Viomi Technology Co., Ltd Q3 FY2022 Earnings Call

Hello, ladies and gentlemen. Thank you for standing by for the Viomi Technology Company Limited Earnings Conference Call for the Third Quarter of 2022. 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. Claire Ji from the company's IR department. Please go ahead, Claire.

Thank you. Hello, everyone, and welcome to Viomi Technology Co., Limited's earnings conference call for the third quarter of 2022. 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 of the company's website at ir.viomi.com. Participating in today's call are Mr. Chen Xiaoping, the Founder, Chairman of the Board of Directors and 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 a Q&A session. Before we continue, please note that 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 this and other risks and uncertainties is included in the company's annual reports on Form 20-F and other filings with the U.S. 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 audited non-GAAP financial measures. In addition, 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. Chen Xiaoping. 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 quickly translate our Founder's remarks before discussing our financial performance for the third quarter of 2022. Hello, everyone. Thanks for joining our third quarter 2022 earnings conference call. In the third quarter, our total revenue reached RMB685.8 million, which is below our previous guidance due to ongoing weak market demand and the resurgence of the pandemic. Additionally, the complete halt of sales of Xiaomi branded sweeper robots in 2022 negatively affected our third quarter revenue. Furthermore, the adjustment of our product portfolio and the increased share of revenue from categories with lower gross margins resulted in a temporary decline in overall gross margin during this quarter. However, we anticipate that gross margin will return to a normal level in the fourth quarter. To enhance our long-term product competitiveness and brand awareness, alongside our ongoing elevator and print advertising campaigns, we launched a video interview program with Langchao Studio and Gongmao Home Appliances. In this program, we explored how IoT home solutions are transforming the future homes of Chinese households, featuring discussions with Zhang Quanling, a senior media specialist, and Li Feng, the Chairman of Gongmao Home Appliances. During the interview, we addressed the topic of Whole-Home Intelligence and responded to Yi Lijing's inquiries about smart development, providing detailed information on our comprehensive IoT home solution and our approach to smart homes with four core capabilities. As smart home appliances now encompass all scenarios, more consumers are eager to experience future living right away. Despite our investment in product innovation and branding leading to a temporary setback amid challenging macro conditions, we believe that the expanding user base of smart home appliances will soon signal a pivotal moment for the industry. Viomi has positioned itself to leverage this demand by completing essential hardware and software integrations and upgrades to truly create smart homes. Our engagements with consumers and our exploration of smartification's future will encourage more individuals to adopt smart home solutions, enhancing our brand influence and fostering industry advancement. Separately, we have made significant progress in product innovation, brand promotion, and channel expansion in recent months. With our effective long-term strategy, we are fortifying our brand positioning in cutting-edge technology. In product innovation, we recently held our 'AI: Helpful 2.0' online software launch event on October 25th. The event concentrated on our software upgrades and product integration across four key areas: healthcare, energy conservation and environmental protection, active intelligence, and natural interactions, thereby enhancing our IoT home solution from a software perspective. On the hardware front, we introduced a range of new smart home appliances, including Alpha, our AI range hood with smart suction capabilities; Master Pro, our 1200G Quanxian AI water purifier with combined heat purification; Alpha 3 Pro, our AI sweeping robot that comes with an all-purpose base station; and Super 2 Max, our AI gas water heater featuring intelligent temperature control. In the smart home products domain, we launched Super 2 AI smart door locks with ultra-wide-angle digital peepholes. These new products received positive feedback and gained significant consumer recognition during their pre-sale and crowdfunding phases. By integrating our software and hardware, we offer a wider range of home use scenarios and smarter user experiences, empowering more users to enjoy the conveniences of IoT home solutions. Our ongoing product innovation is bolstered by enhanced research and development capabilities, along with our commitment to building a deep talent pool. In August, we hosted our first annual Scientific and Technological Meeting to reward our innovation teams and individuals, including a technology superstar prize that included a Tesla car, to encourage ongoing research and development enhancements. Additionally, after receiving approval to establish our Guangdong Work Station in the first half of 2022, we were authorized to set up a post-doctoral workstation in Foshan. Looking ahead, we will persist in collaborating with universities and professional institutions to cultivate top talents for society, incubate smart home initiatives, and advance the overall smart home industry. By the end of the third quarter, we have filed for over 5,500 global patents and accumulated 3,500 authorized patents globally, in addition to more than 2,100 innovations recognized among the Fortune series top 20 enterprises for scientific and technological advancement. We ranked 38th, 60th, and 73rd in the Fortune series top 100 manufacturing, top 100 private enterprises, and top 100 enterprises in 2022, highlighting our technological innovation capacity and overall strength. Furthermore, in the third quarter, we implemented our largest store and value merchant channel strategy, opening new Viomi flagship stores ranging from 200 to 400 square meters in provinces like Hebei, Anhui, Hubei, and Fujian. Concurrently, the sales volume of our bundled home solutions has grown steadily, with various solution options catering to diverse consumer demands, as our offline merchants signed whole-home solution orders worth tens of thousands to hundreds of thousands of RMB across Hunan, Guangdong, Ningxia, and other regions during this quarter. Regarding our international business, we presented several new products at IFA 2022 in Berlin in September, marking our debut at a major consumer electronics marketplace, where we garnered positive feedback from the European market. Looking forward, we aim to diversify our overseas product offerings and anticipate significant growth in export sales. As we move ahead, we will focus on three operational optimization strategies: First, we will streamline our product SKUs, adjust resource allocation, and prioritize more technologically advanced products while refining the smart product landscape. Second, we will continuously enhance our operational structure and implement rigorous cost control measures. Third, we will maintain our solid long-term development strategy with adequate funding reserves to support operations while creating lasting value for our users and shareholders. Thank you. That concludes our Founder's remarks.

