Viomi Technology Co., Ltd (VIOT) Q1 2022 Earnings Report, Transcript and Summary

Hello, ladies and gentlemen. Thank you for standing by for Viomi Technology Company Limited Earnings Conference Call for the First Quarter of 2022. [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. Limited Earnings Conference Call for the First Quarter of 2022. As a reminder, this conference is being recorded. The company's financial and operating results were issued in press as earlier today and are 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 are Mr. Xiaoping Chen, 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 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 that egress 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 filled with the U.S. Securities and Exchange Commission. 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 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 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 our founder's remarks before discussing our financial performance for the first quarter of 2022. Hello, everyone. Thanks for joining our first quarter 2022 earnings conference call. In the first quarter, our total net revenues reached RMB 712 million, in line with our previous guidance. The year-over-year decline in revenues is mainly attributable to two factors. First, this year, we cut off the selling of Xiaomi sweeper robots, which had a high prior-year base for comparison. Second, since the beginning of this year, owing to the widespread COVID-19 recurrency and strict pandemic control measures, market consumption decreased in the first quarter, along with slow demand industrywide. To strengthen our long-term product competitiveness and brand awareness, we continue to invest in R&D and increased marketing and advertising spending. As a result, our R&D-related personnel and experts at the beginning of this year grew by nearly 47% compared to the beginning of 2021, primarily due to the expansion of our AI and algorithm patent tool. As of March 31st, 2022, our stimulated global patent applications and the registered patents reached 5,232 and 3,142, respectively. Furthermore, to support the release of our new products in the first quarter, we launched a large number of elevator and print app among our trending technology branding positioning. Our investments in R&D and marketing for long-term growth caused a temporary loss in the first quarter. However, we also noted an increase in sales contribution from our premier products, thanks to the increased investment in R&D and innovation. In addition, we further improved our operating quality through project portfolio adjustment and strict manufacturing cost control. Our gross margin for the first quarter increased to 26.3%, again, representing a year-over-year and quarter-over-quarter improvement and demonstrating our enhanced product and brand strength. At our strategic new product launch event in March, we rolled out our upgraded one-stop IoT home solution, '1=N44, which includes our whole home product portfolio, four major smart home capabilities such as automatic networking, active intelligence, spatial awareness, and natural interactions, and our four additional services for our users, smart home solution design, OTA upgrades, a membership system and value-added services. Our upgraded one-stop IoT @ Home solutions has already achieved solid initial results, and they are focused on product innovation, service system improvements as well expanded sales channels for whole-home intelligence. So first, with respect to our products, we have enhanced artificial intelligence through innovative AI applications. We introduced a series of new high-end AI products at our launch event in March, many of which have received favorable market feedback and reviews, including the Royal series of AI dishwashers and our AI screen-based control interface, HomePad Plus. More of our new products will be on the market soon, such as our all-space AI air conditioner Space Pro, the 2000G large-flux water purifier Super 2, an AI laser interactive smart screen, and our Royal Pro series of double-screen refrigerators and AI twin-tub washing machines. Our ongoing product innovation would not be possible without our growing and talented R&D team. Our R&D achievements have also been recognized by industry and professional institutions. In April, our AI range hoods' visual detection module technology won the Excellence Award at the 23rd China Patent Awards. Also, in the same month, we took the silver at the 8th Guangdong Patent Awards with one of our water purifiers and its integrated waterway module technology. Further, the Viomi brand was added to the key trademark protection list in Guangdong province. Our hardware R&D, IoT, AI, and algorithms team is also expanding with an increasing number of PhD talents. We were officially listed as Guangdong PhD Work Station by the government and have obtained the selection qualification to establish the Guangdong Postdoctoral Work Station this year. As a result, going forward we will have greater opportunities to cultivate top talents for our society, incubate smart home programs and promote the overall development of the smart home industry in cooperation with universities and professional institutions. Second, as we mentioned during our last earnings call, we have improved our bundled smart home solution offerings based on our one-stop IoT @ Home solution and recently launched comprehensive high customized design solutions for the premium market. Over the past two months, sales of our bundled bonus smart home solution offerings have accelerated [Indiscernible]. Our offline merchants recently signed new whole-home solution orders ranging from RMB 200,000 to RMB 400,000, with customers in Beijing, Guangzhou, Changsha, Hebei, and Kunming, successfully shifting our business from selling products to selling solutions. In addition, we deepened our cooperation with JD Logistics to access a broader range of services including planning, logistics, warehousing, and installation. This enables us to improve efficiency throughout our cycle, from solution design and delivery to installation, as well as provide our customers with more enjoyable after-sale service experience. Third, we have expanded our strategic partnership with sales channels like smart home ecology continues to extend from industry to external channels and smart ecosystem based on home scenarios is taking shape. Last week, we reached a strategic cooperation with Tmall concerning our portfolio of one-stop smart home solutions. Together, we will promote a whole-home smart ecology, with an AI smart kitchen, living room, balcony, restroom and bedroom. Furthermore, in April, we cooperated with JD.com to host 'Viomi 420 JD Day' and introduced new whole-home smart products on its platform. Finally, after forming a strategic partnership with China Unicom last year, we were recently listed as one of China Telecom's top digital ecology partners, promoting channel