Perfect Corp.

standing by and welcome to Perfect Corp's third quarter 2024 earnings conference call. If you would like to ask a question during this time simply press star followed by the number one on your telephone keypad and if you would like to withdraw your question press star one again. We advise you to please limit yourself to one question and one follow-up and you are welcome to rejoin the queue if you wish to ask additional questions. We will be hosting a question and answer session after the management prepared remarks and please note that today's event is being recorded. I will now turn the conference over to the first speaker today, Mr. Jamie Shah, IR Director of the company. Please go ahead.

Thank you, and hello, everyone. Welcome to Perfect Corp's third quarter 2024 earnings 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 third quarter 2024 financial results on our IELTS 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 question and answer session. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release. 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 also discuss non-IFRS measures today. I will now turn the call over to our second speaker today, our CEO, Ms. Alice Chang.

Good morning. Good evening. Thank you, Jimmy, and welcome to Perfect Corp 2024 Third Quarter Earnings Conference Call. Let me start by giving you some updates on our financials and then share our view for the remainder of the year, as well as our progress in product and business development around the world. Our first nine months revenue grew by 12.5% year over year to $44.3 million. Our net income for the same period was $3.9 million. and the adjusted net income increase, 23.2% to $6 million compared to the same period of last year. This continuous increase in revenue and the positive net income resulted from strong growth in our mobile app subscription business under the AIAR cloud solution business. The first nine months of 2024, saw our operating cash flow generate a net inflow of $9.8 million, and our balance sheet remains very strong with over $163.2 million in cash and cash equivalents. In the third quarter, our revenue growth and the business efficiency contributed to the company's bottom line with a net income of $2.5 million. This net income bottom line result comes from the continuous efficient cost management initiative, while allowing the management to focus investing in AI and AR services to expand our market footprint in both B2B and B2C. Furthermore, in terms of adjusted net income, we delivered $3.2 million in the third quarter of 2024 versus $2.7 million in the same period of 2023, an increase of 20.6%. Our B2C mobile business has maintained strong quarter-over-quarter growth, with a number of active paying subscribers reaching an all-time high of over 977,000, representing a 17% year-over-year increase. This sustained growth in paying subscribers underscores the enduring global demand for AI photo and video editing, creation, enhancement, and beautification features spanning all age groups and geographies. Notably, our expansion efforts have yielded positive results in addition to North America, Western Europe, and Japan. We also see notable growth in new markets such as Brazil and Italy, further validating the universal appeal of our app offering. This broadening geographic footprint presents a promising outlook for our mobile beauty apps as we continue to focus on growing our user base in new regions. A new revenue stream has emerged through the introduction of our B2C web-based services. accessible via mobile, laptop, PC, Mac, and iPad, providing user options besides iOS in the Android mobile app. This service operates under a credit-based billing model, where consumers pre-purchase credits each month to access a wide range of AI features, including photo and video creation, editing, enhancements, and beautification. This initiative has expanded our total addressable market via mobile apps tapping into a broader consumer base. Additionally, we shift the shift to direct web-based service offers higher margins by avoiding services fee imposed by Apple stores in the Google store. Our suite of AI UCAN mobile apps continues to receive frequent updates and feature enhancements, integrating innovative AI digital solutions powered by cutting-edge AI technology for photos and videos. This update empowers users to explore and express their creativity, offering new ways to showcase personal styles through the latest advancement in AI-driven content creation and editing. Now shifting to our B2B operation in Q3, we