Viomi Technology Co., Ltd (VIOT) Q2 2021 Earnings Report, Transcript and Summary

Hello, ladies and gentlemen. Thank you for standing by for Viomi Technology Co., Ltd Earnings Conference Call for the Second Quarter of 2021. [Operator Instructions]. Today's conference call is being recorded. I will now turn the call over to your host, Ms. Cecilia Li, the IR Director of the company. Please go ahead, Cecilia.

Thank you, Operator. Hello, everyone, and welcome to Viomi Technology Co., Ltd Earnings Conference Call for the Second Quarter of 2021. As a reminder, this conference is being recorded. The company's financial and operating results were issued in a press release earlier today and posted online. You can download the 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, Mr. Xiaoping Chen, the Founder Chairman of the Board of Directors and Chief Executive Officer; and Mr. Wickham Thai, the Head of our Finance Department. 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 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 annual report on Form 20-F and other filings as filed with the U.S. SEC. The company doesn't 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 also includes discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Viomi's press release contains a reconciliation of the audited non-GAAP measures to the unaudited most directly comparable GAAP measures. I will now turn the call over to our 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, Mr. Chen. I will quickly translate upon his remarks before discussing our financial performance for the second quarter of this year. Hello, everyone, thanks for joining our second quarter 2021 earnings conference call. During the second quarter, we optimized the product portfolio for certain categories and increased sales of new products with higher gross margin further enhancing our business operations and improving the overall gross margin and profitability. Our second quarter net revenue reached RMB1.66 billion, with gross margin once again delivering both year-over-year and quarter-over-quarter increases reaching 21.2%. At the same time, non-GAAP net income attributable to ordinary shareholders of the company increased by 45% year-over-year, significantly improving the profitability. After years of hard working and enhanced exploration, we have developed a 5G IoT @ Home structure, which integrates the technology framework, AI algorithms, 5G IoT models, sensors, smart hardware and cloud storage. This structure encourages further implementation of our one-stop IoT @ Home solution providing our users with smart home appliances, smart home devices and software services across home scenarios. It enables intelligent interconnection from single products to the entire house forming intelligent ecosystem for daily living and creating a company smart home experience for users. To increase our product strategies appeal younger users, we officially announced our changing technology branding strategy, which is underscored by our products, our channel operations in the market team. First, with respect to our product offerings, we continue to focus on AI applications and innovation to support our AI household product strategy. Following the successful April [indiscernible] for series of new products, including the EROX mineral water purifier, the space all direction air conditioner the Alpha 2 premium water level and [indiscernible], which can monitor the female hub data -- We recently launched our SuperPro 1,100 da water purifier, our cost X1 AI-enabled rent and other new AI products with technology upgrades. Many of these cutting-edge products are leading industry consumption trends. During Chinese 618 e-commerce shopping festival, many of our products became the varied and the rest on the top 10 best sellers including the Alpha 2 Pro premier [indiscernible], the [indiscernible] Air Conditioner and new smart washing dryer. In terms of sales channels, we implemented our largest store better merchant channel strategy. We have collaborated with high-quality merchants with strong door operation experience to offer larger experience stores and improved store image. These larger stores provide users with more comprehensive immersive, narrow-based experiences and services, enhancing with more -- enhancing our trending technology brand image. We have established 4 ads and 5 ads [indiscernible] stores in comparison over 200 square meters and 300 square meters, respectively, in [indiscernible] and other policies to offer sales installation and after-sales services. Furthermore, this channel strategy promotes [indiscernible] sales, decreases customer acquisition costs and drives our overall [indiscernible] market growth. According to the national residential market research report 2020, the total new development apartment transactions nationwide exceeded 150,000 square meters in 2020, which equals more than 10 million unit based on our estimation, creating huge potential source of growth for the smart home appliances market. We also increased our investment in branding and marketing, thereby reaching more diverse consumer growth with our omnichannel marketing tools and branding efforts. We invited one of China's top celebrities to become our product spokesperson, enhancing our brand recognition among younger generations. To target more consumers in cities, we collaborated with Focus Media and [indiscernible] leader to advertise in around 100 major cities across the nation. As well as 3 top domestic airline [indiscernible] to increase our exposure to high-end consumers. Furthermore, we plan to advertise on television and other channels in the following months. We also strengthened our new channel marketing on social media, including [indiscernible] through short-form videos and KOL live streaming. Sixth, as in revenue innovation, optimization and cities to strengthen our trending technology brand positioning as well as grow our customer base. We are also expanding our global market expand. Our overseas expansion of our sliver business is progressing in line with our predictions. In addition to our previous coverage in more than 10 countries in Europe, Asia and Australia. We began selling units in India, Saudi Arabia, Thailand and North European countries in the second quarter. As we shared in our previous earnings call, our products were launched on U.S. Amazon in August, marking our official entry into the North American market. Although continuing to expand globally and begin development of the self-operating mode in the second half of the year. Furthermore, our product pipeline includes a series new wafer products for both domestic and overseas market. In addition