So-Young International Inc. Q2 FY2020 Earnings Call

Good morning, ladies and gentlemen, and thank you for standing by for So-Young's Second Quarter of 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the management’s prepared remarks, there will be a question-and-answer session. As a reminder, today's conference call is being recorded. I would now like to turn the meeting over to your host for today's call, Ms. Vivian Xu. Please proceed, ma'am.

Thank you, operator, and thank you for joining So-Young's second quarter 2020 earnings conference call. Please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities and 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 statement, except as required under applicable law. Joining us today on call are Xing Jin, our Founder, Chairman, and CEO; and Min Yu, our CFO. At this time, I would like to turn the call over to Mr. Xing Jin.

Thank you, everyone, for joining us for our second quarter 2020 earnings call. The overall impact of COVID-19 throughout the first half of 2020 tested our ability to adapt and drive engagement with our expanding community of users and medical aesthetics professionals. With that in mind, I want to thank all the employees for their commitment and hard work during the second quarter as we increased our efforts on engagement, content, quality, and provided technology-driven solutions to service stakeholders across our platform. While many sectors in China are recovering, particularly those relating to e-commerce, the recovery across the medical aesthetics and wellness industry has been slower than expected. According to consumption data on our platform as of June 2020, non-surgical treatments were recovering and have returned to pre-pandemic peak levels, while surgeries have only recovered to about 60% of the levels seen in the fourth quarter of last year. Meanwhile, a resurgence of COVID-19 in some mainland cities has prompted some local governments to put restrictions on public and personal life again, causing a slower-than-expected resumption of online hospital and medical service activities. Despite ongoing weaker-than-normal consumer segment and the restrictions on general mobility in parts of China as a result of the outbreak, we generated total revenue of RMB328 million, representing a 15% increase year-over-year from the second quarter of 2019. We also made significant progress in expanding our vibrant community of users and medical aesthetics professionals and driving traffic through our platform. We grew our community with average mobile MAUs increasing to 6.8 million, representing an increase of 174% year-over-year from 2.5 million during the same period of 2019. We also increased the number of paying medical service providers on our platform to 3,735, an increase of 18% from the second quarter of 2019. We focused on two core initiatives to drive our user growth and engagement during the quarter. First, we made great progress increasing the trust between users and our platform by rolling out the preferred doctor list, which we call the Emerald Doctor List. We are the first company across the industry to introduce such a concept. Second, we expanded our community of users and medical aesthetics professionals through consistent content upgrades, including optimizing our live video diagnosis services. Trust is critical for a consumer to make informed decisions. As a platform, it is our responsibility to be a reliable source for our users as they access information from reputable institutions and doctors on our platform. During the second quarter, we launched the Emerald Doctor List, which is a carefully curated list by the evaluation committee comprised of doctor consultants, technical specialists, and aesthetics professionals. These preferred doctor lists enable users to verify and search for doctors based on categories relating to numerous fields of specialization and rating criteria. For example, a user could do a quick verified search for the eye or nose specialist who has the highest rating in post-operational effect, aesthetics, and experience. Offering users this level of verified customization for search builds trust, drives adoption, and improves stickiness on our platform. As of today, our preferred doctor list has covered 14 cities, including Beijing, Shanghai, Guangzhou, Shenzhen, and other capital cities. During the quarter, we continued to upgrade our content; in particular, we made solid progress in using AI technology to improve the effectiveness of how we match patients and doctors for live video diagnosis service. We used AI-enabled technology to analyze user behavior on our platform, including the questions filled by our AI robots during pre-screening, location of the user, articles read, and other factors to optimize how we choose which doctor a patient is referred to. We believe we are becoming increasingly successful at driving greater communication efficiency between doctors and patients and increasing conversion rates for our medical aesthetic professionals. During the second quarter, we completed nearly 127,000 requests, up from 88,000 requests in the first quarter. We believe that this last mile delivery type service will continue to create an efficient bridge between medical professionals and end users, facilitating the delivery of high-quality medical advice and service, which ultimately helps the user make their final decision to pursue a procedure. Recently, we launched the So-Young Ambassadors project to popularize medical aesthetics knowledge among users, promote content development, and support the offline-to-online transition of medical aesthetic institutions. Selected users will have one month to use our programs, produce, and share beauty diaries based on their actual experience. Over 70,000 users have registered as of today in under two months following this launch. The project officially accounts So-Young ambassadors with the So-Young mobile app has attracted nearly 800,000 followers, with MAU reaching nearly 1 million and generating over 700,000 discussions. We believe that our focus on these strategic initiatives will further strengthen our competitive advantage, improve the scale and stickiness of our platform, and demonstrate how our innovative and differentiated platform offers a unique value proposition to a growing number of consumers, professionals, and service providers. In terms of commercialization, we officially launched a membership service for small to medium enterprises (SME) service providers during this quarter. We believe that this service will better provide those who lack content distribution capabilities or experience in operating e-commerce platforms with more exposure to our digital-savvy and qualified end users. This service enables each member to open a mini-website on our platform with a listing of their products and use our promotional events. They will also be able to introduce new ideas and procedures through our VR showroom in the near future. Though we are still in the early stage of our rollout, we are already starting to see encouraging levels of interest from service provider partners. Crisis often yields some innovation and we believe we have the right strategy in place to capitalize on the eventual full recovery of the online medical aesthetic service industry in China. Our platform continues to provide an open, diversified, and trustworthy ecosystem for our users and medical aesthetics professionals. We firmly believe that a reliable community can effectively incentivize service providers to consistently offer high-quality treatment with transparent pricing while giving them access to the best tools and information that allow them to make well-informed decisions for treatment options. I'd now like to turn the call over to Min, who will go through the financials for the second quarter.

