Viomi Technology Co Ltd (VIOT) Q2 2020 Earnings Call Transcript

Viomi Technology Co Ltd (VIOT 3.29%)
Q2 2020 Earnings Call
Aug 24, 2020, 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 earnings conference call for the second-quarter 2020. [Operator instructions] Today's conference call is being recorded. I will now turn the call over to your host, Ms. Cecilia Li, the senior IR manager of the company.

Please go ahead, Cecilia

Cecilia Li -- Investor Relations Contact Officer

Thank you, operator. Hello, everyone, and welcome to Viomi Technology Call Limited earnings conference call for the second-quarter 2020. As a reminder, this conference is being recorded. The company's financial and operating results were issued in press release earlier today and are posted online.

You can download earnings press release and sign up for the company's email distribution release 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. 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 annual report on Form 20-F and other filings as filed with the U.S. Securities and Exchange Commission. The company doesn't assume any obligation to update any forward-looking statements except as required by law.

Please also note Viomi's earnings press release and this conference call also include discussions of unaudited GAAP financial information, as well as, unaudited non-GAAP financial measures. Viomi's press release contains a cons -- reconciliation of auditing 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 -- Founder, Chairman of the Board of Directors, and the Chief Executive Officer

[Foreign language]

Shun Jiang -- Chief Financial Officer

Thank you, Xiaoping. This is Shun, Viomi's CFO. I will quickly translate Mr. Chen's remarks before providing an operational update and discuss our financial performance for the second quarter of 2020.

Hello, everyone. Thank you for joining our second-quarter 2020 earnings conference call. We saw meaningful improvements in operating conditions in the second quarter, as both the industry and the overall economy continued to rebound from the impact of COVID-19 earlier this year. Driven by a robust 618 sales season combined with successful new product launches such as Viomi-branded air conditioning systems, we are pleased to report that our second-quarter revenues reached more than RMB 1.68 billion, representing a year-over-year increase of 45.2%, significantly stronger than expected.

Although the first half of 2020 was challenging, the recent 618 online shopping festival and related promotional event have shown positive signs of an overall industry recovery trend. We achieved our best ever performance during the respective 618 sales season, more than doubling related retail sales value across our entire product range on a year year-over-year basis. Various products such as refrigerators, washing machines, and air conditioners are ranked among the top 10 in terms of GMV on certain online e-commerce platforms. Such resilient and strong performance further demonstrates our ever-increasing brand awareness and market penetration, as well as, consumers and sales channels ever-growing interest in our products, concepts, and value proposition.

The backbone of our constant growth has been our continued product innovation and new product launches under our IoT @ Home strategic framework. With this recent successful introductions of our air conditioning systems and 21Face interactive Smart Screen TV, we now have a comprehensive presence across the entire range of major scenarios in the home environment. We also continue to make significant progress in the development and optimization of our 5G initiatives during the quarter. Two models of our recently launched 21Face interactive Smart Screen TVs are already on the market.

In addition, we expect to soon begin mass production of our WiFi 6 CPE, together with other exciting 5G-related and enabled products in the second half of this year. With ever-increasing 5G network penetration and consumer adoption, this will no doubt be one of the key transformational drivers of the industry growth in the near-term and beyond. We believe our differentiated product and brand position together with our focus on technology R&D in this space will allow us to become a front runner in this imminent 5G plus IoT era, providing seamless next-generation 5G IoT experience to our users. In terms of such user experiences, we have achieved numerous advancements in developing additional content applications and partnerships for our flagship 21Face large-screen refrigerators.

We recently launched a significant upgrade of our 21Face refrigerator large-screen operating system, including additional content offerings such as short-form video recommendations, gourmet recipes, and parenting workshops among others, together with a number of voice recognition and user experience enhancements. On this front, we have also established a number of related cooperation partnerships. In July, we entered into a strategic collaboration agreement with Kugou Music, a leading interactive digital music-related services provider and subsidiary of the Tencent Music Entertainment Group to offer innovative and trending music streaming content. Viomi's users can now enjoy Kugou Music offerings on 21Face large-screen refrigerators and enjoy relevant recommendations in smart play through voice control.

