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Ladies and gentlemen, thank you for standing by for So-Young's Third Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded.I'd like to turn the meeting over to your host for today's call, Ms. Vivian Xu. Please proceed, Ms. Xu.
Thank you, operator, and thank you, everyone, for joining So -Young's Third Quarter 2023 Earnings Conference Call. Joining me today on the call is Mr. Xing Jin, our Co-Founder, Chairman and CEO; and Mr. Nick Zhao, CFO.Please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities and Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to, those outlined in our public filings with the SEC, including our annual report on Form 20-F. So -Young does not undertake any obligation to update any forward-looking statements, except as required under applicable law.At this time, I would like to turn the call over to Mr. Xing Jin. [ Cass ], please.
[Interpreted] Hello, everyone. Thank you for joining So-Young's Third Quarter 2023 Earnings Call. Our business remained resilient and delivered solid financial and operational results during the quarter despite the macroeconomic headwinds. Total revenues were RMB 390 million, an increase of 19% year-over-year and in line with our previous guidance. Profitability also continued to improve, thanks to our careful management of costs. Net income attributable to So-Young International Inc. was RMB 18.3 million compared with RMB 2.3 million in the same period last year.[Interpreted] I would like to start by sharing my thoughts on where the [indiscernible]. We strongly believe that medical aesthetics market going forward will head in 2 directions. The first is a gradual and [ stock ] popularization of high-tier users who were less impacted by a weak macro environment and will continue to see high-quality services. In this scenario, low to mid-tier users would increasingly gravitate towards products with the best quality to cost ratio. The second is a continuation of high-speed growth of light medical aesthetics as the market continue to expand in size. We are adapting each of our business to be able to cater to both of the 2 scenarios.[Interpreted] Taking this into account, we are adjusting our community POP business with a focus towards high-end service end users. During the quarter, we strengthened cooperation with less number of well-respected doctors and institutions, further integrated internal resources and optimized processes, all in an effort to provide the highest quality service and experience through our one-stop solution. Offering premier content and enhancing the user medical aesthetics service experience has helped well-respected doctors and institutions avoid costly price wars, while still generating reasonable premium. During the quarter, we worked with well respected doctors to promote the face contouring category. Online GMV for the face contouring category grew by 40% year-over-year during the quarter, while GMV for all surgical categories grew by 11% quarter-over-quarter. Average transaction value for nonsurgical products grew by 60% year-over-year and GMV grew by 72% year-over-year. In addition, by cooperating clinics with [indiscernible] and investing in medical aesthetics [ MCNs ], we have obtained a deep understanding of the mechanics, which is helping us transform So-Young app into a high-end platform that offers the user a large selection of premium doctors to choose from and reducing the decision-making costs.[Interpreted] So-Young Prime is being adjusted to serve user growth, looking for the best quality to cost ratio products. So-Young Prime is a unique innovation for the light medical aesthetics industry and a critical step in standardized offline services. Since its launch in August of last year, the business has rapidly expanded and scaled with fulfilled orders increasing by 23% sequentially during the quarter. Within fulfilled orders, high-intensified focused ultrasound under the ultrasonic [ anti-age ] category, in particular, increased by 44% sequentially. As I mentioned in our last earnings call, as So-Young Prime scales, our focus is on ensuring the best possible online to offline user experience, improving operational efficiency for our institutional network and refined operations. During the quarter, orders through So-Young Prime from the more than 100 institutions we worked with contributed over 13% of fulfilled orders in-house.[Interpreted] To further standardize the management system for light medical aesthetics institutions, we built a flagship clinic on the second floor of our head office to test our systems in real time. The team operating the clinic fully integrated with So-Young Prime and has already seen monthly visits increase by more than six-fold over the past 3 months. Equally as important, the clinic has already achieved profitability.[Interpreted] Lastly, our supply chain business is being positioned to capture opportunities if the light medical aesthetics market continue expanding rapidly. This is encapsulated with the standout performance it had during the quarter and the remarkable growth it has generated. The supply chain business is a result of our initiative to explore opportunities and acquire deep industry insights that would allow us to expand upstream along the medical aesthetics supply chain. Looking at the upstream medical lasers product category, following the acquisition of Wuhan Miracle, we built a new generation of ultrasonic [ anti-age ] equipment called as the micro-focused ultrasound device, which we are using to build out our direct-to-consumer business model. On the medical injection part, we established a team through [ Elastic ] and achieved rapid growth in performance. Full year shipments are expected to be 7x that of last year. In July, we also signed a strategic cooperation agreement with [ Hehong Biopharma ] for the exclusive distribution rights of 2 filler products. Cooperation agreements such as these fill gaps and greatly enhance our light medical aesthetics product portfolio.