Earnings Call: H2 2019

Mar 26, 2020

Hello everyone. Thank you, good evening and good morning, and welcome to Meitu's full year 2019 earnings conference call. I'm Gary, Chief Financial Officer of Meitu. Joining me today to discuss our results are Wensheng Cai, the Chairman, Xinhong Wu, the CEO, and Susan Wang, COO. 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 an 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 measure, please refer to our public documents on corp.meitu.com. I would now like to turn the call over to Mr. Cai. He will present in Chinese followed by a translation. 蔡总. 大家好，我是美图公司董事长蔡文胜。感谢大家来参加今晚的电话会。今天的业绩发布会回顾我们过往的一年，美图做了不少的调整，站内变得更加地聚焦。我们回归初心，让美图重新成为一个互联网的平台公司，更好地帮助我们的用户变美。2019年，美图在业务表现上也做出了一些成绩。首先我们在2019完成一些业务的优化跟梳理，使得毛利大幅增长，而且在2019年的四季度取得历史上的调整后的净利润。交给李先翻译这部分。 Thank you very much everyone. My name is Cai Wensheng, and thanks for attending the results conference call this evening. Looking back in the past year, Meitu has made a lot of adjustments. In particular, our strategy is now more refined and focused. We have again treated ourselves as if we are a startup company and launched Meitu into an internet platform company with the aim of helping our users to access beauty easier. We have also completed a business restructuring in 2019. It not only drove a significant growth in gross profits, but also led to a positive adjusted net profit in the fourth quarter of 2019. 其实我们在海外用户迅猛增长的同时，我们找到了以付费订阅作为核心的商业模式，带来了可观的收益。展望2020年，虽然年初我们已经感受到肺炎疫情以及全球经济不稳定对我们的广告收入会带来的可能影响，但随着中国疫情有所缓解，我们也感觉到广告市场有回暖的痕迹。我们认为，虽然疫情带来的不稳定性会在全球持续一段时间，但我们因此也看到了一些新的机会。 Okay. Additionally, apart from seeing a very rapid growth of our overseas users, we have also implemented a premium subscription model as one of our core monetization models, bringing very meaningful economic value. Looking ahead in 2020, although we have already felt some headwinds in our advertising business due to the COVID-19 pandemic and the associated uncertainty in the global economy, as the public health situation is slowly improving in China, we have already seen some recovery in the advertising market recently. 首先，美图秀秀的MAU在今年的2月份达到1.23亿的MAU，DAU更达到它的历史新高。另外，美图的一些新业务，让用户通过手机APP直接能跟三甲的皮肤科医院医生问诊。美图的问诊，我们的美图皮肤医生，以及集团旗下的大街网推出的服务，直播MCN的机构，从招聘、培训到发薪到管理的一站式服务，在疫情期间都有可能迎来很好的发展机遇。关于更多业务细节的表现，我请我们的CEO吴欣鸿来给大家继续阐述。谢谢大家。 First of all, our core app Meitu has actually achieved close to 123 million of MAU in February this year. And its DAU has also reached a historical peak. In addition, some new businesses, such as the Meitu Skin Doctor that enable users to get online consultation from dermatologists from top hospitals in China, as well as the one-stop shop solution for KOL searches, training, management, and payroll launched by our subsidiary Dajie Net, are both examples that may see some interesting growth opportunity during the pandemic, as people are staying at home a little bit more. For other details of our business, I will now turn the call over to our Chief Executive Officer, Wu Xinhong. Thank you very much, everyone. 好，谢谢文胜，谢谢Gary的翻译。再次感谢大家参加今晚的电话会。 Thanks for 文胜. Once again, I appreciate everyone to join today's results announcement. 2019年，为了让战略更加聚焦，我们更新了公司的使命，那就是让每个人都能简单变美。而愿景也更新为整合变美生态链，帮助用户全方位变美。总的来说，变美和赋能是我们目前战略的两个核心关键词。好，Peter。好. In order to make our strategy more focused, in 2019 we have updated our company mission and vision, which are to let everyone become more beautiful easily, and to empower the beauty industry and make beauty more accessible to our users respectively. In essence, beauty and power are the two keywords of our new strategy. 我们认为要满足我们3亿用户个性化的变美需求，不能只通过自己一家公司的能力，而是必须与整个变美产业的其他公司来共同服务我们的用户。因此，我们不管从现有的业务还是未来的业务布局，我们都把重点放在了赋能上面。 We believe that in order to satisfy the demand for beauty of our 300 million users, we cannot achieve this by ourselves alone. We must work with the entire beauty industry to serve our users together. Therefore, whether it is a new business or existing business, we have put a strong emphasis on empowering others. 好，举个例子，我们以前的广告业务更多是给广告主展示他们的品牌，但随着我们品牌星球计划的推出，我们的广告产品会加入一些让品牌主可以更好地与他们粉丝互动的机制和活动。 For example, historically our advertising business is about letting advertisers display their advertising elements. But now as we are launching the Planet of Brands initiative, we are adding a bit more mechanism in the advertising such that the brands can interact with their fans much more easy. 另外，我们在今年第二季度也会正式推出与上海市皮肤病医院合作的美图皮肤医生的服务，让用户可以通过美颜相机这个入口，直接在App上面与三甲医院的皮肤专科医生问诊，能改善用户的皮肤问题。 Additionally, in the second quarter this year, we will officially launch the Meitu Skin Doctor service together or in strategic partnership with the Shanghai Skin Disease Hospital, which will enable users to go through our app on BeautyCam directly and be able to connect with these dermatologists in top hospitals so that they can get online consultation and ultimately improve their skin issues. 在社区方面，美图秀秀在2019年变得更加聚焦在变美的内容上。更加聚焦的定位使得用户的时长也有所提升。社区用户平均每天的使用时长已经从上半年的12.5分钟增长到了13.6分钟。同时我们也看到高质量的内容生产者数量有显著的提升。 