Edited Transcript of 1357.HK earnings conference call or presentation 26-Mar-20 11:30am GMT

Wen Sheng Cai, Meitu, Inc. – Executive Chairman [6]

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(foreign language)

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

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So first of all, our core app Meitu has actually achieved close to 123 million of MAU in February this year, and its DAU has also reached a historical peak. In addition, some new businesses such as the Meitu Skin Doctor that enable users to get online consultation from dermatologists from top hospitals in China as well as the one-stop shop solution for KOL searches, training, management and payroll launched by our subsidiary, Dajie Net, are both examples that may see some interesting growth opportunity during the pandemic as people are staying at home a little bit more. For other details of our business, I will now turn the call over to our Chief Executive Officer, Wu Xinhong. And thank you very much, everyone.

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Zeyuan Wu, Meitu, Inc. – CEO & Executive Director [8]

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(foreign language)

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King Leung Ngan, Meitu, Inc. – CFO & Company Secretary [9]

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Thanks, Wen Sheng. And once again, I appreciate everyone to join today’s results announcement.

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Zeyuan Wu, Meitu, Inc. – CEO & Executive Director [10]

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(foreign language)

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King Leung Ngan, Meitu, Inc. – CFO & Company Secretary [11]

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So in order to make our strategy more focused, in 2019, we have updated our company mission and vision, which are to let everyone become more beautiful easily and to empower the beauty industry and make beauty more accessible to our users, respectively. In essence, beauty and power are the 2 keywords of our new strategy.

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Zeyuan Wu, Meitu, Inc. – CEO & Executive Director [12]

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(foreign language)

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King Leung Ngan, Meitu, Inc. – CFO & Company Secretary [13]

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So we believe that in order to satisfy the demand for beauty of our 300 million users, we cannot achieve this by ourselves alone. We must work with the entire beauty industry to serve our users together. Therefore, whether it is a new business or existing business, we have put a strong emphasis on empowering others.

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Zeyuan Wu, Meitu, Inc. – CEO & Executive Director [14]

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(foreign language)

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King Leung Ngan, Meitu, Inc. – CFO & Company Secretary [15]

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So for example, historically, our advertising business is about letting advertisers display their advertising elements. But now as we are launching the planet of brands initiative, we are adding a bit more mechanism in the advertising such that the brands can interact with their fans much more easy.

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Zeyuan Wu, Meitu, Inc. – CEO & Executive Director [16]

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(foreign language)

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King Leung Ngan, Meitu, Inc. – CFO & Company Secretary [17]

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Additionally, in the second quarter this year, we will officially launch the Meitu Skin Doctor service together or in strategic partnership with the Shanghai Skin Disease Hospital, which will enable users to go through our app on BeautyCam directly and be able to connect with these dermatologists in top hospitals so that they can get online consultation, and ultimately improve their skin issues.

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Zeyuan Wu, Meitu, Inc. – CEO & Executive Director [18]

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(foreign language)

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King Leung Ngan, Meitu, Inc. – CFO & Company Secretary [19]

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In terms of the social community initiative, our core at Meitu in 2019 has become much more focused in its content offering surrounding beauty, and such a more focused content has generated quite a bit of improvement in terms of the user time spend. To give you a sense, the daily usage in the first half of 2019 was 12.5 minutes. And in the second half, it has increased to 13.6 minutes. And at the same time, we have also seen there are very significant growth in terms of high-quality content producers on our platform.

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Zeyuan Wu, Meitu, Inc. – CEO & Executive Director [20]

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(foreign language)

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King Leung Ngan, Meitu, Inc. – CFO & Company Secretary [21]

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So other thing that worth a mention is our overseas development. Our overseas flagship products, BeautyPlus, has a very good growth in 2019. It’s MAU has grown 11% from 59.7 million in 2018 to 66.1 million in the end of 2019.

