Good evening, and welcome to Meitu's 2017 interim results conference call. I am Helena Chen from the Investor Relations team. Joining me today to discuss our results are Cai Wensheng, Chairman, Wu Xinhong, Chief Excutive Officer, and Gary Ngan, Chief Financial Officer. 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 this forward-looking statement.
During this call, we will present both IFRS and 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's. For a detailed discussion of the risk factors we face and the non-IFRS measures, please refer to our public documents on corp.meitu.com. Now, I would like to turn the call over to Mr. Cai.
He will present in Chinese, followed by translation.
Thank everyone for joining our call this evening. Here are some key highlights for our interim results. For the six months ended June 30, 2017, total revenues increased by 272.3% year-on-year to CNY 2.18 billion. Non-IFRS adjusted net loss decreased significantly by 87% year-on-year to CNY 33.2 million. Strong revenue growth and associated operating leverage are the key drivers. According to unaudited monthly management accounts, the group generated positive net profits on March and May 2017, demonstrating our ability to achieve profitability.
Our mission of making the world a more beautiful place means more than photos and videos in the virtual world. It covers making users more beautiful in real life, as well as more beautiful internally. We believe this involves the process of educating people about the concept of beauty. On the software side, our photo apps are already setting the trend of beauty.
Meipai is also filling users with positive energies. On the hardware side, it is a way of materializing beauty. Smartphone is just the beginning. Meitu can and will expand to other products that are related to beauty, and there are huge market opportunities for these products. However, Meitu's products will always carry a few characteristics: gearing towards beauty, female, and mid to high-end products. We only monetize a specific target market segment, that is, the one with customers who are capable of and willing to pay a premium to become more beautiful. It is exactly because this model is highly replicable on our user base that is over a billion in size, we see there is a high margin of safety to invest significantly. It is also exactly why we are confident that we can make the world a more beautiful place. This is not just a slogan.
What we are going to do. Also help user to become more beautiful in reality. Now let me hand over to our Chief Executive Officer Wu Xinhong to share the latest developments of our company.
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Thanks, Wensheng. In the first half of 2017, we continued to carry out our mission to empower our users to become more beautiful. As a data-driven mobile internet company, we are striving to gain better insight into our users through our large amount of data and advanced technologies.
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Our active user base is our most important asset as well as the key source of data. We are pleased to announce that our total MAUs reached 7.8% year-on-year growth to 481 million as at June 30, 2017, compared to 446 million in 2016. In particular, overseas MAUs reached 93.74 million, up 35.9% year-on-year.
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We are making great progress in our platformization effort, as reflected by the growth of our accumulated registered Meitu accounts, or MTid, to approximately 200 million as of June 30, 2017. Also, the user trend of our first platform product, Meipai, was encouraging. As of June 30, 2017, the MAU of Meipai increased by 7.9% year-on-year to 152 million, compared to 141 million in 2016. More importantly, Meipai's in-app MAU grew 33.3% year-on-year, indicating much higher user engagement.
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We have been very focused on building Meipai ecosystem, aiming at incentivizing content creators to produce more videos. Firstly, we have upgraded our recommendation algorithms to not only match users with video of their interest, but also to predict and cultivate new interests for them. Secondly, we have also rolled out a number of initiatives to help content creators to monetize their talents. This in turn starts a virtuous cycle to incentivize them financially to create more content. For example, through the launch of Project M platform, KOLs, who are content creators with a large number of followers, are efficiently matched with brand advertisers, so they can make money by producing videos that incorporate marketing elements from those brand advertisers. Another initiative is video shopping, a feature that enables content creators to convert their audience into customers, hence increasing the sales volume of their products.
One of the many encouraging examples for this new feature is that a KOL who sells dried seafood online managed to increase her sales conversion rate by 400% using this feature.
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For our photo apps, MAU year-on-year growth rate of Meitu and BeautyCam has moderated to 9.7% and 1.3% respectively because we have focused most of our product development resources in practice of their platformization, as opposed to launching multiple utility features to fuel user growth in the first half of 2017.
However, we see this as a necessary investment phase for the long-term prospect of these apps. By transforming these photo apps into platforms, we will be able to increase the engagement and retention of users, as well as generate more monetization opportunities through better understanding of our user preference.
