So-Young International Inc. (NASDAQ:SY) Q2 2022 Earnings Conference Call August 16, 2022 7:30 AM ET

Company Participants

Vivian Xu – Investor Relations

Min Yu – Chief Financial Officer and Director

Conference Call Participants

Thomas Chong – Jefferies

Nelson Cheung – Citi

Leo Chiang – Deutsche Bank

Chloe Huang – CICC

Operator

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

Thank you, operator, and thank you for joining So-Young's second quarter 2022 earnings conference call. Please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities and Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to those outlined in our public filings with the SEC, including our annual report on Form 20-F. So-Young does not undertake any obligation to update any forward-looking statements, except as required under applicable law. Joining us today on the call is Mr. Min Yu, our CFO.

At this time, I would like to turn the call over to Mr. Min. Thank you.

Min Yu

Thank you all for joining our second quarter 2022 earnings conference call. Since the beginning of 2022, we have faced many challenges from the external environment, including the macro environment and particularly the resilience of COVID-19 in multiple cities across China, which had a negative impact on business activities and the consumer sentiment. According to data from the National Bureau of Statistics of China, total sales of consumer goods in the first half of 2022 decreased by 0.7% year-on-year. While the situation further weakening in the second quarter when total sales of consumer goods decreased by 4.6% year-over-year.

In Q2, the resurgence of COVID-19 affected the top four medical aesthetics consuming cities by GMV with Beijing, Shanghai, Guangzhou and Shenzhen. Total GMV for the four cities from our platform in the second quarter of 2022 decreased by 71% year-over-year. We were actively adapting and adjusting the operation strategy of second and third-tier cities, driving the revenue contribution of emerging cities to make up for the decline. As a result, in the second quarter, total revenue reached RMB309 million, an increase of 3% from Q1. At the same time, we further increased the number of SKUs on our platform to optimize the online transaction experience with more transparent pricing and attractive incentives for end users, particularly as a way to make up for the decline in surgical GMV due to travel restrictions and safety risk considerations under the epidemic.

GMV of non-surgical treatments in the second quarter of 2022 increased 5% quarter-over-quarter. GMV of non-surgical treatments in June increased 33% compared with May and increased 40% compared with April. Meanwhile, we were prudent with our expenses management and narrowed our losses in the quarter by improving operating efficiency. In the second quarter of 2022, sales and marketing expenses decreased by 41% year-over-year, among which branding and the user acquisition expenses as a percentage of total revenue decreased to 20% from 33% a year ago.

Operating loss narrowed by 46% quarter-over-quarter and we had an operating profit in June. In terms of operating strategy recently, we launched the So-Young Select in cities, including Beijing, Shanghai, Chongqing, Hangzhou, Shenzhen and Wuhan. We strictly selected 8% of the local high-quality and high standard service providers drawn from six categories by applying more than 30 rating criteria, including product, price and service. For service providers, strict selection criteria enables them to strengthen their core competitiveness and support growth recovery in the post-pandemic period for users strict selection criteria address their preference, so they can benefit from the reliable consumer protection – protection provided by us. This helps users improve their decision-making efficiency.

Wuhan Miracle, which we acquired in the third quarter of 2021, also performed well in the second quarter of this year. According to its disclosure of reported results, the revenues were RMB120 million in the first half of 2022, up 8% year-over-year despite the challenging industry environment. Wuhan Miracle is very focused on continuously improving the quality, functionality and the marketability of this self-developed proprietary products. In the first half of the year, the sales of self-developed products accounted for more than 65% of total equivalent sales. We believe this business will continue to achieve stable growth in the future.

Now let me give you an overview of our results for the quarter. Please be reminded that all amounts quoted here will be in RMB terms. While our business, especially in our top markets was negatively impacted by COVID-19, the good news is that we saw a gradual recovery and a steady increase in revenues quarter-over-quarter. For the second quarter of 2022, total revenues were RMB309.1 million, a 31.6% decrease from the same period in 2021 and a 3% increase from the previous quarter. Information services and other revenues were RMB220 million, around 40% decrease from the same period in 2021 and the 10% increase from the previous quarter. The sales of equipment and the maintenance services revenues of Wuhan Miracle remained stable on a quarter-over-quarter basis. We also adjusted our operational expense management dynamically in response to weakening macroeconomic environment.

Total operating expenses were RMB246.6 million, a 26.5% decrease from the same period in 2021 and a 9.2% decrease from the previous quarter. Sales and marketing expenses were RMB121.7 million, a 41.1% decrease from the same period in 2021, and a 4.3% decrease from the previous quarter, primarily due to a decrease in branding and user acquisition expenses. General and administrative expenses were RMB61.8 million, an increase of 9.4% year-over-year and a 5% decrease quarter-over-quarter. The increase was primarily due to the consolidation of Wuhan Miracle and the increase in professional services fees. Research and development expenses were RMB63.1 million, a 12.5% decrease from the same period in 2021, and a 20.1% decrease from the previous quarter. The decrease was primarily attributable to a decrease in payroll costs associated with a decrease in headcount.

