Viomi Technology Co Ltd (VIOT) Q3 2021 Earnings Call Transcript

Viomi Technology Co Ltd (VIOT -1.83%)
Q3 2021 Earnings Call
Nov 24, 2021, 7:30 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 Ltd.'s earnings conference call for the third quarter of 2021. At this time, all participants are in a listen-only mode. Today's conference call is being recorded. I will now turn the call over to your host, Ms.

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

Cecilia Li -- Director of Investor Relations

Thank you, operator. Hello, everyone, and welcome to Viomi Technology Co. Limited earnings conference call for the third 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 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 the chief executive officer; and Mr.

Wickham Thai, the head of our finance department. 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, today'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 -- Director of Investor Relations

Thank you, Mr. Chen. I will quickly translate his former remarks before discussing the financial performance for the third quarter of this year. Hello, everyone.

Thanks for joining our third quarter 2021 earnings conference call. Our third quarter net revenues reached RMB 1.06 billion, which was in line with our previous guidance. As we disclosed in the previous quarter's earnings conference call, there was a year-over-year decline in revenues during the third quarter, mainly due to the significant decrease in sales of Xiaomi-branded sweeper robots. We maintained stable growth in most of our other product categories.

During the third quarter, we enhanced our one-stop IoT home solutions platform to realize AI-driven IoT home scenarios. Currently, we have laid out a full product line of more than 60 categories. As a result, we are the only company in the smart home industry that provides a complete one-stop IoT home solutions integrating smart home appliances, smart home devices, and software services. We also continued to optimize our product portfolio and execute our trending technology brand marketing and the larger store, better merchant channel strategy.

Moreover, we increased our investment in R&D and expanded our AI algorithms and hardware research and development teams to accelerate AI product innovation and technology accumulation, resulting in a 56% year-over-year increase in R&D expenses. To enhance brand awareness, we also invested in additional advertising and marketing resources in the third quarter. Due to the substantial increase in R&D and marketing expenses, our bottom-line declined temporarily. Our strategy adjustments and investments generated positive results including, first, the ongoing gross margin improvement.

Our third quarter gross margin was 22.7%, representing both year-over-year and quarter-over-quarter increases. Second, brand awareness continues to rise. And third, more diversified and balanced sales channels equipped to handle sales and services of our smart home products. Our overall business is developing in a high-quality and healthy direction.

Based on industry data as well as our observations of the smart home appliance industry and the market, we have identified four important industry trends. So, first consumers prefer to buy home appliances with more elaborate and advanced functions in more diversified product categories, especially those which can improve the quality of life such as air and water purifiers, household cleaning devices, and integrated stops. Second, the demand for high-end products is growing rapidly. Third, bundle purchases have become popular, especially among the [Inaudible] generation.

And fourth, we observed that users start to proactively to get to know and to reach the smart home products. And this modification has become a benchmark for the industry and the market, driven by technology progress and the consumption upgrading. To capitalize on this trends and taking into consideration the market opportunities and incorporate the strategies, we have adjusted and refined our product research and development, enhanced our branding, and improved our sales channels. First, with respect to product development, we have developed our product strategy from three perspectives: first, we increased our investment in R&D as well as technology innovation and AI application, enhancing our brand influence through product optimization.

Second, we provide users with customized and bundle purchase solutions rather than solely selling individual products, which reduces customer acquisition costs and increase sales growth. In the past few months, the proportion of bundle sales have increased, and orders over totaling RMB 10,000 to RMB 200,000 have grown rapidly. And third, we are currently focused on scenario innovation and will soon complete our smart home category to provide a more comprehensive smart home experience. To this end, this quarter, we devoted more resources in AI algorithms, software, as well as hardware.

We introduced a series of new AI products in the first half of this year, including the all-direction space air conditioner, premium sweeper robot Alpha 2 Plus, EyeBot range hode, and 800 gallon to 1,200 gallon Super series large-flux water purifiers. We also launched the Cyber series of our smart wet and dry vacuums in September. All of these products demonstrated strong sales performance in the third quarter, driving continued gross margin recovery. Furthermore, we introduced new SKUs in the smart home categories, such as the EyeLink 2T smart lock with AI face recognition technology.

We continually increase our efforts in R&D and we will unveil high-end new smart home products in new product categories in the coming months. In addition, we will roll out exciting new AI product lines in the next year, including the smart home, smart kitchen, water purifier, and cleanliness products, among others. Second, to enhance our branding influence, we invited one of China's top celebrities, Deng Lun, to become our global branding spokesperson and establish our trending technology brand position in the first half this year. In collaboration with Focus Media and Shijiazhuang Cultural Media, we broadened our omni-channel marketing and advertising activities including anniversary advertisements, print media, television, and social media to enhance our brand awareness and exposure.

We also generated high quality content marketing on content platforms such as Douyin and Kuaishou [Inaudible]. Our brand's search frequency on major search engines has climbed, and our internal data shows that post-90s users and users from new Tier 1 and Tier 2 cities have increased over the past few months. Third, we increased our exposure and sales on new channels such as Pinduoduo, Douyin, and Kuaishou. We have built an exclusive team for these new sales channels to boost traffic and attract more young consumers.

And our short-form video marketing and KOL livestreaming has enhanced brand awareness and contributed to an increase in sales. The revenue contribution from these new channels has increased in the past few months as well. Fourth, with respect to our offline channels, we continued to execute our larger store, better merchant strategy to provide our users with one-stop IoT home solutions, integrating bundle purchases, scenario-based shopping experience, and installation, and after-sale services. These efforts have also strengthened our trending technology brand positioning.

