Perfect Corp

NYSE:PERF

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Good morning and good evening, ladies and gentlemen. Thank you for standing by, and welcome to, Perfect Corp.'s Second Quarter 2024 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, Mr. Jimmy Shu, Director, IR Director of the company. Please go ahead.

[Jimmy Shu, executive]

Thank you, and hello, everyone. Welcome to, Perfect Corp.'s Second Quarter 2024 Company Call. With us today are Ms. Alice Chang, our Founder, Chairwoman and Chief Executive Officer; Mr. Louis Chen, our Executive Vice President and Chief Strategy Officer; and Ms. Iris Chen, Vice President of Finance and Accounting. You can refer to our second quarter 2024 financial results on our IR website or in the Form 6-K we filed with SEC earlier. A replay of this call will also be available on our website shortly after its conclusion.

For today's call, management will provide our prepared remarks, followed by a Q&A session. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release.

This call may contain forward-looking statements regarding performance, anticipated plans, our regional results and our objectives. Forward-looking statements are based on management's expectations and are subject to numerous risks and uncertainties that could cause actual results to differ materially from those expressed or implied in 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 management's prepared remarks are in U.S. dollars, and we will discuss non-IFRS measures today.

I will now turn the call over to our CEO, Ms. Alice Chang.

[Alice H. Chang, executive]

Thank you, Jimmy, and welcome to Perfect Corp.'s 2024 Second Quarter Earnings Call. We have some exciting news to share today. Let's get started.

Leveraging our advanced AI capabilities. We started the first half of 2024 with a strong growth we -- within our previous provided guidance. Our first half revenue grew by 13.5% year-over-year to $28.2 million. Our net income grew 185% year-over-year to positive $1.4 million and the adjusted net income increased 26.2% to $2.8 million compared to first half of last year. The double-digit increase in revenue and positive net income were driven by the strong growth in our AI/AR cloud solutions in the subscription services for mobile beauty apps and enterprise business growth.

Both business benefited from our superior AI/AR technologies and contributed to increase in the top line and also to the profitability. The first half of 2024 saw our operating cash flow generated a net inflow of $5.5 million.

In the second quarter, our continuous improvement in the company's bottom line showed a net income of $0.8 million compared to net loss of $0.2 million during the same period in 2023. Our operational strength lies in efficient cost management initiatives, improvements in operational efficiency while sustaining our competitive edge, investments in AI/AR services and continuous development in our market between.

Furthermore, we delivered $1.3 million in adjusted net income for the second quarter of 2024 versus $0.9 million in the same period of 2023, an increase of 43.8%. An essential advantage we possesses is, is leverage unified AI engine for both consumer mobile apps and enterprise SaaS solutions, allowing us to maximize innovation across various sectors.

Our B2C business, particularly our mobile beauty app has continued to grow very strong. We witnessed an 18.3% year-over-year increase in our mobile beauty app active subscribers, reaching a historical high of over 919,000. This sustained growth in active subscribers is a testament to the increasing demand for mobile app that empower users to edit, enhance and beautify their photos and videos. It also indicates a more promising future for [indiscernible] both in our user base.

Our suite of YouCam app continues to lead the innovative digital solution. Harness cutting-edge technologies like GenAI for photos and videos. Users can now explore and express their unique styles in photos, videos and onwards, unlocking their creativity through the latest AI capability. As mentioned earlier, we have introduced quite a few enhancements driven by GenAI including AI [ Avatar ], AI Fashion, AI Hairstyle, AI Headshot, AI Studio, AI Color and AI-enhanced photo/video editing tool. This tool offer users sophisticated options for beautification and enhancements setting new standards in digital creativity and showing case our commitment to continuous innovation.

Turning to our B2B operation. This quarter, we focused in the B2B sector centered on enhancing market penetration across various verticals. We made additional inroads in AI-powered skin diagnostic products and the jewelry fashion [ Virtual Try-On ] solutions. Simultaneously, we expanded the adoption of our mega VTO across all brands in the region. We secured multiple new contracts for our beauty, skin care and the jewelry solutions within B2B sectors, highlighting strong demand for our comprehensive offers in advanced technology across diverse industries. Additionally, we successfully renew major licenses with key beauty groups and retailers. This renewal underscore the growing trust in our solution to meet evolving demand and affirm our leadership in VTO, Virtual Try-On services.

Furthermore, we leverage this opportunity to cross sell to affiliated brand and offer expanded services, including broader skill selection to market expansion. The strong revenue growth this quarter reflects the continuous recovery in sales cycles and the expansion of our enterprise business pipeline.

