Earnings Call Transcript - PERF Q4 2024

Operator, Operator

Good morning and good evening, ladies and gentlemen. Thank you for standing by and welcome to Perfect Corp.’s Fourth Quarter 2024 and Full Year 2024 Earnings Conference Call. Please note that today’s event is being recorded. I will now turn the conference over to your first speaker today, Mr. Jimmy Xia, IR Director of the company. Please go ahead.

Jimmy Xia, IR Director

Thank you. Hello, everyone. Welcome to Perfect Corp.’s fourth quarter 2024 and full year 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 fourth quarter 2024 and full year 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 question-and-answer 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, our 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 also discuss non-IFRS measures today. I will now turn the call over to our CEO, Ms. Alice Chang.

Alice Chang, CEO

Thank you, Jimmy and welcome to Perfect Corp.’s 2024 fourth quarter earnings call. Let me start by giving you some updates on our financials and our progress in product business development around the world in 2024 and share our view for the year of 2025. First of all, we completed the full year 2024 with double-digit growth in revenue as anticipated by our guidance. The total revenue grew by 12.5% year-over-year to $60.2 million. The bottom line net income for the same period was $5 million and the adjusted net income increased 18.6% to $8.3 million compared to 2023. This continuous increase in revenue and the positive net income is mainly due to strong growth within our mobile app subscription business under the AI/AR cloud solution business. For the full year 2024, our operating cash flow generated a net inflow of $13 million, and our balance sheet remains very strong with over $165.9 million in cash and cash equivalents. Our B2C mobile app business has maintained very strong growth with the number of active paying subscribers continuing to breach all-time records with over 1 million at the end of 2024. It is a 14.3% increase compared to 879,000 subscribers at the end of 2023. This sustained growth in paying subscribers highlights the ongoing global demand for AI-powered photo and video editing, creation, enhancement and verification features appealing to all age groups and regions. As mentioned, we have seen positive momentum from our North American and Western Europe markets, as well as developing markets in Brazil. Our U.K. mobile app suite continued to evolve with frequent updates and feature enhancements powered by cutting-edge generative AI for image and video creation. Among the most popular innovations, our GenAI Hair experiences have become a major hit within our user community. These features, including AI hairstyle, hair lengthening, hair waviness, hair volume, hair color, and more provide ultra-realistic seamless previews, transforming how consumers and retailers make style decisions. Beyond hair transformation, our AI technology extends to other exciting innovations such as the AI face swap, AI face expression, AI photo enhancement, video enhancement, and more, delivering next-level creativity and personalization to our growing user community. Beyond our mobile apps, we are also expanding our web-based generative AI solution with YouCam Online Editor. Consumers can now enjoy the latest AI innovation not only through their mobile app but also via a web browser on their laptop and PC ensuring a seamless and accessible experience across the platform. We are focused on harnessing the power of GenAI to deliver engaging new features across text, image, audio, and video that are becoming an integral part of the premium subscription offering for our B2C users on app and web. By integrating state-of-the-art models and algorithms, we aim to create an immersive personalized experience that goes beyond traditional functionality, driving deeper user engagement and loyalty. Our strategy in B2C app and web involves continuous R&D to refine our generative AI content model and enabling features such as AI enhancement in photo and video, as well as AI-created personalized images and videos. Through this relentless innovation, coupled with robust user feedback and deep data analytics, we strive to deliver a subscription-based service that offers clear tangible value, positioning us as a leading provider for cutting-edge image and video GenAI solutions in the consumer market. Before I go to our B2B performance, I want to discuss the recent acquisition of Wanna from Farfetch and its impact on Perfect Corp. The