So-Young International Inc. (NASDAQ:SY) Q2 2023 Earnings Conference Call August 21, 2023 7:30 AM ET

Company Participants

Vivian XU - IR

Xing Jin - Co-Founder, Chairman and CEO

Hui Zhao - CFO

Conference Call Participants

Thomas Chong - Jefferies

Chloe Wei - CICC

Operator

Ladies and gentlemen, thank you for standing by for So-Young's Second Quarter 2023 Earnings Conference Call. [Operator Instructions] 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, Ms. XU.

Vivian XU

Thank you, operator, and thank you for everyone for joining So-Young's second quarter 2023 earnings conference call. Joining me today on this call is Mr. Xing Jin, our Co-Founder, Chairman and CEO; and Mr. Nick Zhao, CFO.

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 appliable law.

At this time, I would like to turn the call over to Mr. Xing Jin. Yes, please.

Xing Jin

[Foreign Language] Hello, everyone. Thank you for joining So-Young's second quarter 2023 earnings call.

We continue to regain solid growth momentum during the quarter, with both our financial and operational metrics climbing steadily. Total revenue exceeded the upper range of our guidance, increasing 33.3% year-over-year to RMB 412 million, a new quarterly high since the beginning of 2022. This translates into improving profitability, with non-GAAP net income attributable to So-Young of RMB 15.5 million during the quarter compared with a loss of RMB 22.7 million during the same period last year.

Let me now walk you through the progress we made during the quarter, starting with our community e-commerce POP business. This business faced significant challenges during the pandemic controls in China but has seen the pace of it probably accelerated during the quarter. The resurgence of confidence among medical aesthetic institutions was driven by the restoration of regular operations at a promising gradual increase in spending on medical aesthetic procedures.

The number of subscribing medical service providers and information service revenue increased sequentially by approximately 21% and 40%, respectively. As sentiment among our users makes a gradual recovery, their preferences have shifted back towards seeking real-time interaction and customized services beyond simply acquiring product information and pricing details. Demand have diversified, requiring additional customer support and the services to facilitate the decision-making process.

Turning to our products. We also optimized the So-Young app to improve the user experience, particularly by enhancing algorithms and user recommendations and fine-turning operations for different demographics based on their in-app behavior. These tweaks allow medical aesthetic institutions to identify and target specific users with greater speed and accuracy, significantly improving overall customer acquisition efficiency and conversion rates.

At the same time, the combination of our high-quality user content and the powerful network effect our community creates has allowed us to significantly broaden the reach and improve services for user acquired through own channels such as our WeChat public accounts and other communities. Looking ahead, as we continue to execute our diversified brand strategy, we will continue to acquire more users with our premium content, practical tools and high-quality services.

In terms of services, our focus remains squarely on nonsurgical medical aesthetic procedures. We'll continue to build a network of premium doctors in this segment and strengthen the promotion of our hot SKUs, such as the body controller and Fotona4D solution. We also launched a seasonal beautiful eye campaign in June.

To support these initiatives, we are looking closely with medical institutions to enhance their brand equity and enrich their product offerings. Online bookings and GMV for nonsurgical procedures increased by 26% and 52% year-over-year, respectively.

For surgical services, we recently launched a program in partnership with public hospital where doctors create premium health content and act as ambassadors for eye procedures, leveraging the strong relationship we have with premium doctors on the esteemed and broad list. We are working together to increase interest, content and awareness of eye surgeries, a surgical category that is in high demand. Our approach includes in-depth analysts of user preference and real-life case studies, coupled with the rollout AI-powered eye testing tools, which recommended the latest trends in eye shapes.

Now I will move on to the progress of So-Young Prime. As proprietary one-stop nonsurgical medical aesthetic solution, So-Young Prime has steadily expanded in size and scale since its launch in last August. As of end of the second quarter, So-Young Prime is now partnered with over 140 medical institutions and over 450 doctors in 28 cities, which reflects the progress we have made in ensuring a seamless user experience and enhancing the operation, operational efficiency of collaborating institutions. Simply put, So-Young Prime's unique value proposition is its quality and user experience.

