So-Young International Inc.

Good morning, ladies and gentlemen, and thank you for standing by for SoYoung's second quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the management's prepared remarks, there will be a question and answer session. As a reminder, today's conference call is being recorded. I would now like to turn the meeting over to your host for today's call, Ms. Vivian Hsu. Please proceed.

Thank you, operator, and thank you for joining Soyang's second quarter 2022 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 the Litigation Reform Act of 1995. Forward-looking statements are subject to risk and uncertainties that may cause actual results to differ materially from our current expectations. Potential risk and uncertainties include, but are not limited to those outlined in our public findings with SE, including our annual report on 420F. Soyang does not undertake any obligation to update any forward-looking statement, except as required under applicable law. Joining us today on call is Mr. Ming Yu, our CFO. At this time, I would like to turn the call over to Mr. Ming. Thank you.

Thank you all for joining our second quarter 2022 Amiens Conference call. Since the beginning of 2022, we have faced many challenges from the external environment, including the macro environment and particularly the resurgence of COVID-19 in multiple cities across China, which had an active impact on business activities and the consumer sentiment. According to data from the National Bureau of Statistics of China, Total sales of consumer goods in the first half of 2022 decreased by 0.7% year-on-year, while the situation further weakening in the second quarter when total sales of consumer goods decreased by 4.6% year-over-year. In Q2, the resurgence of COVID-19 affected the top four medical aesthetic consuming cities by GMV with Beijing, Shanghai, Guangzhou, and Shenzhen. Total GMV for the Four cities from our platform in the second quarter of 2022 decreased by 71% year over year. We were actively adopting and adjusting the operation strategy of second and third tier cities, driving the revenue contribution of emerging cities to make up for the decline. As a result, in the second quarter, total revenue reached RMB 309 million, an increase of 3% from Q1. At the same time, we further increased the number of SKUs on our platform to optimize the online transaction experience with more transparent pricing and attractive incentives for end users, particularly as a way to make up for the decline in surgical GMV due to travel restrictions and safety risk considerations under the pandemic. GMV of non-surgical treatments in the second quarter of 2022 increased 5% quarter over quarter. GMV of non-surgical treatments in June increased 33% compared with May and increased 40% compared with April. Meanwhile, we were prudent with our expenses management and narrowed our losses in the quarter by improving operating efficiency. In the second quarter of 2022, sales and marketing expenses decreased by 41% year-over-year, among which branding and user acquisition expenses as percentage of total revenue decreased to 20% from 33% a year ago. Operating loss narrowed by 46% quarter-over-quarter, and we had an operating profit in June. In terms of operating strategy, recently we launched the SoYang Select, in cities including Beijing, Shanghai, Chongqing, Hangzhou, Shenzhen, and Wuhan. We strictly selected 8% of the local high-quality and high-standard service providers drawn from six categories by applying more than 30 rating criteria, including product, price, and service. For service providers, strict selection criteria enable them to strengthen their core competitiveness and support growth recovery in the post-pandemic period. For users, strict selection criteria address their preference so they can benefit from the reliable consumer protection provided by us. This helps users improve their decision-making efficiency. Wuhan Miracle, which we acquired in the third quarter of 2021, also performed well in the second quarter of this year. According to its disclosure of reported results, the revenues were RMB 120 million in the first half of 2022, up 8% year-over-year despite the challenging industry environment. Wuhan Miracle is very focused on continuously improving the quality, functionality, and marketability of its self-developed proprietary products. In the first half of the year, the sales of the self-developed products accounted for more than 65% of total equipment sales. We believe this business will continue to achieve stable growth in the future. Now, let me give you an overview of our results for the quarter. Please be reminded that all amounts quoted here will be undeterred. While our business, especially in our top markets, was negatively impacted by COVID-19, the good news is that we saw a gradual recovery and a steady increase in revenues quarter over quarter. For the second quarter of 2022, total revenues were $309.1 million, a 31.6% decrease from the same period in 2021 and a 3% increase from the previous quarter. Information services and other revenues were $220 million, around 40% decrease from the same period in 2021 and a 10% increase from the previous quarter. The sales of equipment and the maintenance services revenues of Wuhan Miracle remained stable on a quarter-over-quarter basis. We also adjusted our operational expense management dynamically in response to weakening macroeconomic environment. Total operating expenses were $246.6 million. A 26.5% decrease from the same period in 2021 and a 9.2% decrease from the previous quarter. Sales and marketing expenses were $121.7 million. a 41.1% decrease from the same period in 2021, and a 4.3% decrease from the previous quarter, primarily due to a decrease in branding and user acquisition expenses. General and administrative expenses were $61.8 million, an increase of 9.4% year-over-year, and a 5% decrease quarter-over-quarter, The increase was primarily due to the consolidation of Wuhan Miracle and the increase in professional services fee. Research and development expenses were $63.1 million, a 12.5% decrease from the same period in 2021 and a 20.1% decrease from the previous quarter. The decrease was primarily attributable to a decrease in payroll costs associated with a decrease in headcounts. In the second quarter, Soyang's profitability improved quarter over quarter as we further optimized operations and improved cost control. The net loss attributable to Soyang International Inc. narrowed by more than 51% quarter over quarter. Non-GAAP net loss attributable to Soyang International Inc., which includes the impact of the share-based compensation expenses, was $22.7 million. narrowed by more than 53% quarter over quarter. Now for our balance sheet. As of June 30, 2022, cash and cash equivalents, restricted cash and term deposits, and short-term investments were 1.6 billion RMB, compared with 1.75 billion as of December 31, 2021. For the third quarter of 2022, Soyang expects total revenues to be between $310 million and $330 million. The above outlook is based on the current market conditions and reflects the company's preliminary estimates of market and operating conditions and the customer demand. Our key operating principles and financial objectives that include focus on quality growth, improve operating efficiency and optimize cost of structure and maintain net cash position. During the quarter, we have made progress in executing these objectives. We saw losses narrowed quarter over quarter. We currently have nearly $1.6 billion in cash position, which gives us financial flexibility to grow the business. Looking ahead, we expect that the situation will remain very fluid and the impact of the COVID-19 will affect consumer behavior and medical service provider operations in many ways. But we remain optimistic about the long-term outlook of China's economy and long-term growth prospects of so young. We are uniquely positioned to swiftly adjust in a highly uncertain market environment and create value for our shareholders. This concludes our prepared remarks. I will now turn the call to the operator and open a call for Q&A. Operator, we are ready to take questions.

