Viomi Technology Co., Ltd (VIOT) Q2 2019 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 Second Quarter 2019. 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.

Thank you, operator. Hello, everyone and welcome to Viomi Technology Co. Limited earnings conference call for the second quarter 2019. As a reminder, this conference is being recorded. The company's financial and operating results were issued in 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 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 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 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 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'll quickly translate Mr. Chen's remarks before providing an operational update and discuss our financial performance for the second quarter of 2019. Hello, everyone. Thank you for joining today's earnings call. We are pleased to report another strong quarter with robust top line as well as bottom line growth, despite increasing macro and industry-wide uncertainties. According to industry data compiled by All View Cloud, the overall home appliances market in China declined by 3.2% in the first half of 2019 in terms of retail sales value and has continued to face headwinds in the second half. Nevertheless, our net revenues for the second quarter increased by 63.6% year-over-year to RMB 1.16 billion, in line with our previous guidance. This sustained and resilient growth momentum was attributable to the continued strong market demand across our product portfolio, driven by new product introductions together with sales channel expansion as well as growing brand recognition and customer trust. As part of our core strategy for this year, we have continued to launch additional product lines and SKUs to enhance and complement our IoT @ Home product portfolio over the past several months. In terms of smart water purification systems, we introduced new series of Xiaomi-branded water purifier products, including both 500-gallon and 600-gallon versions. Recently, we also launched a new ultra-thin series of Xiaomi-branded water purifiers. With respect to smart kitchen and other products, we launched Cross 2, the second generation of our Viomi-branded range hood with innovative motion-gesture AIoT features, together with additional product lines in our flagship series of 21Face smart refrigerators and Zero series of smart instant water heaters, among others. We also brought to market a new Xiaomi-branded range hood and stove series as well as a new series of sweeper robots. All of these products have been well received by the market. Our focus remains on new product innovation and development as well as the expansion of existing product lines. For the second half of 2019, we have an exciting pipeline of new and innovative products for Xiaomi and Viomi brands, both in existing and new product categories. We look forward to sharing more details on these products with the market in due course. In the second quarter, we continue to expand and diversify our sales channels with a growing number of our Viomi off-line experience stores. With the addition of approximately 300 stores, the number of Viomi off-line experience stores reached more than 1,900 as of the end of the second quarter. While we expect to continue to open new stores, given the strong interest from potential franchisees, we will shift our emphasis more towards enhancing store productivity, in the second half of 2019. Regarding online sales channels, we continued strengthening our presence on key e-commerce platforms, including Yopine, JD.com, Tmall, Suning and Pinduoduo. Further, we continue to enhance our own e-commerce platforms Yunmi [Foreign Language] and WeChat program, [Foreign Language], our Viomi Lifestyle Center, with upgraded functionalities as well as easier navigation to access our products. The recent 618 [Foreign Language], online shopping festival, was particularly successful, with Viomi witnessing significant year-over-year sales growth, and among the top 10 brands, among numerous categories during the promotion. In addition, as we mentioned on our previous earnings calls, we expect the upcoming 5G era to trigger another growth cycle, in the home appliances industry in China. And have stepped up our investment and preparation. In June, we reached an agreement with Guangzhou Yuexiu Industrial Fund for exploring high-quality investment opportunities, in the smart home industry and deepening our strategic layout in the IoT, plus 5G, plus AI direction, through the integration of our technologies and resources. The partnership is also in line with our value chain investment strategy. To further enhance our IoT @ Home presence, we also recently established partnerships with Fusen Noble-House and E-home, two well-recognized interior design firms in China, to integrate resources and provide more efficient, higher-quality and fully integrated IoT solutions, for consumers. Going forward, we will continue to execute our growth strategy. And remain committed to providing more advanced and holistic user experiences, in the upcoming era. In summary, this quarter marks the fourth quarter, since our IPO in September 2018. Despise various industry headwinds, we have been able to successfully achieve our strategic goals, deliver rapid revenue growth and market share gains, while maintaining healthy levels of profitability. As we look ahead to the rest of 2019 and beyond, our focus will remain on striking a stable and sustainable balance, of growth and profitability. We are fully confident in our ability to deliver attractive long-term returns for our stakeholders. Thank you. That concludes our Founder's comments. I will now provide an operational update. And discuss our financial performance for the second quarter of 2019. So I'll quickly summarize some of our key operational updates. On the user front, the