Viomi Technology Co., Ltd
Q2 2020 Earnings Call Transcript

Published: 24 Aug 2020

[Operator:]

Hello, ladies and gentlemen. Thank you for standing by for Viomi Technology Company Limited Earnings Conference Call for the Second Quarter 2020. At this time, all participants are in listen-only mode. Today's conference call is being recorded. I will now 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 second 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 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 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 this 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. 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 English translation. Mr. Chen, please go ahead.

[Xiaoping Chen:]

[Foreign Language]

[Shun Jiang:]

Thank you, Mr. 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 second quarter of 2020. Hello, everyone. Thank you for joining our second quarter 2020 earnings conference call. We saw meaningful improvements in operating conditions in the second quarter as both the industry and the overall economy continued to rebound from the impact of COVID-19 earlier this year. Driven by a robust ‘618’ sales season, combined with successful new product launches such as our air conditioning systems, we are pleased to report that our second quarter revenues reached more than RMB 1.68 billion, representing a year-over-year increase of 45.2%, significantly stronger than expected. Although the first half of 2020 was challenging, the recent ‘618’ online shopping festival and related promotional events have shown positive signs of an overall industry recovery trend. We received our best-ever performance during the respective ‘618’ sales season more than doubling related retail sales value across our entire product range on a year-over-year basis. Various products, such as refrigerators, washing machines and air conditioners were ranked among the top 10 in terms of GMV on certain online ecommerce platforms. Such resilience and strong performance further demonstrate our ever increasing brand awareness and market penetration as well as consumers and sales channels ever growing interest in our products, concepts and value propositions. The backbone of our constant growth has been our continued product innovation and new product launches under our IoT @ Home strategic framework. With the recent successful introductions of our air conditioning systems and 21Face Interactive Smart Screen TV, we now have a comprehensive presence across the entire range of major scenarios in the home environment. We also continued to make significant progress in the development and optimization of our 5G initiatives during the quarter. Two models of our recently launched 21Face Interactive Smart Screen TVs are already on the market. In addition, we expect to soon begin mass production about Wi-Fi 6 CPE together with other exciting 5G-related and enabled products in the second half of this year. With ever-increasing 5G network penetration and consumer adoption this will no doubt be one of the key transformational drivers of industry growth in the near term and beyond. We believe our differentiated product and brand positioning together with our focus on technology R&D in the space will allow us to become a front runner in this imminent 5G plus IoT era, providing seamless next generation 5G IoT experiences to our users. In terms of such user experiences, we have achieved numerous advancements in developing additional content applications and partnerships for our flagship 21Face large-screen refrigerators. We recently launched a significant upgrade of our 21Face refrigerator large-screen operating system, including additional content offerings such as short-form video recommendations, gourmet recipes and parenting workshops, among others, together with a number of voice recognition and user experience enhancements. On this front, we've also established a number of related cooperation partnerships. In July, we entered into a strategic collaboration agreement with Kugou Music, a leading interactive digital music-related services provider and subsidiary of the Tencent Music Entertainment Group to offer innovative and trending music streaming content. Viomi’s users can now enjoy Kugou Music offerings on 21Face large-screen refrigerators and enjoy relevant recommendations in smart play through voice control. Such partnerships are in line without our 5G IoT strategy, and will enrich our content offerings as well as enhance the cross-scenario and cross-screen content interactivity of Viomi’s various large-screen products. To provide innovative and exciting content for the imminent 5G plus IoT era, we will continue to seek strategic partnerships with entertainment and social media platforms. We believe these collaborations will help further increase our user stickiness, create additional potential monetization channels and further differentiate us from our peers. We've also continued to expand and diversify our sales channels through additional partnerships. In July, we entered a strategic collaboration with Hunan Friendship and Apollo Commercial Co. Ltd., a large scale Hunan-based retail group, an A-share listed company for the promotion of our products, the integration of brand and channel resources as well as the implementation of IoT @ Home solutions. Friendship and Apollo Commercial Co. Ltd. will introduce our IoT @ Home product portfolio and open large scale 5G IoT smart home experience for us, promoting