rep and ever-growing operating pressure, the overall earnings of the interest industry declined in the first 3 quarter of 2022.

Against this backdrop, we continue to improve our operational efficiency, boost the currency of our business and optimize existing offerings. We have proactively explored new customer acquisition channels and persistently engaged in product innovation to achieve long-term sustainable business growth in spite of the industry [indiscernible]. We achieved a industry high GAAP net profit of RMB170 million [ph] in quarter three and our key operating metrics continue to reflect the high quality of our business relative to the industry.

Now, I will walk you through the performance of our insurance business on forefront, the first steady progress on our business model upgrade.

In quarter three, the quality and profitability of our insurance business continues to improve thanks to our persistent optimization of products and user experiences. Our first year premiums increased by 8.4% from quarter two. We revamped transaction processes and based analysis results in improved either perception of our service quality. The number of long-term insurance policyholders have reviewed their policies and the LTV contribution of our products has first increased steadily.

In terms of existing leader management, we further refined our market top platform operational model and cost, [indiscernible] the sales conversion chain across [indiscernible]. To satisfy the last time protection as a dealer, we have enhanced the overall efficiency [ph]. As such, the user repurchase rate remains above 50% and further increasing quality rate. At the same time, to identify either lease more accurately and efficiently, we continue to optimize the algorithm model based on hundreds of users and user profile. The number of either converted from short-term insurance products to long-term products increased by 14% from quarter two. And the sales for in-house LP on [indiscernible] marketing was 2.5x the industry average.

Our new customer acquisition model has achieved an invisible [indiscernible] in quarter three. A number of followers of our video accounts decreased by 110% quarter-over-quarter and the total interest premiums originated from this account decreased by 219% [ph]. Leveraging our video content and the sales conversion capability across the supply chain, we have acquired a large volume directed static and with this, our brilliant profit from state channel. This helped decrease our [indiscernible] quarter-over-quarter in addition with improvement of our capability both in long-term issuance planning and our long-established sales experience. We have cooperated with more external practical providers to acquire greater numbers of high-quality leads which have helped to drive sales conversion for our long-term insurance products. In quarter three, the sales productivity per lease under this partnership increased by 177% the crisis lease.

Second, exploring new customer acquisition channels to drive sustainable business growth. In quarter two, we set up and dedicated the second level of business units which adopts the insurance plan model to promote the online brokerage business. In quarter three, we mainly focused on building up the talent and their capability with retail, targeting the characteristics of customer lease under the insurance plan bundle. We developed operational standards for our province [ph] user management systems. We also led our major leading trading and soft video platform and our bidding retail company to facilitate the customers’ acquisitions and explore a one-on-one customer service bundle. These efforts have helped diversify our side to enhance both user bridge and user experience. Compared to the last quarter, the previous and the revenue generating format in units increased by 42% and the business respectively [ph].

Going forward, we will continue to test our online project team and strengthen our content creation capability. We will gradually test the commercial footprint on a larger scale based on the proven model. Since the beginning of this year, we have stepped up our efforts to develop the offline profitability. In quarter three, we launched to double our Waterdrop Insurance [indiscernible] Diagnostic which is the dedicated system that can help [indiscernible] to customer needs and provide a corporate insurance plan. The customer-centric systems empowers users to identify the protection needs of each family based on family size, household account and gross expenditure and — and then guide them to over more professional, realistic and objective customized insurance solutions that can buy each family’s protect lease. At the end of September, our off-line project team tend with the model line for the debt and raising self-interest trading of more than RMB100 billion or up by 52% [ph] quarter-over-quarter. We have extended our off-line mortgage business to [indiscernible] including Beijing and Shanghai. Going forward, we will optimize the early ecologies of our established network and steadily expand our off-line portage business to our previous prospects.

