Viomi Technology Co., Ltd Q1 FY2021 Earnings Call

Thank you for standing by for Viomi Technology Company, Limited Earnings Conference Call for the First Quarter of 2021. At this time, all participants are in a listen-only mode. Today's conference call is being recorded. I will now turn the call over to your host, Ms. Cecilia Li, the IR Head of the company. Please go ahead, Cecilia.

Thanks, operator. Hello, everyone, and welcome to Viomi Technology Co., Limited earnings conference call for the first quarter of 2021. 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 email distribution list by visiting the IR section at 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; Mr. Xiufei Bao, our new President; and Mr. Shun Jiang, the Head of our Finance Team. The company's management will begin with prepared remarks, and it will all 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 expressed today. Further information regarding these and other risks and uncertainties is included in the company's annual report of Form 20-F and other filings filed with the U.S. Securities and Exchange Commission. The company doesn't assume any obligation to update any forward-looking statements, except as required by law. Please also note, Viomi's 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 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 immediately by an English translation. Mr. Chen, please go ahead.

Thank you, Mr. Chen. I will briefly translate our founder's remarks before discussing our financial performance for the first quarter of 2021. Hello, everyone. Thanks for joining our first quarter of 2021 earnings conference call. Leveraging the optimization of our product portfolio, new product sales growth, and enhanced brand recognition, we delivered strong net revenues that exceeded our previous guidance, increasing 64% from the same period in 2020 when our operations were impacted by COVID-19. Our gross margin recovered to 21.1% from 18.8% a year ago, primarily attributable to the product portfolio optimization. Our continued growth over the past several years has been driven by continued optimization of our IoT products and holistic solutions, through innovation and integration of cross-boundary technologies, alongside a deep understanding of our users' needs. This April, we hosted our Strategic New Product Launch event with the theme of AI: Helpful, with the introduction of a series of AI strategic new products, including the mineral water purifier, EROx; and AI smart toilet, EyeBot, equipped with sensors that are able to monitor human health data; AI water heater, which is able to soften water quality; new AI air conditioners that went with EyeBot2; and a desktop with AI-assisted cooking functionalities. Our products are designed with an eye on healthcare, smartification, home security, and natural AI voice interaction. Some new products, equipped with sensors and supported by AI algorithms, are able to collect home and human health data with users' consent. In addition, we focused our resources on developing key product categories and rolled out more differentiated and industry-leading products. For example, last year, we introduced a series of premium water purifiers such as 2 Pro 1,000-gallon, 1,200-gallon, and Vision 1,200-gallon series, which realize large-flux and low ratios of waste to purified water. Our THD team has been working on research and development for three years based on tens of billions of cases of water quality data to invent our mineral water purifier, EROx, which retains beneficial minerals for human health during the purification process. Equipped with fast margin sensors, this water purifier product is also able to adjust water quality to meet high-end users' needs. We're happy to be endeavoring in the water purification area and have accumulated a significant number of innovative technologies with more than 700 registered patents as of the end of the first quarter. Some of these patents have been awarded the China Excellent Patent Award, authorized by the China National Intellectual Property Administration and World Intellectual Property Organization, as well as recognized by the China Association for Quality Inspection and other authorities. Our sweeper robot business also represents rapid development, particularly in overseas markets and has been one of the key drivers of our first quarter growth. Our sweeper robot export business, which we launched in the fourth quarter of last year, has developed rapidly in mid-Europe, Southeast Asia, Korea, Australia, and other regions, and has also expanded into Northern Europe and additional Asian countries this year. We are expanding to North American markets. We recently registered our store on Amazon and expect to sell on Amazon in the second half of this year, and will cooperate with some KA offline stores as well. In the compact sweeper robot market, we find our niche with our differentiated products. We introduced a series of automatic data collection sweeper robots last year and recently launched an AI-led sweeper robot that applies two patents. Some patents apply to the majority of high-end sweeper robots in the market; this product is equipped with four laser sensors and is supported by AI algorithms for obstacle detection and avoidance. It is able to identify various low substitutes, capture a wider range of angles and distances, as well as map rooms and support OTA upgrades. We will continue to roll out more varied sweeper robot products and enhance our market