Such partnerships are in line with our 5G IoT strategy and will enrich our content offerings, as well as, enhance the cost scenario and cross screen content interactivity of Viomi's various large-screen products. To provide innovative and exciting content for the imminent 5G plus IoT era, we will continue to seek strategic partnerships with entertainment and social media platforms. We believe these collaborations will help further increase our user stickiness, create additional potential monetization channels, and further differentiate us from our peers. We have also continued to expand and diversify our sales channels through additional partnerships.

In July, we entered a strategic collaboration with Hunan Friendship & Apollo Commercial Co Limited, a large-scale Hunan-based retail group, an Asia listed company for the promotion of our products. The integration of brand and channel resources, as well as, the implementation of IoT @ Home solutions. Friendship & Apollo Commercial Co Limited will introduce our IoT @ Home product portfolio and open large-scale 5G IoT smart home experience stores, promoting the development of local homes modification. In addition, we also established a partnership with [Foreign language] Technology Co Limited, a technology company in the intelligent laundry industry in China to introduce Viomi-branded washing machines across a broad spectrum of scenarios, including schools, apartments, communities, and hotels.

Such partnerships will continue to help us diversify our channel presence, improve the customers' shopping experience, as well as, strengthen our overall brand awareness and market penetration. It is also a testament to these potential partners increasing recognition of our value proposition, as well as, our overall IoT @ Home brand and product position. Looking ahead to the second half with a broader rebound in market demand, together with the ramp-up of many of our newly launched products, including air conditioning systems, as well as, the next-generation Viomi-branded water purifiers and various small home appliance products, we have -- we have the foundation to further strengthen our industry positioning, enhance our brand recognition, and deliver attractive returns. To this end, we implemented our 2018 share incentive plan in the second quarter to attract and retain the best available personnel, provide additional and aligning incentives with our employees, and promote the success of our business for the years to come.

Having successfully navigated such challenging market conditions in the first half of 2020, in the second half, first, we will continue to focus on dynamic business practices, stable cash flows, and undertake prudent risk controls to achieve high-quality, sustainable growth under our 5G IoT strategic framework. Second, we will undertake further initiatives in positioning our key business units to enhance an operational efficiencies and provide more attractive and effective incentives. Last, we will strive to create further -- greater synergies and economies of scale across the entire Viomi group, shaping our corporate culture to create a strong foundation and large-scale platform for future success stories in the many years to come. We are now more confident than ever in achieving our 3511 long-term objectives, our road map to becoming a large-scale, high-tech leader in the IoT @ Home space.

That concludes our founder's comments. I will now provide an operational update and discuss our financial performance in the second quarter of 2020. Despite the lingering impact of COVID-19, as well as, ongoing macro uncertainties, we achieved revenues that significantly exceeded our expectations and again, demonstrated the resilience of our business and our ability to identify and capture attractive growth opportunities. Our profitability remained relatively stable, as compared to the first quarter, as we continued the implementation of various cost and expense control initiatives during the quarter, mitigating the margin impact of promotional acti -- promotional campaigns and sales events such as the 618 online shopping festival.

The number of Viomi offline stores remain at around 1,500 in the second quarter, relatively stable compared to the end of the first quarter. Our cumulative household users reached more than 4.2 million. Now let's turn to the detailed financial review of our second-quarter results, as well as, the outlook for the third quarter. As Xiaoping discussed, net revenues were RMB 1.6 billion, an increase of 45.2%, compared to the same period of last year.

Revenues from IoT-enabled smart home products increased by 46.7% to RMB 1.3 billion from RMB 906 million for the second quarter of 2019, primarily due to successful launch and continued rollout of certain new product categories. Within this category, revenues from our smart water purification systems decreased by 22.6% to RMB 266.8 million. The decline was mainly due to decreases in average selling prices, which offset the continued year-on-year growth in sales volumes. Going forward, we expect the impact of like-for-like decline in average selling prices of water purifiers to be more moderate and the category is likely to return to positive revenue growth in the second half, driven by continued volume growth of Xiaomi branded caps, together with the ramp-up of newly launched next-generation Viomi-branded water purifiers.

