Perfect Corp

NYSE:PERF

Earnings Call Transcript 2024-Q1

[Operator]

Good morning, and good evening, ladies and gentlemen. Thank you for standing by, and welcome to Perfect Corp.'s Earnings Conference Call. [Operator Instructions] We will be hosting a question-and-answer session after management's prepared remarks. Please note that today's event is being recorded. I will now turn the conference over to the first speaker today, Ms. Jennifer Wu, IR Manager of the company. Please go ahead.

[Jennifer Wu, executive]

Thank you, and hello, everyone. Welcome to Perfect Crop's earnings call. With us today are Ms. Alice Chang, our Founder, Chair Woman; and Chief Executive Officer; Mr. Louis Chen, our Executive Vice President and Chief Strategy Officer; and Ms. Eric Chen, Vice President of Finance and Accounting. You can refer to our first quarter 2021 financial results on our IR website or in the Form 10-K we filed with SEC earlier. You can later assess a replay of this call on our website shortly after the conclusion of this call. For today's call, management will provide our prepared remarks first, and then we will host a question-and-answer session. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release. We also apply to this call that this call may contain forward-looking statements regarding prepared performance, anticipated plans, our original results and objectives. Forward-looking statements are based on management's expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied on our call today. Perfect Corp undertakes no obligation to update any forward-looking statements, except as required by law after the date of this call. Please note that all numbers stated in the following management's prepared remarks are in U.S. dollar terms, and we will discuss non-IFRS measures today. Without further ado, I will now turn the call to our first speaker today, our CEO, Ms. Alice Chang.

[Alice H. Chang, executive]

