Jun 27, 2020 (Thomson StreetEvents) — Edited Transcript of So-Young International Inc earnings conference call or presentation Monday, May 18, 2020 at 11:30:00am GMT
So-Young International Inc. – CFO & Director
So-Young International Inc. – IR Officer
So-Young International Inc. – Co-Founder, CEO & Chairman
Ladies and gentlemen, thank you for standing by, and welcome to So-Young First Quarter 2020 Earnings Conference Call. (Operator Instructions) I would now like to hand the conference over to your first speaker today, Ms. Vivian XU. Thank you. Please go ahead.
Vivian XU, So-Young International Inc. – IR Officer [2]
Thank you, operator. Hello, everyone, and thank you for joining us today. So-Young’s first quarter 2020 earnings release was distributed earlier today and is available on our IR website at ir.soyoung.com.
On the call today from So-Young is Mr. Xing Jin, Co-Founder and Chief Executive Officer; and Mr. Min Yu, Chief Financial Officer. They will both be available to answer your questions during the Q&A session that follows management’s prepared remarks.
Please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities and Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to those, outlined in our public filings with SEC, including our annual report on Form 20-F.
So-Young does not undertake any obligation to update any forward-looking statements, except as required under applicable law.
It’s now my pleasure to introduce Mr. Xing Jin who will read through his prepared remarks in Chinese first in their entirety before they are translated to English, after which, Mr. Min Yu will go over the financials.
Mr. Xing Jin, please go ahead.
Xing Jin, So-Young International Inc. – Co-Founder, CEO & Chairman [3]
Vivian XU, So-Young International Inc. – IR Officer [4]
[Interpreted] Thank you, everyone, for joining us for our first quarter 2020 earnings call. Before I begin, I want to convey our deepest sympathies to everyone whose loved ones have sadly been affected by this tragic pandemic. We also want to express our sincere gratitude and appreciation to all those helping in the fight against COVID-19, including our employees who have been working hard and doing their very best to limit the spread of the disease while courageously ensuring business continuity.
Xing Jin, So-Young International Inc. – Co-Founder, CEO & Chairman [5]
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(foreign language)
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Vivian XU, So-Young International Inc. – IR Officer [6]
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[Interpreted] Despite the significant impact COVID-19 has had on our business, we delivered solid results during the quarter. We have taken the opportunity to implement strategic changes to ensure we are well positioned for growth when all normal operating conditions resume in the second half of 2020.
Total revenues were RMB 183 million, exceeding the high end of the company’s previous guidance.
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Xing Jin, So-Young International Inc. – Co-Founder, CEO & Chairman [7]
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(foreign language)
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Vivian XU, So-Young International Inc. – IR Officer [8]
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[Interpreted] The macroeconomic environment, as a result of the pandemic, during the quarter, has been challenging, as anticipated, but this has also given us an opportunity to accelerate the deployment of resources to enhance the user experience. We made efforts on expanding our vibrant community of users and medical aesthetics professionals.
We grew our community significantly during the quarter with average mobile MAUs increasing to 4.2 million compared with 1.9 million during the same period of 2019, an increase of 117%.
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Xing Jin, So-Young International Inc. – Co-Founder, CEO & Chairman [9]
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(foreign language)
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Vivian XU, So-Young International Inc. – IR Officer [10]
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[Interpreted] Our core focus during the quarter was twofold: first, we expanded our community; and second, we further streamlined the delivery of high-quality content while driving greater engagement. We believe that our focus on these 2 areas will be critical to demonstrating our innovative and differentiated platform offers a unique value proposition to consumers, professionals and service providers.
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Xing Jin, So-Young International Inc. – Co-Founder, CEO & Chairman [11]
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(foreign language)
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Vivian XU, So-Young International Inc. – IR Officer [12]
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[Interpreted] First, on the expansion of our community. During the quarter, we further enhanced the structure of our content and developed new ways to cater to our vibrant community of users. We established a series of incentives and rolled out promotional plans to acquire more users who are interested in and are passionate about beauty and wellness.
