Perfect Corp.

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

Thank you, and hello everyone, and welcome to Perfect Corp's Earning Call. With us today are Ms. Alice Chen, our Founder, Chairwoman, and Chief Executive Officer, Mr. Louis Chen, our Executive Vice President and Chief Strategy Officer, and Ms. Iris Chen, Vice President of Finance and Accounting. You can refer to our fourth quarter and four-year 2023 financial results on our IR website or in the Form 6-K we filed with ACC earlier. You can later access 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 a question and answer session. Before we continue, I would like to refer you to our Safe Harbor Statement in our earnings press release, which also applies to this call. as this call may contain forward-looking statements regarding PreventCode's performance, anticipated plans, operational results, and objectives. Forward-looking statements are based on management expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed and implied on our call today. PreventCode 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 management prepared remarks are in U.S. dollar terms, and we will discuss non-average measures today. Without further ado, I will now turn the call to our first speaker today, our CEO, Ms. Alison.

Hi, thank you very much, and welcome to PerfectCourse 2023 fourth quarter earnings call. We have some very good news to share with you today. Let's get started. We ended 2023 with a strong fourth quarter. Our fourth quarter revenue grew by 27.6% year over year to $14.1 million. And our net income was positive at $1.4 million. Our full year results was promising too. As our full year 2023 revenue increased by 13.1% year over year, to 53.5 million in our full year 2023 net income was positive at 5.4 million dollars. The company operating cash flow had a net inflow positive of 13.6 million dollars as a result of our robust business model. The increases were driven by the strong momentum in our AIAR cloud solutions and the subscription services for enterprise business and our mobile beauty app business. Powered by our advanced AI capabilities, both segments have contributed to our top-line expansion, profitability improvements, and the positive operating cash flow. In this quarter, we captured a good demand in our AI Skin Bionautics product, as well as accelerated adoptions of jewelry and fashion virtual tryouts. This new deployment and the use cases further extend our coverage into a larger market. Plus, more innovative features powered by generative AI have been rolled out in our UCAM suite of mobile apps in this past quarter. These new AI features have not only attracted new mobile app installations, but also effectively converted more users into premium subscribers. All of this above achievement was centered on our beautiful AI strategy, which consists of four major pillars, duty AI, team AI, action AI, and gen AI. Four key pillars will play a pivotal part of our core business moving forward. We are committed to keep investing in AI to strengthen our leading position in AI. Now let's shift our focus to operational outcomes of fourth quarter and discuss our most recent advancements. On the B2B side, we secure a major license renewal with beauty, skincare, jewelry brands. These renewals not only reaffirm the growth and reliance of this brand on our solutions to meet their evolving needs, but also show our leadership in the field of virtual triumph. We also see the opportunities to cross-sell to sister brands and upsell more services. such as acknowledging their few offerings and expanding to additional countries to our brand clients. Our strong revenue growth in the fourth quarter of 2023 signaled a recovery in enterprise new business acquisitions from the second half of 2023 compared to the slow and prolonged sales cycle we saw in the first half of 2023. We entered this quarter focused on deepening the penetration in different verticals to provide AI-powered skin care diagnosis products, as well as an increase in adoption of virtual trial solutions for jewelry and the fashion industry. Highlights in fourth quarter was the growing demand for skin and skin care and skin diagnosis products. The demand not only comes from skin to your brain, but also comes from new channels such as Mass Spa, aesthetic clinic, and a dermatologist. We utilize our AI-powered technology to provide users with real-time and the trusted, accurate AI skin diagnosis results, which is verified by dermatologists. A key benefit of our AI skin solution Our clients leverage on our AI skin diagnosis technology to provide patients with a thorough assessment of the skin concerns, including redness, wrinkles, moisture, pore, all skin types, more than 14 skin concerns and skin types. So to recommend tailored treatment plans targeting their unique demands. With the help of AI technology, Clinics can not only do consultation for patients, but also give customized recommendations, thus creating a personalized and science-based experience to boost patient engagement. Furthermore, we have also seen good demand for our new product, InCare Pro, which was launched in the last quarter. This self-service product on iPad attracted mid-sized skincare brands, clinics, and Medspa for its high-quality skin analysis and diagnosis results. With the Skincare Pro, we are able to expand into larger customer base. We also see potential of this product to penetrate into the market of larger brands, clinics, and Medspa. The expanded adoption of our skincare and skin diagnosis solution enables us to engage with a larger potential customer base in the skin-related industry and further diversify our revenue stream. As the need for more advanced