Perfect Corp. (NYSE:PERF) Q1 2024 Earnings Call Transcript

Perfect Corp. (NYSE:PERF) Q1 2024 Earnings Call Transcript April 25, 2024

Perfect Corp.  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning and good evening, ladies and gentlemen. Thank you for standing by, and welcome to Perfect Corp.’s Earnings Conference Call. At this time, all participants are in a listen-only mode. We will be hosting a question-and-answer session after management’s prepared remarks. Please note that today’s event is being recorded. I will now turn the conference over to the first speaker today, Ms. Jennifer Wu, IR Manager of the Company. Please go ahead.

Jennifer Wu: Thank you and hello, everyone. Welcome to Perfect Corp.’s earnings 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 first quarter 2024 financial results on our IR website or in the Form 6-K we filed with SEC earlier. You can later access a replay of this call on our IR website shortly after the conclusion of this call. For today’s call, management will provide their prepared remarks first, and then we will host a question-and-answer session. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release, which also applies to this call, as this call may contain forward-looking statements regarding Perfect Corp.’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 required by law after the date of this call. Please note that all numbers stated in the following management’s prepared remarks are in U.S. dollar terms, and we will discuss non-IFRS measures today. Without further ado, I will now turn the call to our first speaker today, our CEO, Ms. Alice Chang.

Alice Chang: Thank you, Jennifer, and welcome to Perfect Corp.’s 2024 first quarter earnings conference call. We have some exciting news to share today, so let’s get started. Leveraging our advanced AI capability, we started 2024 with a robust first quarter. Our first quarter revenue grew by 17.7% year-over-year to $14.3 million, and our net revenue was positive $0.6 million. The double-digit increase in revenue and a positive net income were driven by the strong growth of our AI/AR cloud solutions and subscription services. For both of our mobile business – app business and our enterprise business. Both business clusters have benefited from our superior AI technologies and contributed to our topline expansion and the profitability improvement plus our operating cash flow had a net inflow of $3.5 million due to our sound business model.

In this quarter, we continue to invest in our Beauty AI strategy, including Beauty AI, Skin AI, Fashion AI, and the Gen AI, across both of our consumer in enterprise business. For our consumer app business, we leverage our new Gen AI technologies to launch more innovative features in YouCam suite of mobile apps in quarter one. Attracting more users to our apps and converting more users into subscribers. For our enterprise business, we have renewed contract with many big clients and brought in several new brands for makeup virtual try-on services. We also saw ongoing and strong momentum in our new AI skincare diagnostics product. And we expected this trend will expand and grow. Furthermore, new clients from luxury jewelry and watch industries are integrating our jewelry and the fashion VTO offerings into their digital offerings.

This new development showed our sustained effort to extend our coverage into different verticals and address some larger markets. They also reflected the various avenues we have got to increase with its potential. As we are committed to keep investing resources in AI advancements, we are able to deliver products and services that continuously strengthen our unique position in Beauty AI, Skincare AI and Fashion AI. Now let’s shift our focus to operational outcomes and discuss our most recent advancement. We saw another robust quarter for our B2C mobile beauty app business evidenced either 30% year-over-year increase in our mobile beauty app active subscribers to a historically high over 902,000. The continuous growth in active subscribers reflected in the rising demand for mobile apps that enable users to edit, enhance and beautify their photos and videos.

As self expression and the creativity become increasingly important, consumers expect more personalized and a diverse experiences from mobile apps. Our family of YouCam apps is able to offer unique high-quality digital outputs, leveraging advanced technology like generative AI photos and videos. This new set of Gen AI features including AI editing and beautification for photos and videos empower our users to freely and creatively express themselves on social media and to create high-quality [indiscernible] personalized photos and videos generated or added by YouCam suite of apps. The key appeal of the YouCam family app is Advanced AI and AR technologies to help the users to solve real life challenges and explore more creative ideas. This offerings allow users to beautify, edit, and enhance photos and videos as well as virtually try-on makeup and hairstyle.