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On the technology side, we have started to incorporate AI technologies into various products.
For example, the creative backdrop filter on Meipai employed an AI-based video segmentation technology to remove the background from a user-generated video in real time. This not only empowered users to create a lot of fun and creative videos, but also opened doors for Meipai to work with advertisers in creating branded backdrop filters for more interactive marketing. In addition, AI has helped us to label different videos on Meipai in order to improve the accuracy of content classification and distribution, as well as building a more comprehensive user profile. We now have hundreds of labels, and we aim at expanding them to over 1,000 through deep learning. Furthermore, we have upgraded our recommendation algorithm in early 2017, which were one of the key drivers for Meipai's significantly increased in-app traffic. We also plan to apply this recommendation engine to serve targeted ads in the future.
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To sum up, everything we have done here at Meitu are focusing on our users, and we will continue with this user-centric approach.
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Thanks, Xinhong. Good evening, everyone. I will take over and talk about financials. Results of the first half of 2017 were strong. Total revenue grew 272.3% to CNY 2.18 billion. IFRS net loss reduced by 94% to CNY 131.8 million, compared to CNY 2.19 billion in the first half of 2016. Adjusted net loss reduced significantly by 87% to CNY 33.2 million. As our chairman mentioned previously, we have proven our ability to become profitable in March and May of 2017 on an audited basis. If we analyze a bit deeper, we believe these results have also cleared a few market misperception of our company. Firstly, revenue of our Internet service segment, which includes both advertising and IVAS, have grown over seven times to CNY 246.8 million. This segment now accounts for 11.3% of our revenues, compared to only 4.9% in the first half of 2016.
Advertising revenues grew 219% to CNY 82.6 million, primarily driven by increase in the number of advertisers. However, we are still prioritizing quality- over- quantity of advertisers. We aim to further grow our advertising business, mainly through launching new advertising formats such as branded filters and stickers, introducing promoted feed ads to Meipai, and introducing targeted ad products to enable advertisers to reach specific audience groups. IVAS revenues grew more than 59 times to CNY 164.2 million. Average monthly paying users have increased to 324,000 from 58,000 in the first half of 2016. ARPPU or ARPU has also increased. We have continued to differentiate Meipai's live streaming content from other live streaming platforms. The strong growth from this segment indicates that our Internet business does have a very solid business model, and is highly scalable because of our massive user base.
This is a very different performance compared to the misconception of the market that we don't have a business model for Internet. Now let me turn to our smart hardware segment. Revenue increased by 247% to CNY 1.93 billion. We sold 847,000 units in the first half of 2017, compared to 289,000 a year ago. Average selling price, or ASP, also increased to CNY 2,272 this year from CNY 1,900 last year. The ASP growth is mainly due to the introduction of T series, which is a higher priced model compared to the M series. Gross profit for the first half of 2017 grew about five times to CNY 435 million, representing a gross margin of 20%. This compares to CNY 74.5 million of gross profit and 12.7% gross margin in the first half of 2016.
The key here is that our Internet services and other segment has turned profitable at a gross level, generating 15.8% gross margin in the first half of 2017, compared to a gross loss margin of 119.5% a year ago. If we break down the cost of revenues for this segment, we will see a number of costs are actually not that variable with revenues, such as bandwidth and storage-related costs and video content monitoring fees. These costs mainly associated with Meipai and generating a dollar of additional revenues from advertising doesn't really change these costs. As a result, we have seen very strong operating leverage for this segment. Going forward, the gross margin for this segment will mainly be driven by the business mix of advertising, IVAS, and e-commerce.
For the smart hardware segment, gross profit grew 264% to CNY 396 million, representing a gross margin of 20.5%, which is one percentage point higher than that of first half of 2016. In terms of expenses, they are very straightforward. Expenses as a percentage of revenues decreased across the board. Majority of the expense grew due to an increase in headcount, personal related expenses. We ended the first half of 2017 with 1,715 employees, compared to 1,328 at the end of 2016. There was no significant fluctuation in our overall promotion and advertising expenses between the first half of 2017 and first half of 2016. As usual, vast majority of our user growth came from organic downloads as opposed to paid marketing.
