Viomi Technology Co., Ltd Q4 FY2022 Earnings Call

Hello, ladies and gentlemen, thank you for standing by for Viomi Technology Co., Ltd.'s Earnings Conference Call for the Fourth Quarter and Full-Year 2022. At this time, all participants are in listen-only mode. Today's conference call is being recorded. I would now like to turn the call over to your host, Miss Claire Ji, the IR Director of the company. Please go ahead, Claire.

Hello, everyone. And thank you, Rocco. And welcome to Viomi Technology Co., Ltd.'s earnings conference call for the fourth quarter and full-year 2022. As a reminder, this conference is being recorded. The company's financial and operating results were issued in a press release earlier today and are posted online. You can download the earnings press release and sign up for the company's email distribution list by visiting the IR section of the company's website at ir.viomi.com. Participating in today's call is Mr. Xiaoping Chen, the Founder, Chairman of the Board of Directors and Chief Executive Officer. The company's management will begin with prepared remarks, and the call will conclude with a Q&A session. Before we continue, please know that today's discussion will contain forward-looking statements made under the safe harbor provision of the US 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 as filed with the US Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements except as required by law. Please also know that Viomi's earnings press release and this conference call include a discussion of unaudited GAAP financial information as well as unaudited 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. And I will quickly translate our founder's remarks before discussing our financial performance for the fourth quarter and full-year of 2022. Hello, everyone. Thank you for joining us today for our fourth quarter and full-year 2022 earnings conference call. Due to the adverse impact of the pandemic and the macro headwinds, we experienced a year-over-year decline in revenue in the fourth quarter, and our business scale was greatly affected by external factors and strategic adjustments throughout 2022. Nevertheless, our gross margin in the fourth quarter increased by 3.2% quarter-over-quarter in the fourth quarter of 2022, benefiting from our product portfolio optimization efforts. Our full-year gross margin in 2022 also remained stable compared with 2021 despite fluctuations throughout the year. In the fourth quarter, facing uncertainties in the external environment, we focused on accelerating the recovery of our business scale and optimizing our operations. First, to holistically strengthen our product portfolio, we leveraged our competitive advantages and continued to enhance our core product categories with upgraded functionalities of Viomi's longest-standing category, our AI water purification product, which led the industry with its advanced technology. We grew sales of this product by 6% year-over-year and 133% quarter-over-quarter in the fourth quarter despite the year's challenges, reflecting our success in strengthening our product competitiveness. Going forward, we will redouble our efforts to optimize distribution channels, deepen our existing technological advantages, and further drive our products' market penetration. In addition, to improve our operating efficiency, we implemented more disciplined cost control measures. As a result, both selling and marketing, research and development expenses decreased year-over-year in the fourth quarter. In particular, selling and marketing expenses as a proportion of revenue narrowed compared with that in the second quarter of 2022 on a similar revenue scale. We will continue to optimize costs, streamline organizational structure, and improve operational efficiency. While refining our operations, we also remain committed to bringing more useful and user-friendly whole house smart solutions to customers and continuously improving the intelligent experience of our products. In October, we hosted our virtual 2022 Fall Software Launching Event, 'AI: Helpful 2.0'. This online event focused on software upgrades and product iteration across four dimensions, including healthcare, energy conservation and environmental protection, proactive intelligence, and natural interaction, further improving our one-stop IoT home solutions from the software side. In November, Viomi's proprietary one-stop IoT home solution platform, HomeMap app, was awarded the Precision Science and Technology Award by the Ministry of Science and Technology and the National Office for Science and Technology Awards of China. Meanwhile, we launched a series of new AI smart home appliances, including one of our patented technologies, Super 2 Max and AI Range Hood with Intelligent Vision, which won a silver award in the 2022 Greater Bay Area High-Value Pattern Cultivation Layout Competition. We also introduced Master 3, our AI integrated washer and dryer, featuring an ultra-slick fully embedded design, and Master Pro, our 1200-gallon Quanxian AI water purifier with integrated purification. In the smart home devices category, we unveiled our Super 2 AI smart door lock with an ultra-wide-angle digital peephole. Our solid progress in product innovation across both software and hardware further underscores our business philosophy – focusing on products and technological innovation to provide customers with a useful and user-friendly whole house intelligent experience. In addition to our product advancements, we constantly strive to optimize our one-stop IoT home solution through ongoing technological innovation and talent development. After receiving approval to establish a doctoral workstation in the first half of 2022, in October, we were also successfully authorized to set up a postdoctoral workstation. Moving forward, Viomi will cooperate with universities and professional institutions through cumulative top talents in the industry, incubate whole house intelligent projects, and promote the development of the whole house intelligence industry. In November 2022, we were once again included in the state Intellectual Property Office List of National Intellectual Property Demonstration Enterprises from 2022 to 2025, reflecting our continuous efforts in innovation and intellectual property management. As of the end of the fourth quarter, we have applied for more than 6,100 global patents and accumulated 3,800 authorized patents worldwide, along with more than 2,500 inventions. These achievements are a testament to our technological innovation capabilities and our comprehensive strengths. Despite the challenging environments stemming from repeated COVID-19 outbreaks as well as the negative impact of rolling COVID policies on our store opening progress, sales of our bundled solutions by our offline merchants still reached new heights in 2022. Our flagship stores ranked among the best in the country. Our offline merchants' bundled solutions orders ranged from RMB 100,000 to over RMB 400,000 per unit, clearly demonstrating the growing popularity of Viomi's one-stop IoT home solution nationwide. Furthermore, in the fourth quarter, we successfully introduced a variety of products to overseas markets, such as air conditioners, washing machines, and refrigerators. Moving forward, this additional product category will serve as a new growth driver for our overseas business. In summary, we still see many uncertainties on the horizon. In the post-pandemic year, with consumption confidence recovering, we will adhere to our steady development strategy, concentrating on three factors as we continue to optimize our operations. First, continue to strictly control expenses and improve operational efficiency. Second, focus on core product categories and optimize product structure. And finally, extend domestically and introduce new product categories in overseas markets to accelerate the recovery of our business scale. As we forge ahead, we will continue to maintain sufficient financial reserves to consolidate brand strength, propel the recovery of business profitability, and provide strong support for brand development as we strive to achieve healthy and sustainable growth, laying the foundation for delivering long-term returns to our users and shareholders. Thank you. And that concludes our founder's remarks.

