Earnings Call: H1 2019

Aug 26, 2019

Hello, and welcome to the Meitu Inc. 2019 Interim Results Analyst Conference Call. Throughout the call, all participants will be in listen-only mode, and afterwards there will be a question and answer session. Please note this call is being recorded. Today, I am pleased to present Johanna Chen. Please begin your meeting. Hi, this is actually the CFO, Gary. Welcome everyone to the Meitu first half of 2019 analyst conference call. Today we have Mr. Cai, the chairman of the board, the CEO, Mr. Xinhong Wu, and myself, Gary, Chief Financial Officer. Now I'll pass the call to Mr. Cai for some opening comments. He will present in Chinese and then followed by an English translation. Okay. Thank you very much for everyone attending today's analyst call. In the first half of 2019, Meitu is still in the process of a strategic adjustment, but we have already achieved some interim results, which we think is very encouraging. First of all, our global MAU has already resumed to the growth trajectory, as we saw that in June 2019, our MAU was higher than December 2018 by 0.6%. The social transformation of the Meitu app is also doing very good. Not only we have a pretty solid user growth, the time spent per user on a daily basis has also grew over 100% compared to when it is a pure utility app. Subsequent to June, it's also showing a very positive growing trend in terms of the time spent. Okay. In terms of monetization, we have not only achieved a 27% year-on-year growth in our core advertising business. In overseas market, we have also started a premium subscription model, which was very successful and has become one of the fastest-growing subset under the IVAS segment. In terms of overall financial, in the first half of 2019, our adjusted net loss has narrowed significantly, compared to last year, the loss was 41.4% less, which is within our expectation. Facing the global uncertainty in terms of the macro environment, we are going to focus our resources in the highest projects that gives us the best return on investments, so that we can create long-term value for our shareholder. Now, I would like to ask our Chief Executive Officer, Wu Xinhong, to share the operation. Okay. Thank you, Chairman. Welcome everyone again to the analyst conference call. In June 2019, the total MAU of Meitu's portfolio was 308 million, which is 0.6% higher than the 306 million MAU in December 2018. Okay. Since April 2019, our company's MAU has been rising every month. We believe that is a strong signal that our MAU has already resumed to a growth trajectory. Within which BeautyPlus, which is our overseas product, and our core product, the Meitu app, were the two major drivers for such growth. 虽然美颜相机和美拍在上半年的MAU有所下降，但是美颜相机的MAU下降趋势已经非常地缓慢，并且自从四月份开始，每个月都有所增长。美拍的跌幅是几个产品之中比较大的，但随着美图秀秀社区化的发展，美拍的定位也会发生改变，更多会成为美图秀秀生态的其中一部分。 Although the MAU of BeautyCam and Meipai has been declining, we note that the MAU of BeautyCam, the decline has already decelerated substantially. Since April this year, BeautyCam's MAU has already been increasing every month. In terms of Meipai, the MAU decline is the highest among our portfolio. As the social transformation of the Meitu app continues, the position of Meipai is also going to change, and it will become part of Meitu app's ecosystem. 讲到美图秀秀的社区化，这是我们从2018年下半年开始的一个战略重点。美图秀秀社区在2019年的上半年，可以说是打下了一个非常不错的基础。首先，美图秀秀社区的MAU在今年六月份已经达到了6,000万，而社区用户日均使用的时长也达到了12分钟。对比过去美图秀秀作为纯工具的时候，它的五到六分钟的时长增长了一倍多。而且时长在七八月份一直持续地增长。 On to the social transformation of the Meitu app. This has been one of the highlights since 2018. In the first half of 2019, we believe that the transformation has achieved some good interim results and has laid down a very solid foundation. First of all, the monthly active users of the social Meitu app in June has reached 16 million. The daily time spent of the social user has reached about 12 minutes in June, which compares to about five to six minutes when Meitu app was a pure utility app. It represents about over 100% growth. The time spent in July and August has still been growing. 从内容生产的角度来说，在六月份，用户每天上传超过78万条图片和视频的内容，比起2018年底的时候增长超过5.5倍。虽然美图秀秀的内容目前还是以图片为主，但视频上传的占比也在一直地提升，达到了11%左右。 From the content creation point of view, in June, everyday users has been uploading about 780,000 photos and video combined on a daily basis, which represent about 550% growth compared to end of 2018. Although the content of the Meitu social platform right now, majority is coming from photos, we have seen the proportion of video content has been increasing. From a pretty low percentage in 2018 to about 11% in June 2019. 接下来，美图秀秀将会推出更多带有社交元素的功能，比如说最近在公测的私人相册。私人相册不但可以让用户更有效地管理自己的云相册，更可以邀请他们的密友来共同管理相册并进行互动。我们认为这些举措都会继续增加美图秀秀的粘性，带来更多的用户增长。 Going forward, our Meitu app will also have more social features. For example, currently we are beta testing the private album functionality. This private album not only enables user to manage their cloud album much more effectively, but also they can invite their close friends to manage the album together and also interact together within this private album. We believe these initiatives will continue to increase the user engagement of the Meitu app and also bring more user growth. 在海外方面，我们不仅在用户增长方面取得了不错的成绩，我们更在商业化的探索上做出了适合美图产品的模式，也就是付费订阅。简单来说，付费订阅的用户可以解锁我们产品的一些VIP的功能，比如一些独特的个性滤镜，或者带有IP的AR滤镜等等。这块业务在2019年上半年的收入增速非常快，对比2018年同期增长了6倍，成为了增值服务底下一个很重要的子板块。 