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

Ladies and gentlemen, good evening, and welcome to Meitu's 2021 Interim Results Earnings Conference Call. This is [indiscernible], Senior Investor Relations Manager of Meitu. Joining me today to discuss our results are Mr. Wen Sheng Cai; the Chairman; Mr. Xinhong Wu, the CEO; Mr. Gary Ngan, the CFO. I would like to take this opportunity to remind you that our remarks today may include certain forward-looking statements. A number of risks and factors beyond our control may cause the actual results to differ materially from those contemplated by these forward-looking statements. 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 the public documents on corp.meitu.com. Investors who are using Zoom app or Zoom PC, we suggest you can add your name or institution name. This will help us to invite you in the Q&A section. And now I would like to turn the call over to Mr. Cai. He will present in Chinese followed by a translation in English. [Foreign Language]

[Foreign Language]

[Interpreted] Okay. Thanks, everyone, for joining tonight's call. In the first half of 2021, we continue to focus on our growth strategy and achieved quite remarkable results. Revenue grew 44.6% for the first half compared to the same period last year, making the third consecutive profitable half year in terms of adjusted net profit. Adjusted net profit attributable to the owners of the company was approximately RMB 33.4 million for the first half of 2021. The steady growth is driven by our success in finding the premium subscription business model, which achieved 150.7% year-on-year growth for the first half, representing the largest growth driver Meitu's overall revenue. In fact, this business has been growing consistently and quickly ever since we launched it in 2019.

[Foreign Language]

[Interpreted] In terms of users, it has been kept relatively stable. In fact, we focused on how to convert high-quality users from our massive user base into subscribers. In the first half of 2021, our premium subscription users are growing rapidly. We have approximately 1.7 million active paying subscribers in December last year. And in June 2021, we have already closed to double that to approximately 3 million active paying subscribers. The rapid growth of the premium subscription business proves that Meitu can create new business model to drive a diversified income portfolio. In the meantime, Meitu is going to focus on its building strategy and proactively incubates business to provide SaaS services for cosmetic and medical aesthetic industry. Next, I would like to invite our CEO, Mr. Xinhong Wu, to further elaborate on our business model and other business details. [Foreign Language]

[Foreign Language]

[Interpreted] The massive user base is the core assets of Meitu. In the first half of this year, our mainstream products, Meitu App and BeautyCam maintained a stable MAU and a leading position in domestic image adding competition track and expanded the gap with the major competitors. This depends on our continuous input in resources to optimize products and operations. In the future, in terms of the domestic user growth strategy, we will allocate resources on different platforms with specific focus on Android system to strengthen refined operations.

[Foreign Language]

[Interpreted] Our Meitu template function allows users to easily adopt the template consist of filters and stickers recorded by other users in the editing process to achieve [ pride and vision ]. In the first half of this year, we added a new recommendation function of the template. For example, if a user wants to add a street shot photo, Meitu will recommend a template at fixed street shooting, improving the template function in multiple dimensions.

[Foreign Language]

[Interpreted] In the first half of this year, we have seen an increasing number of users relying on the template function and the number of Meitu's template database increased by nearly 10x. In addition, the number of users using Meitu Template increased by nearly 3x in the first half of this year. The Meitu Template function has become a function with fastest growing users in Meitu app, which perfectly fits their positioning as an image editing app. In the future, we will try to commercialize the function such as pace, templates, IP template and et cetera, to generate new revenue growth momentum.

[Foreign Language]

[Interpreted] In terms of the overseas market, Meitu Overseas business has become #1 in revenue on the overseas growth tracks among domestic image apps. As of June 2021, the non-China revenue ranking of Meitu's products has surpassed other domestic developers in the same category becoming #1 in terms of the overseas revenue. Although affected by the Indian government's announcement of ban on several Chinese apps, overseas MAU performed smoothly when we exclude the impact of India. Financially, due to the low contribution of the Indian market, the financial impact is negligible. However, in response to this change, we quickly adjusted our overseas growth strategy, shifting from pursuing overall user growth to focusing on the growth of high-value users.

[Foreign Language]

[Interpreted] Through precision marketing and data analysis, the input-output ratio of the marketing activities can be effectively improved, thereby driving revenue growth. At present, this strategy has achieved initial results, driving the overseas revenue to increase by 65.7% year-on-year. In addition, in terms of the iOS 14.5 update policy in the first half of this year, we also adjusted the growth strategy accordingly, and we applied different strategies on platforms, increased investment on the Android system and input targeted investment on the iOS system, explore new channels to expand our influence.