Third, production innovation. To meet the protection needs of customers with predictive positions, in quarter two, we launched Waterdrop Blue Ocean [ph], a series of critical illness product with a waiver of our health declarations, further expanding the user group of our CI issuance products by removing the leisure of [indiscernible] for the handling of the patients with chronic diseases. The product series has worthwhile recognition in the market and generated sizable sales. Similarly, in the third quarter, we launched a series of mini [indiscernible] coverage medical insurance products with this concept of declaration. This new product showcase our business to expand our offerings to customers with pre-existing conditions while keeping our advising risks under control.

Despite the protection release of different age groups, in third quarter, we worked with our insurer partners to co-develop a customized credit business insurance products for children which offers additional medical service benefits for leukaemia. We also launched our various low premium credited interest product designed to meet the protection of the younger generations. In the third quarter, the issuance credit our [indiscernible] for our customer under the age of 14 increased 20% quarter-over-quarter. Meanwhile, these customers’ needs for asset allocation in a lower interest risk environment, we continue to enrich our ceiling product metrics and improve the professional capability that our [indiscernible] prevailing products originating from our self-operated [indiscernible] increased by 23% quarter-on-quarter.

Fourth, the export insurance technology. In addition to launched [indiscernible] we also upgraded the whole process interest claims assistance services to optimize user experience. Based on our analysis of larger claim prices, we have recalibrated, integrated the best practices into the whole process of our online claims assistance abilities. Empowered by our digital capability, we upgraded 8 claims assistance services and launched all new claims that have results within our most populations which help either handle various issues during the claims process. For example, our intelligent optimal selling business system leverages our OCR-based subtraction technology to effectively improve the equity of service uploads.

Our product customization assistant uses our late impact to generate, innovate insurance product recommendations for either demanding more customer side protection. In the future, we will continue to invest our claims service system and try to deliver a better claim expertise for our users.

This concludes my briefing on our business — on our Issuance business. Now, let me hand over to [indiscernible] for an update for our Medical Crowdfunding and Patient Recruitment business.

Unidentified Company Representative

Thank you. I would like to share some updates on our medical compounding business.

At the end of Q3, accumulated total of 420 million donors helped exceeding 2.69 million patients create over RMB55.3 billion from our platform. Our user number and fundraising amounts have remained stable even after we implemented a service fee. In the third quarter, the Operational Transparency Committee continue to enhance our operational control related to authenticity and transparency on our medical crowdfunding efforts and launched new initiatives to increase the transparency of fund flows for each donation. For example, we have enhanced fund flow disclosure by an expense statement and more refined visual interest on respect from fundraising pages. When a patient needs some money, the bank will issue payment placed for both our platform and patient. The fundraising phase will also disclose other information such as how much cash has been resolved by patient, service fee charged, the third-party payment internal fee and the demand of funds available for resale.

The fund growth related to each donation are easily traceable. Meanwhile, after several mines on efforts we worked closely with the police in Shandong [ph] to crack down on the case of fundraising fraud executed by malicious individuals, resulting in the arrest of 17 suspects. Let me review various expected measures, the platform realized zero malicious fundraising activities for several consecutive months. It’s notable that our Waterdrop Medical Crowdfunding Platform was successfully integrated into the classic case of joining universe community of shared users in cyberspace which is initiated by the work in net conference. From a global perspective, most average values are either high of financial [indiscernible] caused by fiscal units, especially the people in remote areas who have less total securities. When they unfortunately encounter crisis in means of external injuries, they often have to choose to give up the necessary medical treatment or even realize it because of the heavy financial burden. But what is medical crowdfunding utilize Internet to bring the help of mutual health social media networks which will facilitate the efficiency of funds. Once the dilutive protection network for millions of people in dozens of countries and regions and thereby gaining a wide-ranging recognition.

For the patient recruitment business, in the third quarter, our patient [ph] spectrum presents high growth momentum, including more than 900 patients for clinical trials with Q-on-Q growth rate of 36% and bringing our total number of clinical tower programs to more than 400. We have collaborated with more than 100 innovative pharmaceutical companies and CROs in China worldwide and number of patients and the number of partners continued to increase this quarter. In particularly, [indiscernible] platform has established collaboration with a number of leading global CROs. This has allowed us to work from several international non-centered clinical trials initiated by motivational pharmaceutical companies.

