Perfect Corp.

Good morning and good evening, ladies and gentlemen. Thank you for standing by and welcome to Perfect Corps' second quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise. 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, Mr. Jimmy Shaw, director, IR director of the company, please go ahead.

Thank you. And hello, everyone. Welcome to Perfect Corp's second quarter 2020 call. With us today are Ms. Alice Chang, 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 second quarter 2024 financial results on our IOM website or in the form 6K we filed with SEC earlier. A replay of this call will also be available on our website shortly after its conclusion. For today's call, management will provide our prepared remarks, followed by a Q&A session. Before we continue, I would like to refer you to our safe harbor statement in our earnings press releases. This call may contain forward-looking statements regarding performance, anticipated plans, original results, and our objectives. Forward-looking statements are based on management's expectations and are subject to numerous risks and uncertainties that could cause actual results to differ materially from those expressed or implied in our call today. 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 management's prepared remarks are in U.S. dollars, and we will discuss non-IFRS measures today. I will now turn the call over to our CEO, Ms. Alice Chen.

Thank you, Jimmy, and welcome to Perfect Quartz 2024 second quarter earnings call. We have some exciting news to share today. Let's get started. leveraging our advanced AI capabilities. We started the first half of 2024 with a strong growth with our previous provided guidance. Our first half revenue grew by 13.5% year over year to $28.2 million. Our net income grew 185% year over year to a positive $1.4 million. and the adjusted net income increased 26.2% to 2.8 million compared to first half of last year. The double-digit increase in revenue and the positive net income were driven by the strong growth in our AIAR cloud solutions and the subscription services for mobile beauty apps and enterprise business both. Both businesses benefited from our superior AIAR technologies and contributed to increase in the top line and also to the profitability. The first half of 2024 saw our operating cash flow generate a net inflow of $5.5 million. In the second quarter, our continuous improvement in the company bottom line showed a net income 0.8 million compared to net loss of 0.2 million during the same period in 2023. Our operational strength lies in efficient cost management initiatives, improvement in operational efficiency while sustaining our competitive edge, investments in AIAR services, and continuous development in our market footprint. Furthermore, we delivered $1.3 million in adjusted net income for the second quarter of 2024 versus $0.9 million in the same period of 2023, an increase of 43.8%. An essential advantage we possess is leveraging our unified AI engine for both consumer mobile apps and enterprise SaaS solutions, allowing us to maximize innovation across various sectors. Our B2C business, particularly our mobile beauty app, has continued to grow very strong. We witnessed an 18.3% year-over-year increase in our mobile beauty app active subscribers, reaching a historical high of over 919,000. This sustained growth in active subscribers is a testament to the increasing demand for mobile apps that empower users to edit, enhance, and beautify their photos and videos. It also indicates a more promising future for in our user base. Our suite of UKIM apps continues to lead the innovative digital solution. Harness cutting edge technologies like GenAI for photos and videos. Users can now explore and express their unique styles in photos, videos, and artworks, unlocking their creativity through the latest AI capabilities. As mentioned earlier, we have introduced quite a few enhancements driven by GenAI, including AI avatar, AI fashion, AI hairstyle, AI Headshot, AI Studio, AI Color, and AI enhanced photo video editing tools. These tools offer users sophisticated options for beautification and enhancement, setting new standards in digital creativity, and showing kids our commitment to continuous innovation. Time to our B2B operations. This quarter, we focused in the B2B sector centered on enhancing market penetration across various verticals. We made additional inroads in AI-powered skin diagnostics products and the jewelry fashion solutions. Simultaneously, we expanded the adoption of our mega VTO across all brands in the region. We secure multiple new contracts for our beauty skincare, and jewelry solutions within B2B sectors, highlighting strong demand for our comprehensive offers in advanced technology