Perfect Corp. (PERF) Q1 2025 Earnings Report, Transcript and Summary

Good morning, and good evening, ladies and gentlemen. Thank you for standing by and welcome to the Perfect Corp.'s First Quarter 2025 Earnings Conference Call. Please note that all lines have been placed on mute to prevent any background noise. We will be hosting a question-and-answer session after management's prepared remarks. [Operator Instructions] Please note that today's event is being recorded. I will now turn the conference over to the first speaker today, Mr. Jimmy Xia, IR Director of the company. Please go ahead.

Thank you, and hello, everyone. Welcome to Perfect Corp.'s first quarter 2025 earnings call. With us today are Ms. Alice Chang, our Founder, Chairwoman and Chief Executive Officer; Mr. Louis Chen, our Executive Vice President and Chief Strategy Officer; and Ms. Iris Chen, Vice President of Finance and Accounting. You can refer to our first quarter 2025 financial results on our IR website or in the Form 6-K we filed with SEC. A replay of this call will also be available on our website shortly after its conclusion. For today's call, management will provide our prepared remarks followed by a question-and-answer session. Before we continue, I would like to refer to our safe harbor statement in our earnings press release. This call may contain forward-looking statements regarding performance, anticipated plans, our original results and objectives. Forward-looking statements are based on management's expectations and are subject to numerous risks and uncertainties that could cause actual results to differ materially from those expressed or implied in 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 stated in management's prepared remarks are in U.S. dollars, and we will also discuss non-IFRS measures today. I will now turn the call to our second speaker, Ms. Alice Chang, our CEO.

Thank you, Jimmy, and welcome to Perfect Corp.'s 2025 first quarter earnings conference call. Let me start by providing some financial highlights, then share some exciting developments. After a strong end to 2024, we started the first quarter of 2025 with double-digit growth, which was in line with our revenue guidance for 2025. Total revenue grew by 12.1% year-over-year to $16 million. The net income for the same period was $2.3 million, an increase of 264% year-over-year. And the adjusted net income increased 33.3% to $2 million compared to the first quarter of 2024. The continuous growth in revenue and the positive net income is primarily driven by the strong performance of our mobile app subscription business within the AI/AR cloud solution sector even under current macroeconomic uncertainty. The first quarter of 2025, we saw our operating cash flow generate a net inflow of $4.3 million, and our balance sheet remains very strong with over $164.6 million in cash and cash equivalents. All this results are testimony to the company robust business model, as well as our agility to navigate under the fast-changing world and its global economic uncertainty. Our B2C mobile app business has maintained a strong growth with a number of active paying subscribers of 973,000 to end up the first quarter of 2025, an increase of 7.9% compared to 902,000 subscribers for the first quarter of 2024. Our YouCam mobile app suite continued to evolve with planned updates and AI features enhancement powered by cutting-edge Generative AI features for image and the video creation. We recently unveil a new mobile app called YouCam AI Chat, which features personal AI assistance to assist users with a wide range of topics including fashion, trading, [indiscernible] science, travel, writing, financial advisors, and more. Beyond this specialized AI assistance, the app also deliver powerful AI tools capable of generating images as well as summarizing photos, websites and YouTube videos just to name a few of its popular features. By merchant convenience and personalization, YouCam AI Chat app fulfills the growing demand for seamless digital interactions. This app leverages multiple world renowned AI LLM models such as ChatGPT4o and 4o mini. Before diving into our B2B performance, I would like to provide additional updates on the post acquisition of WANNA. The integration of both teams is progressing smoothly with our operations, cultures and the strategic goals aligned seamlessly. This process will position us well and to bridge new growth opportunities and to further enhance our market position as we work to expand our addressable market. At this first phase of integration, our global sales team have started to engage with the new clients and the prospects to explore additional contract opportunities with emphasis on geographic expansion and product expansion, particularly within the shoes vertical. In our B2B operations, we continue to deepen market penetration in Beauty and Fashion segment. Our platform now posts over 801 brands clients with over 891,000 SKUs. These increases are contributed by organic growth and consolidating the newly acquired WANNA client base and the shoe, bags related SKUs for VTO. We are making very good progress in expanding our unique offering with AI-powered skin diagnostics, which extend across aesthetic clinics, dermatology center, skincare facilities, med spa and wellness center. During the first quarter, we launched our AI skin analysis solution with one of the largest beauty retailer in U.S. Now user can scan their face with a smartphones, allowing the app to deliver skin analysis in seconds, and they received a personalized four-step skin routines and product tailored to their specific needs. Offering our AI skin solutions to a wider global audience has been our priority, and this partnership will open the use case to millions of North American users. Additionally, our YouCam Online Editor SaaS API enable seamless integration of Perfect AI features into client software. Brand developers can now embed, advanced photo, portray and video editing, Generative AI and more offering end user a reach, full features image editing experience within our product. During the first quarter of the year, we added AI hairstyle and the skin analysis API and made refinement to subscription plan and the subscription credit model. In conclusion, despite the global economic uncertainties, we continue to experience growth in the first quarter of 2025, driven by increased revenue, improved operational efficiency, and strong financial performance. Our growth strategy for 2025 remains on track, focusing on expanding our B2C revenue with the introduction of a newer Generative AI function and to drive higher premium subscription plan to increase the value of our subscription. On the enterprise business side, we are focusing on fully integrating the WANNA team and their product into our business, expanding our presence in beauty, skincare, shoes in the fashion market, exploring cross-selling opportunities, diversifying our product in service offerings, strengthening leadership, accelerating revenue growth, and maximizing long-term shareholder value. Lastly, with the rise of more efficient and cost effective AI models virtualizing in specific functionalities, Perfect Corp is a well positioned to benefit from evolving needs of clients and prospects. Thanks to our strong track record, expertise and the deep integration in the beauty and the fashion industry. With that, I have concluded my remarks and will now pass the call over to Louis, who will discuss our financial details with you.