In our overseas business, not only we have achieved some very good growth in terms of user, we have also successfully found a new monetization model, which is the premium subscription. Simply put, the premium subscription means that user can unlock certain VIP functionality, such as some unique filters or AR filters that has IPs, such as Hello Kitty or Astro Boy, and all they need to do is to pay a subscription fee. This particular business has been growing very, very rapidly in the first half of 2019. Compared to the same period last year, it has grown over 600%, and it has become one of the very meaningful sub-segment within the internet value-added services. 在智能硬件方面，我们与小米合作的第一台手机小米 CC9 美图定制版已经在今年7月初顺利推出，并且取得了不少评测机构和用户的好评。除了手机以外，我们的智能硬件部门在聚焦探索皮肤相关的硬件尝试。我们的长远愿景是可以通过美图的计算机视觉能力，通过数据的积累以及对美的理解，帮助用户在现实世界中更科学地护肤和变美。 In terms of smart hardware, the first cooperation phone with Xiaomi, the Xiaomi Mi CC9 Meitu Edition, has been successfully launched in July this year. This particular product has received pretty good comment from both user and professional review agencies. Apart from smartphones, our smart hardware department right now is focusing on searching for these skin-related smart hardware, and putting some experimental efforts in it. Our long-term vision is that we can help user to become more scientific in terms of skin care, and become more beautiful in real life through Meitu's strong computer vision ability, the data analytics, and also the understanding of beauty. 好的，那接下来我请我们的CFO Gary来跟大家分享一下财务的状况。谢谢。 Let me take over and talk a little bit about the financial situation. In the first half of 2019, the most important change to our financial or P&L, is that we have classified the smart hardware as a discontinued business. This means the revenue and associated cost and expenses of the smartphone business will not be consolidated, and instead it will be summarized with one line at the bottom of the P&L. In the first half of 2019, the overall revenue is 464 million RMB, about 4.5% less year-on-year. Within which, online advertising is the largest segment, reaching about 362 million RMB. This business has grown 27% year-on-year. Although starting from the second quarter this year, the global economic or global macro situation has a little bit more uncertainty, we know that our second quarter online advertising revenue actually still have a single digit quarter-on-quarter growth compared to the first quarter. In terms of IVAS, in the first half of 2019, the revenue was approximately 100 million RMB, down about 50% year-on-year. If we analyze this segment a little bit more, we can see that the major decline is coming from the decline of the live streaming business of Meipai. That is because this business is highly correlated with Meipai's user. We have already discussed that Meipai's user has been declining in the first half 2019. If we look closer to this segment, as we have mentioned, the premium subscription growth has grown very substantially. We think that given this great initial success, we are going to focus more of our resource to work with great IPs globally so that we can try to grow this business by providing user with more IP branded filters going forward. As we said, in terms of the smart hardware, the Xiaomi Mi CC9 Meitu Edition was launched in July this year. In the first half of 2019, such revenue has not been reflected in our financials. We can see that after taking away the smartphone revenue, there is still a little bit of smart hardware revenues within this segment. As we have mentioned, Meitu is currently still in the exploration stage of beauty-related smart hardware. We do not expect this segment will have a very large revenue contribution in the short term. We believe that helping user to become more beautiful in real life is an area that warrants more exploration. We believe that with our large user base, our data, and our understanding of beauty, we will eventually be able to get some achievement within this segment. Moving on to gross profit. In the first half of 2019, our gross profit is 308 million RMB, growing 28% year-on-year. The gross margin was 66.4% in the first half of 2019 compared to 49.3% in the first half of 2018. The gross margin expansion in the first half of 2019 is mainly because the high margin advertising business represented a higher percentage of total revenues compared to the Internet value-added services, which carries a lower gross margin. In terms of sales and marketing expenses, the first half of 2019, it was about 170 million RMB, which is significantly less by 38% year-on-year compared to last year. The most important reason behind that was because we have adjusted our user growth strategy, which focusing more on the product itself as opposed to trying to spend user acquisition cost. We have previously mentioned that the June MAU is actually higher than the December MAU last year. You can see that against the backdrop of a reduced sales and marketing, we are still able to grow our user base, which means that we have achieved some success within this new user growth strategy. In terms of R&D and G&A expenses, the first half of 2019 is relatively stable year-on-year. The fluctuation is within 3%. As we always mentioned, the R&D and G&A is mostly personnel expenses related, so we are not going to expand much on that. If investors and analysts have questions, we can answer that in the Q&A session. Moving towards the adjusted net loss. The first half of 2019 was 172 million RMB, which is 41% less than last year, 293 million RMB. The two main reason for this narrowing of losses was because the internet revenue growth and also a very effective cost control. Currently, while we expect that the full year of 2019, we are still going to make a loss, we