Viomi Technology Co., Ltd Q2 FY2024 Earnings Call

Hello, ladies and gentlemen, thank you for standing by for Viomi Technology Co Limited Earnings Conference Call for the First-Half 2024. At this time, all participants are in listen-only mode. Today's conference call is being recorded. I’d now like to turn the call over to your host, Ms. Claire Ji, the IR Director of the company. Please go ahead, Claire.

Hello everyone, and welcome to Viomi Technology Co Limited earnings conference call for the first-half of 2024. 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. Xiaoping Chen, the Founder, Chairman of the Board of Directors, and the Chief Executive Officer; and Mr. [Indiscernible], the Head of our Capital and Strategy Department. The company's management will start with prepared remarks and then there will be a Q&A session. Please note that today's discussion will include forward-looking statements made under the safe harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. These statements involve inherent risks and uncertainties. Consequently, the company's annual results may differ significantly from what is expressed today. More information on these risks and uncertainties can be found in the company's annual report on Form 20-F and other filings with the U.S. Securities and Exchange Commission. The company does not have an obligation to update any forward-looking statements unless required by law. Additionally, Viomi's earnings press release and this conference call will cover unaudited GAAP financial information, as well as unaudited non-GAAP financial measures. Viomi's press release also includes a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. Now I will turn the call over to our Founder and CEO, Mr. Xiaoping Chen, who will deliver his remarks in Chinese, followed by an English translation. Mr. Chen, please proceed.

Thank you, Mr. Chen. I will quickly translate our Founder's remarks before discussing our financial performance for the first half of 2024. Hello, everyone. Thank you for joining us today on our earnings conference call for the first half of 2024. In this period, we implemented our focused strategy, prioritizing high-quality development, consistently enhancing our operating performance, and returning to profitability by concentrating on our advantageous categories. Our core home water solution products revenue grew by nearly 13% year-over-year, while we further optimized our product structure. Consequently, our overall gross margin improved to 24.8% for the first half of 2024 from 22% in the prior year period. Stringent cost control measures led to a year-over-year decline in operating expenses of 19.2%, contributing to a net profit turnaround with net income of RMB5.6 million and a non-GAAP net income of RMB16.1 million. Additionally, we maintained a strong cash position with free cash assets totaling RMB914.3 million. On July 19, 2024, we announced a significant business reorganization expected to be completed as scheduled by the end of August. This reorganization reflects our commitment to our focused strategy and aims to improve our operational results by divesting certain underperforming IoT-related businesses. Viomi will now primarily concentrate on leveraging its core strength in the water purification sector to enhance our overall operational path. According to preliminary estimates, the continuous business revenues exceeded RMB800 million with estimated operational income exceeding RMB70 million in the first half of 2024. In the short term, this strategic reorganization may result in a slight reduction in our business scale, but it will improve the company's profitability, fostering healthy and sustainable long-term growth. Following this major business restructuring, Viomi will adopt a new mission: AI for better water. We are committed to utilizing AI technologies to provide better drinking water solutions for households globally. Leveraging our experience in AI technology application, intelligent hardware, and software development, Viomi aims to redefine home water solutions and establish a unique equipment plus consumable business model. We employ AI technology to enhance user experience holistically, offering remote real-time monitoring of water quality and usage, timely filter replacement reminders, one-click reordering, and DIY replacement options leading to increased filter replacement rates. Our smart waterway self-cleaning technology significantly extends filter lifespan and lowers water purification costs, making our smart water purifiers a reliable, hassle-free, and affordable essential for a healthy lifestyle. By the end of the first half of 2024, Viomi's AI home water solutions had reached nearly 5.9 million household users. In terms of production innovation in industry-leading technology, Viomi has consistently achieved technological breakthroughs over the last decade. We developed a tankless, high-flow water purifier that provides fresh drinking water around the clock and increased water flow capability to 2,000 gallons, expanding usage scenarios from drinking to cooking, washing vegetables, and more. Furthermore, we implemented ERO technology to maintain sustainable water quality from pure water to natural mineral water, establishing new trends in healthy living. At the Viomi Spring Water Purifier New Product Launch event in March 2024, we introduced the Viomi Kunlun Mineral AI Water Purifier. Its innovative mineralizing filter technology allows for the sustained release of beneficial minerals, making its mineral composition nearly identical to that of natural mineral water, so our users can enjoy fresh mineral water at home. Viomi offers a diverse range of products for various home scenarios, covering single-function filtration to integrated functions with instant heating, cooling, and ice-making capabilities, addressing the increasing global demand for cleaner, fresher, and healthier drinking water. In terms of product manufacturing and technology development, Viomi operates a world-leading Water Purifier Gigafactory with an annual production capacity of 5 million water purifiers and 30 million filters. Its highly integrated industrial chain layout, automated production lines, high-standard cleaning workshops, and fully traceable quality control systems enable continuous advancements in water purification, achieving optimal efficiency and meeting global market demands. We have developed one of the industry’s most comprehensive R&D systems, mastering advanced filtration technology and material manufacturing processes. As a result, we hold over 1,600 water purification patents and have attracted many global talents in management, marketing, product development, and quality control. Through ongoing product adjustments and the effective execution of our focused strategies, we have achieved notable sales success while continually improving our benchmarks. By strategically aligning our sales channels with differentiated products, we have expanded our market share and further promoted our mineral water purifiers. In July, the Viomi AI water purifier ranked third in the sector, while our new spring product series topped the unsinked water purifier category on China's leading new media platform. Additionally, Viomi placed 439th in the 2024 China’s top 500 brand list released by the World Brand Lab, with a brand value of RMB13.336 billion. Following our significant business reorganization, Global Water will become our new vision, positioning us as a specialized professional water purification technology company dedicated to delivering fresh and healthy water worldwide. We will intensify our commitment to high-quality products and solutions to enhance user satisfaction. First, we will fortify collaboration with strategic partners to leverage our Water Purifier Gigafactory’s advantages fully. Second, we will enhance domestic marketing penetration of our water purification products, continuing to lead the trend in healthy mineral water and promoting successful household usage. Third, we will proactively expand into key overseas markets to support Viomi’s global strategy, enabling families abroad to enjoy fresh and healthy water through our products. Meanwhile, we will maintain ample capital reserves to ensure stable business growth, providing long-term returns for our users and shareholders. Thank you. That concludes our Founder’s remarks. I will now turn the call over to our Head of Capital Strategy Department to discuss our financial performance. Thank you.