[Foreign Language]

[Interpreted] In terms of commercilization, we verified Meitu's ability to create a new business model and achieve a diversified income portfolio last year. In the first half of this year, the model of our primary subscription business is still expanding rapidly, and the revenue of this business has increased by 150.7% year-on-year.

[Foreign Language]

[Interpreted] It is worth mentioning that since the launch of the premium subscription business in 2019, it has continuously achieved a double-digit sequential growth by quarter so far. We believe that there is still a large room for growth in the future. At the end of last year, we have more than 1.7 million active paying subscribers worldwide. Six months later, we now have around 3 million active paying subscribers. The revenue contribution of premium subscriptions increased from 15.1% in the first half of last year to 26.2% in the first half of 2021. According to the rapid expansion of this business, it is possible that this segment may become our largest revenue contribution in the future. We are glad to see the continued scale expansion of this business.

[Foreign Language]

[Interpreted] After verifying our business monetization capabilities based on our massive user base, we'll continue to upgrade our strategy in 2021 to provide a full range of SaaS service for the cosmetic and medical aesthetic industries. Based on Meitu's current advantages, we mainly provide the SaaS service in 3 aspects, mainly AI technology, ERP and CRM service, supply chain service as well as channel distribution service.

[Foreign Language]

[Interpreted] For the AI technology, we provide an AI scheme analysis solution for global skin care brands and beauty parts through our incubated company MeituEve. Through the independent developed hardware and AI algorithm, MeituEve can accurately identify the skin condition thereby recommending personalized skin care solutions, effectively improving the conversion rate. At present, MeituEve's flagship panorama skin analyzers has been deployed in more than 240 cities around the world. MeituEve continued to deepen its strategic cooperation with the world's leading skin care brands. For example, in the first half of this year, we continue to deepen cooperation with Dior, adding more advanced service such as eye aging service.

[Foreign Language]

[Interpreted] We provide the ERP and CRM-related service. The SaaS business is mainly carried out through the affiliated company, Meidd, that we invested in. Meidd is a leading ERP and CRM SaaS company in the beauty industry in China. It currently provides SaaS service to more than 10,000 offline cosmetic stores all across the country. At the same time, these stores generated more than RMB 6 billion in total sales in the first half of 2021. Meidd can provide centralized procurement service based on ERP and CRM SaaS to provide the stores with a better supply chain management.

[Foreign Language]

[Interpreted] Finally, we provide channel distribution service in the cosmetic industry, many overseas niche brands and new domestic brands are currently facing the problem of sales channels. In response to this problem, we plan to provide channel SaaS service for these brands, specifically through the store network of Meidd.

[Foreign Language]

[Interpreted] In the future, Meitu will continue to deepen its core beauty strategy work with partners to realize our vision of -- to empower the beauty industry and make beauty more accessible to our users. And now please welcome Gary to talk about the financials.

