Viomi Technology Co., Ltd
Q1 2020 Earnings Call Transcript

Published: 26 May 2020

[Operator:]

Hello, ladies and gentlemen. Thank you for standing by for Viomi Technology Co., Ltd Earnings Conference Call for the First Quarter of 2020. [Operator Instructions].I would now like to turn the call over to your host, Ms. Cecilia Li, the Senior IR Manager of the company. Please go ahead, Cecilia.

[Cecilia Li:]

Thank you, Operator. Hello, everyone, and welcome to Viomi Technology Co., Ltd Earnings Conference Call for the First Quarter 2020. 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 Chief Executive Officer; and Mr. Shun Jiang, the Chief Financial Officer. 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 we express 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 does not assume any obligation to update any forward-looking statements, except as required by law.Please also note Viomi's earnings press release and today's conference call also 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.Now I will 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.

[Xiaoping Chen:]

Thank you, Xiaoping. This is Shun, Viomi's CFO. I will quickly translate Mr. Chen's remarks before providing an operational update and discuss our financial performance for the first quarter of 2020.Hello, everyone, thank you for joining our First Quarter 2020 Earnings Conference Call. Despite challenging industry conditions and ongoing macro uncertainties as a result of the COVID-19 outbreak, we successfully delivered better-than-expected results in the first quarter of 2020.Net revenues for the first quarter increased by 13.2% year-on-year to RMB766 million, demonstrating the resilient and diversified nature of our business as well as our strong execution capabilities. Since the beginning of the second quarter, our business and supply chain capabilities have largely returned back to normal. In addition, we have seen meaningful signs of an overall industry recovery. With these positive trends beginning to emerge, we have accelerated the execution of our growth strategy for this year under our 5G + IoT strategic framework.The development of 5G in China has accelerated rapidly. According to China 5G Economic Report 2020 released by China -- released by the China center for International Economic Exchanges, 5G users in China are expected to reach over 800 million by 2025. In March, the government proposed to speed up the establishment of 5G network infrastructure and expand application scenarios. The number of available 5G stations in China has reached over 200,000 by May, according to the data published by the Ministry of Industry and Information Technology of China. With the trend of increasing 5G network penetration, we believe this will be one of the key potential growth drivers of industry growth in the near term and beyond.We believe the upcoming 5G era will bring about 4 revolutionary technological enhancements in the IoT @ Home environment

[Operator:]

[Operator Instructions]. And our first question will come from Hanli Fan with Morgan Stanley.

[Hanli Fan:]

I have three questions for this. The first one is you mentioned just now that you've seen some kind of like positive signs in terms of the industry recovery. In terms of Viomi, from management point of view, how would you see the business recovery for the company itself in recently, for example, April and also early May? That's my first question.And the second question is how was your online performance in the first quarter, particularly during the COVID-19? Because we saw other competitors, they are pretty aggressive in terms of online marketing and sales. And how would you perform in the first quarter and compare with your competitors or other new initiatives you would like to use. That's my second question for the online sales.And the third one is that for the water purification system, in the first quarter you just mentioned that the ASP declined and also the volume, double-digit growth. Actually, I want to see so what's the actual impact from the COVID-19 because of weak demand, so you may kind of reduce your ASP. But looking forward, given that we are experiencing the market recovery, so with less impact from COVID-19, so how do you see the ASP pressure in terms of water purifier in the following quarters or in year 2021? That's my third question.

[Shun Jiang:]

