Viomi Technology Co Ltd (VIOT) 2021 Q3 法說會逐字稿

Hello, ladies and gentlemen, thank you for standing by for Viomi Technology Co., Ltd's earnings conference call for the third 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 third 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 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, the Founder, Chairman of the Board of Directors and the Chief Executive Officer; and Mr. (inaudible), 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 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 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. 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. Chen will deliver his remarks in Chinese, followed immediately by an English translation. Mr. Chen, please go ahead.

(foreign language)

Thank you, Mr. Chen. I will quickly translate our Founder's remarks before discussing the financial performance for the third quarter of this year.

Hello, everyone. Thanks for joining our third quarter 2021 earnings conference call. Our third quarter net revenues reached RMB 1.06 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 revenue during the third quarter, mainly due to the significant decrease in sales of Xiaomi's branded sweeper robots. We maintained stable growth in most of our other product categories.

During the third quarter, 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 the company one-stop IoT home solution, integrating [smart home-intensive] smart home devices and software services.

We also continue to optimize our product portfolio and execute our trending technology brand marketing and a larger store, better merchant channel strategy. Moreover, we increased our investment in R&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&D expenses.

To enhance brand awareness, we also invested in additional advertising and marketing resources in the third quarter. Due to the substantial increase in R&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 third quarter gross margin was 22.7%, representing both year-over-year and quarter-over-quarter increases. Second, brand awareness continues to rise. And third, more diversified and balanced sales 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 appliance industry in the market, we have identified 4 important industry trends.

So first, the 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 [integrated stock].

Second, the demand for high-end products is growing rapidly. Third, bundle purchases have become popular, especially among the post-90s generation. And fourth, we observe the users start to proactively to get to know and to reach the smart home products, and smartification has become a benchmark for the industry and the market driven by technology progress and the consumption upgrading.

To capitalize on these trends and taking into consideration market opportunities and incorporate strategies, we have adjusted and refined our product research and development, enhanced our branding and improved our sales channels.

First, with respect to product development, we have developed our product strategy from 3 perspectives. First, we increased our investment in R&D as well as technology innovation and AI application, enhancing our brand influence through product optimization.

Second, 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 10,000 to RMB 200,000 have grown rapidly.

And third, we are currently focused on scenario innovation and will soon complete our smart home category to provide a more comprehensive smart home experience. To this end, this quarter, we devoted more resources in AI, algorithm, softwares as well as hardwares. We introduced a series of new AI products in the first half of this year, including the all-direction space air conditioner, premium sweeper robot Alpha 2 Plus, EyeBot range hood and 800 gallons to 1,200 gallons Super series with large-flux water purifiers. We also launched the Cyber series of our smart wet and dry vacuums in September. All of these products demonstrated strong sales performance in the third 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. We continually increase our efforts in R&D and will unveil high-end new smart home products and 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 purifier and cleanliness products, among others.

Second, to enhance our branding influence, we invited one of China's top celebrities, Deng Lun, to become our global branding spokesperson and established our trending technology brand positioning in the first half this year. In collaboration with Focus Media and Xinchao Media, we broadened our omni-channel marketing and advertising activities, including elevator advertisements, 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. Our brand's search frequency on major search engines have climbed, and our internal data shows that post-90s users and users from new Tier 1 and Tier 2 cities have increased over the past few months.

Third, 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 traffic and attract more young consumers. In our short-form video marketing and KOL livestreaming has enhanced brand awareness and contributed to an increase in sales. The revenue contribution from these new channels has increased in the past few months as well.

Fourth, with respect to our off-line channels, we continue to execute our larger store, better merchant strategy to provide our users with one-stop IoT home solutions, integrating bundle purchases, a scenario-based shopping experience and installation and after-sales services. These efforts have also strengthened our trending technology brand positioning.

In the second half, we accelerated our nationwide 4s and 5s store portfolio expansion, including a new 450 square meter Viomi flagship store opening (inaudible) in September, a new 760 square meter 5s experience store opening in (inaudible) CBD area in October, becoming the largest Viomi experience store in China. We will open more large scale 4s and 5s Viomi experience stores across the nation.

