Q3 2023 So-Young International Inc Earnings Call
Participants
Vivian Xu; Investor Relations; So-Young International Inc
Xing Jin; Co-Founder, Chairman, and CEO; So-Young International Inc
Nick Zhao; CFO; So-Young International Inc
Thomas Chong; Analyst; Jefferies
Nelson Cheung; Analyst; Citi
Chloe Wei; Analyst; China International Capital Corporation Limited
Presentation
Operator
Ladies and gentlemen, thank you for standing by for So-Young's Third Quarter 2023 Earnings Conference Call. (Operator Instructions)
As a reminder, today's conference call is being recorded. I would now like to turn the meeting over to your host for today's call, Miss Vivian Xu. Please proceed Miss Xu.
Vivian Xu
Thank you, operator and thank you, everyone, for joining So-Young third-quarter 2023 earnings conference call. Joining me today on the call is Mr. Xing Jin, our Co-Founder, Chairman, and CEO, and Mr. Nick Zhao, CFO.
Please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities and Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to those outlined in our public filings with the SEC, including our annual report on Form 20-F. So-Young does not undertake any obligation to update any forward-looking statement except as required under applicable law.
At this time, I would like to turn the call over to Mr. Xing Jin. Yes, please?
Xing Jin
(spoken in Mandarin)
Hello, everyone. Thank you for joining So-Young third quarter 2023 earnings call. Our business remained resilient, and it delivered a solid financial and operational results during the quarter despite the microeconomic headwinds.
Total revenues were RMB390 million, an increase of 19% year-over-year and in line with our previous guidance.
Profitability also continued to improve, thanks to our careful management of costs. Net income attributable to So-Young International Inc. was RMB18.3 million compared with RMB2.3 million in the same period last year.
Xing Jin
(spoken in Mandarin)
I would like to start by sharing my thoughts on where the sector is. We firmly believe that medical aesthetics market going forward, we are ahead in two directions.
The first is a gradual and stock popularization of high tier users who are less impacted by a weak macro environment, and we'll continue to seek high quality services. In this scenario, low- to mid-tier users would increasingly gravitate towards products with the best quality-to-cost ratio. The second is a continuation of high speed growth of light medical aesthetics as the market continued to expand in size. We are adapting each of our business to be able to cater to both of the two scenarios.
Xing Jin
(spoken in Mandarin)
Taking this into account, we are adjusting our community POP business with a focus towards high-end service end users. During the quarter, we strengthened cooperation with select number of well-respected doctors and institutions, further integrate internal resources and optimized the processes, all in effort to provide the highest quality service and experience through our one-stop solution. Offering premium content and enhancing the use of medical aesthetics service experience has helped where respected doctors and institutions avoid costly price wars while still generating reasonable premiums.
During the quarter, we worked with well-respected doctor to promote their face contouring category. Online GMV for the face contouring category grew by 40% year-over-year during the quarter, while GMV for all surgical categories grew by 11% quarter-over-quarter. Average transaction value for non-surgical products grew by 60% year-over-year, and GMV grew by 72% year-over-year.
In addition, by cooperating clinics with simple care and investing in medical aesthetics and MCNs, we have obtained a deep understanding of the mechanics, which is helping us transform So-Young app into a high-end platform that offers users a large selection of premium doctors to choose from and reducing the decision making cost.
Xing Jin
(spoken in Mandarin)
So-Young Prime is being adjusted to serve should looking at the back (technical difficulty) cost-to-ratio product. So-Young Prime is a unique innovation for the light medical aesthetics industry and a critical step to standardize offline service. Since its launch in August last year, the business has rapidly expanded and scaled with fulfilled orders increasing by 23% sequentially during the quarter. Within fulfilled orders, high-intensity focused ultrasound under the ultrasonic age category in particular increased by 44% sequentially.
As I mentioned in our last earnings call, as So-Young Prime scales our focus is on ensuring the best possible online to offline user experience, improving operational efficiency for our institutional network, and refine operations. During the quarter, orders of So-Young Prime from the more than 100 institutions we walked with contributed over 13% of fulfilled orders in house.
Xing Jin
(spoken in Mandarin)
To further standardize the management system for light medical aesthetics institutions, we built a flagship clinic on the second floor of our head office to test our systems in real time. The team operating in the clinics fully integrate with So-Young Prime and has already seen monthly visits increased by more than six fold over the past three months. Equally as important, the clinic has already achieved profitability.
