Good morning and good evening, ladies and gentlemen. Thank you for standing by, and welcome to Perfect Corp.'s earnings conference call. [Operator Instructions] Please note that today's event is being recorded. I will now turn the conference over to the first speaker today, Mr. Rick Lee, VP of IR of the company. Please go ahead, sir.

Thank you, Polly. Hello, everyone, and welcome to Perfect Corp.'s earnings call. With us today are Ms. Alice Chang, our Founder, Chairwoman and CEO; Mr. Louis Chen, our EVP and Chief Strategy Officer; and Ms. Iris Chen, VP of Finance and Accounting. You can refer to our first quarter 2023 financial results on our IR website at ir.perfectcorp.com or in the Form 6-K we furnished to the SEC yesterday afternoon. You can also access a replay of this call on our IR website when it becomes available a few hours after its conclusion. For today's call, management will provide their prepared remarks first and we will be hosting a question-and-answer session. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release, which also applies to this call, and this call may contain forward-looking statements regarding Perfect Corp.'s performance, anticipated plans, operational results and objectives. Forward-looking statements are based on management's expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied on our call today. Perfect Corp. undertakes no obligation to update any forward-looking statements except as required by law after the date of this call. Please note that all numbers are stated in the following management's prepared remarks are in U.S. dollar terms. We will discuss non-IFRS measures today, which are more thoroughly compared and reconciled to the most comparable measures reported in our earnings release and Form 6-K furnished to the SEC. I will now turn the call to our first speaker today, Founder, Chairwoman and CEO of Perfect, Ms. Chang.

Thank you, Rick. Welcome everyone to Perfect Corp.'s first quarter 2023 earnings conference call. We takeoff 2023 with USD 12.1 million in total revenue for the first quarter, representing quarter-over-over gross of 9.7% and a year-over-year growth of 0.9%. The nominal growth reflects the strategic shifts in prioritizing our new subscription-based cloud business driven by much stronger market demand. Specifically our AI/AR cloud solutions and the subscription revenue, which historically accounted for 2/3 of total revenue, grew by 18.7% year-over-year in the first quarter. This is a key area of future growth for Perfect. Although we are still impacted by a longer sales cycle, our value proposition to our clients and our market leadership in AI/AR solutions continue to be strong. We saw very stable renewals with existing brand customers in the first quarter. We also managed to acquire more new logos from extended pipeline as we fine-tune our strategy to counter the impact of the prolonged sales cycle. These new clients will need time to grow and make meaningful impact to our top line revenue. Meanwhile, we continue to invest in AI skincare technology as it is an untapped market with great growth potential. Lastly, our mobile beauty app subscription business powered by AI capabilities such as AIGC, continues to experience strong growth momentum, helping to stabilize and balance our revenue streams. During the first quarter of 2023, we continue making strategic adjustments like those we disclosed in last earning calls as we navigated a challenging business environment. We would like to take the opportunity here to provide some business update and share with you our latest industry observation. Along with insights on how our technology and partnership with brands have helped shape the industry. First, color cosmetics remain a very resilient and attractive category. We saw more luxury…

Thank you, Alice. Before I go into the details of our financial results, please note that all comparisons are on a year-over-year basis. As the reporting period is the first quarter of 2023 versus the comparable period in 2022. And on top of the IFRS measures, we will be also discussing non-IFRS measures to provide greater clarity on the trends in our actual operations. During the first quarter of 2023, our total revenue increased from $12 million in the same period of last year to $12.1 million, representing quarter-over-quarter growth of 9.7% and year-over-year growth of 0.9%. Our AI and AR cloud solutions and subscription revenue, which now contribute 85.4% of our total revenue in quarter 1 grew by 18.7% year-over-year, showing strong growth momentum in our core business. Meanwhile, legacy licensing revenue for physical stores, which accounted for 12.3% of our total revenue, declined by 47.1%. This trend not only show our new prioritization in investing online services, but also reflect customer preference in investing more in our AI/AR cloud solutions and subscription instead of the legacy offline SDK services, which are the main component of the licensing revenue. Turning to our customer order expansion and acquisition. During the first quarter, renewal rate for existing subscription remained as strong as healthy as in the previous cycle. The customer continues to be active on our platform. Furthermore, our ability to acquire new customers is improving via larger funnel and inbound leads for prospects. However, it will take some time for these new customers to grow sizable revenues through us. Among our revenue sources, AR/AI cloud solutions and subscription revenue, which grew by 18.7% to $10.4 million, mainly due to the strong and stable demand for our online virtual try-on solutions for brand customers as well as strong growth in our…

