Earnings Call: H1 2018

Aug 21, 2018

Ladies and gentlemen, thank you for standing by, and welcome to Meitu 2018 Interim Results Announcement Analyst and Investor Presentation Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session, at which time, if you wish to queue for a question, you will need to press 0 followed by 1 on your telephone keypad. I would now like to hand the conference over to your first speaker today. Johanna, thank you. Please go ahead. Thank you. Good evening, and welcome to Meitu 2018 Interim Results Conference Call. I am Johanna Chen from the IR team. Joining me today to discuss our results are Cai Wensheng, Chairman, Wu Xinhong, CEO, Gary Ngan, CFO, and Bryan Cheng, 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 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 in non-IFRS measures, please refer to our public documents on corp.meitu.com/ir. I would like to turn the call over to Mr. Cai. He will present in Chinese, followed by translation. Okay. Thanks, everyone, for joining our results conference call today. 2018 is full of challenges and opportunities. Competition in both the image utility app and smartphone market has intensified, and we have suffered some temporary pressure in both user growth and financial performance. 2018 also marks the 10th year since Meitu's inception, and while we have achieved a lot, there were also a lot of things that we could have done better. Therefore, for the next 10 years, we have come up with a new strategy that centers around beauty and social media, and we will be relentlessly focused to execute this new strategy. One of the most important pieces of this strategy is the transformation of Meitu from a utility app into a social network. Upon the official launch of the new social version of Meitu in September 2018, Meitu will become a social media platform that has over 100 million active users, putting it as one of the biggest social media platforms in China. We believe this transformation will help us to resume user growth, as well as significantly increase user time spent and engagement. Ultimately, this will also help us to increase the monetization potential of Meitu by way of increasing advertising inventories such as promoted feeds. We are very excited about this new strategy. I will now turn the call to our CEO, Wu Xinhong, to share more about this new initiative. Thanks, Wensheng. Again, welcome everyone to our teleconference. First of all, let me walk you through the thinking and the business model behind this new strategy, beauty and social media. I will talk a little bit about the latest update on Meitu social transformation. Finally, I will hand over to Gary to walk you through the performance of our various products and businesses in the first half of 2018. 我们之前有个图，但这边因为是电话会没有展示。我们在图里面，最里面的两层是用户产品，其中最为核心的是赞助相机入口。虽然我们已经成功证明了将工具用户变现的能力，但是我们很清楚，工具应用的变现能力是有天花板的。因此我们将通过美图秀秀的社交转型，搭建一个社交平台来增加用户的使用频率、使用时长以及留存率。 The key thought process behind this beauty and social media strategy is the relationship between user products and monetization products. This forms a unique business model for us. The actual diagram can be accessed through the online presentation platform. If you are just on the phone, you can go to corp.meitu.com/IR to access the presentation. The first two layers are user products and the traffic generated by our camera apps are the core of these two layers. Although we have proven our ability to monetize these utility traffic, we clearly acknowledge the limitation of utility apps monetization potential. Therefore, we are creating a social platform via the transformation of the Meitu app to increase the frequency of usage, time spent and retention rate of users. 在社交平台的上一层是广告平台，它是一个商业化的基础设施，不仅能为我们带来收入，也能够建立精准的流量分发机制到我们各个商业化的业务线上面。而最外面一层是我们要打造的美丽生态圈。到目前，我们已经在这样的生态里面布局了一些产品，比如说像电商、智能硬件以及互联网增值服务。 The next layer is our advertising platform. It not only generates revenue for us, but also functions as an infrastructure to distribute our traffic to various business lines in a targeted fashion. The outermost layer is the ecosystem around beauty, which we are set to establish. So far, we have already started to build out this ecosystem, namely e-commerce, smart hardware and Internet value-added services. 大数据贯穿了用户产品和商业产品的每一个环节，可以更好地支撑业务决策，也能够让我们更加理解用户的行为。 Our data analytics underpin every aspect of both the user products and monetization products, supporting us to make better business decisions as well as helping us to understand the behavior of our users. 关于社交，那我跟大家分享一些关于美图秀秀转型的进展和数据情况。今年的5月1号，我们上线了一个带有社交功能的美图秀秀，借此来获取一些用户的反馈。由于用户反馈的数据非常好，我们很快就进入到了第二阶段的测试。在8月1号，我们开始了对5%的用户进行新版美图秀秀的灰度测试。这个社交平台的版本，可以说是美图秀秀近10年以来最大的一次改版。用户可以直接在美图秀秀的首页看到图片或者视频这样的一个信息流。同时也可以在首页使用美图秀秀原有的非常强大的修图功能。 