Viomi Technology Co., Ltd (NASDAQ:VIOT) Q4 2022 Earnings Call Transcript

Viomi Technology Co., Ltd (NASDAQ:VIOT) Q4 2022 Earnings Call Transcript March 27, 2023

Operator: Hello, ladies and gentlemen, thank you for standing by for Viomi Technology Co., Ltd.’s Earnings Conference Call for the Fourth Quarter and Full-Year 2022. At this time, all participants are in listen-only mode. Today’s conference call is being recorded. I would now like to turn the call over to your host Miss Claire Ji, the IR Director of the company. Please go ahead, Claire.

Claire Ji: Hello, everyone. And thank you, Rocco. And welcome to Viomi Technology Co., Ltd. earnings conference call for the fourth quarter and full-year 2022. 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 earnings press release and sign up for company’s email distribution list by visiting the IR section of the company’s website at ir.viomi.com. Participating in today’s call is Mr. Xiaoping Chen, the Founder, Chairman of the Board of Directors and Chief Executive Officer. The company’s management will begin with prepared remarks and the call will conclude with a Q&A session. Before we continue, please know that today’s discussion will contain forward-looking statements made under the safe harbor provision of the US Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve inherent risks and uncertainties. As such, the company’s actual result may be materially different from the views expressed today. Further information regarding this and other risks and uncertainties is included in the company’s annual report on Form 20-F and other filings as filed with the US Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements except as required by law. Please also know that Viomi’s earning press release and this conference call include discussion of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. In addition, Viomi’s press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures.

I will now turn the call over to our Founder and CEO, Mr. Chen Xiaoping. Mr. Chen will deliver his remarks in Chinese, followed immediately by an English translation. Mr. Chen, please go ahead.

Xiaoping Chen : Thank you, Mr. Chen. And I will quickly translate our founder’s remarks before discussing our financial performance for the fourth quarter and full year of 2022. Hello, everyone. Thank you for joining us today for our fourth quarter and full-year 2022 earnings conference call. Due to the adverse impact of the pandemic and the macro headwinds, we experienced a year-over-year decline in revenue in the fourth quarter, and our business scale was greatly affected by external factors and strategic adjustments throughout 2022. Nevertheless, our gross margin in the fourth quarter increased by 3.2% quarter-over-quarter in the fourth quarter of 2022, benefiting from our product portfolio optimization efforts. Our full-year gross margin in 2022 also kept stable as compared with 2021 despite fluctuations throughout the year.

In the fourth quarter, facing uncertainties of the external environment, we focused on accelerating the recovery of our business scale and optimizing our operations. First, to holistically strengthen our product portfolio, we leveraged our competitive advantages and continued to enhance our core product categories with upgraded functionalities of Viomi’s longest-standing category, our AI water purification product led industry with their advanced technology. We grew sales of this product by 6% year-over-year and 133% quarter-over-quarter in the fourth quarter despite the year’s challenges, reflecting our success in strengthening our product competitiveness. Going forward, we will redouble our efforts to optimize distribution channels, deepen our existing technological advantages, and further drive our products’ market penetration.

In addition, to improve our operating efficiency, we implemented more disciplined cost control measures. As a result, both selling and marketing, research and development expenses decreased year-over-year in the fourth quarter. In particular, selling and marketing expenses as a proportion of revenue narrowed compared with that in the second quarter of 2022 on a similar revenue scale. We will continue to optimize costs, streamline organizational structure and improve operational efficiency. While refining our operations, we also remain committed to bring more useful and user friendly whole house smart solution to customers and continuously improving intelligent experience of our products. In October, we hosted our virtual 2022 Fall Software Launching Event, ‘AI: Helpful 2.0’.

