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Edited Transcript of 1357.HK earnings conference call or presentation 26-Aug-19 11:30am GMT

Half Year 2019 Meitu Inc Earnings Call

XIAMEN Sep 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Meitu Inc earnings conference call or presentation Monday, August 26, 2019 at 11:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* King Leung Ngan

Meitu, Inc. - CFO & Joint Company Secretary

* Wen Sheng Cai

Meitu, Inc. - Executive Chairman

* Zeyuan Wu

Meitu, Inc. - CEO & Executive Director

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Conference Call Participants

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* Robert W. Cowell

86Research Limited - Analyst

* Thomas Chong

Jefferies LLC, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Hello, and welcome to the Meitu Inc. 2019 Interim Results Analyst Conference Call. (Operator Instructions) Please note, this call is being recorded. Today, I'm pleased to present [Yohanah Chin]. Please begin your meeting.

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King Leung Ngan, Meitu, Inc. - CFO & Joint Company Secretary [2]

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Hi, this is actually the CFO, Gary, and welcome, everyone, to the Meitu first half of 2019 earnings conference call. Today, we have with us the Mr. Cai, the Chairman of the Board; the CEO, Mr.

(technical difficulty)

Gary, Chief Financial Officer. And now I'll pass the call to Mr. Cai for some opening comments. He will present in Chinese and then followed by an English translation.

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Wen Sheng Cai, Meitu, Inc. - Executive Chairman [3]

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Okay. (foreign language)

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King Leung Ngan, Meitu, Inc. - CFO & Joint Company Secretary [4]

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[Interpreted] Thank you very much for everyone attending today's analyst call. In the first half of 2019, Meitu is still in the process of a strategic adjustment, but we have already achieved some interim results, which we think is very encouraging.

First of all, our total MAU has already resumed to the growth trajectory as we saw that in June 2019, our MAU is -- was higher than December 2018 by 0.6%. The social transformation of the Meitu app is also doing very good. Not only we have a pretty solid user growth, the time spent per user on a daily basis has also grew over 100% compared to when it is a pure utility app. And subsequent to June, it's also showing a very positive growing trend in terms of the time spent.

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Wen Sheng Cai, Meitu, Inc. - Executive Chairman [5]

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Okay. (foreign language)

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King Leung Ngan, Meitu, Inc. - CFO & Joint Company Secretary [6]

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[Interpreted] In terms of monetization, we have not only achieved 27% year-on-year growth in our core advertising business, in overseas market, we have also started a premium subscription model, which was very successful and has become one of the fastest-growing subsegment under the IVAS segment. In terms of overall financial, in the first half of 2019, our adjusted net loss has narrowed significantly, lowered compared to last year, the loss was 41.4% less, which is within our expectation.

Facing the global uncertainty in terms of the macro environment, we are going to focus our resources in the highest projects that gives us the best return on investments, so that we can create long-term value for our shareholders.

Now I'd like to ask our Chief Executive Officer, Wu Xinhong, to share the operation (inaudible).

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Zeyuan Wu, Meitu, Inc. - CEO & Executive Director [7]

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(foreign language)

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King Leung Ngan, Meitu, Inc. - CFO & Joint Company Secretary [8]

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[Interpreted] Thank you, chairman. Welcome, everyone, again, to the -- attend this conference call. In June 2019, the total MAU of Meitu's portfolio was CNY 308 million, which is 0.6% higher than the CNY 306 million MAU in December 2018. Since April 2019, our company's MAU has been rising every month. We believe that is a strong signal that our MAU has already resumed to a growth trajectory, within which BeautyPlus, which is our overseas product; and our core product, the Meitu app, were the 2 major driver for such growth.

