Viomi Technology Co., Ltd Q2 FY2023 Earnings Call

Hello, ladies and gentlemen. Thank you for standing by for Viomi Technology Company Limited Earnings Conference Call for the First Half of 2023. At this time, all participants are in listen-only mode. Today’s conference is being recorded. I will now turn the call over to your host, Ms. Claire Ji, the IR Director of the company. Please go ahead, Claire.

Thank you, Allison, and hello, everyone. Welcome to Viomi Technology Company Limited earnings conference call for the first half of 2023. As a reminder, this conference is being recorded. The company’s financial and operating results were issued in the 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 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. Jinling Zhang, the Head of our Capital Markets 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 report on Form 20-F and other filings as filed 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 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. Xiaoping Chen. Mr. Chen will deliver his remarks in Chinese, followed immediately by English translation. Mr. Chen, please go ahead.

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 Founder’s remarks before discussing our financial performance for the first half of 2023. Hello, everyone. Thank you for joining us today on our earnings conference call for the first half of 2023. Constrained by both lukewarm consumer sentiment and the company’s strategic adjustments during the first half of 2023, our total revenue recorded RMB1.3 billion, representing a decrease of 20% year-over-year, while gross margin declined by 1.9 percentage points year-over-year. However, as we continue to streamline our organizational structure and enhance operational efficiency, our operating results are on the way to recovery. We see a year-over-year decline of 30.3% in operating expenses and a 1.4-percentage-point decrease in net loss margin. Over the past six months, we enhanced our product mix by focusing on core product categories, driving an increase in the revenue contribution of our water purification products to 22% from 14% a year ago. We believe that optimizing our product category structure will benefit the sustainability of our long-term development. Additionally, we have achieved market-leading industrial chain capabilities in water purification products. We have independently mastered advanced filtration technology and material manufacturing processes, empowering us to research, develop, and produce core components. Moreover, we have developed a comprehensive set of proprietary solutions, including the capability of complete machine assembly, customized automated product production lines, and end-to-end data collection and analysis. In July, Guangdong Lizi Technology Company Limited, one of our subsidiaries, was designated as the national-level specialized and innovative 'Little Giant' enterprise, owing to its remarkable R&D and innovation capabilities in the water purification industry. As one of the highest-level and most authoritative nationwide enterprise evaluation ratings, this honor recognizes and affirms our comprehensive strength in the industrial chain of water purification. Regarding our other product categories, we utilized a flexible combination of OEM and independent R&D to lay out our product mix. Meanwhile, we constantly deepened our investment in and control over core technologies to develop differentiated, intelligent, and whole-house products. On April 28, 2023, we introduced a series of high-tech products at our Spring New Product Launch Event, featuring enhanced iterations of our one-stop IoT home solutions, such as our Master 3 Pro formaldehyde-removing AI vertical air conditioner and Super 2 Pro AI vertical air conditioner equipped with a fresh air system, which improves indoor air quality to protect users’ health. We also debuted our Master 3 ultra-thin built-in refrigerator and washing machine set, which is currently setting a new trend in the home decoration industry, as well as Master 3 Pro gas-electric hybrid water heater. Our brand-new intelligent lighting system within our smart home devices category also made a debut. Turning to our brand, we are proud to be included on the list of 2023 China’s Top 500 brands, ranked 443rd with a brand valuation of RMB3.385 billion. There are only two brands in the smart home sector that made it onto this ranking. We are honored to be one of them. This is powerful recognition of our brand's leading position in the industry. As our offline channels stabilize, with the offline consumer market recovering gradually, we participated in several large-scale acquisitions, including the China Appliance & Electronics World Expo AWE held in Shanghai in April, Shenzhen Creative Week held in May, and the China International Building Decoration Fair held in Guangzhou in July. During these events, we showcased a comprehensive whole-house solution to our offline distributors and attracted consumers to visit and experience future living solutions, supporting the recovery of our offline sales. Furthermore, we enriched our product offering for our overseas markets, with new categories accounting for over 60% of our revenue overseas, effectively compensating for the decline in sales of smart cleaning products in those markets. With the widespread adoption of new energy vehicles and smart terminal devices, as well as breakthroughs in generative AI technology, we believe the era of intelligence has arrived. Integrating AI's power into whole-house intelligence will not only enable a revolutionary user experience but also inspire unprecedented creativity across the whole-house intelligent industry. With our high-tech and fashionable brand positioning, we see Viomi positioned at the forefront of this revolution. By steadily improving our products’ perception of space and environment and upgrading our AI voice interaction technology, we have successfully transitioned our whole-house intelligence from the era of control, which emphasizes connectivity, to the era of perception, characterized by active intelligence and proactive service. Moving forward, we will continue to explore and capitalize on our strengths to optimize our operations, concentrating on the following three areas. First, we will further deepen our roots in the water purification industry and roll out more industry-leading products, creating value for consumers with higher quality, more advanced technology, and more comprehensive services. Second, we will keep focusing on fine-tuning our product mix and improving and iterating our whole-house intelligent product matrix to elevate our products’ intelligent experience and deliver more helpful and user-friendly one-stop IoT home solutions. Last but not least, we will deepen our industrial layout, heighten our cost controls, increase our operational efficiency, and strengthen our product competitiveness to further improve operational performance. At the same time, we will maintain sufficient capital reserves to support these goals and consolidate our brand to drive robust and sustainable growth, sparing no effort to create long-term value for all of our users and shareholders. Thank you. That concludes our Founder’s remarks. I will now turn the call over to our Head of Capital Markets, Mr. Jinling Zhang, to discuss our financial performance. Thank you.

