Perfect Corp.

Good morning and good evening ladies and gentlemen. Thank you for standing by and welcome to Perfect Corp's earning conference call. At this time all participants are in listening only mode. We will be hosting a question and answer session after the management's prepared remarks. Please note that today's event is being recorded. I will now turn the conference over to the first speaker for today, Mr. Rick Lee, VP of IR of the company. Please go ahead.

Alright, thank you Ellie. Hello everyone and welcome to Perfect Corp's earnings call. With us today are Ms. Alice Chen, our founder, chairwoman, and CEO, Mr. Louis Chen, our EVP and CSO, and Ms. Iris Chen, VP of Finance and Accounting. You can refer to our session quarter 2023 financial results on our IR website or in the form 6K we filed with HCEC earlier. You can later assess a replay of this call on our IR website shortly after the conclusion of this call. For today's call, management will provide their prepared remarks first and then we will host the Q&A session. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release, which you also applied to this call. As this call may contain forward-looking statements regarding Perfect Corp's performance, participatory 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 a potential result to differ materially from those expressed or implied 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 the following majorment prepared remarks on US dollar terms and we will discuss non-IFRS measures today. Without further ado, I will now turn the call to our first speaker today, our CEO, Ms. Alice Chen.

Thank you, Ray. Hi, everyone. Welcome to Perfect Corp's 2023 second quarter earnings conference call. Today, I'm happy to share with you our Perfect Corp pioneer in AI and AR solutions for the beauty and fashion, describing innovation and shaping the future for beauty tech, screen tech, and fashion tech. For the second quarter of 2023, we generated $12.7 million in total revenue, representing -over-year growth of 11.9%. The double-digit growth is mainly come from our AI, AR cloud solutions and the mobile beauty app subscription services. In addition, we managed to improve our net income on an adjusted basis to $1.1 million in the second quarter of 2023 from $0.6 million in the same period of 2022, reflecting a margin improvement of 2.7%. Perfect Corp has been an AI pioneer since its inception, utilizing AI machine learning in 2015 for real-time makeover to triumph. With over 50% of our R&D developers specializing in AI, we continuously harness the latest AI advancement to push the boundary of beauty and fashion. Over the years, we have expanded our AI applications, including face shape detection for foundation matching, real-time live hair color virtual triumph, advanced selfie skincare diagnosis using AI deep learning models, and incorporation of AI GAN technology for various visual effects. In the second half of 2022, we introduced alternative AI to beauty tech, such as AI avatar, which allows each user to create his or her own digital twin. Now in 2023, we proudly unveil our range of innovative generative AI products, including AI fashion, AI hairs, and more to come. At Perfect, we are committed to utilizing the most advanced AI and AR technologies to provide continuous support to our three key growth dealers, beauty tech, skin tech, and fashion tech. By harnessing this cutting-edge technology, we aim to enhance and further develop our capabilities in this domain. Our AI advances are not only leading to more collaborations with brands and also enthusiasts in beauty and fashion, but also positioning us for the future success and revenue growth. This is especially true with generative AI. The combination of human creativity and AI allows us to develop products and experiences that captivate our customers. It sets us apart from competitors and serves as a driving force for substantial growth in the long run. Now let me turn to our operational results for the second quarter and explain how our focus in AI has contributed to our growth. On the brand side, we have observed encouraging signs of improvement in product demand. It is evident through stable renewal, growth in key customers, and an increased interest in innovative projects, particularly those involving gene AI. Recently, we participated in the Viva Tech conference in Paris and hosted our fifth annual global beauty fashion tech forum in New York. This event served as a platform for us to unveil and showcase our latest advances in beauty tech, fashion tech, and the creative usage model of generative AI across the board. Several brand groups have shown high interest to start pilot programs using gene AI for new collaborations. On the other hand, our mobile beauty apps have sustained their impressive growth momentum since the first quarter. This is due to the introduction of various premium add-on features powered by gene AI, such as AI avatar and AI fashion. AI fashion is our latest innovation which enables users to explore different fashion styles, outfits, and hairstyles through AI generative image, which we just introduced in our mobile beauty app with very high engagement rate. From the technological development front, in addition to the new features powered by gene AI, Perfate has also been working on enhancing our virtual try-on for jewelry and watches, especially with multiple product acting capabilities. Now we can combine rings, bracelets, and watches virtual