Q3 2024 Perfect Corp Earnings Call
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Speaker Change: Good morning and good evening, ladies and gentlemen. Thank you for standing by and welcome to Perfect Corps' 3rd Quarter 2024 Earnings Conference Call. If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad. And if you would like to record your question, press star 1 again.
Speaker Change: We advise you to please limit yourself to one question and one follow-up, and you are welcome to rejoin the queue if you wish to ask additional questions.
Speaker Change: We will be hosting a question-and-answer session after the management prepared remarks and please note that today's event is being recorded. I will now turn the conference over to the first speaker today, Mr. Jamie Shah, IR Director of the company. Please go ahead.
Jamie Shah: Thank you and hello everyone. Welcome to Perfect Corps' third quarter 2024 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.
Jamie Shah: You can refer to our third quarter 2024 financial results on our IOWEBSITE or in the Form 6K we filed with SEC earlier. A replay of this call will also be available on our website shortly after its conclusion.
Jamie Shah: For today's call, management will provide our prepared remarks, followed by a question and answer session. Before we continue, I would like to refer you to our Safe Harbor Statement in our earnings press release.
Jamie Shah: This call may contain forward-looking statements regarding performance, anticipated plans, our original results, and our objectives.
Jamie Shah: Forward-looking statements are based on management's expectations and are subject to numerous risks and uncertainties that could cause actual results to differ materially from those expressed or implied in our call today.
Jamie Shah: PerfectCorp undertakes no obligation to update any forward-looking statements except as required by law after the date of this call.
Speaker Change: Please note that all numbers stated in management's prepared remarks are in U.S. dollars, and we will also discuss non-IFRS measures today. I will now turn the call over to our second speaker today, our CEO, Ms. Alice Chang.
Alice Chang: Good morning, good evening. Thank you, Jimmy, and welcome to Perfect Corp's 2024 third quarter earnings conference call. Let me start by giving you some updates on our financials and then share our view for the remainder of the year as well as our progress in product and business development around the world.
Alice Chang: Our first nine months of revenue grew by 12.5% year-over-year to $44.3 million.
Alice Chang: Our net income for the same period was $3.9 million, and the adjusted net income increased 23.2% to $6 million compared to the same period of last year.
Alice Chang: This continuous increase in revenue and positive net income resulted from strong growth in our mobile app subscription business under the AIAR cloud solution business.
Alice Chang: The first nine months of 2024 saw our operating cash flow generate a net inflow of $9.8 million, and our balance sheet remains very strong, with over $163.2 million in cash and cash
Alice Chang: In the third quarter, our revenue growth and the business efficiency contributed to the company's bottom line.
Alice Chang: with a net income of 2.5 million dollars.
Alice Chang: This net income bottom line result comes from the Continuous Efficient Cost Management Initiative, while allowing the management to focus on investing in AI and AR services to expand our market footprint in both B2B and B2C.
Alice Chang: $2.7 million in the same period of 2023, an increase of 20.6%.
Alice Chang: Our B2C mobile business has maintained strong quarter-over-quarter growth, with a number of active paying subscribers reaching an all-time high of over 977,000, representing a 17% year-over-year increase.
Alice Chang: This sustained growth in paying subscribers underscores the enduring global demand for AI photo and video editing, creation, enhancement, and beautification features, spanning all age groups and geographies.
Alice Chang: multiply
Alice Chang: Our extension efforts have yielded positive results in addition to North America, Western Europe, and Japan. We also see notable growth in new markets such as Brazil and Italy, further validating the universal appeal of our app offering.
Alice Chang: A new revenue stream has emerged through the introduction of our B2C web-based services.
Alice Chang: accessible via mobile, laptop, PC, Mac, and iPad providing user options besides iOS in the Android mobile app.
Alice Chang: This service operates under a credit-based billing model.
Alice Chang: where consumers pre-purchase credits each month to access a wide range of AI features including photo and video creation, editing, enhancements, and beautification.