In the long-term circling [indiscernible] project initiated by leading domestic pharmaceutical company, our implantation platform demonstrates its unique strength in digital patient recruitment and the test recorded 42 patients for the critical trial on 9 months, despite the volume of COVID lockdowns in China. The pharmaceutical companies, subsequently, honored us with the sales recruitment in awards and we are expected to become exclusive patient recruitment partner in the project to launch next year. Our new digital patient recruitment capability has helped us to build up an excellent reputation and instrumental position in the industry.

This concludes my part and let me turn it over to the call to Hu Yao to discuss our technical innovation update.

Hu Yao

Thank you. Hi, everyone. I’m going to talk about our third quarter technology innovation update across 5 important platforms. Our chatbot not only serves as the ears and voice of our virtual employee but also features as a human-like mindset even for the insurance marketing scenario.

First; regarding the years of the chatbot. In the third quarter, we launched a set of optimization algorithms that enhance the accuracy of our ASR, Automatic Speech Recognition technology, to improve our chatbot’s ability to accurately recognize users’ intentions. We deployed 2 algorithms, one which provides background noise, identifications and filtration and another which is especially adapt for analyzing multi-centers [ph] user responses, therefore enabling our chatbot to understand users just like human.

Second; as for the voice of our chatbot, we have equipped it with a voice cloning technology that enables it to speak to our users while emulating the tone of our best sales staff, thereby enhancing the smoothness of the dialogue and improving the overall user experience significantly. Meanwhile, on top of our proprietary intelligent risk control model, we have also developed additional chatbot functionalities which enable the estimation of our sales conversion rates, the selection of optimal outbound calling plans and the generation of complaint alerts. These models help the chatbot communicate with users at a most appropriate time with advanced dialog spiel and with a more human-like mindset, thereby maximizing our sales conversion rate and minimizing the potential disturbance to our users.

Second, I will address our efforts to refine our intelligent marketing operations through AI technologies. Our AI-powered machine system performed a number of functions, including the first time allocation of leads, scheduling follow-up calls and the reassignment of leads. The system is one of the most important components of our intelligent marketing operations.

In the third quarter, we upgraded the module which performs first time allocation of leads to Version 4.0 which enables more flexibility in AI-based decision-making, including lead sorting and matching. As a result, our ATL efficiency improved by 12% compared with Version 3.0. We use AI to select the most appropriate call back time have significantly improved our user experience and the sales conversion rates. Finally, we have also applied AI to determine the reassignment of leads which helped enhance our ATL with efficiency by around 16%.

In summary, Version 4.0 of our AI-powered matching system is highly stable and efficient in lead making and has reached our industry-leading position. The system continues to play an important role in enhancing our sales conversion rates for long-term insurance products.

Next, I will discuss our medical algorithm platform. Our proprietary extraction algorithm for medical records makes filling out medical records more efficient and speed up our patient recruitment process. The classification algorithm implemented in our medical data center has significantly improved our data governance efficiency, with an accuracy rate of about 95%. In addition, our intelligent verification algorithm which is capable of answering more than 20 types of questions automatically, has significantly improved the efficiency of insurance claims.

In this quarter, we officially rolled out the AI video production function in our Waterdrop broker app. That means our brokers can now access customized AI-powered video production services within minutes, helping them use their personal brand. Through this exclusive video generation tools, we have enhanced our brokers’ customer acquisition capabilities by empowering them to easily create original marketing content.

Finally, I will give you an update on our intelligent risk control platform. We upgraded all of our risk control products and integrated them into a unified algorithmic risk control platform. The platform’s integrated algorithmic capabilities not only provides strong risk control support to all of our businesses but also greatly mitigates the potential TR [ph] risks.

