So-Young International Inc. (NASDAQ:SY) Q3 2022 Earnings Call Transcript

So-Young International Inc. (NASDAQ:SY) Q3 2022 Earnings Call Transcript November 18, 2022

Operator: Good morning, ladies and gentlemen, and thank you for standing by for So-Young's Third Quarter 2022 Earnings Conference Call. As a reminder, today's conference is being recorded. I will now like to turn the meeting over to your host for today's call, Ms. Vivian Xu. Please proceed.

Vivian Xu : Thank you, operator, and thank you for joining So-Young's third quarter 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 those outlined in our public filings with the SEC, including our annual report on Form 20F. So-Young does not undertake any obligation to update any forward-looking statements, except as required under applicable law. Joining us today on the call is Mr. Xing Jin, our Co-Founder, Chairman and CEO. At this time, I would like to turn the call over to Mr. Xing Jin. Yes, please?

Xing Jin: Hello, everyone. Thank you for joining So-Young's third quarter 2022 Earnings Call. China's overall domestic consumer market remained under pressure in the third quarter, with repeated COVID-19 outbreaks in certain parts of the country. Despite this market uncertainty, we delivered solid financial performance during the quarter, and we have now achieved gradual sequential improvements in each of the first 3 quarters of 2022. Total revenues were RMB 320 million, representing a sequential increase of about 5% and in line with our previous guidance. Our progress were well recognized among medical service providers, and we established new cooperation agreements with more institutions, thanks to our device product offering.

The number of paying medical service providers on So-Young's platform reached 6,199, up 28% from the prior year. On the user side, we continue to refine our operations to serve different cohort of medical aesthetics consumers, leverage our deep understanding of users and our edge in big data analysts. We made some progress on our user segmentation efforts, which enable us to cater to the demand of different consumer groups based on location and user characteristics. For new customers with limited budget, we used the popular tox and promotions for new treatments to encourage them to place orders. For customers at medium-price segment, we promoted well-known products to enhance their stickiness. In the third quarter, a number of user verified order on our platform grew 6% sequentially.

In addition, we launched the So-Young Prime program targeting customers in the first and second-tier cities who account for the majority of medical aesthetics consumption. The So-Young Prime program is aimed at establishing clear and transparent industry standards, reducing consumers' trial and error costs, simplifying their decision-making process and providing one-stop solutions for light medical aesthetic services, enabling our customers to pursue beauty with peace of mind. For category with order value of over RMB 8,000 launched during the quarter, such as ultrasonic skin remodeling essential. The monthly online GMV increased by over 60% compared with the previous months. In terms of our operating strategy, So-Young Select had expanded to 19 major cities in China as of the end of October.

As part of our long-term strategy for providing superior user experience, So-Young Select caters to our users' preference for high-quality branded medical service providers and enables providers to offer enhanced service and build their brand value. In the third quarter, with the rollout of So-Young Select, the promotional spend of service providers on our platform increased by over 25% quarter-over-quarter and about 20% year-over-year. We also saw gradual improvement in conversion rate for the medical service providers on our platform. Meanwhile, under So-Young Select, we have also rolled out So-Young Select Doctor, which helps users choose premium doctors, providing useful information to facilitate their decision-making and driving user conversion.

In terms of industry regulation, the recent national regulatory policies emphasize a transparent pricing, consistent online and off-line pricing and cracking down on force advertising and misinformation that harms the interest of consumers. The regulatory requires for online platforms are consistent with the self-regulatory actions, So-Young has been implementing for years, indicating that our work is towards the right direction. Regarding internal platform governance, we continue to promote self-regulation within the industry and strengthened the quality of the supply side in our ecosystem. We also took the initiative to identify and eliminate force transactions and force reviews and established and optimized our antifraud system and data prevention scheme, thereby promoting the healthier development of the industry.

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Looking at the overall Chinese medical aesthetic industry, it is under pressure in the near term, while the positive perspective is intact for the long term. Therefore, for the near term, we took stringent measures to cut cost and increase efficiency and achieve profitability on a quarterly basis. During the quarter, the non-GAAP net profit attributable to So-Young International Inc. reached RMB 9.9 million. We have maintained healthy financial conditions and sufficient cash reserves to ensure that the company remains strong, and we are able to make constant improvements. Going forward, we will work to better serve medical aesthetic consumers by investing in our business and evaluating the user experience. Looking at the global medical sets market, we are pleased to see that it continues to have strong growth potential.