Alice Chang: This initiative has expanded our total addressable markets beyond mobile apps, tapping into a broader consumer base.
Alice Chang: Our suite of AI Ucam mobile apps continues to receive frequent updates and feature enhancements, integrating innovative AI digital solutions powered by CoffeeMage AI technology for photos and videos.
Alice Chang: This update empowers users to explore and express their creativity, offering new ways to showcase personal styles through the latest advancements in AI-driven content creation and editing.
Alice Chang: Now shifting to our B2B operation in Q3, we have prioritized deepening market penetration across several new verticals. Most notably, we made significant strides in expanding our portfolio with AI-powered skin diagnostics.
Alice Chang: including updating, upgrading our industry-leading HD skin analysis solution with up to 15 skin concerns ready for consumers to learn all the details about their skin concerns in the visual simulation.
Alice Chang: This initiative positions us strategically in a frontier market that is projected to grow significantly in the next few years.
Alice Chang: driven by increasing consumer awareness of skin health and the pursuit for better skin and aesthetic beauty.
Alice Chang: With particular emphasis on the aesthetic clinic sector, where we introduced our new upgraded Skincare Pro product, designed with ease of deployment and for small-medium size clinic chain.
Alice Chang: Skincare Pro has been instrumental in establishing a foothold in this growing market and newly enhanced a solution with AI aesthetic simulation capability.
Alice Chang: thereby reducing the likelihood of misunderstanding prior to making a treatment decision. This represents a pivotal area where AI technology plays a critical role in aligning expectations with realistic results.
Alice Chang: All room.
Alice Chang: CORE make a virtual try-on, product continues to perform well across all regions, particularly in the brand sectors. We successfully renewed major licenses with key beauty conglomerates and retailers.
Alice Chang: for both this year and the next, highlighting the essential role our solutions play in enhancing online shopper engagement and driving higher conversion rates for e-commerce.
Alice Chang: This renewal has also enabled us to strategically cross-sell to affiliated brands and extending our offerings, including broader SKU selections and expanding our market reach.
Alice Chang: While the B-to-B sales cycle continues to present some post-recovery challenges, our pipeline remains robust. Our team is diligently focused on guiding
Alice Chang: prospective enterprise clients in adopting our online solutions, helping them implement their consumer engagement strategies.
Alice Chang: and we are pleased to provide an update on our perfect GPT services which we were announced in June.
Alice Chang: Thanks to this introduction, the service has garnered high interest from numeral global beauty brands and skincare brands.
Alice Chang: We anticipate that AI-powered personalized beauty assistants will become a standard feature on all brands' websites in the coming future. Enable 24-7 AI beauty consultation services.
Alice Chang: This AI assistance will offer professionally tailored recommendations that address the unique needs of consumers, including skin types, skin concerns, beauty makeup, preferences, and fashion styles.
Speaker Change: Perpetuity is distinctly designed with a robust focus on the retrieval augmented generation we call REG, R-E-G framework.
Speaker Change: Where the recommendations are all supported by factual information and not merely derived from a standard large language model, LLM.
Speaker Change: This enables brands to provide factual, authoritative documents that train our AI model, ensuring that all recommendations are accurate, reliable, and consistent, meeting the highest quality standards.
Speaker Change: We expect the commercial POC, Proof-of-Concept, will launch early next year and followed by larger-scale deployment in late 2025.
Speaker Change: In conclusion,
Speaker Change: We achieved consistent business growth in the third quarter of 2024, marked by increased revenue, enhanced operational efficiency, and a strong financial performance.
Speaker Change: While our B2C segment continues to demonstrate rapid and organic expansion.
Speaker Change: and sustain long-term growth by diligently developing new AI technologies and leveraging our leadership position in the beauty and fashion space.
Speaker Change: As a company, we remain deeply committed to driving AI innovation that address both consumer and brand pain points through our comprehensive suite of AI services.
Speaker Change: A key advantage that we offer is our ability to leverage a unified AI engine that serves both our consumer-facing apps and enterprise SaaS solutions.
