Q1 2024 So-Young International Inc Earnings Call

Participants

Mona Qiao; Investor Relations; So-Young International Inc

Xing Jin; Chairman of the Board, Chief Executive Officer, Co-Founder; So-Young International Inc

Nick Zhao; Chief Financial Officer; So-Young International Inc

Chloe Wei; Analyst; China International Capital Corporation Limited

Guanran Wang; Analyst; CITIC Securities Company Limited

Yibing Wang; Analyst; Haitong Securities

Zoey Zong; Analyst; Jefferies

Presentation

Operator

Ladies and gentlemen, thank you for standing by for So-Young's first-quarter 2024 earnings conference call. (Operator Instructions) As a reminder, today's conference is being recorded.
I would now like to turn the conference over to your host for today's call, Miss Mona Qiao. Please go ahead, ma'am.

Mona Qiao

Thank you, operator, and thank you, everyone, for joining So-Young's first-quarter 2024 earnings conference call. Joining me today on the call is Mr. Xing Jin, our co-Founder, Chairman, and CEO; and Mr. Nick Zhao, CFO.
Please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities and Litigation Reform Act of 1995. Forward-looking statements are subject to risks and alternatives that may cause actual results to differ materially from our current expectations. Potential risks and alternatives include, but are not limited to, those outlining our public filings with 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.
At this time, I would like to turn the call over to Mr. Xing Jin.

Xing Jin

(spoken in foreign language)

Mona Qiao

(interpreted) Hello, everyone. Thank you for joining the call today. Our business performed well in the first quarter, with total revenues reaching RMB318.3 million, exceeding the upper end of our guidance. At the same time, this marks the first time in five years that we achieved non-GAAP profitability in the first quarter.
Our new businesses continue to grow rapidly, with revenue from self-serve medical products and maternity services increased 23.3% year-over-year. Our pipeline of upstream products continues to further diversify its offerings, while So-Young Prime maintains healthy development.

Xing Jin

(spoken in foreign language)

Mona Qiao

(interpreted) We have made significant progress in the expansion of our chain of clinics. In the first quarter, we opened [our clinic] operations at three clinics, all of which post unit area efficiencies well above industry average at a notable price advantage. In the first quarter, the cumulative clients served by our clinics increased 77% quarter-over-quarter.
We've also made steady headway of vertical integration from products to institutions, driving restructure of pricing system and value allocation in the industry. This will provide consumers with medical aesthetical services that are more cost efficient and help with sustainable development of medical aesthetic practitioners.
In terms of products, institutions, and So-Young platform, as we made steady progress in these initiatives, we are confident in the growth opportunities for us going forward.

Xing Jin

(spoken in foreign language)

Mona Qiao

(interpreted) In our POP segment, we continued to advantage our differentiated strategy to solidify our advantage within the premium segment of the market. By offering customer-sized and high-value services, we are not only able to serve high-end users, but also assist institutions in boasting their profits. During the quarter, our order value increased by 11.3% year-over-year.
In terms of traffic acquisition, we reallocated our budget away from low ROI online channels and instead focused on cultivating and returning a target user base within our private domains. We leverage various channels within and outside of the So-Young platform and improve user engagement, aiming to enhance our monetization efficiency. As a result, in the first quarter, users required through private domains increased by 19.7% quarter-over-quarter.

Xing Jin

(spoken in foreign language)

Mona Qiao

(interpreted) Turning to So-Young Prime, we capitalized on the success of the model clinic we opened at our headquarters in Beijing in the latter half of 2023. Building upon this momentum, we accelerated our strategy transition from partner institutions towards establishing a chain of clinics. During the quarter, we opened three clinics, with operations firmly on track. By the end of this month, we expect to open and commence operations for our third batch of clinics.
To efficiently drive this transition, we have established a comprehensive and standardized workflow system, covering everything from site selection and evaluation to clinic opening and operations. This has enabled us to expand at a pace that significantly surpasses the industry average and set an industry record for the rollout of new clinics. We plan to expand our chain of clinics nationwide, starting with five to six core cities. At the same time, So-Young Prime continues to garner exceptionally high user satisfaction, with user satisfaction of over 4.9 out of 5 for each institution every month at an ever-increasing repurchase rate.