Thank you, Mr. Chen and Claire. Thank you to everyone for joining us today. I will go over our unaudited financial results for the first-half of 2024. Net revenues were RMB1,040.2 million, compared to RMB1,304.4 million for the same period of 2023. This decrease was mainly due to a strategic shift in focus toward home water solutions, resulting in a decrease in revenues from the IoT @ Home portfolio, as well as small appliances design orders. Revenues from the IoT @ Home portfolio decreased by 30.3% to RMB482 million from RMB691.7 million for the same period of 2023. This decrease was primarily due to the company's strategic decision to phase out underperforming SKUs in smart refrigerators and air conditioners, aiming for more sustainable and healthy growth. Revenues from home water solutions increased by 12.9% to RMB323.5 million from RMB286.6 million for the same period of 2023. The increase was primarily driven by our intensified focus on water purification products. Revenues from consumables remained stable at RMB135.8 million from RMB135.9 million for the same period of 2023. Revenues from small appliances and others decreased by 48% to RMB98.9 million from RMB190.2 million for the same period of 2023, primarily due to the company's ongoing effort to streamline SKUs within these categories. Gross profit was RMB258.1 million, compared to RMB286.8 million for the same period of 2023. Gross margin was 24.8%, compared to 22% for the same period of 2023. The increase was primarily driven by the company's effort on expanding revenue contribution from higher gross margin core product categories. Total operating expenses decreased by 19.2% to RMB292.3 million from RMB361.8 million for the same period of 2023. The adjusted operating expenses excluding share-based compensation were RMB281.8 million, representing a year-over-year decrease of 21.8%. The decrease was driven by the company's strategic evaluation of resource efficiency and a focus on more advantageous areas to achieve the best operating result. In greater detail, R&D expenses slightly decreased by 1.2% to RMB109.2 million from RMB109.5 million for the same period of 2023, mainly due to a decrease in stock cost, partially offset by higher share-based compensation expenses resulting from the extension of share incentive plans expiration term to 20 years. Selling and marketing expenses decreased by 33.1% to RMB142.9 million from RMB213.5 million for the same period of 2023, mainly due to a decrease in logistics expenses, online platform service fees, and advertising and marketing fees. As a result of the company's rigorous cost control measures, optimization of sales channels, and the refinement of the product mix. G&A expenses increased by 6.2% to RMB41.2 million, compared to RMB38.8 million for the same period of 2023, primarily due to an increase in professional fees, depreciation and administrative expenses related to the operation of the technology part, partially offset by a decrease in the estimated allowance for accounts and notes receivables. Net income attributable to ordinary shareholders of the company was RMB6 million and the non-GAAP net income attributable to ordinary shareholders of the company was RMB16.5 million. We achieved these good results as we strategically shifted efforts toward home water solution products and implemented strict cost control measures. Additionally, our balance sheet remains healthy. As of June 30, 2024, the company had cash and cash equivalents of RMB701.6 million, restricted cash of RMB206.9 million, short-term deposits of RMB142.6 million, and short-term investments of RMB60.1 million. Now let's turn to our outlook. For the full-year of 2024, we expect revenues of the continuous business to be between RMB1.7 billion and RMB1.9 billion. Incomes from operations of the continuing business to be between RMB110 million and RMB130 million. The above outlook is based on our current market conditions and reflects the company's current and preliminary estimate of the market and operating conditions and customer demand, all of which are subject to change. Thank you.

