Perfect Corp.

Hello, ladies and gentlemen. This conference will begin momentarily. Thank you. Good morning and good evening, ladies and gentlemen. Thank you for standing by and welcome to Perfect Corp's fourth quarter 2024 and full year 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. If you would like to withdraw your question, press star one again. And please limit yourself to one question and one follow-up. You can rejoin the queue again if you have more questions. We'll be hosting a question and answer session after the management's prepared remarks. Please know that today's event is being recorded. I will now turn the conference over to first speaker today, Mr. Jimmy Sha, IR director of the company. Please go ahead.

Thank you. Hello, everyone. Welcome to Perfect Corp's fourth quarter 2024 and full year 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 fourth quarter 2024 and full year 2024 financial results on our IR website or in the link 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 Harper statement in our earnings press release. This call may contain forward-looking statements regarding performance, anticipated plans, our original results, and our objectives. Forward-looking statements are based on management 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 members 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 CEO, Ms. Alice Chen.

Thank you, Jimmy, and welcome to PerfectCorp 2024 Fourth Quarter Earnings Call. Let me start by giving you some updates on our financials and our progress in product business development around the world in 2024. and share our view for the year of 2025. First of all, we completed the full year 2024 with a double digit growth in revenue as anticipated by our guidance. The total revenue grew by 12.5% year over year to $60.2 million. The bottom line net income for the same period was $5 million and the adjusted net income increased 18.6% to $8.3 million compared to 2023. This continuous increase in revenue and the positive net income is mainly due to strong growth within our mobile app subscription business under AIAR cloud solution business. For year 2024, our operating cash flow generated a net inflow of $13 million and our balance sheet remains very strong with over $165.9 million in cash in the cash equivalent. Our B2C mobile app business has maintained very strong growth with a number of active paying subscribers continuing to breach on-time records with over 1 million to end 2024. It is a 14.3 percent increase compared to 879,000 subscribers at the end of 2023. This sustained growth in paying subscribers, highlighting the ongoing global demand of AI-powered photo and video editing, creation, enhancing, and verification features appealing to all age groups and the regions. As we mentioned, we have seen positive momentum from our North American and the Western Europe markets, as well as developing markets in Brazil. Our UK mobile app suite continues to evolve with frequent updates and feature enhancements, powered by cutting-edge generative AI for image and video creation. Among the most popular innovations, our GenAI hair experiences have become a major hit within our user community. These features, including AI hairstyle, hair lengthening, hair wavy, hair volume, hair color, and more, provide ultra-realistic stimulus previews, transforming how consumers and the retailers make style decisions. Beyond hair transformation, our AI technology extends to other exciting innovations, such as the AI face swap, AI face expression, AI photo enhance, video enhance, and more. delivering next-level creativity and personalization to our growing user community. Beyond our mobile apps, we are also expanding our web-based generative AI solution with UCAM Online Editor. Consumers now can enjoy the latest AI innovation not only through their mobile apps, but also via a web browser on their laptops and PCs. ensuring a seamless and accessible experience across the platform. We are focused on harnessing the power of GenAI to deliver engaging new features from text, image, audio, and video. That is becoming an integral part of the premium subscription offering for our B2C users on app and on web. By integrating state-of-the-art models and algorithms, We aim to create immersive, personalized experience that go beyond traditional functionality, driving deeper user engagement and loyalty. Our strategy in B2C app and the web involves a continuous R&D to refine generative AI content model and enabling features such as AI enhancement in photo and video, as well as AI creation, personalized image and video. Through this relentless innovation, coupled with the robot user feedback and the deep data analytics, we strive to deliver subscription-based service that offer clear, tangible value, positioning us as a leading provider for cutting-edge image and video in AI solutions in consumer markets. Before I go to our B2B performance, I want to go over the recent acquisition of Wanna from Farfetch and its impact on PerfectCore. The transaction was completed in early January, and we anticipate spending the next 6 to 12 months similarly integrating Wanna into our team. Wanna's core competence gives us access to new markets and customers within luxury brands. where it offers virtual try-on services for shoes, handbags, scarves, and clothes. This acquisition perfectly aligns with our AI service offering to brand partners and will expand our total addressable market beyond our career reach. Together with PerfectCorp, we'll strengthen our competitive position in the beauty and the fashion space, leveraging our synergistic solution enhanced capabilities, and experienced team members. In our B2B business in 2024, we have prioritized deepening market penetration in skincare in the makeup segment. We reached over 732 brand clients with over 822,000 SKUs onboarded in our platform. We continue to make significant steps in