Perfect Corp. (NYSE:PERF) Q4 2023 Earnings Call Transcript

Perfect Corp. (NYSE:PERF) Q4 2023 Earnings Call Transcript March 1, 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 the 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 today, Ms. Jennifer Wu, IR Manager of the company. Please go ahead.

Jennifer Wu: Thank you, and hello, everyone, and welcome to Perfect Corp.’s earnings call. With us today are Ms. Alice Chang, our Founder and Chairwoman and Chief Executive Officer; Mr. Louis Chen, Executive Vice President and Chief Strategy Officer; and Ms. Iris Chen, Vice President of Finance and Accounting. You can refer to our fourth quarter and full year 2023 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: Hi. Thank you very much, and welcome to Perfect Corp.’s 2023 fourth quarter earnings call. We have some very good news to share with you today. Let’s get started. We ended 2023 with a strong fourth quarter. Our fourth quarter revenue grew by 27.6% year-over-year to $14.1 million, and our net income was positive at $1.4 million. Our full year results was promising too, as our full year 2023 revenue increased by 13.1% year-over-year to $53.5 million, and our full year 2023 net income was positive at $5.4 million. The company operating cash flow had a net inflow positive of $13.6 million, as a result of our robust business model. The increases were driven by the strong momentum in our AI/AR cloud solutions and subscription services.

For enterprise business and our mobile beauty app business powered by our advanced AI capabilities, both segments have contributed to our top line expansion, profitability improvement and positive operating cash flow. In this quarter, we captured a good demand in our AI [skincare] diagnosis product, as well as accelerated adoption of jewelry and fashion virtual try-on. This new deployment and use cases further expand our coverage into a larger market. For us, more innovative features, powered by generative AI helping our rollout in our YouCam suite of mobile app in this past quarter. This new AI features have not only attractive new mobile app installation, but also effectively converted more users into premium subscribers. All of this above achievement was centered on our beautiful AI strategy, which consists of 4 major pillars, beauty AI, skin AI, fashion AI, and gen AI.

Those 4 key pillars will play a pivotal part of our core business moving forward, and we are committed to keep investing in AI to strengthen our leading position in AI. Now let’s shift our focus to operation — operational outcomes of fourth quarter and discuss our most recent advancements. On the B2B side, we secured a major license renewal with beauty, skincare, jewelry brands. These renewals are not only reaffirms the growth and reliance of this brand on our solutions to meet their evolving needs, but also show our leadership in the field of virtual try-on. We also see the opportunities to cross-sell to sister brands and upsell more services such as enlarging their SKU offerings and expand to additional countries to our brand clients. Our strong revenue growth in the fourth quarter of 2023 signaled a recovery in enterprise new business acquisition from the second half of 2023 compared to the slow and prolonged sales cycle we saw in the first half of 2023.

We entered this quarter focused on seasoning the penetration in different verticals to provide AI-powered skincare diagnosis product, as well as an increase in adoption of virtual try-on solutions for jewelry and the fashion industry. Highlight in fourth quarter was the growing demand for skin and skincare and skin diagnosis products. The demand not only comes from skincare brands, but also comes from new channels, such as medspas, aesthetic, clinic and the dermatologists, who utilize our AI-powered technology to provide users with real-time and the [indiscernible] accurate AI skin diagnosis results, which is verified by dermatologists. The key benefit of our AI skin solutions, our clients leverage on our AI skin diagnosis technology to provide patients with a thorough assessment of the skin concerns, including redness, wrinkles, moisture for or skin types, more than 14 skin concerns and the skin type, so to recommend tailored treatment plans are targeting their unique demand.

With the help of AI technology, clinics cannot only do consultation for patients, but also give customized recommendations, just creating a personalized and science-based experience to boost patient engagement. Furthermore, we have also seen good demand for our new products, Skincare Pro, which was launched in the last quarter. This self-service product on iPad attracted midsized skincare brand, clinics and medspas for its high-quality skin analysis and the diagnosis results. With the Skincare Pro, we are able to expand into larger customer base. We also see potential of this product to penetrate into the market of a larger brand clinics and the medspas. The expanded adoption of our skincare and skin diagnosis solution enables us to engage with a larger potential customer base in the skin-related industry and further diversify our revenue stream, as the need for more advanced skin diagnosis continue to grow to keep on advancing our AI technology and help brands in the clinics to streamline their customer engagement process through digital transformation.

