Viomi Technology Co., Ltd Q4 FY2023 Earnings Call

Hello, ladies and gentlemen, thank you for standing by for Viomi Technology Company Limited's Earnings Conference Call for the Second Half and Full Year of 2023. 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, the IR Director of the company. Please go ahead, Claire.

Thank you. Hello everyone, and welcome to Viomi Technology Company Limited earnings conference call for the second half and the full year of 2023. 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 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 Capital Markets and Strategy Department. The company's management will begin with prepared remarks and will continue 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 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 with the U.S. Securities and Exchange Commission. And 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 conference or press release and this conference call includes discussions 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.

Thank you, Mr. Chen. I will quickly translate our Founder's remarks before discussing our financial performance for the second half and full year of 2023. Hello, everyone. Thank you for joining us today on our earnings conference call for the second half and the full year of 2023. In 2023, we continued to advance our focused strategy, optimizing our product mix and improving our operating performance through strong strategic execution, driven by the restructuring of our product mix. The revenue contribution of home water solutions and consumable products increased to 36.8% in 2023 from 32.2% in 2022. Through cost optimization and operating efficiency improvement, our gross margin increased by 2.2 percentage points, while operating expenses decreased by 33.4% in the second half of 2023 compared to the prior year period, leading to a significantly reduced net loss margin of 2.7%. Over the past year, we have demonstrated resilience in overcoming challenges and achieved significant progress in various areas. First, we deepened strategic collaboration with major clients, including the renewal of a three-year strategic cooperation agreement with Xiaomi. Second, we reorganized our business structure and elevated our water purification department to an independent strategic business unit, enhancing our R&D, production, and sales capabilities across the entire water purification industrial chain. Through this strategic move, we now have two major business segments: AI Water and AIoT@Home, enabling synergistic development. Third, we strengthened our capabilities within AIoT@Home and enriched our whole-house intelligent solutions to address uncertainties and challenges from industry giants. Fourth, we bolstered Viomi's brand influence with the appointment of Ms. Xiwei Tian, a well-known actress in China, as our global brand spokesperson. Fifth, on the distribution side, we expanded both our online sales network and offline channel footprint while actively pursuing international markets. Finally, Viomi's IoT Technology Park, built over three years, was officially inaugurated in November 2023, ushering in a new era for Viomi. As a leading company in the water purification sector, we possess the industry's most extensive manufacturing and R&D facilities and have applied for over 1,300 patents in this field by leveraging our expertise in advanced filtration technology and material production methods. Meanwhile, we have independently established a comprehensive organizational framework and assembled an outstanding team of top talent across management, marketing, product development, and quality control. We have also established solid industrial advantages and competitive barriers by building a water purification industry chain anchored by our world-leading purification super factory. First, we centralized water purification product component production, leveraging our cutting-edge IoT Technology Park and seamlessly integrated both upstream and downstream functions. We performed machine assembling, testing, warehousing, and logistics in a single building in the park, effectively reducing logistics costs and improving production efficiency. Second, we constructed the industry's leading automated and intelligent production lines for water purification products, featuring a fully automated dock for manufacturing certain key components. Comprehensive intelligent collection and analysis of production data empowers us to constantly improve the production process. Going forward, we will continue to capitalize on our infrastructure supported by our IoT Technology Park, deepen our investment in the water purification industry chain, and strengthen our in-house capabilities across research, production, and core component inception to provide users with high-quality water purification products. Regarding our AIoT@Home business, we have adhered to the concept of AI helpfulness and concentrated on monitoring and safeguarding family health. During our recent spring product launch event on March 12, we unveiled Alpha X, a cardio-respiratory detection radar equipped with millimeter-wave radar technology. This technology enables continuous, comprehensive monitoring of family members' health. Alpha X provides users with intelligent functions such as one-click report generation and active alerts, empowering them to enhance health tracking and safety. Meanwhile, as the demand for improved living conditions grows in the housing market, we upgraded our IoT’s one-stop IoT@Home solution with the launch of our minimum dollar space series, providing consumers with a stylish, customized, and more intelligent product experience. We have gradually expanded our product offerings to overseas markets, spurring new growth in our international business and enhancing its resilience to economic risks. Furthermore, Viomi has established strategic partnerships with leading local channels in various countries, utilizing their local resources to boost our overseas sales and service capabilities, promoting sustainable growth of our international business. Looking ahead, we see immense potential and opportunities in the global market. Therefore, we will continue to refine our operations across four areas. First, we remain committed to delivering healthy water solutions to our users, allowing them to enjoy excellent water quality and flavor options. Second, we will reinforce collaborations with our strategic business partners, continue to build out our leading water purification super factory, and strengthen the industrial chain. Third, to accelerate the globalization of the Viomi brand, we will develop sales channels and expand overseas markets. Finally, we will continue to improve quality and efficiency while balancing scale expansion, organizational optimization, and operational efficiency enhancements. By leveraging our strengths, we aim to restore profitability through healthy and sustainable development, creating long-term value for users and shareholders. Thank you. That concludes our Founder's remarks, and I will now turn the call over to our Head of Capital Markets and Strategy.

