X Financial (NYSE:XYF) reported first-quarter financial results on Thursday. The transcript from the company's first-quarter earnings call has been provided below.

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Summary

X Financial reported a significant decline in loan origination, with RMB 14.63 billion facilitated, down 58.4% year-over-year and 35.8% sequentially, reflecting a deliberate strategy to prioritize portfolio integrity over origination volume.

Total net revenue for Q1 2026 was RMB 1.18 billion, a 39.3% decline year-over-year, with total operating costs reduced by 28.5% sequentially, driven by decreased borrower acquisition and marketing expenses.

The company tightened underwriting criteria and strengthened compliance infrastructure to improve credit quality, as reflected by a 31-60 day delinquency rate of 2.61% and a 91-180 day delinquency rate of 9.95%.

Net income for Q1 2026 was RMB 37.9 million, a sharp decline from RMB 458.1 million a year ago, with a net profit margin of 3.2%, largely due to elevated credit provisions and reduced revenue.

The regulatory environment in China remains uncertain, which may adversely affect future performance, prompting the company to maintain a cautious outlook with a focus on credit quality and cost control.

Full Transcript

OPERATOR

Hello and welcome to the X Financial first quarter 2026 earnings conference call. All participants will be in a listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star then one on a touchtone phone. To withdraw your question, please press Star then two. Please note this event is being recorded. I would now like to turn the conference over to Victoria Yu. Please go ahead.

Victoria Yu (Moderator)

Thank you. Hello everyone and thank you for joining today's call. Our financial results for the first quarter ended March 3rd were released earlier today and are available on the Company's investor relations website at ir.gaoxiaouinggroup.com. On the call today from X Financial are Mr. Ken Lee, President, Mr. Frank Fu, Ya Zheng, Chief Financial Officer, and Mr. Noah Kaufman, Chief Financial Strategy Officer. Mr. Li will begin with an overview of our business performance and the key operational developments. Mr. Kaufman will then discuss the regulatory environment and first quarter financial performance, followed by Mr. Jiang who will review the financial results, capital position and outlook after the prepared remarks. Mr. Lee, Mr. Jiang and Mr. Kaufman will be available to answer your questions during the Q and A session. I remind you that this call may contain forward looking statements and the safe harbor provisions of the Private Securities Litigation Reform act of 1995. Such statements are based on the management's current expectations and involve known or unknown risks, uncertainties and other factors. These factors are difficult to predict and many are beyond the Company's control, which may cause actual results, performance or achievements to differ materially from those described in these statements. Further information on these and other risks can be found in our SEC filings. The Company undertakes no obligation to update any forward looking statements as a result of new information, future events or otherwise, except as required by law. It is now my pleasure to introduce Mr. Ken Lee.

Ken Lee (President)

Thank you, Victoria and hello everyone. In the first quarter of 2026, we continue to operate with a high degree of discipline. As the operating environment remained challenging, carrying forward the more conservative posture we adopted in the second half of 2025, we further reduced the pace of activity in Q1, keeping our business closely aligned with evolving supervisory expectations while maintaining an unwavering focus on credit quality and risk management. During the quarter, we facilitated an originated RMB 14.63 billion in loans, a decline of 58.4% year over year and 35.8% sequentially from the fourth quarter. This pullback was deliberate as we continue to place greater priority on portfolio integrity and the long term balance sheet stability over near term origination volume Operationally, we made further progress on a number of key initiatives during the quarter. We continued shifting our origination mix toward internally operated channels to deepen borrower relationships and reduce reliance on higher cost third party traffic. Underwriting criteria were further tightened, compliance infrastructure was strengthened and we continue rolling out process automation across servicing and collections, always the goal of improving operational efficiency while keeping our cost base lean From a volume standpoint, borrower activity continues to contract. In the first quarter we served approximately 956,520 active borrowers, down 60.6% year over year and 43.5% from the prior quarter. We facilitated approximately 1.25 million loans during the period with an average loan size of RMB 11,741 per transaction. Outstanding loan balance headquartered at RMB 35.3 billion, a decline of 39.6% from the same period of 2025. Credit Quality Credit conditions remained under pressure in the first quarter consistent with the broader stress we and other crossing industries have been observing. As of March 31st, our 31 to 60 day delinquency rate was 2.61% compared with 2.9% at end of Q4 2025 and 1.25% as of the same period of 2025. Our 91 to 180 day delinquency rate increased to 9.95% compared with 6.31% at the end of Q4 2025 and 2.73% as of the same period Of 2025. The data reflects a borrower base under continued financial strength consistent with what we are seeing across the broader consumer credit industry. We have addressed this by further narrowing our approval criteria, deploying more resources into collections and pulling back on our origination in segments where repayment risk has risen most sharply. Higher credit costs weighed on quarters financial results and we accepted that trade off knowingly. Protecting the integrity of the portfolio matters more to us than defending short term earnings. Looking ahead, our focus is on keeping credit quality stable, managing liquidity carefully and running the business with the same level of discipline we have maintained throughout this period. With that, I'll turn the call over to Noah who will cover the key financial results for the first quarter as well as the regulatory environment.