From the strategic screening of doctors, qualifications and the ability to accurately diagnosis to their treatment plans and the uncertainty of their products, we want to ensure that the user experience is flawless. Fulfilled orders through So-Young Prime increased 83% sequentially during the quarter and is increasingly contribute to revenue.

While So-Young Prime has already demonstrated so much potential, we have cognitive that it is still in the early stages of development. We have made significant progress, but there is still plenty of room to strengthen its reputation as a brand of premium and professional light medical aesthetic procedures.

In addition to broadening and expanding product categories, we want to solidify the association, our close partnership with respected doctors have with the uniqueness and specialization of our platform. As we have reiterated -- sorry, iterated multiple times in recent quarters, the light medical aesthetic service segment is critical for our future growth. So-Young Prime guarantees a high-quality user experience, both online to off-line through its unique operating model and meticulous creation of products and services.

Lastly, I would like to touch on our supply chain business, which includes Wuhan Miracle. After years of research across the industry developed a deeper understanding of its dynamics, we believe it is an ideal time for So-Young to develop new revenue streams along the medical aesthetics -- aesthetical industry value chain by offering upstream products.

During the quarter, revenue from our supply chain business was RMB 86.3 million, an increase of 32% year-over-year, accounting from 21% of total revenue and increasingly contributing to our bottom line. We acquired Wuhan Miracle in 2021 to tap into the medical laser market as a first step. Last year, we expanded further upstream by securing the exclusive distribution rights for the Korea brand [Elevess] for their injectable HA fillers. Last month, we secured exclusive 10-year distribution rights for [indiscernible] and new face filler products.

We have only just begun to explore opportunities by moving upstream with these partnerships. And based on their success so far, we are confident they will significantly enhance our appeal to users and product portfolio in the light medical aesthetic segment.

In summary, our legacy business continues to see the pace of recovery pick up pace, which puts us in a position to confidently allocate resources towards new high-quality growth ventures such as So-Young Prime and our supply chain business. We strongly believe these new ventures reflect the future of the industry and the tremendous opportunities its long-term growth will create. Our focus throughout the remainder of the year will be the further driving high-quality growth, refining operations strategies, enhancing customer acquisition channels, carefully managing costs and consistently improving our financial performance to create value for all shareholders.

I will now turn the call over to our CFO, Nick, to review the financial results for the second quarter before taking your questions.

Hui Zhao

Hello, this is Nick.

Please be reminded that all amounts quoted here will be in RMB. Please also refer to our earnings release for detailed information about our comparative financial performance on a year-over-year basis.

Total revenues during the quarter were RMB 412.1 million, up 33.3% year-over-year and exceeding the high end of our guidance. The increase was primarily due to the increase in average revenue per paying medical service provider and other revenues generated by So-Young Prime.

Before I break down revenues further, I'd like to illustrate some financial statement presentation changes we made this quarter to better reflect the development of our strategic upstream supply chain business.

Starting this quarter, revenue from the sales of medical aesthetic injectable drugs, which had been included in information services and other revenues in previous quarters, is now combined with the sales of equipment and maintenance services revenues. And the new line item is now renamed sales of medical products and maintenance services.

With this in mind, information services and other revenues were RMB 298.9 million, up 40.2% year-over-year, primarily driven by an increase in average revenue per paying medical service provider and other revenues generated by So-Young Prime. Reservation services revenues decreased 12.1% year-over-year to RMB 26.9 million, primarily due to the operating strategy, which gives higher subsidies to end users. Sales of medical products and maintenance services revenues were RMB 86.3 million, up 32.0% year-over-year, primarily due to an increase in sales of both equipment and injectable drugs.

Cost of revenues were RMB 150.4 million, up 43.9% year-over-year. The increase was primarily due to an increase in cost associated with So-Young Prime and Wuhan Miracle. Once again, the financial reporting changes I mentioned before also applied to cost of revenues.

Within cost of revenues, cost of services and others were RMB 106.5 million, up 54.4% year-over-year, primarily due to an increase in costs associated with So-Young Prime. Cost of medical products sold and maintenance services were RMB 43.9 million, up 23.6% year-over-year, primarily due to an increase in cost associated with Wuhan Miracle.

