Earnings Call Transcript - SY Q3 2023

Operator, Operator

Ladies and gentlemen, thank you for standing by for So-Young's Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management gives their prepared remarks there will be a question-and-answer session. As a reminder, today's conference call is being recorded. I'd like to turn the meeting over to your host for today's call, Ms. Vivian Xu. Please proceed, Ms. Xu.

Vivian Xu, Host

Thank you, operator, and thank you everyone for joining So-Young's third quarter 2023 earnings conference call. Joining me today is Mr. Xing Jin, our Co-Founder, Chairman and CEO, and Mr. Nick Zhao, CFO. Please note that today's discussion will include forward-looking statements made under the safe harbor provisions of the U.S. Private Securities and Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could lead to actual results differing significantly from our expectations. Possible risks and uncertainties include, but are not limited to, those detailed in our public filings with the SEC, including our annual report on Form 20-F. So-Young does not intend to update any forward-looking statements, except as required by law. At this time, I would like to turn the call over to our next speaker, please.

Xing Jin, CEO

Hello, everyone. Thank you for joining So-Young's third quarter 2023 earnings call. Our business remained resilient and delivered solid financial and operational results during the quarter, despite macroeconomic challenges. Total revenues were RMB390 million, reflecting a 19% year-over-year increase that aligns with our previous guidance. Profitability continued to improve as a result of our careful cost management. Net income attributable to So-Young International Inc. was RMB18.3 million, compared to RMB2.3 million in the same period last year. I would like to share my thoughts on the direction of the industry. We strongly believe that the medical aesthetics market will evolve in two ways. First, there will be a gradual increase in high-tier users who are less affected by a weak economy and will continue to seek high-quality services. In this context, low to mid-tier users will increasingly choose products that offer the best quality relative to cost. The second trend is the continued rapid growth of light medical aesthetics as the market expands. We are adapting our businesses to address both scenarios. With that in mind, we are adjusting our community POP business to focus on high-end service users. During the quarter, we enhanced our partnerships with a select group of respected doctors and institutions, integrated internal resources, and optimized our processes to deliver the highest quality service through our one-stop solution. By providing premium content and improving the medical aesthetics service experience, we have helped respected doctors and institutions avoid detrimental price competition while still achieving reasonable premiums. During the quarter, we collaborated with these doctors to promote the face contouring category, which saw online growth of 40% year-over-year, while all surgical categories grew by 11% quarter-over-quarter. The average transaction value for nonsurgical products increased by 60% year-over-year with GMV climbing by 72% year-over-year. Additionally, through our partnerships with clinics and investment in medical aesthetics MCNs, we gained a deeper understanding of the market mechanics, which is aiding us in transforming the So-Young app into a high-end platform that offers users a wide selection of premium doctors and reduces decision-making costs. So-Young Prime is being refined to support user growth while seeking the best quality to cost ratio products. This unique innovation for the light medical aesthetics sector is a significant step towards standardized offline services. Since its launch in August of last year, this business has expanded rapidly, with fulfilled orders increasing by 23% sequentially during the quarter. Among those fulfilled orders, high-intensity focused ultrasound within the ultrasonic category saw a sequential increase of 44%. As I mentioned in our last earnings call, ensuring the best possible user experience as So-Young Prime scales is our focus, along with improving operational efficiency in our institutional network and refining operations. During the quarter, orders through So-Young Prime from over 100 institutions we collaborated with contributed more than 13% of fulfilled orders internally. To further standardize the management system for light medical aesthetics institutions, we established a flagship clinic on the second floor of our head office to test our systems in real-time. The clinic's team is fully integrated with So-Young Prime and has experienced an increase in monthly visits by more than six times over the past three months. Importantly, the clinic has already reached profitability. Our supply chain business is also being positioned to take advantage of potential opportunities as the light medical aesthetics market continues to grow quickly, which was evident in the strong performance it showed during the quarter. This supply chain business is part of our initiative to explore opportunities and gain deep industry insights that enable us to expand upstream in the medical aesthetics supply chain. In the upstream medical lasers product category, following our acquisition of Wuhan Miracle, we developed a new generation of ultrasonic anti-age equipment, known as the micro-focused ultrasound device, which we are utilizing to build our direct-to-consumer business model. On the medical injection side, we formed a team and experienced rapid performance growth, with full-year shipments expected to reach seven times that of the previous year. In July, we signed a strategic cooperation agreement for exclusive distribution rights for two filler products, which enhances our light medical aesthetics portfolio. Unlike the traditional upstream R&D production supply chain model used by manufacturers, we create additional value through synergies with our existing business, leveraging our institutional network and extensive consumer reach, allowing us to quickly bring new products to market and enhance their competitiveness. In the third quarter, our supply chain business, including Wuhan Miracle, generated RMB75 million in revenue, an increase of 19% year-over-year, accounting for 20% of total revenue. We entered the injectable filler market just last year with a product targeted at the competitive hyaluronic acid serum market, which has achieved record revenues and profitability on a monthly basis in August and September. This success is a direct result of the synergies we've created between the So-Young platform and high-quality upstream products. Over the long term, the medical aesthetics industry in China has significant growth potential, with low user penetration rates still evident. Markets outside the tier-one cities remain largely untapped. As industry standardization increases, our integrated capabilities and competitive advantages will further emerge. We will maintain our focus on our three core business segments as we work to further integrate institutions, doctors, and products, thereby creating sustainable diversified revenue streams and delivering long-term value for our shareholders. I will now turn the call over to our CFO, Nick, to review the financial results for the third quarter before taking your questions.

