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So-Young International Inc. (SY) Q1 2020 Earnings Call Transcript

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So-Young International Inc. (NASDAQ: SY)
Q1 2020 Earnings Call
May 18, 2020, 7:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to So-Young First Quarter 2020 Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference over to your first speaker today, Ms. Vivian Xu. Thank you. Please go ahead.

Vivian Xu -- Investor Relations

Thank you, operator. Hello everyone and thank you for joining us today. So-Young's first quarter 2020 earnings release was distributed earlier today and is available on our IR website at ir.soyoung.com. On the call today from So-Young, we have Mr. Xin Jin, Co-Founder and Chief Executive Officer; and Mr. Min Yu, Chief Financial Officer. They will both be available to answer your questions during the Q&A session that follows management prepared remarks. Please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the 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. So-Young does not undertake any obligation to update any forward-looking statement, except as required under applicable law.

It's now my pleasure to introduce Mr. Xing Jin, who will read through his prepared remarks in Chinese first, in their entirety, before they are translated to English. After which, Mr. Min Yu will go over the financials. Sir [Phonetic], please go ahead.

Xing Jin -- Co-Founder, Director and Chief Executive Officer

[Foreign Speech]

Thank you everyone for joining us for our first quarter 2020 earnings call. Before I begin, I want to convey our deepest sympathies to everyone who's loved ones have sadly been affected by this tragic pandemic. We also want to express our sincere gratitude and appreciation to all those helping in the fight against COVID-19 including our employees who have been working hard and doing their very best to limit the spread of the disease while courageously ensuring business continuity.

[Foreign Speech]

Despite the significant impact COVID-19 has had on our business, we delivered solid results during the quarter. We have taken the opportunity to implement strategic changes to ensure we are well-positioned for growth when more normal operating conditions resume in the second half of 2020. Total revenues were RMB183 million exceeding the high end of the company's previous guidance.

[Foreign Speech]

The macroeconomic environment as a result of the pandemic during the quarter has been challenging, as anticipated. But this has also given us an opportunity to accelerate the deployment of resources to enhance the user experience. We made efforts on expanding our vibrant community of users and medical aesthetics professionals. We grew our community significantly during the quarter with average mobile MAUs increasing to 4.2 million compared with 1.9 million during the same period of 2019, a increase of 117%.

[Foreign Speech]

Our core focus during the quarter was twofold. First, we expanded our community. And second, we further streamlined the delivery of high-quality content while driving greater engagement. We believe that our focus on these two areas will be critical to demonstrating how innovative and differentiated platform offers a unique value proposition to consumers, professionals and service providers.

[Foreign Speech]

First on the expansion of our community; during the quarter, we further enhanced the structure of our content and developed new ways to cater to our vibrant community of users. We established a series of incentives and rolled out promotional plans to acquire more users who are interested in and are passionate about beauty and wellness. Our editorial team is working closely with users and popular content creators, whom we refer to as medical aesthetics enforcers to generate more high quality content. Leveraging our in-house data driven reasons we are then able to increase the exposure this content gets, which drives the acquisition of users and followers for content providers on our platform. Through this we are expanding our user base from one focused purely on medical aesthetics to one focused on healthier and more high-quality [Indecipherable]. We also increased cooperation with external multichannel networks to produce interesting and professional content of various social media networks. The rich content they produce combined with our enhanced user experience have contributed to the expansion of our user base and a increase in user engagement. This also further strengthens marketing and our brand visibility.

[Foreign Speech]

Second, we continue to develop new ways to urge content providers to create and engage with users with more high quality reviews. Our platform hosts an open and vibrant community of medical aesthetics consumers ranging from newcomers to influencers and professionals. Users utilize our community to share a wide range of experience from medical aesthetics procedures to skincare tips. In order to further strengthen the credibility of our platform, which we believe is critical to our business, we upgraded our back-end system to streamline how we push and promote user-generated premium content. As an example, we give high rankings to users who record in detail their procedures through our Beauty Diaries and demonstrate their authenticity through uploaded photos of their receipts. We also send out push notifications to remind them to post follow-up content on their overall experience, how long the pain lasted and the recovery process.

