Viomi Technology Co., Ltd (VIOT) Q3 2019 Earnings Report, Transcript and Summary

Hello, ladies and gentlemen. Thank you for standing by for Viomi Technology Co. Limited Earnings Conference Call for the Third Quarter of 2019. At this time, all participants are in listen-only mode. Today's conference call is being recorded. I will now turn the call over to your host, Ms. 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 third quarter of 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 third quarter of 2019. Hello, everyone. Thank you for joining today's earnings conference call. We are again pleased to announce that we continued the robust growth momentum from the first half of 2019 and again achieved strong and healthy top and bottom-line growth with revenues increasing by 89.3% to RMB1.07 billion and non-GAAP net income increasing by 116.4% to approximately RMB83.9 million for the third quarter of 2019, despite ongoing macro and industry-wide uncertainty. Our sustained growth and solid results underscore our exceptional innovation capabilities and execution capability, as well as demonstrating the ever-increasing consumer interest and demand for the Viomi brand and our products. As part of our core strategy for this year, we continue to introduce additional product lines and SKUs to strengthen our overall product portfolio and offerings. In addition to new Viomi-branded products, we've also continued to increase our cooperation with Xiaomi on Xiaomi-branded products over the past several months through the introduction of additional product categories, including range hoods, sweeper robots and more recently refrigerators, which have all been well received by the market. Moreover, we also recently launched our new premium AI-focused coKiing brand starting first with a series of air conditioning products. This brand focuses on the mid to high-end market and we expect coKiing to further complement our IoT @ Home product portfolio, address the needs of more consumer segments, open up new markets, and most importantly, enrich the overall user experience. We will share more updates on the development of this brand and related products in future earnings conferences. In accordance with our AI plus IoT plus 5G strategy to continue the theme of preparing for the upcoming 5G era and establish our leading position in this space, we also recently introduced our own 5G customer premise equipment or CPE products to facilitate full home 5G coverage. Developed with industry-leading specifications, we expect this product to raise the IoT @ Home experience to a higher level. In addition we believe there will continue to be more opportunities to enhance and expand user experiences, particularly in away-from-home scenarios. In September, we officially reached an agreement with China's leading automotive brand FAW Bestune for a strategic corporation in the AIoT connectivity space. The specific series of cars under the Bestune brand will be enabled with our IoT @ Home connectivity system breaking the physical boundaries of IoT Home products and building a large -- larger and more comprehensive smart home ecosystem. Going forward we'll continue to engage additional partners to broaden the spectrum of our IoT capabilities, attract more users, and apply our system to diverse usage environments. The rapid and successful developments of our business reflect our outstanding R&D and innovation capabilities along with our ever-increasing market presence and brand recognition. The recent high-profile Double 11 or [Indiscernible] online shopping festival in China was extremely successful for us with many of our products among the top 10 within their respective categories. This is a truly remarkable achievement for being able to generate such levels of brand awareness and consumer interest within --with only -- within only a few short years and really a testament to the market's demand for such next-generation IoT products. It's now been more than one year since our IPO on NASDAQ. Looking back over the past year, we're proud to say that we've been able to successfully demonstrate to the market the strength of our business, management capabilities, and efficient execution. We were ranked as one of the top 50 U.S.-listed Chinese companies with the most investment value which was recently co-published by Barron’s Caijing and Tiger Brokers. We're also pleased to see that we were ranked as one of the kings of IoT as per our recent publication by 36Kr. These developments once again are a testament to our increasing visibility, strong core competencies, and future growth potential. Going forward we will remain consistent and well-aligned with our long-term strategy and continue to focus on delivering healthy revenue and profitability growth. We're also confident that we can maintain our leading position in China's IoT @ Home industry and contribute to its sustainable development. So, that concludes our Founder's statements.

