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 a listen mode only. 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, Vice President of IR of the company. Please go ahead, sir.

Thank you, Ally. Hello, everyone, and welcome to Perfect Corps' Q3 earnings call. With us today are Ms. Ally Chen, Founder, Chairwoman, and Chief Executive Officer, Mr. Louis Chen, our Executive Vice President and Chief Strategy Officer, and Mrs. Iris Chen, VP of Finance and Accounting. You can refer to our third quarter 2023 financial results on our IR website or in the form of 6K, which filed with ACC 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 that we will host a Q&A section. Before we continue, I would like to refer you to our Steve Harper statement in our earnings press release, which is also a press release call. This call may contain forward-looking statements regarding public corporations' performance, anticipated plan, operational results, and objectives. Forward-looking statements are based on measurement expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied on our call today. Perfect Cope 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 measurements prepared remarks are in U.S. dollar terms, and we will discuss no IFRS measures today. Without further ado, I will now turn the call to our first speaker today, our CEO, Ms. Alice Chen.

Hi, everyone. Thank you, Rick. Welcome to PerfectCorp 2023 third quarter earnings call. We have some exciting news to share today. So we get started. In the third quarter of 2023, our growth momentum from quarter two persisted, resulting in a total revenue of $14.5 million. This marked a 13.2% increase in revenue. compared to the same period of last year, and a 14.7% increase when compared to the previous quarter. The primary drivers of this quarter we made from our AI AR cloud solutions for enterprise brand business B2B and the subscription services for our mobile beauty app business B2C. We have seen very promising new developments in our AI skincare solutions, and AI hairstyles for brands. Other innovative app features powered by GenAI, which I will elaborate more shortly. For the bottom line, our net income for the third quarter of 2023 was positive, standing at $3.5 million on an unadjusted basis and a $2.7 million point adjusted. underscoring our commitment to effective cost management while growing top-line revenue. Overall, we are very encouraged by our continued top-line growth and improvement in profitability as a result of our continuous effort to optimize our business in both B2B and B2C. Our strategic development focus in generative AI, has already shown a strong demand from both brand customers and consumers. Creative AI unlocks many new possibilities in digital imaging, video, beauty tech, skin tech, and fashion tech, different usage cases. These new use cases will extend our reach into an even bigger total addressable market. In a rapidly evolving digital landscape, where brands are investing more and more into digital transformation. Perfect is well positioned to help our brand partners with the latest in generative AI models, in addition to a complete line of beauty tech, skin tech, and fashion tech offerings. Finally, our consistent rollout of a wide range of innovative features driven by GenAI technology has maintained the strong growth of our mobile app subscription business. This new AI features have not only drawn a new mobile app installation, but also effectively converted users into premium subscribers. Perfect is ready to capitalize on this new opportunity, and we are positioning ourselves as the beautiful AI company for both B2B and for B2C. Now let's shift to our focus to operational outcomes of the third quarter and discuss our most recent advancements. In the third quarter, on the B2B side, we secured several sizable new and renewals with beauty grid, some of which included up-sale opportunities, such as expanding their few offerings and extending to additional countries. This renewal not only underscores the growing reliance of this brand on our solution to meet their evolving needs, but also reaffirm our leadership in the field of color cosmetics, which continues to be a very key differentiator and a core component for our company. To that front, we have continued to reinforce our omni-channel strategy through the expansion of strategic alliance with various distribution channels of beauty, skincare, and fashion products to ensure comprehensive coverage of all customer touchpoints. For example, we teamed up with DoFree, a key player in global travel retail, to provide both in-store and web-based virtual makeup try-on experiences for 15 beauty brands in airports across 27 countries worldwide. Additionally, we are very excited to announce our partnership with Walmart, the world's largest retailer, to initially offer make-up virtual try-on experience for more than 1,400 beauty products in Walmart mobile apps. This level of integration is made possible thanks to our existing relationship with over 600 global brands. enabling the effortless distribution of this brand's virtual product offerings across diverse retail platforms. As we look to the future, it is clear that virtual triumph technology is becoming essential for all beauty and fashion brands and retailers in engaging with