Xing Jin
(spoken in Mandarin)
Lastly, our supply chain business is being positioned to capture opportunities if the light medical aesthetics market continue expanding rapidly. This is the best encapsulated with the standout performance it had during the quarter and the remarkable growth it has generated. The supply chain business is a result of our initiative to import opportunities and acquire deep industry insights that would allow us to expand upstream along the medical aesthetic supply chain.
Looking at the upstream medical lasers product category, following the acquisition of Wuhan Miracle, we built a new generation of ultrasonic anti-aging equipment called a micro-focused ultrasound device, which we are using to build out our direct-to-consumer business model.
On the medical injection part, we established a team through [Elastic] and achieved a rapid growth in performance. Full year shipments are expected to be seven times that of last year.
In July, we also signed a strategic cooperation agreement with [Hehong Biopharma] for the exclusive distribution rights of two filler products. Cooperation agreement such as these fill gaps and greatly enhance our light medical aesthetics product portfolio.
Xing Jin
(spoken in Mandarin)
This thing differ from the traditional upstream R&D production supply chain model used by manufacturers.
We are able to add further value by developing synergies with our existing business and to fully leverage our institutional network and expansive consumer reach. This allow us to quickly bring new products to market and rapidly make them competitive.
Xing Jin
(spoken in Mandarin)
In the third quarter, revenue from our supply chain business, which includes Wuhan Miracle, reached RMB75 million, an increase of 19% year-over-year and accounting for 20% of total revenue.
We entered as an injectable filler market adjuster last year with a product designed for the highly competitive hyaluronic acid serum. Revenue for this serum keeps hitting new heights and has already become profitable on a single-month basis in August and September. This success directly reflects the enormous synergies we are able to create between the So-Young platform and high quality upstream product.
Xing Jin
(spoken in Mandarin)
Over the long term, the medical aesthetics industry in China still has plenty of room to grow with user penetration rate that are still very low.
Markets beyond the first tier cities remain largely untapped as standardization spread across the industry. Our fully integrated capabilities and other competitive advantage will become more pronounced. Our focus will remain our three core business segments where we will work to further integrate institution, doctors, and products in order to create sustainable diversified revenue streams and create long-term value for our shareholders.
Xing Jin
(spoken in Mandarin)
I will now turn the call over to our CFO Nick to review the financial results for the third quarter before taking your questions.
Nick Zhao
Okay, hello, this is Nick. I will now go through our financial performance in this 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 performances year-over-year basis.
Total revenues during the quarter were RMB385.3 million, up 19.2% year-over-year, and in line with our guidance. The increase was primarily due to an increase in revenues generated by So-Young Prime and sales of medical products. Information services and other revenues were RMB285.9 million, up 24.1% year-over-year, primarily due to an increase in revenues generated by So-Young Prime. Reservation services revenues decreased by 18.8% year-over-year to RMB24.1 million, primarily due to our operating strategy, which gives higher subsidies to end users. Revenue from sales of medical products and maintenance services were RMB75.2 million, up 19.2% year-over-year, primarily due to an increase in sales of cosmetic injectables.
Cost of revenues were RMB142.6 million, up 51.7% year-over-year. The increase was primarily due to an increase in costs associated with So-Young Prime. Within cost of revenues, cost of services and others were RMB103.5 million, up 74.2% year-over-year, primarily due to an increase in costs associated with the So-Young Prime. Cost of medical products sold, and maintenance services were RMB39.1 million, up 13% year-over-year, primarily due to an increase in costs associated with the sales of cosmetic injectables.
Total operating expenses were RMB244.7 million, up 3.4% year-over-year. Sales and marketing expenses were RMB143.8 million, up 15.3% year-over-year, primarily due to an increase in expenses associated with branding and user acquisition activities. G&A expenses were RMB50.2 million, down 16% year-over-year, the change was primarily due to the reversal of share-based compensation expenses, partially offset by increase in payroll costs associated with the expansion of administrative employees to support our business upgrade and new strategic businesses. R&D expenses were RMB50.6 million, down 2.7% year-over-year, primarily due to improvements in staff efficiency.
Income tax benefits were RMB2.2 million compared with income tax benefits of RMB16.5 million in the third quarter of 2022.
Net income attributable to So-Young was RMB18.3 million compared with a net income of RMB2.3 million during the same period last year. Non-GAAP net income attributable to So-Young was RMB9.5 million compared with RMB9.9 million non-GAAP net income attributable to So-Young in the same period of 2022.