[Foreign Speech]

We also provide tools to doctors and institutions for post procedure follow-ups. The ability of doctors and institutions to remain in contact with users in a timely and direct way improves the overall user experience and increases the amount of returning patients for treatment. Meanwhile in order to build a healthier and a more regulated aesthetic system we established authentic alliance to strengthen confidence and in the governance of our platform. For example, user can now verify a doctor's authenticity by scanning QR code through the So-Young app. In addition to asking doctors to upload license and qualifications for professional practice we are also monitoring the quality each doctor through user reviews, failure to do so result in them being removed from our platform. These initiatives help improve the consumers' ability to make informed decisions and highlights reputable institutions and doctors on our platform which reinforces values.

[Foreign Speech]

We formerly introduced our Live Video Diagnosis service through our app last quarter and have seen an enormous uptake in usage since then. During the first quarter, we completed more than 88,000 requests from users for Live Video Diagnosis. This tool is not only a channel used primarily for information and knowledge, but is more a key to last mile delivery service. We believe the core value is that it creates an efficient bridge between medical professionals and the end user, facilitating delivery of high quality medical advice and service which ultimately help the users make their final decision.

[Foreign Speech]

We aim to create an open, diversified, and a trustworthy ecosystem for our users and medical aesthetics professionals. We believe that a reliable community can effectively and efficiently incentivize service providers to consistently offer high quality treatment with transparent pricing, which will result in the healthy and sustainable development for all business operators and users.

[Foreign Speech]

I would now like to turn the call over to Min Yu who will go through the financials for the quarter.

Min Yu -- Chief Financial Officer and Director

Okay, thanks Chris [Phonetic]. Please be reminded that all amounts quoted here will be in RMB terms. Please also refer to our earnings release for detailed information of our comparative financial performance on a year-over-year basis. For the first quarter of 2020, total revenues were RMB182.6 million, down 11% year-over-year, but exceeding the high end of our previous guidance. The decline was primarily due to the outbreak of COVID-19, which curtailed medical service providers spending and required end users to shelter in place which delayed the demand in the first quarter of 2020. Within total revenues, Information Services revenue was RMB126 million, down 12% year-over-year.

Reservation Services revenue was RMB56.5 million, down 11% year-over-year. Cost of revenues were RMB43.1million, up 18% year-over-year, driven primarily by an increase in personnel related costs. Total operating expenses were RMB185.9 million, up 41% year-over-year. Sales and marketing expenses were RMB109.1 million, up 45% year-over-year, primarily due to an increase in expenses associated with marketing campaigns and user acquisition initiatives. General and administration expenses were RMB34 million, up 37% year-over-year primarily due to an increase in personnel-related costs. Research and development expenses were RMB42.8 million, up 37% year-over-year.

The increase was primarily a result of costs associated with increased hiring to support product development, which is in line with the company's strategy of strengthening its technology and big data analysis capabilities. Income tax benefit was RMB4.3 million compared with income tax expense of RMB7 million during the same period last year. The change was primarily due to decreasing taxable income during first quarter of 2019. Net loss was RMB35.9 million, compared with net income of RMB45.9 million in the first quarter of 2019. Non-GAAP net loss was RMB21.6 million compared with RMB51.9 million non-GAAP net income in the same period of 2019. Basic and diluted loss per ADS attributable to ordinary shareholders were RMB0.33 and RMB0.34 respectively compared with basic and diluted earnings per ADS attributable to ordinary shareholders RMB0.28 and RMB0.25 respectively during the first quarter of 2019.

Now, for the balance sheet, as of March 31, 2020 we have total cash and cash equivalents, restricted cash and term deposits, and short-term investments of RMB2.76 billion compared with RMB2.84 billion as of December 31, 2019. The decrease was primarily due to the cash used in operating activities during first quarter. We are closely monitoring the impact of COVID-19 on consumer demand and the sentiment as normal working conditions resume in China. We are cognizant that there are many unknowns relating to overall macroeconomic impact of the outbreak, but we are confident that our fundamentals and the long-term drivers of our business remain strong.

With that in mind, for the second quarter of 2020 we expect total revenues to be between RMB320 million and RMB350 million. As it is still relatively early to fully assess the epidemic long-term impact on our business and the markets in which we operate. I want to remind you that this forecast reflects the company's current and preliminary views on market and operational conditions, which are subject to change.

This concludes our prepared remarks. I will now turn the call to the operator and open the call for Q&A. Operator, we are ready to take questions.

