So-Young International Inc. (NASDAQ:SY) Q2 2019 Earnings Conference Call August 29, 2019 8:00 AM ET

Company Participants

Christian Arnell - IR, Christensen & Associates
Min Yu - CFO
Xing Jin - Co-founder and CEO

Conference Call Participants

Austin Moldow - Canaccord Genuity
Jing Qiang - CICC
Vincent Yu - Needham and Company
Robert Cowell - 86Research
Brian Gong - Citi

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the So-Young Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator instructions] I must advice this conference is being recorded today, 29 August 2019.

I would now like to hand the conference over to your first speaker for today, Mr. Christian Arnell. Please go ahead, sir.

Christian Arnell

Thank you. Hello everyone, and thank you for joining us today. So-Young second quarter 2019 earnings release is distributed earlier today and is available on the IR website at ir.soyoung.com as well as on Globe Newswire Services.

On the call today from So-Young we have Mr. Xing Jin, Co-Founder and Chief Executive Officer; and Mr. Min Yu, Chief Financial Officer. They will both be available to answer your questions during the Q&A session that follows management prepared remarks. Before we begin, I would like to remind you that this conference contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended and as defined in the U.S. Private Securities Litigation Reform Act of 1995.

These forward-looking statements can be identifying by terminology such as will, expect, anticipate, future, intent, plans, believe, estimate, target, going forward, outlook and similar statements. Such statements are based on upon management's current expectations and current market and operating condition and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the Company's control, which may cause the Company's actual results, performance or achievements to differ materially from those in the forward-looking statements.

Further information regarding these and other risks, uncertainties or factors are including in the Company's filings with the U.S. Securities and Exchange Commission. The Company does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise except as required under applicable law.

It is now my pleasure to introduce Mr. Yu, please go ahead.

Min Yu

Thank you, Chris, and thank you everyone for joining us for our second quarter 2019 earnings call. We believe another strong quarter as our results as our business continues to gain growth. momentum and operational efficiency improved. Total revenues during the quarter were RMB285 million, an increase of 87.3% year-over-year and exceeding the high-end of our guidance range.

Our focus right now is on expanding our user base, both in quantity and quality by penetrating deeper into the medical aesthetic service industry, enriching our content offerings and improving the user experience. Average mobile MAUs during the quarter grew significantly, increasing by 72.5% year-over-year to 2.47 million, while total number of purchasing users increased by 118.8% to 202,000

The aggregate value of medical aesthetic treatment transaction facilitated by our platform increased by 81.9% year-over-year to RMD893 million. I believe this speaks strongly to the user experience we are able to offer and the unique value position, our transparent pricing. Reviews and service provider credentials and the convenient access to comprehensive media conference, social community and online reservation functions provide.

At the same time, medical service providers are increasingly seeing how effective our unique value proportions of effective customer acquisition, differentiated branding, and the improved operating efficiency are. The number of paying medical service providers on our platform increased by 39.4% year-over-year to 3,157, and the number of medical service providers subscribing to information service on our platform increased by 96.8% to 2,218.

We are striking a careful balance between increasing monetization of our services and enhancing the user experience which is key to growing our user base. I知 extremely pleased with our progress so far. Our monetization initiatives are not impacting our user base or stickiness to our platform, which I believe reflects to value our platform provides to both users and medicine service provides.

I知 fully convinced that our medical aesthetic treatment sector continues to generate substantial growth, opportunities which I知 confident we will capture and benefit from. With that, let me know quickly go over our financials for the quarter. Please be reminded that all amounts quoted here will be in RMB. Please also refer to our earnings release for detail information of our comparatively financial performance on a year-over-year basis.

For the second quarter 2019, total revenues were RMB285 million, up 87% year-over-year. Within total revenues, information services revenues was RMB212 million, up 106% year-over-year. Reservation services revenue was RMB73 million, up 49% year-over-year. Cost of revenues were RMB50 million, up 136% year-over-year, due primarily to an increase in payroll costs associated with an increase in operational staff headcounts and a share-based compensation expenses.