Revenues from smart kitchen and other products increased by 89.3% to RMB 1.06 billion. The revenue growth was primarily driven by the successful launch and continued rollout of certain products. In particular, the pilot launch of our air conditioning systems, which are particularly well received by the market, as well as, the strong performance of Xiaomi-branded sweeper robots. Revenues from consumable products increased by 24.6% to RMB 86.5 million, primarily due to the increased demand for our water purifier filter products.

Revenues from value-added businesses increased by 45.5% to RMB 268.8 million from RMB 184.8 million for the second quarter of 2019, primarily due to the new product introductions together with increased demand for our small appliance products. Please note that from the next quarter, we will update the naming of our various product categories as follows: smart water purification systems will be renamed as home water solutions, smart kitchen and other smart products will be renamed as it IoT @ Home portfolio, consumable products will be renamed as consumables, and value-added businesses will be renamed as small appliances and others. Hence, going forward, our revenue breakdown will comprise of the following categories in the following order: one, our IoT @ Home portfolio; second, home water solutions; three, consumables; four, small appliances and others. We believe these updates will provide investors with a clear understanding of our core businesses.

There is no revenue reclassification associated with this particular update. Future category results will be directly comparable to their respective previously named categories. Moving on, gross profit was RMB 241 million and gross margin was 14.3%, compared to 26.6% for the second quarter of 2019. The decline in gross margin was primarily due to shifts in our company's business and product mix, including the pilot launch and related promotional campaigns of our air conditioning systems, together with decreases in average selling prices of certain product categories during major sales teams, including smart water purification systems in the quarter.

The first half of this year was quite unique due to the unprecedented industrywide impact of COVID-19. Based on the trends we are currently seeing, we do expect gross margin in the second quarter of 2020 to be a trough -- to a trough and expect to achieve a degree of gross margin uplift in the second half, driven by a recovery in overall industry conditions, general premiumization of our product portfolio, and an increase in average selling prices as compared to the first half. Total operating expenses increased by 13.3% to RMB 239.4 million, primarily due to the growth of our business and an increase in share-based compensation of RMB 20.9 million, which is partially offset by the continued implementation of expense control initiatives during the quarter. We incurred share-based compensation expenses of RMB 31.2 million in the second quarter of 2020, as compared to RMB 10.3 million in the second quarter of 2019.

The increase in share-based compensation expenses was due to the implementation of our 2018 share incentive plan during the quarter from which we awarded approximately 15.6 million share options to certain employees, a small portion of which were immediately vested. In more detail for operating expenses, R&D expenses increased to RMB 60.7 million from RMB 59.6 million for the second quarter of 2019, primarily due to an increase in share-based compensation expenses of RMB 17.5 million to attract and retain research and development personnel, which is partially offset by continued implementation of expense control initiatives during the quarter. Selling and marketing expenses increased by 25.2% to RMB 162.1 million, primarily due to an increase in logistics and promotional expenses as a result of the growth of the company's business. G&A expenses decreased by 25% to RMB 16.7 million, primarily due to continued implementation of expense control initiatives during the quarter.

Total operating expenses as a percentage of revenues was 14.2%, compared to 18.2% for the second quarter of 2019. Excluding the impact of share-based compensation expenses, total operating expenses as a percentage of revenues was 12.4%, as compared to 17.3% for the second quarter of 2019. The decline in expense ratio was predominantly due to greater economies of scale and operating efficiencies, as well as, the continued implementation of our various expense control initiatives. Net income was RMB 10.3 million, compared to RMB 88.9 million for the second quarter of 2019.

Non-GAAP net income, which excludes the impact of share-based compensation expenses was RMB 41.5 million compared to RMB 99.3 million for the second quarter of 2019. Additionally, our balance sheet remains healthy. As of June 30, 2020, we had cash and cash equivalents of RMB 634.2 million, restricted cash of RMB 45.4 million, short-term deposits of RMB 72.6 million, and short-term investments of RMB 294.3 million. In total, over one point -- over RMB 1 billion worth of liquid assets.

