Viomi Technology Co., Ltd Q3 FY2021 Earnings Call

Hello, ladies and gentlemen, thank you for standing by for Viomi Technology Company Ltd's Earnings Conference Call for the Third 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 Director of the company. Please go ahead, Cecilia.

Thank you, operator. Hello, everyone, and welcome to Viomi Technology Co. Limited earnings conference call for the third 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 e-mail 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, and Mr. Wickham Thai, the Head of our Finance Department. 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 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 as 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 today’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 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 now deliver his remarks in Chinese, followed by an English translation. Please go ahead, Mr. Chen.

Okay. Thank you, Mr. Chen. I will quickly translate his remarks before discussing the financial performance for the third quarter of this year. Hello, everyone. Thanks for joining our third quarter 2021 earnings conference call. Our third quarter net revenues reached RMB1,056.5 million, which was in line with our previous guidance. As we disclosed in the previous quarter’s earnings conference call, there was a year-over-year decline in revenues during the third quarter, mainly due to the significant decrease in sales of Xiaomi-branded sweeper robots. We maintained stable growth in most of our other product categories. During the third quarter, we enhanced our one-stop IoT home solutions platform to realize AI-driven IoT home scenarios. Currently, we have laid out a full product line of more than 60 categories. As a result, we are the only company in the smart home industry that provides a complete one-stop IoT home solutions integrating smart home appliances, smart home devices, and software solutions. We also continued to optimize our product portfolio and execute our 'trending technology' brand marketing and 'larger store, better merchant' channel strategy. Moreover, we increased our investment in R&D and expanded our AI algorithms and hardware research and development teams to accelerate AI product innovation and technology accumulation, resulting in a 56% year-over-year increase in R&D expenses. To enhance brand awareness, we also invested in additional advertising and marketing resources in the third quarter. Due to the substantial increase in R&D and marketing expenses, our bottom-line declined temporarily while our strategy adjustment and investments generated positive results including, first, the ongoing gross margin improvement. Our third quarter gross margin was 22.7% representing both year-over-year and quarter-over-quarter increases. Second, brand awareness continues to rise; and third, more diversified and balanced sales channels are equipped to handle sales and services of our smart home products. Our overall business is developing in a high-quality and healthy direction. Based on industry data, as well as our observations of the smart home appliance industry and the markets, we have identified four important industry trends. First, consumers prefer to buy home appliances with more elaborate and advanced functions in more diversified product categories, especially those which can improve the quality of life such as air and water purifiers, household cleaning devices and integrated desktops. Second, the demand for high-end products is growing rapidly. Third, bundle purchases have become popular, especially among the personality generation. And fourth, we observed that consumers are starting to proactively get to know and curate the smart home products, and this modification has become a benchmark for the industry and the market, driven by technology progress and consumption upgrading. To capitalize on these trends and considering market opportunities, we have adjusted and refined our product research and development, enhanced our branding, and improved our sales channels. With respect to product development, we have developed our product strategy from three perspectives: first, we increased our investment in R&D, as well as technology innovation and AI application, enhancing our brand influence through product optimization. Second, we provide users with customized and bundle purchase solutions rather than solely selling individual products, which reduces customer acquisition costs and increases sales growth. In the past few months, the proportion of bundle sales has increased, and orders totaling RMB 10,000 to RMB 200,000 have grown rapidly. Third, we are currently focused on scenario innovation and will soon complete our smart home category to provide a more comprehensive smart home experience. To this end, this quarter, we devoted more resources to AI algorithms, software, as well as hardware. We introduced a series of new AI products in the first half of this year, including the all-direction air space conditioner, premium sweeper robot Alpha 2 Plus, EyeBot range hood, and 800G-1200G Super series large-flux water purifiers. We also launched the Cyber series of our smart wet/dry vacuums in September. All of these products demonstrated strong sales performance in the third quarter, driving continued gross margin recovery. Furthermore, we introduced new SKUs in the smart home categories, such as EyeLink 2T smart lock with AI face recognition technology. We continually increase our efforts in R&D and we will unveil high-end new smart home products in new product categories in the coming months. In addition, we will roll out exciting new AI product lines next year, including the smart home, smart kitchen, water purifier, and cleanliness products, among others. Second, to enhance our branding influence, we invited one of China's top celebrities, Deng Lun, to become our global branding spokesperson and established our 'trending technology' brand positioning in the first half of this year in collaboration with Focus Media and Shijiazhuang Cultural Media. We broadened our omni-channel marketing and advertising activities including elevator advertisements, print media, television, and social media to enhance our brand awareness and exposure. We also collaborated with high-quality content marketing on content platforms such as Douyin, Kuaishou, and Little Red Book. Our brand's search frequency on major search engines has climbed, and our internal data shows that post-90s users and users from new tier-one and tier-two cities have increased over the past few months. Third, we increased our exposure and sales on new channels such as Pinduoduo, Douyin, and Kuaishou. We have built an exclusive team for these new sales channels