[Interpreted] Distinct from the traditional upstream R&D production supply chain model used by manufacturers, we are able to add further value by developing synergies with our existing business and fully leverage our institutional network and extensive consumer reach. This allow us to quickly bring new products to market and rapidly make them competitive.[Interpreted] In the third quarter, revenue from our supply chain business, which includes Wuhan Miracle reached RMB 75 million, an increase of 19% year-on-year and accounting for 20% of total revenue. We entered the injectable filler market just last year with a product designed for the highly competitive hyaluronic acid serum. Revenue for this serum keeps hitting new heights and has already become profitable on a single-month basis in August and September. This success directly reflects the enormous synergies we're able to create between the So-Young platform and the high-quality upstream products.[Interpreted] Over the long term, the medical aesthetics industry in China still has plenty of room to grow with user penetration rates that are still very low. Markets beyond the first tier cities remain largely [ adapted ]. As standardization spreads across the industry, our fully integrated capabilities and other competitive advantage will become more pronounced. Our focus will remain our 3 core business segments where we will work to further integrate institutions, doctors and products in order to create sustainable diversified revenue streams and create long-term value for our shareholders.[Interpreted] I will now turn the call over to our CFO, Nick, to review the financial results for the third quarter before taking your questions.
Okay. Hello, this is Nick. I will now go through our financial performances this quarter. Please be reminded that all amounts quoted here will be in RMB. Please also refer to our earnings release for detailed information of our comparative financial performances on a year-over-year basis.Total revenues during the quarter were RMB 385.3 million, up 19.2% year-over-year and in line with our guidance. The increase was primarily due to an increase in revenues generated by So-Young Prime and sales of medical products. Information services and other revenues were RMB 285.9 million, up 24.1% year-over-year, primarily due to an increase in revenues generated by So-Young Prime. Reservation services revenues decreased by 18.8% year-over-year to RMB 24.1 million, primarily due to our operating strategy, which gives higher subsidies to end users. Revenue from sales of medical products and maintenance services were RMB 75.2 million, up 19.2% year-over-year, primarily due to an increase in sales of cosmetic injectables.Cost of revenues were RMB 142.6 million, up 51.7% year-over-year. The increase was primarily due to an increase in costs associated with So-Young Prime. Within cost of revenues, cost of services and others were RMB 103.5 million, up 74.2% year-over-year, primarily due to an increase in costs associated with So-Young Prime. Cost of medical products sold and maintenance services were RMB 39.1 million, up 13% year-over-year, primarily due to an increase in costs associated with the sales of cosmetic injectables.Total operating expenses were RMB 244.7 million, up 3.4% year-over-year. Sales and marketing expenses were RMB 143.8 million, up 15.3% year-over-year, primarily due to an increase in expenses associated with branding and user acquisition activities. G&A expenses were RMB 50.2 million, down 16% year-over-year. The change was primarily due to the reversal of share-based compensation expenses partially offset by an increase in payroll costs associated with the expansion of administrative employees to support our business upgrade and new strategic businesses. R&D expenses were RMB 50.6 million, down 2.7% year-over-year, primarily due to improvements in staff efficiency.Income tax benefits were RMB 2.2 million compared with income tax benefits of RMB 16.5 million in the third quarter of 2022. Net income attributable to So-Young was RMB 18.3 million compared with net income of RMB 2.3 million during the same period last year. Non-GAAP net income attributable to So-Young was RMB 9.5 million compared with RMB 9.9 million non-GAAP net income attributable to So-Young in the same period of 2022.Basic and diluted earnings per ADS attributable to ordinary shareholders were RMB 0.18 and RMB 0.18, respectively, compared with basic and diluted earnings per ADS attributable to ordinary shareholders of RMB 0.02 and RMB 0.02, respectively, during the same period of 2022.We have ample cash on hand with total cash and cash equivalents, restricted cash, term deposits and short-term investments of RMB 1.4 billion as of September 30, 2023, compared with RMB 1.6 billion as of December 31, 2022. The decrease was primarily due to investments in building our supply chain product pipelines of RMB 38 million and share repurchases of approximately RMB 121 million.For the fourth quarter of 2023, we expect total revenues to be between RMB 380 million and RMB 400 million. The above outlook is based on our current market conditions that reflects the company's preliminary estimates of market and operating conditions and consumer demand.This concludes our key remarks. I will now turn the call to the operator and open the call for Q&A. Thank you.
