Earnings Call Transcript - SY Q2 2022

Operator, Operator

Good morning, ladies and gentlemen, and thank you for standing by for So-Young's Second Quarter 2022 Earnings Conference Call. At this time all participants are in a listen-only mode. After 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.

Vivian Xu, Host

Thank you, operator, and thank you for joining So-Young's second quarter 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 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. Joining us today on the call is Mr. Min Yu, our CFO. At this time, I would like to turn the call over to Mr. Min. Thank you.

Min Yu, CFO

Thank you all for joining our second quarter 2022 earnings conference call. Since the beginning of 2022, we have faced many challenges from the external environment, including the macro environment and particularly the resilience of COVID-19 in multiple cities across China, which had a negative impact on business activities and consumer sentiment. According to data from the National Bureau of Statistics of China, total sales of consumer goods in the first half of 2022 decreased by 0.7% year-on-year. While the situation further weakened in the second quarter when total sales of consumer goods decreased by 4.6% year-over-year. In Q2, the resurgence of COVID-19 affected the top four medical aesthetics consuming cities by GMV with Beijing, Shanghai, Guangzhou, and Shenzhen. Total GMV for the four cities from our platform in the second quarter of 2022 decreased by 71% year-over-year. We were actively adapting and adjusting the operational strategy in second and third-tier cities, driving the revenue contribution of emerging cities to make up for the decline. As a result, in the second quarter, total revenue reached RMB309 million, an increase of 3% from Q1. At the same time, we further increased the number of SKUs on our platform to optimize the online transaction experience with more transparent pricing and attractive incentives for end users, particularly as a way to make up for the decline in surgical GMV due to travel restrictions and safety risk considerations under the epidemic. GMV of non-surgical treatments in the second quarter of 2022 increased 5% quarter-over-quarter. GMV of non-surgical treatments in June increased 33% compared with May and increased 40% compared with April. Meanwhile, we were prudent with our expenses management and narrowed our losses in the quarter by improving operating efficiency. In the second quarter of 2022, sales and marketing expenses decreased by 41% year-over-year, among which branding and the user acquisition expenses as a percentage of total revenue decreased to 20% from 33% a year ago. Operating loss narrowed by 46% quarter-over-quarter and we had an operating profit in June. In terms of operating strategy recently, we launched the So-Young Select in cities including Beijing, Shanghai, Chongqing, Hangzhou, Shenzhen, and Wuhan. We strictly selected 8% of the local high-quality and high standard service providers drawn from six categories by applying more than 30 rating criteria, including product, price, and service. For service providers, strict selection criteria enable them to strengthen their core competitiveness and support growth recovery in the post-pandemic period for users. This helps users improve their decision-making efficiency. Wuhan Miracle, which we acquired in the third quarter of 2021, also performed well in the second quarter of this year. According to its disclosure of reported results, the revenues were RMB120 million in the first half of 2022, up 8% year-over-year despite the challenging industry environment. Wuhan Miracle is very focused on continuously improving the quality, functionality, and marketability of its self-developed proprietary products. In the first half of the year, the sales of self-developed products accounted for more than 65% of total equivalent sales. We believe this business will continue to achieve stable growth in the future. Now let me give you an overview of our results for the quarter. Please be reminded that all amounts quoted here will be in RMB terms. While our business, especially in our top markets, was negatively impacted by COVID-19, the good news is that we saw a gradual recovery and a steady increase in revenues quarter-over-quarter. For the second quarter of 2022, total revenues were RMB309.1 million, a 31.6% decrease from the same period in 2021 and a 3% increase from the previous quarter. Information services and other revenues were RMB220 million, a 40% decrease from the same period in 2021 and a 10% increase from the previous quarter. The sales of equipment and the maintenance services revenues of Wuhan Miracle remained stable on a quarter-over-quarter basis. We also adjusted our operational expense management dynamically in response to the weakening macroeconomic environment. Total operating expenses were RMB246.6 million, a 26.5% decrease from the same period in 2021 and a 9.2% decrease from the previous quarter. Sales and marketing expenses were RMB121.7 million, a 41.1% decrease from the same period in 2021, and a 4.3% decrease from the previous quarter, primarily due to a decrease in branding and user acquisition expenses. General and administrative expenses were RMB61.8 million, an increase of 9.4% year-over-year and a 5% decrease quarter-over-quarter. The increase was primarily due to the consolidation of Wuhan Miracle and the increase in professional services fees. Research and development expenses were RMB63.1 million, a 12.5% decrease from the same period in 2021, and a 20.1% decrease from the previous quarter. The decrease was primarily attributable to a reduction in payroll costs associated with a decrease in headcount. In the second quarter, So-Young's profitability improved quarter-over-quarter as we further optimized operations and improved cost controls. The net loss attributable to So-Young International, Inc. narrowed by more than 51% quarter-over-quarter. Non-GAAP net loss attributable to So-Young International Inc., which includes the impact of share-based compensation expenses, was RMB22.7 million, narrowed by more than 53% quarter-over-quarter. Now for our balance sheet. As of June 30, 2022, cash and cash equivalents, restricted cash, term deposits, and short-term investments were RMB1.6 billion compared with RMB1.75 billion as of December 31, 2021. For the third quarter of 2022, So-Young expects total revenues to be between RMB310 million and RMB330 million. The above outlook is based on the current market conditions that reflect the company's preliminary estimates of market and operating conditions and customer demand. Our key operating principles and financial objectives include a focus on quality growth, improving operating efficiency, optimizing cost structure, and maintaining a net cash position. During the quarter, we have made progress in executing these objectives. We saw losses narrow quarter-over-quarter. We currently have nearly RMB1.6 billion in cash position, which gives us the financial flexibility to grow the business. Looking ahead, we expect the situation will remain very fluid, and the impact of COVID-19 will affect consumer behavior and medical service provider operations in many ways, but we remain optimistic about the long-term outlook of China's economy and the long-term growth prospects of So-Young. We are uniquely positioned to swiftly adjust in a highly uncertain market environment and create value for our shareholders. 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.

