Perfect : First Quarter 2024 Transcript

TRANSCRIPT

04 - 24 - 2024

Perfect Corp.

First Quarter 2024 Earnings Conference Call

TOTAL PAGES: 14

Perfect Corp.

First Quarter 2024 Earnings Conference Call

CORPORATE SPEAKERS:

Alice Chang

Perfect Corp.; Founder, Chairwoman and Chief Executive Officer

Louis Chen

Perfect Corp.; Executive Vice President and Chief Strategy Officer

Iris Chen

Perfect Corp.; Vice President of Finance and Accounting

Jennifer Wu

Perfect Corp.; Investor Relations Manager

PARTICIPANTS:

Brian Schwartz

Oppenheimer; Analyst

PRESENTATION:

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 Crop'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 assess 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.

Perfect Corp.

First Quarter 2024 Earnings Conference Call

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 was driven by the strong growth of our AI/AR cloud solutions and substitution 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 top line 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 beautiful AI strategy including Beauty AI, Skin AI, Fashion AI and Gen AI across both of our consumer and enterprise business.

For our consumer app business, we leverage our new Gen AI technology 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 contracts with many big clients and brought in several new brands for makeup virtual try-on services.

We also saw ongoing strong momentum in our new AI Skincare diagnosis product, and we expected this trend will expand and grow.

Furthermore, new clients from luxury jewelry and watch industries are integrating our jewelry and fashion VTO offering into their digital offering. These new developments showed our sustained effort to extend our coverage into different verticals and address some larger markets. They also reflected the various avenue we have got to increase business potentials. As we are committed to keep investing

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First Quarter 2024 Earnings Conference Call

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 advancements -- we saw another robust quarter for our B2C mobile beauty app business, evidenced by the 30% year-over-year increase in our mobile beauty app active subscribers to a historical high of 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 video.

As self-expression and creativity becomes increasingly important, consumers expect more personalized and diverse experiences from mobile app.

Our family of YouCam app is able to offer unique high-quality digital output, leveraging advanced technology like generative AI for 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-qualityultra-personalized photos and videos generated or edited by YouCam suite of apps.

A key appeal of the YouCam family app is advanced AI and AR technology to help the users to solve real-life challenges and explore more creative ideas. These offerings allow users to beautify, edit and enhance photos and videos as well as virtually try on makeup and hair style. Users can also experience and create their unique and diverse styles in photo and videos and artworks to unleash their creativity by leveraging the latest AI technology.

As the users become satisfied with the quality of our product, our apps, they continue to use it, use our app, making YouCam family apps an integral part of their daily life.

Moreover, we offered a complete line of online AI editing tool on our website and through our YouCam suite of mobile apps that leverage advanced AI capabilities to enhance photos, videos and generate AI artworks, such as AI Enhance for photo and video, AI colorization, AI color correction, Al lighting, AI figures in anime characters.

Our product strategy centers on integrating AI across our entire offerings to edit, beautify and enhance photo and video, in one second and easily transform user experience and solve 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 the ability to leverage the same AI engine to power both our consumer mobile business and our Enterprise SaaS business. This allows us to fully monetize innovation across different sectors in our B2C and B2B sectors.

Our unique AI-driven approach, combined with a commitment on ongoing innovation, positions us to significantly expand market penetration by unlocking AI's transformative potential.

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First Quarter 2024 Earnings Conference Call

Now let's shift focus to our B2B business. This quarter in our B2B sector, we focused on deepening the penetration in new verticals to provide AI skincare diagnosis product and jewelry 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 demonstrated the growing demand from our comprehensive solutions and superior technologies from clients in different industries and sectors. Moreover, we successfully secured all major license renewals with key beauty skin care and jewelry brands and the retailers. This renewal underscores the increasing trust these brands placed in our solutions to address their evolving requirements and highlight our leadership in VTO solution offerings.

We also capitalized on these opportunities by cross-selling to their sister brands and offering additional services, including expanding SKU selections and extending brands' presence into new geographies. The strong momentum in revenue growth in this quarter reflected the recovery in the sales cycle and the pipeline expansion of our enterprise business.

Firstly, 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 renewed contracts with all major existing clients and brought in several new brands for makeup VTO Virtual Try-On Services. Furthermore, we continue to innovate and expand the capabilities of our makeup offerings. We have added metallic textures to eye shadow VTO, and shimmer texture to eyebrow VTO. These new textures for make-up not only allow brands 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 this first quarter, we saw strong momentum for our skin diagnostic products on both existing and the new customers.

As people become increasingly conscious about their skin health, we aim to capitalize on this trend by providing AI solutions. Notably, we gained significant traction in new market segments such as med spas, aesthetic clinics, and dermatology practices. These professional institutions leverage our AI technologies to deliver real-time and dermatologist-verified skin diagnosis results in the scores to their clients and patients.

A key differentiators for our skin service is our cutting-edge and unique high-definition AI diagnosis that offers a comprehensive approach to understand individual skin conditions in super high precision, allowing users to visually change their skin after skin treatment with a very easy to see AR overlays precisely positioned on the location of the actual skin concerns and with a measurable skin scores.

Using advanced AI, our skin diagnosis 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.

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First Quarter 2024 Earnings Conference Call

Third key driver of our skin business success this quarter came from our self-service offering, a new product, Skincare Pro, which gained robust momentum, particularly among aesthetic clinics and medical spa. This is an iPad-based skin diagnosis solution serve as the consultation tool for clinics to engage with their clients and with the newly added CRM add-on module. It can improve customer retention while keep track of each individual customers progress during treatment.

Skincare Pro enables this business to deliver personalized data-driven skin consultations to their clients and patients in a very cost-efficient and easy way.