to our automated collection in UVs business technology, we are making a great drive with labor and optical wider technology upgrades. We believe that there are 3 major drivers that will benefit the intelligent transformation and development of the smart home industry. First, the main consumer group in China and on structure transformation in terms of the [indiscernible] generation has increased and the younger generation has become a major consumption driver in China. According to those research conducted by our third-party consultants, the [indiscernible] generation prefers smart technology products and are more likely to demand and purchase Smart Home appliances. Secondly, the development of new energy vehicles over the past 2 years has created an emotional connection between customers and the smart products and many other industries have also entered the intelligence era. Demand for smart products will drive the demand to Smart Home industry and related to an increase in consumer acceptance. Thirdly, China's 5G infrastructure has improved greatly over the past years. According to a report issued by the Ministry of Industry and Information Technology of Chinese Government, the personnel user penetration rate at 5G will exceed 40%, and the average annual growth rate of 5G units will actually 200% by 2023. The ministry mentioned that Smart Life and Smart Home will be key parts in promoting IoT applications. Our national policy support will also benefit the development of the IoT Smart Home industry. We are committed to becoming the leading one-stop IoT home solutions provider, while developing our hardcore technology. Looking to the second half of the year, we will continue to improve our products through AI innovation is actually our larger store better merchant channel enhancement strategy and strengthen our trending technology branding. With the ongoing development of Home Smart expansion in China, we remain confident in our ability to capitalize on opportunities and deliver long-term growth as well as contribute positively to our consumer core life and industry-wide intelligence transformation. So, this concludes our founder's remarks. Let's now turn to the detailed financial review of the second quarter of this year as well as the outlook for the third quarter. Net revenues decreased slightly by 1.5% to RMB1.66 billion from RMB1.68 billion for the second quarter last year and increased by 43% compared to the same period of 2019. The slight year-over-year decrease was primarily due to first sales decreases in water purifiers and smart appliances resulting from the product portfolio adjustments for margin expansion and second, a high base effect during the same period of last year due to promotional activities after COVID-19 pandemic pick. Revenues from IoT @ Home portfolio increased by 7.9% to RMB1.16 billion from RMB1.06 billion for the second quarter last year. The growth was primarily driven by sales increases in certain product series, particularly the Viomi-branded [indiscernible] and the washing machine. Selling from our home water solutions decreased by 18% to RMB218.9 million from RMB266.8 million for the second quarter of last year. The decline was primarily due to a decrease in sales of Xiaomi-branded water purifiers resulting from a product portfolio adjustment, though partially mitigated by the sales increases in Viomi-branded water purifier. Due to the product portfolio adjustment in Xiaomi-branded water purifier, we achieved year-over-year and quarter-over-quarter increases in the overall gross margin of the home water solutions category. Revenues from consumables increased by 18.2% to RMB102.2 million from RMB86.4 million for the second quarter of 2020, primarily due to the increased demand for our water purifier filter products. Revenues from small appliances and others decreased by 28.8% to RMB191.5 million from RMB268.8 million for the second quarter of 2020, primarily due to continued portfolio optimization for higher gross margin in this category. Gross profit increased by 46% to RMB351.8 million and gross margin was 21.2% compared to 14.3% for the second quarter last year. The year-over-year increase in gross margin was primarily driven by our efforts to shift the business and product mix towards higher gross margin products. And this includes the increased revenue contribution from sales of new Viomi-branded water purifier and super boxes more as cost control measures and margin optimization across our product lines. Total operating expenses increased by 29.4% to RMB309.7 million, primarily due to the increase in selling, marketing expenses. In more detail, R&D expenses increased by 9.1% to RMB66.2 million from RMB60.7 million for the same quarter of last year, primarily due to the increase in R&D expenses related to the salaries and expenses. Selling and marketing expenses increased by 32.5% to RMB214.8 million from RMB162.1 million a year ago, primarily attributable to the increase of advertising and marketing activities in order to enhance our branding and market recognition. G&A expenses increased by 72.6% to RMB28.8 million compared to RMB16.7 million for the second quarter of last year, primarily due to an increase of the estimated allowance for accounting mills receivables, together with a low basis that of lease expenses attributable to the lease expense exemption policies in fact, during the same period of last year due to the COVID-19. Net income attributable to ordinary shareholders of the company increased by 367.4% to RMB46.1 million and non-net income attributable to other shareholders of the company increased by 44.9% to RMB59.5 million. Additionally, our balance sheet remains healthy. As of June 30, 2021, we had cash and cash equivalents of RMB667.6 million, restricted cash of RMB21.5 million, short-term deposits of RMB66.5 million and short-term investments of RMB393.8 million. I would now like to turn to our outlook. For the third quarter of 2021, we currently expect net revenue to be between RMB1 billion and RMB1.1 billion. We expect the sales of Xiaomi brands [indiscernible] to decrease from the third quarter and the own brand [indiscernible] business to achieve faster growth, which will become one of our main categories. The [indiscernible] outlook is based on the current market conditions and reflects the company's current and preliminary happenings in the market and operating conditions and customer demand, which are all subject to change. Well, this concludes our prepared remarks, and we will now open the call for the Q&A session. The Head of our Finance Department, Mr. Wickham Thai will join the session and answer questions. Operator, please go ahead.