Moving on to social media, let me first share some progress and data points on the transformation. On May 1st this year, we have launched a version of Meitu that integrated certain social functionalities to obtain feedback from users. The results were very encouraging and therefore we quickly moved to the second phase. On August 1st, we have enabled about 5% of our users to try out the new version of Meitu. This version represents the biggest upgrade of Meitu in 10 years as it basically transformed it into a social media platform. Users will be able to see the photo and video feed on the front page of the app, while still being able to access all the fantastic camera and image processing functionalities that Meitu offers. 美图秀秀的slogan是创建我的生活方式，也就是一切与生活相关的内容，包括美妆、穿衣搭配、美食、旅行、瑜伽、健身等等。正是因为我们的内容定位是生活方式，很容易就形成一个内容的闭环，包括内容的生产、分发、消费以及互动。 The centerpiece of Meitu's positioning is lifestyle, which literally encompasses anything related to one's lifestyle, such as makeup, fashion, food, travel, yoga, gym, etc. What we are trying to achieve here is a closed loop of content, which involves content creation, distribution, consumption and interaction. We believe that lifestyle positioning makes it very easy to complete this closed loop of content. 值得一提的是，美图秀秀社交化对于用户活跃与变现潜力都有着非常重大的意义。我们观察到，在美图秀秀社交版的核心用户中，单用户每日使用社交平台超过20分钟。相比之下，以前的工具形态，用户每天只使用5到6分钟的时间，所以他们现在一天平均刷新信息流13次，浏览超过50张的照片。在这信息流中我们可以很自然地插入原生广告等等。相比以前只有开屏和首页icon这两个硬广的位置，社交化之后的美图秀秀变现潜力无疑是一个飞跃性的进步。 Importantly, the implication on engagement and monetization potential of this transformation is profound. In the core group of testing users, we have observed that daily time spent in the social platform was 20 minutes, in addition to the five to six minutes that they spent on the utility functions. On average, they refresh the feed for 13 times a day, browsing over 50 photos. Naturally, we can add a view of native ads to this newsfeed. When compared to the only two advertising inventory that Meitu has previously, namely the start screen and front page icon, the social transformation of Meitu clearly represents a step change in its monetization potential. 就如文盛刚才所说，美图秀秀的社交版在九月份正式上线以后，将会变成一个拥有超过1亿MAU的社交平台，跻身中国最大的社交媒体。我们非常期待这次美图秀秀的改版，也希望各位到时候可以参与到我们这个社交平台中，分享大家的生活方式。以上就是我今天所准备的内容，接下来请Gary跟大家同步一下我们2018年上半年的运营和财务的情况。好，谢谢。 As Wensheng has previously mentioned, when this version of Meitu is officially launched in September, Meitu will become a social media platform with over 100 million monthly active users, which is one of the largest social platforms in China. We really look forward to launching this new version, and we hope that all of you will become a user and share your lifestyle on Meitu. This is Gary, and now I will take over and discuss the operation and financial performance for the first half of 2018. First of all, the user metrics. Total monthly active users in June 2018 were 349.9 million, down 15.9% compared to December 2017. We believe such decline is only temporary, and we are confident that our user growth will resume in due course as we continue to execute our beauty and social media strategy. In particular, Meipai's MAU went down to 42.8 million in June 2018 from 98.1 million in December 2017. A non-recurring event was the main reason behind such a decline. In June 2018, downloading of Meipai in various app stores was suspended, and the updating of the front page feed of Meipai was also suspended. This was a response to the discovery of certain inappropriate content on the Meipai platform. Subsequently, we have comprehensively reviewed and upgraded our content monitoring system to ensure that there will be no more inappropriate content on the Meipai platform. In addition, we have also strengthened our communication with the relevant regulators by relocating the Meipai team from Xiamen to Beijing. In 2018, competition in the short-form video market has intensified. In order to differentiate Meipai from its competitor, we have adjusted its content positioning to focus on video where our users can learn a certain talent, such as cooking or skateboarding. Most other short-form video platforms are focusing on funny videos. Although we recognize that fun videos can easily go viral and capture a lot of audience within a short period of time, these videos tend to have a short shelf life and offer little replay value. We take the view that in the longer term, users are unlikely to be satisfied with just funny videos, but want to learn interesting talents as their hobbies become more and more diverse and lifestyles become more sophisticated. In other words, we are building Meipai for the future. In August, just one month after the new positioning of Meipai, we have seen a meaningful increase in its new user retention ratio. Number of videos