Viomi Technology Co., Ltd (VIOT) Q3 2018 Earnings Report, Transcript and Summary

Hello ladies and gentlemen. Thank you for standing by for Viomi Technology Company Limited Earnings Conference Call for the Third Quarter of 2018. At this time, all participants are in listen-only mode. Today’s conference call is being recorded. [Operator Instructions] I will now turn the call over to your host Mrs. Yujie Li of The Piacente Group, Inc. The company’s investor relations partner. Please go ahead Yujie.

Thank you, operator. Hello everyone and welcome to Viomi Technology Company Limited earnings conference call for the third quarter of 2018. The company’s financial and operating results were issued in a press release earlier today and are posted online. You can download earnings press release and [indiscernible] email distribution list by visiting the IR section at 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 Chief Executive Officer; and Mr. Shun Jiang, the Chief Financial Officer. 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 these and other risks and uncertainties is included in the company’s registration statements on Form F-1 and other filings that’s 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 under applicable law. Please also note that the Viomi’s earnings press release and its conference call include discussions of unaudited GAAP financial information, as well as unaudited non-GAAP financial measures. Viomi’s press release contains a recognition of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. I will now turn the call over to Viomi’s Founder and CEO, Mr. Xiaoping Chen. Mr. Chen will deliver his remarks in Chinese followed immediately by English translation. Mr. Chen, please go ahead.

[Foreign Language]