I will give you 2 examples of its application. But — in compliance with users’ right to know requirements, we have developed a model which can recognize unauthorized fundraising activity and identifies the malicious intermediaries with a high degree of accuracy. This helps us better safeguard the interest of our users, maintaining the recognition of Waterdrop Medical Crowdfunding platform and stamp out malicious fundraising activity from the very beginning.

Second, in order to protect user privacy, we have gone above and beyond the conventional methods to provide additional protections for public-facing information upgraded — uploaded by our fundraising units. We use a sensitive information masking model to automatically identify and mask personal information contained in uploaded image to avoid exposure of sensitive information and fulfill our duty to protect user privacy.

Thank you. I will now hand over to Yang Guang to discuss our third quarter financial performance.

Guang Yang

Thank you, Hu Yao. Hello, everyone. I will now walk you through our financial highlights for the third quarter of 2022. Before I go into details on the financial performance, please be reminded that our numbers reported here will be in RMB and please refer to our earnings release for detailed information on our comparator business financial performance on both the year-over-year and quarter-over-quarter basis.

Despite the challenging external environment brought by the year pandemic and the slow economic growth, we have plan forward in the profit-making phase with 4 consecutive quarters of profitability, further withstanding the momentum as we have meticulously pursued a high-quality operational strategy since the third quarter of 2021. Net operating revenue increased by 10% quarter-over-quarter and decreased by 0.9% year-over-year to RMB772 million which was primarily due to the decrease in insurance-related income.

For Q3, operating costs and expenses decreased by 50% year-over-year to RMB639 million due to the effective cost control measures taken since the third quarter of 2021. On a quarter-over-quarter basis, operating costs and expenses increased by 17%. To break it down, operating costs were RMB341 million, up by 15% year-over-year due to the increase in professional and outsourced customer service fee of RMB22 million. The recording of crowdfunding-related service fees direct cost of RMB63 million from sales and marketing expenses to operating costs as we started to charge crowdfunding service fees since April 2021 — 2022.

And RMB19 million increase in the estimated cost of 1 year of insurance coverage related to the termination of mutual aid plan last year based on the final settlement information and partially offset by RMB85 million decrease in personnel costs. On a quarter-over-quarter basis, operating costs increased by 40%, primarily due to professional and outsourced customer service fees increased by RMB64 million as compared to second quarter of 2022.

Total marketing expenses decreased materially by 82% year-over-year to RMB137 million for the third quarter of 2022. The decrease was primarily due to a RMB500 million decrease in marketing expenses to third-party traffic channels and RMB124 million [ph] decrease in outsourced sales and marketing service fees to third parties. On a quarter-over-quarter basis, gross and marketing expenses remained stable compared with RMB144 million for the second quarter of 2022.

G&A decreased by 26% in Q3 to RMB82 million year-over-year due to the combined impact of a decrease of RMB8.7 million in share-based compensation expenses, a decrease of RMB9.9 million in personnel costs and a decrease of RMB5.4 million in rental expenses. On quarterly basis, the G&A expenses remained stable compared with RMB86.1 million for the second quarter of 2022. R&D expenses decreased by 23% to RMB78 million year-over-year. The decrease was primarily due to RMB19 million decrease in research and development personnel costs and share-based compensation expenses and the increase by 11% quarter-by-quarter which is primarily due to RMB7.7 million increase in research and development personnel costs and share-based compensation expenses.

During Q3, we reported a non-GAAP profit of RMB215 million and a U.S. GAAP net profit of RMB169 million compared with an adjusted net loss of RMB453 million for the same period of 2021. The profit we have generated over the last 4 fiscal quarters illustrate the achievement of cost discipline and profit enhancement. As of September 30, 2022, our cash and cash equivalents and the short-term investment balance increased to RMB3,588 million, an increase of RMB300 million or 9% from the end of [indiscernible] quarter, as we continue to generate positive operating cash flow offset by the investing and financing cash outflow.

So far, we have once again reinforced our financial guideline on achieving a non-GAAP profit in the year of 2022. And going forward, we will continue our efforts in calculating our business, enhancing our revenue quality and instilling cost optimization.