Our editorial team is working closely with users and popular content creators whom we refer to as medical aesthetics influencers to generate more high-quality content. Leveraging our in-house data-driven algorithms, we are then able to increase the exposure this content gets, which drives the acquisition of users and followers from content providers on our platform. Through this, we are extending our user base from one that is purely on medical aesthetics to one that has on healthier and more high-quality leads.
We also increased cooperation with external multichannel networks to produce interesting and professional content of various social video networks. The rich content they produced, combined with our enhanced user experience, have contributed to the expansion of our user base and increase in user engagement. This also further strengthens word-of-mouth marketing and our brand visibility.
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Xing Jin, So-Young International Inc. – Co-Founder, CEO & Chairman [13]
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(foreign language)
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Vivian XU, So-Young International Inc. – IR Officer [14]
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[Interpreted] Second, we continued to develop new ways to urge content providers to create and engage with users with more high-quality reviews. Our platform hosts an open and vibrant community of medical aesthetics consumers ranging from newcomers to influencers and professionals. Users utilize our community to share a wide range of experience from medical aesthetic procedures to skincare tips.
In order to further strengthen the credibility of our platform, which we believe is critical to our business, we upgraded our back-end system to streamline how we push and promote user-generated premium content. As an example, we give high rankings to users who record in detail their procedures through our Beauty Diaries and demonstrated their authenticity through uploaded photos of their receipts. We also sent out push notifications to remind them to post follow-up content on their overall experience, how long the pain lasted and the recovery process.
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Xing Jin, So-Young International Inc. – Co-Founder, CEO & Chairman [15]
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(foreign language)
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Vivian XU, So-Young International Inc. – IR Officer [16]
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[Interpreted] We also provide tools to doctors and institutions for postprocedure follow-ups. The ability of doctors and institutions to remain in contact with users in a timely and direct way improves the overall user experience and increases the amount of returning patients for treatment.
Meanwhile, in order to build a healthier and a more regulated ecosystem, we established an Authentic Alliance to strengthen competence and the governance of our platform. For example, user can now verify drug’s authenticity by scanning QR codes through the So-Young app.
In addition to asking doctors to upload license and qualifications for professional practice, we are also monitoring the quality of each doctor through user reviews. Failure to do so result in them being removed from our platform. These initiatives help improve consumer’s ability to make informed decisions and highlights reputable institutions and doctors on our platform, which reinforce its value.
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Xing Jin, So-Young International Inc. – Co-Founder, CEO & Chairman [17]
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(foreign language)
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Vivian XU, So-Young International Inc. – IR Officer [18]
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[Interpreted] We formally introduced our live video diagnosis service through our app last quarter and have seen an enormous uptake in usage since then. During the first quarter, we completed more than 88,000 requests from users for live video diagnosis.
This tool is not only a channel used primarily for information and knowledge, but it’s more akin to a last-mile delivery service. We believe the core value is that it creates an efficient bridge between medical professionals and the end user, facilitating delivery of high-quality medical advice and service, which ultimately help users make their final decision.
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Xing Jin, So-Young International Inc. – Co-Founder, CEO & Chairman [19]
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(foreign language)
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Vivian XU, So-Young International Inc. – IR Officer [20]
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[Interpreted] We aim to create an open, diversified and a trustworthy ecosystem for our users and medical aesthetics professionals. We believe that a reliable community can effectively and efficiently incentivize service providers to consistently offer high-quality treatment with transparent pricing, which will result in the healthy and sustainable development for all business operators and users.
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Xing Jin, So-Young International Inc. – Co-Founder, CEO & Chairman [21]
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(foreign language)
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Vivian XU, So-Young International Inc. – IR Officer [22]
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[Interpreted] I would now like to turn the call over to Min Yu who will go through the financials for the quarter.
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Min Yu, So-Young International Inc. – CFO & Director [23]
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Okay. Thanks, Chris. Please be reminded that all amounts quoted here will be in RMB term. Please also refer to our earnings release for detailed information of our comparative financial performance on a year-over-year basis.