across diverse industries. Additionally, we successfully renewed major licenses with key beauty groups and retailers. This renewal underscores the growing trust in our solution to meet evolving demands and affirm our leadership in VTO virtual try-on services. Furthermore, we leverage this opportunity to cross-sell to affiliated brands and offer expanded services, including broader skill selections and market expansion. The strong revenue growth this quarter reflects the continuous recovery in sales cycles and the expansion of our enterprise business pipeline. Another exciting event took place during the second quarter. We formally announced our generative AI framework for beauty, PerfectGPT, at our sixth annual Global Beauty and Fashion AI Forum in New York City this June. PerfectGPT is a framework that connects all other perfect beauty services, ending at solving customer beauty and fashion pain points through natural language conversation LLM, large language model, and generative AI visual content. Any brand can use this framework to develop its own personalized AI assistance for beauty, skincare, and fashion, and deploy it in conjunction with other digital services for a unified consumer experience. Together, with this perfect GPT framework, we also announced a range of new beauty AI solutions. including the brand new services of beauty GPT with specialized AI makeup transfer, step-by-step tutorials, and the product recommendations. Also, skin care GPT with AI skin analysis and the product recommendations. Down the road, we will develop more generative beauty fashion solutions using GPT technology, such as Hair GPT, Jewelry GPT, Fashion GPT, and more. to enrich consumers' journey. All these services can be integrated into a single touchpoint experience for consumers, all via a simple, intuitive, conversational way of an AI assistant, a brand website, or in our app. Besides the GPT, in Q2, we launched the world's first HD skin analysis solution capable of detecting two times higher precision when doing AI skin analysis on user's face. The improved AI model can now handle more input data from the high-definition smartphone camera, and the upgrade enables brands and the clinics to perform an even more accurate diagnosis for user skin concerns. Plus, the AI skin solution is upgraded with a batch capability to handle a large amount of data images with a new AI skin score validator. Right now, in Brent's lab, Brent can use this new model to efficiently process large amounts of clinical test data and get results faster. The innovation continues also in the AI mega domain. we pioneered the launch of the world's first AI makeup transfer with full-loop creation. This leading technology uses AI to detect and create exactly replicas of any trending makeup loops from social media or from any photo out of a beauty magazine. Our GenAI model can detect the color, texture, and the patterns of a look and transport it seamlessly to the user's personal selfie photo. Consumers can try all kinds of trending looks with just one single photo image. The AI model can further compare look shades and textures with our database of makeup product skills and offer users a recommendation of specific brand products. On the jewelry side, we also launched the Word First real-time multi-category stacking capability virtual tryouts. Consumers can now try pairing several items together, such as wearing multiple rings on different fingers or combining them with bracelets and watches at the same time. The enhanced capability is thanks to our improved tracking and rendering performance architecture to process multiple 3D objects all together directly from smartphone, CPU, GPU. Our company is fully committed to create new AI innovations to help solve both the consumers' and the brands' pain points with our full line of AI services. In closing, we achieved robust business performance in the second quarter and the first half of 2024, marked by strong revenue growth enhanced operational efficiency, and a positive financial outcome. Our B2C segment continues to experience rapid organic growth with the launch of PerfectGPT and all other industry-leading AI technologies. We are confident that PerfectCorp is strategically poised to seize expansion market opportunities for consumers and brands. and to sustain our business growth, both in the near term and the longer term. Driven by the good demand for both of our app subscription and enterprise SaaS renewal solution, we iterate our outlook for the full year 2024, projecting total revenue growth recognized under IFRS to range from 12% to 16% compared to the full year 2023 results. With that, I have concluded my remarks and will now pass the call to Louis, who will discuss our financial details with you. Thank you.

