So-Young International Q1 2023 Earnings Call Transcript

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May 22, 2023

There are 5 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by for SUI Young's First Quarter and 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 would now like to turn the meeting over to your host for today's call, Vivian Xu.

Operator

Please proceed, Ms. Xu.

Speaker 1

Thank you, operator, and thank you, everyone, for joining Sohyang's Q1 2023 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.

Speaker 1

Potential risks and uncertainties include, but are not limited to, online in our public filings with the SEC, including our annual report on Form 20 F. Soyang does not undertake any obligation to update any forward looking statement, except as required under applicable law. Joining me today on the call is Mr. Xin Xin, our Co Founder, Chairman and CEO and Mr. Nick Zhao, CFO.

Speaker 1

At this time, I would like to turn the call over to Mr. Xin Jin. Hello, everyone. Thank you for joining Sohuang's Q1 2023 earnings call. We kicked off 2023 with a strong financial performance as the effects of the pandemic recede and the gradual recovery of medical aesthetics industry gains momentum.

Speaker 1

Total revenue for the Q1 reached RMB310 1,000,000, a year on year increase of 3 percent and exceeding the high end of our previous guidance range. Street cost control matters and operational efficiency improvements resulted in a 15% year on year decrease in operating expenses, while our non GAAP net loss attributable to Sohyang International Inc. Narrowed significantly, decreasing by 94% year on year to 2,750,000. I will now walk you through the progress we have made on Sohyang Prime, our strategic priority this year. As we have emphasized on our last earnings call, the medical aesthetics industry in China is undergoing numerous structural shifts.

Speaker 1

Users are becoming increasingly more sophisticated and discerning. For example, middle class female users are major demographic growth within the large medical aesthetic sectors. They are increasingly showing distinctive consumption habits that reflect this structure shift, such as more attention to safety, service quality and cost for specific high frequency procedures such as antiaging, skincare and body stocking. Medical Institutions and on the other hand, face new challenges such as higher user acquisition costs, constant CapEx requirements to upgrade equipment and the lack of qualified doctors. This impacts their ability to expand.

Speaker 1

Prior to this structure shift taking hold, our focus was squarely on strengthening the numerous competitive advantage we have accumulated. This ban from user acquisition, streamlined operations and integrating upstream and downstream resources to ensuring the quality and authenticity of services and doctors. This competitive advantage enabled us to build significant barrel to entry, tap into broader verticals within the industry, soft pain points and offer a unique value proposition to both consumers and medical institutions. We launched Soyang Prime late last year, a proprietary one stop non surgical medical aesthetic solution. Sohyang Prime covers every process from user acquisition to pricing and delivery.

Speaker 1

In order to guarantee service quality and enhance the user experience, Our staff have their own service contracts within our partner medical institutions. Sohyang Prime was launched to widespread praise from consumers and has already generated repurchase rates significantly higher than any of the previous products launched on our platform. Medical institutions have been incredibly interested in signing on. By the end of the Q1, we have partnered with over 130 institutions in more than 25 cities. During the Q1, fulfilled orders through Sohyang Prime increased by 88% sequentially.

Speaker 1

Going forward, our near term goal is to further expand Sohyang Prime service network. This will solidify its position and strengthen its brand by focusing on popular SKUs, such as medical grade laser and injection treatment and body sculpting. This will also expand our market share for these categories and generate more buzz within the industry. With so much potential, we are confident that Sillion Prime will be a key growth driver for us this year as it expanded into more cities. I will now move on to our POP business.

Speaker 1

With the effects of the pandemic receding and the Chinese New Year holiday period behind us, the medical aesthetics industry have been undergoing a gradual yet uneven recovery. 1st and second tier cities are recovering at a faster pace than Tier 3 and below. Non surgical procedures are also recovering at faster pace than surgical procedures. Medical institutions, as a result, remain cautious on increasing marketing spend during the Q1, but they have gradually been increasing their activity as we get deeper into the Q2. Non surgical orders placed in April were 14% higher than the monthly average last quarter.

Speaker 1

For surgical procedures, the increase was 25%. With transactions on a platform accelerating, Marketing spend by medical institution is also significantly picking up in April. With the recovery clearly underway, we began to increase promotional campaigns across our platforms in March. Our focus was on SKUs that are in high demand, namely skincare and body sculpting. By optimizing the design of the so called Soyoung app, we now display recommendations for popular SKUs and popular doctors as well as offer discounts on surgical procedures.