I will now provide an operational update and discuss our financial performance for the third quarter of 2019. So, I'll first quickly summarize some of the key operational updates. First in terms of sales channels for Viomi-branded products, we saw very strong growth in the online channels including all three of our major e-commerce platforms such as Youpin, JD, Tmall, as well as Suning, et cetera. We have also been stepping up assets in developing our proprietary e-commerce platform in Samsung as well as our own Social Commerce platform, Viomi Lifestyle Center or Yunmi Shangcheng [ph]. Both platforms have experienced significant growth over the past year providing us with additional inwards to enhance user stickiness and create further monetization opportunities going forward. With regard to our off-line store network, we continue to see strong interest and support from franchisees in the Viomi brand. However, in light of prevailing industry conditions, we have shifted our focus in the second half of 2019 more towards further enhancing and optimizing our store performance and productivity, including the closure of underperforming stores. The number of Viomi offline experience stores were approximately 1,600 as of the end of the third quarter of 2019 compared to 1,900 as of the end of the second quarter. Although the number of stores decreased, revenues generated from our offline sales channels still increased on a sequential basis as a reflection of the shift in our offline channel focus. Looking ahead into 2020, we will continue to diversify our sales channels including the opening of additional Viomi Experience stores as well as increasing our presence on other mainstream channels to further broaden our market access and increase brand awareness. In terms of user penetration as of the end of the third quarter of 2019 the number of our household users grew to more than 2.6 million compared to approximately 2.3 million as of the end of the second quarter and approximately 1.4 million as of the end of the third quarter of 2018. In addition the percentage of our household users owning at least two of our IoT products increased to 17.1% from 16.1% in the prior quarter, further demonstrating the increasing trend of users adopting multiple Viomi products. I'll now provide a brief overview of our third quarter 2019 financial results. In the third quarter, we again realized significant topline growth exceeding our previous guidance and showing acceleration on a sequential basis. In addition we achieved an even higher level of bottom-line growth. As Xiaoping discussed, net revenues increased by 89.2% to RMB1.07 billion from RMB565.3 million for the third quarter of 2018, primarily due to continued successful rollout and significant increase in Viomi-branded products together with a successful launch of new Xiaomi-branded products. Revenues from IoT-enabled smart home products increased by 71.9% to RMB829.2 million from RMB482.5 million for the third quarter of 2018, primarily due to the successful rollout of our smart kitchen and our other smart products together with a successful launch of new series of Xiaomi-branded products. Within this category, we're pleased to report the revenues from smart water purification systems increased by 1.2% year-over-year to RMB214.5 million compared to RMB212 million for the third quarter of 2018. This increase was driven by healthy double-digit growth in sales volumes which were partially offset by declines in average selling price. Revenues from smart kitchen products increased by 74.3% to RMB342.1 million from RMB196.3 million for the third quarter of 2018. The rapid growth was primarily driven by significant increases in sales volumes across many of our smart kitchen product categories in particular Viomi-branded refrigerated products as well as the successful launch of new Xiaomi-branded products such as range hoods and gas stoves. Revenues from other smart products increased by 267.8% to RMB272.7 million