Perfect Corp

NYSE:PERF

Earnings Call Transcript 2023-Q2

[Operator]

Good morning and good evening, ladies and gentlemen. Thank you for standing by and welcome to Perfect Corp.'s earning conference call. [Operator Instructions] Please note that today's event is being recorded.

I will now turn the conference over to the first speaker for today, Mr. Rick Lee, VP of IR of the company.

Please go ahead, sir.

[Rick Lee, executive]

All right, thank you, Ellie. Hello, everyone, and welcome to Perfect Corp.'s earnings call.

With us today are Ms. Alice Chang, our Founder, Chairwoman and CEO; Mr. Louis Chen, our EVP and CSO; and Ms. Iris Chen, VP of Finance and Accounting.

You can refer to our second quarter 2023 financial results on our IR website or in the Form 6-K we filed with the SEC earlier. You can later access a replay of this call on our IR website shortly after the conclusion of this call. For today's call, management will provide their prepared remark, first, and then we will host a Q&A session.

Before we continue, I would like to refer you to our safe harbor statement in our earnings press release, which also apply to this call, as this call may contain forward-looking statement regarding Perfect Corp.'s performance, anticipated plans, operational result and objectives. Forward-looking statement 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. undertake no obligation to update any forward-looking statement, except as required by law, after the date of this call. Please note that all numbers stated in the following management prepared remark 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, Rick. Hi, everyone. Welcome to Perfect Corp.'s 2023 Second Quarter Earnings Conference Call.

Today, I'm happy to share with you how Perfect Corp., a pioneer in AI and AR solutions for the beauty and fashion, is driving innovation and shaping the future for beauty tech, skin tech and in fashion tech.

For the second quarter of 2023, we generated $12.7 million in total revenue, representing year-over-year growth of 11.9%. The double-digit growth is -- mainly come from our AR/AI cloud solutions and the mobile beauty app subscription services. In addition, we managed to improve our net income on an adjusted basis to $1.1 million in the second quarter of 2023 from $0.6 million in the same period of 2022, reflecting a margin of -- improvement of [ 2.7% ].

Perfect Corp. has been an AI pioneer since its inception, utilizing AI and machine learning in 2015 for real-time make-up virtual try-ons. With over 50% our -- of our R&D developers specializing in AI, we continuously harness the latest AI advancement to push the boundary of beauty and fashion. Over the years, we have expanded our AI applications, including face shape detection for foundation matching, real-time-live hair color virtual try-ons, advanced selfie skin care diagnosis using AI deep learning models and the incorporation of AI GAN technology for various video effects.

In the second half of 2022, we introduced generative AI to beauty tech, such as AI avatars which allows each user to create his or her own digital twin. Now in 2023, we proudly unveil our range of innovative generative AI products, including AI fashion, AI hairs and more to come. At Perfect, we are committed to utilizing the most advanced AI and AR technologies and provide continuous support to our 3 key growth pillars: beauty tech, skin tech and fashion tech. By harnessing this cutting-edge technology, we aim to enhance and further develop our capabilities in these domains. Our AI advances are not only leading to more collaborations with brands and also enthusiasts in beauty and fashion but are also positioning us for the future success and revenue growth. This is especially true with generative AI, where the combination of human creativity and AI allows us to develop products and experiences that captivate our customers. It sets us apart from competitors and serves as the driving force for sustained financial growth in the long run.

Now let me turn to our operational results for the second quarter and explain how our focus in AI has contributed to our growth. On the brands side, we have observed encouraging signs on -- of improvements in product demand. It is evident through stable renewal; growth in key customers; and increase in our innovative projects, particularly in those involving gen AI. Recently we participated in the VivaTech conference in Paris; and hosted [indiscernible], a new global beauty, fashion tech forum in New York. These events serve as the platforms for us to unveil and showcase our latest advances in beauty tech, skin tech, fashion tech; and the creative usage model of generative AI across the board. Several brand groups have shown high interests to our pilot programs using gen AI for new collaborations.