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

I have three questions. First of all, can you give us a breakdown of the IoT @ Home product portfolio, in particular, how much the contribution came from the robot sweeper products in second quarter? And also what kind of sales momentum are we seeing in July, August in the near term? That's first one. Maybe I just pause and I will ask the rest of the two questions later...

Okay. Thanks for lenience question. About the IoT @ Home portfolio, we have more than 10 small categories, including refrigerators, washing machines, water heaters, sweeping robot and the charger. Among these, Viomi fairly contributed around 20% revenues of IoT @ Home. Viomi-branded washing machines contributed around 10% and Viomi-branded sweeper robot contribute around 10%. Viomi-branded sweeper robots was still the biggest driver for IoT @ Home dates due to low base effect and fast moving revenue contribution. And the revenues from Viomi sweeper robots increased by multiple cuts compared to the second quarter of last year.

And any color on the near-term trend in terms of the growth momentum, including water solutions as well? Can we have a little bit of sense?

Yes, as we mentioned, we continue to execute quality and product optimizations strategies in the second quarter. So we roll out additional new products with higher margin and high ASPs, in particular some key categories, including, say, water purifiers. In addition to introducing more high-end Viomi water purifiers, we also shifted the focus a bit more on supplying more large price Xiamo water purifiers with better gross margin and thus to improve the overall ASP and gross margin and together, the revenue contribution in the coming quarters.

Okay. My second question is on the ASP and the margin trend. Do you have any plan for any price changes, i.e., given the rising raw material costs? That's one. And I think the implication to margin -- because in the second quarter, we have a very good margin improvement with all this mix shift and adjustment on the product portfolio? Are we going to see a similar pattern of margin expansion in the second half?

Yes, we observe the aromatics still decrease in the second quarter, inventively midway compared to the previous month. This also contributes the increase of ASPs across the industry as well as for some of our products. About the margin, we have started from advertising and marketing activities since the second quarter to enhance our branding positioning and recognition. We will invest in more selling and marketing expenses compared to last year, but in a prudent and reasonable way. We expect such expenses will increase lower the margin, while as we have taken product optimization strategy and the overall gross margin has been improving, and we're looking forward to continue improving. We think this will mitigate certain impact of the increased operating expenses on net profit margin. We don't see the material cost increase will impact the margin to the first quarter, and we have taken serious cost control measures. We don't see any material impact from such kind of cost impact, right?

Okay. My last question is on the new product strategy. I think Mr. Chen in the opening remarks, mentioned quite a few new products being innovated and putting market in second quarter and the first half. So what kind of strategy in terms of how we actually make all these SKUs a more meaningful contribution to the revenue.

Yes, I am going to translate Mr. Chen's comment. So we have the [indiscernible] product this year. So first of this [indiscernible] product can help us to make the margin expansion, which you can see from the quarter and second quarter and make our product portfolio more diverse. And that can such -- some SKUs of this product such sweeper robots, EROx water purifier as well as all direction air conditioners can also help increase the revenue contribution in the categories, respectively. So we think this new SKU and the margin expansion can also help us to improve the overall gross margin of our business as well as to help drive our overall growth.

The next question comes from Wei He from CICC.

And I have two questions here. The first is that we noticed the company has done a lot of promotion recently like cooperating with Focus Media, and we can also see the trend from the financial report. So do we expect a higher selling and marketing expense show expense ratio this year? And like would it be higher in the second half of this year? And can you share with us the promotion plans or strategy with more details.

I will quickly translate. So since last year and the first half of the year, we can see among the younger generations, they are more likely to get enrolled and use the Smart Home products and Smart Home is like a hotter topic among them. So recently, we invited one of China's very popular celebrities in our product [indiscernible], and we also do a lot of advertising on this you can see in [indiscernible] and to increase the brand recognition. Okay. Then you mentioned the increase on the selling market expenses, and we see as such investment in advertising in marketing will indeed increase such expenses, but this will be partially mitigated by some of our sales structure optimization as well as some customer control measures. And in the second half of this year, we will also continue to invest in some related expenses on advertising and we will do the advertising on television and some other channels. And from the internal data, we can see that our brand recognition has increased the DTU all of the marketing and advertising tools. So we hope this will also help us to increase our branding image.

