Viomi Technology Co., Ltd (VIOT) Q4 2018 Earnings Report, Transcript and Summary

Hello, ladies and gentlemen. Thank you for standing by for Viomi Technology Company Limited's Earnings Conference Call for the Fourth Quarter and Full Year 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 Ms. Cecilia Li of The Piacente Group, the company's investor relations partner. Please go ahead, Cecilia.

Hello, everyone and welcome to Viomi Technology Company Limited Earnings Conference Call for the Fourth Quarter and Full-Year 2018. 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 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 Board of Directors and the Chief Executive Officer; and Mr. Shun Jiang, the Chief Financial Officer. The company's management will begin with prepared remarks, and the call will include with a Q&A session. Before we continue, please note today's discussion will contain forward-looking statements made under the safe harbor provisions of 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 statement on Form F-1 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 discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. 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 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 Mr. Chen's remarks before providing an operational update as well as discussing our financial performance for the fourth quarter and full year 2018. So hello, everyone. Thank you all for joining today's call. We are, again, pleased to report strong operational and financial results for the fourth quarter of 2018 that exceeded our expectations, capping off a landmark year for Viomi. Net revenues increased by over 140% year-over-year to RMB955.7 million, and increased by close to 200% year-over-year to RMB2.5 billion for the full-year 2018. Our outstanding financial performance was largely driven by a continued robust market demand across our product portfolio along with successful expansion of our sales channels, both online and offline. In terms of new product launches, we continue to broaden our existing product lines to further enrich our IoT-enabled smart home product portfolio. In addition, as we recently announced at our product launch event at the Appliance & Electronics World Expo in Shanghai, we have an exciting pipeline of new and innovative products, including the 5G Face, 5G-enabled smart refrigerator, together with additional models of our flagship 21Face series of smart refrigerators, the AirBot, premium range hood, the Zero series of instant heating water heaters as well as other complementary IoT and value-added products, to enhance our overall IoT @ Home user experience. In total, we expect to introduce approximately 56 trend setting new product lines to the market in 2019. As an integral part of our growth strategy, we continue to expand and diversify our sales channels. In particular, the development of our Viomi offline experience store network, which facilitates our F2C new retail experience. With the addition of approximately 300 stores in the fourth quarter, the number of Viomi offline experience stores reached approximately 1,500 as of the end of 2018, in line with our previous guidance. We expect to expand to at least 2,000 stores in 2019 with the potential for additional stores depending on market conditions. In terms of our online channels, we continue to strengthen our presence on our key platforms, mainly JD.com, Yopine and Tmall. During the fourth quarter, we also expanded the Suning.com, another leading online home appliances retailer in China. Looking ahead to 2019, together with continued growth on these existing channels, we have also started to sell our products on Pinduoduo as well as expanding our own Viomi [Indiscernible] social connectivity and ecommerce platform. Meanwhile, we furthered our strategy to make strategic investments along our value chain to accelerate innovation, ensure quality and quantity of supply, control costs and meet the increasing market demand for our products. In July 2018, we established Guangdong Lizi Technology Co., Ltd, a smart water purification system facility focusing on the research, design, production and supply of smart water purifiers and water purifier filters. And additionally, in more recently, in January 2019, we established Guangdong AI Touch Technology Co., Ltd. for the development, production and supply of touch screen components for our smart products. The integration of these two facilities into our platform provides us with greater control over our supply chain, and we generate additional cost savings overtime. Moreover, as a pioneer in China's IoT smart home products industry, we are relentless in our efforts to advance our cutting-edge technologies and develop high-quality aspirational products to create a modern living experience and high living standards for our growing customer base. In December 2018, we collaborated with China Mobile and showcased our products at a China Mobile store in Shanghai, providing customers with opportunities to experience our IoT @ Home platform in the upcoming 5G era. In the same month, we entered into a strategic cooperation with China Unicom for applying 5G technologies to our IoT products in the future. These strategic collaborations and technology applications are in line with our long-term business strategy and will help us explore more growth opportunities going forward. The future home will be a smart and interconnected home. In partnership with the International Data Corporation, we recently issued a white paper entitled Consumer IoT Outlook 2025, detailing the key trends and growth drivers in the consumer IoT market. As we move through the year, we are confident in our ability to be a leader in China's rapidly developing IoT @ Home industry, further execute our growth strategy and maximize long-term shareholder value. Finally, in light of our strong operational and financial performance, we are pleased to declare