Now let's turn to our outlook. While future industrywide uncertainties and challenges will be difficult to fully predict, based on our assessment of latest industry trends, we are cautiously optimistic that our financial strength, operational flexibility, and strategic direction will allow -- allow us to continue delivering robust growth in the second half. For the third quarter of 2020, the company currently expects net revenues to be between RMB 1.4 billion and RMB 1.45 billion, representing a year-over-year growth of approximately 30.8% to 35.5%. The above outlook is based on the current market conditions and reflects the company's current and preliminary estimates of market and operating conditions and cost of demand which are all subject to change.

This concludes our prepared remarks. We will now open the call for Q&A. Operator, please go ahead.

Questions & Answers:

Operator

[Operator instructions] The first question today comes from Hanli Fan of Morgan Stanley. Please go ahead.

Hanli Fan -- Morgan Stanley -- Analyst

[Foreign language] and thanks for the management. It's Hanli Fan from Morgan Stanley. I have three questions here. The first one is that can management help us update recent business operations, particularly, in July and August? What's the recovery pace? Could you also elaborate a bit into the offline recovery and also the online channel? And my second question is that in the small appliances business, there are some newly launched kind of like niche products, for example, like, the yogurt machine, newer machine, something like that, they were pretty well sold during the virus COVID-19.

So how's Viomi's preparation into these types of kind of niche products and what's your kind of strategy into these small appliances? And my third question is about the net profit margin. So net profit margin at a non-GAAP level is 2.4% in this quarter, primarily coming from the gross profit margin decline. So could you give us kind of like outlook guidance regarding the future net profit margin, putting into the context of gross profit margin, as well as, the expense ratio? That's my question. Thank you.

Shun Jiang -- Chief Financial Officer

Yeah, thank you Hanli. I'll take your questions one by one. So first question's on sales recovery and channel performance. So since the February lows, there has been a noticeable month-on-month recovery in sales performance across online, as well as, offline channels.

For online channels, the year-on-year recovery has been most evident since beginning around May, where we started to re enjoy very healthy double-digit year-on-year growth. For Viomi-branded products, the key drivers have been the various strategic products, water purifiers, as well as, small appliances, as well as, of course, our air conditioning systems. For offline channels, year-on-year growth has reemerged since around June and has continued to accelerate into July. Together with our offline channel partnerships, as well as, new stores and points of sales, we are cautiously optimistic about the continued recovery of our offline sales channel performance going into the second half.

We haven't really seen any slowdown in online channels heading into July or August or either. I think the Viomi-branded product sales through online channels, as discussed, more than doubled across the 618 sales season has continued similar levels of strong performance heading into the third quarter, albeit, off a relatively low base in 2019. I think if you look at our quarterly performance in 2019, it was more volatile and you should expect a smoother quarter-on-quarter performance this year. Nevertheless, I think based on the current trends, we expect strong performance as we have guided for the third quarter, continuing -- going deeper into the second half and into the double-eleven shopping festival toward the year end.

So strong performance across both offline, as well as, on online channels based on current indicators in the third quarter so far. Now the second question based on -- excuse me, second quarter based on, the question on small appliances. So as you can see, by -- with the performance of our value-added businesses or soon to be renamed to the small appliances and others category. Small appliances have indeed performed very well in the second quarter, as well as, the first half of 2020 in general due to your -- I've mentioned trend.

The segment experienced close to 50% year-over-year growth in the quarter. Some of the key product category -- some of the key products within this category includes, say, fans, vacuum cleaners, water dispensers, blenders, kettles, and of course, sweeper robots. So all quite popular products for the stay-at-home dynamic in the first half. Small appliances, in addition, will be a key growth category for our company going forward and we have formed a specialized team focusing on trend setting smaller clients product innovation and development.

We believe there are significant growth and market opportunities to be captured in this space and we'll be devoting the necessary resources to create the appropriate incentives to ensure this initiative will become a success. So we look forward to sharing more progress with the market on this aspect in the quarters ahead. So we're quite excited about small appliances potential going forward. In terms of your third question on net margins, I think while a lot of uncertainties remain, I think we can definitely say that the performance trends in the second quarter, as well as, heading into the third quarter have been quite positive and ahead of expectations in the third quarter, not only from a revenue growth perspective, but I think also from a margin perspective.

