So-Young International Inc. (SY) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by for So-Young's Fourth Quarter and Full Year 2022 Earnings Conference Call. [Operator Instructions] 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, Ms. Vivian Xu. Please proceed Ms. Xu.

Thank you, operator, and thank you for joining So-Young's Fourth Quarter and Full Year 2022 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 the 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. Potential risks and uncertainties include, but are not limited to the online or public filings with the SEC, including our annual report on Form 20-F. So-Young does not undertake any obligation to update any forward-looking statements, except as required under appliable law. Please also note that, unless otherwise stated, all figures mentioned during this conference call are in RMB. Joining us today on the call is Mr. Xing Jin, our Co-Founder, Chairman and CEO; and Mr. Nick Zhao, Senior Vice President of Finance. At this time, I would like to turn the call over to Mr. Xing Jin. [ Kath ], please?

[Foreign Language]

[Interpreted] Hello, everyone. Thank you for joining So-Young's fourth quarter and full year 2022 earnings call.

[Foreign Language]

[Interpreted] 2022 was a remarkable year for all of us at So-Young. Despite multiple external headwinds, we have successfully stabilized our core business and the substantially improved our profitability. In the fourth quarter, amidst the most severe challenges of the past 3 years as the COVID-19 pandemic seriously disrupted the operation of many medical asset institutions. While the slowdown of the Chinese economy made consumers more cautious we managed to achieve quarterly revenue of RMB 325 million, in line with our prior guidance. In the meantime, we significantly scaled up our profit with non-GAAP net income of RMB 38.8 million. We have continued to make strides since reaching breakeven in the third quarter. Thanks to our optimized cost structure and improved efficiency. As of the end of 2022, our cash balance remained at close to RMB 1.6 billion, which provides us with sufficient financial assurance to explore new business growth opportunities in the year ahead.

[Foreign Language]

[Interpreted] Next, I'd like to share some market trends we observed during the past year. In the future, we will look in these directions as we continue to invest resources, seize opportunities presented by change and build new pillars of revenue for our business.

[Foreign Language]

[Interpreted] First, Chinese medical aesthetics user base is strongly upgrading as the ratio of non-surgical users continue to increase. Second, user demands are evolving with high battery users showing increased the amount of premium one-stop medical aesthetics. Finally, along with the long-term trend of consumption upgrade in China, the middle-class medical aesthetics customer group is expanding the growing middle-class demographic in China and particularly urban middle-class females in the first and second-tier cities have formed a medical aesthetics consumption habits characterized by increased volume and frequency of consumption. Meanwhile, we have observed several important differences between the middle class consumers and traditional medical aesthetics consumers.

[Foreign Language]

[Interpreted] First, these consumers generally have higher level of education and are more cautious with their choice of medical aesthetic services. They are more attuned to obstructive factors, including the maturity and the reliability of service, doctors and institutions qualifications and product compliance.

[Foreign Language]

[Interpreted] Second, they're mainly consumer at aging, skin management and shape management products with higher frequency.

[Foreign Language]

[Interpreted] Third, they look for rational prices, not simply purchase cheapness, but they don't want to be charged high [indiscernible] tax.

[Foreign Language]

[Interpreted] Fourth is the value service, quality and delivery.

[Foreign Language]

[Interpreted] Based on these changes in the market and meeting the needs of the consumer group, leveraging the resources and the capabilities we have accumulated through the years, we launched So-Young Prime business at a small scale in first- and second-tier cities in the third quarter of 2022.

[Foreign Language]

[Interpreted] So-Young Prime is our self-operated asset life service platform for non-surgical medical aesthetics. First, based on the big data gathered on our platform, which shows those most popular treatments of live medical aesthetic service for middle-class consumers, we invited experts to create an upgraded treatment plan with standardized operating procedures for treatment and service. So-Young is responsible for pricing and sales. Second, with [ green ] institutions that meet our standards and train and accesses their operating teams and doctors before allowing them into the So-Young Prime service network. These institutions are responsible for providing exclusive -- of exclusive treatment rooms and standardized service to So-Young Prime customers. We have stationed staff in these institutions to welcome So-Young Prime customer and ensure a high-quality service experience throughout the treatment. Finally, we procured and certified the live medical aesthetics equipment and the consumables used in treatment. Injections and other consumables are stored in the [ Gene ] medicine cabinet placed in each institution and medical substance take out of the check each item in front of the customer.

