Viomi Technology Co., Ltd Q2 FY2022 Earnings Call

Hello, everyone, and welcome to Viomi Technology Co., Limited earnings conference call for the second quarter of 2022. As a reminder, this conference is being recorded. The company's financial and operating results were issued in our 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 of the company's website at ir.viomi.com. Participating in today's call are Mr. Xiaoping Chen, the Founder, Chairman of the Board of Directors, and the Chief Executive Officer; and Mr. Thai Wickham, the Head of our Financial Department. The company's management will begin with prepared remarks, and the call will conclude with the Q&A session. Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provision of the United States 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 this and other risks and uncertainties is included in the company's annual report on Form 20-F and other filings with the United States Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements, except as required by law. Please also note that Viomi's earnings press release and this conference call include discussions of unaudited GAAP financial information, as well as unaudited non-GAAP financial measures. In addition, Viomi's press release contains a reconciliation of unaudited non-GAAP measures to the most directly comparable GAAP measure. I will now turn the call over to Viomi's Founder, the CEO, Mr. Xiaoping Chen. Mr. Chen will deliver his remarks in Chinese, followed immediately by an English translation.

Thank you. I will quickly translate our Founder's remarks before discussing our financial performance for the second quarter of 2022. Hello, everyone. Thanks for joining our second quarter 2022 earnings conference call. In the second quarter, our total net revenues reached RMB 924 million in line with our previous guidance. The year-over-year decline in revenues was mainly due to two factors. First, this year, we stopped selling Xiaomi branded sweeper robots, which had a high prior year base for comparison. Second, since the beginning of this year, owing to widespread COVID-19 recurrences, market consumption continued to decrease in the second quarter, along with soft demand industry-wide. To support the release of premium new products and our high-end brand transformation, we continued to enhance our brand promotion and increase advertising spending during the second quarter. In addition to the launch of a large number of elevators and print ads, we reached more targeted young groups by partnering with Tmall and becoming a co-sponsor of the well-known variety show, Design Ideal Future forecasted on the Mango TV platform. Our investment in branding and product promotions during a relatively weak period in the macro environment resulted in a temporary operating loss in the second quarter, but we believe these measures will help us build long-term brand awareness. Furthermore, judging from our performance during the 618 shopping festival, and the sales of our high-end products in recent months, our marketing investment over the past few quarters has boosted the contribution of high-end products to our sales and enhanced our trending technology branding position. In the second quarter, we continued to execute our high-quality business operation strategy. First, we streamlined SKUs and optimized our product mix; second, we focused on core business and product lines to build fast-selling products; and third, we implemented cost control and efficiency improvement measures in production and supply chain. This effort led to ongoing optimization of our business operation, with gross margin increasing by about 1% year-over-year, representing consecutive year-over-year improvement since the fourth quarter of 2020. Despite COVID-19 recurrences and weak consumer spending exerting considerable pressure on our sales, we made significant progress in product innovation, channel expansion, and strategic cooperation. In addition, we continued to develop our one-stop IoT home solution, further solidifying the foundation for our long-term product enhancements and branding influx. With regards to our products, we introduced a series of new AI products at our strategic new product launch event in March, including Space Pro, our all-space AI air conditioner featuring formaldehyde removal; Boss, our large-screen refrigerator with AI fitness functionality; our Royal series of AI laser interactive smart screens incorporating 4K ultra-high definition display; Super 2, our 2000 gallons super large-flux water purifier which generates ultra-micro bubbles to remove pesticide residues; and our Royal series of AI twin-tub washing machines. Among them, the air conditioner, water purifier, and interactive smart screen came to market in the second quarter. In addition, we also introduced a series of new smart home devices, such as EyeLink, our smart lock with upgraded 3D facial recognition technology, as well as HomePad Plus, our AI screen-based control interface for managing all