On the other hand, our mobile beauty apps have sustained their impressive growth momentum since the first quarter. This is due to the introduction of various premium add-on features powered by gen AI such as AI avatar and AI fashion. AI fashion is our latest innovation which enables users to explore different fashion styles, outfits and hairstyles through AI-generated image, which we just introduced in our mobile beauty apps, with very high engagement rate. On the technological development front, in addition to the new features powered by gen AI, Perfect has also been working on enhancing our virtual try-ons for jewelry and watches, especially with multiple-product [ acting ] capability, so now we can combine rings, bracelets and watches virtual try-on at the same time; and together with the make-up virtual try-on, to create a complete virtual try-on look in real time. This would allow consumers to try on different make-up products and accessories together to see how they complement each other's, helping them visualize a total look. This is unique in the market. For brands, this powerful tool will allow cross-sell and build customer loyalty.

Furthermore, in addition, in order to accelerate the adoption of virtual try-on technology for fashion and jewelries, Perfect announced in June the world-first 3D VTO open format with the release of a comprehensive white paper on a new open-standard .vto file format. The new format is to establish a standardized and a simplified process for integrating third-party 3D objects into our virtual try-on platform. In addition, we also launched a 2D-to-3D SKU creation tool for jewelry. This tool can convert from one 2D product image into a simplified 3D asset for virtual try-on. Both initiatives aim to expedite the market adoption for jewelry virtual try-on. [ We will ] greatly reduce the time and costs required for brands to integrate their products into our platform. This breakthrough has the potential to revolutionize the fashion industry by enabling ready integration of virtual try-on experiences [indiscernible] both brands and consumers.

On the business development front, we have made significant progress in expanding our presence in the skin care market. Our diligent business development efforts have result in notable progress. Specifically, during the second quarter, we acquired over 10 new skin care clients across various business segments, including [ pharma brand ], [indiscernible] and [ beauty clinics ] and also in different regions, including United States, [ pan-Asia ] and the Middle East. This demonstrates our strategies in penetrating key growth markets and in establishing partnerships with skin care verticals. At the same pace, we have successfully introduced additional premium add-on features in our mobile beauty apps by incorporating advanced gen AI technology into our offerings. This initiative has allowed us to attract a great number of engaged mobile app users, resulting in incremental subscription revenue.

On client success front in the second quarter. We have worked with several prestige brands to expand their existing VTO offerings in new cases. For example, Dior recently launched its new online and remote one-to-one consultation service to complement its existing digital beauty footprint. This showcased that virtual try-on experience is multichannel, and we expect that newer use cases will start adopting virtual try-on as a key experience in digital beauty. Another good sample is TRESemmé, which is a prominent Unilever hair care brand. It recently introduced an exciting feature on its U.S. website, an AI hairstyle virtual try-on. This innovative tool empowers consumers to explore and visualize different hairstyles before making a commitment for a hair makeover. By leveraging our AI technology, TRESemmé aims to provide a more engaging and personalized experience for its customers. This interactive and very user-friendly AI tool enables individuals to make more informed decisions about their desired hair transformations, eliminating any uncertainty that may arise when considering a new hairstyle.

In addition, we also helped a well-known European luxury fashion brand in launching its first-ever but comprehensive virtual try-on services for -- from make-up to nail polish, nail stickers, bracelets and watches. At the same time, the largest luxury group in Europe also rolled out its jewelry VTO on its website in the second quarter. Lastly, the world's largest e-commerce company has chosen Perfect to launch its VTO features for its nail brands on its shopping app [ in U.S. West ]. This innovative collaboration aims to revolutionize the way -- consumer experience in a shop for nail and jewelry products. The introduction of virtual try-on services for beauty and fashion jewelry highlights a significant shift in the industry. It indicates that virtual try-on has now become an essential requirement [ and table stakes ] for brands to stay relevant in consumers' digital journey over time. Consumers increasingly expect the ability to visualize how make-up and accessories will look [indiscernible] before making any purchase, and virtual try-ons fulfill that demand.