[Foreign Language]

[Interpreted] Enabled by innovation in the live medical aesthetics service model, quality control of service delivery and our scale advantage in operations, user acquisition and the supply chain, So-Young prime providers provides users with premium [ gene ] and low-priced live medical aesthetics service.

[Foreign Language]

[Interpreted] Upon we bill at small scale on August 1 last year, So-Young Prime has quickly won recognition among users. So-Young Prime user satisfaction average order value and the repeated purchase rate were all significantly higher than our existing Pulp business. As of the date, users visit to institutions have continued to grow every month. Even at the end of 2022, while national-wide COVID-19 infections peaked as well as during the Chinese New Year.

[Foreign Language]

[Interpreted] Next, I would like to outline our business plan and objectives for 2023.

[Foreign Language]

[Interpreted] First, we will continue to strengthen and develop our existing community commerce i.e. PAP business, leveraging our established advantage in community operations, user operations and doctor resources. We always aim to enhance user trust, increase user engagement and build our trust towards the professional platform. After 9 years development, our Pulp business has accumulated enriched the beauty direct content transparent trading information, innovative user products and tools and a tremendous volume of industry information. It has also boosted the efficiency of the medical aesthetic industry at scale accumulated high sticky user base numbering the tens of minutes and enable numerous institutions to achieve significant growth and sound returns through operations with So-Young. And these will become cornerstones for our development and the transformation in scale.

[Foreign Language]

[Interpreted] Second, we will continue to focus on expanding So-Young Prime's market penetration, building on our experience in last year. Through optimizing the products on the supply side and growing our network of corporate institutions, we will improve our capability to deliver standardized services, attract more customers and drive repeat purchases. So-Young Prime is our key deployment in the industrial internet. It will comprehensively integrate production factors in the industry. We constructed relationships of the players in supply chain, increase efficiency, lower costs and ultimately benefit consumers. It covers a broader and deeper range than pure Internet business and will solve industry issue at a deeper level and construct higher barriers to entry.

[Foreign Language]

[Interpreted] Looking into 2023, external conditions are moving in a positive direction for the industry and our business and the institution are gradually returning to normal operations. In the long run, there is still large room for growth in Chinese medical aesthetics consumption, particularly for light medical aesthetics. Our new business direction will help us diversify our revenue streams and build a healthier business model. Operationally, we will continue our highly efficient marketing strategy to strictly control our expense, refine our passion and seek profitable growth. With persistent in the near term and confidence in the long term, we will continue to put user first and remain committed to becoming the most trusted medical aesthetics platform.

[Foreign Language]

[Interpreted] Now let me invite our Senior Vice VP of Finance, Nick, to review the financial results for the fourth quarter before taking your questions.