Thank you, Alex. Please note that all financial comparisons are on a year-over-year basis, and the reporting period is the second quarter of 2024 versus the comparable period in 2023. And that, on top of the international financial reporting standard, measures, we will also discuss non-IFRF measures to provide greater clarity on the trends in our operations. In the second quarter of 2024, our total revenue increased to $13.9 million from $12.7 million for the same period in 2023, representing year-over-year growth rate of 9.6%. The robust performance was mainly due to the consistent growth momentum of our AI and AR cloud solutions and mobile app prescription business. which is also the main focus of our business model transformation, carried out in the past few years to convert legacy contracts from licensing revenue into recurring subscription revenue. Our AI and AR cloud solution and subscription revenue saw a much stronger increase versus the total revenue increase rate, reaching $12.9 million in the second quarter of 2024, a 17.4% rise compared to the same period in 2023. The subscription revenue contribution was at 92.8% of the total revenue in the second quarter. This growth can be attributed to the robust expansion of our mobile beauty app subscription and the rising demand of our online skincare diagnosis solutions and online virtual product solutions among brands and retailers. Furthermore, this growth was also contributed by the addition of new categories and the increased popularity of our Gen AI technologies for AI creation and editing features for photos and video. Notably, our mobile app active subscribers have surged by 18.3% year-over-year, reaching an all-time high of over 919,000 by the end of the second quarter this year. This strong momentum underscored the continued growth interest in our suite of mobile beauty apps and our capability to retain and convert those app users into paying subscribers. The licensing revenue, which is mostly generated from our traditional offline services, decreased by 49.8% in the second quarter of 2024 to 0.7 million compared to 1.4 million during the same period of 2023. This result was well expected as the company is on a mission to convert this type of legacy non-recurring revenue into AI AR subscription revenue from brands and consumers instead. The licensing revenue will gradually become immaterial as it continued to be phased out in place of a new subscription revenue model. Growth profit for the second quarter of 2024 grew by 7.8% to $11 million, with growth margin of 79.3% compared to $10.2 million and growth margin of 80.6% for the same period in 2023. The decrease in growth margin was primarily due to the increase in third-party payment processing fees paid to digital distribution partners such as Google and Apple, due to the increase in mobile app subscription revenue. The total operating expenses for the second quarter of 2024 increased by 0.7% to $12.4 million compared to $12.3 million for the same period last year. The increase was primarily due to the higher sales and marketing expenses, research development expenses, offset by a decline in general and administrative expenses in the second quarter of 2024. To break down operating expenses, sales and marketing expense for the second quarter of 24 were $7 million, compared to $6.6 million during the same period of last year, an increase of 7%. This was due to an increase in marketing events, advertising costs for mobile apps, and cloud computing costs. Research and development expenses were $3 million for the second quarter of 24, compared to $2.8 million during the same period of 23. an increase of 7.5%. The increases were from additional R&D headcounts and related personnel costs. General and administrative expenses were $2.4 million for the second quarter of 2024, compared to $3 million during the same period of 2023, a decrease of 19.1%. The decrease were mainly due to lower corporate insurance expenses and increased operational efficiency. Net income was $0.8 million for the second quarter of 2024, compared to a net loss of $0.2 million during the same period of last year. The positive net income in the second quarter of 2024 was supported by continuous revenue growth and effective cost control. Excluding non-cash share-based compensations, non-cash valuation gain and losses of financial liabilities, adjusted net income was $1.3 million for the second quarter of 2024. compared to adjusted net income of $0.9 million in the same period of 2023, an increase of 43.8%. This represents an adjusted net margin of 9.1% in the second quarter of 2024. Looking at our balance sheet, as of June 30, 2024, the company held $158.8 million in cash, cash equivalent, and six-month time deposits, compared to $157.3 million as of March 31, 2024. This increase was a result of the positive operating cash flow and the interest income received from the company's bank deposits. We had a positive operating cash flow of $2 million in the second quarter of 2024 compared to $2.6 million during the same period in 2023. The positive cash flow demonstrated the company's continued ability to generate cash flow to support its business operations and growth strategy. Our customer base had a net increase of 20 brand clients since the end of last quarter, achieving a total of 686 brand clients with over 774,000 SKUs for makeup, skincare, eyewear, and jewelry products as of end of June. This is yet another record quarter for these metrics, showing the continuous increase in customer penetration and SKUs expansion. More brands and products are leveraging on Perfect Console platforms, to manage its services subscribed from Perfect. In the second quarter, Perfect had 151 key customers compared to 152 in Q1 2024, a net decrease of one, a result of normal fluctuation in the B2B business. Renewal continued to be strong while upward sales were weaker in this quarter. In the second quarter of 2024, our total revenue has consistently exhibited expected growth Primarily driven by the continuous momentum in our AI, AR cloud solution and mobile app subscription of our UCAN family of AI power apps. Our operational efficiencies and financial prudence show continued profitability in creating value for investors. Given our robust SaaS business model, we are confident in the growth of our business as we move into second half of 2024. We are also committed to investing in professional development and talent acquisitions. especially in the field of Gen AI technology innovation, to strengthen our core capabilities. This investment aims to further enhance our role as a transformative force, reshaping how consumers interact with digital experience both in brand offerings and in mobile app utilization. We are confident that our strategic position through our proprietary technology will keep us at the forefront of digitalizing how beauty and fashion brands interact with their audience. Finally, we reiterate the Alternative 24 guidance that the total revenue year-over-year growth will range from 12% to 16%. This forecast is based on the company's current assessment of the market and operational conditions, and management will closely monitor business progress and provide updates in order to offer better transparency to the market. That concludes my prepared remarks. Operator, please open up the call for questions.