Another highlight was the accelerated market adoption of our watch and the jewelry virtual try-on solution, marked by several new launch with procedures in the luxury brands. We started to expand into jewelry and watches [indiscernible] virtual try-on in the beginning of 2023. We are excited to see our efforts starting to pay off, as more jewelry and watch use cases were launched in the market. Basically, we have partnered with a luxury European jewelry brand to launch virtual try-on for its bracelet and earrings. Through our advanced technology, the texture and the reflection of the jewelry can be shown visibly through the screen and provide user with true to life shopping experiences. The increased adoption of our virtual try-on services reflects that the demand for jewelry, watch and accessory virtual try-on is huge that our technology is processed by this high-end brand.

Moreover, we have worked with some of our existing luxury brand clients to launch jewelry virtual try-on with our very unique stacking options, meaning that user can try on multiple pieces of earrings and bracelets at the same time. This unique and a leading functionality allows user to mix their match different pieces of online and experience the total look in just a few clicks, helping brands to increase the time users spent on brand website and deepen the engagement with the users. Another good progress to share here is our AI care solution continue to drive new innovation. To complement our industry-leading Gen AI-based hairstyle generation, we now created an industry-first AI wig virtual try-on for user to try on different types of hair wig with true to real simulation results before they buy.

Additionally, we also newly developed AI hair extension, AI hair band combined with our AI hair color, we have a complete hair solutions now. By leveraging the latest diffusion generative AI model, our technology enables users to try various styles before choosing a new style at a salon. This total solution for hairstyle, hair wig, hair extension, hair band, and hair color is unique in the market, with our comprehensive offering, friends and users can virtually try-on different styles before they do hairstyling or buy wig. Now let’s shift focus to our B2C mobile beauty app business. We saw another robust quarter of our mobile beauty app business, evidenced by the 45.7% year-over-year increase in our mobile beauty app active subscribers to a historically high of over 879,000.

And this continuous momentum in subscriber growth reflected the increase in demand for editing, enhancing and beautifying photos and videos through the mobile app. With our suite of YouCam apps, we continue to diversify our product offering to meet it needs from users in a fully capitalized on the app market expansion frame. The consumer end market represents a big, very big growth opportunity with rising global demand for subscription-based premium mobile features. We are well positioned to increase the market share in the consumer space, leveraging proprietary AI technology from Gen AI, our team developed a robust road map of premium features for app subscribers. We have already implemented multiple Gen AI driven enhancements for our app, including AI Avatar, AI fashion, AI hairstyle, AI selfie, AI headshot and AI Studio and et cetera, which provide users with sophisticated beautification with a single click and enhancement tools for photo and video.

Moreover, we launched our online AI editing tools on our website to enable users to edit, enhance their photos efficiently on the web with the help of AI. For example, users can change or remove background within second or replace objects in just a few clicks. Users can also colorize black and white photos or expand pictures easily. We have also offered a series of smart AI photo video enhancement product that can instantly picks blurry photos, upscale and enhance image resolution, eliminate noises and brighten low images without compromising quality and the details. Our product strategy centered on integrating AI across our entire suite of offerings to transform user experience and solve problems for app users. Most importantly, our unique strength is to use the same AI engine to support growth, enterprise SaaS business and our mobile app business.

By doing so, we can make the most use of our R&D capability to monetize in both sectors. With this special strength and our commitment to ongoing innovation, we are poised to expand our market penetration of the industry by unlocking the transformative power of AI. In summary, our business performance of both the fourth quarter and for the full year 2023 were strong, featuring double-digit revenue growth and a positive bottom line. We not only saw a recovery in the enterprise business, but also gained success in expanding into new verticals. The momentum in our mobile app business was very robust, too. These factors suggested that we are well positioned to seize market opportunity and continue to grow our AI business. Based on the strong momentum in both enterprise SaaS solutions demand and our mobile beauty app subscription business, we observed a very healthy recovery in 2024 with an increase of over 20% in our business pipeline, and we expect the growth of our total revenue recognized by under IFRS for full year of 2024 to range from 12% to 16% year-over-year in comparison to a full year of 2023.

