Earnings Call Transcript - PERF Q1 2024

Operator, Operator

Good morning, and good evening, ladies and gentlemen. Thank you for standing by, and welcome to Perfect Corp.'s Earnings Conference Call. 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, Ms. Jennifer Wu, IR Manager of the company. Please go ahead.

Jennifer Wu, IR Manager

Thank you, and hello, everyone. Welcome to Perfect Crop's earnings call. With us today are Ms. Alice Chang, our Founder, Chair Woman, and Chief Executive Officer; Mr. Louis Chen, our Executive Vice President and Chief Strategy Officer; and Ms. Eric Chen, Vice President of Finance and Accounting. You can refer to our first quarter 2021 financial results on our IR website or in the Form 10-K we filed with the SEC earlier. You can later assess a replay of this call on our website shortly after the conclusion of this call. For today's call, management will provide our prepared remarks first, and then we will host a question-and-answer session. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release. We also apply to this call that this call may contain forward-looking statements regarding prepared performance, anticipated plans, our original results, and objectives. Forward-looking statements are based on management's expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied on 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 the following management's prepared remarks are in U.S. dollar terms, and we will discuss non-IFRS measures today. Without further ado, I will now turn the call to our first speaker today, our CEO, Ms. Alice Chang.

Alice H. Chang, CEO

Thank you, Jennifer, and welcome to Perfect Corp's 2024 First Quarter Earnings Conference Call. We have some exciting news to share today. So let's just start leveraging our advanced AI capability. We started 2024 with a robust first quarter. Our first quarter revenue grew by 17.7% year-over-year to $14.3 million, and our net revenue was positive $0.6 million. The double-digit increase in revenue and a positive net income was driven by the strong growth of our AI, AR, cloud solutions, and substitution services for both our mobile business and our enterprise business. Both business clusters have benefited from our superior AI technologies and contributed to our top line expansion and profitability improvement. Plus, our operating cash flow had a net inflow of $3.5 million due to our SaaS-based model. In this quarter, we continue to invest in our Beauty AI strategy, including Beauty AI, Skin AI, Fashion AI, and Gen AI across both our consumer and enterprise business. For our consumer app business, we leverage our Gen AI technology to launch more innovative features in the YouCam mobile app in quarter 1, attracting more users to our apps and converting more users into subscribers. For our enterprise business, we have a renewed contract with many big clients and onboard several new brands for mega virtual try-on services. We also saw ongoing strong momentum in our new AI diagnostics product, and we expect that this trend will expand growth. Furthermore, increments from luxury jewelry and watch industries are integrating our jewelry and fashion VTO offering into their digital offerings. This new development showed our sustained effort to extend our coverage into different verticals and address some larger markets. They also reflected the diverse revenue we have to increase business potential as we are committed to continue investing resources in AI advancements; we are able to deliver products and services that continuously strengthen our unique position in beauty AI, hair AI, and fashion AI. Now let's shift our focus to operational outcomes and discuss our most recent advancements. We saw another robust quarter for our B2C mobile beauty app business, evident by a 30% year-over-year increase in our mobile beauty app active subscribers to a historically high over 902,000. The continuous growth in active subscribers reflected in the rising demand for mobile apps that enable users to enhance and beautify their photos and videos. As sales expression and creativity become increasingly important, consumers expect more personalized and diverse offerings from mobile apps. Our family of YouCam apps can offer unique high-quality digital output, leveraging advanced technology like generative AI for photos and videos. This new set of Gen AI features, including AI editing and beautification for photos and videos, empowers our users to freely and creatively express themselves on social media and to create high-quality ultra-personalized photos and videos generated or enhanced by YouCam. A key appeal of the YouCam family app is advanced AI and AR technology that helps users solve real-life challenges and explore more creative ideas. These offerings allow users to beautify, edit, and enhance photos and videos as well as virtually try on makeup and hairstyles. Users can also create their unique expressions in diverse styles in their work to release their creativity by leveraging the latest AI technology. As the users become satisfied with the quality of our product, they continue to use our app, making YouCam apps an integral part of their daily life. Moreover, we offer a complete line of online AI editing tools on our website and in our YouCam mobile app, leveraging advanced AI capabilities to enhance photos, videos, and generate AI artwork, such as AI Enhance for photo and video, AI colorization, AI color correction, AI lighting, and AI figures in anime characters. Our product strategy focuses on integrating AI across our entire offering to edit, beautify, and enhance photos and videos. In one second, we can easily transform user experience and self-users, real-time problems, and meet evolving needs from a broader user base, while maximizing returns on our R&D investments. A key strength of ours is the ability to leverage the YouCam AI engine to power both our consumer mobile business and our enterprise SaaS business. This allows us to fully monetize innovation across different sectors in our B2C and B2B sectors. Our unique AI-driven approach, combined with a commitment to ongoing innovation, positions us to significantly expand market penetration by unlocking AI transformative potential. Now let's shift focus to our B2B business. This quarter in our B2B sector, we focused on deepening penetration into new verticals to provide AI-driven products in beauty and fashion or to try our own business, while at the same time, expanding the adoption of our makeup Virtual Try-On (VTO) to more brands in the region. Specifically, we secured several new wins for our beauty and jewelry solutions within our B2B sector, demonstrating the growth demand from our comprehensive solutions and superior technology from clients in different industries and sectors. Moreover, we successfully secured a major license renewal with key beauty, skincare, jewelry brands, and retailers. This renewal underscores the increasing trust