Good morning and good evening, ladies and gentlemen. Thank you for standing by and welcome to Perfect Corp's second quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. We will be hosting a question and answer session after management's prepared remarks. Please note that today's event is being recorded. I will now turn the conference over to the first speaker today, Mr. Jimmy Shu, IR Director of the company. Please go ahead.

Thank you and hello, everyone. Welcome to Perfect Corp.'s Second Quarter 2024 Earnings Call. With us today are Ms. Alice Chang, our Founder, Chairwoman, and Chief Executive Officer; Mr. Louis Chen, our Executive Vice President and Chief Strategy Officer; and Ms. Iris Chen, Vice President of Finance and Accounting. You can refer to our second quarter 2024 financial results on our IR website or in the Form 6-K we filed with the SEC earlier. A replay of this call will also be available on our website shortly after its conclusion. For today's call, management will provide our prepared remarks, followed by a Q&A session. Before we continue, I would like to refer you to our Safe Harbor statement in our earnings press release. This call may contain forward-looking statements regarding performance, anticipated plans, original results, and our objectives. Forward-looking statements are based on management's expectations and are subject to numerous risks and uncertainties that could cause actual results to differ materially from those expressed or implied in our call today. Perfect Corp undertakes no obligation to update any forward-looking statements except as required by law after the date of this call. Please note that all numbers stated in management's prepared remarks are in U.S. dollars and we will discuss non-IFRS measures today. I will now turn the call over to our CEO, Ms. Alice Chang.