Okay. And my second question is about the overseas market. So can you give us a more detailed update about the overseas distribution channel development, both online and offline and also are there any negative impacts due to the shortage of shipping containers?

Okay. I'll answer the question. So in the first quarter of 2020 and the first quarter of this year, as we mentioned, we already entered into more than 10 countries in Europe, Asia, Middle East and Australia. And the past [indiscernible], we also expanded into additional 8 countries, including India [indiscernible] European countries and the United States. So our exported products are sold on both online and offline channels and the most through our franchises. So we sold our products to those franchisees and they're still on the [indiscernible] as well as online channels. So we also -- in the North American market, we just launched the U.S. [indiscernible] store and we are also seeking cooperation opportunities for off-line channels that they can have this year by depending on the order selling conditions on Amazon. As for the question about the shortage of the shipping containers. Yes, it did some impact for some delayed orders, but we optimized the manufacturing and delivering timing as well as we plan to get out some like local leader warehouses to mitigate the impact. So generally, it doesn't cause any material impact on our overseas market.

Next question comes from Vincent Yu from Needham & Company.

So I have two questions and the analysts actually has already mentioned. But I would like to discuss a little bit more. The first one is that looks like we missed our guidance range this quarter. So can management talk more about like, which segments didn't perform as well as we previously expected. And did our portfolio optimization contribute to the top line miss as well? And the second question is also wanted to touch about the margins. So in terms of the -- in our understanding, can management share us how did the raw material trends in August compared to second quarter? And do we think that we have seen the peak in terms of raw material prices?

Okay. So I will translate comments for your second question first about raw material accounts. We already observed the [indiscernible] of raw material count like demonstrating more stable when entering in August. So as the industry expects, we also think the raw material cost has been a relatively high position, and we're not likely to increase a lot. So for your first question about the guideline, the second quarter revenue and the third quarter guidance. So we have -- we are shifting our focus on the product portfolio adjustments for the second quarter and the third quarter, and we have like 2 main points. So first, we will increase the sales of some new products with potential growth, and it will take some time to increase the contributions of the new products and SKUs. And second, we will invest in more R&D resources in our own branded products in particular some [indiscernible] water purifier and home devices. And we can see that in long term, these categories and products can help us to drive the overall growth in the long term. So overall, in the third quarter, we will be also conservative about our selling and the guidance, and we remain focused on the product portfolio [indiscernible]. I hope that helps.

Thank you, management. Let me follow one more question. So you mentioned that we are investing in new stores, hiring spokesperson. Have we -- have these expenses already incurred in second quarter 2021? And will we see sales and marketing expenses on a year-over-year basis grow faster than like total revenue growth?

Okay. So for the selling and marketing expenses and impact on the operating expenses net margin. So for the investment in the operate channel, as you know, we cooperate with the merchants to open the off-line stores and merchants themselves to take care of the store operation and that won't like reflect in our operating expenses. So it's one on this part. And for selling and marketing, like we have been conducted the advertising and inviting the spokeperson this -- the second quarter. So we already put some of the selling marketing expenses in the second quarter. And in the second half of this year, we will have some ongoing expenses on this part. So compared to the first half of this year, the expenses will increase. But we also see the effect from our internal data like all of these advertising activity also help our sales online and offline. So we think this is in effect, and we will continue to do such advertising activities in the second half.

Next question comes from Sue Boon from Blue Lodges.

Where international sales play an increasing role, but the management, the international group continuing or with the easing pandemic measures has international group slowed a bit?

Okay. So for the first half of the year, we can see there are robust balances [indiscernible] in the overseas market. That's due to the post-pandemic in some of the over countries. But entering into the second half of the year, we also see the pandemic issues to some changes over time, and we remain conservative, and we see there are indeed some uncertainties in the global market. But so far from the sales data we see internally, the sales performance is good and in our expectations, but we still are conservative about the selling in overseas market, but we will also take very strict measures in a prudent way to make any promotion and marketing activity services.

Is there any particular strategy for marketing in the U.S. market?

Thank you. So in terms of the U.S. market, I do know that our products were just officially launched last week on your store. So on one part, we will cooperate with some local third-party operator to operate our Amazon together. So they know better about the operation guidelines on Amazon, there to add more American customers' culture. And on the other hand, we also will start to do some marketing and PR activities on the US market, such as the KOL recommendations. So we already have levers on the pipeline through that to help us promote the sales in U.S. market.

So as there are no further questions, now I will turn the call back over to Cecilia Li for closing remarks.

Thank you once again for joining us today. If you have further questions, please feel free to contact us with the contact information on our website. Or The Piacente Group, our Investor Relations consultant. Thank you all. Have a good one.

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