have prioritized deepening market penetration across several new verticals. Most notably, we made significant strides in expanding our portfolio with AI-powered skin diagnostics, including updating, upgrading our industry-leading HD skin analysis solution with up to 15 skin concerns ready for consumers to learn all the details about their skin concerns in the visual simulation. This initiative positions us strategically in a skincare market that is projected to grow significantly in the next few years, driven by increasing consumer awareness of skin health and the pursuit for better skin and aesthetic beauty. with particular emphasis on the aesthetic clinic sector, where we introduce our new upgraded SkinCare Pro product, designed with ease of deployment and for small, medium-sized clinic chains. SkinCare Pro has been instrumental in its establishment of foothold in this growing market and newly enhanced the solution with AI aesthetic simulation capabilities. This advanced feature allows both aesthetic practitioners and the patients to visualize the potential outcome in the procedures, thereby reducing the likelihood of misunderstanding prior to making a treatment decision. This represents a pivotal area where AI technology plays a critical role in align with expectations with realistic results. Our core make a virtual triumph Product continues to perform well across all regions, particularly in the brand sectors. We successfully renewed major licenses with key beauty conglomerates and retailers for both this year and the next, highlighting the essential role our solutions play in enhancing online shopper engagement and driving higher conversion rates for e-commerce. This renewal has also enabled us to strategically cross-sell to affiliated brands and extending our offerings, including broader SKU selections and expanding market reach. While the B2B sales cycle continues to present some post-recovery challenges, our pipeline remains robust. Our team is diligently focused on guiding prospective enterprise clients in adopting our online solutions, helping them implement their consumer engagement strategy. And we are pleased to provide an update on our perfect GPT services, which we were announced in June. Since this introduction, the service has garnered high interest from numerous global beauty brands and skincare brands. We anticipate that AI-powered personalized beauty assistance will become a standard feature on all brands' websites in the coming future, enable 24-7 AI beauty consultation services. This AI assistance will offer professionally tailored recommendations that address the unique needs of consumers, including skin types, skin concerns, beauty makeup, preferences, and the fashion style. Perpetuity is distinctly designed with a robust focus on the retrieval augmented generation, we call REC, R-A-G, framework, where the recommendations are all supported by factual information and not merely derived from a standard large language model, LLM. This enables brands to provide factual authoritative documents that train our AI model ensuring that all recommendations are accurate, reliable, and consistent, meeting the highest quality standards. We expect the commercial POC proof of concept will launch early next year and followed by larger scale deployment in late 2025. In conclusion, We achieved consistent business growth in the third quarter of 2024, marked by increased revenue, enhanced operational efficiency, and a strong financial performance, while our B2C segment continues to demonstrate rapid and organic expansion. We are confident that Perfect Corp is strategically positioned to capitalize on expanding market opportunities and sustain long-term growth by diligently developing new AI technologies and leveraging our leadership position in the beauty and fashion space. As a company, we remain deeply committed to driving AI innovation that address both consumer and the brand pinpoints through our comprehensive suite of AI services. A key advantage that we offer is our ability to leverage a unified AI engine that serves both our consumer-facing app and enterprise SaaS solution, enabling us to maximize innovation across diverse sectors. Driven by the positive demand for both our mobile beauty app subscription and enterprise SaaS solution, we look for the full year 2024, such as total revenue growth recognized under IFRS to range from 12% to 14% compared to the full year 2023 results. With that, I have concluded my remarks and will now pass the call over to Louis, who will discuss our financial details with you. Thank you.

