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Edited Transcript of SY.OQ earnings conference call or presentation 29-Aug-19 12:00pm GMT

Q2 2019 So-Young International Inc Earnings Call

Aug 30, 2019 (Thomson StreetEvents) -- Edited Transcript of So-Young International Inc earnings conference call or presentation Thursday, August 29, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christian Arnell

Christensen IR - IR

* Min Yu

So-Young International Inc. - CFO

* Xing Jin

So-Young International Inc. - Co-Founder & CEO

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Conference Call Participants

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* Austin Moldow

Canaccord Genuity - Analyst

* Vincent Yu

Needham & Co. - Analyst

* Robert Cowell

86Ressearch - Analyst

* Brian Gong

Citi - Analyst

* Murphy Mang

- Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to the So-Young second-quarter 2019 earnings conference call. (Operator Instructions). I must advise this conference is being recorded today, August 29, 2019. I would now like to hand the conference over to your first speaker for today, Mr. Christian Arnell. Please go ahead, sir.

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Christian Arnell, Christensen IR - IR [2]

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Thank you. Hello, everyone, and thank you for joining us today. So-Young's second-quarter 2019 earnings release was distributed earlier today and is available on the IR website at IR. SoYoung.com as well as Global Newswire Services.

On the call from So-Young we have Mr. Xing Jin, Co-Founder and Chief Executive Officer; and Mr. Min Yu, Chief Financial Officer. They will both be available to answer your questions during the Q&A session that follows management's prepared remarks.

Before we begin I would like to remind you that this conference contains forward-looking statements within the meaning of Section 21e of the Securities Exchange Act of 1934 as amended and as defined the US Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as will, expect, anticipates, future, intends, plans, believes, estimates, targets, going forward, outlook and similar statements.

Such statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the Company's control, which may cause the Company's actual results, performance or achievements to differ materially from those in the forward-looking statements.

Further information regarding these and other risks, uncertainties or factors are included in the Company's filings with the US Securities and Exchange Commission. The Company does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise except as required under applicable law. It is now my pleasure to introduce Mr. Yu. Please go ahead.

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Min Yu, So-Young International Inc. - CFO [3]

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Thank you, Christian. And thank you, everyone, for joining us for our second-quarter 2019 earnings call. We delivered another strong quarter of results as our business continues to gain growth momentum and the operational efficiency improves.

Total revenues during the quarter were RMB285 million, an increase of 87.3% year-over-year and exceeding the high-end of our guidance range. Our focus right now is on expanding our user base both in quantity and quality by penetrating deeper into the medical aesthetics service industry, enriching our content offerings and improving the user experience.

Average mobile MAUs during the quarter grill significantly, increasing by 72.5% year-over-year to 2.47 million, while total number of purchasing users increased by 118.8% to 202,000. The aggregate value of medical aesthetic treatment transactions facilitated by our platform increased by 81.9% year-over-year to RMB893 million.

I believe this speaks strongly to the user experience we are able to offer and the unique value proposition, our transparent pricing reviews and service provider credentials, and the convenient access to comprehensive media content, social community and online reservation functions provide.

At the same time medical service providers are increasingly seeing how effective our unique value propositions of effective customer acquisitions, differentiated branding and the improved operating efficiencies are. The number of paying medical service providers on our platform increased by 39.4% year-over-year to 3,157, and the number of medical service providers subscribing to information services on our platform increased by 96.8% to 2,218.

We are striking a careful balance between increasing monetization of our services and enhancing the user experience, which is key to growing our user base. I'm extremely pleased with our progress so far. Our monetization initiatives are not impacting our user base or stickiness to our platform, which I believe reflects the value our platform provides to both users and medical service providers.

I'm fully convinced that the medical aesthetic treatment sector continues to generate substantial growth opportunities which I am confident we will capture and benefit from. With that let me now quickly go over our financials for the quarter. Please be reminded that all amounts quoted here will be in RMB. Please also refer to our earnings release for detailed information of our comparative financial performance on a year-over-year basis.

For the second quarter 2019, total revenues were RMB285 million, up 87% year-over-year. Within total revenues, information services revenues was RMB212 million, up 106% year-over-year. Reservation services revenue was RMB73 million, up 49% year-over-year. Cost of revenues were RMB50 million, up 136% year-over-year, due primarily to an increase in payroll costs associated with an increase in operational staff headcount and share-based compensation expenses.

