Perfect Corp

NYSE:PERF

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[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] 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, Vice President of IR of the company. Please go ahead, sir.

[Rick Lee, executive]

Thank you, Andy. Hello, everyone, and welcome to Perfect Corp.'s Q3 Earnings Call. With us today are Ms. Alice Chang, Founder, Chairwoman and Chief Executive Officer; Mr. Louis Chen, our Executive Vice President and Chief Strategy Officer; and Mrs. Iris Chen, VP of Finance and Accounting.

You can refer to our third quarter 2023 financial results on our IR website or in the Form of 6-K we filed with the SEC earlier. You can later access a replay of this call on our website showed to the app be after the conclusion of this call.

For today's call, management will provide their prepared remarks first. Then we will host a Q&A section.

Before we continue, I would like to refer you to our safe harbor statement in our earnings press release, which is our [ prior to this ] call, but this call may contain forward-looking statements regarding Perfect Corporation's performance, anticipated plans, operational 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 recorded 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]

Hi, everyone. Thank you, Rick. Welcome to Perfect Corp.'s 2023 Third Quarter Earnings Call. We have some exciting news to share today. So we get started.

In the third quarter of 2023, our growth momentum from quarter 2 persisted, resulting in a total revenue of $14.5 million. This marked a 13.2% increase in revenue compared to the same period of last year, and a 14.7% increase when compared to the previous quarter.

The primary drivers of this quarter we made from our AR/AI cloud solutions or enterprise brand business, B2B and the subscription services for our mobile beauty app business B2C.

We have seen very promising new developments in our AI skincare solutions and the AI hairstyle footprint, and other innovative app features powered by Gen AI, which I will elaborate more shortly. For the bottom line, our net income for the third quarter of 2023 was positive, standing at $3.5 million on an adjusted basis, and a $2.7 million when adjusted, underscoring our commitment to effective cost management while growing top line revenue.

Overall, we are very encouraged by our continued top line growth an improvement in profitability as a result of our continuous effort to optimize our business in both B2B and B2C. Our strategic development focused in Generative AI has already shown a strong demand from both brand customers and consumers.

Generative AI unlocks many new possibilities, individual imaging, video, beauty tech, skin tech and the fashion tech, different uses cases. These new use cases will extend our reach into an even bigger total addressable market in a rapidly evolving digital landscape where brands are investing more and more into digital transformation.

Perfect is well positioned to help our brand partners with the latest in generative AI model in addition to a complete line of beauty tech, skin tech and the fashion tech offerings.

Finally, our consistent rollout of a wide range of innovative features driven by Gen AI technology has maintained the strong growth of our mobile app subscription business. This new AI features have not only drawn a new mobile app installation, but also effectively converted users into premium subscribers.

Perfect is ready to [ capitalize ] on this new opportunity, and we are positioning ourselves as the really feasible AI company for both B2B and for B2C.

Now let's shift to our focus to new operational outcomes of the third quarter and discuss our most recent advancements. In the third quarter, on the B2B side, we secured several sizable new and renewals with beauty grid. Some of which included up sale opportunities, such as expanding their SKU offerings and extending to additional countries.

This renewal not only underscore the growing reliance of this brand and our solution to meet their evolving needs, but also reaffirm our leadership in the field of our color cosmetics. This continues to be a very key differentiator and a core competence for our company.

To that front, we have continued to reinforce our omnichannel strategy through the expansion of strategic alliance with various distribution channels of beauty, skincare fashion products to ensure comprehensive coverage of all customer touch points.

For example, we teamed up with Dufry, a key player in global travel retail to provide both in-store and web-based virtual mega trial experiences for 15 Dufry brands in airports across 27 countries worldwide.

Additionally, we are very excited to announce our partnership with Walmart, the world's largest retailer to initially offer makeup virtual trial experience for more than 1,400 beauty products in our mobile app.

This level of integration is made possible, thanks to our existing relationship with over 600 global brands, enabling the effortless distribution of this brand's virtual product offerings across diverse retail platform.

As we look to the future, it is clear that virtual trial technology becoming essential for all beauty and fashion brands and retailers in engaging with customers in delivering personalized shopping experiences for all.

In the third quarter, a significant highlight was the accelerated penetration of skincare markets. Marked by notable increase in new deal flow from the skincare sector. We believe the skincare industry is going through a transformational change to adopt more digital technology and to offer consumers with a user-friendly and objectives-driven styles [ noticeable ] results.