from RMB74.1 million for the third quarter of 2018. Rapid growth was primarily driven by significant increases in sales volumes of our Viomi-branded washing machine, water heaters, as well as new categories of sweeper robot products. Separately revenues from consumable products increased by 333.3% to RMB53.7 million from RMB12.4 million for the third quarter of 2018 primarily due to the increased demand for our water purifier filter products. Revenues from value-added businesses increased by 164.8% to RMB186.5 million from RMB70.4 million for the third quarter of 2018 primarily due to new product introductions together with increased demand for our value-added products, including the successful launch of new series of Xiaomi-branded products. Gross profit increased by 40.2% to RMB238.1 million from RMB169.9 million for the third quarter of 2018. Gross margin was 22.3% compared to 30% for the third quarter of 2018. The decrease in gross margin was primarily due to the continued shifts in the company's business and product mix. Total operating expenses decreased by 26.5% to RMB169.2 million from RMB230.2 million for the third quarter of 2018, primarily due to a significant decrease in share-based compensation expenses. A one-off share-based compensation expense of RMB90.2 million was incurred in the third quarter of 2018 that was no longer occurred in the third quarter of 2019. Additionally, we continue to achieve further economies of scale and improve operational efficiency. R&D expenses increased by 29.3% to RMB43.2 million from RMB33.4 million for the third quarter of 2018 primarily due to an increase in personnel related expenses. Selling and marketing expenses increased by 16.4% to RMB113.4 million from RMB97.4 million for the third quarter of 2018, primarily due to increases in relation to the growth of our business offset by a decreasing advertising and promotional-related expenses as a result of achieving further economies of scale and improved operational efficiencies. General and admin expenses decreased by 87.3% to RMB12.6 million from RMB99.4 million for the third quarter of 2018 again the decline was primarily due to a significant decrease in SBC expenses as mentioned a one-off SBC expense of 19.2% -- RMB19.2 million was incurred in the third quarter of 2018 that was no longer incurred this quarter. Net income was RMB73.3 million compared to a net loss of RMB59.8 million for the third quarter of 2018. And then the net loss in third quarter of 2018 was primarily attributable to the one-off share-based compensation expense. Net margin was 6.9% for the third quarter of 2019. Non-GAAP net income which excludes the impact of share-based compensation expenses was RMB83.9 million, an increase of 116.4% from RMB38.7 million for the third quarter of 2018. Our non-GAAP net margin remained at a solid level of 7.8% compared to 6.9% for the third quarter of 2018. Additionally our balance sheet remained healthy as of September 30, 2019. We had cash and cash equivalents of RMB727.1 million restricted cash of RMB4.8 million short-term investments -- short-term deposits of RMB112 million and short-term investments of RMB269.8 million. For the third quarter of 2019 net cash provided by operating activities was positive RMB116.7 million. Now let's turn to our outlook for the fourth quarter of 2019. We currently expect net revenues to be between RMB1.4 billion and RMB1.44 billion representing a year-over-year growth of approximately 46.5% to 60.7%. For the full year of 2019, we currently expect net revenues to be between RMB4.31 billion and RMB4.35 billion representing a year-over-year growth of approximately 68.1% to 69.7%. Please note that the above outlook is based on the current market conditions and reflects our current and preliminary estimates of market and operating conditions and cost of demand which of course are all subject to change. So that concludes our prepared remarks. We will now open the call for Q&A. Operator please go ahead.

