So-Young International Inc. (NASDAQ:SY) Q3 2023 Earnings Call Transcript November 20, 2023
Operator: Ladies and gentlemen, thank you for standing by for So-Young’s Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management gives their prepared remarks there will be a question-and-answer session. As a reminder, today’s conference call is being recorded. I’d like to turn the meeting over to your host for today’s call, Ms. Vivian Xu. Please proceed, Ms. Xu.
Vivian Xu: Thank you, operator, and thank you, everyone for joining So -Young’s 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 U.S. 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 statements, except as required under applicable law. At this time, I would like to turn the call over to. [indiscernible], please.
An aesthetic view of a dental office, revealing the high-tech equipment used for aligners therapy treatments.
Xing Jin: [Foreign Language] [interpreted] Hello, everyone. Thank you for joining So-Young’s third quarter 2023 earnings call. Our business remained resilient and delivered solid financial and operational results during the quarter, despite macroeconomic 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. I would like to start by sharing my thoughts on where the [indiscernible]. We strongly believe that medical aesthetics market going forward will head in two directions.
The first is a gradual and strong popularization of high-tier users who were less impacted by a weak macro environment and will continue to see 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 continue to expand in size. We are adapting each of our business to be able to cater to both of the two scenarios. 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 less number of well-respected doctors and institutions, further integrate internal resources and optimize the processes, all in an effort to provide the highest quality service and experience through our one-stop solution.
Offering premier content and enhancing the user medical aesthetics service experience has helped well-respected doctors and institutions avoid costly price wars, while still generating reasonable premium. During the quarter, we worked with well-respected doctors to promote the 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 nonsurgical products grew by 60% year-over-year and GMV grew by 72% year-over-year. In addition, by cooperating clinics with [indiscernible] and investing in medical aesthetics 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 the user a large selection of premium doctors to choose from and reducing the decision-making costs.
So-Young Prime is being adjusted to serve user growth, looking for the best quality to cost ratio products. So-Young Prime is a unique innovation for the light medical aesthetics industry and a critical step in standardized offline services. Since its launch in August of last year, the business has rapidly expanded and scaled with fulfilled orders increasing by 23% sequentially during the quarter. Within fulfilled orders, high-intensified focused ultrasound under the ultrasonic [indiscernible] 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 refined operations.
During the quarter, orders through So-Young Prime from the more than 100 institutions we worked with contributed over 13% of fulfilled orders in-house. 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 the clinic fully integrated with So-Young Prime and has already seen monthly visits increase by more than six-fold over the past three months. Equally as important, the clinic has already achieved profitability. Lastly, our supply chain business is being positioned to capture opportunities if the light medical aesthetics market continue expanding rapidly. This is 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 explore opportunities and acquire deep industry insights that would allow us to expand upstream along the medical aesthetics supply chain. Looking at the upstream medical lasers product category, following the acquisition of Wuhan Miracle, we built a new generation of ultrasonic anti-age equipment called as the 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] (ph) and achieved rapid growth in performance. Full year shipments are expected to be 7 times that of last year. In July, we also signed a strategic cooperation agreement with [Hehong Biopharma] (ph) for the exclusive distribution rights of two filler products.
Cooperation agreements such as these fill gaps and greatly enhance our light medical aesthetics product portfolio. Distinct 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 fully leverage our institutional network and extensive consumer reach. This allow us to quickly bring new products to market and rapidly make them competitive. In the third quarter, revenue from our supply chain business, which includes Wuhan Miracle reached RMB75 million, an increase of 19% year-on-year and accounting for 20% of total revenue. We entered the injectable filler market just 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’re able to create between the So-Young platform and the high-quality upstream products. Over the long term, the medical aesthetics industry in China still has plenty of room to grow with user penetration rates that are still very low. Markets beyond the first tier cities remain largely untapped. As standardization spreads 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 institutions, doctors and products in order to create sustainable diversified revenue streams and create long-term value for our shareholders.
I will now turn the call over to our CFO, Nick, to review the financial results for the third quarter before taking your questions.
Hui Zhao: Okay. Hello, this is Nick. I will now go through our financial performances 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 on a 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 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 an 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 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 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.
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