Users can also experience and create their unique in a diverse style in photos and videos in our work to release their creativity by leveraging the latest AI technology. As users become satisfied with the quality of our products, our apps, they continue to use it, use our app making YouCam family apps an integral part of their daily life. Moreover, we offer a complete line of online AI editing tool on our website and through our YouCam suite, our mobile app that leverage advanced AI capabilities to enhance photos, videos, and generate AI artwork such as AI enhance for photo and video, AI colorization, AI color correction, AI lighting, AI figures in the anime characters. Our product strategy centers on integrating AI across our entire offering to edit, beautify and enhance photo and video in one second and easily transform user experience, self users real time problems, and meet evolving needs from a broader user base while at the same time maximize return on our R&D investments.

A key strength of ours is a little key to leverage the same AI engine to both our consumer mobile business and our enterprise SaaS business. This allows us to fully monetize innovation across different sectors in our B2C and the B2B sectors. Our unique AI-driven approach combined with a commitment on ongoing innovation positioned as a significantly expand market penetration by unlocking AI transformative potential. Now let’s shift focus to our B2B business. This quarter in our B2B sector, we focused on deepening the penetration in new vertical to provide AI skincare diagnostics product and beauty and fashion, virtual try-on business, while at the same time expanding the adoption of our makeup VTO to more brands and regions. Specifically, we got several new wins for our beauty, skincare, jewelry solutions within our B2B sector.

This demonstrates growth demand from our comprehensive solutions and superior technology from clients in different industries and sectors. Moreover, we successfully secured a major license renewal with key beauty skincare and jewelry brands and the retailers. This renewal underscores the increasing trust this brand placed in our solutions to address their evolving requirements and highlight of our leadership in VTO offering. We also capitalized on this opportunity at cross-selling to their sister brands and offering additional services, including expanding SKU selections and expanding brands presence into new geography. The strong momentum in revenue growth in this quarter reflected the recovery in the sales cycle and pipeline expansion of our enterprise business.

Personally for our beauty AI, we remain a leader in the industry and we continue to innovate. Beauty AI has always been the core of our business. In this quarter, we have a renewed contract with all major existing clients and broadening several new brands for makeup VTO, virtual try-on services. Furthermore, we continue to innovate and expand the capability of our makeup offering. We have added metallic textures to eyeshadow VTO and the shimmer texture to eyebrow VTO. This new textures for makeup not only allows brand to provide more try-on options to their clients, but also further strengthen our market leadership in makeup VTO sector. Secondly, for our Skin AI tech, in the first quarter, we saw strong momentum for our skin diagnostics products from both existing and the new customers.

As people become increasingly conscious about their skin health, we aim to capitalize on the strength by providing AI solutions. Notably, we gain significant tractions in new market segments such as med spas, aesthetic clinic and the dermatology practices. This professional institutions leverage our AI technology to deliver real time in a dermatologists verified skin diagnosis results and the scores to their clients and patients. A key differentiators for our skin service is our cutting-edge in a unique high definition AI diagnostics that offers a comprehensive approach to understand individual skin conditions in super high procedures, allowing users to visually change their skin after skin treatment with a very easy to see AR overlay precisely position on the location of the actual skin concern, and with a measurable skin score.

Using advanced AI, our skin diagnostics solution can detect and evaluate up to 14 key skin concerns, providing patients with a detailed data-driven assessment of their unique skin health profile. Third key driver of our skin business success, this quarter came from our self-service offering, a new product Skincare Pro, which gain robust momentum particularly among aesthetic clinics and the medical spas. This is an iPad-based skin diagnostics solution. Personalized consultation tool for clinic to engage with their clients and with the newly added CRM module, it can improve customer retention will keep track of each individual customer’s progress during treatment. Skincare Pro enables this business to deliver personalized data-driven skin consultation to their clients and patients in a very cost efficient and easy way.

