Earnings Call Transcript - SY Q4 2022

Operator, Operator

Ladies and gentlemen, thank you for standing by for So-Young's Fourth Quarter and Full Year 2022 Earnings Conference Call. 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, Miss Vivian Xu. Please proceed, Miss Xu.

Vivian Xu, Host

Thank you, operator, and thank you for joining So-Young's fourth quarter and full year 2022 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 the 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 20F. So-Young does not undertake any obligation to update any forward-looking statements, except as required by applicable law. Please also note that unless otherwise stated, all figures mentioned during this conference call are in RMB. Joining us today on the call is Mr. Xing Jin, our Co-Founder, Chairman and CEO and Mr. Nick Zhao, Senior Vice President of Finance. At this time, I would like to turn the call over to Mr. Xing Jin.

Xing Jin, CEO

Hello everyone. Thank you for joining So-Young’s fourth quarter and full year 2022 earnings call. 2022 was a remarkable year for all of us at So-Young. Despite a macroeconomic downturn, we successfully stabilized our core business and significantly improved our profitability. In the fourth quarter, facing the most severe challenges of the past three years, as COVID-19 severely disrupted the operation of medical aesthetics institutions and slowed the Chinese economy made consumers more cautious, we achieved quarterly revenue of RMB225 million, in line with our prior guidance. Meanwhile, we significantly increased our profit with a non-GAAP net income of RMB38.8 million. We have continued to make progress since reaching breakeven in the third quarter, thanks to our organized cost structure and improved efficiencies. As of the end of 2022, our cash balance was close to RMB1.6 billion, giving us sufficient financial assurance to explore new growth opportunities in the upcoming year. Next, I’d like to share some market trends we observed during the past year. In the future, we will focus on these directions as we continue to invest resources, seize opportunities presented by change, and enhance our revenue. First, the Chinese medical aesthetic user base is increasingly composed of non-surgical consumers. Second, user demands are evolving, with high-value users showing a greater preference for premium medical aesthetics services. Finally, there is a long-term trend of consumption upgrading in China, leading to an expanding middle-class medical aesthetics customer base. The growing demographic of urban middle-class females in first and second-tier cities has adopted new consumption habits with increased volume and quality. We also notice significant differences between middle-class consumers and traditional medical aesthetics consumers. First, these consumers generally have a higher level of patient education and are more cautious about their choices concerning medical aesthetics services. They are more attentive to aesthetic factors, including the maturity and reliability of services, doctor qualifications, and product compliance. Second, these consumers focus more on anti-aging, skincare management, and shaping products. Third, they seek reasonable prices without simply opting for the cheapest alternatives, avoiding what they view as paying an 'IQ tax.' Fourth, the quality and delivery of services are paramount. Based on these market changes and consumer needs, leveraging our resources and capabilities, we launched the So-Young Prime business on a small scale in first and second-tier cities in the third quarter of 2022. So-Young Prime is our self-operated service platform for non-surgical medical aesthetics. Using the big data from our platform, we identified the most sought-after treatments for middle-class consumers. Experts developed upgraded treatment plans with standardized operating procedures. So-Young is responsible for pricing and sales. We collaborate with institutions that meet our standards, training and evaluating their teams and doctors before integrating them into the So-Young Prime service network. These institutions provide exclusive and standardized service to So-Young Prime customers, supported by staff to ensure a high-quality experience. We also procure and certify the equipment and consumables used in treatments, ensuring each item is inspected in front of the customer. Through innovation in light medical aesthetic services, quality control of delivery, and our operational scale advantages, So-Young Prime offers users premium, affordable non-surgical medical aesthetics services. Upon review at a small scale compared to last year, So-Young Prime has gained rapid recognition among users. User satisfaction, average order value, and repeat purchase rates for So-Young Prime are all significantly higher than our existing pump business. To date, user visits to institutions have continued to grow each month, even during the peak of COVID-19 infections at the end of 2022 and throughout the Chinese New Year. Next, I want to outline our business plan and objectives for 2023. First, we will strengthen and develop our existing community business, leveraging our advantages in community operations, user operations, and adaptive resources. Our goal is to enhance user trust, engagement, and build a reliable professional platform. Over nine years, our community business has generated robust content, transparent trade information, innovative user products, and a wealth of industry data. It has also boosted the efficiency of the medical aesthetic industry at scale, creating a sticky user base in the tens of millions and enabling numerous institutions to achieve significant growth. These elements will be the foundation of our ongoing development and transformation. Second, we will continue to focus on expanding So-Young Prime's market penetration, building on last year’s experiences. By optimizing our supply-side offerings and growing our network of cooperating institutions, we will improve our ability to provide standardized services, attract more customers, and enhance repeat purchases. So-Young Prime is crucial for our industrial internet deployment, integrating production factors within the industry, restructuring supply chain relationships, increasing efficiency, reducing costs, and ultimately benefiting consumers. It encompasses a broader and deeper scope than a purely internet business and will address industry challenges more profoundly, creating stronger barriers to entry. Looking ahead to 2023, external conditions are improving positively for both the industry and our business, with institutions starting to return to normal operations. There is still significant growth potential in Chinese medical aesthetics consumption, particularly in the light medical aesthetics segment. Our new business direction will help diversify our revenue streams and establish a healthier business model. Operationally, we will maintain our efficient marketing strategies, strictly control expenses, refine our operations, and pursue profitable growth. With persistence in the near term and optimism in the long term, we will continue to focus on enhancing the user experience and remain dedicated to becoming the most trusted medical aesthetics platform. Now let me invite our Senior Vice President of Finance, Nick, to review the financial results for the fourth quarter before taking your questions.