Gross profit was RMB235 million, up 80% year-over-year. Gross margin decreased to 82.5% from 86.1% during the same period last year. Total operating expense were RMB225 million, up 83% year-over-year. Sales and marketing expenses were RMB106 million, up 19% year-over-year, due primarily to an increase in payroll costs and share-based compensation expenses. General and administrative expenses were RMB67 million, up 414% year-over-year, due primarily to an increase in payroll costs and share-based compensation expenses.

Research and development expenses were RMB52 million, up 148% year-over-year. This increase was primarily attributable to an increase in payroll costs associated with the expansion of our research and development teams which are focused on enhancing the experiences for users and medical services providers as well as share-based compensation expenses.

The share-based compensation expenses recognized in our cost of revenues and the above expense items during the second quarter of 2019 were RMB73 million in total. The expenses related to the new options granted to employees invested immediately upon the completion of IPO in May 2019 were RMB19 million. This amount was fully recognized in the second quarter of 2019.

Income from operations was RMB10 million compared with RMB8 million during the same periods last year. Non-GAAP income from operations was RMB83 million compared with RMB12 million for the second quarter of 2018.

Income tax expenses were RMB11 million compared with RMB1 million during the same period last year. The increase was primarily related to an increase in taxable income during the second quarter of 2019.

Net income was RMB29 million compared with RMB9 million during the same period last year. Non-GAAP net income was RMB102 million compared to RMB13 million during the same period last year. Basic and diluted earnings per ADS attributable to ordinary shareholders were RMB0.22 and RMB0.21 respectively, compared with a loss of RMB0.38 in the second quarter of 2018 for both.

Next, moving on to the balance sheet, as of June 30, 2019 we had total cash and cash equivalents, restricted cash and short-term investments of RMB2.68 billion compared with RMB1.201 billion as of December 31, 2018. The increase was primarily due to net proceeds from the Company's IPO in May 2019.

Now on to guidance. For the third quarter of 2019 we expect a total revenue to be between RMB280 million to RMB300 million, or USD40.82 to USD43.7 million, which represents an increase of 66.7% to 78.6% year-over-year. This forecast reflects the Company's current and preliminary views on the market and operational conditions which are subject to change.

Okay, this concludes our prepared remarks. I will now turn the call to the operator and open the call for Q&A. Operator, we are ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions). Austin Moldow.

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Austin Moldow, Canaccord Genuity - Analyst [2]

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Congrats on the quarter and thanks for taking some of my questions. My first one's on sales and marketing. Wonder if you could tell us what the marketing and user acquisition total spend was in Q2. And if you are able, I'd be interested in knowing more specifically what your split was between what you spent on branding and traffic acquisition in the quarter.

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Christian Arnell, Christensen IR - IR [3]

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One second as we translate for the CEO please.

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Austin Moldow, Canaccord Genuity - Analyst [4]

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Okay.

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Xing Jin, So-Young International Inc. - Co-Founder & CEO [5]

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(Interpreted) Okay, so we have RMB43 million being spent on sales and marketing cost in the second quarter of 2019. Within that RMB16 million was on payroll, the remaining RMB27 million is on customer acquisition. So, within the RMB27 million, major was on branding and around RMB[1.30] million is on like we are investing in app stores and the remaining was on branding.

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Austin Moldow, Canaccord Genuity - Analyst [6]

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Okay, great. And also I wanted to ask about mobile MAUs. The mobile MAU growth was really nice again this quarter. And I'm just wondering if you could talk through what you think has driven the acceleration to over 70% in the first half of this year from what was 40% through all of 2018. Is there anything in particular that is resonating with your audience?

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Min Yu, So-Young International Inc. - CFO [7]

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For customer acquisition, as you see, we didn't spend a lot of sales and marketing costs on forecasting acquisitions. The major change was we actually had a new version of our app being pushed to the public in April 2019, which is the beginning of the second quarter.

So, since then, our product has been very successful in terms of attracting and retaining our customers and our users. So, I think that's the major contributor for the increase of our MAUs and the quality of our users -- our product change and the improvement in the content offerings to users.

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Austin Moldow, Canaccord Genuity - Analyst [8]

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Got it. And my last question is on purchasing users, which also grew quite rapidly this quarter. From my point of view it looks like it was -- there was a pretty nice bump in newly acquired users. And wondering if there's anything to talk about in your marketing expense per new customer, maybe why that's been so efficient for you, if there's anything to call out there.

