So-Young International Inc. Q1 FY2021 Earnings Call

Good morning ladies and gentlemen and thank you for standing by for So-Young's First Quarter 2021 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.

Thank you, operator, and thank you for joining So-Young's first quarter 2021 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 the 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 Co-Founder, Chairman, and 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 all for joining our earnings call for the first quarter of 2021. We are pleased to start the year with strong results for the first quarter, reporting revenue of RMB360 million, nearly RMB30 million above our guidance, and an increase of 97% compared to the first quarter of 2020. Average mobile monthly active users were 8.39 million, up 101% year-over-year. The number of paying medical service providers on our platform reached 4,702, a 43% increase from the first quarter of 2020. The industry continues to recover, with growing interest from our end users and increased interactive activities on our platform. During the quarter, we executed our strategy to enhance conversion and retention rates while expanding our network of high-quality medical service providers. Our priority remains ensuring the reliability and professionalism of our community to boost user trust and engagement. We have been refining our unique value proposition by enhancing user engagement and retention, improving the user experience, and providing quality content for effective decision-making. Our immediate team strategy focuses on several key areas. First, we are strengthening the authenticity of our community by verifying the qualifications of institutions and doctors and enhancing our review verification processes to eliminate fake reviews. Second, we are enhancing user experience and showcasing our digital capabilities. By collaborating more closely with existing partners and forming new relationships, we aim to provide a broad range of authentic, high-quality products to our users. Our technology and analytical operations assess user behavior to deliver prompt and accurate recommendations to assist online decisions for both surgical and nonsurgical procedures. Additionally, our presales consultation and upselling services have improved the transition from online to offline experiences due to the guarantees offered on our platform. So-Young is not just a transaction facilitator; we are building a closed-loop system that connects all stakeholders, including users, consultants, medical product manufacturers, doctors, and institutions, maximizing their benefits. Third, we are enhancing user acquisition efficiency and marketing visibility. Earlier this year, we partnered with So-Young TV for a New Year’s Gadget Show and collaborated with Hunan TV on a variety show called The Journey of Love. These events sparked considerable interest among users and raised the So-Young brand profile. We also launched a regional short video program on new media channels, attracting a significant number of users to our platform. Consequently, we have seen consistent improvements in user activity metrics related to time spent, interactions, consultations, and bookings, which helped optimize our user base structure. During the Slim Festival in March 2021, the average daily GMV for treatments in body shaping categories surged by 25% compared to February 11 last year. Shifting to monetization, we are encouraged to see that the industry has gradually returned to a normal and healthy growth trajectory since the beginning of the year. Institutions are now pursuing more performance-based marketing strategies to attract users, emphasizing customer quality over quantity. Our prior investments in fostering our social community and branding have proven beneficial, as user trust in So-Young is leading more customers to make purchasing decisions based on recommendations. A notable highlight is the success of So-Young Pass. Since its launch in the fourth quarter of last year, the number of offerings in the So-Young Pass program has expanded from seven to 37, and it now includes 95 institutions across 11 cities. This program has gained significant user attention and popularity, impressing institutions with its ability to attract users. In the future, we plan to optimize the distribution process, aiming to connect quality traffic to customers with strong demand and market potential. We will also focus on improving acquisition efficiency while enhancing user retention, content consumption, and monetization. Now, I will hand it over to Min Yu before Lydia leads us into the Q&A session.