Basic and diluted earnings per ADS attributable to ordinary shareholders were RMB0.18 and RMB0.18, respectively, compared with basic and diluted earnings per ADS attributable to ordinary shareholders of RMB0.02 and RMB0.02, respectively, during the same period of 2022.
We have ample cash on hand with total cash and cash equivalents, restricted cash term deposits, and short-term investments of RMB1.4 billion as of September 30, 2023, compared with RMB1.6 billion as of December 31, 2022. The decrease was primarily due to investments in building our supply chain product pipelines of RMB38 million and share repurchases of approximately RMB121 million.
For the fourth quarter of 2023, we expect total revenues to be between RMB380 million and RMB400 million.
The above outlook is based on our current market conditions that reflects the company's preliminary estimates of market and operating conditions and the consumer demand. This concludes our key remarks. I will now turn the call to the operator and open the call for Q&A. Thank you.
Question and Answer Session
Operator
(Operator Instructions) Thomas Chong, Jefferies.
Thomas Chong
Hi, good evening. Thanks, management, for taking my question. Can you say about the progress of So-Young Prime at May and the expectation for Q4 and 2024? And my next question is about our estimate for marketing expenses in Q4 and next year. Thank you.
Xing Jin
(spoken in Mandarin)
Thank you for your questions, I will take the first one. We launched So-Young Prime just over a year ago since then fulfilled orders have grown by tenfold during a quarter when compared in last year as our user base expands rapidly, which I believe demonstrates in the transactions so this is gaining among consumers.
Within fulfilled orders, high intensified focused ultrasound under the ultrasonic anti-aging category in particular increased by 44% sequentially -- generating strong word of mouth.
Xing Jin
(spoken in Mandarin)
As I mentioned during my prepared remarks that we build a model clinic for high -- we call it is a flagship store for light medical aesthetics procedures on the second floor of our office. The team operating in the clinic are fully integrated with So-Young Prime and driving the development of a standardized measurement system for light medical aesthetics institutions and further improving the overall business model.
Xing Jin
(spoken in Mandarin)
We will continue the So-Young Prime user base so this experience capture emerging in the light medical assets industries and to create products and service with high quality-to-cost ratios. We will also expand the number of categories with cooperation with institutions and an impairment of a standardized measurement system to strengthen our position as an all-around primer for small and mid-sized light medical aesthetic institutions.
Xing Jin
(spoken in Mandarin)
We plan on integrating So-Young Prime with our supply chain business in the future. Products from the supply chain business can directly source So-Young Prime's micro focused ultrasound device -- the new generation of ultrasonic anti-aging equipment -- we launched in the fourth quarter has performed well in clinical applications. Going forward, So-Young Prime will gradually introduce new products for the improved margins and create synergies with our supply chain business.
Xing Jin
(spoken in Mandarin)
Nick Zhao
Okay. I will respond to the question regarding the marketing expense. We have placed an accent on improving advertising efficiency this year. Conversion rate for users placing an order online improved in the third quarter, mainly due to our community content, strong brand image, and new user acquisition matters such as a private domain operation. Looking ahead to Q4 and 2024, we will continue to leverage our community content, strong brand, and other competitive advantages to further improve the user experience to increase user conversion rates.
Lastly, we will also continue deploying a highly efficient marketing strategy, expanding user acquisition channels, improve marketing ROI, and carefully manage marketing costs to maintain our margin and improve the profitability of the company.
Operator
Nelson Cheung, Citi.
Nelson Cheung
(spoken in Mandarin) So I would translate myself in English. So, thanks, management for taking my questions. So how would management expect the vertical effective market to develop in fourth quarter, especially during the Double 11 period? And also, into the next year 2024? Thank you.
Xing Jin
(spoken in Mandarin)
Thank you for asking me. First, as I mentioned in prepared remarks, I believe the medical aesthetics market going forward, we are heading in two directions.
The first is gradual and stacker popularization of high tier users who are less impacted by the weak macro environment, and we'll continue to seek high quality service. In the scenario of low to mid users, it will increasingly gravitate towards products with the best quality-to-cost ratio.
The second is a continuation of high speed growth of light medical aesthetics in the medical and the market continues to expand in size. We are adapting each of our business to be able to cater to both of these scenarios.
