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

So hello, everyone. Thank you for standing by. Welcome to Meitu's Full Year 2020 Earnings Conference Call. I'm Gary. I'm CFO of the company. And joining me today are Chairman, Wen Sheng Cai; and our CEO, Xinhong Wu. I would like to take this opportunity to remind you that today's discussion may contain some forward-looking statement. A number of recent risk factors beyond our control may cause the actual result to differ materially from these forward-looking statements. During this call, we will present both IFRS and non-IFRS measures. We may also discuss general market conditions, and such information may come from a variety of sources outside Meitu. For this detailed discussion of the risk factors and non-IFRS measure, please refer to our public documents on www.meitu.com/en/investors. And again, before we start, if you are using the Zoom app for joining the meeting on the browser, please rename your ID as your name and the institution that you work for, so we can invite you for a discussion during the Q&A session. And now I would like to turn the call over to Mr. Cai. He will present in Chinese, followed by a translation. [Foreign Language]

[Foreign Language]

[Interpreted] Okay. So thank you for joining the analyst conference call tonight. 2020 is not an ordinary year. Despite the challenging macro environment, we continue to focus on executing our growth strategy and achieved encouraging results. 2020 is the first year return to full year profitability. Revenue was RMB 1.19 billion, grew 22.1% year-on-year. Adjusted net profit attributable to owners of the company was RMB 60.9 million. In terms of user metrics, monthly active users, or MAU, at the end of 2020 was 261 million, declined slightly year-over-year by 7.6%. Taking out the impacts from the Indian ban of Chinese apps, our MAU remained relatively stable year-over-year. Since the second half of 2019, our profitability has continued to improve. This is the result of our focused strategy that drove revenue and gross profit growth. The rapid growth of our premium subscription business is a testimony of our ability to create and scale new business models, leading to a more diversified and healthy revenue mix. In 2021, we are upgrading our strategy, aiming at providing software-as-a-service or SaaS for cosmetic and medical aesthetic industry. I will now pass over to Xinhong to discuss our business model and other details.

[Foreign Language]

[Interpreted] Thank you, Wen Sheng. Many thanks again for everyone to joining today's analyst call. The large user base is Meitu's core asset, and we are excited that we achieved some breakthrough in our user stickiness and activity level. During the 2021 Lunar New Year holiday, daily active users or DAU, reached a historical high of 31 million, higher than the previous peak by 13%. Through our Meitu Template initiative, user can save the filter and stickers that they use into a template. When other users sees this template and if they like them, they can apply that template into their image with just 1 click and, therefore, enabling a very viral distribution.

[Foreign Language]

[Interpreted] So the Meitu Template fits very well within the Meitu's apps positioning in image enhancements, while driving a lot of social interaction. For example, during the Lunar New Year eve, 120 million of images were being saved, and the Meitu Template usage was also 9x more than normal days. And the active social user of Meitu has also increased by 98%. Other than that, during 2020, we have also launched MCP, the Meitu Creative Platform, which connects with artists, content and the users and other creators. This creator in aggregate can be designed for brands and regular users as well as setting the trend in design. After the launch of the Meitu Template, Meitu is effectively linking up the ecosystem of both professional-generated content and user-generated content as well as integrating the utility function with social feature. Interaction between brand advertisers and user content can be realized seamlessly. To date, many brand advertisers have already expressed interest in working with designers on our platform to launch better advertising campaign that better communicates their brand images.

[Foreign Language]

[Interpreted] Overseas, we have experienced a negative impact due to the Indian government's ban of many Chinese apps. Excluding such effects, however, our MAU has remained relatively stable. From a financial perspective, given revenues generated by the Indian market was very small to start with, the financial impact due to this ban is negligible. In order to adapt to this new situation, we have also adjusted our user acquisition strategy, focusing on growing user that carries monetization value as opposed to simply headline user number. Through targeted channels and data analytics, we are able to raise the return on investment of our user acquisition efforts. To date, we have seen encouraging results of this new strategy as the revenue generated from overseas has grown 76% year-over-year in 2020.

[Foreign Language]

[Interpreted] So in terms of monetization, during 2020, we have also proven our ability to create and scale new monetization models, which diversify our revenue portfolio. Revenue from our premium subscription business has grown 140% year-over-year. We first started testing this business model in 2019 in our overseas apps and subsequently introduced this model in domestic apps in the second half of 2020. By the end of the year, we have over 1.7 million monthly paid active subscribers, and I emphasize this is a monthly number. As the 2 new business models, respectively, premium subscription and IMS, continue to grow, our revenue portfolio has become more diversified and healthy. Revenue contribution from online advertising has declined to 57% in 2020 compared to 77% in 2019, as the premium subscription revenue contribution has become 17% this year compared to 9% in 2019.