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Christian Arnell, Christensen IR - IR [9]

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Hey, Austin. I'm sorry, we had some audio difficulties there. Could you repeat your question quickly?

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Austin Moldow, Canaccord Genuity - Analyst [10]

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Sure. My question was on purchasing users which grew quite nicely. Wondering if you could talk through anything that's been helping your marketing efficiency for acquiring new customers.

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Min Yu, So-Young International Inc. - CFO [11]

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Yes, I think growing in terms of our purchasing user is actually accompanied with our growth in MAU. We do see some -- efficiency improvements in terms of converting MAU active users into purchasing users. And I think it's because of our operating and our community content actually assisting users to convert and help them to -- assist them to complete their decision-making process.

And the other thing is I think in June we have -- like our end use June campaign in -- I think started from June 6. It also actually helped the users to convert and purchasing services from our platform.

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Austin Moldow, Canaccord Genuity - Analyst [12]

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Great. Thank you very much and congrats again on the quarter.

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Operator [13]

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Natalie Wu.

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Unidentified Analyst [14]

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Thinks management for taking my question. This is (inaudible) representing Natalie Wu. So, we have one question on the Company's guidance. Can the management share more color on the guidance and its breakdown? And we would like to understand what is the top-line trend going forward in the long run? Thank you.

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Christian Arnell, Christensen IR - IR [15]

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Yes, I'm sorry, could you repeat the question again? We're having difficulty hearing.

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Unidentified Analyst [16]

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Sure. Can the management share more color on the guidance breakdown? And also we would like to understand what is the top-line trend going forward in the long run?

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Christian Arnell, Christensen IR - IR [17]

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One second as we translate please.

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Xing Jin, So-Young International Inc. - Co-Founder & CEO [18]

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(Interpreted) So, for a revenue breakdown I can only offer you the breakdown for the second quarter. I think the second quarter RMB285 million, within that RMB79 million was from -- RMB72 million is from commission. The remaining is from information service. As you can see, our information services has been growing faster than the commission-based revenue.

And your second question on the top-line trends going forward, I think currently our Company's key KPI and, of course, our main driver is on the penetration for medical aesthetic service industry in terms of the user base. And we need to -- in the short to medium run, we will balance between monetization and the customer experience. And in the long run I think we will start to monetize on the accumulated users and it will contribute to our top line in the longer run.

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Operator [19]

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Vincent Yu.

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Vincent Yu, Needham & Co. - Analyst [20]

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Congrats on the quarter and thanks for taking my questions. The first question is on [tightening] revenue. So we are seeing a tightening revenue -- sorry, information services revenue per service provider grow from around 77,000 to 96,000. So, what do we think about the potential? Like, what hallmark will we see about these revenues grow going forward?

My second question is on the reservation revenue on ARPU. How should we think about ARPU going forward?

And my third question is about competition. Will we see the impact of like, for example, (inaudible) 18 promotion to us? And what do we see our competition strategy in the future. (Spoken in foreign language).

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Christian Arnell, Christensen IR - IR [21]

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One second as we quickly discuss.

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Min Yu, So-Young International Inc. - CFO [22]

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Thanks for the question. And for the first question what's the long run or my focus to the average revenue from information services from individual service provider. I think historically we do see the trends growing from average consumption from individual service providers on (inaudible) stay with us longer they were spending more. I think going forward this trend will still be the general trend in the long run.

And your second question is seems like my ARPU from commission-based revenue is not very strong. The reason I think, first of all, from a consumer perspective, if they want to book a surgery-based services they usually need to pay like 20% down payment as a reservation fee.

And if the surgery or the high ARPU services, if you pay the reservation fees it's actually very expensive for an online transaction. And naturally users will book services at relatively lower ARPU services or SKUs.

And I think in the second quarter we do have some revenue contributed from our campaign event in June and usually we have provided the (inaudible) and it's been deducted from our top line from gross revenue to net revenue. So it will have some impact on the commission per purchasing user.

But in the long run I think for the consumer, in terms of if they want to consume more medical aesthetic services, and we do see the medical aesthetic services, especially for those injections for laser services, become cheaper and easy access for users. And it will also have certain an impact on the average ARPU we can generate from commission-based revenue.

For the third question about competition with (inaudible) and I think I would give the question to Mr. Jin, my CEO.

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Xing Jin, So-Young International Inc. - Co-Founder & CEO [23]

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(Interpreted) All right, I will try to translate. I think the competition since I think June, as [Vince] mentioned, being very competitive in the market, especially for those large traffic platforms like (inaudible), like Tmall, like [JD] and even [Baidu], they have their own designated medical aesthetics app -- individual app to compete directly with us.

