So-Young International Inc

NASDAQ:SY

Earnings Call Analysis

So-Young's Revenue Growth and Profitability Turnaround

In a remarkable shift, So-Young International Inc proclaimed its return to profitability with a 20.1% jump in quarterly revenues and a RMB 31.3 million net income in 2023. The company's innovative So-Young Prime model saw revenues skyrocket, achieving a compound annual growth rate (CAGR) of 71% and signaling a significant cost-saving victory. With eye-opening 600% growth in product shipments and plans to inaugurate clinics in up to 7 cities in 2024, So-Young positions itself confidently amidst strong sector growth prospects. The full-year reveled in a 19.1% revenue increase to RMB 1.5 billion, a drastic improvement from last year's loss to a neat RMB 21.3 million profit, hinting at a promising future for their nascent businesses. Investors can anticipate revenues reaching between RMB 290 million and RMB 310 million in Q1 of 2024, illustrating So-Young's upward trajectory in a recovering market.

Revenue Growth Amid Market Resilience

In a challenging market, So-Young International Inc. demonstrated commendable resilience with total revenues growing by 20.1% year-over-year to RMB 390.6 million for the quarter. This growth has been fueled by a diversified approach, with legacy business segments like information services seeing a healthy uptick of 15.8%. Alongside this, So-Young has made significant strides in new ventures, most notably in medical products and maintenance services, which surged by 50.6% during the same period.

Strategic Emphasis on Premium Services

To stand out in the competitive market, So-Young strategically focuses on premium services to captivate high-tier users seeking quality over pricing. This is in contrast to e-commerce and short-form video platforms that mainly concentrate on budget-conscious, low-to-mid tier users. As a testament to this strategy, So-Young Prime has made substantial progress, facilitating over 200,000 clinic visits and generating RMB 100 million in revenues for partner institutions.

Expansion and Supply Chain Synergies

Looking ahead, So-Young aims to extend its reach by opening clinics in 6 to 7 cities throughout 2024, potentially exploring franchising opportunities later in the year. The supply chain business will play a pivotal role in strengthening the firm's vertical integration within the medical aesthetic supply chain and capitalize on potential synergies between its various business lines.

Product Market Development

To ensure long-term sustainability and pricing power, So-Young is intent on cultivating a healthy market environment for its products. An example of this strategy in action is the significant increase in shipments of Elravie’s medical injections - a staggering 600% rise, with over 120,000 units sold. Such milestones underscore the company's dedication to maintaining high standards and a robust product offering.

Profitability Turnaround

After a period of losses, So-Young managed to regain profitability with net income attributable to the company reaching RMB 31.3 million in 2023, reversing the preceding year's net loss of RMB 65.6 million. This financial recovery was further bolstered by non-GAAP net income, swinging from a net loss to RMB 57.6 million in profits. These figures demonstrate the effectiveness of the company's operational and strategic adjustments over the past year.

Detailed Fiscal Performance

In terms of detailed earnings, So-Young reported RMB 0.18 per ADS, both basic and diluted, which indicates a sound performance though slightly lower than the same period in the previous year. Revenue for the full year 2023 reached RMB 1.5 billion, marking a 19.1% increase year-over-year. A notable highlight is the information services segment, which grew by 22.2%. However, the cost of revenues also rose notably by 38.4%, reflecting increased costs primarily associated with So-Young Prime and sales of cosmetic injectables.

Financial Position and Future Outlook

So-Young maintains a substantial cash position, with cash and equivalents totaling RMB 1.3 billion at the end of 2023, a decrease from RMB 1.6 billion from the previous year due to share repurchases and an increase in term deposits with maturities longer than one year. The company projects total revenues to range between RMB 290 million and RMB 310 million for the first quarter of 2024, showcasing a cautious yet hopeful perspective on market and customer demand dynamics.

Earnings Call Transcript 2023-Q4

[Operator]

Ladies and gentlemen, thank you for standing by for So-Young's Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator Instructions]

As a reminder, today's conference call is being recorded. I will now like to turn the meeting over to your host for today's call, Ms. Vivian XU. Please proceed, Ms. XU.

[Vivian XU, executive]

Thank you, operator, and thank you, everyone, for joining So-Young's Fourth Quarter and Full Year 2023 Earnings Conference Call. Joining 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 Mr. Xing Jin.

[Xing Jin, executive]

[Interpreted] Hello, everyone. Thank you for joining the call today. Despite the challenging market conditions, our business remained resilient as the new ventures we are developing continue to demonstrate significant growth potential. Total revenues increased by 20% -- sorry, 20.1% year-over-year to RMB 390.6 million during the quarter.

