So-Young International Inc. Q4 FY2020 Earnings Call

Good morning, ladies and gentlemen, and thank you for standing by for So-Young's Fourth Quarter and Full-Year 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'd now like to turn the meeting over to your host for today's call, Ms. Vivian Xu. Please proceed.

Thank you, operator, and thank you for joining So-Young's fourth quarter and full-year 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 the call are Mr. Xing Jin, our Founder, Chairman and the CEO; and Mr. Min Yu, our CFO. At this time, I would like to turn the call over to Mr. Xing Jin. Yes, please.

Thank you, everyone, for joining us for our fourth quarter and full-year 2020 earnings call. We ended 2020 with a solid quarter as total revenues reached RMB 421 million, marking an increase of 19% year-on-year, in line with our previous guidance. Despite small outbreaks of COVID-19 across some provinces in China during the quarter, the medical aesthetics industry and our business remained on track. Our user base exhibited strong growth, with average mobile monthly active users reaching 8.9 million in the fourth quarter, a 142% increase from the previous year. This growth is mainly due to our efforts in continuously expanding our content library to meet user demands and the launch of innovative services based on advanced technologies, such as the VR Store and Live Diagnosis. Our progress received recognition from medical service providers, leading to new partnerships. By the end of the fourth quarter, the number of paying medical service providers on So-Young's platform reached 4,746, up 40% from the prior year. The COVID-19 pandemic presented challenges for the medical aesthetics industry in 2020, particularly for surgical treatments, due to higher costs and the need for consumers to take more time to make decisions. Currently, the surgical category is recovering at a slower pace. However, medical service providers with stronger operational capabilities able to deepen their collaboration with So-Young have excelled under challenging market conditions, significantly enhancing their customer acquisition performance. Moving forward, we believe the industry will advance in a more orderly manner amidst a tightening regulatory environment and the development of various parties throughout the value chain. Increased trust and transparency among all service providers will ultimately support sustainable and healthy growth in the medical aesthetics industry. Now, let me share some key takeaways and recap this past year. We successfully drove engagement and user growth through enriched high-quality content and valuable information. Building on our 2020 user growth, we gained recognition from a larger user base for our trustworthy content and services. Our user demographics show they are more socially informed and knowledgeable, having invested time in researching their options and needs. By the end of 2020, Beauty Diaries on So-Young's platform reached RMB 4.7 million, and the average monthly views of our content across social platforms rose to RMB 1.32 billion, a 150% increase from 2019. Additionally, with successful monthly campaigns like So-Young Ambassador and various user incentive programs, we provided strong support to our content creators, which contributed to growing our user base. Overall, we attribute our success to our extensive content library, engaging community experience, and increasing brand awareness. In 2020, we established ourselves as the most trusted platform in the medical aesthetics industry. As part of our social responsibility, we launched the So-Young Charity Fund, the first charity relief program in China for victims of unlicensed medical procedures. Our participation in the popular variety show, Sisters Who Make Waves, significantly boosted So-Young's brand awareness and image, resulting in related Weibo trending topics reaching RMB 43.76 billion, with organic traffic on our site increasing by 228% year-over-year. We enhanced our services for medical service providers by offering better strategies for customer acquisition. Our partners were significantly impacted by the COVID-19 pandemic early in 2020 but gradually recovered as businesses reopened. Those with limited cash flow needed effective solutions to reach their target audience. In the latter half of 2020, we launched a new membership product on our platform to assist small and medium institutions in acquiring potential users and more sales leads. To counteract restricted foot traffic to offline stores during the pandemic, we introduced a VR Store product to showcase features of each store and their major products to attract a wider range of user interest. For operational support, we created specialized teams for surgical, non-surgical, and new business development based on the focus of each hospital. Thanks to our strong user growth and reputation, service providers are increasingly recognizing the value of our audience and partnering with us for enhanced visibility. We continued to invest in R&D and leverage advanced technology to serve our users better. As the pandemic limited users' access to in-person consultations, we quickly launched several online products to provide remote services with user-friendly technology. In 2020, we facilitated over 550,000 live diagnoses and 70,000 live broadcasts. We improved our algorithm to ensure that the right content reached the right users and promoted high-quality original content. These efforts effectively saved time for both users and medical professionals, streamlining the decision-making process for consumers choosing appropriate treatments. Looking ahead, as our user base has rapidly expanded in recent years, an increasing number of newcomers may lack experience and knowledge about medical aesthetic treatments. We are refining our operations to cater to users at different levels, fostering loyalty and high retention over time. We are enhancing our community-focused content offerings and collaborating closely with medical professionals to find innovative ways to engage new users by generating diverse, high-quality content. Through So-Young’s brand awareness and effective marketing campaigns, we convert the high demand among e-users into real transactions. For instance, in March, we launched a slim festival where we collaborated with influencers who shared their professional insights on healthy slimming methods and recommended various medical treatments. This approach resulted in a significant number of users engaging with trending content on our platforms and allowed us to meet demand during the event by promoting popular treatments. On the business front, we expect non-surgical categories to continue growing strongly in 2021. We aim to strengthen our standardized service processes to enhance performance and expand our network of partner service providers while optimizing operations in key categories. At the same time, we will maintain our traditional strengths in the surgical sector; we are recognized by consumers and medical service providers as the leading medical aesthetics information platform in China. We will continue to leverage our years of experience and strong relationships with top-tier doctors to deliver high-quality services. In summary, we believe the Chinese medical aesthetics industry is on a macro growth trajectory. As a leading player in this sector, we have a responsibility to promote professional standards and offer genuine value to our users. We will continue to leverage our competitive advantages in content, technology, and our user base, focus on user-centric processes, and delve further into the value chain of the medical aesthetics industry to solidify our position as the most trusted platform in the broader consumer healthcare service sector. I will now hand the call over to Min, who will discuss the financials for the fourth quarter and full year.

