Earnings Call Transcript - SY Q3 2020

Operator, Operator

Good morning, ladies and gentlemen. Thank you for standing by for So-Young's Third Quarter 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 first speaker today, Investor Relations Director of So-Young, Ms. Vivian Xu. Please proceed.

Vivian Xu, Investor Relations Director

Thank you, operator, and thank you for joining So-Young third 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 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 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 are Mr. Xing Jin, our Founder, Chairman and CEO, and Ms. Min Yu, our CFO. At this time, I would like to turn the call over to Mr. Xing Jin.

Xing Jin, Founder, Chairman and CEO

Thank you, everyone, for joining us for our third quarter 2020 earnings call. The medical aesthetics and awareness industry faced significant challenges in China during the COVID-19 pandemic. As we emerge from this setback, we are seeing a recovery that is marked by a resilient and innovative response to rapidly changing consumer needs. We are leveraging the recovery by increasing engagement across our ecosystem. As a result, during the third quarter, we made significant progress in expanding our community of users and medical aesthetics professionals. Our third quarter results were solid, with total revenues of RMB 360 million, up 90% from last year. We grew our community with average mobile monthly active users to 8.7 million, representing an increase of 154% year-over-year from 3.4 million during the same period of 2019. We also increased the number of paying medical service providers on our platform to 4,100, up 27% from 2019. We focused on two main initiatives to drive engagement and user growth during the quarter. Our strategy here is simple; to improve users' trust in our platform, we try to facilitate rational decision-making by providing reliable doctors, multilayer content, and supportive medical treatment plans. The first part of our strategy was on our role as a trusted facilitator to help users make sound and rational treatment decisions. At the end of October, we launched the second version of our Emerald Doctor Lists, where we extended categories that are in high demand but require very specialized and accurate information. We want to ensure that our users have visibility on who the best-in-class doctors are while creating the opportunity for these doctors to raise their awareness. One doctor in Chongqing showed us that 43% of total treatments, with more than 47% of revenue contribution, were directly from the list. Our Emerald List is fast becoming known in China as the true doctor-wide list for the medical aesthetics industry, and monthly visits to the home pages of listed doctors were up 40%. A total of 196 doctors have been selected into the first and second version of our Emerald Doctor Lists to further demonstrate the widening influence. Nearly 1,000 doctors applied for selection in the third list within a month of its announcement. By classifying and ranking doctors and medical aesthetics professionals based on their skills, the Emerald Doctor Lists help users make better decisions. It makes it possible to execute such decisions more easily, quickly, and with greater precision. One of the results of the ease and efficiency has been the increased use of our live diagnosis services. We completed 165,000 requests, up from 127,000 in the previous quarter. Another great example of the effectiveness can be seen in the city of Shíyàn; average views of live broadcasts by doctors on the Emerald List were as much as 21.5 times more than before they were published on the list on specific categories. The second thing we did was to improve how we supported the development of intellectual property by professional content creators. Not only did we deploy resources to help them establish their personal web pages, but we also offered exclusive live broadcasts of surgeries at the Aesthetics Doctors and Plastic Surgeons Conference of the Chinese Medical Doctor Associations. The feature resulted in nearly 8,000 medical practitioners signing up. As I stated earlier, building a rich and trusted content ecosystem is important for driving long-term growth of our business. Our So-Young Ambassadors project has been embraced and sought exclusively by users since its launch in June. As of October, nearly 8,500 premium articles were generated, attracting 481,000 to sign up. The project's official account, So-Young Ambassadors, has attracted nearly 9.8 million fans. Based on data from our platform, industry-wide recovery was evident during the third quarter. Although it was gradual, specific trends are emerging as non-surgical treatments have returned to pre-pandemic levels with gross merchandise volume of reservation orders through So-Young increasing by 40% year-over-year. We reinforced our reputation as the first choice in medical aesthetics platform, particularly for non-surgical treatments. We focused on three strategic initiatives. First, for all non-surgical treatments being offered on our platform, we focused on governance by cross-checking details on service delivery, ensuring that contract terms had a standard level of certification to improve our sensitivity of available treatment options. Second, we revised our valuation system for merchants and upgraded our offers and rules making ratings clear and more detailed. As a result, users found it easier to make rational decisions on which treatments to select. Lastly, we offered So-Young Beauty Cards to consumers with the option of prepaying for a number of treatments from an authorized and certified list of merchants. By standardizing the service process, including clearly listing the material brands, treatment equipment, and doctor qualifications, this initiative will effectively protect our users' interests, shorten the time it takes for a user to make treatment decisions and promote repeat purchases. We are pleased to see that China's effective control of the pandemic situation has shed a more positive light on our business. We will continue to leverage our competitive advantages in content, technology, and big data to provide customers with results-driven marketing solutions. We believe that in facing new market dynamics, we remain focused on expanding the breadth and depth of our offerings while providing highly efficient intelligent service that generates even more value for the medical aesthetics industry. I'd now like to turn the call to Min Yu, who will go through the financial part of the quarter.