Thank you, Mr. Chen and Claire, and thanks to everyone for joining us today. I will go over our unaudited financial results for the first half of 2023. Our net revenues were RMB1,304.4 million, compared to RMB1,665.4 million for the same period last year. The decline was mainly due to a decrease in revenues from the IoT@Home portfolio, as well as small appliances and others. Revenues from the IoT@Home portfolio decreased by 21.8% to RMB691.7 million from RMB884.7 million for the same period of 2022. The decline was primarily due to the streamlining of SKUs in smart refrigerators and smart sweeper robots. Revenues from home water solutions increased by 1.7% to RMB286.6 million from RMB281.9 million for the same period of last year. The increase was primarily driven by our efforts to focus on water purification products. Revenues from consumables decreased by 21.0% to RMB135.9 million from RMB172.1 million for the same period of last year. The decrease was primarily due to the reduction in the sales volume of water purifier filters sold to Xiaomi. Revenues from small appliances and others decreased by 36.1% to RMB190.2 million from RMB297.6 million for the same period of 2022, primarily due to ongoing product portfolio adjustments within this category. Gross profit was RMB286.8 million, compared to RMB391.5 million for the same period of 2022. Gross margin was 22.0%, compared to 23.9% for the same period of 2022. The decline was primarily due to a lower selling price of certain cleanup products and was partially offset by increasing sales of higher gross margin products as a result of product portfolio adjustments. Total operating expenses decreased by 30.3% to RMB361.8 million from RMB519.4 million for the same period of 2022, mainly due to the streamlined organizational structure and overall improved operational efficiency. In greater detail, research and development expenses decreased by 31% to RMB109.5 million from RMB158.7 million for the same period of 2022, mainly driven by a decrease in personnel costs and optimization of our ongoing R&D projects. Selling and marketing expenses decreased by 33.4% to RMB213.5 million from RMB320.7 million for the same period last year, primarily due to a reduction in marketing expenses, logistics expenses, and sales personnel costs. General and administrative expenses decreased by 2.8% to RMB38.8 million, compared to RMB39.9 million for the same period of 2022, primarily due to a decrease in personnel costs, partially offset by an increase in the estimated allowances for accounts and notes receivables. Net loss attributable to ordinary shareholders of the company was RMB54.9 million, and non-GAAP net loss attributable to ordinary shareholders of the company was RMB53.7 million. Despite the decrease in revenue scale, our loss from operations narrowed by 43.6%, indicating an improvement in our operational efficiency. Additionally, our balance sheet remains healthy. As of June 30, 2023, the company’s cash and cash equivalents amounted to RMB691.5 million, restricted cash of RMB128.1 million, short-term deposits of RMB260.2 million, and short-term investments of RMB64.3 million.

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

Thank you. Our first question today will come from Jingsheng Liu of CICC. Please go ahead. Once again, we have a question from Jingsheng Liu from CICC. Please go ahead.

Okay. Sorry. Thanks for the management, and this is Jingsheng Liu from CICC. I have three questions about the results, and I will ask them one by one. So the first question is, how did the quarterly revenue perform in Q1 and Q2? Have we seen any improvement from the consumer demand, and which categories showed good sales in the first half of 2023? Thank you. That’s my first question.