share in both domestic and global markets. In addition to focusing on technology upgrades and product innovation, we also make efforts to enhance our IoT holistic home solutions and provide related value-added services and content, including product maintenance services, repurchase discounts, and internet entertainment content, as well as strengthening our service system based on our offline channels. We think our appliances series and demand capabilities are the key to the IoT home industry. We have been vigorously promoting the offline comprehensive service model as one city, one store. We select high-quality stores and partner with them to provide users with one-stop services, including sales experience, after-sales service, and installation. With the rapid consumption upgrade and evolving user needs, users are keen on brands that are fashionable and of good quality. In order to promote our long-term strategy and further develop as a trending brand in the IoT home area, we are pleased to warmly welcome Mr. Bob Bao as the company's President. Prior to joining us, Bob served as the General Manager of Viomi and has extensive experience in the consumer industry with more than 20 years. We believe Bob will bring new energy and insights to our branding development. Looking ahead, we will execute our growth strategy from three perspectives. First, we'll construct our IoT holistic home solutions through our IoT product strategy. Second, we will develop related spending to improve our branding influence and be positioned as a trending brand in IoT home solutions. And third, we will expand our offline stores to integrate scenario-based experiences in the services. We believe with the model's algorithm of our product, marketing channels, and increasing popularization of at-home modifications, we will deliver sustainable healthy growth, attain uniqueness in the IoT home solutions area, and bring long-term shareholder value. So that concludes our prepared remarks. Let's now turn to the detailed financial review of the first quarter of 2021, as well as the outlook for the second quarter. The net revenues were RMB 1.26 million, representing an increase of 64% year-over-year, primarily due to the continued successful rollout and a significant increase in sales of new products, overseas market expansion, as well as the low-base effect of the first quarter of last year due to COVID-19. Revenues from the IoT at home portfolio increased by 11.5% to RMB 919.2 million from RMB 434.7 million for the first quarter of last year. The growth was primarily driven by sustained sales increases for certain new product series, particularly Viomi-branded sweeper robots and smart kitchen products. Revenues from our home water solutions decreased by 4% to RMB 103.8 million, primarily due to decreases in average selling prices of Xiaomi-branded water purifier products. This was partially offset by the successful introduction and increased sales of a new series of Viomi-branded water purifier products, which narrowed the year-over-year decline for home water solutions, compared to previous quarters. Revenues from consumables were RMB 64.8 million, compared to RMB 65 million for the first quarter of last year. Revenues from small appliances and others increased by 6.4% to RMB 167.8 million from RMB 157.8 million for the first quarter of last year. Gross profit increased by 84.1% to RMB 265 million. Gross margin was 21.1%, compared to 18.8% for the first quarter of last year. This is primarily driven by our efforts to shift the business and product mix toward higher gross margin products, including the rollout of new Viomi-branded water purifiers and sweeper robots, alongside the optimization of margins across product lines and cost control measures. Total operating expenses increased by 63.8% to RMB 219.8 million, primarily due to business growth. R&D expenses increased by 10.7% to RMB 65.6 million from RMB 59.3 million for the first quarter of last year, mainly due to an increase in R&D personnel and related salaries and expenses. Selling and marketing expenses increased by 110.8% to RMB 138 million from RMB 65.5 million a year ago, primarily attributable to the low-base effect of the first quarter of last year due to COVID-19 when the company undertook very limited marketing and advertising activities. G&A expenses increased by 71.3% to RMB 16.2 million, compared to RMB 9.5 million for the first quarter of last year, primarily due to the increase of personnel and related salaries and expenses. Net income attributable to ordinary shareholders of the company increased by 173.2% to RMB 49.1 million, and non-GAAP net income attributable to ordinary shareholders of the company increased by 106.8% to RMB 65.3 million. Additionally, our balance sheet remained healthy. As of March 31, 2021, we had cash and cash equivalents of RMB 906.3 million, restricted cash of RMB 45.2 million, short-term deposits of RMB 97.7 million, and short-term investments of RMB 596.9 million. Now, let's turn to our outlook. For the second quarter of 2021, we currently expect that net revenue to be between RMB 1.72 billion and RMB 1.85 billion, representing year-over-year growth of approximately 2.1% to 9.8%. The above outlook is based on the 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. Well, this concludes our prepared remarks. We will now open the call for the Q&A session. The head of our finance team, Mr. Shun Jiang, will join the session in answering the questions. Operator, please go ahead.

