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Viomi Technology Co., Ltd. (NASDAQ:VIOT)
Q2 2019 Earnings Call
Aug. 21, 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 second quarter 2019. At this time, all participants are in listen-only mode. Today's conference call is being recorded. If you require operator assistance, please press * then 0. 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 second 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 then 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, and Chairman of the Board of Directors, and Chief Executive Officer, and Mr. Shun 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 Viomi'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 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

Thank you, Xiaoping, Mr. Chen, Viomi CFO. I'll quickly translate Mr. Chen's remarks before providing an operational update and discuss our financial performance for the second quarter of 2019.

Hello, everyone. Thank you for joining today's earnings call. We are pleased to report another strong quarter with robust topline as well as bottom-line growth, despite increasing macro and industrywide uncertainties. According to industry data compiled by All Blue Cloud, the overall home appliances market in China declined by 3.2% in the first half of 2019 in terms of retail sales value and has continued to face headwinds in the second half. Nevertheless, our net revenues for the second quarter increased by 63.6% year-over-year to 1.16 billion RMB, in line with our previous guidance. The sustained and resilient growth momentum was attributable to the continued strong market demand across our product portfolio, driven by new product introductions, together with sales, channel expansion, as well as growing brand recognition and customer trust.

As part of our core strategy for this year, we have continued to launch additional product lines and SKUs to enhance and complement our IoT @ Home product portfolio over the past several months. In terms of smart water purification systems, we introduced a new series of Xiaomi-branded water purifier products, including both 500-gallon and 600-gallon versions. Recently, we also a new ultra-thin series of Xiaomi-branded water purifiers.

With respect to smart kitchen and other products, we launched Cross 2, the second generation of our Viomi-branded range hood, with innovative motion gesture AIoT features, together with additional product lines in our flagship series of 21Face smart refrigerators and Zero-series of smart instant water heaters, among others. We also brought to market a new Xiaomi-branded range hood and stove series, as well as a new series of sweeper robots. All of these products have been well-received by the market.

Our focus remains on new product innovation and development, as well as the expansion of existing product lines. For the second half of 2019, we have an exciting pipeline of new and innovative products for Xiaomi and Viomi brands, both in existing and new product categories. We look forward to sharing more details on these products with the market in due course.

In the second quarter, we continued to expand and diversify our sales channels with a growing number of our Viomi offline experience stores. With the addition of approximately 300 stores, the number of Viomi offline experience stores reached more than 1900 as of the end of the second quarter. While we expect to continue to open new stores, given the strong interest from potential franchisees, we will shift our emphasis more toward enhancing store productivity in the second half of 2019.

Regarding online sales channels, we continued strengthening our presence on key e-commerce platforms, including Youpin, JD.com, Tmall, Suning, and Pinduoduo. Further, we continue to enhance our own e-commerce platforms, Youmi Shengsheng and WeChat program, Youmi Shenghuoguan, or Viomi Lifestyle Center with upgraded functionalities, as well as easier navigation to access our products.

The recent 618, or [speaking Chinese], online shopping festival was particularly successful with Viomi witnessing significant year-over-year sales growth and among the Top 10 brands among numerous categories during the promotion. In addition, as we mentioned on our previous earnings calls, we expect the upcoming 5G era to trigger another growth cycle in the home appliances industry in China and have stepped up our investment and preparation. In June, we reached an agreement with Guangzhou Industrial Fund for exploring high-quality investment opportunities in the smart home industry and deepening our strategic layout in the IoT, plus 5G, plus AI direction through the integration of our technologies and resources. The partnership is also in line with our value-chain investment strategy.

To further enhance our IoT @ Home presence, we also recently established partnerships with Folsom Noble House and eHome, two well-recognized interior design firms to integrate resources and provide more efficient, higher quality, and fully integrated IoT solutions for consumers. Going forward, we will continue to execute our growth strategy and remain committed to providing more advanced and holistic user experiences in the upcoming era.

In summary, this quarter marks the fourth quarter since our IPO in September 2018. Despite various industry headwinds, we have been able to successfully achieve our strategic goals, deliver rapid revenue growth and market share gains, while maintaining healthy levels of profitability. As we look ahead to the rest of 2019 and beyond, our focus will remain on striking a stable and sustainable balance of growth and profitability. We are fully confident in our ability to deliver attractive, long-term returns for our stakeholders. Thank you.

