Viomi Technology Co Ltd (VIOT) Q1 2021 Earnings Call Transcript

Viomi Technology Co Ltd (VIOT 8.55%)
Q1 2021 Earnings Call
May 27, 2021, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Thank you for standing by for Viomi Technology Company, Limited earnings conference call for the first quarter of 2021. [Operator instructions] Today's conference call is being recorded. I will now turn the call over to your host. Ms.

Cecilia Li, the IR head of the company. Please go ahead, Cecilia. 

Cecilia Li -- Head of Investor Relations

Thanks, operator. Hello, everyone, and welcome to Viomi Technology Co., Limited earnings conference call for the first quarter of 2021. As a reminder, this conference is being recorded. The company's financial and operating results were issued in a press release earlier today and are posted online.

You can download the earnings press release and sign up for the company's email distribution list by visiting the IR section at 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; Mr. Xiufei Bao, our new president; and Mr.

[Inaudible], the head of our finance team. The company's management will begin with prepared remarks and it all 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 of Form 20-F and other filings 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 include discussions of unaudited GAAP financial information, as well as unaudited non-GAAP financial measures. Viomi's press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. I will now turn the call over to our founder and CEO, Mr.

Xiaoping Chen. Mr. Chen will deliver his remarks in Chinese followed immediately by an English translation. Mr.

Chen, please go ahead.

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

[Foreign language] 

Cecilia Li -- Head of Investor Relations

Thank you, Mr. Chen. I will briefly translate our founder's remarks before discussing our financial performance for the first quarter of 2021. Hello, everyone.

Thanks for joining our first quarter of 2021 earnings conference call. Leveraging the optimization of our product portfolio, new product sales growth, and enhanced brand recognition, we delivered strong net revenues that exceeded our previous guidance, increasing 64% from the same period in 2020 when our operations were impacted by COVID-19. Our gross margin recovered to 21.1% from 18.8% a year ago, primarily attributable to the product portfolio optimization. Our continued growth over the past several years has been driven by continued optimization of our IoT products and holistic solutions, through innovation and integration of cross-boundary technologies, alongside a deep understanding of our users' needs.

This April, we hosted our Strategic New Product Launch event with the theme of AI: Helpful, with the introduction of the series of AI strategic new products, including the mineral water purifier, EROx; and AI smart toilet, EyeBot, equipped with sensors that is able to monitor human health data; AI water heater, which is able to soften in the water quality; new AI air conditioners that went with EyeBot2; and a desktop with AI-assisted cooking functionalities. Our products are designed with an eye on healthcare, smartification, home security, and natural AI voice interaction. Some new products, equipped with sensors and supported by AI algorithms, are able to collect home and human health data with users' consent. In addition, we focused our resources on developing key product categories and rolled out more differentiated and industry-leading products.

For example, last year, we introduced a series of premium water purifier such as 2 Pro 1,000-gallon, 1,200-gallon, and Vision 1,200-gallon series, which realize large-flux and then low ratios of waste and purified water. Our THT -- THD team has been working on research and development for three years based on tens of billions in cases of water quality data to invent our mineral water purifier, EROx, which retains beneficial minerals for human health during the purification process. Equipped with fast margin sensors, this water purifier product is also able to adjust water quality to meet high-end users' needs. We're happy in endeavoring in the water purification area and have accumulated a significant number of innovative technologies with more than 700 registered patents as of the end of the first quarter.

Some of these patents have been awarded the China Excellent Patent Award, authorized by China National Intellectual Property Administration and World Intellectual Property Organization, as well as recognized by China Association for Quality Inspection and other authorities. Our sweeper robot business represents rapid development as well in particular in overseas markets and has been one of the key drivers of our first quarter that applied growth. Our sweeper robot export business, which we launched in the fourth quarter of last year has developed rapidly in mid-Europe, Southeast Asia, Korea, Australia, and other regions, and has also expanded into North Europe, and additional Asian countries this year. We are expanding to North American markets.

We recently registered our store on Amazon and the counter sells on Amazon in the second half of this year and the will cooperate with some KA offline stores as well. In a compact sweeper robot market, we find our new show with our different added products. We introduced a series of automatic data collection sweeper robots last year and the recently launched an AI-led sweeper robot out of two patents. Some patent to the majority of high-end sweeper robots in the market, this product is equipped with four laser sensors and supported by AI algorithm for obstacles detection and avoidance.