viewed per user per day has also increased to 83 from 40 last year, indicating some early success. Aside from Meipai, MAU of the other camera apps have moderately declined, partly due to weak seasonality in June and partly due to competition. In our view, the social media transformation of Meitu will change the competitive dynamics altogether as all the competing camera apps will effectively become our partners as their users upload their photos onto Meitu's social media platform. Now let me discuss a little bit on various business lines. In the first half of 2018, we have continued to structurally shift our financial focus away from smart hardware to internet businesses. Gross profit generated by internet businesses now accounts for 37% of total gross profit, as opposed to 9% a year ago. Within the internet business segment, advertising is the biggest growth driver. Revenue from advertising increased 245% year-over-year to RMB 285 million. Number of brand advertising clients have grown to 217 compared to 75 a year ago. Similar to previous periods, these advertisers are some of the most premium brands from many different industries. In the first half of 2018, we have further enriched our advertising solutions, including promoted feeds and video ads. On top of traditional advertising solutions, we have also launched MeituGenius, an O2O advertising solution that specifically aims at improving efficiency of physical cosmetic and skincare offerings. MeituGenius utilize AI technology to enable user to test makeup products virtually, as well as getting personalized makeup looks recommendation based on their facial characteristics and skin conditions. Among the pilot client group were Sephora, MAKE UP FOR EVER, DFS, and Dolce & Gabbana Beauty. Also, we will be strengthening our programmatic advertising solution, launching a private marketplace platform or PMP, in the third quarter of 2018. As Yiming has mentioned, we are very excited about the transformation of Meitu, as there are a lot of potential to explore new advertising inventories and targeted advertising solution in the form of social media platforms. Many of our existing advertisers have shared the same excitement and expressed interest in tapping these new resources. Moving on to internet value-added services. Revenue increased 75% year-over-year to RMB 287 million in the first half of 2018. Virtual gifting and live streaming was still the largest contributor within this segment. The temporary suspension of Meipai's operation has negatively impacted this business, causing the average monthly paying users to decline 34% year-over-year to 0.21 million. However, the IVAS revenues from Meipai still managed to grow moderately year-over-year, thanks to the increase in average revenue per paying users or ARPPU. Revenue contribution from e-commerce has become more meaningful within this segment. We are continuing to improve the user experience of the AI skin detection, adding more skin quality management services, as well as moving towards a marketplace model for our e-commerce platform. Moving on to smart hardware. Market environment in the first half of 2018 has been very challenging. According to IDC, the total smartphone shipment in the Chinese market has declined 16% year-over-year in the first quarter of 2018. Competition in the smartphone market has also intensified, as there has been an increased number of phones launched during the first half of 2018 that are focused on selfie-taking. While Meitu has been able to maintain its product differentiation through cutting-edge image quality and fashionable design, the relatively low shipment volume has limited our supply chain capability, and therefore, we are unable to compete effectively through price. As a result, the total number of smartphones sold in the first half of 2018 was 533,000, compared to 847,000 a year ago. In response to this tough market dynamics, we have decided to extend the development cycle of our phones to maintain the technological edge over our competitors. As a result, we have postponed the launch of V Series from the fourth quarter of 2018 to first quarter of 2019. Revenues for the smart hardware segment was RMB 1.48 billion, compared to RMB 1.93 billion a year ago. Although revenue has declined, average selling price in the first half of 2018 was RMB 2,751, up 21% year-over-year. Now, let me turn to some profitability metrics. Gross profit in the first half of 2018 was RMB 626 million, up 43.8% year-over-year. Gross margin has also increased by 10.5 percentage point in the first half of 2018, mainly because of a significant margin expansion in the internet businesses, as well as the increase in the contribution in the gross profit mix. Sales