Gross profit was RMB235 million, up 80% year-over-year. Gross margin decreased to 82.5% from 86.1% during the same period last year. Total operating expenses were RMB225 million, up 82% year-over-year. Sales and marketing expenses were RMB106 million, up 19% year-over-year, due primarily to an increase in payroll costs and share-based compensation expenses.

General and administrative expenses were RMB67 million, up 414% year-over-year due primarily to an increase in payroll costs and share-based compensation expenses. Research and development expenses were RMB52 million, up 148% year-over-year. This increase was primarily attributable to an increase in payroll costs associated with the expansion of our research and development teams, which are focused on enhancing the experiences for users and the medical service providers as well as share-based compensation expenses.

The share-based compensation expenses recognizing our costs of revenues and the above expense items during the second quarter of 2019 were RMB73 million in total. These expenses related to the new options granted to employees and vested immediately upon completion of IPOs in May 2019 were RMB19 million. This amount was fully recognized in the second quarter of 2019.

Income from operations was RMB10 million, compared with RMB8 million during the same period last year. Non-GAAP income from operations was RMB83 million, compared with RMB12 million for the second quarter 2018. Income tax expenses were RMB11 million compared with RMB1 million during the same period last year. The increase was primarily due to an increase in taxable income during the second quarter of 2019.

Net income was RMB29 million compared with RMB9 million during the same period last year. Non-GAAP net income was RMB102 million, compared to RMB13 million during the same period last year. Basic and diluted earnings per ADS attributable to ordinary shareholders were RMB0.22 and RMB0.21, respectively, compared with loss of RMB0.38 in the second quarter 2018 total.

Next, moving on to the balance sheet. As of June 30, 2019, we had total cash and cash equivalents, restricted cash and short-term investments of RMB2.68 billion, compared with RMB1.21 billion as of December 31, 2018. The increase was primarily due to the net proceeds from the Company's IPO in May 2019.

Now onto guidance, for the third quarter of 2019, we expect total revenues to be between RMB218 million to RMB300 million, or US$40.8 to US$43.7 million, which represents an increase of the 66.7% to 78.6% year-over-year. 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 will now turn the call to the operator and open the call for Q&A. Operator, we are ready to take questions.

Question-and-Answer Session

Operator

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] We have the first question from line of Austin Moldow. Please ask your question.

Austin Moldow

My first one is on sales and marketing. Wonder, if you could tell us, what the marketing and user acquisition total spend was in Q2? And if you're able, I'd be interested in knowing more specifically, what your split was between what you've spent on brand and traffic acquisition in the quarter?

Christian Arnell

One second as we translate for CEO, please.

Austin Moldow

Okay.

Xing Jin

Okay. So, we have RMB43 million in spend on sales and marketing costs in the second quarter of 2019. Within that, 16 million was on payroll, the remaining 27 million is on customer acquisition. So, within the 27 million major was on branding and around 130 is on like we invest in app stores, and the remaining was on branding.

Austin Moldow

Okay, great. And also, I wanted to ask about mobile MAUs. The mobile MAU growth was really nice again this quarter. And I am just wondering if you could talk through, what you think has driven the acceleration to over 70% in the first half of this year from what was 40% through, all of 2018? Is there anything in particular that's resonating with your audience?

Xing Jin

For customer acquisition as you see, we didn't spend a lot of sales and marketing costs for customer acquisitions. The major change was we actually had a new version of our app being pushed to the public due in April 2019, which is the beginning of the second quarter. So since then, our product has been very successful in terms of attracting and retaining our customers and our users. So, I think that's the major contributor for the increase of our MAUs and the quality of our users. Our products change and improvements in the content offerings is to users.

Austin Moldow

And my last question is on purchasing users, which also grew quite rapidly this quarter. From my point of view, it looks like it was -- there was a pretty nice bump in newly acquired users. And I'm wondering, if there's anything to talk about in your sort of marketing expense for new customer or maybe why that's and so efficient for you, if there is anything to call out there?