Thank you, Jennifer, and welcome to Perfect Corp's 2024 First Quarter Earnings Conference Call. We have some exciting news to share today. So let's just start leveraging our advanced AI capability. We started 2024 with a robust first quarter. Our first quarter revenue grew by 17.7% year-over-year to $14.3 million, and our net revenue was positive $0.6 million. The double-digit increase in revenue and a positive net income was driven by the strong growth of our AI, AR, cloud solutions and substitution services for both of our mobile business, our business and our enterprise business. Both business clusters have benefited from our superior AI technologies and contributed to our top line expansion and the profitability improvement. Plus, our operating cash flow had a net inflow of $3.5 million due to our SaaS based model. In this quarter, we continue to invest in our Beauty AI strategy, including Beauty AI, Skin AI, Fashion AI and Gen AI across both of our consumer and enterprise business. For our consumer app business, we leverage our in Gen AI technology to launch more innovative features in YouCam mobile app in quarter 1, attracting more users to our apps and converting more users into subscribers. For our enterprise business, we have a renewed contract with many big clients and boarding several new brands for mega virtual try-on services. We also saw ongoing strong momentum in our new AI [indiscernible] diagnosis product, and we expect that this trend with expanded growth. Furthermore, increments from luxury jewelries and watch industries are integrating our jewelry and fashion BTO offering into their digital offering. This new development showed our sustained effort to extend our coverage into different verticals and address some larger markets. They also reflected the various revenue we have got to increase business potential as we are committed to keep investing resources in AI advancements, we are able to deliver products and services that continuously strengthen our unique position in beauty AI, in hair AI, in fashion AI. Now let's shift our focus to operational outcomes and discuss our most recent advancements -- we saw another robust quarter for our B2C mobile beauty app business, evident by a 30% year-over-year increase in our mobile beauty app active subscribers to a historically high over 902,000. The continuous growth in active subscribers reflected in the rising demand for mobile apps that enable users to added enhance and beautify their photos and video. As sales expression and creativity becomes increasingly important, consumers expect more personalized and diverse [indiscernible] from mobile app. Our family of YouCam app is able to offer unique high-quality digital output, leveraging advanced technology like generative AI of photos and videos. This new set of Gen AI features, including AI editing and beautification for photos and videos, empower our users to freely and creatively express themselves on social media and to create high-quality ultra-personalized photos and videos generated or added by YouCam3.app. A key appeal of the YouCam family app is advanced AI and AR technology to help the users to solve real-life challenges and explore more creative ideas. These offerings allow users to beautify, edit and enhance photos and videos as well as virtually try on makeup and hair style. Users can also appearance and create their unique in a diverse style in photo and videos in our work, to release their creativity by leveraging the latest AI technology.As the users become satisfied with the quality of our product, our app, we continue to use it, use our app, making YouCam apps and integral part of their daily life. Moreover, we offer a complete line of online AI editing tool on our website. And to our YouCam3 mobile app as leverage advanced AI capabilities to enhanced photos, videos and generate AI art work, such as AI Enhance for photo and video, AI colorization, AI color correction, Al lighting, AI figures in anime characters. Our product strategy enters on integrating AI across our entire offering to edit, beautify and enhance photo and videos. In one second and easily transform user experience and self-users, real-time problems and meet evolving needs from a broader user base, while at the same time, maximize return on our R&D investments. A key strength of ours is ability to leverage the YouCam AI engine to power both our consumer mobile business and our Enterprise SaaS business. This allows us to fully monetize innovation across different sectors in our B2C and the B2B sectors. Our unique AI-driven approach combined with a commitment on ongoing innovation positioned us to significantly expand market penetration by unlocking AI transformative potential. Now let's shift focus to our B2B business. This quarter in our B2B sector, we focused on deepening the penetration in new verticals to provide AI in [indiscernible] product and beauty and fashion or to try our own business, while at the same time, expanding the adoption of our makeup VTO to more brands in the region. Specifically, we got several new wins for our beauty, jewelry solutions within our B2B sector has demonstrated the growth demand from our comprehensive solution and inferior technology from clients in different industries and sectors. Moreover, we successfully secured a major license renewal with key beauty skin care and the Jewelry brands and the retailers. This renewal underscores the increasing trust this brand placed in our solutions to address their evolving requirements and highlights of our leadership in VTO solution offering. We also capitalized on these opportunities a cross-selling to their sister brands and offering additional services, including expanding SKU selections and expanding brand presence into new geographies. The strong momentum in revenue growth in this quarter reflected the recovery in the sales cycle and the pipeline expansion of our enterprise business. Firstly, for our Beauty AI, we remain a leader in the industry, and we continue to innovate. Beauty Ai has always been the core of our business. In this quarter, we have renewed contracts with all major existing clients and broadening several new brands for [indiscernible], VTO Virtual Tryout Services. Furthermore, we continue to innovate and expand the capability of our makeup offerings. We have added [indiscernible] to VTO, and [indiscernible] to