Min Yu, CFO

Thanks, Chris. 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 third quarter 2020, total revenues were RMB 359.6 million, up 18.9% 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 practices 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 RMB 265.7 million, up 23.9% year-over-year. Reservation services revenue was RMB 93.9 million, up 6.6% year-over-year. Cost of revenues was RMB 54.7 million, up by only 1.6% year-over-year. Total operating expenses were RMB 335.1 million, up 46.6% year-over-year. Sales and marketing expenses were RMB 221.6 million, up 41.5% year-over-year, primarily due to an increase in expenses associated with branding, user acquisition initiatives, and payroll costs due to the increased number of employees in the business development team. General and administrative expenses were RMB 50.3 million, up 55.4% year-over-year, primarily due to an increase in payroll costs associated with the expansion of administrative employees. Research and development expenses were RMB 63.2 million, up 59.7% year-over-year. The increase was primarily a result of payroll 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 benefit was RMB 16.3 million, compared with the income tax expenses of RMB 2.9 million during the same period last year. The income tax benefit was derived from a change in the preferential income tax rate of one of So-Young's subsidiaries, which resulted in a refund of RMB 16.4 million for tax paid in previous periods. Net income was RMB 0.9 million, compared with a net income of RMB 31.6 million in the third quarter of 2019. Non-GAAP net income was RMB 26.4 million, compared with RMB 40.5 million non-GAAP net income in the same period of 2019. Basic and diluted earnings per ADS, attributable to ordinary shareholders, were RMB 0.01 and RMB 0.01 respectively, compared with RMB 0.31 and RMB 0.29 respectively during the third quarter of 2019. Now for our balance sheet. As of September 30, 2020, we had total cash and cash equivalents, restricted cash, term deposits, and short-term investments of RMB 2.81 billion, compared with RMB 2.84 billion as of December 31, 2019. We are closely monitoring the ongoing impact of COVID-19 on consumer demand and sentiment as normal working conditions resume in China. We are cognizant that there are many news items relating to the overall macroeconomic impact of the outbreak, but we are confident that the fundamentals and long-term drivers of our business remain strong. With that in mind, for the fourth quarter of 2020, we expect total revenues to be between RMB 420 million and RMB 450 million. Although we are seeing a recovery across the e-commerce industry in China, it is 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 would 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. Ladies and gentlemen, we will now begin the question-and-answer session. Your first question comes from the line of Thomas Chong from Jefferies. Please ask your question.

Thomas Chong, Analyst

Thanks, management, for taking my questions. Can you provide some insight on the industry trend after the pandemic? What challenges and opportunities are present? Also, what is the outlook for the industry next year? Thank you.