In terms of the social community initiative, our core at Meitu in 2019 has become much more focused in its content offerings surrounding beauty. Such a more focused content has generated quite a bit of improvement in terms of the user time spent. To give you a sense, the daily usage in the first half of 2019 was 12.5 minutes, and in the second half it has increased to 13.6 minutes. At the same time, we have also seen there are very significant growth in terms of high-quality content producers on our platform. 此外，值得一提的是我们海外的发展。我们海外的旗舰产品BeautyPlus在2019年有了很好的表现，MAU从2018年底的5967万增长了11%到2019年底的6614万。 The other thing that worth a mention is our overseas development. Our overseas flagship products BeautyPlus has a very good growth in 2019. Its MAU has grown 11% from 59.7 million in 2018 to 66.1 million in the end of 2019. 好，我们的海外产品的商业化模式，除了传统的广告以外，也引入了付费订阅的模式。这个模式在2019年的表现非常出色，收入达到应该说接近8600万，比2018年同比增长超过5倍。 In our overseas product, the monetization model has evolved beyond just traditional advertising and also into premium subscription model. This model has a very promising performance in 2019, with revenue reaching approximately 86 million RMB, which is more than five times growth compared to 2018. 通过付费订阅，用户不但可以解锁一些高级的修图功能，更加可以使用一些带有诸如像迪士尼或者Hello Kitty等国际知名IP的AR滤镜和素材，非常受我们用户的喜爱。我们计划继续深挖这个商业模式，为用户带来更多有趣和有吸引力的高级功能。 Through the subscription model, our user not only can unlock some premium photo editing functionalities, but they can also access some AR filters or other photo editing elements with internationally recognized IPs such as Disney IPs or Hello Kitty, etc. These functionalities have received a lot of traction among our users. We plan to continue to explore this business model such that we can bring more interesting and attractive premium functionalities for our users. 最后，我想分享一些为未来布局的业务线。在2019年底，美图推出了一台名为美图宜肤的医学级别的皮肤测试设备，可以以稳定而精确的测试，呈现出用户皮肤的状况和问题。 Lastly, I want to share a little bit about some of the business that we are laying foundation for the future. In 2019, we have launched a medical-grade skin analyzer equipment called MeituEve, which is able to accurately and stably analyze users' skin problems. 美图宜肤推出以后，市场的反应非常热烈，超出了我们的预期。我们也正在与一些国际护肤品这些大牌围绕美图宜肤进行一些合作的洽谈，共同探索一些让用户可以更加科学护肤的方法。 When we launched the MeituEve equipment, the market reaction has actually been very, very positive, surpassing our initial expectation. Right now, we are working with some of the really premium international skincare brands, and we are discussing ways and potential service offering such that our users can much more scientifically to choose their skincare products or use a skincare routine. 好，那以上就是我今天准备的内容。接下来请Gary跟大家同步一下2019年全年的商业化和财务的情况。好，谢谢Gary。 Okay, this is all the information that I prepared. I will pass to Gary to talk about the annual financial situation. Let's start with analyzing the P&L statement. Revenue in 2019 was 977.9 million RMB, with a growth rate of approximately 3% year-on-year. If you look at it just on the surface, it does not look like a very high growth. But in reality, the revenue quality has been increased significantly compared to 2018. This can really be seen if you analyze the gross margin. To put it into perspective, the gross margin in 2019 has reached 71.5%, which is 20 percentage point higher than the 51.9% in 2018. In absolute dollar terms, in 2019, the gross profit is approximately 700 million RMB, which is over 40% increase compared to 2018. The reason behind such a healthy growth in gross margin has something to do with our revenue mix, as I mentioned. If you look at the advertising revenues, which is a very, very high margin business, the growth has been very strong, reached 751 million RMB, growing 21% year-on-year. In particular, the programmatic advertising in 2019 has also grown very rapidly with annual growth rate of 70%, which we believe is very encouraging. As Xinhong Wu just mentioned just now, the advertising business going forward, we will focus a little bit more around how to empower the brands such that they can interact with their fans more, as opposed to just let them display their advertising elements. For example, we will help them to work with the KOLs to promote their brands. Also we will try to integrate some of our smartphone-based skin analysis technology, so that the users can better choose their skincare product and work with their brand more closely. The second thing is that the premium subscription model and revenue generated by this model has increased quite substantially, and this is also one of the reason why our gross profit has grown materially. To help investors and analysts better understand our revenue mix, this year, we have broken down the IVAS and others into three separate revenue lines, namely premium subscription and in-app purchase, IVAS and others. We can now clearly see that the in-app purchase and premium subscription has grown very rapidly, more than five times compared to 2018 to about 86 million RMB in 2019. The gross margin for this particular business is also very high. It is about 65%-70%, which compares to the 20%-25% gross margin of the showroom live streaming, which used to be one of the major contribution in the IVAS revenue line. I think going forward, because the showroom live streaming business does not really fit squarely into our beauty oriented