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

Ladies and gentlemen, Good evening, and welcome to Meitu's 2021 Annual Results Earnings Conference Call. I am Coco, Senior Investor Relations Manager of Meitu. Joining me today to discuss our results are Mr. Xiujuan Wang, 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 our 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. Xinhong Wu, he will present in Chinese followed by a translation in English.

[Foreign Language]

[Interpreted] In 2021, total revenue grew by 39.5% year-over-year. The revenue reached around RMB 1.66 billion, and each of the business segments grew on a different level. The VIP subscription and image size business have the largest growth. It grew by 146.9% year-over-year.

[Foreign Language]

[Interpreted] For the year ended 2021, the number of global VIP members reached 4 million with an increase of more than 100% compared to 1.7 million at the same period in 2020. The main reason behind the high growth of the VIP member is that our VIP features convey a sense of value for money and uniqueness for our paying VIP members.

[Foreign Language]

[Interpreted] By studying our users, we deliver the functions cater to demands of the high-paying intention users, such as providing high-quality filters and assisting them to show the exclusive lifestyle and a good personal brand.

[Foreign Language]

[Interpreted] Except for this, the VIP features can realize some effects that cannot be done manually. Therefore, compared to the regular users, VIP members can have a more efficient process and higher quality outcome. We will keep on iterating our products to meet user demands.

[Foreign Language]

[Interpreted] With the initial success of the VIP subscription services, we found that we can also apply our experiences and capabilities to address work-related demands. So we expand our product offerings from image tools to design tools. We launched the design solutions for corporate and personal work demands for several platforms, including desktop, app and web versions. And these solutions stress the remote and share collaboration functions.

[Foreign Language]

According to the [ image saw ] strategy, we launched the 6 new subscription-based products officially in the launch events lately. These products cover both lifestyle-related and work-related demands. For example, for lifestyle scenarios, we launched a video portraiting app called Wink and also the plot camera called Chic.

[Foreign Language]

[Interpreted] For the work-related scenarios, we launched a poster design function called Meitu Design Room, a professional profile pic editor called Meitu Xiuxiu, a design solution called Meitu for Mac. And also one-stop AI photo processing solution called Meitu [indiscernible]. Some of the products received positive reviews and user number was climbing. We will keep on investing in R&D to deliver a comprehensive product portfolio to stimulate new growth drivers.

[Foreign Language]

[Interpreted] Above are our thoughts on the VIP subscription and image SAR strategy, and then I would like to mention some other highlights in 2021. According to the statistics of App Annie, in January 2022, Meitu's overseas team ranked 4th in the Overseas revenue list of Chinese game makers and ranked 1st in the overseas revenue list of Chinese image makers.

[Foreign Language]

[Interpreted] In 2021, our overseas growth and promotion strategy focused on the pay users growth, and this strategy achieved good financial results. with a 54% increase in overseas revenue in 2021. This shows that although the overseas MAU declined due to the Indian ban policy on Chinese apps, we still make progress in revenues.

[Foreign Language]

[Interpreted] Next, I would like to talk about the operations of the domestic image products. Massive user base is the core asset of Meitu in terms of the domestic users. MAU of Meitu app and BeautyCam kept on leading the domestic image industry. According to the statistic of CrestMobile, in December 2021, both Meitu App and BeautyCam ranked the 1st in the domestic image MAU list. For the future user growth strategy, we will input resources on different mobile app platforms, especially enhancing the Android versions app performance.

[Foreign Language]

[Interpreted] For building the image ecology, we launched a function called Meitu Style on Meitu app last year, and we have seen more and more users rely on this function. In December 2021, number of this function users become 2.8x of the number at the same period in 2020. These functions can record a users added method and effects and save as a template. Other users can 1-click apply this template and then spread out.

[Foreign Language]

[Interpreted] In 2021, we kept on upgrading the Meitu Style, adding features like recommendation, cut out and so on. We also have related events such as template creation games, template competition to trigger the user's creation passion and a template number of growth. In the future, we will improve the Meitu Style function with matters like refine operation and process share mechanism. And we will also try the monetization of this function to create a new growth engine.

[Foreign Language]

[Interpreted] Except for the image business, we also proactively developed the beauty sauce. We provided ERP and supply chain management solution cater for cosmetic stores where our subsidiary Meidd. And we provided AI analysis-based customer insight solution cater for skin care brands, medical, aesthetic, clinics and beauty salons with our Meitu Eve.

