Viomi Technology Q3 2021 Earnings Call Transcript

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November 24, 2021

There are 6 speakers on the call.

Operator

Hello, ladies and gentlemen. Thank you for standing by for Viomi Technologies Company Ltd. Earnings Conference Call for the Q3 of 2021. At this time, all participants are in a listen only mode. Today's conference call is being recorded.

Operator

I will now turn the call over to your host, Ms. Cecilia Li, the IR Director of the company. Please go ahead, Cecilia.

Speaker 1

Thank you, operator. Hello, everyone, and welcome to Viomi Technology Co. Ltd. Earnings conference call for the Q3 of 2021. As a reminder, this conference is being recorded.

Speaker 1

The company's financial and operating results were issued in a press release 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.government.com. Participating in today's call are Mr. Xiaoping Chen, the Founder, Chairman of the Board of Directors and the Chief Executive Officer and Mr. Weichung Tai, the Head of our Finance Department.

Speaker 1

The company's management will begin with prepared remarks and Carl will conclude with a Q and 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.

Speaker 1

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. Securities and Exchange Commission. The company doesn't assume any obligation to update any forward looking statements except as required by law.

Speaker 1

Please also note, today'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.

Speaker 1

Chen will deliver his remarks in Chinese, followed immediately by an English translation. Mr. Chen, please go ahead. Thank you, Mr. Chen.

Speaker 1

I will quickly translate our founder's remarks before discussing the financial performance for the Q3 of this year. Hello, everyone. Thanks for joining our Q3 2021 earnings conference call. Our Q3 net revenues reached RMB 1 point 0.6 billion, which was in line with our previous guidance. As we disclosed in the previous quarter's earnings conference call, there was a year over year decline in revenues during the Q3, mainly due to the significant decrease in sales of Xiaomi branded Swaver robots.

Speaker 1

We maintained a stable growth in most of our other product categories. During the Q3, we enhanced our one stop IoT home solutions platform to realize AI driven IoT home scenarios. Currently, we have laid out a full product line of more than 60 categories. As a result, we are the only company in the smart home industry that provides a company one stop IoT home solution, integrating smart home appliances, smart home devices and software services. We also continue to optimize our product portfolio and execute our changing technology, brand marketing and the larger store better merchant channel strategy.

Speaker 1

Moreover, we increased our investment in R and D and expanded our AI algorithms in hardware research and development teams to accelerate AI product innovation and technology accumulation, resulting in a 56% year over year increase in R and D expenses. To enhance brand awareness, we also invested in additional advertising and marketing resources in the 3rd quarter. Due to the substantial increase in R and D and marketing expenses, our bottom line declined temporarily. But our strategic adjustments and investments generated positive results, including first, the ongoing gross margin improvement. Our Q3's gross margin was 22.7%, representing both year over year and quarter over quarter increases.

Speaker 1

2nd, brand awareness continues to rise. And third, more diversified and balanced of channels equipped to handle sales and services of our smart home products. Our overall business is developing in a high quality and healthy direction. Based on industry data as well as our observations of the smart home appliances industry and the market, we have identified 4 important industry trends. So first, consumers prefer to buy home appliances with more elaborate and advanced functions in more diversified product categories, especially those which can improve the quality of life, such as air and water purifiers, household cleaning devices and integrity stop.

Speaker 1

2nd, the demand for high end products is growing rapidly. 3rd, bundled purchases have become popular, especially among the PILs90 generation. And 4th, we observe the users start to proactively to get to know and to reach the smart home products. And the smartification has become a benchmark for the industry and the market, driven by technology progress and consumption upgrading. To capitalize on this trend and taking into consideration market opportunities and the corporate strategy, we have adjusted and refined our product research and development, enhanced our branding and improved our sales channel.

Speaker 1

First, with respect to product development, we have developed our product strategy from 3 perspectives. First, we increased our investment in R and D as well as technology innovation and AI application, enhancing our brand influence through product optimization. 2nd, we provide users with customized and bundled purchase solutions rather than solely selling individual products, which reduces customer acquisition costs and increased sales growth. In the past few months, the proportion of bundled sales has increased and orders over totaling RMB 10000 to 200000 have grown rapidly. And third, we are currently focused on scenario innovation and we'll soon complete our smart home category to provide a more comprehensive My Home experience.

Speaker 1

To this end, this quarter we devoted more resources in AI, algorithms, software as well as hardware. We introduced a series of new AI products in the first half of this year, including the all directions based air conditioner, premium Swafer Volvo Alpha 2 plus, iBAR Ranch hood and 800 gallon to 1200 gallon super series with large blocks water purifiers. We also launched a fiber series of our smart white and dry vacuums in September. All of these products demonstrated strong sales performance in the 3rd quarter, driving continued gross margin recovery. Furthermore, we introduced a new app to use in the smart home categories, such as the EyeLink 2T Smart Lock with AI face recognition technology.