In terms of gross margins, as we discussed earlier, we do expect gross margin in the second quarter of 2020 to be a trough and do expect a degree of gross margin uplift in the second half. The key drivers of this are recovering industry conditions, so less price competition, the general premiumization of our product portfolio, and an increase in selling prices, as compared to the first half. So I think if you want to look at the overall net margin for the second half, while the exact uplift will be I think it's a little bit too early to predict at the current time. You should expect some degree of uplift from what you saw in the second quarter of this year.

Xiaoping Chen -- Founder, Chairman of the Board of Directors, and the Chief Executive Officer

[Foreign language]

Shun Jiang -- Chief Financial Officer

Sure and Mr. Chen would just like to supplement the response for these two questions. In terms of the small appliances, we have also noted that the industry was growing very quickly and especially for some of these niche products. I think we would like to reemphasize that small appliances will definitely be a key strategic focus for us and our team is definitely focusing on growing our market presence and penetration within this category.

But I think in terms of our core focused products, we will more likely be focusing on some of the more mainstream small appliances category with larger addressable markets to imprint our presence, as well as, our brand in the near-term as a core focus rather than some of the more niche categories as Hanli identified. And also to supplement the response with regards to profit margins and profitability, I think just to add, as you have seen with our growth performance in the second quarter, as well as, guidance for the third quarter, top-line growth and market share gains will continue to remain our number one priority, at least for the near to medium term. Of course, we are also implementing various cost and expense control initiatives to ensure a healthy level of profitability, and do expect a degree of margin uplift in the second half, as compared to the second quarter. But I think it needs to be emphasized that as a rapidly growing company with a quite differentiated value proposition, as compared to some of the more traditional peers in the market, our core focus will continue to be top-line growth in the near to medium term.

Operator

Next question comes from Xudong Chen of CICC. Please go ahead.

Xudong Chen -- CICC -- Analyst

[Foreign language] Thank you for my question. My first question is, what can we expect for your new product launch in your second half? Since your first half, you have great success in your Viomi-branded air conditioning system and your 21Face Smart Screen TV, what can we expect for the second half? That's my first question. And my second question is you have your collaboration agreement with Kugou Music, and could you give me more color about this collaboration? Thanks.

Shun Jiang -- Chief Financial Officer

Yeah. So I'll answer the first question on the second-half key growth drivers as well -- uh, Mr. Chen will take the question on the Kugou Music partnership and some additional content collaboration opportunities. So I think in the second half, you should expect expect several trends, right? One is the kind of the continued ramp-up of some of the new product categories we launched early in the first half as you may have seen during our major product launch event in May.

So some of the key products that we mentioned here are, of course, our air conditioning systems, a lot of new next-generation Viomi-branded water purification systems, as well as, an overall kind of overall upgrade and premiumization, as well as, SKU expansion, around pretty much entire product range, right? I think in the second half across our key categories such as the refrigerated and washing machines, we will be more focused on higher ASP and SKUs, as well as, additional kind of -- additional specific use SKUs or specialized SKUs that will encompass higher margins, as compared to what we were initially focused on when first launched these categories, whereas, perhaps some lower ASP products to gain the market share. So in terms of in terms of -- in terms of new product launches, we do expect quite a number of new SKUs to come on to the market in the second half. In terms of our key categories, I think what we have now at least for the near-term, is pretty much a complete IoT at home portfolio, right, across the major appliances categories within the market. I think there's ample room for expansion still in terms of brand and channel penetration, as well as, SKU expansion and optimization.

But I think categories, we do have a lot of room for growth organically in that sense as well. So second half, I think, overall recovery -- overall industry recovery, as well as, SKU expansion and ramp-up of some of the newly launched products will be the key drivers of growth. And Mr. Chen will answer the second question on the Kugou Music and other content-related partnerships.

Xiaoping Chen -- Founder, Chairman of the Board of Directors, and the Chief Executive Officer

[Foreign language]

Shun Jiang -- Chief Financial Officer

Yeah. So I think the partnership with Kugou and other related partnerships that's including live stream -- live streaming and content partnerships that we expect to be announcing shortly. The idea of this is to increase the content, as well as, enhance the user experience that people -- that users can engage with our product, right, for example, the 21Face large-screen refrigerators. Obviously, a key point-of-sale for these refrigerators is what they can provide outside the core kind of refrigeration capabilities in terms of content, data collection, control, entertainment, and whatnot.