Questions and Answers:

Operator

Certainly. [Operator Instructions] The first question comes from the line of Brian Gong from Citigroup. Please go ahead.

Brian Gong -- Citigroup -- Analyst

[Foreign Speech]

So I will translate myself. So first question, I have two questions, first question is regarding how is the recovery trends in the second quarter for Information Services and Online Reservations respectively and how about the reopening of hospitals and as budget for the hospitals? And my second question is about latest situation of our new sales leads subscription model, what kind of hospitals are package customers and what is the key difference compared to our existing advertising model? Thanks.

Xing Jin -- Co-Founder, Director and Chief Executive Officer

[Foreign Speech]

Okay, for the first question that is for the recovery of the whole sector, we do see from our internal results to see that actually from the early March most of the 20% to 40% of the offline institutions have factored normal business and till the end of March we think that 70% to 80% have begun their normal operations business. And -- but due to the government regulations are still prohibited with people to get more crowded, so actually the physical people who could meet for their institutions have dropped a lot compared to the same period of last year. So we think that it may be till the June we could come back to the normal operations per our expectations.

And to your second question on the CPL we think that actually for the advertising business for those offline institutions they rely on much on the cash flows. So, previously we asked them to pay us in advance and then as those institutions to use this prepaid point for those advertising investments, but those CPCs advertisers, well, we think that were divided into two main groups. One is focused on the online e-commerce and one is on the content distributors, but most ways like small-to-medium institutions the lack of the account hedge of both. So we think that we provide them with subscription services to help them to decrease the difficulty of the operation and we think that among those 60 to 70 small-to-mid institutions, they will have more advantage to get our service.

Operator

Can we move to the next question? Can we move to the next question, presenters? The next question comes from the line of Vincent Yu from Needham & Company. Please go ahead.

Vincent Yu -- Needham & Co. -- Analyst

[Foreign Speech]

Thanks, management for taking my question and congrats on the good quarter. My first question is on the surgical and non-surgical services. So, can management provide some comments on how these two services are trending in the first quarter? My second question is on the online consultation, so I'm wondering what kind of institutions can we have higher interest in these products? Are these the private hospitals or the public hospitals? Thank you.

Min Yu -- Chief Financial Officer and Director

Hi Vince, this is Min. I will try to tackle your first question and for the Live Video Diagnosis question, I will leave to Mr. Xing Jin. So for your first question, non-surgical and surgical, that's actually for the biggest -- the first quarter actually have a lot of stories because in the first month January is a normal month. So there is no difference between what is the distribution between surgical and non-surgical compared to the normal months in the previous year. The second month February, I think starts from end of January when -- 24th to be exact. So start from that time, all the supply for services of medical aesthetic services has been stopped, so until end of February. So through the full month, basically, we don't have a lot of orders and we don't have a lot of reservations even users paid for reservation but the case for future, they can't get services

But start from second half of February, we do see some of the service providers they resume back to business and we start to see users go back to clinics or hospitals to get the services done. And for March, I think they start from those light non-surgical services first. And gradually when -- based on the government restriction, when the service providers, they just started to resume back to the business in March, they are not able to take out the operational surgical services, injections and laser services or those life services can be taken and -- but under certain restrictions like you can only have so how many people in your clinic based on the size or area of your clinic. So from that basis, we do see March compared to a normal month, you will have more non-surgical orders being verified compared to surgical orders. So that's basically the reality in the first quarter. So hopefully I answered your first question, and I will leave the second half of your question to Mr. Xing. Mr. Xing?

Xing Jin -- Co-Founder, Director and Chief Executive Officer

[Foreign Speech]

Well, first we do see the private institutions and also the clinics, the doctors and also the professionals were very actively and proactively to do the Live Video Diagnosis. But we think that most of the patients, especially our end users still want to have the chance to have a top consultation service with our non-private clinics -- doctors on non-private clinics, but we do see that the limitation of those doctors to have such service is still there is the public institutions or hospitals. So, we think that we will invite more doctors who have time and this doctor can range from very young or less experienced to expert in those private institutions or hospitals.

Operator

Thank you. Can we move to the next question? The next question comes from the line of Thomas Chong from Jefferies. Please go ahead.