That’s it for results. But now, let’s turn to our Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] The first question today comes from [indiscernible] with CICC.

Unidentified Analyst

This is [indiscernible] from CICC. First of all, congrats on the results. We noticed that you have a sufficient cash reserves. My question is, what’s your plan for looking at it? That’s all for me.

Unidentified Company Representative

Thank you for the question. I think as mentioned earlier, at the end of September, our cash and cash equivalents and short-term investments totaled RMB3.6 billion. So even taking into account our sales repurchase, we were able to generate a positive cash inflow of RMB300 million in the third quarter. Our ample cash reserve and our operating view to generate positive cash flow put us in a very strong position to deliver our strategic goal and withstand the evolving external environment. So I think we’ll continue to maintain a reasonable and sufficient cash reserve.

Meanwhile, we provided that we have no working customed for our daily operations revenues and approximately amount of funds to build our medium and long-term competitive edge to achieve healthy and sustainable development. I think firstly, we will use our funds to implement our share repurchase program. And since our IPO, we have used our own funds and cumulatively bought back 5.8 million ADS from the open market for a total consideration of approximately US$8.5 million [ph]. And based on our strong confidence in our corporate value and our long-term sustainable development, when in September, we announced the 1-year expansion of our repurchase program with the maximum repurchase amount increased to US$80 million. We plan to reserve the repurchased shares for share incentive plan which will align the interest of our employees with the growth of our company.

I think secondly, we will consider strategic investment at the right time. We will use a portion of the funds to pursue super strategic investments and acquisition opportunities. The purpose will be centering around the solid framework formed by our product innovation capability, technological innovation and the synergies created among — where our unique servicing segment can penetrate deeper to the industry and strengthen our ecosystem of insurance health care technology and thereby, further expanding our guidance in the industry. At this — the year, we will invest in new directives in the health care sector, relying on our established advantage in customer patient relationship and entitling big data analytics, we will come in breakthroughs in the medical innovation space.

As mentioned by the call earlier and our patient recruitment business is gradually becoming an industry here and our CRO business has also made remarkable progress. So going forward, we will continue to allocate an appropriate amount of funds to pursue innovation opportunities in the medical and health care industry. So although the new business initiatives may not generate significant revenue and profit in the short term but we believe that it will help the company create a new competitive edge in the long run and inject new momentum into the long-term growth of the company. I think that’s all for the questions.

Operator

The next question comes from Edwin Liu with CLSA.

Edwin Liu

So thanks for the opportunity to ask questions, I have 2 questions here. First one is regarding the crowdfunding platform. Since we just finished the first full quarter of this crowdfunding where it started to charge the service fee, can you provide a breakdown of the revenue and profit for this segment and any color on the trend? And my second question is regarding the guidance. Appreciate it if management can provide guidance in terms of operating revenue and net profit for this year and next year?

Unidentified Company Representative

Thank you for the question. I’ll answer the first question. Our Waterdrop Medical Crowdfunding platform has seeked to fully subsidize its service fee and started with charging a service fee of 3% in April of this year, up to a maximum amount of RMB5,000 for a single [indiscernible]. And this is to cover part of the operational costs and help more patients with [indiscernible] risk capital. So the user number and fundraising income on our platform has remained stable after the charging of the service fee. And we will also regularly and transparently disclose our service fee revenue in our financial report through our other communication channels.

Since April, when we started to charge the crowdfunding service fee, we have generated around RMB120 million in service fee cumulatively as of the end of September. For Q3, our revenues from service fees were RMB59 million, accounting for around 2.8% of the fund risk during Q3. The rate is below 3% because we are still subsidizing campaigns for collectively a few of the patients in some cases. So the operating cost for our crowdfunding platform was RMB54 million [ph]. But in addition, there are also indirect cost owned by our company, including IT and middle office [ph], risk control and other functions. So the service fee was very sufficient to cover most of the direct operating cost. But overall, our Waterdrop Medical Crowdfunding platform remains on a healthy and stable growth track. However, we did not intend to trust the service fee for profit purpose or for our platform to maintain its daily operations sustainably and in the benefit of users.

