So-Young International Inc. Q1 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to So-Young First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. I would now like to hand the conference over to your first speaker today, Ms. Vivian Xu. Thank you. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining us today. So-Young's first quarter 2020 earnings release was distributed earlier today and is available on our IR website at ir.soyoung.com. On the call today from So-Young, we have Mr. Xing Jin, Co-founder and Chief Executive Officer, and Mr. Min Yu, Chief Financial Officer. They will both be available to answer your questions during the Q&A session that follows management's prepared remarks. Please know that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to those outlined in our public filings with the SEC, including our Annual Report on Form 20-F. So-Young does not undertake any obligation to update any forward-looking statements except as required under applicable law. It is now my pleasure to introduce Mr. Xing Jin, who will present his prepared remarks in Chinese first in their entirety before they are translated to English, after which Mr. Min Yu will go over the financials. Okay, please go ahead.

Thank you, everyone, for joining us for our first quarter 2020 earnings call. Before I begin, I want to convey our deepest sympathies to everyone whose loved ones have sadly been affected by this tragic pandemic. We also want to express our sincere gratitude and appreciation to all those helping in the fight against COVID-19, including our employees who have been working hard and doing their very best to limit the spread of the disease while courageously ensuring business continuity. Despite the significant impact COVID-19 has had on our business, we delivered solid results during the quarter. We have taken the opportunity to implement strategic changes to ensure we are well positioned for growth when all normal operating conditions resume in the second half of 2020. Total revenues were RMB183 million, exceeding the high end of the company's previous guidance. The macroeconomic environment as a result of the pandemic during the quarter has been challenging as anticipated, but this has also given us the opportunity to accelerate deployment of resources to enhance the user experience. We made efforts on expanding our vibrant community of users and medical aesthetic professionals. We grew our communities significantly during the quarter with average mobile MAUs increasing to 4.2 million compared with 1.9 million during the same period of 2019, an increase of 117%. Our core focus during the quarter was two-fold. First, we expanded our community and second, we further streamlined the delivery of high-quality content while driving better engagement. We believe that our initiatives in these areas will be critical to demonstrating how innovative and differentiated our platform offers a unique value proposition to consumers, professionals, and service providers. First, on the expansion of our communities, during the quarter we further enhanced the structure of our content and developed new ways to cater to our vibrant community of users. We established a series of incentives and rolled out promotional plans to acquire more users who are interested in and are passionate about beauty and awareness. Our editorial team is working closely with users and popular content creators, whom we refer to as medical aesthetic influencers, to generate more high-quality content. Leveraging our in-house data-driven approach, we are then able to increase the exposure this content gets, which drives the acquisition of users and followers for content providers on our platform. Through this, we are expanding our user base from one that is purely medical aesthetics to one that is healthier and a more high-quality leads. We also increased cooperation with external multichannel networks to produce engaging and professional content across various social media networks. The rich content they produce, combined with our enhanced user experience, has contributed to the expansion of our user base and an increase in user engagement. This also further strengthens word of mouth marketing and our overall visibility. Second, we continue to develop new ways to encourage content providers to create and engage with users through more high-quality reviews. Our platform hosts an open and vibrant community of medical aesthetic consumers ranging from newcomers to influencers and professionals. Users utilize our community to share a wide range of experiences from medical aesthetic influencers to skin care tips. In order to further strengthen the credibility of our platform, which we believe is critical to our business, we upgraded our backend system to streamline how we push and promote user-generated premium content. As an example, we give high rankings to users who record in detail their procedures through our beauty diaries and demonstrate authenticity through uploaded photos of their visits. We also send out push notifications to remind them to post follow-up content on their overall experience, how long the pain lasted, and the recovery process. We also provide tools to doctors and institutions for post-procedure follow-ups. The ability of doctors and institutions to remain in contact with users in a timely and direct way improves the overall user experience and increases the number of returning patients or treatments. Meanwhile, in order to build a healthier and more regulated ecosystem, we established an Authentic Alliance to strengthen confidence and governance on our platform. For example, users can now verify a drug's authenticity by scanning QR codes through the So-Young app. In addition to asking doctors to upload their licenses and qualifications for professional practice, we are also monitoring the quality of each doctor’s reviews. Failure to comply will result in removal from our platform. These initiatives help improve the consumer's ability to make informed decisions and highlights reputable institutions and doctors on our platform, reinforcing our value. We officially introduced our Live Video Diagnosis service through our app last quarter and have seen an enormous uptake in usage since then. During the first quarter, we completed more than 88,000 requests from users for Live Video Diagnosis. This tool is not only a channel used primarily for information and knowledge but is also a key component of our last-mile delivery service. We believe the core value is that it creates an efficient bridge between medical professionals and the end-user, facilitating the delivery of high-quality medical advice and service which ultimately aids users in making their final decisions. We aim to create an open, diversified, and trustworthy ecosystem for our users and medical aesthetic professionals. We believe that a reliable community can effectively and efficiently incentivize service providers to consistently offer high-quality treatment with transparent pricing, resulting in healthy and sustainable development for all business operators and users. I would now like to turn the call over to Min Yu who will discuss the financials for the quarter.