Loss for the first half of 2017 reduced significantly because a fair value loss on the convertible redeemable preferred shares of CNY 1.9 billion was recognized in the first half of 2016, but did not recur this year. All the preferred shares were automatically converted into ordinary share upon listing in December 2016. Touching a bit on the balance sheet, our cash and other liquid financial resources were CNY 5.3 billion as of June 30, 2017, compared to CNY 5.5 billion at end of 2016. We are very well capitalized, and we do not have any debt or borrowings. In terms of CapEx, we have spent about CNY 24.8 million in the first half of 2017, slightly higher than that of CNY 21.8 million a year ago. Let me finally talk a little bit about our outlook.
`Firstly, we said in the last result we will sell 1.5 million smartphone units this year, and now we expect to sell a bit more at 1.6 million for 2017. However, we note that proportion of sales of T series, which carries a high gross margin, will reduce in the second half of 2017 compared to the first half. Secondly, we believe it is still necessary to accelerate investment in our people, technology, and user growth, mainly in terms of expenses, for the second half of 2017. Therefore, we continue to increase our expenses across the board. As a result, we expect to incur a net loss for full year of 2017, an outlook that is unchanged from what we have discussed during the IPO. This is all our prepared remarks, and we will now open the call to Q&A. Thank you.
Thank you, management. If you have a question, please press zero one on your telephone keypad now and you enter a queue. After you are answered, please ask your question. If you find that your question has been answered before it is your turn to speak, please press zero two to cancel the question. Once again, zero one on your telephone keypad now to ask a question. Our first question is Minnie Wong from Merrill Lynch. Please go ahead.
Hi, thank you, management, for taking my question. First I have a question on Meipai. How is our average, in terms of ARPU, how is it trending? Also, can you just give us some color in terms of like, on Meipai, in terms of like, the differentiation you see against other platforms, like broadcasting platforms. My second question is that on our revenue growth. It seems as this half, like first half of the period, is still largely driven by the growth in our hardware sales. I understand that IVAS is actually increasing as a percentage of total. How are we seeing in terms of the three segments, advertising, the Meipai, and also e-commerce, how do we see each of those growth will trend? Any key metrics that you can share into these three platforms will be very helpful. Thank you.
Okay. In terms of the ARPU, I think you can actually calculate from the announcement, but, as a trend, it has been increasing since we launched our service in the first half of 2016. In terms of the differentiation of Meipai, I think, number one, the content of Meipai is very lifestyle-oriented as opposed to most other live streaming platforms that are focusing more on the showroom business. The other key differentiation is Meipai fundamentally is focusing on short-form videos and live streaming, it's a secondary or support function. I think the main role of live streaming is to enable the KOLs to interact with their fans more easily, but the core is still short-form videos. To answer your question on revenue growth, I think the non-smartphone business has been growing very rapidly. Advertising growth is mainly driven by the number of advertisers.
But as I said, overall strategy-wise, we are still focusing more on quality. I think the flip side of that, the implication of that is once we continue to build a business, you will see both the number of advertisers and also the revenue per advertiser will continue to grow in the next few quarters. Obviously IVAS is driven by both an increase in ARPU and paying users, and we are still seeing very strong growth coming from this segment. E-commerce is still at the testing stage, so we are now working on our product. I think the overall strategy of e-commerce is to find a point of differentiation, which will set us apart from different e-commerce services such as Taobao or JD. We are also very focused on incorporating some AI or artificial intelligence technologies into our e-commerce platform.
I think you'll be able to see some of these products being launched in the second half of 2017 very soon.
Okay, thank you. I just have one follow-up on the MTid, because I think management introduced it, talked about more in your opening remarks. How active are you talking about those MTid in terms of your 200 million, understand there is more registered accounts. How active are they? Then, in the longer term, do we see the cross-selling, or maybe the cross-users across our various products? Which I think that after we grow our users in certain products, then we can achieve cross-selling or maybe cross-users across those. Any color of that would be very helpful.