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Zeyuan Wu, Meitu, Inc. - CEO & Executive Director [9]

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(foreign language)

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King Leung Ngan, Meitu, Inc. - CFO & Joint Company Secretary [10]

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[Interpreted] Although the MAU of BeautyCam and Meipai has been declining, we know that the MAU of BeautyCam, the decline has already decelerated substantially. And since April this year, BeautyCam's MAU has already been increasing every month. And in terms of Meipai, the MAU decline is the highest among all portfolio, but as the social transformation of the Meitu app continues, the position of Meipai is also going to change and it will become part of Meitu app's ecosystem.

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Zeyuan Wu, Meitu, Inc. - CEO & Executive Director [11]

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(foreign language)

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King Leung Ngan, Meitu, Inc. - CFO & Joint Company Secretary [12]

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[Interpreted] Onto the social transformation of the Meitu app. This has been one of the (inaudible) highlights since (inaudible) 2018. In the first half of 2019, we believe that the transformation has achieved some good interim results and has laid down a very solid foundation. First of all, the monthly active users of the social Meitu app in June has reached 60 million and the daily time spent of the social user has reached about 12 minutes in June, which compares to about 5 to 6 minutes. When Meitu app was a pure utility app, it represented about over a 100% growth. And the time spent in July and August has still been growing.

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Zeyuan Wu, Meitu, Inc. - CEO & Executive Director [13]

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(foreign language)

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King Leung Ngan, Meitu, Inc. - CFO & Joint Company Secretary [14]

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[Interpreted] So from the content creation point of view, in June, every day users has been uploading about 780,000 photos and video combined on a daily basis, which represent about 550% growth compared to end of 2018. Although the content of the Meitu social platform right now is still -- majority is coming from photos, we have seen the proportion of video content has been increasing. So from a pretty low percentage in 2018, to about 11% in June 2019.

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Zeyuan Wu, Meitu, Inc. - CEO & Executive Director [15]

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(foreign language)

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King Leung Ngan, Meitu, Inc. - CFO & Joint Company Secretary [16]

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[Interpreted] Going forward, our Meitu app will also have more social features. For example, currently, we are beta testing the private album functionality. This private album not only enables user to manage their cloud album much more effectively, but also they can invite their close friends to manage the album together and also interact together within this private album. We believe this initiatives will continue to increase the user engagement of the Meitu app and also bring more user growth.

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Zeyuan Wu, Meitu, Inc. - CEO & Executive Director [17]

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(foreign language)

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King Leung Ngan, Meitu, Inc. - CFO & Joint Company Secretary [18]

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[Interpreted] So in our overseas business, not only we have achieved some very good growth in terms of user, we have also successfully found a new monetization model, which is the premium subscription. To simply put, the premium subscription means that user can unlock certain VIP functionality, such as some unique filters or AR filters that has IPs, such as Hello Kitty or Astro Boy and all they need to do is to pay a subscription fee. And this particular business has been growing very, very rapidly in the first half of 2019. Compared to the same period last year, it has grown over 600% and it has become one of the very meaningful subset within the Internet value-added services.

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Zeyuan Wu, Meitu, Inc. - CEO & Executive Director [19]

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(foreign language)

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King Leung Ngan, Meitu, Inc. - CFO & Joint Company Secretary [20]

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[Interpreted] So in terms of smart hardware, the first cooperation phone with Xiaomi, the Xiaomi CC9 Meitu Special Edition has been successfully launched in July this year. And this particular product has received a pretty good comment from both user and professional review agencies. Apart from smartphones, our smart hardware department right now is focusing on searching for these skin-related smart hardware and putting some experimental efforts in it. Our long-term vision is that we can help user to become more scientific in terms of skin care and become more beautiful in real life through Meitu's strong computer vision ability, the data analytics, and also the understanding of beauty.

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Zeyuan Wu, Meitu, Inc. - CEO & Executive Director [21]

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(foreign language)

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King Leung Ngan, Meitu, Inc. - CFO & Joint Company Secretary [22]

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So let me take over and talk a little bit about the financial situations. In the first half of 2019, the most important change to our financial or P&L is that we have classified the smart hardware as a discontinued business, which means the revenue and associated costs and expenses of the smartphone business will not be consolidated as up -- and instead, it will be summarized with one line at the bottom of the P&L.