Speaker Change: enabling us to maximize innovation across diverse sectors.
Speaker Change: Driven by the positive demand for both our mobile beauty app subscription and enterprise star solution.
Speaker Change: Look for the full year 2024 project total revenue growth recognized under IFRS to range from 12% to 14% compared to the full year 2023 results.
Speaker Change: With that, I have concluded my remarks and will now pass the call over to Louis who will discuss our financial details with you. Thank you.
Louis Chen: Thank you, Alice.
Louis Chen: Please note that all financial comparisons are on a year-over-year basis and the reporting period is the third quarter of 2024 versus the comparable period in 2023.
Louis Chen: and that on top of the International Financial Reporting Standard, RFRF, measures, we will also discuss some non-RFRF measures to provide greater clarity on the trend in our operations.
Louis Chen: In the third quarter of 2024, our total revenue increased to $16.1 million from $14.5 million for the same period in 2023.
Louis Chen: representing a year-over-year increase of 10.8 percent. The growth stemmed from the original continued growth of our AI and AI cloud solutions and mobile app subscription business.
Louis Chen: The AIAR cloud solution and subscription revenue grew 17.9% to $13.4 million compared to $11.4 million from the year-ago period, which represented 83% of the total revenue in the quarter.
Louis Chen: This growth is attributed to the continuous expansion of our mobile beauty app subscription and the positive momentum from our online skincare diagnosis solution, as well as our virtual trial on business.
Louis Chen: As we continue to expand our services offering through Gen-AI technologies, we should see improvement in service quality and pain point resolutions for both brain clients and consumers.
Louis Chen: The licensing revenue decreased by 14.5% in the 3rd quarter of 2024 to $2.4 million, compared to $2.8 million during the same period in 2023.
Louis Chen: As previously mentioned, this portion of the business is mostly generated from our traditional offline services, and that we are converting this type of legacy, non-recurring revenue into AIAR subscription revenue from brands and consumers.
Louis Chen: The licensing revenue will gradually become immaterial as it continues to be phased out and replaced by new subscription revenue models.
Louis Chen: The decrease in gross margin was mainly due to the increase in third-party payment processing fee paid to distribution partners such as Google and Apple due to the increase in a mobile app subscription revenue.
Louis Chen: The total operating expenses for the third quarter of 2024 increased by 3% to $13 million compared to $12.7 million for the same period last year.
Louis Chen: Going into details for operating expenses, sales and marketing expense for the third quarter of 2024 were $7.1 million compared to $6.4 million during the same period of 2023, an increase of 10%.
Louis Chen: This was mainly due to the increase in marketing events and advertising calls for our mobile apps.
Louis Chen: Research and development expenses were $3.2 million for the third quarter of 2024, compared to $3 million during the same period in 2023, an increase of 5.9 percent.
Louis Chen: The increase were mainly for the headcounts and also for the development into gen-AI computing technologies and related costs.
Louis Chen: Thank you for watching!
Louis Chen: General and administrative spends were $2.1 million for the third quarter of 2024, compared to $3.2 million during the same period of 2023, a decrease of 32.9%.
Louis Chen: The decrease were mainly due to the increased operational efficiencies as we approaching the two-year mark of our listing on NYSE.
Louis Chen: Net income was $2.5 million for the third quarter of 2024 compared to a net income of $3.5 million during the same period of 2023.
Louis Chen: The positive net income in the third quarter of 2024 was supported by continuous revenue growth and efficient cost control.
Louis Chen: This result represents a net income margin of 15.7% in the third quarter of 2024.
Louis Chen: Excluded non-cash share-based compensation, non-cash valuation gain and loss of financial liabilities, the adjusted net income was 3.2 million for the third quarter of this year, compared to the adjusted net income of 2.7 million in the same period of last year, an increase of 20.6%.
Louis Chen: These represent an adjusted net margin of 19.9% in the third quarter of 2024.
Louis Chen: As of September 30, 2024, the company held $163.2 million in cash and cash equivalent and six-month deposits.