Furthermore, we recently developed an integrated and comprehensive Customer Relationship Management, CRM system with our Skincare Pro, allowing skincare professionals to better manage customer profile for skin health reports in cloud-based consult and compare before after results. This integration represents a significant shift in how personalized skincare is delivered, ensuring a more personalized and efficient patient experience, and seamless integrating and upgrading our AI-powered skin analysis and emulation tools as well as providing science-based skincare experience that supports data informed decision and to drive unparallel patient engagement and satisfaction. Skin AI and AR adoption among skincare industries is at its very early stage.

We believe there is a large untapped market for us to serve and grow. Certainly for our AI fashion and jewelry VTO, another highlight of the quarter was celebrated market adoption of our VTO solution for watch and jewelry. We saw several new wins in the renewal of prestige in the luxury brand, making good progress of our VTO offerings in this category. We first began expanding into jewelry and watch VTO at the start of 2023, and we – to see our efforts paying off as more deals have been confirmed and the more use cases for products that have been launched in the market. In particular, we saw renewals and upsells from some luxury jewelry brands this quarter. We believe that superior AI technology and professional service, the brand client experience and working with us, made them willing to renew the contract and to purchase more services.

In this quarter, we have partnered with a European luxury jewelry group and watch group to provide jewelry and watch VTO for three luxury brands within the group that region our cutting-edge AI technology, a sophisticated texture and the radiance reflections of the jewelry can be faithfully portrayed on the screen, providing users an immersive due to real, due to live shopping experience. Though the case is still at its stage of a POC, we believe that this new win not only confirms the trust in our AI technology by this high-end brand, but also unlock the chances to get more new logos on to our SaaS platform for jewelry, accessory and watches. The increasing numbers of jewelry and the watch brands using our VTO and AI technology indicates that the demand for this interactive shopping experience is on the rise.

The unique and the leading function of our product allow brand clients to increase user engagement time and reduce our return rate. Given the robust demand for jewelry and watch VTO, we will continue to deepen our penetration in this sector and further grow our business in different and new categories in the region. We have made good progress in our AI-powered hair solution too in the first quarter. In this quarter, we added a new AI hair type analysis technology that can be quickly identify hair texture, thickness and the curl patterns by simply taking a picture of user’s hair. This AI technology accurately classify hair into nine distinct type across 10 categories. From straight, wavy to extremely curly can deliver precise and personalized recommendations tailored to each unique hair type.

This new innovation on AI hair compliments our full range of AI hair solutions, which includes our hair color, VTO AI, hairstyle generation, AI weak, hair weak generation, and hair extension. This industry-leading solution for hair enabled haircare brands and the retailers to provide customer with a more customized shopping experience. To sum up, we delivered strong business performances in the first quarter of 2024 with double-digit revenue growth and a positive bottom line. Not only did the momentum in our mobile app business remain robust, our enterprise business also gained success in expanding services into new verticals. This positive indicator suggest we are well positioned to capitalize on growing market opportunity for AI on beauty, skin, fashion and generative AI.

We will continue growing our AI/AR-powered business. Driven by the good demand for both our mobile app subscription and enterprise SaaS 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 result. With that, I have now concluded my remarks and will be handling the call over to Louis, who will discuss our financial details with you. Thank you.

Pin-Jen Chen: Thank you, Alice. Please note that all financial comparison are on a year-over-year basis, and the reporting period is the first quarter of 2024 versus the comparable period in 2023. And on top of the international financial reporting standard IFRS measures, we will also discuss non-IFRS measures to provide greater clarity on the trends in our actual operations. As Alice mentioned, in the first quarter of 2024, our total revenue increased to US$14.3 million from US$12.1 million for the same period in 2023, representing a robust year-over-year growth of 17.7%. The strong performance was mainly due to the strong growth momentum of our AI and AR cloud solution and subscription business. Among our revenue sources, AI and AR cloud solution, revenue was $12.4 million in the first quarter of 2024, an increase of 19.6% compared to the same period in 2023.

