So-Young International Inc (SY) 2019 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to So-Young first quarter of 2019 earnings conference call. (Operator Instructions) I must advise you that this conference is being recorded today, Thursday, May 30, 2019.

I would like to hand the conference over to your first speaker for today Mr. Tip Fleming. Thank you. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining us today. So-Young's first quarter of 2019 earnings release was distributed earlier today and is available on the Company's IR website at ir.soyoung.com as well as on Globe Newswire Services.

On the call today from So-Young, we have Mr. Xing Jin, Cofounder and Chief Executive Officer, and Mr. Min Yu, Chief Financial Officer. They will be available to answer your questions during the Q&A session that follows management's prepared remarks.

Before we begin, I'd like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended and as defined in the US Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as will, expects, anticipates, future, intends, plans, believes, estimates, target, going forward, outlook, and similar statements.

Such statements are based on management's current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties, or other factors, all of which are difficult to predict and many of which are beyond the Company's control, which may cause the Company's actual results, performance, or achievements to differ materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties, or other factors are included in the Company's filings with the US SEC.

The Company does not undertake any obligation to update any forward-looking statement as a result of new information, future events, or otherwise except as required under applicable law.

It is now my pleasure to introduce Mr. Min Yu. Please go ahead, Min.

Thank you, Tip, and thank you, everyone, for joining our first earnings call as a public company. I will try to keep my comments here fairly short so that we can leave more time for Q&A.

We are very pleased to report robust growth across the board, which I believe largely reflects our continued strong growth momentum and increasing operational efficiency. The market opportunity is massive and I am confident that we have the right strategy and team in place to ideally position ourselves to benefit from the enormous growth opportunities ahead.

What makes us attractive to users seeking medical aesthetic treatments in China is our ability to provide a unique value proposition with our reliable user experience, transparent pricing, reviews and service provider credentials, and a convenient access to comprehensive media content, social community, and online reservation functions.

This can be seen in our operational data for the quarter with average mobile MAUs increasing by 79% year over year to 1.92 million, total number of purchasing users increasing by 85% to 127,000, and the aggregate value of medical aesthetic treatment transactions facilitated by our platform increasing by 68% year over year to RMB694 million.

We also offer medical aesthetic service providers a similar unique value proposition with an effective customer acquisition, differentiated branding, and an improved operating efficiency. This is also reflected in our results for the quarter with the number of paying medical service providers on our platform increasing by 37% year over year to more than 2,700. And the number of medical service providers subscribing to information services on our platform increasing by 136% to 1,853.

We will continue to invest in enriching our content offerings, deploying AI across our platform, developing additional value-added services, diversifying user acquisition channels, and expanding into adjacent consumption healthcare verticals to strengthen our competitive advantages and fortify our position as a clear market leader.

With that, let me now quickly go over our financials for the quarter. Please be reminded that all amounts quoted here will be in RMB terms. Please also refer to our earnings release for detailed information of our comparative financial performance on a year-over-year basis.

So to start, total revenues were RMB206 million, up 81% year over year. Within total revenues, information services revenues was RMB143 million, up 103% year over year. Reservation services revenue was RMB64 million, up 46% year over year. Cost of revenues were RMB66 million -- RMB36 million, up 146% year over year, due primarily to the RMB14 million increase in payroll costs associated with an increasing operational staff headcount.

Gross profit was RMB170 million, up 72% year over year. Gross margin decreased to 82.3% from 87% during the same period of last year. Total operating expenses were RMB132 million, up 90% year over year.

Sales and marketing expenses were RMB76 million, up 69% year over year, due primarily to share-based compensation expense, an increase in marketing and user acquisition campaigns to enhance our brand recognition, and an increase in payroll costs associated with our expanding sales and marketing teams.

Research and development expenses were RMB31 million, up 134% year over year. This increase was primarily due to the share-based compensation expenses and the increased payroll costs from our expanding R&D teams, who are developing technologies to further enhance the users and medical service provider experience.

General and administrative expenses were RMB25 million, up 124% year over year, due primarily to an increase in payroll costs associated with our expanding the administrative team and share-based compensation expenses. Income from operations was RMB38 million compared with RMB30 million during the same period last year. Non-GAAP income from operations was RMB44 million compared with RMB30 million for the first quarter of 2018.