customers in delivering personalized shopping experiences for all. In the third quarter, A significant highlight was the accelerated penetration of skin care markets, marked by notable increase in new deal flow from the skin care sector. We believe the skin care industry is going through a transformational change to adopt more digital technology and to offer consumer with an user-friendly and objective-driven diagnosis result. Our AI skincare technology distinguishes itself by delivering an unparalleled AI-powered skin analysis that encompasses 14 different skin concerns in real time, providing users with comprehensive and instant feedback on their skin progress. Secondly, we have introduced a new range of substitution plans tailored specifically for small and mid-sized skin skincare brands. on our website. This expanded strategy of skincare enables us to engage with a larger potential customer base of all sizes. By providing tiered substitution plans, we not only make our skincare technology more accessible, but also streamline the sales process. This approach will lead to larger install base for our AI skin care services. Another new use case we launched in the market is our generative AI hairstyle, very new. We upgraded our AI hairstyle solution by replacing the previous generation AI model to the latest diffusion generative AI model, and the result is amazingly good. The realism of the hairstyle images is now hyper-realistic, and the generated style variations unlock more choices for consumers to visualize more hairstyles to choose from. Under the Hairstyle AI development, we announced our partnership with Transmate, a Unilever brand of hair products, to offer AI hairstyle generations for their consumers to try on. And the possibility is ever-expanding. We are also targeting broader hair brand markets, such as the wig legalization and the hair extension with the latest generative AI upgrade. This is a testament to the versatility and the broad applicability of our GenAI-powered virtual try-on technology, demonstrating their potential to cater to a diverse range of market needs. Another cutting-edge AI innovation we just launched in third quarter is in high-quality automated 2D to 3D SKU conversion technology for jewelry and watch BGO virtual tryouts. This result can quickly enlarge the total numbers of SKUs of our jewelry brands' customers they can offer on their website in a cost-effective and speedy way. This new 2D to 3D technology can help us expand to a broader jewelry and watch tryout market. Now let's shift focus to our B2C mobile beauty app business. We had another strong quarter for our app business. As evidenced by 62%, 62.5% year-over-year increase in our mobile app active subscribers to 835,000. This sustained growth, very strong growth, serves as a testament to the increasing demand and market expansion in the realm of photo, video, and camera applications, including image and video creation, beautification, and enhancement. With our suite of Ucam apps, we are diversifying our product offerings and expanding our avenues for monetization. To fully capitalize on the app market expansion trend, we have implemented the following strategies. First, our team created a very rich roadmap of premium features for subscribers. We introduced multiple AI-driven premium features by GenAI. such as AI avatar, AI fashion, AI hair style, AI selfie, and more and more to come. Offering our mobile users with a wide range of photo and video beautification and enhancement solutions. We have a very active roadmap to include AI in all of our products and services. It will transform the whole industry with the power of beautiful AI. Second, we have strengthened our cross-promotion initiative across our suite of mobile apps and executed marketing program to increase our app discoverability to new users. This consumer app market is very large and growing market. More and more global consumers are opting to pay subscription for premium features. Our purpose is focusing to gain more market share in B2C mobile app business. Third, we have expanded our B2C monetization opportunities by introducing a new app, like our new app, UCAM AI Pro. It is a GenAI tool app, GenAI app for AI text-to-image creation and more other GenAI features collection. This new app has a very rich roadmap to include many of our future Gen AI innovations from our perfect lab. We have also optimized our mobile app subscription prices, maintaining competitiveness while increasing our revenue in several markets. Collectively, this effort has been instrumental in driving the impressive expansion of our mobile app business. we are committed to sustaining this effort to enhance the visibility and the reputation of our UCAM app in the mobile app sector, by positioning ourselves favorably for future expansion. In summary, our third quarter was robust, featuring double-digit revenue growth and positive net earnings. Our observations suggest that We are well positioned to meet the revenue growth target we shared in Q2, Quarter 2. Consequently, we reaffirm our projected revenue growth for 2023, which is expected to range from 11.5% to 14.5% year over year in comparison to 2022. With that, I have now concluded my remarks, and we'll be handling the call over to Louis, who will discuss our financial details with you.