expanding our portfolio with AI-powered skin diagnostics. Beyond core beauty and skincare brands, we have actively expanded into new markets and reaching aesthetic clinics, dermatology clinics, skincare centers, mass spots, and awareness centers, broadening our reach and impact to the industry. We continue to see strong demands in the skin diagnostics sector from brands retailers, clinics, and med spots. Our AI-powered skin analysis detects up to 15 major concerns in HD, providing personalized treatment and product recommendations tailored to each user's unique skin profile. The technology has enabled precise treatment measures, tracking progress with a before and after comparison to showcase improvements by combining advance diagnostics with data-driven insights. Our solution enhances client engagement, trust, and long-term loyalty in the evolving world of AI-driven skincare. Our Makeup Virtual Try-On solution remains as a global leader, delivering strong results for brand customers. We have secured key licenses renewal with top beauty conglomerates and retailers. proving our impact on boosting online engagement in e-commerce conversion rates. While the B2B sales cycle has its challenges, our pipeline remains strong and we remain focused on helping enterprise clients adopt AI-driven solutions to elevate consumer engagement and the digital experience. On the fashion tech side of our business, we continue to make strong progress in luxury fashion tech with luxury brands, particularly in watches and jewelry VTO. In January 2025, we acquired Walnut from Farfetch to accelerate our B2B growth with fashion brands and retailers. This strategic move expands our 3D VTO solution to shoes, baths, clothes, and scarves, enhancing digital shopping experience and reshaping how brands engage with customers in the era of AI-powered fashion retail. Additionally, our new web-based AI service, UCAM Online Editor Soft API, integrates GenAI technology for advanced image and video editing. While initially we designed for beauty and fashion professionals, it has gained traction across diverse industries. Significantly expanding our total addressable market, The SaaS API is simplified web and mobile app development, handling complex processing without requiring server maintenance from the clients. Its flexibility makes it suitable for businesses of all sizes, with new clients spanning convenience store chains, telecom carriers, and mobile phone companies. In conclusion, we achieved a solid business growth throughout 2024. highlighted by increased revenue, enhanced operational efficiency, and strong financial performance. We are confident that Perfect Corp is positioned strategically to capitalize on expanding market opportunities and sustain long-term growth by continuously developing new technologies and leveraging our leadership position in beauty and fashion space for our consumer from our app, web, as well as our B2B enterprise brand clients. Our strategy for long-term growth in 2025 and beyond focuses on deepening our presence in the beauty, fashion, and the skin segments and expanding into new segments, exploring cross-sale opportunities, broadening our product service offerings, strengthening of leadership accelerating revenue growth, and maximizing long-term shareholder value. Driven by the positive demand for both our mobile beauty app subscriptions and the enterprise SaaS solution, our outlook for the full year 2025 projects total revenue growth recognized under IFRS to range from 13% to 14.5% compared to the full year's 2024 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, Alice. Please note that all financial comparisons are on a year-over-year basis, and the reporting period is the fourth quarter of 2024 versus the comparable period in 2023, and are on top of the international financial reporting standard measures. We will also discuss non-IFRS measures to provide greater clarity on the trends in our operations. In the fourth quarter of 2024, our total revenue increased to $15.9 million from $14.1 million for the same period in 2023, representing a year-over-year increase of 12.4%. Full-year revenue increased 12.5% to $60.2 million in 2024, from 53.5 million in 2023. The growth came from the continuous growth of our AI and AR cloud solutions and mobile app subscription business. The AI AR cloud solution and subscription revenue grew 25.4% to $15.1 million compared to 12 million from the year ago period, which represent 95% of total revenue in this quarter. The growth is attributed to the continuous expansion of our mobile beauty app subscription and the positive momentum from our online skin diagnosis solution, as well as our virtual trial and business. Licensing revenue decreased by 72.2% in the fourth quarter of 2024 to 0.5 million, compared to 1.8 million during the same period of 2023. The licensing revenue will gradually become immaterial as it continues to be phased out and replaced by a better business model of recurring subscription revenue model. The gross profit for the fourth quarter of 2024 grew by 2.5% to $11.8 million with gross margin of 74.1% compared to 11.5 million and gross margin of 81.3% for the same period in 2023. Full-year gross profit was $46.9 million in 2024 and gross margin of 78% compared to 43.1 million in 2023 with growth margin of 80.6%. The decrease in growth margins was primarily due to the increase in third-party payment processing fee paid to digital distribution partners such as Google and Apple due to the increase in mobile app subscription revenue. The total operating expense for the fourth quarter of 24 decreased by 3.6% to $12.2 million compared to $12.7 million for the same period last year. The decrease was primarily due to the lower R&D expenses and G&A expenses in the fourth quarter of 24. Two-year operating expense increased 2.7% to $50.1 million in 24, compared to $48.8 million in 2023. This increase was mainly