the development of local homes modification. In addition, we also established the partnership with Zhejiang Xiaolan and Zhihui Technology Co. Ltd., a technology company in the intelligent laundry industry in China, to introduce Viomi-branded washing machines across a broad spectrum of scenarios including schools, apartments, communities and hotels. Such partnerships will continue to help us diversify our channel presence, improve the customer shopping experience, as well as strengthen our overall brand awareness and market penetration. It is also a testament to these potential partners’ increasing recognition by value proposition as well as our overall IoT @ Home brand and product position. Looking ahead to the second half, with a broader rebound in market demand, together with the ramp-up of many of our newly launched products, including air conditioning systems, as well as the next generation Viomi-branded water purifiers and various small home appliance products, we have the foundation to further strengthen our industry positioning, enhance our brand recognition and deliver attractive returns. To this end, we implemented our 2018 share incentive plan in the second quarter to attract and retain the best available personnel, provide additional and aligning incentives with our employees and promote the success of our business for the years to come. Having successfully navigated such challenging market conditions in the first half of 2020, in the second half, first, we'll continue to focus on dynamic business practices, stable cash flows and undertake prudent risk controls to achieve high-quality sustainable growth under our 5G IoT strategic framework. Second, we will undertake further initiatives in positioning our key business units to enhance operational efficiencies and provide more attractive and effective incentives. Last, we will strive to create greater synergies and economies of scale across the entire Viomi Group, shaping our corporate culture to create a strong foundation, and large scale platform for future success stories in the many years to come. We're now more confident than ever in achieving our 3511 long-term objectives, our roadmap to becoming a large-scale high-tech leader in the IoT @ Home space. That concludes our founder's comments. I will now provide an operational update and discuss our financial performance in the second quarter of 2020. Despite the lingering impact of COVID-19, as well as ongoing macro uncertainties, we achieved revenues that significantly exceeded our expectations and again demonstrated the resilience of our business and our ability to identify and capture attractive growth opportunities. Our profitability remained relatively stable as compared to the first quarter, as we continued the implementation of various cost and expense control initiatives during the quarter, mitigating the margin impact of promotional campaigns and sales events such as the ‘618’ online shopping festival. The number of Viomi offline stores remained at around 1,500 in the second quarter, relatively stable compared to the end of the first quarter. Our cumulative household users reached more than 4.2 million. Now, let's turn to the detailed financial review of our second quarter results as well as the outlook for the third quarter. As Xiaoping discussed, net revenues were RMB 1.6 billion, an increase of 45.2%, compared to the same period of last year. Revenues from IoT-enabled smart home products increased by 46.7% to RMB 1.3 billion from RMB 906 million for the second quarter of 2019, primarily due to the successful launch and continued rollout of certain new product categories. Within this category, revenues from our smart water purification systems decreased by 22.6% to RMB 266.8 million. The decline was mainly due to decreases in average selling prices, which offset continued year-on-year growth in sales volumes. Going forward, we expect the impact of like-for-like decline in average selling prices of water purifiers to be more moderate, and the category is likely to return to positive revenue growth in the second half, driven by continued volume growth of Xiaomi-branded products together with the ramp-up of newly launched next generation Viomi-branded water purifiers. Revenues from smart kitchen and other products increased by 89.3% to RMB 1.06 billion. The revenue growth was primarily driven by the successful launch and continued rollout of certain products, in particular, the pilot launch of our air conditioning systems, which were particularly well-received by the market, as well as the strong performance of Xiaomi-branded sweeper robots. Revenues from consumable products increased by 24.6% to RMB 86.5 million, primarily due to the increased demand for our water purifier filter products. Revenues from value-added businesses increased by 45.5% to RMB 268.8 million from RMB 184.8 for the second quarter of 2019, primarily due to the new product introductions together with increased demand for our small appliances products. Please note that from the next quarter, we will update the naming of our various product categories as follows. Smart water purification systems will be renamed as Home Water Solutions; smart kitchen and other smart products will be renamed as IoT @ Home portfolio; consumable products will be renamed as Consumables, and value-added businesses will be renamed as Small Appliances and Others. And going forward, our revenue breakdown will comprise of the following categories in the following order