to boost traffic and attract more young consumers, and our short-form video marketing and KOL livestreaming has enhanced brand awareness and contributed to an increase in sales. The revenue contribution from these new channels has increased in the past few months as well. Fourth, with respect to our offline channels, we continued to execute our 'larger store, better merchant' strategy to provide our users with 'one-stop IoT home' solutions, integrating bundle purchases, scenario-based shopping experience, and installation and after-sale services. These efforts have also strengthened our 'trending technology' brand positioning. In the second half, we accelerated our nationwide 4s and 5s store portfolio expansion, including a new 460 square meter Viomi flagship store opening during September, and a new 760 square meter 5s experience store opened in the Shenyang CBD area in October, becoming the largest Viomi experience store in China. We will open more large-scale 4s and 5s Viomi experience stores across the nation. Finally, we are also developing our overseas business by upgrading channels, diversifying our operation models, and expanding product categories. We recently cooperated with renowned agents in Germany, Russia, Malaysia, and Northern Europe to transform our overseas channels from small distributors into high-quality international sales agents. We plan to optimize our overseas business operation by leveraging their local resources, reputation, and import sales experience. We are also planning to explore a self-operated model in more regions; following the successful opening of our first self-operated store on U.S. Amazon in August, we are preparing to launch our online store on European Amazon and will introduce sweeper robot products in the near future. Additionally, we will provide our overseas customers with smart wet/dry vacuums and a sweeper robot with new functions. Going forward, we will expand our global business into additional countries and regions to capture the cleanliness product sector's tremendous growth opportunities. We have completed the first step in establishing our one-stop IoT home solutions platform by building comprehensive product lines across home scenarios and will now focus on product smartification upgrades and scenario application innovation. Looking ahead, we will continue to refine our product portfolio and further stabilize our gross margin recovery. We will also increase our investment in AI application, enhance our 'trending technology' branding, grow bundle sales and services, and improve our overall business operation quality, creating long-term value and returns for our users and shareholders. That concludes our Founders’ remarks. Let’s now turn to our detailed third quarter financial reviews as well as our fourth quarter outlook. Net revenues were RMB1.06 billion compared to RMB1.49 billion for the third quarter of last year. Net revenues were in line with the Company's previous guidance and the decrease was mainly due to the significant decrease in sales of Xiaomi-branded sweeper robots, as well as product portfolio adjustments for margin expansion in other categories. Revenues from the IoT @ Home portfolio decreased by 39.3% to RMB643.5 million from RMB1.06 billion for the third quarter of last year. The decline was primarily due to the first; the decrease in sales of Xiaomi-branded sweeper robots; and second the product portfolio adjustments for margin expansion in some categories. Revenues from our home water solutions increased by 7.9% to RMB157 million from RMB145.4 million for the third quarter of last year. The growth was primarily driven by the Company's product portfolio adjustment in this category, which contributed to increased sales of and demand for new and larger flux water purifiers, as well as a gross margin expansion. Revenues from consumables increased by 11.7% to RMB79.6 million from RMB71.3 million for the third quarter of last year, primarily due to increased demand for the Company's water purifier filter products. Revenues from small appliances and others decreased by 15.9% to RMB176.5 million from RMB209.9 million for the third quarter of last year, primarily due to the Company's continued product portfolio optimization to obtain a higher gross margin in this category. Gross profit was RMB239.7 million, compared to RMB254.3 million for the third quarter of last year. Gross margin increased to 22.7% from 17.1% for the third quarter of last year, primarily driven by the Company's continued efforts to shift the business and product mix towards higher gross margin products. Total operating expenses increased by 28.2% to RMB290.3 million year-over-year primarily due to the increase in research and development expenses and selling and marketing expenses. R&D expenses increased by 56.1% to RMB82.2 million from RMB52.7 million for the third quarter of last year, mainly due to the increase in R&D experts and related salaries and expenses, as well as increased investment in research and development of new products. Selling and marketing expenses increased by 20.4% to RMB183.4 million from RMB152.2 million a year ago, primarily attributable to an increase in advertising and marketing activities to enhance the Company's branding and market recognition. General and administrative expenses increased by 15.2% to RMB24.7 million, compared to RMB21.4 million for the third quarter of last year, primarily due to an increase in the estimated allowance for accounts and notes receivables, together with increased lease expenses due to the workplace expansion. Net loss attributable to ordinary shareholders of the Company was RMB29.3 million, and non-GAAP net loss attributable to ordinary shareholders of the Company was RMB22.2 million. Additionally, our balance sheet remained healthy. As of September 30, 2021, we had cash and cash equivalents of RMB771.7 million, restricted cash of RMB25.6 million, short-term deposits of RMB67 million, and short-term investments of RMB463.5 million. Now let's turn to our outlook. For the fourth quarter of this year, we currently expect net revenues to be between RMB1.2 billion and RMB1.3 billion. We expect the sales of Xiaomi-branded sweeper robots to continue to decrease in the fourth quarter, while the own-branded sweeper robot business will achieve faster growth, which will become one of the main categories. The above outlook is based on the current market conditions and reflects our current and preliminary estimates of market and operating conditions and customer demand, which are all subject to change. This concludes our prepared remarks. We will now open the call for the Q&A session. The Head of our finance department, Mr. Wickham Thai will join the session and answer questions.