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

Thanks a lot, management, and Mr. Chen. I have two questions. First is on the sweeper robots. What kind of growth are we looking for this year overall, because obviously, the first quarter has a very strong growth and momentum, and Mr. Chen just mentioned that we have the plan to expand the region overseas, and in the second half, we'll get into the U.S. on Amazon. So, any particular guidance or explanation of how we're going to grow the business overseas will be very helpful. And the second question is on the raw material price increase impact. Because in the first quarter, we already saw the gross margin decrease on a sequential basis versus the fourth quarter of last year. So, how are we going to look at the momentum or trend in the following quarters? Thank you.

Okay. Thank you for Lillian's question. For the first question about the sweeper robot, our sweeper robot business grows fast, particularly in the Viomi-branded sweeper robot. We expect the rapid growth of own-branded sweeper robots will continue. The domestic sweeper robot market is an addressable market according to our agents' data. The market size of the sweeper robot is expected to reach over RMB 10 billion by 2021 and close to RMB 20 billion by 2022. There are more players in the industry, and we observe the market shares of new brands have been increasing since 2020, and this trend is expected to continue. We also found our niche with differentiated products, including a series of automated data collection sweeper robots and the AI laser radar sweeper robot we recently introduced. Under such a situation and the observation of the market demand for sweeper robots, we are positive about our market shares in the domestic market in the following years. In terms of the global markets, the market size is also huge and promising. Our research indicates there are many potential opportunities, particularly in Europe and North America. We have sold our sweeper robots in Europe, Southeast Asia, Australia, and the sales for the sweeper robot in the first quarter in overseas markets exceeded our previous expectations. Next, we will expand to the North American market. We recently successfully registered our store on Amazon, and we will start to sell sweeper robot products in the second half of this year. We also plan to sell our products through some offline channels in North America. We are confident that global market sales will become an important driver of our overall business. For the second question about gross margin and the rising raw material prices, while we expect a meaningful recovery in our overall gross margin for 2021, we will experience some seasonal fluctuations due to upcoming promotional events such as the June 18 campaign in the second quarter, which we expect will have some impacts on our gross margin. Secondly, the increase in raw material costs will also be a factor that impacts the gross margins for the whole industry. We have taken cost-optimization measures to mitigate the impact of raw material costs, including pricing agreements with suppliers and some technical upgrades for cost savings. Lastly, we noted the government's plans to take measures to control the rising raw material prices. We expect this will relieve some pressure from the increase in raw material costs under the government's involvement. Thank you.

Raw material costs will also influence the gross margins for the entire industry. We have implemented cost-optimization strategies to alleviate the effects of raw material costs, which include pricing agreements with suppliers and certain technical upgrades for savings. Additionally, we have observed the government's initiatives aimed at controlling the rising raw material prices. We anticipate that this will help ease some of the pressure from the increase in raw material costs due to the government's intervention. Thank you.

So, Mr. Chen has comments on Mr. Jiang's remarks. I will just quickly translate. Regarding the first question about development, we obviously evolved our business and established an independent department to drive our category. We have attracted talents from all walks of life from outside. The second fold of development is we've evolved our business over the past two to three years. We are very confident that this category will be one of the drivers to grow both our top-line growth, as well as to gain profitability. That's the comments from Mr. Chen. Hope that is helpful.

Regarding the first question about development, we have clearly evolved our business and created an independent department to lead our category. We have brought in talents from various backgrounds. Over the past two to three years, we have further developed our business. We are very confident that this category will significantly contribute to our top-line growth and profitability. That summarizes Mr. Chen's comments. I hope this information is helpful.

We have evolved our business and established an independent department to drive our category. We have attracted talents from various backgrounds. Over the past two to three years, we are confident that this category will be a significant contributor to both our top-line growth and profitability. That's the comments from Mr. Chen. Hope that is helpful.

We have established an independent department to drive our category and attracted talents from diverse backgrounds. Over the past two to three years, we have evolved our business significantly. We are very confident that this category will be a key driver for both our top-line growth and profitability. That's Mr. Chen's comments. Hope that is helpful.

Yes. We have some internal accounts regarding our sweeper robot category in terms of product and data management and team development in both the domestic and global market. Our aim is to develop the top brands in the sweeper robot category. Yes, that's it.

The next question comes from Waye He and Rudy Waye with CICC. Please go ahead.