Our AI skincare technology distinguishes itself by delivering an unparalleled AI-powered skin analysis that encompasses 14 different skin concerns in real time, providing users with comprehensive and instant feedback on their skin progress.

Secondly, we have introduced a new range of subscription plans tailored specifically for small and mid-sized skincare brand, the next part on our website. This expanded strategy on skincare enables us to engage with a larger potential customer base of all sizes.

By providing tiered subscription plan, we not only make our skincare technology more accessible, but also streamline the sales process. This approach will lead to larger installed base for our AI skincare services.

Another new use case we launched in the market is our Generative AI hairstyle, very new. We upgraded our AI hairstyle solution by replacing the previous generation AI model to the latest effusion Generative AI model, and the result is amazingly good. The realism of the hairstyle images is now hyper realistic, and the generative style variation unlock more choices for consumers to visualize more hairstyles to choose from.

On to the AI hairtsyle AI development, we announced our partnership with TRESemmé, a Unilever brands of hair products to offer AI hairstyle generation for their consumer to try on. And the possibility is ever expanding. We are also targeting broader hair brand markets, such as [indiscernible] visualization and hair extension with the latest generative AI upgrade.

This is a testament to the versatility and the broad applicability of our Gen AI-powered virtual trial technology, demonstrating their potential to cater to a diverse range of market needs.

Another cutting-edge AI innovation we just launched in third quarter is in high-quality automated 2D to 3D SKU conversion technology for jewelry and large VTO, virtual try out. These results can quickly enlarge the total numbers of SKUs of our jewelry brands customers. They can offer on their website in a cost-effective and 3D way. This new 2D to 3D technology can help us expand to a broader jewelry in large trial market.

Now let's shift, focus to our B2C mobile beauty app business. We had another strong quarter for our app business. And as evidenced by 62%, 62.5% year-over-year increase in our mobile app active subscribers to 835,000. This sustained growth, very strong growth, shows us a testament to the increasing demand and market expansion in the room of photo, video and camera applications, including image and video creation, beautification and enhancements.

With our [indiscernible] YouCam app, we are diversifying our product offering and expanding our revenues for monetization to fully capitalize on the app market expansion train. We have implemented the following strategies. First, our team created a very regional map of premium features for subscribers. We introduced multiple AI-driven premium features by Gen AI, such as AI Avatar, AI Fashion, AI Hairstyle, AI Selfie and more to come, offering our mobile users with a wide range of photo and video beautification and enhancement solutions.

We have a very active road map to include the AI in all of our products and services. It will transform the whole industry with the power of beautiful AI.

Again, we have strengthened our cross promotion initiatives across our fleet of mobile apps. And actively executed marketing programs, the increase of app's coverability to new users. This customer is consumer at market is very large and growing market. More and more global consumers are opting to paying subscription for premium features. And Perfect is focusing to gain more market share in B2B mobile app business.

Third, we have expanded our B2C monetization opportunities, introducing new apps like our new app, YouCam AI Pro. It is a Gen AI tool -- app, Gen AI app for AI tap to image curation and more other Gen AI features collections. This new app has a very great road map to include many of our future Gen AI innovation from our Perfect labs.

We have also optimized our mobile app position prices, maintaining our competitiveness while increasing our revenue in several markets.

Collectively, this effort has been instrumental in driving the impressive expansion of our mobile app business. We are committed to sustaining this effort to enhance the visibility and the reputation of our YouCam app in the mobile app sector while positioning us -- ourselves favorably for future expansion.

In summary, our third quarter was robust, featuring double-digit revenue growth and positive net earnings. Our observations suggest that we are well positioned to meet the revenue growth target we shared in Q2, quarter 2.

Consequently, we reaffirm our projected revenue growth for 2023, which is expected to range from 11.5% to 14.5% year-over-year in comparison to 2022.

With that, I have now concluded my remarks, and I will be handing the call over to Louis, who will discuss our financial details with you.

[Pin-Jen Chen, executive]

Thank you, Alice. Before I go into the details of our financial results, please note that all comparisons are on a year-over-year basis, and that the reporting period is the third quarter of 2023 versus the comparable period in 2022. And now, on top of the IFRS measures, we will also discuss non-IFRS measures to provide greater clarity on the trend in our actual operations.

