Viomi Technology Co Ltd (VIOT) Q4 2020 Earnings Call Transcript

Viomi Technology Co Ltd (VIOT -0.11%)
Q4 2020 Earnings Call
Mar 25, 2021, 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., Ltd's fourth-quarter and full-year 2020 earnings conference call. [Operator instructions] Today's conference call is being recorded. I will now turn the call over to your host, Ms.

Cecilia Li, senior IR manager of the company. Please go ahead, Cecilia.

Cecilia Li -- Senior IR Manager

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

You can download the earnings press release and sign up for our email distribution list by visiting the IR section at our website at ir.viomi.com. Our founder, chairman of the board of directors, and chief executive officer, Mr. Xiaoping Chen, will begin with prepared remarks; and head of our finance team, Mr. [Inaudible], will join the 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 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 our 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 mostly 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 Chief Executive Officer

[Foreign language]

Cecilia Li -- Senior IR Manager

Thank you, Mr. Chen. I will quickly translate up on his remarks before discussing our financial performance for the fourth-quarter 2020. Hello, everyone.

Thanks for joining our fourth-quarter and full-year 2020 earnings conference call. We delivered robust full-year growth of 25.3%, despite macroeconomic uncertainties and the challenging environment for the whole industry. In line with what we communicated on that earnings call, we executed on our quality growth strategy in the fourth quarter, optimized our business and product mix, and further improved our business operations, realizing a meaningful recovery in gross margin. Gross margin for the fourth quarter increased to 23.5% from 17.1% for the third quarter of that year and 19.9% for the fourth quarter of 2019.

We will continue to execute on this growth strategy and invest more resources in branding and R&D for our IoT products, as well as our services team. In recent years, we have seen the momentum in the IoT industry continue to develop with intensity. We see the home scenario to be a key application area with holistic IoT solutions based on health services and hardware to be a flourishing channel in this industry. In the past two years, we have been developing a 5G IoT home structure, which integrates technology framework, sensors, AI algorithms, [Inaudible] modules in the smart hardware to deliver cross-product and cross-scenario interactions through our IoT protocol and modules.

As an important part of our quality growth strategy and focus with our R&D, we continue to roll out more diversified new products with a focus on the seamless integration of AI and IoT technology. Our innovative SKUs with higher margin and higher average selling prices are main drivers of our gross margin uplift. In the past months, we have introduced Super and Vision series of water purifiers under our new premium water purifier sub-brand Quanxian, new SKUs of 21Face 5G large-screen refrigerators, EyeBot AI washing machines, as well as the New Wind AI washer-dryers, together with a series of smart home devices, including the 5G IoT CPE products, routers, and IoT chips. In particular, in the water purifier sector, in order to address demands of users, as well as tackle environmental protection concerns, we applied innovative double reserve osmosis technologies to realize larger flux and improve water purification efficiency.

Further, we will soon introduce a new high-end water purifier, which leaves beneficial minerals in the water during the purification process, allowing us to meet user demand when it comes to human health. Our innovations in water purification technologies have been highly recognized by industry experts. Last week, a group of experts from professional and academic organizations, including the China Association for Quality Inspection, Chinese Academy of Engineering, and the Engineering School of Tsinghua University participated in assessment of two of our water purification technologies. The result of this assessment was that our technology were recognized as industry-leading with the potential for its further application in the water purification area.

Immediately after this assessment group, channel of mineral water purifier for household and similar purposes was officially launched. The successful launch in domestic and overseas rapid development of our new Viomi-branded sweeper robots was also a key pillar of our overall profitability improvement. In the fourth quarter, we expanded a dedicated sweeper robot team, commenced the sweeper robot manufacturing in our own factory. What came out of this was the development and introduction of auto dust collection sweeper robots such as Alpha series.

With the success of export of this sweeper robots and its growth momentum, we will continue to roll out more differentiated SKUs and expand into more domestic and global markets. We are also seeking to provide more comprehensive IoT housing solutions, consisting of IoT product experiences, services, and internet content. With regards to our value-added content business, we introduced a series of service packages, including software updates, product maintenance services with purchase discounts, as well as Internet entertainment content. We continue to upgrade our large-screen refrigerator operating system, following our cooperation with Douyin, Kugou Music, ITE, Ximalaya, and Douguo.

We recently expanded cooperation with additional third-party platforms to further enrich our large-screen Internet resources, create differentiated kitchen scenario experience, as well as increase user stickiness. Leveraging our investment and endeavors in R&D, we have achieved solid performance in patent innovation. As of the end of last year, the number of our accumulative domestic and global patent application had reached over 3,000, among which over 2,400 were already registered. End of January, we were recognized as one of top 100 innovative companies in Guangdong, further demonstrating our technology recognition in new consumer IoT market.