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Zeyuan Wu, Meitu, Inc. – CEO & Executive Director [22]

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(foreign language)

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King Leung Ngan, Meitu, Inc. – CFO & Company Secretary [23]

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So in our overseas product, the monetization model has evolved from — evolved beyond just traditional advertising and also into premium subscription model. And this model has a very promising performance in 2019 with revenue reaching approximately RMB 86 million, which is more than 5x growth compared to 2018.

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Zeyuan Wu, Meitu, Inc. – CEO & Executive Director [24]

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(foreign language)

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King Leung Ngan, Meitu, Inc. – CFO & Company Secretary [25]

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So through the subscription model, our user not only can unlock some premium photo editing functionalities but they can also access some AR filters or other photo editing elements with internationally recognized IPs such as Disney IPs or Hello Kitty, et cetera. And these functionalities have received a lot of traction among our users. And we plan to continue to explore this business model such that we can bring more interesting and attractive premium functionalities for our users.

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Zeyuan Wu, Meitu, Inc. – CEO & Executive Director [26]

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(foreign language)

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King Leung Ngan, Meitu, Inc. – CFO & Company Secretary [27]

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So lastly, I want to share a little bit about some of the business that we are laying foundation for the future. In 2019, we have launched a medical-grade skin analyzer equipment called MeituEve, which is able to accurately and stably analyze users skin problems.

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Zeyuan Wu, Meitu, Inc. – CEO & Executive Director [28]

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(foreign language)

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King Leung Ngan, Meitu, Inc. – CFO & Company Secretary [29]

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So when we launched the MeituEve equipment, the market reaction has actually been very, very positive, surpassing our initial expectation. So right now, we are working with some of the really premium international skincare brands, and we’re discussing ways and potential service offering such that our users can much more scientifically to choose their skincare products or use a skincare routine.

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Zeyuan Wu, Meitu, Inc. – CEO & Executive Director [30]

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(foreign language)

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King Leung Ngan, Meitu, Inc. – CFO & Company Secretary [31]

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Okay. So this is all the information that I prepared. And now I’ll pass to Gary to talk about the annual financial situation.

So let’s start with analyzing the P&L statement. So revenue in 2019 was RMB 977.9 million with a growth rate of approximately 3% year-on-year. So if you look at it, just on the surface, it doesn’t look like a very high growth. But in reality, the revenue quality has been increased significantly compared to 2018, and this can really be seen if you analyze the gross margin. So to put it into perspective, the gross margin in 2019 has reached 71.5%, which is 20 percentage points higher than the 51.9% in 2018. And in absolute dollar terms, in 2019, the gross profit is approximately RMB 700 million, which is over 40% increase compared to 2018. And the reason behind such a healthy growth in gross margin has something to do with our revenue mix, as I mentioned. If you look at the advertising revenues, which is a very, very high-margin business, the growth has been very strong, reached RMB 751 million, growing 21% year-on-year. And in particular, the programmatic advertising in 2019 has also grown very rapidly with an annual growth rate of 70%, which is, we believe, is very, very encouraging. And as Xinhong just mentioned just now, the advertising business going forward, we will focus a little bit more around how to empower the brands such that they can interact with their fans more as opposed to just let them display their advertising elements. For example, we will help them to work with the KOLs to promote the brands. And also, we will try to integrate some of our smartphone-based skin analysis technology so that the users can better choose their skincare product and work with the brand more closely.

Now the second thing is that the premium subscription model and revenue generated by this model has increased quite substantially. And this is also one of the reason why our gross profit has grown materially. It should help investors and analysts better understand our revenue mix. This year, we have broken down the IVAS and others into 3 separate revenue lines, namely premium subscription and in-app purchase, IVAS and others. So we can now clearly see that the in-app purchase and premium subscription has grown very rapidly, more than 5x compared to 2018 to about RMB 86 million in 2019. And the gross margin for this particular business is also — it’s very high. It’s about 65% to 70%, which compares to the 20% to 25% gross margin of the showroom live streaming, which used to be one of the major contribution in the IVAS revenue line. So I think going forward because the showroom live streaming business does not really fit squarely into our beauty-oriented strategy, so we’re going to move this revenue line to the others. And going forward, the others revenue line here will be consist of businesses that, number one, doesn’t really fit into our overall beauty-related strategy or the businesses that could be related to the main strategy but they are still very small, experimental and very new. So before they become scalable, we’ll keep them in the others line, and then we’ll take them out and disclose separately as they become more meaningful.