Mel D -- Jefferies -- Analyst

Thanks management for taking my question. This is Mel D [Phonetic] representing Thomas Chong and we have questions on the content strategies in the future. And since this is -- content is one of our core target, so we will know more -- we would like to know more about the strategies in the future and we would like to know about organic traffic generation ability of our high-quality content.

Xing Jin -- Co-Founder, Director and Chief Executive Officer

[Foreign Speech]

First, we divided our content into UGC and PGC. UGC primarily go with our user generated content, we think that it -- we will give a series of incentive and also promotion plans to have more users to generate high quality and also to increase the quantity of the UGC. And for the PGC, we can get the core value for the PGC that we think that our PGC content providers, especially for those doctors who can give us their professional information. And we think at on this side we are going to give incentive and also as well as training for especially those young doctors on our platform and we will have them to set up the doctors IP to give them more exposure on our platform.

And also the relations between the content and also the traffic, we think that the content is a very good way to raise the users engagement for the traffic because usually those e-commerce platforms doesn't have such engagement and also relations with other users and some communities have only users, a lack of the decision-making allowance to their final users like [Indecipherable]. So we do think that, we are going to have those content outside the e-Commerce platform to have more users to have engagement with us.

Operator

Thank you. The next question comes from the line of Jing Qiang from CICC. Please go ahead.

Jing Qiang -- CICC -- Analyst

[Foreign Speech]

My first question is regarding utilizing [Indecipherable]. So I would like to understand more about like specific operation metrics, in regard to this feature, which has the right connector rate, what the churn and also to give supply [Indecipherable]? And also, I would like to understand the competitive landscape with regard to this feature? The second question is regarding the demand going forward. This is speaking with regard to [Indecipherable]? The third question is a hospital question in regards to why the like take rates for the reservation that's [Indecipherable] this quarter? Thank you.

Xing Jin -- Co-Founder, Director and Chief Executive Officer

[Foreign Speech]

Well, for your first question, we think that in fact for the members of the Live Video Diagnosis, especially for the users' request, we think that we do see a big hit in the February and March this month, because it was a lot of consumers and doctors at the time who were not able to go out. So, it happens to have a right product online and we do see the urgent from our both the consumer side and the service provider side. And after those, people especially back to their normalize life, we do see slightly jump of those requests, but we think that if we look at the long run still a very good momentum on the business growth.

And we think that -- we do think that because this is the need from both of the users' needs and also supply side, we think that is, do need time for us to incentive our users especially give some education for the users who want to try on these services. So, we think that we will play a good role to lead them to accept such services. And for the comparison to other platform, we do think that since the need upraised from the users, we do see other platforms provide some similar service to attract users' interest. But if you do have the chance to take a try, we think that for example most of their requests from users in other platforms can now be have facility -- can now be able to facilitated well, because people there, especially those doctors just a user, a chance to advertising themselves. But for us we actually give a lot of like the guidance and also the internal control to regulated those people's behavior on our platform to maintain a very good result on the Live Video Diagnosis. And we do think that the core value for the Live Video Diagnosis is how to best match the needs of both parties and in the most efficient way. So it's very important.

[Foreign Speech]

We think that unlike those just as use this tool for our traffic acquisition, we think that we just want to provide a pure service between our users and those doctors on our platform. We think that this is our core value we can provide on this ecosystem and we -- that's why we put efforts to regulating such services on our platform and also to guide those get what they just want. Otherwise, what they get once we continue to provide those to just to put the advertisement all those users to buy the products from this. So this is very critical for us we think.

[Foreign Speech]

And for your second question, we do think that we do see that our platform, especially after the February of this year, we -- there was a wave of rapid order recovery on our platform, but we think that is a curve, we will go to be smooth after that, because it is still the -- because, this is still internal needs from our user end.

Min Yu -- Chief Financial Officer and Director

So for your third question about why, it seems like the Reservation commission is more than 10%; I think that's a really good question. It's not a normal case scenario because -- it's because of the first quarter we had a very low base for Reservation revenue, compared to not only with the first quarter of 2019, but compared to our fourth quarter of 2019. There are three major difference which contribute to my commission rate. First of all, actually in my commission rates, in my Reservation revenue, there is a part of the revenue is contributed by the annual fee of the service providers. It's very low -- it's very low, it's like each service provider pays us around RMB500 per month.