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 second quarter of 2019. I will quickly summarize some of our key operational updates. On the user front, the number of our household users grew to more than 2.3 million, compared to approximately 2 million as of the end of the first quarter, and approximately 1.2 million as of the end of the second quarter of. In addition, the percentage of our household users owning at least two of our IoT products increased to 16.1% from 15.2% in the prior quarter, further demonstrating the increasing trend of users adopting multiple Viomi products and making the Viomi-connected home a closer reality.

I will now provide a brief review of our second quarter 2019 financial results. In the second quarter, we again achieved significant top-line growth. In addition, we achieved even greater levels of bottom-line growth, as well as net margin expansion, all while maintaining healthy levels of liquidity. As Xiaoping discussed, net revenues increased by 63.6% to 1.16 billion RMB from 709.3 million RMB for the second quarter of 2018, primarily due to the continued successful rollout and significant increases in sales of Viomi-branded products.

Revenues from IoT-enabled smart home products increased by 55.7% to 906 million RMB from 581.7 million RMB for the second quarter of 2018, primarily due to the continued successful rollout of the company's smart kitchen products and other smart products. Within this category, we are pleased to report that revenues from our smart water purification systems resumed healthy growth in the second quarter, achieving 21.2% increase year-over-year to 344.8 million RMB compared to 284.5 million RMB for the second quarter of 2018. The growth was primarily driven by the introduction of new series of smart water purifier products together with overall increases in sales volume.

Revenues from smart kitchen products increased by 61.5% to 351.3 million RMB from 217.5 million RMB for the second 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 163.2% to 209.9 million RMB from 79.8 million RMB for the second 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 38.3% to 69.4 million RMB from 50.2 million RMB for the second quarter of 2018, primarily due to increased demand for the company's water purifier filter products.

Revenues from value-added businesses increased by 138.7% to 184.8 million RMB from 77.4 million RMB for the second quarter of 2018, primarily due to new product introductions together with increased demand for the company's value-added products.

Gross profit increased by 60.8% to 308.3 million RMB from 191.7 million RMB for the second quarter of 2018. Gross margin was 26.6% compared to 27% for the second quarter of 2018. The slight decrease in gross margin was primarily due to shifts in the company's business and product mix. Please also note that gross margins are generally lower on a seasonal basis in the second quarter due to various high-profile online promotional campaigns, such as 618, during the period.

Total operating expenses increased by 45.7% to 211.3 million RMB from 145 million RMB for the second quarter of 2018, primarily due to the growth of the companies. R&D expenses increased by 112.3% to 59.6 million RMB from 28.1 million RMB for the second quarter of 2018, primarily due to an increase in employee-related expenses amounting to 24.2 million RMB.

Selling and marketing expenses increased by 21.3% to 129.5 million RMB from 106.7 million RMB for the second quarter of 2018, primarily due to increases in logistics expenses amounting to 16.2 million RMB, as a result of the growth of the company's business. G&A expenses were 29.2 million RMB compared to 10.2 million RMB for the second quarter of 2018, primarily due to an increase in professional expenses, as well as increases in employee-related expenses.

Net income was 88.9 million RMB, an increase of 117.6% from 40.9 million RMB for the second quarter of 2018. Net income margin was 7.7%, increasing from 5.8% for the second quarter of 2018, primarily attributable to greater economies of scale together with prudent cost-control measures. Non-GAAP net income, which excludes the impact of share-based compensation expenses, was 99.3 million RMB, an increase of 113.7% from 46.5 million RMB for the second quarter of 2018, an acceleration on a quarter-over-quarter basis, again. Non-GAAP net income margin was 8.6% compared to 6.5% for the second quarter of 2018.

Our balance sheet remained healthy. As of June 30, 2019, the company had cash and cash equivalents of 668 million RMB, restricted cash of 22.9 million RMB, short-term deposits of 109.7 million RMB, and short-term investments of 192.7 million RMB.