these brands place in our solutions to address their evolving requirements and highlights our leadership in VTO solution offerings. We also capitalized on these opportunities to cross-sell to their sister brands and offer additional services, including expanding SKU selections and brand presence into new geographies. The strong momentum in revenue growth this quarter reflected the recovery in the sales cycle and the pipeline expansion of our enterprise business. Firstly, for our Beauty AI, we remain a leader in the industry and continue to innovate. Beauty AI has always been at the core of our business. In this quarter, we have renewed contracts with all major existing clients and broadened several new brands for VTO services. Furthermore, we continue to innovate and expand the capability of our makeup offerings. We have added enhancements to our VTO offerings. This new addition will not only allow brands to provide more tryout options to their clients but also further strengthen our market leadership in the makeup VTO sector. Secondly, for our skin AI technology, in this first quarter, we saw strong momentum for our skin diagnostic products among both existing and new customers. As people become increasingly conscious about their skin health, we aim to capitalize on this trend by providing AI solutions. Notably, we gained significant traction in new market segments such as clinics and dermatology practices. This professional institutions leverage our AI technology to deliver real-time video and analysis to their clients and patients. A key differentiator for our offerings is our cutting-edge high-definition AI analysis that offers a comprehensive approach to understand individual conditions effectively, allowing users to visually change their skin after treatment with an easy-to-use overlay, precisely positioned on the location of the actual skin concerns with measurable skin scores. Using advanced AI, our skin diagnosis solution can detect and evaluate up to 14 key skin concerns, providing patients with a detailed data-driven assessment of their unique health profile. The third key driver of our skin business success this quarter came from our self-service offering, a new product, Skin Pro, which gained robust momentum, particularly among aesthetic clinics and medical spas. This is an iPad-based solution used in offices as a consultation tool that enables clinics to engage with their clients. With the newly added ARM module, it can improve customer retention by keeping track of each individual customer’s progress during treatment. Skin Pro enables businesses to deliver personalized data-driven skin consultations to their clients and patients in a very cost-efficient and easy way. Furthermore, we recently developed and integrated a comprehensive customer relationship management system with our Skin Pro, allowing skincare professionals to better manage customer profiles with health reports in cloud-based formats and compare before and after results. This integration represents a significant shift in how personalized skincare is delivered, ensuring a more personalized and efficient patient experience. Integrating and upgrading our AI-powered skin analysis, diagnosis, and emulation tools while providing clients with a better experience for data-informed decisions drives unparalleled patient engagement and satisfaction. The AI and AR adoption among the skincare industry is at its very early stage, and we believe there is a large untapped market for us to serve and grow. For our fashion and jewelry VTO, another highlight of the quarter was the accelerated market adoption of our VTO solution for jewelry and watches. We saw several new wins and renewals from luxury brands, making good progress with our VTO offerings in this category. We began expanding into jewelry and watch VTO at the start of 2023, and we are starting to see our efforts pay off as more deals have been confirmed and more use cases for our products launched in the market. In particular, we saw renewals and upsells from luxury jewelry brands this quarter. We believe our superior AI technology and the professional service provided create a positive client experience that makes brands willing to renew contracts and purchase more services. In the quarter, we've partnered with a European luxury jewelry group to provide jewelry and watch VTO for three luxury brands within the group. Leveraging our cutting-edge AI technology, sophisticated testers, and radiant reflections of the jewelry can be faithfully portrayed on our screens, providing users with an immersive shopping experience. This case, though still in the early stages, confirms the validity of our AI technology by high-end brands, and unlocks opportunities to onboard new logos onto our SaaS platform for jewelry, accessories, and watches. The increasing number of jewelry and watch brands using our VTO and AI technology indicates that the demand for this interactive shopping experience is on the rise. The leading functions of our products allow brand clients to increase user engagement time and reduce return rates. Given the robust demand for jewelry and watch VTO, we will continue to deepen our penetration in this sector and further grow our business in various categories and regions. We have made significant progress in our AI-powered hair solutions, too, in the first quarter. In this quarter, we added a new AI hair type analysis technology that can quickly identify hair texture, thickness, and curl patterns simply by taking a picture of users' hair. This AI technology accurately classifies hair into nine distinct types across ten categories, including straight, wavy, and extremely curly, enabling precise and personalized recommendations tailored to each unique hair type. This new innovation complements our full range of AI hair solutions, including hair color VTO, AI hairstyle generation, AI wig generation, and hair extensions. This industry-leading solution enables hair brands and retailers to provide customers with a more customized shopping experience. To sum up, we delivered strong business performance in the first quarter of 2024 with double-digit revenue growth and a positive bottom line. Not only did the momentum in our mobile app business remain robust, but our enterprise business also gained traction in expanding services into new verticals. These positive indicators suggest we are well-positioned to capitalize on the growing market opportunity for AI in beauty, skin, fashion, and generative AI. We continue growing our AI/AR-powered business, driven by the strong demand for both our mobile app subscription and enterprise stock solutions. We reiterate our outlook for the full year 2024, projecting total revenue growth recognized under IFRS to range from 12% to 16% compared to the full year 2023 results. With that, I have now concluded my remarks, and we will be handing the call over to Louis, who will discuss our financial details with you. Thank you.