As we progress into 2021, we have continued to execute on our quality growth strategy through the introduction of new high-end products, optimization of product lines, and phasing out specific SKUs with lower margins. We will also invest more resources in branding and R&D for our IoT products, as well as the IoT service system to optimize our 5G IoT Home system and user experience. With a focus on AI and smartification, we will launch more new products, including the water purifiers, sweeper robots, air conditioners, and smart home products. Among others, in our upcoming Spring new product launch event in the early April.

Further, we will optimize our off-line service system and expand off-line sales and experience channels to realize meaningful business expansion from terminal sales to user operations. All of this product and technology innovation, IoT experience, as well as the service optimization are the key drivers of our long-term development. The construction of China's 5G infrastructure has demonstrated rapid development. An era of the commercial application of IoT is on the way.

According to data released by IDC, 85% of devices will be connected to the Internet and 15% will be connected to IoT by 2022. It was pointed out in the guidelines for construction of the National AI Standards System, launched by the Ministry of Industry and Information Technology and other national official departments in last July that smart home product and application will be promoted as one of the important industries in this area. We believe that with the rapid application of 5G and the continuous improvement of smart home ecology, IoT will be applied in more and more home scenarios. We are confident in our leading position in this industry, as well as our capabilities to deliver robust and stable growth while maintaining a healthy level of profitability, bringing long-term value to our shareholders.

That concludes our founder's remarks. Let's now turn to the detailed financial review of the fourth-quarter 2020, as well as the outlook for the first-quarter 2021. The net revenues were RMB 1.89 billion, representing year-over-year increase of 8.5%. The growth was slightly below our previous guidance by just around 0.6% primarily due to the proactive step to stop the sales of some specific products with lower average selling prices and lower gross margins, such as some low-end refrigerators and washing machines, in order to make room for the launch of a slate of new large-screen refrigerators and high-end washing machines, as well as to improve the profitability.

Revenues from IoT @ Home portfolio increased by 15.7% to RMB 1.11 billion from RMB 963.7 million for the fourth quarter of 2019, primarily driven by the sustained sales increase for certain new product categories, in particular, our sweeper robots. Viomi-branded sweeper robot business is expected to make greater contribution in 2021. Revenues from our home water solutions decreased by 5.9% to RMB 363 million. The decline was primarily due to the decreases in the average selling prices of our Xiaomi-branded water purifiers products.

This was partially offset by the successful introduction and increased sales of our new series of Viomi-branded water purifier products, which narrowed the year-over-year decline for home water solutions compared to the previous quarter. Viomi-branded water purifiers are expected to make greater contribution in our home water solution business, as well as our total net revenues in 2021. Revenues from consumables increased by 69.3% to RMB 160.2 million primarily due to increased demand for our water purifier filter products. Revenues from small appliances and others decreased by 15.5% to RMB 251.2 million primarily due to product portfolio optimization for higher gross margin in this category.

Gross profit increased by 28% to RMB 443.8 million, and gross margin was 23.5% compared to 17.1% for the third quarter of last year and 19.9% for the fourth quarter of 2019. The quarter-over-quarter and year-over-year increases in gross margin were primarily driven by our efforts to shift the business and product mix toward higher gross margin products, including the rollout of our new Viomi-branded water purifiers and sweeper robots, alongside the optimization of margins across product lines. As Mr. Chen discussed, the meaningful recovery in gross margin was in line with our quality growth strategy, demonstrating our business flexibility and strong execution capabilities.

As we continue to phase out our lower-margin products and focus our efforts on generating greater revenue contribution from higher-margin product categories and SKUs, we do expect to experience not full degree of gross margin recovery in 2021. The total operating expenses increased by 21.3% to RMB 331.8 million primarily due to the growth of our business, as well as increases in R&D expenses and selling and marketing expenses. In more detail, R&D expenses increased by 41.8% to RMB 93.1 million. Selling and marketing expenses increased by 17.3% to RMB 217.4 million.

G&A expenses decreased by 5.7% to RMB 21.3 million. The net income attributable to ordinary shareholders of the company increased by 23.3% to RMB 110.6 million and non-GAAP net income attributable to ordinary shareholders of the company increased by 15.3% to RMB 115.5 million. Additionally, our balance sheet remained healthy. As of December 31, 2020, we had cash and cash equivalents of RMB 504.1 million, restricted cash of RMB 70.6 million, short-term deposits of nil, and short-term investments of RMB 696.1 million.