In the second quarter, So-Young's profitability improved quarter-over-quarter as we further optimize operations and improve cost controls. The net loss attributable to So-Young International, Inc. narrowed by more than 51% quarter-over-quarter. Non-GAAP net loss attributable to So-Young International Inc., which includes the impact of share-based compensation expenses were RMB22.7 million, narrowed by more than 53% quarter-over-quarter.

Now for our balance sheet. As of June 30, 2022, cash and cash equivalents, restricted cash and term deposits and short-term investments were RMB1.6 billion compared with RMB1.75 billion as of December 31, 2021. For the third quarter of 2022, So-Young expects total revenues to be between RMB310 million and RMB330 million. The above outlook is based on the current market conditions that reflects the company's preliminary estimates of market and operating conditions and the customer demand. Our key operating principles and the financial objectives and that include focus on quality growth, improve operating efficiency and optimize cost structure and maintain net cash position.

During the quarter, we have made progress in executing these objectives. We saw losses narrowed quarter-over-quarter. We currently have nearly RMB1.6 billion in cash position, which gives us the financial flexibility to grow the business.

Looking ahead, we expect the situation will remain very fluid and impact of COVID-19 will affect consumer behavior and medical service provider operations in many ways, but we remain optimistic about the long-term outlook of China's economy and long-term growth prospect of So-Young. We are uniquely positioned to swiftly adjust in a highly uncertain market environment and create value for our shareholders.

This concludes our prepared remarks. I will now turn the call to the operator and open the call for Q&A. Operator we are ready to take questions.

Question-and-Answer Session

Operator

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

Thomas Chong

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

Min Yu

Yes. Yes, please go ahead.

Thomas Chong

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

Min Yu

Okay. Yes, first the question the trend for sales and marketing costs, customer acquisition costs – excuse me, sorry. All right. No worries, I will go ahead. So, for the sales and marketing it accounts around like 49%, of the total revenue in the second quarter, and it includes the payroll cost for our sales and marketing personnels and offline BDs. Other than that, the expense spent on customer acquisition of around 20% to 30% in total of the revenue. And going forward, I think, in the next of few quarters, we will still keep a very prudent cost control approach. For sales and marketing cost, i.e. for customer acquisition cost, we will keep it within the 30% to 35% range. And for the total sales and marketing cost, we will still keep the same level in terms of the revenue going forward.

And for your second question what's the competitive landscape for the industry, including surgical and non-surgical? I think for surgical services, it has been very challenging in the past few quarters. One of the reasons is, I think, because surgical is relatively much more expensive than non-surgical services. And the current macro-economic conditions have been very challenging for the consumption market.

I think the other reason is for the COVID-19 the impact for the travel ban, because for surgicals, usually the good doctors or the high quality surgical service providers who are in large scale cities like Beijing, Shanghai, Chengdu managing those very developed cities, but because of the travel ban applied by the government to contain COVID extension, I think, that it has been impacted the consumers to travel to those cities, to apply or take those services.

And for non-surgicals, and I think for the competitive landscape, the surgical market So-Young is still in a better position compared to other competitors. But still it's been a systematic negative impact to surgical. It has been going down continuously for the past few quarters. And for non-surgical services you still keep developing at a relatively healthier pace, but I think, in terms of competitors are still mainly for [indiscernible] and us as a major participant. Other than that all other smaller competitors have been relatively less competitive compared to the previous years. That's the second part of your question.

I think the third question is how the operating expenses going forward? Are we going to apply check cost control or…

Operator

[Indiscernible]

Min Yu

Sorry, operator can you put yourself on mute? Okay. Yes, for the third part of the question, I think, going forward, we will still keep very strict cost control policies internally. In terms of operating costs or expenses we have been – we will still – we can see the downward trend in the next couple of quarters and to keep the business in developing much high quality efficiently. So I think that's the third part of the question.

Thomas Chong

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

Operator

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

Nelson Cheung

Hi, thanks management for taking my questions. I have few questions. My first question is regarding your guidance. We like to know whether your guidance reflect what kinds of consumption expectations or recovery trend for the company? And any metric or trend that you could share in July and August about the business, that would be great.

And then my second question is regarding the reservation service. So, given weaker consumption demand right now, is there any further steps that you could still retain or re-acquire the user when the economy or the macro improve and would it translate into additional acquisition cost for us? Thank you.

Min Yu

Okay. Yes, for first part of your question, yes, that guidance the RMB310 million to RMB330 million is currently our best estimation for the quarter. To be frank, the macroeconomic conditions here in Mainland China is not as positive as we used that to be expected. As you can see, the July economic numbers has been quite weak. And although we've seen a slow recovery in consumption, but it still needs time to recover to a pre-pandemic status, i.e. still need a couple of quarters to recover to like third quarter, fourth quarter last year.