Another exciting event took place during the second quarter. We formally announced our generative AI framework for beauty, PerfectGPT at our sixth annual Global Beauty & Fashion AI Forum in New York City this June. Perfect GPT is a framework that commenced all other Perfect Beauty services, aiming at solving customer beauty and fashion pain points through natural language conversation, LLM, large language model and Generative AI video content. Any brand can use this framework to develop its own personalized AI assistance for beauty, skincare and fashion and deploy it in conjunction with other digital services for a unified consumer experience, together with the perfect GPT framework.

We also announced a range of new beauty AI solution, including the brand new services of beauty GPT with specialized AI megatransfer step-by-step tutorials and the product recommendation. Also skincare GPT with AI skin analysis and product recommendations.

Down the road, we will develop more generative beauty fashion solutions using GPT technology, such as hair GPT, jewelry GPT, fashion GPT and more. To enrich consumers' journey, all these services can be integrated into a single touch point experience for consumers. All via simple intuitive conversational way of an AI assistant on brand website or in our app.

Beside GPT, in Q2, we launched the world's first HD Skin Analysis solution capable of detecting 2x higher precision when doing AI skin analysis on user's face. The improved AI model can now handle more info data from the high-definition smartphone camera and the upgrade enables brands and clinic to perform an even more accurate diagnosis for user's skin concerns. Plus, the AI solution, skin solution is upgraded with a batch capability to handle a large amount data images with a new AI skin score validator. Right now in [ brand's lab ] breaking news this new model to efficiently process large amounts of clinical test data and get results faster. The innovation continues also in the AI makeup domain. We pioneered the launch of the world's first AI Makeup Transfer with full look creation. This leading technology uses AI to detect and create exactly replicas of any training makeup look from social media or from any photo out of a beauty magazine.

Our GenAI model can detect the color, texture and the patterns of a look and transport it seamlessly to the user's personal selfie photo. Consumer can try all kinds of 20 looks with just one single photo image. The AI model can further compare look test and textures with our database of a makeup product SKUs and offer users a recommendation of specific brand products.

On the jewelry side, we also launched the world's first real-time multi-category stacking capability Virtual Try-On. Consumers can now try pairing several items together such as wearing multiple rings on different fingers or combining them with bracelets and watches at the same time. The enhanced capability is thanks to our improved tracking and rendering performance architecture to process multiple 3D objects, altogether directly from smartphone, CPU GPU.

Our company is fully committed to create new AI innovations to help solve both the consumers and the brand pain points with our full line of AI services.

In closing, we achieved robust business performance in the second quarter and the first half of 2024, marked by strong revenue growth, enhanced operational efficiency and the positive financial outcome.

Our B2C segment continued to experience rapid organic growth with the launch of a PerfectGPT and all other industry-leading AI technology. We are confident that Perfect Corp. is strategically poised to seize expansion market opportunity for consumers and brands and sustain our business goals both in the near term and the longer term.

Driven by the good demand for both of our app subscription and enterprise SaaS renewal 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 concluded my remarks. And I will now pass the call to 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 second quarter of 2024 versus the comparable period in 2023. And that, on top of the international financial reporting standard measures, we will also discuss non-IFRS measures to provide greater clarity on the trends in our operations.

In the second quarter of 2024, our total revenue increased to $13.9 million from $12.7 million for the same period in 2023, representing year-over-year growth rate of 9.6%. The robust performance was mainly due to the consistent growth momentum of our AI/AR Cloud solutions and mobile app subscription business, which is also the main focus of our business model transformation, carry out in the past few years to convert legacy contracts from licensing revenue into recurring subscription revenue.

Our AI and AR cloud solution and subscription revenue saw a much stronger increase versus the total revenue increase rate, reaching $12.9 million in the second quarter of 2024, up 17.4% rise compared to the same period in 2023. The subscription revenue contribution was at 92.8% of the total revenue in the second quarter. This growth can be attributed to the robust expansion of our mobile beauty app subscription and the rising demand of our online skin care diagnostic solutions and online virtual product solutions among brands and retailers.

Furthermore, this growth was also contributed by the addition of new categories and the increased popularity of our GenAI technologies for AI creation and editing features for photos and video. Notably, our mobile app active subscribers have surged by 18.3% year-over-year reaching an all-time high of over 919,000 by the end of the second quarter this year. The strong momentum underscored the continued growth interest in our suite of mobile beauty app and our capability to retain and convert those app users into paying subscribers.

The licensing revenue, which is mostly generated from our traditional offline services, decreased by 49.8% in the second quarter of 2024 to $0.7 million compared to $1.4 million during the same period of 2023. This result was well expected as the company is on a mission to convert this type of legacy nonrecurring revenue into AI/AR subscription revenue from brands and consumer instead. The licensing revenue will gradually become immaterial as it continued to be phased out in place of a new subscription revenue model.

