Meitu uses operating leverage to achieve a five-fold increase in positive gross profit compared with the same period last year.

according to the 2017 semi-annual report, Meitu has made a profit in two of the past six months (March and May). At the same time, Meitu's gross profit also reached 440 million yuan, an increase of nearly five times compared with the same period last year, and the company's overall gross profit margin reached 20% in the first half of the year, compared with 12.7% in the same period last year.

original title: Meitu 2017 semi-annual report: the profit potential of Internet companies in terms of operating leverage

this phenomenon is particularly common in Internet companies. In the process of commercialization that begins after accumulating a certain number of users, the increase in income is generally not accompanied by an increase in costs. With the deepening of the degree of commercialization, the revenue increases significantly, but the cost remains the same or increases slightly, the company's profits will continue to accelerate.

< strong > 1. Internet service revenue achieves positive gross profit, accounting for a significant increase < / strong >

A few days ago, Meitu released its semi-annual report for 2017, showing a year-on-year increase of 272.3% and a month-on-month increase of 119.5%. What is really eye-catching is that its Internet service and other parts achieved positive gross profit of 38.918 million yuan for the first time since IPO, with a gross profit margin of 15.8%. In the same period last year, this part of the business was still losing money.

Meitu's core business mainly has two parts, one is smart phones, the other is Internet services and other. For quite a long time before, Meitu's smartphone business, though small in scale, has always been a profitable business, while the Internet services sector has continued to burn money as users.

We can see from the financial report that the reason why this part of the business is able to turn losses into profits is that its costs have not increased significantly with the rapid growth of its income. Through this strong "operating leverage", Meitu has realized a positive gross profit of Internet services.

when this part of the business begins to turn a profit, Meitu is actually very close to the overall profit promised in the prospectus. In the first half of 2017, Meitu's adjusted net loss was only 33.2 million yuan, down 87 per cent from a year earlier.

< strong > II. What is operating leverage? < / strong >

this phenomenon is particularly common in Internet companies. In the process of commercialization that begins after the accumulation of a certain number of users, the increase in revenue is generally not accompanied by an increase in costs. With the deepening of the degree of commercialization, the revenue increases significantly, but the cost remains the same or increases slightly, the company's profits will continue to accelerate.

since the beginning of this year, Meitu has improved the commercialization of its Internet business and greatly increased the sale of advertising and paid props, resulting in a 762% increase in revenue to 247 million yuan. The two most important costs of this part of the business, namely, bandwidth and storage costs and video content monitoring fees, have not grown as rapidly as revenue. According to the financial report, the total cost of this part of the business increased by only 230.7 per cent year-on-year to 207.9 million yuan.

for example, each extra round of 1 million ads sold by Meitu does not significantly increase costs such as bandwidth, because it may only sell an extra ad space once. The increase in the income of paid props is mainly due to the increase in the number of paying households and the ARPU value, which will not increase the cost of Meitu.

overall, Meitu only increased its cost by 230.7% in exchange for an increase of 762% in revenue, which generated operating leverage, so that the income of this part of the business gradually exceeded the cost and realized a positive gross profit. If Meitu can continue to maintain such operating leverage, then it will certainly cross the break-even point and make a net profit.

< strong > III. What kind of company has good operating leverage? < / strong >

when Facebook, Twitter and Snap went public, companies were far from profitable, either they were trying to be users and not commercializing, or they were not very commercialized or just the beginning. However, from the data chart below, we can observe that whether we have good operating leverage has a significant impact on the future development of the company, especially on the effectiveness of commercialization.

" comments "

Daily Active Users: daily active users (millions)

Revenue per User: revenue per user (same below in US dollars)

Cost of Revenue per User: revenue cost per user (that is, the actual cost of running a service, such as running a server (paying partners, etc.)

Total Costs per User: total cost per user (i.e. revenue cost plus company operating costs, including engineering, marketing, etc.)

