Viomi Technology Co., Ltd Q4 FY2020 Earnings Call

Hello, ladies and gentlemen, thank you for standing by for Viomi Technology Co. Ltd's Fourth Quarter and Full Year 2020 Earnings Conference Call. At this time, all participants are in listen-only mode. Today's conference call is being recorded. I will now turn the call over to your host, Ms. Cecilia Li, Senior IR Manager of the company. Please go ahead, Cecilia.

Thank you, operator. Hello, everyone, and welcome to Viomi Technology Co. Ltd earnings conference call for the fourth quarter and full-year 2020. As a reminder, this conference is being recorded. The company's net financial and operating results were issued in the press release earlier today and are posted online. You can download the earnings press release and sign up for our e-mail distribution list by visiting the IR section at our website at ir.viomi.com. Our Founder, Chairman of the Board of Directors and Chief Executive Officer, Mr. Xiaoping Chen will begin with prepared remarks; and the Head of our Finance Team will join the 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 expressed 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 filed with the U.S. SEC. The company doesn't assume any obligation to update any forward-looking statements, except as required by law. Please also note our earnings press release and this conference call 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 mostly most directly comparable GAAP measures. I will now turn the call over to our Founder and CEO, Mr. Xiaoping Chen. Mr. Chen will deliver his remarks in Chinese followed immediately by an English translation. Mr. Chen, please go ahead.

Mr. Chen will deliver his remarks in Chinese followed by an English translation.