try-on at the same time, and together with the make-up virtual try-on to create a complete virtual try-on look in real time. This would allow consumers to try on different makeup products and accessories together to see how they complement each other, helping them visualize a total look. This is unique in the market. For brands, this powerful tool will allow pro-fail and build customer loyalty. Furthermore, in addition, in order to accelerate the adoption of virtual try-on technology for fashion and jewelry, Perfate announced in June the world's first 3D VTO open format with the release of a comprehensive white paper on a new open standard .vto file format. The new format is to establish a standardized and a simplified process for integrating third-party 3D objects into our virtual try-on platform. In addition, we also launched a 2D to 3D view creation tool for jewelry. This tool can convert from one 2D product image into a simplified 3D asset for virtual try-on. Both initiatives aim to expedite the market adoption for jewelry virtual try-on. It will greatly reduce the time and cost required for brands to integrate their product into our platform. This breakthrough has the potential to revolutionize the fashion industry by enabling rapid integration of virtual try-on experiences and fitting both brands and consumers. On the business development front, we have made significant progress in expanding our presence in the skincare market. Our diligent business development efforts have resulted in notable progress. Basically, during the second quarter, we acquired over 10 new skincare clients across various business segments, including pharma brands, mass bars, beauty clinics, and also in different regions, including United States, Pan Asia, and the Middle East. This demonstrates our strategy in penetrating key growth markets and establishing partnerships with skincare verticals. At the same pace, we have successfully introduced additional premium add-on features in our mobile beauty apps by incorporating advanced DNA technology into our offerings. This initiative has allowed us to attract a great number of engaged mobile app users, resulting in incremental subscription revenue. On the client success front in the second quarter, we have worked with several prestigious brands to expand their existing VTO offerings in new cases. For example, your recently launched new online and remote -to-one consultation service, the complement is existing digital beauty footprint. This showcases that virtual try-on experience is multi-channel, and we expect that newer use cases will start adopting virtual try-on as a key experience in digital beauty. Another good example is TressMed, which is a prominent Unilever care-care brand. It recently introduced an exciting feature on its US website, an AI hairstyle virtual try-on. This innovative tool empowers consumers to explore and visualize different hairstyles before making a commitment for a hair makeover. By leveraging our AI technology, TressMed aims to provide a more engaging and personalized experience for its customers. This interactive and very user-friendly AI tool enables individuals to make more informed decisions about their desired hair transformation, eliminating any uncertainty that may arise when considering a new hairstyle. In addition, we also help a well-known European luxury fashion brand in launching its first-ever but comprehensive virtual try-on services, from makeup to nail polish, nail stickers, bracelets, and watches. At the same time, the largest luxury group in Europe also rolled out its jewelry VTO on its website in the second quarter. Lastly, the world's largest e-commerce company has chosen Perfect to launch its VTO features for its nail brand on its shopping app and US web. This innovative collaboration aims to revolutionize the way consumers experience in the shop for nail and jewelry products. The introduction of virtual try-on services for beauty and fashion jewelry highlights a significant shift in the industry. It indicates that virtual try-on has now become an essential requirement for cable space programs to stay relevant in consumer digital journeys. Over time, consumers increasingly expect the ability to visualize how makeup and accessories will look in space before making any purchase, and the virtual try-on fulfills that demand. Perfect Corp, as a pioneering force, is leading the market to provide AI-driven virtual try-on solutions across all categories. With the steadfast commitment to innovations and cutting-edge technology, Perfect has been instrumental in revolutionizing the beauty and fashion industry to enhance consumer engagement and consumer purchasing journeys. In summary, we had a good second quarter with a double-digit revenue growth, and as we look forward to the full year 2023, we estimated the -over-year total revenue growth, ranging from .5% to .5% compared to 2020. Throughout this journey, our team will diligently monitor and access key performance indicators to ensure we stay on track with our objectives. Perfect is still well-positioned to benefit from the megatrend of digital transformation of beauty and fashion. Together with a new wave of innovation created by generative AI technology, we'll continue to propel the growth of both our brand's SaaS business as well as our mobile app consumer subscription business. Thank you for listening, and now I'm turning the call over to Louis to go over the financial details with you. Thank you.

