Viomi Technology Co., Ltd (VIOT) Q1 Earnings Conference Call Transcript

Viomi Technology Co., Ltd (VIOT -1.03%)
Q1 2019 Earnings Call
May 23, 2019, 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 Company, Limited's earnings conference call for the first quarter 2019. At this time, all participants are in a listen-only mode. If you require operator assistance, please press *0. Today's conference call is being recorded. I will now turn the call over to your host, Ms. Cecelia Li of the Piacente Group, the company's investor relations partner. Please go ahead, Cecilia.

Cecilia Li -- The Piacente Group -- Investor Relations Representative

Thank you, operator. Hello, everyone, and welcome to Viomi Technology Co. Limited's earnings conference call for the first quarter 2019. As a reminder, this conference is being recorded. The company's financial and operating results were issued in a press release earlier today and 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. Sun Jiang, the Chief Financial Officer. The company's management will begin with prepared remarks, and the call will conclude with a Q&A session.

Before we continue, please note today's discussion will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the company's registration statements on Form F-1 and other filings as filed with the U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements except as required by law.

Please also note that the Viomi's earnings press release and its 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 Viomi's 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 -- Founder, Chairman, and Chief Executive Officer

Hello, everyone. Thank you for joining today's earnings call. 2019 began positively, as we continued the strong growth momentum from last year with robust operating and financial performance in the first quarter. First-quarter net revenues more than doubled year over year, as we continue to experience robust market demand across our product portfolio while further enhancing our brand recognition and channel penetration. Our sustained revenue growth and healthy profitability once again demonstrated the viability of our highly scalable business model, as well as our strong execution capabilities.

We launched numerous new and exciting product lines over the past several months, further enriching and diversifying our IoT-enabled product portfolio, strengthening our IoT at home platform, and bringing our users more comprehensive and enhanced experiences across multiple scenarios. These products include complementary models of our flagship 21Face series of smart refrigerators, washing machines, water heaters, as well as range hoods. In addition to value-added products such as sweeper robots, food processors, sweeper robots, rice cookers, among many others.

Moreover, we also introduced our revolutionary AirBot premium range hood, developed with state-of-the-art space engine principles, as well as the 5G Face smart refrigerator, developed for the upcoming 5G era. These products attracted wide attention from mainstream media, including CCTV and People's Daily, as well as the consumer market, and are a testament to a strong innovation, product development, and marketing capabilities.

In addition to these Viomi-branded products, we also brought to market a new series of Xiaomi-branded products, including new 500-gallon and 600-gallon series of water purifier products, as well as small appliances products such as food processors, which have all been well received by the market. Our new product pipeline remains strong, with multiple flagship Xiaomi-branded and Viomi-branded products, both in existing and new product categories, expected to be introduced over the coming months. We are excited for the additional growth opportunities these new products present.

Also, as an important part of our growth strategies, we further expanded and diversified our sales channels in the first quarter. As of March 31st, the number of Viomi offline experience stores reached more than 1,600, and we are on track to achieve our previously stated of at least 2,000 stores in the near term.

On the online front, we continued maintaining strong partnerships and strengthened our presence on leading e-commerce platforms such as Youpin, JD.com, Tmall, and Suning, and have recently expanded to Pinduoduo. Meanwhile, we continue to be dedicated to the further development of our proprietary e-commerce platforms, including Youmi Shengsheng and our own WeChat program Youmi Shenghuoguan, or Viomi Lifestyle Center. Both have been growing rapidly and will be an important driver in delivering incremental revenue streams going forward. We will provide additional progress updates to these channels in the coming quarters.

In terms of our value chain investments, both Guangdong Lizi Technology, our smart water purification system facility, and Guangdong AI Touch Technology, our touchscreen components facility, have been successfully integrated into our platform and commenced commercial manufacturing. This integration has provided us greater control over our supply chain and has already started to generate incremental cost savings. We're also continuing to evaluate several additional strategic value chain investments and partnership opportunities to further strengthen our supply chain integration and facilitate expansion of our business ecosystem.