Hui Zhao, CFO

Okay. Hello, this is Nick. I will now go through our financial performances this quarter. Please be reminded that all amounts quoted here will be in RMB. Please also refer to our earnings release for detailed information of our comparative financial performances on a year-over-year basis. Total revenues during the quarter were RMB385.3 million, up 19.2% year-over-year and in line with our guidance. The increase was primarily due to an increase in revenues generated by So-Young Prime and sales of medical products. Information services and other revenues were RMB285.9 million, up 24.1% year-over-year, primarily due to an increase in revenues generated by So-Young Prime. Reservation services revenues decreased by 18.8% year-over-year to RMB24.1 million, primarily due to our operating strategy, which gives higher subsidies to end users. Revenue from sales of medical products and maintenance services were RMB75.2 million, up 19.2% year-over-year, primarily due to an increase in sales of cosmetic injectables. Cost of revenues were RMB142.6 million, up 51.7% year-over-year. The increase was primarily due to an increase in costs associated with So-Young Prime. Within cost of revenues, cost of services and others were RMB103.5 million, up 74.2% year-over-year, primarily due to an increase in costs associated with So-Young Prime. Cost of medical products sold and maintenance services were RMB39.1 million, up 13% year-over-year, primarily due to an increase in costs associated with the sales of cosmetic injectables. Total operating expenses were RMB244.7 million, up 3.4% year-over-year. Sales and marketing expenses were RMB143.8 million, up 15.3% year-over-year, primarily due to an increase in expenses associated with branding and user acquisition activities. G&A expenses were RMB50.2 million, down 16% year-over-year. The change was primarily due to the reversal of share-based compensation expenses partially offset by an increase in payroll costs associated with the expansion of administrative employees to support our business upgrade and new strategic businesses. R&D expenses were RMB50.6 million, down 2.7% year-over-year, primarily due to improvements in staff efficiency. Income tax benefits were RMB2.2 million compared with income tax benefits of RMB16.5 million in the third quarter of 2022. Net income attributable to So-Young was RMB18.3 million compared with net income of RMB2.3 million during the same period last year. Non-GAAP net income attributable to So-Young was RMB9.5 million compared with RMB9.9 million non-GAAP net income attributable to So-Young in the same period of 2022. Basic and diluted earnings per ADS attributable to ordinary shareholders were RMB0.18 and RMB0.18, respectively, compared with basic and diluted earnings per ADS attributable to ordinary shareholders of RMB0.02 and RMB0.02, respectively, during the same period of 2022. We have ample cash on hand with total cash and cash equivalents, restricted cash, term deposits, and short-term investments of RMB1.4 billion as of September 30, 2023, compared with RMB1.6 billion as of December 31, 2022. The decrease was primarily due to investments in building our supply chain product pipelines of RMB38 million and share repurchases of approximately RMB121 million. For the fourth quarter of 2023, we expect total revenues to be between RMB380 million and RMB400 million. The above outlook is based on our current market conditions that reflects the company's preliminary estimates of market and operating conditions and consumer demand. This concludes our key remarks. I will now turn the call to the operator and open the call for Q&A. Thank you.

