Earnings Call: Q1 2021

May 19, 2021

Earnings release

Good morning, ladies and gentlemen, and thank you for standing by for Sohyoung's First Quarter of 2021 Earnings Conference Call. As a reminder, today's conference call is being recorded. I would now like to turn the meeting over to your host for today's call, Ms. Vivian Xu. Please proceed. Proceed. Please note that the discussion today will contain forward looking statements made under the Safe Harbor provisions of U. S. Private Securities and the Litigation Reform Act of 1995. Forward looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to, those outlined in our public filings with the SEC. Including our annual report on Form 20 F, Sohuang does not undertake any obligation to update any forward looking statement, except as required under applicable law. Joining us today on the call are Mr. Xin Jin, our Co Founder, Chairman and CEO and Mr. Ming Yu, our CFO. At this time, I would like to turn the call over to Mr. Xin Jin. Case, please? We are very pleased to kick start the year with solid results for the Q1 of this year, with revenue of RMB360 1,000,000, almost RMB30 1,000,000 above the top of our guidance and up 97% from the Q1 of 2020. Average mobile MAUs were 8,390,000, up 1 point up 101% year over year. And the number of paying media service providers on our platform was 4,702, up 43% from the Q1 of 2020. The industry continues its recovery during this quarter. We have seen increasing level of interest from our end users as well as an increased interactive activity across our platform. During the quarter, we continue to execute on our strategy to increase conversion and retention rates, while further expanding our network of high quality medical service providers. On the user front, we always make it a top priority to ensure the reliability and professionalism of our community in order to increase user trust and user engagement. We reinforced and differentiated our unique value proposition by working to improve user engagement and retention, by providing better user experience and by reinforcing quality content that drives efficient decision making. In terms of our medium term strategy, first, we are reinforcing the authenticity of our community in terms of medical nature. Besides verifying the qualification of institutions and doctors, we have also made improvements to our verification procedures for user reviews of treatments sold on our platform, removing fake reviews. 2nd, we continue to improve user experience and strengthen our digital capabilities. Through deepening cooperation with existing institutional partners and forming relationships with new ones, we are able to offer a wide range of authentic and high quality products to end users. Our robust technology and intelligent algorithms analyze user behavior to make fast and accurate recommendations and help decision making online for both surgical and non surgical procedures. In the meantime, our professional pre sales consolidation and upsell service improved user experience from online to offline due to the guarantees on our platform. In our ecosystem, Sohuya is not just playing the role of transaction facilitator between user and institutions. We are also building a closed loop system that connects all stakeholders, including users, consultants, medical product manufacturers, doctors and institutions, maximizing benefits to each of them. 3rd, we are improving user acquisition efficiency, primarily through brand exposure and marketing. Earlier this year, we partnered with Xuejeng TV in this New Year's Gala Show and Hunan TV in a variety show called Journey of Love. These events became hot topics among users and elevated the Sohyang brand profile. Meanwhile, we created original short video programs, which were broadcast on new media channels, bringing targeted users to our platform. As a result, we witnessed consistent improvement of user activities in terms of time spending, interaction, consolidation and booking, which led to optimizing the structure of our user base. During the Sling Festival in March 2021, daily average GMV for treatments in body shaping categories grew by 25% compared with the results of Double 11 last year. Moving on to monetization. Since the beginning of the year, we have been pleased to see that the whole industry has gradually returned to a normal and healthy growth track. Institutions have adopted more performance based marketing strategy to acquire users, shifting their focus from quantity to better quality of customers. Our previous investment in cultivating our social community and branding has paid off under these circumstances. Because of their growing trust in the Sohuang platform, more users made purchase decision based on our recommendations and indoor system endorsements. One great example was Sohyang Pass. Since it was launched in Q4 last year, over the past 6 months, the number of selected products in Sohuang Pass program have increased from 7 to 37 and now cover 95 institutions and 11 cities. Sohyang Pass drew the attention of users and became very popular. Institutions were also impressed with this performance in terms of attracting end users. Going forward, we will find the whole process of distribution, aiming to allocate