Thank you, Mr. Chen and Claire. Thank you to everyone for making time to join us for the earnings conference call today. I will go over our unaudited financial results for the second half and full year of 2023. Net revenues were RMB1,189 million compared to RMB1,596.4 million for the second half of 2022. The decrease was mainly due to a decrease in revenues from the IoT @ Home portfolio as well as small appliances and orders. Revenues from the IoT @ Home portfolio decreased by 28% to RMB529.1 million from RMB735.2 million for the second half of 2022. The decrease was primarily due to the streamlining of product offerings, which was achieved by reducing selling SKUs of smart white goods, such as our smart rapid readers, smart air conditioners, and smart washing machines. Revenues from home water solutions decreased by 20.5% to RMB370.4 million from RMB399.1 million for the second half of 2022. The decrease was due to the lower volume of purified water sold to Xiaomi Corporation. Revenues from consumables decreased by 4.2% to RMB178.5 million from RMB186.4 million for the second half of 2022. The decrease was primarily due to the lower volume of water purification filters sold to Xiaomi Corporation, partially offset by the increase in sales of Viomi brand water purification filters. Revenues from small appliances and others decreased by 4.5% to RMB164 million from RMB275.6 million for the second half of 2022, primarily due to the ongoing product portfolio adjustments within this category. Gross profit was RMB282.7 million compared to RMB345.6 million for the second half of 2022. Gross margin was 23.8% compared to 16.1% for the second half of 2022. The increase was primarily driven by the company's efforts to shift the product mix towards higher gross margin products such as water purifiers and filters, and partially offset by a decrease in the selling price of certain clearance products as a result of the product portfolio adjustment. The operating expenses decreased by 33.4% to RMB344.3 million from RMB517.1 million for the second half of 2022, primarily attributable to the streamlining of the organizational structure and improved operational efficiency. In greater detail, R&D expense decreased by 19.7% to RMB113.4 million from RMB141.2 million for the second half of 2022, due to a decrease in R&D experts and related salaries and expenses. Selling and marketing expenses decreased by 36% to RMB188.2 million from RMB294.1 million for the second half of 2022, mainly due to a decrease in online platform services and logistics expenses and sales-related personnel costs. G&A expenses decreased by 47.8% to RMB42.7 million from RMB81.8 million for the second half of 2022, primarily due to the fact that a significant amount of additional expected credit loss allowance was made against the third customer in the second half of 2022. Net loss attributable to ordinary shareholders of the company was RMB28.7 million, and non-GAAP net loss attributable to ordinary shareholders of the company was RMB30.9 million. Despite the decrease in revenue scales, our net loss attributable to ordinary shareholders narrowed by 84%, demonstrating an improvement in our operational efficiency. Additionally, our balance sheet remains healthy. As of December 31, 2023, the company had cash and cash equivalents of RMB491.7 million, restricted cash of RMB144.6 million, short-term deposits of RMB365.8 million, and short-term investments of RMB30.4 million. Next let's briefly discuss key financial results for the full year of 2023. Net revenues were RMB2,493.4 million compared to RMB3,232.7 million for 2022. Revenues from the IoT @ Home portfolio decreased by RMB399 million to RMB1,220.9 million from RMB1,619.9 million for 2022. Revenues from home water solutions decreased by 11.3% to RMB604 million from RMB681.1 million for 2022. Revenues from consumables decreased by 12.3% to RMB314.4 million from RMB358.4 million for 2022. Revenues from small appliances and others decreased by 38.2% to RMB354.1 million from RMB573.3 million for 2022. Gross profit was RMB569.5 million compared to RMB737.1 million for 2022. Gross margin was 20.8%, the same as in 2022. Total operating expenses decreased by 31.9% to RMB706.2 million from RMB1,036.5 million for 2022. In greater detail, R&D expenses decreased by 25.7% to RMB222.9 million from RMB300 million for 2022. Selling and marketing expenses decreased by 34.7% to RMB401.8 million from RMB614.9 million for 2022. G&A expenses decreased by 33% to RMB81.5 million from RMB121.7 million for 2022. Net loss attributable to ordinary shareholders of the company was RMB84.7 million, and non-GAAP net loss attributable to ordinary shareholders was RMB84.6 million.

