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

Viomi Technology Co., Ltd (NASDAQ:VIOT) Q4 2023 Earnings Call Transcript March 25, 2024

Viomi Technology Co., Ltd isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, ladies and gentlemen, thank you for standing by for Viomi Technology Company Limited’s Earnings Conference Call for the Second Half and Full Year of 2023. 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, the IR Director of the company. Please go ahead, Claire.

Claire Ji: Thank you. Hello everyone, and welcome to Viomi Technology Company Limited earnings conference call for the second half and the full year of 2023. 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 the Chief Executive Officer; and Mr. Jinling Zhang (ph), the Head of Capital Markets and Strategy Department. The company’s management will begin with prepared remarks and will continue with the Q&A session.

Before we continue, please note that today’s discussion will contain forward-looking statements made under the safe harbor provision 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 report on Form 20-F and other filings filed with the U.S. Securities and Exchange Commission. And 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 conference or press release and this conference call includes discussions 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. Xiaoping Chen. Mr. Chen will deliver his remarks in Chinese, followed immediately by English translation. Mr. Chen, please go ahead.

Xiaoping Chen: [Foreign Language] [Interpreted] Thank you, Mr. Chen. I will quickly translate our Founder’s remarks before discussing our financial performance for the second half and full year of 2023. Hello, everyone. Thank you for joining us today on our earnings conference call for the second half and the full year of 2023. In 2023, we continue to advance our focused strategy, optimizing our product mix, and improving our operating performance through strong strategic execution, driven by the restructuring of our product mix, the revenue contribution of home water solutions and the consumable products increased to 36.8% in 2023 from 32.2% in 2022. Through cost optimization and operating efficiency improvement, our gross margin increased by 2.2 percentage points, while operating expenses decreased by 33.4% in the second half of 2023 compared to the prior year period, leading to a significantly reduced net loss margin of 2.7%.

Over the past year, we have demonstrated resilience in overcoming challenges and achieved significant progress in various areas. First, we deepened strategic collaboration with major clients including the renewal of a three-year strategic cooperation agreement with Xiaomi. Second, we reorganized our business structure and elevated our water purification department to an independent strategic business unit, comprehensively enhancing our R&D, production and sales capabilities across the entire water purification industrial chain. Through this strategic move, we now post two major business segments: AI Water and AIoT@Home, enabling synergistically development. Third, we strengthened our capabilities across AIoT@Home and enrich our whole-house intelligent solutions to address uncertainties and challenges from industry giants.

Fourth, we boosted Viomi’s brand influence with the appointment of Ms. Xiwei Tian, a well-known actress in China, as our global brand spokesperson. Fifth, on the distribution side, we expanded both our online sales network and offline channel footprint we’re actively pursuing overseas market. Finally, Viomi’s IoT Technology Park meticulously constructed over three years was officially inaugurated in November 2023, ushering in a new era of Viomi. As a leading company in the water purification sector, we possess the industry’s most extensive manufacturing and R&D facilities and have cumulatively applied for over 1,300 patents in this field by leveraging our expertise in advanced filtration technology and the material production methods. Meanwhile, we have independently established a comprehensive organizational framework and assembled an outstanding team of top talent across management, marketing, product development and quality control, encompassing product design, R&D, manufacturing and marketing further improving the market competitiveness of our water purification products.

We have also established solid industrial advantages and competitive barriers by building a water purification industry chain anchored by our world leading water purification super factory. First, we have centralized water purification product component production, leveraging our cutting-edge AIoT (ph) Technology Park and seamlessly integrated both upstream and downstream functions. We performed machine assembling, testing, warehousing and logistics in a single building in the park, effectively reducing logistics costs and improving production efficiency. Second, we have constructed the industry’s leading automated and intelligent production lines for water purification products, featuring a fully automated dock factory for manufacturing certain key components.

Comprehensive intelligent collection and analyze of production data further empowers us to constantly improve the production process. Going forward, we will continue to capitalize on our infrastructure supported by our IoT Technology Park, deepen our investment in the water purification industry chain and strengthen our in-house capabilities across research, production and inception of core components to provide users with high quality water purification products. Regarding to our AIoT@Home business. We have adhered to the concept of AI helpful and concentrated on monitoring and safeguarding family health. During our recent spring product launch event on March 12, we unveiled Alpha X, a cardio respiratory detection radar equipped with millimeter wave radar technology.

