Earnings Call Transcript - SY Q2 2021

Operator, Operator

Good morning, ladies and gentlemen, and thank you for standing by for So-Young's Second 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.

Vivian Xu, Host

Thank you, operator, and thank you for joining So-Young's second 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 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 Co-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. Go ahead, please.

Xing Jin, CEO

Thank you all for joining our earnings call for the second quarter of 2021. We are very pleased to report another strong quarter. Revenue grew to RMB452 million, exceeding the high-end of our guidance of RMB450 million, an increase of 38% from the same period of 2020. Non-GAAP net income attributable to So-Young International, Inc. reached RMB74 million, an increase of 145% from the second quarter of 2020. Average mobile MAUs were 10 million, up 48% year-over-year. Total number of users purchasing reservation services was 245,000, up 44% compared with the same period of 2020. The number of paying medical service providers on our platform was 4,899, up 31% from the second quarter of last year. During the quarter, the number of users purchasing reservation services in dental treatments grew approximately 120% year-over-year to about 14,800, and the number of professional dental institutions on our platform grew to 2,950, increasing by more than three times from the same period last year. In the second quarter, we announced the acquisition of a controlling interest in Wuhan Miracle Laser Systems, the first medical laser company listed on the National Equities Exchange and the Quotations or NEQ exchange in China. The acquisition will further enhance our competitive advantage in the non-surgical aesthetic segment and allow us to explore new collaboration opportunities with upstream equipment device and medical drug providers. Wuhan Miracle is mainly engaged in R&D, production, sales, and agent service for lasers and other photoelectric medical anesthetics equipment. It has more than 10 product lines, including both self-owned and licensed products. Wuhan Miracle covers the broadest range of projects among photoelectric manufacturers and is able to solve diversified needs of different users. According to its reported results, the revenue for the first half of 2021 increased by 119% year-over-year, and net profit attributable to Wuhan Miracle for the first half of 2021 increased by 252% year-over-year. Our solid results and new strategy have enabled us to consistently improve our operations to meet the increasing changing demand from our end users and business partners and expand our market share. Innovative technologies in medical settings are driving an increasing awareness of aesthetic treatments and services among consumers. Notably, the popularity of non-surgical procedures to maintain a healthy appearance or promote anti-aging benefits is constantly growing. In the second quarter, the revenue contribution of our non-surgical business increased to 46% of our total revenue, up from 40% in the second quarter last year. The reservation orders from non-surgical procedures increased by 40% year-over-year, and the reservation orders from non-surgical procedures accounted for 70% of total orders. Moving over to all operational strategies, firstly, leveraging our community content and advantages in new media resources will continue to develop and launch fresh and highly successful products. In the second quarter, we have been stepping up efforts to recommend core products with good word of mouth to users on our platform, including Fotona4D Photorejuvenation, which resulted in a year-over-year increase of over 100% for online orders. Online orders for Fotona4D even increased by 500% year-over-year. On the non-surgical production side, we continued to optimize the online transaction experience, increasing the number of SKUs on our platform and provided more transparent and attractive prices. We also launched an online consumer protection project, such as advanced compensation and medical beauty insurance. At the end of June, over 140,000 non-surgical SKUs were available on our platform, an increase of 41% compared with the same period last year. Secondly, we continue to stress the standardization of non-surgical procedures and enhance our measurement and control of our products and equipment to optimize user experience. The strategic investment in Wuhan Miracle will not only expand our service network for institutional clients but also improve our fulfillment service and ensure that we are able to offer authentic products to customers. With this acquisition, our service in the non-surgical categories will become more diversified, creating a competitive moat in the long term. Lastly, to ensure our users are guaranteed only authentic products and don't have to worry about safety issues, on aesthetic treatment and services, we will continue to deepen our cooperation with our network of medical device manufacturers in order to consistently screen drugs, medical devices, and service providers. We continue to develop more popular categories, such as dental services. By working with institutional clients, we connected users with institutions and offered them premier dental services by bringing a standardized system to enhance the service quality of these institutions. On the regulatory front, over the past few months, regulatory authorities have expressed their views and opinions on various matters such as antitrust, data security, and medical aesthetics advertising, and issued a series of policies and guidance for multiple industries. We have taken this opportunity to reflect on our practice and our role as an industry leader and engage in self-reflection and introspection. First of all, since our inception, we have established a stringent review and approval process for all doctors and institutions, as well as conducted a rigorous review mechanism for content and service offerings on our platform. In addition, following the guidance issued by regulatory bodies at various levels, we have established an internal review process and continued to improve the online information we provided about medical aesthetics services. At the same time, we have also been actively engaged in the self-discipline of China's medical aesthetics industry by promoting platform governance and assisting our institutional partners with compliance audits and promoting a standardized and orderly development of the medical aesthetics industry. To summarize, we believe the Chinese medical aesthetics industry is well on the track of steady growth. As a leader in the industry, we have the responsibility to make the industry better by promoting industry standards and providing authentic and truly valuable services for our users. Looking forward, we will leverage our competitive advantage in content, technology, and our large user base and continue to focus our efforts on user acquisition and expand our online presence into other segments of the industry. By making use of medical aesthetics as an entry point, So-Young will be built as one of the trusted medical aesthetics and medical care platforms in China. Let me invite Min to give us an overview of our results for the quarter before the operator will open for the Q&A.