Okay. I will take this question. MTid, if you look at the history of the MTid is mostly coming from the Meipai product. By definition, the Meipai users are obviously a lot more active than the utilities or photo apps users. To give you a sense, Meipai users spend over 30 minutes a day, whereas, most of the photo apps spend about five to six minutes a day. So you will be able to see the MTid activities. Currently, it is much higher than the non-registered users. But even for the non-Meipai users, the users using MTid obviously are more active than the non-registered user as well.
Thank you.
The next question is Kim Chong from CCBI. Please go ahead.
Hi Cai, Wu Xinhong and Gary, thank you for taking my question. I have a question, when do we expect to see meaningful revenue contribution from e-commerce? Any updates on [MeituBeauty] or MeituDIY would be very helpful.
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Sorry, excuse me, let me just translate the answer. Yeah. The e-commerce business really started in Q4 of 2016, and six months later, we are now testing a lot of different concepts. I think in order to see really huge progress in terms of revenues will be taking us to 2018. We know that there is a lot of high expectation for our e-commerce business, but if you look at Taobao or JD, in their first few years, the business is actually quite slow. We do not think it will take as long as what they have taken, but if you want to see a great ramp up in recent months, that will be quite challenging.
Right now we have already have a team of over 100 people and the two major businesses are Personalized services and [MeituBeauty]. Personalized services is a very complimentary business to our user base, whereas [MeituBeauty], going forward, will be more focused in terms of the business model, especially on cosmetics and skincare products. We should be able to see revenues or business picking up in second half of this year. But to become a meaningful drivers of revenues, we will probably have to take it to 2018.
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Yeah. The question is the cooperation with Google, it is focusing on Hong Kong and whether it is focusing on Hong Kong and Taiwan exclusively, and whether we will have four months of full contribution from 1st of September.
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The cooperation with Google is two folds. On one hand, we have the advertising partnership with them, but also we are working something on technology and on the side of artificial intelligence. Going back to the advertising, right now the 1st of September is the start of a testing phase. If the result is going to be good, then we will also start to deploy more resources or sales resources ourselves into selling ads in these two jurisdictions. But I think overall speaking, we should really treat that as a surprise on the upside, because we have not really had guided that we will have much monetization in these two jurisdictions previously.
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I just so happened to also attended the Google event. In that event, there are over 100 advertisers from luxury brands and products. I think the reaction has been quite overwhelming and we are quite pleased with the reaction from the advertisers, because they do not really know that they can work with Meitu to advertise their products previously.
Thank you.
Our next question is Warren Wong from FSCSS Management. Please go ahead.
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The question is what is the differentiation and the outlook of the IVAS segment because it has been growing quite rapidly. Our Chief Executive Officer replied that right now most of the revenues are coming from the tipping of live streaming. Going forward, we will still have a couple other IVAS businesses such as the in-app purchases. For example, you will have to pay in order to unlock certain features of the apps. We will also start to work with VIP memberships as well as some data related services providing to the users.
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The question was mostly related to the outlook of smartphone sales. I think we actually have said that in the prepared remarks that we will be shipping about 1.6 million units for the full year of 2017. That is our expectation for the full year.
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The question is, because the first half has been very positive, are we raising our forecast of the smartphones shipment this year? I think the answer is yes, because previously we talked about 1.5 million units for 2017, and now we are revising that up to 1.6 million units.
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The question is, platformization is one of your key strategies, so what are your product plans? Our Chief Executive Officer replied that the core of the strategy is to increase the number of users, proportion of users that log on to our apps using a registered account. If you look at Meipai, it is a very successful example of a utility app transforming into a social product. For most of the other apps, we are also adopting this similar strategy. For example, Meitu Social, it is also going to become a social platform in due course. Obviously, I cannot really disclose the timing at this moment, but I think the strategy is for most of our other apps to also adopt similar strategy. I just want to supplement with two points.
One, all of our product going forward will be supported by AI technologies, and also will embrace some of the most popular features such as cloud-based beautification and augmented reality features.
Okay.
From a financial management point of view, we tend to be slightly more conservative because we want to be able to achieve the guidance that we are giving. But the first half of this year, we have launched a couple of new products and, if the products that we launch in the second half also beat our expectation, then obviously the end result will be higher than what we have guided today. Maybe we can talk about this offline because it is very detailed.