Thank you. We will now begin the question-and-answer session. If you would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw that question, again, press star 1. Your first question comes from Brian Schwartz with Oppenheimer. Please go ahead.

BRIAN SCHWARTZ, OPPENHEIMER, Yeah. Hi, Alice and Louis. And congratulations on the subscription rub and the growth of the technology innovation in the corridor. questions I wanted to ask you was maybe about the outlook and thinking about the second half. I know there's a lot of concern out here about the macro and the election impact to demand. Maybe from a high level, I don't know if it's for Louis, can you talk about the shape of the pipeline seeing exit in Q2 compared to maybe where it started in the first quarter, how your coverage ratios and the and just the shape of the pipeline as we enter the second half of the year.

Hi, Brian. Good to talk to you again. So I think if we look at our first half of the year, top line, we reached 13.5% growth. That's where we'd be in the range of the annual guidance that we have given, between 12% to 16%. Certainly the Q2 was slightly slower compared to Q1, but I think that's also part of the seasonality effect. As we see the pipeline, the renewal from the brain customer are performing quite robust. So we are able to renew all the major contracts in this first half of the year. That gives us confidence moving into second half to keep up this performance. So with that said, I think, you know, looking at the second half of the year with the pipeline that we have been developing and the visibility that we see, we iterate the annual guidance. So I think we will still perform within the range that we have given to the market. If second half, the macro improves it, say the interest rate comes down, the cost of capital, you know, is cheaper, the enterprise are willing to spend more, we certainly can hit a higher range of our guidance. If not, I think we'll be in that range.

Hi, YM. This is Alice. Nice to talk to you. So YMQ2 is normally, as we expected, not a high growth season. B2C, in this case, the consumer thinks not affecting by all the conditions. And this is quite global. So we're expansion to a lot of new regions. in Q2. For B2B, just like Louis said, renewal is still strong, and the new upsell is not as strong as we expected. However, all the new AI we announced in June in New York and Paris, the productivity part, all the AI transfer parts, got all the brand groups high interest. I think all of them are considering AI, how AI, GenAI, AI, GPT can have impact on their internally operation efficiency, but externally how to face to the consumer using GenAI, GPT. We are currently the only solution in the market. Innovation for those brand groups already form a very high AI community to engage, evaluate it. It takes time. But my assumption, my vision for every beauty group, they need to have AI assistance using GDG and our AI services together as a general consumer engagement way, brand new way. It may take time, but we see end of this year will be some POC to come.

That's real helpful. And then, Alice, that's a good lead-in to my second question. I just wanted to ask about AI in spending trends. Is there a possibility, as we think about budget at these brands, is there a possibility that the business will allocate more funds specifically AI initiatives as the technology and you're introducing new products here in the second year. What are you hearing from kind of the brand and the market?

Hi, Brian. From the beauty enterprise that we have been introducing this AI, all of them are very interested and majority of them have actually set up AI committees or even a special AI budget to explore new possibilities how AI can help on beauty and fashion. I think the enterprises are certainly cautious about how to do the AI. So these budgets are initially for pool of concepts or pilot projects. So this is one of the main tasks for the second half of the year to develop these tailor-made solutions, how to use innovative AI, GPT, LLM solutions to help the beauty consumer with the discovering product, finding a new look, trying on and learning tutorials and more. So we certainly are, I think it's a promising area for years to come. And especially this year is the phase of initial exploratory and using these AI budgets to build some pilot projects. I believe that is going to be the initial trend.

Thank you, Louis. And then, you know, with 2Q specifically, with the key customer account, you know, because there's been a little bit of churn there. I think it mentioned that there's some financial distress among those customers churning. Is it fair to assume that those customers that are churning are more smaller brand partners of the business than larger ones? Or maybe the question is, what's the typical average size of these key customers that are churning? Thanks.

Right. So some of these are not necessarily churning. Sometimes it can be just a downgrade as we define key customer or as a threshold of $50,000. So typically we do see exactly as you said, the larger enterprise are very stable. So they are using multiple services in multiple regions and for many, many years already. There's not much impact in there. However, some other customers who are just starting or we hope to upgrade in or they are just marginally over that threshold, that's what we see as a normal situation. Typically, we try to up-sale newer modules to them to make sure that they're becoming a larger client so we can increase the number of KCs. In this quarter, too, we see that upgrade sales being a bit smaller. A smaller brand. And across beauty industry, I think certainly the growth have been a little bit more modest across the industry, affected, you know, whether it's China or in the other region as well. So we don't see that as too much of an alert at the moment. Of course, the growing momentum, you know, hopefully to come back as enterprise spending reopen and they are willing to commit to a larger amount contract or expanding the services to more geographies or injecting more SKUs.

Well, that's good. So they haven't fully gone away. Last And for me, you know, you have a global business. Shed a little light in terms of what you're seeing in terms of trends and momentum in the different geographies, what you're seeing in Asia-Pac versus what you're seeing in the Asia-Pac versus EMEA. And thank you again for taking my questions.

