Viomi Technology Co., Ltd (VIOT) Earnings Call Transcript & Summary

Hello, ladies and gentlemen, thank you for standing by for the Viomi Technology Company Limited's Earnings Conference Call for the Third Quarter of 2022. [Operator Instructions] Today's conference call is being recorded. I will now turn the call over to your host, Ms. Claire Ji, from the company's IR department. Please go ahead, Claire.

Thank you. Hello, everyone, and welcome to Viomi Technology Limited's Earnings Conference Call for the Third Quarter of 2022. As a reminder, this conference is being recorded. The company's financial and operating results were issued in our press release earlier today and are posted online. You can download earnings press release and sign up for the company's e-mail distribution list by visiting the IR section of the company's website at ir.viomi.com. Participating in today's call are Mr. Chen Xiaoping, the Founder, Chairman of the Board of Directors and Chief Executive Officer; and Mr. [ Thai Wickham ], the Head of our Finance Department. The company's management will begin with prepared remarks, and the call will conclude with the Q&A section. Before we continue, please note that 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 this 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 does not assume any obligation to update any forward-looking statements, except as required by law. Please also note that Viomi's earnings press release and other conference call -- and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. In addition, 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. Chen Xiaoping. 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 third quarter of 2022. Hello, everyone. Thanks for joining our third quarter 2022 earnings conference call. In the third quarter, our total revenue reached RMB 685.8 million, below our previous guidance as a result of lingering weak market demand and the pandemic resurgence. In addition to the macro headwinds, the complete cutoff of sales of Xiaomi-branded sweeper robot in 2022 adversely impacted our third quarter revenue. Furthermore due to the adjustment of the product portfolio and increase in the proportion of the revenue from product categories with relatively low gross margins caused a temporary decline in the company's overall gross margin in the third quarter. However, we estimate the gross margin will return to a normal level in the fourth quarter to build our long-term product competitiveness and brand awareness, alongside our ongoing elevator and ad campaigns, we jointly launched a video interview program with Langchao Studio and Gongmao Home Appliances. In this program, we delve deeper into the topic of how the IoT home solution is reshaping the future homes of Chinese people with Zhang Quanling, senior media specialist and investor, and Li Feng, the Chairman of Gongmao Home Appliances. In the interview, Asking about the Whole-Home Intelligence, we responded to senior media specialist, Yi Lijing's questions about how smart home development with in-depth information on our one-stop IoT home solution and our 4 capabilities, 4 services approach to the smart home. With smart home appliances and smart home products covering all scenarios, more people want to live in homes of the future immediately. Although our investment in product innovation and branding resulted in a temporary loss in the context of a challenging macro environment. We expect that given the continuously expanding user base of smart home appliance, the industry will soon approach an inflection point. Viomi has taken the lead and positioned our company to capitalize on this demand by completing the hardware and software integration and upgrade necessary to create a truly smart home. We believe our communications with consumers and our explorations of the future of smartification will encourage more consumers to become smart home users, enhance our brand influence and promote the development of industry. Separately, we have made good progress in product innovation, brand promotion and channel expansion over the past few months. Underpinned by our effective long-term brand and product development strategy, we continue to strengthen our trending technology brand positioning. In terms of product innovation, we hosted AI: Helpful 2.0, our autumn online software launch event on October 25th, which then focused on our software upgrades and product interaction across 4 dimensions, including health care, energy conservation and environmental protection, active intelligence, and the natural interaction, further improving our one-stop IoT home solutions from the software side. At the same time, on the hardware side, we launched a series of new smart home appliances, including Alpha, our AI range hood with AI smart eye function; Master Pro, our 1200 gallon Quanxian AI water purifier with integrated heat purification; Alpha 3 Pro, our AI sweeping robot equipped with an all-purpose base station; and Super 2 Max, our AI gas water heater with intelligent temperature control. In the category of smart home products, we introduced Super 2 AI smart door locks with an ultra-wide-angle digital peephole. These new products achieved good results and have received broad consumer recognition in their pre-sale and crowdfunding stages. By deeply integrating our software and hardware, we provide richer home use scenarios and more intelligent user experiences, empowering more users to enjoy the convenience and ease of IoT home solutions. Our continued product innovation supported by our elevated research and development capabilities as well as our efforts to build big talent resources. In August, we held our first annual scientific and technological meeting where we generally rewarded our technological innovation teams and individuals and the winner of the technology superstar price was rewarded a Tesla car, constantly encouraging ongoing R&D innovation. Furthermore following the approval we received to establish our Guangdong doctoral work station in the first half of 2022, we obtained authorization to setup a post-doctoral workstation in [indiscernible]. Moving forward, Viomi will continue to cooperate with universities and professional institutions to cultivate top talents for our society, incubate smart home programs and promote the overall development of the smart home industries. As of the end of the third quarter, we have applied for more than 5,500 global patents and accumulate to the 3,500 authorized patents worldwide, along with more than 2,100 innovations in the latest list of the Fortune series top 20 enterprise for scientific and technological innovation, the Fortune series top 100 manufacturing, top 100 private enterprise and top 100 enterprise in 2022. Viomi ranked third place; 38, 60 and 73, respectively, a testament to our technological innovation capability and our comprehensive strength. Furthermore we continue to execute our largest store and value merchant channel strategy in the third quarter and open additional Viomi 4S flagship stores encompassing over 200 to 400 square meters in provinces including Hebei, Anhui, Hubei, and Fujian, among others. Meanwhile the sales volume of our bundled home solutions increased steadily with various solution options and prices to meet consumers' diverse demand. Our offline merchants signed whole-home solution orders ranging from tens of thousands to hundreds of thousands of RMB with customers in Hunan, Guangdong, Ningxia and other areas during this quarter. Also our overseas business, in September, we showcased a number of new products at IFA 2022 in Berlin, marking our first appearance at one of the world's most significant technology marketplaces for the consumer and electronic industries where we received positive feedback from the European market. Going forward, we will enrich our overseas offerings with additional product categories and expect a breakthrough in the sales of export sales as a result. As we forge ahead, we will continue to concentrate the following 3 aspects of the operation optimization. First, on the product side, streamline the number of our SKUs, adjusted resource allocation and focus on more technological advanced products while improving the whole home smart product landscape. Second, continuously refine our operational structure and implement disciplined cost control measures. Third, adhere to our solid long-term development strategy with ample funding reserves to support our operations while creating long-term value for all of our users and shareholders. Thank you. That concludes our founder's remarks. Now Mr. Thai Wickham, the Head of our Finance Department, will go over our third quarter 2022 unaudited financial results in more detail.