Operator, Operator

Thank you. And today's first question comes from Thomas Chong at Jefferies. Please go ahead. Hello, Thomas Chong, your line is open.

Thomas Chong, Analyst

Hi. Good evening. Thanks management for taking my questions. Can you share about the progress So-Young Prime has made and the expectation for Q4 and 2024? And my next question is about our estimate for marketing expenses in Q4 and next year? Thank you.

Xing Jin, CEO

Thank you for your questions. I will take the first one. We launched So-Young Prime just over a year ago. Since then, fulfilled orders have grown tenfold during the quarter compared to the same period last year. As our user base expands rapidly, it demonstrates the transaction; its services are gaining traction among consumers. Within fulfilled orders, particularly high-intensity focused ultrasound under the ultrasonic anti-age category increased by 44% sequentially, generating strong word of mouth. As I mentioned earlier, we built a model clinic, which we call a flagship store for light medical aesthetics procedures on the second floor of our office. The team operating the clinic is fully integrated with So-Young Prime and is driving the development of a standardized management system for light medical aesthetics institutions, further improving the overall business model. We will continue to grow So-Young Prime's user base, enhance the service experience, capture emerging opportunities in the light medical aesthetics industry, and create high-quality products and services. We will also expand the number of categories in collaboration with institutions and a standardized management system to strengthen our position as a comprehensive partner for small and midsized light medical aesthetics institutions. In the future, we plan to integrate So-Young Prime with our supply chain business, allowing products from the supply chain to be directly linked through So-Young Prime. The micro-focused ultrasound device, the new generation of ultrasonic anti-aging equipment we launched in the first quarter, has performed well in clinic applications. Going forward, So-Young Prime will gradually introduce new products, further improve margins, and create synergies with our supply chain business.

Hui Zhao, CFO

Okay. I'll respond to the question regarding the marketing expense. We have placed an emphasis on improving advertising efficiency this year. Conversion rate for users placing an order online improved in the third quarter, mainly due to our community content, strong brand image, and new user acquisition methods such as private domain operations. Looking ahead to Q4 and 2024, we will continue to leverage our community content, strong brand, and other competitive advantages to further improve the user experience to increase user conversion rates. Lastly, we will also continue deploying a highly efficient marketing strategy, expand the user acquisition channels, improve marketing ROI, and carefully manage marketing costs to maintain our margin and improve the profitability of the company.

Operator, Operator

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

Nelson Cheung, Analyst

Thank you to management for addressing my question. How does management anticipate the development of the medical aesthetics markets in the fourth quarter, particularly during the Double 11 period, and what are the expectations for 2024? Thank you.