Xing Jin, Founder, Chairman and CEO

We are pleased to see that the industry has recently recovered to nearly pre-pandemic levels. Our performance indicates that So-Young and the industry have generally bounced back. The industry's lowest point was during February and March, right at the onset of COVID-19. We experienced a series of small rebounds in May and June, with steady growth in August and September, culminating in a traditional peak season at year-end. Major platform promotions have spurred a new consumption boom in medical aesthetics treatments and services. In terms of categories, non-surgical treatments were the least affected by the pandemic, while surgeries, with higher transaction values, experienced the largest impact but are gradually recovering. Our total transaction volumes have returned to the same level as last year’s end, although total revenue and ARPU still show discrepancies. Regarding recovery, we observe different trends in volume and growth rates. Volume is nearly back to normal, but the industry growth rate is still significantly below the pre-pandemic rate of 20%. Offline service providers require more time to regain confidence in advertising investments. Market education has broadened the consumption of medical aesthetics from a niche market to mainstream acceptance, with concepts like skincare, anti-aging, and hair care becoming more popular among consumers. Medical aesthetics consumption is expanding to a wider audience, encompassing various age groups and occupational backgrounds. Demand remains strong, particularly among consumers seeking non-surgical options, and users who would typically travel abroad for treatments are now seeking comparable services locally due to travel limitations. We also observe that institutions are reducing prices to attract price-sensitive consumers amid increased competition and price wars. Some medical aesthetics service providers have reallocated parts of their marketing budgets from surgical treatments to attracting users for non-surgical options in response to the challenging macro environment. We've noted that pricing in this area has driven a rise in new customers. However, it remains uncertain if these price-sensitive consumers will become long-term clients. The revenue structure for medical aesthetics services remains largely unchanged; surgical treatments continue to be the primary source of revenue and profit. If the increase in entry-level treatments does not lead to greater demand for surgical and other high-value procedures, service providers may hesitate to invest in marketing. The influx of entry-level users and treatments could create additional pressure on performance. While service providers are using discounts to increase customer traffic, dissatisfaction could lead to negative reviews on e-commerce platforms, impacting the entire industry and specific institutions. Compared to larger traffic platforms, concerns for our platform are less pronounced, as our data shows that only a small percentage of transactions reflect average prices below RMB 20, whereas competitors report over 70% of transactions around RMB 1,000. We anticipate the industry growth rate will gradually return to the pre-pandemic level of 20% in 2021, provided we maintain effective management in China. Service providers are expected to gradually increase marketing budgets, especially for surgical treatments. Institutions are employing sales promotions and cross-selling strategies to capitalize on limited market opportunities, amidst ongoing pricing wars. If service providers find these techniques ineffective, it could lead to complaints and disputes. We believe that the key to sustainable industry growth lies in service quality. We will focus on enhancing our service offerings to meet consumer demands for access to quality doctors, service providers, content, and products, including diversifying our offerings such as live diagnosis, an Emerald Doctor List, and So-Young Beauty Cards to better serve our users.

Thomas Chong, Analyst

Thanks. That's all.

Operator, Operator

Thank you. Your next question comes from the line of Brian Gong from Citigroup. Please ask your question.

Brian Gong, Analyst

Okay. I will translate myself. Based on our advantage in user growth, what is So-Young's strategy for monetization in 2021? And is there any update for the CPL subscription product you mentioned before? Thank you.

Xing Jin, Founder, Chairman and CEO

User growth, particularly in our core medical segment, will be a fundamental strategy for us over the next two to three years. As we expand our user base, we expect to see more varied user characteristics and stages. Our focus is on understanding the needs and challenges of users at different experience levels with our Big Data and other technologies. This approach is aimed at shortening users' decision-making cycles and enhancing monetization. We have several key products. One is the Emerald Doctor List, which allows users to quickly search for and select doctors. Another is our ongoing work on live video diagnosis, facilitating face-to-face communication between users and medical professionals. We also have So-Young Beauty Cards; through standardized live treatments and careful selection of service providers, we ensure quality service delivery and user experience. Lastly, we provide customized medical treatment plans that integrate various service provider resources. This year, due to a decrease in our home market size, service providers are adopting more cautious marketing strategies and are spending less on new monetization products. In light of this, we plan to slow down the promotion of our CPL products while continuing to develop new monetization options and enhance lead quality. We anticipate that with a market recovery next year, we will successfully introduce more products to improve overall monetization efficiency.

Operator, Operator

Thank you. Your next question comes from the line of Vincent Yu from Needham & Company. Please ask your question.

Vincent Yu, Analyst

Hi, management. Thank you for taking my question, and congrats on the strong user growth and great quarter. My question is on the light treatment part or the non-surgical business part. As the industry is seeing more non-surgical demand or light treatment, will the growing demand for light treatments lead to changes in user behavior and their decision-making facets both online and offline? And how will So-Young adapt to the emerging trends?