Thank you, Jimmy, and welcome to Perfect Corp.'s 2024 Second Quarter Earnings Call. We have some exciting news to share today. Let's get started. Leveraging our advanced AI capabilities, we began the first half of 2024 with strong growth, surpassing our earlier guidance. Our revenue for the first half grew by 13.5% year-over-year to 28.2 million. Our net income surged 185% year-over-year to 1.4 million, and the adjusted net income rose 26.2% to 2.8 million compared to the same period last year. The double-digit rise in revenue and positive net income were fueled by robust growth in our AI/AR cloud solutions as well as subscription services for mobile beauty apps and enterprise business. Both segments benefited from our advanced AI/AR technology, contributing to an increase in revenue and profitability. In the first half of 2024, our operating cash flow generated a net inflow of 5.5 million. In the second quarter, our consistent improvement in the company's bottom line showed a net income of 0.8 million compared to a net loss of 0.2 million during the same quarter in 2023. Our operational strength stems from efficient cost management, improved operational efficiency while maintaining our competitive advantage, investments in AI/AR services, and continuous growth in our market presence. Additionally, we recorded 1.3 million in adjusted net income for the second quarter of 2024, up from 0.9 million in the same quarter of 2023, marking a 43.8% increase. A key advantage we have is utilizing our unified AI engine for both consumer mobile apps and enterprise SaaS solutions, enabling us to foster innovation across different sectors. Our B2C business, particularly in mobile beauty apps, has continued to show strong growth, with an 18.3% year-over-year increase in active subscribers, reaching a record high of over 919,000. This sustained growth in active subscribers highlights the increasing demand for mobile apps that empower users to edit, enhance, and beautify their photos and videos, indicating a bright future for our user base. Our suite of YouCam apps continues to lead in innovative digital solutions, utilizing cutting-edge technologies like Gen AI for photos and videos. Users can now explore and express their unique styles in various formats, unlocking creativity through the latest AI capabilities. As mentioned earlier, we have rolled out several enhancements driven by Gen AI, including features like AI avatar, fashion, hairstyle, headshot, studio, color, and advanced photo and video editing tools. These offerings provide users with sophisticated options for beautification and enhancement, setting new standards in digital creativity and showcasing our dedication to innovation. Shifting to our B2B operations, in this quarter, we concentrated on enhancing market penetration across different sectors. We made significant progress in AI-powered screen diagnostics and jewelry fashion try-on solutions. Concurrently, we expanded the adoption of our mega-VTO across all brands in the region. We secured multiple new contracts for our beauty, skincare, and jewelry solutions within the B2B sector, reflecting solid demand for our comprehensive offerings in advanced technology across various industries. Additionally, we successfully renewed major licenses with key beauty groups and retailers, underscoring the growing trust in our solutions to meet evolving demands and affirming our leadership in VTO vertical try-on services. Moreover, we seized the opportunity to cross-sell to affiliated brands and offer expanded services, including broader skill selections and market expansion. The strong revenue growth this quarter reflects the continuous recovery in sales cycles and the expansion of our enterprise business pipeline. Another significant event this quarter was our formal announcement of the Generative AI framework for beauty, PerfectGPT, at our sixth Annual Global Beauty and Fashion AI Forum in New York City this June. PerfectGPT connects all perfect beauty services and helps address customer beauty and fashion challenges through natural language conversation and generative AI visual content. Any brand can utilize this framework to develop its own personalized AI assistant for beauty, skincare, and fashion, integrating it with other digital services for a unified consumer experience. Along with the PerfectGPT framework, we introduced a variety of new beauty AI solutions, including BeautyGPT services that feature AI megatransfer, step-by-step tutorials, and product recommendations. Additionally, Skincare GPT offers AI skin analysis and product recommendations. In the future, we plan to develop additional generative beauty fashion solutions using GPT technology, including Hair GPT, Jewelry GPT, and Fashion GPT, to enhance consumers' experiences. All these services can be centrally integrated for consumers through a simple, intuitive conversational AI assistant on brand websites or in our app. Besides BeautyGPT, we launched the world's first HD skin analysis solution in Q2, capable of detecting skin conditions with twice the precision compared to previous models. The enhanced AI model now processes more input data from high-definition smartphone cameras, allowing brands and clinics to provide even more accurate analysis for users' skin concerns. Furthermore, this AI skin solution has been upgraded with batch capabilities to manage large volumes of data images alongside a new AI skin score validator. Brands in BrandLab can utilize this advanced model to efficiently process significant amounts of clinical test data and receive results more swiftly. Innovation continues in the AI megadomain as well. We pioneered the launch of the world's first AI megatransfer with full-loop creation. This cutting-edge technology employs AI to detect and replicate any trending megaloops from social media or beauty magazines. Our Gen AI model can identify color, texture, and patterns and seamlessly transfer them to users' personal photos. Consumers can experiment with various trending looks using just a single image, with the AI model further comparing shades and textures against our database of makeup products and recommending specific brands. In the jewelry sector, we also introduced the world's first real-time multi-category stacking capability virtual client. Consumers can now try pairing various items, like wearing multiple rings on different fingers or combining them with bracelets and watches simultaneously. This enhanced capability results from our improved tracking and rendering performance architecture that processes multiple 3D objects directly from smartphones. Our company remains committed to creating new AI innovations to address consumer and brand challenges through our comprehensive line of AI services. In conclusion, we achieved strong business performance in the second quarter and the first half of 2024, marked by significant revenue growth, enhanced operational efficiency, and positive financial outcomes. Our B2C segment continues to experience rapid organic growth with the launch of Perfect GPT and other industry-leading AI technologies. We are confident that Perfect Corp. is strategically poised to seize expansion opportunities in the market for consumers and brands and to sustain our business goals in both the near and long term. Fueled by robust demand for our app subscriptions and enterprise SaaS renewal solutions, we maintain our outlook for the full year 2024, projecting total revenue growth under IFRS to range from 12% to 16% compared to the results of 2023. With that, I conclude my remarks and will now turn the call over to Louis, who will discuss our financial details with you. Thank you.