Growing our household user base and educating consumers on the capabilities and benefits of our IoT at home platform and IoT-enabled smart products will continue to be central to our long-term growth strategy. To this end, we are continually making efforts to enhance user experiences across different scenarios in the home environment through the AI plus IoT -- and soon, 5G plus AI plus IoT -- direction. Looking ahead in 2019, our priorities remain focused on delivering robust top-line growth and market share gains. We are fully confident in our execution capabilities and achieving our goals.

Shun Jiang -- Chief Financial Officer

That concludes our founder's comments. I will now provide an operational update and discuss our financial performance for the first quarter of 2019. As Xiaoping mentioned, we began 2019 on a positive note, with strong revenue growth and operational performance. To quickly summarize some of our key operational updates, we continued deepening our household penetration, with our number of household users growing to more than 2 million at the end of the first quarter of 2019, compared to approximately 1.7 million at the end of 2018 and approximately 1 million as of the end of the first quarter of 2018. In addition, the percentage of household users possessing at least two of our IoT products increased to 15.2% from 13.3% in the prior quarter, demonstrating the increasing trend of users adopting multiple Viomi products and making the Viomi-connected home a closer reality.

Now, let's move on to our quarterly financial performance. We are pleased to report another strong quarter of financial results, as we delivered significant top-line growth toward the upper end of our guidance range, together with solid levels of profitability as well as healthy cash flows and liquidity. Net revenues increased by 104.4% to RMB 676.2 million from RMB 330.8 million for the first quarter of 2018, primarily due to the continued successful rollout and significant increase in sales of Viomi-branded products. As previously discussed, the first quarter is generally a seasonal trough during the calendar year as compared to the second and fourth quarters.

Revenues from IoT-enabled smart home products increased by 103.8% to RMB 502.5 million from RMB 246.5 million for the first quarter of 2018, primarily due to the successful rollout of the company's smart kitchen and other smart products, though the growth was partially offset by a temporary decline in revenues from the smart water purification systems category. Within the IoT products category, as just mentioned, revenues from smart water purification systems decreased on a year-on-year basis by 18.9% to RMB 120 million as compared to RMB 148 million for the first quarter of 2018. This temporary decline was primarily due to anticipation of new Xiaomi-branded 500-gallon and 600-gallon smart water purification products that were brought to the market in April 2019, together with a minor delay in the launch of these products.

As you can see, the impact of this temporary decline was largely mitigated by our diverse product mix, which helped us achieve strong overall year-on-year net revenue growth in the first quarter. In addition, based on the sales trends we have already seen in April and May, we expect to resume healthy double-digit year-on-year revenue growth from the smart water purification system product category in the second quarter.

Revenues from smart kitchen products increased by 188.7% to RMB 196.6 million from RMB 68.1 million for the first quarter of 2018. The rapid growth was primarily driven by significant increases in sales volumes of the company's Viomi-branded refrigerator products. Revenues from other smart products increased by 511.1% to RMB 185.9 million from RMB 30.4 million for the first quarter of 2018. The rapid growth was primarily driven by significant increases in sales volumes of the company's Viomi-branded washing machine and water heater products. Separately, revenues from consumable products increased by 28.7% to RMB 48.1 million from RMB 37.4 million for the first quarter of 2018, primarily due to increased demand for the company's water purifier filter products.

Revenues from value-added businesses increased 167.5% to RMB 125.6 million from RMB 46.9 million for the first quarter of 2018, primarily due to new product introductions together with increased demand for the company's value-added products, in particular small appliances products.

Gross profit increased by 93.6% to RMB 189.4 million from RMB 97.8 million for the first quarter of 2018. Gross margin was solid at 28% compared to 29.6% for the first quarter of 2018. Again, this decrease in gross margin on a year-on-year basis was primarily due to shifts in the company's business and product mix. As additional points of reference, gross margin for the full year of 2018 was also 28% and gross margin for the fourth quarter of 2018 was only 27%.

