Viomi Technology Co. Ltd (NASDAQ:VIOT) Q3 2022 Earning Call Transcript November 23, 2022
Operator: Hello, ladies and gentlemen. Thank you for standing by for the Viomi Technology Company Limited Earnings Conference Call for the Third Quarter of 2022. 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. Claire Ji from the company’s IR department. Please go ahead, Claire.
Claire Ji: Thank you. Hello, everyone, and welcome to Viomi Technology Co., Limited earnings conference call for the third quarter of 2022.Other 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 earnings press release and sign-up for the company’s email 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 Financial Department. The company’s management will begin with of prepared remarks and the call will conclude with a 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 reports on Form 20-F and other filings are 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 this conference call include discussions of unaudited GAAP financial information as well as an audited 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.
Photo by Joseph Ngabo on Unsplash
Xiaoping Chen: 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 RMB685.8 million, below our previous guidance, other result of lingering weak market demand and that the pandemic resurgence. In addition to the macro headwinds, the complete cut off the sales of Xiaomi branded sweeper robots in the 2022, adversely impact our third quarter revenue. Furthermore due to the adjustment of the product portfolio and increasing the proportion of the revenue from product categories with relatively low gross margins cost 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 print ad campaigns, we jointly launched a video interview program with Langchao Studio and Gongmao Home Appliances. In this program, we built 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 the investor and, Li Feng, the Chairman of Gongmao Home Appliances. In the interview, asking about Whole-Home Intelligence, we responded to the senior media specialist Yi Lijing’s question about how home development — how smart development with in-depth information on our onestop IoT home solution and our four capabilities, four services approach to the smart home.
With smart home appliances and smart home products now 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 macroenvironment, 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 the position 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 exploration of the future of smartification will encourage more consumers to become smart home users, in-house our brand influence and promote development of industry.
Separately, we have made good progress in product innovation, brand promotion and the channel expansion over the past few months. Underpinned by our effective long-term brand and the product development strategy, we continue to strengthen our trending technology brand positioning. In terms of product innovation, we’ve hosted “AI: Helpful 2.0” our autumn online software launch event on October 25th.The event focused on our software upgrade and product integration across four dimensions, including healthcare, energy conservation and environmental protection, active intelligence and the natural interactions further improving our onestop IoT home solution from the software side. At the same time on the hardware side we launched a series of new smart home appliance, including Alpha our AI range hood with AI smart eye suction; Master Pro, our 1200G 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 ultrawide-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 continuous product innovation is supported by our elevated research and development capabilities, as well as our efforts to build deep talent resources. In August we held our first annual Scientific and Technological Meeting, where we generously rewarded our technological innovation teams and individuals and the winner of the technology superstar price was rewarded a Tesla car, constantly encouraging ongoing risk R&D innovation.
Furthermore, following the approval we received to establish our Guangdong Work Station in the first half of 2022 we obtained authorization to set up a post-doctoral workstation in Foshan. Moving forward, while we 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 paid 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 a technological innovation. The Fortune series top 100 manufacturing, top 100 private enterprise and top 100 enterprise in 2022.
Now we ranked third place 38, 60 and 73, respectively, attachment 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 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 in this quarter.
As to our overseas business, in September, we showcased a number of our new products at IFA 2022 in Berlin, marking our first appearance at one of the 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 scales of export sales as a result. As we forge ahead, we will continue to concentrate the following three aspects of the operation optimization. First, on the product side, streamline the number of our SKUs, adjust resource allocation and focus on more technological advanced products while improving the 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 adequate 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.
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Wickham Thai: Thanks, Chen. Now I will go over the details of the unaudited financial results for the third quarter 2022.Net revenues were RMB685.5 million compared to RMB1,056.5 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 RMB376.0 million from RMB643.5 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 RMB119.9 million from RMB157.0 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 RMB70.2 million from RMB79.6 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 RMB119.7 million from RMB176.5 million for the third quarter of 2021, primarily due to the product portfolio adjustment within this categories. Gross profit was RMB135.9 million compared to RMB239.7 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 the proportion of revenue from products categories with relatively low gross margins.