And the overall idea of this to continue to increase engagement, increase the overall smartification of these products within our overall IoT @ Home framework. So I think based on the initial data that we've collected, the engagement has been very positive. The trends are definitely very encouraging and we hope to continue to collect and improve some of these data metrics as we continue to -- continue to adopt more kind of these content partnerships and user enhancements going forward. I think we will continue to collect such data and we'll share with the market in the coming quarters once the data is a little bit more refined and mature.

So we are very excited about these various initiatives.

Xudong Chen -- CICC -- Analyst

[Foreign language] Congratulations for the strong revenue growth this quarter. Thanks.

Shun Jiang -- Chief Financial Officer

Thank you.

Operator

Next question comes from Vincent Yu Needham & Company. Please go ahead.

Vincent Yu -- Needham and Company -- Analyst

Thank you [Inaudible] for taking my question and congrats on a strong quarter. I have three questions. Two -- the first two are quite like more general questions. One is which -- in which product line the company see the most growth potential toward second-half 2020? And the second question is, our view on how home appliance consumer demand will trend during the second-half 2020? And my third question is a follow-up on the question, the refrigerator cooperation with these Internet -- other Internet companies, like on what screen of the refrigerator, if the users are, like, example, watching advertisements or going to open a membership on IGE or Gogo, are we're going to share revenue on these activities? Also, is an -- is that possible to share on how we cooperate with the fresh food e-commerce companies, like are they other customer ordering refreshed foods on our refrigerated screen, like, what -- like, generally, how much -- like, what kind of, like, revenue-sharing mechanism will work? [Foreign language]

Shun Jiang -- Chief Financial Officer

Yeah. Thanks, Vincent. I'll take your questions. First question with regards to which product line the company sees most potential in the second half.

I think in terms of like-for-like growth versus last year, of course, air conditioning -- air conditioners is a relatively large product category and as the new product introduced for this year will be a significant contributor to year-over-year growth. But nevertheless, I think based on the trends we are seeing in July and heading into August, growth is recovering across nearly the entirety of our product lines, especially for some categories that were lagging in previous months, such as our refrigerators and washing machines. Additionally, as discussed, we're placing significant emphasis on next-generation Viomi-branded water purifiers, as well as, trend setting -- various trend-setting small appliances products and expect these categories to add a new layer of growth for the upcoming quarters as well. Your second question on views on household appliances or consumer demand will trend during the second half.

I think, if we look at the performance of some of our peers that have reported their first half results, as well as, some of the major online retailers and together with their overall consumption outlook, I think the tone is generally relatively positive, definitely as compared to, say, earlier in the year with the worst of the impact of COVID-19 in the past. Although uncertainties and challenges will definitely continue to remain in the second half, as mentioned, based on the current trends that we're seeing, we are cautiously confident in the continued and sustained rebound in overall consumption demand in the second half. Thirdly, on the kind of the monetization opportunities for some of these internet services initiatives. I think, look, there's a lot of options and past monetization, right, whether it's revenue split, kind of advertising revenues, or kind of other user engagement channels and whatnot.

I think the core focus for us at the moment is to enhance the user experience and build out our user base. I think that is what we're -- that is going to be our core focus and ties into what Mr. Chen mentioned earlier on how near to medium-term focus will continue to be on top-line growth, as well as, market share gains, right? This concept of building out our installed base. This will be key to kind of make mainstream our product concepts, as well as, gain recognition, as well as, being able to engage into more of these content partnerships and relationships and offer its users this unique experience and value proposition.

And then after this initial phase, we can then think about kind of the various monetization opportunities that you mentioned, right. We have various ideas, but I think at the moment, we shouldn't expect too material of such services-related revenues. I think the metrics that we're -- that most keeping track of is, of course, installed base and user stickiness, as well as, user activity will be our core focus for the near-term. I think as the installed base continues to grow and becomes more mature, and then, I think we'll have many options available to us as to how to best create our monetization plan.