Total operating expenses increased by 133.8% to RMB 153.1 million from RMB 65.5 million for the first quarter of 2018, primarily due to the rapid growth of the company's business as well as increases in share-based compensation expenses. Research and development expenses increased by 74.3% to RMB 36.6 million from RMB 21 million for the first quarter of 2018, primarily due to an increase in employee-related expenses, including share-based compensation expenses to attract and retain R&D personnel as well as increases in expenses associated with new product development.

Selling and marketing expenses increased by 153.3% to RMB 100.9 million from RMB 39.9 million for the first quarter of 2018, primarily due to an increase in employee-related expenses as well as increases in logistics, advertising, marketing, and brand promotion expenses in relation to Viomi-branded products. G&A expenses was RMB 15.6 million compared to RMB 4.7 million for the first quarter of 2018, primarily due to an increase in employee-related expenses, including share-based compensation expenses as well as the expansion of administrative departments.

Net income was RMB 41.3 million, an increase of 40.5% from RMB 29.4 million for the first quarter of 2018. Non-GAAP net income, which excludes the impact of share-based compensation expenses, was RMB 53.1 million, an increase of 68.1% from RMB 31.6 million for the first quarter of 2018, an acceleration on a quarter-on-quarter basis. Non-GAAP net margin was 7.9% compared to 9.6% for the first quarter of 2018. Again, this was primarily due to the year-over-year decline in gross margin as a result of shifts in the company's product and business mix. As additional points of reference, non-GAAP net margin for the full year of 2018 was 7.1% and non-GAAP net margin for the fourth quarter of 2018 was only 6.8%.

For the first quarter of 2019, net cash provided by operating expenses was healthy at RMB 29.2 million. Our balance sheet also remained healthy. As of March 31st, 2019, the company had cash and cash equivalents of RMB 764 million, restricted cash of RMB 31 million, and short-term investments of RMB 345.1 million. As we look ahead, as Mr. Chen mentioned, our priority will be to continue to deliver robust top-line growth while still maintaining healthy levels of profitability.

Now, let's turn to our outlook. For the second quarter of 2019, the company expects net revenues to be between RMB 1.15-1.2 billion, representing year-over-year growth of approximately 62.1-69.2%. This outlook is based on current market conditions and reflects the company's preliminary estimates of market and operating conditions and customer demand, which are all subject to change, especially given the current macro environment.

I would also like to add that the second quarter of 2018 was an especially strong quarter, and we experienced quite noticeable seasonality across quarters during 2018, especially during the third quarter. Given our robust and visible new product pipeline and launch schedule over the next several months, both for Xiaomi-branded and Viomi-branded products, especially heading into June and the third quarter of 2019, we currently expect there to be significantly less noticeable seasonality in the third quarter of 2019 as compared to the same period in 2018, and thus remain confident in achieving our full-year targets.

Therefore, based on the growth that we have seen in the first quarter of 2019, we would expect, based on current evaluation of market conditions, that we can achieve similar levels of growth for the full year of 2019. That concludes our prepared remarks. We will now open the call for Q&A. Operator, please go ahead.

Questions and Answers:

Operator

We will now begin the question and answer session. To ask a question, you may press *1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If, at any time, your question has been addressed and you would like to withdraw your question, please press *2. For the benefit of all participants on today's call, if you wish to ask your question to the company's management in Chinese, please immediately repeat your question in English. Once again, press *1 to ask a question. At this time, we will pause momentarily to assemble our roster. The first question comes from Xudong Chen of CICC. Please go ahead.

Xudong Chen -- CICC -- Analyst

Thank you for taking my question. I have two questions. The first one is since the U.S. and China trade friction became a hot issue recently, what's your view on the impact for U.S. and China trade friction? Will that affect the confidence of the investors or change the situation of demand and supply for the market? That's the first one. The second one -- since AI plus IoT became Xiaomi's key strategy for several years, what's the company's role in that AI plus IoT strategy, and when will the IoT product reach high shipments? Thank you.