transaction was completed in early January, and we anticipate spending the next 6 to 12 months integrating Wanna into our teams. Wanna’s core competencies give us access to new markets and customers within luxury brands, where it offers virtual try-on services for shoes, handbags, scarves, and clothes. This acquisition perfectly aligns with our AI service offering to brand partners and will expand our total addressable market beyond our current reach. Together with Perfect Corp., we will strengthen our competitive position in the beauty and fashion space, leveraging our synergistic solution, enhanced capabilities, and experienced team members. In our B2B business in 2024, we have prioritized deepening market penetration in the skincare and makeup segment. We reached over 732 brand clients with over 822,000 SKUs onboarded in our platform. We continue to make significant steps in expanding our portfolio with AI-powered skin diagnostics. Beyond core beauty and skincare brands, we have actively expanded into new markets reaching aesthetic clinics, dermatology clinics, skincare centers, med spas, and awareness centers, broadening our reach and impact on the industry. We continue to see strong demand in the skin diagnostic sector from brands, retailers, clinics, and med spas. Our AI-powered skin analysis detects up to 15 major concerns in HD, providing personalized treatment and product recommendations tailored to each user’s unique skin profile. The technology has enabled precise treatment measures, tracking progress with before and after comparisons to showcase improvement. By combining advanced diagnostics with data-driven insights, our solution enhances client engagement, trust, and long-term loyalty in the evolving world of AI-driven skincare. Our makeup virtual try-on solution remains the global leader, delivering strong results for brand customers. We have secured key license renewals with top beauty conglomerates and retailers, proving our impact on boosting online engagement and e-commerce conversion rates. While the B2B sales cycle has its challenges, our pipeline remains strong, and we remain focused on helping enterprise clients adopt AI-driven solutions to elevate consumer engagement and digital experiences. On the fashion tech side of our business, we continue to make strong progress in luxury fashion tech with luxury brands, particularly in watches and jewelry VTO. In January 2025, we acquired Wanna from Farfetch to accelerate our B2B growth with flagship brands and retailers. This strategic move expands our 3D VTO solutions to shoes, bags, clothes, and scarves, enhancing the digital shopping experience and reshaping how brands engage with customers in the era of AI-powered fashion retail. Additionally, our new web-based AI service, YouCam Online Editor SaaS API, integrates GenAI technology for advanced image and video editing. While initially designed for beauty and fashion professionals, it has gained traction across diverse industries, significantly expanding our total addressable market. The SaaS API simplifies web and mobile app development, handling complex processing without requiring extensive maintenance from clients. Its flexibility makes it suitable for businesses of all sizes, with new clients spanning convenience store chains, telecom carriers, and mobile phone companies. In conclusion, we achieved solid business growth throughout 2024, highlighted by increased revenue, enhanced operational efficiency, and strong financial performance. We are confident that Perfect Corp. is strategically positioned to capitalize on expanding market opportunities and sustain long-term growth by continuously developing new technologies and leveraging our leadership position in the beauty and fashion space for our consumers from our app, web, as well as our B2B enterprise brand clients. Our strategy for long-term growth in 2025 and beyond focuses on deepening our presence in the beauty, fashion, and skin segments and expanding into new segments, exploring cross-sell opportunities, broadening our product and service offerings, strengthening leadership, accelerating revenue growth, and maximizing long-term shareholder value. Driven by positive demand for both our mobile beauty app subscriptions and enterprise SaaS solutions, our outlook for the full year 2025 projects total revenue growth recognized under IFRS to range from 13% to 14.5% compared to the full year 2024 results. With that, I have concluded my remarks and will now pass the call over to Louis, who will discuss our financial details with you. Thank you.