[Foreign Language]

[Interpreted] Meidd provided the ERP services to cosmetic stores in a sinking market, helping the merchants to manage their such as marketing, sales and inventory data. Now it has served over 11,500 stores in more than 250 cities. Based on that, Meidd obtains a complete grasp of the cosmetic market's supply and demand trend by evaluating the data on its ERP system. With this information, Meidd reduced the information synergy between upstream supply and downstream sales network, improving its efficiency as a whole. In 2021, the business line from supply chain management increased by 4x compared to the level in 2020.

[Foreign Language]

[Interpreted] Meidd provided the AI analysis-based customer management solution for skin care brands, medical aspheric clinics, beauty salons and so on. Supported by the unique AI algorithm, it can analyze the skin data and then recommend proper skin care products. Also, it built a complete customer skin profile and proceeded the post-sales customer management. This will finally help these clients increase the sales conversion and promote the brands.

[Foreign Language]

[Interpreted] Although these 2 solutions target on different areas, they are sharing the same goal, which is the customer success. We hope our services can assist the customers to better promote themselves, no matter with customer management or data insight analysis services. And my section is finished now, please welcome Gary to talk about the financials.

Thank you, Xinhong. So first of all, I would like to talk about the profit and loss for 2021. In the year of 2021, revenue was RMB 1.66 billion, significantly increased by 39.5% year-over-year. The revenue growth is mainly driven by our new business of VIP subscription and image SaaS. This business segment has increased 146.9% year-over-year, and has been continuing to grow. It is now our second largest revenue contributor, representing around 31.2% of total revenues higher than 17.6% in 2020. This also shows that Meitu is reducing its reliance on a single business stream. Moving on to online advertising. Revenue was around RMB 766 million, increased 12.5% year-over-year. The online advertising business is relatively stable throughout the past 2 years. And we are now proactively expanding our customer base. Meanwhile, our promotion model becomes more diversified, and we have introduced more creative solutions for our clients, such as holding these themed activities to interact with our users to realize brand marketing. And in terms of the VIP subscription and image SaaS business, this is a much more natural business model because it fits better with our image app -- the form of the image app. So as we previously mentioned, the VIP subscription service is currently -- is addressing mostly the lifestyle-related scenarios. And the image SaaS business is addressing more the work-related demands. Revenue from this segment reached $519 million in 2021 and the vast majority or about 90% of the revenues within this business line is coming from the VIP subscription services. To give everyone a little bit of a background. We started this VIP subscription service in our overseas applications back in 2019. And after achieving very promising results in overseas business, we apply this business model to our domestic Chinese apps in late 2020. And as we can see, throughout 2021, the domestic VIP subscription revenue has grown very significantly. It grew about 14x compared to 2020. And in the future, we will launch more and more new features and products to deliver a comprehensive product portfolio, and we are very positive about the future of this business segment. And finally, from the IMS and other revenues in 2021, also increased significantly with about a 20% yield year-over-year The IMS business is obviously the highest proportion within this business line. It accounts for about 86.3% within this business line, and the absolute dollar amount is about RMB 258 million. Just to touch a little bit upon the recent acquisition of Meidd, we have completed the acquisition in January 2022. And after the completion, we now own about 63.35% of Meidd. And its financial results will be consolidated after its completion. So in 2021, there's actually no contribution from Meidd. And to just give everybody a sense of its current state of operation, its revenue currently is about RMB 15 million per month. So now moving on to gross profit. The total gross profit was about RMB 1.125 billion, increased by about 41.7% year-over-year. Gross profit margin was 67.5%, increased by 1 percentage point over last year. The increase in gross profit margin is mainly because the VIP subscription and image SaaS business revenue contribution has been increasing. And this business carries a very high gross margin. So that's why there's an expansion in gross margin. And moving on, I will talk a little bit about the expenses structure. Sales and marketing, R&D and administrative expenses have respectively increased by 36%, 35% and 28.7% in the first half -- in the full year of 2021. As we all know, Meitu's main expenses are mostly related to staff costs. And as we are expanding in every business segment, especially in the VIP subscription and Image SaaS, there's inevitably some increase in staff cost. And marketing cost has also increased in 2021. So just to conclude, this year, we have achieved the second consecutive year of annual profit in terms of adjusted net profit. The adjusted net profit for this year was RMB 85.1 million. And I think this is mainly because a very large increase in gross profit driven by the VIP subscription model. And finally, in terms of cash as of December 2021, we have around RMB 1.26 billion of cash and other liquidity on our account. Although the global economy is somewhat uncertain, we can confidently say that our strong balance sheet and cash reserves can fully support us in seizing some of the next growth opportunities, and generate value for the -- long-term value for shareholders. So this concludes our prepared remarks, and we can now open the floor to question and answer.