Shun Jiang -- Chief Financial Officer

Thanks, Xudong. I'll answer your first question, and then Mr. Chen will answer your second question. So, in terms of the impact on U.S.-China relationship, we have not noticed any material short-term impacts from the recent U.S.-China trade frictions, and our business momentum remains strong. We have no sales into the U.S., nor do we source any raw materials or products from U.S.-based suppliers, and hence have negligible, if any, exposure to the U.S. market or any respective tariffs. Having said that, as a consumer products company, we would not be immune to any industrywide impacts in the future, should the frictions remain prolonged.

Xiaoping Chen -- Founder, Chairman, and Chief Executive Officer

In terms of the second question, Xiaomi's strategy for AI plus IoT, we view this on a couple of different factors. So, first, obviously, Xiaomi, as well as other participants entering into the AI plus IoT space, as well as the smart home space, will help to educate consumers on the benefits as well as the capabilities of such products and help the industry transform at a more rapid pace. So, we think that their entry will definitely be beneficial to the overall industry growth as a whole.

Secondly, in terms of benefits to Viomi, obviously, as an important strategic partner to Xiaomi, we are able to generate additional product sales through additional product partnerships with Xiaomi. Currently, the major product that we partner with them on is, of course, the water purifiers, but as discussed during the call just now, we have several new and exciting product categories to be announced very shortly over the coming months that we will also be able to benefit from Xiaomi's increased presence in the AI plus IoT or smart home space.

And, in terms of overall industry growth, a few data points. According to iResearch, the penetration for smart home products was only currently around 34% for 2018 as opposed to 100% for products such as televisions or smartphones. This ratio is expected to increase to over 64% over the next five years. So, that's No. 1. No. 2, according to the consumer IoT outlook 2025 whitepaper that we co-released together with IDC in March, the average number of smart home devices per Chinese household was only 0.9 units in 2018, which is expected to increase to 6.8 units by 2025. So, we very much think that the IoT space -- particularly the smart home product space -- is still in a very nascent phase in China, with significant growth potential.

Xudong Chen -- CICC -- Analyst

Thank you.

Operator

The next question comes from Lillian Liu of Morgan Stanley. Please go ahead.

Lillian Liu -- Morgan Stanley -- Director

Hello, management. Thanks a lot for the introduction. I have three questions. One is a follow-up on Xiaomi's AI/IoT initiative. I think one of the things is how we balance our own branded home appliances right now versus the new category we're going to do for Xiaomi, and what specific categories we're going to push for Xiaomi, and how much contribution are we budgeting for the next one or two years. That's the first question. The second is channel. As mentioned, we are expanding channels, and also with Pinduoduo and the new channels, into our network. Can you provide us some details about the contribution split of revenue by different channels, Xiaomi versus non-Xiaomi, and all the third-party channels, et cetera? Third question is about the SG&A investment. Obviously, we are quite focused on expanding market share and footprint. What kind of investment into market are we budgeting for, and what impacts our margin going forward? Thanks.

Shun Jiang -- Chief Financial Officer

Thanks, Lillian. I'll just go one by one. So, in terms of the partnership with Xiaomi and additional categories, we can't disclose as of yet the exact product categories, but as mentioned, both in terms of large appliances as well as small appliances, we expect to be announcing together with Xiaomi several new partnerships over the coming months, so you should be seeing these new products being announced as soon as, say, June.

In terms of how we think about balancing Xiaomi products versus Viomi-branded products, we think about additional product partnerships with Xiaomi as incremental SKUs and incremental channels that are complementary, and also differentiated with our existing Viomi product portfolio. So, you won't have the situation where it's an exact same product, and one is Xiaomi-branded and one is Viomi-branded. There will definitely be a delineation in terms of the positioning or the design, as well as the target audience, for these incremental products.

Your second question on the channel breakdown -- so, in the first quarter, due to the lower contribution of the overall sales of water purifiers, sales through the Xiaomi channel is approximately 37% of our total revenues. For the full year -- and, taking into consideration these new product cooperation -- we expect Xiaomi to represent around 40% of our total revenues for the full year.

In the first quarter, for non-Xiaomi channels, it was roughly split two thirds online and one third offline. For online channels, roughly, one third was JD and one third was Youpin, and the remaining third online channels included Tmall, Youmi Shengsheng, Suning, Pinduoduo, et cetera.