The continued expansion can be attributed to the robust growth in the mobile beauty app subscription and the strong demand for our online virtual try-on solution among brand customers, especially with the addition of new categories that now serve on skin diagnosis, jewelry, fashion markets, and the growing popularity of our Gen AI technology and AI editing features for photo and video. Notably, our mobile app active subscriber has surged by 30% year-over-year, reaching an all-time high of 902,000 by the end of the first quarter of 2024. The strong momentum underscored the growing interest in our suite of mobile beauty app from both users and subscribers. The licensing revenue, which is mostly generated from our traditional offline services, increased by 7.1% in the first quarter of 2024 to $1.6 million compared to $1.5 million during the same period of 2023.

Gross profit for the first quarter of 2024 grew by 16.9% to $11.2 million, gross margin of 78.3% compared to gross profit of $9.6 million and gross profit margin of 78.8% for the same period in 2023. The decrease in gross margin was primarily a result of the increase in third-party payment processing fees paid to digital distribution partners such as Google and Apple due to the increase in our mobile app subscription revenue. The total operating expenses for the first quarter of 2024 increased by 11.8% to $12.4 million compared to $11.1 million in the same period last year. The increase was primarily due to the higher sales and marketing expenses occurred in the first quarter of 2024. To break down operating expenses, the sales and marketing expense for the first quarter 2024 were $7.2 million compared to $6 million during the same period of 2023, an increase of 19%, and this was due to an increase in marketing and user acquisition cost.

The research and development expenses were $3 million for the first quarter of 2024 compared to $2.6 million during the same period of 2023, an increase of 15.4%. The increase were from additional R&D headcounts and related personnel costs. General and administrative expenses were $2.2 million for the first quarter of 2024 compared to $2.4 million during the same period of 2023, a decrease of 9.9%. The decrease mainly came from the lower directors and officers insurance premium fee. Net income was $0.6 million for the first quarter of 2024 compared to a net income of $0.7 million during the same period of 2023, a decrease of 9.4%. The positive net income in this first quarter was supported by continued revenue growth and effective cost control.

Excluding the non-cash share-based compensation, the non-cash valuation gain and loss for financial liability and one-time non-recurring cost associated to our de-SPAC deal, the adjusted net income was $1.5 million for the first quarter of 2024 compared to adjusted net income of $1.3 million in the same period of 2023, an increase of 14.5%. This represents a sound margin rate of 10.6% in the first quarter of 2024. Looking at our balance sheet, as of March 31 2024, our company held $157.3 million in cash, cash equivalent and six months time deposits compared to $154.2 million as of December 31, 2023. The increase in cash and cash equivalents including six months time deposits result from the positive operating cash flow and interest income received from the company’s bank deposits.

We had positive operating cash flow of $3.5 million in the first quarter of 2024 compared to $3.8 million during the same period of 2023. The positive cash flow demonstrated the company’s ability to generate efficient cash flow to support its business operation and the growth. In total, our customer base had a net increase of 21 brand clients since the end of last quarter, achieving a total of 666 brand clients with over 745,000 SKUs for makeup, skincare, eyewear, and jewelry product as of March 31, 2024. This is yet another record quarter for these metrics, showing the continuous increase in customer penetration and SKU expansion. More brands and products are leveraging on Perfect console to operate the various different sub modules subscribed from Perfect.

In the first quarter of 2024, our total revenue has consistently exhibited strong growth, primarily driven by the continuum momentum in our AI and AR cloud solutions and mobile app subscription earnings from premium features and AI-powered apps. Despite a very mild rise in expenses, our net income remained positive. We continue our investment in talent acquisition and technology innovation to expand our core competencies and acting as a transformative tool that reinvent our products are showcased and consumed. We firmly believe that our position within the thriving industry equipped us to remain at the forefront of revolutionizing our beauty and fashion brands engage with the audiences. Finally, we reiterate our 2024 guidance. The total revenue year-over-year growth will range from 12% to 16% under IFRS.