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

We will now start the question-and-answer session. Our first question comes from Jingsheng Liu. Please go ahead.

Hi. Hello, thanks for the management. I'm Liu Jingsheng from CICC, and I have three questions about the results, and I'll ask them one by one. Okay, so the first one is, for the Home Water Solutions business, can you introduce what is the result of both the volume and the ASP? And how do the Xiaomi brand and Viomi’s brand products perform professionally? Thank you. That's my first question.

Okay. Thank you. Let me just get to your question. As for the Home Water Solution business, we had a 13% increase in revenue for the first-half of 2024, compared to the same period of last year. And due to further focus on the Home Water Solution business, as well as deepening our strategic cooperation with Xiaomi in this category. Through continuous product adjustment and the effective implementation of a focused strategy, we have achieved significant success in sales while steadily enhancing our brand strength. Strategically, aligning our sales channel with efficient products, we have successfully expanded our market share and further promoted our mineral water purifiers. In July, the Viomi AI water purifier ranked third in the water purifier sector, while our new Spring Product series claimed the top position in the unsinked water purifier category on China's leading new media platforms. Additionally, we are ranked 439th in the 2024 China's top 500 brands list released by the World Brand Lab with a brand value of RMB15 billion. We will maintain close cooperation with our strategic partners while expanding differentiated channels and products to jointly increase the penetration rate of the water purifier market and make AI water purifiers essential for a better life. Thank you. Please go on.

Okay, thank you. And my second question is, what is your purpose of divesting IoT business? And what are the remaining categories now? And can you explain why do you choose these categories to remain? And can you also introduce some financial results of the remaining categories? Thank you.

It's a very good question. The business we're divesting are certain underperforming IoT businesses so that we can quickly restore our operations and get the company back to a benign status. Certain IoT businesses have shown a trend of construction in scale during the past few years, which to a certain extent has dragged down our overall operating efficiency. Therefore, we have started to streamline and focus on more productivity in 2023 and invested our resources in more advantageous product categories. As we mentioned at the beginning of the PR for the first-half of 2024, based on our preliminary estimate, the estimated revenue of continuing business was no less than RMB500 million, with the estimated income from operation being more than RMB50 million for the first-half of 2024. Also, we estimate the top line of the continuing business will reach between RMB1.7 billion to RMB1.9 billion for the full-year of 2024, with the income from operations between RMB110 million to RMB130 million. Next, we plan to sort out the overall revenue structure with the new Home Water Solution business, consumables, and other appliances and services. Although it’s not finalized yet, the new Home Water Solution business will include unsinked water purifiers, pipeline water dispensers, free installation products like top water dispensers, smart kettles, as well as centralized water purification and softening systems, and water heaters covering homes and areas including kitchen, living room, bathroom, and a whole house of water systems. Thank you. Please go on.

Okay, thank you. And my last question is what does the management expect to see improved after these divestments? And what will be the focusing forms in the future? Thank you, that's my last question.

