Viomi Technology Co Ltd (VIOT) Q4 2021 Earnings Call Transcript

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Viomi Technology Co Ltd ( VIOT 8.82% )
Q4 2021 Earnings Call
Mar 28, 2022, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, ladies and gentlemen. Thank you for standing by for Viomi Technology Co., Limited’s earnings conference call for the fourth quarter and full year 2021. [Operator instructions] I will now turn the call over to your host, Ms. Cecilia Li, the IR director of the company.

Please go ahead, Cecilia.

Cecilia LiDirector of Investor Relations

Thank you, operator. Hello, everyone, and welcome to Viomi Technology Co., Limited earnings conference call for the fourth quarter and full year 2021. 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 email 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. Wickham Thai, the head of our finance department.

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. SEC.

The company doesn’t assume any obligation to update any forward-looking statements, except as required by law. Please also note, today’s earnings press release and this conference call 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 an English translation. Mr.

Chen, please go ahead.

Xiaoping ChenFounder, Chairman of the Board of Directors, and Chief Executive Officer

[Foreign language]

Cecilia LiDirector of Investor Relations

Thank you, Mr. Chen. I will quickly translate our founder’s remarks before discussing our financial performance for the fourth quarter and full year 2021. Hello, everyone.

Thank you for joining our fourth quarter and full year 2021 earnings conference call. Our fourth quarter net revenues reached approximately RMB 1.33 billion, beating our previous guidance. As we disclosed earlier, the year-over-year decline was mainly due to the significant decrease in the sales of Xiaomi-branded sweeper robots. Thanks to our ongoing product portfolio adjustments, we achieved a growth margin of 25.6% for the fourth quarter, maintaining consecutive year-over-year growth since the fourth quarter of 2020, and once again demonstrating the strength of our product line, growing brand recognition, as well as the improvement in our operating quality.

We incurred a loss in the third quarter of 2021 following substantial investments in R&D and marketing but resumed profitability during the fourth quarter as a result of stringent cost-control measures. The smart home industry is developing rapidly, accelerated by the industry’s overall transformation, increasingly matured IOT technology, popularization of 5G, national policies port, as well as lifestyle changes of the personality of generations, the main smart home consumer group. According to statistics from AskCI Consulting, China’s smart home market has been continuously expanding, doubling in size between 2016 and 2021, to reach RMB 580 billion. It is expected to exceed RMB 650 billion by the end of 2022.

Last April, 16 government agencies, including the Ministry of Industry and Information Technology, jointly issued guiding opinions on accelerating the development of digital homes and improving the living quality, which requires a fairly complete set of digital home-related policies and standards to be established by the end of 2022, as well as a digital home standard system to be in place by the end of 2025. We also see that consumers who use the smart home products are transforming from small groups of people to the mass market. Over the past year, enterprises from various sectors, such as home enhancements, communication, and internet entered the IoT smart home industry in quick succession, targeting industry signals such as hardware products, IoT development platforms, and operating systems. As one of the first enterprises to focus on IoT smart home area, we have been offering one-stop IoT home solutions since 2017.

We have rapidly embraced our one-stop IoT home product line and are now developing a premium customized AI home experience to bring IoT smart home solutions to the next level. First, I’d like to discuss our most — our latest product innovations, as well as our upgraded one-stop IoT home solutions. 1=N44, which we involved at our strategy strategic product launch event this month. 1=N44 leverages three components to synergistically provide users with a seamless customizable smart home experience.

The 1=N44 stands or our comprehensive product portfolio, smart home appliances, and home devices across home scenarios. The first of four represents the four major smart home capabilities of home map, including automatic networking, active intelligence, spatial awareness, and natural interactions. We have already achieved the one-click home device, now working with our smart home screen devices. To support home map’s spatial awareness capabilities, we are developing Alpha X, our self-developed millimeter wave radar module.

Alpha X can sense users’ presence and movement to track trajectory without zero contact, providing better user privacy protection compared with the viral sensors. Going forward we will integrate Alpha X into our product functions, such as automatic fire control, sleeping, and monitoring to truly achieve active device intelligence. We are also iterating our products’ voice detection function to enable natural interactions between users and devices. And section four represents four additional services we offer to our users, including the smart home solution device, OTA upgrade, a membership system, and value-added services.