quality and compatible traffic to customers with stronger demand performance and greater market potential. We will also further improve user acquisition efficiency, while focusing on increasing user retention, content consumption and monetization efficiency. Quoted here will be RMB. Please also refer to our earnings release for detailed information of our comparative financial performance on a year over year basis. For the Q1 of 2021, total revenues were RMB360 1,000,000, up 97% year over year from RMB182.6 million and significantly above our guidance as mentioned. The increase was primarily due to an increase in the number of paying medical service providers. The number of paying medical service providers on Sohuang's platform were 4 1,702, an increase of 42.7 percent from 3,295 in the Q1 of 2020. Within total revenues, information service revenues were RMB277.8 million, up 120 0.5% year over year from RMB126 1,000,000. The increase was mainly due to an increase in average revenue per paying medical service provider. Reservation services revenues were RMB81.8 million, an increase of 44.7 percent from RMB56.5 1,000,000 in the Q1 of 2020. The increase was primarily due to an increase of 123.3 percent in the number of purchasing users. Cost of revenues were RMB52.4 million, up 21.5 percent year over year from RMB43.1 million. Cost of revenues included share based compensation expenses of RMB4.3 million compared to RMB2.2 million in the Q1 of 2020. Total operating expenses were RMB367.3 million, up 97.6 percent from RMB186 1,000,000 in the Q1 of 2020. Sales and marketing expenses were RMB242.4 million, up 122.1 percent from RMB109.1 million a year ago, primarily due to increasing in the expenses associated with marketing and the user acquisition activities, especially branding expenses. Sales and marketing expenses included share based compensation expenses of RMB2.3 million compared with RMB0.7 million in the corresponding period of 2020. G and A expenses were RMB55.2 million, up 62.5 percent from RMB34 1,000,000 a year ago, primarily due to an increase in payroll costs associated with the expansion in the number of administrative employees. G and A expenses included share based compensation expenses of RMB7.2 million compared with RMB8.3 million in the corresponding period of 2020. Research and development expenses were RMB70 1,000,000 up 63%. The increase was primarily attributable to increase in payroll costs. Research and development expenses for the Q1 of 2021 included share based compensation expenses of RMB5.1 1,000,000 compared with RMB3 1,000,000 in the corresponding period of 2020. Income tax benefit was RMB4.3 million compared with RMB4.3 million in the Q1 of 2020. Net loss was RMB46.3 million compared with a net loss of RMB36 1,000,000 in the same period of 2020. Non GAAP net loss was RMB27.4 million compared with a non GAAP net loss of RMB21.6 million in the same period of 2020. Basic and diluted loss ADS attributable to ordinary shareholders were RMB0.42 and RMB0.42 respectively compared with RMB0.34 and RMB0.34, respectively, during the Q1 of 2020. Now for the balance sheet. As of March 21, 2021, we had total cash and cash equivalents, restricted cash and term deposits, term deposits and short term investments of RMB2.6 1,000,000,000 compared with RMB2.7 billion as of December 31, 2020. For the Q2 of 2021, Sohuang expects total revenues to be between RMB430 1,000,000 and RMB450 1,000,000, representing a 31% to 37.1% increase from the same period of 2020. The above overlook is based on the current market conditions and reflects the company's preliminary estimates of market and operating conditions and the customer demand. This concludes our prepared remarks. I will now turn the call to the operator and open the call for Q and A. Operator, we are ready to take questions. Thank you. First question comes from the line of Thomas Chong of Jefferies. Your line is open. Please go ahead. Thanks management for taking my questions. Management talks about how we are going to operate our Google Power users in 2021 and how we are going to better monetize our users as well as the trend. If possible, can management share about MAU target as well as our marketing strategies? Thank you. Okay. I will be answering this question. Our user growth strategy in 2021 won't change compared to 2020. We will still be focused on expanding our user base and increase our penetration in terms of our targeted user base. For the last part of your question, as you said, what's your MAU? What's our MAU target and guidance? And I think although we never provide that guidance in the previous quarters, but we still see positive increase in terms of our MAU. For the Q1 of average MAU is around like 8,000,000, 8,400,000. And going forward, we expect our MAU at the end of the year still we're seeing around 40% growth. That's our target. And for what's our strategy and how we're going to spend our sales and marketing budget. As you can see, in the 1st quarter results, we did have bigger or larger than normal previous quarters spending in sales and marketing. Excluding those payrolls, we have around RMB192 1,000,000 spent on the customer acquisition. Within that, we have around 102 have been focused on branding, which we