skin diagnosis continues to grow, we keep on advancing our AI technology and help brands and the clinics to streamline their customer engagement process through digital transformation. Another highlight was the accelerated market adoption of our watch and the jewelry virtual try-on solution. Marked by several new launches with prestigious and luxury brands, we started to expand into jewelry and watches with virtual try-ons in the beginning of 2023. And we are excited to see our efforts starting to pay off as more jewelry and watch use cases were launched in the market. Specifically, we have partnered with a luxury European jewelry brand to launch virtual try-ons for its residents and the yearlings. Through our advanced technology, the textures and the reflections of the jewelry can be shown vividly through the screen and provide users with true-to-life shopping experiences. The increased adoption of our virtual try-on services reflects that the demand for jewelry, watch, and accessory virtual try-ons is huge, that our technology is trusted by this high-end brand. Moreover, we have worked with some of our existing jewelry brand clients to launch jewelry virtual try-ons with our very unique stacking options, meaning that users can try on multiple pieces of earrings and bracelets at the same time. This unique, stimulating functionality allows users to mix and match different pieces of online and experience the total look in just a few clicks, helping brands to increase the time users spend on brand websites and the deepening engagement with users. Another good progress to share here is our AI tier solution. Continue to drive new innovations. To complement our industry-leading gen AI-based AI hairstyle generation, we now created the industry-first AI wig virtual try-on for users to try on different types of hair wigs with true-to-real simulation results before they buy. Additionally, we also newly developed AI hair extensions, hair band, combined with our AI hair color, we have a complete clear solutions now. By leveraging the latest diffusion generative AI model, our technology enables users to try various styles before choosing a new style as a salon. This total solution for hairstyle, hair wig, hair extension, hair band, and hair color is unique in the market. With our comprehensive offering, Friends and users can virtually try on different styles before they do hairstyling or a bi-week. Now let's shift focus to our B2C mobile beauty app business. We saw another robust quarter of our mobile beauty app business, evidenced by the 45.7% year-over-year increase in our mobile beauty app active subscribers. to a historically high of over 879,000. And this continuous momentum in subscriber growth reflected the increasing demand for editing, enhancing, and beautifying photos and videos using mobile apps. With our suite of UCAM apps, we continue to diversify our product offerings to meet the needs from users in a fully capitalized on the app market expansion frame. The consumer app market represents a big, very big growth opportunity with rising global demand for subscription-based premium mobile features. We are well-positioned to increase the market share in the consumer space, leveraging proprietary AI technology from GenAI. Our team developed a robust roadmap of premium features for app subscribers. We have already implemented multiple GenAI-driven enhancements for our app, including AI Avatar, AI Fashion, AI Hairstyle, AI Selfie, AI Headshot, and AI Studio, and et cetera, which provide users with sophisticated beautification with a simple click and enhancement tools for photo and video. Moreover, we launched our online AI editing tools on our website to enable users to edit, enhance their photos efficiently on the web with the help of AI. For example, users can change or remove background within seconds or replace objects in just a few clicks. Users can also colorize black and white photos or expand pictures easily. We have also offered a series of smart AI photo-video enhancement products that can instantly explore photos, upscale and enhance image resolution, eliminate noises, and brighten low-digit images without compromising quality and details. Our product strategy centers on integrating AI across our entire suite of offerings to transform user experience and solve problems for app users. Most importantly, our unique strength is to use the same AI engine to support both enterprise SaaS business and our mobile app business. By doing so, we can make the most use of our R&D capability to monetize in both sectors. With this special strength and our commitment To ongoing innovation, we are posed to expand our market penetration of the industry by unlocking the transformative power of AI. In summary, our business performs of both the fourth quarter and for full year 2023 were strong, featuring double-digit revenue growth and a positive bottom line. we not only saw recovery in the enterprise business, but also gained success in expanding into new verticals. The momentum in our mobile app business was very robust, too. These factors suggested that we are well-positioned to seize market opportunity and continue to grow our AI business. Based on the strong momentum in both enterprise solution demands and our mobile beauty app subscription business. We observed a very healthy recovery in 2024 with an increase of over 20% in business pipeline. And we expect the growth of our total revenue recognized by under IFRS for full year of 2024 to range from 12% to 16% year over year in comparison to a full year of 2023. With that, I've now concluded my remarks, and I will be handing the call over to Luis, who will discuss our financial details with you. Thank you.