strategy, we are going to move this revenue line to the others. Going forward, the others revenue line here will be consist of businesses that, number one, does not really fit into our overall beauty creator strategy or the businesses that could be related to the main strategy, but they are still very small, experimental, and very new. Before they become scalable, we will keep them in the others line and then we will take them out and disclose it separately as they become more meaningful. Moving on. Let me just go through a little bit on the company's expense structure. Our Chairman has talked about in the fourth quarter of 2019, we have generated adjusted net profit. The reason behind that, apart from a very significant growth in gross profit, the expenses control is also an indispensable factor. The most important expense control that we have executed is the reduction in sales and marketing expenses. It went down from RMB 780 million in 2018 to about RMB 330 million in 2019. The core reason for such a drop in sales and marketing is because we have adjusted our user acquisition strategy. In 2018, if you remember, we have done a lot of big brand marketing exercise, such as sponsoring the TV series and all that. We also have spent a lot of money in terms of acquiring users from various channels or buying downloads from various channels. But now starting from 2019, we have slowly moved that to become product feature driven user acquisition strategy. We try to put in features in the apps such that users are able to help us to market the product through word of mouth marketing. Obviously, such a significant reduction in sales and marketing will have a little bit of a temporary disruption to our user growth. As you can see, our total MAU in 2019 versus 2018 has a little bit of a reduction. But I think our sense is that this new strategy actually works very well because if you look into February, for example, as our Chairman has mentioned, our core app, Meitu, has again reached its historical peak. It is not like when we turn off the sales and marketing, our MAU just collapse, but instead we are able to find ways to drive user growth to its historical peak, even without spending a lot of money. I think we have proven this quite nicely in the first couple of months this year. Moving on to R&D and G&A expenses, I think both of which has a little bit of decline year-over-year. For these two expenses, most of that or the vast majority of that is actually related to employee expenses. We have discussed with the market that in late 2019, we have some business restructuring, we have some human resources restructuring, and these are done in the later part of 2019. Our current run rate of R&D and G&A would be even a bit lower than the average of the second half of 2019. Obviously, as we closely monitor the pandemic situation, we will very nimbly adjust our investment into both R&D and G&A and try to make sure that every single dollar that we invest will generate positive ROI. Just touch a little bit upon the profitability. In the full year of 2019, we have a RMB 190 million of adjusted net loss, which is significantly down by 70% compared to RMB 860 million in 2018. In terms of cash reserve, we have about RMB 2.6 billion of cash on our balance sheet. Although the global economy is quite uncertain for the rest of 2020, in our view, because our business efficiency has been improving and we have a very strong balance sheet, I think we will be able to weather the storm quite easily. This is all the content that we have prepared for this conference call. Now we can go to the Q&A session. You can use the raise hand feature in the Zoom app if you are using the mobile app or using the browser-based experience. For participants who are joining the meeting on the phone, you can press star nine to raise hand, and you can also press star nine again to cancel the request. You can press star six to mute or unmute your line. Shannon, I think we can move to the Q&A session. Yeah. The first question comes from a caller whose phone number ending in 984. The caller- Hello? Can you hear me? Yeah, we can hear you. Please go ahead. Okay. Thank you for taking my question. I am asking the questions on behalf of Thomas Chong from Jefferies. We would like to know more about the advertisement market recovering. Since management is quite confident on the recovery pace of the advertisement market, we would like to see more color out. Can you share more color on that? Okay. Thank you very much for your question. It is still very early days, right? We are in March, and I can share what we have been seeing in our advertising business. If you break down a little bit into different components of the advertising business. In February, where the pandemic is worst in China, we have seen a pretty meaningful drop in our KA business. However, the programmatic business in China has virtually been unaffected. The revenue for programmatic advertising is pretty much the same as January. Obviously, in February, the programmatic sales in overseas is also continuing with its growth trend. That is the first thing. Our