integration and bringing an intelligent lifestyle to tens of millions of households in China. As one of the first movers in one-stop smart home solutions, we expect to continue to promote partnerships with additional channels and companies to jointly develop the smart home ecology for families. Despite a diverse impact of the pandemic on our larger store, better merchant offline strategy execution with certain degrees of delays in our door opening and furnishing, the overall progress was still within our expectations. We joined hands with offline merchants to build large immersive one experience stores in shopping malls and KA stores with massive foot traffic to offer local customers, the complete set of smart home appliances and services with a one-stop solution. As to our overseas business, despite the effects of international warfare, weaker consumer spending, and inventory backlog of certain distributors, we still achieved substantive progress. So first, we reached a collaboration with international sales agents in the Vietnam and Malaysia to expand the sales of our sweeper robots in these regions. And second, we continue to broaden the online presence of our self-operated stores. After launching our self-operated store in Italy Amazon in March, we opened self-operated stores in Germany, France, and Spain Amazon, where our effort to [Indiscernible] was well received among European consumers. And third, in first quarter, we launched our smart white and dry vacuums in overseas markets, and we will continuously expand their sales over the next year. In the second half of this year, we will continue to focus on four perspectives. First, we were getting the product innovation and develop key AI app to us. Second, we will increase our advertising and marketing investment to strengthen our training technology branding positioning. And third, we will streamline our product lines and optimize our product portfolio. And fourth, we will enhance our sales channels and secure our larger store, better merchant offline strategy to lay a solid foundation for elevating consumer experience and developing long-term brand value. Together with stricture and more disciplined cost and expense control measures, we will deploy these tactics to support healthy growth in the mid-to long term and remain committed to creating value for our customers and shareholders in the long run. That concludes our founder's remarks. Let's now turn to our detailed first quarter 2022 financial review as well as our second quarter outlook. So for the first quarter, net revenues were RMB 712.1 million, compared to RMB 1,255.6 million for the first quarter of last year. Net revenues were in line with our previous guidance. In addition to the overall weaker consumption environment, the decrease was mainly due to two factors. The first is the complete cutoff of our selling of Xiaomi branded sweeper robots this year as well as the high prior-year base for comparison. And second is the continued product portfolio adjustments for margin expansion across product categories. In details, revenue from IoT @ Home portfolio decreased by 60.8% to RMB 360.2 million from RMB 919.2 million for the first quarter of last year. The decline was primarily due to the complete cutoff of sales of Xiaomi-branded sweeper robots and the continued product portfolio adjustments for margin expansion in other categories, both of which also contributed to the overall gross margin improvement for IoT @ Home portfolio category. Revenues from home model solutions decreased slightly by 2.6% to RMB 101 million from RMB 103.8 million for the first quarter of last year. The decline was primarily due to the continued product portfolio adjustment involving a decrease in small-flux water purifiers, which was partially mitigated by the increased sales contribution of large-flux water purifiers. As a result of the product portfolio adjustment, the Company once again achieved year-over-year gross margin improvement in this category. Revenue from consumables increased by 10.8% to RMB 71.8 million from RMB 64.8 million for the first quarter of last year, primarily due to the increased demand for the water purifier solutions products. Revenue from smart houses and others increased by 6.7% to RMB 179.1 million from RMB 167.8 million for the first quarter of last year. Gross profit was RMB 187 million, compared to RMB 265 million for the first quarter of last year. Gross margin increased to 26.3% from 21.1% for the first quarter last year, primarily driven by the company's continued efforts to shift the business and product mix toward higher gross margin products. Total operating expenses increased by 15.9% to RMB 254.8 million from RMB 219.8 million for the first quarter last year, primarily due to the increase in R&D expenses and selling and marketing expenses. In more detail, R&D expenses increased by 20.5% to RMB 79.1 million from RMB 65.6 million for the first quarter of last year, mainly due to the increase in R&D headcount and related salaries and expenses. Selling and marketing expenses increased by 15% to RMB 158.8 million from RMB 138 million for the first quarter of last year, mainly due to the increase in advertising and marketing expenses to promote company's brand awareness. G&A expenses increased by 4.7% to RMB 17 million, compared to RMB 16.2 million for the first quarter of last year, primarily due to the increase in related personnel salaries expenses. Net loss attributable to ordinary shareholders of the company was RMB 50 million, compared to net income attributable to ordinary shareholders of the company of RMB49.1 million for the first quarter. Non-GAAP net loss attributable to ordinary shareholders of the company was RMB 41.7 million, compared to non-GAAP net income attributable to a shareholder the company of RMB 65.3 million for the first quarter of last year. Additionally, our balance sheet remained healthy. As of March 31st, 2022, the company had cash and cash equivalents of RMB 868.4 million, restricted cash of RMB 64.2 million, short-term deposits of RMB 10 million, and short-term investments of RMB 411.8 million. Now let's turn to our outlook. For the second quarter of 2022, we currently expect the net revenues to be between RMB 850 million and RMB 1.05 billion. We estimate that the year-over-year change in revenues will be mainly due to the high comparison base from the Xiaomi-branded sweeper robot business for the second quarter of last year, which the company has completely cut off this year, as well as the impact of overall market demand in the second quarter of this year. The above outlook is based on the current market conditions and reflects the company's current and preliminary estimates of market and operating conditions and customer demand, all of which are subject to change. This concludes our prepared remarks. We will now open the call for the Q&A session. The head of our finance team, Mr. Wickham Thai will join the session in question. Operator, please go ahead.