Thank you, Alice, and good morning, good evening, everybody. Please note that all financial comparisons are on a year-over-year basis, and the reporting period is the fourth quarter of 2023. versus a comparable period in 2022, and that on the top of the international financial reporting standard measures. We will also discuss some non-IFRS measures to provide greater clarity on the trends in our actual operation. As Alice mentioned, in the fourth quarter of 2023, our total revenue increased to $14.1 million, or $11.1 million for the same period in 2022, representing a very robust year-over-year growth of 27.6%. It was also the best quarter of 2023. Meanwhile, our full-year revenue was $53.5 million for 2023, compared to $47.3 million in 2022, representing a year-over-year increase of 13.1%, which we met the guidance we provided to investor analysts. We are very pleased to have achieved this result, even under the challenge of macroeconomics in 2023, and a strong encouragement to our entire team for the year-long effort in growing our business in both enterprises and consumer apps. Among our revenue source, AR, AI cloud solution and subscription revenue was $12.0 million in the fourth quarter of 2023, an increase of 25% compared to the same period of 2022. The full year AR, AI cloud solution and subscription revenue was $44.8 million in 2023 compared to $36.9 million in 2022. representing an increase of 21.2%. The continuous station can be attributed to the strong demand of our online virtual try-on products among brand customers and the robust growth in the mobile beauty app subscription, especially with the addition of new categories that now we serve on skin diagnosis, beauty reads, and fashion markets. Notably, our mobile app active subscriber has surged by 45.7% year-over-year, reaching an all-time high of over $879,000 by the end of the fourth quarter of 2023. A strong momentum underscored a growing interest in our suite of new apps, and our generative AI effort has started to pay off. High-sensing revenue, which is mostly generated from our traditional offline services, increased by 77.6% in the fourth quarter of 2023 to $1.8 million, compared to $1 million during the same period of 2022. Full year 2023, licensing revenue decreased by 10.5% to $7.5 million compared to $8.4 million in 2022. This decrease reflects the shift from our traditional offline services and the demand of growing online virtual trial offerings. First profit-wise, for the fourth quarter of 2023, it grew by 26% to $11.5 million, with gross margin of 81.3%, compared gross profit of $9.1 million and gross margin of 82.3% for the same period in 2022. In the full year 2023, we saw gross profit increase by 7.3% to $43.1 million with gross margin of 80.6% compared to $40.2 million in 2022 and margin of 84.9%. The decrease in gross margin was primarily a result of the increase in third-party payment processing fee pay to digital distribution partners such as Google and Apple due to the increase in mobile app subscription revenue. We expect the margin should be stabilized around this figure as the scale of each business segment become more mature and robust. The company has a very good control in operating expenses. The total operating expense for the fourth quarter of 23 decreased by 83.7% to $12.7 million compared to $77.9 million for the same period last year. Year 2023 lost total operating expenses decreased by 56.2% to $48.8 million compared to $111.2 million in 2022. The decrease were primarily due to the high base of non-cash listing expenses that occurred in the fourth quarter of 2022. To break down operating expenses, sales marketing expense were on the fourth quarter of 2023 were $6.7 million compared to $6.3 million during the same period of 2022, an increase of 6%. This was due to an increase in marketing and user acquisition costs. The full year sales and marketing expense was $25.7 million for 2023 compared to $24.5 million in 2022, representing an increase of 4.8%. This was primarily due to the increase in the marketing and user acquisition costs which was partially offset by the decrease in sales and marketing people-related expenses. Overall, we were able to grow our business without an unnecessarily increase of our marketing expenses. This shows the benefit of our strong recurring business model and effective customer acquisition