Speaker 1

This incentivizes users to return to the platform, increases engagement and drive fulfilled orders and GMV growth. With the summer holiday season rapidly approaching, we will expand the number of medical institutions we partner with to increase the supply of key SKUs and strengthen user engagement and stickiness. After 10 years of rapid development, the skill and growth potential of the Chinese medical aesthetics industry remains enormous. The industry is standardizing at its growth, shifting from product driven to technology driven. Our focus throughout 2023 will be on high quality growth, empowering SME medical institutions and providing better products to consumers through services such as SohuangPrime.

Speaker 1

I am confident that this will strengthen our core competitiveness and improve our financial performance. I'll now turn the call over to our CFO, Nick, to review the financial results of the Q1 before taking your questions.

Speaker 2

Hello, this is Nick. The investments we made in our infrastructure infrastructure capacity and service expansion during the challenging environment last year are beginning to pay off and are reflected in our financial performance this quarter. Total revenues during the quarter were RMB310.1 million, up 3.2% year over year and exceeding the high end of our previous guidance. The increase was primarily due to an increase from the sales of equipment and maintenance services and other services. The revenue is composed of 3 main streams: information services, reservation services and revenue from sales of equipment and maintenance services.

Speaker 2

Information services and other revenues were RMB217.8 million, up 9.2% year over year, primarily driven by an increase in other revenues from Sohuang Prime. As our CEO, Mr. Jin, outlined earlier, the industry's recovery has been uneven. Reservation services revenues continued to feel the impact of COVID-nineteen on such call transactions, decreasing 29.9% year over year to RMB29.7 million but has also begun to rebound in April. Sales of equipment and maintenance services, which were from Wuhan Miracle Laser System Inc, were RMB62.6 million, up 7% year over year.

Speaker 2

Cost of revenues were RMB113.7 million, up 6.7 percent year over year. The increase was primarily due to investments made in service providers to enhance operational efficiency and improve the quality of services. Total operating expenses were RMB229.8 million, down 15.4 percent year over year. Sales and marketing expenses were RMB112.5 million, down 11.6% year over year, primarily due to the increase in expenses associated with branding and user acquisition activities. G and A expenses were RMB61.5 million, down 5.9% year over year due to operational efficiency improvement.

Speaker 2

R and D expenses were RMB55.8 million, down 29.3% year over year, primarily due to a decrease in payroll costs. Income tax benefits were RMB4.3 million compared with income tax benefits of RMB2.0 million in the Q4 of 2022. Net loss attributable to Sohyun International Inc. Were RMB11.9 million compared with a net loss of RMB66 1,000,000 during the same period last year. With revenue growing once again, our non GAAP net loss attributable to Sohyang International Inc.

Speaker 2

Narrowed significantly to RMB2.8 million, a decrease of 94.3% year over year. This compares with RMB48.3 million in the same period of 2022. Basic and diluted loss per ADS attributable to ordinary shareholders were RMB0 point 12 and RMB0.12, respectively, compared with the basic and diluted losses per ADS attributable to ordinary shareholders of RMB0.62 and 0.62, respectively, during the same period of 2022. We have ample cash on hand with the total cash and cash equivalents, restricted cash and term deposits and short term investments of RMB1.5 billion as of March 31, 2023 compared with RMB1.6 billion as of December 31, 2022. Looking ahead, we will continue to carefully monitor and control our expenditures and improve our operational efficiency as we navigate this period of recovery and leverage our ample cash position to strategically invest in our future.

Speaker 2

For the Q2 of 2023, we expect total revenues to be between RMB380 1,000,000 and RMB400 1,000,000. The above outlook is based on the company's preliminary estimates of market and operating conditions and the customer demand. Please be reminded that all amounts quoted here are in RMB. Please also refer to our earnings release for detailed information of our comparative financial performances on a year over year basis. This concludes our key remarks.

Speaker 2

I will now turn the call to the operator and open the call for Q and A. Thanks.

Operator

We will now begin the question and answer session. The first question comes from Thomas Chong with Jefferies. Please go ahead.

Speaker 3

How do you expect the market trend to be in the second quarter and not the second half? Thank you.

Speaker 1

Consumption across the board is steadily improving with consumption of medical aesthetics product gradually recovering as well. We launched a number of initiatives to attract additional users. This includes optimizing products on our platform for popular SKUs that have ample supply and package together complementary products to improve operational efficiency and shorten the time it takes for consumer to make a decision during sales payroll. The number of users placing orders and GMV during the quarter increased 23% 27% sequentially, respectively. Orders placed on our platform in April also increased when compared to the average during the Q1.

Speaker 1

As we discussed last quarter, medical institutions remain cautious on increasing marketing spend. During this quarter, the majority of marketing budget allocation came from top tier medical institutions, with module covering average marketing spend and the number of medical institutions are both gradually increasing April when compared with average last quarter. Over the long term, we expect the behavior of users to structurally change with an increasing focus being placed on the consumer experience and cost benefit. Both users and the medical institutions will change their consumption behavior, which we are strategically adapting to. Thanks.