Perfect Corp. as a pioneering force is leading the market to provide AI-driven virtual try-on solution across all categories. With a steadfast commitment to innovations and cutting-edge technology, Perfect has been instrumental in revolutionizing the beauty and fashion industry to enhance consumer engagement and consumer purchasing journey.

In summary, we had a good second quarter with a double-digit revenue growth. And as we look forward to the full year 2023, we estimated a year-over-year total revenue growth ranging from 11.5% to 14.5% compared to 2020 (sic) [ 2022 ]. Throughout this journey, our teams will diligently monitor and [ access ] key performance indicators to ensure we stay on track with our objectives. Perfect is [ fairly well ] positioned to benefit from the megatrend of digital transformation of beauty and fashion. Together with the new wave of innovation created by generative AI technology, we will continue to propel the growth of both our brand SaaS business as well as our mobile app consumer subscription business.

Thank you for listening. And now I'm turning the call over to Louis to go over the financial details with you. Thank you.

[Pin-Jen Chen, executive]

Thank you, Alice.

Before I go into the detail of our financial results, please note that all comparisons are on a year-over-year basis; and that the reporting period is the second quarter of 2023 versus the comparable period of 2022; and that, on top of the IFRS measures, we will also discuss non-IFRS measures to provide greater clarity on the trends in our actual operations.

For the second quarter of 2023, our total revenue increased from USD 11.3 million in the same period of last year to USD 12.7 million, representing a year-over-year growth of 11.9%. Our AR and AI cloud solution and subscription revenue, which now contributes 86.7% of our total revenue, grew by 16.3% year-over-year, showing strong growth momentum in our core business. Meanwhile, [ legacy ] licensing revenue for physical stores, which now accounted for 10.9% of our total revenue, increased by 6.2%. This trend not only resonate with our continuous focus on prioritizing online services but also underscore customer inclinations [ to direct resources ] into our AR cloud solutions and subscriptions.

Regarding customer order [ extension ] and acquisition trends during the second quarter. Renewal rate for existing subscription has remained strong and healthy, demonstrating continued customer engagement with our platforms. Additionally, as the macro economy showed signs of recovery, our effort in acquiring new customer have shown improvements. We remain cautiously optimistic about the long-term growth potential that they bring to our business.

Among our revenue sources, AR/AI cloud solution and subscription revenue grew by 16.3% to USD 11 million, representing 86.7% of our total revenue in the second quarter of 2023, mainly due to solid demand of our online virtual try-on solutions for brand customers and robust growth in our mobile beauty app subscriptions. Our mobile beauty app active subscribers have surged by 63.3% year-over-year, reaching a historical high of over 777,000 by the end of the second quarter of 2023. This [ remarkable ] growth showed the strong demand for innovative features powered by generative AI in our suite of mobile beauty apps and highlight the strong momentum we have generated in the market.

Licensing revenue, which is mostly generated from our traditional off-line services, increased by 6.2% to USD 1.4 million, representing 10.9% of our total revenue compared to 11.5% of total revenue in the second quarter of 2022. This reflects brand customers' continuous elevated interest for online services other than traditional physical store deployments. Our licensing revenue seems to stabilize at the current level.

AR/AI cloud solution and subscription revenue showed strong growth momentum in this quarter. This trend not only align with management's continuous strategy to prioritize new cloud-based subscription services but also demonstrate the significant role that generative AI plays in driving business growth. As generative AI technology [ regularly ] evolves, we expect to see even more creative and advanced applications to further drive our revenue growth.