So in the first half of 2019, the overall revenue is RMB 464 million, about 4.5% less year-on-year, within which online advertising is the largest segment, reaching about RMB 362 million. This business has grown 27% year-on-year.

Although the sign from the second quarter this year on the global economic or global macro situation has a little bit more uncertainty, we know that our second quarter online advertising revenue actually still have a single-digit quarter-on-quarter growth compared to first quarter.

In terms of IVAS, in the first half of 2019, the revenue is approximately RMB 100 million, down about 50% year-on-year. If we analyze this segment a little bit more, which we can see that the major decline is coming from the decline of the live streaming business of Meipai, and that is because the -- this business is highly correlated with Meipai's user. And we have already discussed that Meipai's user has been declining in the first half of 2019.

But if we look closer to this segment, as we have mentioned, the premium subscription growth has grown very substantially, and we think that given this great initial success, we are going to focus more of our resource to work with great IPs globally, so that we can try to grow this business by providing user with more IP-branded filters going forward.

And as we said, in terms of the smart hardware, the Xiaomi CC9 Meitu Special Edition, was launched in July this year. So in the first half of 2019, such revenue has not been reflected in our financials. And we can see that after taking away the smartphone revenue, there is still a little bit of smart hardware revenues within this segment. As we have mentioned, Meitu is currently still in the exploration stage of beauty-related smart hardware. So we do not expect this segment will have a very large revenue contribution in the short term. But we believe that powering user to become more beautiful in real life is an area that warrants more exploration, and we believe that with our large user base, our data and our understanding of beauty, we will eventually be able to get some achievement within this segment.

So moving on to gross profit. In the first half of 2019, our gross profit is RMB 308 million, growing 28% year-on-year. The gross margin was 66.4% in the first half of 2019 compared to 49.3% in the first half of 2018. The gross margin expansion in the first half of 2019 is mainly because the high-margin advertising business is -- represented higher percentage of total revenues compared to the Internet value-added services, which carries a lower gross margin.

And in terms of sales and marketing expenses, the first half of 2019, it was about RMB 170 million, which is significantly less by 38% year-on-year compared to last year.

The most important reason behind that was because we have adjusted our user growth strategy, which focusing more on the product itself as opposed to trying to spend on user acquisition costs. And we have previously mentioned that the June MAU is actually higher than the December MAU last year. So you can see that on the back -- against the backdrop of a reduced sales and marketing, we are still able to grow our user base, which means that we have achieved some success within this new user-growth strategy.

In terms of our R&D and G&A expenses, the first half of 2019 is relatively stable year-on-year. The fluctuation is within 3%. As we always mentioned, the R&D and G&A as mostly personnel expenses related, so we are not going to expand much on that. If investors and analysts have question, we can answer that in the Q&A session.

So moving towards the adjusted net loss. The first half of 2019 was RMB 172 million, which is 41% less than last year RMB 293 million. And the 2 main reasons for this narrowing of losses was because the Internet revenue growth and also a very effective cost control. And currently, while we expect that the full year of 2019, we are still going to make a loss, we believe this loss will be significantly less than the full year of 2018.

And finally, in terms of cash, we have a very strong balance sheet. At June 30, 2019, we have about RMB 2.55 billion of cash and -- which is very -- which can support our daily operation very smoothly. So in the short term, we are not going to have any capital-raising events.

So that's all the prepared remarks that we have. And we can now open up the floor for Q&A. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Robert Cowell from 86Research.

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Robert W. Cowell, 86Research Limited - Analyst [2]

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Congratulations on the return to growth of the MAU and also strong time spent data on the Meitu app. I'm interested in how we are thinking about the user experience going forward? Because we have now 2 key functions for the Meitu app. One is photo editing and the other is social. How are we balancing those 2? And where do you see the user experience going in the future? And then also, if you could provide any color on the usage of those core photo editing app? How that is evolving as social becomes a more important part of the experience?