Louis Chen, CFO

Thank you, Alex. Please note that all financial comparisons are on a year-over-year basis, and the reporting period is the fourth quarter of 2024 versus the comparable period in 2023 and are on top of the International Financial Reporting Standards measures. We will also discuss non-IFRS measures to provide greater clarity on the trends in our operations. In the fourth quarter of 2024, our total revenue increased to $15.9 million from $14.1 million for the same period in 2023, representing a year-over-year increase of 12.4%. Full year revenue increased 12.5% to $60.2 million in 2024 from $53.5 million in 2023. The growth came from the continuous expansion of our AI and AR cloud solutions and mobile app subscription business. The AI/AR cloud solutions and subscription revenue grew 25.4% to $15.1 million compared to $12 million from the year-ago period, which represents 95% of total revenue in this quarter. The growth is attributed to the continued expansion of our mobile beauty app subscription and the positive momentum from our online skin diagnosis solutions, as well as our virtual try-on business. Licensing revenue decreased by 72.2% in the fourth quarter of 2024 to $0.5 million compared to $1.8 million during the same period of 2023. The licensing revenue will gradually become immaterial as it continues to be phased out and replaced by the better business model of recurring subscription revenue model. The gross profit for the fourth quarter of 2024 grew by 2.5% to $11.8 million with a gross margin of 74.1% compared to $11.5 million and gross margin of 81.3% for the same period in 2023. Full year gross profit was $46.9 million in 2024 and a gross margin of 78% compared to $43.1 million in 2023 with a gross margin of 80.6%. The decrease in gross margin was primarily due to the increase in third-party payment processing fees paid to digital distribution partners such as Google and Apple due to the increase in our mobile app subscription revenue. The total operating expense for the fourth quarter of 2024 decreased by 3.6% to $12.2 million compared to $12.7 million for the same period last year. The decrease was primarily due to the lower R&D expenses and G&A expenses in the fourth quarter of 2024. Full year operating expenses increased 2.7% to $50.1 million in 2024 compared to $48.8 million in 2023. This increase was mainly due to the increase in sales and marketing expenses and R&D expenses and also offset by the decrease of G&A expenses. Going into more detail on operating expenses, the sales and marketing expense for the fourth quarter of 2024 was $6.9 million compared to $6.7 million during the same period of 2023, an increase of 3.6%. The full-year sales and marketing expense increased 9.7% to $28.2 million in 2024 compared to $25.7 million in 2023. This increase was largely due to an increase in marketing events and advertising costs related to our mobile apps and cloud computing costs. Research and development expenses were $2.8 million for the fourth quarter of 2024 compared to $3 million during the same period of 2023, a decrease of 8.3%. The decrease was from streamlining certain R&D processes and benefiting from expense savings. Full year R&D expenses increased 4.7% to $12 million for 2024 compared to $11.5 million in 2023. This increase resulted from the increase in R&D headcount and related personnel costs. General and administrative expenses decreased by 41% to $1.8 million for the fourth quarter of 2024 compared to $3 million during the same period of 2023. Full year G&A expenses decreased by 26.6% to $8.5 million compared to $11.6 million in 2023. The decrease was mainly due to the increased operational efficiency as we marched into the third year mark of the listing on NYSE. Net income was $1.1 million for the fourth quarter of 2024 compared to the net income of $1.4 million during the same period of 2023. Full year net income was $5 million for 2024 compared to $5.4 million in 2023. The positive net income was supported by continued revenue growth and effective cost control. This result represents a net margin – net income margin of 8.3% for the full year 2024. Excluding non-cash share-based compensation, non-cash valuation gain, and loss of financial liabilities, the adjusted net income was $2.3 million for the fourth quarter of 2024 compared to the adjusted net income of $2.1 million in the same period in 2023, an increase of 8.2%. Full year adjusted net income was $8.3 million in 2024 compared to $7 million in 2023, an increase of 18.6%. This represents an adjusted net margin of 13.8% for the full year 2024. As of December 31, 2024, the company held $165.9 million in cash and cash equivalents and 6 months deposits compared to $163.2 million as of December 30, 2024. We had a positive operating cash flow of $3.3 million in the fourth quarter of 2024 compared to $3.1 million during the same period of 2023. For the full year, operating cash flow was $13 million in 2024 compared to $13.6 million in 2023. The positive cash flow demonstrates the company’s continued ability to generate continuous cash flow to support its business operations and growth strategy. On the mobile app side and business metrics, our mobile app subscription business was growing and the active subscriber increased 14.3% year-over-year, reaching an all-time high of over 1 million by the end of 2024. Our YouCam suite of beauty apps has demonstrated its ability to provide both enjoyment and value to users, successfully converting them into paying subscribers. Our enterprise customer base had a net increase of 24 brand clients since the end of last quarter, achieving a total of 732 brand clients with over 822,000 SKUs for makeup, skincare, eyewear, watches, and jewelry products as of the end of last year. The further expansion of these metrics highlights the ongoing growth in customer penetration and SKU expansion. In the fourth quarter, Perfect Corp. stayed at 151 key customers, the same as at the end of the previous quarter, demonstrating the stability of our enterprise business in this quarter. In summary, in the fourth quarter of 2024, our AI and AI cloud solution and mobile app subscription business continued to drive our growth. Throughout the year, we remain focused on operational efficiencies and financial discipline, resulting in an 18.6% year-over-year increase in full-year adjusted net income and adjusted net margin rate of 13.8%. As mentioned by Alex, we will continue to invest in the growth of our business through the development of AI technologies, both organically and through M&A opportunities to strengthen our core competencies. Our commitment to advancing GenAI positions us as industry leaders, empowering our consumers and enterprise clients with tools that outperform current solutions and redefine what’s possible in user engagement and personalized services. Our acquisition of Wanna from Farfetch has significantly enhanced Perfect Corp.'s market reach, allowing us to tap into new customer segments and geographies that were previously out of scope. By integrating Wanna’s established customer base, product offerings, and distribution channels, we can rapidly expand our footprint and drive growth across untapped markets. Additionally, this transaction strengthened our competitive positioning by broadening our product portfolio to increase brand visibility and position us to better serve a wider range of industries. We are excited about the opportunities ahead for our B2C and B2B business lines by continuing to invest in AI innovations, expanding our market presence, and building on our strong foundation. We are confident that we will sustain growth well into the future. Finally, our 2025 guidance for total revenue year-over-year growth will range from 13% to 14.5%. 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 in order to better offer transparency to the market. With that, I conclude my prepared remarks. Operator, please open up the call for questions.