For the first quarter 2020, total revenues were RMB 182.6 million, down 11% year-over-year, but exceeding the high end of our previous guidance. The decline was primarily due to the outbreak of COVID-19, which curtailed medical service providers’ spending and required end users to shelter in place, which delayed the demand in first quarter of 2020.
Within total revenues, information services revenue was RMB 126 million, down 12% year-over-year. Reservation services revenue was RMB 56.5 million, down 11% year-over-year.
Cost of revenues were RMB 43.1 million, up 18% year-over-year, driven primarily by an increase in personnel-related costs.
Total operating expenses were RMB 185.9 million, up 41% year-over-year. Sales and marketing expenses were RMB 109.1 million, up 45% year-over-year, primarily due to an increase in expenses associated with marketing campaigns and user acquisition initiatives.
General and administration expenses were RMB 34 million, up 37% year-over-year, primarily due to an increase in personnel-related costs.
Research and development expenses were RMB 42.8 million, up 37% year-over-year. The increase was primarily a result of costs associated with increased hiring to support product development, which is in line with the company’s strategy of strengthening its technology and big data analysis capabilities.
Income tax benefit was RMB 4.3 million compared with income tax expense of RMB 7 million during the same period last year. The change was primarily due to a decrease in taxable income during the first quarter of 2020.
Net loss was RMB 35.9 million compared with a net income of RMB 45.9 million in the first quarter of 2019.
Non-GAAP net loss was RMB 21.6 million compared with RMB 51.9 million non-GAAP net income in the same period of 2019.
Basic and diluted loss per ADS attributable to ordinary shareholders were RMB 0.33 (sic) [RMB 0.34] and RMB 0.34, respectively, compared with basic and diluted earnings per ADS attributable to ordinary shareholders RMB 0.28 and RMB 0.25, respectively, during the first quarter of 2019.
Now for the balance sheet. As of March 31, 2020, we had total cash and cash equivalents, restricted cash and term deposits and short-term investments of RMB 2.76 billion compared with RMB 2.84 billion as of December 31, 2019. The decrease was primarily due to the cash used in operating activities during first quarter.
We are closely monitoring the impact of COVID-19 on consumer demand and sentiment as normal working conditions resume in China. We are cognizant that there are many unknowns relating to overall macroeconomic impact of the outbreak, but we are confident that the fundamentals and the long-term drivers of our business remain strong.
With that in mind, for the second quarter of 2020, we expect total revenues to be between RMB 320 million and RMB 350 million. As it is still relatively early to fully assess the epidemic’s long-term impact on our business and the markets in which we operate, I want to remind you that this forecast reflects the company’s current and preliminary views on the market and operational conditions, which are subject to change.
This concludes our prepared remarks. I will now turn the call to the operator and open the call for Q&A. Operator, we are ready to take questions.
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Questions and Answers
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Operator [1]
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(Operator Instructions) The first question comes from the line of Brian Gong from Citigroup.
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Brian Gong, Citigroup Inc, Research Division – Equity Research Associate [2]
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(foreign language)
So I will translate myself. So first question — I have 2 questions. First question is regarding how is the recovery trend in the second quarter for information services and online reservation, respectively, and how about the reopening of hospitals and the budget for the hospitals?
And my second question is about — it is the situation of our new sales lease subscription model. What kind of hospitals are targeted customers? And what’s the key difference compared to our existing advertising model?
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Xing Jin, So-Young International Inc. – Co-Founder, CEO & Chairman [3]
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(foreign language)
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Vivian XU, So-Young International Inc. – IR Officer [4]
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[Interpreted] Okay. For the first question, that is for the recovery of the whole sector, we do see from our internal results to see that actually from the early March, most of the — 20% to 40% of the off-line institutions are back to their normal business. And till the end of March, we think that 70% to 80% have become the normal operation business. And — but due to the government regulation that still prohibit those people to get more crowded, so actually, the physical people who could meet for their institutions have dropped a lot compared to the same period of last year. So we think that maybe till the June, we could come back to the normal operation per our expectations.
And to your second question on the CPL, we think that actually for the advertising business for those off-line institutions, they rely much on the cash flows. So previously, we asked them to pay us in advance and then asked those institutions to use these prepaid points for those advertising investments.