Xing Jin
(spoken in Mandarin)
Based on the outlook potential, we will focus on our three business segments to create consolidated professional medical aesthetics platform for all consumers. First, we are adjusting our community e-commerce business with a focus towards high end services and users seeking high-quality online medical aesthetic services. Secondly, So-Young Prime is being adjusted to serve user growth, look for the best quality cost ratio products as we continue to explore standardized measurement system for light medical aesthetics. Third, our supply chain business is being positioned to incrementally capture a larger share of the light medical aesthetics market as they continue to expand rapidly and to create synergies with other business segments.
Xing Jin
(spoken in Mandarin)
In addition, according to consumption data published by the National Bureau of Statistics, total retail sales of consumer groups during the first 10 months increased by 69% year-over-year and 76% year-over-year in October, indicating that the economy is gradually gaining recovery momentum.
In summary, we remain confident with the growth perspective in medical aesthetics market for 2024 and further into the future. Even though our business is occasionally impacted by volatile markets, it remained resilient. We will continue investing in acquiring high-quality users and institutions to create value for the industry and are confident in our long-term growth perspective. Thank you.
Operator
Chloe Wei, CICC. I'm sorry, we're not able to hear your audio at this time. So, we'll move to the next question, which is from [Gigi Ryan] with CITIC. Please go ahead.
(spoken in Mandarin) Let me translate my questions. As profitability has improved for two consecutive quarters, how do you expect margins to trend next quarter and going forward? Thank you.
Nick Zhao
Thank you for your question. With a soft consumer sentiment, we are focused on driving revenue growth with a gradual diversification of revenue streams. Our supply chain business and So-Young Prime is showing a solid performance each quarter and reflects this focus. The improvement in our profitability for the past two consecutive quarters reflects the improvements we have made in operating efficiency. We will continue to execute this strategy and remain confident that we will be able to maintain profitability next quarter. 2023 is a critical year for our business transformation. We have made steady progress in laying a solid foundation for future growth and creating long-term sustainable value for our shareholders.
Looking forward to 2024, we will continue to grow revenue, improve operating efficiency, and carefully manage costs. We will be well positioned to increase our competitiveness and maintain healthy cash flows as we leverage opportunities to generate returns for our shareholders. Thank you.
Thank you.
Operator
Chloe Wei, CICC.
Chloe Wei
(spoken in Mandarin) So I will translate myself, Mr. Xing Jin, what do you think of the future competitive landscape? And given the thoughts, how do we position ourselves in the long run? Thank you.
Xing Jin
(spoken in Mandarin)
Thank you for your question. We have been exploring new business models across different verticals within the industry that are outside the traditional Internet business models. We are trying to find new ways to think about industry development and exploring value creation.
Xing Jin
(spoken in Mandarin)
First, looking midway upstream, we are seeing that a major short video platform tapped into medical aesthetics in the third quarter. We believe these platforms as well as the major e-commerce platform are mainly applying a low-priced purchase model, which fits their operation models. Based on our expectation of industry popularization in the future, we are adopting a different operating strategy with our POP business to focus on the demand of high-end users by providing them a better consumption experience, which will also improve our margin.
Xing Jin
(spoken in Mandarin)
Downstream adds to the institutional end of the spectrum, users are increasingly seeking products with a high quality-to-cost ratio, which our operations will be able to cater to add this space growth. We believe the chain stores of light medical aesthetics will have a huge market growth space in the future. Domestic competitors in the vertical are few and far between with only two brands growing over 20 chain stores with limited standardized products and low margins.
There are successful models already deployed outside China, which provides a premier consumption experience for low- to mid-tier users. We are working on deploying a standardized management system for light medical aesthetics institutions through So-Young Prime with high quality-to-cost product ratios for our users. This positions us as an all-around partner for a large number of small and midsized light medical aesthetics institutions.
Xing Jin
(spoken in Mandarin)
Upstream competition is getting fierce in the injections category, but in numerous key market, potential remain intact for medical lasers, particularly in the ultrasonic anti-aging category. Based on our observations, we customized and launched the ultrasonic anti-aging product called as micro-focused ultrasound device during the first quarter. For injections, we see enormous growth potential in the regenerative market, driven by new materials and have expanded our offering in the category.
Xing Jin
(spoken in Mandarin)
In summary, in addition to developing the Internet business model, we're also exploring growth potential along industry supply chain with a focus on the long term. We are confident that our superior positioning in the market and our product advantage to going forward, driven by our integration and innovation along the industry value chain. Thank you. Thank you for asking.
Operator
Thank you. And ladies and gentlemen, we're approaching the end of today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the company sponsoring this event.
