Viomi Technology Co., Ltd Q1 FY2020 Earnings Call

Hello, everyone. Thank you for joining Viomi Technology Co., Ltd's Earnings Conference Call for the First Quarter of 2020. I would now like to hand the call over to your host, Ms. Cecilia Li, the Senior IR Manager of the company. Please proceed, Cecilia.

Thank you, Operator. Hello, everyone, and welcome to Viomi Technology Co., Ltd Earnings Conference Call for the First Quarter 2020. As a reminder, this conference is being recorded. The company's financial and operating results were issued in a press release earlier today and are posted online. You can download the earnings press release and sign up for the company's e-mail distribution list by visiting the IR section of the company's website at ir.viomi.com. Participating in today's call are Mr. Xiaoping Chen, the Founder, Chairman of the Board of Directors and Chief Executive Officer; and Mr. Shun Jiang, the Chief Financial Officer. The company's management will begin with prepared remarks, and the call will conclude with a Q&A session. Before we continue, please note today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from the views we express today. Further information regarding these and other risks and uncertainties is included in the company's annual report on Form 20-F and other filings as filed with the U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements, except as required by law. Please also note Viomi's earnings press release and today's conference call also include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Viomi's press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. Now I will turn the call over to our Founder and CEO, Mr. Xiaoping Chen. Mr. Chen will deliver his remarks in Chinese, followed immediately by English translation. Mr. Chen, please go ahead.