Thank you, Alice. Before I go into the details of our financial results, please note that all comparisons are on a year-over-year basis and that the reporting period is the third quarter of 2023 versus the comparable period in 2022. And that on top of the IFRS measures, We will also discuss non-IFRS measures to provide greater clarity on the trend in our actual operations. For the third quarter of 2023, our total revenue increased to $14.5 million from $12.9 million in the same period of last year, representing a year-over-year double-digit growth of 13.2%. Among our revenue sources, they are AI cloud solution and subscription revenue, which constitutes 78.3% of our total revenue, grew by 24.8% to $11.4 million in the third quarter of 2023. This expansive expansion can be attributed to the strong demand of our online virtual try-on solutions among main customers and the robust growth in our mobile beauty app subscription. In the current quarter, we have successfully renewed contracts with prominent beauty brands, with some renewal offering after opportunities to expand skill offerings and extend deployment to cover more regions. We also acquired several new customers in this quarter, including Walmart. Notably, among our beauty app business, active subscriber has been surged by 62.5% year-over-year, reaching an all-time high of over 835,000 at the end of the third quarter of 2023. This significant expansion underscores the increasing demand for photo and video editing applications, and the widespread acclaim of our innovative, generative AI feature within our suite of mobile beauty app. These premium AI features not only expand our mobile beauty app user base, but also capture the attention of enterprise users, resulting in a growth energy between our mobile app and enterprise operation that may bring more revenue stream into our business. High-sensing revenue, which is now mostly from the traditional offline services, decreased by 13.6% from $3.3 million to $2.8 million, representing 19.5% of our total revenue, compared to 25.5% of total revenue in the third quarter of 2022. The lower revenue contribution from licensing, not only online with management expectations, but also underscore customer continuous elevated interest for online services rather than legacy offline offering. And the gross profit was $11.8 million, while gross margin was 81.2% compared to 85.3% for the same period of last year. This change in gross margin primarily stemmed from the higher platform fee paid to third-party distribution platforms, Apple and Google, which can be attributed to the company's expansion for its mobile app business. Compared to the 18.6 gross profit margin for the second quarter of 2023, For that, the third quarter was 81.2%, showing a quarter-over-quarter improvement. Total operating expenses increased by 13.3% to $12.7 million, from $11.2 million for the same period of last year. To break down operating expenses, sales and marketing expense were $6.4 million, representing 44.3% of our total revenue. compared to 6.1 million and 47.8% of total revenue during the same period last year. The 4.9% year-over-year change was primarily due to the increase in marketing and user acquisition costs. Research and development expenses were 3 million, representing 20.9% of total revenue, compared to 2.6 million and 19.9% of total revenue during the same period last year. The 18.9% year-over-year change was resulted from an increase in R&D headcount expenses. General and administrative expense was 3.2 million, representing 21.8% of total revenue, compared to 2.5 million and 19.3% of total revenue during the same period last year. The 28.1% year-over-year change was primarily due to an increase in public company-related costs. The change in expense category signify a major increase in spending, a necessary step as our business expands, and seek to grow our revenue. Looking ahead, we will maintain cautious oversight and implement effective expense control measures to ensure that our spending remains responsible and aligned with our growth objectives. Net income was 3.5 million for the third quarter of 2023, compared to the net income of 1.6 million during the same period of 2022. showing a 126.7% year-over-year increase in our bottom line. Excluding non-cash share-based compensation, foreign exchange impact, and one-time non-recurring costs associated with our DEPAC deal, adjusted net income was $2.7 million for the third quarter of 2023, compared to adjusted net income of $2.3 million in the same period of 2022. Turning into our balance sheet, As of September 30, 2023, our company held 201.3 million in cash and cash equivalent and six-month time deposit, compared to 198 million as of June 30, 2023, reflecting a 3.3 million or 1.7% quarter-over-quarter increase. The company's cash position remains down and healthy. In total, our customer base has a net increase of 26 new brand clients since the end of last quarter, Achieving a total of 627 brand clients, we offered 678,000 SKUs for makeup, skincare, eyewear, and jewelry products as of September 30, 2023. In this quarter, we grew our key customers from 163 at the end of last quarter to 169. The addition not only came from our new win for more beauty and fashion brands, but also benefited from a successful penetration into skincare, jewelry, and hair market in the last quarter. In the third quarter of 2023, our total revenue has consistently exhibited strong growth, primarily driven by the impressive momentum in our AI, AR cloud solution and mobile app subscriptions for premium features and AI-powered apps, including the newly launched Ucam AI Pro. Furthermore, our unwavering commitment to operational efficiency has resulted in a noteworthy uptick in our gross profit, showcasing our dedication to maintain a balance between revenue expansion and profitability. Concurrently, we have continual investment in talent acquisition and technology innovation. Despite our rising operating expenses, our net income remains robust. We firmly believe that our position within the streaming AI industry equips us to seize the opportunities ahead and deliver sustainable value to our shareholders. That concludes my prepared remarks. Operators, let's open up for questions.