It was able to identify various low substitutes, capture a wider range of angles and distances, as well as map rooms, and support OTA upgrade. We will continue to roll out more different ranges with the sweeper robot products and enhance our market shares in both domestic and global markets. In addition to focusing on technology upgrades and product innovation, we also make efforts to enhance our IoT holistic home solutions and provide the related value-added services and the content, including software update product maintain services, repurchase discounts, and internet entertainment content, as well as strengthening our service and system-based on our offline channel. We think our appliances series and demanding capabilities are the key to IoT home industry.

We have been vigorously promoting the offline comprehensive service model as one city, one store. We select high-quality stores and iterate them as our service allies and provide users with one self-services including sales experience, after selling, and installation services. With the rapid consumption upgrade and evolving user needs, users are keen on brands that are fashionable and of good quality. In order to promote our 3511 long-term strategy and further develop us as the trending brand in IoT home area, we are pleased and warmly welcome Mr.

Bob Bao as the company's president. Prior to joining us, Bob served as the general manager of Viomi and has extensive experience in a consumer industry with more than 20 years. We believe Bob will bring new energy and insights to our branding development.  with his extensive experience in the consumer industry. Looking ahead, we will execute on our growth strategy from three perspectives.

First, we'll construct our IoT holistic home solutions through our 5G-type, IoT-type product strategy. Second, will develop related spends in improving branding influence in a position to access the trending brand in IoT home solutions area. And third, we will expand our offline stores to integrate scenario-based experience in the services. We believe with the model's algorithm of our product, marketing channel, as well as increasing popularization of at-home modification, we will deliver, sustain healthy growth, attain our uniqueness in IoT home solutions area, and bringing long-term shareholder value.

So that concludes our prepared remarks. Let's now turn to the detailed financial review of the first quarter of 2021, as well as the outlook for the second quarter. The net revenues were one RMB 1.26 million, representing an increase of 64% a year over year, primarily due to the continued successful rollout and a significant increase in sales of new products, overseas market expansion, as well as the low-base effect of the first quarter of last year due to COVID-19. Revenues from IoT @ Home portfolio increased by 111.5% to RMB 919.2 million from RMB 434.7 million for the first quarter of last year.

The growth was primarily driven by sustained sales increases for certain new product series, in particular Viomi-branded sweeper robots and smart kitchen products. Revenues from our home water solutions decreased by 4% to RMB 103.8 million. The decline was primarily due to the decreases in average selling prices of Xiaomi-branded water purifier products. And this was partially offset by the successful introduction and increased sales of a new series of Viomi-branded water purifier products, which narrowed the year-over-year decline for home water solutions, compared to previous quarters.

Revenues from consumables were RMB 64.8 million, compared to RMB 65 million for the first quarter of last year. Revenues from small appliances and others increased by 6.4% to RMB 167.8 million from RMB 157.8 million for the first quarter of last year. Gross profit increased by 84.1% to RMB 265 million. And gross margin was 21.1%, compared to 18.8% for the first quarter of last year.

This is primarily driven by our efforts to shift the business and product mix toward higher gross margin products, including the rollout of new Viomi-branded water purifiers and sweeper robots, alongside the optimization of margins across product lines and cost control measures. Total operating expenses increased by 63.8% to RMB 219.8 million, primarily due to the growth of our business. R&D expenses increased by 10.7% to RMB 65.6 million from RMB 59.3 million for the first quarter of last year, mainly due to the increase of R&D experts and related salaries and expenses. Selling and marketing expenses increased by 110.8% to RMB 138 million from RMB 65.5 million a year ago, primarily attributable to the low-base effect of the first quarter of last year due to COVID-19 when the company undertook very limited marketing and advertising activities.

G&A expenses increased by 71.3% to RMB 16.2 million, compared to RMB 9.5 million for the first quarter of last year, primarily due to the increase of personnel and related salaries and expenses. Net income attributable to ordinary shareholders of the company increased by 173.2% to RMB 49.1 million and non-GAAP net income attributable to ordinary shareholders of the company increased by 106.8% to RMB 65.3 million. Additionally, our balance sheet remained healthy. As of March 31, 2021, we had cash and cash equivalents of RMB 906.3 million, restricted cash of RMB 45.2 million, short-term deposits of RMB 97.7 million, and short-term investments of RMB 596.9 million.