Thanks for your attention. 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 second quarter 2020, total revenues were RMB328.2 million, up 15% year-over-year and in line with our previous guidance. The increase was primarily due to an increase in the number of paying medical service providers whose operations have gradually recovered from the impact of the COVID-19 pandemic as it becomes better controlled in China. Within total revenues, information services revenue was RMB234.5 million, up 11% year-over-year. Reservation services revenue was RMB93.7 million, up 28% year-over-year. Costs of revenues were RMB50.7 million, up by only 2% year-over-year. Total operating expenses were RMB287.4 million, up 28% year-over-year. Sales and marketing expenses were RMB185.2 million, up 75% year-over-year, primarily due to an increase in expenses associated with marketing campaigns and user acquisition initiatives. General and administrative expenses were RMB49.8 million, down 26% year-over-year. Research and development expenses were RMB52.3 million, up 1% year-over-year. The marginal increase was primarily a result of costs associated with increased hiring to support product development, which is in line with the company's strategy of strengthening its technology and big data analysis capabilities. Income tax expenses were RMB2.8 million, compared with an income tax expense of RMB10.8 million during the same period last year. The change was primarily due to the decrease in taxable income during the second quarter of 2020. Net income was RMB2.1 million, compared with a net income of RMB29.3 million in the second quarter of 2019. Non-GAAP net income was RMB30.1 million, compared with RMB102.2 million non-GAAP net income in the same period of 2019. Basic and diluted earnings per ADS attributable to ordinary shareholders were RMB0.02 and RMB0.02, respectively, compared with RMB0.22 and RMB0.21, respectively, during the same quarter of 2019. Now for our balance sheet: As of June 30, 2020, we had total cash and cash equivalents, restricted cash, and term deposits and short-term investments of RMB2.88 billion compared with RMB2.84 billion as of December 31, 2019. The increase was primarily due to cash generated from operating activities during the second quarter. With that in mind, for the third quarter of 2020, we expect total revenues to be between RMB340 million and RMB370 million. Although we are seeing a recovery across the e-commerce industry in China, it's still relatively early to fully assess the epidemic's long-term impact on our business and the markets in which we operate. So I want to remind you that this forecast reflects the company's current and preliminary views on the market and operational conditions, which are subject to change. This concludes our prepared remarks. I will now turn the call to the operator and open the call for Q&A. Operator, we are ready to take questions.

Ladies and gentlemen, we will now begin the question-and-answer session. We have the first question coming from Thomas Chong from Jefferies. Please go ahead.

Thanks management for taking my question. My question is about the 2021 outlook. Given that COVID is over this year, how should we think about the impact of consumer income levels? If the income is affected, would that affect our business or our revenue growth?

Okay. Thanks, Thomas. This is Min. I will try to answer your question here. For 2020, I think you're correct that the reason why it seems like our traffic is going up, but our revenue is not recovering at the same rate compared to the traffic growth. The major reason is that consumers have relatively lower expectations on their income growth. From the consumption side, the higher ARPU consumption or relatively more expensive consumption will be slow to recover compared to other sectors in China post-pandemic. But we do see the trend is recovering. We insist on investing in traffic acquisition, trying to improve our content quality, and enhance our app experience to keep users engaged when they have an interest in medical aesthetics and marketing our brand name to the general public that So-Young is the best platform for medical aesthetics, and we can help them to make their decisions. What we observed is that users take relatively longer and spend much more time when making decisions, especially for those surgical services that carry higher risks and costs. As the pandemic impact diminishes and economic activities normalize, we expect consumers will start to spend money again on higher or more expensive services. When that happens, the individual MAU value generated for us will return to normal levels as well, which will positively impact our revenue.

Thank you. The next question comes from the line of Brian Gong from Citigroup. Please go ahead.

I will translate myself. Thanks management for taking my questions. I have two questions. First is, how is the budget – how is the whole industry recovery stage right now, especially for surgical services? And second question is, how is the progress on our new subscription model? Thank you.