Thank you, Ally. Please note that all financial comparisons are on a year-over-year basis, and the reporting period is the third quarter of 2024 versus the comparable period in 2023. And on top of the International Financial Reporting Standard, or IFRS, measures, we will also discuss some non-IFRS measures to provide greater clarity on the trend in our operations. In the third quarter of 2024, our total revenue increased to $16.1 million, from 14.5 million for the same period in 2023, representing a year-over-year increase of 10.8%. The growth stemmed from the original continued growth of our AI and AR cloud solutions and mobile app subscription business. The AI AR cloud solution and subscription revenue grew 17.9% to 13.4 million compared to 11.4 million from the year-ago period, which represented 83% of the total revenue in the quarter. This growth is attributed to the continuous expansion of our mobile beauty app subscription and the positive momentum from our online skincare diagnosis solution, as well as our virtual trial business. As we continue to expand our services offering through Gen AI technologies, we should see improvement in service quality and pain point resolution for both brain clients and consumers. The licensing revenue decreased by 14.5% in the third quarter of 2024 to 2.4 million, compared to $2.8 million during the same period in 2023. As previously mentioned, this portion of the business is mostly generated from our traditional offline services, and that we are converting this type of legacy, non-recurring revenue into AIAR subscription revenue from brands and consumers. The licensing revenue will gradually become immaterial as it continues to be phased out and replaced by new subscription revenue models. Gross profits for the third quarter of 2024 grew by 9.6% to $13 million, with gross margin of 80.3%, compared to $11.8 million and gross margin of 81.2% for the same period in 2023. The decrease in gross margin was mainly due to the increase in third-party payment processing fee paid to distribution partners such as Google and Apple due to the increase in mobile app subscription revenue. The total operating expenses for the third quarter of 2024 increased by 3% to $13 million compared to $12.7 million for the same period last year. The increase were mainly due to the higher sales and marketing expenses and research and development expense, but were mostly offset by the decline in general and administrative expenses in the third quarter of 2024 as the company continued to operate more efficiently as a public company. Going into details for operating expenses, Sales and marketing expense for the third quarter of 24 were $7.1 million, compared to $6.4 million during the same period of 2023, an increase of 10%. This was mainly due to the increase in marketing events, advertising costs for our mobile apps. Research and development expenses were $3.2 million for the third quarter of 2024, compared to $3 million during the same period in 2023, an increase of 5.9%. and also further development into GenAI computing technologies and related costs. General and administrative expense were $2.1 million for the third quarter of 2024, compared to $3.2 million during the same period of 2023, a decrease of 32.9%. These decreases were mainly due to the increased operational efficiencies as we are approaching the two-year mark of our listing on NYSE. Net income was $2.5 million for the third quarter of 2024, compared to a net income of 3.5 million during the same period of 2023. The positive net income in the third quarter of 2024 was supported by continuous revenue growth and efficient cost control. These results represent a net income margin of 15.7% in the third quarter of 2024. Excluded non-cash share-based compensation, non-cash valuation gain, and loss of financial liability, the adjusted net income was 3.2 million for the third quarter of this year compared to the adjusted net income of $2.7 million in the same period of last year, an increase of 20.6%. These represent an adjusted net margin of 19.9% in the third quarter of 2024. As of September 30, 2024, the company held $163.2 million in cash and cash equivalent and six-month deposits, compared to $158.8 million as of June 30, 2024. The increase in cash and cash equivalent, including six-month time deposits, 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 $4.2 million in the third quarter of 2024, compared to $4 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. Of note, our mobile app subscription subscriber increased 17% year-over-year, reaching an all-time high of 977,000 by the end of the third quarter of this year. Our suite of beauty apps has once again shown its capability to offer both enjoyment and practical value to users, effectively turning them into paying subscribers. In total, our enterprise customer base had a net increase of 22 brand clients since the end of last quarter, achieving a total of 708 brand clients with over 806,000 SKUs for makeup, skincare, eyewear, watches, and jewelry products as of September 30, 2024. These represent a record for these metrics, showing the continuous increase in customer penetration and SKUs expansion. In the third quarter, Perfect Corp had 151 key customers compared to 151 in the second quarter of 24, demonstrating the stability of our enterprise business in this quarter. In the third quarter of 2024, the AI and AI cloud solution and mobile app subscription business continue to drive our growth. We also continue to focus on operational efficiencies and financial prudence, which saw a significant increase in adjusted net income of 20.6% year over year and adjusted net margin rate of 19.9%. Following up on recent quarters, We have been and will continue to invest in developing of AI technologies in order to strengthen our core capabilities. Our software is at the forefront of developing innovative Gen AI solutions that enhance user experiences and streamline operations within the beauty and fashion space. We anticipate growth as our cutting edge technology continues to attract new clients and expand our market reach both in assisting and new verticals. By prioritizing research and development in AI, We are well positioned to meet the evolving needs of our customers and capitalize on emerging opportunity in this beauty and fashion landscape. We believe that there are additional opportunities both within our B2B and B2C business. While the overall macroeconomic rebound has not been apparent, there are clear signs from the customer base which makes us feel optimistic about the future of Perfect Corp. Finally, our 2024 guidance for total revenue year-over-year growth will range from 12% to 14%. The forecast is based on company current assessment of the market and operational conditions. The management will closely monitor business progress and provide updates in order to offer better transparency to the market. That concludes my prepared remark. Operator, please open up the call for questions.