smart home appliances across scenarios. These new AI-equipped products provide our consumers with a superior smart home experience and have received favorable market feedback and reviews. Furthermore, sales growth and product influence among our mid- to high-end products are also increasing. During the recent 618 shopping festival, some of our mid-to-high-end products topped the e-commerce sales charts in their respective categories, such as our Space series of air conditioners, Super series of water purifiers, and 21Face AI large-screen refrigerators. Meanwhile, based on our one-stop IoT home solutions, we are accelerating the implementation of our premium bundled home solution offerings nationwide. After our offline merchants in the first quarter signed whole-home solution orders ranging from RMB 200,000 to RMB 400,000 with customers in Beijing, Guangzhou, Changsha, and Kunming, some offline merchants in Chengdu, Zunyi, Yinchuan, and certain other cities followed suit in the second quarter, recording multiple high-end whole-home solution orders exceeding RMB 200,000 and RMB 300,000. Our consumers' recognition and adoption of our premium AI products and our bundled home solution offerings are a testament to the success of our phased transformation into a premium brand and our investment in research and development for our AI products. The successful launch of our new AI product, which received positive market feedback, and the smooth adoption of bundled home solution offerings would not have been possible without our team's efforts in technological innovation and product research and development. As of June 30, 2022, our accumulated global patent applications and registered patents reached more than 5,400 and 3,300, respectively. Our research and development achievements have also been recognized by industry and professional institutions. In July, the intelligence detection method of our AI range hood, a visual detection module, won the 23rd China Patent Excellence Award. Also in April, we took silver at the 8th Guangdong Patent Award with one of our water purifiers with the integrated water wind module technology. This award is not only the recognition of our technological innovation capability but also the affirmation of our intellectual property differences. Secondly, we continue to execute our large store in emerging channel strategy. In the second quarter, we collaborated with our newly signed offline merchants and opened additional Xiaomi 4S and 5S starship stores in provinces including Hunan, Anhui, Guizhou, etc. These flagship stores enhanced our branding and brand positioning through unified store front separation and an immersive scenario experience, helping to implement our one-stop IoT home solution. Also, our overseas business in the second quarter faced challenges due to the international macro environment, including the increase in oil and backlog material prices which led to sluggish demand in the European market. At the same time, we made positive efforts for our China optimization and mid-to-high-end transformation. We have established stable cooperation with newly joined large international agents and expanded the market in Southeast Asia with the trend of high-end products sold overseas. The sales population of the mid-and-high-end mobile market has further increased. As we progress through 2022, we will further enrich the product offerings of intelligent clean products and roll out additional categories of products in overseas markets. Furthermore, we continue to deepen our strategic cooperation with more channels in the second quarter to promote the integrated and stable development of the smart home industry. In the first half of this year, we reached partnerships with major players like Jingdong.com, Tmall, and China Telecom. In May, we expanded our strategic cooperation with Kuka, one of the leading domestic home design enterprises. Together, we will integrate smart home ecology and the whole health of customization business while accelerating the public popularization of our one-stop IoT home solutions. We successfully navigated challenges caused by the pandemic and the weak macro industry environment in the first half of the year and made progress in new product development and brand awareness enhancement. Moving forward, we will continue to focus on four aspects; first, streamlining SKUs and continuously optimizing the product portfolio; second, devoting more resources to improving product competence, building fast-selling products and providing a more immersive scenario experience; third, creating more offline immersive consumption and facilitating the implementation of our one-stop IoT home solution to lay the foundation for user experience improvement and long-term brand value development; fourth, implementing more disciplined cost and expense control measures to lay a solid foundation for long-term healthy growth and create value for our customers and shareholders in the long run. Thank you. That concludes our Founder's remarks.