[Foreign Language]

[Interpreted] So after proving our ability to monetize and given our large and beauty-focused user base, we are refining our strategy in 2021. We aim to provide a full service SaaS or software-as-a-service for cosmetic and medical aesthetic industry. Building on our core strengths, we have identified 4 area of SaaS, which are: targeted marketing service; AI technology; enterprise resource planning, or ERP; customer relationship management or CRM as well as channel distribution services.

[Foreign Language]

[Interpreted] Firstly, that's the targeted marketing channels. To the beauty industry, being able to accurately reach users that have a demand for beauty, is a highly valued ability. Apart from traditional display ads, we have also launched 2 different SaaS to help brands driving fans and, ultimately, sales. The first 1 is our IMS business under the brand of Meitu [ Meixu ]. This business provides brands and advertising agents a turnkey solution for influence and marketing, covering recruitment, training, content creation and settlement, among other aspects. The other service that are currently under beta testing is Meitu [ Yoyen ], which aims at connecting with medical aesthetic clinics and provide them with targeted user access and sales lead, and in turn, driving sales conversion.

[Foreign Language]

[Interpreted] Secondly, AI technology. Through the brand, MeituEve, we are providing AI skin analysis SaaS to global skincare brands and beauty spas. Through the proprietary hardware and AI algorithms, MeituEve can accurately analyze one's skin condition and provide user with optimal skincare solution, which, in turn, can increase the sales conversion at the storefront of our clients. The flagship product of MeituEve, the panoramic skin analyzer, has already covered 2,000 beauty spas in China as well as sealed a few strategic cooperation deals with global leading skincare brands, such as Christian Dior and Shiseido.

[Foreign Language]

[Interpreted] Number three, it's ERP and CRM SaaS. This business is mainly carried out through our investor associate company, Meidd. Meidd is a leading ERP and CRM SaaS provider in Mainland China, focusing on the cosmetic stores, which -- it has already covered over 10,000 of them in domestic China. These shops in aggregate during 2020 had over RMB 11 billion of turnover. So based on this large network and large turnover, Meidd is able to provide supply chain management services, so that will help them to better manage the supply chain efforts.

[Foreign Language]

[Interpreted] So finally, it's the distribution capability. In the cosmetic industry, there are a lot of overseas niche brands and new domestic brands that faces challenges in distribution. Regarding this, we plan to provide distribution SaaS for these brands. And in practice, we'll leverage the storefront network already built by Meidd as well as the network of sales promoters to be built by another investee company called the [ Measured ] Group.

[Foreign Language]

[Interpreted] In the future, Meitu is going to continue with its beauty-focused strategy and together with our business partners to carry out our vision of empowering the beauty industry and make beauty more accessible to our users. This conclude my prepared remarks for tonight. And now I will take over to talk about the financials. Revenue in 2020 was RMB 1.194 billion, grew significantly by 22.1% year-over-year. We have now built a diversified portfolio of business that are quite resilient to external shocks, despite some negative impacts due to COVID-19 pandemic. Online advertising revenues was RMB 680 million, declined 9.5% year-over-year. We note that the decline in percentage term is actually less than that of the first half, which is a good thing, and that is because the pandemic's impact mainly manifests itself in the first half of 2020. As the pandemic is being alleviated in domestic China, the advertising business has seen some rebounding since the second half of the year. As mentioned previously, advertising revenue contribution has already declined to 57% in 2020 compared to 77% in 2019, indicating a much more diversified revenue portfolio. Premium subscription business has grown very rapidly, with revenue increasing 140.1% year-over-year. This is mainly due to the overseas team introducing a lot of differentiated features as well as optimizing the paying conversion. We have since adopted this business model to our domestic Chinese apps since the fourth quarter of 2020, and the revenues has been growing phenomenally. Other revenues has also seen a very fast growth this year, growing 177% year-over-year. Within the other revenues, the highest contributing and fastest-growing is our IMS business, and IMS business accounted for about 71% within other revenues. This business is a newly incubated business in 2020. So there's no year-on-year comparison figures. In terms of gross profit, 2020 gross profit was RMB 790 million, growing 13.5% year-over-year. Gross margin was 66.5%, which is 5% less than 2019. The gross margin decline is mainly a result of the revenue mix changes. Especially, the newly incubated IMS business is a low-margin business that will dilute the overall gross margin percentage. But if we look at the individual business margin profile across time during 2020, all of them are actually quite positively trending. So now I'm going to talk about our expenses. Chairman Cai has mentioned in the opening that 2020 is the first year that we have achieved profitability with adjusted net profit attributable to owners of the company at RMB 60.9 million. And this is a continuation of consecutive profitability since the fourth quarter of 2019. The encouraging results -- it's a function, not only because of the growing gross profit, but the cost control has also contributed positively to this result. Sales and marketing, R&D and G&A expenses in 2020 has respectively declined by 11.9%, 19.3% and 17.9%, respectively. And this is mainly due to our good cost control in both our cost level as well as expenses, which is mainly related to personnel expenses. So just touching a little bit upon the balance sheet. By the end of the 2020, we have RMB 2.18 billion of cash. Now although we do see there is still a lot of uncertainty in the global economy, we are quite confident that our strong balance sheet, a very significant cash reserve is going to enable us to grasp a lot of opportunity that is waiting for us in terms of growth and, ultimately, to bring long-term shareholder value. So this is all of the prepared remarks for tonight, and we can now go into the Q&A session. Thank you very much, everyone.