Operator, Operator

And your first question comes from the line of Pat McCann with Noble. Please go ahead.

Pat McCann, Analyst

Hey. Thanks for taking my question. I was wondering – I noticed you certainly highlighted the growth in the brand clients. And my question had to do with the B2B side of the house. I am wondering what the situation is with your enterprise clients as far as their ability to potentially start to spend more money on services such as yours. What’s the situation with the B2B, especially given that it has the higher margins? And will that – would you anticipate a return to growth there in 2025? What should we look for there? And then, I guess sort of the follow-up to that would be how does the B2B revenue play into your 13.5% to – or 13% to 14.5% growth guidance for 2025?

Louis Chen, CFO

Thank you, Pat. So, the B2B market, I said, it still remains challenging, right. Last year, certainly in the previous year, we had challenges from inflation and costs. More recently, we started hearing clients certainly worry about potential tariffs that may come later in the year. So, they are cautious to understand what exactly will be the impact on their financials that may turn their spending plans. So, the pipeline remains very solid. The interest from the B2B brands is still there. They are investing. They want to be more digital. This is where we play the role. However, we understand that they are not yet ready to write a big check. So, we see that the renewal rate for the business continues to be healthy. So, they will continue to use what they are already using, but the expansion to have a more accelerated growth, I think it still remains to be proven. And we remain vigilant about the market and how the world economy will play, and this certainly may affect their cost structure from that perspective. But the good news is, we are expanding our total addressable market into newer markets. So, our total addressable market, whether it’s client groups or market geographies is expanding, again, partially because of the Wanna acquisition as we are expanding into newer categories that we were not previously present or only started to get into the market and that potentially can contribute to growth. The guidance that we have provided certainly is based on current visibility. We didn’t want to just have big talk and be overly optimistic without seeing the market moving. So, we are cautiously optimistic about that since there is no real competition in the segment that we are in. We remain a solid leader in this space. So, I believe that once that market opens, and probably bounces back to stronger consumption, it might drive more revenue in there. The total guidance for 2025 expects that the B2C revenue is growing faster than the B2B revenue continuously for the last year or 2 years. So, we expect that the B2B revenue may be somewhere between 30% to 40% of the total revenue in this year pursuant to our guidance model.