[Operator Instructions] The first question today comes from Lillian Lou of Morgan Stanley. Please go ahead.

[Foreign Language] So I have three questions. First is about the new store opening. So by third quarter the total number was 1,600, there was a decrease. What's the number or target by the year-end? Does the company still stick to the original target of 2,000 stores by the year-end? And the second is on the margin, what's the guidance for fourth quarter and 2020 in terms of the gross margin and the OP margin? And the third question is on the breakdown of the sales guidance for fourth quarter by product. Any color you can mention and provide to us? Thank you.

Thanks, Lillian. So, I'll just take them one-by-one. Firstly, on the store expansion rates. So, as we mentioned, there was a shift in our strategy with regards to the expansion of our off-line store network in the second half of this year mainly taking into consideration the prevailing industry conditions. As we may know the home appliances industry and particularly in offline channels has had some challenges for this year and we have adjusted accordingly. So the focus in the second half of this year has very much been towards further enhancing and optimizing our store performance and productivity as well as raising the bar for potential franchisees wanting to partner with Viomi. So -- and also the closure of some underperforming store and the elimination of some underperforming franchises. So as we discussed, the number of Viomi offline stores was approximately 1,600 as of the end of the third quarter compared to 1,500 as of the start of the year. And as we also noted although the number of stores decreased on a sequential basis quarter-on-quarter revenue generated from the offline channels was still increasing so highlighting the increased productivity per a store. So for the fourth quarter, while we're continuing to open new stores and have largely completed our phase of store closures, we probably don't expect a significant increase in net store count as compared to the end of the third quarter. So it's still around, let's say, 1,600 to 1,700 stores is probably what you should expect by the end of this year. Looking ahead to 2020 and I think there are some uncertainties here as well, right? So our main strategy is to continue to diversify our sales channels including the opening of additional stores as well as increasing our presence on other mainstream channels including potentially some of the mainstream KA offline channels to further broaden our market access and increase brand awareness. Over the longer-term, we do see the potential to open many more Viomi stores, though the pace of store openings will of course depend on the marketing conditions. I think it's also worth highlighting that as we continue to develop our business and our brand gains more recognition, we see these offline stores more and more as showrooms and experienced rather than our channels to facilitate sales of our products. All right. So I think that's the first question. The second question in terms of the margin profile, right? So as you would have seen there has been, I would say a shift in our margin profile as well as our expense profile. Now I would say this is largely contributed particularly in this quarter and at least the coming quarter with regards to the introduction of several new Xiaomi-branded products. And Xiaomi-branded product -- new Xiaomi-branded products although some may have lower gross margin than our overall gross margin, they may not necessarily have lower operating margins and some may even have higher operating margins. So the trend is mainly due to less expense contribution, as well as the Xiaomi-branded products. So we don't incur a relevant sales and marketing expenses. So what you have seen here is a decline in gross margin, but also a material decline in the selling expenses as a percentage of sales, which has provided us with relatively stable or even increasing our operating and net margins on an year-over-year basis. So I think the fourth quarter you can probably expect a similar margin profile as compared to the third quarter. So around the 8% -- 7.5% to 8% net margin levels. So going forward, I think we're still in the process of finalizing the details of our budget for the 2020. And we will be able to provide more clarity on that as we get into 2020 in our next earnings call. So your last question was on the fourth quarter by segments, right? So the fourth quarter by segment, I think if you look at water purifiers probably around 10% year-on-year growth. The other IoT smart home categories, they should continue to see very robust growth. So, between say, 50% to 100% on The Smart Kitchen and other smart product categories. For consumables, I think also a robust growth 50% to 100% now we're looking at -- for that particular business and value-added close to 100% growth there as well. So, that should get you to our guidance of around say of around 50% overall growth. Okay. Does that answer the question?

Thank you. That's very clear.

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

[Foreign Language] Thank you for taking my question. I have two questions. The first one is Viomi did a really good job in Double 11. As home appliances industry declining in the first half, did you see some recovery in second half? And what's the outlook for 2020? That's the first question. The second one is, as you and Xiaomi have good relationship in IoT home appliances and Xiaomi has put 5G plus the IoT to be the next maybe five to 10 years long-term strategy. What can we expect Viomi's role in Xiaomi's development? Thank you.

Thanks, Xudong. Your first question on the industry outlook. According to the industry data, there's still some ongoing weaknesses in the overall home appliances market industry particularly in the offline channels. It's fair to say that the industry as a whole has not performed as well as had expected, I'd say as at the start of this year. Nevertheless, we believe this does provide exciting opportunities for new brands and companies such as Viomi. And as you can see we've been able to deliver robust and healthy growth despite such industry conditions, which we believe can be attributed to our unique positioning and execution capabilities. I think the overall industry outlook is still quite uncertain and it's quite difficult to predict, given the ongoing macro issues. And we hope to provide more clarity on this again going into 2020 on our next earnings call. The second question on the cooperation with Xiaomi. So it wouldn't be appropriate for me to comment on Xiaomi's own future strategy and where you see Viomi as well. But from our perspective given the evidence that you can see this year, you can clearly see that we've been one of the few Xiaomi existing companies I would say to have materially expanded our relationship with Xiaomi, broadening our product cooperation initially from only water purifiers and some water -- products to now including large appliance products such as range hood stores and refrigerators as well as very core small appliances and products such as sweeper robots and blenders. So we do see ourselves as an important partner for Xiaomi in it's AIoT rollout.