Okay. Thank you, Hanli. Why don't I address them one by one. So in terms of our sales recovery, we have indeed seen meaningful sales recovery in April and May as compared to February and March, and this will probably cover your second question as well. So online channels have resumed year-on-year growth in recent months. And encouragingly, off-line sales are also close to similar levels as to what they were in their respective period of last year.So in terms of product categories in the past couple of months, larger appliances such as refrigerators and kitchen products have seen the most visible pickup in demand recovery as retail channels and logistics and installation services had resumed normal activity. So we do see positive -- a lot of positive momentum heading into the 618 shopping festival and have guided around 10% year-on-year revenue growth for the second quarter, off a strong base from last year.So in terms of your second question on the sales channels. So the first -- in the first quarter, approximately just over 50% of our sales came from the Xiaomi channel and around -- the remaining came from the Viomi channels. Although Viomi channel is approximately 70% -- or just over 70% came from online and the remainder came from off-line. Now in January, off-line was doing quite well before the onset of COVID-19. And as you would know, off-line suffered a lot in the subsequent months. If you're looking at the second quarter, that ratio will trend more towards say 80% online to 20% off-line, particularly given the increased contribution of the upcoming 618 shopping festival to our sales, while the off-line channels are still in the middle of their recovery phase. So in online, I think we're seeing very positive trends and even double-digit year-on-year growth heading into -- or in May and heading into June.In terms of the water purifier margins, so as we guided last year -- sorry, as we guided last quarter, the gross margins for water purifier did decline quite materially in the first quarter while ASPs and margins -- we believe ASPs and margins for this product category will likely remain under a degree of pressure in the second quarter due to continued promotional activities and commercial -- continued promotional and destocking activities, especially for old SKUs. While we do expect a recovery in the second half both in terms of ASPs and margins, these will largely be driven by a ramp-up in sales volume and contribution from newer higher-margin, higher-ASP products, such as those that we announced last week in our product launch event.Second is the continued realization of various cost control measures, including along the supply chain measures coming into effect. And thirdly, as you alluded to, we do expect a degree of price competition to ease as industry and economic impact of COVID-19 continue to moderate and destocking initiatives complete. So I think in terms of the water purifier trends, the second quarter will still be under a degree of pressure, but it's likely to be a trough, if you're looking at it from a whole year perspective.

[Hanli Fan:]

Yes. Just one quick clarification in terms of numbers. You mentioned 80% and 20% online/off-line split in the second quarter 2020. That's only for Viomi channel or all your sales revenue?

[Shun Jiang:]

That's for the Viomi channel.

[Operator:]

Our next question will come from Xudong Chen with CICC.

[Xudong Chen:]

I have two questions. First, as we saw, you just launched a 5G smart screen or smart TV last week and also upgraded a lot of amazing products. What can we expect those new products for this year and especially for the Jingdong shopping festival on June 18?And my second question is about the COVID-19. Seems the global demand has seen sharply decline Q2 but China market is recovering from COVID-19. Home appliances company, like Gree, just saw their sales warming up. Did you see the recovery from your side? And in your perspective, did you see some demand delayed for 1 quarter? Or did you see demand vanish because people have less money due to the COVID-19 impact and try to buy cheaper things? What will be the trend? And what will be the company's strategy to deal with these situations?

[Shun Jiang:]

Yes. Maybe I'll take your second question first. So as we mentioned and as you mentioned, we have seen very meaningful recovery across the board in terms of products going into April and May across our product categories. So I think the overall improvements have been very visible. Obviously, the recovery is still relatively nascent, and it remains to be seen how sustainable it is. But I think going into the 618 shopping festival, there is a degree of optimism, particularly in terms of the volume sales.Now I think in the first quarter and early in the second quarter, there was still a degree of inventory amongst various channels. And as that continues to be cleared, we do see kind of additional upside potential going into the second half. So as also mentioned, if you look at the second quarter, while ASPs continue to be a little bit under pressure, volume increases had seen quite meaningful uptrends and recoveries. So I think that's something that will underpin a rebound in the second half as the broader economy continues to recover.I think in terms of the overall consumer sentiment and wallet, that is a little bit too early to comment on. But I think what is interesting for our business is that we have minimal or close to negligible overseas exposure. So we don't have much exposure to the international export markets. And we are nearly 100% exposed to the recovery on the China demand side.So on your first question with regards to new products, we have launched a whole series of new products over the past several months, including a wide variety of new product lines across our product portfolio, such as the refrigerators, washing machines, air conditionings, so new SKUs along these product categories. And we do expect to generate good revenue growth from these products. I think air conditioning is a completely new category for us this year, and we have seen very positive response as we have begun selling this product over the past several months. You may have seen in the recent May 1 shopping festival that some of our air conditioning products were among the top 10 in the air conditioning product category among various online channels. So I think that category is definitely off to a good start and should contribute relatively meaningfully for the full year. I think in terms of exact sales forecast, it's still a bit early, but in terms -- but I think air conditioning as well as some of the other new SKUs that were introduced in our product launch event should contribute meaningfully as we get into the second half.Another new product category that was launched late last year was the Xiaomi sweeper robot. I think that has also been very well accepted by the -- or received by the market, having generated over RMB100 million revenues -- of revenues per quarter since its launch in the third quarter of last year.So in terms of television products, I think this is more, at least in the early stage, as a standard bearer or as a center point in terms of increasing our brand image and kind of anchoring our brand positioning as a fully-fledged IoT experience provider. I think in terms of the sales volume, let's wait and see. It was only launched last week. But I think if you look at the overall revenue contribution to the entire business, it shouldn't be too meaningful at least for this year.