Now I will go over our fourth quarter and full-year 2022 unaudited financial results in more detail. Net revenues were RMB 910.5 million compared to RMB 1,332.8 million for the fourth quarter of 2021. The decline was mainly due to a decrease in revenues from IoT@Home portfolio and small appliances and others. Revenues from the IoT @ Home portfolio decreased by 48.1% to RMB 359.2 million from RMB 692 million for the fourth quarter of 2021. The decline was primarily due to SKU adjustments for smart kitchen products. Revenues from home water solutions increased by 6% to RMB 279.2 million from RMB 263.3 million for the fourth quarter of 2021. The increase was primarily driven by an increase in revenues from larger flux water purifiers as a result of the product portfolio adjustment within this category. Revenues from consumables decreased by 3.5% to RMB 116.2 million from RMB 120.4 million for the fourth quarter of 2021. Revenues from small appliances and others decreased by 39.3% to RMB 155.9 million from RMB 257.1 million for the fourth quarter of 2021, primarily due to the continued product portfolio adjustment within this category. Gross profit was RMB 209.7 million compared to RMB 341.5 million for the fourth quarter of 2021. Gross margin was 23% compared to 25.6% for the fourth quarter of 2021. The decline was primarily due to a decrease in the selling price of certain cleanup products as a result of our product portfolio adjustments. The operating expenses decreased by 19.4% to RMB 274.7 million from RMB 340.7 million for the fourth quarter of 2021, primarily due to a decrease in selling and marketing expenses, partially offset by an increase in general and administrative expenses. In greater detail, research and development expenses decreased by 23.6% to RMB 74.7 million from RMB 97.8 million for the fourth quarter of 2021, mainly due to a decrease in research and development experts and related salaries, as well as the company's continued efforts in R&D efficiency improvement. Selling and marketing expenses decreased by 29.7% to RMB 151.1 million from RMB 214.8 million for the fourth quarter of 2021, mainly due to a decrease in logistics and marketing expenses. General and administrative expenses increased by 74.5% to RMB 48.9 million compared to RMB 28 million for the fourth quarter of 2021, primarily due to an increase in the estimated allowance for accounts and notes receivables from a third-party client recognized in the same period. Net loss attributable to ordinary shareholders of the company was RMB 106.3 million and non-GAAP net loss attributable to ordinary shareholders of the company was RMB 101.6 million. The difference between net loss from operations and net loss in 2022 was mainly due to an increase in the valuation allowance of deferred tax assets provided, which caused an increase in income tax expenses. Additionally, our balance sheet remains healthy. As of December 31, 2022, the company had cash and cash equivalents of RMB 737.1 million, restricted cash of RMB 76.1 million, short-term deposits of RMB 171.5 million, and short-term investments of RMB 197.1 million. Next, let's briefly discuss some key financial results for full-year 2022. Net revenues were RMB 3,232.7 million compared to RMB 5,303.8 million for 2021. Revenues from the IoT @ Home portfolio decreased by 52.4% to RMB 1,619.9 million from RMB 3,401.0 million for 2021. Revenues from home water solutions decreased by 8.3% to RMB 681.1 million from RMB 742.9 million for 2021. Revenues from consumables decreased by 2.4% to RMB 358.4 million from RMB 367 million for 2021. Revenues from small appliances and others decreased by 27.7% to RMB 573.3 million from RMB 792.9 million for 2021. Gross profit was RMB 737.1 million compared to RMB 1,198.1 million for 2021. Gross margin improved to 22.8% from 22.6% for 2021. Total operating expenses decreased by 10.7% to RMB 1,036.5 million from RMB 1,160.5 million for 2021. In more detail, research and development expenses decreased by 3.8% to RMB 300 million from RMB 311.8 million for 2021. Selling and marketing expenses decreased by 18.1% to RMB 614.9 million from RMB 751 million for 2021. General and administrative expenses increased by 24.5% to RMB 121.7 million compared to RMB 97.7 million for 2021. Net loss attributable to ordinary shareholders of the company was RMB 275.5 million and non-GAAP net loss attributable to ordinary shareholders of the company was RMB 256 million. And this concludes our prepared remarks. We will now open the call for Q&A. Our founder and I will join this session and answer questions. Operator, please go ahead.