[Operator Instructions] And today's first question comes from Thomas Chong at Jefferies.
Can you share about the progress So-Young Prime has made and the expectation for Q4 and 2024? And my next question is about our estimate for marketing expenses in Q4 and next year.
[Interpreted] Thank you for your questions. I will take the first one. We launched So-Young Prime just over a year ago. Since then, fulfilled orders have grown by tenfold during the quarter when compared to the same period last year. As our user base expands rapidly, which I believe demonstrate the transaction, its services are gaining among consumers. Within fulfilled orders, high-intensified focused ultrasound under the ultrasonic [ anti-age ] category, in particular, increased by 44% sequentially, generating strong word of mouth.[Interpreted] As I mentioned during my prepared remarks, we built a model clinic for [indiscernible]. We call it as a flagship store for [indiscernible] for light medical aesthetics procedures on the second floor of our office. The team operating the clinic are fully integrated with So-Young Prime and driving the development of a standardized management system for light medical aesthetics institutions and further improving the overall business model.[Interpreted] We will continue to drive So-Young Prime's user base, improve the service experience, capture emerging opportunities in the light medical aesthetics industry and create products and service with high quality to cost ratios. We will also expand the number of categories with cooperation with institutions and an improvement of standardized management system to strengthen our position as an all-around partner for small and midsized light medical aesthetics institutions.[Interpreted] We plan on integrating So-Young Prime with our supply chain business in the future. Products from the supply chain business can be directly through So-Young Prime. Micro-focused ultrasound device, the new generation of ultrasonic [ anti-aging ] equipment we launched in the [ fourth ] quarter has performed well in clinic applications. Going forward, So-Young Prime will gradually introduce new products, further improve margins and create synergies with our supply chain business.
Okay. I'll respond to the question regarding the marketing expense. We have placed an emphasis on improving advertising efficiency this year. Conversion rate for user placing an order online improved in the third quarter, mainly due to our community content, strong brand image and new user acquisition methods such as private domain operations. Looking ahead to Q4 and 2024, we will continue to leverage our community content, strong brand and other competitive advantages to further improve the user experience to increase user conversion rates. Lastly, we will also continue deploying a highly efficient marketing strategy, expand the user acquisition channels, improve marketing ROI and carefully manage marketing costs to maintain our margin and improve the profitability of the company.
And our next question comes from Nelson Cheung with Citi.
[Interpreted] So how would management expect the medical aesthetics markets to develop in fourth quarter, especially during the Double 11 period, and also into the next year, 2024?