Thanks, Claire. Now I will go for the details of the unaudited financial results for the third quarter 2022. Net revenues was RMB 685.8 million compared to RMB 1,056.5 million for the third quarter of 2021. Net revenues were below the company's previous guidance. The decline was mainly due to the ongoing product portfolio adjustments in some categories as well as overall weakened consumer spending. Revenues from IoT @ home portfolio decreased by 41.6% to RMB 376 million from RMB 643.5 million for the third quarter of 2021. The decline was primarily due to the SKU adjustments for some categories as well as the complete cutoff of sales of Xiaomi-branded sweeper robots. Revenues from home water solutions decreased by 23.6% to RMB 119.9 million from RMB 157 million for the third quarter of 2021. The decline was primarily due to the decreased demand for water purifiers. Revenues from consumables decreased by 11.8% to RMB 70.2 million from RMB 79.6 million for the third quarter of 2021, which was in line with the decreased demand for water purifiers. Revenues from small appliances and others decreased by 32.2% to RMB 119.7 million from RMB 176.5 million for the third quarter of 2021, primarily due to the product portfolio adjustment within these categories. Gross profit was RMB 135.9 million compared to RMB 239.7 million for the third quarter of 2021. Gross margin was 19.8% compared to 22.7% for the third quarter of 2021. The decline was primarily due to the temporary increase in proportion of revenue from product categories with relatively low gross margins. Total operating expenses decreased by 16.5% to RMB 242.5 million from RMB 290.3 million for the third quarter of 2021, primarily due to the year-over-year decrease in selling and marketing expenses. In more details, research and development expenses decreased by 19.1% to RMB 66.5 million from RMB 82.2 million. million for the third quarter of 2021, mainly due to the reduced expenses in product development as well as the decrease in research and development aspects related service and expenses. Selling and marketing expenses decreased by 22% to RMB 143.1 million from RMB 183.4 million for the third quarter of 2021, mainly due to the decrease in sales-related expenses and personnel costs. General and administrative expenses increased by 33% to RMB 32.9 million compared to RMB 24.7 million for the third quarter of 2021, primarily due to the increase in estimated allowance for accounts and notes receivables recognized in the current period. Net loss attributable to the ordinary shareholders of the company was RMB 69.6 million compared to the net loss attributable to the ordinary shareholders of the company of RMB 29.3 million for the third quarter of 2021. Non-GAAP net loss attributable to the ordinary shareholders of the company was RMB 78.7 million compared to the non-GAAP net loss attributable to the ordinary shareholders of the company of RMB 22.2 billion for the third quarter of 2021. Additionally our balance sheet remained healthy. As of September 30, 2022, the company has cash and cash equivalents of RMB 760.1 million, restricted cash of RMB 65 million, short-term deposit of RMB 83.7 million and short-term investments of RMB 259.5 million. The details of unaudited results for the third quarter 2022 was introduced as above. Thank you.

This concludes our prepared remarks. We will now open the call for Q&A session. Our founder and Mr. Thai will join the session and answer questions. Operator, please go ahead.

[Operator Instructions] Today's first question comes from [ Mark Slang ] with Morgan Stanley.

I have 2 questions. The first one, can you please give us more insight or color on the SKU adjustment in the third quarter for robotic sweepers. And my second question is what's the recent trend of robotics sweepers in China and overseas market. And are you expecting demand to remain weak in fourth quarter in 2022?