Pin-Jen Chen, CFO

Thank you, Alice. Please note that all financial comparisons are on a year-over-year basis and that the reporting period is the first quarter of 2024 versus the comparable period in 2023, and now on the top of the International Financial Reporting Standard (IFRS) measures. We will also discuss non-IFRS measures to provide greater clarity on the trends in our actual operations. As Alice mentioned, in the first quarter of 2024, our total revenue increased to $14.3 million from $12.1 million for the same period in 2023, representing a robust year-over-year growth of 17.7%. The strong performance was mainly due to the strong growth momentum of our AI and AR cloud solution and subscription business. Among our revenue sources, AI and AR Cloud solutions revenue was $12.4 million in the first quarter of 2024, an increase of 19.6% compared to the same period in 2023. The continued expansion can be attributed to the robust growth in the mobile beauty app subscription and the strong demand for our online solutions among brand customers, especially with the addition of new categories that we now serve, including jewelry and fashion markets and the growing popularity of our Gen AI technology and editing features for photo and video. Notably, our mobile active subscribers have surged by 30% year-over-year, reaching an all-time high of 902,000 by the end of the first quarter of 2024. The strong momentum underscores the growing interest in our suite of mobile beauty apps from both users and subscribers. The licensing revenue, which is mostly generated from our traditional offline services, increased by 7.1% in the first quarter of 2024 to $1.6 million compared to $1.5 million during the same period in 2023. Gross profit for the first quarter of 2024 grew by 16.9% to $11.2 million, yielding a gross margin of 78.3% compared to gross profit of $9.6 million and gross profit margin of 78.8% for the same period in 2023. The decrease in gross margin was primarily a result of the increase in third-party payment processing fees paid to digital subscription distribution partners such as Google and Apple due to the increase in our mobile app subscription revenue. Total operating expenses for the first quarter of 2024 increased by 11.8% to $12.4 million compared to $11.1 million in the same period last year. The increase was primarily due to higher sales and marketing expenses incurred in the first quarter of 2024. Breaking down the operating expenses, the sales and marketing expenses for the first quarter of 2024 were $7.2 million compared to $6 million during the same period in 2023, marking an increase of 19%, which resulted from an increase in marketing and user acquisition costs. Research and development expenses were $3 million for the first quarter of 2024 compared to $2.6 million during the same period of 2023, an increase of 15.4%. The increase was due to additional R&D headcount and related personnel costs. General and administrative expenses were $2.2 million for the first quarter of 2024 compared to $2.4 million during the same period in 2023, representing a decrease of 9.9%. This decrease mainly stemmed from lower direct and officer insurance premiums. Net income was $0.6 million for the first quarter of 2024 compared to a net income of $0.7 million during the same period of 2023, a decrease of 9.4%. The positive net income in this first quarter was supported by continued revenue growth and effective cost control. Excluding noncash share-based compensation, noncash valuation gains and losses for financial liability, and one-time nonrecurring costs associated with our deal, the adjusted net income was $1.5 million for the first quarter of 2024 compared to adjusted net income of $1.3 million in the same period of 2023, an increase of 14.5%. This represents a sound margin rate of 10.6% in the first quarter of 2024. Looking at our balance sheet as of March 31, 2024, our company held $157.3 million in cash, cash equivalents, and 6-month time deposits compared to $154.2 million as of December 31, 2023. The increase in cash and cash equivalents and 6-month time deposits was the result of positive operating cash flow and interest income received from the company's bank deposits. We had positive operating cash flow of $3.5 million in the first quarter of 2024 compared to $3.8 million during the same period of 2023. The positive cash flow demonstrates the company's ability to generate sufficient cash flow to support its business operations and growth. In total, our customer base had a net increase of 21 clients since the end of last quarter, achieving a total of 666 clients with over 745,000 SKUs for makeup, skincare, eyewear, and jewelry products as of March 31, 2024. This is yet another record quarter for this metric, showing the continuous increase in customer penetration and expansion. More brands and products are leveraging Perfect Corp to operate various different SAP modules. In the first quarter of 2024, our total revenue has consistently exhibited strong growth, primarily driven by the continued momentum in our AI and AR cloud solutions and mobile app subscription earnings from premium features and AI-powered apps. Despite a slight rise in expenses, our net income remained positive. We continue our investment in talent acquisition and technology innovation to expand our core competencies, ensuring our products are showcased and consumed effectively. We firmly believe that our position within this driving industry equips us to remain at the forefront of enabling beauty and fashion brands to engage with their audiences. Finally, we reiterate our 2024 guidance that total revenue year-over-year growth will range from 12% to 16% under IFRS. This forecast is based on the company's current assessment of market and operational conditions, and management will closely monitor business progress each quarter and update our guidance periodically for better transparency to the market. And with that, I conclude my prepared remarks. Operator, please open up for questions.