Thank you, Xiaoping. This is Shun. Viomi’s CFO. I will quickly translate the previous remarks before providing an operational update and discuss our financial performance for the quarter. Hello, everyone. Thank you all for joining our first earnings conference call as a public company. Our successful IPO on September 25 on NASDAQ was an exciting milestone for Viomi. I would like to take this opportunity to thank all our shareholders, partners, respected customers, and our talented employees that helped make this happen. Rest assured, we’ll continue to work relentlessly to fulfill our mission of redefining the future home. We are very pleased to report that in the third quarter we continue to deliver outstanding growth, with net revenues reaching RMB565.3 million, up 170.9% year-on-year, driven by robust market demand across key product categories, particularly related to continued successful rollout and significant increase in sales of Viomi branded products. I will share details of our financial performance later in the call. Our success has largely been driven by attractive value proposition, increase in brand recognition, new product launches, sales channel expansion, and increasing receptiveness and adoption of smart home AI and IoT technology in China. The tremendous growth we have achieved in the years since our inception, as well as in the third quarter is a testament to the increasing consumer interest in our IoT @ Home platform, the viability of our highly scalable business model, as well as our strong execution capabilities. Our unique IoT @ Home platform consists of an ecosystem of innovative IoT products together with a suite of complementary consumable products and value-added businesses. Our platform provides an attractive entry point in the consumer home, enabling consumers to intelligently act with a broad portfolio of IoT products in an intuitive and human-like manner to make daily life more convenient efficient and enjoyable. At the same time, the platform allows us to grow our household user base and capture various additional scenario driven consumption event in home environment. As of the end of the third quarter, our IoT @ Home platform had approximately 1.4 million household users, an increase of approximately 200,000 household users during the quarter and having approximately doubled over the past year. Product developments from hardware and software perspective is central to our strategy. We have devoted concerted efforts towards expanding and upgrading our IoT @ Home platform to provide seamless integrated smart home solutions that enhance the overall user experience. In terms of new product launches in the third quarter, we successfully introduced approximately 15 new product lines, including our 21 Face Smart Refrigerator, Viomi Two-in-One Smart Washer Dryer, and our Viomi Smart Water Heater among others. All of these further complement our IoT enabled smart home product portfolio and provide additional solutions to enable a complete IoT @ Home experience for our users. We now have over 60 product lines within our IoT product portfolio. Powered by AI proprietary software and data analytic systems, our IoT @ Home platform captures extensive consumer behavior data and generates deep insights, enabling us to continue to enhance our products and explore additional bespoke value-added businesses and monetization opportunities. In addition, our strong relationship with Xiaomi, our strategic partner, shareholder and important customer, has been instrumental to our success. We look forward to continuing to strengthen the successful relationship and exploring additional ongoing collaboration opportunities with Xiaomi in the future. In summary, we had established a strong foundation for success and are well-positioned to capitalize on the tremendous growth opportunities ahead in China's smart home products industry. We will strive to further strengthen our market position and deliver long-term shareholder value in the years ahead. That concludes our Founder’s comments. I will now provide an operational update and discuss our financial performance for the quarter. I’ll begin with some key operational updates. As mentioned, we continue to deepen our household penetration with our number of household users reaching over 1.4 million at the end of the third quarter of 2018, as compared to approximately 1.3 million in the prior quarter and approximately 700,000 as of the end of the third quarter of 2017. In addition, the percentage of household users possessing at least two of our IoT products increased to 13.2% from 12.5% in the prior quarter demonstrating the increasing trend of users adopting multiple Viomi products and making the Viomi connected home a closer reality. An integral strategy for us is the continued expansion and diversification of our sales channels, particularly the development to our Viomi off-line experience stores network, which facilitate our F2C new retail experience. These experience stores operated by our third-party network partners and staffed with well-trained store managers and sales personnel enable consumers to experience in person the functionalities and benefits of our IoT platform. We believe these stores play a key role not only in helping to promote our brand and products, but also in educating consumers and importantly incentivizing bundled purchases, which generate high revenue and wallet share per customer, while lowering average customer acquisition cost and logistics expenses. The number of Viomi off-line experience stores has increased to approximately 1200 as of the end of the third quarter of 2018, compared to approximately 700 in the prior quarter. We are targeting approximately 1,500 stores by the end of this year with a near-term target of up to 2,000 stores across China. We’re also constantly working closely with our network partners to enhance overall store productivity, further strengthen brand recognition across various regions and educate local consumers on the functionalities and benefits of our IoT @ Home platform. In terms of online channels, we further diversified our online presence, having become one of the most successful brands on Yopine, further developed our own Jumei [JingDong] [ph] online sales platform and have also started to partner with Suning for online sales. Now, let’s move on to our financial performance. We’re pleased to report robust financial results for the third quarter of 2018, achieving significant top line growth and solid levels of profitability, together with healthy cash flows and liquidity. As discussed, net revenues increased by 170.9% year-on-year to RMB565.3 million, primarily due to the continued successful roll out and significant increase in sales of Viomi-branded products, together with the further expansion of our sales channels. Revenue from IoT-enabled smart home products increased by 181.7% year-over-year to RMB482.5 million, primarily due to the continued strong growth of our smart kitchen products and other smart products categories. As Xiaoping mentioned, we introduced several new product lines in this quarter, including our Viomi Two-in-One Smart Washer Dryer and our Viomi Smart Water Heater, which were also important contributors to our overall growth. Revenues from value-added businesses and consumable products increased by 121.4% to RMB82.8 million, primarily due to the increase in end demand for the company’s value-added products. Gross profit increased by 152.8% to RMB169.9 million. Gross margin was 30%, compared to 32.2% in the year-ago period, primarily due to shifts in the company’s product and business mix. To put this in perspective, sales of smart water purification systems, which are relatively higher gross margin products for us, represented close to 70% of our total net revenues in the third quarter of 2017, as compared to less than 40% in the third quarter of 2018, in line with our product diversification strategy. On a sequential quarter basis, gross margin increased by 300 basis points from 27% a quarter earlier, mainly as a result of further channel and product diversification, together with additional economies of scale achieved by the company. Total operating expenses increased by 531.5% year-over-year to RMB230.2 million, primarily due to the rapid growth of the company’s business, as well as an increase in share-based compensation expenses, which totaled RMB98.6 million, including a one-off share-based compensation expense of RMB90.2 million awarded to our founder prior to the company’s IPO to award the founder’s contribution to the company’s development. R&D expenses increased by 160.5% to RMB33.4 million from RMB12.8 million for the third quarter of 2017, primarily due to an increase in employee-related expenses, including share-based compensation expenses, as well as increase – increases in other expenses associated with new product development. Selling and marketing expenses increased by 368.8% to RMB97.4 million from RMB20.8 million for the third quarter of 2017, primarily due to an increase in employee-related expenses, as well as increases in logistics, advertising, marketing and brand promotion expenses in relation to Viomi-branded products. G&A expenses were RMB99.4 million, compared to RMB2.9 million for the third quarter of 2017, primarily due to the one-off share-based compensation expense, as previously mentioned, as well as professional service fees and other expenses of approximately RMB4.3 million related to the company’s initial public offering. Non-GAAP net income, which excludes the impact of share-based compensation expenses was RMB38.7 million, representing a year-on-year increase of 35.6%. As of September 30, 2018, the company had a healthy cash and cash equivalents balance of RMB933.3 million, compared to RMB280 million as of December 31, 2017. The increase was primarily due to net proceeds of approximately RMB636 million raised in the company’s initial public offering in late September 2018. For the third quarter of 2018, net cash provided by operating activities was RMB29.8 million. In summary, we are pleased to report strong operational and financial results for the third quarter of 2018, our first quarter as a public company. As we look ahead and continue to grow our business through further brand investment, product development and expanding sales channels, we intend to do so in a prudent manner with an emphasis on maximizing operating efficiency, achieving economies of scale and prudent cost control. We’re proud of the strong top line growth we have been able to deliver, while also maintaining consistent and healthy levels of profitability. As such, we’re confident in our ability to successfully execute our growth strategies going forward. Now let’s turn to our outlook. For the fourth quarter of 2018, the company currently expects net revenues to be between RMB850 million and RMB880 million, representing year-on-year growth of approximately 115.8% to 123.4%. For the full-year of 2018, the company currently expects net revenues to be between RMB2.46 billion and RMB2.49 billion, representing year-over-year growth of approximately 181.2% to 184.6%. This outlook is based on current market conditions and reflects the company’s – company management’s current and preliminary estimates of market and operating conditions and customer demand, which are all subject to change. This concludes our prepared remarks. We will now open the call for Q&A. Operator, please go ahead.