Thank you, Alice. Please note that all financial comparisons are on a year-over-year basis, and the reporting period is the second quarter of 2024 versus the comparable period in 2023. On top of the international financial reporting standard measures, we will also discuss non-IFRS measures to provide greater clarity on the trends in our operations. In the second quarter of 2024, our total revenue increased to 13.9 million from 12.7 million for the same period in 2023, representing a year-over-year growth rate of 9.6%. The robust performance was mainly due to the consistent growth momentum of our AI and AR cloud solutions and mobile app subscription business, which is also the main focus of our business model transformation carried out in the past few years to convert legacy contracts from licensing revenue into recurring subscription revenue. Our AI and AR cloud solution and subscription revenue saw a much stronger increase versus the total revenue increase rate, reaching 12.9 million in the second quarter of 2024, a 17.4% rise compared to the same period in 2023. The subscription revenue contribution was 92.8% of the total revenue in the second quarter. This growth can be attributed to the robust expansion of our mobile beauty app subscription and the rising demand for our online skincare diagnostic solutions and online virtual product solutions among brands and retailers. Furthermore, this growth was also contributed by the addition of new categories and the increased popularity of our Gen AI technologies for AI creation and editing features for photos and videos. Notably, our mobile app active subscriber has surged by 18.3% year-over-year, reaching an all-time high of over 919,000 by the end of the second quarter this year. The strong momentum underscored the continued growth interest in our suite of mobile beauty apps and our capability to retain and convert those app users into paying subscribers. The licensing revenue, which is mostly generated from our traditional offline services, decreased by 49.8% in the second quarter of 2024 to 0.7 million compared to 1.4 million during the same period of 2023. This result was expected as the company is on a mission to convert this type of legacy non-recurring revenue into AI and AR subscription revenue from brands and consumers instead. The licensing revenue will gradually become immaterial as it continues to be phased out in place of a new subscription revenue model. Gross profit for the second quarter of 2024 grew by 7.8% to 11 million with a gross margin of 79.3% compared to 10.2 million and a gross margin of 80.6% for the same period in 2023. The decrease in gross margin was primarily due to the increase in third-party payment processing fees paid to digital distribution partners due to the increase in our mobile app subscription revenue. The total operating expenses for the second quarter of 2024 increased by 0.7% to 12.4 million compared to 12.3 million for the same period last year. The increase was primarily due to higher sales and marketing expenses and research and development expenses, offset by a decline in general and administrative expense in the second quarter of 2024. To break down operating expenses, sales and marketing expense for the second quarter of 2024 were 7 million compared to 6.6 million during the same period last year, an increase of 7%. This was due to an increase in marketing events and advertising costs for our mobile apps and cloud computing costs. Research and development expenses were 3 million for the second quarter of 2024 compared to 2.8 million during the same period of 2023, an increase of 7.5%. The increases were from additional R&D headcounts and related personnel costs. General and administrative expenses were 2.4 million for the second quarter of 2024 compared to 3 million during the same period of 2023, a decrease of 19.1%. The decrease was mainly due to lower corporate insurance expenses and increased operational efficiency. Net income was 0.8 million for the second quarter of 2024 compared to a net loss of 0.2 million during the same period last year. The positive net income in the second quarter of 2024 was supported by continuous revenue growth and effective cost control. Excluding non-cash share-based compensation, non-cash valuation gains, and losses of financial liability, adjusted net income was 1.3 million for the second quarter of 2024 compared to adjusted net income of 0.9 million in the same period of 2023, an increase of 43.8%. This represents an adjusted net margin of 9.1% in the second quarter of 2024. Looking at our balance sheet, as of June 30, 2024, the company held 158.8 million in cash, cash equivalents, and six-month time deposits compared to 157.3 million as of March 31, 2024. This increase was a result of the positive operating cash flow and the interest income received from the company's bank deposits. We had a positive operating cash flow of 2 million in the second quarter of 2024 compared to 2.6 million during the same period in 2023. The positive cash flow demonstrated the company's continued ability to generate cash flow to support its business operations and growth strategy. In total, our customer base had a net increase of 20 brand clients since the end of last quarter, achieving a total of 686 brand clients with over 774,000 SKUs for makeup, skincare, eyewear, and jewelry products as of the end of June. This is yet another record quarter for these metrics, showing the continuous increase in customer penetration and SKU expansion. More brands and products are leveraging Perfect console platforms to manage its services subscribed from Perfect. In the second quarter, Perfect had 151 key customers compared to 152 in Q1 2024, a net decrease of one, a result of normal fluctuations in the B2B business. Renewals continue to be strong, while upgrade sales were weaker in this quarter. In the second quarter of 2024, our total revenue has consistently exhibited expected growth, primarily driven by the continuous momentum in our AI and AR cloud solution and mobile app subscription of our YouCam family of AI-powered apps. Our operational efficiencies and financial prudence show continued profitability in creating value for investors. Given our robust SaaS business model, we are confident in the growth of our business as we move into the second half of 2024. We are also committed to investing in professional development and talent acquisition, especially in the field of Gen AI technology innovation, to strengthen our core capability. This investment aims to further enhance our role as a transformative force, reshaping how consumers interact with digital experience, both in brand offerings and in mobile app utilization. We are confident that our strategic position through our proprietary technology will keep us at the forefront of revolutionizing how beauty and fashion brands interact with their audience. Finally, we reiterate our 2024 guidance that the total revenue year-over-year growth will range from 12% to 16%. This forecast is based on the company's current assessment of the market and operational conditions, and management will closely monitor business progress and provide updates to offer better transparency to the market. That concludes my prepared remarks. Operator, please open up the call for questions.