Furthermore, we recently developed and integrated a 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 console and compare before-and-after results. This integration represents a significant shift in how personalized skin care is delivered, ensuring a more personalized and efficient patient experience. By seamlessly integrating and upgrading our AI-powered skin analysis, diagnosis and emulation tools as well as providing science-based skincare experience that for data- informed decisions and drive unparalleled patient engagement and satisfaction. Since 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.

Actually, for our fashion and Jewelry, VTO, another highlight of the quarter was the accelerated market adoption of our VTO solutions for watch and jewelry, we saw several new wins and renewal of prestige and luxury brands, 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 are thrilled to see our efforts paying off as more deals have been confirmed and 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 the superior AI technology and professional services the brand clients experience when working with us made them willing to renew the contract and purchase more services.

In the 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. Leveraging our cutting-edge AI technology, the sophisticated texture and radiant reflections of the jewelry can be faithfully portrayed on screen, providing users and immersive, true to real -- true to life, shopping experience.

Though the case is still at its stage of a POC, we believe that this new win not only affirms the trust in our AI technology by these high-end brands, but also unlock the chances to get more new logos onto our SaaS platform for jewelry, accessories and watches.

The increasing numbers of jewelry and watch brands using our VTO and AI technology indicates that the demand for these interactive shopping experiences is on the rise. The unique and leading functions of our products allow brand clients to increase user engagement time and reduce return rate. Given the robust

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First Quarter 2024 Earnings Conference Call

demand for jewelry and watch VTO, we will continue to deepen our penetration in this sector and to further grow our business in different and new categories and the regions.

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 quickly identify hair texture, thickness and curl patterns by simply taking a picture of users' hair. This AI technology accurately classified hair into 9 distinct types across 10 categories, from straight, wavy, to extremely coily and can deliver precise and personalized recommendations tailored to each unique hair type.

This new innovation on AI hair complements our full range of AI hair solutions, which includes our hair color VTO, AI hairstyle generation, AI hair wig generation and hair extension. This industry-leading solution for hair enables haircare brands and the retailers to provide customers with a more customized shopping experience.

To sum up, we delivered strong business performance 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 assessed in expanding services into new verticals. These positive indicators suggest, we are well positioned to capitalize on growing market opportunity for AI on beauty, skin, fashion and generative AI.

We continue growing our AI/AR power business. Driven by the good demand for both our mobile app subscription and enterprise stock 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 results.

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

Louis Chen^ Thank you, Alice.

Please note that all financial comparisons are on a year-over-year basis and the reporting period is the first quarter of 2024 versus the comparable period in 2023, and that 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 USD 14.3 million from $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 solutions 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

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First Quarter 2024 Earnings Conference Call

serve on skin diagnosis, jewelry, fashion market 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 underscore the growing interest in our suite of mobile beauty apps from both users and subscribers.

The licensing revenue, which is mostly generated from our traditional off-line 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, with 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 expenses for the first quarter of 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 costs.

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 headcount 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 fees.

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-cashshare-based compensation, the non-cash valuation gain and loss for financial liability and one-timenon-recurring costs 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 other balance sheet as of March 31, 2024, our company held $157.3 million in cash, cash equivalent and 6-month time deposits, compared to $154.2 million as of December 31, 2023. The increase

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First Quarter 2024 Earnings Conference Call

in cash and cash equivalents, including 6-month time deposits, was a result on the positive operating cash flow and the 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 sufficient cash flow to support its business operations 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 clients, with over 745,000 SKUs for makeup, skincare, eyewear and jewelry products as of March 31, 2024. This is yet another record quarter for this metric, showing the continuous increase in customer penetration and SKU expansion. More brands and products are leveraging on perfect console to operate the various different SaaS modules subscribed from Perfect.

In the first quarter of 2024, our total revenue has consistently exhibited strong growth, primarily driven by the continued momentum in our AI and AR cloud solutions and mobile app subscription earnings from premium features and AI-powered app.

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 competency in acting as a transformative tool that reinvents how our products are showcased and consumed.

We firmly believe that our position within this thriving industry equips us to remain at the forefront of revolutionizing how beauty and fashion brands engage with the audiences.

Finally, we reiterate our 2024 guidance that total revenue year-over-year growth to 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.

And with that concludes my prepared remarks.

Operator, please open up for questions.

Operator^ Your first question comes from the line of Brian Schwartz with Oppenheimer.

Brian Schwartz^ Thanks for taking my question 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 SKUs, is that coming all 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.

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First Quarter 2024 Earnings Conference Call

As you can tell we expand into new verticals, the jewelry and skin analysis.

So the -- it's quite spread out and split between three different verticals, but make-up is still the biggest one. They have more SKUs than jewelry, especially luxury jewelry. They don't have too many SKUs like makeup and skin care also, they do have new SKUs in our consoles, but still make-up has the biggest part and the rest split between skin care and jewelry.

Brian Schwartz^ Okay. And then my next question, I wanted to ask 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 sector, especially our SaaS business model, the lead time to acquire new customers is not immediately like B2C.

So it takes time. And we keep our sales talent in each of the business units, not growing too much from now. And since we see the growing in skincare channels and the fashion jewelry channels right now -- so we specifically increase some of a few sales capability in the business unit.

And so overall, we will keep increase but not too much and still 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 comments in 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?

Louis Chen^ Hi Brian, this is Louis.

I think the macro certainly has impacted some of those smaller customers.

We're looking to -- majority of our enterprise clients, they are on annual base contracts.

So upon the expiration of the contract, typically, they'll renew on a year-to-year basis.

What we noted 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 pressure that they are getting.