Gross profit for the second quarter of 2024 grew by 7.8% to $11 million with gross margin of 79.3% compared to $10.2 million and gross margin of 80.6% for the same period in 2023. The decrease in gross margin was primarily due to the increase in third-party payment processing fees paid to digital distribution partners such as Google and Apple due to the increase in our mobile app subscription revenue.

The total operating expenses for the second quarter of '24 increased by 0.7% to $12.4 million compared to $12.3 million for the same period last year. The increase were primarily due to the higher sales and marketing expenses, research development expenses, offset by a decline in general and administrative expense in the second quarter of 2024.

To break down operating expenses, sales and marketing expense for the second quarter of '24 were $7 million compared to $6.6 million during the same period of last year, an increase of 7%. This was due to an increase in marketing events, advertising costs for our mobile apps and cloud computing costs.

Research and development expenses were $3 million for the second quarter of '24 compared to $2.8 million during the same period of '23, an increase of 7.5%. The increases were from additional R&D headcount and related personnel costs.

General and administrative expenses were $2.4 million for the second quarter of 2024 compared to $3 million during the same period of 2023, a decrease of 19.1%. The decrease were mainly due to lower corporate insurance expenses and increased operational efficiencies.

Net income was $0.8 million for the second quarter of 2024 compared to a net loss of $0.2 million during the same period of last year. This positive net income in the second quarter of 2024 was supported by continued revenue growth and effective cost control.

Excluding noncash share-based compensation, noncash valuation gain and losses of financial liabilities, adjusted net income was $1.3 million for the second quarter of 2024 compared to adjusted net income of $0.9 million in the same period of 2023, an increase of 43.8%. This represents an adjusted net margin of 9.1% in the second quarter of 2024.

Looking at our balance sheet. As of June 30, 2024, the company held $158.8 million in cash, cash equivalents and 6-month time deposits compared to $157.3 million as of March 31, 2024. This increase was a result of the positive operating cash flow and the interest income received from the company's bank deposits. We had a positive operating cash flow of $2 million in the second quarter of 2024 compared to $2.6 million during the same period in 2023. The positive cash flow demonstrated the company's continued ability to generate cash flow to support its business operations and growth strategy.

In total, our customer base had a net increase of 20 brand clients since the end of last quarter, achieving a total of 686 brand clients with over 774,000 SKUs for makeup, skincare, eyewear and jewelry product as of end of June. This is yet another record quarter for these metrics, showing the continued increase in customer penetration and SKU expansion. More brands and products are leveraging on Perfect console platforms to manage it's services subscribe from Perfect.

In the second quarter, Perfect had 151 key customers compared to 152 in Q1 2024, a net decrease of 1, a result of normal filtration in the B2B business, renewal continued to be strong while upgrade sales were weaker in this quarter.

In the second quarter of 2024, our total revenue has consistently exhibited expected growth primarily driven by the continuous momentum in our AI/AR cloud solutions and mobile app subscription of our U.K. family of AI-powered apps. Our operational efficiencies and financial prudence to continued profitability in creating value for investors. Given our robust sales business model, we are confident in the growth of our business as we move into second half of 2024.

We are also committed to investing in professional development and talent acquisitions, especially in the field of GenAI technology innovation to strengthen our core capabilities. This investment aims to further enhance our role as a transformative core, reshaping how consumers interact with digital experience both in brand offerings and in mobile app utilization. We are confident that our strategic position through our proprietary technology will keep us at the forefront of digitalizing how beauty and fashion brands interact with their audience.

Finally, we reiterated our 2024 guidance that the total revenue year-over-year growth will range from 12% to 16%. This forecast is based on the company's current assessment of the market and operational conditions, and management will closely monitor business progress and provide updates in order to offer better transparency to the market.

That concludes my prepared remarks. Operator, please open up the call for questions.

[Operator]

[Operator Instructions] Your first question comes from Brian Schwartz with Oppenheimer.

[Brian Schwartz, analyst]

And congratulations on the subscription revenue growth of the technology innovation in the quarter. A couple of questions I wanted to ask you was maybe about the outlook and thinking about the second half. I know there's a lot of concern out here about the macro and the election impact to demand in app. Maybe from a high level I don't know if it's for Louis or can you talk about kind of the shape of the pipeline seeing exit in Q2 compared to maybe where it started in the first quarter, how your coverage ratios and just the shape of the pipeline is as we enter the second half of the year?

[Pin-Jen Chen, executive]

Brian, good to talk to you again. So I think if we look at our first half of the year, top line, we reached 13.5% growth as well will be in the range of the annual guidance that we have given between 12% to 16%. Certainly, the Q2 was slightly slower compared to Q1, but I think that's also part of the seasonality effect.

