Viomi Technology Co., Ltd Q4 FY2021 Earnings Call

Hello, ladies and gentlemen. Thank you for standing by for Viomi Technology Company Limited Earnings Conference Call for the Fourth Quarter and Full Year 2021. 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, 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 fourth quarter and full year 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. SEC. 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 in 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 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 English translation. Mr. Chen, please go ahead.

Thank you, Mr. Chen. I will quickly translate our formal remarks before discussing our financial performance for the fourth quarter and full year 2021. Hello, everyone. Thank you for joining our fourth quarter and full year 2021 earnings conference call. Our fourth quarter net revenues reached approximately RMB1.33 billion, beating our previous guidance. As we disclosed earlier, the year-over-year decline was mainly due to the significant decrease in the sales of Xiaomi-branded sweeper robots. Thanks to our ongoing product portfolio adjustments, we achieved a gross margin of 25.6% for the fourth quarter, maintaining consecutive year-over-year growth since the fourth quarter of 2020 and once again demonstrating the strength of our product lineup, growing brand recognition, as well as improvement at our operating quality. We incurred a loss in the third quarter of 2021 following substantial investments in R&D and marketing, but resumed profitability during the fourth quarter as a result of stringent cost control measures. The smart home industry is developing rapidly, accelerated by the industry's overall transformation, increasingly matured IoT technology, popularization of 5G, national policy support, and lifestyle changes of the young generation, the main smart home consumer group. According to statistics from AskCI Consulting, China's smart home market has been continuously expanding, doubling in size between 2016 and 2021 to reach RMB580 billion. It is expected to exceed RMB650 billion by the end of 2022. Last April, 16 government agencies, including the Ministry of Industry and Information Technology, jointly issued guiding opinions on accelerating the development of digital homes and improving living quality, which requires a fairly complete set of digital home-related policies and standards to be established by the end of 2022, as well as the digital home standard system to be in place by the end of 2025. We also see that consumers who use the smart home products are transforming from small groups of people to the mass market. Over the past year, enterprises from various sectors, such as home appliances, communication, and Internet entered the IoT smart home industry in quick succession, targeting industry segments such as hardware products, IoT development platforms, and operating systems. As one of the first enterprises to focus on IoT smart home area, we have been offering one-stop IoT home solutions since 2017. We have rapidly enriched our one-stop IoT home product line and are now developing a premium customized AI home experience to bring IoT smart home solutions to the next level. First, I'd like to discuss most of our latest product innovations, as well as our upgraded one-stop IoT home solutions. 1=N44, which we are launching this month, leverages three components to synergistically provide users with a seamless, customizable smart home experience. The end in 1=N44 stands for our comprehensive product portfolio of smart home appliances and home devices across home scenarios. First of all, we present the four major smart home capabilities of HomeMap, including automated networking, active intelligence, spatial awareness and natural interactions. We have already achieved a one-click home device networking with our smart home screen devices. To support HomeMap's spatial awareness capabilities, we developed Alpha X, our self-developed millimeter wave radar module. Alpha X can help users track presence and movement trajectory without contact, providing better user privacy protection compared to the viral sensors. Going forward, we will integrate Alpha X into our products functions such as automatic device control, sleep monitoring and safety monitoring to truly achieve active device intelligence. We are also iterating our product voice interaction function to enable natural interactions between users and devices. And second, the four represents four additional services we offer to our users, including the smart home solution design, OTA upgrades, a membership system and value-added services. We have enriched our bundled smart home solution