This online event focused on software upgrades and product iteration across four dimensions, including healthcare, energy conservation and the environmental protection, proactive intelligence, and natural interaction, further improving our one-stop IoT home solutions from the software side. In November, Viomi’s proprietary one-stop IoT home solution platform, HomeMap app, was awarded by the Precision Science and Technology Award by the Ministry of Science and Technology and the National Office for Science and Technology Awards of China. Meanwhile, we launched a series of new AI smart home appliance, including one of our patented technologies, Super 2 Max and AI Range Hood with Intelligent Vision, which won a silver award in 2022 Greater Bay Area High-Value Pattern Cultivation Layout Competition.

We also introduced Master 3, our AI integrated washer and dryer, with an ultra-slick fully embedded design, and Master Pro, our 1200 gallon Quanxian AI water purifier with integrated purification. In the smart home devices category, we unveiled our Super 2 AI smart door lock with an ultrawide angle digital peephole. Our solid progress in product innovation across both software and hardware further underscores our business philosophy €“ focus on products and technological innovation to provide customers with a useful and user-friendly whole house intelligent experience. In addition to our product advancements, we constantly strive to optimize our one-stop IoT home solution through ongoing technological innovation and talent development. After receiving approval to establish a doctoral workstation in the first half of 2022, in October, we were also successfully authorized to set up a postdoctoral workstation.

Moving forward, Viomi will cooperate with universities and professional institutions through cumulative top talents in industry, incubate whole house intelligent projects and promote the development of whole house intelligence industry. In November 2022, we were once again included in the state Intellectual Property Office List of National Intellectual Property Demonstration Enterprises from 2022 to 2025, reflecting our continuous efforts in innovation and intellectual property management. As of the end of the fourth quarter, we have applied for more than 6,100 global patents and accumulated 3,800 authorized patents worldwide, along with more than 2,500 inventions. These achievements are testament to our technological innovation capabilities and our comprehensive strengths.

Despite the challenging environments stemming from repeated COVID-19 outbreaks as well as the negative of rolling COVID policies on our store opening progress, sales of our bundled solutions by our offline merchants still reached new heights in 2022. flagship stores in , among others. Our offline merchants bundled solutions orders ranging from RMB 100,000 to over RMB 400,000 per unit, clearly demonstrating the growing popularity of Viomi’s one-stop IoT home solution nationwide. Furthermore, in the fourth quarter, we successfully introduced an area of product to overseas markets, such as air conditioners, washing machines, and refrigerators. Moving forward, this additional product category will serve as a new growth driver for our overseas business.

In summary, we still see many uncertainties in horizon. In the post pandemic year, with consumption confidence recovering, we will adhere to our steady development strategy, concentrating on three factors as we continue to optimize our operations. First, continue to strictly control expenses and improve operational efficiency. Second, focus on core product categories and optimize product structure. And finally, thirdly, extend domestically and introduce new product categories in overseas markets to accelerate the recovery of our business scale. As we forge ahead, we will continue to maintain sufficient financial reserves to continuously consolidate brand strength, propel the recovery of business profitability, and provide strong support for brand development as we strive to achieve healthy and sustainable growth, laying the foundation for delivering long-term returns to our users and shareholders.

Thank you. And that concludes our founder’s remarks. Now I will go over our fourth quarter and full-year 2022 unaudited financial results in more details. Net revenues were RMB 910.5 million compared to RMB 1,332.8 million for the fourth quarter of 2021. The decline was mainly due to a decrease in revenues from IoT@Home portfolio and small appliances and others. Revenues from IoT @ Home portfolio decreased by 48.1% to RMB 359.2 million from RMB 692 million for the fourth quarter of 2021. The decline was primarily due to SKU adjustments for smart kitchen products. Revenues from home water solutions increased by 6% to RMB 279.2 million from RMB 263.3 million for the fourth quarter of 2021. The increase was primarily driven by an increase in revenues from larger flux water purifiers as a result of the product portfolio adjustment within this category.