Operator, Operator

Your first question comes from the line of Brian Schwartz with Oppenheimer.

Brian Schwartz, Analyst

Thanks for taking my question this afternoon or evening where you're at. I had a couple. First one was around the SKU growth in the quarter because it looked very strong. I was just wondering if the expansion in SKUs is coming all from the core beauty segment, or is the expansion being spread evenly across some of those newer segments like fashion and skin, too?

Alice H. Chang, CEO

Yes, Brian. This is Alice. Thanks for the questions. As you can tell, we expand into new verticals like jewelry and skin analysis. So it's quite spread out among the three different verticals, but makeup still accounts for the biggest share. They have more SKUs than jewelry, especially luxury jewelry. The jewelry doesn't have as many SKUs as makeup, and skincare does also have new SKUs in our consoles, but still, makeup has the largest proportion, with the rest distributed between skincare and jewelry.

Brian Schwartz, Analyst

Okay. And then my next question, I wanted to ask that now that a recovery is happening in the enterprise business, how are you thinking about expanding your sales capacity? Did you add sales reps in Q1? And what are your plans for hiring more sales reps this fiscal year?

Alice H. Chang, CEO

Yes. For B2B sectors, especially our software business model, the lead time to acquire new customers is not immediate like B2C. So it takes time. We keep our sales talent in each of the business units, not growing too much for now. Since we see growth in skincare and fashion channels right now, we are specifically increasing some sales capability in those business units. Overall, we will keep increasing but not too much and maintain the same group for B2B growth.

Brian Schwartz, Analyst

Okay. And then, Alice, can you talk about the decline that's happening in the key customer count? I think the commentary in the press release indicates there's some financial distress from those customers. Is it your sense that this has bottomed, and those distressed customers have churned out, resulting in more financial stability among that customer cohort moving forward?

Pin-Jen Chen, CFO

Brian, this is Louis. I think the macro environment has impacted some of those smaller customers. The majority of our enterprise clients are on annual contracts. Upon the expiration of the contract, typically, they renew on a year-to-year basis. What we noted in this quarter is many smaller clients were unable to get their following year budgets approved by their management, mainly due to the financial pressure they are experiencing. We saw some of those customers not renewing their agreements at the end of this period. Management is very vigilant about this trend. I don't think it is something significant or material to our revenue, but it is certainly something we are monitoring closely.

Alice H. Chang, CEO

Most of the decrease we've observed are not big customers, but rather medium-sized ones. They are facing financial difficulties and may drop out because they do not see substantial user engagement given their challenging financial situations. The size lies just above the threshold of $50,000 for those medium-sized brands that we saw in the first quarter.

Brian Schwartz, Analyst

My final question, Louis, I just wanted to ask you about the G&A expense because it came in a lot lower than I had forecasted. As I think about my model moving forward, is this the right level for the G&A expense as we think about our models here moving forward?

Pin-Jen Chen, CFO

I think we always run a very agile and streamlined team for our back office and G&A. In the last few quarters, we've needed to spend more since we're a newly listed company just for governance, compliance, and differing auditor or external services. As the company matures, we expect that some of these costs will reduce. As I mentioned in my remarks, the D&O insurance premium has also been reduced. The company has been performing pretty well in the market and so forth. We aim to maintain a lower G&A cost. So I believe the level you see in this quarter is not a one-off but could become the standard, though the market can change quickly. Our core focus is on investing more in R&D development and effectively utilizing our sales and marketing outreach while trying to keep G&A costs from rising.

Operator, Operator

As there are no further questions at this time, I'd like to hand the conference back to management for closing remarks.

Alice H. Chang, CEO

Thank you again for joining our call today, and have a good one. I look forward to seeing you next time. Thank you.

Operator, Operator

This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.