So, all of that's been providing a much challenging market conditions or environment compared to before. And we need to face the challenges or competition really seriously. So, since the beginning of the year we have designed our strategy for the operation this year, we'll be major focus on customer acquisition.

And for customers, we think we need to use committee-based product like what we have currently to provide better content and to improve engagement with the users and the different parties of the industry, i.e. like doctors, clinics, consultants, even the (inaudible) on -- in the platform to better encourage them to communicate with each other and share the useful content with them and assist their decision-making.

So, although from the traffic point of view we are relatively in a weaker position in terms of competition compared to the large traffic platforms like (inaudible) and (inaudible). But they also in the relatively weaker position [commit to us] in terms of community content and the product, which is more informative for users to help them for decision-making.

So, we have some data analysis on our competitors during the same June campaign. The order size per order transaction value is relatively much smaller than what we have. It being approved that we -- in more convincing or dedicated platform of brand for customers to understand medical aesthetic services and make the right choice for some of the higher ARPU SKUs.

So, in -- I think in the long run we will be still focusing on customer acquisition. We have been -- spent like most of our Company resources in terms of teams or R&D resources in terms of improving our product, trying to improve engagement between users. And we have seen some of the good results from the traffic point of view.

And I think we are also planning to have faster user increase in the next few quarters. And going forward we will be still focusing on customer acquisition and the gap between the traffic with the large traffic platform and us will be smaller.

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Vincent Yu, Needham & Co. - Analyst [24]

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Thank you, management. Can I follow up with one more question?

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Christian Arnell, Christensen IR - IR [25]

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Sure, go ahead.

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Vincent Yu, Needham & Co. - Analyst [26]

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So, the last question around the phenomenon like what we see sometimes, users can read our diaries and watch our online like the doctor kind of Q&A. And then they probably will go to the off-line service provider and pay off-line. So, in Chinese like we call it (spoken in foreign language). Is there any way in the future we can try to deal with this kind of issue? Thanks.

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Min Yu, So-Young International Inc. - CFO [27]

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So Vince, may I just reconfirm the question with you? Because your voice was a little bit [break down] previously. So, you are asking if the users look at the information and without reserving through us and go directly off-line. Is that your question?

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Vincent Yu, Needham & Co. - Analyst [28]

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Yes, yes, so basically if they just try to utilize our information and they just book off-line. Is there any way we can manage the service provider to provide service through that that way and we skip paying out the commission fees?

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Min Yu, So-Young International Inc. - CFO [29]

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Yes, I think the commission in other ways like CPS-based on the transaction facilitated on the platform. And we still be very -- that's very important revenue for us for sure. But we think as a more efficient platform we would like to have I think from a service provider's point of view as well, they would like to get in contact with our user on the platform in an even earlier stage rather than just at a later decision-making stage for making a reservation.

And I think for other vertical platforms we have very similar business model with us. But in different sectors not a lot of platform actually offering reservations on sales or on Chinese CPS. But if they are efficient enough they will be more likely turning to other information services type like we are currently seeing.

So, it's been very natural for our information service [to] grow faster than our commission-based facilities. Because for us, our user -- every individual user on that platform is an important resource for our revenue to generate revenues to us. So, we do have some policies to try and convince users to revert to us and we also have some regulation policies or rules to regulate those service providers who should pay me under the contract -- pay me a commission under the development contract with us.

But going forward I would still see information services revenue will still grow faster than commission-based services -- commission-based revenue.

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Vincent Yu, Needham & Co. - Analyst [30]

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Got it, thanks a lot.

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Operator [31]

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Robert Cowell.

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Robert Cowell, 86Ressearch - Analyst [32]

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Congratulations on the really strong user growth. My questions are actually related to that. So first, what is your sense of the total MAU across all the platforms in this vertical? That's the first one.

And then the second one is would you consider increasing the sales and marketing in order to drive even faster user growth? Thank you.

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Min Yu, So-Young International Inc. - CFO [33]

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For your first question, how about other platforms like our vertical competitors, what is their MAU. To be frank, I'm not in a position to comment on that because there's -- some other third-party service providers can provide some of the guidance to the other platforms or our competitor's MAU. But I would be focused on our own strategy and our own MAU growth.