a special cash dividend of $0.0333 per ordinary share or $0.10 per ADS to thank for shareholders for their ongoing support. That concludes our founder's comments. I will now provide an operational update and discuss our financial performance for the fourth quarter and full year 2018. As Xiaoping mentioned, 2018 was a landmark year for Viomi, with our successful IPO on Nasdaq last September being one of the many highlights. Now moving onto some of our key operational highlights. As mentioned, we continue to deepen our household penetration with the number of our household users growing to over 1.7 million as of the end of 2018 compared to approximately 1.4 million as of the end of the prior quarter and approximately 900,000 as of the end of the same quarter last year. In addition, the percentage of our household users possessing at least two of our IoT products increased to 14.3% from 13.2% in the prior quarter, demonstrating the increasing trend of users adopting multiple Viomi products and making the Viomi connected home a closer reality. Now let's move on to our quarterly financial performance. We are pleased to report strong financial results for the fourth 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 142.6% year-over-year to RMB955.7 million, primarily driven by the continued successful rollout and significant increase in the sales of Viomi branded products, together with further expansion in our sales channels. Revenues from IoT-enabled smart home products increased by 149.9% year-over-year to RMB770.6 million, primarily due to the strong continued growth in sales from our smart kitchen products and other smart products categories. Within this category, revenues from smart water purification systems increased by 21.8% year-over-year to RMB285.7 million. Revenues from smart kitchen products increased by 618% year-over-year to RMB263.1 million. Revenues from other smart products increased by 498.4% year-over-year to RMB221.8 million. Separately, revenues from consumable products increased 12% year-on-year to RMB41.9 million. And revenues from value-added products increased by 197.7% year-over-year to RMB143.2 million, primarily due to new product introductions together with increased demand for company's value-added products. Gross profit increased by 102.2% to RMB258.4 million. Gross margin was 27.0% compared to 32.4% in the year-ago period. The year-over-year decline was primarily due to shifts in the company's product and business mix. In addition, as we mentioned on the last earnings call, we did expect the gross margin would trend lower in the fourth quarter, mainly due to promotional activities around the Double 11 shopping festival. Total operating expenses increased by 165% year-over-year to RMB198.6 million, primarily due to the rapid growth of the Company's business as well as an increase in share-based compensation expenses, which totaled RMB10.3 million. R&D expenses increased by 62.3% to RMB41.8 million from RMB25.8 million for the fourth quarter of 2017, primarily due to an increase in employee-related expenses, including share-based compensation expenses as well as increases in other expenses associated with new product development. Selling and marketing expenses increased by 222% to RMB135.5 million from RMB42.1 million in the fourth 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. General and administrative expenses was RMB21.3 million compared to RMB7.1 million for the fourth quarter of 2017, primarily due to an increase in employee related expenses, including share-based compensation expenses as well as the expansion of administration departments. Net income was RMB 54.9 million compared to RMB47 million for the fourth quarter of 2017. Non-GAAP net income, which excludes the impact of share-based compensation expenses was RMB65.1 million, representing a year-on-year increase of 37.1%. As of December 31, 2018, the company had a healthy cash and cash equivalents balance of RMB 940.3 million, restricted cash of RMB29.6 million and short-term investments of RMB169 million. For the fourth quarter of 2018, net cash provided by operating activities was RMB184.1 million. Let's turn to some highlights for the full year. Just a summary, total net revenues increased by 193.3% to RMB2.6 billion, primarily due to the continued successful rollout and significant increase in sales across our product categories, particularly, Viomi-branded products. Revenues from IoT-enabled smart home products increased by 192.2% to RMB2.1 billion. Revenues from consumable products increased by 62.2% to RMB 141.9 million. And revenues from value-added businesses increased by 360.5% to RMB 338 million. Cost of revenues increased by 208.2% to RMB1.8 billion. Gross profit increased by 160.8% to RMB717.8 million. Gross margin was 28% for the full year. Total operating expenses increased by 272% to RMB639.3 million. And net income was RMB65.4 million compared to RMB93.2 million for the full year of 2017. This was mainly due to the impact of share-based compensation, particularly, a one-off share-based compensation incurred in the third quarter. Non-GAAP net income, which excludes the impact of share-based compensation for the full year was RMB182 million compared to RMB99.1 million for the full year of 2017. As we move through the year, given the massive opportunities we see, our key focus will be on delivering robust top line growth, while still maintaining healthy levels of profitability. We have great confidence in our ability to achieve long-term sustainable growth and propel our leadership in this rapidly evolving IoT market. Now let's turn to our outlook. For the first quarter of 2019, the company currently expects net revenues to be between RMB660 million and RMB690 million, representing a year-over-year growth of approximately 99.5% to 108.6%. This outlook is based on current market conditions and reflects the company'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.