Pat McCann, Analyst

Great. Thank you.

Operator, Operator

And your next question comes from the line of Lisa Thompson with Zacks Investment Research. Lisa, please go ahead.

Lisa Thompson, Analyst

Hi. Let me just follow up on your last answer. If you are thinking that next year, B2B is going to be 30% to 40%, what was it last year?

Louis Chen, CFO

So, last year, I think it was around 40%-ish plus or minus; we are finishing our auditing with the audit service. So, the B2C part has become the bigger part of the total business in 2024.

Lisa Thompson, Analyst

And in looking at what your earnings plan is for the year, do you think that you are going to be able to reduce operating expenses to keep in line with the reduction in gross margin because of that and then come out kind of the same as you did last year?

Louis Chen, CFO

I think we are still investing, and I think we are still at a relatively smaller scale to stop investing, right. So, I think the opportunity is quite big there. The expenses in the net income are positive. The operating income is virtually almost breakeven. So, that’s not really our key concern, especially with the capital that we have to invest in growth. I think now with expansion into newer categories, coming out with new products, especially in AI innovation, we will continue to invest. I am not saying that we will increase any significant differences between what our expense model has been in the previous few years. So, in a nutshell, I think we will try to run the model with financial discipline to make sure that it’s not creating financial pressures. But at the same time, we continue to invest in AI development, research, and growing the R&D team.

Lisa Thompson, Analyst

Okay. I just have one question on Wanna. Can you talk about that landscape as far as competition? I know you dominate beauty. What does it look like in the fashion landscape?

Louis Chen, CFO

Yes. So, Wanna has certainly been the leader in the fashion space. They have more than two dozen big logos, big names such as Valentino, Balenciaga, Louis Vuitton, Gucci, and more. So, I think there is not really much competition after we acquired Wanna. So, after the integration, we really become the AI/AR powerhouse for fashion and beauty virtual try-on market. There might be a few other smaller start-ups that are in the shoes market or only doing certain watches market, but not in the scale and reach that can compete with us. So, I think the strategic merger really created the opportunity to become the one-stop shop for all the luxury brands, especially for the top luxury brands that rely on global teams; they rely on bigger, more established organizations to provide services to them. And I think Wanna was part of the Farfetch, which is again a great company, a great group and now part of Perfect Corp., a more established global leader in technology. We are confident that we can give extra runway for this business to grow and really become a dominant player across both beauty and fashion.

Lisa Thompson, Analyst

Great. Thank you for those answers.

Operator, Operator

And your next question comes from Aashi Shah with Sidoti. Aashi, please go ahead.

Aashi Shah, Analyst

Great. Thank you so much for taking my question and congrats on a very solid fourth quarter results. I have one of the questions regarding gross margin. Gross margin declined 6% quarter-over-quarter. I understand the year-over-year decline because the B2C part is higher, but why did we see a 6% decline quarter-over-quarter? And like if you can just give us what the key drivers behind this compression were? And then I have a follow-up.

Louis Chen, CFO

Yes. Hi Aashi. So, I think the fourth quarter, the good news is, the B2C was growing at a faster pace than we expected. So, the overall revenue contribution from B2C versus B2B in the fourth quarter was much higher than we expected, and that’s how the overall gross margin has a bigger dip. I think it’s not expected; it was not expected, but I think it’s really more maybe a one-time thing because the fourth quarter shopping season was driving good sales, where people getting new smartphones are downloading new apps or subscribing to new apps and we have seen this pattern typically in our seasonality pattern. The fourth quarter will have that impact because the B2C is bigger. Just this year, it was a lot more bigger and growing faster than we expected. On the other hand, B2B continues to be challenging in the fourth quarter, right. So, the revenue contribution from B2B was slightly lower than we expected; that also contributed to the drop in the gross margin. For the 2025 full year, I think we expect that, that may gradually come up slightly.