number of our household users grew to more than 2.3 million compared to approximately 2 million as of the end of the first quarter, and approximately 1.2 million as of the end of the second quarter of 2018. In addition, the percentage of our household users, owning at least two of our IoT products increased to 16.1% from 15.2%, in the prior quarter. Further demonstrating the increasing trend of users, adopting multiple Viomi products and making the Viomi connected home a closer reality. I will now provide a brief review of our second quarter 2019 financial results. In the second quarter, we again achieved significant top line growth. In addition, we achieved even greater levels of bottom-line growth, as well as net margin expansion. All while maintaining healthy levels of liquidity. As Xiaoping discussed, net revenues increased by 63.6% to RMB1.16 billion from RMB709.3 million for the second quarter of 2018, primarily due to the continued successful rollout and significant increases in sales of Viomi-branded products. Revenues from IoT-enabled smart home products increased by 55.7% to RMB906 million, from RMB581.7 million for the second quarter of 2018. Primarily due to the continued successful rollout, of the company's smart kitchen products and other smart products. Within this category, we are pleased to report that revenues from our smart water purification systems, resumed healthy growth in the second quarter, achieving 21.2% increase year-over-year, to RMB344.8 million compared to RMB284.5 million for the second quarter of 2018. The growth was primarily driven by introduction of new series of smart water purifier products, together with overall increases in sales volumes. Revenues from smart kitchen products increased by, 61.5% to RMB351.3 million, from RMB217.5 million, for the second quarter of 2018. The rapid growth was primarily driven by significant increases in sales volumes, of the company's Viomi-branded refrigerator products. Revenues from other smart products increased by, 163.2% to RMB209.9 million from RMB79.8 million for the second quarter of 2018. The rapid growth was primarily driven by significant increases in sales volumes of the company's Viomi-branded washing machine and water heater products. Separately, revenues from consumable products increased by 38.3% to RMB 69.4 million from RMB 50.2 million for the second quarter of 2018, primarily due to increased demand for the company's water purifier filter products. Revenues from value-added businesses increased by 138.7% to RMB 184.8 million from RMB 77.4 million for the second quarter of 2018, primarily due to new product introductions, together with increased demand for the company's value-added products. Gross profit increased by 60.8% to RMB 308.3 million from RMB 191.7 million for the second quarter of 2018. Gross margin was 26.6% compared to 27.0% for the second quarter of 2018. The slight decrease in gross margin was primarily due to shifts in the company's business and product mix. Please also note that gross margins are generally low on a seasonal basis in the second quarter due to various high profile online promotional campaigns such as 618 during the period. Total operating expenses increased by 45.7% to RMB 211.3 million from RMB 145 million for the second quarter of 2018, primarily due to the growth of the company's business. R&D expenses increased by 112.3% to RMB 59.6 million from RMB 28.1 million for the second quarter of 2018, primarily due to an increase in employee-related expenses, amounting to RMB 24.2 million. Selling and marketing expenses increased by 21.3% to RMB 129.5 million from RMB 106.7 million for the second quarter of 2018, primarily due to increases in logistics expenses amounting to RMB 16.2 million as a result of the growth of the company's business. G&A expenses were RMB 22.2 million compared to RMB 10.2 million for the second quarter of 2018, primarily due to an increase in professional expenses, as well as increases in employee-related expenses. Net income was RMB 88.9 million, an increase of 117.6 million -- 117.6% from RMB 40.9 million for the second quarter of 2018. Net income margin was 7.7%, increasing from 5.8% for the second quarter of 2018, primarily attributable to greater economies of scale together with prudent cost control measures. Non-GAAP net income, which excludes the impact of share-based compensation expenses was RMB 99.3 million, an increase of 113.7% from RMB 46.5 million for the second quarter of 2018 and accelerating on a quarter-over-quarter basis, again. Non-GAAP net income margin was 8.6% compared to 6.5% for the second quarter of 2018. On balance sheet -- our balance sheet remained healthy. As of June 30, 2019, the company had cash and cash equivalents of RMB 668 million, restricted cash of RMB 22.9 million, short-term deposits of RMB 109.7 million and short-term investments of RMB 192.7 million. Now let's turn to our outlook. For the third quarter of 2019, the company expects net revenues to be between RMB 880 million and RMB 920 million, representing a year-over-year growth of approximately 55.7% to 62.7%. This outlook is based on current market conditions and reflects the company's latest and preliminary estimates of market and operating conditions as well as customer demand, which are all subject to change. Given the increase in macro uncertainties and current headwinds in the home appliances industry in China, we expect to place greater emphasis on maintaining prudent cost control measures and return on investments going into the second half. Nevertheless, with the strong and visible new product pipeline together with an ever-increasing brand awareness and channel penetration, we are confident in our ability to continue to deliver robust growth, as well as stable levels of profitability for the full year 2019 and beyond. 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.