[Operator:]

[Operator Instructions] The first question today comes from Hanli Fan of Morgan Stanley. Please go ahead.

[Hanli Fan:]

[Foreign Language] Thanks for the management. It’s Hanli Fan from Morgan Stanley. I have three questions here. The first one is, can management help us update recent business operations, particularly in July and August, what's the recovery pace? Could you also elaborate a bit into the offline recovery and also the online channel? And my second question is that in the small appliances business, there are some newly launched, kind of like niche products, for example, like the yogurt machine, a noodle machine, something like that. They were pretty well sold during the rise of COVID-19. So, how Viomi’s preparation into these types of kind of niche products, and what's your kind of strategy into the small appliances? And my third question is about the net profit margin. So, net profit margin at a non-GAAP level is 2.4% in this quarter, primarily coming from the gross profit margin decline. So, could you give us kind of like outlook or guidance regarding the future net profit margin put into the context of gross profit margin as well as expense ratio? That's my question.

[Shun Jiang:]

Yes. Thank you, Hanli. I'll take your questions one by one. So, the first question is on sales recovery and channel performance. So, since the February lows, there has been a noticeable month on month recovery in sales performance across online, as well as offline channels. For online channels, the year-on-year recovery has been most evident since beginning around May where we started to re-enjoy very healthy double-digit year-on-year growth. For Viomi-branded products, the key drivers have been the various kitchen products, water purifiers, as well as small appliances, as well as of course air conditioning systems. For offline channels, year-on-year growth has reemerged since around June and has continued to accelerate into July. Together with our offline channel partnerships, as well as new stores and points of sales, we're cautiously optimistic about the continued recovery of our offline sales channel performance going into the second half. We haven't really seen any slowdown in online channels heading into July or August or either. I think, that the Viomi-branded product sales through online channels, as discussed more than doubled across the ‘618’ sales season and continued similar levels of strong performance heading into the third quarter, albeit off a relatively low base in 2019. I think, if you look at our quarterly performance in 2019, it was more volatile and you should expect a smoother quarter-on-quarter performance this year. Nevertheless, I think, based on the current trends, we expect strong performance as we have guided, for the third quarter, continuing -- going deeper into the second half and into the Double 11 shopping festival towards the year-end. So, strong performance across both, offline as well as online channels, based on current indicators in the third quarter so far. The second question, based on -- excuse me, second quarter based on what was the question on small appliances. So, as you can see, by -- with the performance of our value-added businesses, or soon to be renamed to the small appliances and others category, small appliances have indeed performed very well in the second quarter, as well as the first half of 2020 in general, due to your aforementioned trends. The segment experienced close to 50% year-over-year growth in the quarter. Some of the key products within this category include fans, vacuum cleaners, water dispensers, blenders, kettles, and of course sweeper robots, so all quite popular products for the stay-at-home dynamic in the first half. Small appliances, in addition will be a key growth category for our Company going forward. And we have formed a specialized team focusing on trendsetting small appliance product innovation and development. We believe there significant growth and market opportunities to be captured in the space. And we'll be devoting the necessary resources to create the appropriate incentives to ensure this initiative will become a success. So, we look forward to sharing more progress to the market on this aspect in the quarters ahead. So, we're quite excited about small appliances’ potential going forward. In terms of your third question on net margins, I think, while a lot of uncertainties remain, I think we can definitely say that the performance trends in the second quarter as well as heading into the third quarter have been quite positive and ahead of expectations in the third quarter, not only from a revenue growth perspective, but I think also from a margin perspective. In terms of gross margins, as we've discussed earlier, we do expect gross margin in the second quarter of 2020 to be a trough and do expect a degree of gross margin uplift in the second half. The key drivers of this recovering industry conditions, so less price competition, the general premiumization of our product portfolio and increase in selling prices as compared to the first half. So, I think if you want to look at the overall net margin for the second half, while the exact uplift will be, I think it's a little bit too early to predict at the current time, you should expect some degree of uplift from what you saw in the second quarter of this year.

[Xiaoping Chen:]

[Foreign Language]

[Shun Jiang:]

Mr. Chen would just like to supplement the response for the two questions. In terms of the small appliances, we have also noted that the industry is growing very quickly and especially for some of these niche products. I think, we would like to reemphasize that small appliances will definitely be a key strategic focus for us. And our team is definitely focusing on growing market our presence and penetration within this category. I think, in terms of our core focus products, we will more likely be focusing on some of the more mainstream small appliances category with the larger addressable markets to imprint our presence as well as brands, in the near-term, as a core focus, rather than some of the more niche categories as Hanli identified. And also, to supplement the response with regards to margins and profitability, I think just to add, as you have seen, with our growth performance in the second quarter as well as our guidance for the third quarter, top-line growth and market share gains will continue to remain our number one priority, at least for the near to medium term. Of course, we're also implementing various cost and expense control initiatives to ensure a healthy level of profitability and do expect a degree of margin uplift in the second half as compared to the second quarter, but I think it needs to be emphasized that as a rapidly growing Company with a quite differentiated value proposition as compared to some of the more traditional peers in the market, our core focus will continue to be top line growth for the near to medium term.

[Operator:]

The next question comes from Xudong Chen of CICC. Please go ahead.

[Xudong Chen:]

Thank you for taking my question. My first question is, what can we expect for your new product launch in your second half? Since your first half you have great success in your Viomi-branded air conditioner system and your 21Face Smart Screen TV, what can we expect for the Second half? That's my first question. And my second question is, you have your collaboration agreement with Kugou Music, and could you give me more color about this collaboration? Thanks.