As we see the pipeline, the renewal from the brand customers are performing quite robust. So we are able to renew all the major contracts in the first half of the year. That gives us confidence of moving into second half to keep up this performance. So with that said, I think looking at the second half of the year with the pipeline that we have been developing and the visibility that we see that we reiterated the annual guidance. So I think we'll still perform within the range that we have given to the market.

In second half, the macro improvements to say the interest rates come down, the cost of capital is cheaper and the enterprise are willing to spend more. I would certainly can see at a higher range of our guidance. If not, I think we'll be in that range.

[Alice H. Chang, executive]

This is Alice. Nice to talk to you. So Brian, Q2, it's normally as we expected, not a high growth season. B2C, in this case, the consumer seems not affecting by all the conditions, and it's quite global. So the expansion to a lot of the new regions in Q2.

For B2B, just like Louis said, renewals still strong. And the new upsells is not as strong as we expected. However, the -- all the new AI we announced in June in New York and Paris, the PerfectGPT part, all the AI transfer part got all the brand groups high interest.

I think all of them are considering AI, how AI, GenAI, AI GPT can have impact on their internal operation efficiency externally how to face to the consumer using GenAI GPT.

We are currently the only solution in the market innovation for those brand groups already from a very high AI committee to engage, evaluate it. It takes time. But my assumption, my vision for every beauty group, they need to have a AI assistant using GPT and our AI services together as a general consumer engaging way, brand new way. It may take time, but we see end of this year will be some POC to come.

[Brian Schwartz, analyst]

That's real helpful. And then, Alice, that's a good lead into my second question. I just wanted to ask about AI and spending trends. Is there a possibility as we think about budget at these brands? Is there a possibility that bids will allocate more funds specifical AI initiatives as the technology mature and you're introducing new products here in the year. What are you hearing from kind of the brand end in the market?

[Pin-Jen Chen, executive]

Brian, from the beauty enterprise as we have been introducing this AI, all of them are very interest and majority of them have actually set up a committee or even a special AI budget to explore new possibilities how AI can help on beauty and fashion.

I think the enterprises are certainly cautious about how to do the AI. So these budgets are initially for proof of concepts or pilot projects, so this is one of the main tasks for the second half of the year to develop these tailor-made solutions, how do you generative AI, GPT, LLM solutions to help the beauty consumer with the discovering product and finding the new looks, trying on learning tutorials and more. So certainly, I think, is a promising area for years to come, especially this year, it's a phase of initial exploratory and using these AI budget to build some pilot projects. I believe that is going to be the initial trend.

[Brian Schwartz, analyst]

And then with 2Q specifically with the key customer accounts because there's been a little bit of upturn there, I think you mentioned that there's some financial distress among those customers churning. Is it fair to assume that those customers that are churning are more smaller brand partners of the business than larger ones? Or maybe the question is, what's the typical average size of these key customers that are churning?

[Pin-Jen Chen, executive]

Right. So some of these are not necessarily churning. Sometimes it can be just a downgrade as we define key customers or I've said all of $50,000. So typically, we do see that, as you said, the larger enterprise are very stable. So they are using multiple services in multiple regions and for many, many years already. There's not much impact in there. However, some other customers who are just starting or we hope to upgrade them or they are just marginally over that threshold that what we see as a normal situation.

Typically, we try to upsell new modules to them to make sure that they're becoming a larger clients, so we can increase the number of KC. In this quarter, too, we see that upgrade sales being a bit smaller -- smaller brand and the core beauty, I think, certainly the growth has been a little bit more modest across the industry, effective whether it's China or in other regions as well. So we don't see that as too much of alert at the moment. Of course, the growing momentum, hopefully, to come back as enterprise spending reopened and they are willing to commit to a larger amount of contract or spending services to more geographies or injecting more SKUs?

[Brian Schwartz, analyst]

Well, that's good. So they haven't fully gone away. Last one for me, you have a global business. Shed a little light in terms of what you're seeing in terms of trends and momentum in the different geographies, what you're seeing in Asia Pac versus what you're seeing in the expense versus EMEA.

[Pin-Jen Chen, executive]

We do see a few -- from a global perspective, quarter 2, Japan -- Japanese yen has been demonstrated much weaker in quarter 2. Certainly, the currency seems to be recovering in these past few days. But as far of quarter that affected somewhere between 0.3% to 0.4% of our top line of the currency against U.S. dollar. So we see a good momentum in Latin America and in Brazil, especially for our B2C mobile app business, really, really grow a good momentum going there for mobile consumers willing to pay for annual subscription for beauty apps. So that contribution in LatAm, especially in Brazil, is increasing.

Certainly, the challenges, [ the low life] continue to be China per se. I think that the condition is fierce competition in pricing in China for that momentum that seems to be slow. We don't sure yet when that will be recovering.