We have also enriched our band of smart home solutions offering with packages designed for various types of households, including our RMB 60,000 to RMB 80,000 Super packages for large apartments worth over RMB 1 million, our RMB 200,000 Space packages for penthouses, and our RMB 300,000 Royal series for houses valued at over RMB 100 million, which delivers a premium customized AI experience for the high-end market. And like other smart IoT home companies which specialize in platforms or operating systems, we used our smart home products at the carrier to bring our users in upgrading whole home IoT experience, as well as optimize the product functionalities through software and AI application. At the March event, we also introduced a series of high-end products with our currently most advanced AI technology, underscoring our trending technology branding positioning. These new products include our all-space AI air conditioner Space Pro, which utilizes active manganese to heavily remove formaldehyde; Boss, our AI defense refrigerator equipped with 3D somatosensory sensors; Super 2, our 2000G large-flux water purifier, which uses ultra-micro bubbles to remove the agricultural residues; and a new series of smart home devices, such as HomePad Plus, our AI screen-based control interface; and Cyber 2T, our smart lock with 3D facial recognition and video functions.

We also launched several new products in our premium brand, coKiing, including the Royal Pro series of double-screen refrigerators priced at RMB 50,000, the Royal series of AI laser interactive smart screens priced at RMB 40,000; and the Royal series of AI twin-tub washing machines priced at RMB 200,000. Second, I’d like to share with you our progress in developing our offline channels. Over the past few months, we have continued to execute our larger store, better merchant channel strategy. We are opening additional immersive offline stores encompassing over 200 or 300 square meters in Tier 1, Tier 2, and new Tier 1 cities to enhance our trending technology branding positioning, as well as provide our customers with a more comprehensive and premium smart home experience.

Third, we optimized our product portfolio on new content channels and continued to improve our brand marketing during the quarter as we did closing our third quarter earnings conference call. Following the establishment of a dedicated content marketing and sales team for our new channels, such as Pinduoduo and Douyin last year, we have continually refined our product categories on these channels by adding higher gross margin products with mid- and high-end positioning products. We also continued to strengthen our trending technology brand awareness and increased our exposure on this new channel through KOL live streaming and recommendations, as well as other marketing activities. In 2022, where we will increase additional investments on marketing channels, we will broaden our omnichannel marketing and advertising activities, including online promotions, such as in platform, KOL, and tech guru recommendations; and social media and offline promotions, such as the elevator advertising and print media.

In addition, to enhance awareness and exposure to our brand in hundreds of cities, our marketing strategy will promote a brand message of channeling technology to consumers through multiple marketing channels. Finally, we also made some progress in overseas market expansion. In the fourth quarter, we entered into markets in Singapore, Germany, Italy, and the other countries, following our self-channel transformation progressing smoothly, shifting partly from small distributions to international agents, leading to new partnerships with large-scale agents in Northern Europe and Germany, among others. We also extended our self-operated model to new overseas markets.

Along with the U.S. Amazon store we launched last August. We opened a self-operated Amazon store in Italy in March this year, with additional self-operated European Amazon stores to come into service in the coming months. By strategically shifting from selling products to selling solutions, we have pioneered a new business model in the smart home industry, while also improving our smart products, IoT capabilities, and services for our one-stop IoT home solutions.

We have also strengthened our trending technology branding as we entered the high-end market. Going forward, we will continue to increase our investments in R&D, particularly in AI software and algorithms. We’re optimizing the product lines and upgrading our technology to deliver healthy and long-term growth. That concludes our founder’s remarks.

I’d now turn to our detailed fourth quarter and full year 2021 financial review, as well as the first quarter 2022 outlook. Net revenues were RMB 1.33 billion compared to RMB 1.89 billion for the fourth quarter of 2020. Net revenues exceeded the company’s previous guidance. And a year-over-year decrease was mainly due to the continued significant decrease in sales of Xiaomi-branded sweeper robots, together with product portfolio adjustments for margin expansion in other categories and the overall weaker consumer demand in certain categories.