due to the increase in sales and marketing expenses, R&D expenses, and also offset by a decrease of G&A expenses. Going into more detail from operating expenses. The sales marketing expense for the fourth quarter of 24 were $6.9 million compared to $6.7 million during the same period of 2023, an increase of 3.6%. The full-year sales and marketing expense increased 9.7% to $28.2 million in 24 compared to $25.7 million in 2023. These increases were largely due to increase in marketing events, advertising costs related to mobile apps, and cloud computing costs. Research and development expenses were $2.8 million for the fourth quarter of 2024, compared to $3 million during the same period of 2023, a decrease of 8.3%. The decrease was from the streamlining certain R&D process and benefiting from expense savings. Full-year R&D expense increased 4.7% to $12 million for 2024, compared to $11.5 million in 2023. This increase resulted from an increase in R&D headcount and related personnel costs. General and administrative expenses decreased by 41% to $1.8 million for the fourth quarter of 2024, compared to $3 million during the same period of 2023. Four-year G&A expenses decreased by 26.6% to $8.5 million, compared to 11.6% in 2023. The decrease were mainly due to the increased operational efficiency as we march into the third year mark of the listing on NYSE. Net income was $1.1 million for the fourth quarter of 2024 compared to the net income of $1.4 million during the same period of 2023. Full year net income was $5 million for 2024 compared to $5.4 million in 2023. The positive net income was supported by continued revenue growth and effective cost control. This result represents a net margin net income margin of 8.3% for the full year 2024. Excluding non-cash share-based compensation, non-cash valuation gain and loss of financial liabilities, the adjusted net income was $2.3 million for the fourth quarter of 2024 compared to the adjusted net income of $2.1 million in the same period in 2023, an increase of 8.2%. Full year adjusted net income was $8.3 million in 2024 compared to 7 million in 2023, an increase of 18.6%. These represent an adjusted net margin of 13.8% for the full year 2024. As of December 31st of 2024, the company held 165.9 million in cash and cash equivalent in six months deposits, compared to 163.2 million as of December 30th, 2024. We had a positive operating cash flow of $3.3 million in the fourth quarter of 2024 compared to $3.1 million during the same period of 2023. For the full year, operating cash flow was $13 million in 2024 compared to $13.6 million in 2023. The positive cash flow demonstrates the company's continuing ability to generate continuous cash flow to support its business operations and growth strategy. On the mobile app side and business metrics, the mobile app subscription business was growing, and the active subscriber increased to 14.3% year-over-year, reaching an all-time high of over 1 million by end of 2024. Our UCAM Suite of Beauty app has demonstrated its ability to provide both enjoyment and value to users, successfully converting them into paying subscribers. Our enterprise customer base had a net increase of 24 brand clients, since the end of last quarter, achieving a total of 732 brand clients with over 822,000 SKUs for makeup, skincare, eyewear, watches, and jewelry products as of end of last year. The further expansion of these metrics highlights the ongoing growth in the customer penetration and SKU expansion. In the fourth quarter, Perfect Core stayed at the 151 key customers the same as the end of the previous quarter, demonstrating the stability of our enterprise business in this quarter. In summary, in the fourth quarter of 2024, AI and AR cloud solution and mobile app subscription business continue to drive our growth. Throughout the year, we remain focused on operational efficiencies and financial discipline, resulting in an 18.6% year-over-year in full-year adjusted net income and adjusted net margin rate of 13.8%. As mentioned by Alice, we will continue to invest in the growth of our business through the development of AI technologies, both organically and through MMA opportunities to strengthen our core competencies, our commitment to advancing GN AI position, position us as an industry leader, empowering our consumers and enterprise clients with tools that outperform current solutions and redefine what's possible in user engagement and personalized services. Our purchase of Warner from Farfetch significantly enhanced perfect core market reach, allowing us to tap into new customer segments and geographies that were previously out of scope. By integrating one established customer base, product offerings, and distribution channels, we can rapidly expand our footprint and drive growth across untapped markets. Additionally, these transactions strengthen our competitive positioning by broadening our product portfolio, increase brand visibility, and position us to better serve a wider range of industries. We are excited about the opportunities that are ahead of our B2C and B2B business line, but continue to invest in AI innovation, expanding our market presence, and building on our strong foundation. We are confident that we will sustain growth well into the future. Finally, our 2025 guidance for total revenue year-over-year growth will range from 13% to 14.5%. This forecast is based on company current assessment of the market and operational conditions. and management will closely monitor business progress and product updates in order to better offer transparency to the market. With 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'd like to ask a question during this time, you can press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. And again, please limit yourself to one question and one follow-up. And your first question comes from the line of Pat McCann with Noble. Please go ahead.

