Meitu, Inc. (1357) Earnings Call Transcript & Summary

Okay. So good evening, everybody, and welcome to Meitu's 2020 Interim Results Earnings Conference Call. This is Gary, Chief Financial Officer of Meitu, and joining me today to discuss our results are Wen Sheng Cai, the Chairman; Xinhong Wu, Founder and CEO; and Xiujuan Wang, COO. I would like to take this opportunity to remind you that our remarks today may include certain forward-looking statements. A number of recent factors beyond our control may cause the actual results to differ materially from those contemplated by these forward-looking statements. And during this call, we will present both IFRS and non-IFRS financial measures. We may also discuss general market conditions for our industry, and such information may come from a variety of sources outside of Meitu. For a detailed discussion of the risk factors we face and non-IFRS measures, please refer to our public documents on www.meitu.com. And for all the participants online joining the call using Zoom's app or browser, it would be great if you can re-name yourself and also include the organization that you represent so that it's easier for us to call upon your name for the question-and-answer session. So without further ado, I would like to turn the call to Mr. Cai. He will present in Chinese, followed by a translation. [Foreign Language]

Okay. [Foreign Language]

[Interpreted] So thank you very much for joining the call tonight. The first half of 2020 is full of challenges. It started off with the COVID-19 epidemic within Mainland China and turned into a global pandemic in the second quarter overseas. Subsequently, in June this year, the Indian government has suspended the operations of multiple apps from Chinese developers within India. Despite all these challenges, Meitu has kept a healthy 20% revenue growth in the first half of 2020 and generated RMB 25 million of adjusted net profits attributable to shareholders of the company. In terms of user base, our MAU in June was 294 million (sic) [ 295.4 million ], up 4.6% compared to the end of 2019. This encouraging performance is primarily due to our focused beauty strategy as well as a portfolio of diversified monetization models serving our 300 million global monthly active users, which includes online advertising, premium subscription, value-added services and some new businesses under incubation. In particular, we have launched a new business called Influencer Marketing Solutions, which has generated over RMB 100 million of revenues. We believe this business does not only help Meitu to monetize but also helps Meitu in growing its influencer ecosystem and eventually becomes an integral part of Meitu's social platform. Now I would like to invite our CEO, Xinhong Wu, to talk a little bit more about this new business model and other details of our various business lines.

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[Interpreted] So my name is Xinhong Wu, and once again, thank you very much for everyone joining this call today.

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[Interpreted] As Wen Sheng has discussed, the first half of 2020 is indeed full of challenges, but it was also full of opportunities. For example, the pandemic has actually reduced a lot of outdoor activities for our users, and our team has really capitalized on this opportunity to grow our MAU back into a growing trajectory. In addition, the Meitu app team has also managed to raise our social user engagement from an average daily time spent of 12 minutes last year to 15.4 minutes in the first half 2020, growing it by 28%.

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[Interpreted] So one of the key strategy for this result is the addition of derivative, or in Chinese [Foreign Language], functionality to help users to create content and make derivative works. Simply put, the derivative function enables our users to take whatever filter and effects that they see from a photo or video and apply it to their own photo and create something entirely new, and that can all be achieved with just one click. In addition, this function can also enable users to interact with each other using images as well, such as making image-based comments.

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[Interpreted] In the near future, we will push this strategy even further. For example, when users are editing the photos, all of the individual functions and specs can be saved and form an editing formula that enable other users to use the same formula with just one click. We believe this strategy can better connect content creator and user and may even attract some professional designers to serve our users better and, in time, drive the user engagement on the Meitu social platform and, hence, forging a stronger user base for advertising business.

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[Interpreted] In terms of the advertising business, it did get affected by the COVID-19 pandemic, causing a 12% revenue decline year-over-year. Fortunately, the advertising revenue has already recovered to the pre-COVID level towards the end of the second quarter. And in the second half, we'll continue to push our Brand Planet initiative, driving more brands to create corporate accounts on the Meitu social community and promote their interaction with their own fans through a series of functionalities such as free product trial, product reviews and branded live streaming. This will ultimately create a win-win for both the brands and Meitu's community user. Especially, these users can get some benefits and also some brand-only privileges through this initiative.

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[Interpreted] The premium subscription revenue has increased year-on-year by 209%, continued to be Meitu's monetization growth highlight apart from online advertising. This business generates its revenue mainly through overseas subscription users. Although the pandemic has not really eased overseas so far, this business has not really received any negative impact from the pandemic, and its growth trajectory has continued as well.