Thank you. We will now begin the question-and-answer session. Your first question comes from Brian Schwartz with Oppenheimer. Please go ahead.

Yes. Hi, Alice and Louis. Congratulations on the subscription revenue growth and the technology innovation in the quarter. A couple of questions I wanted to ask you were about the outlook and thinking about the second half. I know there's a lot of concern out here about the macro and the election impact on demand in the half. Maybe from a high level, I don't know if it's for Louis or, can you talk about the shape of the pipeline, seeing exit in Q2 compared to maybe where it started in the first quarter, how your coverage ratios and just the shape of the pipeline as we enter the second half of the year?

Hi, Brian. Good to talk to you again. I think if we look at our first half of the year, top line, we reached 13.5% growth. That's well within the range of the annual guidance that we have given between 12% to 16%. Certainly, Q2 was slightly slower compared to Q1, but I think that's part of the seasonality effect. As we see the pipeline, the renewal from the brand customers are performing quite robust. So we are able to renew all the major contracts in this first half of the year. That gives us confidence moving into the second half to keep up this performance. So looking at the second half of the year, with the pipeline we have been developing and the visibility that we see, we reiterate the annual guidance. If the macro improves, the interest rates come down, and the cost of capital becomes cheaper, enterprises will be willing to spend more. We certainly can hit a higher range of guidance. If not I think we'll be within that range.

Hi, Brian. This is Alice. Nice to talk to you. So the buy-in Q2 is normally as we expected not a high growth season. We could see in this case the consumer isn't being affected by all the conditions, and this is quite global. We are expanding to a lot of new regions in Q2. For B2B, just like Louis said, renewal is strong and the new upsells are not as strong as we expected. However, all the new AI we announced in June in New York and Paris, particularly the Perfect GPT part, has garnered significant interest from all the brand groups. They are considering how Gen AI and GPT can impact their internal operations along with the external engagement with consumers. We are currently the only solution in the market. Innovation for those brand groups has already led to a high AI community for engagement, evaluation, and pilot projects. It takes time, but my vision for every beauty group is that they will need to have AI assistance using GPT and our AI services together as an external consumer engagement tool. It may take time, but we anticipate some POCs by the end of this year.

That's really helpful. And then Alice, that's a good lead-in to my second question. I just wanted to ask about AI and spending trends. Is there a possibility as we think about budgets at these brands that more funds might be allocated specifically to AI initiatives as the technology evolves and you introduce new products? What are you hearing from the brands in the market?

Hi, Brian. From the beauty enterprises perspective, as we have been introducing these AI solutions, all of them have expressed interest, and the majority have actually set up AI committees or even special AI budgets to explore new possibilities, specifically how AI can help in beauty and fashion. The enterprises are certainly cautious about how to implement AI. These budgets are initially meant for proof of concept or pilot projects. This is one of the main tasks for the second half of the year to develop tailor-made solutions, how to use generative AI, GPT, and LLM solutions to assist beauty consumers with product discovery, finding new looks, trying on, and learning tutorials, among others. I believe that is going to be the initial trend.