This is Nick. I will now take some time to go through the financials for the fourth quarter and the full year 2022. Please be reminded that all amounts quoted here will be in RMB. Please also refer to our earnings release for detailed information of our comparative financial performance on a year-over-year basis. For the fourth quarter of 2022, total revenue were RMB 325.1 million compared to RMB 449.5 million in the corresponding period of 2021, in line with our previous guidance. The decrease was primarily due to a decrease in average revenue per paying medical service provider. The decrease was primarily due to, one, COVID-19 control measures and the surge of COVID-19 cases, especially in major areas in China, limited people visited to offline service providers. And two, pressure on the overall Chinese consumer markets. Within the total revenue, Information Services and other revenues were RMB 233.9 million, down 32.1% year-over-year. Reservation services revenues were RMB 26.0 million, down 37.2% year-over-year. Sales of equipment and maintenance service revenues, which were from Wuhan Miracle Laser Systems, Inc., were RMB 65.3 million compared with RMB 63.8 million in the same period of 2021. Cost of revenues were RMB 88.2 million, down 30.6% year-over-year. The decrease were primarily due to our cost optimization matters and efficiency improvement programs. Total operating expenses were RMB 212.6 million, down 42.8% year-over-year. Sales and marketing expenses were RMB 98.4 million, down 35.6% year-over-year primarily due to a decrease in expenses associated with branding and user acquisition activities. G&A expenses were RMB 73.2 million, down 14.8% year-over-year. The change was primarily due to a decrease in share-based compensation expenses, partially offset by an increase in payroll costs and professional service fees. R&D expense were RMB 41.1 million, down 39.2% year-over-year, primarily due to a decrease in payroll costs. Income tax benefits were RMB 2.4 million compared with income tax expenses of RMB 10.1 million in the fourth quarter of 2021. Net income attributable to So-Young International Inc. were RMB 31.3 million compared with a net loss attributable to So-Young International Inc. of RMB 27.7 million in the fourth quarter of 2021. Non-GAAP net income attributable to So-Young International Inc., which excludes the impact of share-based compensation expenses and impairment of goodwill and intangible assets attributable to So-Young International Inc. were RMB 38.8 million compared with RMB 62.9 million in the same period of 2021. Basic and diluted earnings per ADS attributable to ordinary shareholders were RMB 0.29 and RMB 0.29, respectively, compared with basic and diluted losses per ADS attributable to ordinary shareholders of RMB 0.26 and RMB 0.26, respectively, during the fourth quarter of 2021. For the full year 2022, total revenues were RMB 1.26 billion, down 25.7% year-over-year. Within total revenues, Information Services revenues were RMB 888.5 million, down 31.9% year-over-year. Reservation services revenues were RMB 128.7 million, down 53.4% year-over-year. Sales of equipment and maintenance service revenues were RMB 240.7 million. Cost of revenues were RMB 393.3 million, up 19.9% year-over-year due primarily to the consolidation of Wuhan Miracle. Total operating expenses were RMB 957.4 million, down 30.8% year-over-year. Net loss attributable to So-Young International Inc. were RMB 65.6 million compared with net loss of RMB 8.4 million in the fiscal year 2021. Non-GAAP net loss attributable to International Inc. were RMB 22.2 million compared to a net loss of RMB 139.5 million in fiscal year 2021. Basic and diluted losses per ADS attributable to ordinary shareholders were RMB 0.61 and RMB 0.61, respectively, compared with basic and the diluted losses per ADS attributable to our ordinary shareholders of RMB 0.08 and RMB 0.08, respectively, in fiscal year 2021. With regards to some items on our key balance sheet, we have adequate liquidity in this quarter. As of December 31, 2022, we had a total cash and cash equivalents, restricted cash and term deposits, term deposits and short-term investments of RMB 1.6 billion compared with RMB 1.8 billion as of December 31, 2021. For the first quarter of 2023, we expect total revenues to be between RMB 290 million to -- and RMB 310 million. The above outlook is based on our current market conditions that reflects the company's preliminary estimates of the market and operating conditions and the customer demand. This concludes our key remarks. I will now turn the call to the operator and open the call for Q&A.

[Operator Instructions] Today's first question comes from Thomas Chong at Jefferies.

[Foreign Language] Thanks management for taking my question. Can you share with us about your marketing strategies and the expected user base in 2023?

[Foreign Language]

[Interpreted] As the market gradually recovers, we will ramp up our marketing strategy compared to 2022, yet we will still emphasize efficiency and accuracy and make adjustments based on market conditions.

[Foreign Language]

[Interpreted] In addition to our existing marketing strategy, we will also focus on private domain operations in efforts to increase user engagement and repurchase rates. In 2022, we attended private domain operations for So-Young Prime and developed an effective conversion path with private domain clients contributing over 90% of So-Young Prime orders.

[Foreign Language]

[Interpreted] We will continue to optimize community content and our innovative user tools to generate more organic user traffic. But as we mentioned before, competition in the medical aesthetics industry is no longer merely for traffic. Professional platforms need outperformed understanding of users and the industry to provide a good service experience and meet customer demand.

And our next question today comes from Nelson Cheung at Citi.

[Foreign Language] My question is regarding management's view -- regarding the recovery strategy of medical aesthetics industry in 2023 and the growth driver for So-Young this year.

[Foreign Language]

[Interpreted] We still hold our cautiously optimistic outlook for 2023, mainly depending on the recovery pace of the overall consumption environment and the medical aesthetics market. At the same time, we do see the marketing spend from institutions lagging behind the recovery on the user side.

