So-Young International Inc (SY) 2019 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to So-Young Third Quarter 2019 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded.

I would like to hand the conference over to your first speaker today, Mr. Christian Arnell. Thank you. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining us today. So-Young's third quarter 2019 earnings release was distributed earlier today and is available on the IR website at ir.soyoung.com as well as through GlobeNewswire services.

On the call today from So-Young, we have Mr. Xing Jin, Co-Founder and Chief Executive Officer; and Mr. Min Yu, Chief Financial Officer. They will both 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 U.S. Private Securities Litigation Reform Act of 1995. Such statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties and 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 factors are included in the company's filings with the U.S. Securities and Exchange Commission. 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.

Thank you, Christian, and thank you, everyone, for joining us for our third quarter 2019 earnings call. We delivered another strong quarter results as our business revenue exceeding the high end of our guidance range as we capitalized on the strength, quality and the stickiness of our platform. Our community of users continues to grow as a result of our enhanced user experience and the rich content offerings.

Average mobile MAUs and total number of purchasing users are growing rapidly, increasing 144% and 60%, respectively, from the same period last year. Users are increasingly finding value in our diversified content offerings, which have now expanded beyond traditional beauty diaries on the recovery processes to include message boards, Q&A functions, short videos and live video broadcasts. This is reflected in a 75% year-over-year increase in aggregate value of medical aesthetic treatment transactions facilitated by our platform to RMB 976 million.

Our transparent pricing reviews and the service provider credentials and the convenient access to a diverse array of content continues to enhance the user experience, and it is creating a truly unique community. Medical service providers on our platform also continue to see the unique value proposition, our effective customer acquisition services, differentiated branding and ability to improve operating efficiency offer in driving growth across the businesses.

The number of paying medical service providers on our platform increased by 34% year-over-year to 3,230. And the number of medical service providers subscribing to information services on our platform increased by 52% to 2,104.

We have been rolling out additional tools for medical service providers to enhance conversion rates, strengthen their return on investments and the gradual increased monetization of our services. These tools were developed based on the enormous amounts of information we gather on our platform, and we specifically customized with different user demographics in mind, which will allow medical service providers to target users more effectively and efficiently.

We continued to be strategic in monetizing services across our platform, which has not impacted our user base or stickiness. This is key to enhancing the user experience and growing our user base. We are aware of the competition nature of the industry but remain confident that our differentiated platform and technological innovation will continue to drive operational efficiency, while we grow our community of users, increase monetization and capitalize on the network effect. We continue to build our platform out to scale with diverse revenue streams, which will help strengthen and support our profitability over the long run.

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. Please also refer to our earnings release for detailed information of our comparative financial performance on a year-over-year basis.

For the third quarter 2019, total revenues were RMB 302 million, up 80% year-over-year. Within total revenues, information services revenue was RMB 214 million, up 87% year-over-year. Reservation services revenue was RMB 88 million, up 64% year-over-year. Cost of revenues were RMB 54 million, up 104% year-over-year due primarily to an increase in payroll costs associated with an increase in operational staff headcount.

Gross profit was RMB 249 million, up 72% year-over-year. Gross margin decreased to 82.2% from 85.7% during the same period last year. Total operation -- total operating expenses were RMB 228 million, up 37% year-over-year. Sales and marketing expenses were RMB 157 million, up 44% year-over-year due primarily to an increase in marketing and user acquisition expenses as well as payroll costs and the recognition of share-based compensation expenses.

General and administrative expenses were RMB 32 million, up 38% year-over-year due primarily to an increase in payroll costs and share-based compensation expenses. Research and development expenses were RMB 40 million, up 14% year-over-year. The decrease was primarily attributable to the one-off share-based compensation expenses recognized for the re-designation of ordinary shares held by 1 employee to Series E preferred shares in the second quarter of 2018, net of the increase in the payroll costs associated with the expansion of research and development teams.