Thank you, Louis. Then with Q2 specifically regarding the key customer accounts, I'm aware there's been some churn. I think you mentioned some financial distress among those customers. Is it fair to assume that those customers that are churning are smaller brand partners rather than larger ones? What's the typical average size of these key customers that are churning?

Some of these are not necessarily churn, sometimes they can just be downgrades as we define a key customer as a threshold of $50,000. Typically, we see, as you mentioned, that larger enterprises are very stable; they use multiple services in multiple regions and have been doing so for many years. There's not much impact there. However, some other customers who are just starting, or we hoped to upgrade, or they are barely over that threshold, are what we see as a normal situation. Typically, we try to upscale newer modules to make sure they become larger clients so we can increase the number of key customers. In this quarter, we see that average sales being a bit smaller. Smaller brands across the beauty industry are experiencing more modest growth, whether in China or other regions as well. We don't see that as much of a concern at the moment, but we're hopeful the growing momentum will return as enterprise spending reopens, and they will be willing to commit to larger contracts or greater spending on services across more geographies or with more SKUs.

That's good to know; they haven't fully gone away. Last one for me, you have a global business. Can you shed some light on the trends and momentum in different geographies, specifically what you're seeing in Asia Pacific versus what you're seeing in EMEA? Thank you again for taking my questions.

You're welcome, Brian. From a global perspective in Q2, the Japanese Yen has demonstrated much weakness, affecting our top line by around 0.3% to 0.4% against the U.S. dollar. We see good momentum in Latin America, particularly in Brazil, especially for our B2C mobile app business. We have seen strong growth there, with consumers willing to pay for annual subscriptions for beauty apps, contributing positively in that region. However, there are challenges and stiff pricing competition in China, which is slowing momentum; we are uncertain when recovery will occur. Another promising growth area will be the Middle East and Southeast Asia. Although their revenue contributions are still lower compared to developed countries, they do show potential. Brand penetration is increasing, and travel retail is also coming back in various regions.

Your next question comes from the line of Lisa Thompson with Zacks. Please go ahead.

Hi, guys. I have lots of questions, but I'll just ask a few of them. Just to go back to the AI assistant, you said by year-end you might see some pilots or something. What kind of company do you think will be the first to start rolling this out? Will it be retailers or brands? What might they be using them for like the first initiatives we will see?

Hi, Lisa. Glad to talk to you. In our forum, we announced the Perfect GPT. It's a natural dialogue to the end-user, plus all the AI services we offer. My view is that just like all new innovations, it will likely start from a prestigious beauty group and then, once matured, it will spread to the mass market. We are talking to potential beauty groups and fashion groups, especially at the prestige level. Most of them, as Louis said, are forming AI committees to explore how Gen AI and GPT can be integrated for both internal and external services. So, answering your question, we anticipate the earlier adoption will be from top beauty and fashion groups by the end of the year, expanding to more mass markets later.

Alright, great. I'm excited to see this. There’s so much potential. Let me ask a question just about revenues. The licensing revenues are a mystery to me. Are they going to fluctuate quarterly or are they starting to trend down to zero from here? Going forward, is it reasonable to think they would be higher than the second-quarter numbers?

Hi, Lisa. I think the licensing revenue is expected to remain relatively flat moving forward. Years ago, it used to be significantly higher, especially pre-COVID. After that, the business and technology have moved much more online, and our revenue model has transitioned to subscription-based, recurring income. These legacy products will not vanish completely; there will still be demand for deploying these products alongside online services. However, we do not expect it to become substantial. It will gradually become more immaterial, likely around 5% to 10% of total revenue.

Yes, Lisa. The in-store demand we experienced post-COVID also indicates every brand and retailer is trying to engage online. It’s more sustainable for our business model to focus on renewals, especially online. We do not expect strong growth for in-store sales and are encouraging a shift to the subscription model.

Okay, so would it be logical to predict revenues will remain under $1 million a quarter moving forward?

I think that's a fair assumption.