[Shun Jiang:]

Yes. So, I'll answer the first question on the second half key growth drivers as well and Mr. Chen will take the question on the Kugou Music partnership and some additional content collaboration opportunities. So, I think in the second half, you should expect several trends, right? One is the kind of the continued ramp-up of some of the new product categories we launched earlier in the first half, as you may have seen during our major product launch event in May. So, some of the key products that we mentioned here are of course our air conditioning systems, a lot of new next generation water -- Viomi-branded water purification systems as well as an overall kind of -- overall upgrade and premiumization as well as SKU expansion of our pretty much entire product range. I think, in the second half, across our key categories, such as the refrigerators and washing machines, we will be more focused on higher ASP SKUs as well as additional kind of -- additional specific use SKUs, specialized SKUs that will encompass higher margins as compared to where we were initially focused on when we first launched these categories, whereas perhaps some low ASP products to gain the market share. So, in terms of new product launches, we do expect quite a number of new SKUs to come onto the market in the second half. In terms of key categories, I think what we have now, at least for the near-term is pretty much a complete IoT @ Home portfolio across the major appliances categories within the market. I think, there's ample room for expansion still in terms of brand and channel penetration, as well as SKU expansion optimization. But, I think categories, we do have a lot of room for growth organically in that sense as well. So, second half, I think, overall recovery -- overall industry recovery, as well as SKU expansion and ramp-up of some of the newly launched products will be the key drivers of growth. And Mr. Chen will answer the second question on the Kugou Music and other content-related launches.

[Xiaoping Chen:]

[Foreign Language]

[Shun Jiang:]

Yes. So, I think the partnership with Kugou and other related partnership that's including live streaming and content partnerships that we expect to be announcing shortly, the idea of this is to increase the content, as well as enhance the user experience that people -- our users can engage with our products, like for example, the 21Face large-screen refrigerators. Obviously, a key point of sale before these refrigerators is what they can provide outside the core kind of refrigeration capabilities, in terms of content, data collection, control, entertainment, and whatnot. And the overall idea of this is to continue to increase engagement, increase the available smartification of these products within our overall IoT @ Home framework. So I think, based on initial data that we've collected, the engagement has been very positive. The trends are definitely very encouraging, and we hope to continue to collect and improve some of the data metrics as we continue to adopt more kind of these content partnerships and user enhancements going forward. I think, we will continue to collect such data and will share with the market in the coming quarters, once data is a little bit more refined and mature. But, we are very excited about these various initiatives.

[Operator:]

Next question comes from Vincent Yu of Needham & Company.

[Vincent Yu:]

Thank you for taking the question, and congrats on the strong quarter. I have three questions. The first two are quite like more general questions; one is, in which product line the Company sees the most growth potential for the second half of 2020? And the second question is about how home appliance consumer demand will trend during the second half of 2020? And my third question is a follow-up on the question on the refrigerator cooperation with these other internet companies, [Technical Difficulty] screen of the refrigerator. If the users are like for example watching advertisement or going to open their membership on IGE [ph] or KugoU, are we going to share revenue on these activities? Also, is that possible to share how we cooperate with fresh ecommerce companies, like are they -- are the customers ordering fresh food on refrigerator screen, like what -- like generally how much -- like what will kind of like revenue sharing mechanism will work? [Foreign Language]

[Shun Jiang:]

Yes. Thanks, Vincent. I'll take your questions. First question is with regards to which product lines Company sees most growth potential in the second half. I think, in terms of like-for-like growth versus last year of course air conditioners. Air conditioners is a relatively large product category and as a new product introduced this year, will be a significant contributor to the year-over-year growth. But nevertheless, based on the trends we are seeing in July and heading into August, growth is recovering across nearly the entirety of our product lines, especially for some categories that were lagging in previous months, such as refrigerators and washing machines. Additionally, as discussed, we're placing significant emphasis on next generation of Viomi-branded water purifiers, as well as various trendsetting small appliances products and expect these categories to add a new layer of growth for the upcoming quarters as well. Your second question on views on how home appliances consumer demand will trend during the second half. I think, if we look at the performance of some of our peers that have reported their first half results, as well as some of the major online retailers and together with their overall growth consumption outlook, I think the tone is generally relatively positive, definitely as compared to say earlier the year with the worst of the impact of COVID-19 in the past. Although uncertainties and challenges will definitely continue to remain in the second half, as mentioned, based on the current trends that we're seeing, we're cautiously confident in a continued and sustained rebound in overall consumption demand in the second half. Thirdly, on the kind of the monetization opportunities for some of these internet services initiatives, I think, there's a lot of options and past monetization, right, whether it's revenue splits, kind of advertising revenues, or kind of other user engagement channels and whatnot. I think, the core focus for us at the moment is to enhance the user experience and build out our user base. I think that is going to be our core focus and tie it into what Mr. Chen mentioned earlier on how our near medium term focus will continue to be on top line growth as well as market share gain, this concept of building out our installed base. This will be key to kind of making mainstream our product concept as well as gain greater recognition as well as being able to engage into more of these content partnerships and relationships and also use this unique experience and value proposition. And then, after this initial phase, we can then think about kind of the various monetization opportunities that you mentioned, right? We have various ideas, but I think at the moment, we shouldn't expect too material of such services related revenues. I think, the metrics that we’re kind of most keeping track of is of course our installed base and user stickiness as well as user activity will be our core focus for the near-term. I think, as the installed base continues to grow and become as more mature and then I think we'll have many options available to us as to how to best create a monetization plan.