Aashi Shah, Analyst

Okay. But it does not go back to 2023 levels?

Louis Chen, CFO

Correct. Yes. I think in 2023, our B2B business was about half of the total business. I think for this year, as I have said earlier, we expect the B2B business to be more challenging. And if the B2C continues to grow really quickly, fast and the B2B contribution may drop to, let’s say, 30% or a little bit over 30%.

Aashi Shah, Analyst

Right. Okay. And just another question relating to the acquisition, like if you can give us the timeline for the full integration. And also regarding the revenue split, like you said that revenue growth, like the revenue guidance is 13% to 14.5%, if you can just break down how much of that growth is expected to come from the acquisition and how much is organic growth?

Louis Chen, CFO

So, the deal just closed about 40 days ago, so the team is going through extensive integration work across all different departments. We expect that to continue to happen in the first half of the year, meaning that the go-to-market together as one team, as one platform will happen later in the year. And with that, again, we try to do as soon as we can from a sales and marketing perspective, from product development, from customer service, customer success. If we are able to move very quickly on this, the revenue may be – the contribution of that new acquisition might come in earlier or in a more meaningful way this year. The guidance that we have given started with a quite conservative look into what the business is and how that contributes. Again, Wanna is a smaller start-up. They have about 30 employees. They have great clients like 20, 20-plus; in contrast, we have like 700. That gives you a perspective about the size of the acquisition. It’s not going to have a tremendous change overnight, but it’s much more the new value that we can unlock after the integration is done. Gradually, as this process marches on, we may adjust our guidance depending on the market.

Aashi Shah, Analyst

Great. And just one more if we have the time; strategically, where do you see increasing your investment going into the New Year, like to take advantage of the adoption of AI? Where are your top investment priorities from an incremental dollar perspective?

Alice Chang, CEO

AI, especially Generative AI, is our focus right now from the R&D side. You can see the evolving of a new AI model every month. It’s exciting, and recently, the open model to the world. I think this is a great opportunity for the application services on top of the big models. I think that R&D, no matter if it’s headcount or server training, GPU, all these things are the main focus. Of course, digital marketing is still important, especially for B2C. If not buying apps, then all the effort we put in is in digital marketing to attract worldwide app users to come to us. So, AI is the whole focus of R&D this year. I think it’s for the next 5 to 10 years. The speed of investment, I can see is fast because the whole ecosystem evolves so fast. We will pay very high attention to the market and recent developments in the market; I think it is very, very important for service providers like us.

Aashi Shah, Analyst

Thank you.

Operator, Operator

And our next question again from Lisa Thompson with Zacks Investment Research. Lisa, please go ahead.

Lisa Thompson, Analyst

Hi. I just wanted to ask again about whatever happened to AI assistant and if you think that’s going to be a big driver for your mobile apps. Talk about where you are with that.

Alice Chang, CEO

Thank you. Yes, the AI assistant is one we are developing. I think in the last half of last year, we tried to branch it into our B2B for the brand to use and the B2C. For B2C, there is an AI assistant agent, copilot, we will launch in our app before the second quarter of this year to try the market. I think that’s the future. Everybody needs it, and it’s a pay-by-service kind of business model. For B2B brands, we have our PerfectGPT. Already for POC, we did have brands doing POC – trying to do POC with us. Brands, their movement to this new AI, especially Generative AI, the speed is not as fast. We saw POC may start before the end of this year and brands are testing, doing validation. The B2C part will be faster. We will make the same agent, beauty agents, editing agents to our app before the second half of this year.

Lisa Thompson, Analyst

Great. I look forward to that. Thank you so much.

Alice Chang, CEO

Thank you.

Operator, Operator

As there are no further questions at this time, I would like to hand the conference back over to Mr. Jimmy Xia. Jimmy?

Jimmy Xia, IR Director

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 to everyone again in our next call. Goodbye.

Operator, Operator

This concludes today’s conference call. Thank you all for joining. You may now disconnect.