Income from operations was RMB 20 million compared to a loss of RMB 22 million during the same period last year. Non-GAAP income from operations was RMB 29 million compared with a loss of RMB 6 million for the third quarter of 2018. Income tax expenses were RMB 3 million compared with income tax benefits of RMB 1 million during the same period last year. The change was primarily due to an increase in taxable income during the third quarter of 2019.

Net income was RMB 32 million compared with net loss of RMB 25 million during the same period of last year. Non-GAAP net income was RMB 40 million compared to net loss of RMB 9 million during the same period last year. Basic and diluted earnings per ADS attributable to ordinary shareholders were RMB 0.31 and RMB 0.29, respectively, compared with loss of RMB 1.68 in the third quarter of 2018.

Next, moving on to the balance sheet. As of September 30, 2019, we had total cash and cash equivalents, restricted cash and short-term investments of RMB 2.78 billion compared with RMB 1.21 billion as of December 31, 2018. The increase was primarily due to net proceeds from company's IPO in May 2019.

Now on to guidance. For the fourth quarter of 2019, we expect total revenues to be between RMB 320 million to RMB 340 million or USD 44.8 million to USD 47.6 million, which represents an increase of 75% to 85.8% 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) Your first question comes from the line of Junhui Kang from CICC.

Congratulations on a strong quarter. I've got 2 questions. First, we saw a rather strong MAU growth in this quarter, but the purchasing user numbers saw a sequential decline. Can management explain a little bit the mechanism behind? And second, we saw like strong reservation service revenue growth, while like 1% sequential growth for information service this quarter. So can management share more color on the growth for both business lines in fourth quarter and going forward? And what is the comparative landscape behind this forecast? And what is the strategic focus next year for the management?

Okay. I think I will leave the question -- I will let CEO, Mr. Xing Jin, to answer the question. Just give us a minute to translate the question to the -- to Mr. Xing.

(foreign language)

[Interpreted] Yes. So the answer to the first question was -- so in the second quarter that the company started for the university and the schools some promotional programs to the students around the specific program called the (inaudible). And on this particular program, because it's targeting students, so it had a lower ASP than our usual ASP for the other services. And so which is why that you saw in the Q3 that the actual paying customers experience decrease Q-on-Q. However, if you exclude this one-off impact from the school promotional program, you actually see that the purchasing users MAU actually maintained like a good growth level. And in Q3, overall, we had very strong MAU is because we actually -- the company started like a strong promotional branding exercise. And we believe that this promotional exercise will have like a sustained positive impact going forward to our overall MAU growth.

(foreign language)

[Interpreted] So the answer to your second question is that there were 2 different explanations. So the first one was that the company had a monetization system upgrade, which has affected especially the small and medium service providers and their spending on the information services part. So we've actually put more resources into this overall initiative. And so the goal is actually to increase longer term the actual penetration rate for these kind of service providers. And so we believe that going forward, we should be able to see a good recovery in the growth rate for information services.

The second part was that for the reservation services, as you rightly pointed out, that the growth for the third quarter was actually higher than the growth for the information services part, partly because we had the [618] program, which was for the second quarter, and there was a time lag between the recognition for some of the fees, which were recognized actually in quarter 3. And so I think, overall, going forward, we should be able to see quite good growth for both information services and for reservation services.

Our next question comes from the line of Vincent Yu from Needham & Co.

So I have 2 questions. One is on the progress of rollout of our new monetization tools for the information service segments. Are we -- like what's the exact progress until now? And will we see improvement in per user monetization next quarter? And my second question is on the -- like on the execution side. So we see -- we saw some ad dollar shift to other platforms in the last quarter. Basically, some institutions are trying, like, say, Meituan or Alibaba's services and solution and some budget to it. Do we see this being -- get included in this quarter? (foreign language)

(foreign language)

[Interpreted] So the answer to your 2 questions. For the first one is that the actual monetization system is currently the upgrades in progress because it's quite a complicated system and which we had to discuss with our service providers. So the actual time line that we can see will be up until the first half of next year. As you know that the company before was transaction reservation, i.e., e-commerce-focused. But going forward, the company would like to move to more early stage in terms of monetization and to focus more on the sales lease and to help our service provider institutions to secure more customers early on in the whole purchasing process.