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 your question, simply press star 1 again. We advise you to please limit yourself to one question and one follow-up, and you're welcome to rejoin the queue if you wish to ask additional questions. Your first question comes from the line of Ashi Shah with ZDOT & Co. Ashi, your line is now open.

Thank you, management, for taking my question. Two questions here. One is on the revenue breakdowns side. I'm just wondering if management can share what is the growth for each segment within the AI solution Like what is the growth rate like for B2B versus B2C? I think that will be very helpful. And also another question is on the, I see you reiterated the full year guidance. So the revenue will be growing about 12 to 14% for this year. Just wondering if there are any thoughts on the growth rate into next year. Thank you.

Hi, Ashi. Nice talking to you again. So we can see the trend for this year. The B2C business is growing at a faster rate compared to the B2B. The metric you can see, for example, the key clients remain the same at 151. Those are mainly from the B2B side. So basically, as the market rebound, it seems taking a little bit more time. The main growth are coming from the B2C sector in this past quarter. The guidance for next year, we are working on that. So we are still working through client pipelines and with all different global sales teams. So we don't have yet a number to share with you at the current moment, but we're working on that and we expect to share that toward the end of the year for more visibility.

Okay, thank you, Luis.

Your next question comes from the line of Lisa Thompson with small cap research. Lisa, your line is now open.

Hi, everyone. Thanks so much for getting on here and telling us about your new product. Could you talk a little bit more about the desktop version you have of the mobile apps? I'd be interested to see how people are using that differently from the mobile and also Is that included when you buy a mobile app? You also get the desktop version? And I would think that that product would put you against different competitors. Could you talk about that also?

Hi, Lisa. This is Alice. Yes, this is a web-based. It's a new emerging solution in the market, and also we are starting to release it early this year. So we also see users not only using apps right now, but also using web browsers. So not only on the mobile screen, but also you can use the PC browser to do the same thing. So that is also the reason we jumped on it early this year, trying to developing and also adding more features just like our apps into the web. This is just like what I said, it's a very new using model from app to web. We see this will be a very good growing potential from the market. Of course, the competitors are different, but I would think for the mobile users to have the option to use both mobile and web, that will be a good solution for the future. You don't need to only on the app. Also, when you access the browser, you can use the same features at the same time, any place, anywhere. So this is a new usage model for the end user, consumer, and we're still focusing on photo and video creating, editing, enhancing, and beautification at the same time. just open up a new option for users, not only on app, but also on the web.

Hi, Lisa. And to echo a bit on that, the data we observe interesting is that the user base of the mobile app doesn't overlap too much to the web-based solution. So it seems that we are addressing a different type of TA in here. So your question whether this is a bundle, at the current moment, it is not. So the consumer who subscribe to the app is really looking for something that is mobile, that's very easy to use on a smaller screen. While a user who may want to spend more time, a little bit more professional or more amateur professional, they are using larger screen on their desktop, then they are opting into this. As all these computing are now moving more into the cloud with the AI and generative AI, it really doesn't matter if you're running on mobile or being just casual use case, or you want to spend really more time retouching your photo and video on a larger screen, we want to address both markets.

Great. So are they priced the same?

No, they are not. On the web-based, we feel that it's going to be more, as we said, credit-based. So it is a monthly subscription. You'd have various options on how much credit they want to consume per month. So they can subscribe and so their accounts get deposited a certain fixed number of credits. And depending on the complexity of the editing feature or creation feature they want to use with the data credit, they can always top up their account anytime if they want to use more. So the current two models are slightly different.

Okay. I imagine the objective is to get a much higher gross margin, right?

Yes, absolutely. So I think this is at the cost for running generative AI is certainly something to keep monitor on, right. So in order to provide a sustainable, you know, server infrastructure and offer that, that's why we are moving to a credit base. But I think most importantly, it's really addressing a larger group of audience. Just a note to share with you, for example, we noticed that on the desktop basis, we have a slightly higher percentage of male users compared to the mobile use case in the demographic. So I think this is really making our total addressable market slightly bigger, too.

Great. Thank you. Sounds good. Thank you so much.

Again, if you would like to ask a question, simply press star followed by the number one on your telephone keypad. Your next question comes from the line of Pat McCann with Noble Capital Markets. Pat, your line is now open.