Other good growth area will be Middle East and Southeast Asia. Although its revenue contribution relatively to developed countries is still slightly lower, but the momentum, I do see promising new brands, new retailers, a lot of them, travel retailer is coming back as well in various regions. So these were the highlights and the low lights.

[Operator]

Your next question comes from the line of Lisa Thompson with Zacks.

[Lisa Thompson, analyst]

I have lots of questions, but I'll just ask a few of them. Just to go back to the AI assistant, you said by year-end, you might see some pilots or something. What kind of company do you think is the first to start rolling this out? Is it going to be retailers or brands? And what might they be using them for like the first ones we're going to see?

[Alice H. Chang, executive]

So in our [ folder ] we announced PerfectGPT. It's a natural dialogues to the end user plus AI services we have. My view just like all the new innovations will start from Prestige beauty group. And then once it's mature, then it'll go to the mass market. So by saying that, what we are talking to those potential beauty groups, fashion groups, very on top of the prestige part. Most of them are group. And just like Louis said that because they are forming AI committee to see how using our GenAI GPT for their internal and external services.

So answering your question, we see this is more from will be earlier from a top beauty group, fashion group and one toward the end of this year and then expand it to more mass and the retailers.

[Lisa Thompson, analyst]

All right. Great. I'm excited to see this. There's so much potential. Let me ask a question just about revenues. The licensing revenues are a mystery to me. Are they going to be going up and down quarterly? Or are they just starting to wane to 0 from here? Going forward, is it ever going to be higher than the second quarter number?

[Pin-Jen Chen, executive]

I think the licensing revenue is going to -- we expect this to be more flat compared to what we see in the trend. But years ago, it used to be a much higher rate, especially pre-COVID. After that, I think the business and technology has moved much more online and also to the revenue subscription-based recurring basis. So it's really for those more legacy products like in-store Virtual Try-On product, this type of demand. I think it's not going to be 0. It's always going to be there because in some markets, there might be a need deploying this product along the side of doing that online. But again, we don't expect that to be another significant. As I said in my remarks, will gradually become more immaterial, somewhere, let's say, between 5%, or more than 10% of the revenue. That seems to be the expected results.

[Alice H. Chang, executive]

Lisa. The in-store now -- we start from in-store after COVID every brand and the retailers trying to engage on the website, and it's more renewal are sustainable for our business model. So internally, we also encourage them to transform to the renewal base especially online. So in-door still has its demand for some of these events or in specific stores. We did not expect it will grow, and we will also encourage them to move [ also ] the model to our subscription and the renewal base.

[Lisa Thompson, analyst]

Okay. So do you think it would be logical to keep revenues under $1 million a quarter going forward?

[Pin-Jen Chen, executive]

I think that's fair to say.

[Lisa Thompson, analyst]

Okay. Good. That's helpful. Let me go back to my questions. So yes, so another mystery I have is when I look at the Q2 gross margin versus the Q1, it's up, but it's the -- licensing was down a lot, and I would assume that's like 100% gross margin. And I thought that mobile was -- the apps were going faster than B2B. So that should also take margins down. What am I not understanding about how this works?

[Pin-Jen Chen, executive]

I think it's a little more fluctuation. The Q1, Q2 isn't really too much different internal margin profile. You are right in this quarter 2, the B2C app is growing faster than the B2B, therefore, the margin, we see a year-over-year basis decline around 1%. So I don't think there's anything wrong in your estimate.

The B2B has a higher margins, depending on the type of product, right? So some are 90%, some are 92%. Some are even higher. So it really, I don't think it's a fair comparison quarter-to-quarter because of the different mix and the renewal period of each may be different. But again, if we look at the summary and the overall average, I think it's quite in line quarter 1 and quarter 2.

[Lisa Thompson, analyst]

Okay. All right. Another question I have. Have you given any thought to doing advertising for the mobile apps? I shockingly saw a couple of face tune ads a few weeks ago, which surprised me. Are you looking at doing any other different marketing than what you've been doing?

[Pin-Jen Chen, executive]

We still spend some of the market -- sales marketing expenses and efforts in user acquisitions. So we do advertise in select countries, in select channels. It's really based on the analytics of how much of those advertising can bring real ROI to bring real user conversion and become paying active subscribers. So there's always new channels and new platforms for doing ad, and we continue to pilot test, but again, this is not a very big part of it. I think organic growth, digital SPO that is where our big investment comes, but additionally, some users are very hard to be targeted and advertising comes as the additional help.

[Alice H. Chang, executive]

So besides us in our operation and organic growth is the key. And of course, CPI advertising is part of them but organic growth is always the key focus of our business -- app business growth. So you can see our advertisement out of our total paid subscriber percentage is pretty low, but we're still trying all different kinds of advertisement or channels to try and get good ROI for all the investment of the advertisement.