Louis Chen: compared to $158.8 million as of June 30, 2024. The increase in cash and cash equivalent, including six-month time deposits, was a result of the positive operating cash flow and the interest income received from the company's bank deposits.
Louis Chen: We had a positive operating cash flow of $4.2 million in the third quarter of 2024 compared to $4 million during the same period in 2023.
Louis Chen: The positive cash flow demonstrated the company's continued ability to generate cash flow to support its business operations and growth strategy.
Louis Chen: Of note, mobile app subscription subscribers increased 17% year-over-year, reaching an all-time high of 977,000 by the end of the third quarter of this year.
Louis Chen: Our suite of beauty apps has once again shown its capability to offer both enjoyment and practical value to users, effectively turning them into paying subscribers.
Louis Chen: Subs by www.zeoranger.co.uk
Louis Chen: In total, our enterprise customer base had a net increase of 22 brand clients since the end of last quarter, achieving a total of 708 brand clients.
Louis Chen: In the third quarter, Perfect Corp had 151 key customers, compared to 151 in the second quarter of 2024, demonstrating the stability of our enterprise business in this quarter.
Louis Chen: In the third quarter of 2024, the AI and AR cloud solution and mobile app subscription business continue to drive our growth.
Louis Chen: We also continue to focus on operational efficiencies and financial prudence, which saw a significant increase in adjusted net income of 20.6% year-over-year and adjusted net margin rate of 19.9%.
Louis Chen: Following up on recent quarters, we have been and will continue to invest in developing of AI technologies in order to strengthen our core capabilities.
Louis Chen: Our software is at the forefront of developing innovative Gen AI solutions that enhance user experiences and streamline operations within the beauty and fashion space.
Louis Chen: We anticipate growth as our cutting-edge technology continues to attract new clients and expand our market reach both in assisting and new verticals. By prioritizing research and development in AI, we are well positioned to meet the evolving needs of our customers and capitalize on emerging opportunity in this beauty and fashion landscape.
Louis Chen: We believe that there are additional opportunities both within our B2B and B2C business. While the overall macroeconomic rebound has not been apparent, there are clear signs from a customer base which make us feel optimistic about the future of PerfectQuark.
Louis Chen: Finally, our 2024 guidance for total revenue year-over-year growth will range from 12 to 14 percent. The forecast is based on company current assessment of the market and operational conditions. The management will closely monitor business progress and provide updates in order to offer better transparency to the market.
Louis Chen: That concludes my prepared remarks. Operator, please open up the call for questions.
Speaker Change: Your first question comes from the line of Ashi Shah with ZDOT and Co. Ashi, your line is now open.
Speaker Change: Thanks.
Ashi Shah: Thank you management for taking my question. Two questions here. One is on the revenue breakdowns side. I'm just wondering if management can share what is the growth for each segment within the AI solution?
Ashi Shah: like, what is the growth rate like for B2B versus B2C? I think that would be very helpful. And also another question is on the, I see you reiterated the folio guidance.
Ashi Shah: So, the revenue will be growing about 12 to 14 percent for this year. Just wondering if there are any thoughts on the growth rate into next year. Thank you.
Speaker Change: Hi Ashley, nice talking to you again. So we can see the trend for this year the B2C business is growing at a faster rate compared to the B2B.
Speaker Change: The guidance for next year, we are working on that. So we are still working through current pipelines and with all different global sales teams.
Speaker Change: So we don't have yet a number to share with you at the current moment, but we're working on that and we expect to share that toward the end of the year for more visibility.
Speaker Change: Thanks for watching!
Speaker Change: Your next question comes from the line of Lisa Thompson with Zaxmos Small Cap Research. Lisa, your line is now open.
Lisa Thompson: Hi everyone, thanks so much for getting on here and telling us about your new product. Could you talk a little bit more about the desktop version you have of the mobile apps? I'd be interested to see how people are using that differently from the mobile and also is that included when you buy a mobile app you also get the desktop version?