But those CPC advertisers will — we think, that we are divided into 2 main growths: one is focused on the online e-commerce and one is on the content distributors. But in most ways, like small to medium institutions, their lack of the advantages of both, so we think that we provide them with subscription services to help them to decrease the difficulty of the operation. And we think that among those 60 to 70 small to mid- institutions, they will have more advantage to get our service.
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Operator [5]
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The next question comes from the line of Vincent Yu from Needham & Company.
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Shenghao Yu, Needham & Company, LLC, Research Division – Senior Analyst [6]
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(foreign language)
Congrats on the good quarter. My first question is on the surgical and nonsurgical services. So can management provide some comments on how these 2 services are trending in the first quarter?
My second question is on the online consultation. So I’m wondering what kind of institutions currently have higher interest in these products? Are these the private hospitals or the public hospitals?
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Min Yu, So-Young International Inc. – CFO & Director [7]
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This is Min. I will try to tackle your first question. And for the live video diagnosis question, I will leave to Mr. Xing Jin.
So for your first question, nonsurgical and surgical, that’s actually for the — the first quarter actually have a lot of stories because in the first month, January, it’s a normal month. So there is no difference between what is the distribution between surgical and nonsurgical compared to the normal month in the previous year.
But second month, February, I think start from end of January when — 24th to be exact, so start from that time, all the supply for services of medical aesthetic services has been stopped so until end of February. So for the full month, basically, we don’t have a lot of orders, and we don’t have a lot of reservations. Even users paid for reservation, but they pay for future, they can’t get services.
But start from second half of February, we do see some of the service providers, they resumed back to business. And we started to see users go back to clinics or hospitals to get their services done.
And for March, I think they start from those live nonsurgical services first. And gradually, when — because based on the government restriction, when the service providers just started to resume back to their business in March, they are not able to take out the operational surgical services. But injections, laser services or those light services can be taken and — but under certain restrictions like you can only have how many people in your clinic based on the size or area of your clinic.
So from that basis, we do see March, compared to normal months, you will have more nonsurgical orders being verified compared to surgical orders. So that’s basically the reality in the first quarter.
So hopefully, I answered your first question, and I will leave the second half of your question to Mr. Jin.
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Xing Jin, So-Young International Inc. – Co-Founder, CEO & Chairman [8]
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(foreign language)
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Vivian XU, So-Young International Inc. – IR Officer [9]
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[Interpreted] Well, first, we do see the private institutions and also the clinics, the doctors and also the professionals were very actively and proactively to do the live video diagnosis. But we think that most of the patients, especially our end users, still want to have the chance to have a type of consultation service with our nonprivate clinics — doctors from nonprivate clinics. But we do see that the limitation of those doctors to have such service and — is still there in the public institutions or hospitals. So we think that we will invite more doctors who have time and this doctor can range from very young or less experienced to expert in those private institutions or hospitals.
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Operator [10]
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The next question comes from the line of Thomas Chong from Jefferies.
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Melody Chan, Jefferies LLC, Research Division – Equity Associate [11]
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This is Melody representing Thomas Chong. We have questions on the content strategies in the future. Since this is a — content is one of our core targets, so we would know more — we would like to know more about the strategy in the future, and we would like to know about organic traffic-generation ability of our high-quality content.
(foreign language)
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Xing Jin, So-Young International Inc. – Co-Founder, CEO & Chairman [12]
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(foreign language)
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Vivian XU, So-Young International Inc. – IR Officer [13]
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[Interpreted] First, we divided our content to UGC and PGC. UGC primarily go with our user-generated content. We think that it — we will give a series of incentive and also promotion plans to have more users to generate high quality and also to increase the quantity of the UGC.
And for the PGC, we could get — the core value for the PGC that we think that our PGC content provider, especially for those doctors who can give us their professional information. And we think that, on this side, we are going to give incentive and also — as well as training for especially those young doctors on our platform, and we will help them to set up the doctor’s IP to give them more exposure on our platform.