Thanks a lot management for the detail explanation and congratulations on the good result. I have three questions. First of all, it's more on the quarter outlook in terms of the -- our strategy. Because I think in second quarter, there has been significant savings in the SG&A ratio, as management mentioned. Is that something that is going to continue in terms of protecting the gross margin, operating margin and net margin? So basically, what's the margin outlook for the quarter and the rest of the year? Second question is about the further cooperation with Xiaomi in terms of other home appliances products. How do we see the potential cannibalization between Xiaomi's product and Viomi's home appliances products? Also, can you give us a little bit detail about the future investments in the IoT and the smart home appliances category? Lastly, a very small technical question is can you give us a little bit detail on the channel split in second quarter? Thanks.

Yeah. Thanks, Lillian. I'll just address them one-by-one. So firstly, on the margin outlook and cost structure, as you can see in the results for this quarter, our operating expenses on a non-GAAP basis were approximately 17% of our revenues during the period as compared to around 20% in previous periods. The decrease in expense ratio predominantly came from achieving efficiencies in selling and marketing expenses such as logistics and advertising, and was mainly as a result of successfully realizing economies of scale and implementing prudent cost control measures. So based on our current business plan and prevailing market conditions, which are subject to change on a dynamic basis, we would expect to place great emphasis on maintaining this cost control strategy and return on investments going into the second half. So accordingly, we will probably target non-GAAP net margin of around 8% going into the second half of the year and for the full year. So your second question on the -- on Xiaomi cooperation, so as you may have seen, we have launched a number of [Foreign Language] Mi Home products in the recent months, including the two larger categories of the range hood and stove as well as recently the sweeper robots. So these two products have actually been very well received by the market. We will continue to launch additional Xiaomi-branded products in the second half of this year, and we will discuss with the market in due course the timing of these as well as the financial impact of these. We very much see a healthy coexistence between Xiaomi-branded as well as Viomi-branded products, even if they are in the same category as we have historically shown in water purifiers with a distinct categorization, functionality and price points for these products. So we do see healthy coexistence between the two brands. In terms of the channel breakdown, in the second quarter, revenue from the Xiaomi channel constituted approximately 40% of our total revenues with the Viomi and other channels representing the remaining 60%. In terms of non-Xiaomi channels, off-line constituted close to one-third, and online two-thirds of the respective revenues. Within the online channels, Yopine and JD, each constituted around one-third of the online portion, with the remaining one-third represented by other sales channels such as Tmall, Suning online, Pinduoduo as well as own e-commerce channels.

Okay. Thanks a lot.

Thank you.