Hello. Thank you very much for the management's presentation. I have two questions here. The first is about domestic market development. Since we know that the profit margin of the businesses with Xiaomi is quite low, how is the company planning to further promote the self-owned brand and the products in the domestic markets, especially for the water purifiers and robotic vacuum cleaners? The second question is about overseas. Are we planning to promote more categories overseas, or currently are we just limiting the categories to the water purifiers and robotic vacuum cleaners? Yes, that's my questions.

Given the low profit margins for businesses associated with Xiaomi, how does the company intend to enhance the promotion of its self-owned brand and products in domestic markets, particularly for water purifiers and robotic vacuum cleaners? Additionally, are there plans to expand our product categories overseas, or are we currently restricting our focus to just water purifiers and robotic vacuum cleaners? Those are my questions.

Now that the profit margin of the businesses with Xiaomi is quite low, how is the company planning to further promote the self-owned brand and the products in the domestic markets, especially for the water purifiers and robotic vacuum cleaners? The second question is about overseas. Are we planning to promote more categories overseas, or currently are we just limiting the categories to the water purifiers and robotic vacuum cleaners? Yes, that's my question. Cecilia Li, IR Head.

Okay. I will quickly translate. For the first question about how to develop our own branded business in the market, we are focusing on developing our IoT home holistic product portfolio. We have expanded to around 60 product categories across home scenarios. We also have some key categories and SKUs that we aim to develop mostly this year to drive our branding influence and position as a trending brand in IoT home holistic solutions. In the past half to one year, the concept of IoT home modification has increased in the domestic market. We are confident that we can achieve better development in the domestic market with our advantages and differentiation. For the key categories, we think the water purifier and sweeper robots business are crucial for us this year, and we will invest more in R&D and marketing resources in these two categories, which we believe will drive our top line. For your second question about the overseas market expansion, we will continue to focus on the development of our sweeper robot business in export markets this year. So far, we do not plan to expand the categories, but we will increase our branding influence in the overseas market in the sweeper robot category. Thank you.

The next question comes from Roger Duan with Needham and Co. Please go ahead.

Hi. Thank you for taking my question. I have two questions here. The first one is a follow-up on the raw material price increase. Can management give us a sense of just how much the raw material prices have increased in the last several quarters? And do we have any plan to increase our retail prices like others have done in the industry? And the second question is around the pricing strategy for sweeper robots internationally. Is the pricing strategy different internationally versus domestically? And will that continue to be a margin driver for the year? Thank you.

Can management provide an update on the increase in raw material prices over the last few quarters? Are there any plans to raise our retail prices as other companies in the industry have done? Additionally, how does the pricing strategy for sweeper robots differ internationally compared to domestically? Will this continue to contribute positively to margins for the year? Thank you.

Okay. I will quickly translate. For the first question about the impact of the increase in raw material costs and the effect on our pricing strategy, we have seen that the raw material prices have been increasing since the first quarter of last year. We have taken three measures to mitigate the impact. First, like some other companies in the whole industry, we increased the ASPs of some of our products to a reasonable extent. Second, we also optimized the sales and product structures, promoting and selling more products with higher margins. For example, in the smart kitchen product category, we have been focusing on mid- to high-end refrigerators with higher gross margins. Lastly, we have increased the revenue contribution from bundle sales to mitigate the impact of raw material cost increases for single products. This answers the first question. Regarding your second question about the pricing strategy for our sweeper robots in the domestic and global market, we position our sweeper robots as mid- to high-end products in both markets. For the domestic market, the average selling price of our sweeper robots is around RMB 2,000 to RMB 3,000, which is above the average ASP of some sweeper robot brands in China. We have introduced differentiated functionalities, such as the automatic dust collection feature in our sweeper robot launched last year, as well as a laser radar sweeper robot introduced this year. For the global market, we also aim to position our sweeper robots in the mid- to high-end product range, with the average selling price exceeding that of other global brands. That covers Mr. Chen's comments. I hope it's helpful.

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

So, thank you once again for joining us today. If you have further questions, please contact us through the contact information on our website or our investor relations partner. Thank you all. Have a good one.

Thank you once again for joining us today. If you have further questions, please contact us through the contact information on our website or our investor relations partner. Thank you all. Have a good one.

This concludes the conference call. You may now disconnect your lines. Thank you.