[Lisa Thompson, analyst]

Okay. All right. And I guess one last question is kind of a big picture question. Look, I've started to see companies that are talking about AI for e-commerce, where they seem like they're putting together platforms for selling and retailing. How big of impact was that going to have on you? Or are they just going about it the wrong way?

[Pin-Jen Chen, executive]

I don't think it's the right impact. I think the different AI technology we developed work in conjunction to different e-commerce platforms and different type of targeting. What we are trying to build as our unique solution is more for personalized recommendation, right? So as part of the AI try to find what you need, and it's important for beauty category specifically to know the user style, the shape of their face, the color of their eye, the color of their hair.

So this is where we come very strong with our AI services, be able to understand and analyze and clear that with the white load. And I think that technology, again, is supplemental technology to the overall e-commerce platform, where the brand now normally sending them e-mail marketing or having a chatbot, be able to actually analyze and you use a very, very personalized recommendation, which we believe is going to increase the conversion rate and the basket size.

[Alice H. Chang, executive]

My view for all the AI conversational AI assistant will be on every vertical website for retailer, no matter what kind of vertical. And that's the future. You don't need to search and browse. You just go online. You don't need to go to the store to ask BA. Now you just go online. Every vertical website will have an AI assistant to talk to you. You can ask any question, reply and recommend. And so I think that's the future for every website.

And Perfect, we are focusing on beauty, skincare fashion, that's our vertical because not only ChatGPT conversation, message chat conversation. Besides in the dialogue, we can also add the value add of our AI services that we've already developed for beauty, skincare, fashion, so provide a real recommendation digitally to the users.

So Perfect Corp. now is the only solution for AI assistant, conversational assistant ways the Virtual Try-On recommendation analysis together as a one point of user point, single point of view for all the AI system of any of the brand site. However, I think this new -- brand new experience, I believe, will come from top brand group and then turning to our own mass market one by one in the next 3 to 5 years.

[Lisa Thompson, analyst]

Right. I just can't imagine that those companies that are just getting involved in this would even have the information required to make recommendations other than like find me a red lipsticks, something very simple, whereas you have years of experience that has to be somewhat of a moat to keep them away. Okay. Sounds good. I'm looking forward to seeing that out in the wild. I really am because it's going to be great to just be able to ask some questions and find a product. So much [indiscernible] for...

[Alice H. Chang, executive]

Yes thank you for that. Because just like you said, because of all of our knowledge about beauty, skincare, so in the PerfectGPT it, not only it's a GPT platform but we use [ R&D ]. We use our own know-how database to integrate it and specifically for each brand recommendation. I think that's also one of the uniqueness based on our over 600 -- almost 700 brand experience, and we know exactly what the user like and do the recommendations through the conversational dialogue with AI systems.

[Operator]

Your next question comes from the line of Christopher [ Riccio ] with Partners Corp.

[Unknown Analyst]

Just a few questions. I wonder if you could walk me through the process of converting your brand clients into a key customer. Is there a specific methodology that you guys try to use? Is there a marketing approach? Is there top salespeople that you assign to certain brands to try to convert them into a clinical "key customer?" Is there an overarching methodology, so to speak, to make them this upper tier customer within your brand client pool? That's my first question.

I guess the second question related would be, is there -- and forgive me if it's somewhat of a naive or even question, but is there an overarching profile to your key customers? Are they all retailers? Are they -- if you could possibly generalize as to what your key customers other than the obvious revenue profile? What are the key customers typically look like, if at all, or do they range throughout the span of your brand clients?

[Pin-Jen Chen, executive]

Chris, this is Louis. Let me answer the second question first. So typically, a typical profile of a key customer, they are typically multinational. So they're operating in more than one countries. So these are typically beauty brands that are there for a few years already, so extended their business across the continent. So -- and that is where once they start using the service, they typically have a unified global strategy to align their offering in different countries. Therefore, their consumption of our services is in greater territories, right? So that will generate more revenue.

The other thing that we have seen as part of that profile of the key customers is the brand or brand groups, meaning that they are not only operating one brand. They probably had a sister brand or a number of good brands so either they acquired over the years or they have grown organically into some adjacent brands. So that kind of typical profile.

Retailer is the same thing, right? So retailers like Sephora, for example, they are operating in many other countries. So they are certainly part of the key customer [ life ].

As your first question for the promise of converting [ brand ] client to key client. Mostly it starts -- we always want to make the entry to start working the brand very easy, right? This is new technology to them. We are not asking them to commit up-front multimillion-dollar agreement, which might be very a high commitment. So I think typically we start -- they can do a pilot, they can do in one country only for selected products, right? So something easy, [ under $50,000 ] to start with. And the process there is let them see the results. Let them see the [indiscernible] showing a better conversion, lower return rates, bigger basket size and then encourage them to deploy these services to more countries. Therefore, they will have been the recurring compounding effects on the revenue to increase and hopefully become bigger than $50,000 a year, much more than that and then become a key customer.