VTO. This new patches will make up not only allows brands to provide more tryout options to their clients, but also further strengthen our market leadership in makeup VTO sector. Secondly, for our skin AI tech, -- in this first quarter, we saw strong momentum for our skin diagnostic products on both existing and the new customers. As people become increasingly conscious about their skin health aim to capitalize on this trend by providing AI solutions, notably we gained significant traction in new market segments such as [indiscernible], Clinic and dermatology practices. This professional institutions leverage our AI technology to deliver real-time [indiscernible] verified in analysis, [indiscernible] in the scores to their clients and patients. A key differentiators for our sceneries our cutting in a unique high-definition AI analysis that offers a comprehensive approach to understand individual in conditions in super high procedures, allowing users to visually change their scheme after skin treatment with a very easy to CAR overlay, precisely positioned on the location of the actual skin concerns and with a measurable skin scores.Using advanced AI, our skin diagnosis solution can detect and evaluate up to 14 key time concerns, providing patients with a detailed data-driven assessment of their unique key health profile. Third key driver of our skin business success this quarter came from our self-service offering, a new product, in care Pro, which gained robust momentum, particularly among aesthetic clinics and medical spa. This is an iPad-based [indiscernible] offices solution as the consultation tool for Clinic to engage with their clients and with the newly added ARM module, it can improve customer retention, we're keep track of each individual customers progress during treatment. Skincare Pro enables this business to deliver personalized data-driven skin consultations to their clients and patients in a very cost-efficient and easy way. Furthermore, we recently developed and integrated a comprehensive customer relationship management, ERM system with our Skincare Pro, allowing skincare professionals to better manage customer profile for in health reports in cloud-based households and compare before after results. This integration represents a significant shift in how personalized skin care is delivered, ensuring a more personalized and efficient patient experience. [indiscernible] integrating and upgrading our AI-powered skin analysis, diagnosis and emulation tools as well as providing client base in care experience that for data-informed decisions and drive unparalleled patient engagement and satisfaction in AI and AR adoption among skin care industries, is at its very early stage. We believe there is a large untapped market for us to serve and grow.Actually, for our fashion and Jewelry, VTO, another highlight of the quarter was the accelerated market adoption of our VTO solution for watching jewelry, we saw several new wins and the renewal of prestige in the luxury brands, making good progress of our VTO offerings in this category. We first began expanding into a jewelry in a watch VTO at the start of 2023. And we are to see our efforts paying off as more deals have been confirmed and more use cases for products that have been launched in the market. In particular, we saw renewals and upsells from luxury jewelry brands this quarter. We believe the superior AI technology and professional service, the brand client experience and working with us, made them willing to renew the contract and purchase more services. In the quarter, we have partnered with in European luxury Jewelry group and watch group to provide jewelry and watch VTO for 3 luxury brands within the group, leveraging our cutting-edge AI technology, a sophisticated tester and Radiant reflections of the jewelry can be faithfully portrayed our screen, providing users and immersive due to real [indiscernible] live shopping spirit. So the case is still at its stage of a [indiscernible], we believe that this new win not only confirm the through in our AI technology by this high-end brand, but also unlock the chances to get more new logos onto our SaaS platform for jewelry, accessories and watches. The increasing numbers of jewelry and watch brands using our VTO and AI technology indicates that the demand for this interactive shopping experience is on the rise. If you need the leading function of our products allow brand clients to increase user engagement time and reduce our return rate, given the robust demand for jewelry and watch VTO. We will continue to deepen our penetration in this sector and to further grow our business in different and new categories and the regions.We have made good progress in our AI-powered hair solution too in the first quarter. In this quarter, -- we added a new AI hair type analysis technology that can be quickly identified hair texture, thickness and curl patterns and simply taking a picture of users here. This AI technology accurately classified hair into 9 distinct type across 10 categories of straight, wavey, extremely curly can deliver precise and personalized recommendations tailored to each unique hair type. This new innovation on AI hair complements our full range of AI hair solutions, which includes our hair color VTO, AI hairstyle generation, AI hair weak generation and hair extension. This industry-leading solution for hair enable hair brands and the retailers to provide customers with a more customized shopping experience. To sum up, we delivered strong business performance in the first quarter of 2024 with double-digit revenue growth and a positive bottom line, not only did the momentum in our mobile app business remain robust. Our enterprise business also gained assessed in expanding services into new verticals. These positive indicators suggest, we are well positioned to capitalize on growing market opportunity for AI on beauty, skin, fashion and generative AI. We continue growing our AI/AR power business. Driven by the good demand for both our mobile app subscription and enterprise stock solution, we reiterate our outlook for the full year 2024, projecting total revenue growth recognized under IFRS to range from 12% to 16% compared to the full year 2023 results. With that, I have now concluded my remarks, and we will be handling the call over Louis, who will discuss our financial details with you. Thank you.

