So-Young International Inc. (SY) Q3 2021 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and thank you for standing by for So-Young's Third Quarter 2021 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I will now like to turn the meeting over to your host for today's call, Ms. Vivian XU. Please proceed.

Thank you, operator, and thank you for joining So-Young's Third Quarter 2021 Earnings Conference Call. Please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities and 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 statements, except as required under applicable law. Joining us today on the call are Mr. Xing Jin, our Co-Founder, Chairman and CEO; and Mr. Min Yu, our CFO. At this time, I would like to turn the call over to Mr. Xing Jin. Kass, please?

[Foreign Language]

Thank you all for joining our earnings call for the third quarter of 2021.

[Foreign Language]

We continue to execute our growth strategy during the quarter and are pleased to deliver solid financial performance despite the challenges and impact of COVID-19 in part of China. Revenues grew to RMB 431.5 million, in line with our prior guidance, an increase of 20% from the same period of 2020. Non-GAAP net income attributed to So-Young International Inc. was RMB 28.9 million, an increase of 9.6% from the third quarter of last year.

[Foreign Language]

In the third quarter, the resurgence of COVID-19 in several cities across the country resulting in weaker-than-normal consumer sentiment and heightened containment measures had a negative impact on our business. Having said that, we firmly believe that the long-term outlook for the medical aesthetics industry remains strong and intact.

[Foreign Language]

Let's talk about our strategy progress on our operations during the quarter. Firstly, our team worked tirelessly with institution to increase brand endorsements on the platform with the aim of improving conversion rates. The number of paying medical service providers on our platform was 4,841, a increase of 18.2% from 4,096 in the third quarter of 2020. So-Young has become the premium one-stop comprehensive medical aesthetics and medical service platform to facilitate presales and after sales services. Thus, closing the information gap between online and offline demands. Information service revenue maintained steadily growth, increasing 21.1% year-over-year to RMB 321.6 million. The number of key medical service providers subscribing to So-Young's information service were 2,242, up from 2,146 in the prior year.

[Foreign Language]

In terms of user experience, we focused on a few key areas: strengthening the digital capabilities of So-Young platform, increasing personal data protection and improving the customization of community content based on individual profiles and purchasing behaviors.

[Foreign Language]

On the nonsurgical product side, the popularity of nonsurgical categories remains high in terms of user demand. We further increased the number of SKUs on our platform to optimize the online transaction experience with more transparent pricing and attractive incentives for the users, particularly as a way to reward our loyal repeated users. Our online consumer protection projects has gained much traction and demonstrated progress in brand loyalty as we continue to strengthen the management and control our product authenticity and the supervision over treatments and services. Alongside the standardization of nonsurgical procedures, as of September, over 140,000 nonsurgical SKUs were available on our platform, an increase of 26% compared with the same period in last year. As a result, in third quarter, revenue contribution of our nonsurgical business increased to 49% of total revenue, up from 43% in the third quarter of 2020.

[Foreign Language]

Secondly, we worked to ensure consistent standardization of nonsurgical procedures and service, while helping institutions to enhance contract performance and authenticity of high-quality service. We will continue to grow our market share in the nonsurgical categories and expand our go-to-market strategy by introducing more upselling and popular products that address different customer needs.

[Foreign Language]

To refine our operation in the surgical categories, we allocated more resources to support reputable doctors and expand our advantage in this area. We upgrade our customized treatment program to help users find personalized solutions consisting of effective diagnosis and treatment by matching them with the right doctor and the professional consultants.

[Foreign Language]

Now I would like to give you update on our business integration with Wuhan Miracle Laser Systems. We closed the deal in the middle of Q3. The acquisition of Wuhan Miracle has helped us expand our institutional network, fulfillment service and is a great example of our strong growth strategy, exploring new collaboration opportunities with equipment and device manufacturers as well as medical drug providers. We have set up a flagship store for Wuhan Miracle on So-Young's platform and added online products to So-Young As of early November, So-Young had established business relationships with more than 30 institutions derived from Wuhan Miracle network.

[Foreign Language]

Going forward, we will scale this service model and seek opportunities with upstream product providers through trials that will connect them directly with many of our users.

[Foreign Language]

On the regulatory front, we remain in close communication with regulators and follow industry guidelines by promoting self-discipline on platform governance, conducting stringent internal review mechanist on all doctors and institutions on our database and facilitating rigorous approval process [indiscernible] content and service offerings. As a leader in the medical aesthetics and medical industry, we particularly focus on the accuracy of the online information we provide on medical aesthetics services, assisted our institutional partners with compliance audits and promote the standardization and orderly development of the medical aesthetics industry.