You're welcome, Brian. We do see a few, you know, from a global perspective. Quarter two, Japan, Japanese yen has been demonstrated much weaker in quarter two. Certainly, the currency seems to be recovering in these past few days. But as far as quarter two, that affected somewhere between 0.3 to 0.4% of our top line of the currency against U.S. dollar. I see we see a good momentum in Latin America and in Brazil, especially for our B2C mobile app business. Really, really grow a good momentum going there for mobile consumers willing to pay for annual subscription for beauty apps. So that contribution in Latin, especially in Brazil, is increasing. Certainly the challenges, the low lives continue to be, you know, China per se. I think that the condition is, you know, fierce competition in pricing in China. So that momentum seems to be slow. We're not sure yet when that will be recovering. Other good growth area will be Middle East and Southeast Asia. Although its revenue contribution relatively to developed countries is still slightly lower, but the momentum I do see promising new brands, new retailers, a lot of them. Travel retailers are coming back as well in various regions. So these were the highlights and the lowlights.

Thank you. Your next question comes from the line of Lisa Thompson with Vax.

Please go ahead.

Hi, guys. I have lots of questions, but I'll just ask a few of them. Just to go back to the AI assistant, you said by year end you might see some pilots or something. What kind of company do you think is the first to start rolling this out? Is it going to be retailers or brands? And what might they be using them for, like the first ones we're going to see?

Hi, Lisa. Glad to talk to you. So in our forum, we announced PerfectGPT. It's, you know, natural dialogue to the end user plus all the AI services we have. My view, just like all the new innovations, we'll start from prestige beauty group. And then once it's matured, then it'll go to the mass market. So by saying that, what we are talking to those potential beauty groups, fashion groups, very on top of the prestige part. Most of them are groups, just like Louis said, because they are forming AI committee to see how using GenAI, GPT, for their internal and external services. So answering your question, we see this is more from, will be earlier from a top beauty group, fashion group, and one for the end of this year, and then expanded to more mass in the retailer.

All right, great. I'm excited to see this. There's so much potential. Let me ask a question just about revenues. The licensing revenues are a mystery to me. Like, are they going to be going up and down quarterly, or are they just starting to wane to zero from here? Like, going forward, is it ever going to be higher than the second quarter number?

Hi, Lisa. I think the licensing revenue is going to be more flat compared to what we see in the trends. Years ago, it used to be a much higher rate, especially pre-COVID. After that, I think the business and technology has moved much more online and also revenue subscription-based, recurring basis. So it's really for those more legacy products, like in-store virtual try-on products, this type of demand. I think it's not going to be zero. It's always going to be there because in some markets, there might be a need. for deploying these products along the side of doing that online. But again, we don't expect that to be another significant, as I said in my remarks. It will gradually become more immaterial, somewhere, let's say, between 5%, no more than 10% of the revenue. That seems to be the expected result.

Yeah, Lisa, the in-store now, we start from in-store after COVID. brands and the retailers trying to engage on the website. And it's more renewal, sustainable for our business model. So internally, we also encourage them to transform to the renewal base, especially online. So in-store still has its demands for some of the events or in specific stores. But we did not expect it will grow, and we will also encourage them to move the model to our subscription and the renewal base.

Okay, so do you think it would be logical to keep revenues under a million dollars a quarter going forward?

I think that's fair to say.

Okay, good. That's helpful. Let me go back to my questions. So another mystery I have is when I look at the Q2 growth margin versus the Q1, it's up, but licensing was down a lot, and I would assume that's like 100% growth margin. And I thought that mobile was, the apps were going faster than B2B, so that should also take margins down. What am I, like, not understanding about how this works?

I think it's a normal situation. The Q1-Q2 isn't really too much different internal margin profile. You are right in this quarter, too. The B2C app is faster than the B2B. Therefore, the margin, we see, you know, year-over-year basis decline all around 1%. So I don't think there's anything wrong in your estimates. The B2B has higher margins, but depending on the type of product, right? So some are 90%, some are 92%, some are even higher. So I don't think it's a fair comparison quarter to quarter because the different mix and the renewal period of each may be different. But again, if we look at the summary and the overall average, I think it's quite in line quarter one and quarter two.

Okay. All right. Another question I have, have you given any thought to doing advertising for the mobile apps? I shockingly saw a couple of Facetune ads a few weeks ago, which surprised me. Are you looking at doing any other different marketing than what you've been doing?

We still, you know, spend some of the sales marketing expenses and effort in user acquisitions. So we do advertise in, you know, select countries, select channels. It's really based on the analytics of how much of those advertising can bring real ROI to bring real user conversion and become paying active subscribers. So there's always new channels and new platforms for doing ads, and we continue to pilot it. But again, this is not a very big part of it. I think organic growth, digital, SEO, that is where our big investment comes. But additionally, some users are very hard to be targeted, and advertising comes as additional help.