So the strategy there has been always an upsell, right? So to start using something to get familiar with their platforms and then upsell them more services, either to more categories or beauty products or more geographies. Or even if they are [ brand group] after using them in their sister brands.

[Unknown Analyst]

I see. Two quick follow-up questions. One actually related to a previous question. Very briefly, I see that your R&D has traditionally seems to monitor around a 21% cost margin. Is that something that is going to be very stable? In other words, there's not a lot of operating leverage there as you continue to scale up, we should continue to see you committing around 21% of your top line R&D? Or does that begin as your revenue line continues to grow? Does that flatten out and we begin to see more and more of your operating leverage being squeezed, so to speak, from that cost line item?

[Pin-Jen Chen, executive]

I think we are pretty pleased with the R&D cost structure, especially out of here in Taiwan. Very efficient team, a very good cost structure and traditionally, had ranging between 20% to 25% of the revenue as the revenue started to increase.

Certainly, we're still investing in R&D talent. As I mentioned in the remarks, I think it's an area of GenAI that needs a lot more talent to develop a lot of new use cases. So I think generally, we are happy to see or are able to run this team around 21%, as you mentioned. If we were to run these in different countries or different development cities, Silicon Valley or other places, it will be a lot higher cost. So I think it is it is fine to run around this.

Of course, as we call the category bigger, the ratio may go down a little bit, as you said, the leverage. But at the same point, we are also increasing R&D spending in terms of hiring more headcount. So net-net, I think, remain about the same ratio of the revenue at least for the midterm.

[Operator]

Your next question -- [Operator Instructions] -- comes from Aashi Shah with Sidoti.

[Aashi Shah, analyst]

Congratulations on a very solid second quarter results. I have one question about the monthly active subscribers. This quarter, we saw -- and it up 18% year-over-year. Can you give us some color on what -- on the subscriber's nature, what percentage is new to the applications? And what does the churn rate look like?

[Pin-Jen Chen, executive]

Aashi, I think the subscriber we see quarter-after-quarter increased. Typically, those increases are on an annual subscription basis. So I think that's good, meaning they are those customers, they are really high frequency use. Their community to use these apps throughout the entire year rather than just taking a short time, 1 month subscription. So I think that means that they also are more tentatively to renew year after year after year.

We haven't announced publicly yet our renewal rate or churn rate in specific terms. So I'll refrain from answering that, but I think as a sure we see the momentum, big growth is not just coming from one particular country or one particular product. I see what we are seeing is more than 10 countries, probably 15 to 20 countries now that the consumer -- the mobile app consumer are really much more open to paying a subscription for digital apps even for tool-like app, which is traditionally was very, very difficult.

But I think now the mindset probably has changed. There are so many other apps that all are requesting some sort of subscription base and to unlock the premium features. So our strategy has been as long as we keep innovating on these innovations and premium features, we're able to retain those active subscribers and then continue to convert more of the free trial users into our paying subscribers.

[Aashi Shah, analyst]

And I have a follow-up question. If you can rank maybe three or five new categories in terms of growth, what would those categories be? And which ones would you think would most likely contribute to revenue growth in the second half of 2024? What are the catalysts that you're looking at right now in terms of categories or the new categories that you've just started working with?

[Pin-Jen Chen, executive]

I think the -- it doesn't matter which category typically, it takes time, right? Enterprise customer, they are really cautious on deploying services. So services that we have deployed and already passed the pilot test things like, for example, the pilot did last year, we started to see more scale this year and even more the following year. On our historical experience, typically a client will take about 2 years until they become a more mature in the consumption of these services. So with that said, I think the growth momentum on the skincare is very strong because it's an area that we invested heavily in the past 2 years and started to see to capitalize on that result.

Of course, makeup is very mature and robust, so we see probably a slower growth rate from that perspective, but the size of it is bigger, right? So because we've been doing makeup for 8, 9 years now.

Jewelries and -- jewelries, watches, we see very, very good momentum going on because we're able to launch about 10 to 12 pilot in the last year. Many of these pilots have been concluded, and they are converting into full deployment, and then also expanding to more countries. So internal contribution, I feel that skincare because of the strategy of going the [ Med ] Spa, the clinics, even addressing the long tail clients will show more results financially.

The B2C consumer app continues to be very strong. So we're spending more look here. We're getting more digital marketing efforts around different languages to expand the market there. And then jewelries and watches, I think, is very promising. Our quality is really, really superior to any competitor. So we're winning virtually every deal that is opened in the market.