I will now open or we will now begin the question and answer session. If you'd like to ask a question, please press star and number one on your telephone keypad. That's star and number one on your telephone keypad. Our first question comes from Clark Jeffries from Piper Schadler. Your line is now open.

Hello. Thank you for taking the question. A couple here. You know, Lewis, you mentioned some renewals at some large customers or renewals of opportunities. Wondering if you could speak to the spending trends in the top, say, five customer cohort. I know that was nearly a third of the business last year. Just wanted to get an update on how your spend with the largest customers have changed year over year. And then maybe a follow-up is, you know, we've seen pretty promising brand and SKU growth at nearly 30% year over year. But brand revenues are maybe a little bit disconnected from that. Any expectation on whether we could see brand revenue accelerate here over the coming quarters? I know that licensing versus cloud revenue is a dynamic here, but hoping you could comment on any other factors that might play out such that brand and skew growth would match revenue growth going forward. Thank you.

Thank you, Clark, for the question.

So we have seen the renewal for the large customers have been very, very healthy in this year. So I think the majority, if not all, of the large customers have renewed their license with us on time. So I think that is a strong testament that, you know, they share the functionality, the license is essential to their business, so they continue to offer the beauty tech and skin tech or fashion tech solution that we provide. I think from that perspective, we remain quite confident about the result for this year and also for next year as the renewals are mostly 2023, 2024. I think in terms of, you know, a larger acceleration in the brand business, if that was your question, I think ultimately it will come from, you know, the future possible adaption of new innovations such as chain AI and other beauty tech solutions that we bring to the market. I think the first half of this year was particularly more challenging for brands into looking into additional spending. And the good news is they are spending their current existing license as is, but there's not much impact in there. Renewal rate and churn rate has been very, very well positive. And then, again, you know, we'll remain very cautiously optimistic. We have been introducing quite a lot of new solutions, especially in the GenAI space to the brand, and look forward to materialize that into better deals and bigger deals for next year. We certainly will encourage brands to onboard more SKUs in more territories. So I think that acceleration also is going through extension to more distribution channel. So deal with Walmart or Amazon, allow our brand partners to distribute their SKUs broader. So certainly the investment, we believe that in the long term is going to pay off and accelerate our revenue once there's a massive

scale of use across all touch points, and you transform the way that users shop online forever. Thank you very much.

Our next question is going to come from Timothy Zhao from Goldman Sachs. Your line is now open.

Great. Thank you, Meghman, for taking that question. Two questions here. One is on the, I think, your revenue breakdown. Just wondering if your management can share what is the growth for each segment within the AI solutions, i.e., what is the growth rate like for the revenue 2B versus 2C? I think that would be very helpful. And secondly, I think it seems that you reiterate the four-year guidance. I think the revenue will be growing at around 11.5% to 14.5% for this year. Just wondering if there's any thoughts of the growth rate into next year. Should we expect a faster growth rate? As you mentioned, I believe earlier this year, there's a delayed sales cycle or extended sales cycle because of microenvironment. Just wondering how that has changed since then. Thank you.

Thank you, Timothy, for the question. We remain quite confident about our yearly guidance for these years, as we expressed. I think everything seems to be moving based on our plan. Certainly, you know, the macro is still challenging to predict a more longer term. In our department, we are working internally to better understand each client's funnels and how we look into the next year. So that is not something that we have been able to complete yet. We are in the process. As soon as we have that, we'll certainly share broader publicly about our view for 2024. I think if we look at the industry is moving in a positive direction. I think the digital transformation across all sectors is a trend and it's non-stopping. So in certain categories go faster and others are a little bit more challenging, such as creating 3D SKUs. It takes more time, you know, to enable more brands, more SKUs in a short period of time. That is something that, for example, what Alex mentioned about our 2D to 3D conversion is going to help. We believe that's going to help and potentially change the way that industries typically operate. Our quality, you know, the name of the company is called Perfect, but we want to deliver that perfection to the clients. You know, being able to create automatically more SKUs, I think you accelerate that, and subsequently, of course, you generate more revenue for us. In terms of the segment, I think the skincare segment component is the one that is growing both in the funnel that we receive, you know, across different geography. I think we see a lot more demand for skin tech relatively compared to other. Of course, color cosmetic remains our core competence and remains our key category there, right? It's about a little bit over half of our revenue coming from color cosmetics. But I think skincare, you know, after investing in this field for three, four years now, we finally see some, you know, good movements. For brands of dyes, not only the top global skincare brands, we also noticed a lot of regional or local beauty brands, skincare brands also started to adopt the AI skin diagnosis segment. V2C, of course, is growing much, much stronger. We saw a number of assist pain subscriber have grew, you know, year-over-year 60 plus percent, which is very, very encouraging. There's still a lot of room to grow in that market. It's a huge market. You know, we are kind of a latecomer in that market, but it's a lot of room for us to grow. You know, similar functionality type of app, you know, they are in a much bigger scale, so we just getting market shares quarter after quarter from them. The AI segment is very promising, although it is new. So from the revenue contribution in this quarter, it is still relatively small, but I think this is where forward-looking, we're always looking for new innovations that will generate consumer interest. So we are devoted and investing quite a lot in the development for GenAI. So in our roadmap, I think we have more than a dozen products in GenAI. Some already launched, and some will be coming out very soon into the market.