We will now begin the question-and-answer session. [Operator Instructions]. The first question comes from Lillian Lou of Morgan Stanley. Please go ahead.

Hello. Good evening or good morning, management. Thanks for the introduction of the result and congratulation on the good results in third quarter. I have a few questions, maybe I start one by one as easy approach. So, first question is about – can you share us about the breakdown of IoT product growth in the third quarter, i.e., how much growth you delivered in water purifier products and other kitchen appliance and other products?

Thank you, Lillian. So, for the third quarter of 2018, the vast majority of the growth came from the smart kitchen and the other smart products categories for this particular quarter. So, in terms of the smart kitchen category, we had year-on-year growth of approximately five actions. Smart kitchen category grew from approximately RMB10 million to over RMB170 million for this particular quarter. As mentioned, there was a significant shift in the company’s business mix from 2017 to 2018. Other smart products grew from approximately RMB20 million in the third quarter of 2017 to over RMB100 million in the third quarter of this year. Water purifiers around RMB150 million in the third quarter last year to approximately RMB200 million in the third quarter of this year.

Okay, thanks. And my second question is about the offline store expansion. You’ve been achieving quite a fast expansion with top 100 stores by third quarter and the target of 1,500 by the year-end. So, what’s the allocation of the stores, i.e., I suppose most of them are in the Tier 2, Tier 3 cities? Can you give us a little bit of kind of sense?

Yes.

And also do you have – can you share us about the operational data about the offline store right now in terms of per store revenue or return per store, et cetera? Thanks.

Yes. So, our store – our offline store expansion is progressing very smoothly now at over 1,200, stores with targeting around 1,500 stores by the end of this year. In terms of the regional allocation, currently approximately 75% of our stores are located in our key target markets of Tier 2 to 4 cities, of which Tier 3 to 4 cities will continue to be the – our main focus in the near future in addition to further penetration of Tier 1 cities, as our brand recognition becomes more prominent. In terms of store performance over the past several months, average company revenue per store, that’s our ex-factory sales to the respective stores has trended around RMB50,000 to RMB70,000 to over RMB70,000 per store per month with various fluctuations as a result of the rapid pace of store openings. As you can appreciate, many of these stores are relatively new and will take some time to ramp up and become more mature and meaningful in terms of our operating performance. For contacts, we only had approximately 400 stores at the start of this year, 700 stores by mid this year and now have over 1,200 stores. We generally target a one to one-and-a-half-year payback period for new store openings.