[Foreign Language]

To summarize, So-Young's goal is to provide comprehensive medical aesthetics and medical information that will resolve information asymmetry within the industry. Meanwhile, we are developing a B2B platform to enhance our cooperation with upstream product suppliers. In addition, we are strengthening our community operations capabilities [indiscernible] on the supply end and improving overall user satisfaction rate by facilitating value-added service in the treatment execution phase. We believe this will help us extend our reach to a growing number of sets users and raise the size of total addressable market. As we continue to grow our reputation as the most trusted medical aesthetics and medical care platform in China, we will further strive to raise standardize -- or standards and the quality of the industry.

[Foreign language]

Now let me invite Min to give us overview of the results of the quarter, before we will open up to the Q&A.

Thanks, Kass. Please be reminded that all amounts quoted here will be in RMB. Please also refer to our earnings release for detailed information of our comparable financial performance on a year-over-year basis. For the third quarter 2021, total revenues were RMB 431.5 million, up 20% year-over-year from RMB 360 million, in line with our previous guidance. The increase was primarily due to an increase in the number of paying medical service providers and the consolidated revenues of RMB 48.1 million in '21 Q3 from Wuhan Miracle. The number of paying medical service providers on the platform were 4,841 increased 18.2% from 4,096 in the third quarter of 2020. The total number of medical service providers subscribing to information services on So-Young's platform was 2,242 during the quarter compared with 2,146 in the third quarter of 2020. Within total revenues, information services and other revenues were RMB 369.7 million, up 39.2% year-over-year from RMB 265.7 million. Reservation Services revenues were RMB 61.7 million, a decrease of 34.3% from RMB 93.9 million in the third quarter of 2020. Cost of revenues were RMB 89.6 million, up 63.7% year-over-year from RMB 54.7 million in the third quarter of 2020. The increase was primarily due to the consolidation of the costs of Wuhan Miracle, cost of revenues included share-based compensation expenses of RMB 4.8 million compared with RMB 5.1 million in the third quarter of 2020. Total operating expenses were RMB 322.5 million, a decrease of 3.7% from RMB 335.1 million in the third quarter of 2020. Sales and marketing expenses were RMB 190.7 million, down 13.9% from RMB 221.6 million a year ago, primarily due to a decrease in expenses associated with branding and marketing activities. Sales and marketing expenses included share-based compensation expenses of RMB 2.2 million compared with RMB 2.2 million in the corresponding period of 2020. G&A expenses were RMB 54.7 million, up 8.7% from RMB 50.3 million a year ago, primarily due to the consolidation of General and administrative expenses of Wuhan Miracle. G&A expenses included share-based compensation expenses of RMB 10 million compared with RMB 12.2 million in the corresponding period of 2020. Research and development expenses were RMB 77.1 million, up 22.1% from RMB 63.2 million a year ago. The increase was primarily due to the consolidation of the research and development expenses of Wuhan Miracle. R&D expenses for the third quarter of 2021 included share-based compensation expenses of RMB 5.1 million compared with RMB 6 million in the corresponding period of 2020. Income tax expenses was RMB 4.3 million compared with RMB 16.3 million income tax benefit in the third quarter of 2020. Net income attributable to So-Young International, Inc., was RMB 6.8 million compared with net income attributable to So-Young International, Inc., of RMB 0.9 million in the third quarter of 2020. Non-GAAP net income attributable to So-Young International was RMB 28.9 million compared with RMB 26.4 million in non-GAAP net income in the same period of 2020. Basic and diluted income per ADS attributable to ordinary shareholders were RMB 0.06 and RMB 0.06, respectively, compared with RMB 0.01 and RMB 0.01, respectively, during the same quarter of 2020. Now for our balance sheet. As of September 30, 2021, we had total cash and cash equivalents, restricted cash and term deposits, term deposits and short-term investments of RMB 1.8 billion compared with RMB 2.7 billion as of December 31, 2020. For the fourth quarter of 2021, So-Young expects total revenues to be between RMB 430 million and RMB 450 million, representing a 1.3% to 6% increase from the same period of 2020. The above outlook is based on the current market conditions and reflects the company's preliminary estimates of market and operating conditions and customer demand. 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.

[Operator Instructions] Your first question comes from the line of Thomas Chong from Jefferies.