Operator, Operator

Thank you. And today's first question comes from Thomas Chong with Jefferies. Please go ahead.

Thomas Chong, Analyst

Thanks management for taking my question. My first question is about the marketing budget. Can management share some color about the trends in recent months and coming quarters? My second question is about the competitive landscape. Can you comment – sorry, can you hear me?

Min Yu, CFO

Yes. Yes, please go ahead.

Thomas Chong, Analyst

Okay. Can you comment on both surgical and non-surgical side? And my last question is about the OpEx trends. I've been seeing some – most of the companies highlight about cost control and efficiency. So how should we think about the OpEx trend? Thank you.

Min Yu, CFO

Okay. Yes, first the question the trend for sales and marketing costs and customer acquisition costs: excuse me, sorry. No worries, I will go ahead. So, for the sales and marketing it accounts around 49% of the total revenue in the second quarter, and it includes the payroll cost for our sales and marketing personnel and offline BDs. Other than that, the expense spent on customer acquisition is around 20% to 30% of total revenue. And going forward, I think, in the next few quarters, we will still keep a very prudent cost control approach. For sales and marketing costs, specifically for customer acquisition costs, we will keep it within the 30% to 35% range. And for the total sales and marketing costs, we will still maintain the same level in terms of revenue going forward. And for your second question regarding the competitive landscape for the industry, including surgical and non-surgical, I think for surgical services, it has been very challenging in the past few quarters. One of the reasons is that surgical procedures are relatively much more expensive than non-surgical services. The current macroeconomic conditions have been quite challenging for the consumption market. I think another reason is the impact of COVID-19 and the travel ban, which has affected consumers traveling to cities where high-quality surgical service providers are located. As for non-surgical services, So-Young is still in a better position compared to our competitors. Nevertheless, there has been a systematic negative impact on the surgical sector, which has been experiencing continuous declines over the past few quarters. Non-surgical services are still developing at a relatively healthier pace, but competitors remain primarily focused on a few major participants like us, while smaller competitors have become less competitive compared to previous years. That answers the second part of your question. Regarding the third question on how operating expenses will trend going forward, we will continue to keep strict cost control policies internally. We expect to see a downward trend in operating costs over the next couple of quarters to maintain high-quality, efficient business operations.

Thomas Chong, Analyst

Got it. It's very useful. Thank you.

Operator, Operator

And our next question today comes from Nelson Cheung with Citi. Please go ahead.

Nelson Cheung, Analyst

Hi, thanks management for taking my questions. I have a few questions. My first question is regarding your guidance. We would like to know whether your guidance reflects what kind of consumption expectations or recovery trends for the company? Any metric or trend that you could share in July and August about the business would be great. And then my second question regards the reservation service. So, given weaker consumption demand right now, are there any additional steps you could take to retain or re-acquire users when the economy or macro conditions improve? Would this translate into additional acquisition costs for us? Thank you.