So besides that, in our operation, organic growth is the key. And of course, DPI advertising is part of them, but organic growth is always the key focus of our business app business growth. So you can see our Advertisement out of our total paid subscriber percentage is pretty low, but we're still trying all different kinds of advertisements or channels to try and get good ROI for all the investments of the advertisements.

Okay. All right. And I guess one last question is kind of a big picture question. Like I've started to see companies that are talking about ai for e-commerce where they seem like they're putting together platforms for selling and retailing how big of impact was that going to have on you or is they just going about it the wrong way i don't think it's a direct impact i think we the different ai technology we develop is work in conjunction to different commerce platforms and different type of targeting

What we try to build as our unique solution is more for personalized recommendations. So as part of the AI, try to find what you need, and it's important for beauty categories specifically to know the user's style, the face of their shape, the color of their eyes, the color of their hair. So this is where we come very strong with our AI services, be able to understand and analyze and pair that with the right look. And I think that technology, again, it is a supplemental technology to the overall e-commerce platform where the brand now not only sending them email marketing or having an AI chat box, be able to actually analyze and give users a very, very personalized recommendation, which we believe is going to increase the conversion rate and the basket size.

And Lisa, my view for all the AI conversational AI assistants, will be on every vertical website for retailer, no matter what kind of vertical. And that's the future. You don't need to search and browse. You just go online. You don't need to go to the store to ask VA. No, you just go online. Every vertical website will have an AI assistant to talk to you. You can ask any question, reply, and recommend. So I think that's the future for every website. And perfect, we are focusing on beauty, skin care, fashion. That's our vertical because not only a chativity conversation, message test conversation, besides the dialogue, we can also add the value add of all our AI services that were already developed for beauty, skin care, fashion. So provide a real recommendation digitally to the users. So Perfect Corp right now is the only solution for AI assistant, conversational assistant with all the recommendation analysis together as the one point of user point, single point of view for all the AI assistant on any of the brand side. However, I think this brand new experience, I believe, will come from top brand groups and then, you know, turning to all mass markets one by one in the next three to five years.

Right. I just can't imagine that those companies that are just getting involved in this would even have the opportunity information required to make recommendations other than, like, find me a red lipstick. Like, you know, something very simple. Whereas you have years of experience that have to be somewhat of a moat to keep them away. Okay. Sounds good. I'm looking forward to seeing that out in the wild. I really am because it's going to be great to just be able to ask some questions and find a product.

So much need for it. Just like you said, because of all our knowledge about beauty in here, so in the PerfectGPT, not only is it a GPT platform, but we use RET. We use our own know-how database to integrate it, and specifically for each brand recommendation. I think that's also one of the uniquenesses based on our over 600, almost 700 brand experience, and we know exactly what the users like and do the recommendations through the conversational dialogue with AI assistance.

Your next question comes from the line of Christopher Ricuccio with Partners Corp. Please go ahead.

Good morning, Alice and Louise. Can you hear me?

Yes. Very clear.

Good morning to you both. Just a few questions. I wonder if you could walk me through the process of converting your brand clients into a key customer. Is there a specific methodology that you guys try to use? Is there a marketing approach? Is there a top salespeople that you assign to certain brands to try to convert them into a quote unquote key customer? Is there an overarching methodology, so to speak, to make them this upper tier customer within your brand client pool? That's my first question. And I guess the second question related would be, is there And forgive me if it's somewhat of a naive or even question, but is there an overarching profile to your key customers? Are they all retailers? If you could possibly generalize as to what your key customers, other than the obvious revenue profile, what do the key customers typically look like, if at all, or do they range throughout the span of your brand clients?

Hi, Chris. This is Luis. Let me answer the second question first. So typically, a typical profile of a key customer, they are typically multinational, so they're operating in more than one country. So these are typically beauty brands that are there for a few years already, so expanding their business across the continent. And that is where, you know, once they start using the service, They typically have a unified global strategy to align their offering in different countries. Therefore, their consumption of our services is in greater territories, right? So that will generate more revenue. Now, the other thing that we have seen as part of that profile of the key customers is the brand or brand groups, meaning that they are not only operating one brand. They probably have a sister brand. or a number of good brands. So either they acquired over the years or they have grown organically into some adjacent brands. So that kind of typical profile. Retailer is the same thing. So retailers like Sephora, for example, they are operating in many other countries. So they are certainly part of the key customer life. Your first question, for the process of converting brand client to key client, Mostly, we always want to make the entry to start working the brain very easy. This is new technology to them. We are not asking them to commit a multi-million dollar agreement, which might be very high commitment. So I think we'll typically start, they can do a pilot. They can do in one country only for selected product. So something easy under $50,000 to start with. And the process there is let them see the results. Let them see the analytics is showing a better conversion, lower return rates, bigger basket size, and encourage them to deploy these services to more countries. Therefore, they will have these recurring compounding effects on the revenue to increase and hopefully become bigger than $50,000 a year, much more than that, and then become key customers. So the strategy there has been always an up-sale, right? So to start using something to get familiar with the platforms and then up-sale them more services, either to more categories of beauty products or more geographies, or even if they are a brand group, start using them in their system brands.