The answer to your second question is that Baidu, at the moment, still has about 70% of the customers in terms of the overall customer acquisition, the -- in the medical aesthetics market. I think for So-Young, the core target at the moment is to close our gap with Baidu. And from where we can see that our key advantages over Baidu include our customer acquisition and our ROI in which our conversion rate is actually much higher. As you mentioned about the other platforms, such as Alibaba and Meituan-Dianping, well, we can see that our single-month spending for our customers is around RMB 6,000, and that is increasing. And this ASP is much higher than the 2 platforms which you mentioned because we actually target very different customer bases. So we don't see those platforms as our key competition but rather than it's Baidu.

Your next question comes from the line of Austin Moldow from Canaccord Genuity.

I wanted to ask more about marketing and user acquisition. First, can you share the total marketing and user acquisition expense for Q3 and the split between brand marketing and user acquisition in the app store spending? And second, can you talk about what's driving marketing efficiency and what your marketing strategy will be for the rest of the year?

Thanks. One second, we'll just translate quickly for CEO.

Austin, I will give you the answer for the first part -- first half of your question, the split in terms of the sales and marketing cost for customer acquisition. Third quarter, we total have RMB 155 million spending on sales and marketing. Within that, around RMB 30 million is payroll. The remaining RMB 125 million is customer acquisition cost. And within RMB 125 million, 1/3 is for traffic acquisition, and 2/3 are branding.

And I think for your second part of the question, what's the marketing strategy or customer acquisition strategy, I will leave to Mr. Xing.

(foreign language)

[Interpreted] In terms of our advertising and the promotion strategy, so as you can see that from the second half of this year, the company started quite an intensive branding exercise. The goal is actually to increase the overall branding and the reputation of the company, not only within the medical beauty users around the wider public. And for next year, I think our key goal is fully on the strong and continued branding advertising campaign. We would like to convert some of those potential customers into actually purchasing customers. And we've also started social media campaigns over platforms such as Douyin, which has been very successful. And also, we have started using some particular -- the actual targeted online stores and other information kind of channels. Our ratio of the advertising split would still remain 1:2 on branding versus others.

And if I could ask 1 quick follow-up. I wanted to ask about average revenue per paying information service provider. I think you mentioned a few factors to why the growth might have accelerated this quarter, but wondering if you can just summarize some of the main drivers of that growth acceleration in the information service ARPU number.

Yes. I think I will try to answer your question here. So you see there is average ARPU for information services in terms for the institutions paying for information services a little bit increased in third quarter compared to the second quarter. The reason why I think is mainly because the total number of information services is just increased by 1% quarter-on-quarter in the third quarter, but you do see around 100 institutions less to spending on -- to acquiring information services. The reason we explained a little bit earlier is because we have a strategic -- monetization strategy upgrade, which we purposely decreased part of our resources available for invest by institutional service providers. And those ones are relatively low-ARPU service providers. They just buy certain CPT resources at a fixed price. And we do have those resources being replaced or decreased in the first page of our app. And because of that, we do see the third quarter information services have very -- just stayed the same compared to second quarter. We don't see any increase quarter-on-quarter. And those low-ARPU institutions, they tentatively changed their investment in terms of branding or information services spending in the third quarter. And we believe a company with our strategy, our monetization strategy upgrades, we will have more tools or information services available for service providers to invest, and it will help in the longer run or in the future. We will see the penetration rate for information service payment without our platform. We think the service providers will increase, and we will see the recovery of increase in terms of service providers who are paying for information services. So yes, that hopefully answered your question here.

(Operator Instructions) Your next question comes from the line of Thomas Chong from Jefferies.

I have a question about our content strategy. Can management talk about our strategy over the next few years? And how are we seeing the changes in terms of the user behavior in browsing the content? (foreign language)

(foreign language)

[Interpreted] The answer to your question is that on the content strategy, so last few years, the company has gradually been building up an ecosystem for the content was before it was predominantly UGC. But now we have extended to include, for example, doctors. And now you can see our platform that you can find the doctor's Q&A session, you can find short videos, and you can have the online video consultation with a doctor. In addition, on the doctors, there are also consultants on the platform. And where the consultants can come to help is to the design of the actual -- on the actual beauty aspect for the potential customer. Also, there are certain celebrities, which we have been motivating them to actually -- to also to contribute to the content of our app.