Our legacy business reflected in revenues from information services and others increased by 15.8%, while new business reflect in revenues from sales of medical products and maintenance services increased by 50.6% during the quarter. By carefully managing cost, we regained profitability with net income attributable to So-Young International Inc of RMB 31.3 million in 2023, a significant turnaround from net loss attributable to So-Young International Inc. of RMB 65.6 million last year.

In many ways, last year presented even more challenged situation than the COVID-19 pandemic did. In this context, our financial results for the year are even more impressive and attachment to our students and adaptability in the face of evolving consumer behaviors and market practice.

Looking back at 2023, it's evidence that our differentiated strategy was key to maintaining stable growth. While e-commerce platforms and short-form video platforms prioritized the pricing of products to attach budget cautious low-to-mid tier users, we prioritized the premium service to attract high-tier users seeking quality services.

This segment represented only 13% of frequent users, drives 51% of market volume. We've consistently maintained a strong competitive advantage with the segment given our premium products and services. Throughout the year, we further strengthened this advantage by offering high-tier users, the personalized services they required for high-quality procedures, which also drives support the probability of the partner institutions we corporate with.

Moving forward, we remain committed to the strategy as we build stronger relationships with more high [ collaborative ] doctors and institutions.

So-Young Prime made significant progress throughout the year with over 200,000 clinics visit facilitate, generating over RMB 100 million in revenues for partner institutions. This translates to significant user acquisition cost savings of roughly RMB [ 140 ] million. To further optimize our model, we piloted operations for a chain of clinics by establishing a model mix for light medical aesthetics procedures on the second floor of our headquarters last summer.

The results have been impressive. These clinics have been exceptional growth with steadily expanding margins and monthly revenue increasing 13.8x during the second half of this year, a CAGR of 71%. Equally as important, it hit breakeven of only 3 months of formal operations. Building on this success, we are now actively expanding our network by turning partner institutions into a chain of clinics.

Several are already under construction with the first ones already operational. We plan to open clinics in 6 to 7 cities throughout 2024 and will explore franchise opportunities in the later half of this year.

Our supply chain business also continues to create opportunities for us by leveraging synergies with our other business to expand upstream around the medical aesthetic supply chain, distinct from the traditional upstream R&D production supply chain model used by manufacturers.

We are able to add further value by leveraging our institutional network and enhancing consumer reach. This allow us to support emerging trends and quickly bring new products to market and rapidly make them competitive. To date, we have 7 injectable products available on the market, 1 R&D center and 2 robust production lines. We approach each relationship with care by adopting a cautious and safe approach. Developing a healthy market for our products is key to long-term sustainability and pricing power.

Our cooperation with Korea band, Elravie, is a perfect example. We positioned their hyaluronic acid program that's a mid-market product and through the careful selection of partner institutions, we distributed to gross sales significantly last year. Shipments of this product increased nearly 600% with over 120,000 medical injections sold so far.

More than 750 select partner institutions also gained from this, with 500 of our core institutions seeing revenue increase by 20% last year as a result. A single SKU can generate revenue of RMB 2 million for them in one campaign. We planned to add a new Elravie product to our portfolio this year and looking at other opportunities in the anti-aging category.

Our current portfolio of 7 products addresses demand across various segments within the highly demanded collagen categories, including [indiscernible] and others. Building a strong upstream presence along the medical aesthetics supply chain requires strategic investment and lead time.

Through 3 years of focused efforts, we have built stronger synergies between our product development pipeline, sales team and our platform as we secure additional product certifications, we are confident in our ability to consistently generate incremental revenue and profit growth over the long term.

We are currently undergoing a strategic business transformation with a strong focus on the development and growth of our new ventures. While these new initiatives are making promising progress and generating rapid growth, they are still in their investment phase. We are confident that this new business will become significant contributors to revenue in the coming quarters.

The medical aesthetic sector in China still presents significant growth potential is all adopting the right strategy. As the industry moved towards greater standardization, our compressive vertically integrated capabilities and the competitive strengths are set to become increasingly evident. We will continue to adjust the business to create greater synergies between our business and institutions, doctors and products. This strategy focus will allow us to build more drivers and diverse sorry, build more diverse and sustainable revenue sources and a solid profit structure ultimately delivering long-term value to our shareholders.

I will now turn the call over to our CFO, Nick, to review the financial results for the fourth quarter before taking your questions. Nick, please?

[Hui Zhao, executive]

Hello, this is Nick. 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. Total revenues during the quarter were RMB 390.6 million, up 20.1% year-over-year and in line with our guidance.

The increase was primarily due to the increase in revenues generated by So-Young Prime and the sales of cosmetic injectables. Information services and other revenues were RMB 268.1 million, up 15.8% year-over-year, primarily due to an increase in revenues generated by So-Young Prime.

Reservation services revenues decreased 20.7% year-over-year to RMB 20.6 million, primarily due to the operating strategy which gave higher subsidies to end users.