For the third quarter of 2023, the total revenue increased to USD 14.5 million, from USD 12.9 million in the same period of last year, representing a year-over-year double-digit growth of 13.2%.

Among our revenue sources, AI cloud solution and subscription revenue, which constitute 78.3% of our total revenue, grew by 24.8% to $11.4 million in the third quarter of 2023. This is intensive expansion can be attributed to the strong demand of our online virtual trial solutions among brand customers, and a robust growth in our mobile beauty app subscription.

In the current quarter, we have successfully renewed contract with prominent beauty brands with some renewal offering after opportunities to expand SKU offering and extend deployment to cover more regions. We also acquired several new customers in this quarter, including Walmart.

Notably, our mobile beauty app business, active subscriber has been surged by 62.5% year-over-year, reaching an all-time high of over 835,000 at the end of the third quarter of 2023. This significant expansion in this quarter, increasing demand for photo and video editing application, and the widespread acclaim of our innovative generative AI feature within our fleet of mobile beauty app.

These premium AI features not only span our mobile beauty app user base, but capture the attention of enterprise users, resulting in a growth synergy between our mobile app and enterprise operations that may bring more revenue stream into our business.

Licensing revenue, which is now mostly from the traditional offline services decreased by 13.6% from $3.3 million to $2.8 million, representing 19.5% of our total revenue compared to 25.5% of total revenue in the third quarter of 2022. The lower revenue contribution from licensing, not only online with management expectation, but also underscore customer continues elevated interest for online services rather than legacy offline offering.

In the gross profit was USD 11.8 million, while gross margin was 81.2% compared to 85.3% for the same period of last year. This change in gross margin primarily seen from the higher platform fees paid to third-party distribution platforms, Apple and Google, which can be attributed to the company expansion subscription for its mobile app business.

Compared to the [ 80.6% ] gross operating margin for the second quarter of 2023. For that, the third quarter was 81.2%, showing a quarter-over-quarter improvement.

Total operating expenses increased by 13.3% to $12.7 million from $11.2 million for the same period of last year. To break down operating expenses, total marketing expense were $6.4 million, representing 44.3% of our total revenue compared to $6.1 million and 47.8% of total revenue during the same period last year. The 4.9% year-over-year change was primarily due to the increase in marketing and user acquisition costs.

Research and development expenses were $3 million, representing 20.9% of total revenue compared to $2.6 million and 19.9% of total revenue during the same period last year. An 18.9% year-over-year change was resulted from an increase in R&D head count expenses.

General and administrative expense was $3.2 million, representing 21.8% of total revenue compared to $2.5 million and 19.3% of total revenue during the same period last year. The 28.1% year-over-year change was primarily due to an increase in public company-related costs.

The change in expense category signify a major increase in spending, a necessary step of our business team to seek to grow our revenue. Looking ahead, we will maintain cautious oversight and implement effective expense control measures to ensure that our spending remains responsible and aligned with our growth objectives.

Net income was $3.5 million for the third quarter of 2023 compared to the net income of $1.6 million during the same period of 2022, showing a 126.7% year-over-year increase in our bottom line.

Excluding noncash share-based compensation for the change in impact and onetime nonrecurring costs associated with our leaseback deal, adjusted net income was $2.7 million for the third quarter of 2023 compared to adjusted net income of $2.3 million in the same period of 2022.

Turning into our balance sheet. As of September 30, 2023, our company held $201.3 million in cash and cash equivalents and 6 months time deposits, compared to $198 million as of June 30, 2023, reflecting a $3.3 million or 1.7% quarter-over-quarter increase. The company's cash position remains sound and healthy.

In total, our customer base has a net increase of 26 new brand clients in the end of last quarter, achieving a total of 627 brand clients, with over 678,000 SKUs for makeup, skincare, eyewear and jewelry products as of September 30, 2023.

This quarter, we grew our key customers from 163 at the end of last quarter to 159. The addition not only came from our new win for more beauty and fashion brands, but also benefited from our successful penetration into skincare, jewelries and hair market in the last quarter.

In the third quarter of 2023, our total revenue has consistently exhibited strong growth, primarily driven by the impressive momentum in our AI, AR cloud solution and mobile app subscription. For premium features and AI-powered app, including the newly launched YouCam AI Pro.