sense is even during the pandemic situation, there is actually a number of businesses that requires more advertising. For example, apps downloads, games, to a certain extent, e-commerce. These advertisers who predominantly uses programmatic advertising would pretty much be unaffected. The reason why we believe we have seen some recovery in the advertising market is because if we look at the order book in March, it is actually quite meaningfully rebounded from February. I would almost say that, March hasn't really ended, but I think there is a good chance that it will be higher than January. Obviously, some of those budgets could be just simply shift from February to March. I think that the fact that we have seen advertising rebounded from February, it is at least some sign of recovery. It is not like, oh, February was significantly down from January, and then March is even worse than February. We are not seeing that. Okay. Thank you. That is really helpful. For participant who wants to ask a question, if you join on the line, you can press star nine, or you can use the app to use the Raise Hand function. For the investors who just joined our call, just to let you know that for participants who joined the meeting on the phone or a browser on a laptop, you can use the raise hand feature, and we can unmute you to speak. For participants who join a meeting on the phone, you can press star nine to raise hand or lower hand. You can also press star six to mute or unmute your call. Next question comes from Samuel Ho, from First Shanghai Securities. Hi, management. Good evening. Hi. We can hear you. Yep. Go ahead, please. I just want to ask a simple question. Will the company looking for any M&A investment in the near term? If yes, what kind of investment will be more interested? Thank you. Thank you very much for the question. We actually have been doing quite a bit of investment, and in some instances, M&A deals for the past few years. I think the general strategy has really not been changed. It is always businesses that fit our overall strategy, and as we have talked to the market a few times, our strategy now is very focused on empowering the beauty industry to help our users to become more beautiful. If we are doing significant M&A transactions, these will be companies that are complementary to our strategy. I think I can tell you right now, at this point in time, we do not have any specific targets in mind, and especially the global economy, it is still quite uncertain at the moment. I think we will also be a little bit more conservative when it comes to M&A. But if there are a great project at the right price, we will also be able to move very quickly because of our strong balance sheet. Thank you. Thank you so much. Okay, our next question is from the caller whose phone number ending in 984. Hello. Thank you for taking my question. I would like to know more about the overseas expansion strategies of Meitu. Also, can you share more on the competitive landscape in the online advertising? Because we just talked about the online advertising market trend, and I would like to know more about the competitive landscape. Let me translate this. I have two questions. First, can the management share what strategies you have for overseas expansion? Secondly, what are your thoughts on the current competitive environment for online advertising? Can you share a bit about that? Thank you. 好，Gary 你来回答吧。 OK。主要你是想知道海外的发展，能够再具体一点问吗？Can you be a bit more specific in which part of overseas? 比方说，因为我们会launch一些新的APP，想问一下可能未来在overseas，我们会不会有其他的、新的一些产品会去launch，或者是MAU上面，我们会不会有其他的一些target或者是KPI呢？ Okay. If there is any new forms of apps and whether there is target for MAUs. For overseas, I think right now, the business strategy is pretty much like a mirror image of what we are doing in China. BeautyPlus is actually an international version of BeautyCam, and AirBrush is international version of 美图秀秀. Basically, these are the two main apps in China, and there is a corresponding two main apps in overseas. Obviously, the overseas app will have a bit more difference in terms of localization versus Chinese app. Which, for example, the premium subscription model works in overseas, it does not really work in China because people or users in China are not very used to pay subscription for app features. I think in the overseas part, we may experiment a little bit more using video editing apps, which right now this function is being satisfied within 美图秀秀 in China. But in overseas, we may actually launch a video editing app standalone. Apart from that, I don't think we have very significant different plans compared to what we have in China. We normally don't give out specific guidance in terms of user growth, but our sense is that the overseas users growth trend, it's very likely to continue. One of the observations or thinkings that we have at this moment is that given the global pandemic situation, a lot of users in Western countries are kind of forced to stay at home right now. Previously, they all like to go out. They enjoy the outdoor a bit more compared to the Chinese users, but now they're