[Operator:]

Our next question will come from Robert Cowell with 86Research.

[Robert Cowell:]

My question is also about the recent launch event, a couple of somewhat related points. The first is basically this launch event was online, I think one of your first major launch events that was conducted through this live broadcast format. When we look at this launch event as a brand-building and promotional opportunity, how does the live event compare to our previous launch event?And then the second question is about the smart screen that was launched. You laid out a vision for how it works as kind of a center point for the smart home. I'm wondering how you think about pricing for this and whether or not there is some consideration of basically trying to be aggressive on the pricing to get that position in the smart home.And then third, also related to this vision of the smart home, how do we think about interoperability with other platforms for smart home devices? Are we trying to make our devices accessible across different platforms? Or are we looking at more of a closed ecosystem concept?

[Shun Jiang:]

All right, Robert, thanks for your questions. Maybe I'll pass these on to Chen Zong, who can give a detailed response, and I'll follow it up with some translation.

[Operator:]

Our next question will come from Vincent Yu with...

[Shun Jiang:]

Sorry, sorry, sorry. Not yet, we're going to answer these questions in Chinese first and then some translation.

[Xiaoping Chen:]

Maybe I'll just translate the first two responses while Mr. Chen will respond to the third question. So in terms of the online product launch event, it was actually very successful, able to reach over 2 million views since last week. So a very high viewership, which is a signal of very high interest in the direction of not only Viomi but also in terms of Viomi's positioning in the upcoming kind of 5G and IoT era, which has been a very hot topic in the industry. I think the news reports and feedback that we received have been very plentiful and overall quite positive and has really kind of increased the interest in Viomi and Viomi's direction among industry watchers, not only in the sense of smart appliances, but also in terms of the broader 5G and IoT industry.So I think some key points with regards to the event. The interactive smart screen TV that we launched, I think this will, as mentioned, be very central to our IoT @ Home experience. It essentially completes the IoT @ Home scenario in terms of our product coverage, being a focal point of the living room. So a screen in your living room, being able to engage in cross-operability and cross-screen experience across scenarios and environments in your home.Secondly is the Home SaaS cloud services that we announced. So this concept, it really kind of brings the fact that we're not only offering products, but really pushing this holistic IoT concept, right? So Viomi's 5G + IoT strategy places a marker for Viomi's future strategy, direction and positioning as not just a products provider but in terms of a holistic kind of IoT experience play.The second question on 5G. So 5G, we do expect this to have quite a revolutionary impact on the kind of home appliances industry or the IoT @ Home industry, quite similar to what's currently underway in the mobile phone industry. So I think there's several kind of easy-to-understand concepts of 5G so -- is that it will directly upgrade routers and current WiFi connectivity, resulting in faster connections, being able to connect more products at the same time and offering automatic connections, right, so very easy to use and seamless connections for the end consumer. So the overall 5G + IoT ecosystem, we envisage to be more flexible, being able to offer more high-quality content and, I think in the end, will offer a better experience and better value proposition for consumers.And what is this value proposition? I think we want consumers to really get into this next-generation idea of the high-tech home. So what will it be like? So I think over the next period, it will be important to educate consumers on our vision for what the future home should be and how we can help them achieve this to essentially upgrade their home living experience. So Mr. Chen will now provide the answer for the third question on interoperability.