Now, let's turn to our outlook. So for the second quarter of 2021, we currently expects that net revenue to be between RMB 1.72 billion and RMB 1.85 billion, representing year-over-year growth of approximately 2.1% to 9.8%. 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 customer demand, which are all subject to change. Well, this concludes our prepared remarks.

We will now open a call for the Q&A session. The head of our finance team, Mr. [Inaudible], will join the session in answering the questions. Operator, please go ahead.

Questions & Answers:

Operator

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

Lillian Lou -- Morgan Stanley -- Analyst

Thanks a lot, management and Mr. Chen. I have two questions. First is on the sweeper robots.

What kind of growth we are looking for this year overall, because obviously, first Q has a very strong growth and momentum, and Mr. Chen just mentioned that we have the plan to expand the region overseas, and in the second half, we'll get into the U.S. on Amazon. So, any particular guidance or explanation of how we're going to grow the business overseas will be very helpful.

And the second question is on the raw material price increase impact. Because first Q, we already saw the gross margin decrease on a sequential basis versus the fourth quarter last year. So, how are we going to look at the momentum or trend in the following quarters? Thank you.

Cecilia Li -- Head of Investor Relations

[Foreign language]

Unknown speaker

OK. Thank you for Lillian's question. For the first question about the sweeper robot, our sweeper robot business grows fast, in particular, in the Viomi-branded sweeper robot. And we spot the rapid growth of own-branded sweeper robots will continue.

On the domestic sweeper robot market is an addressable market according to our agents' data. The market size of the sweeper robot is expected to reach over RMB 10 billion by 2021 and close to RMB 20 billion by 2022. There are more players in the industry, and we observe the market shares of new brands has been increasing since 2020, and this trend is expected to continue. We also found our niche without differentiated products, including a series of automated tax collection sweeper robots and the AI laser radar sweeper robot we recently introduced.

Under such a situation and the observation of the market demand of sweeper robots, we are positive for our market shares in the domestic market and in the following years. In terms of the global markets, the market size is also huge and promising, we think. For our research, we think there are a lot of potential opportunities, particularly in Europe and North America. We have sold our sweeper robots in Europe, Southeast Asia, Australia, and the sales grew for sweeper robot both for this first quarter in overseas market, exceeding our previous expectations.

Next, we will expand to North America markets. We recently successfully registered our stock on Amazon, and we will start to sell sweeper robot products in the second half of this year. We also plan to sell our products on some offline channels in the North America. We have expansion in North America and the additional regions and markets.

We are confident the global market sales will become an important driver of our overall business. For the second question about the gross margin and the raw material prices rising, as we discussed, compared to 2020, our overall gross margin for 2021 would demonstrate a meaningful recovery, while we also experienced some season -- seasonal fluctuations due to some promotional events such as the coming June 18 campaign in the second quarter, which we expect to have some impacts on our gross margin. Secondly, the increase of these raw material costs will also be a factor that impacts the gross margins for the whole industry. As for this, we have taken some cost-optimization measures to mitigate the impacts for raw material costs, including price law agreements with suppliers and some technical upgrade for cost-saving.

Third, we noticed the latest news that the government plans to take measures to control the raw materials' price uptick. We expect this will spread the pressure for -- from this increase in raw material costs to be relieved under the government's involvement. Yeah. Thank you.

Lillian Lou -- Morgan Stanley -- Analyst

Thank you very much.

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

[Foreign language]

Cecilia Li -- Head of Investor Relations

So, Mr. Chen has comments on Xiu's comments. Yeah, I will just quickly translate. So, the -- for this first question about development, yeah, they obviously evolved our business.

So, we have established an independent department who obviously evolve our category and we have been attracting talents from all walks of life from the outside. So, the second fold of development there was we've evolved our business within two to three years. So, we've already had one of the key categories of our strategy. So, we are very confident that this category will be one of the drivers to grow both the top-line growth, as well as to gain our profitability.

Yeah, so that's the commentary -- comments from Mr. Chen. Hope that it's helpful.

Lillian Lou -- Morgan Stanley -- Analyst

[Foreign language]

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

[Foreign language]

Lillian Lou -- Morgan Stanley -- Analyst

[Foreign language]

Cecilia Li -- Head of Investor Relations

Yeah. So, we already have some internal accounts regarding our sweeper robot category in terms of product and data management of team development in both the domestic market. And our aim is to develop the top brands in sweeper robot category. Yeah.