Gross profit was USD 10.2 million, while gross margin was 80.6% compared to 85.8% for the same period of last year. The change in gross margin was due to increase in the cost of goods sold, which was driven by the growth in the company's mobile beauty app subscription. This surge in subscription led to higher platform fees paid to third-party digital distribution platforms, namely Apple and Google. Compared with a 78.8% gross margin for the first quarter of 2023, the second quarter was 80.6%, demonstrating a quarter-over-quarter improvement.

Total operating expenses increased 12.5% to USD 12.3 million from USD 11 million for the same period of last year. To break down operating expenses: Sales and marketing expense were USD 6.6 million, representing 51.7% of our total revenue, compared to $6.1 million and 53.6% of total revenue during the same period last year. The 7.9% year-over-year changes were primarily due to increase in promotion and user acquisition expenses. Research and development expense were USD 2.8 million, representing 21.8% of total revenue, compared to USD 2.6 million and 23.3% of total revenue during the same period last year.

General and administrative expenses were USD 3 million, representing 23.8% of total revenue, compared to $2.2 million and 19.8% of total revenue during the same period last year. The 34.3% year-over-year changes was primarily due to an increase in public company related costs. The change [ in expense ] category reflects a moderate increase in spending while our core business is growing. Moving forward, we will carefully monitor and control our expense to ensure responsible spending practices.

Net loss was USD 0.2 million for the second quarter of 2023 compared to a net income of USD 27.4 million during the same period of 2022, mainly due to the $28.4 million adjustment in noncash valuation gain on financial liabilities at fair value through profit or loss in the second quarter of 2022. Excluding noncash share-based compensation, foreign exchange impacts and onetime nonrecurring costs associated with our de-SPAC deal, adjusted net income was USD 1.1 million for the second quarter of 2023 compared to adjusted net income of USD 0.6 million in the same period of 2022.

Turning to our balance sheet. As of June 30, 2023, our company held USD 198 million in cash and cash equivalents and time deposits 6 months or longer, compared to USD 196.1 million as of March 31, 2023, reflecting a USD 1.9 million or 0.9% quarter-over-quarter increase. The company cash position remains healthy.

In total, our customer base had a net increase of 76 new bland -- brand clients since the end of last quarter, achieving a total of 601 brand customers with over 655,000 SKU for make-up, skin care, eyewear and jewelry products as of June 30, 2023. In this quarter, we grew our key customer to 163 from 158 at the end of last quarter. The new acquisition came from the improvement in our sales cycles, with larger funnels and increased inbound leads brought by the recovery in market conditions.

In the second quarter, our revenue saw strong momentum due to the continued demand for our online [ AI ] cloud solutions and subscriptions as well as the rapid increase in our mobile app subscribers. Concurrently, we effectively managed our expenditures to ensure profitability while achieving revenue growth. A stable renewal rate of existing subscriptions, diligent cost control measures and a healthy cash position further reinforce our unwavering confidence in growing our revenue in the long term.

That concludes my prepared remarks. Operator, let's open up for calls for questions.

[Operator]

[Operator Instructions] We have a question from Clarke from -- we have a question from Timothy Zhao from Goldman.

[Timothy Zhao, analyst]

I think I have a question about your full year revenue guidance. I think the guidance is quite helpful and which implies the revenue growth in the second half to be, I think, by my calculation, close to 20% year-on-year compared to single-digit growth in the first half. I was wondering if management could further elaborate to the drivers behind the revenue acceleration into the second half. And then also I think a related question is that I noticed the brand customers actually increased quite a lot in the second quarter, to over 600 in June, but it seems that revenue growth and contract liability growth lagged behind a little bit. Wondering if you could help us understand what is the customer paying behavior of those newly acquired customers and when we can see more revenue contribution from these new customers.