[Operator instructions] Our first question comes from Hildy Ling from Morgan Stanley. Please go ahead.

[Foreign language] Thank you very much management for giving me this opportunity to ask some two simple minor questions, small questions. The first one is about the sales trend in the recent sales trends in April and May. And how about -- and also the trends in terms of byproduct perspective, how are they trending? And also about the trends in terms of the pricing and on the volume? The second question is about the -- our strategy and -- expectation for the second half of the year and our strategy behind it. And compared with our strategy and expectations set at the beginning of the year, how has that changed given the macro volatility? And have we adopted any -- was a plan of strategy change in this regard because of the macro changes?

Okay. Thank you for this question. And for the first question, entering into April and May, we saw the consumption environment is weak due to the impacts from recurring pandemic and, thus, our sales performance is also impacted. While we observed this sales contribution of our premium products with higher gross margins are increasing. Second, among our new products released in last year and this year, we saw sales of space and millennial series of air conditioners increased due to seasonal demand as well as the popular functions during cognizing period such as forced space cooling, UV stabilization, and fresh air system. Besides certain smart devices such as smart locks, also received good market feedback and sales performance. We saw the sales of some large appliances such as refrigerators, washing machines are relatively weak due to the lack of how we services of installation and logistics as a result of COVID control measures. Going forward, this year, we expect the overall average price to maintain stable compared to the last year with a certain fluctuation for varied categories as we expect the overall sales volume increase, we're entering into the second half. Well, again, this is still depending on the consumer demand and the pandemic situation the next months. Regarding the second question of our expectation on the second half -- okay. With the increasing quarantine regions and continued with macroenvironment since April, we expect the consumption trend won't demonstrate material rebound, but should believe compared to the first half of this year as we saw the government has taken some measures to stimulate consumption. And we are also taking some measures to carry down the expenses and cost of our products.

[Foreign language] Thank you very much, management. I don't have further questions. Thanks.

Our next question comes from Rudi Wei from CICC. Please go ahead.