Next question is Minnie Wong from Merrill Lynch. Please go ahead.
Hi. Thank you for taking my follow-up question. I understand that advertising this quarter, one of the key IVAS has been growing fast, is also getting more meaningful. I understand that you are talking about that is the AI that potentially will have a lot of these branded backdrop features. Do you think this is something like what Snap Inc. has been doing? What are the major advertiser industries that we are seeing, and how do you think that this will trend, given that because our user base predominantly is still female-driven. So how does our advertising mix base now and how do you think that will trend?
I guess across the three segments, do you think advertising, live broadcasting, e-commerce, which one of these, if you have to rank it, which one do you think our company would be focusing most of our efforts, or are they just going side by side along with each other?
Sure. In terms of the advertisers, I think what we are seeing right now, it comes really across many different industries. Obviously, FMCG, luxury brands, skincare, cosmetics, they are the key pillars. But we are also seeing e-commerce business, some other apps, games. I think right now, because the user base is actually quite massive, even though it is sort of geared slightly towards female, but it does not change the fact that there is a huge user base and a lot of advertisers want to tap into that. I think the point I here want to make is, even if we just tap into the luxury, skincare, cosmetics, all the so-called female-related verticals, then it will be a huge opportunity for us already. That is the answer to your first question. I think second question, that is actually quite a good one.
From a resource deployment perspective, we are looking at the three segments pretty much one segment. The reason is because the whole idea is to allocate our traffic to the highest return on investment business lines. As what the chairman has mentioned previously, for a certain business, the ramping up phase will take slightly longer than the others. For example, e-commerce, I think it will be one of the major, or even it could potentially be the largest sub-segment in the future. But in the near term, obviously, the ramp-up speed will be much slower than that of internet value-added services. I think the way I look at it is, you look at how many people are actually paying for the service, and then you will be able to understand how fast this business will ramp up.
Because if you look at IVAS, the paying users is only a few hundred thousand people.
Could become maybe 1 million people in the future, but still, it is a very small amount of people. Whereas e-commerce, you are talking about could be a few million or tens of millions of people paying for it. That is why you need time to slowly ramp up this business. But by the same token, e-commerce, because there are so many paying users, in fact, the revenue potential could be highest.
But then also margin on that side would be lower. I would imagine advertising would have the highest margin, and then live broadcasting, and then e-commerce, based on what existing business model or existing companies are doing with this.
Not necessarily.
Not necessarily. Okay. Yeah, for Meitu.
Yeah, I think advertising will definitely be the highest margin, but e-commerce versus IVAS, it will depend on the mix. It really depends on the mix.
All right. Thank you.
As a reminder, please press zero one on your telephone keypad now to ask a question. The next question is Chen Wang from TM Security. Please go ahead.
The question is talking about the overseas users and what is the strategy and what is the distribution of the users. Which country has the higher overseas users, and what apps are these users using primarily? For both Chinese and overseas users, we have seen very good growth for this first half. Obviously, I think in order to fuel the growth further, we are focusing our user acquisition strategy in fourth- and fifth-tier cities. For example, like what Weibo has done previously. I think if you compare the Chinese user and the overseas users, the overseas users' activity level is not as good as China. I think there are some cultural differences and also definition of beauty that drive the differences. To also answer your question, I think most of the users are using the app called BeautyPlus in overseas countries.
The three largest countries, in terms of users we have hold on just one second. There are India, Indonesia, Thailand. They are the three largest countries. We also have quite a bit of users in Japan, Korea, and United States. The question is: what is the split between SME and KA currently? Because the perception is that the promoted feeds are mostly for SMEs, whereas the display ads are mostly for KAs. In fact, right now, all of our advertisers are KA advertisers. We haven't really started the promoted feeds business. We haven't really disclosed the number of advertisers, but if you look at the revenue size right now, most advertisers will have a budget of around CNY 500,000- CNY 1 million per half year or per project. You can sort of back out a range of advertisers that we have at the moment.
As a reminder, please press zero one on your telephone keypad now to ask your questions. This is the end of the Q&A section. Also, this is the end of the call. Thank you everyone for attending.