Our future plans will remain on track, unchanged and that is to make the service fee cover the operational cost. So we will keep our crowdfunding platform on a healthy and steady development type, continuously upgrade the service and explore more monetization scenarios in an orderly and healthy manner. We will strive to provide premium fundraising service for more patients in need and help establish a strong health advertising system for the public.

And to talk about the guidance for the whole year profit, I think at the beginning of this year, we set the goal to achieve non-GAAP profit for our established business for the full year of 2022. So far, we have achieved a good progress with our strategic transformation and we have continued to see improvements in our operating and financial performance. Since earlier this year, our revenue has gradually stabilized and returned to the growth track quarter-over-quarter. Since we work to achieve in adjusting net profit in Q4 last year, we have maintained a healthy level of profitability in each quarter of 2022.

In Q3, our net profit on GAAP basis reached RMB170 million. Despite the external uncertainties, we have established the foundation for more healthy and more solid and more billing growth path against the various external factors. We have entered into a phase of healthier and more sustainable growth, business growth, with a more solid foundation for future development. For our 2022 full year profit, we expect to maintain the profitable plan in Q4 and achieved a net profit around RMB500 million for the full year of 2022, outperforming the goal we set at the beginning of the year.

I hope that answers all your questions.

Operator

The next question comes from Thomas Wang with Goldman Sachs.

Thomas Wang

A quick question on the increase in operating costs in the third quarter. So I just want to try to understand what’s driving that increase?

Unidentified Company Representative

I think the increase in the operating cost was due to the recording of certain crowdfunding related service direct cost of RMB63 million, switched from certain marketing expenses to operating costs as we started to charge crowdfunding services since April of this year. Of course, we were only starting to charge starting from April this year, so it didn’t cover the fourth quarter. And also, we will increase — yes. We will increase cost on the providing and also the customer service fees. That’s mainly related to the crowdfunding dividend.

Operator, do we have the last question?

Operator

Yes, we do. [Operator Instructions] The next question comes from Susie Liu [ph] with Bank of America.

Unidentified Analyst

This is Susie Liu [ph] from Bank of America Securities. My question is about future expansion strategy. We see that Waterdrop has already established a competitive advantage in Tier 3 cities or below but which is the area you’ve been focused on? And going forward, are there any strategy to expand business in Tier 1 and Tier 2 cities? And could you share more details on your strategy, please?

Unidentified Company Representative

Okay. This is [indiscernible] speaking. Talk something about interest in about expanding our business to first and second tier cities. Right now, more than 80% of our current is either from Tier 3 and below cities which is consistent with operation distribution. So from the perspective of absolute number user — our users in Tier 1 and Tier 2 cities, we have an advantage in the industry. So to expand either to the first and Tier — the second tier cities, we have 4 strategies.

First, our online also brokerage business mainly works on Tier 1 and Tier 2 cities. We provide diversified business model such as the organization based model, the AB patterns, agent model and really just normal according to the local conditions and the launch of the best systems that help brokers diagnose customer needs and provide appropriate interest base. This way, we can set the middle-class survey in the first and second tier cities with more professional and objective insurance solutions. Second, we will leverage our customer design to continuously reach our product offerings and develop product lines to better diversified users in Tier 1 and Tier 2 cities. Third, we will — if the issue’s [indiscernible] which features in big concerns and community marketed to facilitate customer acquisition. This will enhance our user experience and expand our reach among business in Tier 1 and Tier 2 cities who already have a deeper awareness management. And fourth and we are going to working with [indiscernible] which are open emerging white collar workers and invest in promotion to pay with a higher recognition to deepen our brands and rates among customers in Tier 1 and Tier 2 cities. That’s all. Thank you.

Operator

We are now approaching the end of the conference call. Thank you for your participation in today’s conference. You may now disconnect. Have a good day.

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