Min Yu, CFO

Okay. Yes, for the first part of your question, yes, that guidance of RMB310 million to RMB330 million is currently our best estimation for the quarter. To be frank, the macroeconomic conditions here in Mainland China are not as positive as we had previously expected. As you can see, the July economic numbers have been quite weak. Although we've seen a slow recovery in consumption, it will still require time to fully recover to pre-pandemic levels, which may take a couple of quarters to reach the levels seen in the third and fourth quarters of last year. As for your second question regarding the reservation revenues, given the challenging economic conditions, consumers are being relatively hesitant to spend money, and we have been controlling our costs in sales and marketing to ensure the efficiency of our marketing investments. In the future, once we see a clear trend of recovery in consumption or an increase in personal disposable income, we will, of course, consider increasing our spending on customer acquisition. We are confident that once the market recovers, we will be able to acquire new customers effectively. So, that is our estimation, and we hope for more satisfactory conditions by the fourth quarter that could lead to improved performance by the year's end. I believe that answers your question.

Nelson Cheung, Analyst

Thank you. That's very helpful. Thank you.

Operator, Operator

Thank you. And our next question today comes from Leo Chiang with Deutsche Bank. Please go ahead.

Leo Chiang, Analyst

Hi. Thank you management for taking my questions. I have two questions. The first question is we see the number of paying service providers still grow robustly this quarter. Can management share the reason behind the growth under the top quarter? My second question is about So-Young Select. Can management share the monetization model for So-Young Select? And are we expecting to see the revenue contribution in the second half? Thank you.

Min Yu, CFO

Okay. For the paying service providers, the second quarter has been challenging for major cities such as Shanghai and Beijing, which are crucial as they account for roughly 30% to 34% of our total revenues in 2021. All of these cities have been negatively impacted by COVID-19, leading us to work harder to assist service providers in recovering from the pandemic. Additionally, we have improved our operational policies in lower-tier cities to help service providers re-engage with our platform and attract customers. Regarding your second question about So-Young Select, it has been a new product we rolled out in July. We are currently testing it in the six cities previously mentioned. Although I cannot disclose specific data on revenue contributions at this time, initial feedback indicates that it has helped improve service providers' user conversion rates. We will continue to monitor and analyze the performance, and further information may be available in the third quarter financial results.

Leo Chiang, Analyst

That's very helpful. Thank you.

Operator, Operator

Thank you. Today's next question comes from Chloe at CICC. Please go ahead.

Chloe Huang, Analyst

Hi, management. Thanks for taking my questions. Congratulations on the solid results of the second quarter. So my first question is about the ARPU. We have seen a 42% decrease year-over-year in the ARPU for service providers in the second quarter. Should we expect this trend to continue? My second question is that we acquired Wuhan Miracle in the third quarter of 2021. Could you please provide more insight into the synergies and the future prospects of Wuhan Miracle? Thank you.

Min Yu, CFO

Okay. For your first question about the ARPU for service providers, I must admit that the current decrease is due to service providers investing less because of COVID-19 impacts. This is comparable to our reduced investment in sales and marketing on other platforms as well. Therefore, it's a prudent approach for better cost control. As for the future, this decreasing trend may persist in the coming months, specifically in June and July. However, as of August, we are not observing further declines in spending from service providers, and we are seeing signs of a gradual recovery. This is in line with the current economic recovery trend. We hope that as the impact of the pandemic eases and control measures are lifted, service providers will begin investing more on the platform, which will eventually lead to a normalization of ARPU. Regarding your second question about the Wuhan Miracle synergies, we have implemented new strategies to help improve product visibility and marketability on our platform, and we are seeing positive early signs. There are new products developed by Wuhan Miracle in the pipeline. We believe that by aligning our operational strategies, we can enhance acceptance of these products among users on our platform and in the market. Although these improvements may not be immediately reflected in financial results, we expect better outcomes in 2023 compared to 2022.

Chloe Huang, Analyst

Okay, very helpful. So I will have a next-up question. So about the ARPU, I'm wondering whether the decrease is related to exploring lower-tier cities, as the institutions there are potentially paying less than those in higher-tier cities?

Min Yu, CFO

I believe the major reason for the decline is attributed to the significant impact on revenues from cities like Shanghai and Beijing, which accounted for approximately 35% or 30% of total revenues in 2021. In the second quarter, we had virtually no revenue from Shanghai, while revenues from Beijing dropped to a third of normal levels due to COVID impacts. Although spending from lower-tier cities has remained stable, the primary losses stemmed from the major cities. We expect that as conditions normalize, institutions in Shanghai will increase their spending, which will contribute to ARPU recovery.

Chloe Huang, Analyst

Okay, many thanks. I have no further questions.

Min Yu, CFO

Thank you.

Operator, Operator

And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference over to Vivian Xu for closing remarks.

Vivian Xu, Host

Well, thank you for your participation in today's conference. You may now disconnect. Have a good day. Bye.

Min Yu, CFO

Thank you all. Bye.