Based on the careful analysis of consumer behavior on our platform, we are already seeing that the data show that by the end of June, non-surgical treatments returned to the pre-pandemic level of last December. Surgeries have only recovered to about 60% of levels seen during the fourth quarter of last year. The performances before the first half of the year also reflect consumer desires and consumption patterns powered by different cities. When looking at the Tier 2 and Tier 3 cities, where most users often do their own business, we find that e-commerce is still impacted by the pandemic. Overall, the recovery situation is still a little weak, and from the past few months to the present, we have noticed relatively minor overall improvements. However, we see a continuous trend, especially the local surgery that has recovered to a stable level. Right now, we do not have a very clear visibility on when a full recovery will occur.

Okay. Again for your second part of your question, it's about the subscription services. We are currently offering these to institutions on our platform. We built out that service in the second quarter. As mentioned in Mr. Xing's remarks, we provide the service to mid or smaller service providers who don't have a sophisticated team skilled in operating online business. For other subscription services, we are ready to roll them out for service providers, but from a management perspective, we decided to postpone that rollout by a couple of months. We want to ensure that service providers focus on recovery and their commission-based revenues first and that they spend more on information services, including subscription services that provide them with more sales leads. We believe this requires time. Therefore, more services or subscription offerings will be ready in the fourth quarter.

Thank you. We have our next question coming from the line of Vincent Yu from Needham & Company. Please go ahead.

Sure. Thanks management for taking my question. I have two questions as well. The first question is about the product category. As the medical aesthetic industry growth rate is decelerating in 2020 due to the COVID, which has been shown by some third-party reports. Do you have any comments on which procedure category has seen the biggest drop in interest, and which has been the most resilient? My second question is about competition. In June 2019, some other companies announced strong sales numbers. From your observation, has COVID-19 accelerated the online penetration for the medical aesthetic industry? And if so, what's our plan to capture this online spending versus other competitors?

Regarding your question, I will summarize it briefly. In the first half of 2020, it’s evident that non-surgical services have recovered much faster than surgical services. Among the non-surgical services, categories like anti-aging and laser services have been returning to a rapid recovery. The reason is that these treatments are relatively cheaper compared to surgical procedures. Many soft medical aesthetics treatments usually cost around 200 to 300 RMB, which are fully recovered by the end of the second quarter. In the third quarter, we also observe year-over-year growth for these categories. For more expensive non-surgical treatments, we see penetration extending into the younger generation. In general, non-surgical services are the best recovering categories post-pandemic. However, surgical services are usually busiest in the first and fourth quarters, and this year is atypical due to the pandemic. The first quarter was fully down, and second-quarter periods tend to be low seasons for surgical transactions.

First, regarding your question about the recent shopping festival sales. We have seen platforms disclose their members, particularly in GMV. We have a respected method for calculating GMV on our platform. We think that we've provided very clear numbers and eliminated a lot of irrelevant traffic not related to medical aesthetics. On the topic of competition, search engines still remain the largest user acquisition platform for medical aesthetic institutions. We continue to grow client visits generated from offline while maintaining a distinct advantage in user acquisition costs. We categorize users into proactive users, who search for medical aesthetics information, and passive users, who might be attracted by cheaper prices or shopping incentives. This consumption group continues to mature, increasing demand for professional platforms and content. We begin with medical services and aim to expand into more categories to cater to lower-tier users. The uniqueness of our community and the richness of our professional content distinguishes us from competitors. We believe we can continue to expand our community and engage offline partners effectively.

Thank you. We have the next question from the line of Thomas Chong from Jefferies.

Thanks, management, for taking my question today. My question is about the MAU and the sales and marketing trend. Given our solid momentum in user growth, can management comment on how we should think about the MAU outlook in the coming quarters as well as the trend in marketing costs, considering that user acquisition is becoming more expensive in the industry?

We are actually growing our users in three ways: First, through content marketing; second, through continuous investment in doctors, especially the doctor's IP; and third, through branding. We are branding ourselves as a community that provides all features and value propositions to our users. We believe that direct and accurate targeting of users’ needs is critical in building lasting relationships with our end users. In Q2, we have made solid progress in So-Young brand partnership and exposure. We have achieved over 10 billion impressions for our brand placement. We believe we can increase the depth and scale of our branding in the second half, which may increase the overall cost of user acquisition. In terms of content, we plan to use the So-Young Ambassadors program to enhance our community ecosystem. We also aim to sign up celebrities and launch incentive programs for So-Young accounts to improve content production capabilities. We believe these two strategies will enhance user growth and engagement on our platform.

Thank you. We do not have any further questions at this moment. Back to you, ma'am. Thank you. Ladies and gentlemen, that concludes our conference call for today. Thank you all for your participation. You may disconnect your lines now. Thank you.