Finally, we are also developing our overseas business by upgrading channels, diversifying our operational models and expanding product category. 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-operating model in more regions following the successful opening of our first self-operated store on U.S. Amazon in August. We are preparing to launch our online store on European Amazon and will introduce sweeper robot products in the near future. Also, we will provide our overseas customers with smart wet and dry vacuums and sweeper robots with new functions.

Going forward, we will expand our global business into additional countries and regions to capture the cleanliness product sector's tremendous growth opportunities. We have completed the first 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 smartification upgrades and scenario application innovation.

Looking ahead, we will continue to refine our product portfolio and further stabilize our gross margin recovery. We will also increase our investments in AI application, enhance our training technology branding, grow bundle sales in the services and improve our overall business operation quality, creating long-term value and returns for our users and shareholders.

That concludes our Founder's remarks. Let's now turn to our detailed third quarter financial review as well as our fourth quarter outlook.

Net revenues were RMB 1.06 billion compared to RMB 1.49 billion for the third quarter of last year. Net revenues were in line with the company's previous guidance and the decrease was mainly due to the significant decrease in sales of Xiaomi-branded sweeper robots as well as product portfolio adjustments for margin expansion in other categories.

Revenues from IoT @ Home portfolio decreased by 39.3% to RMB 643.5 million from RMB 1.06 billion for the third quarter of last year. The decline was primarily due to -- the first, the decrease in sales of Xiaomi-branded sweeper robots; and second, the product portfolio adjustments for margin expansion in some categories.

Revenues from our home water solutions increased by 7.9% to RMB 157 million from RMB 145.4 million for the third quarter of last year. The growth was primarily driven by the company's product portfolio adjustment in this category, which contributed to increased sales of and a demand for new and larger flux water purifiers as well as the gross margin expansion. Revenues from consumables increased by 11.7% to 9 -- sorry, RMB 79.6 million from RMB 71.3 million for the third quarter of last year, primarily due to increased demand for the company's water purifier filter products.

Revenues from small appliances and others decreased by 15.9% to RMB 176.5 million from RMB 209.9 million for the third quarter 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 239.7 million compared to RMB 254.3 million for the third quarter of last year. Gross margin increased to 22.7% from 17.1% for the third quarter of last year, primarily driven by the company's continued efforts to shift the business and product mix towards higher gross margin products.

Total operating expenses increased by 28.2% to RMB 290.3 million year-over-year, primarily due to the increase in R&D expenses and the selling and marketing expenses. In more detail, R&D expenses increased by 56.1% to RMB 82.2 million from RMB 52.7 million for the third quarter of last year, mainly due to the increase in R&D experts and related salaries and expenses as well as increased investments in research and development of new products.

Selling and marketing expenses increased by 20.4% to RMB 183.4 million from RMB 152.2 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 24.7 million, compared to RMB 21.4 million for the third quarter last year, primarily due to an increase in the estimated allowance for accounts and notes receivables, together with increased lease expenses due to the workplace expansion.

Net loss attributable to ordinary shareholders of the company was RMB 29.3 million and non-GAAP net loss attributable to ordinary shareholders of the company was RMB 22.2 million.

Additionally, our balance sheet remained healthy. As of September 30, 2021, we had cash and cash equivalents of RMB 771.7 million, restricted cash of RMB 25.6 million, short-term deposits of RMB 67 million and short-term investments of RMB 463.5 million.

Now let's turn to our outlook. For the fourth quarter of this year, we currently expect net revenues to be between RMB 1.2 billion and RMB 1.3 billion. We expect the sales of Xiaomi-branded sweeper robots continue to decrease in the fourth quarter in the own-branded sweeper robot business to achieve faster growth, which will become one of the main categories.

The above outlook is based on current market conditions and reflects our current and preliminary estimates of market and operating conditions and customer demand, which are all subject to change.

This concludes our prepared remarks. We will now open the call for the Q&A session. The Head of our Finance Department, Mr. (inaudible), will join the session and answer questions. Operator, please go ahead.

(Operator Instructions) The first question today comes from Lillian Lou with Morgan Stanley.