Thank you, Alice. Please note that all financial comparisons are on a year-over-year basis and the reporting period is the first quarter of 2025 versus the comparable period in 2024, and that on top of the International Financial Reporting Standards, IFRS measures. We will also discuss non-IFRS measures to provide greater clarity on the trends in our operations. In the first quarter of 2025, our total revenue increased to $16 million from $14.3 million for the same period in 2024, representing a year-over-year increase of 12.1%. The growth came from the continuous growth of our AI/AR cloud solutions and mobile app subscription business. AI and AR cloud solutions and subscription revenue grew 13.3% to $14.1 million compared to $12.4 million from the year-ago period, which represented 88% of total revenue in the quarter. This growth is attributed to the continuous expansion of our mobile beauty app subscription and the positive momentum for our online skin diagnosis solution, as well as our virtual try-on business. Licensing revenue increased by 1.5% in the first quarter of 2025 to $1.6 million compared to $1.6 million during the same period of 2024. The licensing revenue will gradually become immaterial as it continues to be phased out and replaced by the new AI/AR cloud subscription revenue model. Gross profit for the first quarter of 2025 grew by 11.4% to $12.5 million with gross margin of 77.9% compared to $11.2 million and gross margin of 78.3% for the same period in 2024. The small decrease in gross margin was primarily due to the increase in third-party payment processing fees paid to the digital distribution partners such as Google and Apple due to the increase in our mobile app subscription revenue. The total operating expenses for the first quarter of 2025 increased by 2% to $12.6 million compared to $12.4 million for the same period in last year. The increase was mainly due to the increase in R&D expenses, but was mostly offset by the decrease in G&A expenses. Going into detail for operating expenses. Sales and marketing expense for the first quarter of 2025 were $7.4 million compared to $7.2 million during the same period of 2024, an increase of 2.6%. This increase were largely due to the increase in marketing events and advertising costs related to our mobile apps and cloud computing as well as WANNA sales and marketing expenses. Research and development expense were $3.6 million for the first quarter of 2025 compared to $3 million during the same period of 2024, an increase of 17.5%. The increased result from additional R&D headcounts for new product development and WANNA-related personnel cost. General and administrative expenses decreased by 21.6% to $1.7 million for the first quarter of 2025 compared to $2.2 million during the same period of 2024. The decrease were mainly due to decrease of corporate insurance premiums as well as saving from external professional services. Net income was $2.3 million for the first quarter of 2025 compared to a net income of $0.6 million during the same period of 2024, an increase of 264%. The positive net income was supported by continued revenue growth and effective cost control. These results represent a net income margin of 14.3% for the first quarter of 2025. The company continues to deliver good profitability to invest in developing a complete line of audio, video creativity and enhancement solution for both consumers and enterprises. Excluding non-cash share-based compensation, non-cash valuation gain and loss of financial liability, the adjusted net income was $2 million for the first quarter of 2025 compared to adjusted net income of $1.5 million in the same period of 2024, an increase of 33.3%. This also represents an adjusted net margin of 12.6% for the first quarter of 2025. As of March 31, 2025, the company held $164.6 million in cash and cash equivalents and six-month deposit compared to $165.9 million as of December 31, 2024. We had a positive operating cash flow of $4.3 million in the first quarter of 2025 compared to $3.5 million during the same period in 2024. The positive cash flow demonstrated the company's continued ability to generate continuous cash flow to support its business operation and growth strategy. On the mobile app business front, our YouCam mobile app active subscribers was 973,000 by the end of the first quarter of 2025 compared to 1 million by the end of 2024 year. Although the number of subscribers has some expected decrease, the revenue from the app subscription continued to grow strongly. This decrease in active subscriber was expected as we continue to perform pricing optimization initiatives as well as introducing higher price point new subscription plans, representing a significant increase in revenue per active users. Our enterprise customer base had a net increase of 59 brand clients since the end of last quarter, achieving a total of 801 brand clients with over 891,000 SKUs for makeup, skincare, eyewear, watches, jewelry, scarves, shoes, apparel and fashion products as of March 31, 2025. The further expansion in these metrics highlight the inclusion of WANNA client base, as well as ongoing growth in customer penetration and SKUs expansion. In the first quarter, Perfect Corp. number of key customers was 148 down from 151 at the end of December, 2024. This reduction was due to a few unexpected U.S. clients contract churn due to the rising financial challenges in the macroeconomic environment. In the first quarter of 2025, AI and AR cloud solutions and mobile app subscription business continue to drive our growth. As previously mentioned, WANNA's integration process will help us grow our business and the additional development of AI technology will strengthen our core competencies and expand our total addressable market. Even with the uncertainties in today's macroeconomic environment, we are still excited about the opportunity that are ahead of our B2C and B2B business lines. Our offering can help bring clients, increase customer engagement, increase basket size, as well as create saving by decreasing return rates. Our suite of YouCam apps continue to deliver value through fun interactive features with a focus on Gen AI-powered photo and video functionality, as well as other innovative new AI capabilities. Our 2025 guidance remains intact. Total revenue year-over-year growth is expected to range from 13% to 14.5%. This forecast is based on the company's current assessment of the market and operational conditions and management will monitor business progress and provide updates to offer better clarity to the market. That concludes my prepared remarks. Operator, please open up the call for questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Lisa Thompson from Zacks. Please go ahead.