Yeah. This is Rudy Wei we from CICC, and thank you very much for the management presentation. Actually, I have two questions here, and maybe I can ask them one by one. The first is that one of your strategy is to increase the gross profit margin by optimizing the product structure, so many low-end products have been out of production. So I wonder whether this process is almost completed at this stage. And to which extent do you think that the gross profit margin can be improved in the future? [Foreign language]

Okay. Thanks for this question. The product portfolio optimization is still ongoing for us as we need to balance the overall sales and the sales growth of new premium products as well as introduce the alternative products for low-end markets. Currently, we are adjusting the product lines for multiple categories, including air conditioners, refrigerators, and sweeper robots. With respect to the gross margin, as you can see, the margin has been improving in the past year. In 2022, we are confident to maintain an overall margin level of over 20% and made with seasonal fluctuation due to inventory cleanup for some categories during the promotional season. With the product portfolio optimization, we expect the gross margin still to improve on a year-over-year basis.

And my second question is about our water purifier product. since we have been doing water purifiers business for a long time, but the market has been declining actually in recent years. And actually, your water purifier business also is segment. But we noticed that since more brands are introducing water purifier products recently. Also, we noted the increase of your consumables businesses related to water purifiers. So I wonder whether you have the same feeling that more brands are doing this business? And what do you think of the recent future of the water purifying market? [Foreign language]

As we can see in the recent two years, the growth of the overall demand of water purifier is not as far as some other cleaning categories, but it is still a potential market with increasing penetration rate. And we also observed from our frontline research as well as from the industry data the consumer needs change over time and the industry develops throughout the [Indiscernible]. Firstly, we have seen the market contribution of large plus water purifiers with over 800 gallons are increasing. The market is gradually phasing out some small plus water purifiers, and more companies starting increasing their introductions of large plus water purifiers as well. Secondly, smartification has been one of the required demands of consumers. Third, water purifiers with multiple functions are more needed by the market, namely instant heating, mineralization and UV stabilization, etc. The desktop purify, as you mentioned, is also a trend in the industry. We have developed and introduced desktop purifiers. And in the second half of this year and next, we will introduce additional SKUs with multiple functions.

The next question comes from Lu Xuanzi from Guojin Securities. Please go ahead.

[Foreign language]

For the first question, the overall positioning of our sweeper robots, both in the domestic and overseas market is a mid-to-high end. As currently sweeper robots is not a necessity compared to large plans and the market penetration rate is still low, per our research and market data, the consumers who buy sweeper robots are less sensitive on price, and they are highly demanding on obstacle avoidance and multiple functions and smartification. In terms of functions, we focus on automatic dust collecting and self-cleaning, which are also the trend for current market. In addition, we developed different versions for our consumers with diverse nets such as sweeper robots with UV sterilization and SKU designed for families with pests. More importantly, as we offer one-stop smart home solution with bundled sales of smart plans and devices, our sweeper robots is able to connect with whole-home smart products for interactions, remote control, and inspection. As the only one movable plans, the sweeper robots can scan the home and create home map for our future development, such as the security detection system. For the second question regarding the offline sales, our off-line sales, as well as the new store openings, are indeed impacted by the recurring pandemic and current control in some regions and logistic was delayed in some cities. To mitigate the decline sales from off-line channels due to the COVID lighting, we shipped more marketing and sales resources toward our nice channels, particularly some social platforms such as Douyin. In addition to small and cleaning products, we have started to sell wide plans on Douyin, live streaming, and have seen good sales performance. We also depend on cooperation with platforms, including Tmall and Jindong to journey promote whole-home smart device portfolio. Our largest store [Indiscernible] is on the track through the COVID lighting impacted the store opening and furnishing to some degree. We are also seeking cooperation opportunities with diverse third-party offline channels. We recently reached strategic partnership with China Telecom and with Kuka Home, which is [Indiscernible] to integrate off-line resources and promote our smart product portfolio.

[Foreign language]

Okay. I'll translate our founder's comments. So as we can see at this moment, it's a little hard to focus the pandemic situation in the rest of this year. As you can see, we don't know how long the pandemic situation and some content control measures, [we’ll update]. And we think it do take some time for the consumers to recover the consumption continues. So meanwhile, we will take very prudent way to improve our operations as well as to maintain a very healthy gross margin level as well as the healthy cash level. But we are confident, in the mid-to long term, the China economy will recover. But in the meantime, we will just invest in R&D and such expenses to maintain a very stable development.

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 only ask through the contact information on our website or the Piacente Group, our investor relations consultant. Thank you all. Have a good night.

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