Okay, thanks. Please be reminded that all amounts quoted here will be in RMB terms. Please also refer to our earnings release for detailed information on our comparative financial performance on a year-over-year basis. For the first quarter of 2020, total revenues were RMB182.6 million, down 11% year-over-year, but exceeding the high end of our previous guidance. The decline was primarily due to the outbreak of COVID-19, which curtailed medical service providers' spending and required end-users to shelter in place, delaying demand in the first quarter of 2020. Within total revenues, Information Services revenue was RMB126 million, down 12% year-over-year. Reservation Services revenue was RMB56.5 million, down 11% year-over-year. Cost of revenues was RMB43.1 million, up 18% year-over-year, driven primarily by an increase in personnel-related costs. Total operating expenses were RMB185.9 million, up 41% year-over-year. Sales and marketing expenses were RMB109.1 million, up 45% year-over-year, primarily due to an increase in expenses associated with marketing campaigns and user acquisition initiatives. General and administrative expenses were RMB34 million, up 37% year-over-year primarily due to an increase in personnel-related costs. Research and development expenses were RMB42.8 million, up 37% year-over-year. The increase was primarily a result of costs associated with increased hiring to support product development, which aligns with the company's strategy of strengthening its technology and big data analysis capabilities. Income tax benefit was RMB4.3 million compared with income tax expense of RMB7 million during the same period last year. The change was primarily due to decreasing taxable income during the first quarter of 2019. Net loss was RMB35.9 million, compared with net income of RMB45.9 million in the first quarter of 2019. Non-GAAP net loss was RMB21.6 million compared with RMB51.9 million non-GAAP net income in the same period of 2019. Basic and diluted loss per ADS attributable to ordinary shareholders were RMB0.33 and RMB0.34 respectively compared with basic and diluted earnings per ADS attributable to ordinary shareholders of RMB0.28 and RMB0.25 respectively during the first quarter of 2019. Now for the balance sheet, as of March 31, 2020, we have total cash and cash equivalents, restricted cash, term deposits, and short-term investments of RMB2.76 billion compared with RMB2.84 billion as of December 31, 2019. The decrease was primarily due to cash used in operating activities during the first quarter. We are closely monitoring the impact of COVID-19 on consumer demand and sentiment as normal working conditions resume in China. We are cognizant that there are many unknowns relating to the overall macroeconomic impact of the outbreak, but we are confident that our fundamentals and the long-term drivers of our business remain strong. With that in mind, for the second quarter of 2020, we expect total revenues to be between RMB320 million and RMB350 million. As it is still relatively early to fully assess the long-term impact of the epidemic on our business and the markets in which we operate, I want to remind you that this forecast reflects the company's current and preliminary views on market and operational conditions which are subject to change. This concludes our prepared remarks. I will now turn the call to the operator and open the call for Q&A.

Certainly. The first question comes from the line of Brian Gong from Citigroup. Please go ahead.

So I will translate myself. So first question, I have two questions. First question is regarding how is the recovery trends in the second quarter for Information Services and Online Reservations respectively and how about the reopening of hospitals and the budget for the hospitals? And my second question is about the latest situation of our new sales leads subscription model, what kind of hospitals are package customers and what is the key difference compared to our existing advertising model? Thanks.

Okay, for the first question regarding the recovery of the whole sector, we do see from our internal results that actually from early March, about 20% to 40% of the offline institutions have returned to normal business. By the end of March, we believe that 70% to 80% have begun their normal operational activities. However, due to government regulations still prohibiting large gatherings, the physical presence of people in these institutions has dropped significantly compared to the same period last year. We estimate that it may take until June to return to normal operations. Regarding your second question on the CPL, we believe that for the advertising business, those offline institutions rely heavily on cash flows. Previously, we asked them to pay us in advance, and as these institutions used this prepaid amount for advertising investments. However, those CPC advertisers are divided into two main groups. One is focused on online e-commerce, and the other is on content distributors. Most small-to-medium institutions do not have a strong financial foundation. Therefore, we are offering them subscription services to help reduce operational difficulties, and we believe that among these 60 to 70 small-to-medium institutions, they will benefit more from our services.

Can we move to the next question? The next question comes from the line of Vincent Yu from Needham & Company. Please go ahead.