So moving on, let me just go through a little bit on the company’s expense structure. So our Chairman has talked about, in this fourth quarter of 2019, we have generated adjusted net profit. And the reason behind that, apart from a very significant growth in gross profit, the expenses control is also an indispensable factor. The most important expense control that we have executed is the reduction in sales and marketing expenses. So it went down from CNY 780 million in 2018 to about CNY 330 million in 2019. The core reason for such a drop in sales and marketing is because we have adjusted our user acquisition strategy. So in 2018, if you remember, we have done a lot of big brand marketing exercise, such as sponsoring the TV series and all that. And we also have spent a lot of money in terms of acquiring users from various channels or buying downloads from various channels.

But now in [2017] from 2019, we have slowly moved that to become product feature-driven user acquisition strategy. So we try to put in features in the apps such that users are able to help us to market the products through word-of-mouth marketing. And obviously, such a significant reduction in sales and marketing will have a little bit of a temporary disruption to our user growth. As you have seen, our total MAU in 2019 versus 2018 has a little bit of a reduction. But I think our sense is that this new strategy actually works very well because if you look into February, for example, as Chairman has mentioned, our core at Meitu has again reached its historical peak. So it’s not like when we turn off the sales and marketing, our MAU just collapsed. But instead, we are able to find ways to drive user growth to its historical peak even without spending a lot of money. And I think we have proven this quite nicely in the first couple of months this year. So moving on to R&D and G&A expenses, I think both of which has a little bit of decline year-over-year. And for these 2 expenses, most of that or the vast majority of that is actually related to employee expenses. And we have discussed with the market that in this — late 2019, we have some business restructuring, we have some human resources restructuring and these are done in the later part of 2019. So our current run rate of R&D and G&A would be even a bit lower than the average of the second half of 2019. And obviously, as we closely monitor the pandemic situation, we will very nimbly adjust our investment into both R&D and G&A and try to make sure that every single dollar that we invest will generate positive ROI.

So just to touch a little bit upon the profitability. In the full year of 2019, we have a RMB 190 million of adjusted net loss, which is significantly down by 70% compared to RMB 860 million in 2018.

In terms of cash reserve, we have about RMB 2.6 billion of cash on our balance sheet. And although the global economy, it’s quite uncertain for the next — rest of the 2020 in our view. But because our business efficiency has been improving, and we have a very, very strong balance sheet, I think we’ll be able to weather the storm quite easily.

So this is all the content that we have prepared for this conference call. And now we can go to the Q&A session. (Operator Instructions)

Shannon, so I think we can move to the Q&A session.

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Questions and Answers

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Operator [1]

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Yes. So the first question comes from a caller who’s phone number ending in 984.

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Unidentified Analyst, [2]

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Okay. I’m asking the questions on behalf of Thomas Chong from Jefferies. So we would like to know more about the advertisement market recovering because since management is quite confident on the recovery pace of the advertisement market. So we would like to see more color. Can you share more color on that?