Okay, good. That’s helpful. Let me revisit another topic. When I look at the Q2 gross margin versus Q1, it's up, but the licensing was down significantly, and I would assume that has a 100% gross margin. I thought that the mobile apps were growing faster than B2B, which should lower margins. What am I missing about this?

It reflects normal fluctuations; Q1 and Q2 aren't drastically different in internal margin profile. You are correct; in Q2, the B2C app is growing faster than B2B, leading to a year-over-year decline in margin around 1%. Comparing results is difficult due to the varying mix and renewal periods for each product. However, overall averages remain consistent between Q1 and Q2.

Okay. All right. Another question I have. Have you given any thought to doing advertising for the mobile apps? I was surprised to see a couple of face-tune ads a few weeks ago. Are you considering different marketing approaches than before?

We do allocate some of our marketing budget towards user acquisition. We do advertise in select countries through particular channels, based on analytics that display ROI and real user conversion leading to paying subscribers. We continue to explore new advertising channels, though it isn't a dominant part of our strategy. Organic growth and digital downloads remain our primary focus. We try different advertising avenues to achieve a good ROI on our investments.

Beyond our operations, organic growth remains key. CPI advertising is part of our strategy, but organic growth is always our primary focus. The advertisement percentage of our total paid subscribers remains low, but we continue to experiment with different advertisement channels to drive good ROI for our investments.

I guess my last question is a big picture one. I've seen companies discussing AI for e-commerce, creating platforms for selling and retailing. How big of an impact will that have on you, or are they approaching it improperly?

I don't think it has the right impact. The different AI technologies we develop work in conjunction across different e-commerce platforms and types. Our emphasis is on personalized recommendations, specifically targeting beauty categories to understand a user's style, face size, eye color, and hair color. Our AI services excel in this domain, effectively analyzing and delivering personalized recommendations to the users, thus enhancing the conversion rates.

I believe that AI conversational assistants will become commonplace on retail websites. Users will be able to interact and receive recommendations without needing to search manually. Most retail websites will soon have an AI representative providing personalized insights and product suggestions based on user queries. At Perfect Corp., we focus on beauty, skincare, and fashion, utilizing our knowledge base of around 700 brands to enhance user experiences through our PerfectGPT platform.

Your next question comes from the line of Christopher Recouso with Partner Group. Please go ahead.

Good morning, Alice and Louis. Can you hear me?

Yes. Very clear. Christopher.

Good morning to you both. Just a few questions. I wonder if you could walk me through the process of converting your brand clients into key customers. Is there a specific methodology you use? Is there a marketing approach? Are there top salespeople assigned to certain brands to convert them into key customers? Is there an overarching methodology, so to speak, to make them this upper-tier customer within your brand client pool? That's my first question. And I guess the second question related would be, and forgive me if it's somewhat naive, but is there a profile of your key customers? Are they all retailers? If you could possibly generalize what your key customers typically look like beyond the revenue profile, what do key customers typically encompass?

Hi, Chris. This is Louis. Let me answer the second question first. A typical profile of a key customer would be multinational brands operating in multiple countries. Typically, these brands have been around for several years and are expanding their business across regions. Once they start using our services, they usually have a unified global strategy that aligns their offerings across different countries, thereby boosting their consumption of our services. Another notable characteristic of key customers is that they often encompass multiple brands, either from acquisitions or organic growth. Retailers like Sephora, for instance, have client relationships across many countries, making them key customers. As for your first question, our goal is to make the initial entry with brands as easy as possible. We don’t ask them for multi-million dollar commitments upfront, which may deter them due to high risk. Instead, we aim to start small—frequently with pilot programs or specific regions—allowing them to see results, better conversions, lower return rates, and higher basket sizes, which collectively encourage them to expand usage and increase their annual spend beyond the key customer threshold.

I see. Thank you. Two quick follow-up questions: relating to previously discussed topics, I see that your R&D has traditionally amounted to around a 21% cost margin. Is that a stable figure moving forward? As you continue to scale, will we see this commit at around 21% of your top line, or will we eventually see operational leverage squeezing down that cost?