On your third question, in terms of opex, non-GAAP opex as a percentage of sales was approximately 21% for the first quarter of 2019. As we had discussed on previous earnings calls, the first quarter is generally a seasonally low quarter. Operating expenses as a percent of sales will generally be higher than in seasonally high quarters, such as the second and fourth quarters, but for the full year, you should be expecting around 20% for selling and marketing expenses plus R&D plus G&A -- those three categories.

Our non-GAAP net margin was 7.9% in the first quarter, as compared to 7.1% for the full year of 2018, which is relatively in line with our previous expectations, and as discussed, based on our current outlook, we expect non-GAAP net margins to be around a similar region that we experienced in 2018 and the first quarter of this year for the full year of 2019.

Lillian Liu -- Morgan Stanley -- Director

Thank you very much.

Operator

Once again, if you have a question, please press *1. The next question comes from Joy Wei of 86 Research. Please go ahead.

Joy Wei -- 86 Research -- Analyst

Hi. Congratulations on solid results. I have a question regarding our strategy for our own brand awareness. How do we compete in the competitive home appliance market? For example, we noted that we have put a lot of emphasis on the connectivity function of our product. Are we seeing the speed of the consumers adopting the IoT products to pick up, and what's the general strategy to increase our brand awareness, and what's the implication of the cost and expense financials? Thanks.

Shun Jiang -- Chief Financial Officer

Thanks, Joy. So, to answer your question in a couple of aspects, to increase brand awareness, we have several means. One is to obviously continue to open our offline experience stores together with the appropriate marketing and promotional events surrounding these store openings. So, for these IoT products that do require a certain degree of consumer education, we feel that our offline experience stores are a very important channel to allow consumers to test firsthand the functionalities as well as the benefits of connectivity of these products.

Second is these large-scale product launch events, such as the AWE event in March, together with the related third-party media coverage that these events are able to generate. As you may have seen, following the AWE event in March, there was quite widespread media coverage, including on some mainstream channels, such as the People's Daily, CCTV, of our brand, which is definitely a positive. Third, traditional advertising channels such as billboards, newspaper and magazine ads, as well as celebrity spokespeople are obviously very important in the home appliances space in China as well. We will continue to invest in these initiatives. Lastly, the social marketing initiatives, such as our WeChat program, as well as related social media advertising campaigns. So, those are the main avenues that we are currently using to increase our brand awareness.

Your second point on what effects have we seen -- I think there's a couple of operating metrics that we have disclosed: The continued significant increase in our connected household user base, now over 2 million household users, an increase of over 1 million users over the past 12 months, as well as the continued increase in users with two or more of our products is currently at 15.2%, as compared to just over 10% a year ago. So, these two metrics show that not only are we increasing our user base, but this user base is also more and more connected to the internet and buying more of our products.

Joy Wei -- 86 Research -- Analyst

Thank you. That's helpful.

Operator

Once again, if you have a question, please press *1 on a touchtone phone. As there are no further questions now, I would like to turn the call back over to the company for closing remarks.

Cecilia Li -- The Piacente Group -- Investor Relations Representative

Thank you once again for joining us. If there are further questions, please feel free to contact the Viomi Investor Relations department through the information provided on our website or the Piacente Group, the company's investor relations consultant. Operator, you may disconnect the line.

Operator

Thank you. This concludes this conference call. You may now disconnect your line. Thank you.

Shun Jiang -- Chief Financial Officer

Thank you, everyone.

Xiaoping Chen -- Founder, Chairman, and Chief Executive Officer

Thank you.

Duration: 38 minutes

Call participants:

Cecilia Li -- The Piacente Group -- Investor Relations Representative

Xiaoping Chen -- Founder, Chairman, and Chief Executive Officer

Shun Jiang -- Chief Financial Officer

Xudong Chen -- CICC -- Analyst

Lillian Liu -- Morgan Stanley -- Director

Joy Wei -- 86 Research -- Analyst

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