Viomi Technology Co., Ltd
Q3 2021 Earnings Call Transcript

Published: 24 Nov 2021

[Operator:]

Hello, ladies and gentlemen, thank you for standing by for Viomi Technology Company Ltd's Earnings Conference Call for the Third Quarter of 2021. At this time, all participants are in a listen-only mode. 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.

[Cecilia Li:]

Thank you, operator. Hello, everyone, and welcome to Viomi Technology Co. Limited earnings conference call for the third 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 at 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 Chief Executive Officer, and Mr. Wickham Thai, the Head of our Finance Department. The Company’s management will begin with prepared remarks and the call will conclude with a Q&A session. Before we continue, please note today's discussion will contain forward-looking statements made under the Safe Harbor provisions of 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 mostly 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.

[Xiaoping Chen:]

[Cecilia Li:]

Okay. Thank you, Mr. Chen. I will quickly translate up on his 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 RMB1,056.5 million, 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 third quarter, mainly due to the significant decrease in sales of Xiaomi-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 a complete one-stop IoT home solutions integrating smart home appliances, smart home devices, and software solutions. We also continued to optimize our product portfolio and execute our 'trending technology' brand marketing and 'larger store, better merchant' channel strategy. Moreover, we increased our investment in R&D and expanded our AI algorithms and 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 while our strategy adjustment 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 and the markets, we have identified four 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 integrated desktops. Second, the demand for high-end products is growing rapidly. Third, bundle purchases have become popular, especially among the personality generation. And fourth, we observed a – start to proactively to get to know and curate the smart home products and its modification has become a benchmark for the industry and the market, driven by technology progress and the consumption upgrading. To capitalize on this trends and taking into consideration the market opportunities and incorporate the strategies, we have adjusted and refined our product research and development, enhanced our branding and improved our sales channels. With respect to product development, we have developed our product strategy from three perspectives

[Operator:]

The first question today comes from Lillian Lou with Morgan Stanley. Please go ahead.

[Lillian Lou:]

I have two questions. First one is on third quarter results and a nearly 30% decline in revenue. What’s the rationale behind that big increase in R&D and marketing expense? And how do we think about fourth quarter, the balance between revenue versus the margin control? And the second question is, 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? Thank you.

[Xiaoping Chen:]

[Cecilia Li:]

I will quickly translate the comment from Mr. Chen. So, as we observed from the market, since the second half of last year to this year we see the users started proactively to get to know and approach the smart home products. So we think that’s the time to capture the market opportunity and we also see this smartification is a very – is a chance for the whole industry in the market. So, we wanted to invest in more R&D and selling and marketing expenses. So, for the upside, we proactively decreased sales of Xiaomi sweeper robots and you know that the gross margin of that business is relatively lower than the others. So, we are decreasing 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 56% and we also again saw increasing selling and marketing expenses. But we think in the near future, the R&D expenses will back to relatively normal level and we will deal like invest in selling and marketing but we are 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 solutions. That’s from our Founder.

[Lillian Lou:]

[Xiaoping Chen:]

[Wickham Thai:]

I will introduce the overseas sales progress Lillian just mentioned. For that past few months, we saw the 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, 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 uploading of the products and caused some order delays. We expect such a 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 self-agents which will help us to increase sales by leveraging the local resources and reputation. Thirdly, as the overseas consumer mix towards cleanliness product more diversifies, 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. Thank you.

[Xiaoping Chen:]

[Lillian Lou:]

[Operator:]

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

[Unidentified Analyst:]

Okay. Thank you for the management’s presentation. This is 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 especially about the sales during this year’s Double 11 Festival? And what’s your outlook for next year’s consumption and sales trends?

[Xiaoping Chen:]

[Cecilia Li:]

I will translate this question. So, we invited to – invited Deng Lun as our spokesperson and just we think that’s in line with our brand positioning of 'trending technology' and then we are very popular among young people especially their personality generation so it grows our brand as well as to help us to increase the brand awareness. And except that we invited Deng Lun as the spokesperson, we also are investing in lot of the advertisements in Xinchao and technical media and we also do a lot of advertisement on some social media and we also do the content marketing like Red Little Book and so you can see that brand awareness in the social media and platforms. And we also see the brand awareness increased in offline channels and while we can also the searching – the searching frequency of our brand increased in some social media such as Baidu. And on the performance, we have the Double 11 Shopping Festival we can see the best contribution with our new major high end products increased a lot, especially the bundle sales such as the refrigerators and the smart kitchen products. So, overall we think, it’s very good direction for us to invite Deng Lun as our spokesperson, and then 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 have to drag our brand awareness. That’s it. Thank you.

[Wickham Thai:]

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 new series of AI products on the pipeline, we expect that new products to drive long-term and help the business growth and enhance our brand influence. Second, we expect the expanded offline store portfolio as well as diversify online sales channels to help increase the overall sales as well. Third, we invested more in advertising and marketing resources in the second half of this year and observe in the self-increased brand awareness and expect this improved brand recognition will help drive the sales growth. We see some uncertainties of market and macro economies, in particular, the impact from real estate investing, which may result in the decreased needs of decorating home for the next year. Thank you.

[Unidentified Analyst:]

Okay. Thank you. That’s all from me.

[Operator:]

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

[Vincent Yu:]

Hey, Xiaoping Chen. Hi, management. Thanks for taking my question. I have two questions. The first question is about the bundles sale. As we mentioned multiple times in our prepared remarks, can management share how much percent – or what percentage the bundles sale is in our third quarter brand new or order like the percentage of our total orders. And under the service we are seeing some weakness in the macro USA market. What we think about the trend of this bundled sale going forward? And my second question is about 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, concerning that we might encounter a more pressure from the raw material side. Are we going to adopt the same strategy going forward or what we think about, like the old margin trends for us and the ASP trends? Thank you.

[Xiaoping Chen:]

[Cecilia Li:]

I will quickly translate first. So, as we are developing our long-term home solutions, so we are changing our – transforming the tradition more to selling individual products to selling solutions. So, for online channels, the motive of sales is to individual product selling, but for the offline channels, we can see that over 50% of the sales are from the bundle sales which are like our suite of products. And no longer the online, one is you have to capture much purchase the bundles, the products like over RMB 250,000. So, in terms of the real impact on our industry, we can see the overall home decorating will decrease a little and we think that also caused some impact on the overall home appliance industry. But as we roll out more mid to high end products, as well as promote more bundle sales, we think this can make a big impact and can improve the purchase amount per customers. Thank you.

[Wickham Thai:]

Yes. Regarding the price of raw materials, as still our price of raw materials has already at relatively high point and not going up for much higher trends. We don’t expect the raw material cost will cause significant impacts on our operating results. And we will continue to take cost control measures to mitigate the increase. In terms of ASP, actually we have – we must develop the price strategy for the next year. We expect the overall channel will go up in a number to expand as we expect an increase of the sales contribution of our new products with higher ASPs and higher margins. Thank you.

[Vincent Yu:]

Thank you.

[Operator:]

This concludes our Question-And-Answer Session. Now I’d like to turn the call back over to the company for any closing remarks.

[Cecilia Li:]

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.

[Operator:]

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