Thanks, Chen. Now I will go over the details of the unaudited financial results for the third quarter of 2022. Net revenues were RMB685.5 million compared to RMB1,056.5 million for the third quarter of 2021. Net revenues were below the company's previous guidance. The decline was mainly due to the ongoing product portfolio adjustments in some categories as well as overall weakened consumer spending. Revenues from the IoT @ Home portfolio decreased by 41.6% to RMB376.0 million from RMB643.5 million for the third quarter of 2021. The decline was primarily due to MSKU adjustments for some categories, as well as the complete cutoff of sales of Xiaomi-branded sweeper robots. Revenues from home water solutions decreased by 23.6% to RMB119.9 million from RMB157.0 million for the third quarter of 2021, driven by decreased demand for water purifiers. Revenues from consumables decreased by 11.8% to RMB70.2 million from RMB79.6 million for the third quarter of 2021, consistent with the decreased demand for water purifiers. Revenues from small appliances and others dropped by 32.2% to RMB119.7 million from RMB176.5 million for the third quarter of 2021, primarily due to product portfolio adjustments within these categories. Gross profit was RMB135.9 million compared to RMB239.7 million for the third quarter of 2021, resulting in a gross margin of 19.8%, compared to 22.7% for the third quarter of 2021. This decline was primarily due to the temporary increase in the proportion of revenue from product categories with relatively low gross margins. Total operating expenses fell by 16.5% to RMB242.5 million from RMB290.3 million for the third quarter of 2021, mainly due to the year-over-year decrease in selling and marketing expenses. In more details, research and development expenses decreased by 19.1% to RMB66.5 million from RMB82.2 million for the third quarter of 2021, primarily due to reduced expenses in product development and decreases in research and development personnel-related salaries. Selling and marketing expenses decreased by 22% to RMB143.1 million from RMB183.4 million for the third quarter of 2021, also mainly due to decreases in sales-related expenses and personnel costs. General and administrative expenses increased by 33% to RMB32.9 million compared to RMB24.7 million for the third quarter of 2021, primarily due to an increase in the estimated allowance for accounts and notes receivables recognized in the current period. Net loss attributable to ordinary shareholders of the Company was RMB79.6 million compared to a net loss attributable to ordinary shareholders of the Company of RMB29.3 million for the third quarter of 2021. Non-GAAP net loss attributable to ordinary shareholders of the Company was RMB78.7 million compared to a non-GAAP net loss attributable to ordinary shareholders of the Company of RMB22.2 million for the third quarter of 2021. Additionally, our balance sheet remains healthy. As of September 30, 2022, the Company had cash and cash equivalents of RMB760.1 million, restricted cash of RMB65 million, short-term deposits of RMB83.7 million, and short-term investments of RMB259.5 million. The details of our unaudited results for the third quarter 2022 were introduced as above. Thank you.

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

Thank you. Today's first question comes from Mark Zhang with Morgan Stanley. Please proceed.

Hi, thanks management for taking my question. I have two questions. The first one, can you please give us more insight or color on the SKU adjustment in the third quarter for robotic sweepers? And my second question is about the recent trend of robotic sweepers in the China and overseas market. Are you expecting demand to remain weak in the fourth quarter and 2023? Thank you.