believe this loss will be significantly less than the full year of 2018. Finally, in terms of cash, we have a very strong balance sheet. At June 30, 2019, we have about 2.55 billion RMB of cash, which can support our daily operation very smoothly. In the short term, we are not going to have any capital raising plans. That is all the prepared remarks that we have, and we can now open up the floor for Q&A. Thank you. Operator? Ladies and gentlemen, if you do wish to ask an audio question, please press zero one on your telephone keypad. If you wish to withdraw your question, you may do so by pressing zero two to cancel. Once again, please press zero one to register for a question. There will be a brief pause while this question are being registered. The first question is from Robert Cao from 86Research. Please go ahead. Hey, management. Thank you for taking my question. Congratulations on the return to growth of the MAU and also strong time spent data on the Meitu app. I am interested in how we are thinking about the user experience going forward, because we have now two key functions for the Meitu app. One is photo editing and the other is social. How are we balancing those two? Where do we see the user experience going in the future? Then also, if you could provide any color on the usage of those core photo editing apps, how that is evolving as social becomes a more important part of the experience. Thank you. Okay. Hold on, let me just translate the question. 工具的行为和数据。美图秀秀的工具是为社交生态服务的，所以未来会针对美图秀秀的社交功能做进一步的一些工具上的创新。举个例子，比如说在视频上面会有很多的围绕社交的创新，也就是说美图秀秀的工具会逐渐地从修图进化到修视频。这些都是为了整个社交生态服务的。所以这两者之间本身就是一个非常好的互补平衡。 From the strategic point of view, the utility now is being positioned to serve the social function. Going forward, I think the innovation on the utility part is actually going to drive more social usage. To give an example, as you can see that the video sharing is growing in the Meitu app. So in the future, there will be more video editing functionality in the Meitu app to support the growth of the video sharing in the social feature. 然后我们从去年9月份往社交转型以后，我们能看到无论是工具还是社交数据都有明显的增长，说明这个转型是被验证成功的。然后我们也看到了很多使用美图秀秀工具的用户，在修完图之后，会直接把图片分享到我们的社区。有这样的行为的用户越来越多，也说明了用户已经逐渐建立了社交的心智。对数据是非常正向的。 From the social transformation since September, October last year, we have seen data for both utilities and social in terms of user engagement has been growing. We also have discovered that a lot of users directly share their photos after they edit it with our utility. So this means that we are slowly building up the user trajectory of the loop of edit the photo and then share it on the social platform. So we believe this usage trajectory is starting to take form. Thank you. Once again, if you would like to ask a question, please press 01 on your telephone keypad. Once again, please press 01 on your telephone keypad to ask a question. Press 02 to cancel the question. The next question is from Thomas Chong at Jefferies. Please go ahead. Hi. Thanks management for taking my questions. I have a question about the advertising revenue trend. Given the fact of macro headwinds, and we see a solid momentum in the first half, how should we think about the trend as we go into the second half in 2020? My second question is about the premium subscription revenue growth. Can you share about how we should think about the second half in 2020? Thank you. Sure. In terms of advertising, obviously because of the global uncertainty, we don't have a very strong visibility beyond Q3. Right now, as we saw in Q3, it's still going to be a positive growth against Q2. But in Q4, I think the visibility dropped a lot. I'm not saying that it's going to be worse, it's just that we haven't really seen much pre-order coming in. But that has always been the case for our business. Right now, most of our advertising orders is not like a full year commitment and things like that. We'll just have to see how that unfolds. What we want to note here is that our advertising portfolio is actually quite diverse. If you look at the first half momentum, a lot of those is actually driven by programmatic advertising. KA is still the largest contribution, but programmatic advertising has also grown quite a lot, and overseas advertising is slowly growing as well. I think our advertising portfolio is quite diverse, and this could be one of the points that could withstand such a macro uncertainty. In terms of the premium subscription model, I think what we can tell you is that the growth has been very strong in the first half. To give you a sense, in December the revenue was a few hundred thousand RMB, and in July it has been RMB 8 million, and every month it has been growing. Right now it is too early to call what is the peak or the trend is still very strong. We do not really know how to put a figure for the second half, but I think we can expect the growth to be strong in the second half. Once again, if you would like to ask a question, please press 01 on your telephone keypad. Press 02 to cancel the question. Once again, if you would like to ask a question, please press 01 on your telephone keypad. Press 02 to cancel your question. There are no questions on the line at the moment. I will return the conference back to the management. Thank you once again for dialing into our analyst briefing call. If you have further questions, feel free to email our IR team at ir@meitu.com and we will respond to you at our earliest convenience. Thank you very much once again. Goodbye. Thank you. This now concludes our presentation. Thank you all for attending. You may now disconnect.