Revenues from consumables decreased by 3.5% to RMB 116.2 million from RMB 120.4 million for the fourth quarter of 2021. Revenues from small appliances and others decreased by 39.3% to RMB 155.9 million from RMB 257.1 million for the fourth quarter of 2021, primarily due to the continued product portfolio adjustment within this category. Gross profit was RMB 209.7 million compared to RMB 341.5 million for the fourth quarter of 2021. Gross margin was 23% compared to 25.6% for the fourth quarter of 2021. The decline was primarily due to a decrease in the selling price of certain clean-up products as a result of our product portfolio adjustments. The operating expenses decreased by 19.4% to RMB 274.7 million from RMB 340.7 million for the fourth quarter of 2021, primarily due to a decrease in selling and marketing expenses, partially offset by an increase in general and administrative expenses.

In greater details, research and development expenses decreased by 23.6% to RMB 74.7 million from RMB 97.8 million for the fourth quarter of 2021, mainly due to a decrease in research and development experts and related salaries, as well as the company’s continued efforts in R&D efficiency improvement. Selling and marketing expenses decreased by 29.7% to RMB 151.1 million from RMB 214.8 million for the fourth quarter of 2021, mainly due to a decrease in logistics and marketing expenses. General and administrative expenses increased by 74.5% to RMB 48.9 million compared to RMB 28 million for the fourth quarter of 2021, primarily due to an increase in the estimated allowance for accounts and notes receivables from a third party client recognized in the same period.

Net loss attributable to ordinary shareholders of the company was RMB 106.3 million and non-GAAP net loss attributable to ordinary shareholders of the company was RMB 101.6 million. The difference between net loss from operations and net loss in 2022 was mainly due to an increase in the valuation allowance of deferred tax asset provided, which caused an increase in income tax expenses. Additionally, our balance sheet remains healthy. As of December 31, 2022, the company had cash and cash equivalents of RMB 737.1 million, restricted cash of RMB 76.1 million, short-term deposits of RMB 171.5 million and short-term investments of RMB 197.1 million. Next, let’s briefly discuss some key financial results for full-year 2022. Net revenues were RMB 3,232.7 million compared to RMB 5,303.8 million for 2021.

Revenues from IoT @ Home portfolio decreased by 52.4% to RMB 1,619.9 million from RMB 3,401.0 million for 2021. Revenues from home water solutions decreased by 8.3% to RMB 681.1 million from RMB 742.9 million for 2021. Revenues from consumables decreased by 2.4% to RMB 358.4 million from RMB 367 million for 2021. Revenues from small appliances and others decreased by 27.7% to RMB 573.3 million from RMB 792.9 million for 2021. Gross profit was RMB 737.1 million compared to RMB 1,198.1 million for 2021. Gross margin improved to 22.8% from 22.6% for 2021. Total operating expenses decreased by 10.7% to RMB 1,036.5 million from RMB 1,160.5 million for 2021. In more detail, research and development expenses decreased by 3.8% to RMB 300 million from RMB 311.8 million for 2021.

S&M expenses decreased by 18.1% to RMB 614.9 million from RMB 751 million for 2021. G&A expenses increased by 24.5% to RMB 121.7 million compared to RMB 97.7 million for 2021. Net loss attributable to ordinary shareholders of the company was RMB 275.5 million and non-GAAP net loss attributable to ordinary shareholders of the company was RMB 256 million. And this concludes our prepared remarks. We will now open the call for Q&A. Our founder and I will join this session and answer questions. Operator, please go ahead.

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Q&A Session

Operator: . And today’s first question comes from Marcus Liang with Morgan Stanley.

Marcus Liang: I have three small questions. Firstly, can I ask how sales trending year-to-date for January and February 2023? And my second question, with robot vacuum appears moderating their prices, so making the prices lower, how does Viomi see the market growth going forward and the market share also going forward? Second question and the last question is, how do you see your overseas expansion and what are you focused on? And how is this split between China and overseas revenue in 2023?

Claire Ji: Can I recall your first question €“ first and second one?

Marcus Liang: The first question is, how is the company trending year-to-date in January and February 2023? And the second question would be, as your robot vacuum competitors are lowering prices, how do you see market growth going forward and your market share?