strategy. From the research and development expense side, we were $3 million for the fourth quarter of 23 compared to $2.6 million during the same period of 2022. an increase of 17.7%. The full-year R&D expense were 11.6 million for 2023 compared to 10.5 million for 2022, an increase of 9.3%. The increase were from the additional R&D headcount and related personnel costs, and it is relatively mild increase when compared to our top-line revenue growth in the same period. The general and administrative expenses were $3 million, for the fourth quarter of 2023, compared to 69 million during the same period, 2022, a decrease of 95.7%. The full year G&A expenses were 11.6 million in 23, compared to 76.2 million in 22, a decrease of 84.8%. The decrease were due to the significant decrease in listing related expenses after the completion of the dispatch transaction and listing process in 2022. The net income was $1.4 million for the fourth quarter of 23 compared to a net loss of $190.3 million during the same period of 2022. The full year 23 net income was $5.4 million compared to a net loss of $161.7 million in 2022. The increase in our bottom line were due to a significant decrease in leasing expenses after the completion of the D-SPAC transaction and the listing process in 2022, and the increase in the fair value of convertible redeemable preferred shares in 2022, which were then converted to perfect ordinary shares upon recapitalization. Excluding non-cash share-based compensation, foreign exchange impact, and one-time non-recurring costs associated to a D-SPAC deal, the adjusted net income was $1.8 million for the fourth quarter of 2023, compared to adjusted net loss of $0.01 million in the same period of 2022. The full year adjusted net income was $7 million for 2023, compared to $4.1 million for 2022, an increase of 72.1%. This represents a good net margin of around 13% in 2023. Looking at our balance sheet, as of December 31, 2023, Our company held $154.2 million in cash and cash equivalent in six months' time deposit, compared to $201.3 million as of September 30, 2023. The decrease in cash and cash equivalent was a result of the completion of the tender offer to purchase up to approximately 16 million shares for an aggregated purchase price of approximately $50 million. Another important note, with our capability to generate positive cash flow from our business. We had a positive operating cash flow of $13.6 million in the full year 2023 compared to the negative $3.3 million in the full year 2022. This improvement demonstrated the value of our business model in creating strong capital structure to support the growth of our business operations. In total, our customer base had a net increase of 18 branch clients since the end of last quarter, achieving a total of 645 brand clients with over 704,000 views for makeup, skincare, eyewear, jewelry, and others as of December 31, 2023. This is yet another record quarter for these metrics, showing that a continuous increase in customer penetration and skew expansion. More brands and products are leveraging on Perfect Console to operate the various different submodules They subscribe from perfect. In the fourth quarter of 2023, our total revenue has consistently exhibited strong growth, primarily driven by the continued momentum in our AR AI cloud solutions and in the mobile app subscription. The premium feature and the AI power app, including the newly launched UCAM AI Pro and the UCAM Enhance. Despite a very mild rise in expenses, our net income remains strong, robust, delivering double digits and margins. We continue our investment in talent acquisition and technology innovation to expand our core competencies in acting as a transformative tool as we reinvent how products are showcased and consumed. We firmly believe that our positioning within the thriving AI industry equips us to remain at the forefront of revolutionizing how beauty and fashion brands engage with audiences. Finally, for 2024, The company expects total revenue recognized by IFRS to grow year-over-year to a range between 12% to 16%. This forecast is based on the company's current assessment of the market and operational conditions, and management will closely monitor the business progress each quarter and update our guidance periodically to offer better transparency to the market. That concludes my prepared remarks.