[Operator]

Your next question comes from Mike Kupinski with Noble.

[Mike Kupinski, analyst]

Yes. First, let me offer my congratulations on a solid quarter as well. Just a couple of questions related around the margins. I was -- you mentioned cost efficiency initiatives, and I was wondering if you can just give me the impact that, that had -- those cost initiatives had in the quarter -- in this latest quarter. And then I was just wondering if you can maybe give me a little regarding your verticals you're expanding beyond skincare into fashion apparel and jewelry.

I was just wondering if that is going to more so affect B2B. Or do you think that those expansions and verticals are going to affect over B2C? And then based on that answer, if you can just kind of give me your thoughts on sustainable margins as you kind of look forward over the course of the next couple of years given how you see the two different businesses growing given that there's a different margin profile between B2B and B2C.

[Pin-Jen Chen, executive]

Mike, let me start with the first, and Alice may add on to the others two. So in terms of the margin, if we look at the B2B, one of the forte and the advantage we have is this clients that we serve, many of them has not a category, right? So a beauty brand, they have make product, cosmetic, they have skincare, they have hair product and more. Even some of the group, they also do jewelries and fashions and eyewear which means our customer acquisition costs for our new category, there's efficiency there because it's the same sales team, is the same customer service team, customer support success team, but we're able to spin our offering and serve more products and services to the same client or the client groups.

So I feel that is a very unique part of our business, how we are able to move from a single income category to a [indiscernible] category in these past few years. And I may continue to execute on that strategy as there's certainly more consolidation in the industry. So this beauty group, they are also expanding. They are acquiring new brands. They are getting into newer categories and then we are able to serve them as the current service providers.

On the sustainable margin, if we look at the B2B business, the margin is typically much higher over 90%. We develop technology in-house. We don't pay separate royalties to anybody. So this is really a pure margin business.

The B2C part, we pay Apple and Google for the distribution that we know Apple charge 30% and Google 15%, right? So in that perspective, the Apple consumer margin will be up 70% for us, and then Google we have 85%. So the overall sustainable margin, it really depends on the mix ratio between the Apple users, their Google users and our B2B customers..

So I think what we see here on the 79% may go down a little bit depending on if the B2C continues to grow stronger in the next few quarters. But I don't think it's going to be much lower than what we see now, maybe 1% or 2% more dip, but that should be it.

I think for new vertical and maybe I'll let Alice comment on the potential for new vertical.

[Alice H. Chang, executive]

For new verticals, it is for B2B, it's very vertical because makeup brand, they may not need jewelry. So we talked to a makeup brand, skincare brands, jewelry brands, [ care ] brands, I -- its own demand. So this is, like Louis said, some of the brand group, they have all the different divisions. So once we know one of the division, easier for us to talk to the others. And for purely new brand group with a very specific vertical demand like hair, or even like Med Spa, Clinic that we need to rebuild- build from not rebuild from the digital -- build from digital marketing and talk to them.

So for Med Spa, I would say it is a new market with very, very high demand for our skin analysis and aesthetic simulation. And this is not in the brand group. But within brand group, they have multiple demand that for us, we don't need to do too much from ground marketing efforts, then we can expand easily to different verticals but do see a very, very strong demand from Med Spa, clinics for the skin analysis and static simulation, microplasticsurgery request.

And for the B2C, all these are for B2B very vertical. But for B2C, glad that we can leverage all the technology we work with the vertical, and we integrate them into our beauty app. For the app user, the end user, they pay $35, $40 per year, they can enjoy everything. So that is also one of the key that although the whole economy has somewhat is challenged, but the B2C beauty market still keep on growing very strong.

[Mike Kupinski, analyst]

Just one quick question, if I may. Can you just talk a little bit, you touched on the prospect of M&A, I think. And wondering if you can just talk a little bit about the M&A environment and whether or not you would look for some compelling acquisition opportunities here.

[Pin-Jen Chen, executive]

Certainly, M&A is part of the growth strategy beside organic growth. We've certainly been paying attention and looking at opportunities. Nothing material has been ready to be announced yet.

I think the market, it is reopening. I think valuation has come down to a much more reasonable rate levels for a lot of these tech companies. So it's something that we are actually looking at the synergies that we can be with our global distribution, we offer local platform. So again, once we have any news, we'll be sharing that to the market.

[Operator]

And that concludes the question-and-answer session. I will now turn the conference over to Jimmy Shu for closing remarks.

[Jimmy Shu, executive]

Thank you once again for joining the call today. If you have any further questions, please feel free to contact us directly or through our IR website. We look forward to speaking with everyone in our next call. You may now disconnect.

[Operator]

This concludes the conference call. Thank you for your participation. You may now disconnect.