Thanks for joining us. Please note that all figures mentioned will be in RMB. For detailed year-over-year financial performance, please refer to our earnings release. In the fourth quarter of 2020, total revenues reached RMB 424.6 million, an increase of 18.6% year-over-year, consistent with our guidance. The growth was mainly driven by a rise in the number of paying medical service providers as they began to recover with the easing impact of COVID-19 in China. Within total revenues, information services revenue was RMB 335.9 million, up 27% year-over-year, while reservation services revenue was RMB 88.7 million, down 5.3% year-over-year. Costs associated with revenues were RMB 63.6 million, up 8.7% year-over-year. Total operating expenses amounted to RMB 331.2 million, up 48.6% year-over-year. Sales and marketing expenses rose to RMB 210.4 million, up 59.2% year-over-year, mainly due to increased marketing and payroll expenses. General and administrative expenses reached RMB 49.9 million, up 38.4% year-over-year, primarily reflecting higher payroll costs related to expanding administrative staff. Research and development expenses were RMB 70.9 million, up 29.6% year-over-year, largely due to increased payroll costs. Income tax expenses stood at RMB 13.0 million, compared to RMB 29 million in the same period last year, primarily due to decreased taxable income. Net income was RMB 37.7 million, down from RMB 69.9 million in the fourth quarter of 2019. Non-GAAP net income was RMB 62.2 million, compared to RMB 86.4 million for the same period in 2019. Basic and diluted earnings per ADS attributable to ordinary shareholders were RMB 0.60 and RMB 0.35, respectively, compared to RMB 0.68 and RMB 0.65 in the fourth quarter of 2019. For the full year 2020, total revenues were RMB 1.29 billion, up 12.4% year-over-year. Within total revenues, information services revenue was RMB 962.1 million, up 15.4%, and reservation services revenue was RMB 332.9 million, up 4.6% year-over-year. Cost of revenues reached RMB 212.2 million, up 6.8% year-over-year due mainly to increased service costs linked to online platform development. Total operating expenses for the year were RMB 1.14 billion, representing a 41.1% year-over-year increase. Net income for the year stood at RMB 4.9 million, compared to RMB 176.7 million in fiscal year 2019. Non-GAAP net income was RMB 97 million versus RMB 280.9 million in fiscal year 2019. Basic and diluted earnings per ADS attributable to ordinary shareholders were RMB 0.05 for both, compared to RMB 1.64 and RMB 1.54 in fiscal year 2019. Now, turning to our balance sheet, as of December 31, 2020, we had total cash and cash equivalents, restricted cash, term deposits, and short-term investments of RMB 2.68 billion, down from RMB 2.84 billion as of December 31, 2019. For the first quarter of 2021, So-Young anticipates total revenues to be between RMB 320 million and RMB 330 million, indicating a 75.3% to 80.8% increase from the same period in 2020. This forecast is based on current market conditions and reflects our preliminary estimates of market dynamics, operating conditions, and customer demand, particularly in light of the ongoing uncertainties related to COVID-19. This concludes our prepared remarks, and I will now turn the call over to the operator for Q&A.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. The first question comes from Thomas Chong from Jefferies.