Lisa Thompson: and I would think that that product would put you against different competitors. Could you talk about that also?
Alice Chang: Hi Lisa, this is Alice.
Alice Chang: Yes, this is a web-based, it's a new emerging solution in the market and also we are starting to release it early this year. So we also see users not only using apps right now, but also using web browsers.
Alice Chang: So, not only on the mobile screen, but also you can use the PC, browser, to do the same thing. So, that is also the reason we jumped on it early this year, and trying to developing
Alice Chang: And also adding more features, just like our apps, into the web.
Alice Chang: using model.
Alice Chang: And, of course, the competitors are different, but I would think for the mobile users to have the option to use both mobile and the web, that will be a...
Alice Chang: So this is a new usage model for the end-user, consumer, and we're still focusing on photo and video.
Alice Chang: creating, editing, enhancing and beautification at the same time.
Alice Chang: Just open up a new option for users, not only on app, but also on the web.
Speaker Change: Hi Lisa, and to echo a bit on that, what the data we observed interesting is that the user base of the mobile app
Speaker Change: doesn't overlap too much to the web-based solution, so it seems that we are addressing a different type of TA in here.
Speaker Change: So your question whether this is a bundle, at the current moment it is not.
Speaker Change: So the consumer who subscribes to the app is really looking for something that is mobile, that is very easy to use on a smaller screen. While users who may want to spend more time, a little bit more professional or more amateur professional, they are using a larger screen on their desktop, then they are opting in to this.
Speaker Change: And all this computing are now moving more into the cloud with the AI and generative AI. It really doesn't matter if you are running on mobile or being just.
Speaker Change: casual use case or you want to spend really more time retouching your photo and video on a larger screen, we want to address both markets.
Speaker Change: Great, so are they priced the same?
Speaker Change: No, they are not. On the web-based, we feel that it's going to be more, as we said, credit-based. So it is a monthly subscription. You'd have various options on how much credit they want to consume per month.
Speaker Change: So they can subscribe, and so their accounts get deposited a certain fixed number of credits. And depending on the complexity of the editing feature or creation feature they want to use, that will deduct that credit. They can always top up their account anytime if they want to use more. So the current two models are slightly different.
Speaker Change: Okay, I imagine the objective is to get a much higher gross margin, right?
Speaker Change: Yes, absolutely. So I think this is, as the cost for running generated AI is certainly something to keep monitor on, right? So in order to...
Speaker Change: to provide a sustainable survey infrastructure and offer that. That's why we are moving to a credit-based. But I think most importantly, it's really addressing a larger group of audience.
Speaker Change: Just to share with you, for example, we noticed that on the desktop basis we have a slightly higher percentage of male users compared to the mobile use case in the demographic. So I think this is really making our total addressable market slightly bigger too.
Speaker Change: Great, thank you. Sounds good. Thank you so much.
Speaker Change: Again, if you would like to ask a question, simply press star followed by the number 1 on your telephone keypad.
Speaker Change: Your next question comes from the line of Pat McCann with Noble Capital Markets. Pat, your line is now open.
Pat McCann: Hey, thanks for taking my questions and congrats on the solid quarter. My question had to do with perfect GPT. I was wondering, because you mentioned that you think that in the future there's going to be a wide adoption of
Pat McCann: of a beauty, an AI beauty assistant on brand websites and that sort of thing. And I was just wondering on how, you know...
Pat McCann: How you're getting there, you know, for example, like I'm thinking about how on so many websites these days you you might have a you might run across a a Chat bot an AI chat bot. I'm wondering is that is your data related to the usage of?
Pat McCann: assistance like that? Is that how you're you're coming up with?
Pat McCann: AI assistant. I was just wondering if you could talk a little bit
Speaker Change: more about what's your confidence in the market opportunity there. And then I was just wondering on how the perfect GPT offering would sort of fit with your current B2B offering. Thanks.
Pat McCann: Hi, Pat.
Pat McCann: I think that what we've seen in the...
