Meitu, Inc. ('Meitu' or the 'Company', together with its subsidiaries 'the Group'), today is pleased to announce its unaudited consolidated earnings results for the six months ended June 30, 2018. During this period, Meitu's results highlights were as follows:

● Revenue from Internet business segment grew 131.6% year-on-year to RMB571.7 million, accounting for 27.9% of total revenue for the six months ended June 30, 2018, compared to 11.3% for the same period in 2017.
● Online advertising revenue maintained high growth momentum with a 244.8% year-on-year increase. The Company aims to further grow its advertising revenue through measures that include introducing promoted feeds to its products.
● The Net Loss for this six-month period was reduced by 3.4% year-on-year to RMB127.4 million.
● With the aim to resume growth of active user base and significantly increase the monetization potential of its Internet businesses, the Company has embarked on a 'Beauty and Social Media' strategic pathway that will enable the Meitu app to evolve into a social network.

1. Internet business revenue has increased significantly, maintaining high growth momentum

In the first half of 2018, revenue from the Internet business segment increased significantly by 131.6% year on year to RMB571.7 million. Gross profit of the segment increased by 494.5% to RMB231.4 million. Gross profit margin stood at 40.5% in the first half of 2018, up from 15.8% in the first half of 2017. The margin expansion was primarily due to the operating leverage of online advertising and Internet value-added service, partially offset by the growing lower-margin e-commerce business.

Online advertising

Revenue from online advertising has maintained a high growth momentum with a 244.8% year-on-year increase to RMB284.9 million in the first half of 2018, mainly driven by a greater number of quality brand advertisers.

The Company aims to further grow advertising revenue through: (i) introducing more advertising inventories like promoted feeds to address various user needs; (ii) strengthening the technique of content marketing and integrated marketing to enhance the quality of advertisements, thus raising the fill rate; (iii) introducing precision marketing to add value for clients. Additionally, the combination of increasing user data and more sophisticated data analytics will help advertisers to enhance their capabilities with regard interest generation and conversions. 

Internet value-added services and others

Revenue from Internet value-added services and others increased by 74.7% year-on- year to RMB286.8 million in the first half of 2018. The majority of Meitu’s Internet value-added services business is derived from the sale of virtual items on its Meipai live streaming service. In response to a voluntary clean-up of inappropriate content on the Meipai platform, the downloading of Meipai was suspended from all app stores in both March and June of 2018. As a result, the number of average monthly paying users declined by 34.4% on a year-on-year basis to 213,188, alongside the Meipai's MAU. Despite this, revenue from Meipai still managed to grow mildly, thanks to a significant increase in the average revenue per paying user.

The revenue from Meitu's e-commerce platform, MeituBeauty, as a percentage of total Internet value-added services business, has grown in the first half of 2018. MeituBeauty differentiates itself by providing an AI-empowered skin analytics tool, which enables users to receive more tailor-made product recommendations, thus leading to higher sales conversion. 

2. Continued reduction of net loss

During the period, the Company's net loss has decreased by 3.4% year-on-year to RMB127.4 million, compared to RMB131.8 million in the first half of 2017. This is primarily due to continued investments in Meitu product lines, partially offset by an increase in net gains from long-term investments.

In the first half of 2018, total revenue decreased by 5.9% year-on-year to RMB 2,052 million. Gross profit increased significantly by 43.8% to RMB626 million in the first half of 2018, up from RMB435.3 million in the first half of 2017; gross margin increased to 30.5% in the first half of 2018, from 20% in the first half of 2017. The Internet business segment as a percentage of total revenue continued to grow to 27.9%, compared to 11.3% in the first half of 2017.

3. Challenging conditions in the smart hardware market

The market condition of the smartphone business was challenging in the first half of 2018 as total smartphone shipments in the Chinese market continued to decline year-over-year. In addition, competition in the market has intensified as many competitors have launched selfie-focused smartphone products. In response to this market environment, the Company has decided to enhance its users' experience through: (i) utilizing higher performance chipsets in its smartphone products; and (ii) extending the research and development cycle. While these measures will undoubtedly put pressure on the near-term financial performance of this division, the Company sees them as necessary investments in the long-term value of the Meitu Smartphone brand.

In the first half of 2018, revenue from the smart hardware segment decreased by 23.4% year-on-year to RMB1,480.3 million: this is due to the launch of fewer new smartphone models, but is partially offset by higher average selling prices ('ASP'). Gross margin for the smart hardware segment increased to 26.7% in the first half of 2018, from 20.5% in the first half of 2017, thanks to a higher-margin product mix. However, gross profit slightly decreased to RMB394.7 million in the first half of 2018, from RMB396.3 in the first half of 2017, primarily due to a decrease in the number of smartphone units sold. The number of smartphone units sold decreased by 37% year-on-year to 533,260. ASP was RMB2,751 in the first half of 2018, compared to RMB2,272 in the first half of 2017. Product mix is a key factor that drives ASP.

4. Enabling the Meitu app to evolve and driving the resumption of growth in active users with the new 'Beauty and Social Media' strategy 

Together with some one-off factors like the download suspension of Meipai from various app stores in March and June, 2018, increased competition has put pressure on the Company's overall user growth. The overall MAU has declined to 349.9 million in June 2018, compared to 415.8 million in December, 2017.

Taking into consideration of the competitive environment and the current stage of the Company's development, Meitu has embarked on a 'Beauty and Social Media' strategic pathway. One of the most important aspects of this new strategy is to transform the Meitu app, the flagship photo-editing app, into a social media platform.

The Company aims to drive MAU growth of the Meitu app from two perspectives: (i) more use scenarios. Previously, when Meitu was a utility-only app, users would use it only when they had an image to edit, most likely after they had taken a photo; however, when the app is transformed into a social network, users would also be able to browse the images uploaded by their friends and/or other users. Such browsing behaviour will bring incremental traffic to Meitu, thus increasing Meitu's MAU; (ii) through increased usage from male users. 

This structural change will also drive monetization as it allows more targeted advertising inventory like promoted feeds, as well as better track the usage of non-standardized advertising products like AR filters.

In early May 2018, the Company has added some social functionalities to the Meitu app to obtain feedback from users. The testing results have been positive: the daily time spent by the core social user group is multiple times higher than the average utility user.

Upon the official launch of this social media version of Meitu in September 2018, Meitu will become one of the biggest social media platforms in China with over 100 million MAU.

5. Outlook

In the second half of 2018, the Company will continue to enrich its product portfolio of Internet value-added services to satisfy users' diverse needs for beauty. However, under challenging smartphone market conditions, the Company has decided to increase the development cycle of new products to ensure a better overall user experience. Therefore, the Company will reschedule the launch of the V Series from second half of 2018 to first half of 2019. The continued growth of the gross profit performance of the Internet business is likely to be outweighed by the near-term pressure of the smart hardware business.

The Company expects to invest significantly over the next 18 months to reposition the Meitu brand as a social platform and build an active community to drive user engagement through fun and innovative content.

This investment will take the form of promotion and marketing expenses, as well as revenue sharing to content providers. The Company will monitor the return on this investment and adjust the investment amount actively to maximize its impact.

As a result, the Company's near-term priority is to drive (i) growth in active users, particularly social users, and (ii) growth in gross profits. It will deemphasize net profit generation until a scalable social media platform is established, which will generate the greatest long-term value for shareholders.

To facilitate the implementation of the 'Beauty and Social Media' strategy, Meitu has reorganized into three major product-centric business groups, namely the Social Product Business Group, the Beauty Product Business Group, and the Smart Hardware Product Business Group.