Sales of medical products and maintenance service revenues were RMB 101.9 million, up 50.6% year-over-year, primarily due to an increase in sales of cosmetic injectables.

Cost of revenues were RMB 137.6 million, up 56.0% year-over-year. The increase was primarily due to an increase in costs associated with the So-Young Prime and the sales of cosmetic injectables. Within cost of revenues, cost of services and others were RMB 94.1 million, up 73.6% year-over-year, primarily due to an increase in costs associated with So-Young Prime. Cost of medical products sold and maintenance services were RMB 43.6 million, up 28.1% year-over-year, primarily due to an increase in costs associated with sales of cosmetic injectables.

Total operating expenses were RMB 257.8 million, up 21.3% year-over-year. Sales and marketing expenses were RMB 126.2 million, up 28.3% year-over-year, primarily due to an increase in payroll costs and the expenses associated with branding and user acquisition activities.

G&A expenses were RMB 86.7 million, up 18.4% year-over-year, primarily due to 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 RMB 45.0 million, up 9.6% year-over-year, primarily attributable to an increase in payroll costs.

Income tax benefits were RMB 10.8 million, which was primarily due to the impact of additional deductions for research and development expenditures, compared with income tax benefits of RMB 2.4 million in the fourth quarter of 2022.

Net income attributable to So-Young was RMB 17.5 million compared with a net income of RMB 31.3 million during the same period last year. Non-GAAP net income attributable to So-Young was RMB 35.3 million compared with RMB 38.8 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 RMB 0.18 and RMB 0.18, respectively, compared with basic and diluted earnings per ADS attributable to ordinary shareholders of RMB 0.29 and RMB 0.29, respectively, during the same period of 2022.

For the full year 2023, total revenue were RMB 1.5 billion, up 19.1% year-over-year. Within total revenues, information services and other revenues were RMB 1.1 billion, up 22.2% year-over-year. Reservation services revenues were RMB 101.3 million, down 21.3% year-over-year. Sales of medical products and maintenance services revenues were RMB 333.5 million, up 28.7% year-over-year.

Cost of revenues were RMB 544.3 million, up 38.4% year-over-year, primarily due to an increase in costs associated with So-Young Prime and the sales of cosmetic injectables. Total operating expenses were RMB 1.0 billion, up 4.9% year-over-year.

Net income attributable to So-Young International Inc. were RMB 21.3 million compared with net loss of RMB 65.6 million in the fiscal year 2022.

Non-GAAP net income attributable to So-Young International Inc. was RMB 57.6 million compared to a net loss of RMB 22.2 million in the fiscal year 2022.

Basic and diluted earnings for ADS attributable to ordinary shareholders were RMB 0.21 and RMB 0.21, respectively, compared with basic and diluted losses per ADS attributable to ordinary shareholders of RMB 0.61 and RMB 0.61, respectively, in fiscal year 2022.

We have ample cash on hand with a total cash and cash equivalent, restricted cash and term deposits, term deposits and short-term investments of RMB 1.3 billion as of December 31, 2023, compared with RMB 1.6 billion as of December 31, 2022. The decrease was primarily due to share repurchases of RMB 125.6 million in 2023 and RMB 111.3 million increase in terms deposits with maturities longer than 1 year.

I'd like to reiterate that our new businesses are currently in a critical phase of development as we support them in their early stages of growth. They are critical pieces to the foundation we are building for future growth and recognize that we are just at the start of this journey. We, however, are extremely confident that they will increasingly contribute to revenue growth in the quarters ahead.

With this in mind, for the first quarter of 2024, we expect total revenues to be between RMB 290 million and RMB 310 million. The above outlook is based on the current market conditions that reflects the company's preliminary estimates of market and operating conditions and the customer demand.

This concludes our key remarks. I will now turn the call to the operator and open the call for QA. Operator, we are ready to take questions. Thank you.

[Operator]

[Operator Instructions]. And our first question will come from Katrina Chu of Citigroup.

[Unknown Analyst]

[Interpreted] I will translate myself. My question is about the overall outlook of the medical aesthetic market in 2024 and also the market landscape of the medical aesthetic market in first quarter of 2024. Thank you.

[Xing Jin, executive]

[Interpreted] According to data from China National Bureau of Statistics, retail sales of consumer groups are gradually recovering, increasing of 6.7% year-over-year in January and February 2024. Consumption data from our medical aesthetics platform is also reflecting this trend, with a gradually improving macroeconomic environment and our differentiated strategy taking hold. We remain optimistic about the growth perspective of the medical aesthetics industry in 2024 and over the long term.

The Chinese medical aesthetics industry is maturing. Structural changes in consumer behavior are driving tremendous shift in demand. As consumers mature, the market is trading away from low frequency and high construction value towards high frequency, high quality and diversification.