Hey, thanks for taking my questions, and congrats on the solid quarter. My question had to do with Perfect GPT. I was wondering, because you mentioned that you think that in the future there's going to be a wide adoption of a beauty, an AI beauty assistant on brand websites and that sort of thing. And I was just wondering on how you're getting there. For example, I'm thinking about how on so many websites these days, you might run across a chat bot, an AI chat bot. I'm wondering, is that data related to the usage of assistance like that? Is that how you're coming up with... your perception that it's moving in that direction for a beauty AI assistant. I was just wondering if you could talk a little bit more about what's your confidence in the market opportunity there. And then I was just wondering on how the perfect GPT offering would sort of fit with your current B2B offering. Thanks.

Hi, Pat. I think what we've seen in the – in the beauty sector, right? So because the beauty is very personalized, so most of the time consumer has really a lot of questions and doubt about what product fits me better. So it's not just a generic product, it's really up to your skin type, up to your beauty style. So typically the brand, they have to train and hire a large team of beauty advisors, whether online or offline, today mostly offline in the shop, to give users a consultation, right? And that is really one of the pain points of the brands also getting either for them to grow bigger, to address a larger audience, because they just can't hire so many people to do this type of training and one-on-one consultation. So they're really eager to offer something smarter than traditional chatbots. So it's not just designed to like track my order, you know, asking, you know, when I'll get the order, how can I get refunds, these type of customer services. But it's much more about knowing my product, right? And we use AI to analyze your skin type, analyze your beauty style, your facial, you know, ratio and so forth. So I think this is where the demand and the potential come that each brand, they see that the consumer who comes to the website shop for product, the conversion rate isn't very high because of those doubts, right? And you can have many Q&A and any material, but it's just harder for consumers to to really spend so much time to dig into it, to read about it, and then walk away with the basket, with the product. So I think the AI, the perfect GPT, really comes to solve that problem for them to increase the user engagement. They are expected to see if they spend a lot more time in that engagement with the brand or with the AI assistant, and therefore build up the confidence to take the product home and try it on them. So this is kind of the new playground. I don't think it is the same as the traditional chatbot, which is mainly used more for customer services in a traditional way.

And let me comment a little bit more besides what Louis said. PerfectGPT, my view for the brand to be their online AI duty assistant, because not only the chatting, we integrate brands their own know-how, their own know-how for beauty into the AI training database for, you know, tracking. But we also integrate our AI solution, perfect AI solution for virtual trial, for skin analysis, for facial attributes analysis. So accordingly, While you are chatting, asking questions to the student assistant, we are also using our AI analysis to tell the user what's the best for them instead of just, you know, sending all the messages to them. And the brand already have a mega trial or scheme analysis on their brand side. They can directly integrate the perfect GPT together with our our virtual try-on and AI analysis, face analysis, skin analysis, all the tools together to provide users a real personalized recommendation, just like experts from beauty industry.

Great. And if I could ask one follow-up question to that, it would be, I guess, you know, like you mentioned, Louis, the pain point of having have the brands having people to help make these recommendations. It seems like if this could offer significant cost savings to brands, I'm wondering what would the implications be for what you can charge on these contracts by being able to save the brands? How significant could this be for your price point when you're negotiating these contracts with B2B clients?

I think we're still in the early days to understand the real full impact of these AI services, not only in beauty, but across all industries. And I think data is going to show us how really it's helping the brand on the cost-saving perspective or improving the sales process or customer satisfaction. So our approach is currently we're working very closely with key brands to train customers And because they want to make sure that they are really giving the user the experience that the luxury and the prestige brands they're all designed for. So I think this will see, as I said, on the proof of concept. So we do that at different scale in different markets to test the results. And I think based on that result, we have more confidence about how we can commercially benefit from these type of services. So I think the first is to create a quality of service. to make sure that things work properly and then really garner the data to make those business decisions next. Certainly, I think this is something that the brand would like to invest because it's harder and harder, again, to retain people and then to train them in the long term. And having something that works 24-7 all the time from the website or from the mobile app, I think it is a very compelling offer. Great. I appreciate it very much.

Again, if you would like to ask a question, please press star one on your telephone keypad. If you want to return a question, simply press star one again. As there are no further questions at this time, I'd like to hand the conference back over to the management 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 the next call. Goodbye.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.