We do have some -- as I mentioned to the market earlier and you can see from historical numbers, we do have some seasonality in terms of sales and marketing spending. We usually spend more in the second and third quarter of the year and will spend relatively less in the first quarter and fourth quarter.

But this quarter, this second quarter seems we're not spending a lot [on] sales and marketing because we do feel our -- in the second quarter of 2019, our efficiencies in terms of acquiring customers being improved compared to the past year. The reason why I explained earlier, is because our major improvement in terms of the product and content we're offering to the general public and our users.

And in the third quarter, as the seasonality going on, we will prepare for the high seasons in the fourth quarter of the year. And we will invest more in terms of sales and marketing and trying to generate more users and let them get onto our platform and convert them into actual purchasing users in the next few quarters.

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Robert Cowell, 86Ressearch - Analyst [34]

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Maybe if I could ask a follow-up then. Do you have a target for in the longer-term how big you think your platform can be in terms of total MAU?

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Christian Arnell, Christensen IR - IR [35]

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One second as we translate quickly.

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Xing Jin, So-Young International Inc. - Co-Founder & CEO [36]

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(Interpreted) The Company only officially provide a forecast on the next three quarters' top-line range. For other numbers operating matrix forecast, we are not able to provide at the moment. But as you probably can monitor in some (inaudible), they will provide a reference point for you in terms of our traffic growth and user base. As I said earlier, our major goal for the long run is to try and get more users and, again, more penetration into the general medical aesthetic service consumer base.

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Robert Cowell, 86Ressearch - Analyst [37]

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Okay, got it. Thank you very much.

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Operator [38]

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Brian Gong.

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Brian Gong, Citi - Analyst [39]

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This is Brian Gong from Citi. Congratulations for the fantastic results. I just have one question. I know the Company is focusing on MAU growth right now. But just wondering if you can share with us yourself about what could be the other potential monetization opportunities in your view, except for our currency revenue results. Thanks.

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Christian Arnell, Christensen IR - IR [40]

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One second as we translate quickly.

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Min Yu, So-Young International Inc. - CFO [41]

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Thanks for the question. I think first of all it's a question we need to divide that into two parts. First, in terms of medical aesthetic services itself, we are currently operating -- generating most of our revenues from. We are working on a lot of -- working on testing a lot of monetizing strategies at the moment.

That will be -- the draw for that is to improve the matching efficiencies between our users and our service providers on the platform; i.e. we are doing very comprehensive user behavior analysis and labeling the different users' characteristics and features and matching -- and developing and matching the relevant product which can be -- better help service providers to get connect with the targeted users on the platform. And of course we will -- at the right time we will use -- we will monetize that kind of product.

For example, currently we have a video broadcast for video diagnosis on -- between consultants and our users on a platform. Although we are currently not monetizing on that. And also the private messages, etc., all these tools we provide to users -- or provide to service providers on the platform to get connected with users (inaudible) in a certain stage. Once the time is appropriate or our user base has been improved to the right size, then we will have more opportunity to test monetization from there. This is one perspective.

The other perspective is of course we will expand to other consumption healthcare fields. For example dental. This year we have dedicated a team working on the dental services. Although we are not aggressively monetizing on dental services this year. But going forward we think it will also contribute revenues and profits to our business and platform as a whole.

Other than dental, we are also are now testing something (inaudible) like skin -- skincare, ophthalmology, health checkup, etc., for those consumption healthcare clinics to get onto our platform. And we are also accumulating content and community content and product for users in these fields.

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Brian Gong, Citi - Analyst [42]

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Yes, fantastic. Thanks, thanks a lot.

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Operator [43]

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(Operator Instructions). [Murphy Mang].

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Murphy Mang, - Analyst [44]

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(Spoken in Chinese). I will translate my question. So, could you please give me more color on the revenue guidance of this year and also the margin? And any color on last year's revenue guidance would be better? Thank you.

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Min Yu, So-Young International Inc. - CFO [45]

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Thanks for the question. As a company we -- our company policy, we only provide the guidance for next quarter's top line with a range. And for other financial-related metrics we do not provide official guidance.

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Operator [46]

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(Operator Instructions). As there are no further questions at this time, I would like to hand the call back to Christian Arnell for any closing remarks.

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Christian Arnell, Christensen IR - IR [47]

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Thank you, everyone, for joining our call tonight. If you have any further questions or comments, please don't hesitate to reach out to anyone. This concludes the call. Have a good night.

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Operator [48]

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Thank you, sir. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

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Editor [49]

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Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.