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

Pin-Jen Chen: Thank you, Alice and good morning, good evening, everybody. Please note that all financial comparisons are on a year-over-year basis, and the reporting period is the fourth quarter of 2023 versus the comparable period in 2022. And now, on the top of the international financial reporting standard measures, we will also discuss some non-IFRS measures to provide greater clarity on the trends in our actual operations. As Alice mentioned, in the fourth quarter of 2023, our total revenue increased to $14.1 million from $11.1 million for the same period in 2022, representing a very robust year-over-year growth of 27.6% and it was also the best quarter of 2023. Meanwhile, our full year revenue was $53.5 million for 2023 compared to $47.3 million in 2022, representing a year-over-year increase of 13.1%, which we met the guidance we provided to investor analysts.

We are very pleased to have achieved these results even under the challenge of macroeconomics in 2023 and a strong encouragement to our entire team for the year-long effort in growing our business in both enterprises and consumer apps. Among our revenue sources, AR/AI cloud solution and subscription revenue was $12.0 million in the fourth quarter of 2023, an increase of 25% compared to the same period of 2022. The full year AR/AI cloud solutions and subscription revenue was USD 44.8 million in 2023 compared to [$36.9 million] in 2022, representing an increase of 21.2%. The continued expansion can be attributed to the strong demand of our online virtual try-on products, among brand customers and the robust growth in the mobile beauty app subscriptions, especially with the addition of new categories that now we serve on skin diagnosis, jewelry and fashion markets.

Notably, our mobile app active subscribers has surged by 45.7% year-over-year, reaching an all-time high of over 879,000 by the end of the fourth quarter of 2023. The strong momentum underscores the growing interest in our suite of mobile apps and our generative AI effort has started to pay off. Licensing revenue, which is mostly generated from our traditional offline services increased by 77.6% in the fourth quarter of 2023 to $1.8 million compared to $1 million during the same period of 2022. The full year 2023, licensing revenue decreased by 10.5% to $7.5 million compared to $8.4 million in 2022. The decrease to reflect the shift from our traditional offline services and the demand of growing online virtual try-on offering. Gross profit wise, for the fourth quarter of 2023 grew by 26% to $11.5 million with gross margin of 81.3% compared to gross profit of $9.1 million and gross margin of 82.3% for the same period in 2022.

The full year 2023, we saw gross profit increased by 7.3% to $43.1 million with gross margin of 80.6% compared to $40.2 million in 2022, a margin of 84.9%. The decrease in gross margin was primarily a result of the increase in third-party payment processing fee paid to digital distribution partners, such as Google and Apple due to the increase in our mobile app subscription revenue. We expect the margin should be stabilized around this figure, as the sale of each business segment become more mature and robust. The company has a very good control in operating expenses. The total operating expense for the fourth quarter of ’23 decreased by 83.7% to $12.7 million compared to $77.9 million for the same period last year. Full year 2023 loss — total operating expenses decreased by 56.2% to $48.8 million compared to $111.2 million in 2022.

The decrease were primarily due to the high base of non-cash listing expenses that occurred in the fourth quarter of 2022. To break down operating expenses, sales and marketing expense were on the fourth quarter of ’23 were $6.7 million compared to $6.3 million during the same period of 2022, an increase of 6%. This was due to an increase in marketing and user acquisition costs. The full year sales and marketing expense was $25.7 million for 2023 compared to $24.5 million in 2022, representing an increase of 4.8%. This was primarily due to the increase in the marketing and user acquisition costs, which was partially offset by the decrease in sales and marketing people-related expenses. Overall, we were able to grow our business without unnecessarily increase of our marketing expenses, this shows the benefit of our strong recurring business model and effective customer acquisition strategy.