Hey, thanks for taking my question. I was wondering, you know, I noticed, you know, certainly you highlighted the growth in the brand clients. And my question had to do with the B2B side of the house. I'm wondering what the situation is with your enterprise clients as far as uh their ability to potentially start to spend more money on services such as yours what's the situation with the b2b especially given that it has the higher margins and will that would you anticipate a return to growth there in 2025? What should we look for there? And then I guess sort of the follow-up to that would be, how does the B2B revenue play into your 13 to 14.5% growth guidance for 2025?

Thank you, Pat. So the B2B market, I would say, still remains challenging. Last year, certainly on the previous year, we had challenges from inflation and cost. Most recently, we started hearing clients certainly worry about potential tariffs that may come later in the year. So they are certainly cautious to understand what exactly will be the impact to their financials that may turn their spending plans. So the pipeline remains very solid. The interest from the B2B brands are still there. You know, they are investing. They want to be more digital. This is where we play the role. However, we understand that, you know, they are not yet ready to write a big check. So we see that the renewal rate for the business continues to be healthy. So they will continue to use what they're already using. But the expansion to have a more accelerated growth, I think it still remains to be proven. And we've been vigilant about the market and how the world economy will play. And this certainly may affect their cost structure from that perspective. But the good news is we are spending our time right into newer markets. So our total addressable, whether it's client groups or it's market, geography is spending, again, partially because of the one acquisition as we are spending into newer categories that we were not previously present or only started to, you know, get into the market, and that potentially can contribute in the growth. The guidance that we have provided certainly is based on current visibility. We didn't want to just have a big talk and have it overly optimistic without seeing the markets moving. So we are cautiously optimistic about that since there's no real competition in the segment that we are. We remain a solid leader in this space. So I believe that once the market opens and probably bounce with a stronger consumption, it might drive more revenue in there. The total guidance for 2025, we expect that the B2C revenue is growing faster than the B2B continuously for the last year or two. So we expect that the B2B revenue may be somewhere between 30% to 40% of the total revenue in this year pursuant to our guidance model. Great, thank you.

