What is the reason behind Meitu’s huge losses?

Meitu, which became popular with its Meitu XiuXiu app, is going to be listed in Hong Kong. Whether in terms of brand recognition or the number of users covered, the image processing tool created by Meitu is one of the most successful applications in the world. Despite this, Meitu is still in a loss-making situation at the IPO gate, and is jokingly called a "unprofitable business" by the industry.

Meitu plans to go public in Hong Kong, with losses increasing year by year

Recently, the Hong Kong Stock Exchange has published the prospectus of Meitu, which plans to be listed on the main board of Hong Kong. In addition, Meitu's IPO (initial public offering) in Hong Kong in the fourth quarter of 2016 is expected to be valued at more than US$5 billion and raise US$500 million to US$1 billion. If successful, it will be the second largest IPO transaction in the global technology field this year, second only to Japan's Line.

However, Wang Xueheng, an analyst at Guosen Securities, said that in the eyes of buyers, some unicorns are not worth the high prices at all. The high valuation must be related to future expectations or current high growth, but there are very few such unicorns.

According to Meitu's IPO documents, Meitu's product line mainly includes three categories of products: picture beautification software, video APP and Meitu mobile phone. Data provided by Meitu officials show that the number of devices using Meitu's mobile products in the world has exceeded 1 billion; in June 2016, the MAU of Meitu applications was about 446 million, an increase of 81% month-on-month. At the same time, Meitu's beauty and selfie line products such as Beauty Camera, Beauty Camera, and Trendy Selfie have a total of 724 million users worldwide. In addition, the total number of short videos produced by Meipai users is 530 million, and the average daily viewing time per person is 40 minutes. Half a year after the launch of Meipai's live broadcast product, the cumulative number of viewers reached 570 million.

At present, for Meitu, it not only has a huge number of users, but also is in an important period of business expansion. Listing in Hong Kong seems to be the best choice for Meitu.

However, as the news of Meitu's IPO spread, its current situation of huge losses also surfaced. From 2013 to June 2016, Meitu's cumulative losses exceeded 6.2 billion yuan. Among them, the losses in 2013, 2014, 2015 and the first half of 2016 were 25.81 million yuan, 1.77 billion yuan, 2.22 billion yuan and 2.19 billion yuan respectively, showing an increasing trend year by year. According to the prospectus, the reason for Meitu's losses is due to the investment in new product research and development and the layout and promotion of Meitu's global business. One of the main factors that caused Meitu's huge loss of nearly 2.2 billion yuan in the first half of 2016 was the fair value loss of convertible redeemable preferred shares.

Why doesn't Meitu make money?

According to Meitu's prospectus, Meitu has completed five rounds of financing so far, with a total financing amount of US$501 million. Specifically, it received a first round of financing of US$5 million from Sinovation Ventures on November 7, 2013; completed a US$55 million Series A financing on January 28, 2014; completed a US$115 million Series B financing from H Capital, Ceyuan Ventures, IDG and others in June 2014; completed a US$190 million Series C financing from Qiming Venture Partners, H Capital and IDG in January 2015; and completed a US$136 million Series D financing from April to June 20, 2016.

Meitu, which started out as a tool application, has not been able to convert its huge number of users into cash flow. Even after several rounds of financing, it is still in a loss-making state. After careful investigation, it is not difficult to find that the main reasons behind Meitu's losses are the single profit model and unclear monetization model.

1. Single profit model, heavily dependent on smartphones

Meitu's revenue in the first half of 2016 was 590 million yuan. Among the Internet services and other businesses, only Meipai and Meimei Store were profitable, with a profit of 28.63 million yuan, accounting for 4.9% of Meitu's total revenue, a decrease of 30% from the previous month. The highest profit came from Meitu mobile phones, with a profit of 557 million yuan, accounting for 95.1% of the total revenue, an increase of 300% from the previous month. Obviously, the core of Meitu's revenue is mobile phone hardware.

As for Meitu mobile phones, the real competitors are mobile phone manufacturers such as Samsung and Huawei, which have strong supply chains and production capabilities. Some industry insiders analyzed that although Meitu mobile phones have made an indispensable contribution to the total revenue, it does not mean that they have a strategic position. Because most of Meitu's applications are tool-based photo editing and rely little on hardware, the increase in mobile phone sales has not played a role in the traffic of Meitu's APPs. Therefore, in the future, Meitu can "integrate" its hardware and software and learn to cooperate with Xiaomi.

According to the analysis of iResearch, apart from Meipai, the random demand of a large number of users for tool applications has led to low user stickiness, which is also the culprit for Meitu's relatively single profit model, so it can only rely on the sale of smart hardware such as mobile phones to increase revenue.

In fact, it is not just beautification tools. For software companies that mainly promote weather, app stores, security and antivirus functions, their days are not easy. For example, the weather forecast application "Moji Weather" APP, which has been in service for 6 years, was also a model of successful transformation like Meitu. From Nokia's Symbian system to iPhone and Android, Moji Weather has hundreds of millions of users. However, since almost every mobile phone has free weather forecast software and its functions are becoming more and more abundant, Moji has no way to charge users. At present, it can only do advertising for application distribution and diversion, and sell hardware products like Meitu, but it is ultimately a drop in the bucket.

2. Other monetization models remain unclear

Meitu stated in its prospectus that the company currently has four major monetization models, including smartphones, online advertising, e-commerce and Internet value-added services. However, only smartphone sales have good revenue, and the future of the other three monetization methods is unclear.

Through this listing, Meitu announced its investment and M&A standards: first, businesses with cutting-edge technologies, such as machine learning, computer vision, augmented reality, and businesses related to Meitu's business; second, businesses with mature Internet service monetization models that can develop together with the company's plans to continuously monetize users; third, businesses that operate applications or communities with a considerable user base; and fourth, businesses that have excellent intellectual property rights in entertainment, or produce high-quality video content that can enrich existing content and entertainment services.

Under this plan, Meitu acquired approximately 33.3% of the shares of Bellus3D, Inc. This company focuses on integrating 3D facial recognition technology to use 3D mapping to modify dynamic images in videos. The investment in cutting-edge technology is worth looking forward to, but for Meitu, it is still difficult to achieve profitability quickly.

In addition, in terms of social business, the traffic of social platforms is dominated by companies such as Tencent and Sina, and the probability of snatching traffic is too low. Industry insiders pointed out that social networks with huge user bases such as WeChat, Weibo, QQ Space, and Momo are also deeply involved in image social networking, actively providing users with the function of publishing multimedia content such as pictures and videos. Overall, independent image communities still face relatively fierce competition in terms of user activity, content scale, and commercial development.

As a winner of Toutiao's Qingyun Plan and Baijiahao's Bai+ Plan, the 2019 Baidu Digital Author of the Year, the Baijiahao's Most Popular Author in the Technology Field, the 2019 Sogou Technology and Culture Author, and the 2021 Baijiahao Quarterly Influential Creator, he has won many awards, including the 2013 Sohu Best Industry Media Person, the 2015 China New Media Entrepreneurship Competition Beijing Third Place, the 2015 Guangmang Experience Award, the 2015 China New Media Entrepreneurship Competition Finals Third Place, and the 2018 Baidu Dynamic Annual Powerful Celebrity.