Thank you, Alice. Before I go into the detail of our financial results, please note that all comparisons are on a -over-year basis, and that the reporting period is the second quarter of 2023 versus the comparable period of 2022. And that on top of the IFRS measures, we will also discuss non-IFRS measures to provide greater clarity on the trends in our actual operations. For the second quarter of 2023, our total revenue increased from $11.3 million in the same period of last year to $12.7 million, representing a -over-year growth of 11.9%. Our AR and AI cloud solutions and subscription revenue, which now contribute .7% of our total revenue, grew by .3% -over-year, showing strong growth momentum in our core business. Meanwhile, legacy licensing revenue for physical stores, which now accounted for .9% of our total revenue, increased by 6.2%. These trends not only resonate with our continuous focus on prioritizing online services, but also underscore customer inclination to direct resources into our AR cloud solutions and subscriptions. Regarding customer order expansion and acquisition trends during the second quarter, a new rate for existing subscriptions has remained strong and healthy, demonstrating continued customer engagement with our platform. Additionally, as the macroeconomics show signs of recovery, our efforts in acquiring new customers have shown improvements. We remain cautiously optimistic about the long-term growth potential that they bring to our business. Among our great revenue sources, AR, AI cloud solutions and subscription revenue grew by .3% to $11 million. Representing .7% of our total revenue in the second quarter of 2023 mainly leads to solid demand of our online virtual trial solutions for brand customers and robust growth in our mobile beauty app subscription. Our mobile beauty app active subscribers surged by .3% year over year, reaching a historical high of over $700,000 by the end of the second quarter of 2023. These remarkable growths show the strong demand for innovative features powered by generative AI in our suite of mobile beauty apps and highlight the strong momentum we have generated in the market. Licensing revenue, which is mostly generated from our traditional offline services, increased by .2% to $1.4 million, representing .9% of our total revenue compared to .5% of total revenue in the second quarter of 2022. This reflects brand customers' continuous elevated interest for online services rather than traditional physical store deployment. While licensing revenue seems to stabilize at the current level, AR, AI cloud solutions and subscription revenue shows strong growth momentum in this quarter. This trend not only aligns with management's continued strategy to prioritize new cloud-based subscription services, but also demonstrates the significant role that generative AI plays in driving business growth. As generative AI technology rapidly evolves, we expect to see even more creative and advanced applications to further drive our revenue growth. Growth profits of $10.2 million US dollars, while growth margin was 80.6%, compared to .8% for the same period of last year. A change in growth margin was due to an increase in the cost of goods sold, which was driven by the growth in the company's mobile beauty app subscription. This surge in subscription led to higher platform fees paid to self-party digital distribution platforms, namely Apple and Google. Compared with the .8% growth margin for the first quarter of 2023, the second quarter was 80.6%, demonstrating a -over-quarter improvement. Total operating expenses increased .5% to $12.3 million US dollars from $11 million US dollars for the same period of last year. To break down operating expenses, sales and marketing expenses were $6.6 million US dollars, representing .7% of our total revenue, compared to $6.1 million and .6% of total revenue during the same period last year. The .9% new over-year changes was primarily due to increase in promotion and user acquisition expenses. Research and development expenses were $2.8 million US dollars, representing .8% of total revenue, compared to $2.6 million US dollars and .3% of total revenue during the same period last year. General and administrative expenses were $3 million US dollars, representing .8% of total revenue, compared to $2.2 million and .8% of total revenue during the same period last year. The .3% -over-year changes was primarily due to an increase in public company related costs. The change in expense category reflects a moderate increase in spending while our core business is growing. Moving forward, we will carefully monitor and control our expense to ensure responsible spending practices. Net loss was $0.2 million US dollars for the second quarter of 2023, compared to a net income of $27.4 million US dollars during the same period of 2022, mainly due to the $38.4 million adjustment in non-cash valuation gains or financial liabilities at fair value to profit or loss in the second quarter of 2022. Excluding non-cash share-based compensation, foreign exchange impacts, and one-time non-recurring costs associated with our D-Spec deal, adjusted net income was $1.1 million US dollars for the second quarter of 2023, compared to adjusted net income of $0.6 million US dollars in the same period of 2022. Turning to our balance sheet, as of June 30, 2023, our company held $198 million US dollars in cash and cash equivalents in time deposits this month or longer, compared to $196.1 million US dollars as of March 31, 2023, reflecting a $1.9 million US dollar for .9% -over-quarter increase. The company cash position remains healthy. In total, our customer base had a net increase of 76 new brain-clients in the end of last quarter, achieving a total of 601 brain customers. We over 655,000 SKUs for makeup, skincare, eyewear, and jewelry products as of June 30, 2023. In this quarter, we grew our key customer to 163 from 158 at the end of last quarter. The new acquisition came from the improvement in our sell cycle, larger funnel, and increased inbound leads through by the recovery market conditions. In the second quarter, our revenue saw strong momentum due to a continued demand for our online AI cloud solutions and subscriptions, as well as a rapid increase in our mobile app subscribers. Currently, we effectively manage our expenditure and show profitability while achieving revenue growth, a stable renewal rate of existing subscriptions, religion cost control measures, and a healthy cash position for the report on wavering confidence in growing our revenue in the long term. That concludes my prepared remarks. Operator, please open up for questions.

If you have a question, press the star followed by the number one on your telephone keypad. Again, that's star and the number one on your telephone keypad. We have a question from Timothy Rao from Goldman. Your line is now open.