Christian Arnell

Hey, Austin, I'm sorry. We had some audio difficulties there. Could you repeat your question quickly?

Austin Moldow

Sure. My question was on purchasing users, which grew quite nicely. Wondering, if you could talk through anything that's been helping them your marketing efficiency for acquiring new customers?

Xing Jin

Yes, I think growing in terms of our efficiency really is actually accompanied with our growth in the MAU. We do see some efficiencies improvements in terms of converting MAU active users into our presently user, and it's I think -- it's because of our operating and our community content actually assisted users to convert and help them to assist them to complete a decision making process. And the other thing is, I think in June, we have our like our annual June campaign in I think start from June 6th. It also actually helped the users to convert and the purchasing services from our platform.

Operator

We have the next question from the line of Natlee Wu. Please ask your question.

Jing Qiang

Hi. Thanks management for taking my question. This is Jing Qiang representing Natalie Wu. So, we have one question on the Company's guidance. Can the management share more color on the guidance and its breakdown? And we would like to understand what is top line trend going forward in the long run? Thank you.

Christian Arnell

I am sorry. Could you repeat the question again? We're having difficulty hearing.

Jing Qiang

Sure. Can the management share more color on the guidance breakdown? And also, we would like to understand what is the top line trend going forward in the long run?

Christian Arnell

One second as we translate this.

Xing Jin

So, for revenue breakdown, I can only offer the breakdown for the second quarter. I think the second quarter RMB285 million within that 79, which from 72, yes RMB72 million is from commission, the remaining is from information service. As you can see, our information service has been growing faster than the commission-based revenue.

And your second question on the top line trend going forward, I think currently our company's key KPI and of course our main driver is of penetration for medical aesthetic service industry in terms of the user base, and we need to in a short to medium around, we will balance between monetization and consumer experience. And in long run, I think we will start monetizing on the accumulative usage and it will contribute to our top line in the longer run.

Operator

We have the next question from the line Vincent Yu. Please ask your question.

Vincent Yu

Hi, guys. Congrats on quarter and thanks for taking my question. My first question is on the advertising revenue. So, we've seen advertising revenue -- sorry, information service revenue per service provider grow from around 77,000 to 96,000. So, what do we think about the potential like, what's the hallmark, what we see about these revenues grow going forward? And my second question is on the reservation revenue, ARPU, how should we think about ARPU going forward? And my third question is about competition, what we see the impact of the [indiscernible] promotion to us? And what we see our competition strategy in future?

Christian Arnell

One second as we could be discussed.

Min Yu

Thanks for the question and for the first question, what's long run or my forecast to the average revenue from information services from individual service provider. I think historically we do see the trends growing from average consumption from individual service providers on the cost [indiscernible] they stay with us longer, they were spending more. I think going forward this trend will still be the general trend in the long run.

And your second question seems like ARPU from commission based revenue is not very strong. The reason I think first of all, from a consumer prospective, if they want to book a surgery based services, they usually need to take like 20% down payments as the reservations fee, and they use surgery or the high ARPU services as if you pay the reservation fees. It's actually very expensive for online transaction, and it's naturally for users, will book services as relatively lower ARPU services or SKUs.

And I think in second quarter, we do have some revenue contributed from our company advancing June and usually we have provided the rope, and it's been deducted from our top line as from gross revenue to the net revenue. So, it will have some impacts on the commission per purchasing user. But in the long run, I think for the consumer, and in terms of if they want to consume more medical aesthetic services.

And we do see the medical aesthetic services, especially for those injections or lower services become cheaper and easy access for users. And it will also have certain impact on the average ARPU we can generate from commission based revenue. For third question about competition with the midpoint, and I think I will give the question to Mr. Jin, my CEO.