(foreign language) I have 2 questions. First one is on third quarter results. Under a nearly 30% decline in revenue, what's the rationale behind the big increase in R&D and marketing expense? What -- and how do we think about fourth quarter, the balance between revenue versus the margin control?

And the second question is on overseas sweeper robot business outlook, how much it could be in the fourth quarter and onwards? And any bottleneck we've been seeing from overseas transportation and also related cost?

(foreign language)

I will quickly translate 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 get to know and to approach the smart home products. So we think that's the time to capture the market opportunity.

And we also see that smartification is a very -- is a trend for the whole industry in the market. So we wanted to invest in more R&D and selling and marketing experiences. So for the top line side, we proactively decreased the sales of Xiaomi sweeper robots. As you know that the gross margin of such business is relatively lower than the others. So we decreased the sales of Xiaomi sweeper robots to have more healthy gross margin and margin recovery.

And in terms of expenses, the year-over-year increase of R&D expenses is around like 56%, and we also gained some increase in the selling and marketing expenses. But we think in the near future, the R&D expenses will be 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.

I will introduce the overseas sales progress Lillian 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 first quarter. This is due to several factors.

First, due to the strong consumer demand during the post COVID-19, the distributors purchased a large volume of cleanliness products resulting in high stocking levels since the second quarter.

Secondly, the shortage of containers and labor resources in the overseas ports did impact on the offloading of products and caused some order delays. We expect such situation will continue in the second half of this year while we were taking some measures to mitigate the impacts and drive the growth increase.

On one side, from our acknowledge of overseas markets, 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 demand and drive the overall overseas sales. We will continue to expand additional countries and regions where we expect to have potential market growth.

(foreign language)

The next question comes from Rudi Wei with CICC.

Thank you for the management's presentation. This is Rudi Wei from CICC. And I have a question from -- for the promotion strategy. We have had Deng Lun as our brand spokesperson. And how it works? 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? (foreign language)

(foreign language)

I will translate Mr. Chen's comments. So we invited Deng Lun as our spokesperson because we think that's in line with our brand positioning of trending technology. And Deng Lun is very popular among young people, especially the post-90s generation, so he can endorse our brand as well as to help us to increase the brand awareness.

And [he accept when we invited him] and we have a spokesperson, we also are investing a lot of the advertisement in Xinchao and [Focus Media], and we also do a lot of advertisement on some social media and we also do the content marketing like red little book (sic) [Little Red Book] and to which we can see that the brand awareness increased on the social media and platforms.

And we also see the brand awareness increase in off-line channels. And we can also see search frequencies 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 bundled sales such as refrigerators and the smart kitchen products.

So overall, we think it's a very good direction for us to invite Deng Lun 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.

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 products has increased in the past few months and we have a 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.

Second, we expect the expanded off-line store portfolio as well as diversify online sales channel to help increase the overall sales as well.

Third, we invested more advertising and marketing resources in the second half of this year and observe in the soft increased brand awareness and expect the 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 need of decorating home for the next year. Thank you.

The next question comes from Vincent Yu with Needham & Company.

(foreign language) I have 2 questions. The first question is about the bundled sale, as we mentioned multiple times in our prepared remarks. Can management share how much percent -- what percentage the bundled sale is in our third quarter revenue or order -- like the percentage of total orders.

And for these bundled service, we are seeing some weakness in the macro [U. S. market]. What do we thinking about the trend of this bundled sale going forward?

And my second question is about our gross margin and our associated sales strategy as we are like have healthy 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 will we think about like the overall margin trend for us and the ASP trend?

(foreign language)

I will quickly translate first. So as we are developing our one-stop home solution, 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 go through the individual price selling. But for the off-line channels, we can see that over 50% of the sales are from the bundled sales, which are like over 3 products. And not long ago, like one is to have a customer just purchase the bundle -- the product like over RMB 250,000.

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

Yes. Regarding the price of raw materials, as the overall price of raw materials has already a relatively high point and not going up for a much higher change, 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 strategies for the next year. We expect the overall change 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. Thank 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.

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 Piacente Group, our Investor Relations consultant. Thank you all. Have a good night.

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