[Foreign Language]

[Interpreted] First, on the unit side, we see regional differences in the recovery of the medical aesthetics market. Due to the impact of the pandemic in the past few years and especially consideration of the surge in COVID-19 infections at the end of last year, a large number of treatments, orders were backlogged. Therefore, in the Tier 1, Tier 2 cities, user orders have rebounced rapidly since the beginning of this year and have already recovered to the level of the same period of last year -- of 2021. In third and fourth tier cities, so user orders have recovered to the 2022 level, but not yet to the 2021 level.

[Foreign Language]

[Interpreted] On the institution side, we see that they are still cautious when budgeting their market spend, mainly because of two factors: First, because user orders in first and the second tier cites rebounced rapidly post infection, institutions do not need spend a lot on marketing at this stage. Second, the overall turbulence of the past few years has met institution more cautious about spending. But overall, we do see institutions spending gradually recover.

And our next question today comes from [indiscernible] at CICC.

[Foreign Language] So my first question is about, could you please revisit some of the things that you're thinking about as far as the business volume in the short to medium term view, say, in the next 3 to 5 years? And also, can you give us just an update around maybe how you're thinking about the competitive landscape?

[Foreign Language]

[Interpreted] As a new growth driver, So-Young Prime trajectory will mainly depend on the development of the non-surgical market, which will continue to expand in line with the growth of the -- with the middle class female population.

[Foreign Language]

[Interpreted] We will expand the network on the supply side corporate with more institutions, in which the product portfolio boost the number of service outlets, ensure high-quality service delivery and improve the user penetration rate and repurchase rate.

[Foreign Language]

[Interpreted] Non-surgical medical aesthetics users are used to consume daily, cosmetic and skin care products, which is area of expertise for the numerous small and medium institutions, but small and medium institutions are usually weak in equipment, SKU design, service delivery and brand awareness. So-Young Prime forms a network ensuring service delivery of high standard by empowering these institutions. In addition to benefiting small and medium institutions, these initiatives could serve large medical aesthetics -- aesthetical user group and increased convenience for consumption for them. That makes us distinctive from our competitors.

[Foreign Language]

[Interpreted] Therefore, only by connecting the supply chain and linked the upstream, midstream and downstream can we expand the medical aesthetics industry addressable market and provide users with a better service experience, building a safe and secure environment for customers and driving the overall growth of the industry.

[Foreign Language]

[Interpreted] For the second question, with environmental uncertainties and the consumption demand recovery, there is plenty of space in the medical aesthetics market and industry outlook is clear.

[Foreign Language]

[Interpreted] We believe the medical aesthetics industry is driven by the supply side, and that is where we will put more emphasis in the future. We will also integrate the core production advantages we have accumulated in terms of institutions, doctors and users, standard for service quality and service delivery and provide users with a premium experience. These comprehensive capabilities will enable us to build a strong competitive barrier compared with the pure Internet model. We will be able to solve issues at a deeper level and create more differentiation from our competitors.

[Foreign Language]

[Interpreted] In the past few years, we have provided users with a transparent and trusted information platform through our community commerce business, both in the efficiency of the medical aesthetic industry at scale. In the future, we will continue to optimize our community content, innovative new user tools leverage the scale advantage of the Internet and provide a second complement of resources for offline service delivery. Of course, we may also cooperate with other traffic platforms.

[Foreign Language]

[Interpreted] We believe our integration capabilities across industrial change, and our investment in the service delivery experience will benefit users and drive the sustainable development of the whole industry.

And our next question comes from [indiscernible] with [indiscernible] Securities.

[Foreign Language] Let me translate it. My question is, do you see any changes in mathematic and growth-matic consumption demands on the user end after the COVID-19?

[Foreign Language]

[Interpreted] In the question, first, as we mentioned on prepared remarks, user demands are evolving. Middle-class medical aesthetics consumers have different demands from the traditional consumption group as they focus more on quality, safety, [ gene ] products and rational prices. Demand for certain high order values SKU have increased. For example, SKUs in those photo electric and injection categories with average order value over RMB 5,000 are highly popular among users.

[Foreign Language]

[Interpreted] Secondly, as the market recovers, we believe the surgical market, which was pursued in the past few years, will experience a wave of consumption as they come in, recovers and travels pickup.

[Foreign Language]

[Interpreted] Also with the rebound in outbound travel, users will rush to developed overseas market for medial aesthetics consumption.

Ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to management for any closing remarks.

We are now approaching the end of the conference call. Thank you for your participation in today's conference. You may now disconnect it. Have a good day. Thank you. Bye.