Thank you, Mr. Chen. I will quickly summarize his remarks before discussing our financial performance for the fourth quarter of 2020. Hello, everyone. Thanks for joining our fourth quarter and full-year 2020 earnings conference call. We delivered robust full-year growth of 25.3%, despite macroeconomic uncertainties and the challenging environment for the whole industry. In line with what we communicated on that earnings call, we executed on our quality growth strategy in the fourth quarter, optimized our business and product mix, and further improved our business operations realizing a meaningful recovery in gross margin. Gross margin for the fourth quarter increased to 23.5% from 17.1% for the third quarter of that year and 19.9% for the fourth quarter of 2019. We will continue to execute on this growth strategy and invest more resources in branding and R&D for our IoT products as well as our services team. In recent years, we have seen the momentum in the IoT industry continue to develop with intensity. We see the home scenario to be a key application area with holistic IoT solutions based on health services and hardware to be a flourishing channel in this industry. In the past two years, we have been developing a 5G IoT home structure, which integrates technology framework, sensors, AI algorithms, teaching modules in the smart hardware to deliver cross-product and cross-scenario interactions through our IoT protocol and modules. As an important part of our quality growth strategy and focus with our R&D, we continue to roll out more diversified new products focused on the seamless integration of AI and IoT technology. Our innovative SKUs with higher margins and higher average selling prices are the main drivers of our gross margin uplift. In the past months, we have introduced Super and Vision series of water purifiers under our new premium water purifier sub-brand, Quanxian, new SKUs of 21Face 5G large-screen refrigerators, EyeBot AI washing machines, as well as the New Wind AI washer-dryers, together with a series of smart home devices, including the 5G IoT CPE products, routers and IoT chips. In particular, in the water purifier sector, we – in order to address demands of users as well as tackle environmental protection concerns, we applied innovative double reserve osmosis technologies to realize larger flux and improve water purification efficiency. Furthermore, we will soon introduce a new high-end water purifier, which leaves beneficial minerals in the water during the purification process, allowing us to meet user demands when it comes to human health. Our innovations in water purification technologies have been highly recognized by industry experts. Last week, a group of experts from professional and academic organizations, including the China Association for Quality Inspection, Chinese Academy of Engineering and the Engineering School of Tsinghua University, participated in an assessment of two of our water purification technologies. The result of this assessment was that our technologies were recognized as industry-leading with the potential for further applications in the water purification area. Immediately after this assessment, a channel for the mineral water purifier for household and similar purposes was officially launched. The successful launch in domestic and overseas rapid development of our new Viomi-branded sweeper robots was also a key pillar of our overall profitability improvement. In the fourth quarter, we expanded a dedicated sweeper robot team and commenced the sweeper robot manufacturing in our own factory. What came out of this was the development and introduction of auto dust collection sweeper robots such as the Alpha series. With the success of export of these sweeper robots and its growth momentum, we will continue to roll out more differentiated SKUs and expand into more domestic and global markets. We are also seeking to provide more comprehensive IoT housing solutions, consisting of IoT product experiences, services, and internet content. With regards to our value-added content business, we introduced a series of service packages, including software updates, product maintenance services with purchase discounts, as well as Internet entertainment content. We continue to upgrade our large-screen refrigerator operating system, following our cooperation with Douyin, Kugou Music, ITE, Ximalaya, and Douguo. We recently expanded cooperation with additional third-party platforms to further enrich our large-screen Internet resources, create differentiated kitchen scenario experiences, and increase user stickiness. Leveraging our investment and endeavors in R&D, we have achieved solid performance in patent innovation. As of the end of last year, the number of our cumulative domestic and global patent applications had reached over 3,000, among which over 2,400 were already registered. By the end of January, we were recognized as one of the top 100 innovative companies in Guangdong, further demonstrating our technological recognition in the new consumer IoT market. As we progress into 2021, we have continued to execute on our quality growth strategy through the introduction of new high-end products, optimization of product lines, and phasing out specific SKUs with lower margins. We will also invest more resources in branding and R&D for our IoT products as well as the IoT service system to optimize our 5G IoT Home system and user experience. With a focus on AI and smartification, we will launch more new products, including water purifiers, sweeper robots, air conditioners, and smart home products, among others, in our upcoming Spring new product launch event in early April. Further, we will optimize our offline service system and expand offline sales and experience channels to realize meaningful business expansion from terminal sales to user operations. All of this product and technology innovation, IoT experience, as well as the service optimization, are the key drivers of our long-term development. The construction of China's 5G infrastructure has demonstrated rapid development. An era of the commercial application of IoT is on the way. According to data released by IDC, 85% of devices will be connected to the Internet and 15% will be connected to IoT by 2022. It was pointed out in the guidelines for construction of the National AI Standards System launched by the Ministry of Industry and Information Technology and other national official departments last July that smart home products and applications will be promoted as one of the important industries in this area. We believe that, with the rapid application of 5G and the continuous improvement of smart home ecology, IoT will be applied in more and more home scenarios. We are confident in our leading position in this industry as well as our capabilities to deliver robust and stable growth while maintaining a healthy level of profitability, bringing long-term value to our shareholders. That concludes our founder's remarks. Let's now turn to a detailed financial review of the fourth quarter 2020, as well as the outlook for the first quarter 2021. The net revenues were RMB1.89 billion representing a year-over-year increase of 8.5%. The growth was slightly below our previous guidance by just around 0.6%, primarily due to the proactive step to stop the sales of some specific products with lower average selling prices and lower gross margins, such as some low-end refrigerators and washing machines, in order to make room for the launch of a slate of new large-screen refrigerators and high-end washing machines, as well as to improve profitability. Revenues from the IoT @ Home portfolio increased by 15.7% to RMB1.11 billion from RMB963.7 million for the fourth quarter of 2019, primarily driven by the sustained sales increase for certain new product categories, in particular our sweeper robots. The Viomi-branded sweeper robot business is expected to make a greater contribution in 2021. Revenues from our home water solutions decreased by 5.9% to RMB363 million. The decline was primarily due to the decreases in the average selling prices of our Xiaomi-branded water purifier products. This was partially offset by the successful introduction and increased sales of our new series of Viomi-branded water purifier products, which narrowed the year-over-year decline for home water solutions compared to the previous quarter. Viomi-branded water purifiers are expected to make a greater contribution to our home water solution business as well as our total net revenues in 2021. Revenues from consumables increased by 69.3% to RMB160.2 million, primarily due to increased demand for our water purifier filter products. Revenues from small appliances and others decreased by 15.5% to RMB251.2 million, primarily due to product portfolio optimization for a higher gross margin in this category. Gross profit increased by 28% to RMB443.8 million, and gross margin was 23.5% compared to 17.1% for the third quarter of last year, and 19.9% for the fourth quarter of 2019. The quarter-over-quarter and year-over-year increases in gross margin were primarily driven by our efforts to shift the business and product mix toward higher gross margin products, including the rollout of our new Viomi-branded water purifiers and sweeper robots, alongside the optimization of margins across product lines. As Mr. Chen discussed, the meaningful recovery in gross margin was in line with our quality growth strategy, demonstrating our business flexibility and strong execution capabilities. As we continue to phase out our lower-margin products and focus our efforts on generating greater revenue contribution from higher-margin product categories and SKUs, we do expect to experience the full degree of gross margin recovery in 2021. The total operating expenses increased by 21.3% to RMB331.8 million, primarily due to the growth of our business as well as increases in R&D expenses and selling and marketing expenses. In more detail, R&D expenses increased by 41.8% to RMB93.1 million. Selling and marketing expenses increased by 17.3% to RMB217.4 million, G&A expenses decreased by 5.7% to RMB21.3 million. The net income attributable to ordinary shareholders of the company increased by 23.3% to RMB110.6 million and non-GAAP net income attributable to ordinary shareholders of the company increased by RMB15.3% million to RMB115.5 million. Additionally, our balance sheet remained healthy. As of December 31st, 2020, we had cash and cash equivalents of RMB504.1 million, restricted cash of RMB70.6 million short-term deposits of nil and short-term investments of RMB696.1 million. We won't go into details on our full-year 2020 results, but as mentioned earlier, they can be reviewed on our earnings press release. Now let's turn to our outlook. For the first quarter of 2021, we currently expect net revenue to be between RMB900 million and RMB950 million, representing year-over-year growth around 17.6% to 24.1%. The above outlook is based on the current market conditions and reflects current and preliminary estimates of market and operating conditions and customer demand which are all subject to change. So this concludes our prepared remarks. We will now open the call for the Q&A session. And the Head of our finance team will join the session and answer questions. Operator, please go ahead.