Thank you, management. Now we can enter the Q&A section. [Operator Instructions] [Foreign Language] We have a question from the investor called [ Melody Chan ].

I have a question on our business, our VIP subscription business. As mentioned earlier, our business has grown very fast. And how should we think about the business trend in 2022? And what -- if we are going to invest more in the R&D part to drive -- further drive the business? [Foreign Language]

Okay. Let me just take this question. So if you look at the VIP subscription and image SaaS business, as I just mentioned about 90% of that is coming from the VIP subscription platform, which is mainly to see business. So it's consumer facing. And as I said, it's more related to the lifestyle-related demand. And the remaining 10% is about the image SaaS business, which is catering more for the work demand. So I think if you look at the growth rate, which is about 140 plus percent, it's clearly showing a very strong momentum, and this momentum has continued to be showing in the first couple of months in 2022. So that's the first point. Secondly, I think from the work demand point of view, I think there's a lot of exciting products that has been already announced and upcoming, as Xinhong has earlier mentioned, such as the Meitu for Mac and the poster-related features. So I think from the point -- from a point of view, as a business potential, right, I think the work demand part of this business is going to be very, very strong because having to use these features for work means that you're also generating money by yourself. So I think the users are actually much more likely to pay for the work-related features when compared to the features related to lifestyle. And we have seen in many different -- similar products both in China and in overseas markets that the work-related SaaS business actually carry a much higher paying percentage compared to lifestyle-related features.

[Operator Instructions] [Foreign Language] We have an online question. [Foreign Language] How is the development of the overseas development -- business development? And what's the plan for the next phase?

[Foreign Language]

[Foreign Language] Okay. So I'll just combine the two and answer two in one. So first of all, the overseas revenue has also been growing very quickly it's in double digits in the year of 2021. Obviously, it's a little bit slower than the Chinese business because it has started much earlier than the domestic business. Now as we have mentioned in the first half of 2021 results call, the strategy of this business is to focus more on the developed countries. And we will try to use a very targeted way to market our apps to attract these high paying intention users and try to convert them into paying users. And finally, Xinhong just added that -- similar to the domestic business, the overseas business is also adding more business-to-business elements to it. So it's very similar to what we are doing in China because previously, overseas apps like Airbrush and BeautyPlus are mostly [ easy ] to consumer. But now we are also going to expand our product offering to cover business needs. Thank you.

[Operator Instructions] [Foreign Language] We have an online question. The question is I would like to know if your project that -- if you project that subscriptions will surpass the online advertising? If yes, do you think it will happen in 2022 or 2023? [Foreign Language]

Thanks for the questions. I think it's probably going to be very close. Like the 2 business is going to be very close in 2022. I think the assumption is it will surpass that of advertising by 2023. Thank you.

We have an online question. The question is [Foreign Language]. Okay the question is what's the trend of the VIP members number growth in -- or after 2022? And how about the R&D investment plan afterwards?

[Foreign Language] So let me just translate what I said just now. In terms of the VIP members, I'll give a little bit of a directional guidance. So if you look at the paying penetration in the domestic app right now, it's about 1%, plus a little bit. And the overseas is about 7% to 8%. So I think -- that basically tells us that the domestic business is still in a very early stage, and it's very likely to move towards 7% to 8% in the long term. Obviously, it's not going to be next 2 years to reach this kind of level. And also, typically speaking, the overseas market has slightly higher paying percentage in this mature state. So in terms of the R&D investment, I think it will continue to grow. But because the revenue growth is very rapid right now. So I think it is safe to assume that the R&D expenses as a percentage of revenue is going to be a bit lower in 2023 -- 2022, sorry.