Profit per User: profit per user

from the chart, the revenue cost per user of Facebook remains stable, which means that the cost of each new user is roughly the same as that of the previously acquired user. The influence of FB did not increase at that time, but it did not decrease either. At the same time, the total cost has risen only slightly, which means that the cost per Facebook user is slightly higher than before (probably due to a large number of acquisitions in mid-2011), but the situation is basically manageable.

this means that as long as the average revenue of a single user or the total number of users increases, Facebook's profits will increase. This is the case of a company with strong operating leverage but initially went public at a loss, and the two figures of Facebook continued to grow and became a social giant.

while in IPO, the income cost per user is basically the same, and the total cost is higher than that of Facebook. And as a result of the acquisition of MoPub, there was a temporary improvement in performance at that time. As long as Twitter can increase the revenue of a single user, or the total number of users, then profits are close at hand. If it can do both, it can also become a social giant similar to FB.

but obviously, things didn't turn out that way later. On the one hand, Twitter user growth has slowed down, on the other hand, the cost of Twitter is a little out of control. Since the acquisition of MoPub, the company has spent $1.24 for every $1 in revenue. If the company had simply maintained its pre-IPO cost structure, today's situation would have been very different.

A big problem for Snap is that revenue costs for individual users have been increasing, but to make matters worse, Snap revenue costs include share to content publishers. Excluding this effect, the cost per user of Snap increased from 47 cents in 2015 to 66 cents in 2016, an increase of 40 percent, still far exceeding the cost level of Facebook or Twitter in the same period of IPO.

this means that in order to make a profit, Snap not only needs to increase the number of users, but also the growth rate of the number of users or the growth rate of revenue per user must be higher than the cost growth rate. This is a bad operating lever, and the enterprise must accept the double challenge. Judging from the current situation, the growth rate of users has been affected by Ins Stories, but the cost has been rising all the time, and the share price of Snap has halved in half a year.

as to why revenue costs have increased so much, Snap explained in his prospectus: "We expect expenses, including those related to manpower and custody, to continue to increase in the future. From the history of the development of the company, with the increase of users and the expansion of user base, the development and application need more support of hardware facilities and the realization of more functions, the increase of labor cost is inevitable. All these factors have contributed to the increase in costs in the past, and we still expect costs to continue to rise in the future. "

regardless of the previously mentioned bandwidth storage and video content monitoring costs, or Meitu's sales and marketing expenses (23.6% year-on-year improvement), administrative expenses (7.6% year-on-year improvement) and R & D expenditure (6.4% year-on-year improvement), all are controlled at a fairly good level, especially when gross profit increases nearly fivefold year-on-year.

< strong > IV. Conclusion < / strong >

although we know that for a company, to be able to make money and continue to make a lot of money is responsible to shareholders and employees, and profitability can enable a company to go to a better stage of development. But for Meitu, I think the key is to win the battle of short video and global expansion. There is really no need to rush to make a profit. According to the previous prospectus, Meitu still aims to break even for the month by the end of 2017 and make a full profit by 2018.

in fact, according to the 2017 semi-annual report, Meitu has made a profit in two of the past six months (March and May). At the same time, Meitu's gross profit also reached 440 million yuan, an increase of nearly five times compared with the same period last year, and the company's overall gross profit margin reached 20% in the first half of the year, compared with 12.7% in the same period last year.

in addition, as there are no more losses caused by changes in the fair value of convertible redeemable preferred shares, Meitu's net loss was 132 million yuan, down 94% from the same period last year, as all these preferred shares were converted into common shares in December 2016.

before, due to some differences in the financial reporting rules (IFRS) in the Hong Kong stock market, the market misread Meitu as an extremely money-consuming company. In fact, Meitu is indeed very close to making a full profit. Because with the deepening of its commercialization (increasing the advertising inventory of its own products, increasing the types of paid props and further cooperating with advertising systems like Google and Facebook, etc.), the profits of the Internet services sector are bound to continue to grow, and profits are expected.

Edit: mary