Nick Zhao, CFO

Hello, this is Nick. I will now take some time to go through the financials for the fourth quarter and full year 2022. Please be reminded that all amounts quoted here will be in RMB. Please also refer to our earnings release for detailed information about comparative financial performances on a year-over-year basis. For the fourth quarter of 2022, total revenue was RMB325.1 million compared to RMB449.5 million in the corresponding period of 2021, in line with our previous guidance. The decrease was primarily due to a decrease in the average revenue per paying medical service provider, which was primarily impacted by COVID-19 control matters and the surge of COVID-19 cases, especially in major areas in China, limiting people’s access to offline service providers, and pressure on the overall Chinese consumer market. Within the total revenue, information services and other revenues were RMB233.9 million, down 32.1% year-over-year. Reservation services revenue was RMB26.0 million, down 37.2% year-over-year. Sales of equipment and maintenance service revenue from Wuhan Miracle Laser System Inc. were RMB65.3 million compared with RMB63.8 million in the same period of 2021. Cost of revenues stood at RMB88.2 million, down 30.6% year-over-year. The decrease was primarily due to our cost optimization measures and efficiency improvements in programs. Total operating expenses were RMB212.6 million, down 42.8% year-over-year. Sales and marketing expenses were RMB98.4 million, down 35.6% year-over-year, primarily due to a decrease in expenses associated with branding and user acquisition activities. G&A expenses were RMB73.2 million, down 14.8% year-over-year. This change was primarily due to a decrease in share-based compensation expenses, partially offset by an increase in payroll costs and professional service fees. R&D expenses were RMB41.1 million, down 39.2% year-over-year, primarily due to a decrease in payroll costs. Income tax benefit was RMB204 million compared with income tax expenses of RMB10.1 million in the fourth quarter of 2021. Net income attributable to So-Young International was RMB31.3 million compared with a net loss attributable to So-Young International of RMB27.7 million in the fourth quarter of 2021. Non-GAAP net income attributable to So-Young International, which excludes the impact of share-based compensation expenses and impairment of goodwill and intangible assets attributable to So-Young International, was RMB38.8 million compared with RMB62.9 million in the same period of 2021. Basic and diluted earnings per ADS attributable to ordinary shareholders were RMB0.29 and RMB0.29, respectively, compared with basic and diluted losses per ADS attributable to ordinary shareholders of RMB0.26 each during the fourth quarter of 2021. For the full year 2022, total revenues were RMB1.26 billion, down 25.7% year-over-year. Within total revenues, information services and other revenues were RMB888.5 million, down 31.9% year-over-year. Reservation services revenue was RMB128.7 million, down 53.4% year-over-year. Sales of equipment and maintenance service revenue were RMB240.7 million. Cost of revenues stood at RMB393.3 million, up 19.9% year-over-year, primarily due to the consolidation of Wuhan Miracle. Total operating expenses were RMB967.4 million, down 30.8% year-over-year. Net loss attributable to So-Young International was RMB65.6 million, compared with a net loss of RMB8.4 million in the fiscal year 2021. Non-GAAP net income attributable to So-Young International was RMB22.2 million compared to a net loss of RMB139.5 million in fiscal year 2021. Basic and diluted losses per ADS attributable to ordinary shareholders were RMB0.61 and RMB0.61, respectively, compared with basic and diluted losses per ADS attributable to ordinary shareholders of RMB0.08 each in fiscal year 2021. Regarding some items on our key balance sheet, we maintained adequate liquidity this quarter. As of December 31, 2022, we had total cash and cash equivalents, restricted cash, term deposits, and short-term investments of RMB1.6 billion compared with RMB1.8 billion as of December 31, 2021. For the first quarter of 2023, we expect total revenue to be between RMB290 million and RMB310 million. The above outlook is based on current market conditions reflecting the company's preliminary estimates of the market and operating conditions and customer demand. This concludes our key remarks. I will now turn the call to the operator and open the call for Q&A.

Operator, Operator

Today's first question comes from Thomas Chong at Jefferies. Please go ahead.

Thomas Chong, Analyst

Thanks management for taking my questions. Can you share with us your marketing strategies and the expected user base in 2023? Thank you.