Speaker 1

We continually increase our efforts in R and D and we will unveil high end new smart home products in new product categories in the coming months. In addition, we will roll out exciting new AI product lines in the next year, including the smart home, smart kitchen, water to fire and the cleaning mix products among others. 2nd, to enhance our brand influence, we invited YNAB China to top celebrity, Dong Lun, to become our global branding spokesperson and established our trending technology brand positioning in the first half of this year. In collaboration with Focus Media and Xincao Culture Media, we broadened our omni channel marketing and advertising activities, including elevator advertisement, print media, television and social media to enhance our brand awareness and exposure. We also generate high quality content marketing on content platforms such as Douyin, Kuaishou and Little Red Book.

Speaker 1

Our brand search frequency on major search engines have climbed and our internal data shows that close 90 users and users from new Tier 1 and Tier 2 cities have increased over the past few months. 3rd, we increased our exposure and sales on new channels such as Pinduoduo, Douyin and Kuaishou. We have built an exclusive team for these new sales channels to boost the traffic and attract more young consumers. In our short form video marketing and KOL live streaming has enhanced brand awareness and contributed to an increase in sales. The revenue contribution from this new channels has increased in the past few months as well.

Speaker 1

1st, with respect to our offline channels, we continue to execute our larger store better merchant strategy to provide our users with 1 stop IoT home solutions and packaging bulk purchases, a scenario based shopping experience and installation and after sale services. These efforts have also strengthened our channel technology brand positioning. In the second half, we accelerated our nationwide 4 F and 5 F store portfolio expansion, including a new 4 60 square meter Romy flagship store opened in Zhengzhou in September, a new 760 Square Meter 5S experience store opened in Shenyang CBD area in October, becoming the largest Vomey experience store in China. We will open more large scale for and slightly as well made experience stores across the nation. Finally, we are also developing our overseas business by upgrading channels, diversifying our operation models and expanding product categories.

Speaker 1

We recently cooperated with renowned agents in Germany, Russia, Malaysia and Northern Europe to transform our overseas channels from small distributors into high quality international sales agents. We plan to optimize our overseas business operation by leveraging their local resources, reputation and import sales experience. We are also planning to explore self operated model in more regions, following the successful opening of our 1st self operated store on U. S. Amazon in August.

Speaker 1

We are preparing to launch our online store on European Amazon and we will introduce vapor robot products in the near future. Also, we will provide our overseas customers with a smart white and dry vacuums and a sweeper robot with new functions. Going forward, we will expand our global business into additional countries and regions to capture the cleaning needs product sector's tremendous growth opportunities. We have completed the 1st step in establishing our One Step IoT Home Solutions platform by building comprehensive product lines across home scenarios and will now turn our focus to product modification upgrades and a scenario application innovation. Looking ahead, we will continue to refine our product portfolio and further stabilize our gross margin recovery.

Speaker 1

We will also increase our investment in AI application, enhance our training technology branding, grow bundle sales and services and improve our overall business operation quality, creating long term value and returns for our users and shareholders. That concludes our commentary remarks. Let's now turn to our detailed third quarter financial reviews as well as our 4th quarter outlook. Net revenues were RMB 1,060,000,000 compared to RMB 1,49,000,000 for the Q3 of last year. Net revenues were in line with Hikami's previous guidance and decrease was mainly due to the significant decrease in sales of Xiaomi branded swivel robots as well as product portfolio adjustments for margin expansion in other categories.

Speaker 1

Revenues from iOK at home portfolio decreased by 39.3 percent to RMB643.5 million from RMB1.06 billion for the Q3 of last year. The decline was primarily due to the first, the decrease in sales of Xiaomi branded scrubber ball box and second, the product portfolio adjustments for margin expansion in some categories. Revenues from our home water solutions increased by 7.9% to RMB157 1,000,000 from RMB145.4 million for the Q3 of last year. The growth was primarily driven by the company's product portfolio adjustment in this category, which contributed to increase the sales of and the demand for new and the larger flex water providers as well as the gross margin expansion. Revenues from consumables increased by 11.7 percent to RMB79.6 million from RMB71.3 million for the Q3 of last year, primarily due to increased demand for the company's water purifier filter products.