Today's first question comes from Marcus Liang with Morgan Stanley.

I have three small questions. Firstly, can I ask how sales are trending year-to-date for January and February 2023? And my second question, with robot vacuum competitors moderating their prices, how does Viomi see the market growth going forward and its market share also? My last question is, how do you see your overseas expansion, and what are you focused on? Also, how is the split between China and overseas revenue in 2023?

Can I recall your first question – first and second one?

The first question is, how is the company trending year-to-date in January and February 2023? And the second question would be, as your robot vacuum competitors are lowering prices, how do you see market growth going forward and your market share?

In the past few months of 2022, we have observed a certain degree of recovery in our offline channel, which is attributable to the overall offline consumption rebound. However, in the past month, due to the repeated impact of the epidemic and a number of our offline dealers, stock has decreased, along with the inventory backup of offline distributors leading to a decrease in the volume of shipment of our offline sales. But on the other hand, we opened more than 100 new stores during 2022, most of which are located in the prep decoration marketplace with over 200 square meters of store area. We are steadily proceeding with our channel expansion strategy by focusing on larger stores and better merchants. Based on the overall situation up to now, the offline scale has steadily increased month over month, and the offline sales are expected to achieve a growth rate of over 30% compared to 2022. Regarding your second question about the robotic vacuum cleaners, the scale of overseas sales decreased significantly, and there are negative impacts we all know, like the historically high price of natural gas, geopolitics, and the generally subdued consumption atmosphere in the European market in 2022. In the domestic market, our robotic vacuum cleaners are mainly sold online, where the leading brands in this sector account for a large market share, and this sector is already under fierce competition. For our one-stop whole house intelligent solution, we will keep this product line and provide several models to meet customers' diversified needs. In the meantime, we will further optimize distribution channels, deepen our existing technology advantages in areas like water purifiers, and more. I believe your last question concerns overseas expectations. Yes, I mentioned earlier that we saw our overall revenue proportion from the overseas market decrease by over 50% in 2022. However, in the second half of last year, we participated in the IFA 2022 in Berlin in September for the first time, which is the world's most significant technology marketplace for the consumer and electronics industries. We showcased a number of new products to European customers and franchises and received much positive feedback. Additionally, we accomplished the certification and assembly of air conditioners, washing machines, and refrigerators in European countries, as well as water purifiers and smart door locks in Southeast Asian countries. We believe that with the enriched product categories and expanded reach, hopefully, our overseas sales would achieve a recovery and mitigate the declining sale of smart cleaning products. In the past few months of 2022, our overseas sales of air conditioners and other home appliance products reached more than RMB 60 million. We aim for overseas sales to double in 2022 compared with 2021.

And our next question today comes from an unidentified participant with CICC.

I have three questions. The first one is how was the overseas market performing in 2022? Was it better or worse than the Chinese market? What is the outlook for the overseas environment this year?

Your first question, we just discussed a little about the overseas market performance in 2022, which was impacted by the historically high price of natural gas and geopolitics, leading to subdued expectations in the consumption market in European countries. As we used to focus on European markets with comparatively simple product lines, overseas sales in 2022 were heavily impacted and decreased by over 50%. However, as we mentioned earlier, we have enriched our product categories and expanded to regions like Southeast Asia, and we hope our overseas sales will recover. Regarding your question about the domestic market growth, the domestic business in this quarter decreased about 30% on a year-over-year basis. Both online and offline channels have been significantly affected by the negative result of rolling COVID policies. However, we see some optimizations in revenue proportion by products, with a larger percentage of revenue contributed by water purifiers. Our overall gross margin improved more than 3% quarter-over-quarter. Looking forward, we will focus on our core product categories with technological advantages, especially water purifiers, and we will double our efforts to optimize distribution channels, both online and offline. In regards to the channels, due to the repeated impact of the epidemic and a number of our offline dealer stores have decreased, alongside the inventory backup of offline distributors, we have seen a decline in the volume of shipment of our offline sales over the past year. However, on the other hand, we have opened over 100 new stores in 2022, most of which are located in the prep decoration marketplace with over 200 square meters of store area. We are steadily proceeding with our channel expansion strategy, and based on the overall situation, our offline scale has steadily increased month over month, and offline sales are expected to achieve a growth rate of over 30% compared to 2022.

Thank you. And ladies and gentlemen, this concludes today's question-and-answer session. I'd like to turn the conference back over to management 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 through our investor relations consultant. Thank you.

Thank you, everybody. 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.