I see. Thank you. Two quick follow-up questions. One actually related to a previous question. Very briefly, I see that your R&D has traditionally seems to amount to around a 21% cost margin. Is that something that is going to be, is that very stable? In other words, there's not a lot of operating leverage there as you continue to scale up. We should continue to see you committing around 21% of your top line to R&D, or does that begin as your revenue line continues to grow, does that flatten out and we begin to see more and more of your operating leverage

being squeezed so to speak from that that uh cost blind light i think we are pretty pleased with the r d cost structure especially out of here in taiwan very efficient team you know very good cost structure i think traditionally had range in between you know 20 to 25 percent of the revenue as the revenue size is increased certainly we're still investing in r d talents As I mentioned in the remarks, I think it's an area of general AI that needs a lot more talent to develop a lot of new use cases. So I think generally we are happy to see or able to run this team around 21%, as you mentioned. If we were to run this in different countries or different development cities, Silicon Valley or other places, it would be a lot higher cost. So I think it is it is fine to run around these. Of course, as we grow the category bigger, that ratio may go down a little bit, as you said, the leverage. But at the same point, we are also increasing our spending in terms of hiring more headcounts. So net-to-net, I think, remains about the same ratio of the revenue, at least for the mid-term.

Your next question, please limit yourself to one question, and one follow-up comes from Aisha Shah with Sidoti, please go ahead.

Hi, Alice. I'm Louis. Thank you for taking my question, and congratulations on a very solid second quarter results. I have one question about the monthly active subscribers. This quarter, we saw an 18% year-over-year. Can you give us some color on the subscriber's nature? What percentage is new to the applications and what does the churn rate look like? Thank you for taking my question.

Hi, Ashley. I think the subscriber we see, you know, quarter to quarter increase. Typically, those increase are on annual subscription basis. So I think that's good in meaning there are those customers, they are really high frequency users, they are committed to use these apps throughout the entire year rather than just taking a short time, one month subscription. So I think that means that they also are more tentatively to renew year after year after year. We haven't announced publicly yet our renewal rate or churn rate in specific terms. So I will refrain from answering that. But I think that's a show we see the momentum. It's not just coming from one particular country or one particular product. I see what we have seen is more than 10 countries, probably 15 to 20 countries now, that the consumer, the mobile app consumer, are really much more open to paying a subscription for digital apps, even for tools like apps, which is traditionally what's very, very difficult. But I think now the mindset probably has changed. There are so many other apps that all are requesting some sort of subscription base and to unlock the premium features. So our strategy has been as long as we keep innovating on these innovations and premium features, we're able to retain those active subscribers and then continue to convert more of the free trial users into paying subscribers.

Thank you. And I have a follow-up question. If you can rank maybe three or five new categories in terms of growth, what would those categories be and which ones would you think would most likely contribute to revenue growth in the second half of 2024? Like, what are the catalysts that you're looking at right now in terms of categories or the new categories that you just started working with? Thank you.

You're welcome. I think it doesn't matter which category. It typically takes time, right? Enterprise customers, they are really cautious on deploying services. So, you know, services that we have deployed and already passed the pilot test, Things like, for example, the pilot last year, we started to see more scale this year and even more the following year. From a historical experience, typically, you know, a client will take about two years until they become a more mature, you know, consumption of these services. So with that said, I think, you know, the growth momentum on the skincare is very strong because it's an area that we invested heavily in the past three years and started to see, you know, to capitalize on the results. Of course, makeup is very mature and robust, so we see probably a slower growth rate from that perspective, but the size of it is bigger, right? So because we've been doing makeup for eight, nine years now. Jewelry and jewelry watches, we see very, very good momentum going on because we're able to launch about 10 to 12 pilots in the last year. Many of these pilots, you know, have been concluded and they are converting into full deployments. and then also expanding to more countries. So internal contribution, I feel that skin care, because of the strategy of going, you know, the med spa, the clinics, you know, even addressing the long-tail clients, will show more results financially. The B2C consumer app continues to be very strong, so we're spending in more locale. We are getting more digital marketing efforts around different languages to expand the market there. And then Jewelry, if you watch it, I think it's very promising. Our quality is really, really superior to any competitor, so we're winning virtually every deal that is open in the market.