Hi. It's great to see another great quarter coming out. Can you first talk about your launch of the new AI chat app? Where did you launch it and how is it being received?

The app just launched last month, and this is app on the Apple Store app store – Apple's app store and Google Play. User can just download it from the app store. And as I said, this is integrating of all the AI assistant into one and also adding some of our strengths like image editing by AI and photo summarized and all kinds of different AI tools into one app.

When it was launched in all countries in all languages?

Yes, just released to the app stores with eight languages support. It can be downloaded over the world.

Okay. All right. That's ahead of schedule because I thought you were only going to do in couple of countries.

We move fast.

Okay. Let me ask you a question about the WANNA acquisition. Now, I thought that you had said that they were going to add about 20 key customers, but if they did, then you must have lost a lot of customers in Q1 or did they not add 20?

Hi. This is Louis. So the WANNA acquisition did add a little bit over a dozen of the key customers after the integration. And you are right, we also have suffered some loss for our beauty business as I mentioned in my remarks for the other beauty clients from the key customer accounts.

Okay. All right. I was wondering about that. And just the last question is when you talk – look at future acquisitions is are you going to have to be trying to find new verticals that you're not in or is there any opportunity out there to say, scoop up some of the competitors that maybe do like try-ons for eyeglasses because – is there a shakeout out there in any categories? What is your thinking about acquisitions going forward?

I think our priority has been expanding our TAM through acquisition, accelerating our methods market penetration. In the core business that we are, there isn't too much other competitors that are we think it's worth for doing acquisition. We very much have a better product, more complete services. So I think we are winning that from just organic growth. But for newer categories, newer verticals, acquisition could help and accelerate our penetration, especially in enterprise clients that are typically take long time to penetrate. So again, options are available, but our key priority has been spending the TAM rather than just taking out competitors.

So what verticals are left out there?

I think on the shopping, I think certainly in the fashion space, there is still a lot of other things. Of course, we have technology to grow internally, but I think most importantly is the luxury business, the luxury retailers, a lot of them are still not fully digitized or using VTO technologies. So I think spending clients potentially would be a bigger priority rather than just acquiring them because it's a part of the market education and getting onboard more key clients.

Okay. Great. Thank you so much. That's all my questions.

Thank you. [Operator Instructions] Our last question comes from the line of Pat McCann from Noble Capital Markets. Please go ahead.

Hey, thanks for taking my questions. First, I wanted to ask about the WANNA acquisition and how that relates to or impacts the sales process. When you go to a potential B2B client, I'm wondering, having a more full lineup of services for a more complete list of categories now that you've acquired WANNA. How does that – are you seeing any notable positive impacts as far as being able to provide more fully for a potential client's needs? Just wondering early results, kind of what you're seeing there and how it maybe makes the sales process easier for your salespeople?