Noah Kaufman (Chief Financial Strategy Officer)

Great. Thank you Ken. Hello everyone. It's great to speak with you again. Ken walked through the operational and credit developments, so I'll take you through the financial results for the quarter and then provide an update on the regulatory landscape in the first quarter of 2026, total net revenue was 1.18 billion RMB, or US$170.5 million, representing a 39.3% decline year over year and a 19.9% decline sequentially from Q4 2025. Total operating costs and expenses came in at 1.04 billion RMB, or US$150.1 million, down 28.5% sequentially and 24.1% year over year. The year over year cost reduction was driven by the sharp pullback in borrower acquisition and marketing spend, which fell from 709 million RMB in Q1.20 to 219.8 million RMB this quarter. Total provisions were 282.9 million RMB, or US$41 million, down substantially from 669.3 million RMB in Q4 2025, which was a meaningful sequential improvement but still well above the 135.5 million RMB we recorded in the same period last year. Continuing to weigh on profitability relative to prior year levels on the discretionary spending side, we maintained tight control. Borrower acquisition and Marketing expense was 219.8 million RMB, or US$31.9 million in the first quarter, significantly below the 709 million RMB we spent in Q1 2025. As we continue to prioritize capital efficiency over volume growth, income from operations recovered to 140.7 million RMB, or US$20.4 million, a 75.4% decrease year over year, but a meaningful rebound from the depressed Q4 2025 level. Operating margin improved to 12%, up from 1.4% in Q4 2025, though still well below the 29.6% recorded in the prior year period. Income before income taxes was 136.8 million RMB, or US$19.8 million, as the sequential improvement in operating results was partially offset by investment related items. Below the operating line. Net income was 37.9 million RMB, or US$5.5 million in the first quarter, compared with 57.2 million RMB in Q4 2025 and 458.1 million RMB in Q1 2025. Net profit margin was 3.2%, compared with 3.9% in the prior quarter and 23.6% a year ago. Return on equity was 1.9% for the quarter, reflecting the substantial reduced earnings base on the regulatory environment, the regulatory environment governing Internet based lending and the People's Republic of China continued to evolve to during the first quarter of 2026, with authorities further strengthening oversight across the consumer credit business chain. The Company continues to monitor these developments closely. However, management has limited visibility into the ultimate scope and direction of implementation. If current and emerging regulatory requirements are implemented as currently understood, the Company's operating results may be materially and adversely affected and historical levels of profitability should not be assumed to be indicative of future performance. The first quarter results reflect a business and transition revenue and profitability well below prior year levels. As we work through a period of elevated credit costs and reduced origination activity, but with early signs of sequential stabilization and operating performance, we are managing carefully through this environment. With that, I'll hand things over to Frank to take you through the detailed financial results per ADS metrics, non GAAP adjustments and the balance sheet.

Frank Fu (Chief Financial Officer)

Thank you Norm and hello everyone. I will walk through the key financial highlights for the first quarter, then cover the balance sheet, capital returns and our outlook. Please note that all numbers stated in RMB terms and rounded up. Full details are available in the 6K file with SEC financial results the total net revenue for the first quarter was approximately RMB 1.2 billion, down around 39% from the same period of last year and about 20% from the prior quarter. The decline was driven primarily by the significant reduction in loan origination activity we have been deliberately pursuing and was partially offset by growth in guaranteed income and financing income. Operation income was IMB 141 million with operation margin of 12%, well below the 29.6% we recorded a year ago with a meaningful recovery from the 1.4% reported in the fourth quarter of 2025. The improvement sequentially reflects the benefit of the low origination related provisions as our credit tightening measures took hold. Net income for the quarter was IRB 38 million compared with IRB 458 million in the same period of last year. The sharp year over year decline reflects substantially higher credit provisions and the substantially low revenue base. Non GAAP adjusted net income was RMB 81 million on the per ADS space. Basic earnings were RMB 0.96 $0.14 compared with RMB 10.92 a year ago and non GAAP adjusted basic earnings per ads were RMB 2.8 or $0.30. Revenue mix across our business lines. The pattern was consistent with the overall volume pullback. Facilitation fees fell sharply as original volume dropped. Post origin fee declined more modestly in line with the smaller outstanding portfolio on the positive side, guaranteed income more than triple year over year, reflecting continued recognition of revenue from our existing guaranteed loan portfolio. Financing income was broadly stable. For the full breakdown line item, please refer to the 6K's balance sheet and Liquidity Our balance sheet remained well capitalized at the end of the quarter. Total assets were possibly RMB 13.6 billion and the shareholders equity was approximately RMB 7.8 billion, giving us equity to assets ratio of around 57%. We remained a solid liquidity position and with total cash including restrict cash of approximate RMB 2.4 billion and the balance sheet is in good shape to navigate the current environment. Capital returned to the shareholders. We continue our share repurchase program during the quarter from January 1st through May 15th, 2026, we will purchase approximately 1.8 million ADS for the total approximately US$8.2 million. We have approximately 39.8 million remaining under the existing program which runs through November 30th, 2026. This reflects our ongoing commitment to returning value to the shareholders while maintaining balance sheet strength. Business Outlook Our near term outlook remains cautious. The regulatory environment continues to be evolved quickly and we have limited visibility into the full scope and timing of the implementations. We expect these dynamics to continue to influence our industry high pricing, funding conditions and residential activity for the foreseeable Future. For the second quarter of 2026, we expect total loan origination to be in the range of IMB 11.5 to IMB 12.5 billion. Consistent with our continued focus on quality over the volume, we remain focused on capital preservation, discipline, origination and cost control. We will keep investors update as the regulatory picture becomes clear. That concludes our prepared remarks. We will now take questions. Operator, please go ahead.

OPERATOR

We will now begin the question and answer session. To ask a question, you may press Star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press Star then two. At this time, we will pause momentarily to assemble our roster. Once again. To ask a question, please press Star then one. To join the question queue, We are showing no questions at this time. I would like to turn the conference back over to Victoria Yu for any closing remarks.

Victoria Yu (Moderator)

Okay, thank you everyone for joining us today. If you have additional questions, please reach out to our investor relations team directly. We appreciate your interest and look forward to speaking with you again. Thank you. Operator, back to you.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.