And your next question comes from the line of Lisa Thompson with Zacks Investment Research. Lisa, please go ahead.

Oh, hi. Let me just follow up on your last answer. If you're thinking that next year B2B is going to be 30% to 40%, what was it last year?

So last year I see was 40%-ish. We are finishing our auditing with the audit service. So the B2C part has become the bigger part of the whole business in 2024.

And in looking at what your kind of earnings plan is for the year, Do you think that you're going to be able to reduce operating expenses to keep in line with the reduction in gross margin because of that and then come out kind of the same as you did last year?

I think we are still investing, and I think we're still at a relatively smaller scale to stop investing. So I think the opportunity is quite big there. The expenses in the net income is positive. They're operating well. income is virtually almost break-even. So that's not really our key concerns, especially with the capital that we have to invest in the growth. I think now with expansion into newer categories, coming out with new products, especially in AI innovation, we will continue to invest. Nothing that will increase any significant differences between what our expense model has been in the previous few years. So in a nutshell, I think we will try to run the model with financial discipline to make sure that it's not creating financial pressures, but at the same time, continue to invest in AI development research and growing the R&D team.

Candice, I just have one question on Juana. Can you talk about that landscape as far as competition? I know you dominate beauty. What does it look like in the fashion landscape?

Yeah, so WANA has certainly been the leader in the fashion space. They have more than two dozen big logos, big names, such as Valentino, Valenciaga, Louis Vuitton, Gucci, and more. So I think there's not really much competition after we acquire WANA. So after the integration, we really become the AI, AR powerhouse for fashion and beauty virtual trial market. There may be a few other smaller startups that are you know, in the shoes market or only doing, you know, certain watches market, but not in the scale and reach that can compete with us. So I think the strategic merger really created opportunity to become the one shop for the luxury brands, especially for the top luxury brands. They rely on global teams. They rely on bigger, more established organization to provide services to them. And I think Walnut was part of the Farfetch, which is, again, it's a great company, great group. And now part of Perfect Corp, a more established global leader in technology, we are confident that we can give, you know, extra runway for this business to grow and really become a dominant player across both beauty and fashion.

Great. Thank you for those answers.

Again, if you'd like to ask a question, simply press star followed by the number one on your telephone keypad. And your next question comes from the line of Ashi Shah with Sidoti. Ashi, please go ahead.

Great. Thank you so much for taking my question and congrats on a very solid fourth quarter results. I have one of the questions regarding gross margin. Gross margin declined six percentage quarter over quarter. I understand the year over year decline because the B2C part is higher, but like the B2C business is more. But why did we see a six percentage decline quarter over quarter. And like, if you can just give us what the key drivers behind this compression.

So, um, so I think the, the full quarter, uh, you know, the, the good news is the B2C was growing at a faster pace than we expected. So the overall revenue contribution from B2C versus B2B in the fourth quarter, uh, was, uh, much higher than we expected. And that's how. the overall growth margin has a bigger dip. I think it's not expected, it was not expected, but I think it's really more maybe a one-time thing because the fourth quarter, the shopping season was driving in a good sale, you know, where the people getting new smartphones or they are downloading new apps or they are subscribing new apps. We have seen this pattern typically, you know, in our seasonality patterns, The quarter four will have that impact because the B2C is bigger. Just this year, it was a lot more bigger and growing faster than we expected. On the other hand, B2B continues to be challenging in quarter four. So the revenue contribution from B2B was slightly lower than we expected. That also contributed to the drop in the gross margin. For the 2025 full year, I think we expect that that may gradually come up slightly.