Thanks, management for taking my question and congrats on the good quarter. My first question is on the surgical and non-surgical services. Can management provide some comments on how these two services are trending in the first quarter? My second question is on the online consultation, so I'm wondering what kind of institutions have higher interest in these products, are these private hospitals or public hospitals? Thank you.

Hi Vince, this is Min. I will try to tackle your first question, and for the Live Video Diagnosis question, I will leave that to Mr. Xing Jin. For your first question, non-surgical and surgical services had significant differences in the first quarter. January was a normal month, so there was no difference in distribution compared to the previous year. However, starting in February, with the outbreak of COVID-19 on the 24th, all medical aesthetic services ceased, leading to a lack of orders and reservations even though users paid for reservations. Services were unavailable until the end of February. After that, some service providers resumed operations, and we began to see users going back to clinics or hospitals for services. In March, we noticed an increase in non-surgical orders compared to surgical orders because they could only operate under certain restrictions. So, overall, non-surgical services started recovering first. I will leave the second half of your question to Mr. Xing.

Regarding your second question about online consultations, we are seeing both private institutions and clinics very actively engaging with the Live Video Diagnosis service. However, many patients still prefer a top consultation service with their doctors at non-private clinics. There are limitations for those doctors in public institutions or hospitals, but we will work on inviting more doctors to participate, which can range from less experienced to expert levels in both private and public institutions.

Thank you. Can we move to the next question? The next question comes from the line of Thomas Chong from Jefferies. Please go ahead.

Thanks management for taking my question. This is Melody representing Thomas Chong and we have questions on content strategies in the future. Our content is one of our core targets, so we would like to know more about strategies for the future and our ability to generate organic traffic through high-quality content.

First, we divided our content into User Generated Content (UGC) and Professional Generated Content (PGC). For UGC, we believe that our series of incentives and promotional plans will encourage more users to generate high-quality content and also increase the quantity of UGC. As for PGC, we see significant value in our PGC content providers, especially doctors who can provide professional information. We plan to incentivize and train especially young doctors on our platform, helping them establish their presence and gain more visibility. Furthermore, we believe that content can significantly raise user engagement and drive organic traffic for our platform.

Thank you. The next question comes from the line of Jing Qiang from CICC. Please go ahead.

My first question is regarding utilizing our services. I would like to understand more about specific operational metrics, such as the right engagement rate, churn rate, and supply demand. Also, I would like to understand the competitive landscape in relation to this feature? The second question is regarding demand going forward as we regain normalcy. The third question is about the reservation take rates this quarter.

For your first question, we noticed a significant increase in requests for the Live Video Diagnosis, especially in February and March, due to many consumers and doctors unable to operate normally. This allowed for a strong online product to emerge. After returning to normalcy, we saw a slight drop in requests, but we are optimistic about continuous growth due to strong user demand. In terms of competition, while others offer similar services, we have strict internal controls to ensure high-quality user experiences. Our goal is to maximize the needs of both parties efficiently while maintaining service quality. For your second question, after February, we have seen a significant recovery in orders on our platform. However, the recovery will be gradual as consumption returns to medical aesthetic services.

Regarding your third question on the reservation commission rates being higher than 10%, this is primarily due to a very low base for reservation revenue in the first quarter of 2019. Several factors contributed to this scenario: first, a portion of the reservation revenue comes from the annual fee service providers pay us, which is about RMB500 per month for each provider. Second, we have higher commission rates for premium customer services compared to regular online reservation services. Third, we usually launch marketing initiatives in March to encourage user reservations, but due to COVID-19, we did not incur those costs this quarter. Combining all these factors led to a higher apparent commission rate this quarter.

Thank you very much.

Thank you. We have our next question from the line of Leo Chiang from Deutsche Bank. Please go ahead.

So, I'll translate my questions. My first question is regarding the structural change in the industry after coronavirus. Can management share some observations from both customer and service provider perspectives? My second question is regarding the recovery path—given that it is likely to take until June to achieve capacity normalization, should we expect our second half revenue to show a U-shaped or V-shaped recovery?

Thanks, Leo. Regarding the structural changes in the medical aesthetics service industry, we see service providers gradually resuming operations while spending less on customer acquisition compared to normal periods. Although we are not observing widespread business closures in our sector, service providers are slow to invest until capacity returns. From our analysis, we anticipate a gradual recovery, resembling a Nike logo shape rather than a V or U shape. Returning to normal levels will depend on service providers’ capacity and their ongoing engagement with customer acquisitions.

Thank you. I would now like to hand the conference back to our presenters for any closing remarks. Thank you.

Okay, thank you everyone, and that's all. Thank you.

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