Income tax expenses were RMB7 million compared with RMB2.4 million during the same period of last year. The increase was primarily due to an increase in taxable income during the quarter. Net income was RMB46 million compared with RMB31 million during the same period of last year. Non-GAAP net income was RMB52 million compared to RMB31 million during the same period of last year.

Basic and diluted earnings per ADS attributable to ordinary shareholders were RMB0.28 and RMB0.25, respectively, compared with RMB0.36 and RMB0.33 in the first quarter of 2018, respectively.

Next, moving on to the balance sheet. As of March 31, 2019, we had total cash and cash equivalents, restricted cash, and short-term investments of RMB1.28 billion. Please note that this doesn't include the around USD180 million we raised during our IPO earlier this month.

Now onto guidance. For the second quarter of 2019, we expect total revenues to be between RMB260 million to RMB280 million or USD38.7 million to USD41.7 million, which represents an increase of 71% to 84% year over year. This forecast reflects the Company's current and preliminary views on the market and operational conditions, which are subject to change.

This concludes our prepared remarks. I will now turn the call to the operator and open the call for Q&A. Operator, we are ready to take questions.

(Operator Instructions) Austin Moldow, Canaccord.

Hi, thanks for taking my questions. My first one is around Q2 guidance. Wondering if you can elaborate on the revenue guidance at all; what you are expecting between information and revenue services.

Actually, the current forecast for RMB260 million and RMB280 million, the composition of the two revenue lines including information services and commission, is very similar to that we see -- is around the same ratio for the first quarter. Other than that, I probably won't be able to provide more information on the distributions of that.

Okay. All right. I want to ask about sales and marketing expense a little bit. How much of your sales and marketing expense was spent on marketing and user acquisition?

And within that line item, seeing as in 2018 about three-quarters of marketing was spent on brand advertising, can you help us think about what you think the composition between brand and other user acquisition will be for 2019 and how that might differ from 2018's distribution?

Yes, for first quarter 2019, the RMB75 million spent on sales and marketing. Within that, RMB48 million has been spent on customer acquisition. Half of that, around half of that, has been spent on branding and the remaining will be on the traffic acquisition.

The reason why seems the first quarter is low is because the first quarter usually is a low season for customer acquisition or advertisement for ourselves. So we can see we spent relatively less, around 36%, for total revenue for sales and marketing.

And going forward for the full year we think -- last year in 2018 within the RMB233 million spent on customer acquisition, more than 70% had spent on branding. Just around 25%, 26% has been spent on traffic acquisition. For the full year of 2019, we expect that there are some structural change on that. We will spend relatively more on traffic acquisition and -- but still, branding will be the major cost for customer acquisition in the Company's strategy.

Okay. And my last question, if possible. Are you able to provide the number of total medical service providers on your platform? That way we can see the percentage of those paying.

You mean for first quarter?

Yes. I think in 2018, it was 5,600.

That's not only the medical aesthetic service, but other medical service providers. And I think at the end of the first quarter, it's around 6,000.

Okay, great. Thanks very much and congrats on the quarter.

(Operator Instructions) Leo Chiang, Deutsche Bank.

Hi. Thank you, management, for taking my questions. Congratulations on the successful IPO and the solid 1Q result. I have two questions. My first question is regarding to the reservation service.

So according to the results, we noticed that average ticket size per medical aesthetic treatment declined year over year and the take rate also declined year over year. Can management assure like what is the reason behind this and the trend going forward?

Yes, I think the reservation revenue has been especially -- I think the number of reservations or the people who reserve through us and experience services offline has been increased quite substantial for that quarter. But the ARPU seems coming down.

The reason why is because first quarter usually are the low season for medical aesthetic service, especially for this year because this year Chinese New Year has been with 10 days earlier compared to last year 2018, which have an impact on the reservations for medical aesthetic services for users. Because usually in China, they won't -- consumers won't do severe treatment or serious like surgical treatment before Chinese New Year.

And February as a full month are very quiet because that's a holiday season in China. So that's the reason why it seems like the ARPU is low. And we do have a March campaign event for getting more people to consume or reserve through us. And this year's theme for March campaign is dental services.