Xing Jin, CEO

Thank you. As the market gradually recovers, we will ramp up our marketing strategy compared to 2022. However, we will still emphasize efficiency and accuracy while making adjustments based on market conditions. In addition to our existing marketing strategy, we will also focus on private domain operations to increase user engagement and repurchase rates. In 2022, we attempted private domain operations for So-Young Prime and developed active conversion paths, with private domain clients contributing over 90% of So-Young Prime orders. We will continue to optimize community content and our innovative user tools to generate more organic user engagement. However, as we mentioned before, competition in the medical aesthetics industry is no longer merely for traffic. Professional platforms need a profound understanding of users and the industry to provide a good service experience and meet immediate customer demands.

Operator, Operator

Thank you. And our next question today comes from Nelson Cheung at Citi. Please go ahead.

Nelson Cheung, Analyst

Thanks management for taking my questions. My question is regarding management's view on the recovery stage for the medical aesthetics industry in 2023 and the growth drivers for So-Young this year. Thank you.

Xing Jin, CEO

We maintain a cautiously optimistic outlook for 2023, largely depending on how quickly the overall consumption environments and the medical aesthetics market recover. Additionally, we observe that marketing spending from institutions is trailing behind the recovery on the user side. On the user side, there are regional differences in the recovery of the medical aesthetics market. The impact of the epidemic in the last few years, particularly the surge in COVID-19 infections at the end of last year, has resulted in a significant backlog of treatment orders. Consequently, in Tier one and Tier two cities, user orders have rebounded quickly since the start of this year and have already returned to the level of the same period in 2021. In third and fourth-tier cities, user orders have recovered to the 2022 level but have yet to reach the 2021 level. For institutions, they are being cautious with their marketing budgets for two main reasons. First, with orders in first and second-tier cities rebounding quickly, institutions do not feel the need to invest heavily in marketing at this time. Secondly, the overall turbulence of the past few years has led to more cautious spending, although we are starting to see a gradual recovery in institutions' spending.

Operator, Operator

Thank you. And our next question today comes from Chloe Wei at CICC. Please go ahead.

Chloe Wei, Analyst

Thank you. My first question is could you please revisit some of the things that you're thinking about regarding the business volume in the short to medium term, say in the next three to five years? Also, can you provide us with an update on your thoughts around the competitive landscape? Thank you.

Xing Jin, CEO

As a new growth driver, So-Young Prime's growth will largely depend on the expansion of the non-surgical market, which will continue to grow alongside the rising middle-class female population. We plan to enhance our supply network, collaborate with more institutions, diversify our product offerings, increase the number of service outlets, ensure high-quality service delivery, and improve user engagement and repeat purchase rates. Non-surgical medical aesthetics users have traditionally consumed daily cosmetic and skincare products, areas where many small and medium institutions excel. However, these institutions often lack adequate equipment, service delivery capabilities, and brand recognition. So-Young Prime aims to create a network that guarantees high service standards by empowering these institutions. This strategy not only supports small and medium businesses but also caters to large groups of medical aesthetics users and enhances convenience. Such a differentiation sets us apart from our competitors. By connecting the supply chain and integrating upstream, midstream, and downstream elements, we can expand the addressable market for medical aesthetics, improve user experience, foster a safe environment for customers, and stimulate overall industry growth. Given the environmental uncertainties and recovering consumer demand, the medical aesthetics market holds significant growth potential, and the industry's outlook is promising. We believe that the medical aesthetics sector is primarily driven by the supply side, which will be our future focus. We will leverage our core production strengths related to institutions, doctors, and users, establish service quality and delivery standards, and offer users a premium experience. These comprehensive capabilities will create a robust competitive edge compared to a purely internet-based model, enabling us to address deeper issues and differentiate ourselves further from competitors. Over recent years, we have provided users with a reliable information platform. Our community e-commerce model has improved the efficiency of the medical aesthetics industry significantly. Moving forward, we will continue to enhance our community content, develop new user tools, utilize the internet's scale advantages, and provide supplementary resources for offline service delivery. We may also partner with other platforms for traffic generation. We believe our ability to integrate across the industry and our commitment to enhancing service experiences will benefit users and promote sustainable improvements throughout the industry.

Operator, Operator

Thank you. And our next question today comes from Hugo with an undisclosed securities. Please go ahead.

Unidentified Analyst, Analyst

Thank you for the opportunity. My question is about the changes in consumer demands following COVID-19. Thank you.

Xing Jin, CEO

Thank you for your question. As we noted in our prepared remarks, user demands are changing. Middle-class consumers in medical aesthetics have different needs compared to traditional buyers, placing more emphasis on quality, safety, premium products, and reasonable pricing. There has been a notable rise in the demand for certain high-priced items, particularly in the photonic and injection categories, where average order values surpass RMB5000 and are very popular among users. As the market recovers, we anticipate that the surgical market, which has been less prominent in recent years, will see a resurgence as the economy improves and travel resumes. Additionally, as outbound travel picks up again, users will likely return to international markets for medical aesthetics. Thank you. That’s all.

Operator, Operator

Ladies and gentlemen, this concludes our question-and-answer session. I’d like to turn the conference back over to management for any closing remarks.

Vivian Xu, Host

We are now approaching the end of the conference call. Thank you for your participation in today’s conference. You may now disconnect. Have a good day. Thank you. Bye.