Thank you. We will now begin the question-and-answer session. The first question today comes from Lillian Lou with Morgan Stanley. Please go ahead.

Thanks a lot. I have two questions. First of all, what's the company's 2021 strategy for the own brands and Xiaomi brands? In particular, is there guidance by categories? And the second question is on channel. What's the strategy on the offline/online channel shifts in 2021, especially when we saw some more expansion of online channel in last year because of COVID-19? So going on, what kind of shifts can we expect? And a little bit of a number question is, in 2020, what's the contribution mix from online and offline, breakdown by Xiaomi channel, non-Xiaomi channel, and non-Xiaomi offline channel? Thank you very much.

Okay. For the first question regarding the Viomi-branded business, we can elaborate from multiple perspectives. Firstly, we will shift the Viomi brand business and product mix toward diversification with the introduction of more high-end products that utilize more advanced technologies, as well as phase out some specific SKUs with lower margins across product lines such as some SKUs of low-end washing machines and refrigerators without screens. With regard to the key categories, we will focus more on business with higher margins and good growth momentum, such as own-branded water purifiers and sweeper robots. For Viomi-branded water purifiers, we will introduce a series of large flux water purifiers in the second-half of 2020, and we saw robust sales of some of the new products such as Quanxian and new instant heating water purifiers after they were introduced. We've also seen the water purifier industry develop towards large flux, and industry data show that the sales contributions from large flux, as well as instant heating water purifiers, are increasing. We expect the Viomi-branded water purifiers business to make a greater revenue contribution in both our home water solutions and our overall revenues in 2021. We will also invest more in our Viomi-branded sweeper robots, particularly in overseas markets, which we expect to be a solid goal. Having expanded our sweeper robot team, we are following additional global markets and channels for Viomi-branded sweeper robots, and we think the revenue contribution from this category will increase as well. In terms of technology application, as we discussed earlier, we will focus more on AI and smartification, which are key parts of our IoT products. In our upcoming new product launch event in early April, we will introduce more products with AI applications. For Xiaomi-branded business, we will continue the stable and solid cooperation with Xiaomi. We are also glad to seek more cooperation with Xiaomi in the future.

Okay. I will quickly translate Mr. Chen's additional comments. So he highlighted three points regarding our channel expansion strategy. First, heading into 2021, we observed a meaningful recovery of the offline channels across the Chinese market. We will expand our offline stores and improve the overall offline operating system, including user experience and IoT design. We will increase the number of offline outlets in 2021. Second, we will maintain a very good operating system and capabilities for online channels with Youpin, Jingdong, Suning, etc. Finally, we have been expanding our channels and marketing tools using new digital media, such as Douyin and Kuaishou. We believe such new media will be a development trend for marketing and channel expansion in 2021. That's Mr. Chen's response, and we hope that is helpful.

The next question comes from Xudong Chen with CICC. Please go ahead.