The first question today comes from Lillian Lou with Morgan Stanley. Please go ahead.

I have two questions. The first is regarding the third quarter results and the nearly 30% decline in revenue. What is the explanation for the significant increase in R&D and marketing expenses, and how should we approach the balance between revenue and margin control for the fourth quarter? The second question pertains to the outlook for the overseas sweeper robot business. What could the figures look like in the fourth quarter and beyond, and have we encountered any bottlenecks related to overseas transportation and associated costs? Thank you.

I have two questions. The first is about the third quarter results and the nearly 30% decline in revenue. What is the reasoning for the significant increase in R&D and marketing expenses? How should we view the balance between revenue and margin control in the fourth quarter? The second question concerns the outlook for the overseas sweeper robot business. What can we expect for the fourth quarter and beyond? Have there been any bottlenecks related to overseas transportation and associated costs? Thank you.

I will quickly translate the comment from Mr. Chen. So, as we observed from the market, since the second half of last year to this year we see the users started proactively to get to know and approach the smart home products. So we think that’s the time to capture the market opportunity and we also see this smartification is a very – is a chance for the whole industry in the market. So, we wanted to invest in more R&D and selling and marketing expenses. So, for the upside, we proactively decreased sales of Xiaomi sweeper robots and you know that the gross margin of that business is relatively lower than the others. So, we are decreasing the sales of Xiaomi sweeper robots to have a healthier gross margin and margin recovery. And in terms of expenses, the year-over-year increase of R&D expenses is 56%, and we also again saw increasing selling and marketing expenses. But we think in the near future, the R&D expenses will return to a relatively normal level and we will continue to invest in selling and marketing, but we are stable and to a softer extent to enhance our brand awareness. What all we do is to capture the opportunities in the future and to enhance our IoT smart home solutions. That’s from our Founder.

In terms of expenses, R&D expenses increased by 56% year-over-year, and we also saw a rise in selling and marketing expenses. However, we believe that R&D expenses will soon normalize, and we will maintain our investment in selling and marketing, albeit at a more measured pace to boost our brand awareness. Our goal is to seize future opportunities and improve our IoT smart home solutions.

I will introduce the overseas sales progress Lillian just mentioned. For the past few months, we saw the overseas market demonstrating a relatively softer growth compared to the robust growth in the first quarter. This is due to several factors. First, due to the strong consumer demand during the post-COVID, the distributors purchased a large volume of cleanliness products resulting in high stocking levels since the second quarter. Secondly, the shortage of containers and labor resources in the overseas ports did impact the unloading of the products and caused some order delays. We expect such a situation will continue in the second half of this year, while we are taking some measures to mitigate the impacts and drive the growth increase. On one side, from our knowledge of overseas markets, the price of these containers won’t continue to go up to a larger extent, and on the other side, we will enter cooperation with more renowned international agents which will help us to increase sales by leveraging the local resources and reputation. Thirdly, as the overseas consumer mix towards cleanliness products becomes more diversified, we will increase the new categories and SKUs to cater to the additional demands and drive the overall overseas sales. We will continue to expand into additional countries and regions where we expect to see potential market growth. Thank you.

We will enter cooperation with more renowned international agents to help us increase sales by leveraging local resources and reputation. Additionally, as the overseas demand for cleanliness products diversifies, we will introduce new categories and SKUs to meet this demand and boost overall overseas sales. We will also continue to expand into more countries and regions where we anticipate market growth. Thank you.