This technology enables continuous comprehensive, constantly monitors of family member’s health. Alpha X provides users with intelligent functions such as one-click report generation and active alerts, empowering them to improve health tracking and safety. Meanwhile, as demand for improved leading increases throughout the housing market, we have further upgraded our IoT’s — one-stop IoT @ Home solution with the launch of our minimum dollar space series, which provides consumers with establish, customized and more intelligent product experience. Meanwhile, we have expanded our distribution network and global channels, growing domestic channels while propelling breakthroughs in overseas markets. We have gradually expanded the range of product offers to our overseas markets, which has spurred new growth in our overseas business and strengthen its resilience to high-wind (ph) risk.

Furthermore, Viomi has established strategic partnerships with leading local channels in various countries, utilizing their local resources to further enhancing our overseas sales and service capabilities and promote sustainable growth of our overseas business in the future. Looking forward, we see immense potential and opportunities in the global market. And therefore, we will continue to refine our operations across four areas. First, we remain committed to providing our users with healthy water solutions, allowing them to enjoy an area of water quality and flavor options. Second, we will reinforce collaborations with our strategic business partners, continue to build out our leading water purification supermarket — super factory and strengthen the industrial chain.

Third, to further accelerate the globalization of Viomi brand, we will continuously develop sales channels and expand overseas markets. Finally, we will continue to improve quality and efficiency striking a precise balance between scale expansion, organizational optimization and operational efficiency enhancements. Harnessing the strengths, we will further restore profitability driven healthy and sustainable development and create long-term value for users and shareholders. Thank you. That concludes our Founder’s remarks, and I will now turn the call over to our Head of Capital Markets and Strategy, Mr. [indiscernible], to discuss our financial performance.

Unidentified Company Representative: Thank you, Mr. Chen and Claire. Thank you to everyone for making time to join us for the earnings conference call today. I will go over our unaudited financial results for the second half and full year of 2023. Net revenues were RMB1,189 million compared to RMB1,596.4 million for the second half of 2022. The decrease was mainly due to a decrease in revenues from IoT @ Home portfolio as well as small appliances and orders. Revenues from IoT @ Home portfolio decreased by 28% to RMB529.1 million from RMB735.2 million for the second half of 2022. The decrease was primarily due to the streamlining of product offerings, which was achieved by reducing selling SKUs of smart white goods, such as our smart rapid readers, smart air conditioners and smart washing machines.

Revenues from home water solutions decreased by 20.5% to RMB370.4 million from RMB399.1 million for the second half of 2022. The decrease was due to the lower volume of water purified sold to Xiaomi Corporation. Revenues from consumables decreased by 4.2% to RMB178.5 million from RMB186.4 million for the second half of 2022. The decrease was primarily due to the lower volume of water purified filters sold to Xiaomi Corporation, partially offset by the increase of sales Viomi brand water purified filters. Revenues from small appliances and others decreased by 4.5% to RMB164 million from RMB275.6 million for the second half of 2022, primarily due to the ongoing product portfolio adjustments within this category. Gross profit was RMB282.7 million compared to RMB345.6 million for the second half of 2022.

Gross margin was 23.8% compared to 1.6% for the second half of 2022. The increase was primarily driven by the company’s efforts to shift the product mix towards higher gross margin products such as water purifier and filters and partially offset by a decrease in the selling price of certain clearance products as a result of the product portfolio adjustment. The operating expenses decreased by 33.4% to RMB344.3 million from RMB517.1 million for the second half of 2022, primarily attributable to the streamlining of the organizational structure and overall improved operational efficiency. In greater detail, R&D expense decreased by 19.7% to RMB113.4 million from RMB141.2 million for the second half of 2022, due to a decrease in R&D experts and related salaries and expenses.

Selling and marketing expenses decreased by 36% to RMB188.2 million from RMB294.1 million for the second half of 2022, mainly due to a decrease online platform services and logistics expenses and sales-related personnel costs. G&A expenses decreased by 47.8% to RMB42.7 million from RMB81.8 million for the second half of 2022, primarily due to the fact that a significant amount of additional expected credit loss allowance was made against the third-party — third customer, actually, in the second half of 2022. Net loss attributable to ordinary shareholders of the company was RMB28.7 million and non-GAAP net attributable to ordinary shareholders of the company was RMB30.9 million. Despite the decrease in revenue scales, our net loss attributable to ordinary shareholders of the company narrowed by 84%, demonstrating an improvement in our operational efficiency.

Additionally, our balance sheet remains healthy. As of December 31, 2023, the company had cash and cash equivalent of RMB491.7 million, restricted cash of RMB144.6 million, short-term deposits of RMB365.8 million and short-term investment of RMB30.4 million. Next let’s briefly discuss key financial results for the full year of 2023. Net revenues were RMB2,493.4 million compared to RMB3,232.7 million for 2022. Revenues from IoT @ Home portfolio decreased by RMB24.6 billion to RMB 1,220.9 million from RMB1,619.9 million for 2022. Revenues from home water solutions decreased by 11.3% to RMB604 million from RMB681.1 million for 2022. Revenues from consumables decreased by 12.3% to RMB314.4 million from RMB358.4 million for 2022. Revenues from small appliances and others decreased by 38.2% to RMB354.1 million from RMB573.3 million for 2022.