Now, operator, please open up the call for questions.

We will now begin the question and answer session. To ask a question at this time, simply press the star followed by the number one on your telephone keypad.

We'll now take a moment to compile our roster. Our first question today comes from the line of Timothy Zhao from Goldman Sachs. Please go ahead. Great.

Thank you, Benjamin, for taking my question, and congrats on the very solid results. I have two questions here. One is about your revenue guidance to 2024. I was wondering shares on color. into the revenue growth breakdown or revenue compensation breakdown between your B2B and B2C BNS, which segment maybe grows faster into 2004? And also, a related question on this topic is, I think you mentioned AI payers within the BNS. I was just wondering, for 2003, what is the rough breakdown between the cosmetics, skin care, fashion, jewelry, different customer base, and what is your outlook for 2024? And the second question is on the margins. I saw, I think, for 2053 full year, you had a pretty strong top line and also solid extension in terms of gross profit and net profit. But I think in terms of margin, actually, there was slight decline in terms of both gross margin and net margin. on a year-to-year basis in terms of use-through. Just wondering what is your outlook for the profit and the profit margin?

Thank you. Hi, Timothy. Good morning.

Very nice to talk to you again. Yeah, so our guidance, again, as we operate in a recurring business, and our business are very contractual, right, so we are recognizing it based on IFRS measure as the period goes. So I'll remark that we have seen a good recovery momentum in the last quarter of 23. We compared that to the earlier first half of 23, which was very challenging. So I think that is a good sign of the recovery. It's giving us a stronger faith in the 2024 business. But those contracts, you know, you take time to materialize into RF, IFRS. So I think, as we said, we've seen the business pipeline to become a lot more solid. Certainly, we see over 20% in our business pipeline going forward. At the start of the breakdown, B2C continued to be very strong, as we have reported in our last quarter. I think we expect that trend to be continuing. But the B2B part, as I said, the recovering is also coming to help. We see the B2C probably will be still growing a little bit faster than the B2B space, but the B2B is certainly recovering from the early challenge in 2023. In terms of the AI pillars, the beauty AI is certainly still a dominant part of it. It's a part of our core business for many years. But the skin AI part is growing very, very fast. The skin AI part, if we look at the organic demand that comes in, is actually outpacing the other categories. I think that's mainly due to the AI skin diagnosis product is becoming more robust, covering more skin concerns, and also be able to penetrate into newer channels. So it's not just a traditional brand website. It's now going into, you know, spots and clinics and other channels. So I think out of the four pillars, the skin one in terms of the enterprise business is already, you know, let's say, generating a good, you know, one-third, if no more, of that demand. In terms of the generative AI, it's very, very promising. This is very young. It just launched about a year ago. And so from 10 of growth and from the roadmap perspective, we see a lot of innovation will happen in this pillar, and so we have a strong faith in that. But not to forget about the fashion AI, which is more to the luxury and prestige of jewelry and watches, And this is the area that we invested so much in last year. And it's already to see results. More than a dozen brands has already launched, commercially launched in the market for our jewelry, including the newest addition for stackings. So I think all these four are very important pillars to sustain a growth in 2024. In terms of margin, as I mentioned, as the B2C business increased, due to the fee paid to Apple and Google, it is eating up some of our gross profit around 3%, 4% company-wide. We have observed this trend in the last four quarters, but it seems to be quite stabilized into 80%, 81% gross profit margin. We don't expect a big change of that margin based on our current visibility.

So that will be my answer to your question. Great. That's very helpful. Thank you, guys. Our next question comes from the line of Clark Jeffries from PSC.

Please go ahead.

Hello. Thank you for taking the question.