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[Interpreted] In addition, although the Indian government has suspended operation of a number of apps developed by Chinese companies, our subscription business has remained relatively unscathed because this business has really not scaled up in India. And therefore, this regulation has very minimal impacts from a revenue perspective. And given such encouraging results in overseas market, we are going to introduce this business model into our Chinese image apps and strive to raise our monetization potential.

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[Interpreted] Now I want to turn to talk about the news business that we launched in 2020, which is the Influencer Marketing Solution business. This business has already generated about RMB 100 million so far. As the largest and leading provider of image and video editing app, Meitu's user have very good ability to produce content. And because of the pandemic, our users have become more interested in becoming influencer than ever.

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[Interpreted] Under the brand of Meitu [ Nation ], this business provides a platform for their brand advertisers to use KOL and KOC marketing. And it also provides certain complementary solutions, such as recruitment, training and settlement services for the KOL or KOCs. On one hand, this business will be able to help our influencer to monetize better and, hence, incentivize them to produce better content on Meitu's platform. On the other hand, this will also enable Meitu to link up with other market participants, such as e-commerce platform, and such that these influencer can help the brands to market their product in the creation, in the content and live streaming alike.

[Foreign Language]

[Interpreted] So this concludes my prepared remarks. Thanks, everybody. And now I will take over to talk about the financials. So in the first half of 2020, revenue was RMB 557 million, growing 20.1% year-on-year. Although some of the businesses actually had negatively impacted by the pandemic, because our business portfolio is relatively diversified now and it covers both Mainland China and overseas, so the overall business it's still relatively solid despite these headwinds. Online advertising is the only business that saw a revenue decline at RMB 319 million, declining 12.1% year-on-year. In the first quarter this year, because of the dual impact of the pandemic as well as the negative seasonality due to Chinese New Year, revenue drop is quite pronounced in the first quarter. But as the pandemic started to ease out in Mainland China towards the end of second quarter and early third quarter, revenue from advertising has really gone back to the pre-COVID level. And in terms of overseas advertising, there's a little bit impact from the pandemic as well. But because overall overseas advertising is still relatively small, so its impact is not very much felt in the entire advertising business. Thus, one notable point is that in the first half of 2020, the online advertising revenue as a percentage of total revenue has declined to 57% compared to 78% a year ago. So as you can see, our business portfolio is becoming more and more diversified. Now on the premium subscription business, it has continued to grow at a very rapid pace, growing 209.2% year-on-year. And this business is mainly driven by our overseas image app products. So again, the overseas pandemic situation is still relatively bad, but this business has really not seen any slowdown. As of now, it still continue to grow sequentially every month. And I think one of the largest reason is because our overseas product team has really been able to find out what are the functionalities that is very in high demand and popular in overseas markets. And at the same time, our ability to monitor ROI in terms of user acquisition and monetization has become a lot stronger. So this business is really data-driven as much as product-driven right now. So in terms of the other revenue line, it also has a pretty significant growth at 126% year-on-year. And the fastest-growing subsegment is obviously the Influencer Marketing Solution that Xinhong has talked about. IMS business account for about slightly over 70% within this segment. And this is a new business so we don't really have a year-on-year comparison. So going on to the gross profit in the first half of 2020, total gross profit was RMB 356 million, growing 15.5% year-on-year. Gross profit margin was 63.8%, a little bit less than a year ago by 2.6% (sic) [ 2.6 points ]. And the decline in gross margin, it's really just a result of the changing business portfolio, especially the newly incubated IMS business carries a lower margin, and that's why the overall gross margin is a bit diluted. So now let me go over of the expense structure. As our Chairman has mentioned, in the first half of 2020 -- this is actually the first half year that we have achieved adjusted net profit at RMB 25 million, which is an extension of what we have achieved in the fourth quarter of last year. And this encouraging result is because of the growing gross profit, obviously, but also the expenses management has also contributed quite significantly. So the first thing that we have reduced significantly is the promotion expenses. In the first half of 2020, the total promotional expenses was around RMB 51.4 million, down from RMB 64 million in the first half of 2019. But as you can see, despite the decline in promotional expenses, our MAU in the first half of 2020 is still growing. So that can really conclude that our ability to drive user growth through product and operation is actually quite successful as opposed to just simply driving user growth using channel marketing or paid marketing. So on to R&D and G&A expenses, in the first half of 2020, it has declined by 26% and 22%, respectively. And these 2 expenses items are mostly due to employee and related expenses. And as we have mentioned in the last results conference call, we have concluded a set of expenses optimization exercise towards the second half of 2019. So this is why the year-on-year comparison for these 2 line items are pretty pronounced in the first half of this year. So on to the balance sheet, right now, at the end of June this year, we have RMB 2.5 billion of cash. And our outlook for the global environment, we still believe this is quite uncertain, but I think we are pretty confident to say that with our healthy balance sheet and abundant cash reserve, we are able to capture whatever opportunities to drive our further business growth despite such uncertainty. So this is all the prepared remarks. And now we can go into the Q&A session. Thank you, everybody.