Thanks, management, for taking my questions. My question is more about 2021 and the outlook for the next couple of years. What is our strategy for surgical and non-surgical treatments? Additionally, what are the similarities and differences between us and our competitors in terms of advertising and operational advantages? Thank you.

Thank you, management, for taking my questions. My question is more about 2021 and the outlook for the next couple of years. What is our strategy for surgical and non-surgical treatments? Additionally, what are the similarities and differences between us and our competitors regarding advertising and operational advantages? Thank you.

First, for the non-surgical categories, our main focus is on treatments with low average transaction values. We aim to strengthen our leading position in terms of quantity, pricing, and the coverage of our SKUs. For treatments with middle to high average transaction values, we plan to standardize our services and improve performance with the So-Young Pass to target mid to high-end user groups. Additionally, through our So-Young Ambassador program and the new media team, we will enhance partnerships with upstream OEMs, increase content on non-surgical treatments in our community, and drive user engagement. Lastly, we will promote shopping festivals, such as anti-aging and slim festivals, along with other promotional activities to bolster consumer awareness of our professional advantages in non-surgical categories. Regarding the surgical categories, we aim to expand our list of doctors by introducing more top-tier surgeons through our Emerald Doctor Lists, including those from public hospitals. We will utilize features like So-Young doctor public accounts and Live Diagnosis to help doctors improve efficiency while upgrading their IPs and highlighting their differentiations. For specific areas like eyelid surgery, rhinoplasty, breast surgery, and fat transfer, we will form dedicated teams for each category. We also plan to restart the overseas surgery business in Korea and Japan, depending on the pandemic situation and travel policy changes. In terms of marketing, we are the only platform specifically focused on professional medical aesthetics, whereas our competitors operate as comprehensive e-commerce platforms, which hinders their ability to be seen as specialized, or they are too small to invest sustainably. Operationally, our dedicated team allows us to fine-tune our service across various categories and regions. Thank you.

Thank you. Our next question comes from Brian Gong from Citigroup. Please go ahead.

I will translate myself. Thank you to the management for taking my question. I would like to inquire about the plastic surgery and medical aesthetics sector, particularly following the Chinese New Year. When does management anticipate a complete recovery in this area? Additionally, when can we expect that to reflect in our revenue? Thank you.

The uncertainties of the pandemic have led to weakened consumer confidence overall. However, due to our engaged user base, high-quality content, and community-building capabilities, we have effectively attracted repeat users and new users to our platform. The monthly active users during the fourth quarter reached nearly 9 million, maintaining a growth momentum of over 140%. With the ongoing increase in demand for our medical aesthetic services, clinics and hospitals are investing more in marketing, particularly in user acquisition. In the fourth quarter, we expanded our paying medical service providers to over 4,500 members, marking the highest growth compared to several quarters last year. Each customer's average advertising budget also grew steadily last year. Surgical treatments were significantly impacted by the pandemic due to their high average transaction value. Overall, the industry is on a positive recovery path. However, there are still gaps in both transaction scales and transaction values for average customers when compared to the peak in the fourth quarter of 2019. Based on the early 2021 situation, where consumer demand is particularly growing in the non-surgical sector, we believe this will contribute to healthy overall market growth. That's all. Thanks.