Min Yu, CFO

Thanks for the introduction. Please note that all amounts mentioned will be in RMB. I encourage you to look at our earnings release for more detailed information regarding our financial performance compared to the previous year. In the second quarter of 2021, our total revenues reached RMB451.8 million, reflecting a 37.7% year-over-year increase from RMB328.2 million, surpassing the high end of our previous guidance of RMB450 million. This growth was primarily driven by a rise in average revenue per paying medical service provider. The number of paying medical service providers on our platform reached 4,899, an increase of 31.2% from 3,735 in the second quarter of 2020. Additionally, the total number of medical service providers subscribing to information services on So-Young’s platform was 2,236 during the quarter, up 8.8% from 2,056 in the second quarter of 2020. Within total revenues, Information Services revenue totaled RMB360 million, up 53.8% year-over-year from RMB234.5 million. Revenue from reservation services was RMB91.9 million, a decrease of 2.8% from RMB93.7 million in the second quarter of 2020. Our cost of revenues was RMB58.8 million, an increase of 15.9% year-over-year from RMB50.7 million in the previous year’s second quarter. This cost included share-based compensation expenses of RMB3.8 million, down from RMB6 million in the same period of 2020. Total operating expenses were RMB335.4 million, up 16.7% from RMB287.4 million in the second quarter of 2020. Sales and marketing expenses amounted to RMB206.7 million, which was an 11.6% increase from RMB185.2 million a year ago, primarily due to higher payroll costs associated with increasing our marketing staff. Sales and marketing expenses included share-based compensation expenses of RMB1.6 million, unchanged from the same period in 2020. General and administrative expenses totaled RMB56.5 million, a 13.3% increase from RMB49.8 million a year ago, mainly due to higher payroll costs related to an expanded administrative workforce. These expenses also included share-based compensation costs of RMB7.2 million, compared to RMB14.2 million in the same quarter of 2020. Research and development expenses reached RMB72.1 million, up 37.9% from RMB52.3 million a year earlier, driven by increased payroll costs associated with growing our R&D team. This quarter's R&D expenses included share-based compensation expenses of RMB3.6 million, down from RMB6.2 million in the prior year. Our income tax expenses were RMB11.1 million, an increase from RMB2.8 million in the second quarter of 2020. Net income attributable to So-Young International, Inc. was RMB57.6 million, compared to RMB2.1 million in the same quarter last year. Non-GAAP net income attributable to So-Young International Inc. was RMB73.7 million, an increase from RMB30.1 million in non-GAAP net income for the same period in 2020. Basic and diluted income per ADS attributable to ordinary shareholders were RMB0.54 and RMB0.53, respectively, compared to RMB0.02 for both during the same quarter last year. Now, regarding our balance sheet, as of June 30, 2021, we had total cash and cash equivalents, restricted cash, term deposits, and short-term investments of RMB2.26 billion, down from RMB2.68 billion as of December 31, 2020. For the third quarter of 2021, So-Young anticipates total revenues to be between RMB430 million to RMB450 million, indicating a year-over-year increase of 66.6% to 69.7%. This outlook is based on current market conditions and reflects the company's preliminary estimates of market dynamics, operating conditions, and customer demand. This concludes our prepared remarks. I will now hand the call over to the operator for the Q&A session.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Your first question comes from Thomas Chong of Jefferies. Please ask your question.

Thomas Chong, Analyst

Now I will translate myself. What are the company's views regarding the recent changes in the advertising guidelines regulating the beauty and medical sector, which were issued by the state administration for market regulation? And how will it affect the company's business moving forward? Thank you.