[Foreign Language] Thank you. So I'll go through the first half financials with everyone here. In the first half of 2021, total revenues was RMB 806 million, growing significantly year-on-year by 44.6%. The growth is mainly coming from our new business model which is the premium subscription and in-app purchases. This business has grown significantly by 150.7% year-on-year and has been consistently driving our business forward, now has already become our second largest revenue contributor. In terms of online advertising, revenue was around CNY 393 million, increased by 23.3% year-on-year. The main reason for this increase is because the pandemic was relatively well controlled in China already with the rollout of vaccines and that has caused the domestic advertising market to recover gradually. In terms of revenue contribution, online advertising has decreased to about 48.7% in the first half of this year compared to about 57% last year. That is a testimony of how we are reducing the reliance on a single revenue model. For the premium subscription model, the growth has been very rapidly, as I mentioned previously. In the first half, revenue for this line of business came in at about RMB 211 million, growing 150.7% year-on-year. In 2019, we have started this premium subscription business in overseas. And after achieving very remarkable success, we started to roll it out in the Chinese apps middle of last year. In the first half of this year, the overseas subscription business still record double-digit growth on a year-on-year basis. And obviously, for the domestic business, even though it started slower than the overseas, the growth rate, it's significantly higher than the overseas counterparts. And we believe that the premium subscription business model, it's a model that is more native to our business because it is a very natural extension of what a user is using our app, which is photo editing and camera primarily. In fact, we are able to monetize our premium subscribers at the same time, while we are increasing the user experience. So we intend to launch more differentiated new features, try to raise our sales and marketing efforts such that we can continue to increase the paying conversion ratio. And subsequently, we intend to continue to optimize our product and launch more features that will drive user stickiness and ultimately increasing the subscriber retention rate. For other income in the current period -- other revenues, excuse me, it has also increased significantly with a year-on-year increase of 25.2%. Within the other revenues, the highest contributor was the IMS business, which is the Influencer Marketing Solutions, and it accounted for about 87% of other revenues. In absolute terms, it's about RMB 146 million, increasing by approximately 50% year-over-year. In terms of gross profit, the total gross profit for the first half of 2021 was around RMB 533 million increased by 49.8% year-over-year. The gross profit margin was 66.1%, which is about 2.3 percentage point increase over the same period last year. The increase of gross profit margin was mainly due to the change in revenue mix, especially in terms of the increase in gross profit from the high profit margin business such as the premium subscription services. Next, I will talk about the profitability and expense structure. As our Chairman mentioned that the company has achieved the third consecutive semiannual profit in terms of adjusted net profit in the beginning of the call, we -- in this period, we have achieved CNY 33.4 million of adjusted net profit attributable to owners of the company. This is mainly due to a large increase in the gross profit, driven by our new business model. And sales and marketing, R&D and G&A expenses has respectively increased by 39.8%, 38% and 25% in the first half of 2021. The increase is mostly in line with the growth of our revenue lines, and it's mainly due to employee expenses. In terms of cash, as of June 2021, we have about CNY 1.1 billion of cash on the balance sheet. Even though the global economy is still not very -- I mean there's still quite a bit of uncertainty in the global economy, we can confidently say that our balance sheet is very strong, and our cash reserve can fully support us in terms of seizing some of the next growth opportunity and ultimately generating long-term shareholder value. So this is all the prepared remarks for tonight, and I will open the floor for Q&A.

Thank you management. Now we can enter the Q&A section. [Operator Instructions] [Foreign Language] [Operator Instructions]. Investor whose name is [indiscernible] you can ask the question now.

[Foreign Language]

Okay. So the question is related to the strategy around the cryptocurrencies that we have on our balance sheet. And I think the reason for acquiring the cryptocurrencies has actually been quite fully explored and explained in the announcement that we have made previously when we make the purchase. So just in order to recap that a little bit, we -- it is part of our treasury management. And I think it might be useful if you just go back and read those announcement and there will be a lot more detail in terms of the -- what was the logic and the strategy around the cryptocurrencies.

Investor whose name is [ Melody ], you can raise your question.

My question will be focusing on our overseas strategies. Given that we are already the #1 and achieving a good result there, can you share a bit more detail on our overseas strategies?

[Foreign Language]

[Foreign Language]

Let me just quickly translate that. So I think in terms of overseas strategy, the focus we have right now is mostly on the subscriber growth, the paying subscriber growth. Based on our previous experience, we used to do a lot of user acquisition in multiple countries, but we realized that some of the countries the paying inflammation or the subscriber propensity is actually not very high. So we're now slightly shifting our focus in to deploying more resources into the countries that have high ARPU users as well as the users that are more likely to be converted into subscribers. That's the first point. The second point is, we are also working on product extension in a sense that if you look at our current overseas product portfolio BeautyPlus and AirBrush, they are mostly a to-see or to-consumer product. But in the post pandemic world, I think there's a big opportunity for us to get into servicing these business clients, especially smaller, medium-sized business where they require a lot of online cooperation small team, cross platform, that kind of thing. So I think 1 of the examples that we can give you is, for example, if we can give these smaller businesses or small teams some templates to help them to solve their design issues much more efficiently. So that would be the 2 business kind of product extension that we are going to roll out in the near future for our overseas business. Okay. So there's 1 question from the chat box, it is in Chinese, but I will translate that. So it's mostly asking about the accounting treatment of the cryptocurrencies and whether this is a IFRS-based treatment. So just quickly respond to that. So all of the accounting treatment in our financials are actually reviewed by a big 4 auditor, PricewaterhouseCoopers. And including the cryptocurrency treatment is actually under the IFRS. As a global practice, all of the cryptocurrencies are being treated as an intangible asset. And therefore, all those treatment is actually in line. So if you look at any listed company, you will see the same treatment, whether it's listed in Hong Kong or it is in the U.S.

We are now open to the next question. [Foreign Language] [Operator Instructions]

Okay. So it appears that there's no more further questions from the floor. So once again, thank you, everyone, for dialing into our call, and thank you for your interest in Meitu. So this concludes the analyst briefing call. And good evening, everybody, and have a nice day. Thank you.

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