I think we are pleased with the R&D cost structure, especially since we operate here in Taiwan with a very efficient team. Historically, it ranges between 20% to 25% of revenue. As revenue increases, we will still invest in talent, especially in Gen AI development. Generally, we hope to maintain around this 21% mark, especially as our operational efficiency keeps pace. However, over time and as revenue scales up, that ratio may drop slightly; feedback depends on our investment in headcount.

Your next question, please limit yourself to one question and one follow-up, comes from Aashi Shah with Sidoti. Please go ahead.

Hi, Alice, Louis. Thank you for taking my question, and congratulations on a very solid second-quarter result. I have one question about the monthly active subscribers. This quarter, we saw an 18% year-over-year increase. Can you give us some color on the subscriber nature? What percentage is new to the applications, and what does the churn rate look like? Thank you for taking my question.

Hi, Aasha. I think the subscriber numbers will increase quarter over quarter. Traditionally, these increases come from annual subscribers. This indicates a commitment from users, suggesting they will likely renew their subscriptions year after year. We haven't disclosed our renewal or churn rates specifically yet, but we see positive momentum not coming from just one country or product. We see engagement across about 15 to 20 countries, with consumers now more open to paying for beauty app subscriptions, even for simple tools. Our insight is that as long as we keep innovating on premium features, we can continue to retain our active and free trial users, converting them into paying subscribers.

Thank you. I have a follow-up question. If you could rank maybe three to five new categories in terms of growth, what would they be, and which ones would most likely contribute to revenue growth in the second half of 2024? What are the catalysts you're observing right now in terms of categories or new ones that you've just started working with?

You're welcome. I think it varies by category. Typically, a client takes roughly two years to mature in service consumption. The growth momentum in skincare is quite strong because of heavy past investment; we are starting to see results. Makeup growth is robust but more mature, while Jewelry and Watches show good promise with 10 to 12 pilots converting to full deployment. Skincare, B2C consumer apps, and Jewelry are the identified areas of growth.

Your next question comes from Mike Kupinski with Noble. Please go ahead.

Yes. First, let me offer my congratulations on the quarter as well. Just a couple of questions related to margins. You mentioned cost efficiency initiatives, and I was wondering if you could share the impact those initiatives had in this latest quarter. Also, regarding your verticals, you're expanding beyond skincare into fashion, apparel, and jewelry. I was wondering if those expansions will predominantly impact B2B or B2C, and given this growth, how do you see sustainable margins over the next couple of years given the differing margin profiles?

Hi, Mike. Let me start with the first question. In terms of margin, B2B clients typically have multiple categories. This allows us to utilize the same sales and customer service teams, creating efficiency as we expand offerings. Regarding sustainable margins, B2B generates higher margins over 90%. With our in-house technology development and minimal royalties, it’s a pure margin model. However, B2C incurs third-party fees affecting margins. Overall, depending on the mix, we may see slight reductions—perhaps 1% or 2%. The New Verticals, I'll let Alice address.

The New Vertical expansion is largely B2B; demand drives specific vertical marketing efforts within beauty brands, skincare, and med spas. We need to build our marketing around these new operational demands. We see enormous interest from med spas seeking skin analysis and aesthetic simulations. For B2C, we can leverage our vertical technology effectively into our apps, allowing users to pay $35-$40 annually and enjoy everything within the app.

Thank you for that background. Just one quick question, if I may. Can you elaborate on the prospects of M&A? What is your perspective on the current M&A environment? Are you seeking compelling acquisition opportunities?

Hi, Mike. Certainly, M&A remains part of our growth strategy alongside organic growth. We’re actively looking for suitable opportunities. Nothing material has been announced yet. The market is reopening, and valuations have lowered to more reasonable levels for technology companies. We aim to create synergy with our global distribution and platforms. Once we have news ready, we’ll share it with the market.

And that concludes the question-and-answer session. I will now turn the conference over to Jimmy Shu for closing remarks.

Thank you once again for joining the call today. If you have any further questions, please feel free to contact us directly or through our IR website. We look forward to speaking with everyone in our next call. You may now disconnect.

This concludes the conference call. Thank you for your participation. You may now disconnect.