So we will see -- it seems like -- because the revenue we disclose are the net revenue term, which we'll deduct all those like -- we use the [red envelope] for some of the marketing or discount for users being net out from the revenue line. So it seems like a relatively lower take rate. But we didn't change any commission rates. We agreed with our service providers it's still 10% across the platform.

All right, thanks. My second question is we noticed that the sales and marketing expense grows lower than MAU growth, so it implies that our user acquisition efficiency is improving. Can management share what's the reason and the trend that we will see?

Yes, I think that's a very good question. Because our revenue line, especially for the first quarter, more than two-thirds, almost 70%, is from our information service revenue. The GMV term is -- we are not calling that GMV term because that means we facilitated certain amount of the reservations. And we -- we only take 20% as reservation payment and 10% after that as our revenue, but the major 80% has been paid offline.

And I think that's -- our sales and marketing on this is not to only encourage people to reserve through us. You should take it as how much money we spent and how much customers or MAUs we acquired. Because from that means efficiencies of our sales and marketing strategy.

From that point of view, I think our growth in terms of MAUs have been more than our so-called GMV growth. And we do feel our sales and marketing strategy being quite successful, especially since last year, third quarter of last year. And we do still see very strong customer growth or MAU growth in first quarter.

Yes, we also find our information service partner -- I think from the service provider's point of view, our information services has been -- the institution or medical aesthetic service providers or medical service providers who pay for our information service has been growing more than 130% year over year. I just want to be focused on that. Thanks.

Thank you.

(Operator Instructions) Vincent Yu, Needham and Company.

Hi, Min. Congrats on a great quarter. So my question is around when I was browsing the app, we do see you guys have so-called black card membership. So it looks like to potentially can be a new revenue stream from the customer side. So my question is around that: can you give more insights on this membership program?

Second is how -- on our current select programs or the services on the platform, what percentage of these kind of low pricing high frequency kind of Botox shot or kind of service? And the last is I do see Meituan is also pushing like these kind of cheaper but like high frequency Botox, that kind of service, on their platform, on their app. So what you see from that competition? Thank you.

For the first question, for the black card, I think I will try to answer you. And for the Botox or the dermal filler, these kind of SKUs also being provided by Meituan, I think I will also leave to our CEO Mr. Jin for more explanation.

But for the black card, I think we -- just for information, we just start to test for the membership not long time ago. And currently we don't have a lot of revenues being contributed from these group of customers, but we do feel that will be an important tool for us to gather or keep tracking the loyal customers and provide better services to them.

We will start to apply more tools or services for those customers going forward. And just for the first-quarter result and for the historical results in 2018, it's not very substantial from those group of customers yet.

And I will let Mr. Jin to answer the competition about for -- we are currently facing from as you think of from Meituan. I will do the translation.

(spoken in Chinese)

I will do the translation on what has been said by Mr. Jin. First of all, I think compared to those large traffic platforms, like you have mentioned Meituan, I think the key competitive advantage we have is our community. So the community is not easy for any platform to accumulate such large amounts of UGC content. And it's also very important that the platform itself has its own characteristic and the community environment. What can encourage people to share their own experiences.

And it's gathering that group of young generation ladies or females who are interested in medical aesthetics to come to our platform, read information, find out who are the best service provider and the most appropriate services they can take, and take the reservations offline. And we, of course, as a platform, we help them to assist them to make that decision, making -- to go through the decision-making process and get the work done, get the reservations done.

Because of that, we do see our ARPU is -- on our platform, especially for those with surgical services where users have longer decision-making process and a relatively high risk, they are more willing to come to our platform and assist them to take -- make the decision. And the ARPU, of course, we do see our ARPU is higher than the large traffic platforms.

For the large traffic platforms like Meituan, they treat medical aesthetics as one monetizing strategy or SKU they can monetize on their large traffic. And they do have large traffic, but they don't have so much -- so large operation team offline to help them maintain the operations or to regulate those service providers on the platform.

We have more than 300 business development personnel currently. And we also have another 200 to 300 operational personnel online for the content and community operation and community, how to say, the verifying their information. So we do -- but for like Meituan, I think they are around 1/10 of the team like what we have. So they don't have so much resources to cover or those service providers and provide as good services or as informative information like us on the platform to our users.