[Xiaoping Chen:]

Okay. So we'll answer the question in two parts. So in terms of interoperability, I think we're adopting quite an open approach. We believe that the 5G generation will, in general, be quite an open platform and it will be very interoperable, similar to cross-operation among current phone carriers. So while there may be a single account, more products will be able to connect across this account. And this is mainly due to the increased connectivity as well as the ease of connectivity, such as our kind of one-touch connection that is able to achieve across our products as well as the -- well, across 5G routers.So I think in terms of what we really think that the value lies in the 5G era, so as we know, 3G enabled browsing, 4G enabled videos, the 5G IoT generation, we believe will enable greater control, particularly with regards to, say, streaming and interactive screen-based content and also allow for more content and content consumption scenarios across the home and across a variety of connected screens in the home environment. So this scenario-based consumption will also be a key feature in the 5G era. So I think in summary, 5G just makes everything more seamless to use for consumers and will create additional opportunities that, at the moment, may not have the best experience or are currently not available yet.

[Operator:]

Our next question will come from Vincent Yu with Needham & Company.

[Vincent Yu:]

My first question is about the smart TV and the living room scenario. So considering that we, in our other SKUs, such as refrigerators, also have the, like a display so we have been able to accumulate some data. And are we going to do some like advertisement campaign targeting the user behavior in the living room scenario?My second question is considering the competition landscape, are we going to -- what we are thinking about our strategy to taking market share? And also like how to handle the pricing pressure from peers? My third question is have our -- the large item delivery returned to normal in counts like April or May timing after the breakout of pandemic?

[Shun Jiang:]

Mr. Chen will answer the first couple of questions. Yes. Okay. Thank you. We'll address those questions one by one. First question is with regards to the data that our products are able to capture from household users and what we're able to do with it. So I think there's several different factors. I think the most obvious is in terms of advertising. Some of the pilot programs that we've enabled, particularly on our 21Face refrigerators, have been quite successful. I think if we are able to roll this out on a larger scale and as we continue to increase our installed base, this will essentially be similar to a focus media screen in the home, right? But not just that, we're able to collect a variety of data to position each household or each area quite uniquely. We can offer very targeted advertising capabilities across individual households or areas or regions rather than, say, blanket -- blanket advertising campaigns. And I think more importantly, we're able to then collect the data upon the data that we utilize, so being able to see whether the advertising campaigns are being engaged upon, what their conversion ratio is and really being able to significantly increase the advertising quality or value going forward. So we see a lot of potential opportunities in this area as we continue to roll out our concept of this screen-filled IoT @ Home experience.So the second question on the kind of the TV industry and competitive dynamics. So our positioning is definitely not going to go for pure price competition. We don't think that this is the correct strategy for us. As mentioned, this particular product, as you would have seen in our product launch event last year, is very much an integral part of our IoT @ Home portfolio and overall experience. So it's not just an individual product. It very much fits into the holistic experience that we want to provide. So it's quite a unique positioning. We want to give the consumer this premium, high-tech experience. But then again, on our mid end, what is the price. So what we're trying to do is provide this 5G next-generation product at traditional prices, right?Thirdly, in terms of logistics. So I think in general, nearly all operational -- operations have returned to close to normal within the industry. I think that the most noticeable trend has been the pickup in demand and sales of larger appliances, such as refrigerators, air conditioning and kitchen products in recent weeks or even month or 2, which were very depressed in the first quarter. So these products with very high kind of installation or logistics requirements are seeing very significant rebound. So I think, definitely for TV, which is just a less installation-intensive product, it's definitely not a problem.So I think in general, what we're seeing now is the industry effectively -- at least the domestic China industry, heading close to normal in terms of supply as well as demand. And we're cautiously optimistic heading into the 618 shopping festival as well as the second half of this year.

[Operator:]

As there are no further questions now, I would like to turn the call back over to management for closing remarks. Please go ahead.

[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 IR website or The Piacente Group, the company's IR consultant. Thank you all. Have a good one.

[Shun Jiang:]

Thank you.

[Xiaoping Chen:]

Thank you.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.