And linked on to the actual content, we have actually also diversified outside the normal beauty aesthetic channels into, for example, into dental to include hair implants, to include eye operations such as LASIK and also to include slimming body treatment and also including dermatology to improve the skin. And how to help the monetization on this, the content strategy was that the content helps us to -- actually to build a bigger pool of the actual customers. As you know, 1 customer may only do 1 or 2 or a single-digit number of times in terms of the -- in terms of number of operations. However, we would like to increase the time spent on actually using the So-Young app and also to include their stickiness on using our app to include -- improve the user experience. At the same time, we can cross-sell our other type of products. For example, before, if they only used the medical beauty treatment, but now maybe they can also look at hair, dental, et cetera.

Your next question comes from the line of Brian Gong from Citigroup.

Congratulations on the solid results. I have 3 questions. First is that management has just mentioned that you expect the money -- monetization upgrade to have significant improvement during the first half of next year, right? So just wonder if you have contacted medical service providers regarding our new monetization? Or if so, can you share how is their feedback so far? And the second question is regarding the decrease on reservation services. The decrease seems to improve to 9% in the third quarter from 8.2% in the second quarter. May I know the reason behind? And third question is regarding the MAU. Not sure if management can share the trend on the MAU in the fourth quarter so far.

Yes. Brian, this is Min Yu. I will try to answer your questions, all the 3 questions. First of all, the monetization strategy. We did discuss a lot in the previous questions. For the monetization strategy, we are currently still doing the developing the shifting from the mainly focused on transaction monetization to leads monetization. So we are also developing a new algorithm, providing new tools, for example, like video broadcasting diagnosis and a lot of tools like testing or skin testing of face, and we will generate leads available for service providers to invest and acquire the valuable leads in terms of different service types and different categories of the customers. We are not monetizing aggressively currently on the lease in the fourth quarter, as I mentioned. And also in the third quarter, we don't have any leads generated revenue.

And as mentioned by Mr. Xing, next half next year, in the first half of next year, we probably will see more revenue generated or more information service revenue generated from these leads-based revenue type. So -- but over the period, we need to educate our (inaudible) team. We need to let the service providers change or adjust their investment behavior and try to familiarize of our available tools and the leads available for them to invest. And that need a time, and we will also start to -- probably, in the next few quarters, you will see our information services generated from leads rather than just from CPC and CPT.

And for the take rates question, other take rates, still the same. Commission rate is 10% around -- across all different types of services. And why you see the change in terms of take rate in the third quarter is also related to the question being -- related to the answer for the second quarter, why we have more purchasing users. As mentioned by Mr. Xing, we have a campus campaign for target university students to provide those low-ARPU service items. And we provide that envelope or discount to attract those users, and it will have impact on the net revenue. And you will see that will be half deduct in terms of from the gross commission revenue we have. But as usual, we don't have -- we didn't change any commission rate. It's still flat around 10% across all different types of services. And the change is mainly contributed by our red envelope strategies being applied in different quarters.

And now your third question about MAU growth. We provide fourth quarter revenue guidance, but we don't provide a MAU guidance. But from the previous -- as mentioned by Mr. Xing, our marketing campaign has been quite effective. And across this year, our customer acquisition spending has been very efficient. And we -- and as our key goal for our company's KPIs to increase our user base and increase our penetration rates in terms of medical aesthetics population. So we will still see the growth in terms of MAUs in the next few quarters.

(Operator Instructions) There are no further questions at this time. I would like to hand the conference back to Mr. Christian Arnell for closing remarks. Please continue.

Thank you, everyone, for joining the call tonight. If you have any further questions or comments, please don't hesitate to reach out to the IR team. Thank you, and have a good night.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may all disconnect.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]