Thanks everyone. Please be reminded that all amounts quoted here will be in RMB. 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 2021, total revenues were RMB360 million, up 97% year-over-year from RMB182.6 million, and significantly above our guidance as mentioned. The increase was primarily due to an increase in the number of paying medical service providers. The number of paying medical service providers on So-Young’s platform was 4,702, an increase of 42.7% from 3,295 in the first quarter of 2020. Within total revenues, information service revenue was RMB277.8 million, up 120.5% year-over-year from RMB126 million. The increase was mainly due to an increase in average revenue per paying medical service provider. Reservation services revenue was RMB81.8 million, an increase of 44.7% from RMB56.5 million in the first quarter of 2020. The increase was primarily due to an increase of 123.3% in the number of purchasing users. Costs of revenues were RMB52.4 million, up 21.5% year-over-year from RMB43.1 million. Costs of revenues included share-based compensation expenses of RMB4.3 million compared to RMB2.2 million in the first quarter of 2020. Total operating expenses were RMB367.3 million, up 97.6% from RMB186 million in the first quarter of 2020. Sales and marketing expenses were RMB242.4 million, up 122.1% from RMB109.1 million a year ago, primarily due to an increase in expenses associated with marketing and user acquisition activities, especially branding expenses. Sales and marketing expenses included share-based compensation expenses of RMB2.3 million, compared with RMB0.7 million in the corresponding period of 2020. G&A expenses were RMB55.2 million, up 62.5% from RMB34.0 million a year ago, primarily due to an increase in payroll costs associated with the expansion in the number of administrative employees. G&A expenses include share-based compensation expenses of RMB7.2 million compared with RMB8.3 million in the corresponding period of 2020. Research and development expenses were RMB70 million, up 63%. The increase was primarily attributable to an increase in payroll costs. Research and development expenses for the first quarter of 2021 included share-based compensation expenses of RMB5.1 million compared with RMB3.0 million in the corresponding period of 2020. The income tax benefit was RMB4.3 million compared with RMB4.3 million in the first quarter of 2020. Net loss was RMB46.3 million compared with a net loss of RMB36 million in the same period of 2020. Non-GAAP net loss was RMB27.4 million compared with a non-GAAP net loss of RMB21.6 million in the same period of 2020. Basic and diluted loss per ADS attributable to ordinary shareholders were RMB0.42 and RMB0.42 respectively compared with RMB0.34 and RMB0.34 respectively during the first quarter of 2020. Now, for our balance sheet. As of March 31, 2021, we had total cash and cash equivalents, restricted cash and term deposits, plus short-term investments of RMB2.6 billion compared with RMB2.7 billion as of December 31, 2020. For the second quarter of 2021, So-Young expects total revenues to be between RMB430 million and RMB450 million, representing a 31% to 37.1% increase from the same period in 2020. The above outlook is based on the current market conditions and reflects the company's preliminary estimates of market and operating conditions and customer demand. This concludes our prepared remarks. I will now turn the call back to the operator and open the floor for Q&A.

Thank you. The first question comes from Thomas Chong of Jefferies. Your line is open. Please go ahead.

Thank you, management, for addressing my questions. I would like to hear more about how we plan to operate our user base in 2021 and improve monetization and user attraction. Could management provide insights on our MAU target and the marketing strategies we will implement?

Okay, I will be answering these questions. Our user growth strategy in 2021 won’t change compared to 2020. We will still be focused on expanding our user base and increasing our penetration in terms of our targeted user base. Regarding your question about our MAU target, we haven’t provided guidance in previous quarters, but we do see a positive increase in terms of our MAU. For the first quarter, our average MAU was around 8.4 million, and going forward, we expect our MAU by the end of the year to see around 40% growth; that’s our target. Regarding our strategy and how we’re going to spend our sales and marketing budget, as you can see in the first-quarter results, we did spend larger amounts than normal in sales and marketing. Excluding payrolls, we spent around RMB192 million on customer acquisition. We have around RMB102 million focused on branding, associated with the TV shows mentioned earlier. In terms of promoting our Slim Festival in March, we did invest in a large offline campaign with Focus Media. This corresponds to extra spending compared to the first quarter of last year and even the fourth quarter of 2020. For context, in the fourth quarter of 2020, we spent around half of that on branding expenditure. This does not mean we will spend unusually high amounts in sales and marketing or customer acquisition; our budget is around 40% of total revenue. While we had higher spending on branding in the first quarter, we have already planned our branding expenditure for Q2, Q3, and Q4. As a pattern, we typically have more spending in branding in the third quarter each year but lower in Q2 and Q4. Our early spending was necessary for the March Slim Festival. Moving forward, we will continue to split our sales and marketing budget evenly between branding and customer acquisition. So we won't maintain high levels of spending, like in the first quarter, which exceeded 60% of our next few quarters; it will return to normal levels.

Thank you. Our next question comes from the line of Leo Chiang of Deutsche Bank. Your line is open. Please go ahead.

Good evening. Thank you for taking my questions. My question is: what is the provision for marketing expenses and the trend regarding institutions that you are spending on So-Young’s platform?