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

[Foreign Language] Thank you for taking my question. My first question is about Xiaomi sweeping robot. The company has launched this category for Xiaomi. It seems this category is still growing under weak macro environment. Can you give me more color about this product and its future strategy? And my second question is the water purifier seems to recover this quarter. What can we expect for the second half in 2019? Since China home appliances market is suffering from the weak macro, what can we expect for Viomi-branded products in the second half? Thanks.

Thanks, Xudong. So I'll just take those one by one as well. So in terms of the sweeper robots, you're absolutely right. This is very much growing in essence market in China that we do see a lot of headroom for future growth. So we recently launched the Xiaomi-branded sweeper robot series, a new category for us. This has already received over 20,000 units in terms of shipments within one to two months. So this is definitely performing very well. And as mentioned, we also have a number of other Mi Home products coming in the second half. So also just to give you a little bit of color on the range hood and stove, we've also shipped close to 20,000 units of this product category as well, which also only came online over the past couple of months. So on your second question regarding the water purifiers and the overall kind of revenue development for the second half so as you saw water purifier growth resumed quite healthy growth. We guided healthy double-digits. We achieved over 20% year-on-year growth in water purifier product in the second quarter. This was mainly driven by additional new SKUs, some larger volume products. In the second half, we will also have some additional products, additional SKUs within the water purifier category, for example, the ultra-thin series that we recently launched. So I think for the full year, including the temporary decline in the first quarter as well as the increase or the resumption of growth in the second quarter, you can probably expect around 15% growth for the water purifier category on a year-on-year basis, which is well ahead of the industry growth. In terms of Viomi-branded products, given the relatively low base in 2018, the year-on-year growth will still be extremely healthy. And we are also continuing to launch new product categories, going into the second half. So in terms of our Viomi-branded products we expect well over 100% year-on-year, growth for this category.

Thanks.

[Operator Instructions] The next question comes from Vincent Yu of Needham. Please go ahead.

Hey, Shun and Xiaoping congrats to the -- on the strong quarter. So, I have a few questions. One, can you share some insights on the business strategy behind on opening 300 experience stores, in this quarter? In addition, it's approaching our annual target. So are we going to lift the target? The second question is around, the related consumable sales. So, considering the strong smart water purification system, sales in the quarter, when will we see the related consumer -- consumable sales loop in, like around fourth quarter or beginning next year? And my last question is around our, strategy to develop new product lines. Are we going to focus -- are we going to see more SKUs in kitchen use, bathroom use or home safety? Thanks.

Thanks. Again, I'll take them, one by one. So in terms of our store opening schedule, so we opened around 300 new stores on a net basis for the second quarter of 2019. This has been relatively on track, on our historical store opening speed, so around 100 new stores per month. So as we discussed during the call, our target was around 2,000 stores, for this year. While we expect to continue to open new stores on a gradual basis, given strong interest from potential franchisees, we believe that going into the second half, core focus will be more to emphasize, enhancing store profitability and productivity, rather than to increase raw store count. On your second question on consumables, so, at the end of last year, we had -- there was around 100 million units, I am sorry, 1 million units of water purifier products in the market. And we're obviously continuing to sell additional units this year. So we estimate that each unit roughly generates around, RMB300 of consumables revenues per year. So, I think if you extrapolate that, the 1 million units should be able to generate around RMB 300 million of consumables revenues for this year. And on an ongoing basis, the consumables revenues will ramp up the increase in installed base. And on your third question on new product development, so if you look at our product portfolio, we pretty much cover the entire range of large appliances or white good products in the home environment already, which is very much part of our product positioning and to be able to provide integrated IoT @ Home experience to our users. This larger appliance focus positioning is then complemented by our various small appliances and smart devices to further enhance connectivity and overall user experience. So our strategy in the short-term will be to continue to build out additional SKUs within pretty much all of our existing product categories to cover a wider range of consumer demands and price points. We will, however, update the market in due course, if we intent to enter into any new product categories on a large scale or material nature down the road.

Got it. Thank you.

[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.

Thank you everyone.

Thank you.

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