associated with the TV shows as mentioned earlier in the previous quotes. And we also for in terms of promoting our Sling Festival in March, we did spend a large campaign off line with Focus Media. So that's the extra expanding compared to the Q1 of last year, same period of last year and even more than Q4 of 2020. In terms of 2020, Q4 of 2020, we spent around like half of that for branding expenditure. So but that means we can't or we will spend more than usual or budget our budget is much more than previous years for sales and marketing or customer acquisition? The answer is no, because we have very strict budgeting policy for sales and marketing is around customer acquisition. Our budget is around like 40% of total revenue. If you that's the general rule in the previous years. And although we spent more in terms of branding in the Q1, but going forward, we have already planned our branding expenditure for Q2, Q3 and Q4. And mainly, as you can see in the previous 20 2019, we will have more spending in branding for Q3 every year, but relatively lower in terms of Q2 and Q4 for this year. We just have an earlier spending to dedicate promotion on our March Sling Festival and that's the case. And going forward, we will still as to spend half our budgeting cost sales and marketing on branding and half of that on traffic acquisition. And it won't have like consistent large amount of sales and marketing spending like Q1 of this year, which is more than like 60% for the next few quarters, it will come down to the normal level. That's the that's for budget side or expense side? And for the do we have any focus on like customer conversion and what's the monetization strategy and going forward for the ROIs of our traffic acquisition? For that part of the question, we think in 2020, we did see a large growth of MAU, but we also suffered by the COVID-nineteen impact, and we see the conversion is relatively lower compared to previous years. So it's the efficiency looks lower than previous years, but now we do see the recovering trend and the conversion and the conversion trend for our paying customers are closing or coming back to the regular level, which we will be very positive for that side as well and seeing consistent customer conversion improvement in the next few quarters. That's my answer. Thank you. Our next question comes from the line of Leo Jiang of Deutsche Bank. Your line is open. Please go ahead. Thanks for taking my questions. So my question is that what is the proportion of marketing expense and the trend for institutional, which spending on Sohyang platform? You are observing? Okay. Thank you. Okay. So first, according to Frost and Sullivan report, the Kegelop online customer acquisition spending by medical aesthetics service industry in China was about 20% in the past 5 years. The percentage of total customer acquisition spending on all online medical aesthetic service platform has continued to increase from less than 2% in 2015 to 13% in 2019. The market share of the online platform is continuously expanding. And secondly, in terms of the number of institutions at our platform, we have formed a partnership with more institutions. In the Q1, we could see that the number of paying medical service providers on our platform was up more than 40% get the number of more than 4,700, thanks to our target user base and our strong brand recognition among users. And lastly, we think that with improvements in institutions' operation capabilities, we see that their spending behavior is also growing mature as they turn to customer acquisition channels with better ROI performance. In order to reduce overall customer acquisition cost, those institutions are also testing new ways to put their allocation of marketing, also improving their own capabilities. We believe that as long as our performance is better than the peers in the market, market. Our contribution of value in the industry is increasing. Institution will maintain their preference for Sohyang when they're allocating their spendings. Thank you. Thank you. Thank you. Our next question is from Shikki Gai of CICC. Please go ahead. Thanks management for taking my question. I noticed that we have recently signed a cooperation contract with Bloom Mage Biology. So could you provide more detailed direction direction for future cooperation with upstream manufacturers or the suppliers? Thank you. Going forward, we will continue to strengthen cooperation with medical product manufacturers to have better control over our user experience. So let me elaborate one event we just cooperate we just entered an inclusive comprehensive strategic cooperation agreement with Brooklineage BiTEK for its skin booster products. If you see the according to the agreement, we will partner with Bloom Age and help the latter on 2 strategic initiatives. 