We won't go into details on our full-year 2020 results, but as mentioned earlier, they can be reviewed on our earnings press release. Now, let's turn to our outlook. For the first quarter of 2021, we currently expect net revenue to be between RMB 900 million and RMB 950 million, representing year-over-year growth around 17.6% to 24.1%. The above outlook is based on the current market conditions and reflect current and preliminary estimates of market and operating conditions and customer demand, which are all subject to change.

So this concludes our prepared remarks. We will now open the call for the Q&A session. And the head of our finance team, Mr. [Inaudible] will join the session and answer questions.

Operator, please go ahead.

Questions & Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator instructions] The first question today comes from Lillian Lou with Morgan Stanley. Please go ahead.

Lillian Lou -- Morgan Stanley -- Analyst

Thanks a lot. [Foreign language] I have two questions. First of all, what's the company's 2021 strategy for the own brands and Xiaomi brands? In particular, is there guidance by categories? And the second question is on channel. What's the strategy on the off-line/online channel shifts in 2021, especially when we saw some more expansion of online channel in last year because of COVID-19? So going on, what kind of shifts are we going to expect? And a little bit of a number question is, in 2020, what's the contribution mix from online and off-line, breakdown by Xiaomi channel, non-Xiaomi channel, and non-Xiaomi off-line channel? Thank you very much.

Unknown speaker

OK. For the first question, for Viomi-branded business, we can elaborate for multiple perspectives. Firstly, we will shift the Viomi brand business and product mix toward diversification with introduction of more high-end products with more advanced technologies, as well as phase out some specific SKUs with lower margins across product lines, such as some SKUs of low-end washing machines and refrigerators without screens. With regard to the key categories, we will focus more on business with higher-margin and good growth momentum, such as own-branded water purifiers and sweeper robots.

For Viomi-branded water purifiers, we will introduce a series of large flux water purifiers in the second half of 2020, and we saw robust sales of some of new products such as Quanxian and new instant heating water purifiers after introduced. We've also seen the water purifiers industry developed to large flux, and the industry data also show the sales contribution of large flux, as well as the instant heating water purifiers, are increasing. We expect Viomi-branded water purifiers business to deliver greater revenue contribution in both of home water solutions and of our overall revenues in 2021. We will also invest more in our Viomi-branded sweeper robots, in particular, in overseas market, which we expect to be a solid goal.

As we have expanded our sweeper robot team and is following additional global markets and channels for Viomi-branded sweeper robots, we think the revenue contribution from this category will increase as well. In terms of technology application, as we discussed earlier, we will focus more on AI and smartification, which reflect the key parts of IoT products. In our upcoming new product launch event in the early April, we will introduce more products with AI application. For Xiaomi-branded business, we will continue the stable and solid cooperation with Xiaomi.

We are also glad to seek more cooperation with Xiaomi in the future. OK. About the channel, we don't expect a major channel shift for Xiaomi-branded business in short term compared to 2020. While with our overseas expansion, the sales contribution which as a percentage of total revenues will increase in 2021.

In terms of revenue breakdown for 2020, the revenues from Viomi-branded business and Xiaomi-branded business contributed nearly half and half of full year of 2020. Within Viomi-branded business, approximately over 50% are from online and the rest are from off-line and then from exports, which mainly consists of Viomi-branded sweeper robots. Within the online channels of full year of 2020, Xiaomi Youpin was the largest contributor, followed by Jingdong and Tmall, and Suning. We saw online contribution increase during the second quarter of 2020, while with the recovery of off-line channels in the second half, we didn't see a major channel shift caused by the COVID-19 for full year of 2020.

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

[Foreign language]

Cecilia Li -- Senior IR Manager

OK. I will quickly translate Mr. Chen's additional comments. So he said three points of our strategy for the channel expansion.

So first, heading into 2021, we saw a meaningful recovery of the off-line channels across China market. And we will expand our off-line stores, as well as to improve the overall off-line operating system, including the user experience and the IoT design. And we will increase the off-line outlets for 2021. And the second is that we will maintain very good operating system and capabilities for online channels with Youpin, Jingdong, Suning, etc.

And lastly, we have been expanding our channels and marketing tools with new digital media, such as Douyin and Kuaishou. And we think such new media will be development training for the marketing and the development of our channel expansion as well for 2021. That's the answer from our Mr. Chen.

So hope that's helpful. Thank you.