Thank you. Now I will go over the details of the unaudited financial results of the second quarter of 2022. Net revenues were RMB 924.2 million compared to RMB 1,658.9 million for the second quarter of 2021, in line with the company's previous guidance. In addition to the overall weaker consumption environment, the decrease was mainly due to the complete cutoff of sales of Xiaomi branded sweepers this year, as well as its high prior year base for comparison and ongoing product portfolio adjustments in some categories. Revenues from IoT and home portfolio decreased by 54.2% to RMB 524.5 million from RMB 1,146.3 million for the second quarter of 2021. The decline was primarily due to the complete cut-off of sales of Xiaomi-branded sweeper robots, as well as SKU adjustments in some categories. Revenues from home water solutions decreased by 17.4% to RMB 180.9 million from RMB 218.9 million for the second quarter of 2021, primarily due to decreased demand for water purifiers. Revenues from consumables decreased slightly by 1.9% to RMB 100.3 million from RMB 102.2 million for the second quarter of 2021. Revenues from small appliances and others decreased by 38.1% to RMB 118.5 million from RMB 191.5 million for the second quarter of 2021, primarily due to the product portfolio adjustment within this category and decreased demand for small appliance products. Gross profit was RMB 204.5 million compared to RMB 351.8 million for the second quarter of 2021. Gross margin increased to 22.1% from 21.2% for the second quarter of 2021, primarily driven by the company's continued efforts to shift the business and product mix toward higher gross margin products, partially offset by decreases in selling prices of some products due to product portfolio adjustment in this quarter. Total operating expenses decreased by 14.6% to RMB 264.6 million from RMB 309.7 million for the second quarter of 2021, primarily due to the year-over-year decrease in selling and marketing expenses. In more detail, research and development expenses increased by 20.4% to RMB 79.7 million from RMB 66.2 million for the second quarter of 2021, mainly due to the increase in research and development staff and related salaries and expenses, as well as the increased input in new product development. Selling and marketing expenses decreased by 24.6% to RMB 162 million from RMB 214.8 million for the second quarter of 2021, mainly due to decreases in marketing expenses, partially offset by increased expenses on advertising activities that enhance the company's brand recognition. General and administrative expenses decreased by 20.3% to RMB 22.9 million compared to RMB 28.8 million for the second quarter of 2021, primarily due to the decrease in estimated allowance for accounts and notes receivables recognized in the current period. Net loss attributable to ordinary shareholders of the company was RMB 39.6 million compared to net income attributable to ordinary shareholders of the company of RMB 46.1 million for the second quarter of 2021. Non-GAAP net loss attributable to ordinary shareholders of the company was RMB 33.9 million compared to non-GAAP net income attributable to ordinary shareholders of the company of RMB 59.5 million for the second quarter of 2021. Additionally, our balance sheet maintained its health. As of June 30, 2022, the company had cash and cash equivalents of RMB 816.3 million, restricted cash of RMB 46.8 million, short-term deposits of RMB 10 million, and short-term investments of RMB 237 million. Now let's turn to our outlook. For the third quarter of 2022, we currently expect net revenues to be between RMB 740 million and RMB 840 million. We estimate that the year-over-year change in revenues will be mainly due to the uncertainty pertaining to the potential effects of the COVID-19 recurrences, as well as the potential impact of overall market demand in the third 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, all of which are subject to change.

This concludes our prepared remarks. We will now open the call for a Q&A session. Our Founder and Mr. Thai will join this session and answer questions. Operator, please go ahead.

The first question today comes from Hildy Ling with Morgan Stanley. Please go ahead.

Hi, thank you, management, for the presentation. I have three questions, allow me to ask. So the first one is about the expectation for the second half of this year in terms of sales and margin expectation, and what do you think about the key drivers behind such sales expectation? So this is the first question. The second one is about the overseas market expansion or overseas sales. We are seeing that the macro has been quite volatile, but the European market is quite weak, but the U.S. market has been relatively more resilient and there seems to be a little bit of improvement in inflation as well or less pressure from that. What do you think about the overseas trends - overseas sales trends nowadays and what's your expectation in the second half of the year? The third question is about the robotic - robot vacuum segment. How is that performing in the first half of this year? And how do you see for this segment to perform in terms of the demand in the second half?