Okay. Thank you. And next question, sorry,, revenue contribution, in your release, you listed a related party and the third-party in the revenue breakdown.–I don’t know whether my understanding is right, is it by channel, i.e., the revenue come from a related party is sales done through Xiaomi’s channel and third-party as sales done by other channels? And with that, can you give us a little bit of breakdown of sales by channel, i.e., how much from Xiaomi and then how much from specific third-party channel, such as JD, Suning, et cetera? Thanks.

Yes. So, your understanding is correct. Our related party is Xiaomi channel sales. So, if we look at our business in terms of the two main components, the Xiaomi channel, represented just over 40% of our sales for the third quarter this year. In terms of the Viomi’s channel breakdown, approximately just over half of our revenues in the third quarter came from online channels, with the remainder coming from our offline experience store sales or sales through the offline experience stores. In terms of the online channel breakdown, there was a shift in the third quarter or further diversification of our online sales channels. In the second quarter, a large portion or the 60% of our online sales came from JD, whereas in the third quarter, it’s a much more balanced mix, around 30% to 40% came from Yopine, a similar amount came from Tmall and JD was a lower proportion. So, those are the three main online channels. As mentioned, we also started to collaborate with Suning as well in terms of their online platform sales, as well as further development of our propriety Jumei [indiscernible] platform.

Okay, thanks. My last question is about sales expense ratio, because my understanding is right now, we are in a very fast expanding phase, say, generally are we going to see higher sales expense ratio going forward? Any guidance on that?

Yes. So, in terms for a target kind of operating expense ratio, we’re looking at say, low-teens in terms of selling and marketing expenses around in terms of percentage of sales, around 4% to 5% of sales for R&D and around 1% to 1.5% for G&A. This is on a non-GAAP basis, excluding share-based compensation expenses. So operating expenses as a percentage of sales was relatively higher in the third quarter due to seasonally lower sales in the third quarter. So, you can imagine certain fixed expenses, for example, on the selling employees, as well as advertising and promotion expenses, as well as R&D, as well as G&A expenses, will be a relatively higher percentage of sales during these seasonal – seasonally lower quarters. So, we expect some expenses as a percentage of sales to trend meaningful in lower in the fourth quarter as sales pick up.

Okay. Thank you. That’s all my questions.

The next question comes from Xudong Chen of CICC. Please go ahead.

Hi? [Foreign Language] Can you hear me?

Yes.

First, congratulations on the strong quarter and I have two questions. First, I think, can you share to us more about your forecast in Q4 and 2019? And the second question is, could you talk more about the new product in progress and future strategy of the company especially in 2019, and especially the trend of gross margin, shipment, ASP etc? Thanks.

Yes, so in terms of fourth quarter, as mentioned, we are guiding top line revenues of around 850 to 880 million RMB. This will represent full-year 2018 revenues of up close to 2.5 billion RMB. So, in terms of margin trend, so, we do expect gross margins to trend lower in the fourth quarter, mainly as a result of the promotional activities such as the [strong free] the Double 11 shopping festival. But also, as mentioned, just before, our operating [indiscernible] we should also be able to experience a certain level of operating leverage in the fourth quarter in terms of expenses as a percentage of sales in the fourth quarter as well. So, looking into 2019, we are very positive on the company's future outlook. We’re continuing to build our sales channels, as well as to expand our product portfolio, as well as looking to enhance our value-added businesses. And at the moment, we’re looking at similar levels of growth for the full-year of 2019 as for the full-year of 2018. Or slightly lower due to the scale being larger.

Okay thanks. And something else – something that to me confuse about adjustments between GAAP and non-GAAP and could you tell me more about that and the conversion of the pre-investor stock to the common stock, can you talk more about that?