[Operator Instructions] So the first question is from Thomas Chong from Jefferies.

Can you comment about the outlook in 2021, in particular, the advertising business?

Thomas, sure. I'll take this question. So in terms of 2021, I think, for our company, the gross profit growth is very likely -- well, also revenue growth, I guess, is very likely to come from the continued growth of the premium subscription business. As we said in the call earlier, we have just introduced this business model in our domestic app, and it just has been growing very, very fast in this fourth quarter 2020. So we're expecting this trend to continue. So that's the first point. And in terms of advertising, obviously, we are likely to see some recovery from 2020. And I think international or overseas advertising is very likely to also see some more rebound. I think the international rebound is going to be a bit more prominent than the domestic rebound. Shannon, do we have a next question?

[Operator Instructions]

[Foreign Language]

[Interpreted] So there's a question from the chat asking what is the potential in the Meitu cloud enhancement business? What is the potential market size and the competition landscape? What is the current progress of this business because there has not been mentioning in the annual results?

[Foreign Language]

[Interpreted] Let me just translate that. So in our view, the photo -- sorry, the photo shooting studio market is actually very big. And that actually create a very big market potential for this cloud image enhancement business because, right now, there's a lot of photo editing labor or photo editing specialists working for these studios. Just to give you 1 example in Xiamen, there's National Chain Photo Studio. They employ 500 image enhancing specialists. So we can see how labor intensive this is. And we believe that using artificial intelligence to automatic enhance the image that can effectively help these photo shoot studios to reduce the cost and also increase the efficiency. The second issue that -- or challenges that faces these photo shoot studios is very high user acquisition cost. So I think Meitu is also in a very good position to provide user acquisition for them. So apart from these traditional photo shooting studio, there's also a lot of other instances where this cloud services is needed. For example, in the e-commerce space, there's a lot of people. They need a batch processing of these product photos. And in any case, I think this is 1 of the very good example of how AI is going to able to empower the industry and improve that. So we do see there's a very big potential in this particular business. And this is also 1 of the pushes that Meitu has been always trying to achieve since the inception 13 years ago. Thank you.

[Foreign Language]

[Foreign Language] Question is from Binnie Wong.

So I guess my question here is also looking forward in 2021. What -- if you look at the monetization, how -- what do you think is the more like optimal mix? And then what are some of the challenges we might see, right? Because if you look at, say, for advertising, the market is certainly very competitive with a lot of your peers offloading a lot of more advertising inventories. So -- and then how do you see in terms of the traffic conversion? I mean it's very amazed to see the traffic that you guys have. But then when it boils down to conversion for individual user, how do you see that? Maybe I'll quickly translate myself. [Foreign Language]

[Foreign Language] So thank you very much, Binnie, for the question. So I think -- okay, let's break down the answer into a few parts, right? The -- 2 of them is actually quite interrelated. So firstly, in terms of revenue mix in 2021, I think, if you look at the online advertising, looking at our product as they stand right now, it's mostly brand advertising in start-up page and a little bit of icons. So the ceiling -- it's relatively low. So I would say that, as I mentioned before, there will be some rebound in advertising in 2021 compared to 2020. But there's probably just some -- maybe some double-digit growth there, but that's pretty much about it. But on the other hand, if you look at the premium subscription business, we are still at about 1.7 million subscribers, which is not even 1% of our total MAU as we stand right now. So you can see there is a much, much higher potential in the premium subscription business. And I think it's quite hard to talk about a target revenue mix in 2021 because it's almost like this is a resulting figure. It's not what we are trying to control. But if you -- imagine this, so there's a 20% growth in advertising, but there's a lot more upside coming from the premium subscription. So ended up, you see premium subscription percentage would continue to grow in terms of revenue contribution as a percentage of the total. So that's the first answer. And I think in terms of your second question, you're right that there's a lot of advertising inventories in the market, and it's growing as we speak. But I think what we are trying to do right now, it's not to compete on the advertising inventory, but rather, we're trying to compete with data and targeted user access. So a very good example that actually Xinhong has talked about earlier is the testing of Meitu [ Yoyen ], which is an advertising -- a programmatic advertising platform that connects the medical aesthetic clinics to users. So what we do there essentially is, okay, there's a user who use a lot of photo enhancement functions. For example, they touch up the black eye circles. They use a lot of chin thinning functionality, for example. Then we're -- we'll be able to realize that this user could be a potential client for medical aesthetic clinics. And then we will serve them a programmatic app. When they click on it, it would take her to a one-on-one consultants, which is provided by these clinics. And with that, they can start to talk about what kind of surface that they are likely to use. So with this kind of targeted user access, we were able to -- quite frankly, we believe we can outcompete a lot of our competitors who have just headline coverage or just exposure. I think we're able to do a lot more. And the other thing, which is in similar fashion, is in 1 to 2 years' time, as the MeituEve business continue to grow, we have more and more user skin data. We are also able to integrate these data into a programmatic platform. And then we can help these brands to identify user's skin problems and serve very accurate targeted apps. So I think it's a great question, how we're going to compete. And then I think the answer is mostly through the data that we're able to provide to differentiate us from other competitors.