Xing Jin, CEO

Thank you for your question. As I mentioned earlier, I believe the medical aesthetics market will evolve in two main ways. Firstly, there will be a gradual increase in high-tier users who are less affected by the current economic conditions and are likely to continue seeking high-quality services. In this context, mid-tier users will also start to prefer products that offer the best quality for their cost. Secondly, we anticipate ongoing rapid growth in the light medical aesthetics sector as the market expands. We are tailoring our various business operations to address both of these trends. Looking ahead, we plan to focus on our three business segments to build a comprehensive medical aesthetics platform for consumers. We are enhancing our community e-commerce business to cater to high-end services and consumers seeking top-quality online medical aesthetics. Additionally, we are refining So-Young Prime to accommodate user growth and meet the demand for products that provide the best quality-to-cost ratio as we implement standardized management systems for light medical aesthetics. Our supply chain business will also aim to capture a larger portion of the rapidly growing light medical aesthetics market and create synergies with our other business segments. Furthermore, recent consumption data from the National Bureau of Statistics indicates that total retail sales have grown by 69% year-over-year during the first ten months and by 76% in October, suggesting that the economy is gradually regaining momentum. In conclusion, we are optimistic about the growth potential in the medical aesthetics market for 2024 and beyond. Despite occasional market volatility, our business has shown resilience. We will keep investing in acquiring quality users and institutions to generate value for the industry and are confident in our long-term growth outlook. Thank you.

Operator, Operator

Thank you. And our next question today comes from Chloe Wei at CICC. Please go ahead. Hello, Chloe. Your line is open.

Chloe Wei, Analyst

I'm sorry, we can't hear your audio right now, so we'll move on to the next question from CITIC.

Unidentified Analyst, Analyst

Let me translate my questions. As profitability has improved for two consecutive quarters, how do you expect margins to trend next quarter and going forward? Thank you.

Hui Zhao, CFO

Thank you for your question. With soft consumer sentiment, we will focus on driving revenue growth with a gradual diversification of revenue streams. Our supply chain business and So-Young Prime are showing solid performance each quarter and reflect this focus. The improvement in our profitability for the past two consecutive quarters reflects the improvements we have made in operating efficiency. We will continue to execute this strategy and remain confident that we will be able to maintain profitability next quarter. 2023 is a critical year for our business transformation. We have made steady progress in laying a solid foundation for future growth and creating long-term sustainable value for our shareholders. Looking forward to 2024, we will continue to grow revenue, improve operating efficiency and carefully manage costs. We will be well positioned to increase our competitiveness and maintain healthy cash flows as we leverage opportunities to generate returns for our shareholders. Thank you.

Unidentified Analyst, Analyst

Thank you.

Operator, Operator

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

Chloe Wei, Analyst

So I will translate myself. Mr. Xing Jin, what is your perspective on the future competitive landscape? Based on that, how should we position ourselves for the long term? Thank you.

Xing Jin, CEO

Thank you for your question. We have been exploring new business models across various sectors within the industry, moving away from traditional Internet models. Our aim is to identify innovative approaches to industry development and value creation. For instance, we have observed a major short video platform entering the medical aesthetics space in the third quarter. These platforms, along with major e-commerce sites, tend to utilize a low-priced purchase model that aligns with their operational strategies. Anticipating widespread industry adoption in the future, we are adjusting our POP business strategy to cater to high-end users by enhancing their consumption experience, which should also boost our margins. Focusing downstream, institutional clients are increasingly demanding products that offer a high quality-to-cost ratio, which we are well-positioned to provide as this sector expands. We foresee substantial market growth potential for chain stores specializing in light medical aesthetics. There are few domestic competitors in this space, with only two brands operating over 20 chain stores, offering limited standardized products and low margins. Successful models from outside China cater to low- to mid-tier users with premium consumption experiences. We are developing a standardized management system for light medical aesthetics institutions through So-Young Prime, ensuring high-quality products at competitive prices for our clients. This strategy positions us as a comprehensive partner for many small to midsized institutions in this field. While competition is intensifying in the injection category, there remains significant potential for medical lasers, especially in the ultrasonic anti-aging segment. Based on our insights, we launched a Micro-focused ultrasound device in the first quarter to target this market. In terms of injections, we see substantial growth driven by new materials in the regenerative market and have broadened our offerings in this area. Overall, in addition to evolving our Internet business model, we are keen on exploring growth opportunities throughout the industry supply chain with a long-term perspective. We are confident that our strategic market positioning and product advantages, driven by our integration and innovation along the industry value chain, will serve us well moving forward. Thank you for your question.

Operator, Operator

Thank you. And ladies and gentlemen, we are approaching the end of today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.