Speaker 1

Revenues from small fences and others decreased by 15.9 percent to RMB176.5 million from RMB209.9 million for the Q3 of last year, primarily due to the company's continued product portfolio optimization to obtain a higher gross margin in this category. Gross profit was RMB 239,700,000 compared to RMB254 point 3 million for the Q3 of last year. Gross margin increased to 22.7 percent from 17.1% for the Q3 of last year, primarily driven by the company's continued efforts to shift the business and mix towards higher gross margin products. Total operating expenses increased by 28.2 percent to RMB290.3 million year over year, primarily due to the increase in R and D expenses and the selling and marketing expenses. In more details, R and D expenses increased by 56.1 percent to RMB82.2 million from RMB52.7 700,000 for the Q3 of last year, mainly due to the increase in R and D experts and the related salaries and expenses as well as increased investment in research and development of new products.

Speaker 1

Sales and marketing expenses increased by 20.4 percent to RMB183.4 million from RMB152.2 million a year ago, primarily attributable to an increase in advertising and marketing activities to enhance the company's branding and market recognition. General and administrative expenses increased by 15.2% to RMB 24 point 7,000,000 compared to RMB 21,400,000 for the Q3 last year, primarily due to an increase in the estimated allowance for accounts receivables together with increased lease expenses due to the workplace expansion. Net loss attributable to ordinary shareholders of the company was RMB 29,300,000 and non GAAP net loss attributable to ordinary shareholders of the company was RMB 22,200,000,000. Additionally, our balance sheet remained healthy. As of September 30, 2021, we had cash and cash equivalents of RMB 771,700,000, restricted cash of RMB 25,600,000, short term deposits of RMB 67,000,000 and short term investments of RMB 163,500,000.

Speaker 1

Now let's turn to our outlook. For the Q4 of this year, we currently expect net revenues to be between RMB 1,200,000,000 and RMB 1,300,000,000. We expect the sales of Xiaomi branded Swiber robots continue to decrease in the Q4 and the own branded Swaver robot business to achieve better growth, which will become one of the main categories. The above are the case based on current market conditions and reflects our current and preliminary estimates of market and operating conditions and customer demand, which are also subject to change. This concludes our prepared remarks.

Speaker 1

We will now open the call for the Q and A session. The Head of our Finance Department, Mr. Weiwei Kang Tai, will join the session and answer questions. Operator, please go ahead.

Operator

Thank you. We will now begin the question and answer session. The first question today comes from Lillian Lu with Morgan Stanley. Please go ahead.

Speaker 2

I have two questions. First one is on Q3 results and a nearly 30% decline in revenue, what's the rationale behind a big increase in R and D and marketing expense? What and how do we think about Q4, the balance between revenue versus the margin control? And the second

Speaker 3

question is on overseas with robot business outlook.

Speaker 2

How much is onwards? And any bottleneck we've been seeing from overseas transportation and also related cost? Thank you.

Speaker 1

I will quickly translate into the comments from Mr. Chen. So as we observed from the market, since the second half of last year to this year, we see the users start to proactively to get to know and to approach the smart home products. So we think that's the time to capture the market opportunities. And we also see this modification is a very is a trend for the whole industry in the market.

Speaker 1

So we wanted to invest in more R and D and selling marketing expenses. So for the top slide side, we proactively decreased sales of Xiaomi Swaver robots. As you know that the gross margin of such business is relatively lower than the others. So we decreased the sales of Xiaomi Swiper robots to have more healthy gross margins and margin recovery. And in terms of the expenses, the year over year increase of R and D expenses is around like 56%, and we also gained some increase in the selling and marketing expenses.

Speaker 1

But we think in the near future, the R and D expenses will back to a relatively normal level, and we will still like invest in selling and marketing, but in a stable and softer extent to enhance our brand awareness. And so what all we do is to capture the opportunities in the future and to enhance our IoT Smart Home solution. That's the feedback from our founder.

Speaker 3

I will introduce the overseas sales progress, Lilian just mentioned. For the past few months, we saw the overall overseas market demonstrating a relatively softer growth compared to the robust growth in the Q1. This is due to several factors. 1st, due to the strong consumer demand during the post COVID-nineteen, the distributors purchased a large volume of cleanliness products, resulting in high stocking levels since the Q2. Secondly, the shortage of containers and labor resources in the overseas ports did impact on the uploading of products and caused some order delays.

Speaker 3

We expect such a situation will continue in the second half of this year, while we were taking some measures to mitigate impacts and drive the growth increase. On one side, from our acknowledge of overall overseas market, the price of these containers won't continue to go up to a larger extent. And on the other side, we will enter cooperation with more renowned international sales agents, which will help us to increase sales by leveraging their local resources and reputation. Thirdly, as the overseas consumer net towards cleanliness product more diversified, we will increase the new categories and SKUs to cater the additional demands and drive the overall overseas sales. We will continue to expand additional countries and regions where we expect to have potential market growth.