Gross profit was RMB569.5 million compared to RMB737.1 million for 2022. Gross margin was 20.8% equals the same as 2022. Total operation expenses decreased by 31.9% to RMB706.2 million from RMB1,036.5 million for 2022. In greater detail, R&D expenses decreased by 25.7% to RMB222.9 million from RMB300 million for 2022. Selling and marketing expenses decreased by 34.7% to RMB401.8 million from RMB614.9 million for 2022. G&A expense decreased by 33% to RMB81.5 million from RMB121.7 million for 2022. Net loss attributable to ordinary shareholders of the company was RMB84.7 million and non-GAAP net loss attributable to ordinary shareholders of the company was RMB84.6 million.

Claire Ji: Yeah. This concludes our prepared remarks, and we will now open the call for Q&A. Mr. Chen, our Founder; and Mr. Sam (ph), our Head of Capital Markets and Strategy will join this session and answer questions. Operator, please go ahead.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] And today’s first question comes from Hunter Diamond of Diamond Equity Research. Please go ahead.

Hunter Diamond: Hi, everyone. Firstly, congratulations on the results. My question is, with the recent strategic move of relocating the smart water purification system facility to the Viomi Internet Things Technology Park, can you provide insights into the new product development pipeline? More specifically, what innovative product launches and stakeholders anticipate in the water purification segment over the next two quarters and how do these align with Viomi’s broader innovation and growth strategy?

Claire Ji: Okay. Thank you, Hunter. I will briefly translate the questions to Chinese. [Foreign Language] [Interpreted] Going about this question, Mr. Sam will answer the question in represent of the management.

Unidentified Company Representative: Recently, we proudly released our new product, Viomi AI mineral water purified Quanxian with advanced technical method and strictly selected high-quality mineral resources. We successful realized the slow precipitation of mineral from purification filters in a long lasting and steady state, which makes the filter water contains six kind of beneficiary mineral elements and also the same as the natural mineral water, especially the strong helium content in our filters water can reach the level of twice of the national standard for national mineral water. With the consumption of upgrading the population of the concept of healthy drink water, people’s demand for drinking water gradually changed from clean water to healthy water.

By launch of Quanxian (ph), we aim to lead the trend and break through the development of the water purified industry targeting at the new generation of consumers pursuing a healthy lifestyle. Moving forward, we will follow the route of producing mineral water, enrich the related product mix and provide customers with healthy water solutions for different scenarios. In addition, we have built the Viomi water purification super factory to achieve highly integrate industrial chain featuring a fully automated dark factory for manufacturing key components, which will improve our production efficiency, enhance the cost advantage. Furthermore, the comprehensive intelligent connection and analysis of production data empowers us to constantly improve our production progress and achieve the technological breakthroughs.

Additionally, combined together, support us to continually provide better solutions for our use of major demand and establish solid industrial advantages and competitive barriers. Thank you. Please go ahead.

Hunter Diamond: Thank you. And then the next question, just moving beyond the water purification segment, can you shed some light on Viomi’s strategic initiatives for its existing product segments? So what key developments or strategic pivots are you planning to drive growth, enhance Internet of Thing integration and maintain the competitive advantage across your existing portfolio?

Xiaoping Chen: [Foreign Language] [Interpreted] Thank you, Hunter and Claire. I will answer this question. As more and more players gather in this field of whole housing intelligence with different solutions to present and interpret concept, each players had to face growing challenges as well as opportunities in this industry. Viomi has built up unique one-stop AIoT@Home solutions combined hardware, software solutions design and services. And the number of cumulative household users has reached 8.4 million globally. We are adhered to the concept of AIoT@Home (ph) continually upgrading our solutions from the dimensions of health, intelligence and security. And these segment then, we keep optimizing our product portfolio and focusing our product differentiation.

In the second half of 2023, we launched a series of outstanding new products like the upgrade Viomi AI air conditioning, air conditioner Super 3, which can intelligently adjust the ambient temperature according to the different stage of sleep, improving the comfort level and sleep quality. In addition, we unveiled Alpha X, a car detection reader equipped with millimeter wave reader technology, which realize the continuously comprehensive contactless monitoring of family members, health. Alpha X provide our users with intelligence functions such as one click report generation and active alert, empower them to improve healthy, track and safety. We also launched the new intelligent store lock, Master 3 MAX, which is equipped with the prime van recognition technology, providing users from a higher level of security guarding.