Xing Jin

I think the competition since I think, in June, as Vincent mentioned, it's being very competitive in the market, especially for those large traffic platforms, like [indiscernible], like Timo and like JD, and even Baidu. They have their own designated medical aesthetics app, individual app to compete directly with us. So all of that's being provided a much challenging market condition or environment compared to before, and we need to face the challenges competition really seriously.

So since in the beginning of the year, we have designed our strategies for the operation. This year will be major focus on customer acquisition. And for customers, we think we need to use [indiscernible] based products like what we have currently to provide better content and to improve engagement with the users and the different parties of the industry, i.e. like doctors, clinics, consultants, even the [KOLs] in the platform to better encourage them to communicate with each other and the share that useful contents with them and assist their decision making.

So, although from the traffic point of view, we are relatively in weaker position in terms of competition compared to the large traffic platforms like [indiscernible], but they also in the relatively weaker position [indiscernible] in terms of community content and the product, which is more informative for users to help them for decision making. So, we have some data analysis on our competitors doing the same June campaign.

The order size, per order is relatively much smaller than what we have. It being approved to that via a more convincing or dedicated platform of brands for customer to understand medical aesthetic services and makes the right choice for some of the higher ARPU SKUs. So, I think in long-run, we will be still focusing on consumer acquisition.

We have been spent right like most of our company resources in terms of teams or R&D resources in terms of improving our product, trying to improve engagement between users. And we have seen some of the good results from a traffic point of view. And I think we are also planning to have faster user increase in the next few quarters, and going forward, we will be still focusing on customer acquisition and the gap between the traffic with the large traffic platform and as will be smaller.

Vincent Yu

Thank you, management. Can I follow up with one more question?

Christian Arnell

Sure. Go ahead.

Vincent Yu

Yes. So, the last question around the phenomena like what we see sometimes our users can read out dairies and we watch our like online structure kind of [indiscernible] G&A and then the Company will go to the offline service provider and reserve and pay offline. So, in Chinese like we call free time. So, is there any way in the future we can try to deal with this kind of like issue? Thank.

Xing Jin

So, Vince, may I just reconfirm with the question because your voice was a little breakdown, please. So, you are asking for, yes, the users look at information and without the reserving through us and go directly offline. Is that your question?

Vincent Yu

Yes. So, basically, if they just try to utilize our information and they just book offline, is there any way we can manage the service provider to provide service through that way and paying us the commission fee?

Xing Jin

Yes. I think the commission in other way like CPAs based on the transaction facilitated on online platform. And we still be very, that's very important in revenue for us for sure, but we think as a more efficient platform, we would like to have, I think from the service provider point of view as well, they would like to get in contact with our user on a platform in even earlier stage rather than just as a later decision making stage of making reservation.

And I think for other vertical platforms, with very similar business model with us, but in different sector, not a lot of platform actually offering reservation on sales or [indiscernible] trying to get. But if there are efficient enough, they will be more likely tending to other information services type like we are currently seeing. So, it's been very natural for our information service grow faster than our commission based services.

It is for us, our user, every individual user on my platform is important resources for our revenue to generate revenues to us. So, we do have some policies to try to convince user to visit through us, and we also have some regulation qualities or rules to regulate those service providers who should pay me under the contract -- pay me commissioning on the development contracts with us. But going forward, I would still see information centers revenues will still grow faster than commission based revenue.

Operator

We have the next question from the line of Robert Cowell. Please ask your question.

Robert Cowell

Hi, management, thank you for taking my questions and congratulations on the really strong user growth. My questions are actually related to that. So, first, what is your sense of the total MAU across all the platforms and its vertical? That痴 the first one. And then the second one is, would you consider increasing the sales and marketing in order to drive even faster user growth? Thank you.

Min Yu

Thanks, Rob. For the first question, how about other platforms like our vertical competitors, what's the MAU to be frank, I知 not in the position to comment on that because we -- there are some other third-party service providers can provide some of the guidance to the other platforms other competitors MAU, but I will be focused on our own strategy and our NAV growth. We do have some, as I mentioned to even market earlier and you can see from historical than this.