Okay. Thank you. And congratulations on strong growth. Thank you.

Thank you.

The next question today comes from Robert Cowell of 86Research. Please go ahead.

Hi, management. Thank you for taking my question. I actually have two. The first is about the new brand you recently launched coKiing. I'd like to hear your thoughts on the logic of launching a second brand at this time, particularly given the fact that Viomi itself is still a relatively new brand to a lot of consumers? And then my second question is maybe a little bit broader. I think this year you'll have done a very good job of moving quickly and expanding the product portfolio. But I'm thinking longer term what are your core competitive advantages? How do you see that those -- how do you see your core competitive advantages? And what's the CapEx you need in the longer-term to defend and extend the strength of those competitive advantages, particularly as we're looking into 2020 on CapEx spend?

Yes, okay. I'll take them one by one again. So on the new premium coKiing brand. So we recently launched this brand with a series of air conditioning products. So the idea of this brand was to -- and this is a co-branded coKiing and by Viomi brand is that we wanted to essentially set a foundation for say a premium brand. So we really want Viomi to be positioned as you may recall as a more accessible mass market or mid-tier brand for the middle class. But going forward, we also want the opportunity to premiumize our product and had product categories with higher ASP products for the more premium consumer to really lift the brand portfolio and potentially margins going forward as well. So that's why we chose to launch the coKiing brand at this stage. Initially for air conditions which completes in a near term our IoT product portfolio. So as you may have seen, these air conditioning are very much positioned towards the mid to high-end market with innovative AI plus IoT capabilities. So, I think that's the rationale for launching this new brand at this time. And given the size of the addressable market, we see significant room for growth for Viomi as well as the coKiing by Viomi brand in parallel. So your second question on core advantages. So the Viomi concept right is founded on the idea of positioning our brand as a unique high-tech next-generation IoT brand for the middle class consumer in China. So this demographic is very important to us. The largest demographic and very much growing demographic, key characteristics that they have limited or they have controllable living expenses, a good amount of disposable income; like smart products and high-tech products, but also have a degree of price sensitivity, right? So given our business model which incorporates this concept of bundled sales of back-end monetization of flattening the sales channels as well as being very attractive in terms of being marketed towards in the high-technology rather than purely a value for money products. We see our brand and products have been very attractive to our key demographic and also being able to -- key markets to the demographics effectively. And I think as you can see by our results over the past five quarters now and even since, we've been listed and even before that it's very clear that there is a market here for a brand such as us and we've really been able to leverage our management capabilities and experience as well as this brand focus to penetrate this -- these demographics as well as leverage the opportunity in time when this -- when the home appliances industry, this giant home appliances industry in China is going through this transformation phase from the traditional hardware aspects and business model to this next generation next-generation IoT products as well are more user-centric business model. So in terms of CapEx required, so as you know we're relatively asset-light business. So our core competencies are in the R&D design software and services aspect. We outsource the vast majority of our manufacturing to OEM suppliers. And on the downstream channels, we refined our franchisees to operate the stores. So CapEx has been very limited through our history. Now going forward, we don't expect to be incurring significant CapEx in the near-term to build manufacturing facilities -- build new manufacturing facilities and whatnot. But as we had mentioned in our IPO perspectives as well and consistently on the various earnings calls, we're constantly on the lookout for potential investment opportunities in value chain investments. These could potentially, include some of our core suppliers or components many suppliers are OEM suppliers to be able to control the quality and timing and configure our suppliers for the new products.

Thank you very much.