Meanwhile, as the demand for improved living increase throughout the housing market, we have further upgraded our one-stop AIoT@Home solution with the launch of multi-million-dollar space series, which provided the customer with the stylish and customized and more intelligent product experience. Thank you.

Hunter Diamond: Great. Thank you for taking my questions and again, congratulations on the results.

Operator: Thank you. And our next question comes from [indiscernible] with CICC. Please go ahead.

Unidentified Participant: Hello. Thank you for [indiscernible]. Congratulations for the results. I’m [indiscernible] from CICC, and I have three questions, and I will ask them one by one. And my first question is, I wonder how the quarterly revenue performed in Q3 and in Q4? And have we seen any improvement of IoT business? And except for the water purifier, which categories are so well in 2023? That’s my first question.

Claire Ji: [Foreign Language] [Interpreted] Mr. Sam, please go ahead.

Unidentified Company Representative: Thank you. I will answer this question. In general, the performance of Q3 and Q4 both achieved optimization in gross margin, reaching 23.8% with 2.2 percent points higher than the second half of 2022 and a 1.8 percentage points higher than the first half of 2023. On product side, other than the water purification product, we saw an increased revenue contribution — among our smart kitchen and bathroom appliance, especially the water heaters as we released several new products among this segment, and we received positive feedback from the market. At our spring launch event in March 2023, we released the MAT 3 Pro, a gas electric hybrid AI water heater which brings users new bathing experience with rapid heating, constant water temperature and [indiscernible].

In terms of the number of users, the number of globally cumulative household users increasing steadily and the percentage of household users, at least two connected products reached 23% by the end of 2023. Thank you.

Unidentified Participant: Okay. Thank you. And my second question is, what is our operating strategy in 2024? And will it focus on products or focus on channel operation? And what is the whole business outlook for 2024? Thanj you.

Unidentified Company Representative: Okay. Let me just answer this directly. Our strategy for 2024 will be still focusing on our core products and aiming for a high-quality development. We will devote our efforts on product differentiation and channel diversity. On the product side, we will further focus on our product category with dedication (ph). With respect to water purification products, we introduced the new AI — water purified, Quinlin. At our spring launch event in March 2024, we define water purification with our advanced technology. We put more efforts on water heaters and kettles alongside the concept of whole house water systems. And talking about the channel side, we will focus on the — improving the return on investment of our online channels and actively develop new channels, both online and offline with house — mechanism to establish win-win business.

We will further utilize professional business operating team on the major online channels to improve the AI and enhance the company’s operational efficiency. Let’s talk about the overseas side. In addition, to — in reaching the product category we offered, we have deepened strategic cooperation with leading local channels in various countries, utilizing the resources to further enhance our overseas sales and service capacities and also promote our sustainable goals of our overseas business in the future. In conclusion, we aim to refine our operations in follow aspects. First, we will continue to optimize our revenue structure, increasing the revenue contribution of our core products and further optimize gross margin. Second, we will further deepen collaboration with Xiaomi, supporting the recovery of our revenue scales.

Third, we expect to see faster growth in overseas channels, new social media channels and offline channels which will further diversify our revenue sources. Okay. Thank you, please.

Unidentified Participant: Okay. And my last question is, I wonder what is the expense plan for 2024 and which areas should we improve more resources and money on? And that’s all for my question. Thank you.

Unidentified Company Representative: Okay. Thank you. Let me just answer you directly. We will stick to a strict cost control method and severely monitor the return of investment, ensuring the further optimization of our operational performance in 2024. We will allocate the resources in target key channels. First, we will put weight on investment in water purification products, in online new social media channels such as [indiscernible] to reinforce the brand recognition among users and increase the market penetration of our products. Second, at the offline channel end, we will jointly develop the sales channels and promote the transformation of home appliance in cooperation with the major shopping centers for home appliances as well as the JD offline stores and other e-commerce platforms.

With respect to water purification products, we are also exploring channels relatively independent from each category in order to provide customers better product demonstration and long-term service support. Last, but not least, about the overseas market, we are strengthening our cooperation with and support to local distributors aiding the intelligence level and increasing the brand exposure of products offered in the overseas market. Thank you.

Operator: Thank you. This concludes our question-and-answer session. I would 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 any further questions, please feel free to contact us through the contact information on our website or our Investor Relations consultant, the Piacente Group, and thank you all for the conference.

Xiaoping Chen: Thank you.

Operator: Thank you. This concludes today’s conference call. You may now disconnect your lines, and have a wonderful day.