So from these three perspectives, first of all, we have very strong community feature, which makes us, in terms of in competition with large traffic platforms, we have the advantage and that's a very large barrier. And because of that, we gather in higher-value users.

Our ARPU of users is higher than the general large traffic platform. And we do have the strong offline operation team, which provides better quality services to users and of course also better quality controls to service providers.

(interpreted) Other than the three points we mentioned earlier, we do have a more detailed operation on the doctors' level compared to other large traffic platforms. They are mainly focused on the service providers or clinics or hospitals.

But we also have developed the tools for doctors who can on our platform to answer users' questions or have a video broadcasting diagnostics. And trying to have better services for doctors and also as well as the customers who are using our platform.

And another point is as a vertical platform, we can focus on the service or the industry we are participating in. We can promote our brand as a medical aesthetic service brand. And further, we will provide health and -- beauty and health to our users. And it's also a more unique position for us, and we can invest in our branding to find out those more dedicated or focused user base.

Got it. Thank you very much for the detailed explanation, Mr. Jin and Mr. Yu.

(Operator Instructions) Sid Kapoor, Silver Mount.

Hi, guys. Congratulations on the debut and well done for the first quarter. From our perspective, it would be really good to understand if you want to take a step back and think about the longer-term opportunity that you have in medical aesthetics. How would you characterize the runway that you guys have to grow in the Chinese market? And kind of how do you describe that from facts and figures? Thank you.

I think from an investor point of view, China's medical aesthetics market has been growing very fast. If you started doing the past 5 years at a 25% CAGR to more than RMB120 billion in 2018. And we do feel this market still will grow at the 24%, 25% CAGR in the next 5 years to reach more than RMB360 billion in 2023.

And in this market, there are two very unique characteristics for the market for -- in China. First one: the market is very fragmented. So the only -- 5%, slightly -- 7.2% of the market has been contributed by the top 5 service providers or the hospital chains in China. And more than 80%, 81% of the revenue generated from private-owned hospital service providers rather than other, like, healthcare services industry in China mainly controlled by public hospitals.

So these two characteristics make the industrial service providers in this industry spend a lot of money in customer acquisition. Last year they spent almost more than 25% of that total industry revenue into customer acquisition to acquire customers, which is around RMB32 billion. Within the RMB32 billion, RMB18 billion has been spent online and mainly on search engines.

So as a vertical platform like us, we do have very obvious competitive advantage, especially on the customer acquisition efficiencies compared to search engines. So we are not fighting; we are gaining the market share from the search engines obviously in the past five years. Because the market or this vertical platform for medical aesthetics has been just existed since 2014, and it's growing from 0 to more than RMB1.3 billion in total market size in the past five years.

And we do feel and we are very confident that this specific vertical platform business model industry will grow at 58% to 60% CAGR in the next 5 years to reach around 25% of the total online customer acquisition spending of medical aesthetics market.

So as a market leader, So-Young last year in 2018, we already account for more than 50% of the vertical platform business. And as said by Mr. Jin, in the vertical business, if you are leader of the platform, you usually will take more market share. For example, like Autohome, they are taking more than like 70%, 80% of the total market for auto sector. And we are also seeing our market share expanding and we will see our market share will be reaching 70% to 80% in the next 3 years.

So that's why we are very confident in terms of our growth. And of course, the industry itself is growing and taking the market shares from the search engine sector.

Sure, that's really useful. And I think just some kind of commentary around two kind of follow-up questions. I think the first would be how do you think about the clinics that you are serving in some ways? And how do you think about the value proposition that you provide for them relative to what you charge them to provide that service?

Sorry, first question is what the service provider --

Yes, so basically like the clinics. I mean, they pay you an information service fee and then of course a booking fee as well. And kind of how do you think about the traffic that you can direct towards them or the customer that you can direct towards them? And why do you think you present a better solution for them to acquire customers than another channel to acquisition?

Sure, sure. I think for a very standard process like a new clinic start to cooperate with our platform, they will start for, like, a commission-based services we provide, which means we divert our users. And our user will visit through us using their service or their specific clinic services and we take 10% of the reservation as our commission revenue.