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

Hi, management. Thank you for taking my questions. So I have a few questions and quite a lot about coKiing. So one is on the investment in new product line for coKiing brands and other like new initiatives, so what we think about R&D expenses going forward? The second question is on the revenue contribution from coKiing to these new brands in fourth quarter and in 2020 and can we share some – our margin profile for this product? And third question is on the competition like on October 1 like many has showed their progress in 5G IoT space in October. So, can we give our view on the competition. [Foreign Language]

Okay. Thanks, Vincent. I'll take your first two questions and our CEO Xiaoping will answer the last one. So, in terms of R&D expenses, so we will obviously continue to invest in R&D of our products as well as technology and services. R&D is a very important part of our core focuses. So R&D expenses will continue to increase. But as you can see our revenues are also continuing to increase at a very rapid rate. So if you think about operating expenses as a percentage of sales, if you roughly expect operating expenses as a percentage of sales to be around say 14% to 16%, over the next several quarters with selling and marketing being around say 10% to 12%, R&D being around 3.3% to 4% and G&A being around 1% to 2%, right? So that's the R&D aspect. With regards to unit economics and margin profile of the coKiing brand, I think it's still very early stage, right? This was only launched a few weeks ago in the fourth quarter. So there was no revenue contribution in the third quarter. And we'll probably only be insignificant revenue contribution as a whole in the fourth quarter of 2019. Now going into 2020 I think we will need some more time to see the performance of coKiing-specific products. So apart from air conditioning will also be launching new product categories under the coKiing brand as well for the premium to high-end market. So I think we just need a little bit more patience in terms of providing specific guidance for that. In terms of margin contribution, I think you should at least for the short term think about it this way. So at least for air conditioning over the next several quarters, you probably should not expect this to be a margin upgrade driver. It will be – or should be at least a breakeven products and will contribute to growth in the operating profits and bottom line as a whole, but likely in the near-term not a margin uplift driver in and of itself. And so I'll pass over to Xiaoping to discuss the 5G competition aspect.

[Foreign Language] Okay. I'll just quickly translate that. So, as we mentioned in the 5G product launch and coKiing product launch a few weeks ago, we very much see our role as well as our positioning in the next 5G generation -- IoT generation to be quite differentiated. So, for a start 5G, we think is very important for IoT especially in the home scenario as we'll be able to provide full and uninterrupted home coverage, no matter how large your home is to really increase the user experience to the next level. And obviously increase speed and levels of connectivity. So, secondly, all of our 5G R&D especially including the development of our CPE products was developed in-house and proprietary, the one-year through our dedicated R&D as well as dedicated 5G team. Thirdly, our 5G CPE this product actually has very advanced and industry-leading specifications. It can allow 256 products to be connected to it, has 3.6 gigabytes and 3.66 MBPS download and connectivity speed. So, this is very much a high-tech product, not just run-of-the-mill CPE product. Fourthly, so, we -- based on our understanding, we don't believe that any of the traditional home appliances brand have dedicated 5G capabilities or dedicated 5G focus. So, we very much think that how first-mover advantage in this space will be able to -- we would be able to provide us a leadership position when the technology does come online and when the next-generation products do come to the market. Fifthly, I think if we look around the industry, a lot of related industries and particularly the traditional home appliances industries are trying to learn from Viomi, right. So, we have -- what we have done by focusing on 5G including the launch of this CPE product company, we have really transformed ourselves from say a smart home or smart appliances or an IoT company into a high-tech company, right? I think this transition will be very important to our future brand positioning as well as how consumers see the Viomi brand. So, going forward or in the future, perhaps consumers will no longer see Viomi as just another home appliances brand or even an IoT Home appliances brand, but really a high-tech or technology brand. That happens to make these IoT @ Home user experience for them. I think that this will be a key point of differentiation between us and some of the traditional home appliances brands. And lastly, I think as stated 5G, plus AI, plus IoT, this focus -- this will really usher in a new generation, right? So, we believe this will essentially or in some ways wipe the slate clean in terms of the competitive dynamics as well as the incumbent strength of some of the traditional companies which is why we very much made a push towards being an early mover as well as double check ourselves as a critical leader in this space.

Thank you.

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 contract 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 lines. Thank you.