Xing Jin

(spoken in foreign language)

Mona Qiao

(interpreted) Lastly, I will provide a quick recap of the process we have made in our upstream supply chain business. Sales of the Korean brand Elravie continue to grow strongly over the quarter, increasing 80% year-over-year. In just one year, we have established a mature distribution network that covers 750 institutions through both direct and agency self-channels.
Our recent launch of True Lift, a non-surgical anti-aging ultrasound device, has further diversified our product portfolio, with sales far exceeding expectations. The success of this product is a testament to the strength of our brand, word-of-mouth recognition among consumers and to demonstrate how are able to quickly bring new products to markets and rapidly secure their market positions through our expansive institutional network.

Xing Jin

(spoken in foreign language)

Mona Qiao

(interpreted) We recognize the immense potential for growth in China's medical aesthetics market. However, the industry still contains a less-than-[variable] public perception despite its development over the past two decades. While a HA injection that costs tens of RMB can be sold for thousands, many institutions within the sector struggle to turn a profit. Reality such as this points to structural issues.
So-Young will address these issues by establishing an industry platform. By integrating the upstream, midstream, and downstream resources of the medical aesthetical industry, we aim to fundamentally reduce costs and increase efficiency, and provide consumers with better and more cost-effective medical aesthetic services. This approach is designed to drive sustainable revenue and profit growth for the platform, while ultimately delivering greater long-term value to our shareholders.

Xing Jin

(spoken in foreign language)

Mona Qiao

(interpreted) I will now turn the call over to our CFO, Nick, to review the financial results for this quarter before taking your questions.

Nick Zhao

Hello. This is Nick. Please be reminded that all amounts quoted here will be RMB. Please also refer to our earnings release for detailed information of our comparative financial performances on a year-over-year basis.
Total revenues during the quarter were RMB318.3 million, up 2.6% year-over-year, exceeding the high end of our guidance. Growth was primarily driven by sales of medical products and maintenance services, which increased 23.3% year-over-year to RMB86.5 million, driven by the sales volume increase of cosmetic products and medical equipment.
Information services and other revenues were RMB208.7 million, a slight decrease of 0.7% year-over-year.
Reservation service revenues decreased 22.3% year-over-year to RMB23.1 million, primarily due to the policy change for commission rates and subsidies.
Cost of revenues were RMB117.3 million, up 3.2% year-over-year, primarily due to increased costs associated with the sales of cosmetic products and medical equipment. Within cost of revenues, cost of services and others were RMB74.2 million, down 8.9% year-over-year, primarily due to a decrease in payroll costs.
Cost of medical products sold and maintenance services were RMB43.1 million, up 33.7% year-over-year, primarily due to an increase in costs associated with the sales of cosmetic products and medical equipment.
Total operating expenses were RMB237.8 million, up 3.5% year-over-year.
Sales and marketing expenses were RMB113.3 million, up 0.7% year-over-year, primarily due to an increase in payroll costs associated with the expansion of our marketing team.
G&A expenses were RMB85 million, up 38.1% year-over-year, primarily due to an increase in payroll costs associated with the expansion of administrative employees to support the enhancement of our core and new strategic businesses.
R&D expenses were RMB39.6 million, down 29% year-over-year, primarily attributable to improvements in employee efficiency.
Income tax benefits were RMB2.6 million compared with income tax benefits of RMB4.3 million in the same period of 2023.
Net loss attributable to So-Young was RMB21.2 million compared with a net loss of RMB11.9 million during the same period last year. Net non-GAAP net income attributable to So-Young was RMB4.1 million compared with RMB2.8 million net non-GAAP net loss attributable to So-Young in the same period of 2023.
Basic and diluted loss per ADS attributable to ordinary shareholders were RMB0.21 and RMB0.21, respectively, compared with basic and diluted losses per ADS attributable to ordinary shareholders of RMB0.12 and RMB0.12, respectively, during the same period of 2023.
We have maintained a robust cash position with cash and cash equivalents, restricted cash and term deposits, term deposits and short-term investments, totaling RMB1.3 million as of March 31, 2024, effectively flat when compared with December 31, 2023.
For the second quarter of 2024, we expect total revenues to be between RMB380 million and RMB400 million. The above outlook is based on the current market conditions that reflect the company's preliminary estimates of market and operating conditions and the customer demand.
This concludes our key remarks. I will now turn the call to the operator and open the call for Q&A. Operator, we are ready to take questions.