Total operating expenses were RMB 282.4 million, up 14.5% year-over-year. Sales and marketing expenses were RMB 137.9 million, up 13.3% year-over-year, primarily due to an increase in expenses associated with branding and user acquisition activities

G&A expenses were RMB 92.3 million, up 49.4% year-over-year due to 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 RMB 52.1 million, down 17.4% year-over-year, primarily due to improvements in staff efficiency. Income tax benefits were RMB 0.8 million compared with income tax benefits of RMB 0.1 million in the second quarter of 2022.

Net loss attributable to So-Young were RMB 2.6 million compared with net loss of RMB 32.3 million during the same period last year. Non-GAAP net income attributable to So-Young was RMB 15.5 million compared with 22.7 million non-GAAP net loss attributable to So-Young in the same period of 2022.

Basic and diluted loss per ADS attributable to ordinary shareholders were RMB 0.02 and RMB 0.02, respectively, compared with basic and diluted loss per ADS attributable to ordinary shareholders of RMB 0.3 and RMB 0.3, respectively, during the same period of 2022.

Net increase in cash and cash equivalents, restricted cash and term deposits, short-term investments in this quarter is RMB 56.3 million. And net cash inflow from operating activities this quarter is RMB 90.9 million. We have ample cash on hand, with total cash and cash equivalents, restricted cash and term deposits, term deposits and short-term investments of RMB 1.5 billion as of June 30, 2023, compared with RMB 1.6 billion as of December 31, 2022.

For the third quarter of 2023, we expect total revenue to be between RMB 380 million and RMB 400 million. The above outlook is based on our current market conditions that reflect the company's preliminary estimates of market and operating conditions and the customer demand.

This concludes our key remarks. I will now turn the call to the operator and open the call for Q&A. We are ready to take questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Today's first question comes from Thomas Chong at Jefferies. Please go ahead.

Thomas Chong

Hi. good evening. Thanks management for taking my questions. I have two questions. My first question is about what's the major driver behind the significant growth in revenue in Q2? And where do we expect the medical aesthetic market to trend in Q3 and the second half? [Foreign Language] And my second question is about the reason for the significant narrowing of the net losses in both year-on-year and on a sequential basis. Where should we expect the profitability trend in the second half?

Xing Jin

[Foreign Language] Thanks, Thomas. Let me translate and get back to you soon. So the Q2 results were better than expected, allowing us to regain a growth trajectory. Total revenue was RMB 412 million, an increase of over 30% both year-over-year and sequentially and a new quarterly high since the early 2022.

On the user front, we launched a seasonally beautiful eye campaign in June, leveraging content from our community and the popular SKU to promote summer deals, including products for eye anti-age, contouring, wrinkles and slimming among others. The number of purchasing users increased by 24% year-over-year and GMV increased by 40% year-over-year in Q2 as a result, reflecting strong demand.

On the institutional front, sentiment has improved as it gradually increased spending on information services products and the overall marketing. During the quarter, we optimized our infrastructure for algorithms and user recommendations to help institutions improve user acquisition and operational efficiency.

Lastly, we also benefit from an increasing diverse stream of revenues. Revenue from our upstream supply chain business increased by 32% compared to the same period last year, contributing 21% of total revenue. Having only launched about one year ago, it's impressive to see So-Young Prime increasingly begin to contribute to revenue.

Looking forward to Q2 and the second half of this year, we believe the medical aesthetic marketing -- market will trend in line with the overall consumption environment, gradually gaining momentum and trending upwards.

Despite uncertainties and volatility in the market, we will maintain growth momentum and adjust our strategy according to market dynamics. At the same time, we will continue to build and develop infrastructure that will allow us to expand both upstream and downstream of the value chain.

Hui Zhao

Thank you. I think the increase in our net profit -- non-GAAP net profit and the narrowing down of the GAAP net loss is mainly due to the combined impact of the increase in revenue and the improvement in our operational efficiency. The operational -- operating loss narrowed by over 35% year-over-year and sequentially.

On a non-GAAP basis, we were profitable, with net income of RMB 15.5 million during the quarter and net income of RMB 12.7 million in the first half of the year of 2023 compared to a loss of RMB 22.7 million and a loss of RMB 17.9 million in the same period last year. Looking forward, we continue to grow revenue, improve operating efficiency and create more profit for the company and our shareholders. Thank you.