Okay. Thank you, management. [Operator Instructions] Okay, we have an online question. The's question is [Foreign Language]. So the growth of the revenue for 2021 is mainly driven by the growth in the VIP subscription and image SaaS business. And what is the reason that the users want to become VIP members? [Foreign Language]

[Foreign Language] Okay so let me just translate the answer. So we have done a lot of user survey, and we realize that there is a lot of these sort of personalized demands that are not being satisfied at the moment. And that's why there's a lot of features that we have launched to satisfy these kinds of demands. And ultimately, the idea is to sell the VIP membership such that the user feels that is very value for money. And also, they are able to derive sort of some sense of uniqueness or having something that other people don't have if they don't become a member. So this is sort of how we think about in terms of the user psychology and also from the features to drive this VIP business. And on top of that, because we've talked a lot about the social elements or the demand for the social interaction for the VIP business. But at the same time, we see there is a tremendous potential in the design related or work-related demand. So for example, aside from creating posters, some people also have the demand for building personal brand or do some personal marketing for himself. So these are the different reasons and how we think about what kind of features that we'll create to drive the VIP business.

[Foreign Language]

So just to add on, we actually have seen the younger generation has a much, much higher intend to pay compared to years ago. So I think this is also one of the biggest drivers for our VIP subscription business.

Okay. Thank you, management. We have an online question. The question is [Foreign Language] So do management have any expectation on the operating cash flow in 2022, when will the operating cash flow to be a positive figure?

So I think it is quite likely that in 2022, our operating cash flow will be positive. [Foreign Language]

We have an online question. Do we have any competitor with the MeituEve and the image SaaS business? [Foreign Language]

[Foreign Language] I'll answer the first. So there are actually quite a number of competitors for both MeituEve and the image SaaS business. But our view is that a competitive market, actually, it's very good to drive the team to work harder and move faster. And obviously, I think Meitu is a pioneer in a lot of the -- both technology and the product offering, in these 2 business segments. So for example, next month, we are going to launch the new version of the MeituEve panoramic AI skin analyzer, and there will be some very world-leading technology involved in this new product.

[Foreign Language] So Meitu has a lot of data and technical experiences in the portrayed AI. So can we apply these type of technologies in the field of avatar creation? What's the point of view of the management?

[Foreign Language] So as we all know, Meitu has always been focusing on helping users to manage their facial image SaaS. And we used to help people manage their real face, obviously. And we are thinking more of -- is there a pathway to switch from helping people manage their actual face to their virtual identity. And that's why we have a product which is, in a nutshell, is an editor for virtual avatar. That will be coming out into close beta by the end of this year. So this editor is going to help both our business partners to, for example, make them -- make it easier for them to create virtual idles. And also, will able -- this editor will also help end consumers to help them to create avatars that can perform things like video chat or live streaming, things like that. So this product will come in a close beta by the end of this year, and we currently plan to launch it next year.

Okay. Thank you, management. We will take the last question. [Foreign Language] What's the point of view from the company on the market cap management? Or do the management consider any stock share buyback?

Okay. Let me just take this question. So previously, we have bought back some of the shares. So we wouldn't rule that out. But currently, we have no plans to repurchase shares.

So we will take the next question. So the 2021 MAU has not increased year-over-year. Has the industry growth peaked? Are there future growth plans? [Foreign Language]

[Foreign Language] So let me just quickly translate that. So if you look at our 2021 MAU, it hasn't increased. The main reason is because the -- it's the Indian MAU because the Indian government has blocked our Chinese app. And if you take that effect out, our MAU actually has remained relatively stable. And our view is that the image MAU industry, there's still a lot of potential to grow. But I think in order to capture that potential, we will have to find different scenarios in order to like to basically try to find -- try to address the demand in various different image scenarios from our users. And we actually have launched several products, which has generated very good traction as we have mentioned earlier in the call, it's not being reflected in the 2021 results, obviously, but I think we should be able to see that in 2022, there's a good chance that our over MAU can go back into a growth trajectory.

Okay. Thank you, management. Due to the time constraints, we will close the meeting. [Foreign Language] Thanks for joining tonight's conference, and thanks again for your participation. Should you have any questions, please contact Meitu IR team. [Foreign Language]

[Foreign Language]

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