Furthermore, our unwavering commitment to operational efficiency has resulted in a noteworthy uptick in our gross profit, showcasing our dedication to maintain a balance between revenue expansion and profitability.

Concurrently, we have continued our investment in talent acquisition and technology innovation. Despite our rising operating expenses, our net income remains robust. We firmly believe that our position within the thriving AI industry equipped us to seize the opportunities ahead and deliver sustainable value to our shareholders.

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

[Operator]

I will now open or we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Clarke Jefferies from Piper Sandler.

[Clarke Jeffries, analyst]

Louis, you mentioned some renewals at some large customers or renewals of opportunities. Wondering if you could speak to the spending trends in the top, say, 5 customer cohort? I know that was nearly 1/3 of the business last year. Just wanted to get an update on how your spend with the largest customers have changed year-over-year?

And then maybe a follow-up is, we've seen pretty promising brand and SKU growth at nearly 30% year-over-year. But brand revenues are maybe a little bit disconnected from that. Any expectation on whether we could see brand revenue accelerate here over the coming quarters? I know that licensing versus cloud revenue is a dynamic here, but hoping you could comment on any other factors that might play out such that brand and SKU growth would match revenue growth going forward.

[Pin-Jen Chen, executive]

Clarke. So we have seen the renewal for the large customers have been very, very healthy in this year. So I think the majority of all of the large customers have renewed their license with us on time. So I think that is a strong testament that they feature the functionality, the license is essential to their business. So they continue to offer the beauty tech and skin tech or fashion tech solution that we provide. I think from that perspective, we remain quite confident about the results for this year and also for next year as the renewal are mostly 2023, 2024.

I think in terms of a larger acceleration in the brand business, if that was your question. I think ultimately, you come from the future possible adoption of new AI innovations such as Gen AI and other beauty tech solution that we bring to the market.

I think the first half of this deal was particularly more challenging for brands into looking into additional spending. And the good news is they are spending their current existing license assets. There's not much impact in their renewal rates and churn rate has been very well positive.

And then, again, we'll remain very cautiously optimistic. We have been introducing quite a lot of new solutions, especially in the Gen AI space to the brand, and look forward to materialize that into better deals and bigger deals for next year.

We certainly will encourage brands to onboard more SKUs in more territories. So I think the acceleration also is going through expansion to more distribution channel, [indiscernible] Amazon allow our operating partners to distribute their SKUs broader.

So certainly, the investment, we believe that in the long term, it's going to pay off and accelerate our revenue once there's a massive scale of use across all touch points and you transform the way the user shop online forever.

[Operator]

Our next question is going to come from Timothy Zhao from Goldman Sachs.

[Timothy Zhao, analyst]

Great. Two questions here. One is on the -- I think your revenue breakdown. Just wondering if your management can share what is the growth for each segment within the AI solutions, i.e., what is the growth rate like for the revenue 2B versus 2C? I think that will be very helpful.

And secondly, I think it seems that you reiterate the full year guidance. I think the revenue will be growing at around 11.5% to 14.5% for this year. Just wondering if there's any thoughts of growth rate into next year? Should we expect a faster growth rate, as you mentioned, I believe, earlier this year, there's a delayed sales cycle or extended sales cycle because of macro environment. Just wondering how that has changed since then?

[Pin-Jen Chen, executive]

We remain quite confident about our yearly guidance for these years, as we expressed. I think everything seems to be moving based on our plan.

Certainly, the macro is still challenging to predict a more longer term, another form we are working internally to better understand each client funnels and how we look into the next year. So that is not something that we have been able to complete yet. We are in the process. As soon as we have done, we'll certainly share broader publicly about our view for 2024.

I think, if we look at the industry, it's moving in a positive direction, right? I think the digital transformation across all sectors is the trend and its non-stopping. In certain categories, go faster, and others are a little bit more challenging, such as creating 3D SKUs, it takes more time to enable more brands, more SKU in a short period of time.

That is something that, for example, what Alice mentioned about our 2D to 3D conversion, it's going to help. We believe that's going to help and potentially change the way our industry typically operate. Our quality, our other name of the company called Perfect, where we want to deliver the perfection to the client, be able to create automatically more SKUs. I think you will accelerate that and consequently, of course, you generate more revenue for us.