This forecast is based on company’s current assessment of the market and operational conditions, and management will closely monitor the business progress each quarter and update our guidance periodically to offer better transparency to the market. That concludes my prepared remarks. Operator, please open up for questions.

See also 8 Powerful Alternatives to Elasticsearch and 20 Most Profitable Banks in the US in 2024.

Q&A Session

Operator: Thank you. [Operator Instructions] Your first question comes from the line of Brian Schwartz with Oppenheimer. Your line is open.

Brian Schwartz: Yes. Hi. Thanks for taking my questions this afternoon or evening where you’re at. I had a couple. First one was around the SKU growth in the quarter. Because it looked very strong and I was just wondering if the expansion in SKU, is that coming off from the core beauty segment or is the expansion being spread evenly across some of those newer like fashion and the skin segments too?

Alice Chang: Yes, Brian. This is Alice. Thanks for the questions. Yes, because we expanded to new verticals, the jewelry and skin analysis. So it’s quite spread up, split between three different verticals, but makeup still the biggest one. They have more SKUs than jewelry, especially luxury jewelry. They don’t have too many SKUs like makeup. And skincare also, they do have new SKUs in our consoles, but still makeup has the biggest part and the rest of the split between skincare and the jewelry.

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

Alice Chang: Yes. For B2B sectors, especially our soft business model, the lead time to acquire new customers is not immediately like B2C, so it takes time. So we keep our sales talents in each of the business unit not growing too much from now, and since we see the growing in our skincare channels and the fashion jewelry channels right now, so we’ll specifically increase some, a few sales capability in the business unit. And so we’re always – we’ll keep increase, but not too much and still [serve the] same group and the growth of the B2B growth.

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

Pin-Jen Chen: Hi, Brian. This is Louis. Yes, I think the macro setting has impacted some of those smaller customers. We look into – you know, majority of our enterprise clients, they are on annual based contracts. So upon the duration of the contract, typically they’ll renew on a year-to-year basis. What we noticed in this quarter is many of those not so big clients that they didn’t have their following year budget approved by their management, mostly, mainly because of the overall financial, the pressure that they’re getting. So we saw some of those customers not renewing those agreements at the end of its period. We certainly – management are very vigilant about the trend. I don’t think it is something significant. It doesn’t contribute on the material part of the revenue.

But it is certainly something set to see some of these customers non-renewing those. So the companies [start doing our effort to you] and acquire more customers so we can kind of net that impact out.

Brian Schwartz: Okay. And then my last…

Alice Chang: Most of the decrease from what I observed are not big customers, but there’s more medium-sized customers. When they face financial difficulties, they need to drop off not because they don’t like this engagement of users because they just have a very difficult financial situation. And the size is just a little bit more than the threshold 50k. Those kind of a medium-sized brands that we saw in first quarter.

Brian Schwartz: Thank you. And my final question. Louis, I just wanted to ask you about the G&A expense. Because it came in a lot lower than I had forecasted at. And as I think about my model moving forward, is this the right level for the G&A expense as we think about our models here moving forward? Thanks again for taking the questions.

Pin-Jen Chen: You are welcome. I think we always run a very agile and [indiscernible] for our back office and G&A. In the last few quarters still in the U.S. with a more cost as a newly listed company just for governance, compliance and related different auditor or external counsel services. As the company getting more mature as a public company, some of these costs will be reduced. As I mentioned in my remarks the D&O insurance premium has been reduced. The company has been performing pretty well in the market and so forth. So I think we try to always to maintain slim and lower cost G&A. So I think what you see in this quarter certainly is not a one-off situation, but the market can change quickly. But at the core, we focus more of our investment into R&D development and certainly expanding in sales and marketing outreach while try to be really nimble and effective in the G&A.

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

Alice Chang: Thank you, again for joining our call today, and have a good one and look forward to seeing you online next time. Thank you. See you next time.

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