all forced at home. So I think the time that they will be able to allocate in terms of exploring new apps and just using apps more in general has a good chance of that happening. So that actually it's beneficial to our organic download. The second thing is because the global economic slowdown has caused a lot of offline companies like hotels and travel and a lot of these offline companies to reduce their marketing spend. So globally, what we are seeing is the user acquisition cost is actually coming down a little bit. So that might also give us a good opportunity to grow our users. If we are able to find a model that generate positive ROI, i.e., you acquire users, but you can be very confidently able to generate subscription revenues over a course of 3, 4 months and recoup that cost and generate some additional return, then we will obviously invest in this user growth, like a positive ROI business model. So that's the first part of the question. The second part regarding advertising competitive landscape, it's a little bit difficult to answer this question because we're not really competing in the advertising market per se. So 美图秀秀, it's competing with users' time from other community apps, but they don't necessarily compete for the same advertisers. So we haven't really come across situations where this advertiser said, "I will only put ads on app A but not B because they are competing." It's not like this. If there's a brand launching an advertising campaign, they want to maximize the exposure as much as possible, and they also look at the return on investment for their ad campaign. What we are trying to do, I'm probably not answering your question very directly, but I think the core idea here or the core strategy that we want to adopt in 2020 is that we want to move away from just giving ad space. We want to become more engaging with the users and try to promote engagement between the brands and their target audience. So we are trying to really pull these two parties together and create a new form of advertising model. I think it's probably going to be quite promising going forward. Got it. Thank you. Hello? The next question comes from the investor from the line ending 732. Your line is open now. Oh, okay. Hi, management. Thanks for taking my question. The first question is the breakdown between China and overseas advertising revenue, right? I think if you look at 2019, overseas revenue, it is approximately a little over 15%. Yeah. I think for the global advertising situation, we have not really had a very strong sense. It is not as bad as what we saw in China KA in February. But I think the global situation has really just unfolded the last couple of weeks, so I think we are still too early to make a very concrete observation. I think we have to just be a little bit more patient before we have a very strong conclusion. Okay. Got it. Thank you. So the second question about the premium service revenue. Sorry, premium subscription revenue. So I just want to understand more about this product. What kind of subscription? Is this monthly subscription, annual subscription? What is roughly the price and what kind of a service the subscribers can get from that product? I just want to have a better understanding about this product specifically. Okay. The subscription, it is mostly two options. Either it is a monthly subscription or it is an annual subscription. Most of our user actually opt for the annual subscription because it is cheaper than the monthly subscription and theoretically they can cancel it anytime. But our cancellation rate is actually not very high. Maybe I will take one of the app to explain to you because we have a couple of apps and the monthly fee it is about $6. If you do an annual then it will just be $30. You can see the annual price is a bit cheaper than the monthly subscription. If you pay for the subscription, as we said on the call previously, you have some premium features. For example, the filters will be a bit different. It is different colors, different style. We will also have some automatic beautification functions that would not be available to the free user. But you can now use that with the subscription. Also there are some AR filters that are branded with IPs like Hello Kitty, Mickey Mouse, those kind of things. So there are things that you would not be able to use unless you pay for the subscription. Okay. Thank you. Just one more quick one to follow up. What are the top two, three countries that are contributing to this revenue line, the subscription revenue line? It would be U.S., Japan, and I think a couple of countries in South America. Okay. Thank you very much. That is all from me. If you have a question, please use the raise hand feature on Zoom app. If you join the call from the phone, you can press star nine to raise hand or lower hand, or you can press star six to mute or unmute line. Everyone, I am not seeing any more questions from the floor. We will be concluding the conference call tonight. Thank you once again for joining, and we are looking forward to talking with you all again. Stay safe and healthy.