[Xiaoping Chen:]

[Foreign Language]

[Shun Jiang:]

Mr. Chen wanted to reemphasize just a couple of points I think on the first a couple of questions. As discussed, small appliances is going to be definitely one of our key growth categories going forward, and even in larger appliances, right? Given the impact of COVID-19 we're definitely seeing a transformational stage within the industry where people are -- or consumers and users are more focused on kind of enhancing their home living lifestyle, paying more attention to say the user experience of such products and more kind of engage with products with these next-generation IoT product -- IoT capabilities. So, this definitely presents a good opportunity for us and it's reflected into the trends that we saw in the second quarter as well as heading into the second half. And last question on the monetization opportunity, I think, just to reemphasize again, the near-term focus will be to build out our installed base and then there's several -- or many kind of monetization avenues going forward, including advertising revenues, GMP, revenue sharing for subscriptions or whatnot that we’ll look forward to exploring down the road.

[Operator:]

The next question comes from Robert Cowell with 86Research.

[Robert Cowell:]

Hey, management. Thanks for taking the time. So, I wanted to ask about the share-based compensation in the second quarter. It looks like you all significantly stepped up the SBC there. And it makes sense, given the situation that we use share-based compensation as a way to retain some of the important members of the team. I guess, on this front, I want to ask, if you can provide any more color on the structure of the grants that you all provided in the second quarter. So, the first would be about the number of participants, or if you could provide any more specificity as to specifically, which teams or departments are getting this compensated with SBC. And then, also on vesting schedule and strike price, if you could provide any maybe an average strike price or some sort of color on either of those fronts, it would be helpful for us to better understand the incentive plan.

[Shun Jiang:]

Thanks, Robert. So, as discussed, we issued around 15.6 million options to approximately 100 employees, quite a diverse claim. These employees predominantly were in the R&D teams, as well as certain management personnel, predominantly R&D focused personnel. In terms of the kind of the terms of these options or the incentive plan, as disclosed in our prospectus as well as the 20-F Annual Report, these are five-year vesting period, incentive plan with 40% of the amount issued matured after two years, so zero, after one year 40% up to three years, and then 20% for the next three years, accumulating for the entirety of the plan. The average strike price -- or the average kind of exercise price is around US$0.55 to US$1.1 per share, which translates into -- or translates into 1.65 to $3 or $3.30 per ADS. So, this is relatively in the money options. Small portion of these were vested. So, just over 1.5 million were vested immediately, so some back dated options to certain management employees that were hired few years earlier. I think, the overall impact on our share-based compensation expense line item, while outsized this quarter, should not be too different from what we have historically expensed. The historical SB expense was predominantly due to -- or predominantly arose from the amortization of our 2015 share option plan which has now largely been fully amortized. So, now, this 2018 share option plan is in essence replacing the 2015 share option plan. Now, in this particular quarter, the expense was slightly outsized due to the kind of the immediately amortized portion that were expensed kind of on a one-off basis. I think, over the second half of this year, you should expect around say RMB 40 million of SBC expenses in relation to the 2018 plan, subject to of course exchange rates or any forfeitures. So, on average, around RMB 20 million per quarter, and probably slightly decreasing over time, given the amortization schedule.

[Robert Cowell:]

Thank you. That's very helpful.

[Operator:]

At this time, we show no further questions. And I would like to turn the conference back over to management for closing remarks.

[Cecilia Li:]

Thank you once again for joining us today. If you have further questions, please feel free to contact Viomi's Investor Relations department through the contact information provided on our website or The Piacente Group, the Company's Investor Relations consultant. Thank you everyone. Have a good day and night.

[Operator:]

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