and marketing expenses was RMB 446 million, accounting for 21.7% of total revenues. We expect sales and marketing expenses to continue to increase in absolute terms in the second half of 2018, as we are launching the social transformation of Meitu. The increased spend will gear more towards branding and kickstarting viral marketing as opposed to traditional traffic acquisition. This is because Meitu has already a very large existing user base. Therefore, we expect this increase in spending will only be temporary. Research and development expenses was RMB 351 million, accounting for 17% of total revenues. The increased expenses was mainly personnel-related. General and administrative expenses was RMB 136 million, accounting for 7% of total revenues. Similarly, the increased expenses was mainly personnel-related. We have recently reorganized our business into three distinct business groups to better focus on executing the new beauty and social media strategy. At the same time, we will continue to review and optimize our cost structure to maximize operating efficiency. Moving down the P&L statement. Other gains in the first half of 2018 was RMB 162 million, mainly comprises of RMB 77 million of disposal gains over certain long-term investments, as well as RMB 85.3 million of fair value gains on several Early-stage investments. Net loss for the period was RMB 127.4 million. Oh, excuse me, it is actually RMB 130 million, approximately 1% less than a year ago. Although we expect the gross profit growth of the internet businesses continues to be strong, it is likely to be outweighed by the near-term pressure of the smart hardware business. We are also committed to invest in Meitu to transform it into a scalable social network. Therefore, we expect the net loss to widen in the second half of 2018. Moving on to the balance sheet. As of June 30th, 2018, cash and short-term investment totaled RMB 3.8 billion. Capital expenditure during the first half of 2018 was RMB 91.8 million. Most of the capital expenditure were related to acquiring servers to increase our data analytics capability, as well as preparing the transformation of Meitu into a social platform. Additionally, on May 25th of 2018, we have announced a share repurchase plan to purchase up to $100 million worth of shares via on-market transactions. As of June 30th, 2018, we have repurchased approximately $71 million worth of shares. We will continue to monitor the market condition and repurchase our shares as opportunity arises. With that, I will open up the line for question and answers. Thank you very much, everyone. Operator, please. Thank you. Ladies and gentlemen, if you wish to queue for a question, please press zero followed by one on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press zero followed by two. Again, that's zero one on your telephone keypad now. Your first question comes from Robert Cowell from EDC. Your line is now open. Please go ahead. Hey, management. Thanks for taking my question. I actually have two questions. The first is about your new corporate structure. I see that you're now organizing the company based on different product groups, a social group, a beauty product group, and a smart hardware group. My question is about Meitu, the app specifically. Which group does that app fall under, and what does that say about the priority for Meitu going forward? My second question is about the smartphone business. I know last year, y'all made a big push in the sales channel, specifically opening a number of offline locations, et cetera. I'm wondering if there have been any changes of plans with respect to the sales channel for the smartphone business. Thank you. All right. Just one second. Bryan, yes. This is Bryan. To answer the first question, Meitu is in the Meitu application. It falls under a business group called Social Media Products Group. That's our main focus and top priority for the company. The strategy going forward is that we're focusing the application on the beauty and the social media, the main strategy, and Meitu as application is the main vehicle to carry out the strategy. That will be the top priority for the company as well. We want to let you know that all of the Meitu experience shop offline is actually operated by our distribution partner, Aiseda. We actually don't own and operate any of those shops. With respect to this channel strategy going forward, we do not have any material change at this moment, but recognizing the big environment of the smartphone market, which is not very optimistic, we will take a more conservative approach in setting up new offline shops. Thank you. Thank you, Robert. Your next question comes from Robry Gu from Credit Suisse. Your line is now