Thank you. Our next question comes from Leo Chiang from Deutsche Bank. Please go ahead.

Thank you for taking my question. My question is regarding the intense competition in the industry. What strategy will you implement to compete effectively with others? Additionally, what are the long-term entry barriers? Thank you.

Thank you for taking my question. In the face of fierce competition, what strategy will you adopt to compete with others in the industry? And in the long term, what are the entry barriers? Thank you.

In summary, our competitive strategy is to differentiate ourselves from our peers, which includes three main points. The first is focusing on teams on excellent services to improve user experience. The second is to combine e-commerce community and AI technology to improve user decision-making efficiency. The third is to strengthen brand awareness and increase mind share of users while continuing to build on our reputation as a professional medical aesthetics service platform.

In summary, our competitive strategy is to differentiate ourselves from our peers. This includes focusing on providing excellent services to improve user experience, combining e-commerce community and AI technology to enhance user decision-making efficiency, and strengthening brand awareness to increase user recognition while building our reputation as a professional medical aesthetics service platform.

On the first point, currently most institutions use the online platform as a group buying channel to direct traffic into their offline shops. Customers attracted by low price offers are usually persuaded to upgrade their packages and pay for much higher services or treatments by sales consultants. Users often feel cheated and that the service quality is not guaranteed. We have observed that platforms with this business model achieve significant growth in terms of orders or GMVs, but we believe that in the long run, it also results in negative brand sentiment. We will continue to provide service quality and extend our services online to give greater security to the performance. For non-surgical categories, we will continue to promote So-Young Pass to enhance the standardization of service and treatment. Through reviews from third-party investigations and consumers, we will work selectively with the best-performing institutions and continuously improve user experience. For medical aesthetic surgeries, we continuously research and select top-tier plastic surgeons for our 2021 Emerald Doctor Lists. At the same time, we also provide top-tier doctors with shared facilities and operating rooms to control overall quality on each treatment. In terms of improving users' decision-making process, we are the only platform to have both e-commerce and community-building capabilities. In addition, our AI tools have been used over 1.5 billion times, including those for facial and skin mapping techniques. The combination of these three factors has allowed us to continuously improve the efficiency of user decision-making. Lastly, our continuous brand building and campaigns on social media have also strengthened our brand awareness among users. So, this should be the most important antidote for So-Young. That's all. Thank you.

Thank you. Our next question comes from Vincent Yu from Needham & Company. Please ask the question.

Thank you to the management for taking my question. My first question is about user growth and monetization. In 2020, we experienced significant growth in our user base. What are our expectations for this trend in 2021? Additionally, what are our monetization expectations for this year? My second question concerns the So-Young Pass. Can management provide details about our strategy regarding the So-Young Pass, which appears to be a crucial step for standardizing user experience? Thank you.