For the first question about the SKU adjustment, as we introduced in the previous call, actually we're in a translational product strategy and brand positioning in an ongoing process. The cleaning of certain products and integration of new products during this weak demand periods to a certain extent put pressure on our operating results. It might take a longer time for the new products to be accepted by the market. Actually we're promoting and introduce more premium and with high technology products to the market. We emphasize more like bundle sales -- bundle sales at one-stop home solution products. And for the second question about the overseas market. In the third quarter, with the international geopolitics and foreign euro exchange rate lasting, the overall consumer sentiment in euro is still low and adversely impacted our overseas sales. But we started to sell more product categories in addition to sweeper robots like air conditioners, refrigerators, washing machines and heaters, et cetera. Our overseas sales are expecting a recovery in the coming season. Also, as we mentioned, just now we participated at the IFA 2022 in Berlin in September for the first time, which is the world's most significant technology marketplace for the consumer and electronic industries. We showcased a number of new products to the euro consumers and franchises and we received many positive feedbacks. In the meantime we see the softened Asian markets with great potential, and we are actively exploring more new franchise in these areas.

Sir, can I just have a quick follow-up? So in terms of demand that you expected in 2022, sort of [indiscernible] what you talk about in fourth quarter?

Sorry, you mean the expectation for fourth quarter?

Yes, I mean both fourth quarter and 2023 please?

Okay. Due to the complex situation of COVID-19 and the weak consumption in recent quarters, we tend to be more prudent about the estimation and guidance. As far as we can see, the overall popularity of the Double 11 shopping festival this year is not as good as last year, and the sales scale of Q4 is expected to decline on a year-over-year basis. With respect of gross margins, we estimate it maintains a stable level for the whole year, let's say, above 20%. Also we are continuously working on the operation optimization, both of the structure and number of SKUs has been optimized in an orderly manner. And we continue to refine our operational structure and implement disciplined cost control measures as mentioned as well.

And our next question today comes from [ Alex Wang ] with CICC.

I have 3 questions for you. My first question is also about overseas market. What is the overseas revenue and its growth rate? How about the overseas revenues proportion in sales? What is the outlook for overseas demand? [Foreign Language]

Can you please -- you mean you've got 1 question or 2 questions, 3 questions?

Three questions. This is the first question.

Okay. As we mentioned just now, in the third quarter, the international geopolitics and the euro exchange rate lasting. So we did not -- we are also adverse impacted by the overseas sales. And we start to sell more categories, as we mentioned just now. And on going forward, we will keep enriching overseas offerings with additional home appliances product categories and expect new breakthrough in the scale of export sales. The proportion of the overseas, our revenues, we will share in the future. Yes.

My second question is about the strategy of premium new products and solutions and considering the relatively weaker demand in the Chinese market and overseas market, does Viomi feel some pressure for its strategy regarding premium products? How does Viomi think about the demand of China in the future? And will Viomi consider making adjustments in the [indiscernible] strategy? [Foreign Language]

[Foreign Language]

Okay. I'll quickly translate our founder's answer. Firstly, both the domestic and overseas market environment, as we can see, are all shrinking. The market demands are on a sluggish level. And secondly, as we can see, the Western world and the Eastern world, the market in fact come to a balance -- coming to a balancing point. And also in the domestic world, we can see in most of the developing areas that the rural areas are developing fast. We're seeing more demand in the younger generation. And so our strategy is about to facing the situation and meeting the challenge is, first, we will mapping more medium-level products which has price advantages. And also we will enrich our overseas product portfolios, and we will delve deeper in the European market.

My last question is about the cooperation with Xiaomi. What is the proportion of the revenue from Xiaomi in the third financial quarter? Whether the current cooperation is based on water purifiers? What is -- whether there are other categories that will cooperate with Xiaomi and what is the arrangement of the cooperation in the future? [Foreign Language]

Okay. About the cooperation with Xiaomi, the proportion of revenue from Xiaomi is, in the third quarter, is around 40%. And as we mentioned just now that we gradually decreased the Xiaomi brand sweeper robo business since early 2021 and completely cut off this business in the year 2022. Currently the major product categories we cooperate with Xiaomi was -- are water purifiers, on smart kitchen products and small appliances like [indiscernible] et cetera. Recently certain model of Xiaomi-branded water purifier supplied by us have achieved remarkable sales in the market. Looking forward, we will maintain a stable cooperation with Xiaomi and export further reciprocal opportunities in additional categories.

[Foreign Language]

I'll briefly translate Mr. Chen's answer. Our cooperation with Xiaomi and with the developing our cooperation with Xiaomi about 3 aspects. Firstly, about the cooperation with water purifiers, this amount of revenue is stable, and we are working on new SKUs in the future. And also we are expanding the order categories of smart kitchen appliance. And thirdly, we are discussing about the smart home products in the future.

Thank you. And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Claire Ji for any additional or closing comments.

Okay. 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, the company's Investor Relationship Consultant. Thank you.

Okay. Ladies and gentlemen, this concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.