[Operator Instructions] The first question comes from Lillian Lou of Morgan Stanley.

I have three questions. First of all, I think that Mr. Chen talked about in 2019, there are going to be 56 new SKUs to be launched, and we're getting more into Viomi branded, the full set of home appliance category. So can you give us a little bit small detail guidance in terms of the category growth i.e. by each major category, such as water purifier, home -- the refrigerator, washing machine, et cetera? And second question is, obviously, I think where India -- the company's India expansion phase, so how do we think about the expense ratio in 2019 compared to the level of 2018? And the lastly, also I think Mr. Xiaoping said that we are adding new channels including, Pinduoduo, et cetera, okay? You give a little bit breakdown of the channel split? And in the -- in terms of the percentage of revenue?

Yes. Thanks, Lillian. Why don't I take that one? So your first question on the individual product category growth split. I think we won't go into too much detail on this call, but in terms of the major categories, I think the Viomi-branded products, so in particular, the smart kitchen products, which included the refrigerators, dishwashers, the range hoods and the ovens as well as the other smart products, such as the washing machines and the water heaters, we do expect to experience very robust growth in these product categories. So we've guided at least 100% revenue growth in the first quarter, and I think we are confident of achieving similar levels of growth for the full year. I think the majority of the growth will come from these product categories. Having said that, we still expect to have strong market demand as well as robust growth from our water purifier business. But this particular product, given that it's in a more mature phase of development, will have a slightly lower growth rate as compared to, say, the smart kitchen or other smart products as well as the value-added products categories. So I think in summary, the Viomi product categories, you can probably expect in excess of the 100% growth that we've guided for the first quarter. And for the water system, you can probably expect a similar level of growth or slightly higher than the fourth quarter year-on-year growth, which was in the 20% year-on-year for the water purifiers. Yes, for your second question about expenses, as well as kind of our profit margin. So I think as we alluded to during the call, given the current stage of our development and considering the vast growth opportunities, we believe prioritizing top line growth and market share gains in the near term will allow us to maximum shareholder return over the long-term. But having said that, we have always prided ourselves on delivering a robust top line growth while still achieving healthy levels of profitability as you would've seen in our most recent Q4 results as well as the full year 2018 results as well as our historical performance. So in terms of the operating experience -- operating expenses on a non-GAAP basis, operating expenses as a percentage of sales was around 20% for 2018. Going forward, we do expect to generate some levels of economies of scale in operating leverage, particularly as we scale up our Viomi branded business, particularly on the selling and marketing expenses side. However, as discussed, depending on market conditions, we may choose to reinvest such amount back into our products brand and businesses to generate additional top line growth if such attractive opportunities present themselves. So I think, in summary, if we're thinking about operating margins or net income margins, I think we are targeting at a minimum what we achieved in 2018, which is in the mid-to-high single digit number for bottom line. Sorry, was there a third question?