As a result, e-commerce platform and medical institutions are shifting their focus upstream and towards acquiring diverse traffic. Competing on pricing will no longer be an option to attract the premium users. The old model will lower the value proposition of products and services and lead to a smaller share of wider market.

In 2024, these market shifts will continue. As a result, we will focus on refining our 3 business and further consolidate the positioning of our platform in the market. We will do this by upgrading our community for business and adding high-end customized services, passing to top-tier users by adopting a depreciated operating strategy from our peers.

So-Young Prime will focus on offering the best quality to cost to ratio for mid-tier users and our upstream business will support both of these platforms and user groups, capturing opportunities in the light medical aesthetics market and expanding margins.

[Operator]

Our next question comes from [indiscernible] of Citic Securities.

[Unknown Analyst]

[Interpreted] I'd like to ask what are your thoughts on the recent suspension of medical aesthetic light broadcasting? And where do you think the regulation trend going forward?

[Xing Jin, executive]

[Interpreted] The medical aesthetics market continues to be regulated strongly. For any new marketing models that deployed regulators will require an observation period where they can stop any behavior that breaks the medical [indiscernible].

We believe medical aesthetics marketing will continue to be restricted to a few channels approved by regulators, such as search engines and e-commerce. This regulatory trend actually benefit us indirectly as a value proposition of our existing legal marketing channels become more pronounced. We maintain our belief that a healthy market is a foundation for long-term growth and value creation for companies.

We will focus our attention on the supply side of the market going forward by integrating the core production advantage we have accumulated in terms of institutions, doctors and users. This will also allow us to set standards for service quality and delivery, ensuring users receive a premier experience.

These comprehensive capabilities will enable us to build a strong competitive barrier. Unlike pure Internet business model, we are in a position to solve issues at a deeper level, creating a differentiated model from our competitors.

[Operator]

And next, we have a question from Chloe Wei of CICC.

[Chloe Wei, analyst]

[Interpreted] My question is concerning So-Young Prime. Could management maybe share some more about the P&L contribution, revenue and margins and what we have in 2023 and what we should expect in 2024. Also, could management share some color on the playbook in different cities in China since we are looking at more chain clinics in operation by the end of 2024. How should we expect the pace and investments?

[Xing Jin, executive]

[Interpreted] Last year, So-Young Prime completed its strategic transformation into our asset light highly-efficient platform and operational model, which helped us to take the lead in the surgery and light medical aesthetic sector.

The model clinic, we opened last August is a logical next stop of our previous cooperation with institutions and products. We gathered and experienced clinical operating team to promote development of a standardized management system for light medical aesthetics institution that takes advantage of our supply chain innovative capabilities.

Our model clinics did breakeven up to only 3 months for former operations, which reflects our strong reputation among medical aesthetics users and strengthened our confidence to begin exploring franchising opportunities.

In 2024, we plan on opening more than 10 clinics in 6 cities national-wide. Each location has been selected based on data from our cooperation with institution, strict operational requirements, profitability and deep market research.

[Operator]

And the next question comes from Joey Tan of Jefferies.

[Unknown Analyst]

[Interpreted] This is Joey from Jefferies on behalf of Thomas Chong. My question is can management share with us the outlook for the upstream supply chain business.

[Xing Jin, executive]

[Interpreted] Thank you for your question. We plan to launch a new [indiscernible] in 2024 and also added new [indiscernible] products sourced through our supply chain business. In addition, from 2025 in the light demanded collagen category, we will launch various products, including [ PWLA ], which will establish a strong presence for us in this vertical.

With 3 years operational experience, the synergies between our product development pipeline, sales team and platform are now rapidly strengthening. We expect to add more products and continuously generate incremental revenue and profit growth from the supply chain business.

[Operator]

And next, we have a question from [indiscernible] from Haitong Securities.

[Unknown Analyst]

[Interpreted] Let me translate myself. I'm here -- have a question about the profit margin. And I would like to know what the reason for the year-over-year decrease in gross margin and where your margin trend going forward?

[Hui Zhao, executive]

[Interpreted] Okay, I will translate myself. The decrease in gross margin was mainly due to the changes in revenue mix. In Q4 2023, our sales of information and reservation services maintained high margins compared to those for sales of medical products and maintenance which was lower, while revenue from new business such as So-Young Prime have already demonstrated their potential.

It is still in the early stages of development with a lower gross margin. As we strategically expand our presence along the medical aesthetic value chain, each of those new businesses are expected to increasingly contribute to our bottom line as the synergies created by our presence, both upstream and downstream, strengthened the profitability of our business, overall is expected to improve in the mid to long term.

[Operator]

We are now approaching the end of the conference call. Thank you for your participation in today's conference. You may now disconnect. Have a good day.

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