Operator

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

Xudong Chen -- CiCC -- Analyst

[Foreign language] Thank you for taking my question. The first one is I observed that your gross profit margin has recovered in this quarter. What is the biggest reason for this gross profit margin recovery? And will this trend continue in 2021? That's my first question. And I will have a follow-up.

Unknown speaker

We are confident on the recovery on margin side as we have been executing the quality growth strategy on the following perspectives. We will continue to shift the Viomi-branded business and product mix toward diversification. We've introduced some more high-end products with higher-margin and higher ASPs. And the revenue contribution of these new products will increase.

And we will continue to phase out some specific SKUs of lower margin across product lines, such as some SKUs of lower-end washing machines and refrigerators without screens, as mentioned just now. Due to the above actions we've been taking, we expect the gross margin to recover in 2021.

Xudong Chen -- CiCC -- Analyst

And my second question is since you have a good relationship with Xiaomi and you have your own IoT platform business and Xiaomi also has their -- [Foreign language] like that. So how can you balance your product and the Xiaomi platform and your platform? That's my second question.

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

[Foreign language]

Cecilia Li -- Senior IR Manager

OK. I will quickly translate Mr. Chen back. So we can elaborate just the answer from three perspectives.

So first is regarding the IoT platform of Xiaomi and our products, which connects to the [Inaudible]. So firstly, we can show some stage from the senior management of Xiaomi recently that they clearly emphasized on their IoT platform. And we also have seen a growing shipment of [Inaudible] in the market. Actually, many of our IoT products can be and are -- have been connected with [Inaudible].

And we also saw those products that we sold on our Youpin platform very welcome. Secondly is about the sweeper robot business. Actually, as you know that we have cooperating with Xiaomi on the sweeper robot business since 2019, and this helped us to develop our own Viomi-branded sweeper robot to expand domestic, as well as the global market. And thirdly, we are also seeking more and more cooperation with Xiaomi.

And we think we will have many opportunities to expand the product category cooperation with them in the future. So that's the answer for the question.

Xudong Chen -- CiCC -- Analyst

Yes. Thank you. That's help a lot.

Operator

Next question is from Vincent Yu with Needham and Company. Please go ahead.

Vincent Yu -- Needham & Company -- Analyst

Thank you, management, for taking my questions. I have two questions. The first question is, can management talk about the view on the overall home appliance market in 2021? Are we seeing competitive pressure from industry leaders, which may cause price war? And how was the first two months of 2021 going so far in terms of the consumer demand? My second question is about how much the international market contributed in fourth quarter and how big of an opportunity we see that this can grow into 2021? Thank you.

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

[Foreign language]

Cecilia Li -- Senior IR Manager

OK. I will translate. So in the year of 2020, we saw the pressures of the whole industry due to the COVID-19 with regard to the top-line growth, as well as earnings. But heading into 2021, we saw the recovery of the whole industry.

Specifically, we saw that consumers paid more attention to smart products, especially some IoT products, and we can see the domestic market of the sweeper robot has increased very quickly since the start of this year. And you can see that during the AWE that we recently hosted, and a lot of people and consumers put a lot of focus on the IoT experience and the smart products. And we think the IoT products, as well as the whole IoT home industry, has gained more recognition compared to previously. And regarding to the competition, well, we think that many of the traditional home appliances or any -- as well as many companies, they shift their focus toward develop their smart products.

So we think this is a trend. But with regards to holistic IoT solutions, as well as the IoT experience or services, we think we remain the leading position in this perspective. And so we will increase our resources in our branding and R&D in the IoT holistic solutions and to improve the comprehensive IoT experience. That's the answer for the first question.

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

[Foreign language]

Cecilia Li -- Senior IR Manager

OK. I will translate. So in terms of talking about our global market expansion, as you know that we have expanded our export market since the fourth quarter of last year. And heading into the first quarter of this year, we have been rapidly expanding our global market, especially for our Viomi-branded sweeper robot business, and we also see some very robust growth, like multiple-fold in this category in global market.

And as the trend continue, we think we will gain a very solid growth from the global market. And we are also seeking more channels as well. OK. I hope this is helpful.

Vincent Yu -- Needham & Company -- Analyst

Yes. Thank you. Appreciate it.

Operator

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

Cecilia Li -- Senior IR Manager

Thank you once again for joining us today. If you have other 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 day and night.

Operator

[Operator signoff]

Duration: 43 minutes

Call participants:

Cecilia Li -- Senior IR Manager

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

Lillian Lou -- Morgan Stanley -- Analyst

Unknown speaker

Xudong Chen -- CiCC -- Analyst

Vincent Yu -- Needham & Company -- Analyst

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