[Operator Instructions] And your first question comes from the line of Timothy Zhao from Goldman Sachs.

Yes. 2 questions from my side. First, I noticed that on your balance sheet, there's over 30% quarter-on-quarter growth of contract liabilities, which is actually quite strong relative to the revenue growth either on a Q-on-Q or year-on-year growth basis. Just wondering if management could share more detailed color behind this very strong increase in the contract liabilities. Shall we interpret that going forward, we should be able to see accelerating quarterly revenue growth for the rest of this year? And that would be my first question. And secondly, I think in your prepared remarks as well as in the press release, I think you mentioned that company is fine-tuning the sales marketing strategy in the context of a prolonged sales cycle and also macro uncertainties. But I saw I think in the first quarter, the sales marketing expenses was quite flattish, stable year-on-year. Just wondering if management have any guidance with sales market expenses for the rest of this year?

This is Louis. Great to talk to you again. Yes, so the contract liabilities certainly is an advanced indicator that the company is gaining more contract with the customers. As we said, we are prioritizing our subscription business model and as part of the accounting and the subscription contracts, it will take time to be fully recognized. So yes, so you see a significant sizable growth in contract liabilities. It certainly reflect the nature of the business. On your second question, again, we are always running a very efficient team, whether it's in sales, marketing or R&D. So even reaching to new geography, participating in a lot more trade show and also spending in the digital marketing, we managed to get our costs very well under control, are able to enlarge our funnel. I think this is early results we see one of the measures that the management has put together in the last 6 months already, and it seems to be started to work out the results.

Your next question comes from the line of Clarke Jeffries from Piper Sandler.

I wanted to dig into the brief mention of generative II. And just more broadly, how do you expect some of the recent innovations that have been made available to be applied to the platform. Certainly, encouraging to hear about the Magic Avatar functionality. Does that offer new revenue opportunities in sort of charging for consumption for some of those sort of creations by users? Or do you see it as a user acquisition or retention tool within the mobile app product? And then I have one follow-up.

Clarke, this is Louis. So the way that we introduced the Magic Avatar feature in our YouCam Perfect app, it is an add-on service on top of the subscription. Consumers can decide to just-opt in for these features. So I think we charged them $2.99 for 50 avatar or $3.99 for 100 avatar. The current active subscriber, they can also opt-in to do that at a discounting rate. So basically, I think the first benefit of that is we see an increase in the ARPU to allow us to increase the average order value of the customer or lifetime value of the customers. After where are we seeing these to attract new type of customers who are not traditionally part of our app. So we certainly -- it's still early. We launched this in early March. So it just made for the first month. Our early results shows a prominent potential to both increase the value of existing subscribers but also to attract new subscribers.

I'd like to add something about AIGC that we have developed. The first feature is what you said AI art is YouCam app -- mobile app that's Magic Avatar. This is only one of the AIGC applications we are developing. We already developed and the released. And a lot more -- and this one is for B2C app first. A lot of more AIGC, we are thinking how we can apply that not only on app, but also to brands with a different fashion, style, hairstyle. So I -- personally I'm excited to see AIGC progress new AI technology developed to the market and open up a new ways to engage with consumers and also the brand can leverage to engage with their customers. Always, we have new technology to embed on our apps -- users beauty apps to try the markets with the users directly if the feedback is very positive and always we would bring to our brands for them to imagine how they can leverage it and engage with their beauty consumers. So yes, we are people investing and developing our new application next quarter. I believe we can share more about more of our AIGC features and solutions with you.