That's it.

Operator

That's the next question is from [Inaudible] with CICC. Please go ahead.

Unknown speaker

Hello. Thank you very much for the management's presentation. And actually, I have two questions here. The first is about domestic market development.

Since we know the, actually, the profit margin of the businesses with Xiaomi is quite low. And how the company plans to further promote the self-owned brand and the products in the domestic markets, especially, I suppose, should be the water purifiers and the robotic vacuum cleaners? And the second question is about overseas. Like are we going to like promote more categories to overseas? Or currently, we just limit the categories to like the water purifiers and the robotic vacuum cleaners? Yeah, that's my questions.

Cecilia Li -- Head of Investor Relations

[Foreign language]

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

[Foreign language]

Cecilia Li -- Head of Investor Relations

OK. I will quickly translate. So for the first question about how to develop our own branded business in the Latin market, so we still could focus on developing our IoT @ Home holistic product portfolio. So we have expanded to like around over 60 product categories across the home scenarios.

And we also have some key categories and the SKUs that we aim to develop mostly this year to drive our branding influence and the position as the trending brand in IoT @ Home holistic solutions area. So, [Inaudible] we know that in the past half to one year, the concept of IoT @ Home modification has increased in domestic market. So we are confident that we can have a better development in the domestic market with our advantages and the differentiation. So for the key categories, we think the water purifier and sweeper robots business, those two are the key categories for us this year, and we'll build, develop and invest in more R&D and marketing resources in the two categories, and we believe those two categories will be also the drivers for our top line.

For your second question about the overseas market expansion. So this year, that we will still focus on the development of our sweeper robot business in the export market. So, so far, we don't plan to expand the categories, but we will expand the global markets, as well as the channels, and to increase our branding inflows in overseas market in the sweeper robots category. Thank you. 

Operator

The next question comes from Roger Duan with Needham and Co. Please go ahead.

Unknown speaker

Hi. Thank you for taking my question. I have two questions here. First one is a follow-up on the raw material price increase.

Can the management give us a sense of just how much the raw material increase in the last several quarters? And do we have any plan to increase our retail prices like others have done in the industry? And the second question is around the pricing strategy for sweeper robots internationally. Is the pricing strategy different internationally versus domestic? And will that continue to be a margin driver for the year? Thank you.

[Foreign language]

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

[Foreign language] 

Cecilia Li -- Head of Investor Relations

OK. I will quickly translate. So for the first question about the impact of the increase of the raw material costs and the impact for our pricing strategy. So we have seen like that increase of the raw material has increased since the first quarter of last year, and we have taken like three measures to mitigate the impact.

So first, as some other companies in the whole industry that we increased the ASPs of some of our products to some and reasonable extent. So second, we also optimized the sales and the product structures. So we promote and sell more products with higher margins. For example, in the smart kitchen product, we sell more the mid- to high-end refrigerators with higher gross margin.

Third, we have been increasing the percentage, the revenue contribution from the bundle sales to mitigate the impact of the raw material cost price [Inaudible] for single product. So, this answers the first question. So for your second question about the pricing strategy for our sweeper robots in domestic and global market. So, we position our sweeper robots at mid- to high-end products in both of the domestic and global market.

So, for the domestic market, most of our sweeper robots, the ASPs are around RMB 2,000 to RMB 3,000, so that's above the average ASPs of some sweeper robots brands in China. So we have some differentiated functionalities, such as the [Inaudible] sweeper robot that we introduced last year, which aims to the auto dust -- automatic dust collection. And this year, we introduced a laser radar sweeper robot, which is also a differentiation for our sweeper robot category. So for the global market, we also aim to position, you know, the mid- to high-end products for this category.

So the average selling price is above some of the global brands. So that's the comments of Mr. Chen. I hope that's helpful.

Unknown speaker

Thank you so much.

Operator

[Operator instructions] As there are no further questions, now I'd like to turn the call back over to Cecilia Li for closing remarks. 

Cecilia Li -- Head of Investor Relations

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

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

[Foreign language]

Unknown speaker

Thank you. 

Operator

[Operator signoff]

Duration: 43 minutes

Call participants:

Cecilia Li -- Head of Investor Relations

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

Lillian Lou -- Morgan Stanley -- Analyst

Unknown speaker

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