Yes.

Could you repeat your third question. Sorry?

The third question is about the channel split. As we're adding new channel, such as Pinduoduo. So can you give us an idea of what percentage of revenue contribution by each channel, the Xiaomi channel, the JD, Suning and all this new channels?

Yes, sure. So for the fourth quarter of 2018, revenues generated from the Xiaomi channel or sales to Xiaomi was approximately 43.5% of our total revenues. Across the full-year, our revenues generated from Xiaomi was approximately 51% of our total net revenues. This compares to approximately 85% for 2017. So you can see the successful diversification of our sales channels. Going into 2019, while this trend is expected to continue, it will not be as drastic. For 2019, we still expect approximately 40% or at least 40% of our revenues to come from the Xiaomi channel. For non-Xiaomi channels or Viomi channels, in Q4, approximately 40% came from sales due to offline channel and remaining 60% from offline. Of the sales to online channels, Yopine, Tmall and JD, each contributed around 30% of the 60% of online. And with the remaining 10% from Suning, Pinduoduo and [indiscernible].

Your next question comes from Xudong Chen of CICC.

I have two questions. First one, did you see the competition in IoT business with more traditional companies like Midea or Haier? And the smart phone brand like Huawei and like Xiaomi, they also have their IoT products? And what's your comment for these companies? They -- what do you think is the advantage of Viomi? And my second question is, with more purifiers only with two -- with just one filter, will this happen in Viomi's products? If so, what will be the strategy for the consumables?

Yes, thank you. I'll just directly take that as well. In terms of the competition, we look at it this way. So we operate in a huge and highly attractive industry, right? Whether you look at it from a home appliances perspective or a smart home technology or IoT perspective, this is a huge market in China that's currently also undergoing a transformational phase. So I think competition will always exist. But we believe that the Viomi's core competencies, including our R&D capabilities, you would've seen some very innovative and industry defining and trend setting products that we recently announced at our product launch event at the AWE last week. As well as our unique business model, which we have discussed in detail previously as well as the continued penetration of our products and brand, a unique brand proposition as well as our broad and diversified product portfolio. Together with our early mover advantage in this IoT space, we think positions us quite well to capture these growth opportunities in the year ahead. So I think while there will be competition, we believe that given that the uniqueness of Viomi's core competencies that we are able to be successful in this market. Onto your question about water purifiers. So if you mean water purifiers with one or two filters, so we already had these products. So for the MIJIA, the Xiaomi 1A product or the Viomi S2 product, so these essentially have three in one filters plus and an RO filter. So these products are already on the market. If you're inquiring about additional SKUs in the product category, I think you will definitely be seeing additional SKUs at different price points across the spectrum for water purifiers that will be launched this year as well to further diversify our product range.

The next question comes from [Dan Stendsina] of Needham.

Can you hear me, okay?

Yes. Laura.

So great number guys. And I love this 1.7 million unique households, that's awesome. My first question is about gross profit. So I'm looking at the gross margin decline year-over-year of 32% going to 27%, coupled with my sales and marketing growth of 222%, which is just feels like a lot of extra money being spent per product sold. And I'm wondering if you could comment on that? And whether it's due to more competition? Or why I am having to grow, both discounting at the gross profit line and sales and marketing expense also? Could you talk about that, please?

Sure, thanks, Laura. So I think if you look at our business profile in 2017 compared to that of 2018, it's quite different in terms of business and the product mix, right? In 2017, as mentioned approximately 85% of our business was through Xiaomi, right? And only 15% of our business was through our own channels or selling our own branded products as compared to say a 50-50 split in 2018. So you can defer -- infer from that the majority of the growth, the very robust growth that we are -- we were able to achieve in 2018 was largely driven by the prevalence or introduction of our own branded products. So the refrigerators, the washing machines, the range hoods, the water heaters and whatnot, the majority or the vast majority of these products were only introduced in 2018 under our own brand. And of course, coming with that, you have a different margin profile, both in terms of brand marketing. So for Xiaomi branded products, obviously, Xiaomi will incur the brand promotion and related expenses. And for our products, we will incur, say, the selling and marketing as well as the promotional expenses and logistics expenses and whatnot. And also in terms of the actual product gross margins, in 2017, the majority of our business was sold through Xiaomi, and the majority of that was water purifiers. And water purifiers as a product line generally has higher margins than some of the other smart appliances products that we are selling under own brand, such as the refrigerators the -- and the washing machines and whatnot. So I think in short, it's primarily a shift in the company's product and business mix.