Revenues from IoT @ Home portfolio decreased by 37.9% to RMB 692 million from RMB 1.11 billion for the fourth quarter of 2020. The decline was primarily due to the decrease in sales of Xiaomi-branded sweeper robots and the continued product portfolio adjustments for margin expansion in some categories, both of which contributed to the overall gross margin improvement for IoT @ Home portfolio. Revenues from our home wireless solutions decreased by 27.5% to RMB 263.3 million from RMB 363 million for the fourth quarter of 2020. The decline was primarily due to the weaker consumer demand for the industry occurred during the quarter, as well as the product portfolio adjustments we made by decreasing the proportion of small-flux water purifiers in our product mix.

As a result of product portfolio adjustments, the company once again achieved a year-over-year gross margin recovery for this category. Revenues from consumables decreased by 24.8% to RMB 120.4 million from RMB 160.2 million for the fourth quarter of 2020, primarily due to decreased demand for purifier filter products. Revenues from small appliances and others increased by 2.3% to RMB 257.1 million from RMB 251.2 million for the fourth quarter of 2020. Gross profit was RMB 341.5 million compared to RMB 443.8 million for the fourth quarter of 2020.

Gross margin increased to 25.6% from 23.5% for the fourth quarter of 2020, primarily driven by the company’s continued efforts to shift the business and product mix toward higher gross margin products. Total operating expenses increased by 2.7% to RMB 340.7 million year over year, primarily due to the increase in R&D expenses and G&A expenses. In more detail, R&D expenses increased by 5.1% to RMB 97.8 million from RMB 93.1 million for the fourth quarter of 2020, mainly due to the increase in R&D experts and the related salaries and expenses. Selling and marketing expenses decreased by 1.2% to RMB 214.8 million from RMB 217.4 million a year ago.

G&A expenses increased by 31.4% to RMB 20 million compared to RMB 21.3 million for the fourth quarter of 2020, primarily due to the increase in related personnel salaries and expenses. Net income attributable to ordinary shareholders of the company was RMB 22.7 million, and non-GAAP net income attributable to ordinary shareholders of the company was RMB 33.5 million. Additionally, our balance sheet remained healthy. As of December 31st, 2021, we had cash and cash equivalents of RMB 187 million, restricted cash of RMB 35.8 million, and short-term investments of RMB 828.9 million.

Next, let’s briefly discuss more key financial results for the full year 2021. Net revenues for full year 2021 were RMB 5.3 billion compared to RMB 5.83 billion for 2020. Revenues from IoT @ Home portfolio decreased by 7.4% to RMB 3.4 billion from RMB 3.67 billion for 2020. Revenues from our home water solutions decreased by 15.9% to RMB 722.9 million from RMB 883.3 million for 2020.

Revenues from consumables decreased by 4.1% to RMB 767 million from RMB 382.9 million for 2020. Revenues from small appliances and others decreased by 10.7% to RMB 792.9 million from RMB 887.7 million for 2020. Gross profit was RMB 1.2 billion compared to RMB 1.08 billion for 2020. Gross margin improved to 22.6% from 18.6% a year ago.

Total operating expenses increased by 24.6% to RMB 1.16 from RMB 931.8 million for 2020. In more detail, R&D expenses increased by 17.4% to RMB 311.8 million from RMB 265.7 million for 2020. Selling and marketing expenses increased by 25.8% to RMB 751 million from RMB 597.2 million a year ago. G&A expenses increased by 41.8% to RMB 97.7 million compared to RMB 68.9 million for 2020.

Net income attributable to ordinary shareholders of the company was RMB 88.6 million, and non-GAAP net income attributable to other shareholders of the company was RMB 136 million. Now, let’s turn to our outlook. For the first quarter of 2020, we currently expect net revenues to be between RMB 618 million and RMB 713 million. We estimate that a year-over-year change in the first quarter revenue will be mainly due to the high business value of Xiaomi-branded sweeper robot business for the first quarter of 2021, which the company has then subsequently scaled back that business, as well as the overseas market impact in the first quarter of 2022.