Okay, the business we've divested are certain under-performing IoT businesses. All fundamentals have turned around. Earnings will improve significantly and get the company back to a benign state. As we mentioned before, based on our preliminary estimate, the estimated revenue of the continuing business was more than RMB800 million, with the estimated income from operation more than RMB50 million for the first-half of 2024. The full-year guidance for the continuing business is between RMB1.7 billion to RMB1.9 billion in top line and RMB110 million to RMB130 million of the income from operations. As we can see, divesting income from our business will strengthen our overall scale in the short-term, but will produce significant improvement on the operational result in the future. Through this reorganization, we can concentrate our resources to focus fully on the company's most powerful water purification field and further improve the brand influence of Xiaomi AI water in the following three aspects. First, we will strengthen our collaboration with strategic partners to fully leverage our Water Purifier Gigafactory’s competitive advantage. Second, we will increase our water purification products' domestic market penetration, continuing to lead the healthy mineral water trend and promoting access for household users. Third, we will actively expand into key overseas markets such as North America and Southeast Asia to promote Viomi’s global strategy and enable families abroad to enjoy fresh and healthy water through our products. Thank you.

Okay, the next question comes from Hunter Diamond with Diamond Equity Research. Please go ahead.

Hi. Congratulations on the results. Some of my questions were already answered, but a few more. My first question was, what are the expected impacts of the extended filter lifespan technology on customer retention and recurring revenue, considering the reduced need for frequent filter replacements?

Well, through the application of AI technology, we hope to enhance the customer experience. Excuse me, can you hear me?

Yes.

Okay, continue. The increased acceptance of water purifiers and reduced cost of water purification. The increasing installation base will bring in recurring revenue from consumables. According to our observation, the market size and penetration rate of China's household water purifier market has maintained a low level for a long time. Many customers switch to other ways to get purified water and do not change the filter mainly because of the frequent need for filter changes, causing a lot of problems and extra cost. This is due to a low degree of product intelligence; customers cannot have a clear expectation of the lifespan of the filters and cannot replace the filters by themselves. We can change that. Let's just take the 1,200-gallon Quanxian AI water purifier, for example. It comes with two filters. One is a composite filter with a two-year lifespan. Its selling price is around RMB300 and the other is an RO filter with an average lifespan of five to six years, and its selling price is around RMB900. For a family with a daily usage of 10 liters of water, assuming they are using the water purifier for eight years, the annual cost for the filters is less than RMB230. This is very attractive and has an obvious advantage compared to bottled water. You can reorder filters easily through the app and replace them by yourself in three seconds. It's pretty simple and easy. We believe it will encourage more customers to purchase and continue using water purifiers, increasing the installation rate and improving customer retention. In short, at Viomi, we aim for AI to provide better water using AI technology to create better water and durable, reliable products, promoting customer health awareness and allowing more customers to use AI purifiers to enhance their quality of living while improving the penetration rate of household water purifiers. This will further facilitate high-quality and sustainable scale growth of the company. Thank you. Please go on.

Thank you. And my next question was, can you provide more details on Viomi’s omnichannel marketing and service supporting the expansion into international markets, particularly the U.S. where competition is very strong?

Right. Thank you. That's a very good question. Regarding the China expansion, with our existing omnichannel marketing and service capabilities combined with our accumulated strength in water purification, manufacturing, R&D, and product strength, we will explore the North American market. At present, we have both domestic marketing and after-sales service systems covering both online and offline channels, including the sales channels of mainstream e-commerce platforms, as well as live streaming sales on new media platforms. We are also actively expanding into overseas markets. Besides the original European and Southeast Asia markets, we are taking steps to expand into the North American market. We see great potential in the household water purifier market in North America, and it's also a great challenge. We have the industry-leading gigafactory as our strong quality assurance. Using AI technology, we develop water purifiers, and our overseas users can also download the app for device management, allowing real-time monitoring of water quality and usage, DIY filter replacements, and reduced maintenance costs. Meanwhile, we have a rich reserve of technology to embrace customized product development demand around the world, all of which has built up solid support for Viomi to expand in the global market. Thank you, Hunter.

Great. Thank you for the detailed answers. That's all I have for questions. Thank you.

And that concludes our question-and-answer session. I would like to turn the conference back over to management for any 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 our investor relationship consultant. Thank you. Goodbye.

Thank you.

Thank you. Bye-bye.