Thank you. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. If you do ask a question in Chinese, please repeat it in English immediately. And we do ask that you limit yourself to one question at a time, and if you would like to ask more than one, please rejoin the queue. At this time, we will pause momentarily to assemble our roster. And today's first question comes from Thomas Chong with Jefferies. Please go ahead.

Thanks, management, for taking my question. My first question is about the marketing budget. Can management share some color about the trend in recent months and coming quarters? My second question is about the competitive landscape. Can you tell me about the trend

Yes, please go ahead.

Can you comment on both surgical and non-surgical side? And my last question is about the OPAS plan. I've been seeing most of the company highlight about cost control and efficiency. So how should we think about the OPAS plan? Thank you.

Okay. Okay. Yeah, the first question, the trend for sales marketing costs, customer acquisition costs, excuse me, sorry. No worries. We'll go ahead. So for the sales marketing, it accounts around like 49% of total revenue in the second quarter And it includes the payroll costs for our sales marketing personnel and offline BDs. Other than that, the expense spent on customer acquisition is around 20% to 30% in total of the revenue. And going forward, I think in the next few quarters, we will still keep a very prudent cost of control approach for sales marketing costs for customers i.e., for customer acquisition costs, we'll keep it within the 30% to 35% range. And for the total sales marketing costs, we will still keep the same level in terms of revenue going forward. And for your second question, what's the competitive landscape for the industry, including surgical and non-surgical? I think for surgical services, it has been very challenging in the past few quarters. One of the reasons is I think because surgical is relatively much more expensive than non-surgical services, and the current macroeconomy conditions have been very challenging for the consumption market. I think the other reason is for the COVID-19 impact for the travel bans. Because for surgicals, usually the good doctors or the high-quality surgical service providers are in large-scale cities like Beijing, Shanghai, Chengdu, managing those very developed cities, but because of the travel bans applied by the government to contain COVID expansion, I think that it has impacted the consumers to travel to those cities to apply or take those services. And for non-surgicals, and I think for the competitive landscape of the surgical market, Soyang is still in a better position compared to other competitors, but still it's been a systematic negative impact to surgical. It has been going down continuously for the past few quarters. And for non-surgical services, you still keep developing at a relatively a healthier pace, but I think in terms of competitors, still mainly for Nguyen Tse-Ping and us as major participants. Other than that, all other smaller competitors have been relatively less competitive compared to the previous years. That's the second part of your question. question is how the operating expenses going forward, are we going to apply cost control? Sorry, operators, did you keep yourself on mute? Okay. For the third part of the question, I think going forward, we will still keep very strict cost control policies internally. In terms of operating costs or expenses, you can see the downward trend in the next couple of quarters. and to keep the business developing high quality efficiently. I think that's the third part of the question.

Got it. It's very useful. Thank you.

And our next question today comes from Nelson Chung with Citi. Please go ahead.

Hi, thanks, Benjamin, for taking my question. I have a few questions. My first question is regarding your guidance. We'd like to know whether your guidance reflects what kinds of consumption expectations or recovery trends for the company, and any metrics or trends that you could share in July and August about the business. That would be great. And then my second question is regarding the information, the reservation service. Given weaker consumption demand right now, is there any further steps that we could do to retain or reacquire the user once the economy of the macro improves and it translates into additional acquisition costs for us? Thank you.