Great. Thank you, Luis. Thank you, Tim.

Our next question comes from Brian Schwartz from Oppenheimer. Your line is now open.

Hi, good morning.

This is Camden Levy sitting in for Brian Schwartz. Thank you for taking my question. Thinking about 2024 and your go-to-market and sales organization, do you anticipate any adjustments in terms of the investment cadence or just how should we be thinking about the sales and marketing line? heading into next year on the back of the Walmart partnership and the indie brand opportunity. Thanks.

Hi, Ken.

I think for our enterprise sales process, right, it's the same test formula we have been playing for years. I think certainly, you know, the work amount is there, and as we get more brands starting to adopt, the sales cycle seems to be getting a little bit better compared to early this year. I think that's the good news. Of course, now we are addressing a broader market to go to new verticals like, you know, watches and jewelry and potentially, you know, others as well. So the investment, I think from an expense perspective for next year, you know, we certainly do want to increase and invest in R&D. I think that is an area, you know, very worthy to invest in. On the sales and marketing side, I think we will remain more cautious. I think our global team, is capable of delivering and expanding our business for these new adjustment categories. So we are not looking at, you know, much increased internal sales market and headcounts, for example. But engineering development, that is certainly remain a core competence that we need to invest now in creating these new roadmap, or try to address a broader market for 2024. So I think as I said in our remark, we always look into our top line, you know, trend and when we are controlling our expenses. to make sure that we are also delivering a positive profitability to investors, shareholders.

Perfect. Thank you so much. And then just one follow-up question. If we were to think about the emerging industries and verticals that you guys are going after with VTO and beauty tech, is there – if you were to stack rank maybe your top three new categories in terms of growth catalyst, how would you define those categories or which ones are – most likely to contribute to, you know, 2024 and 2025?

I think, you know, we certainly want to play around our target customer, our primary target customer, always the female shoppers. So when we think about our roadmap and business expansion, we think about what, you know, shoppers, you know, especially females that are shopping online, what are the categories that they really need to try before they buy? And I think that will generate the most value. That is why years ago we started with makeup, and then now expanding to jewelry and watches. So if you think about online, I think accessories, apparel, like anything that you can wear on your body, on your face, on your hand, on your body, will be certainly in our radar. And rest assured, we are certainly working on many of these aspects. But we also are cautious that we want to deliver, you know, the perfection. So we don't want to rush in the market with, you know, unfinished product or something that is not ready for prime time. So whenever we come to the market, we really wow the consumer and the brands to offer something that they have never seen before. And I think that is remain, you know, a solid belief on how we approach the market for expansion. So I think, you know, in a broader way, I think AR Commerce, we are a strong believer in that. And one new area that is going to take a little bit more significance is certainly in our generative AI. So that is something that was not possible before the technology existed. And now with the power of Generation AI, I think there's a lot of new potentials. For example, we talk about the hairstyle generation, how we trust the Unilever brand. This is just one of the examples of how we're able to already create real use cases that bring real business benefits to the brand by harnessing the power of Generation AI.

And that will remain our core focus for now. Perfect. Thank you so much. Thank you.

Again, if you'd like to ask any questions, please press star and number one on your telephone keypad. That's star and number one on your telephone keypad. As there are no further questions at this time, I'd now like to hand back the conference over to the management for closing remarks.

All right. Thank you, everyone, for joining our call today. Wish you have a good day.