On the research and development expense side, we were $3 million for the fourth quarter of ’23 compared to $2.6 million during the same period of 2022, an increase of 17.7%. The full year R&D expense were $11.6 million for 2023 compared to $10.5 million for 2022, an increase of 9.3%. The increase were from the additional R&D headcount and related personnel cost, and it is relatively mild increase when compared to our top line revenue growth in the same period. The general and administrative expenses were $3 million for the fourth quarter of 2023 compared to $69 million during the same period 2022, a decrease of 95.7%. Full year G&A expenses were $11.6 million in ’23 compared to $76.2 million in ’22, a decrease of 84.8%. The decrease were due to the significant decrease in listing-related expenses after the completion of the de-SPAC transaction and listing process in 2022.

The net income was $1.4 million for the fourth quarter of ’23 compared to a net loss of $190.3 million during the same period of 2022. The full year ’23 net income was $5.4 million compared to a net loss of $161.7 million in 2022. The increase in our bottom line were due to a significant decrease in listing expenses after the completion of the de-SPAC transaction and the listing process in 2022 and the increase in the fair value of convertible redeemable preferred shares in 2022, which were then converted to Perfect Ordinary Shares upon recapitalization. Excluding non-cash share-based compensation, foreign exchange impact and onetime non-recurring costs associated to our de-SPAC deal, the adjusted net income was $1.8 million for the fourth quarter of ’23 compared to adjusted net loss of [ $0.01 ] million in the same period of 2022.

The full year adjusted net income was $7 million for 2023 compared to $4.1 million for 2022, an increase of 72.1%. This represents a good net margin of around 13% in 2023. Looking at our balance sheet. As of December 31st, 2023, our company held $154.2 million in cash and cash equivalents and 6 month time deposits compared to $201.3 million, as of September 30, 2023. The decrease in cash and cash equivalent was a result of the completion of the tender offer to purchase up to approximately 16 million shares for an aggregate purchase price of approximately $50 million. Another important note is our capability to generate positive cash flow from our business. We had a positive operating cash flow of $13.6 million in the full year 2023 compared to the negative $3.3 million in full year 2022.

This improvement demonstrated the value of our business model in creating strong capital structure to support the growth of our business operations. In total, our customer base had a net increase of 18 brands clients since the end of last quarter, achieving a total of 645 brand clients with over [ 700,000, 704,000 ] SKUs for makeup, skincare, eyewear, jewelries and others, as of December 31st, 2023. This is yet another record quarter for these metrics showing that the continuous increase in customer penetration and SKU expansion. More brands and products are leveraging on Perfect console to operate the various different [stuff] modules, they subscribe from Perfect. In the fourth quarter of 2023, our total revenue has consistently exhibited strong growth, primarily driven by the continued momentum in our AR/AI cloud solution and in the mobile app subscription.

The premium feature and the AI-powered app, including the newly launched YouCam AI Pro and the YouCam Enhance. Despite a very mild rise in expenses, our net income remained strong, robust, delivering double digits and margins. We continue our investment in talent acquisition and technology innovations to expand our core competencies, and acting as a transformative tool, as we reinvest how products are showcased and consumed. We firmly believe that our positioning within the thriving AI industry equip us to remain at the front — forefront of revolutionizing our beauty and fashion brands engage with audiences. Finally, for 2024, the company expects total revenue recognized by IFRS to grow year-over-year to a range between 12% to 16%. This forecast is based on the 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. Now operator, please open up the call for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question today comes from the line of Timothy Zhao from Goldman Sachs.

Timothy Zhao: Great. Congrats on the very solid fourth quarter results. I have 2 questions here. One is about your revenue guidance to 2024. Just wondering can you share some color into the revenue growth breakdown or revenue compensation breakdown between your B2B and the B2C business, which segment maybe grows faster in 2024? And also, a related question on this topic is, I think you mentioned AI pillars within the business. I was just wondering for ’23, what is the rough breakdown between the cosmetics, skincare, fashion, jewelry, different customer base? And what is your outlook for ’24? And the second question is on the margins. I saw — I think for 2023 full year, you had a pretty strong top line and also solid expansion in terms of gross profit and net profit.