[Pin-Jen Chen, executive]

Thank you, Timothy, yes. So we have seen certainly more demand for the brand customers [ for all sizes ]. And as we have seen, typically when the customer started to join our platforms, initially they will start with more reasonable orders. And over time, you grow with more upsell and cross-sells, so we do see the -- some healthy sign that are more clients; or the need for digital beauty solutions, for beauty tech, fashion tech and skin tech, coming to their solution. That's how you saw the increase of total brand customers to over 600 now for the first time. And certainly that will be encouraging signs for us to continue to work with those customers so they understand our solution and grow to be a bigger spender over the time. In term of the business outlook guidance, certainly the company, as we grow and, again, more maturity in our business and more robust business model, we also feel important to share visibility and then transparency with the market. As well we certainly have seen indicators from both the online solutions, as I said, playing but also the mobile app subscription that is growing very, very, very fast that are showing a strong confidence to the company that second half of the year will be performing much better than the first half of the year, therefore generating the guidance that we are putting forward at this time.

[Operator]

We have our second question from Clarke Jeffries from Piper Sandler.

[Clarke Jeffries, analyst]

I just wanted to, I mean, maybe dig into the subcomponent of AR and AI cloud solutions. Louis, could I confirm with you what AR and AI cloud solutions are growing at right now? And I -- maybe as a follow-up to the prior question: It seems like the subscription business is growing quite well in terms of active users maybe growing in excess of 30%, maybe by my math. And so just could you just remind us, what are the dynamics of AR and AI cloud solutions that seems to be accelerating in the second part of the year, I would assume, based off of that guidance?

[Pin-Jen Chen, executive]

Yes, Clarke. So the AR/AI cloud solutions includes all our beauty tech, skin tech solutions that are online, so mostly are helping brand on e-commerce journey, [ so consumers ] and virtual try-on or skin diagnoses, so other -- these type of solutions; but also includes mobile app subscription for the premium subscriptions where the consumer are downloading our family of beauty apps and opt in to unlock premium features, including some of these new generative AI features. So both certainly continues to grow as we see these patterns. In this last quarter, the mobile app subscriptions, certainly it was coming from a lower base, but it's growing very rapidly. I think we have seen quarter after quarter hitting record-high number of active subscribers, and this time with over 60% active subscriber increase. So that's certainly giving management confidence that the trends seem to be very strong demand for the remaining of the year, but I think, because of these 2 primary drivers, that we are driving our model for the whole year revenue projection.

[Clarke Jeffries, analyst]

Certainly. Maybe a follow-up is the SKU count and the brand count are both growing quite well. Do you anticipate some of those SKUs and brand counts to see an inflection in monetization that you would expect the AR and AI cloud solutions to accelerate off of business you've already won and will start to build in terms of revenue contribution through -- over the coming year? Does that make sense?

[Pin-Jen Chen, executive]

Right. So as I explained earlier, I think the brand customer business typically take a few years to grow into scale and maturity. I think we've seen already from end of last year and early this year that, the leads, the funnel that we are developing is actually much larger and wider, although it was taking longer to -- it was a very prolonged sales cycle. I think we are certainly passing through this process after 6, 9 months working on this deal; and are starting to see some more capitalizing on these results. Certainly these are the baseline where we want to grow our future business with, but I -- once the customer are with us and they have their initial SKUs on the platforms, then we open up opportunity to do more omnichannel cross-sells to them, all right; once they have the SKU digitized on our systems, be able to take that into different e-commerce and e-tailers or their own dot-com presence. In short, each of these represent opportunity to monetize by increased of -- subscription revenue towards the brands, so yes, you are right. I think we see a good recovery from number of new brands and number of SKU that keep joining in these platforms. And also we also see more categories are being added here. We have been working on the beyond beauty category for 12, 18 months now. And we are starting to see, as I report in our last quarter, that we now have over a dozen jewelries or watches brands already on the systems. And each quarter, as they pass, there are more SKUs that are also being injected through these new partnerships and new client categories.

[Operator]

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

[Rick Lee, executive]

All right, thank you, Ellie. Thank you, everyone, again for joining our call today. Have a good one. Thank you.