Thank you, Xiaoping. This is Shun, Viomi's CFO. I will quickly translate Mr. Chen's remarks before providing an operational update and discussing our financial performance for the first quarter of 2020. Hello, everyone, thank you for joining our First Quarter 2020 Earnings Conference Call. Despite challenging industry conditions and ongoing macro uncertainties as a result of the COVID-19 outbreak, we successfully delivered better-than-expected results in the first quarter of 2020. Net revenues for the first quarter increased by 13.2% year-on-year to RMB766 million, demonstrating the resilient and diversified nature of our business as well as our strong execution capabilities. Since the beginning of the second quarter, our business and supply chain capabilities have largely returned back to normal. In addition, we have seen meaningful signs of an overall industry recovery. With these positive trends beginning to emerge, we have accelerated the execution of our growth strategy for this year under our 5G + IoT strategic framework. The development of 5G in China has accelerated rapidly. According to the China 5G Economic Report 2020 released by the China Center for International Economic Exchanges, 5G users in China are expected to reach over 800 million by 2025. In March, the government proposed to speed up the establishment of 5G network infrastructure and expand application scenarios. The number of available 5G stations in China has reached over 200,000 by May, according to the data published by the Ministry of Industry and Information Technology of China. With the trend of increasing 5G network penetration, we believe this will be one of the key potential growth drivers of industry growth in the near term and beyond. We believe the upcoming 5G era will bring about four revolutionary technological enhancements in the IoT @ Home environment: product connectivity, algorithms, interactions, and ecosystems, driving the evolution from product intelligence to scenario intelligence. Viomi has been dedicated to exploring new technologies and applications in the 5G + IoT space and expects to be at the forefront and the standard bearer of 5G + IoT for the home environment. Just last week, we hosted our 5G IoT Strategy and 2020 New Product Launch Event, where we outlined our vision and its product strategy for the imminent 5G + IoT era and emphasized our long-term strategic objectives. We introduced a number of new and exciting product lines across our portfolio, including the state-of-the-art 21Face Interactive Smart Screen TV. The product will come in four sizes, including a high-end 75-inch model with 5G connectivity and 8K resolution, delivering stunning life-like scenes. Equipped with industry-leading specifications, users will be able to enjoy next-generation content offerings with high-speed 5G connectivity. Supported by 3D interactive sensors, long-distance sensors, and a 1080p HD camera, the product enables natural gesture and motion control while integrating WiFi, Bluetooth, ZigBee, and other protocols to deliver truly holistic IoT functionalities. The launch of this product will be an important milestone in the realization of cross-scenario and cross-screen interactions and completes our vision for the fully integrated and screen-filled IoT @ Home lifestyle experience. In addition to introducing the smart TV as an interactive interface for IoT @ Home, we also introduced our home private cloud service, the Home SaaS concept, offering rich media streaming content, cloud storage, and improved AI interaction services, bringing users an enjoyable seamless experience while protecting their privacy and data safety. The development of our home cloud service, together with other content and service offerings, will allow us to provide users with more intelligent IoT solutions based on the integration of software services and IoT products, with the support of big data and 5G infrastructure, further expanding and enhancing the IoT @ Home experience and providing us with additional value creation opportunities. In addition, we announced several exciting next-generation products at the event, including new lines of water purifiers with revolutionary water purification technologies, such as the ROX 1,600 gallon water purifier product with unique next-generation large-flux reverse osmosis capabilities. Other additions to our product portfolio include new series of our flagship 21Face large-screen refrigerators, washing machines, and various smart kitchen products and smart devices, among others. Also announced were new scenario-based content offerings and partnerships to enhance user stickiness. The continued introduction of new and innovative products and partnerships is the best testament to our commitment to research and development, which will further strengthen our IoT product portfolio and differentiate our brand and products among peers. We have also been expanding our premium coKiing brand, which was first introduced in late 2019, with a series of AI-centric air conditioning products through increasing additional product categories across home scenarios. With the expansion of our premium coKiing brand, we will be offering a complete advanced and AI-centric product portfolio to the high-end market, further strengthening our brand image while diversifying our sales channels and consumer market targets to drive premiumization and deliver additional growth prospects. In terms of our overall marketing strategy, in addition to major product launch events and traditional advertising campaigns, we are diversifying our advertising and promotional channels in accordance with the latest consumer preferences and market trends. We continue our efforts to showcase our products through cooperation with numerous KOLs on some platforms like self-media, Little Red Book, Douyin, and TikTok, together with live streaming on e-commerce platforms such as Taobao and JD. We invite these KOLs to test and showcase our products as well as interact with their fans and consumers on these platforms. Such marketing strategies help us attract a wide audience of young consumers and increase their interest in the purchase of our products. In summary, looking ahead in 2020 and beyond, we will adhere to dynamic and prudent business practices while maintaining stable expansion under our 5G + IoT strategic framework. We are fully committed to and confident in achieving our long-term goals and objectives, our roadmap to becoming a large-scale, high-tech leader in the IoT @ Home space. That concludes our founder's comments. I will now provide a quick operational update and discuss our financial performance for the first quarter of 2020. Despite the adverse industry conditions in the first quarter, we achieved solid financial and operating performance. Net revenues recorded a double-digit increase, beating our previous guidance, thanks to our diversified business product and channel mix as well as our ever-increasing brand awareness across sales channels and among end consumers. We also continued to sustain a healthy level of profitability, having implemented a number of stringent cost control measures to offset the adverse industry-wide impact of COVID-19 while maintaining our commitment to research and development. The company's balance sheet remains strong with approximately RMB1.2 billion of cash and cash equivalents, short-term deposits and investments as of the end of the first quarter. The number of Viomi offline experience stores is approximately 1,500 as of March 31 and has held relatively steady in the subsequent months. Our number of household users reached more than 3.7 million, and the percentage of household users with at least 2 of our connected products reached 18.4%. While uncertainties remain, we believe our financial strength and operational flexibility will position us well to capture the opportunities ahead as the industry and broader economy continue to recover. Let's now turn to the detailed financial review of our first quarter results and the outlook for the second quarter. As Xiaoping discussed, net revenues were RMB765.5 million compared to RMB676.2 million for the first quarter of 2019, primarily due to the successful rollout and increased sales of certain Xiaomi-branded and Viomi-branded products, offsetting the broader industry-wide impact of COVID-19. Revenues from IoT-enabled smart home products increased by 8.0% to RMB542.7 million from RMB502.5 million for the first quarter of 2019, primarily due to the continued successful rollout of the company's smart kitchen and other smart products. Within this category, revenues from our smart water purification systems decreased by 10% to RMB108 million from RMB120 million for the first quarter of 2019. The decline was primarily due to decreases in average selling prices despite double-digit year-on-year sales volume growth in the quarter. Revenues from smart kitchen and other smart products increased by 13.6% to RMB434.7 million from RMB382.5 million for the first quarter of 2019. The growth was primarily driven by the continued successful rollout of certain new products, in particular the Xiaomi-branded sweeper robot, which offset the broader industry-wide impacts of COVID-19. Revenues from consumable products increased by 35% to RMB65 million from RMB48.1 million for the first quarter of 2019, primarily due to increased demand for the company's water purifier filter products. Revenues from value-added businesses increased by 25.6% to RMB157.8 million from RMB125.6 million for the first quarter of 2019, primarily due to new product introductions together with increased demand for the company's small appliance products. Cost of revenues increased by 27.7% to RMB621.5 million from RMB486.8 million for the first quarter of 2019. Gross profit was RMB144 million compared to RMB189.4 million for the first quarter of 2019. Gross margin was 18.8%. The decline in gross margin as compared to the first quarter of 2019 was primarily due to shifts in the company's product and business mix, together with decreases in average selling prices of certain product categories, including our smart water purification systems. Total operating expenses decreased by 12.4% to RMB134.2 million from RMB153.1 million for the first quarter of 2019, primarily due to our stringent expense control measures implemented during the quarter to offset the adverse industry-wide impacts of COVID-19, while continuing to invest in research and development. R&D expenses increased by 62% to RMB59.3 million, primarily due to increases in employee-related expenses, expenses associated with new product development and expenses related to the application of new patents. Selling and marketing expenses decreased by 35.1% to RMB65.5 million, primarily due to a decrease in logistics expenses as well as stringent expense control measures in relation to marketing and promotional activities and other selling and marketing-related expenses implemented during the quarter to offset the adverse industry-wide impact of COVID-19. G&A expenses decreased by 39.5% to RMB9.5 million compared to RMB15.6 million for the first quarter of 2019, primarily due to the company's stringent expense control measures. Net income was RMB17.8 million, and non-GAAP net income, which excludes the impact of share-based compensation expenses, was RMB31.4 million. Now let's turn to our outlook. As discussed previously, while we have seen meaningful improvements in comparison to the first quarter and the overall industry trend is encouraging, we believe our industry, as well as the broader economy in China and globally, are still facing significant challenges and uncertainties that will be difficult to quantify. In light of these factors, for the second quarter of 2020, the company currently expects net revenues to be between RMB1.25 billion and RMB1.28 billion, representing a year-over-year growth of approximately 7.7% to 10.3%. In terms of profitability, as a result of continued aggressive promotional campaigns, particularly with the upcoming 618 online shopping festival, together with ongoing destocking initiatives for previous generation products in preparation for the launch of several new product lines, we do expect gross margins to decline slightly in the second quarter in comparison to the first quarter of 2020. Nevertheless, as a result of our stringent cost control measures, together with our dynamic and prudent business practices and execution capabilities, we do expect to continue to remain profitable in the second quarter, with a positive trend heading into the second half as such cost control measures take full effect and new higher-margin products contribute to a greater share of our overall sales revenues. The above outlook is based on current market conditions and reflects the company's current and preliminary estimates of market and operating conditions and customer demand, which are all subject to change. So this concludes our prepared remarks, and we will now open the call for Q&A. Operator, please go ahead.