According to the Frost & Sullivan, browsing back from the year-over-year decrease in 2020 due to the outbreak of the pandemic and the global medical aesthetic market grew by 13% year-over-year in 2021 and is expected to grow by 14% year-over-year in 2022, with CAGR of approximately 13% from 2021 to 2025. In 2020, the number of the medical aesthetic treatments per 1,000 people in China was about 21 compared with 82 and 48, respectively, in South Korea and the United States, which are more developed medical aesthetics market. So the penetration rate of the medical aesthetics in China still has plenty of room to grow. 2022 is a nice anniversary of So-Young and marks a new beginning for us. We are confident that we will overcome the uncertainties of the current market environment and will leverage the best industry experience we have accumulated to place the user as the center of our business and build the most trusted medical aesthetic service platform.

I will read the prepared remarks on behalf of Mr. Xing Jin then open the Q&A. Now I will go through the financials for the third quarter. Please be reminded that all amounts recorded here will be in RMB. Please also refer to our earnings release for detailed information of our corporate financial performance on a year-on-year basis. For the third quarter 2022, total revenues were RMB 323.3 million compared to the RMB 431.5 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, which was impacted by the resurgence of COVID-19 and remained under pressure from China's overall domestic consumer market. Within total revenues, information services and other revenues were RMB 235.7 million, down 26.7% year-over-year.

Reservation services revenue were RMB 29.7 million, down 51.8% year-over-year. Sales of equipment and maintenance service revenue, which were from Wuhan Miracle Laser System Inc. were RMB 57.8 million compared with RMB 48.1 million in the same period of 2021. Cost of revenues were RMB 94 million, up almost 5% year-over-year. The increase were primarily due to the consolidation of Wuhan Miracle. To weather the storm, we adopt a serious cost saving SKUs such as reducing marketing activities, optimizing cost structure, et cetera, in order to maintain operating efficiencies. Total operating expense were RMB 236.6 million, down 26.6% year-over-year. Sales and marketing expense were RMB 124.8 million, down almost 35% year-over-year, primarily due to a decrease in expense associated with branding and user acquisition activities.

Research and development expense were RMB 52 million, down 32% year-over-year, primarily due to a decrease in payroll costs. General and administrative expenses were RMB 59.8 million, up 9.4% year-over-year, primarily due to an increase in payroll costs and professional service fees. Income tax benefit was RMB 16.5 million compared with income tax expense of RMB 4.3 million in the third quarter of 2021. The increase in income tax benefit was primarily due to the refund of income tax of RMB 12.6 million in the third quarter of this year based on the final 2021 tax refund filing results -- a tax return filing results, sorry. Net income attributable to So-Young International Inc. RMB 2.3 million compared to RMB 6.8 million in the third quarter of 2021.

Non-GAAP net income attributable to So-Young International Inc., which includes the impact of share-based compensation expenses, was RMB 9.9 million compared with RMB 28.9 million in the same period of last year. Basic and diluted earnings per ADS attributable to ordinary shareholders were RMB 0.02 and RMB 0.02, respectively, compared with RMB 0.06 and RMB 0.06, respectively, during the third quarter of 2021. With regards to some items on our key balance sheet, we held adequate liquidity in the quarter as of September 30, 2022. We had 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. Net current assets was RMB 1.3 billion as of September 30, 2022 compared with RMB 1.3 billion as of December 31, 2021.

Net assets was RMB 2.6 billion as of September 30, 2022 compared with RMB 2.1 billion as of December 31, 2021. For the fourth quarter of 2022, we expect total revenue to between RMB 310 million and RMB 330 million. The above outlook is based on the current market conditions that reflects the company's preliminary estimates of the market and operating conditions and the customer demand. Today, the Board of Directors of the company authorized a share repurchase program, under which the company is authorized to repurchase of an aggregate value of USD 15 million of these shares, including in forms of the ADS during the 12-month period beginning from November 18, 2022. This concludes our key remarks. I will now turn the call to the operator and open the call for Q&A.

Operator, we are ready to take questions.

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