According to the Frost & Sullivan report, online customer acquisition spending in China's medical aesthetics service industry has grown by approximately 20% over the past five years. The portion of customer acquisition spending directed toward online medical aesthetics platforms rose from under 2% in 2015 to 13% in 2019, indicating a continuous increase in market share for these platforms. Additionally, we have established partnerships with more institutions. In the first quarter, the number of paying medical service providers on our platform increased by over 40%, surpassing 4,700, which can be attributed to our targeted user base and strong brand recognition. Furthermore, we are noticing enhancements in the operational capabilities of these institutions, and their spending behaviors are evolving as they seek customer acquisition channels with better return on investment. To lower overall customer acquisition costs, they are also trying new strategies for their marketing budgets while enhancing their capabilities. We believe that as long as we perform better than our market peers, our contribution and value in the industry will grow, making So-Young a top choice for these institutions when they allocate their spending. Thank you.

Thank you.

Thank you. Our next question is from CICC.

Thank you, management, for answering my questions. I noticed that we have recently signed a cooperation contract with Bloomage Biotechnology. Could you provide more detailed guidance on future cooperation with upstream manufacturers or suppliers? Thank you.

Going forward, we will continue to strengthen cooperation with medical product manufacturers to enhance our user experience. Let me elaborate: we have chosen to partner with Bloomage Biotechnology for their skin booster products through a comprehensive strategic cooperation agreement. We are collaborating with Bloomage on two key initiatives: one is the hyaluronic acid program, and the other is establishing a future medical aesthetics alliance. Our goal is to become the strategic partner for each medical aesthetics service provider. Additionally, we will offer comprehensive support, including product research and development and training for new products. We have also developed a packaging solution for their hyaluronic acid program. As the largest medical aesthetics platform in China, So-Young will uphold our industry leadership and facilitate efficient connections between consumers and businesses.

Thank you. Next question is from the line of Vincent Yu of Needham & Company. Please go ahead.

Thank you management for taking my questions. I have two questions. First, can you provide insights into the trends for surgical and non-surgical treatments in the medical aesthetics market? The market has experienced significant growth this year, and there appears to be strong demand from consumers. How can we gain a competitive advantage in surgical treatments? Also, have we returned to pre-2020 levels for surgical treatments? My second question is about the So-Young Pass. Could you share more information on its expected revenue contribution and the number of cities we plan to enter this year? Thank you.

First, the medical aesthetics market is experiencing a strong recovery. We see an increase in users' willingness to purchase and their interest. The first-quarter data indicates that our monthly active users reached 8.2 million, showing a robust growth rate. Users are spending significantly more time engaging with institutions and doctors compared to the previous year. Surgical bookings are gradually improving, with reservations returning to pre-pandemic levels, although total gross merchandise value is still behind. Non-surgical bookings are gaining strong momentum; during the Slim Festival in March, the daily average gross merchandise value for injection treatments rose by 62% compared to last year's Double 11. Skin care and anti-aging treatments are particularly popular among our users. We expect increased competition in the non-surgical sector among both manufacturers and institutions. Consumers are becoming more knowledgeable and discerning about services, weighing effects and risks, which highlights the importance of consumer awareness. This year, we will utilize our platform's strengths in content and community engagement while enhancing consumer protection and optimizing user experiences across all platforms. To improve the online user experience for our products and build greater trust, we are focusing on three areas: expanding the total supply of SKUs, refining our product library to enhance standardization and improve service descriptions, and upgrading payment and after-sales warranty systems to ensure user satisfaction. We aim to strengthen our leading position in both SKUs and pricing systems by maintaining a wide coverage of lower-end product lines. For mid to high-end products, our So-Young Pass has been well-received, and we have improved its contract terms, helping us attract more affluent customers. We are also partnering with manufacturers to integrate So-Young Ambassador programs, user-generated content, and new media to boost supply and user engagement in non-surgical treatments. Through events like the anti-aging festival and Slim Festival, we are promoting our expertise in non-surgical aesthetics, alongside various marketing initiatives. Since launching So-Young Pass in October last year, it has expanded to 11 cities with over 90 institutional partners. We hold regular events to optimize our SKU offerings, especially in non-surgical product standardization, which has expanded our standardized categories to over 30. This approach fosters transparency and standardization in the non-surgical sector. However, as So-Young Pass has not yet achieved significant scale, it currently does not make a meaningful contribution to our revenue since we are still subsidizing our end-users. Therefore, we have not created a separate line item for this growth, though we can confirm that the overall conversion rate for the So-Young Pass program is higher than our other reservation products. Thank you.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now all disconnect.