Total operating expenses decreased by 16.5% to RMB242.5 million from RMB290.3 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 RMB66.5 million from RMB82.2 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 experts and related salaries and expenses. Selling and marketing expenses decreased by 22% to RMB143.1 million from RMB183.4 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 RMB32.9 million compared to RMB24.7 million for the third quarter of 2021, primarily due to the increase in the estimated allowance for accounts and notes receivables recognized in the current period. Net loss attributable to ordinary shareholders of the Company was RMB59.6 million (sic) compared to net loss attributable to ordinary shareholders of the Company of RMB29.3 million for the third quarter of 2021. Non-GAAP net loss attributable to the ordinary shareholders of the Company was RMB78.7 million compared to non-GAAP net loss attributable to ordinary shareholders of the Company of RMB22.2 million for the third quarter of 2021. Additionally, our balance sheet remains healthy. As of September 30, 2022, the Company had cash and cash equivalents of RMB760.1 million, restricted cash of RMB65 million, short-term deposits of RMB83.7 million and short-term investments of RMB259.5 million. The details of our unaudited results for the third quarter 2022, was introduced as above. Thank you.
Claire Ji: 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.
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Operator: Thank you. Today’s first question comes from Mark Zhang with Morgan Stanley. Please go ahead.
Mark Zhang: Hi, thanks management for taking my question, I have two 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 the recent trend of robotic sweepers in China and overseas market. And are you expecting demand to remain weak in fourth quarter and 2023? Thank you.
Xiaoping Chen: Yes, thanks for Mark’s question. For the first question about the SKU adjustment as we introduced in the previous call, actually, we are – actually, we are in a transactional product strategy and brand positioning in an ongoing process. The cleaning of certain products and integration of new products during this, weak demand period to a certain extent, put pressure on our operating results. It might take a longer time for the new products to be set by the market. Actually, we are promoting – and introduce more premium and with high technology products to the market. And we emphasize more like bundle sales, bundle sales are 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 robot 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 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. And we showcased a number of new products to the Euro consumers and franchises and we shipment positive feedbacks. In the meantime, we see the, soften Asian markets with great potential, and we are actively exploring – more new franchise in these areas and thank you.
Mark Zhang: And so, can I just have a quick follow-up. So in terms of demand do you expected in 2023 to sort of rebound as same as what you talk about in fourth quarter? Thank you.
Xiaoping Chen: Sorry, you mean – the expectation for fourth quarter?
Mark Zhang: Yes, I mean both fourth quarter and 2023 please? Thank you.
Xiaoping Chen: 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 Eleven Shopping Festival is yet not – as good as last year, and the sales scale of Q4 is expected to decline on a year-over-year basis. With the respect of gross margins, we estimate – we estimate it maintains 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. Thank you.
Mark Zhang: All right, thank you very much, management.
Operator: Thank you. And our next question today comes from with CICC. Please go ahead.
Unidentified Analyst: Thank you, Viomi. I have three 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 and what is the outlook for overseas demand?
Xiaoping Chen: Can you please – you mean you got one question or two questions?
Unidentified Analyst: Three questions?
Wickham Thai: Three questions and this is the first question, thank you.
Xiaoping Chen: Okay. As we mentioned just now in the third quarter, the international geopolitics and euro exchange rate last time. So we did not – we are also adverse impacted by the overseas sales. 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 scale of export sales. The proportion of the overseas – our revenues, we will share in the future, yes.
Unidentified Analyst: Thank you. My second question is about the strategy of premium new products and solutions and considering the relatively weak demand in the Chinese market and overseas market but Viomi build some pressure for its strategy regarding premium products. How does Viomi think about the demand of China in the future and will Viomi consider and making adjustments in the €“ strategy?
Xiaoping Chen: Okay, okay. I’ll quickly translate our Founder’s answer. Firstly, the – both 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 e-com world, marketing SaaS come to a balance – coming to a balancing point. And also in the domestic world, we can see in most of the developing areas like the rural areas are developing fastly, we see more demand in the younger generation. And so, our strategy is about to facing the situation and meeting the challenge is, first, we will – we will make more medium-level products which has price advantages. And also, we will enrich our overseas product portfolios, and we will go deeper in the – its European market. Thank you.
Unidentified Analyst: Thank you for Founder’s answer and translator. 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 carbon 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?
Xiaoping Chen: 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 with the robot business since early 2021 and completely cut off this business in the year 2022. Currently, the major product categories we – cooperate with Xiaomi was our water purifiers and smart kitchen products and small appliances like peephole structure. Recently, certain model of, Xiaomi-branded water profile 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. Thank you.
Unidentified Analyst: Thank you.
Xiaoping Chen: I’ll quickly complete Mr. Chen’s answer. Our cooperation with Xiaomi and developing our cooperation with Xiaomi about three 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 kitchen – smart kitchen appliance. And thirdly, we are discussing about the smart home products in the future. Thank you.
Operator: Thank you. And ladies and gentlemen, this concludes our question-and-answer session. I’d like to turn the conference back over to Claire for any additional or closing comments.
Claire Ji: 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 Relations consultant. Thank you.
Operator: 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.