We will maintain our 2020 user growth strategy this year, execute more forcefully, and focus on the acquisition of mid to high-end and premium users. Users typically fall into a triangular distribution model in most mass consumer categories with price-sensitive users accounting for the majority. However, for medical aesthetics services, users usually fall into an inverted bell-shaped distribution structure with mid to high-end and premium users forming the majority of the mainstream market. These price-insensitive users are willing to pay for quality service and a better result for the treatments. The transaction value of treatments is usually above RMB 1,000. We have a significant advantage among this user segment and will continue to reinforce and expand our reach to them. According to third-party market research in terms of users' perception of So-Young, as a professional medical aesthetics platform, it's far ahead of our peers. This year, we will continue to invest in our branding and consolidate our advantage in users' mind share. In addition, we are continuously improving the effectiveness of our user acquisition targeting users through short-video platforms and social media channels, which has helped us acquire more premium users. For monetization, we will insist on the principle of past user experience first by continuing to inspect our partner institutions' operations and regularly reviewing the uncertainties of drugs and medical services used by those offline shops, strictly preventing fake transactions and reviews to avoid misleading consumers. At present, we believe we are the most compliant medical aesthetics platform in the market, and we will continue to comply with and promote industry standards to strengthen our brand image. We expect – we think that this may have some short-term impact on our revenue. But in the long term, we will still stick to the strategy because we believe this is the right one for long-term growth and it will bring more value-added service to our loyal customers. Unlike traditional services to end customers, usually those qualified institutions can register on our platform as they have the license or follow all the restrictions. But for the So-Young Pass, it's actually round on behalf of ourselves. This is actually us using our branding to promote on our platform. First of all, for those products shown on our So-Young Pass, they are standardized and safer; they also could be at certain prices. In this way, we can streamline our SOP process working with those offline institutions and hospitals and also working with those selectively to establish price points; this ensures certain price levels, enhancing user experience especially from the online part. We are promoting our branding on our platform. The products featured on our So-Young Pass are standardized and safer, and they are offered at specific prices. This approach allows us to streamline our SOP process when collaborating with offline institutions and hospitals, and selectively establish price points, ensuring certain price levels and enhancing the user experience, particularly online.

We think that we will actually go deeper into the cooperation with those offline institutions ranging from product designers to SOP designers and also to control the overall quality of such services. We will first test this in several cities, and if it is successful and well received by our end users, we're going to expand it to the whole regions of China. Thanks.

Thank you. Our final question today comes from CICC. Please ask the question.

My question is about the reservation service. We have observed a decline in reservation service revenue in both absolute and relative terms. How do you plan to increase the sales of reservations on your platform in the future to create a complete closed-loop business model? Thank you.

My question is regarding the reservation service. We can see a decline in reservation service revenue in both absolute and relative terms. How do you plan to enhance the sales of reservations on your platform in the future to create a complete closed-loop business model? Thank you.

In the short term on the consumer side, we will continue to strengthen the guarantee of the reservation performance in terms of advanced payment, insurance, and disputed mediation. On the merchant side, we will use online payments as a tool to strengthen our traffic distribution and conversion, promoting merchants to guide users to place orders online.

In the short term on the consumer side, we will continue to strengthen the guarantee of the reservation performance in terms of advanced payment, insurance, and disputed mediation. On the merchant side, we will use online payments as a tool to strengthen our traffic distribution and conversion, promoting merchants to guide users to place orders online.

Currently, I think that all the medical aesthetics e-commerce platforms, including So-Young itself, actually adopt a group buying model, which is a relatively outdated e-commerce model. A better medical aesthetics e-commerce model must comprise online and offline marketing channels to form a closed-loop ecosystem which should include the following characteristics: the first is streamlined products or services; the second is online management of inventory and reservation; and third, but not the least important, is conducting real-time communication between e-commerce platforms and the medical service providers through technology tools like SaaS. We believe this closed-loop e-commerce model should provide consumers with a much better customer experience and help service providers and institutions improve operational efficiency. We think that we will gradually upgrade So-Young Pass to form a closed-loop sales model that will make it easier for users to place orders, thanks to improved user experience. Meanwhile, So-Young Pass features a one-time, multiple-service purchasing model and has increased users' interest in our platform. We believe that the So-Young Pass currently covers more than 10 cities and more than 11 cities and covered 10 hot categories. The most popular categories include skin cleansing and some laser projects. The hottest cities mainly include top-tier cities like Beijing, Shanghai, Guangzhou, and Shenzhen. That's all. Thanks.

All right, thank you. So, ladies and gentlemen, we have reached the end of the question-and-answer session. With that we conclude our conference for today. Thank you for participating and disconnect.