Thank you for taking my question. The first one is, I observed that your gross profit margin has recovered in this quarter. What is the biggest reason for this gross profit margin recovery? And will this trend continue in 2021? That's my first question. And I will have a follow-up.

We are confident in the recovery of our margins, as we have been executing the quality growth strategy on the following perspectives. We will continue to shift the Viomi-branded business and product mix towards diversification. We have introduced more high-end products with higher margins and higher average selling prices. The revenue contributions from these new products will increase. We will continue to phase out specific SKUs of lower margin across product lines, such as some SKUs of lower-end washing machines and refrigerators without screens as mentioned just now. Due to the above actions, we expect gross margin to recover in 2021.

Thanks. And my second question is, since you have a good relationship with Xiaomi and you have your own IoT platform business and Xiaomi also has their platform, how can you balance your product and the Xiaomi platform and your platform? That's my second question.

Thank you for your question. Regarding the balance between our product offerings and the platforms from Xiaomi and our own IoT business, we are committed to optimizing our strategies to leverage both platforms effectively.

Okay. I will quickly translate Mr. Chen's comments on the IoT platform. From three perspectives, firstly, we gleaned comments from Xiaomi's senior management which clearly emphasized their priority on their IoT platform. Many of our IoT products can connect to this platform, and we have witnessed those products sold through our Youpin platform being very welcomed by consumers. Secondly, we have cooperated with Xiaomi on the sweeper robot business since 2019, helping us to develop our own Viomi-branded sweeper robot to expand in domestic and global markets. Thirdly, we are actively seeking more cooperation opportunities with Xiaomi. We believe many opportunities for collaboration lie ahead.

Yes. Thank you. That helps a lot.

The next question is from Vincent Yu with Needham & Company. Please go ahead.

Thank you, management for taking my questions. I have two questions. The first question is, can management talk about their view on the overall home appliance market in 2021? Are we seeing competitive pressure from industry leaders that might lead to a price war? And how have the first two months of 2021 been in terms of consumer demand? My second question is about how much the international market contributed in the fourth quarter, and how big of an opportunity this can grow into in 2021? Thank you.

Thank you for the opportunity to ask questions. I have two inquiries. First, could management share their perspective on the home appliance market for 2021? Are we experiencing competitive pressure from industry leaders that could result in a price war? Also, how has consumer demand been in the first two months of 2021? My second question pertains to the contribution of the international market in the fourth quarter and the potential growth opportunities in 2021. Thank you.

Okay. I will translate. In 2020, we saw pressures on the whole industry due to COVID-19 affecting both top-line growth and earnings. However, heading into 2021, we observed recovery across the whole industry. Specifically, we noted that consumers are paying more attention to smart products, especially some IoT products. The domestic market for sweeper robots has increased very quickly since the start of this year. Many consumers showed significant interest in IoT experiences and smart products at our recent AWE. We believe that IoT products and the entire IoT home industry have gained more recognition compared to the past. In terms of competition, traditional home appliances and many companies are shifting their focus to smart products. We see this as a trend. With regards to holistic IoT solutions as well as IoT experience or services, we believe we maintain a leading position in this perspective. Therefore, we will increase our resources in branding and R&D for IoT holistic solutions to enhance the comprehensive IoT experience.

The entire IoT home industry has gained more recognition compared to the past. In terms of competition, traditional home appliances and many companies are shifting their focus to smart products. We see this as a trend. With regards to holistic IoT solutions as well as IoT experience or services, we believe we maintain a leading position in this perspective. Therefore, we will increase our resources in branding and R&D for IoT holistic solutions to enhance the comprehensive IoT experience.

In terms of our global market expansion, we began to expand our export market in the fourth quarter of last year. Moving into the first quarter of this year, we are rapidly expanding our global market, especially for our Viomi-branded sweeper robot business. We are observing significant growth, multiple-fold in this category globally. As this trend continues, we anticipate achieving solid growth from the international market, and we are also exploring more channels. I hope this is helpful.

Yes. Thank you. I appreciate it.

As there are no further questions, I would now like to turn the call back over to the company for closing remarks.

Thank you once again for joining us today. If you have other questions, please contact us through the contact information on our website or through The Piacente Group, our Investor Relations consultant. Thank you all. Have a good day and night.

This conference has now concluded. You may disconnect your lines. Thank you.