[Interpreted] Thank you for asking me. And first, as I mentioned in prepared remarks, I believe the medical aesthetics market going forward will head in 2 directions. The first is gradual and stock popularization of high-tier users who are less impacted by the weak macro environment, and will continue to seek high-quality services. In the scenario, low to mid users will increasingly gravitate towards products with the best quality to cost ratio. The second is a continuation of high-speed growth of light medical aesthetics and the medical and the market continues to expand in size. We are adapting each of our business to be able to cater to both of these scenarios.[Interpreted] Based on the outlook potential, we will focus on our 3 business segments to create consolidated professional medical aesthetics platform for all consumers. First, we are adjusting our community e-commerce business with a focus towards high-end services and users seeking high-quality online medical aesthetics services. Second, So-Young Prime is being adjusted to serve user growth, look for the best quality to cost ratio products as we continue to explore standardized management system for light medical aesthetics. Third, our supply chain business is being positioned to incrementally capture a larger share of the light medical aesthetics market as they continue to expand rapidly and to create synergies with other business segments.[Interpreted] In addition, according to consumption data published by the National Bureau of Statistics, total retail sales of consumer groups during the first 10 months increased by 69% year-over-year and 76% year-over-year in October, indicating that the economy is gradually gaining recovery momentum. In summary, we remain confident with the growth perspective in medical aesthetics market for 2024 and further into the future. Even though our business is occasionally impacted by volatile market, its remained resilient. We will continue investing in acquiring high-quality users and institutions to create value for the industry and are confident in our long-term growth perspective.
And our next question today comes from Chloe Wei at CICC. I'm sorry, we're not able to hear your audio at this time so we'll move to the next question, which is from [ Guanran Wang ] with CITIC.
[Interpreted] As profitability has improved for 2 consecutive quarters, how do you expect margins to trend next quarter and going forward?
Thank you for your question. With a soft consumer sentiment, we will focus on driving revenue growth with a gradual diversification of revenue streams. Our supply chain business and So-Young Prime is showing a solid performance each quarter and reflects this focus. The improvement in our profitability for the past 2 consecutive quarters reflect the improvements we have made in operating efficiency. We will continue to execute this strategy and remain confident that we will be able to maintain profitability next quarter. 2023 is a critical year for our business transformation. We have made steady progress in laying a solid foundation for future growth and creating long-term sustainable value for our shareholders. Looking forward to 2024, we will continue to grow revenue, improve operating efficiency and carefully manage costs. We will be well positioned to increase our competitiveness and maintain healthy cash flows as we leverage opportunities to generate returns for our shareholders. Thank you.
And our next question comes from Chloe Wei with CICC.
[Interpreted] Mr. Xing Jin, what do you think of the future competitive landscape? And given the thoughts, how do we position ourselves in the long run?
[Interpreted] Thank you for your question. We have been exploring new business models across different verticals within the industry that are outside the traditional Internet business models. We are trying to find new ways to think about industry development and exploring value creation.[Interpreted] First, looking midway upstream, we are seeing that a major short video platform tapped into medical aesthetics in the third quarter. We believe these platforms as well as the major e-commerce platforms are mainly applying a low-priced purchase model, which fits their operation models. Based on our expectation of industry popularization in the future, we are adopting a different operating strategy with our POP business to focus on the demand of high-end users by providing them a better consumption experience, which will also improve our margins.[Interpreted] Downstream adds to the institutional end of the spectrum, users are increasingly seeking products with a high quality to cost ratio, which our operations will be able to cater to add this space growth. We believe the chain stores of light medical aesthetics will have a huge market growth space in the future. Domestic competitors in the vertical are few and far between with only 2 brands owning over 20 chain stores with limited standardized products and low margins. There are successful models already deployed outside China, which provides a premium consumption experience for low- to mid-tier users. We are working on deploying a standardized management system for light medical aesthetics institutions through So-Young Prime with high-quality to cost product ratios for our users. This positions us as an all-around partner for a large number of small and midsized light medical aesthetics institutions.[Interpreted] Upstream competition is getting fierce in the injections category, but in numerous key market, potential remains intact for medical lasers, particularly in the ultrasonic [ anti-aging ] category. Based on our observations, we customized and launched the ultrasonic [ anti-aging ] product called as the Micro-focused ultrasound device during the [ fourth ] quarter. For injections, we see enormous growth potential in the regenerative market, driven by new materials and have expanded our offering in the category.[Interpreted] In summary, in addition to developing the Internet business model, we're also exploring growth potential along the industry supply chain with a focus on the long term. We are confident that our superior positioning in the market and our product advantage will [indiscernible] going forward, driven by our integration and innovation along the industry value chain. Thank you. Thank you for asking.
Thank you. And ladies and gentlemen, we are approaching the end of today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]