Sure, thank you for taking my question. I think I have a question about your full year revenue guidance. I think the guidance is quite helpful and which implies the revenue growth in the second half to be, I think, by my calculation, close to 20% young year compared to single digit growth in the first half. I was wondering if Madeline could further elaborate to the drivers behind the revenue acceleration into the second half. And so I think a related question is that I noticed the brand customers actually increased quite a lot in the second quarter to over 600 in June. But it seems that the revenue growth and contract liability growth lags behind a little bit. I'm wondering if you could help us understand what is the customer paying behavior of those newly acquired customers and when we can see more revenue contribution from these new customers. Thank you.

Thank you, Timothy. So we have seen certainly more demand for the brand customers for all sizes. And as we have seen, typically when the customers started to join our platform, initially they'll start with more reasonable orders. And over time, you grow with more upsell and close sales. So we do see some healthy signs that more clients are in need for beauty solutions for beauty tech, fashion tech, and skin tech. Coming to the solution, that's how you saw the increase of total brand customers who are over 600 now for the first time. And certainly that will be encouraging signs to continue to work with those customers so they understand our solution and grow to be a bigger spender over the time. In terms of the business outlook guidance, certainly the company as we grow and again more maturity in our business and more robust business model, we also feel important to share the visibility and transparency with the market. So we certainly have seen indicators from both the online solutions, as I explained, but also the mobile app subscription that's growing very, very fast. That is showing a strong confidence to the company that the second half of the year will be performing much better than the first half of the year, therefore generating the guidance that we are putting forward at this time.

Thank you,

Luis. We have our

second question from Clark Jeffries from Piper Sandler. Their line is now open.

Hello. Thank you for taking the question. I just wanted to maybe dig into the subcomponents of AR and AI cloud solutions. Luis, could I confirm with you what AR and AI cloud solutions are growing at right now? And maybe as a follow up to the prior question, it seems like the subscription business is growing quite well in terms of active users, maybe growing in excess of 30 percent, maybe by my math. And so could you just remind us what are the dynamics of AR and AI cloud solutions that seems to be accelerating in the second part of the year, I would assume, based off of that guidance?

Yes, Clark. So the AR and AI cloud solutions include all of our beauty tech, skin tech solutions that are online, so mostly are helping brands on e-commerce journeys, so consumers can virtual try on or skin diagnosis or other these type of solutions, but also include the mobile app subscription for the premium subscription where the consumer are downloading our family of beauty apps and opting to unlock premium features, including some of these new generative AI features. So both are certainly continues to grow as we see this pattern. In the last quarter, the mobile app subscription certainly was coming from a lower base, but it's going very rapidly. I think we have seen quarter after quarter hitting record high number of active subscribers, and this time we over 60 percent active subscriber increase, so that's certainly giving management confidence that the trends need to be very strong demand for the remaining of the year. So I think because of these two primary drivers that we are driving our model for the

whole year revenue projection. Certainly, maybe a follow up is,

you know, the SKU, the SKU count and the brand count are both growing quite well. Do you anticipate some of those SKUs and brand counts to see an inflection in monetization that you would expect the AR and AI cloud solutions to accelerate off of business you've already started? I think we have seen already one and both start to build in terms of revenue contribution over the over the coming year. That makes sense.

Right. So as I explained earlier, I think the brand customer business typically takes a few years to grow into scale and maturity. I think we have seen already from the end of last year and early this year that the lead, the funnel that we are developing is actually much larger and wider, although it was taking longer to it was a very prolonged sales cycle. And I think we are certainly passing through this process after six, nine months working on this deal that started to see some more capitalizing on these results. Certainly, these are the baseline where we want to grow our future business with. Once the customer are with us and they have their initial SKUs on the platform, then we open our opportunity to do more omni-channel cross sales to them. Once they have the SKUs digitized on our system, we are able to take that into different e-commerce and e-tailers or their own dot com presence. Each of these will represent an opportunity to monetize by increase of subscription revenue toward the brand. So, yes, you are right. I think we see a good recovery from a number of new brands and a number of SKUs joining in this platform. And also, we also see more categories are being added here. We have been working on the Beyond Beauty category for 12, 18 months now, and we have started to see, as I reported in our last quarter, that we now have over a thousand jewelry or watches brand already on the system. Each quarter, as they pass, there are more SKUs that are also being injected

through

these new partnerships and new

client categories. Thank you very much.

If you'd like to ask a question, please press star followed by the number one on your telephone.

There

are no further questions at

this time. I'd like to hand the conference back to the management for the closing remarks. Thank you.

Thank you, Ellie. Thank you, everyone, again, for joining our call today. Have a good one. Thank you.