Okay, but it does not go back to 2023 levels.

Correct, correct. Yeah, I think in 2023, our B2B business was about half of the total business. I think for this year, as I said earlier, we expect the B2B business to be more challenging. And if the B2C continues to grow really quick, fast, and the B2B contribution may drop to, let's say, 30% or maybe over 30%.

Right. Okay. And just another question relating to the acquisition, like if you can give us the timeline for the full integration and also regarding the revenue split, like you said that revenue growth, like the revenue guidance for is 13 to 14.5%. If you can just break down how much of that growth is expected to come from the acquisition and how much is the organic growth?

So the deal just closed like 40, 45 days ago. So the team is going through extensive integration work across all different departments. So we expect that to continue to happen in the first half of the year, meaning that the go-to-market together as one team, as one platform will happen later in the year. And with that, again, we've tried to do as soon as we can from a sales marketing perspective, from product development, from customer service, customer success. So if we are able to move very quickly on this, the revenue, maybe the contribution of that new acquisition might come in earlier or in more meaningful way in this year. The guidance that we are given, then we started with a quite conservative look into what the business are as is and how that contributes. Again, one is a smaller startup, right? They are about 30 employees. they have good grain clients like 20, 20 plus. In contrast, we have like 700, right? So that gives you a perspective about the size of the acquisition. So it's not going to have a tremendous change overnight, but it's much more the new value that we can unlock after the integration is done. And then gradually as this process march toward and we may adjust our guidance depending on the market.

Great. Just one more if we have the time. Strategically, where do you see increasing your investment going into the new year to take advantage of that option of AI? Where are your top investment priorities from an incremental dollar perspective?

AI is especially generated by AI. It's all our focus right now from R&D side. So you can see the evolving of a new AI model every month is excited and recently the open model to the to the world. So I think this is a great opportunity for you know the application services on top of this big big models. So by saying that R&D no matter is headcount or Some of the server training, GPU, all these things are the main focus. Of course, digital marketing is still important, especially for B2C. If not buying apps, then all the effort we put is in digital marketing to attract all the worldwide app users to come to us. So AI is the home focus of R&D this year. I think it's for the next 5 to 10 years, but the speed of investment I can see is fast and because the whole ecosystem evolves so fast. We'll pay very high attention to the market and recent recent development of the market. I think there's a very, very pro to service providers like us.

Thank you.

And our next question, again, from Lisa Thompson with Sachs Investment Research. Lisa, please go ahead.

Hi. I just wanted to ask again about whatever happened to AI Assistant, and if you think that's going to be a big driver for your mobile apps. Talk about where you are with that.

Thank you. Yeah. AI Assistant is the one we are developing. I think the last second half of last year, we tried to branch them into B2B for the brand to use and the B2C. For B2C, there's AI assistant, agent, co-pilot. We will launch that in our app before second quarter of this year. to try the market. I think that's the future. Everybody needs it. And it's a, you know, pay by service kind of a business model. And for B2B brands, we have, you know, we have a perfect GPT and now ready for POC. We did have brands doing POC, trying to doing POC with us. And again, brands, their movement to this new AI, especially generative AI, the speed is not as fast. So we saw POC may start before end of this year when testing, doing validation. B2C part will be faster. We will make the same agent, beauty agents, editing agents to our apps before second half of this year.

Great, I look forward to that. Thank you so much.

Thank you.

As there are no further questions at this time, I'd like to hand the conference back over to Mr. Jimmy Shea. Jimmy?

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 to everyone again in our next call. Goodbye.

This concludes today's conference call. Thank you all for joining. You may now disconnect.