We do have some seasonality in terms of sales and marketing spending. We usually spend more in second and third quarter of year and we spend relatively less in the first quarter and fourth quarter. But this quarter, this second quarter seems we are not spending a lot of the sales and marketing because we do see our in the second quarter up 2019, our efficiencies in terms of acquiring customers being improved compared to the past year.

The reason why I think I explained earlier is because our major improvements in terms of the product and content we offering to the general public and users. And in the third quarter as the seasonality going on, we will prepare for the high seasons in the fourth quarter of the year, and we will invest more in terms of sales and marketing. And we are trying to generate more users and let them get on to our platform and convert them into purchasing users in the next few quarters.

Robert Cowell

Maybe if I could ask the follow up. Then do you have a project for in the longer term, how big you think your platform can be in terms of total MAU?

Christian Arnell

One second, let me translate quickly.

Xing Jin

So, Rob, company only officially provided a forecast on the next few quarters, top line range. For other numbers operating metrics forecast, we are not able to provide at the moments. But as you probably can monitor in some way, [indiscernible] Christmas Day will provide a reference point for you in terms of our traffic goals and the user base. As I said earlier, our major goal for long run is to trying to get more users, and again, more penetration into the general medical asthmatic service consumer based.

Operator

We have the next question from the line of Brian Gong. Please ask your question.

Brian Gong - Citi

This is Brian Gong from Citi. Congratulations for the fantastic results. I just have one question. I know the Company is focusing on, I mean, new gross right now. But just wondering, if you can share with us your thoughts about what could be the other potential monetization opportunities in your view, I mean, except for our current revenue resources? Thanks.

Christian Arnell

One second, let me translate quickly.

Min Yu

Yes. Thanks for the question. I think, first of all, this question we need to divide that into two parts. First, in terms of medical aesthetic services itself, we are currently operating, generating most of our revenues from. We are working on a lot of -- working on and testing a lot of monetizing strategies. At the moment, that will be -- the goal for that is to improve the matching efficiencies between our users and our service providers on the platform, i.e., we are doing very persuasive user behavior analysis and labeling the differences users characteristics features.

And the matching and developing and matching the relevant product, which can be better help for this provider to get connected with the targeted users on the platform. And of course, we will -- at the right time, we will use, we will be monetizing on that kind of product. For the example currently, we have a video broadcast for video diagnosis on between consultants and our users on the platform. Although, we are currently not monetizing on that and also their private messages, et cetera.

All these tools we provide some users, to provide to providers on a platform get connected with these users really in a certain stage was the time is appropriate or we our user base has been increased improved to the right size, and we will have more opportunities to test monetization from there. This is one perspective. The other perspective is of course we will extend to other consumption healthcare field. For example dental, this year, we have dedicated a team working on the dental services.

Although, we are not aggressive in monetizing on dental service this year, but going forward, we think it will also contribute revenues and profit to our platform as a whole. Other than dental, we're also now testing some other like skin, ophthalmology, health checks et cetera for those consumption in healthcare clinics and get onto our platform. And we are also accumulating content and the community content and products for users in these fields.

Operator

[Operator instructions] We have the next question from the line of Murphy Min [ph]. Please ask your question.

Unidentified Analyst

So could you be pleased give more color on the revenue guidance of this year and also the margin. And any colors on the [indiscernible] guidance would be better? Thank you.

Xing Jin

As a company policy, we only provide the guidance for next quarter's top line with a range and therefore other financial related metrics, we do not provide official guidance.

Operator

[Operator Instructions] As there are no further questions at this time, I'd like to hand the call back to Christian Arnell for any closing remarks. Thank you.

Christian Arnell

Thank you everyone for joining our call tonight. If you have any further questions or comments, please don't hesitate to reach out to anyone. This concludes the call. Have a good night.

Operator

Thank you, sir. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.