Our first question will come from Hanli Fan with Morgan Stanley.

I have three questions for this. The first one is you mentioned just now that you've seen some kind of positive signs in terms of the industry recovery. In terms of Viomi, from management point of view, how would you see the business recovery for the company itself in recently, for example, April and also early May? That's my first question. And the second question is how was your online performance in the first quarter, particularly during the COVID-19? Because we saw other competitors, they are pretty aggressive in terms of online marketing and sales. And how would you perform in the first quarter and compare with your competitors or other new initiatives you would like to use? That's my second question for the online sales. And the third one is that for the water purification system, in the first quarter you just mentioned that the ASP declined and also the volume, double-digit growth. Actually, I want to see what's the actual impact from the COVID-19 because of weak demand, so you may kind of reduce your ASP. But looking forward, given that we are experiencing the market recovery, so with less impact from COVID-19, how do you see the ASP pressure in terms of water purifier in the following quarters or in year 2021? That's my third question.

Thank you, Hanli. Let me address your questions one by one. We have indeed experienced a significant sales recovery in April and May compared to February and March, which also relates to your second question. Our online channels have returned to year-on-year growth recently, and encouragingly, offline sales are approaching similar levels to the same period last year. Regarding product categories, larger appliances like refrigerators and kitchen products have shown the most noticeable increase in demand recovery as retail channels, logistics, and installation services have resumed normal operations. We are optimistic about the momentum leading into the 618 shopping festival and are projecting around 10% year-on-year revenue growth for the second quarter, building on a strong base from last year. Addressing your second question about sales channels, in the first quarter, just over 50% of our sales came from the Xiaomi channel, while the remainder came from the Viomi channels, which is about 70% online and the rest offline. In January, offline sales were performing well before the COVID-19 outbreak, but offline suffered significantly in the following months. In the second quarter, we expect that ratio to shift towards 80% online and 20% offline, particularly with the upcoming 618 shopping festival contributing to our sales, while offline channels continue their recovery. In the online space, we are seeing very positive trends, including double-digit year-on-year growth in May and as we move into June. Concerning the water purifier margins, as we mentioned last quarter, gross margins for water purifiers fell considerably in the first quarter, and we anticipate that average selling prices and margins for this product category will remain under pressure in the second quarter due to ongoing promotional activities and destocking efforts for older SKUs. However, we expect a recovery in the second half, mainly due to increased sales volume and contributions from newer, higher-margin products that we introduced last week. Additionally, we are implementing various cost control measures, including those in the supply chain. Lastly, as you pointed out, we also expect some price competition to ease as the effects of COVID-19 on the industry and economy continue to lessen and destocking initiatives are completed. Therefore, while the second quarter will still see some pressure on water purifier trends, it is likely to represent a low point when viewed over the entire year.