Perfect. Certainly, the harder question is how does the B2B products change generative AI. Just my follow-up in terms of the current operating environment, I was curious, where do you see the most attractive return on your investment right now? Is that pursuing opportunities for expansion within the top 20? Is that growing outside of the top 20 beauty brands? Or is it may be investing in the sort of digital marketing advertising accelerators for the B2C business?

I think we are starting to diversify a lot more of business as you have noted in our release, right? So I think B2B remains a very strong core of our business with all our partners, and we continue to help them expand omnichannel, which means going to different e-tailers or retailers partner to distribute their SKUs, the AR experience in more geographies, in more platforms, but that continues to be strong. Of course, we see the long tail part of the beauty business starting to take off at a much faster pace, right? So virtual try-on is becoming very much the table stake for all the e-commerce solutions. That segment is continued to grow well for online services. The mobile app subscription seems to be as mentioned, we reached another record high quarter for active subscribers. I think there's another positive trend we are seeing the business also solidifying on that front. The advertising business with our newly announced partnership with Teads that’s very new, but the other way that we want to go beyond is the traditional e-commerce and the brand as well, right? The virtual experience engaging experience that is worth to be seen for more consumers and not only those on visiting the e-commerce shopping cart, right? So I think this will be a new way to offer engagement type of interactive advertising ads, right? So I think consumers are not only satisfied with the traditional banners or video ads, they will try to be part of that and I think VTO whether it's for watches or for makeup does make sense. And fundamentally, I think one point worth noted here, the core technology are the same, right? We develop the engine, whether it's AR or AIGC, and we find different use cases to apply for consumer business but as well for brand business. So there is a very huge saving for us from a development cost perspective. We managed to run this engineering team, which only accounted about 20% of our revenue. I think that is a very efficient way to run that. And at the same time, once this technology, we can pilot test that almost in a test that on the consumer side. And as we gain feedback and understand how consumers are reacting to that, repackaging this technology in the different form factors and different use cases and offered to the beauty brands.

[Operator Instructions] And your next question comes from the line of Chris Chia from Kendall Court.

Louis, Alice, good to hear you on the call. I had a question on the competitive environment. Given what you've observed in the last 6 months, given the longer sales cycle and the challenging market condition, can you discuss a little bit about what you observe from a pricing and product differentiation strategy and how you think that that's going to evolve in the coming months?

Yes. Chris, this is Alice. From the competitive point of view, actually, we do not see any competitors even stronger than us or far behind us right now. So it's not competition any risk so far. So just what we did -- as we said, increased the pipeline, and it will take some time to make the revenue, keep the revenue -- keep those brands in our pipeline to grow the revenue. And for mobile apps, actually, there are a lot of competitors of beauty apps. There are quite several beauty apps in there. But we did see -- since we leverage AI more last year, add more AI features that turns out to be very attractive to the end user, very unique features by AI and the track and make those end users -- new users not only on our app, but also very sticky. We increased the renewal rate, everything. So -- and just like Louis said, the core technology we applied to end user app first and collective feedback is good, and we approach and also introduced to the brand site. So since these new features, AI features to the beauty upside is so attractive. Hopefully, that's our wish that we can leverage that and also give feedback to the brands, and they can also use our technologies to attract their own users. Do you want to add something Louis?

So essentially, I think the competitive landscape that we are remains pretty much the same. Our position -- our value proposition to the brand remain very intact. As I mentioned, the renewal rates are pretty much the same as in previous cycles, but we haven't seen really a significant change in that landscape.

Since there are no further questions at this time. I'd like to hand the conference back to management for closing remarks.

All right. Thank you again for joining our call today. If you have any further questions, please feel free to contact us or request through our IR website. We look forward to speaking with everyone in our next call. Have a good day.

Thank you.

This concludes today's conference call. You may now disconnect.