This concludes our prepared remarks, and we will now open the call for Q&A. Mr. Chen, our Founder; and Mr. Sam, our Head of Capital Markets and Strategy will join this session and answer questions. Operator, please go ahead.

Thank you. We will now begin the question-and-answer session. The first question comes from Hunter Diamond of Diamond Equity Research. Please proceed.

Hi, everyone. Firstly, congratulations on the results. My question is, with the recent strategic move of relocating the smart water purification system facility to the Viomi Internet of Things Technology Park, can you provide insights into the new product development pipeline? More specifically, what innovative product launches and stakeholders anticipate in the water purification segment over the next two quarters and how do these align with Viomi's broader innovation and growth strategy?

Thank you, Hunter. I will briefly translate the question to Chinese. Regarding this question, Mr. Sam will respond on behalf of the management.

Recently, we proudly released our new product, Viomi AI mineral water purified Quanxian, with advanced technical methods and strictly selected high-quality mineral resources. We successfully realized the slow precipitation of minerals from purification filters in a long-lasting and steady state, which makes the filtered water contain six beneficial mineral elements, similar to natural mineral water. The strong helium content in our filtered water can reach the level of twice the national standard for mineral water. With the upgrading consumption trends, the demand for drinking water gradually changed from clean water to healthy water. By launching Quanxian, we aim to lead the trend and drive the development of the water purification industry, targeting the new generation of consumers pursuing a healthy lifestyle. Moving forward, we will continue to produce mineral water, enrich the related product mix, and provide customers with healthy water solutions for various scenarios. In addition, we have built the Viomi water purification super factory to achieve a highly integrated industrial chain featuring a fully automated dark factory for manufacturing key components, which will improve our production efficiency and enhance cost advantages. Furthermore, the comprehensive intelligent collection and analysis of production data enables us to constantly improve our production processes and achieve technological breakthroughs. This all supports our commitment to continually provide better solutions for our users' major demand and establish solid industrial advantages and competitive barriers.

Thank you. And then the next question, just moving beyond the water purification segment, can you shed some light on Viomi's strategic initiatives for its existing product segments? What key developments or strategic pivots are you planning to drive growth, enhance Internet of Things integration, and maintain a competitive advantage across your existing portfolio?