Question and Answer Session

Operator

(Operator Instructions) Chloe Wei, CICC.

Chloe Wei

(spoken in foreign language) So let me translate myself. Thanks management for taking my question. Congrats on the solid first quarter result. The top-line was ahead of our expectation.
So my question is about the full-year outlook. From what we got from the prepared remarks, I believe our [our time] has turned more positive. So is there some trend and maybe management want to share with us? And given the headwinds from the macro, how should we think about our full-year top-line growth? Thank you.

Xing Jin

(spoken in foreign language)

Mona Qiao

(interpreted) Developments on medical aesthetics industry in the first quarter, is in line with our observation and expectation at the beginning of the year. First, the Chinese medical aesthetics market is gradually recovering with the overall consumption market. As retail sales of consumer goods in China increased by 4.7% year-over-year in the first quarter. Medical aesthetics consumption data has also reflected a gradual growth trend.
Second, as the medical aesthetics user group tends to mature, user demands are more diversified. It's difficult to attract high-quality clients simply with low prices, more enriched products and services are required to cater to differentiated user demand.

Xing Jin

(spoken in foreign language)

Mona Qiao

(interpreted) In 2024, we will maintain our strategies based on our existing business. We will establish a platform that's vertically integrates upstream supply chains, midstream operations, and downstream distribution channels to fundamentally optimize cost and enhance efficiency. This strategic approach will enable us to deliver superior and more cost-effective services to consumers.

Xing Jin

Xie xie.

Operator

Guanran Wang, CITIC Securities.

Guanran Wang

(spoken in foreign language) Thanks for this opportunity. Just two questions. First is, how should consider a decline of the traditional metrics such as MAU? And what business -- different advantages in this intensified traffic competition? Thank you.

Xing Jin

(spoken in foreign language)

Mona Qiao

(interpreted) In terms of online traffic, all industries are experiencing intensified competition for traffic. For So-Young app, we continue to boost engagement and attract more organic user traffic through operation of community content and self-media resources.
In addition, there were extensive private domain operations. We strive to connect So-Young app with private domains, expanding its traffic pool as we increase private domain retention rate and user engagements. This part of data is not reflected in our MAU. But judging from recent transition data such as GMV and online orders, it has remained basically stable. It testaments to the effectiveness of this strategy. It can also help lower traffic costs and enhance profits.
Thirdly, in terms of cooperation with third-party traffic sources, we emphasized our traffic of accuracy and placement ROI, reduced budget for channels with low ROI to further reduce placement costs, and increased margins of our platform.

Xing Jin

(spoken in foreign language)

Mona Qiao

(interpreted) Compared to our peers, we have two core competitive advantages. First, we have high-quality users and a high average, order volumes. Second, we benefit from our own offline medical aesthetic institutions, including So-Young chain clinics and shared hospitals, which provide us with greater room for innovation.
For surgical customers, we organized offline consultations and invite multiple renowned doctors to participate. Centralized consultations help users save time and transportation costs and face-to-face communication also increased users' decision-making efficiency.
For high-end injection customers, we screen high-quality doctors on the platform and complete service deliveries within our own or cooperative institutions. With this approach, we have stronger control over the contract fulfillment and delivery process, while simultaneously commanding price power and conducting refined user operations in a closed-loop manner, thus avoiding the risk of user attrition.