Yes. The difference between GAAP and non-GAAP is share-based compensation around RMB98 million. The last proportion of this was one-off share-based compensation expense to our founder, prior to the company's IPO of 4 million shares for the founder's contribution to the company's development over the years. So, this was the main difference between the GAAP and non-GAAP number. The other SPC was just ongoing share-based compensation expenses related to employee-related benefits.

Okay.

What was the second part of your question?

The conversion of the pre-investors stock to common stock?

Yes. So, all of the preferred shares and related instruments prior to the IPO have now been converted to common stock.

Okay. Thanks. That's all my questions. Thank you.

I think your second question was on product development. So, in terms of new products, as mentioned we introduced approximately 15 new product lines in the third quarter. So, we will – in terms of the margin profile we will continue to pursue a rather diversified margin strategy with certain products strategically priced, I’d say lower gross margins or more attractive gross margins to attract customers and act as key entry points into the consumer home, and some products with higher gross margins. Along the same line, we will continue to expand our product portfolio, so there may be some fluctuations with regards to our overall ASP, which is a result of the different product positioning and target market segments. For example, ASP of our refrigerator business increased in the third quarter due to the introduction of 21 Face product line, while the ASP of our washing machine product line decreased due to more economic model with smaller capacity being introduced in the quarter. In terms of overall gross margins, we're still looking at say gross margins of in the high 20s in the year ahead.

The next question comes from Laura Martin of Needham. Please go ahead.

Hi, good morning. So, could we talk about the bundle structure as you introduced more products, it feels to me like your selling more bundles and thank you for the two products number. So, when you think about what are your primary bundles sizes both in terms of dollars and in terms of number of products? And do you see an increase in our products that are sold in bundles?

Yes. So, thanks Laura. So, in terms of bundled sales. These primarily come from our off-line experience stores, which have the capability of educating consumers on the functionality and additional capabilities of our products. So, over the past several quarters, we’ve seen bundled sales represented around 50% of the revenue of off-line experience store sales. In terms of the bundled sizes, so – and bundled sales, the definition of this is, are tickets with three or more products. So, if we look at our ASPs for our products, which are generally around 3,000 to 5,000 per item, you are looking at ticket size of around 10,000 plus or even higher bundled sale as such. We also, also say special prize bundles, prepackaged bundles of say 3, 5, 7, 9 products to encourage consumers to adopt how essentially adopt our IoT @ Home platform in [indiscernible].

Okay. So, building on that. If the smallest bundle is three and the number you gave us is two products, can we assume that what that means is, that’s a proxy for repeat business that the number of people that have two products is really in online sales where people bought one at a time came back and bought a second one. They didn’t buy them simultaneously?

Yes. So, I think if we look at our number of customers with two or more products that’s a function of two trends, right? One, could be that a consumer already has one product and purchases additional products to enjoy the functions, the benefits of the connectivity and the second function is that, particularly in more recent quarters where our product line has become broader is people who are purchasing in bundle at first instance. It’s a function of both of these two aspects.

Okay. And then my last question is on the product roadmap. I think you mentioned that you just introduced water heaters, could you talk about big products that are you still or areas that you still don't have a product in and are you thinking about launching in that area, is there some reason that will keep you out of that category that you’re not in today?

Yes. We think that in the near term, we will focus on enhancing our product range within our product lines. So, offering various different types of, say, refrigerators or washing machines of different categories and price points, and working on enhancing the software capabilities rather than increasing major new categories. Having said that, we are constantly looking to develop say, additional smaller devices such as SWEEPER robots, coffee machines, food processors et cetera that will further complement the household scenarios, and be able to offer a more complete IoT @ Home experience. So, more of these smaller products, probably less of the big product categories are new product categories in the near future more focusing on developing the depth of these product lines.

Thank you very much.

As there are no further questions now, I would like to turn the conference back over to the company for any closing remarks.

Thank you once again for joining us today. If you have further questions, please feel free to contact Viomi's Investor Relations department throughout the contact information provided on Viomi’s website or The Piacente Group, the company's investor relations consultant. Thank you all. Have a good day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.