Yes. Just one quick clarification in terms of numbers. You mentioned 80% and 20% online/offline split in the second quarter 2020. That's only for the Viomi channel or all your sales revenue?

That's for the Viomi channel.

I have two questions. First, as we saw, you just launched a 5G smart screen or smart TV last week and also upgraded a lot of amazing products. What can we expect those new products for this year, especially for the Jingdong shopping festival on June 18? And my second question is about the COVID-19. Seems the global demand has seen a sharp decline in Q2, but the China market is recovering from COVID-19. Home appliances company, like Gree, just saw their sales warming up. Did you see recovery from your side? And in your perspective, did you see some demand delayed for one quarter? Or did you see demand vanish because people have less money due to the COVID-19 impact and try to buy cheaper things? What will be the trend? What will be the company's strategy to deal with these situations?

Yes. Maybe I'll take your second question first. So as we mentioned and as you mentioned, we have seen very meaningful recovery across the board in terms of products going into April and May across our product categories. So I think the overall improvements have been very visible. Obviously, the recovery is still relatively nascent, and it remains to be seen how sustainable it is. But I think going into the 618 shopping festival, there is a degree of optimism, particularly in terms of the volume sales. Now I think in the first quarter and early in the second quarter, there was still a degree of inventory amongst various channels. And as that continues to be cleared, we do see kind of additional upside potential going into the second half. So as also mentioned, if you look at the second quarter, while ASPs continue to be a little bit under pressure, volume increases had seen quite meaningful uptrends and recoveries. So I think that's something that will underpin a rebound in the second half as the broader economy continues to recover. I think in terms of the overall consumer sentiment and wallet, that is a little bit too early to comment on. But I think what is interesting for our business is that we have minimal or close to negligible overseas exposure. So we don't have much exposure to the international export markets. And we are nearly 100% exposed to the recovery on the China demand side. So on your first question with regards to new products, we have launched a whole series of new products over the past several months, including a wide variety of new product lines across our product portfolio, such as the refrigerators, washing machines, air conditioners, and new SKUs along these product categories. We do expect to generate good revenue growth from these products. I think air conditioning is a completely new category for us this year, and we have seen very positive response as we have begun selling this product over the past several months. You may have seen in the recent May 1 shopping festival that some of our air conditioning products were among the top 10 in the air conditioning product category among various online channels. So I think that category is definitely off to a good start and should contribute relatively meaningful for the full year. I think in terms of exact sales forecast, it's still a bit early, but I think air conditioning as well as some of the other new SKUs that were introduced in our product launch event should contribute meaningfully as we get into the second half. Another new product category that was launched late last year was the Xiaomi sweeper robot. I think that has also been very well accepted by the market, having generated over RMB100 million in revenues per quarter since its launch in the third quarter of last year. So in terms of television products, I think this is more, at least in the early stage, as a standard bearer or as a center point in terms of increasing our brand image and kind of anchoring our brand positioning as a fully-fledged IoT experience provider. I think in terms of the sales volume, let's wait and see. It was only launched last week. But I think if you look at the overall revenue contribution to the entire business, it shouldn't be too meaningful at least for this year.

Our next question will come from Robert Cowell with 86Research.

My question is also about the recent launch event, a couple of somewhat related points. The first is basically this launch event was online, I think one of your first major launch events that was conducted through this live broadcast format. When we look at this launch event as a brand-building and promotional opportunity, how does the live event compare to our previous launch event? And then the second question is about the smart screen that was launched. You laid out a vision for how it works as kind of a center point for the smart home. I'm wondering how you think about pricing for this and whether or not there is some consideration of basically trying to be aggressive on pricing to get that position in the smart home. And then third, also related to this vision of the smart home, how do we think about interoperability with other platforms for smart home devices? Are we trying to make our devices accessible across different platforms? Or are we looking at more of a closed ecosystem concept?

All right, Robert, thanks for your questions. Maybe I'll pass these on to Chen Zong, who can give a detailed response, and I'll follow it up with some translation.

Our next question will come from Vincent Yu with Needham & Company.