Hi, Pat. It's very positive feedback we heard from the client, because again, they're having a full complete solution. It saves a lot of their integration efforts, right? So I think this is one of the strengths and synergy we try to build that is not just one product company, but it's a whole platform of solution, especially with our global sales team and global customer service team. So we are able to support those clients across the different geographies. That is something that standalone, WANNA wouldn't be able to do it. And now as part of the Perfect Corp., we are able to bring this total value to the client. Certainly more and more clients are looking at offering multi-category integration services, and they want to work with one company, with one platform, so they will get more familiar either from creation process to analytic process, so that will come as additional synergy. But I think the most important one is the capability that we are able to upgrade the existing technology to even better because of our decade long of research and more engineering resources. So we'll be able to take the WANNA solution as is, but also to infuse and shift new technology in there to upgrade, whether it's Generative AI or other new algorithm under development. So also in general, I think the strategy as we map out is been executed well. And so far the market feedback has been also strong and positive.

Thanks. And I was also wondering with regard to the B2C monetization strategies where you are maybe twain a little bit with different ways to monetize the apps and cost structures for subscribers. I was just wondering if you could give any more color there as far as the types of things you're trying and kind of what the feedback you're getting from the consumer is.

Our recent market research and looking at other competitor alternative product there, we noticed that there's a room to optimize our price point. Originally, we were charging around $39 a year for the subscription, and now we are introducing a much higher premium subscription with newer feature at $79 per year. So it is a significant increase in ASP. Of course, that is driven by just adding new Generative AI features. Some of those are very advanced and very fun and cool. So the early results show the consumers are willing to upgrade from their original plan into this newer plan. And that's also part of the contribution and revenue and increase in the ASP. We'll continue to do such type of optimizations and depending on the market needs to segment different product line or different subscription plans and keep optimizing on that.

Great. Thanks so much for all the color. That's all I had. Congrats, again on the quarter.

Thank you. We have our last question from the line of Aashi Shah from Sidoti. Please go ahead.

Hi. Congratulations on another great quarter. I just wanted to ask about the WANNA acquisition, and if you can just talk a little bit about the competitive landscape that is there in the industry in the shoe market and the handbags, please?

I think our view, there isn't too much competitor in the bag space. I think WANNA has portrayed probably the best solution, there's still room to improve the shoes market. WANNA is clearly leading in that industry with a number of brands, especially in the top luxury segments. So covering more than a dozen of top shoes brands in there. So there are a few competitors, but in a much smaller scale that are there. And again, Perfect Corp, we are not shy of competition. We think we have great technology to make the solution even lead better. I think, of course, the worldwide macroeconomic challenges is slowing down some of these new adoption by key clients. They are waiting to see what is going to be their new cost structure, how they're going to invest in digital, and we certainly will be ready to support our clients, when that decision is coming. But again, we are not waiting, we are doing a lot of integration and improvement of the technology through our in-house development teams. And I think when the market offer better clarity and open up, we will be ready to take it.

All right. And switching sides and asking a little bit about the B2B clients, following up on another question, like you've lost a lot of key brand customers. Can you tell us like what the – like any color on what the conversation with clients are looking like with respect to the macroeconomic conditions in the U.S. right now?

Certainly, yes. We lost a little bit more than what we expected. None of them were big Tier 1 clients. But they say medium sizes clients. I think most of those feedback that gave us is not the churn because of the competition, but mostly the churn because the financial pressures that they have from management to cut on the cost because whether it is a tariff or other concern they want to be prepared and be ready to save some costs and navigate through these difficult economic times. So that is something that we may try to regain those customers once the situations get better. But so far I don't think there's anything that the management is too worried about. Of course, we assess to see those clients go. But so far it has not been the VIP the big clients, it has been just more of the small regional brands.

Right. And my last question is about the capital allocation strategy and is there any change in that? And there is about $160 million in cash on hand right now, so what the plan for the cash is going to be like?

I think under the current environment, holding on the cash is actually not a bad thing. I think there are a lot of deals, activities in the market has been very much on hold and [indiscernible]. So we will remain to see – I mean, the capital is there to support the growth. I think growing organically is our key priority, especially with the B2C business going very strongly, that's why we launch a new app. We are launching a lot of updates and upgrades to our existing app subscriptions and this is part of the use of the capital to invest in R&D, to invest in market. [MMA] is still in our radar, but I think for the time being, I will be a little bit more selective into looking at what are the options in the market under the current environment.

Thank you so much and congratulations on a great quarter again.

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

Thank you once again for joining the call today. If you have any further questions, please feel free to contact us directly or through our IR website. We look forward to speaking to everyone next time. Thank you and goodbye.

That concludes our conference call for today. Thank you for joining and you may now disconnect.