Makes perfect sense and thank you for that. And my second question is, I was very interested in the founder's comments about the deals around 5G and 5G availability, and I am curious as to when you think 5G is going to start contributing revenue, 5G type of connectivity?

[Foreign Language]

Yes. So I think in terms of the technology and the connectivity, in terms of our R&D and our products, it's mostly ready. So we already have, say, prototype or near ready products in place. And the pilot testing of these products is already underway. I think when they will come online will obviously be dependent on when the large service provider, such as China Unicom and China Telecom, they have the overall network in place and stable throughout various parts of China. So I think it's hard for us to give an exact timeline. But given the rapid developments around the space as well as the progression of 5G technology in recent months or quarters, we expect to see these products coming onto the market in the near future.

Your next question comes from Robert Cowell of 86Research.

The first one, I want to follow up on the 5G question just now. I'm interested in how you think 5G impacts the product design and functionality of your smart appliances? And then my second question is, if we're looking out over the longer term our production strategy, how much of it do we want to bring in-house? Is this -- is the establishment of these two factories indicative of a larger trend toward in-house production?

Thanks, Robert. I'll answer the second question first and Mr. Chen will address your first question on 5G. So in terms of thinking about the medium to -- medium term, we don't expect to devote significant resources or CapEx to say building large-scale assembly plants in the near future. So our business model will still be predicated on an asset light one as we have been operating. So cooperating with our OEM partners on the upstream end, while keeping the R&D and design and patents in-house as well as say outsourcing the operational of our offline experience stores to our franchise partners. So having said that and as we mentioned a key part of our use of proceeds in the -- as part of the IPO will be to make certain strategic investments along the value chain, which I think these two production facilities come under, right? So you can see that the -- these two production facilities, one is to predominantly meant bringing the production of water purified filters, and the other is to produce the screens for the -- for our smart products, right? So this is very much a part of our strategy to bring some of the core components of our products, so some of the raw materials of our products -- as well as some of the raw materials of our products in-house to be able to reduce costs as well as to ensure the quality and quantity of supply. So I think some of the general assembly work or the heavy lifting, we'll continue to partner with our -- strong OEM partners with. And in terms of the 5G question, I'll ask Mr. Chen to address.

[Foreign Language]

So I think couple of parts to the response. So 5G, I think the most important aspect of 5G is that it increases cloud connectivity as well as connectivity between users as well as connectivity between products and products, anytime and anywhere. So previous technology or current technology with WiFi and Bluetooth, you can connect on a local basis. But in terms of a remote basis, there are -- there is still lack of functionality. So really, the 5G in terms of connectivity, you really take our products as well as the IoT products industry in general to the next level in terms of user experience. And also we think that once 5G comes online there will be a change in user experience or how users engage or interact with these products. So it opens up essentially new possibilities in terms of consumption as well as daily usage or how people think about home appliances or electronics, I mean, the home scenario. So this is why we are really dedicating a lot of efforts into speeding up our R&D as well as partnering with these service providers to launch these products or have these products ready for launch as soon as the network is in place. Obviously, as discussed with the timing, it will ultimately depend on when the service providers have the technology in place. But as far as we're concerned, we want to be ready on day one when it does happen.

[Operator Instructions]

[Operator Instructions] As there are no further questions now, I'd like to turn the call back over to the company for 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 through the contact information provided on our website or The Piacente Group, the company's investor relations consultant. Thank you all, have a good one.

This concludes this conference call. You may now disconnect your line. Thank you.