And also, the relations between the content and also the traffic, we think that the content is a very good way to raise the user’s engagement for the traffic because usually those e-commerce platform doesn’t have such engagement and also relations with the users. And some communities have only users, a lack of the [decision-making allowance] to their final users like Bilibili. So we do think that we are going to have those content outside the e-commerce platform to have more users have engagement with us.
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Operator [14]
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The next question comes from the line of Junhui Kang from CICC.
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Junhui Kang, China International Capital Corporation Limited, Research Division – Associate [15]
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(foreign language)
My first question is regarding live video diagnosis feature. So I would like to understand more about like specific operation tactics in regard to this feature, such as these like next survey monetization and also the supply of [cap work]. And also, I would like to understand the competitive landscape with regard to this feature.
The second question is regarding demand going forward, specifically with regard to like user demand.
The third question is (inaudible) question in regard to why the like take rate for the reservation that has included 10% this quarter.
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Xing Jin, So-Young International Inc. – Co-Founder, CEO & Chairman [16]
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(foreign language)
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Vivian XU, So-Young International Inc. – IR Officer [17]
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[Interpreted] Well, for your first question, we think that in — for the numbers of the live video diagnosis, especially for the users’ request, we think that we do see a big hit in the February and March this month because it was a lot of consumers and doctors at the time who are not able to go out. So it happens to have the right product online and we do see the urgent from our — both the consumer side and the service provider side.
And after those people, especially back to their normal life, we do see a slight jump of those requests. But we think that if you look at the long run, we still have a very good momentum on the user growth.
And we think that we do that — we do think that because this is the need from both of the user’s need and also supply side, we think that is — do need time for us to incentive our users, especially give some education for the users who want to try the services. So we think that we will play a good role to lead them to accept such services.
And for the comparison to other platform, we do think that since the need upgrade from the users, we do see other platforms provide some similar users — provide some similar service to attract the users’ interest. But if you do have the chance to take a try, we think that, for example, most of the request from users in other platform cannot be — have facilities — can now be able to facilitate well because people there, especially those doctors, just they use this chance to advertising themselves. But for us, we actually give a lot of — like the guidance and also the internal control to regulate those people’s behavior on our platform to maintain very good results on the live video diagnosis. And we do think that the core value for the live video diagnosis is how to best match the needs of both parties and in the most efficient way. So it’s very important.
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Xing Jin, So-Young International Inc. – Co-Founder, CEO & Chairman [18]
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(foreign language)
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Vivian XU, So-Young International Inc. – IR Officer [19]
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[Interpreted] We think that, unlike those that just use us to — for our traffic acquisition, we think that we just want to provide a pure service between our users and those doctors on our platform. We think that this is our core value we can provide on this ecosystem. And we — that’s why we put efforts to regulating such services on our platform and also to guide those get what they just want. Otherwise, what they get once, we continue to provide those to just put the advertisement or alert those users to buy the products from this. So this is very critical for us, we think.
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Xing Jin, So-Young International Inc. – Co-Founder, CEO & Chairman [20]
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(foreign language)
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Vivian XU, So-Young International Inc. – IR Officer [21]
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[Interpreted] And we — for your second question, we do think that — we do see that on our platform, especially after the February of this year, we — there was a wave of rapid order recovery on our platform, but we think that the curve will go to be smooth after that because it is still the — because this is still internal needs from our user end.
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Min Yu, So-Young International Inc. – CFO & Director [22]
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So for your third question about why it seems like the reservation commission is more than 10%, I think that’s a really good question. It’s not a normal-case scenario because of the first quarter we had a very low base of reservation revenue compared to not only the first quarter of 2019, but compared to the fourth quarter of 2019.
There are 3 major difference, which contribute to my commission rate. First of all, actually, in my commission rates — in my reservation revenue, there is — a part of the revenue is contributed by the annual fee of the service providers. It’s very low. It’s very low. It’s like each service provider pays us around RMB 500 per month. So it’s like around RMB 1,500 per quarter for around — we have 3,500 paying service providers, as you see in our report.