You know, Louis, interesting to hear about the skin AI segment, you know, having maybe a wider aperture of new business interests. compared to Beauty AI, if I understood that correctly. Also interesting to hear about the recovery in the enterprise sales cycles and the good growth in new business pipelines to start the year. I was just wanting to ask strategically, are we at the position where you might be increasing your investment going into the new year to take advantage of some of those improvements in the enterprise sales cycles? Where are your top investment priorities from an incremental standpoint? dollar perspective in terms of investing behind the enterprise sales capacity. And then as a follow-up, I wanted to ask if there was any way to level set expectations on cash flow. A $17 million improvement year over year in operating cash flow is fairly substantial. Any way to think about whether that is the right number for the business on an annual basis at this point? or if there were certain working capital items that may have benefited free cash flow, and we might see an ebb and flow in 2024.

Thank you.

Thank you, Clark. Good evening.

Yes, the skin AI, I think, is an area that we have been investing for more than three years now. It certainly took time to develop to a more mature status, and I think now it's kind of closing the cavern. You know, more and more brands and clinics I started to see the benefit of these solutions. So, and I think I like the consumer beauty, color cosmetic, where are more dominated by big brand. I think market is very much more long tail as well. So there's a lot more potential clients to address. And I think this is where the opportunities are and where we are investing also our sales effort, both online digital marketing, why, you know, some advertising, or joining different trade shows, conferences, or targeted to skin markets. I think that remains a priority for 2024. And we have seen this globally happening, not only regionally in one specific country or region. We've seen that demand equally growing in Japan, in the US, and in Europe as well. So Skin AI, among other things, is the one that It's been developed for a few years. It has been well-tested in the market, and I think it's now time to gain more scale. From the B2B pipeline cycle perspective, yes, we have seen that the enterprise demand is certainly accelerated compared to the first half of 2023, where people were a little bit more skeptical about the future of the economy. I think now at the end of the interest hike, the terminal rate, I think the enterprise spending seems to be coming back more into pre-interest hike period. We have seen that the entire sales cycle has been shortened significantly. So customer enterprise budget seems to be a little bit more relaxed in terms of investing in new innovations, and we want to capitalize on that. So our top priority is, again, to have our solutions ready for web, for online subscriptions. and be able to help all these new demands to integrate and deploy in the market as fast as we can. In terms of the cash flow, you know, the result that you saw now earning, it is not from a one-off cash flow, free cash flow. I think it's a continuous result, and we've seen it quarter after quarter that we're able to bring in around this figure, and I think that is what our expectations are for the operating cash flow. to remain positive so we are managing our financials as I always say we have strong discipline and we have seen that because the nature of the of these are contractual we get paid you know advance and then we deliver the service across the year are we able to generate these good operating cash flow Claude I can add some comments for the investment part both committed to keep on investing on

AI development in the R&D side. And that's because this, especially after generative AI, the market is very large to grow. And this is a very early stage. So you can hear not only beauty AI, beauty virtual trial, we also expand into the beauty side for the hair. So here is... It's very unique in the market. Hairstyle, virtual trial, hair week, virtual trial, all this are developed by our generative AI team. So we deployed it to B2B enterprise for brands adoption and also to our B2C app. So the commitment for R&D development will keep on increasing. For sales channel, I think it will not have a big increase. For the new market, like skin, med spa, clinic, that one is very new to us. And the organic demand is coming in very strong. And we also like to develop in different countries besides major countries like US, Japan, Middle East. for the resellers, partners, and affiliate partners to get us more acquainted to the market and refer more clients to our site. So, and the good thing is all this AI, generative AI and all kinds of AI solutions, we can use it in our B2B enterprise solutions. And also to our B2C app, the beauty app users. Quite synergy, complement to each other. And of course, we are opening and still searching in the market for any synergy M&A to come. Very selective. That's always our target to go.

Really appreciate it. Yeah, it makes a lot of sense to invest behind the way to innovation and Gen AI.

Thank you very much for both. Thank you.

As there are no further questions at this time, I'd like to hand the conference back to management for closing remarks.

Thank you again for joining our call today and have a good one and look forward to seeing you online next time.

This conference is now concluded. Thank you for attending today's presentation. You may now disconnect.