Thank you, Hunter and Claire. I'll address this question. As more competitors enter the whole house intelligence market with various solutions, each faces increasing challenges and opportunities. Viomi has created distinctive all-in-one AIoT@Home solutions that integrate hardware, software, design, and services. We currently have 8.4 million cumulative household users globally. We are committed to the AIoT@Home concept and are continuously enhancing our solutions in health, intelligence, and security. In this segment, we are optimizing our product lineup and concentrating on product differentiation. In the latter half of 2023, we launched several remarkable new products, including the upgraded Viomi AI Air Conditioner Super 3, which smartly adjusts room temperature based on different sleep stages to enhance comfort and sleep quality. We also introduced Alpha X, a health detection radar using millimeter-wave technology, offering continuous, comprehensive, and contactless health monitoring for family members. Alpha X features intelligent functionalities like one-click report generation and proactive alerts, enabling users to better track health and safety. Additionally, we released the new intelligent smart lock, Master 3 MAX, which incorporates advanced recognition technology for enhanced security. As the housing market's demand for better living conditions rises, we have further improved our all-in-one AIoT@Home solution with the launch of the multi-million-dollar space series, which offers customers stylish, customized, and more intelligent product experiences.

Great. Thank you for taking my questions and again, congratulations on the results.

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

Hello. Thank you for your insights. Congratulations on the results. I'm from CICC, and I have three questions, which I will ask one at a time. My first question is about the quarterly revenue performance in Q3 and Q4. Have we seen any improvement in the IoT business? Aside from the water purifier, which categories performed well in 2023? That's my first question.

Mr. Sam, please proceed.

Thank you. I will answer this question. In general, the performance of Q3 and Q4 both achieved optimization in gross margin, reaching 23.8%, which is 2.2 percentage points higher than the second half of 2022 and 1.8 percentage points higher than the first half of 2023. On the product side, apart from the water purification products, we observed an increased revenue contribution from our smart kitchen and bathroom appliances, especially the water heaters, as we released several new products in this segment and received positive feedback from the market. At our spring launch event in March 2023, we released the MAT 3 Pro, a gas-electric hybrid AI water heater that offers users a new bathing experience with rapid heating and a constant water temperature. In terms of the number of users, the cumulative household users globally are steadily increasing, with 23% of households using at least two connected products by the end of 2023.

Okay. Thank you. And my second question is, what is our operating strategy in 2024? Will it focus on products or channel operation? What is the overall business outlook for 2024? Thank you.

Our strategy for 2024 will still focus on our core products while aiming for high-quality development. We will devote our efforts to product differentiation and channel diversity. On the product side, we will concentrate on our product categories with dedication. For water purification products, we introduced the new AI - purified water, Quinlin. At our spring launch event in March 2024, we will redefine water purification with our advanced technology. We will put more effort into water heaters and kettles along with the concept of whole house water systems. Regarding the channel side, we will improve the return on investment of our online channels and actively develop new channels, both online and offline, to establish win-win business strategies. We will further utilize our professional business operating teams on major online channels to improve AI and enhance the company's operational efficiency. In addition, we are deepening strategic cooperation with leading local channels in various countries, utilizing their resources to enhance our overseas sales and service capabilities while promoting the sustainable goals of our overseas business in the future. In conclusion, we aim to refine our operations in the following aspects: first, optimize our revenue structure, increasing the revenue contribution of our core products while further enhancing gross margin; second, deepen collaboration with Xiaomi to support the recovery of our revenue scales; and third, expect faster growth in overseas channels, new social media channels, and offline channels will further diversify our revenue sources. Thank you.

Okay. And my last question is, what is the expense plan for 2024? In which areas should we invest more resources and funds? That's all for my questions. Thank you.

Thank you. Let me answer you directly. We will stick to a strict cost control method and closely monitor the return on investment, ensuring further optimization of our operational performance in 2024. We will allocate resources to key channels. First, we will prioritize investment in water purification products, along with new social media channels to bolster brand recognition among users and increase market penetration of our products. Second, at the offline channel end, we will jointly develop sales channels and promote the transformation of home appliances in cooperation with major shopping centers and e-commerce platforms. For water purification products, we are also exploring independent channels for each category to provide customers with better product demonstrations and long-term service support. Last, but not least, regarding the overseas market, we are strengthening our cooperation with local distributors to boost the intelligence level and increase brand exposure of our products in international markets. Thank you.

Thank you. This concludes our question-and-answer session. I would 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 any further questions, please feel free to contact us through the contact information on our website or our Investor Relations consultant. Thank you all for the conference.

Thank you.

Thank you. This concludes today's conference call. You may now disconnect your lines and have a wonderful day.