We will collaborate with more established international agents to boost sales by utilizing local resources and reputation. Additionally, as the overseas consumer interest in cleanliness products becomes more varied, we will introduce new categories and SKUs to meet the growing demand and enhance overall overseas sales. Our expansion efforts will continue into new countries and regions where we foresee market growth potential. Thank you.

The next question comes from Rudy Wei with CICC. Please go ahead.

Thank you for the management’s presentation. This is Rudy Wei from CICC. I have a question regarding the promotion strategy. We have had Deng Lun as our brand spokesperson. How is that going? Also, can you provide details specifically about the sales during this year’s Double 11 Festival? What’s your outlook for next year’s consumption and sales trends?

Thank you for the management’s presentation. This is Wei from CICC. I have a question regarding the promotion strategy. We have had Deng Lun as our brand spokesperson. How is it working? Also, can you provide details about the sales during this year’s Double 11 Festival? What’s your outlook for next year’s consumption and sales trends?

I will translate this question. So, we invited Deng Lun as our spokesperson because we believe it aligns with our brand positioning of 'trending technology' and is very popular among young people, especially the personality generation, so it enhances our brand as well as helps us to increase brand awareness. In addition to inviting Deng Lun as the spokesperson, we are also investing a lot in advertisements in various media, and we also do a lot of advertising on social media, as well as content marketing like Little Red Book. As a result, we can see that brand awareness on social media and platforms has increased. We also see an increase in brand awareness in offline channels, with a noticeable rise in the search frequency of our brand on platforms such as Baidu. In terms of performance during the Double 11 Shopping Festival, we have seen a significant contribution from our new major high-end products, especially bundle sales such as refrigerators and smart kitchen products. Overall, we believe it’s a very positive direction for us to have invited Deng Lun as our spokesperson, and we also see the effects of that, as evidenced by our sales performance. We hope that all these marketing and selling activities can continue to enhance our brand awareness. That’s it. Thank you.

Yes. We will share the growth outlook for 2022. We estimate to deliver stable growth for next year due to several factors. First, as we see the sales contribution of new products has increased in the past few months, and we have new series of AI products in the pipeline, we expect that these new products will drive long-term growth and enhance our brand influence. Second, we expect the expanded offline store portfolio, as well as diversified online sales channels, will also help increase overall sales. Third, we invested more in advertising and marketing resources in the second half of this year and observed an increase in brand awareness; we expect this improved brand recognition will help drive sales growth. However, we see some uncertainties in the market and macro economies, particularly the impact from real estate investing, which may result in decreased needs for home decoration next year. Thank you.

Okay. Thank you. That’s all from me.

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

Hi, management. Thanks for taking my question. I have two questions. The first is about bundle sales. Can management share what percentage of bundle sales made up our total orders in the third quarter? Additionally, we are noticing some weakness in the macro USA market. What are our expectations for bundle sales trends moving forward? My second question is regarding gross margin and our sales strategy. We are maintaining a healthy gross margin while letting go of some lower-margin products. Given the pressure from raw material costs, will we continue with this strategy, or what are our outlooks on old margin trends and ASP trends? Thank you.

We are seeing some weakness in the macro USA market. What do we think about the trend of bundle sales going forward? My second question is about gross margin and our associated sales strategy. We are maintaining a healthy gross margin while also giving up some product items that have lower gross margins. Considering the pressure from raw material costs, will we adopt the same strategy going forward, or what do we think about the past margin trends for us and the average selling price trends? Thank you.

I will quickly translate first. As we are developing our long-term home solutions, we are transforming our focus from selling individual products to selling solutions. For online channels, the mode of sales is mostly individual product selling, but for offline channels, we can see that over 50% of the sales are from bundle sales, which are like our suite of products. As for the online, we can now capture much larger purchase aggregations, with products totaling over RMB 250,000. In terms of the real impact on our industry, we can see the overall home decorating will decrease a little, which can impact the overall home appliance industry. But as we roll out more mid to high-end products while promoting more bundle sales, we think this can significantly improve purchase amounts per customer. Thank you.

Regarding the price of raw materials, our raw material prices have stabilized at relatively high points and are not expected to rise further. We don’t anticipate that raw material costs will cause significant impacts on our operating results. We will continue to implement cost control measures to mitigate any increases. In terms of ASP, we are developing a pricing strategy for next year. We expect the overall channel contributions to rise as we launch new products with higher ASPs and margins.

Thank you.

This concludes our Question-and-Answer Session. Now I’d like to turn the call back over to the company for any closing remarks.

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 website or our Investor Relations consultant. Thank you all. Have a good night.

This concludes this conference call. You may now disconnect your lines. Thank you for attending.