Internal of the segment, I think the skincare segment component is the one that is growing both in the funnel that we received across different geographies. I think we see a lot more demand for skin tech relatively compared to other.

Of course, Color Cosmetics remain our core competence, and remain our key category there, right? It's about a little bit over half of our revenue coming from Color Cosmetics. But I think skincare, after investing in this view for 3, 4 years now, we finally see some good movement for brands of all sizes, not only the top global skincare brands. We also noted a lot of regional or local beauty skincare brands also starting to adopt the skin diagnosis segments.

B2C, of course, is growing much, much stronger. You saw our number of active paying subscriber have grew year-over-year 60-plus percent, which is very, very encouraging. There's still a lot of room to grow in that market. It's a huge market. We are kind of a latecomer in that market, but there's a lot of room for us to grow. Similar functionality type of app. They are in a much bigger scale. So we're just gaining market share quarter after quarter from them.

The AI segment is very promising, although it is new. So from a revenue contribution in this quarter, it is still relatively small, but I think this is where forward-looking -- we're always looking for new innovations that will generate consumer interest. So we are devoted and investing quite a lot in the development for Gen AI. So in our enrollment, I think we have more than a dozen products in Gen AI, some already launched and some will be coming out very soon into the market.

[Operator]

Our next question comes from Brian Schwartz from Oppenheimer.

[Camden Levy, analyst]

Hi. Good morning. This is Camden Levy sitting in for Brian Schwartz.

Thinking about 2024 and your go-to-market and sales organization, do you anticipate any adjustments in terms of the investment cadence? Or just how should we be thinking about the sales and marketing line, heading into next year on the back of the Walmart partnership and the brand opportunity?

[Pin-Jen Chen, executive]

I think for our enterprise sales process, right, it's the same Perfect formula we have been playing for years. I think certainly, the world of [indiscernible] there. And as we get more brands started to adopt, the sales cycle seems to be getting a little bit better compared to early this year. I think that's a good news.

Of course, now we're addressing a broader market to go to new verticals like watches and jewelries and potentially others as well.

For the investment, I think from an expense perspective for next year, we certainly want to increase an event in R&D. I think that is an area very worthy to invest.

On the sales and marketing side, I think we remain more cautious. I think our global team is capable of delivering and expanding our business for these new adjusting categories. So we are not looking at much increased internal sales and marketing headcount, for example. But engineering development, that certainly remain a core competence, that we need to invest now in creating this new road map to try to address a broader market for 2024.

So I think, I said in our remarks, we always look into our top line trend and when we are controlling our expenses to make sure that we are also delivering a positive profitability to investors, shareholders.

[Camden Levy, analyst]

Perfect. And then just 1 follow-up question. If we were to think about the emerging industries and verticals that you guys are going after with VTO and beauty tech. Is there -- if you were to stack rank, maybe your top 3 new categories in terms of growth catalysts, how would you define those categories? Or which ones are most likely to contribute to 2024 and 2025?

[Pin-Jen Chen, executive]

I think, we certainly want to play around our target customer. Our primary target customers are always the female shoppers. So when we think about our road map and business expansion, we think about what shoppers, especially female, they are shopping online, what are the categories that they really need to try before they buy? And I think that will generate more of the value.

That's why years ago, we started with makeup, and then they're now spending into jewelry in the watches. So if you think about the line, I think accessories, apparel, anything that you can wear on your body, on your face, on your hand and your body will be certainly in our radar. And rest assured, we are certainly working on many of these aspects.

But we also are cautious that we want to deliver the protection. We don't want to rush in the market with unfinished product or something that is not ready for prime time. So whenever we come to market, we really wow the consumer and the brands to offer something that they have never seen before. And I think that remains in our solid belief on how we approach the market, as I mentioned.

So I think in the broad way, I think AR commence, we are strong believer in that. The one new area that is going to take a little bit more significance is certainly in our Generative AI. So that is something that was not possible before this technology existed. And now, with the power of Generative AI, I think there's a lot of potential.

For example, we talk about the hairstyle generation with TRESemmé, the Unilever brand. Its one of example of how we're able to already create real use cases that bring real business benefits to the brand by harnessing the power of Gen AI, and that will remain our core focus for now.

[Operator]

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

[Rick Lee, executive]

All right. Thank you, everyone, for joining our call today. Wish you have a good day. Bye-bye.

[Alice H. Chang, executive]

Thank you.