Xing Jin, Founder, Chairman and CEO

Light medical aesthetics encompasses non-surgical procedures, including minimally invasive options like facial injections and thread lifts, as well as energy-based services such as laser treatments for skin tightening or spot removal. These medical treatments involve various decision-making pathways. High-value, non-surgical options like picosecond lasers typically range from CNY 5,000 to over CNY 10,000 per unit, and their high costs, coupled with the inherent risks and invasiveness, impose strict standards on practitioners. The decision-making process for these treatments mirrors that of surgical procedures. Similarly, filler injections like hyaluronic acid around the nose, forehead, eyes, and chin, as well as thread lifts, also demand significant technical expertise from doctors, making their decision pathways analogous to those for surgical interventions. Although these light treatments are non-surgical, the consumer choices and decision-making processes are largely similar to those seen in surgical contexts. For both types of treatments, we equip consumers with essential decision-making tools. This toolkit includes genuine user-generated content, a wide array of products with clear pricing, and verified certifications for the materials and equipment utilized. We've also introduced innovative solutions such as the Emerald Doctor List and So-Young Beauty Cards to enhance decision-making efficiency and uphold service quality. Another fast-growing area in non-surgical treatments is entry-level options like Aqua-Oxygen and Needle-Free injections, which generally have average transaction values below RMB 200, and in some cases, even below RMB 100. These options, which represent over 71% of total inventories on certain platforms, involve minimal risk and do not require physician participation. Entry-level treatments attract a larger potential consumer base, driving growth in the medical aesthetics market. However, the overall purchasing power is lower, and the conversion rates to higher-end items tend to be diminished. For these procedures, consumer decisions are largely influenced by factors such as price and convenience, including location. Therefore, we are expanding our supply and increasing the number of service providers while also offering more discounts and special subsidies to consumers.

Vincent Yu, Analyst

Okay. That's all. Thank you.

Operator, Operator

Thank you. Your next question comes from the line of Leo Chiang from Deutsche Bank. Please ask your question.

Leo Chiang, Analyst

Thank you for taking my question. The competition in the sector is becoming more aggressive. What initiatives will So-Young implement to boost your market share as the competition grows?

Xing Jin, Founder, Chairman and CEO

First, addressing both sides. On the merchant side, the total spending by medical aesthetics service providers on user acquisition decreased due to the negative effects of COVID-19 compared to the previous year. Nevertheless, we managed to achieve revenue growth, which suggests that we are still gaining market share in the overall market. We expect that as industry growth returns to normal levels of around 20%, sentiment will improve and marketing spending will recover to pre-pandemic figures, or even exceed them. We possess a unique advantage that sets us apart from competitors, which we intend to maintain. Concurrently, we will refine our approach in each category, enhancing our advantages on the doctor side with innovations such as live video diagnostics and the Emerald Doctor List to improve user experiences and attract more spending from service providers. Our monetization products assist small to medium service providers in acquiring high-quality users through our platform. We continually enhance this feature to demonstrate our capability in helping these providers accurately and efficiently identify users. On the user side, despite the pandemic, we have sustained our investment, reflecting our commitment to developing a trusted medical aesthetics platform because we are optimistic about the long-term outlook for the industry. Consequently, our monthly active users have risen to historically high levels, positioning us well for market share growth among users. To boost our competitive edge, we are enhancing our traditional strengths in surgical treatments, particularly on the doctor side, while also fine-tuning our operations to penetrate more categories, thereby creating higher entry barriers. For non-surgical treatments, we have adopted a strategy that follows competitors in entry-level treatments, increasing the number of service providers and SKUs on our platform and offering subsidies to maintain our pricing advantage. Additionally, we have improved collaboration with service providers to enhance delivery quality. We have introduced So-Young Beauty Cards for selected non-surgical treatments, which will be implemented based on current market conditions, and we plan to train offline merchants to capture more market share through an improved service experience. That's all. Thank you.

Operator, Operator

Thank you. Your next question comes from the line of an unidentified analyst from 86Research. Please ask your question.

Unidentified Analyst, Analyst

Hello. Thank you to management for addressing my question. I have a follow-up regarding our new initiatives. Can management provide more details or metrics on our new products like the So-Young Beauty Card? Additionally, do we have any other products planned for next year? Thank you.

Min Yu, CFO

Okay. Thanks. Let me try to answer your question about any new product for So-Young and the Beauty Card. Right now, we don't have much data to share. For So-Young, we have upgraded our service to a more dedicated team to enhance services for our high-value customers, but they are not significantly contributing to our revenue at this time. As for the Beauty Card model, we just launched it in the second half of this year. We are working to improve the user experience and operational efficiency while targeting new users in the light non-surgical market. We are optimistic about the future of these new services and plan to provide more information over the next few quarters. Regarding other new products for the New Year, dental services will remain one of our offerings alongside medical aesthetics. However, dental clinics have been more adversely affected by the pandemic recently, and their recovery has been slower. Next year, we will continue to invest in dental treatments and look to introduce new products, like insurance based on the new business model. Currently, this sector contributes a small amount of revenue compared to that from medical aesthetics. Hopefully, that answers your question. Thanks.

Operator, Operator

Thank you. Well, ladies and gentlemen, that's all the time we have for questions today. So with that we conclude our conference for today. Thank you for participating. You may all disconnect.