[Pin-Jen Chen, executive]

Thank you, Alice. Please note that all financial comparisons are on a year-over-year basis and the reporting period is the first quarter of 2024 versus the comparable period in 2023 and now on top of the International Financial Reporting Standard, IFRS measures. We will also discuss non-IFRS measures to provide greater clarity on the trends in our actual operations. As Alice mentioned, in the first quarter of 2024, our total revenue increased to USD 14.3 million from $12.1 million for the same period in 2023, representing a robust year-over-year growth of 17.7%. The strong performance was mainly due to the strong growth momentum of our AI and AR cloud solution and subscription business. Among our revenue sources, AI and AR Cloud solutions revenue was $12.4 million in the fourth quarter of 2024, an increase of 19.6% compared to the same period in 2023. The continued expansion can be attributed to the robust growth in the mobile beauty app subscription and the strong demand for our online bigotry on solution among brand customers, especially with the addition of new categories that now served on [indiscernible], jewelry, fashion market and the growing popularity of our Gen AI technology and editing features for photo and video. Notably, our mobile active subscriber has surged by 30% year-over-year, which is an all-time high of 902,000 by the end of the first quarter of 2024. The strong momentum underscore the growing interest in our suite of mobile beauty apps from both users and subscribers. The licensing revenue, which is mostly generated from our traditional off-line services, increased by 7.1% in the first quarter of 2024 to $1.6 million compared to $1.5 million during the same period of 2023. Gross profit for the first quarter of 2024 grew by 16.9% to $11.2 million to gross margin of 78.3% compared to gross profit of $9.6 million and gross profit margin of 78.8% for the same period in 2023. The decrease in gross margin was primarily a result of the increase in third-party payment processing fees paid to digital subscription distribution partners such as Google and Apple due to the increase in our mobile app subscription revenue. The total operating expenses for the first quarter of 2024 increased by 11.8% to $12.4 million compared to $11.1 million in the same period last year. The increase was primarily due to the higher sales and marketing expenses occurred in the first quarter of 2024. To break down operating expenses, the sales marketing expense for the first quarter of 2024 were $7.2 million compared to $6 million during the same period of 23%, an increase of 19%, and this was due to an increase in marketing and user acquisition costs. The research and development expenses were $3 million for the first quarter of 2024 compared to $2.6 million during the same period of 2023, an increase of 15.4%. The increase were on additional R&D headcount and related personnel costs. General and administrative expenses were $2.2 million for the first quarter of 2024 compared to $2.4 million during the same period of 2023, a decrease of 9.9%. The decrease mainly came from the lower direct and officer insurance premium. Net income was $0.6 million for the first quarter of $24 million compared to a net income of $0.7 million during the same period of 2023, a decrease of 9.4%. The positive net income in this first quarter was supported by continued revenue growth and effective cost control. Excluding the noncash share-based compensation, the noncash valuation gain and loss for financial liability and onetime nonrecurring costs associated to our at deal -- the adjusted net income was $1.5 million for the first quarter of 2024 compared to adjusted net income of $1.3 million in the same period of 2023, an increase of 14.5%. This represents a sound margin rate of 10.6% in the first quarter of 2024. Looking at other balance sheet as of March 31, 2024, our company held $157.3 million in cash, cash equivalent and 6-month time deposits compared to $154.2 million as of December 31, 2023. The increase in cash and cash equivalents, accruing 6-month time deposits was a result on the positive operating cash flow and the interest income received from the company's bank deposits. We had positive operating cash flow of $3.5 million in the third quarter of 2024 compared to $3.8 million during the same period of 2023. The positive cash flow demonstrated the company's ability to generate sufficient cash flow to support its business operations and the growth.In total, our customer base had a net increase of 21 clients since the end of last quarter, achieving a total of 666 clients with over 745,000 SKUs for makeup, in care, eyewear and jewelry products as of March 31, 2024. This is yet another record quarter for this metric, showing the continuous increase in customer penetration and student expansion. More brands and products are leveraging on perfect console to operate the various different SAP modules subscribed from Perfect. In the first quarter of 2024, our total revenue has consistently exhibited strong growth, primarily driven by the continued momentum in our AI and AR cloud solutions and mobile app transmission earnings from premium features and AI-powered app. Despite a very mild rise in expenses, our net income remained positive. We continue our investment in talent acquisition and technology innovation to spend our core competencies reacting as a transformative tool that remains our products are showcased and consumed. We firmly believe that our position within this driving industry equip us to remain at the forefront of replacing our beauty and fashion brands engage with the audience. Finally, we reiterate our 2024 guidance that total revenue year-over-year growth to range from 12% to 16% under IFRS. This forecast is based on company's current assessment of the market and operational conditions, and management will closely monitor the business progress each quarter and update our guidance periodically over better transparency to the market. And with that concludes my prepared remarks. Operator, please open up for questions.