Okay, yeah, for your first part of your question, That's guidance 310 to 330 million RMB. It's currently our best estimation for the quarter. To be frank, the macroeconomic conditions here in mainland China is not as positive as we used to be expected. As you can see, the July economic numbers have been quite weak. And also, although we've seen a slow recovery in consumption, but it still needs time to recover to a pandemic status, I do need a couple of quarters to recover to third quarter, fourth quarter of last year. And for the second part of your question, for the reservation revenues, because of the economic condition has been quite challenging, and the Of course, the consumer is being relatively more hesitant to spend money. We have been containing our costs in terms of sales marketing as well to make sure the efficiencies of marketing investments. Going forward, I think once we see a very clear trend of consumption recovery, or personal disposable income increase. Of course, we will try to spend more in terms of the customer acquisition. We are confident that once the market or consumption be recovered, we will still be able to acquire new customers in the market. That's why we still need to see the economic development in the next couple of months. Hopefully, everything can have much more satisfactory conditions in the fourth quarter, which can have a better performance at the end of the year. So I think that's the best estimate I can give, and hopefully it answers your question.

Thank you. That's very helpful. Thank you.

Thank you. And our next question today comes from Leo Cheng with Deutsche Bank. Please go ahead.

Hey, thank you, management, for taking my question. So I have two questions. First question is, We see the number of paying service providers still grow robustly this quarter. Can management share the reason behind the growth under the top quarter? My second question is about Soyang Select. Can management share the monetization model for Soyang Select, and are we expecting to see revenue contribution in the second half? Thank you.

Okay, for the paying service providers, I think because in the second quarter, it's been like in Shanghai and Beijing, those large cities used to be very important or takes around like the top four cities accounts around like 30 to 34% of our total revenues in 2021. And all of them have impacted by the COVID-19. And we try to uh help the service providers recover from the uh from from the pandemic and also we we have different uh we improved our operating policies or strategies in the lower tier cities to help service providers to get back to the platform and and trying to acquire customers from our platform so we have different policies to let them have relatively lower cost and high efficiencies to acquire customers. It helped to recruit more lower-tier CDS service providers to the platform, and hopefully they can get return for their investment and get new customers in the next few quarters. We will see in the future if the trend can consist, but still we will be very conservative because I think the macroeconomic is still very challenging and we will try our best to help customers or service providers to survive and or even get back to the regular in the next few quarters. And for the second question, Soyang Select, it has been a new product we rolled out in July. And it still is being currently testing in the six cities I just mentioned in the remarks. From current data, it did help to improve the service provider's user conversion rate. And we will keep tracking the data. And although I have to say, currently, it can't disclose more on data, how the revenue contributions are because of the Soyang Select. probably in the third quarter financial results, we will see more color.

That's very helpful. Thank you.

Thank you. And once more, if you have a question, please press star then 1. Today's next question comes from Chloe at CICC. Please go ahead.

Hi, management. Thanks for taking my questions. So congratulations on the solid result of the second quarter. So my first question is about the ARP pool. So we have seen a 42% decrease year over year on the ARP pool for the service providers in the second quarter. So should we expect the trend to be continued? And my second question is that we acquired the Wuhan Miracle in the third quarter of 2021. So could you please give us some more color about the synergies and what is the future prospect of Wuhan Miracle? That's it. Many thanks.

Okay. For the first question, are proof of service providers? I think to be frank, that is because of the, I think service providers invested less because of the COVID impact. It's same like as we invested less in self-marketing. on other platforms as well. So it's been a very, I think it's a prudent approach to better cost control. For the future, that decreasing trend can consist, in the past couple of months, including June and July, I think it's currently August, We are not seeing further decreasing in terms of service provider spending on the platform, but gradually or slowly recovering. That's the current trend. I think it's also in line with the current economy recovery trend. Hopefully, when all the pandemic impacts or the pandemic control policy being loosened. I think service providers will start to invest more on the platform. And the ARPU will also be back to a normal level. And for your second question for the Wuhan Miracle Synergies, We have tested new approach in terms of helping the Wuhan Miracle's product better approach the end users on the platform and we do see positive signs and there is new products by Wuhan Miracle in the pipeline and we will also apply the policies of cooperation together and help the new product being better accepted by the platform users and also by the market. So although I think it can not currently be seen or reflected from the financial numbers, but we do expect that we'll have a better result I think in 2023 rather than in 2022.

okay thank you very helpful so I will I will have a next question so about our pool I'm wondering is it a decrease is it related to like we are exploring the lower tier cities and the institutions there are paying less than the higher tier cities I think the major reason is because of Shanghai and Beijing

These two cities account for, the top four major cities account for 35% or 30% of the total revenues in 2021. And in the second quarter, Shanghai, basically we have no revenue in full quarter. And in Beijing, we have like a third of the revenue, or half of the regular quarter revenues because of the COVID-19. I think other than those impacts for those lower tier cities, they have been spending or invested in a very stable status. So they didn't spend more, but we also not seen they are decreasing their spending on the platform, but the major cities have been impacted materially. So I think if being back to normal, the Shanghai institutions will spend more and then we will see the optimal recovery from those major cities.

Okay, many thanks. I have no further questions.

Thank you. And ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference over to Vivian Hsu for closing remarks.

Well, thank you for your participation in today's conference. You may now disconnect it. Have a good day. Bye. Thank you all.