[Foreign Language] I have a question on -- about the regulation side. Any comments about the guidelines on medical and aesthetical advertising law enforcement as well as relevant regulatory situation.

[Foreign Language]

As medical aesthetics has both medical nature and consumption nature, the guidelines on medical aesthetics advising law enforcement issued by the SAMR, the state administration for market regulation, will help maintain the order of the medical aesthetics market and it truly protect the rights and interest of consumers.

[Foreign Language]

As our online service platform from medical aesthetics, we will strictly follow the requirements of law on protection of consumer rights and interests, e-commerce law and other laws and regulations as mentioned in the guidelines as we provided the online information services. We will let consumer acquire the specific information of products, including price, performance, specifications and disclose of the information of the products or service in the comprehensive, genic, accurate and real-time manner in order to guarantee the right to note and the right to choose of consumers.

[Foreign Language]

Meanwhile, we will proactively follow the guidance to -- guidelines to further establish and optimize our [indiscernible] take the initiatives to block illegal promotion information and maintain the standardization and other development opportunities. As a platform that started in the first place and continuously conduct self-disciplined [indiscernible] we believe institutions should not cheat consumers by its aggregation or fraud information in marketing and consumer acquisition. We strictly forbid illegal promotion information and take protection of consumer rights and interest of [indiscernible]. For institutions, they will turn to more prudent professional and compliant platform when choosing marketing channels.

[Foreign Language] A – Vivian XU : In the long run, regulations are positive to the healthy development of the industry. As a leader in the industry, we will stick to self-discipline for the improve our internal review mechanisms and drive medical aesthetics to return to its medical nature.

Your next question comes from the line of Nelson Cheung from Citi.

[Foreign Language] So let me translate myself. So with the revenue decline of reservation revenue this year, can management share the reasons behind it? And what's your expectation for the long-term trend of this business going forward?

[Foreign language] A –Vivian XU : First is due to the resurgence of COVID-19 in some member cities, consumers' confidence is weaker than normal and their willingness to spend is not that strong. It's impacted medical aesthetics market.

[Foreign Language]

Secondly, the price for medical aesthetics treatment is generally expensive and some consumers need to take transit travel to get the treatment. The containment measures in some cities prohibit their movement.

[Foreign Language]

In the meantime, in this Q3, we tested new promotions with selected institutions. We encourage institutions to expand inventories and give more rebates to users, making them have more incentive to place orders online.

[Foreign Language]

As a result, under the new promotion, GMV of online transactions in September was 96% and 78% higher than that in March and June, respectively. While ARPU was 76% and 39% higher, respectively, as well.

[Foreign Language]

Over long run with a better use of online experience and the standardization of our product offerings, we will enhance the fulfillment of the online transaction and extend our service to off-line, ensuring users gets the authentic products. For institutions using online payment service will be an important factor if they want to -- higher traffic and conversion. They will be encouraged to let user place order online.

Your next question comes from the line of Vincent Yu from Needham and Company.

[Foreign Language] My first question is about the impact from COVID-19. As you just said, COVID-19 resurgence continued to impact our business operation, can management share your view on its impact on fourth quarter, especially on user base sites? And also for the next year, what do you see for user growth and revenue growth? My second question is about the progress in So-Young PASS. Compared to surgical categories, which is greatly impacted by COVID-19, how is the growth trend for nonsurgical category and highlights here?

[Foreign Language]

Thank you for the first question. In Q3 and Q4, the rebound of pandemic in some cities brought short-term uncertainties to our business. We are monitoring the development of the market and we'll make adjustments for our marketing strategy timely.

[Foreign language]

For the Q4 and next year, we believe the popularity of nonsurgical category will maintain its momentum. We will solidify our existing strong position on surgical side while executing our established strategy on nonsurgical side to penetrate into more market and gain more market share.

[Foreign Language]

In the past several years, the main driver for the growth of medical aesthetics industry came from the plastic surgeries because these surgeries are nonstandard treatments, the quality of which is largely dependent on surgeon doctors. Therefore, the status of the industry remains fragmented with no universal standard and poor service quality. The COVID-19, by some degree, has changed user behavior. In the meantime, the advancement of the technology of light aesthetics and expanding user group are accelerating the development of the digitalization and the standardization of the industry.

[Foreign language]

We believe such trend to continue in the next 5 years. Institution required to improve their medical skill and service quality, while the upstream equipment and drug providers want to increase their exposure and brand influence to end users, both of them will need more service from our platform.