1 is hyaluronic acid program and 1 is creating the future medical alliance. We think that we will become the strategic partner to help each and manage medical and aesthetic service providers. And also, we think that in several ways, we will provide comprehensive support like including product R and D and new product training. In addition, we have also developed a package solution for its hyaluronic acid program. So as the largest medical aesthetics platform in China, Sohuya will maintain our leadership in the industry and enable efficient connection between consumers and the business. Thank you. Next question is from the line of Vincent Liu of Nedang and Company. Please go ahead. Hi, management. Thanks for taking my question. I have two questions. The first question is the medical is about the trends on the 2 categories of the medical aesthetic market. The medical aesthetic market has been active since the beginning of the year with significant growth. Management also mentioned strong demand on the consumer side. Can you share more details about the trends for surgical and non surgical treatments, respectively? And how do we gain a competitive edge in the light of that insect category? And for the surgical treatments, have we returned to normal states compared to the 2020? And then my second question is about the Sohyang Pass. Can management give us more color on Sohyang Pass? How much revenue contribution can we expect to see and how much how many target cities we are planning to enter this year? Thank you. First, the medical aesthetics market as a whole is under healthy recover. We see that the users' willingness to purchase and the interest keep increasing. So if you see the number that during the Q1, MAU on our platform reached 8,400,000 and maintained a very good rate of the growth. So in addition to the content consumption, our user average time spent and the interaction with institutions and doctors both increased significantly year over year. And your question is on the surgical booking. We could see that the surgical booking gradually recovering and the number of reservation has returned to the level before the epidemic. Yet the total GMV is still a bit behind on that. Nonsurgical bookings kept a strong momentum. We can see that during the Slim Festival in the March, daily average GMV for injection stream has increased by 62% compared with the 11 last year. So we still see that like the injection, skincare and the anti aging remain most popular treatments to users on our platform. We could see that the competition among non surgical sector is intensified this year for both upstream manufacturers to the downstream institutions. In contrast, the consumer side count fully under stand and evaluate service, those service like the effect and the risk behind that. Aiming to solve pain points of consumers. This year, we will continue to leverage the age of our platform in content and community, construction and also enhance consumer protection and optimize user experience on our platform. And we first are about to improve the online user experience for products, units and enhance user trust on our platform. So we do it in 3 ways. One is, of course, increasing the total SKU supply. And we also secondly, we also refine our product library, enhancing standardization and improving description of service and SKUs. And third, we refined payment and after sales warranty systems to protect the whole user experience. So you could see that we separate our non surgical treatments in 1st of all is for those low end product lines. We reinforced our leading position in both number of SKUs and pricing system as well as the regional and also the categories coverage. For the mid to the high end product line, we could see that the soyaan pass are widely recognized by our users and we successfully to improve the performance of promised contract terms, which could focusing to acquire those mid to high end customers group. And second sorry, and later we enhanced cooperation with upstream manufacturers through our metrics of Sohye Ambassador Program, PUGC and the new media content. It is in the effort to increase content supply and user engagement for non surgical treatments. Lastly, enhance the customer recognition of our expertise in non surgical through some like the shopping events some shopping events like the anti aging festival and the SLEAM festival as well as market campaigns. That's all. Thank you. Referring to your question about the Sohuyaan Pass, since the launch last October, Sohuyan Pass program has now expanded to 11 cities with more than 19 institution partners. In terms of the product selection, we regularly hope to manage to select products for our Sohyang Pass program and consistently optimize our SKUs. Especially for the non surgical product standardization, we have expanded our standardized category to 30 plus So this allows us to establish standards and strengthen transparency in the non surgical sector. Meanwhile, in terms of the order fulfillment, we saw the complaints rate for the products under the Sohyang Pass program largely below those on our main apps for the reservation products. At the revenue level, since the Sohyang Pass have not scaled up yet and did not contribute a meaningful revenue. We and at this moment, we still give the subsidy to our end users. So we did not separate a different line for disclose more detailed number on the revenue level of Sohuyaan Pass. But we are generally saying that the total take rate for the Sohuyaan Pass program was higher than other products. Thank you. Thank you. Yes, ladies and gentlemen, this concludes today's conference call. Thank you for participating.