And going forward, when these clinics start to accumulate more reservations, accumulate more UGC content related to them, they will start to promote themselves, trying to get more exposure of their services or their clinic on the platform to try to get more users' attention. So they will start to use our information services to promote their own branding and differentiate themselves, especially if they have certain uniqueness in certain services.

So we do feel once the user or service providers start using information service, we provide it to them, they will start to spend more. Because we do have a very effective or efficient customer acquisition result for them. For example, on my platform, the average ROI for our user or our service provider is materially higher than search engines because search engine these days become very expensive.

Now they are in the bidding process on the keywords, so we divert one offline visitor to the service providers could be more than like five to eight times higher than what we can provide to use the service providers. So that is why we are very confident and we do see the trend --

Sorry, just to clarify. Sorry. You said it was five to eight times higher on the search engine. Is that what you are saying?

Yes. I mean the ROI, yes.

Versus what you provide. All right.

So the search engine is five to eight times higher in terms of customer acquisition cost compared to my platform.

Sure.

So that is why we are also seeing the service providers, they are shifting the budget from investing in search engines to the vertical platforms like us.

And is there any kind of commentary that you can provide around the type of customers that you provide? I mean, one of the things we noticed was that the retention rates that you guys have are somewhere around the 80s. And it would be really useful to get some idea of how you think about kind of providing that retention in terms of customers or the quality of customers that you send to the clinics. And are they different customers to what they could acquire elsewhere?

I think that you are -- because on our platform, we can provide reservation services, so users can reserve through us to certain service providers. But the reservation is not compulsory; they can also just read those informations about that service provider or that doctor and they can go directly offline without booking through us or reserve through us and paying everything offline. But we do share the information services paid by those service providers because if they want to show them or get more exposure on our platform, they need to pay information services.

So we can't track that amount of users who are just reading information and go offline directly without reserving through us. And for those who make the reservation with us, we do have tracking their retention rate. So in annual terms, the second-year retention is around like 32%, 33% and the third-year retention is around like 20%. So that's for the reservation services.

But I also would like to direct your attention to the retention rates for service providers who pay us in terms of information services. In 2018, 87% from those who paid us in terms of information service in 2017 renewed information service with us, which means that 87% of the clinics paid us information services in 2017 are still using our information service in 2018.

You will ask what is the trend rate for the 13%. Only two scenarios for the 13% trend. One is we find that quality is not good enough, so we kicked them out from our platform. Second one is they just run out of their business; they close down. So all the remaining service providers or clinics who use our information services will 100% renew with us.

Yes, understand. And just one kind of final question on this. If you think about the evolution of the clinic market, will it be a risk to your business if the clinic market doesn't consolidate in China? And actually, if we look forward to 5 years or 10 years that the top 5 is still, let's say, 5% or 10% in terms of concentration? Do you think that poses a risk?

Yes, I think the future of this market is fragmented. So it's a very fragile market because medical aesthetic services is very simple for doctors to have their own business. We do see our -- the market in China, the top 5 clinic chains only account for 7.2% in 2018 for the total market size.

And the market is growing like 25% every year. And we do see a lot of entrepreneurship from doctors itself because having medical aesthetic services clinics, it is relatively easy for them to have their own business. And I think the fragmented market trend or the future of that market will be consistent going forward.

For example, like in the US, which is the biggest medical aesthetic service market in the world, the market is very fragmented and mainly focused by users -- mainly comprised by the doctor's own entrepreneurship or one doctor or one, two, three doctor clinics. So, and for the Korea, South Korea market is also very fragmented. There are not -- the concentration trend or the risk from concentration, we are not seeing that for the next three to five years' time.

That's very useful. Thank you so much.

(Operator Instructions) No questions as of this time. I would like to hand the conference back to Mr. Tip Fleming. Please go ahead.

Thank you, operator. And thank you, everyone, for joining the call today. This concludes our conference call. If you have any further questions, please don't hesitate to contact us or the Company directly. Thank you again for joining. Goodbye.

Thank you, all.

Thank you. Ladies and gentlemen, that does conclude the conference for today and thank you for participating. You may now all disconnect.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.