But I think in terms of margin, actually, there was slight decline in terms of both gross margin and net margins on a year-on-year basis in terms of Q3. Just wondering what is your outlook for the profit and the profit margin for ’24?

Pin-Jen Chen: Timothy, very nice to talk to you again. Yes. So our guidance, again, as we operate in a recurring business and our business are very contractual, right? So we are recognizing it based on IFRS measure, as the period. So — so our remarks there, we have seen a good recovery momentum in the last quarter of ’23. We compare that to the earlier first half of ’23, which was very challenging. So I think that’s a good sign of the recovery is giving us a stronger face in the 2024 business. But those contracts, it will take time to materialize into IFRS. So I think, as we said, we’ve seen the business pipeline to become a lot more solid. Certainly, we see over 20% in our business pipeline going forward. As far as the breakdown, B2C continues to be very strong, as we have reported in our last quarter.

I think we expect that trend to be continuing. But the B2B part, as I said, the recovery is also coming to help. We see the B2C probably will be still growing a little bit faster than the B2B space, but the B2B certainly recovering from the early challenge in 2023. In terms of the AI pillars, the beauty AI is certainly still a dominant part of it, is our part of our core business since many years. But the skin AI part is growing very, very fast. The skin AI part, if we look at the organic demand that comes in is actually outpacing the other categories. I think that’s mainly due to the AI skin diagnosis product is becoming more robust, covering more skin concerns and also be able to penetrate into newer channels. So it’s not just a traditional brand.

The website is now going into medspas, and clinics and other channels. So I think out of the 4 pillars, the skin one in terms of the enterprise business is already, let’s say, generating a good 1/3, if no more of that demand. In terms of the generative AI, it’s very, very promising. This is very young. It’s just launched about a year ago. And so, from technical ground and from a roadmap perspective, we see a lot of innovation will happen in this pillar. And so, we have a strong faith in that. But not to forget about the fashion AI, which is more to the luxury and prestige jewelries and watches. And this is the area that we invested so much in last year, and it’s already — are ready to see results. More than a dozen brands had already launched, commercially launched in the market for our jewelries, including the newest addition for stacking.

So I think all these 4 are very important pillars to sustain our growth in 2024. In terms of margin, as I mentioned, as the B2C business increased due to the fee paid to Apple and Google, it is eating up some of our gross profit around 3%, 4% company-wide. We have observed this trend in the last 4 quarters. So it seems to be quite stabilized into 80%, 81% gross profit margin. We don’t expect a big change of that margin based on our current visibility. So that will be my answer to your question.

Operator: Our next question comes from the line of Clarke Jeffries from PSC.

Clarke Jeffries: Louis, thanks for taking the question. Louis, interesting to hear about the Skin AI segment, having maybe a wider aperture of new business interest compared to beauty AI, if I understood that correctly. Also interesting to hear about the recovery in the enterprise sales cycles and the good growth in new business pipeline to start the year. I was just wanting to ask strategically, are we at the position, where you might be increasing your investment going into the new year to take advantage of some of those improvements in the enterprise sales cycles, where are your top investment priorities from an incremental dollar perspective in terms of investing behind the enterprise sales capacity? And then as a follow-up, I wanted to ask if there was any way to level set expectations on cash flow, a $17 million improvement year-over-year and operating cash flow is fairly substantial.

Any way to think about whether that is the right number for the business on an annual basis at this point? Or if there were certain working capital items that may have benefited free cash flow, and we might see an ebb and flow in 2024?

Pin-Jen Chen: Thank you, Clarke. Yes, the skin AI, I think, is an area that we have been investing for more than 3 years now. It certainly took time to develop to a more mature status. And I think now you’re kind of closing the case and more and more brands and clinics are started to see the benefit of these solutions. So I — and I think unlike the consumer beauty cycle [Technical Difficulty] are more dominated by big brand. I think the skin market is very much more, long tail as well. So there’s a lot more potential clients to address. And I think this is where the opportunities are and where we are investing also our sales efforts, both online digital marketing wide, some advertising or joining different trade — tradeshows, conferences more targeted to skin market.