offerings with packages designed for various types of households, including our RMB60,000 to RMB80,000 Super packages for large apartments worth over RMB1 million. Our RMB200,000 Space packages for penthouses and our RMB300,000 Royal series for houses valued at over RMB100 million, which deliver a premium customized AI experience for the high-end market. Like other IoT home companies, we utilize our smart home products as carriers to bring our users an upgraded whole-home IoT experience, as well as optimize the product functionality through software and AI applications. At the March event, we also introduced a series of high-end products with our currently most advanced air technology, underscoring our changing technology brand positioning. These new products include our all-space AI air conditioner Space Pro, which utilizes active manganese to help remove formaldehyde, Boss, our AI business refrigerator equipped with 3D somatosensory sensors, Super 2, our 2000-gallon large-flux water purifier, which uses ultra-micro bubbles to remove agricultural residues, and a new series of smart home devices such as HomePad Plus, our AI screen-based control interface and Cyber 2T, our smart lock with 3D facial recognition and video functions. We also launched several new products in our premium brand coKiing, including the Royal Pro series of double-screen refrigerators priced at RMB50,000, the AI laser interactive smart screens priced at RMB40,000, and the Royal new series AI twin-tub washing machines priced at RMB20,000. Second, I'd like to share with you our progress in developing our offline channels. Over the past few months, we have continued to execute our larger store, better merchant channel strategy. We are opening additional immersive offline stores encompassing over 200 or 300 square meters in tier-one, tier-two and new tier-one cities to enhance our trending technology brand positioning as well as provide our customers with a more comprehensive and premium smart home experience. Third, we optimized our product portfolio on new content channels and continued to improve our brand marketing during the quarter. As we disclosed in our third quarter earnings conference call, following the establishment of a dedicated content marketing and sales team for our new channels such as Pinduoduo and Douyin last year, we have continually refined our product categories on these channels by adding higher gross margin products with mid and high-end positioning products. We also continued to strengthen our trending technology brand awareness and increase our exposure on these new channels through key KOL live streaming and recommendations, as well as other marketing activities. In 2022, we will increase additional investment in marketing channels. We will broaden our omnichannel marketing and advertising activities, including online promotions such as in-platform KOL and Tagaru recommendations, and social media as well as offline promotions such as elevated advertising and print media. In addition, to enhance awareness and exposure of our brand in hundreds of cities, our marketing strategy will promote a branded message of channel technology to consumers through multiple marketing channels. Finally, we also made some progress on overseas market expansion. In the fourth quarter, we entered into markets in Singapore, Germany, Italy and other countries. Further, our self-channel transformation has progressed smoothly, shifting partly from small distributions to international agents leading to new partnerships with large-scale agents in Northern Europe and Germany, among others. We also extended our self-operated model to new overseas markets. Along with the U.S. Amazon store we launched last August, we opened a self-operated Amazon store in Italy in March this year, with additional self-operated European Amazon stores to come into service in the coming months. By strategically shifting from selling products to selling solutions, we have pioneered a new business model in the smart home industry while also improving our smart products, IoT capabilities and services for our one-stop IoT home solutions. We have also strengthened our trending technology branding as we entered the high-end market. Going forward, we will continue to increase our investments in R&D, particularly in AI software and algorithms. We're optimizing the product lines. We are upgrading SKU to deliver healthy and long-term growth. That concludes our financial remarks. Let's now turn to our detailed fourth quarter and full year 2021 financial reviews, as well as the first quarter 2022 outlook. Net revenues were RMB1.33 billion compared to RMB1.89 billion for the fourth quarter of 2020. Net revenues exceeded the Company's