[Operator]

Your first question comes from the line of Brian Schwartz with Oppenheimer.

[Brian Schwartz, analyst]

Thanks for taking my question this afternoon or evening where you're at, I had a couple. First one was around the SKU growth in the quarter because it looked very strong. And I was just wondering if the expansion in SKUs, is that coming all from the core beauty segment? Or is the expansion being spread evenly across some of those newer like fashion in the skin segments, too.

[Alice H. Chang, executive]

Yes, Brian. This is Alice Thanks for the questions. As you can tell, we expand into new verticals, the jewelry and skin analysis. So the -- it's quite spread out fleet between 3 different verticals, but make up feel the biggest one. They have more SKUs than jewelry, especially luxury jewelry. They don't have too many SKUs like makeup and skin care also, they do have new SKUs in our consoles, but still make has the biggest part and the rest of the fleet between skin care and jewelry.

[Brian Schwartz, analyst]

Okay. And then my next question, I wanted to ask that now that a recovery is happening in the enterprise business, how are you thinking about expanding your sales capacity. Did you add sales reps in Q1? And what are your plans for hiring more sales reps this fiscal year?

[Alice H. Chang, executive]

Yes. For B2B sectors, especially our software business model, the lead time to acquire new customers, if not immediately like B2C. So it takes time. And we keep our sales talent in each of the business units, not go in too much from now. And since we see the growing skin care channels and the fashion celery channels right now -- so we specifically increase some sales capability in the business unit. And so overall, we will keep increase but not too much and still the same group and the growth of the B2B growth.

[Brian Schwartz, analyst]

Okay. And then, Alice, can you talk about or Louis, the decline that's happening in the key customer count. I think the commentary in the press release is there's some financial distress from those customers. I guess the question is just kind of looking forward, is it your sense that, that has bottomed that the more distressed customers that you had, those are kind of has been churned out and there's more financial stability among that customer cohort moving forward?

[Pin-Jen Chen, executive]

Brian, this is Louis. I think the macro selling has impacted some of those smaller customers. We're looking to -- majority of our enterprise clients, they are on annual base contracts. So upon the expiration of the contract, typically, they'll renew on a year-to-year basis. What we noted in this quarter is many of those not so big clients that they didn't have their following year budget approved by their management, mostly mainly because of the overall financial the pressure that they are getting. So we saw some of those customers not renewing those agreements at the end of this period. We certainly management are very vigilant about the trend. I don't think it is something significant. It doesn't contribute on the material part of the revenue. But this is certainly something set to see some of these customers on renewing those -- so the company is doing our effort to acquire more customers, so we can kind of net that impact out.

[Alice H. Chang, executive]

Most of the decrease from what I observed are not big customers, but there's more medium-sized customers. And they take the financial difficulties they to drop out because they don't like the engagement of users because they just have a very difficult financial situation. And the size is just a little bit more than the threshold 50,000 of those kind of medium-sized brands that we saw in first quarter.

[Brian Schwartz, analyst]

And my final question, Louis, I just wanted to ask you about the G&A expense because it came in a lot lower than I had forecasted at. And as I think about my model moving forward, is this the right level for the G&A expense as we think about our models here moving forward. You're welcome.

[Pin-Jen Chen, executive]

I think we always run a very agile and slim team for our back office and G&A. In the last few quarters, selling more case as a newly listed company just for governance, compliance and lately different auditor or external console services. As the company matures, getting more mature as a public company, some of these costs will be reduced -- as I mentioned in my remarks, the D&O insurance premium has been reduced. The company has been performing pretty well in the market and so forth. So I think we try to a maintain remand lower cost G&A. So I think what you see in this quarter certainly is not a one-off situation, but the market can change quickly. But at the core, we focus more of our investment into R&D development and certainly spending in sales and marketing outreach while trying to be ineffective in the G&A

[Operator]

[Operator Instructions] As there are no further questions at this time, I'd like to hand the conference back to management for closing remarks.

[Alice H. Chang, executive]

Thank you again for joining our call today, and have a good one and look forward to seeing you on my next time. Thank you.

[Operator]

This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.