So every quarter, we will have the annual fee being recognized as revenue for reservation of around RMB 5 million. Then you will ask why it’s reservation revenue? Because it’s based on the U.S. GAAP, because they only pay — when the service providers pay us annual fee, then they can open for user to reserve their services on the platform, so it’s directly connected to our reservation services. So in the U.S. GAAP accounting standard, they categorize that part of the revenue as a reservation service revenue. So that’s one part.
And the other part is our premium customer services, as you know, [Trian], so they still contribute a very low amount of revenue in the — if you’re back in the normal quarter. But if you put in this first quarter, very low basis of reservation revenue commission from the online services. The premium membership service usually have relatively higher commission rate compared to the normal online reservation services.
And the third reason is another one is because, usually, in March, we will have a market campaign for users to — after Chinese New Year, they come to my platform and then we have market campaign to encourage them spending or reserve services on our platform, and we will provide certain reimbursement to users and would directly deduct on reservation revenue. But in this March, we didn’t because of COVID-19. So it saved us a bit of money for the reimbursement to users.
So all those major 3 factors adding together, it seems like my commission rate is higher than 10%. But part of that, I think it’s because we’ve fixed reservation revenue every month from the annual fee. So even in February, we don’t have a lot of reservation. We don’t have a lot of verified GMV or verified services, then we still have reservation revenue coming for that month.
Hopefully, I answered your question. So the main reason is because of the low base of the normal online reservation revenues in the normal quarters.
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Operator [23]
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We have our next question from the line of Leo Chiang from Deutsche Bank.
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Leo Chiang, Deutsche Bank AG, Research Division – Research Analyst [24]
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(foreign language)
So I’ll translate my questions. My first question is regarding to the structural change of the industry after coronavirus. Can management share some observation from both customer side and service provider side?
My second question is regarding to the recovery path. So given it is likely to reach to normal capacity in June, so what should we expect for our second half revenue? Is it more like U-shaped or V-shaped recovery in the second half?
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Min Yu, So-Young International Inc. – CFO & Director [25]
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All right. Thanks, Leo. So I will try to answer your question. First question, are there any structural change for the medical aesthetics service industry? From current, our observation, I think we do see service providers they resume back to the business, gradually opening up the capacity and relatively spending lower than the normal period — or normal quarters on customer acquisition. We do see they are coming back. But as just now, Mr. Jin said, the trend, it seems like the Nike’s logo rather than a V shape or U shape. You have a very sharp drop in the beginning, and you’re gradually coming back as a major consumption service in the society, and users will gradually come back to the service providers based on the capacity opening up by the service providers and how much money it is spending on customer acquisition. So the trend is like that.
And from a structure, we are not seeing from like other industry or like restaurants or the beauty services industry, you do see the smaller players or service providers, they are booking bankruptcy and they’re closing the business. From my — our platform, we are not seeing that trend happening. Just the service providers, in the beginning, spend less on customer acquisition and gradually opening up, investing when the capacity opening up and the users will go back to the service providers. And as I said earlier, the trends will be like a Nike logo shape rather than a V shape or U shape. So that’s one.
And what’s your second question? Sorry.
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Vivian XU, So-Young International Inc. – IR Officer [26]
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The recovery.
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Min Yu, So-Young International Inc. – CFO & Director [27]
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The recovery trend. Sorry, Leo, what’s the second question?
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Leo Chiang, Deutsche Bank AG, Research Division – Research Analyst [28]
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Yes. So the first one is structural change. And the second one is the recovering trend. So you all answered. Yes.
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Min Yu, So-Young International Inc. – CFO & Director [29]
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I think I, yes, basically answered all questions. Thank you.
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Operator [30]
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I would now like to hand the conference back to our presenters for any closing remarks. Thank you. Over to you.
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Vivian XU, So-Young International Inc. – IR Officer [31]
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Okay. Thank you for everybody, and that’s all. Thank you.
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Xing Jin, So-Young International Inc. – Co-Founder, CEO & Chairman [32]
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(foreign language)
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Min Yu, So-Young International Inc. – CFO & Director [33]
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Thank you.
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Operator [34]
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Thank you. Ladies and gentlemen, that does conclude the conference for today. Thank you for participating. You may all disconnect now. Thank you.
[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]