The above outlook is based on current market conditions and reflects the company’s current and preliminary estimates of market and operating conditions and customer demands, which are all subject to change. This concludes our prepared remarks, and we will now open the call for the Q&A session. The head of our finance department, Mr. Wickham Thai, will join the session and answer the questions.

Operator, please go ahead.

Questions & Answers:

Operator

[Operator instructions]The first question comes from Hildy Ling with Morgan Stanley. Please go ahead.

Hildy LingMorgan Stanley — Analyst

Thank you. [Foreign language] Let me repeat all these in English for us. So, congratulate company on a very decent fourth quarter results and a very visible gross margin expansion there. A couple of questions.

So, the first one is, what about the — can we have some color of the sales trends year to date, in particular, the sweeper robots in the domestic and overseas market. And the second question is about also about revenue outlook, but that’s also for the full year 2022. How should we think about it for the overseas business and also the domestic business? And also, can we have a little bit of color of each product category segments as well? And the final question is about the margin of the gross margin and also the operating margin for the first quarter of 2022 and also for the full year 2022. And how should we think about the rising commodity prices, raw material costs, and also the oil prices? How would that affect our margin outlook? And when will we see a more visible trend of an inflection point? So, that’s all for my question.

[Foreign language]

Wickham ThaiHead of Finance

OK. Thanks for Hildy’s questions. For the sales trend update, we saw the overall consumer demand is relatively weak compared to the same period of 2021, while we saw our products and channel portfolio is trending more diversified and healthier. Firstly, we saw the sales contribution of high-end products is increasing due to our introductions of a series of premium products and our efforts for the product portfolio adjustments.

Secondly, we saw the sales on our new channels, such as Pinduoduo and Douyin, increasing very fast. And we are increasing additional mid- to high-end products and products with higher margins on these channels. We expanded sales on this new channel to increase as well and help us to enhance our brand awareness. And for the sweeper robots, for both domestic and overseas markets.

we saw weaker consumer demands for the whole industry compared to the first quarter of 2021 when we achieved a very robust growth in sweeper robots, particularly for the overseas markets due to the international war and COVID-19. The market demands for smart and premium cleaning products are impacted. Despite the overall macro environment, our introduction of new SKUs, product line optimization, and overseas channel expansion are in line with our expectations. First, in terms of product SKU, we recently introduced our new self-cleaning sweeper robot, Alpha 3 in January.

And we see a fast growing in sales and received good feedback from the market. At the recent new product launch events, we also introduced our new wet and dry vacuum cleaners, Cyber Pro and Cyber 2, which is equipped with double brushes, photoelectric sensor, and OTA upgrade functions. Second, the sales contribution of high-end SKUs are increasing. As we drive the product line toward premium, the sales contribution of our high-end products, such as Alpha 2 Pro and Alpha 2 Plus, and Alpha 3 increased.

Third, as just discussed, for overseas market, we successfully stepped into new markets in Singapore, Germany, Italy, and other countries. Further, our new cooperation with larger-scale international agents are smooth and we expanded our self-operated model. Along with the U.S. Amazon store we launched last August, we opened Amazon store in Italy, and we will open more self-operated Amazon stores in Europe in the coming months.

Overall, though we experienced temporary market fluctuations, we still expect our cleaning business in 2022 to achieve growth and the product lines to turn more diversified. Yeah, for the second question about the sales outlook of 2022, generally, for the sales structure, we could refer to the structure of Q4 2021, like IoT @ Home portfolio may accounted for half of the total portfolio, and home water solutions accounted for around 20%, and small appliance and others accounted for around 20%, and consumables accounted for 10% around. For the overseas business, we expect around high single digit of the total revenue. But it’s subject to the market changes and the company’s adjustment later.

For the third question about the margin and price, we saw the price of raw materials were relatively stable when entering into the fourth quarter of last year. While due to the war and a series of economic reductions, the price went up in the first quarter. The increased price has been partially reflected in our ASPs, so it is partially offset by the increased ASPs. In addition, we have done some price lock agreements with suppliers in advance.