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

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(foreign language)

Okay. So thank you very much for your question. So I mean, it’s still very early days, right? We’re in March, and I can share what we have been seeing in our advertising business. So if you break down a little bit into different components of the advertising business. So in February, where the pandemic is worst in China, we have seen a pretty meaningful drop in our KE business. However, the programmatic business in China has virtually been unaffected. So the revenue is for programmatic advertising, it’s pretty much the same as January. And obviously, in February, the programmatic sales in overseas, it’s also continuing with its growth trend. So that’s the first thing. Our sense is even during the pandemic situation, there is actually a number of businesses that requires more advertising, for example, apps downloads, games, to a certain extent e-commerce. So these advertisers who predominantly uses programmatic advertising would pretty much be unaffected. And the reason why we believe we have seen some recovery in the advertising market is because if we look at the order book in March, it’s actually quite meaningfully rebounded from February, and I would almost say that, I mean, March hasn’t really ended, but I think there’s a good chance that it will be higher than January. Obviously, some of those budgets could be just simply a shift from February to March. But I think the fact that we have seen advertising rebounded from February, it’s at least some sign of recovery. It’s not like February was significantly down from January and then March is even worse than February. So we’re not seeing that.

(Operator Instructions)

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Operator [4]

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(Operator Instructions)

So next question comes from Samuel Ho from First Shanghai Securities.

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Samuel Ho;First Shanghai Securities;Associate Director, [5]

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I just want to ask a simple question. Will the company looking for any M&A investment in the near term? If yes, what type of — what kind of investment will be more interested?

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

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(foreign language)

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Samuel Ho;First Shanghai Securities;Associate Director, [7]

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(foreign language)

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

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(foreign language) So thank you very much for the question. So we actually have been doing quite a bit of investment, and in some instances, M&A deals for the past few years. So I think the general strategy has really not been changed. It’s always businesses that fits our overall strategy. And as we have talked to the market a few times, our strategy now is very focused on empowering the beauty industry to help our users to become more beautiful. So what we — if we are doing significant M&A transactions, these will be companies that are complement to our strategy. I think I can tell you, right now, at this point in time, we don’t have any specific targets in mind. And especially the global economy, it’s still quite uncertain at the moment. I think we will also be a little bit more conservative when it comes to M&A. But if there are a great project at the right price, we will also be able to move very quickly because of our strong balance sheet.

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Operator [9]

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So our next question is from the caller who’s phone number ending in 984.

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Unidentified Analyst, [10]

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I would like to know more about the overseas expansion strategies of Meitu. And also, can you share more on the competitive landscape in the online advertising because we just talk about the online advertising market trend, and I would like to know more about the competitive landscape. (foreign language)

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King Leung Ngan, Meitu, Inc. – CFO & Company Secretary [11]

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Okay. (foreign language) Can you be a bit more specific in which part of overseas?

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Unidentified Analyst, [12]

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(foreign language)

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King Leung Ngan, Meitu, Inc. – CFO & Company Secretary [13]

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Okay. So if there’s any new forms of apps and whether there’s target for MAUs, right? So for overseas, I think right now, the business strategy, it’s quite — it’s pretty much like a mirror image of what we’re doing in China. So BeautyPlus is actually an international version of BeautyCam. And AirBrush is international version of Meitu Xiuxiu. So basically, these are the 2 main apps in China and there’s a corresponding 2 main apps in overseas. Obviously, the overseas app will have a bit more difference in terms of localization versus Chinese app, which, for example, the premium subscription model works in overseas, it doesn’t really work in China because people or users in China are not very used to pay subscription for app features. I think in the overseas part, we may experiment a little bit more using video editing apps, which right now this function is being satisfied within Meitu Xiuxiu in China. But in overseas, we may actually launch a video editing app stand-alone. But apart from that, I don’t think we have very, very significant different plans compared to what we have in China. And we normally don’t give out specific guidance in terms of user growth, but our sense is that the overseas users growth trend, it’s very likely to continue. And one of the observations or thinkings that we have at this moment is that given the global pandemic situation, a lot of users in western countries are kind of forced to stay at home right now. Previously, they all like to go out, they enjoy the outdoor a bit more compared to the Chinese users. But now they’re all forced at home. So I think the time that they will be able to allocate in terms of exploring new apps and just using apps more in general has a good chance of that happening. So that actually it’s beneficial to our organic download. And the second thing is because the global economic slowdown has caused a lot of off-line companies like hotels and travel and a lot of these nononline — off-line companies to reduce their marketing spend. So globally, what we are seeing is the user acquisition cost is actually coming down a little bit. So that might also give us a good opportunity to grow our users. And if we are able to find a model that generate positive ROI, i.e. you acquire users, but you can be very confidently able to generate subscription revenues over a course of 3, 4 months and recoup that cost and generate some additional return, then we will obviously invest in this user growth like a positive ROI business model.