previous guidance and the year-over-year decrease was mainly due to the continued significant decrease in sales of Xiaomi-branded sweeper robots together with product portfolio adjustments for margin expansion in other categories, and overall weaker consumer demands for certain categories. Revenues from the IoT @ Home portfolio decreased by 37.9% to RMB692 million from RMB1.11 billion for the fourth quarter of 2020. The decline was primarily due to the decrease in sales of Xiaomi-branded sweeper robots and the continued product portfolio adjustments for margin expansion in some categories, both of which contributed to the overall gross margin improvement for the IoT @ Home portfolio. Revenues from our home water solutions decreased by 27.5% to RMB263.3 million from RMB363 million for the fourth quarter of 2020. The decline was primarily due to weaker consumer demands for the industry overall during the quarter, as well as a product portfolio adjustment we made by decreasing the proportion of small-flux water purifiers in our product mix. As a result of the product portfolio adjustments, the Company once again achieved year-over-year gross margin recovery for this category. Revenues from consumables decreased by 24.8% to RMB120.4 million from RMB160.2 million for the fourth quarter of 2020, primarily due to decreased demands for purifier filter products. Revenues from small appliances and others increased by 2.3% to RMB257.1 million from RMB251.2 million for the fourth quarter of 2020. Gross profit was RMB341.5 million compared to RMB443.8 million for the fourth quarter of 2020. Gross margin increased to 25.6% from 23.5% for the fourth quarter of 2020, primarily driven by the Company's continued efforts to shift the business and product mix toward higher gross margin products. Total operating expenses increased by 2.7% to RMB340.7 million year-over-year, primarily due to the increase in R&D expenses and G&A expenses. In more detail, R&D expenses increased by 5.1% to RMB97.8 million from RMB93.1 million for the fourth quarter of 2020, mainly due to the increase in R&D experts and related salaries and expenses. Selling and marketing expenses decreased by 1.2% to RMB214.8 million from RMB217.4 million a year ago. G&A expenses increased by 31.4% to RMB20 million compared to RMB21.3 million for the fourth quarter of 2020, primarily due to the increase in related personnel salaries and expenses. Net income attributable to ordinary shareholders of the Company was RMB22.7 million and non-GAAP net income attributable to ordinary shareholders of the Company of RMB33.5 million. Additionally, our balance sheet remained healthy. As of December 31, 2021, we had cash and cash equivalents of RMB587 million, restricted cash of RMB35.8 million, and short-term investments of RMB828.9 million. So next, let's briefly discuss more key financial results for the full year 2021. Net revenues for full year 2021 were RMB5.3 billion compared to RMB5.83 billion for 2020. Revenues from the IoT @ Home portfolio decreased by 7.4% to RMB3.4 billion from RMB3.67 billion for 2020. Revenues from our home water solutions decreased by 15.9% to RMB742.9 million from RMB883.3 million for 2020. Revenues from consumables decreased by 4.1% to RMB767 million from RMB382.9 million for 2020. Revenues from small appliances and others decreased by 10.7% to RMB792.9 million from RMB887.7 million for 2020. Gross profit was RMB1.2 billion compared to RMB1.08 billion for 2020. Gross margin improved to 22.6% from 18.6% a year ago. Total operating expenses increased by 24.6% to RMB1.16 billion from RMB931.8 million for 2020. In more detail, R&D expenses increased by 17.4% to RMB311.8 million from RMB265.7 million for 2020. Selling and marketing expenses increased by 25.8% to RMB751 million from RMB597.2 million a year ago. G&A expenses increased by 41.8% to RMB97.7 million compared to RMB68.9 million for 2020. Net income attributable to ordinary shareholders of the Company was RMB88.6 million compared to net income attributable to ordinary shareholders of the Company of RMB136 million. Now let's turn to our outlook. For the first quarter of 2022, we currently expect net revenues to be between RMB680 million and RMB730 million. We estimate that the year-over-year change in the first quarter revenue will be mainly due to the high base effect from the Xiaomi-branded sweeper robot business for the first quarter of 2021, which the Company has since scaled back, as well as the overseas market impact in the first quarter of 2022. 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. This concludes our prepared remarks, and 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 announce the questions. Operator, please go ahead.