[Operator Instructions] We have a question from a participant ending 085. [Foreign Language]

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[Interpreted] Great. So let me just translate the question first. Simply, the first question is related to elaboration on the actual business model of the IMS business, whether the revenue is booked gross or net. And the second question is about what is the sales and marketing outlook going to be like, is it going to continue to decline. And the final question is regarding the advertising. What is the advertising outlook for the second half of this year? What is the difference in terms of performance in domestic versus global MNC (sic) [ MCN ] clients? Is there any particular verticals that has a different performance? So I'll take the first 2 questions. So the IMS business is an integrated solution that provides to MCN organization or some advertising agency or brand advertiser directly. So the crux of it is really help the brand advertisers to use influencers to market their products or do marketing campaigns. And at the same time, this business will also provide some complementary services, as I mentioned in the call, like recruitment, training and settlement services for those MCN or brand advertisers. And because our client is the advertising agents directly or the brand advertisers directly, we're actually booking this business in gross revenues. And on the second question, our sales and marketing budget, it probably will be a little bit higher in the second half compared to the first half because overall speaking, I think right now we are at a point where we are breaking even, generating a little bit of profit. But at the same time, we are also facing a lot of growth opportunities. So I don't think we're at a point where we are just staying back and to just keep our business steady. But instead, we will reinvest our profit into generating growth opportunity in the future. So I think the long and short of it is we will reinvest part of the money that we make back into sales and marketing and, to a lesser extent, on R&D to drive our new businesses. But overall speaking, I think we're still trying to maintain this breakeven level at least for the next 6 to 12 months, barring any unforeseen issues, whether it's the pandemic or geopolitical environment hiccups. Now Susan [Foreign Language]

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So I think our advertisers are mainly driven by FMCG clients. And as you can see right now, the so-called lipstick economy is growing very rapidly. So this is relatively a positive market backdrop for us. So F&B clients, skin care, cosmetics, the consumption is picking up. And therefore, we think these advertisers will continue to increase in their advertising investments. And therefore, I think in Q3 to Q4, we should continue to see some more sequential growth from the second half of this year. And Susan, I just want to add a little bit in terms of the development of our advertising business. So we're moving away from just providing display ads to a lot more interactive ads, such as livestreaming, branded livestreaming, content-based marketing that can drive purchase directly. So in the second half of this year, one of the biggest initiatives, as Xinhong has mentioned, is Brand Planet, which is, again, it's something more of an integrated marketing solution, so that our advertising business is no longer just a display ad business. Thank you. [Operator Instructions] So a question on the line. Could you please open the line for [ Wang Qing ]? Operator, would you please open the line for [ Wang Qing ]?

[Operator Instructions]

Okay. So since there's no further question from the participants, I would like to conclude this call. And as usual, if you have further questions, feel free to contact us at the Investor Relations mailbox, which is [email protected]. So once again, thank you very much for joining our call, and we will see you next time. Thank you very much.

Thank you.

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[Interpreted] So let me just translate that question-and-answer together. The question is what is the latest update on the cooperation with Xiaomi regarding the smartphone. And the answer is that because we would like to focus more on our beauty strategy, and Xiaomi also has its own reasons, so we are not foreseeing launching any new smartphone models in the foreseeable future. Okay. So maybe I'll just ask again one last time. [Operator Instructions] And if there's no more question from the line, then let's conclude the call. And thank you very much again, and we will see you next time. Bye-bye. You may now disconnect.

Thank you. Bye-bye.

Bye. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]