Xing Jin, CEO

Thank you. We noticed that documents issued by regulatory authorities since the beginning of this year have mainly focused on supervising the practices of medical institutions in the medical aesthetics sector. We believe that such supervision is conducted for the long-term and healthy development of the entire industry. As an internet medical services information platform, since our inception, we have established a business review and approval process for all the doctors and institutions we partner with, as well as a content and product review mechanism. We are committed to building strong governance across our platform and strive to curb any non-compliant activities. To cooperate with So-Young, medical institutions are required to submit their state-issued business license, medical institution practice license, and other documents issued by governance authorities, as well as undergo our internal review and verification. We also require doctors to provide their qualification certificates and verified practice licenses before information can be published on our platform. Regarding the publishing of content on products and services, we have built a rigorous information display system equipped with risk control and anti-fraud systems. Information displayed by institutions must first meet our strict requirements. We have two additional review procedures, one automated and the other through manual inspections. We also have a professional compliance team that closely monitors state policies and standards in real-time, which we then compile to optimize our platform's verification system and standardization process. Additionally, we have a strict set of violation information risk control model library. Because of our professional internal risk control measures and platform governance, we think this should be the operational strength that differentiates us from our peers. Last May, we initiated a self-discipline campaign for China's medical aesthetics industry to promote platform governance. Regarding the draft guidelines on regulation in advertising the medical aesthetic sector issued by SAMR, we will provide our feedback through appropriate channels on the premise of protecting the legal rights and interests of consumers. Through positive and constructive feedback, we aim to create a voice for medical aesthetics professionals and, at the same time, provide better service to our customers and promote regulated and orderly environments for the development of the industry. Meanwhile, we also believe that with strict regulation and further execution of specific rules, offline medical institutions are required to enhance their service capability and medical level, not blindly pursue traffic growth in marketing and user acquisition and even treat consumers with faith or specialty. Institutions will be more cautious in selecting marketing channels. The enforcement guidance also clarifies online platform operators’ duties to perform contracts and to verify government compliance, which will be enhanced. In this regard, as the first mover in the industry to start and continuously self-discipline, we believe that So-Young will benefit from the regulation in the long run. In the long term, we believe that regulations will prove highly conducive to the healthy development of the industry. For So-Young, we are committed to adhering to all regulations. We will continue to further improve our internal review mechanism for full compliance and regular self-governance. To lead by example, we will remain proactive in intercepting medical aesthetics promotional information that doesn't comply with the rules, offer authentic information and online services, and promote better care in the medical aesthetics industry. Okay, thank you. That's all.

Operator, Operator

The next question comes from Nelson Cheung of Citi. Please ask your question.

Nelson Cheung, Analyst

So let me first state it out in English. Thanks management for taking my questions. So my question is regarding business prospects. Can management share your views related to the impact of COVID on your business? And can you share more details about the growth trend going into the second half of this year? And my second question is regarding your progress on the So-Young Pass, the SY Pass. Yeah, thank you.

Xing Jin, CEO

In July and August, China faced the dual impact of COVID-19 resurfacing in a few cities and damages from flooding disasters. Operations of medical institutions were adversely affected in first-tier and second-tier cities such as Shanghai, Chengdu, Nanchang, and Jinjiang. As the situation got under control, medical institutions were able to resume operations and return to their regular growth trend. Looking to business growth in the second half of this year, firstly, policies, in particular, regulations for medical aesthetics advertising required institutions to conduct self-inspections for unqualified products and treatments in their offerings. Meanwhile, the enforcement guidelines also set clear requirements for online performing operators to fulfill the duties imposed by laws. As a result, institutions will be more cautious about marketing in the near term. In the second half of this year, taking advantage of the rising popularity of non-surgical treatments, we will continue to implement our established strategy to grow the non-surgical categories, further penetrate and expand market share while maintaining our strength in the surgical category. As of the end of August, So-Young Pass has extended its network to 36 cities from 11 tier 1, and the number of institutions has increased from 95 to over 160. The number of verified orders on So-Young Pass also increased by 40% in Q2 compared to Q1. That's all, thank you.

Operator, Operator

Your next question comes from Leo Chiang of Deutsche Bank. Please ask your question.

Leo Chiang, Analyst

Let me translate myself. So thanks management for taking my question. My question is regarding the competition landscape. Can management share the latest competition landscape you have observed recently? Thank you.