I will translate the first two responses while Mr. Chen will address the third question. Regarding the online product launch event, it was very successful, reaching over 2 million views since last week. This high viewership indicates significant interest in Viomi and its positioning in the upcoming 5G and IoT era, which is currently a hot topic in the industry. The news reports and feedback we have received have been abundant and largely positive, increasing interest in Viomi's direction among industry watchers, not only in smart appliances but also in the broader 5G and IoT industry. Some key points about the event include the interactive smart screen TV that we launched, which will be central to our IoT @ Home experience. It essentially completes our product coverage in the IoT @ Home scenario, serving as a focal point in the living room, enabling cross-operability and enhanced experiences across different scenarios and environments within a home. Additionally, we introduced Home SaaS cloud services, emphasizing that we are not just selling products but promoting a comprehensive IoT concept. Viomi's 5G + IoT strategy marks our future direction, positioning us as more than just a product provider but as a player in delivering a holistic IoT experience. On the second question about 5G, we anticipate that it will have a revolutionary impact on the home appliances sector and the IoT @ Home industry, similar to the changes being seen in the mobile phone industry. There are several straightforward aspects of 5G; it will upgrade routers and current WiFi connectivity, allowing for faster connections, the ability to connect more devices simultaneously, and providing automatic connections for seamless user experience. We envision the overall 5G + IoT ecosystem to be more flexible, offering higher-quality content and ultimately delivering a better experience and value proposition for consumers. We want consumers to embrace this next-generation concept of a high-tech home. Over the coming period, it will be crucial to educate consumers about our vision for the future home and how we can assist them in enhancing their living experience. Now, Mr. Chen will provide insights on the third question regarding interoperability. We'll address this question in two parts. Regarding interoperability, we are taking a very open approach. We believe that the 5G generation will generally be a very open platform and highly interoperable, similar to the way current phone carriers operate together. Although there may be a single account, more products will be able to connect through this account. This is largely due to improved connectivity and ease of connection, like our one-touch feature that works across our products and 5G routers. We see the value in the 5G era, where 3G allowed browsing and 4G enabled videos. We believe the 5G Internet of Things generation will provide greater control, especially for streaming and interactive screen-based content. It will also facilitate more content and consumption scenarios within the home across various connected screens. This scenario-based consumption will be a significant aspect of the 5G era. In summary, 5G will make everything easier for consumers and will create new opportunities that currently might not offer the best experience or may not be available at all.

My first question is about the smart TV and the living room scenario. Given that we have displays in our other products, like refrigerators, we have been able to gather some data. Are we planning an advertising campaign that targets user behavior in the living room? My second question relates to the competitive landscape. What is our strategy for gaining market share, and how do we plan to address pricing pressures from competitors? My third question is whether large item delivery has returned to normal levels, such as those we saw in April or May after the pandemic's breakout.

Mr. Chen will respond to the first few questions. Thank you. We'll answer them one at a time. The first question pertains to the data our products gather from household users and our use of this data. There are several factors to consider. The most apparent one is advertising. Some of the pilot programs we've implemented, especially on our 21Face refrigerators, have seen strong success. If we can expand this on a larger scale and grow our installed base, it will resemble a media screen in the home. Moreover, we can collect diverse data to profile each household or area distinctly. This allows us to provide highly targeted advertising capabilities to specific households or regions rather than employing blanket advertising strategies. Importantly, we can also gather data on the effectiveness of these advertising campaigns, including their engagement levels and conversion rates, which enables us to enhance the quality and value of advertising going forward. We see substantial opportunities as we continue to develop our IoT @ Home experience. The second question is about the TV industry and competitive landscape. Our strategy will not rely on pure price competition, as we believe this is not the right approach for us. As highlighted in our product launch event last year, this product is primarily part of our IoT @ Home portfolio and overall user experience. It is not simply an individual item; it is integral to the comprehensive experience we aim to offer. We strive to provide consumers with a premium, high-tech experience while also offering a 5G next-generation product at traditional price points. Regarding logistics, operational activities have generally returned to near-normal levels within the industry. Recently, we have observed a noticeable increase in demand and sales of larger appliances, such as refrigerators, air conditioning units, and kitchen products, which had experienced significant declines in the first quarter. These appliances, which come with high installation or logistics demands, are rebounding strongly. Given that TVs have lower installation requirements, we do not foresee challenges in that area. Overall, the domestic China industry seems to be nearing normalcy in terms of both supply and demand, and we remain cautiously optimistic as we approach the 618 shopping festival and the latter half of the year.

Thank you once again for joining us today. If you have further questions, please feel free to contact us through the contact information on our IR website or The Piacente Group, the company's IR consultant. Thank you all. Have a good one.

Thank you.

Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.