Speaker 3

Thank you.

Operator

The next question comes from Rudy Wei with CICC. Please go ahead.

Speaker 4

Thank you for the management presentation. This is Rudy Wei from CICC. And I have a question from for the promotion strategy. And we have had Dong Lun as our brand spokesperson. And how it works?

Speaker 4

Also, can you introduce briefly about the sales during this year's Double 11 Festival? And what's your outlook for next year's consumption and sales trends?

Speaker 1

Our chance for administration is to translate. So we invited Dong Wei as our spokesperson because we think that in line with our brand positioning of changing technology. And then we are very popular among young people, especially the Pilsenitis generation. So he can force our brand as well as to help us to increase the brand awareness. And except that we invited them only as a subperson, we also are investing a lot of the advertisement in Qingqao and the Shenzhou Media.

Speaker 1

And we also do a lot of advertisement on some social media and we also do the content marketing on some like relative book. And to which we can see that brand awareness increased on the social media and platforms. And we also see the brand awareness increased in offline channels. And we can also see the searching frequency of our brand increased in some search engines such as Baidu. And from the performance of the Double 11 Shopping Festival, we can see the sales contributions of our new mid to high end products increased a lot, especially the bundle sales such as the refrigerators and the smart kitchen products.

Speaker 1

So overall, we think it's very good direction for us to invite them as our spokesperson and we also see the effects of that can see from that from our sales performance. So we hope all of these marketing and selling activities can still continue to help to drive our brand awareness. That's it. Thank you.

Speaker 3

Yes. We will share the growth outlook for 2022. We estimate to deliver a stable growth for next year due to several factors. First, as we see the sales contribution of new product has increased in the past few months and we have new series of AI products on the pipeline, We expect the new products to drive long term and healthier business growth and enhance our brand influence. 2nd, we expect the expanded offline store portfolio as well as diversified online sales channel to help increase the overall sales as well.

Speaker 3

3rd, we invested more advertising and marketing resources in the second half of this year and observed in the soft increase brand awareness and respective improved brand recognition will help to drive the sales growth. We see some uncertainties of market and macro economy, in particular the impact from real estate industry, which may result in the decreased needs of decorating home for the next year. Thank you.

Speaker 4

Thank you. That's all from me.

Operator

The next question comes from Vincent Yu with Needham and Company. Please go ahead.

Speaker 5

Hi, management. Thanks for taking my question. I have two questions. The first question is about the bundled sale, as we mentioned multiple times in our prepared remarks. Can management share how much percent is what percentage the bundled sale is in our Q3 revenue or order like a percentage of our total orders?

Speaker 5

And for these bundled service, we are seeing some weakness in the macro real USA market. What will we think about the trend of these bundled sale going forward? And my second question is about our gross margin and our sales associated sales strategy as we are like have healthy gross margin while at the same time we are like giving up some product items which have less gross margin. So considering that we might encounter more pressure from the raw material side, are we going to adopt the same strategy going forward? Or what we think about like the overall margin trend for us and the ASP trend?

Speaker 5

Thank you.

Speaker 1

I will quickly translate first. So as we are developing our 1st home home solutions, so we are changing or say transforming the traditional mode of selling individual products to selling solutions. So for the online channels, so most of our sales are still through the individual product selling. But for the offline channels, we can see that over 50% of the sales are from the bundled sales, which are like over 3 products. And no longer ago, like when is the other customer just purchased the bundles, the products like over RMB 250,000.

Speaker 1

So in terms of the real estate impact on our industry, we can see the overall home decorating decreases recently and we think that also caused some impacts on the overall home and home industry. But as we roll out more mid to high end products as well as promote more bundled sales, we think this can mitigate impact and can improve the purchase amount per customer. Thank you.

Speaker 3

Yes. Regarding the price of raw materials, as the overall price of raw materials is already at relatively high point and not going up for a much higher chance. We don't expect the raw material costs will cause significant impacts on our operating results, and we will continue to take cost control measures to mitigate the influence. In terms of ASP, actually, we have commenced to develop the pricing strategy for the next year. We expect the overall churn will go up in a limited extent as we expect an increase of the sales contribution of our new products with higher ASPs and higher margins.

Speaker 3

Thank you.

Speaker 5

Thank

Operator

you. This concludes our question and answer session. Now I'd like to turn the call back over to the company for any closing remarks.

Speaker 1

Thank you once again for joining us today. If you have further questions, please feel free to contact us through the contact information on our website or the PSNA Group, our Investor Relations consultant. Thank you all. Have a good night.

Operator

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

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Viomi Technology Q3 2021
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