Now, let's turn to our outlook. For the third quarter of 2019, the company expects net revenues to be between 880 million RMB and 920 RMB, representing year-over-year growth of approximately 55.7% to 62.7%. This outlook is based on current market conditions and reflects the company's latest and preliminary estimates of market and operating conditions as well as customer demand, which are all subject to change. Given the increasing macro uncertainties and current headwinds in the home appliances industry in China, we expect to place greater emphasis on maintaining prudent cost-control measures and return on investments going into the second half.

Nevertheless, with the strong and visible new product pipeline together with an ever-increasing brand awareness and channel penetration, we are confident in our ability to continue to deliver robust growth, as well as stable levels of profitability for the full-year 2019 and beyond.

This 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 * then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press * then 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. At this time, we will pause momentarily to assemble our roster. The first question comes from Lillian Liu of Morgan Stanley. Please go ahead.

Lillian Liu -- Morgan Stanley -- Director

Thanks a lot, management, for the detailed explanation and congratulations on the good results. I have three questions. First of all, is more on the quarter outlook in terms of the strategy because I think in the second quarter there have been significant savings in the SG&A ratio, as management mentioned. Is that something that is going to continue in terms of protecting the gross margin, operating margin, and net margin. So basically, what's the margin outlook for the quarter and the rest of the year? The second question is about further cooperation with Xiaomi, in terms of other home appliance products. How do you see the potential cannibalization between Xiaomi's product and Viomi's home appliances products? Also, can you give us a little bit of detail about the future investment in the IoT and the smart home appliances category? Lastly, a very small technical question is can you give us a little bit of detail on the channel split in the second quarter? Thanks.

Shun Jiang -- Chief Financial Officer

Thanks, Lillian. I'll just address them one by one. So, firstly, on the margin outlook and cost structure, as you can see in the results for this quarter, our operating expenses on a non-GAAP basis was approximately 17% of our revenues during the period, as compared to around 20% in previous periods. The decrease in expense ratio predominantly came from achieving efficiencies in selling and marketing expenses, such as logistics and advertising, and was mainly as a result of successfully realizing economies of scale and implementing prudent cost control measures.

Based on our current business plan and prevailing market conditions, which are subject to change on a dynamic basis, we would expect to place greater emphasis on maintaining this cost-control strategy and return on investments, going into the second half. So accordingly, we would probably target a non-GAAP net margin of around 8%, going into the second half of the year and for the full year.

So your second question on Xiaomi Corporation, as you may have seen, we've launched a number of Mi Xiaomi Home products in the recent months, including the two larger categories of the range hood and stove, as well as recently the sweeper robot. So these two products have actually been very well received by the market. We will continue to launch additional Xiaomi-branded products in the second half of this year and we will discuss with the market in due course, the timing of these as well as the financial impact of these. We very much see a healthy coexistence between Xiaomi-branded as well as Viomi-branded products, even if they're in the same category, as we have historically shown in water purifiers with a distinct categorization, functionality, and price points for these products. So we do see healthy coexistence between the two brands.

In terms of the channel breakdown, in the second quarter, revenue from the Xiaomi channel constituted approximately 40% of our total revenues, with the Viomi and other channels representing the remaining 60%. In terms of non-Xiaomi channels, offline constituted close to one-third and online, two-thirds of the respective revenues. Within the online channels, Youpin and JD each constituted around one-third of the online portion, with the remaining one-third represented by other sales channels, such as Tmall, Suning online, Pinduoduo, as well as our own e-commerce channels.

Lillian Liu -- Morgan Stanley -- Director

Okay, thanks a lot.

Operator

The next question comes from Xudong Chen of CICC. Please go ahead.

Xudong Chen -- CICC -- Analyst

Thank you for taking my question. My first question is about Xiaomi sweeping robots. The company has launched this category for Xiaomi. It seems this category is still growing in the weak market environment. Can you give me more color about this product and the future strategy? My second question is the water purifier seems to have recovered this quarter. What can we expect for the second half in 2019? Since China home appliances market is suffering from the weak macro, what can we expect from Viomi-branded products in the second half? Thanks.