open. Please go ahead. Hi, management. Good evening. This is Robry. I'm speaking on behalf of Thomas Chong from Credit Suisse. We have two questions today. Our first question is, could management help us to understand the recent progress for e-commerce business? Could management share more details about the e-commerce platforms? What about the GMV trend and other KPI that can be shared to us? The second question is about the general competition for photo apps in China market. As Gary also mentioned in the previous prepared remarks, you have already faced some fierce competition. Could you please share about us the general picture of the competition landscape? Thank you. This is Bryan. As to the first question, e-commerce, the e-commerce currently, we are selling products via our application, and going forward, we are expanding, we are developing the future direction of the e-commerce into more of an Alibaba model. Basically, we are selling not only the products from the third-party provider as well, so we are monetizing via advertising as well. That is for the e-commerce. Also GMV-wise, every month, we are averaging out at RMB 20 million as GMV. For the second question, in terms of the competitive dynamics in the camera app products, I think, obviously, it is getting more and more crowded in this space. I think the response to that is actually twofold. Number one is what I have mentioned earlier, is to basically turn our competitors into our partners, because I think creating a new camera app is not that difficult, to be frank. I think when user use all these new camera app, and then they edit their pictures, and when they share it to the Meitu platform, which I think it is a very natural move, that effectively make everyone our partner. So we are addressing the competition in this way. On the other hand, obviously, in our beauty business group, we are also launching new products to address these niche markets, which I think what some of our competitors has previously, quite successfully captured, and I think we are going to do something very similar. Because we have a lot of very strong R&D capability, as well as the understanding of user behavior, I think we should be able to catch up very quickly. This is Bryan. Let me add a few more points to the second question. If you look at the photo editing application landscape in China, Meitu possess a very unique positioning. In terms of branding and also in terms of the capability and functionality we can provide via the application. To take one thing, for example. When our competitor comes out with new features in the photo editing application, because of the gravity of our branding, one way we can compete is that we can quickly come out with a similar functionality. Because the power of our branding, we can draw user back into our application. In that way, our competitor is developing new features to increase the user base for our application. That is because of the power for Meitu as a brand. The second thing is, as Gary mentioned, we have a strong team of researcher and developers in our MT Lab. They are constantly developing new features, not only for now, but also even for the future. We are rolling out features like AI-enabled vision, the vision recognition, image recognition, and also the augmented reality, those functionalities. We are continuously adding this function into our application. By those two points, we are competing very effectively with our competitor. To add a little bit more points into the first question, the e-commerce. As I mentioned before, we are involving the business model into not only selling the product ourselves, but also selling the products on behalf of other, the third-party providers. We are monetizing not only via selling, but also via advertising. In addition, as we are developing the Meitu application as a more social media platform, we can do more stuff like we are going to provide the lifestyle related virtual goods. Basically, in the future, we envision ourselves not only selling the real form products, but also the virtual goods as well. Thank you. Thank you. There are currently no more questions in queue. As a reminder, if you wish to queue for a question, please press 01 on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press 0 followed by 2. Again, that is 01 on your telephone keypad now. There are currently no more questions in queue. Speakers, please continue. If there is no more question on the queue, then we may conclude this call. Thank you very much for everyone to joining our results briefing, and we look forward to speak with you again. Thank you. Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you all for your participation. You may all now disconnect.