Xiaoping Chen -- Founder, Chairman of the Board of Directors, and the Chief Executive Officer

[Foreign language]

Vincent Yu -- Needham and Company -- Analyst

Thank you.

Shun Jiang -- Chief Financial Officer

Mr. Chen just wanted to reemphasize just a couple of points, right, I think on the first couple of questions. As discussed, small appliances, it's going to be definitely one of our key growth categories going forward and even in larger appliances, right. Given the impact of COVID-19, we're definitely seeing a transformational stage within the industry, where people or consumers and users are more focused on kind of enhancing the home living lifestyle, paying more attention to, say, the user experience of such products, and more kind of engage with our products with these next-generation IoT product -- IoT capabilities.

So this definitely presents a good opportunity for us and is reflected in the trends that we saw in the second quarter, as well as, heading into the second half. And last question on the monetization opportunity and just to reemphasize again, the near-term focus will be to build out our installed base. And then, there's several or many kind of monetization avenues going forward, including advertising revenues, GMV, revenue sharing for subscriptions, or whatnot that we look forward to exploring down the road. OK.

The next question, please.

Operator

The next question comes from Robert Cowell of 86Research.

Robert Cowell -- 86Research Ltd. -- Analyst

Hey, management, thanks for taking the time. So I wanted to ask about the share-based compensation in the second quarter. It looks like you all significantly stepped up the SBC there. And it makes sense given the situation that we use share-based compensation as a way to retain some of the important members of the team.

I guess on this front, I want to ask, if you can provide any more color on the structure of the grant that you all provided in the second quarter. So the first would be about the number of participants or if you could provide any more specifi -- specificity as to specifically which teams or departments are getting to compensate this SBC? And then also on vesting schedule and strike prices, if you could provide any, maybe, an average strike price or some sort of color on either of those fronts, it would be helpful for us to better understand the [Inaudible] in that plan.

Shun Jiang -- Chief Financial Officer

Yeah. Thanks, Robert. So as discussed, we issued around 15.6 million options to approximately 100 employees, so quite a diverse plan. These uh -- these employees predominantly were in the R&D teams, as well as, certain management personnel, predominantly R&D-focused personnel, right.

In terms of the kind of the terms of these options or the incentive plan as disclosed in our prospectus, as well as, the 20-F annual report, these are five-year vesting period incentive plan with 40% of the of the amount issued matured after two years. So zero after one year, 40% after two years, and then, 20% for the next three years accumulating to the entirety of the plan. The average strike -- or the average kind of exercise price is around USD 0.55 to USD 1.1 per share, which translates into or translates into $1.65 to $3 or $3.30 per ADS, right, so these are relatively in the money options. A small portion of these were vested, so just over $1.5 million were vested immediately.

So some backdated options to certain management employees that were hired a few years earlier. I think the -- I think the overall impact on our share-based compensation expense line item while outside this quarter, should not be too different from what we had historically expensed. The historical SP expense was predominantly due to -- predominantly arose from the amortization of our 2015 share option plan which has now largely been fully amortized. So now, this 2018 share option plan is in essence replacing the 2015 share option plan.

Now in this particular quarter, the expense was slightly outsized due to the kind of the immediately amortized portion that were expensed kind of on a one-off basis. I think over the second half of this year, you should expect around, say, $40 million of SBC expenses in relation to the 2018 plan, subject to, of course, exchange rates or any forfeitures. And so, on average around $20 million per quarter and probably slightly decreasing over time given the amortization schedule.

Robert Cowell -- 86Research Ltd. -- Analyst

Thank you. That's very helpful.

Operator

At this time, we show no further questions and I would like to turn the conference back over to management for closing remarks.

Cecilia Li -- Investor Relations Contact Officer

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, everyone. Have a good day and night.

Operator

[Operator signoff]

Duration: 58 minutes

Call participants:

Cecilia Li -- Investor Relations Contact Officer

Xiaoping Chen -- Founder, Chairman of the Board of Directors, and the Chief Executive Officer

Shun Jiang -- Chief Financial Officer

Hanli Fan -- Morgan Stanley -- Analyst

Xudong Chen -- CICC -- Analyst

Vincent Yu -- Needham and Company -- Analyst

Robert Cowell -- 86Research Ltd. -- Analyst

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