Claire Ji: In the past few months of 2022, we have observed a certain degree of recovery of our offline channel, which is attributable to by the overall offline consumption rebound. However, in the past month, due to the repeated impact of epidemic and a number of our offline dealers, stock has decreased, along with the inventory backup of offline distributors lead to decreasing in the volume of shipment of our offline sales. But on the other hand, we have more than 100 stores newly opened during 2022 and most of which are located in the prep decoration marketplace with over 200 square meters door area. We are steadily proceeding our channels expanding strategy by larger store, better merchants. Based on overall situation up to now, the offline scale has steadily increased month over month and the offline sales are expected to achieve a growth rate of over 30% compared to 2022.

And to your second question about the robotic vacuum cleaners, the scale of the overseas sales decreased a lot and there are the negative impacts we all know, like the historically high price of natural gas, geopolitics and overall subdued consumption atmosphere in European market in 2022. And, well, in the domestic market, our robot mainly sold online where the leading brands in this sector account for a large market share, and this sector is already under fierce competition. For our one-stop whole house intelligent solution, we will keep this product line and provide several models to meet customers’ diversified needs. In the meantime, we will further optimize distribution channels, deepen our existing technology advantages in sects like water purifiers and so on.

And I believe your last question is about overseas expectations. And, yes, I mentioned earlier, due to the impact €“ yeah, we mentioned. So, our overall revenue proportion from oversea market decreased over 50% in 2022. But while in the second half of last year, we participated in the IFA 2022 in Berlin in September for the first time, which is the world’s most significant technology marketplace for the consumer and electronics industries. We showcased a number of new products to the European customers and franchises and received many positive feedback. And next to that, we accomplished the certification and assembling of air conditioners, washing machines, refrigerators in European countries, and water purifiers, smart door locks in Southeast Asia countries.

And we believe with the enriched product categories and expanded regions, hopefully, our overseas sales would achieve a recovery and mitigate the decreasing sale of smart cleaning products. And in the past few months of 2022, the overseas sales of air conditioners and other home appliance products reached more than RMB 60 million. And we are aiming for the overseas sales to be doubled in 2022 compared with 2021.

Operator: And our next question today comes from with CICC.

Unidentified Participant: I have three questions. The first one is how was the overseas market performing in 2022? And was it better or worse than the Chinese market? And what is the outlook for the overseas environment this year?

Claire Ji: Your first question, we just discussed a little bit about the oversea market perform in 2022 of things strickened by the historically high price of natural gas and the geopolitics and the expectations in the consumption market in European countries remains subdued and as we used to focus on European markets with comparably simple product lines. So the overseas sales in 2022 has been heavily strickened and decreased over 50%. And as we mentioned earlier, we have enriched our product categories and extended regions like Southeast Asia countries, and hopefully our overseas sales would achieve a recovery. And also, about your question, I believe you asked about the domestic market growth, right? And the domestic business in this quarter decreased about 30% on a year-over-year basis.

And both online and offline channels have been strickened hard by the negative effect of rolling COVID policies. However, we see some optimizations in revenue proportion by products, with a larger percentage of revenue contribute by water purifiers. Our overall gross margin improved more than 3% quarter-over-quarter. Looking forward, we will focus on our core product categories with technological advantages, especially water purifiers and we will double our efforts to optimize distribution channels, both online and offline. In regards of the channels, due to the repeated impact of the epidemic and a number of our offline dealer store has decreased. Along with inventory backup of offline distributors lead to a decrease in the volume of shipment of our offline sales in the past year.

But on the other hand, we have opened more than 100 stores newly in 2022 and most of which are located in the prep decoration marketplace with over 200 square meters store area. We are steadily proceeding our channel extending strategy. And based on the overall situation, our offline scale has steadily increased month over month and offline sales are expected to achieve a growth rate of overall 30% compared to 2022.

Operator: Thank you And ladies and gentlemen, this concludes today’s question-and-answer session. I’d like to turn the conference back over to management 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: Thank you, everybody. 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.