Speaker Change: In the beauty sector, right? So because the beauty is very personalized So most of the time consumer has really a lot of questions and doubt about what product fits me better
Speaker Change: So, typically the brand, they have to train and hire a large team of beauty advisors.
Speaker Change: with online or offline, today mostly offline in the shops, to give users a consultation, right? And that is really one of the pain points of the brands, also a gating item for them to grow bigger, to address a larger audience, because they just can't hire so many people to do this type of training and one-on-one consultation.
Speaker Change: So they are really eager to offer something smarter than traditional chatbots.
Speaker Change: So it's not just designed to like track my order, you know, I'm asking, you know, when I'll get the order, how can I get refunds, these type of customer services, but it's much more about knowing my product, right? And we use AI to analyze your skin type, analyze your beauty style, your facial, you know, ratio and so forth.
Speaker Change: They see that the consumer who comes to the website shop for product, the conversion rate isn't very high because of those doubts, right? And you can have many Q&A and any material, but it's just harder for consumer to really spend so much time to dig into it, to read about it.
Speaker Change: and walk away with the basket, right, with the product. So I think the AI, the perfect GPT, really comes to solve that problem for them to increase the user engagement. They are expected to see if they spend a lot more time in that engagement with the brand or with the AI assistant.
Speaker Change: and therefore build up the confidence to take a product home and try it on them. So this is kind of the new playground. I don't think it is the same as the traditional chatbot, which is mainly used more for customer services in a traditional way.
Speaker Change: And let me comment a little bit more besides what Louis said. Perfect GPT, my view for the brand to be their AI, online AI beauty assistant.
Speaker Change: their own know-how, their own know-how for beauty into the AI training database for...
Speaker Change: We are also using our AI analysis to tell the user what's the best for them instead of just, you know, sending all the messages to them.
Speaker Change: And the brain already have make up trial or skin analysis on their brain side. They can directly integrate the perfect GBT together with our...
Speaker Change: Our virtual try-on and AI analysis, face analysis, skin analysis, all the tools together to provide you a real personalized recommendation just like experts from the beauty industry.
Speaker Change: Great, and if I could ask one follow-up question to that. It would be, I guess, you know, like you mentioned, Lewis, the pain point of having, have the brands having people to help make these recommendations. It seems like if this could offer a significant cost savings.
Speaker Change: to brands, I'm wondering what would the implications be for
Speaker Change: for what you can charge on these contracts by being able to save the brands, you know, how significant
Speaker Change: Could this be for your price point when you're negotiating these contracts with B2B clients?
Speaker Change: I think we are still in the early days to understand the real full impact of these AI services, not only in beauty but across all industries.
Speaker Change: And I think the data is going to show us, you know, how really it's helping the brand on the cost-saving perspective or improving the sales process or customer satisfaction.
Speaker Change: So, our approach is currently we are working very closely with key brands to train, because they want to make sure that they are really giving the user the experience that the luxury and the prestige brands, they're all designed for.
Speaker Change: So I think this, we see, as Alice said, on the proof of concept, right? So we do that at different scale in different market to test the result. And I think based on that result, we have more confident about how we can commercially benefit from these type of services. So I think the first is to create a quality of service to make sure that things work properly. And then really garner the data to make those business decision next.
Speaker Change: Certainly, I think this is something that the brand would like to invest because it's harder and harder, again, to retain people and then to train them in the long term. And having something that works 24-7 all the time from the website or from the mobile app, I think it is a very compelling offer.
Speaker Change: Again, if you would like to ask a question, please press star 1 on your telephone keypad.
Speaker Change: As there are no further questions at this time, I'd like to hand the conference back over to the management for closing remarks.
Speaker Change: Thanks for watching!
Speaker Change: Thank you once again for joining the call today. If you have any further questions, please feel free to contact us directly or through our IR website. We look forward to speaking with everyone in the next call. Goodbye.
Speaker Change: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Speaker Change: Please wait, the conference will begin shortly. Thank you for watching.