Yes, thanks for Mark's question. For the first question about the SKU adjustment, as we introduced in the previous call, we are in a transactional product strategy and brand positioning in an ongoing process. The cleaning of certain products and the integration of new products during this weak demand period puts pressure on our operating results. It might take longer for the new products to be accepted by the market. We are promoting and introducing more premium and high technology products to the market, and we emphasize bundle sales, offering one-stop home solution products. For the second question about the overseas market, in the third quarter, with the impacts of international geopolitics and foreign exchange rates persisting, overall consumer sentiment in Europe remains low, adversely affecting our overseas sales. However, we started selling more product categories beyond sweeper robots, such as air conditioners, refrigerators, washing machines, and heaters. Our overseas sales are expected to recover in the coming season. As we mentioned, we participated in IFA 2022 in Berlin in September for the first time, which is one of the most significant technology marketplaces for the consumer and electronic industries. We showcased several new products to the European consumers and franchises and received positive feedback. Additionally, we see the Asian markets softening but still holding great potential, and we are actively exploring new franchises in these areas. Thank you.

And so, can I just have a quick follow-up? So in terms of demand do you expect the overall demand in 2023 to rebound similarly to what you mentioned for the fourth quarter? Thank you.

Sorry, you mean the expectation for the fourth quarter?

Yes, I mean both fourth quarter and 2023 please? Thank you.

Okay. Due to the complex situation of COVID-19 and weak consumption in recent quarters, we tend to be more prudent with our estimations and guidance. As far as we can see, the overall popularity of the Double Eleven Shopping Festival is not as strong as last year, and the sales scale of Q4 is expected to decline on a year-over-year basis. Regarding gross margins, we estimate it will maintain a stable level for the whole year, let's say, above 20%. We are continuously working on operational optimization; both the structure and number of SKUs have been optimized in an orderly manner. We continue to refine our operational structure and implement disciplined cost control measures as mentioned as well. Thank you.

Thank you. Our next question comes from Alex Wang with CICC. Please go ahead.

Thank you, Viomi. I have three questions for you. My first question is about the overseas market. What is the overseas revenue and its growth rate? What proportion do overseas revenues represent in sales, and what is the outlook for overseas demand?

Can you please clarify if that is one question or two questions?

Three questions.

Three questions and this is the first question, thank you.

Okay. As we mentioned earlier, in the third quarter, international geopolitics and euro exchange rate fluctuations impacted our overseas sales. We began selling more categories, as we mentioned before. Going forward, we will keep enriching overseas offerings with additional home appliance product categories and expect a breakthrough in the scale of export sales. The proportion of overseas revenues will be shared in the future, yes.

Thank you. My second question concerns the strategy regarding premium new products and solutions. Given the relatively weak demand in both the Chinese and overseas markets, how does Viomi perceive demand in China moving forward? Will Viomi consider making adjustments to its strategy?

Okay, I'll quickly translate our Founder's answer. Firstly, both the domestic and overseas market environments, as we can see, are shrinking and market demands are sluggish. Secondly, as we can observe, the Western and e-commerce markets are coming to a balancing point. In the domestic market, we see fast development in many areas, particularly in rural areas, leading to more demand among the younger generation. Our strategy is to face the situation and meet the challenge: first, we will develop more medium-level products with price advantages; and secondly, we will enrich our overseas product portfolios and deepen our engagement in the European market. Thank you.

Thank you for the Founder's answer and the translation. My last question is regarding the cooperation with Xiaomi. What is the proportion of revenue from Xiaomi in the third financial quarter? Is the cooperation based solely on water purifiers, or are there other categories that will also collaborate with Xiaomi? What are the arrangements for future cooperation?

The proportion of revenue from Xiaomi in the third quarter is around 40%. As we mentioned earlier, we gradually decreased the Xiaomi brand involvement in our robotics business since early 2021 and completely cut off this business in 2022. Currently, the major product categories we cooperate on with Xiaomi include our water purifiers, smart kitchen products, and small appliances like peephole structures. Recently, certain models of Xiaomi-branded water purifiers supplied by us have achieved remarkable sales in the market. Looking ahead, we will maintain stable cooperation with Xiaomi and explore further reciprocal opportunities in additional product categories.

Thank you.

I will quickly complete Mr. Chen's answer. Our cooperation with Xiaomi involves three aspects: firstly, our partnership with water purifiers, where the revenue amount is stable, and we are working on new SKUs; secondly, we are expanding the order categories for smart kitchen appliances; and thirdly, we are discussing smart home products for future collaboration. Thank you.

Thank you. And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Claire for any additional or closing comments.

Okay. 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 The Piacente Group, the company's Investor Relations consultant. Thank you.

Ladies and gentlemen, this concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.