We will now begin the question-and-answer session. The first question comes from Hildy Ling with Morgan Stanley.

Thank you. Let me repeat everything in English first. Congratulations to the company on a solid fourth quarter and a notable expansion in gross margins. I have a couple of questions. First, can you provide insight into the sales trends year-to-date, specifically regarding the sweeper robots in both the domestic and international markets? My second question is about the revenue outlook for the full year 2022. How should we view this for both the overseas and domestic businesses? Additionally, could you offer some details on each product category segment? Finally, I would like to inquire about the gross margin or operating margin projections for the first quarter of 2022 as well as for the full year. How should we anticipate the impact of rising commodity prices, raw material costs, and oil prices on our margin outlook? When might we expect to see a clearer indication of a trend change? That concludes my questions.

Okay. Thanks for Hildy's questions. For the sales trend to date, we saw the overall consumer demand is relatively weak compared to the same period of 2021, while we saw our product and channel portfolio is trending more diversified and healthier. Firstly, we saw the sales contribution of high-end products is increasing due to our introductions of a series of premium products and our efforts for the product portfolio adjustments. Secondly, we saw the sales on our new channels such as Pinduoduo and Douyin increasing very fast, and we are increasing additional mid to high-end products and products with higher margins on these channels. We expect the sales on these new channels to increase further as well and help us to enhance our brand awareness. And for the sweeper robots, for both domestic and overseas markets, we saw weaker consumer demands for the whole industry compared to the first quarter of 2021, when we achieved a very robust growth in sweeper robots, particularly for the overseas market due to the international war and COVID-19, the market demand for smart and premium cleaning products are impacted. Despite the overall macro environment, our introduction of new SKUs, product line optimization and overseas channel expansion are in line with our expectations. First, in terms of product SKU, we recently introduced our new self-cleaning sweeper robot, Alpha 3, in January. And we see fast-growing sales and received good feedback from the market. At the recent new product launch event, we also introduced our new wet and dry vacuum cleaners, Cyber Pro and Cyber 2, which are equipped with double brushes, photo elastic sensor and OTA upgrade functions. Second, the sales contribution of high-end SKUs is increasing. As we drive the product line towards premium, the sales contribution of our high-end products, such as Alpha 2 Pro and Alpha 2 Plus and Alpha 3 increased. Third, as just discussed, for the overseas market, we successfully stepped into new markets in Singapore, Germany, Italy and other countries. Further, our new cooperation with larger-scale international agents are smooth and we expanded our self-operated model. Along with the U.S. Amazon store we launched last August, we opened Amazon store in Italy, and we will open more self-operated Amazon stores in Europe in the coming months. Overall, though we experienced temporary market fluctuations, we still expect our cleaning business in 2022 to achieve growth and the product lines to turn more diversified. For the second question about the sales outlook of 2022. Generally, for the sales structure, we could refer to the structure of Q4 2021, like - home portfolio may account for half of the total portfolio and home water solutions accounted for around 20%, small appliances and others accounted for around 20% and consumables accounted for around 10%. For the overseas business, we expect around high single digit of the total revenue. But it's subject to the market changes and the company's adjustment later. For the third question about margin and price, we saw the price of raw materials were relatively stable when entering into the fourth quarter of last year. While due to the war and a series of economic reductions, the price went up in the first quarter. The increased price has been partially reflected in our ASPs, so it is partially offset by the increased ASPs. In addition, we have done some price lock agreements with suppliers in advance. So overall, we don't expect the certain price of raw materials to cause material impacts on our gross margin or net profit margin. Our partner is more influenced by the extent of our investment in our R&D and marketing expenses to deliver mid to long-term growth as we strengthen our branding of one-stop home solutions. We will consider increasing additional investments in marketing and channels. As we already saw benefits of our marketing activities like we did in the third quarter of last year, we are confident these investments will help promote our new strategic products and enhance our brand image.

Yeah, thank you.

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

Okay. So thank you very much for the management’s presentation. And I have two questions here. The first is about our promotion and the brand building strategy. We noticed that the company has launched many new products just two weeks ago, and most of the products are targeted at high-end customers. So how do you plan to improve the brand image and make the customers willing to pay for those new products? Also, we knew our spokesperson had some problems recently. So how serious is the influence to us?

I will translate our founder's feedback closely. Regarding brand stability and your questions, we are witnessing a turning point for the consumer groups that purchase smart home products. The market has shifted from small groups to larger investments, which is crucial for our industry. Additionally, we are actively considering further marketing efforts, particularly in cities with high concentrations of young people, like Tier 1 and Tier 2 cities. In response to the spokesperson issue, we acted quickly and effectively, minimizing any negative impact on our brand image. Our prompt response actually led to increased positive exposure in the market. We are steadily positioning our brand as more premium. At our recent product launch, we unveiled high-end solutions aimed at premium consumers, including options priced at RMB300,000 and RMB200,000. We have observed a rise in the usage of these offerings among our users. That summarizes the insights shared by our CEO.

I will repeat the question in English. What is your outlook for the competition in 2022? How do you assess the market competition situation? Will it become more intense? Thank you.

I will clearly translate. For the question, we can elaborate from two sides. From the supplier side, we see that there are several uncertainties globally, but supply chain capability is still very needed and mainly concentrated in China. So we are not very concerned about this point. On the consumer demand side, we observed that since the fourth quarter of last year, consumer demand has been relatively weak domestically. As you see, we are left with some large companies. However, during the period of decreasing consumer demand, this has nearly led to more competitive situations among the players as they may engage in additional stock and promotional activities. For us, as we shift our products and business towards premium offerings, while maintaining our gross margin and increasing R&D and conducting various branding activities, we are confident in overcoming these challenges and delivering long-term growth. Thank you.

Thank you very much. That’s all from my side.

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

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

Thank you.

This concludes this conference call. You may now disconnect your line. Thank you.

Thank you. Bye.