Operator

Thank you. And our next question today comes from [Li Xing with Guoyuan Securities]. Please go ahead.

Unidentified Analyst

Hi, good evening, and thanks for management taking my question. I would like to say congratulations first on the growth momentum and the improved profitability in this quarter. And I have one question about MAU. What's the estimate for future MAU trend? [Foreign Language]

Xing Jin

[Foreign Language] Thank you. In Q2, the number of purchasing users increased by 24% year-over-year, while GMV increased by 40% year-over-year. With demand gradually growing, conversion rates from MAU is also improving. Traffic on our platform is mainly generated from these three sources: So-Young app, private domains and other operational channels. We are confident that traffic will continue to grow.

Firstly, the MAU metrics disclosed in the earnings release reflects traffic from So-Young app, which is expected to continue being the primary source going forward. We will continue to attract more organic user traffic through community content operations like the media and improving engagement with innovative tools.

Secondly, for those traffic from private domain, we are developing strategies to improve user conversion, and we will leverage the experience we have gotten from So-Young Prime and apply this to other business as well.

For traffic from other channels, we will maintain our cautious approach when it comes to spending and marketing. We are placing more of an emphasis on content operations and leverage our competitive advantage in rolling out content to drive conversion rates on Douyin, Little Red Book, Kuaishou while, at the same time, acquiring more users through live broadcasting. We will also attempt to introduce links to our platform in channels to expand the direct user conversion channels. Thank you. That's all.

Operator

Thank you. And our next question today comes from [ Katrina Zhou ] with Citigroup. Please go ahead.

Unidentified Analyst

Hi, thanks management for taking my questions. This is [ Katrina ] from Citi asking on behalf of Nelson Cheung. Can management share with us more about the progress of So-Young Prime in the second quarter and the trend in the second half of the year? [Foreign Language]

Xing Jin

Thank you for your question. It has been just one year since the launch of So-Young Prime last August. Over the past one year, we streamlined the process and adjust the operational strategies while building So-Young Prime out to scale. With one year of operational history behind us, So-Young Prime now covers over 140 institutions into 28 cities, providing a premium service experience for a large number of users.

As a one-stop nonsurgical medical aesthetic solution, we established in collaboration with institutions, So-Young Prime is still in the early stages of development. We launched a series of promotional campaigns in Q2 to gain significant mile share among users, strengthening its brand and recognition as a professional nonsurgical medical aesthetic platform and has steadily expanded size and reach. In each Q1 and Q2 of this year, fulfilled orders through So-Young Prime increased by over 80% sequentially, building upon sound word of mouth. In Q2, revenue generated by So-Young Prime began increasingly contributing towards revenue.

Looking forward to the second half of this year, So-Young Prime will continue to strictly access -- assesses the quality of institutions and services on the platform as it grows in size, improve operational efficiency of participating institutions and strengthen its professional nonsurgical medical aesthetic brand image.

We are also exploring opportunities to build partnerships with upstream players along the supply chain to reduce product operating costs, improving operational efficiency and establishing synergies between our various business segments.

Operator

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

Chloe Wei

Okay, thanks management for taking my question. So my question is for Nick. And could you give us some color on the reason for the year-over-year decrease in the gross margin and as well as the trends so as going on? [Foreign Language]

Hui Zhao

Okay. Thanks for the question. The decrease in gross margin was mainly due to changes in our revenue mix. In Q2 2023, our information and reservation services maintained high margin. The gross margin for sales of medical products and maintenance services is lower than our information and reservation services.

Our So-Young Prime business is still in the early stage of development with a lower gross margin. In addition, we've launched promotional campaign for So-Young Prime during this quarter, resulting in a decrease in gross margin.

In the short term, we expect gross margins to remain at approximately similar level as we continue to invest in So-Young Prime's promotional activities and expand sales of medical products and maintenance services. As we build our supply chain capabilities and operational efficiency improvements for So-Young Prime at scale, gross margin will begin improving again. Thank you.

Operator

Thank you. We are now approaching the end of the conference call. Thank you for your participation in today's conference. You may now disconnect, and have a good day.