There are 3 unanswered questions in the chatbox. Maybe the management can address those questions one by one. The first 1 is from [ Xin Cai Fung ].

[Foreign Language]

[Interpreted] Okay. So there's a lot of beautification products, for example, like FaceU and B612. How do we see their competitive landscape?

[Foreign Language]

[Interpreted] Okay. So if you look at the third-party data provider, QuestMobile, there are 2 subsegments with 1 of it, which is image enhancement and the other is photo taking. And in both segments, major step is -- and #1 by far. So I think we are still a very solid market leader in both of these subsegments, despite there are many, many competitors out there. On the other hand, we are also looking at a change in terms of the product -- the form of the product in the sense that we are going to emphasize a lot on providing services to user as opposed to just being a tool. So we are now providing a lot of services to users, which help them to become more beautiful. So we're trying to build a market position of beauty. In the way you can think about it, if a user wants to become more beautiful, the first thing that they will think about is to come to Meitu. And we believe that this is -- through services, it's really what will help users to create value and also a very good way to increase stickiness of the users. And on top of that, as we have mentioned before, the Meitu Template is also 1 of the breakthroughs that we have had recently because this is really a very natural integration of the utility function as well as the social features. And as reflected by the encouraging data that we have seen in the Lunar New Year, we have reached 31 million DAU, which is a very strong historical peak. So I think this is a strong testimony that this strategy has been working very well so far.

[Foreign Language]

[Interpreted] Okay. So there are 3 questions on the chat that mainly talks about the cryptocurrencies. Okay. So I guess I will talk about that -- answer them together. So I think the first feedback is we actually have written quite extensively in the voluntary announcement 2 weeks ago, which I encourage our investor and analysts to read them in detail. It talks about why we are buying the cryptocurrencies and -- both Bitcoin as well as Ethereum in detail. So I guess that clears up the reason why we want to buy cryptocurrencies. And I think 1 of the question is regarding the financial or accounting treatment of the cryptocurrency. So I think right now, the global standard of accounting for cryptocurrency is treating them as intangible assets. So the treatment will be very fairly standard. It will be traded as an intangible asset, but it's not going to be a fair value instrument, as mentioned on the chatbox. And also there's 1 clarification that we want to make there. Because in the chatbox, it's talked about 2018, there's a white paper. And we want to clarify that, that white paper is actually not written by Meitu. We are just a partner of -- a potential partner of that BTC coin. [Foreign Language]

[Foreign Language]

Yes. So I hope I have cleared up all the questions.

[Operator Instructions]

Okay. So if there is no further questions from the floor, I think we can conclude this call. So thank you very much, everybody, to join our analyst conference call tonight. And we will talk to you...

Gary, there was a question, but the question was ascending in a private message. And I think the question is asking about the -- there is an announcement about Ruisheng Tianhe seeking IPO and its relationship with Meitu's long-term plan to probably go back to Asia market to get public.

Okay. So I'll take that question. So Ruisheng is a non-wholly-owned subsidiary of Meitu, which engage in advertising agency business. So they operate fairly independent from Meitu. So obviously, we have some cooperation, but they are mostly an independent operating entity. And I think what they plan, to go to Asia, has no particular bearing with Meitu because, ultimately, Meitu is -- it's a company that's based in Xiamen -- headquartered in Xiamen, but we have global ambitions. So I think we are not, at the moment, seeking to list in other exchange boards right now.

Okay. So if there is no further question, then we have reached the end of the conference call. Thank you for...

So thank you very much for everyone joining. [Foreign Language]

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