Operator

Yibing, Haitong.

Yibing Wang

(spoken in foreign language) Okay. Thanks for management. I'll translate myself. My question is about the So-Young Prime. I want to ask is the current progress of the opening new clinics on the So-Young Prime in line with your expectation. And what's your midterm to long-term plans for proprietary chain clinics? Thank you.

Xing Jin

(spoken in foreign language)

Mona Qiao

(interpreted) We planned to open 15 clinics in 2024 at the beginning of the year. By the end of the first quarter, we opened three clinics. Since then, we added two more before today's earnings. Now, we are opening six clinics in all generally in line with our expectation.
During the process, we have established a comprehensive and standardized workforce system, covering everything from site selection and evaluation to client opening and operations. This has enabled us to expand at a pace that significantly surpasses industry average and set an industry record for the rollout of new clinics.

Xing Jin

(spoken in foreign language)

Mona Qiao

(interpreted) Emphasizing on authentic products, cost performance, and transparency, our aim is to position standardized light medical aesthetical services as the first choice of everyday cosmetic consumption. We expect to reach the scale of 100 to 150 clinics in the next three years.

Xing Jin

(spoken in foreign language)

Mona Qiao

(interpreted) While expanding our chain of clinics, we continue to build our operation team, combining our advantages in product supply, development, and innovation. We are driving the build out of a standardized management system for light medical aesthetics institutions as well as an end-to-end online process management capabilities to improve operating and management efficiency for institutions.
In the future, we will continue to improve efficiency per staff and efficiency per unit area for our chain of clinics, increase penetration of our proprietary supply chain products, improve margin of our chain clinics while providing users with more cost-effective services.

Xing Jin

(spoken in foreign language)

Mona Qiao

(interpreted) User satisfaction is fundamental to chain operation. With that in mind, we emphasized more on user satisfaction. From January to April, user satisfaction in our chain of clinics reached 98% and in line with our expectations.

Xing Jin

Xie xie.

Mona Qiao

Thank you.

Operator

Zoey Zong, Jefferies.

Zoey Zong

(spoken in foreign language) Thanks for the management for taking my question. And I have two questions. The first question is, can management share on your progress for upstream supply chain business? And the second question is, with the cash reserves of [the target market] RMB1.3 billion. What will be the planned usage? Thank you.

Xing Jin

(spoken in foreign language)

Mona Qiao

(interpreted) On product side, first [our array] maintained strong momentum, with sales increasing 80% year-over-year and revenue increased 56.5% year-over-year in the first quarter. In addition, we spent just one year to establish a mature distribution network covering 715 institutions through both direct and agencies of channels.
In the future, we will continue to integrate our upstream supply chain help companies to increase profit and return to users with products of sound cost performance, reaching win-win situation.

Xing Jin

(spoken in foreign language)

Mona Qiao

(interpreted) Second, we continue to expand our product pipeline. The launch of face lift product, True Lift, further diversifies our photo-electric category with sales far exceeding expectations. This is a testament to the strength of our brand, word-of-mouth recognition among consumers, and demonstrates how we are able to quickly bring new products to market and rapidly secure their market position to our expansive institutional network. We expect to add more products and continuously generate incremental revenue and profit growth from the supply chain business.

Nick Zhao

This is Nick. (spoken in foreign language)
I will translate. We will use the cash for two purposes. First of all, we will continue expanding along upstream and downstream of the industry, including upstream product pipeline and downstream chain clinics to lay solid ground for our integrated industry platform. And secondly, we will share repurchase plan or potential dividend to return values to our shareholders. Thank you.

Operator

Thank you, sir. Ladies and gentlemen, we have reached the end of our question-and-answer session and our conference. Thank you for joining us today. You may now disconnect your lines.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the company sponsoring this event.