And for your second part of your question.

Vivian Xu

On the reservation.

Min Yu

Yes, for the reservation revenues, because the economic condition has been quite challenging and of course, the consumers being relatively more hesitated to spend money and we have been containing our cost in terms of sales marketing as well to make sure the efficiencies of marketing investments.

Going forward, I think, once we see a very clear trend of consumption recovery or income personal disposable income increase, and we will – of course, we will try to spend more in terms of customer acquisition. We are confident that once the market or consumption being recovered, we will still be able to acquire new customers in the market. So that's why we have a 300 – we still need to see the economic development in the next couple of months. Hopefully, everything can have a much more satisfactory conditions in the fourth quarter and which can have a better performance in close of the year. So I think that's the best estimate I can give. And hopefully, it answers your question.

Nelson Cheung

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

Operator

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

Leo Chiang

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

Min Yu

Okay. For the paying service providers I think that because in the second quarter it's been like in Shanghai and Beijing, those large cities used to be very important or takes around like these – the top four cities account around like 30% to 34% of our total revenues in 2021 and all of them have impacted by the COVID-19. And we try to help the service providers recover from the pandemic. And also, we have different – we improved our operating policies or strategies in the lower-tier cities. We help service providers to get it back to the platform and trying to acquire customers from our platform.

So we have different policies to let them have relatively lower cost and high efficiencies to acquire customers. It helped to recruit more lower-tier cities service providers to the platform. And hopefully, they can get a return for their investment and get new customers in the next few quarters. We will see in the future, so how these – if the trends can consist. But we – still we will be very conservative because of I think the macroeconomic condition is not – is still very challenging, and we will try our best to help customers or service providers to survive and/or even like get back to the revenue in (0:24:19) the next few quarters.

And for the second question, So-Young Select, it has been a new product we rolled out in July. And then still, it's been currently testing in the six cities I just mentioned in the remarks. From current data, it did help to improve the service providers' user conversion rate, and we will keep tracking the data. And although I have to say, currently, I can't disclose more on data, how the – about the revenue contributions because of the So-Young Select. Probably, in the third quarter financial results, we will see more color.

Leo Chiang

That's very helpful. Thank you.

Operator

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

Chloe Huang

Hi, management. Thanks for taking my questions. So congratulations on the solid results of the second quarter. So my first question is about the ARPU. So we have seen a 42% decrease year-over-year on the ARPU for the service providers in the second quarter. So should we expect the trend to continue? And my second question is that we acquired Wuhan Miracle in the third quarter 2021. So could you please give us some more color about the synergies? And what is the future prospect of Wuhan Miracle? That's it. Many thanks.

Min Yu

Okay. For your first question, ARPU for service providers, I think, to be frank that is because of the, I think, service providers invested less because of the COVID impact. It's the same like as we invested less in sales and marketing on other platforms as well. So it's been very – I think it's a prudent approach to better cost – for better cost control. For the future, that decreasing trend can consist in the past couple of months, including June and July. I think currently in August, we are not seeing further decreasing in terms of service provider spending on the platform, but gradually or slowly recovering, that's the current trend. I think it's also in line with the current economy recovery trend. Hopefully, when all the pandemic impact being – all the pandemic control policy being loosened, I think it's – I think service providers will start to invest more on the platform and the ARPU will also be back to a normal level.

And for your second question for the Wuhan Miracle synergies, we have tested a new approach in terms of helping the Wuhan Miracle's product better approach the end users on the platform and we do see positive signs. And there is new products by Wuhan Miracle in the pipeline, and we will also apply the policies or the operations together and help the new product being better accepted by the platform users and also by the market. So although I think it cannot currently been seen or reflected from the financial numbers, we do expect that we'll have a better result in – I think in 2023 rather than in 2022.

Chloe Huang

Okay, very helpful. So I will have a next up question. So about the ARPU, I'm wondering is it – the decrease, is it related to like we are exploring the lower-tier cities and the institutions, they are paying less than the higher-tier cities?

Min Yu

I think the major reason is because of Shanghai and Beijing. These two cities account for – the top four major cities account for 35% or 30% of the total revenues in 2021. And in the second quarter, Shanghai, basically, we have no revenue in full quarter. And in Beijing, we have like a third of the revenue because half of the revenue – regular quarter revenues because of the COVID. I think other than those impacts for those lower-tier cities they have been spending or invested in a very stable status. So they didn't spending more, but also the – we're also not seeing they are decreasing their spending on the platform, but the major cities have been impacted materially. So I think if being back to normal, the Shanghai institutions will spend more, and then we will see the ARPU recovery from those major cities.

Chloe Huang

Okay, many thanks. I have no further questions.

Min Yu

Thank you.

Operator

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

Vivian Xu

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

Min Yu

Thank you all. Bye.