Your next question comes from Mike Kupinski with Noble.

Please go ahead.

Yeah, first let me offer my congratulations on a solid quarter as well. Just a couple of questions related around the margins. You mentioned cost efficiency initiatives, and I was wondering if you can just give me the impact that those cost initiatives had in the quarter, in this latest quarter. And then I was just wondering if you can maybe give me a little regarding your verticals you're expanding beyond skincare into fashion apparel and jewelry i was just wondering if that is going to more so affect b2b or do you think that those expansions and verticals are going to affect more b2c and then based on that answer if you can just kind of give me your thoughts on sustainable margins as you kind of look forward over the course of the next couple of years, given how you see the two different businesses growing, given that there is a different margin profile between B2B and B2C?

Hi, Mike. Let me start with the first, and Elliot may add on to the others, too. So in terms of the margin, if we look at the B2B, one of the forte and the advantage we have is these clients that we serve, many of them have not a category, right? So a beauty brand, they have makeup products, color cosmetics, they have skincare, they have hair products and more. Even some of the groups, you know, they also do jewelries and fashions and eyewear, which means our customer acquisition calls for our new category, there's efficiency there because it's the same sales team, it's the same customer service team, customer support success team, But we're able to expand our offering and serve more products and services to the same client or the client groups. So I feel that is a very unique part of our business, how we are able to move from a single category to a minor category in these past few years. And that may continue to execute on that strategy as there's certainly more consolidation in the industry. So these beauty groups, they're also expanding. They are acquiring new brands. They are getting into newer categories. and then we are able to serve them as the current service providers. On the sustainable margin, if we look at the B2B business, the margin is typically much higher, over 90%. We develop technology in-house. We don't pay somebody royalties to anybody. So this is really a pure margin business. The B2C part, we pay Apple and Google for their distribution. We know Apple charges 30% and Google 15%. So in that perspective, the Apple consumer margin will be at 70% for us, and then the Google will be at 85%. So the overall sustainable margin is really depending on the mix ratio between the Apple users, the Google users, and our B2B customers. So I think what we see here on that 79% may go down a little bit depending on if the B2C continues to grow stronger in the next few quarters. but I don't think it's going to be much lower than what we see now. Maybe one or two percent more deep, but that should be it. I think for new verticals, maybe I'll let Alice comment on the potential for new verticals.

For new verticals, for B2B, it's very vertical because make a brand, they may not need jewelry. So we talked to mega brands, skin-hair brands, jewelry brands, hair brands, by its own demand. So this is, like Louis said, some of the brand groups, they have all the different divisions. So once we know one of the divisions, easier for us to talk to the others. And for purely new brand groups with very specific vertical demand, like hair, or even like MedSpa Clinic, that we need to rebuild from digital marketing and talk to them. So for MedSpa, I would say it is a new market with very, very high demand for our skin analysis and aesthetic simulation. And this is not in the brand group. But within the brand group, they have multiple demands. For us, we don't need to do too much, you know, from ground marketing efforts. Then we can expand easily to different verticals. But do see a very, very strong demand from med spa clinics for the skin analysis and aesthetic simulation microplastic surgery request. And for the B2C, all these are for B2B, very vertical. But for B2C, glad that we can leverage all the technology we work with vertical, and we integrate them into our beauty apps. For the app user, the end user, they pay $35, $40 per year. They can enjoy everything. So that is also one of the key that although the whole economy has some challenge for the B2C beauty app market feel keep on growing very strong.

Thank you for the color. Just one quick question, if I may. Can you just talk a little bit, you touched on the prospect of M&A, I think, and wondering if you can just talk a little bit about the M&A environment and whether or not you would look for some compelling acquisition opportunities here.

Hi, Mike. Certainly, MMA is part of the growth strategy besides organic growth. We've certainly been paying attention and looking at opportunities. Nothing material is ready to be announced yet. I think the market is reopening. I think the valuation has come down to a much more reasonable rate level for a lot of these tech companies. So it's something that we certainly have to be looking at the synergy that we can be with our global distribution, with our global platform. So again, once we have any news, we'll be sharing that to the market.

And that concludes the question and answer session. I will now turn the conference over to Jimmy Shaw for closing remarks.

Thank you once again for joining the call today. If you have any further questions, please feel free to contact us directly or through our IR website. We look forward to speaking with everyone in our next call. You may now disconnect.

This concludes the conference call. Thank you for your participation.