Shun Jiang -- Chief Financial Officer

Thanks, Xudong. I'll just take those one-by-one, as well. So, in terms of the sweeper robots, you're absolutely right. This is very much a growing and nascent market in China that we do see a lot of headroom for future growth. So we recently launched the Xiaomi-branded sweeper robot series, a new category for us. This has already received over 20,000 units in terms of shipments within one to two months, so this is definitely performing very well. As mentioned, we also have a number of Mi Home products coming into the second half. So also just to give you a little bit of color on the range hood and stove. We've also shipped close to 20,000 units of this product category, as well, which also only came online over the past couple of months.

On your second question regarding the water purifiers and the overall revenue development for the second half, as you saw, water purifier growth resumed quite healthy growth. We guided healthy double-digits. We achieved over 20% year-on-year growth in the water purifier market in the second quarter. This was mainly driven by additional new use, so some larger volume products. In the second half, we will also have some additional products, additional SKUs, within the water purifier category, for example, the ultra-thin series that we recently launched.

So I think for the full year, including the temporary decline in the first quarter, as well as the increase or the resumption of growth in the second quarter, you can probably expect around 15% growth for the water purifier category on a year-on-year basis, which is well ahead of the industry growth.

In terms of the Viomi-branded products, given the relatively low base in 2018, the year-on-year growth will still be extremely healthy and we are also continuing to launch new product categories going into the second half. So in terms of Viomi-branded products, we expect well over 100% year-on-year growth for this category.

Operator

Again, if you have a question, please press * then 1 on a touchtone phone. The next question comes from Vincent Yu of Needham. Please go ahead.

Vincent Yu -- Needham -- Analyst

Hey, Xiaoping, and congrats on the strong quarter. So I have a few questions. One, can you share some insights on the bigger strategy behind opening 300 experience stores in this quarter? In addition, it's approaching our annual target, so are we going to lift the target? The second question is around the related consumable sales. So considering the strong smart water purification system sales in this quarter, when we will see the related consumer consumable sales loop in, around fourth quarter or beginning next year? My last question is around our strategy to develop new product lines. Are we going to see SKUs in kitchen use, bathroom use, or home safety? Thanks.

Shun Jiang -- Chief Financial Officer

Thanks. Again, I'll take them one-by-one. So in terms of our store opening schedule, we opened around 300 new stores on a net basis for the second quarter of 2019. This has been relatively on track on our historical store opening speed, so around 100 new stores per month. As we discussed during the call, our target was around 2000 stores for this year. While we expect to continue to open new stores on a gradual basis given strong interest from potential franchisees, we believe that going into the second half, our core focus will be more to emphasize enhancing store profitability and productivity, rather than to increase raw store count.

On your second question on consumables, at the end of last year, there were around 1 million units of water purifier products in the market and we're, obviously, continuing to sell additional units this year. So we estimate that each unit roughly generates around 300 RMB of consumables revenues per year. So I think if you extrapolate that, the 1 million units should be able to generate around 300 million of consumables revenues for this year and on an ongoing basis, the consumables revenues will ramp up per the increasing in-store base.

On your third question on new product development, if you look at our product portfolio, we pretty much cover the entire range of large appliances, or wide, good products in the home environment, already, which is very much a part of our product positioning and to be able to provide an integrated IoT @ Home experience to our users. This large appliance focus positioning is then complemented by our very small appliances and smart devices to further enhance connectivity and overall user experience. So our strategy in the short-term will be to continue to build-out additional SKUs within pretty much all of our existing product categories to cover a wider range of consumer demand and price points. We will, however, update the market in due course if we intend to enter into any new product categories on a large scale or material nature down the road.

Vincent Yu -- Needham -- Analyst

Got it. Thank you.

Operator

Again, if you have a question, please press * then 1. 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 today. If you have further questions, please feel free to contact Viomi's Investor Relations department through the contact information provided on our website or the Piacente Group, the company's investor relations consultant. Thank you, all.

Shun Jiang -- Chief Financial Officer

Thank you, everyone.

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

Thank you.

Operator

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

Duration: 34 minutes

Call participants:

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

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

Shun Jiang -- Chief Financial Officer

Lillian Liu -- Morgan Stanley -- Director

Xudong Chen -- CICC-- Analyst

Vincent Yu -- Needham -- Analyst

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