Thank you, Ms. Liu, for your question. As the first quarter typically comes at a flat season with lower revenue scale, it takes around 40% of the revenue in the first half of 2023. In the first quarter, we pushed hard on SKU streamlining and down-market product clearance, which resulted in a lower profit margin than the same period last year. On the positive side, the total SKU number decreased by 30%, which helped us prepare better for the big promotion season. Regarding market demand during the 618 promotion season, we did observe a recovery of the consumption market. However, such recovery is still subdued, and overall sales did not meet our expectations. The competition on e-commerce platforms is getting fiercer; companies are compelled to compete with one another at lower prices to maintain their sales volumes, which ultimately reduces profit margins. We have also observed an increase in demand for quality, durable, and differentiated products in the construction market. Products with concepts such as ultra-thin, customized building, healthcare, and energy conservation are becoming increasingly popular among young consumers. Therefore, we will keep focusing on optimizing our product mix by expanding the percentage of those products with better profit margins, such as our water purifiers and smart kitchen products, and introduce products to meet the recovering market demands. For sales, our air conditioners and water purifiers performed quite well during the 618 season. The air conditioning peak season came earlier than in past years, and we saw an increase in air conditioner sales starting from March this year, with their revenue contribution increasing from 15% last year to 18% this year. Meanwhile, as we promoted water purifier products more effectively, the revenue contribution of large flex water purifiers increased to 22%, up from 17% in the same period last year. Thank you.

Okay. Thank you. My second question is, what is the pipeline for the new products launched this year? Will the company launch any new category products, and what will be the business focus in the second half of this year? Thank you.

In the first half of 2023, we introduced a series of new products at the Spring New Product Launching Events, featuring enhanced iterations of our one-stop IoT home solutions, such as our Master 3 Pro formaldehyde-removing AI vertical air conditioner and Super 2 Pro AI vertical air conditioner equipped with a fresh air system, both of which improved indoor air quality and benefit the health of our users’ family members. We also debuted our Master 3 ultra-thin built-in refrigerator and washing machine set, currently setting trends in the home decoration industry. Regarding new product categories, we launched a series of intelligent lighting system products. We creatively enhanced the basic functions of lighting systems with our software capabilities, enabling our intelligent lighting system products to satisfy different needs of users in varying scenarios and adapt easily to different or customized home decoration designs. We believe that the intelligent lighting system is an indispensable part of the whole-house intelligence solutions and will significantly improve the smart home experience of our one-stop IoT solutions. In the second half of 2023, we will continue to explore and capitalize on our strengths to optimize our operations, focusing on three key areas. First, we will deepen our roots in the water purification industry and offer more higher-quality products with leading technology and comprehensive services. Second, we will continue fine-tuning our product mix and iterating our whole-house intelligent product matrix to deliver user-friendly one-stop IoT home solutions and enhance user experience. Third, we will deepen our industrial layout, strengthen our cost control, increase our operational efficiency, and expand operation channels to further improve performance. Thank you.

Okay. Thank you. My last question is about the robotic vacuum. As we all know, competition in robotic vacuum cleaners has become very fierce this year. How has this business performed in the first half of 2023? Thank you, that’s my last question.

Thank you. The business scale of our robotic vacuum cleaners has significantly shrunk since last year. This decline is mainly due to our overdependence on the overseas market, especially Europe. The geopolitical crisis and foreign currency fluctuations in the first half of 2023 adversely affected our sales of sweeper robots, especially in the second quarter. We expect sales of sweeper robots to see a slight rebound in the second half of 2023, as headwind factors are easing starting July this year. However, we have not observed any clear signals of recovery in this product category, neither domestically nor internationally, and competition continues to intensify. In any case, our robotic vacuum cleaners are an essential part of our one-stop whole-house intelligence solution; therefore, we will maintain this product line and continue offering several models primarily through OEMs. Additionally, we have expanded our product categories available in the overseas market, whereby revenues from these new categories accounted for over 60% of our overseas revenues in the first half of 2023. Simultaneously, we are actively exploring new commercial opportunities in emerging markets, particularly in the rapidly growing Southeast Asian market. Thank you.

And that concludes the question-and-answer session. I would like to turn the call back over to management for any additional or closing remarks.

Okay. Thank you once again for joining us today. If you have any further questions, please feel free to contact us through the information on our website or our Investor Relationship Consultant. Thank you.

Thank you.

The conference has now concluded. Thank you for attending today’s presentation, and you may now disconnect.