[Foreign Language]

Operation for So-Young PASS was started last October, and the number of cities covered has expanded to over 50 by the end of this quarter from 11 at the beginning. Corporate institution also increased from more than 250 from 90 at first. While expanding the coverage, we are continuously optimizing service experience and a popular category of So-Young PASS.

[Foreign language]

For nonsurgical, the orders accounted for 76% of total orders during the quarter. Meanwhile, the hot selling products were established with our advantage in the community content and new media such as Fotona4D, photorejuvenation, [harting] and other categories recorded more than 85% year-over-year growth in average GMVs from users' online orders. Among them, the online GMV for the Fotona4D even grew over 400% year-over-year.

[Foreign language]

In addition, we added So-Young PASS to the shop opening and the promotional campaigns of newly joined institutions, healthy and small- and medium-sized institution with less online resources and operations experience to rapidly increase the exposure and improve accurate client acquisition.

[Foreign language]

In summary, we mentioned before, So-Young PASS is just the first step as we take to enhance contract performance for user and also investing use on the nonsurgical side. For the whole nonsurgical business benefited from the rising popularity of nonsurgical services, we are committed to standardization of nonsurgical service in the long term, continuously enhance content performance and ensure users to enjoy a premium experience of authentic products on the nonsurgical side. Meanwhile, we are seeking of cooperation trials with upstream manufacturers, further helping users to solve their pain points in nonsurgical categories, improving the overall user satisfaction and penetrating to more medical aesthetics users.

Your next question comes from the line of Leo Chiang from Deutsche Bank.

[Foreign Language] I'll translate my question. So my question is regarding the MAU and sales and marketing. Just wondering why the reason behind the MAU decrease and the reason behind the decrease in marketing expense? And what is the marketing and promotion strategy for next quarter and next year?

[Foreign Language]

Firstly, due to the impact -- negative impact of resurgence of COVID-19 in some large cities, consumer confidence was hurt and consumption willingness declined resulting in the Q-on-Q decrease in MAU.

[Foreign Language]

Secondly, as we already mentioned at the beginning of this year, our marketing strategy in this year is to acquire more [indiscernible] putting the priority of user quality ahead of quantity, which is different from the strategy in last year when we focused on targeting new users.

[Foreign Language]

Referring to the total marketing fee during the quarter, we optimized our marketing strategy, reducing branding spending in offline channels and increasing online promotional content, leveraging our content advantages and also releasing the premium content on third-party platform to enhance effectiveness, establishing our image as a professional medical aesthetics and in medical platform.

[Foreign language]

Looking forward to the whole year of 2021, we estimate the total sales and marketing expense will account for no more than 50% of our revenues, maintaining the same level as we projected in the beginning of this year.

Your next question comes from the line of Shiqi Ge from CICC.

[Foreign Language] Just wondering if you could give us more business update on Wuhan Miracle? And since you added the business of upstream equipment supply, could you please also share with us more color about your long-term development strategy?

[Foreign language]

In the third quarter, we closed the deal of acquiring Wuhan Miracle. We have set up a flagship store for Wuhan Miracle on our platform and promote its products to our users and integrate its products with So-Young PASS. As of early November, So-Young had established business relations with more than 30 institutions derived from Wuhan Miracle network.

[Foreign language]

Referring to your second question, in the past few years, we have made efforts to solve the difficulty of user decision-making by providing more transparent information, by normalizing and optimizing our community [indiscernible] enable our users to gain better understanding of medical aesthetics treatments with professional help at the information level.

[Foreign Language]

With the refinement of our operation, our online service will be more standardized and transparent in price. We are able to correctly display to users the place of production, usage, specification and other information. We are also pioneered in offering online rights protection at no cost, providing advanced compensation and insurance for relevant medical aesthetics treatment to our users.

[Foreign Language]

At present, as we better understand the medical aesthetics industry, we are aware that the higher transaction value of upstream products and the limited choice of categories have set limits for more users to enjoy medical aesthetics consumption. [indiscernible] user demand side, we are seeing that medical aesthetics consumption expanding out of the original user base as the demands for the medical aesthetics continues to rise. For that reason, we believe at the current stage, we will leverage ages of our platform, enhance cooperation with the supply end, explore into new industry, enable more users to have access to good medical aesthetics experience and expand the overall market size.

If there are no further questions. That brings to the end of a call. Thank you for participating. You may all disconnect now. Thank you all.

Thank you. Good night.