So that’s the first part of the question. And the second part regarding advertising competitive landscape. It’s a little bit difficult to answer this question because it’s not really a — we’re not really competing in the advertising market per se. So Meitu Xiuxiu, it’s competing with user’s time from other community apps. But they don’t necessarily compete for the same advertisers. So we haven’t really come across situations where this advertiser, I will only put ads on app A but not B because they are competing. So it’s not like this. So if there’s a brand launching an advertising campaign, they want to maximize the exposure as much as possible, and they also look at the return on investment for that ad campaign. So what we are trying to do — I don’t know — I’m probably not answering your question very directly, but I think the core idea here or the core strategy that we want to adopt in 2020 is that we want to move away from just giving a ad space. We want to become more engaging with the users and try to promote engagement between the brand and their target audience. So we are trying to really pull these 2 parties together and create a new form of advertising model. And I think this — it’s probably going to be quite promising going forward.

The next question comes from the investor from the line ending 732.

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Unidentified Analyst, [14]

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(foreign language)

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King Leung Ngan, Meitu, Inc. – CFO & Company Secretary [15]

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So the first question is the breakdown between China and overseas advertising revenue, right? So I think overseas, if you look at 2019, overseas revenue, it’s approximately a little over 15%. Yes. And I think for the global advertising situation, we haven’t really — have a very strong sense. So it’s not — it’s not as bad as what we saw in China KE in February. But I think the global situation has really just unfolded the last couple of weeks. So I think we’re still too early to make a very concrete observation. So I think we have to just be a little bit more patient before we have a very strong conclusion.

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Unidentified Analyst, [16]

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Okay. Okay, got it. So the second question about the premium and service revenue. It is — sorry, premium subscription revenue. I just want to understand more about this product. What kind of subscription? Is this like monthly subscription, annual subscription? What is roughly the price? And what kind of a service that subscribers can get from that product? I just want to have a better understanding about this product specifically.

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King Leung Ngan, Meitu, Inc. – CFO & Company Secretary [17]

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Okay. So the subscription, it’s mostly 2 options. So either it’s a monthly subscription or it’s an annual subscription. Most of our users actually opt for the annual subscription because it’s cheaper than the monthly description and they can — they can theoretically can cancel that anytime. But our cancellation rate is actually not very high. The — maybe, I will take one of the app to explain to you because we have a couple of apps. And the monthly fee, it’s about USD 6. And if you do an annual, then it will just be USD 30. So you can see the annual price is a bit cheaper than the monthly subscription. And if you pay for the subscription, as we said on the call previously, you have some premium features. So for example, the filters will be a bit different. It’s different colors, different style. And then we’ll also have some automatic beautification functions that would not be available to the free user, but you can now use that with the subscription. And also there are some AR filters that are branded with IPs like Hello Kitty, Mickey Mouse, those kind of things. So there are things that you would not be able to use unless you pay for the subscription.

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Unidentified Analyst, [18]

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Okay. And just one more quick one as a follow-up. What are the top like 2, 3 countries that are contributing to this revenue line, the subscription revenue line?

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King Leung Ngan, Meitu, Inc. – CFO & Company Secretary [19]

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It would be U.S., Japan and I think a couple of countries in South America.

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Operator [20]

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(Operator Instructions) So everyone, I’m not seeing any more questions from the floor. So we’ll be concluding the conference call tonight. Thank you once again for joining, and we are looking forward to talking with you all again. Stay safe.