Xing Jin, CEO

At the current level of market competition, we believe it is no longer merely about competing for user traffic, but whether the platform can really address the pain points for users and improve user experience. From the perspective of both regulation and a better user experience, the platform must be professional at all times and have in-depth knowledge of the industry. As the popularity of the non-surgical category increases in demand, we will continue to strengthen the operation of the non-surgical category and implement our established strategy to expand market share on top of growing our entire medical aesthetics user base. Meanwhile, we are continuously strengthening our cooperation with other platforms to empower the entire medical aesthetics industry. For instance, we partnered with JD.com to establish the JD Healthy Medical Aesthetics channel so that consumers can experience and have easy access to professional and premier medical aesthetic services. Besides that, we also worked with AutoNavi to connect with over 1,000 institutions and established a consumer service for medical aesthetics users on their Amap platform. So-Young Pass has also achieved more strategic co-operations with Little Red Book and Weibo, and we hope to explore popular treatments in medical aesthetics, build a premier shortlist of select products, and expand our service scope to continue powering more institutions. That's all. Thank you.

Operator, Operator

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

Vincent Yu, Analyst

Thanks, management. Thank you for taking my question. I have two questions. One is to follow up on the impact of the regulation. So my question is more focused on how the regulation impacts the traditional industry structure and like traditional practices in this industry? And how we view this as a potential opportunity? And the second question is on the Miracle Laser acquisition. How should we think about the strategy behind this acquisition? What kind of cooperation will we have between this manufacturing company and the institutional clients? And also, what kind of monetization model are we hoping to see for the future? Yes, thank you.

Xing Jin, CEO

First, we believe that the regulatory actions against non-compliant practices and strict regulatory requirements will benefit the healthy development of the entire industry in the long run. With the tightening of regulations, local regulations will further clarify and detail the approval system and the process for institutional adapters. Meanwhile, the usage specifications for drugs and equipment will be strengthened, forming more effective protection for manufacturers and institutions producing, distributing, and using genuine and authentic products. Beyond entry compliance, we are seeing that stricter regulations will, to some extent, drive institutional base levels from their marketing and customer acquisition towards improving internal operations, leading to better service quality. Besides educating consumers to distinguish and select services, institutions need to retain clients with good service and skills. Institutions won't survive long by focusing only on customer acquisition and ignoring management and service quality. Tightened market regulation has a significant driving effect on standardization and going online for the entire medical aesthetics market, particularly in the non-surgical medical aesthetics market.

Min Yu, CFO

Yes. I will try to answer your questions about our acquisition of Miracle Laser. As mentioned earlier in the prepared remarks, Miracle Laser is one of the biggest manufacturers of laser medical machinery in China. We think the synergies going forward between the platform of So-Young and further cooperation with branded manufacturers like Wuhan Miracle will create a complete service experience for users on the platform. At the same time, we can ensure that the services taken by customers will have a very consistent experience. It will also result in certain cost-saving effects; for example, we will provide our platform customers directly to the clinics or hospitals that have Wuhan Miracle’s medical instruments or equipment. We will share the revenues between them. It will be a showcase attempt for us for further cooperation with upstream manufacturers in the medical aesthetic service industry. Going forward, we anticipate further cooperation with other branded manufacturers to provide consistent screening of drugs, medical devices, and service providers to our customers. At the same time, Wuhan Miracle itself is a very well-run business. They have been listed on the NEQ exchange in China for almost six years, being highly compliant in terms of financial control and internal control. Although the industry as a whole was impacted by COVID-19 in 2020, they have recovered quite well in the first half of this year, and we feel very positive about their growth moving forward after being acquired by us. Our cooperation will add more elements to the business going forward. Okay, that's it. Thanks.

Vincent Yu, Analyst

Thank you.

Operator, Operator

Our next question comes from the line of an unidentified analyst from CICC. Please ask your question.

Unidentified Analyst, Analyst

Thanks, management, for taking my questions, and congrats on your strong performance. We noticed that the absolute value of sales and marketing expenses has declined sequentially. Can you please comment on any marketing and promotion trends in the second half of this year? Thank you.

Xing Jin, CEO

We are planning to execute more targeted brand advertisements and raise brand awareness among our users. At the same time, we will leverage the advantages of our platform and conduct performance-based marketing on third-party platforms with premium content to establish our brand as a professional medical aesthetics platform. For the full year, we forecast that sales and marketing expenses as a percentage of our revenues will remain largely stable at no more than 50%. That's all. Thank you.

Unidentified Analyst, Analyst

Thank you.

Operator, Operator

There are no further questions. This concludes today's conference call. Thank you for participating. You may now all disconnect.

Vivian Xu, Host

Thank you.