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King Leung Ngan, Meitu, Inc. - CFO & Joint Company Secretary [3]

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Okay. Hold on, let me just translate that question.

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Zeyuan Wu, Meitu, Inc. - CEO & Executive Director [4]

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(foreign language)

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King Leung Ngan, Meitu, Inc. - CFO & Joint Company Secretary [5]

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[Interpreted] So from the strategic point of view, the utility now is being positioned to surface the social function. So going forward, I think the innovation on the utility part is actually going to drive more social usage. To give an example, as you can see that the video sharing is growing in the Meitu app. So in the future, there will be more video editing functionality in the Meitu app to support the growth of the video sharing and the social feature.

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Zeyuan Wu, Meitu, Inc. - CEO & Executive Director [6]

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(foreign language)

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King Leung Ngan, Meitu, Inc. - CFO & Joint Company Secretary [7]

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[Interpreted] So as from the social transformation, since October -- September-October last year, we have seen data for both utilities and social in terms of user engagement growing. And we also have discovered that a lot of user, they directly share their photos after they edit it with our utility. So this means that we are slowly building up the user trajectory of the -- look of edited photo and they share it on the social platform. So we believe this user trajectory -- usage trajectory is trying to take the floor.

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Operator [8]

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(Operator Instructions) The next question is from Thomas Chong at Jefferies.

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Thomas Chong, Jefferies LLC, Research Division - Equity Analyst [9]

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I have a question about the advertising revenue trends. Given the backdrop of macro headwinds and we see a solid momentum in the first half, how should we think about the trend as we go into the second half and 2020? And my second question is about the premium subscription revenue growth, can you share about how we should think about the second half and 2020?

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King Leung Ngan, Meitu, Inc. - CFO & Joint Company Secretary [10]

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Sure. So in terms of advertising, obviously, because of the global uncertainty, we don't have a very strong visibility beyond Q3. Right now as we saw in Q3, it's still going to be a positive growth against Q2. But in Q4, I think, this visibility dropped a lot. I'm not saying that it's going to be worse, but it's just that we haven't really seen much preorder coming in, but that was -- that has always been the case for our business. Right now most of our advertising orders does not make a full year commitment and things like that. So we'll just have to see how that unfolds.

But what we want to note here is that our advertising portfolio is actually quite diverse, and if you look at the first half momentum, a lot of those is actually driven by programmatic advertising. Obviously, [KE] has still the largest contribution, but programmatic advertising has also grown quite a lot. And also, overseas advertising is slowly growing as well. So I think, our advertising portfolio is quite diverse, and this could be one of the points that would stand such macro uncertainty.

And in terms of the subscription, premium subscription model, I think what we can tell you is that the growth has been very strong in the first half. So to give you a sense, like in December, the revenue was few hundred thousand RMB and in July, it's been like RMB 8 million and every month it has been growing. So right now it's too early to call what is the peak or -- like the trend is still very, very strong. So we don't really know how to put our a finger for the -- or put a figure for the second half, but I think, we can expect the growth to be strong in the second half.

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Operator [11]

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(Operator Instructions) Well, there are no questions on the line at the moment, I will return the conference back to the management.

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King Leung Ngan, Meitu, Inc. - CFO & Joint Company Secretary [12]

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Okay. So thank you, once again, for dialing into our analysts briefing call, and if you have further questions, feel free to e-mail our IR team at ir@meitu.com, and we'll respond to you at our convenience. Thank you very much, once again.

Goodbye.

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Zeyuan Wu, Meitu, Inc. - CEO & Executive Director [13]

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Thank you.

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Operator [14]

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This now concludes our presentation. Thank you all for attending. You may now disconnect.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]