So, overall, we don’t expect the certain price of raw materials to cause material impacts on our gross margin or net profit margin side. Our partner is more influenced by the extent of our investment in our R&D and marketing expenses to deliver mid- to long-term growth as well as to strengthen our branding of one-stop home solutions. We will consider to increase additional investments in marketing end channels. As we already saw benefits of our marketing activities, like we did on the third quarter of last year, we are confident these investments will help promote our new strategic products and enhance our brand imagine — image.

Yeah, thank you.

Operator

The next question comes from Rudi Wei with CICC. Please go ahead.

Rudi WeiCICC — Analyst

OK. So, thank you very much for the management’s presentation. And I have two questions here. The first is about our promotion and brand-building strategy.

We noticed that the company has launched many new products just two weeks ago, and most of the products are targeted at high-end customers. So, how do you plan to improve the brand image and make the customers willing to pay for those new products? Also, we knew our spokesperson, Deng Lun, had some problems recently. So, how serious is the influence to us? [Foreign language]

Xiaoping ChenFounder, Chairman of the Board of Directors, and Chief Executive Officer

[Foreign language]

Cecilia LiDirector of Investor Relations

So, I will quickly translate our founder’s feedback. So, the branding stabilized for your questions. So, firstly, we are seeing a turning point for the consumer groups who buy their home — smart home products. And we see the market has been transformed from small group of people to investment, and this is very important for our industry.

And second, we are doing a lot, and we will consider to do more in additional marketing advertising, especially in some cities, where, like, young people are concentrated like this new one, Tier 1 and the Tier 2 cities. And for your question about the Deng Lun issue, as we responded very quickly and very efficiently, so this issue didn’t cause any material impacts on our brand image. And as we respond very quickly and which give us very additional and more exposure on the market, as you can see from [Inaudible]. And we are four — and fourthly, we are turning our brand position into more premium.

So, we introduced — at our recent product launch event, we are introducing more premium bands of purchase solutions offerings to our high-end market, including the RMB 300,000 solutions, the 20 — the RMB 200,000 Space packages of our premium consumers. And we see the uses of such groups are increasing among our users. So, that’s the answer from our CEO.

Rudi WeiCICC — Analyst

[Foreign language] So, I will repeat the question in English. So, what’s your outlook for the competition in 2022? How do you evaluate the market competition situation? Will it become more fierce? Thank you.

Xiaoping ChenFounder, Chairman of the Board of Directors, and Chief Executive Officer

[Foreign language]

Cecilia LiDirector of Investor Relations

I will quickly translate. So, for the question we can elaborate from two sides differences from the supply chain side. As we see that there are a few — exists many uncertainties in global guide, but supply chain capability is still very needed and mainly concentrated in China. So, we are not very concerned about this point.

And from the other side about consumer demand, we see that from the fourth quarter of last year, the consumer demand became relatively weak in domestic, as you see that they are allowing us and some big giant companies. But overall, during the period that consumer demand decrease, it nearly caused more competitive situations among the players. And the [Inaudible] may do a lot additional stock and stocking and the promotional activities. For us, as we like shift our products and business toward premium and we are maintaining the level of our gross margin and increase in R&D and do a lot of branding activities, we are confident to go through these challenges and deliver long-term growth.

Thank you.

Rudi WeiCICC — Analyst

Thank you very much. That’s all from my side.

Operator

As there are no further questions now, I’d like to turn the call back over to the company for closing remarks.

Cecilia LiDirector of Investor Relations

Thank you once again for joining us today. If you have further questions, please contact us through the contact information on our website or The Piacente Group, our investor relations consultant. Thank you all. Have a good night.

Wickham ThaiHead of Finance

Thank you.

Xiaoping ChenFounder, Chairman of the Board of Directors, and Chief Executive Officer

[Foreign language]

Operator

[Operator signoff]

Cecilia LiDirector of Investor Relations

Thank you. Bye.

Duration: 48 minutes

Call participants:

Cecilia LiDirector of Investor Relations

Xiaoping ChenFounder, Chairman of the Board of Directors, and Chief Executive Officer

Hildy LingMorgan Stanley — Analyst

Wickham ThaiHead of Finance

Rudi WeiCICC — Analyst

More VIOT analysis

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