Operator

Are you ready for the next question? Thank you. The next question comes from Nelson Chung with Citibank. Please go ahead.

Speaker 3

So let me translate myself. Okay, management share with us the progress of Sohuang Prime in Q1 and the outlook for the full year. Thank you.

Speaker 1

Sohuang Prime is the focus this year. While expanding its scale, we are at the same time working on enhancing the user experience, standardizing service processes and strengthening the delivery of service offline. This will ensure a high end consumer experience. On the product end, we partnered with doctors and experts to develop and upgrade the services and bundle them together to offer an easy to use and cost effective one stop solution. For example, we jointly developed innovative anti aging products that are exclusive to our platform.

Speaker 1

This includes a unique procedure using the Penicilla Ultrasonic Anti engine Cannon, which is specifically sought out by users. On leveraging our strong supply chain capabilities, we diversified our product offerings to strengthen user trust and choice. We download screen institutions to ensure they meet our high standard. We have trained medical teams and streamlined processes. As of the end of March, Sohuang Prime has expanded to over 130 institutions in more than 25 cities.

Speaker 1

Its light asset model improved user acquisition cost and operating efficiency and improved solid user experience makes it a unique value proposition. For few others through Sohyang Prime increased by 88% compared with last quarter, a trend that has continued into April. This year, we will continue to expand its reach and service scope. Sohuian Prime was developed with recent consumption trends in the light medical aesthetics market in mind. We are committed to maintaining a high end user experience by helping the industry grow overall, leveraging our supply chain expertise.

Operator

The next question comes from Chloe Wei with CICC. Please go ahead.

Speaker 4

So let me translate myself. Thanks management for taking my question. I have 2. So the first one is about can management maybe give us some color on the marketing strategy and maybe guide us through how will the marketing spend look like in the rest of the year? And my second question is for Nick.

Speaker 4

So the numbers of advertisers have decreased on a quarterly basis. So how do you expect the trend in Q2 and the second half of the year? Thank you.

Speaker 1

As we mentioned last quarter, our focus is really on hitting efficiency this year. Repurchase rate for online orders this quarter was 7 percentage points higher than 2 years ago. With a recovery underway, we'll be increasing marketing spend to educate users, we will support and advise medical institutions with their marketing spend. We will focus platform operations this year to increase user engagement. We will also expand cooperation with other platforms to explore new user acquisition opportunities and content.

Speaker 2

Okay. With regard to the paying medical institutions, we believe that the reduction of paying medical institutions is the result of cumulative impact of several factors. First of all, I think the Q1 the first impact is the seasonality impact. Q1 is traditionally slower in the marketing expenditures in our industry. Secondly, the challenging market situations in Q4 2022 resulted in significant shrink in the marketing budget from medical institutions.

Speaker 2

And thirdly, the infections after the open up of quarantine policy also caused a temporary and yet sharp reduction in users' visits to institutions, which lead to institutions' further reduction in marketing activities in Q1. With the gradual market recovery, we have seen the rebound of institution marketing activities. And we would expect a turning point in Q2 with regard to the number of paying medical institutions on our platform. Thank you.

Operator

Okay. Ready for the next question. Okay. The next question comes from Jesse Hsu with Credit Suisse. Please go ahead.

Speaker 4

We are very glad to see the significant narrowing of net loss in the quarter on top of revenue growth. So first, can you help us to better understand the factors and reasons behind the net loss in 1Q? And also, how should we look at the bottom line trend in the second quarter and also the second half of the year? Thank you.

Speaker 2

Thanks, JC. This is Nick. In the Q1, our non GAAP net loss attributable to Sohyang International Inc. Narrowed significantly compared with the same period last year with a year on year decrease of 94% to RMB2.75 million as we described earlier. The Q1 is typically slow for the medical aesthetic market as it coincided with the Chinese New Year and was impacted also by the rapid spread of COVID-nineteen after the open up of quarantine policy.

Speaker 2

As a result, revenue in the Q1 were impacted as well. As the impact of the pandemic recedes, we are deploying more people and marketing resources as the market recovers. So during the Q2 and throughout 2023, we will focus on enhancing user experience and improve institutional operational efficiency to kick start the revenue growth. We will also strictly control costs and expenses while improving the operational efficiency going forward. Thank you.

Operator

This concludes our question and answer session and the Sohyang International Incorporated First Quarter 2023 Earnings Conference Call. Thank you for attending today's presentation. You may now disconnect.

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So-Young International Q1 2023
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