Okay. Thanks for Hildy's questions. For the first question regarding sales and margin expectations, we typically don't give specific guidance, especially under the macro environment with more uncertainties due to COVID-19 and the macro market, but we expect revenues to be driven from several perspectives. First, sales of our new high-end products have been increasing over the past several months and some SKUs hit their best sales during the major promotion season. We estimate our AI-centric premium products will help lead to long-term revenue growth. Second, we have been preparing to export additional product categories, which will partially mitigate the impact from the re-consumer finance and help drive growth in the short term. With respect to gross margins, we still estimate it to maintain a stable level, at least over 20% for the whole year. As we will continue to promote premium products with higher margins and take product portfolio adjustments, we expect the overall gross margin to remain at a reasonable level in the midterm. For the second question about overseas sales, we estimate that the overall overseas consumer demand will still be relatively weak not only in the U.S. but especially in Europe. Due to international geopolitics, increasing prices of crude oil and raw materials, alongside the falling euro exchange rate, the overall consumer sentiment in Europe is relatively low, and we expect this trend to continue into the second half of this year. While we are taking some actions to mitigate the impacts of weak consumer sentiment in overseas markets, first, we see that the Southeastern Asian market is relatively dynamic, and we see a growing market with great potential. Therefore, we will increase the sales of our products in Southeastern Asia. Second, in the following months, we will start to sell additional product categories, including more sweeper robots, which we believe could help drive growth for our overseas markets. We will share more details regarding this in due course. For the third question about our vacuum robot, the sales of our own branded sweeper robots were relatively weak compared to the same period last year, mainly due to the overseas market situation.

Sorry, allow me to follow up on a question. So in terms of the revenue and net profit contribution, how much of it is coming from the overseas market? And if we consider this going forward, is the company planning to expand - put more focus in the domestic market or put more focus on the overseas market?

I will quickly translate Mr. Chen's answer. We are quite optimistic about our overseas revenues for the second half of the year. As we mentioned before, aside from the cleaning products, we plan to introduce new categories of products into overseas markets. We expect the overseas revenue percentage to exceed 20%, although it was around 10% for the first half of the year.

Thank you very much. That's all from me.

Thank you for your presentation. My first question is how is the company's current cooperation with Xiaomi? What is the contribution from the top tier to Xiaomi in the company's revenue? What is the outlook for related future revenue growth? Will the future cooperation continue to expand or adjust? And my second question is, in terms of the smart home solution, what is the contribution of the new smart home solution to the company's revenue? Could you provide information about how the updated demand accounts for the revenue? My third question is, in the second quarter of 2022, was there any performance pressure brought from the real estate? How does the company view the impact from the real estate industry in the future in China?

Okay. Thank you for the questions. For the first question about the Xiaomi business, firstly, we always maintain stable cooperation with Xiaomi, and the revenue contribution from Xiaomi-branded business has been stable around 40% over the past several quarters, and we expect it to maintain at this level in the short to midterm. In terms of categories we cooperate on, despite scaling back on Xiaomi-branded sweeper robots, we don't have material changes in other categories we cooperate together. Currently, we cooperate on home water solutions, smart kitchen products, and some other small appliances. We will maintain the current cooperation and explore further reciprocal opportunities to expand cooperation into additional categories. And for the second question about the home solution, first of all, the IoT home solution offering is one of our selling metrics with bundled sales and certain services and is not separately calculated as a revenue disclosure sector. The premium bundled offerings we recently started promoting mainly through our offline merchants. As we previously shared, our offline merchant partners had whole-home solution orders ranging from RMB 200,000 to RMB 400,000 with customers in major cities. We accomplished multiple high-end whole-home solution orders exceeding RMB 200,000 and RMB 300,000 in several other cities in the second quarter. Regarding your question about the impact from real estate, we are not directly impacted by it as we don't have direct cooperation with real estate or in terms of borrowing for households. However, our sales are indirectly hindered by the overall demand for home appliances in new apartments. We observed the impact on the overall industry's trending sales as some cities have implemented policies to stimulate the real estate industry. It is important to note that the smart home demand is becoming less dependent on real estate due to an increasing number of young people replacing old appliances with smart home products.

Okay. I will quickly translate our Founder's response. For the first question, our cooperation with Xiaomi is quite stable at present. Recently, we are working on new collaborations to introduce new categories to the market, and we look forward to the Xiaomi part revenue increasing our total revenue. Regarding the second question, we are hopeful that, despite potential impacts, sales should improve in the competitive environment, and we are considering bundled offerings to enhance revenue contribution.

That concludes our response to your questions. Thank you.

As there are no further questions, 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.

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