So it's like around RMB1,500 per quarter for around, we have a 3,500 paying service provider as you see in our report. So every quarter, we will have the annual fee being recognized as revenue for Reservation of around RMB5 million. Then you ask why it's Reservation revenue, because it is based on the U.S. GAAP, because they only pay when the service providers pay us annual fee, then they can open for user to reserve their services on the platform, so it is directly connected to our Reservation Services. So in the U.S. GAAP accounting standard, they categorize that part of the revenue as Reservation Service revenue. So, that's one part.

And the other part is our premium customer services. As you know [Indecipherable]. So they still contributes a very low amount of revenue in the -- if you back in a normal quarter, but if you put in this first quarter, very low basis of Reservation revenue commission from the online services. The premium membership service usually have relatively higher commission rate compared to the normal online reservation services. And the third reason is another one is because usually in March, we will have a market campaign for users to after Chinese New Year to come to my platform and we have market campaign to encourage them spending or reserve services on our platform and we will provide certain reimbursement to users and we will directly deduct our reservation revenue.

But in this March, we didn't, because of COVID-19. So, it saved us a bit of money for the reimbursement to users. So all of these major three factors adding together, it seems like my commission rate is higher than 10%. But, part of that, I think it's because it was fixed reservation revenue every month from the annual fee. So, even in February, we don't have a lot of reservation, we don't have a lot of verified GMV or verified services or then we still have reservation revenue coming for the month. Hopefully I answered your questions. So the main reason is because of the low base of the normal online reservation revenues in the normal quarters.

Jing Qiang -- CICC -- Analyst

Thank you very much.

Operator

Thank you. We have our next question from the line of Leo Chiang from Deutsche Bank. Please go ahead.

Leo Chiang -- Deutsche Bank -- Analyst

[Foreign Speech]

So, I'll translate my questions. My first question is regarding to the structural change of the industry after coronavirus. Can management share some observation from both customer side and service provider side? My second question is regarding to the recovery path, so given, it is likely to reason to no more capacity in June, so why should we expect for our second half revenue it is more likely U-shaped or V-shaped recovery in the second half? Thank you.

Min Yu -- Chief Financial Officer and Director

All right. Thanks, Leo. So I will try to answer your question. First question, are there any structural change for the medical aesthetics service industry. From -- coming to our observation, I think we do see service providers they resume back to the business gradually opening up their capacity and relatively spending lower than the normal periods on normal quarters on customer acquisition. We do see they are coming back, but as just now Mr. Xing said, the trend, it seems like the Nikes logo, rather than a V-shape or U-shape. You have a very sharp drop in the beginning and you are gradually coming back as a major consumption service in the society and the users will gradually come back to the service providers based on the capacity, opening up by the service providers and how much money they're spending on customer acquisition.

So the trend is like that. And from a structure, we are not seeing from -- like other industry or like restaurants or the Beauty Services industry, you do see the smaller players or service providers they approaching bankruptcy and they are closing the business. From my -- our platform, we are not seeing that trend happening, just the service providers in the beginning, spend less on customer acquisition and gradually opening up, investing when the capacity opening up and the users will go back to the service providers. And as I said earlier, the change will be a Nike logo shape, rather than a V-shape or U-shape. So that's one and what's your second question, sorry? Oh, the recovery trend -- sorry, Leo what's your second question?

Leo Chiang -- Deutsche Bank -- Analyst

Yes, yes. So the first one is the structure change and the second one is recovering trend, so you all answered.

Min Yu -- Chief Financial Officer and Director

I think, yeah, basically I answered all your questions. Thanks.

Operator

Thank you. I would now like to hand the conference back to our presenters for any closing remarks. Thank you. I would now like to hand the conference back to our presenters for any closing remarks, over to you.

Vivian Xu -- Investor Relations

Okay, thank you for everybody and that's all. Thank you.

Operator

[Operator Closing Remarks]

Duration: 62 minutes

Call participants:

Vivian Xu -- Investor Relations

Xing Jin -- Co-Founder, Director and Chief Executive Officer

Min Yu -- Chief Financial Officer and Director

Brian Gong -- Citigroup -- Analyst

Vincent Yu -- Needham & Co. -- Analyst

Mel D -- Jefferies -- Analyst

Jing Qiang -- CICC -- Analyst

Leo Chiang -- Deutsche Bank -- Analyst

More SY analysis

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