In the second half, we accelerated our nationwide 4s and 5s store portfolio expansion, including a new 460 square meter Viomi flagship store opening [Inaudible] in September, a new 760 square meters, 5s experience store opened in Shenyang CBD area in October, becoming the largest Viomi experience store in China. We will open more large-scale 4s and 5s Viomi experience stores across the nation. Finally, we are also developing our overseas business by upgrading channels, diversifying our operation models, and expanding product categories. We recently cooperated with renowned agents in Germany, Russia, Malaysia, and Northern Europe to transform our overseas channels from small distributors into high-quality international sales agents.

We plan to optimize our overseas business operation by leveraging their local resources, reputation, and import sales experience. We are also planning to explore self-operated model in more regions following the successful opening of our first self-operated store on U.S. Amazon in August. We are preparing to launch our online store on European Amazon and will introduce sweeper robot products in the near future.

Also, we will provide our overseas customers with the smart wet and dry vacuums and a sweeper robot with new functions. Going forward, we will expand our global business into additional countries and regions to capture the cleanliness product sector's tremendous growth opportunities. We have completed the first step in establishing our one-stop IoT home solutions platform by building comprehensive product lines across home scenarios and will now turn our focus to product smartification upgrades and scenario application innovation. Looking ahead, we will continue to refine our product portfolio and further stabilize our gross margin recovery.

We will also increase our investment in AI application, enhance our trending technology branding, grow bundle sales and services, and improve our overall business operation quality, creating long-term value and returns for our users and shareholders. That concludes our founders' remarks. Let's now turn to our detailed third quarter financial reviews as well as our fourth quarter outlook. Net revenues were RMB 1.06 billion, compared to RMB 1.49 billion for the third quarter of last year.

Net revenues were in line with the company's previous guidance, and the decrease was mainly due to the significant decrease in sales of Xiaomi-branded sweeper robots, as well as product portfolio adjustments for margin expansion in other categories. Revenues from IoT Home portfolio decreased by 39.3% to RMB 643.5 million from RMB 1.06 billion for the third quarter of last year. The decline was primarily due to, the first, the decrease in sales of Xiaomi-branded sweeper robots; and second, the product portfolio adjustments for margin expansion in some categories. Revenues from our home water solutions increased by 7.9% to RMB 157 million from RMB 145.4 million for the third quarter of last year.

The growth was primarily driven by the company's product portfolio adjustment in this category, which contributed to increased sales of and a demand for new and larger-flux water purifiers, as well as a gross margin expansion. Revenues from consumables increased by 11.7% to 99 -- RMB 79.6 million from RMB 71.3 million for the third quarter of last year, primarily due to increased demand for the company's water purifier filter products. Revenues from small appliances and others decreased by 15.9% to RMB 176.5 million from RMB 209.9 million for the third quarter of last year, primarily due to the company's continued product portfolio optimization to obtain a higher gross margin in this category. Gross profit was RMB 239.7 million, compared to RMB 254.3 million for the third quarter of last year.

Gross margin increased to 22.7% from 17.1% for the third quarter of last year, primarily driven by the company's continued efforts to shift the business and product mix toward higher gross margin products. Total operating expenses increased by 28.2% to RMB 290.3 million year over year, primarily due to the increase in R&D expenses and the selling and marketing expenses. In more detail, R&D expenses increased by 56.1% to RMB 82.2 million from RMB 52.7 million for the third quarter of last year, mainly due to the increase in R&D experts and related salaries and expenses, as well as increased investment in research and development of new products. Selling and marketing expenses increased by 20.4% to RMB 183.4 million from RMB 152.2 million a year ago, primarily attributable to an increase in advertising and marketing activities to enhance the company's branding and market recognition.

General and administrative expenses increased by 15.2% to RMB 24.7 million, compared to RMB 21.4 million for the third quarter last year, primarily due to an increase in the estimated allowance for accounts and notes receivables, together with increased lease expenses due to the workplace expansion. Net loss attributable to ordinary shareholders of the company was RMB 29.3 million, and non-GAAP net loss attributable to ordinary shareholders of the company was RMB 22.2 million. Additionally, our balance sheet remained healthy. As of September 30, 2021, we had cash and cash equivalents of RMB 771.7 million, restricted cash of RMB 25.6 million, short-term deposits of RMB 67 million, and short-term investments of RMB 463.5 million.

Now let's turn to our outlook. For the fourth quarter of this year, we currently expect net revenues to be between, RMB 1.2 billion and RMB 1.3 billion. We expect the sales of Xiaomi-branded sweeper robots continue to decrease in the fourth quarter and the own-branded sweeper robot business to achieve faster growth, which will become one of the main categories. The above outlook is based on current market conditions and reflects our current and preliminary estimates of market and operating conditions and customer demand, which are all subject to change.

This concludes our prepared remarks. We will now open the call for the Q&A session. The head of our finance department, Mr. Wickham Thai will join the session and answer the questions.

Operator, please go ahead.

Questions & Answers:

Operator

[Operator instructions] The first question today comes from Lillian Lou with Morgan Stanley. Please go ahead.

Lillian Lou -- Morgan Stanley -- Analyst

[Foreign language]I have two questions. First one is on third quarter results. On the nearly 30% decline in revenue, what's the rationale behind that big increase in R&D and marketing expense? What -- and how do we think about fourth quarter, the balance between revenue versus the margin control? And the second question is on overseas sweeper robot business outlook, how much it could be in the fourth quarter and others? And any bottleneck we've been seeing from overseas transportation and also related cost? Thank you.

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

[Foreign language]

Cecilia Li -- Director of Investor Relations

I will quickly translate the comments from Mr. Chen. So as we observed from the market, the second half of last year to this year, we see the users start to proactively to get to know and to approach the smart home products. So we think that's the time to capture the market opportunities.

And we also see this modification as a very -- is a trend for the whole industry and the market, so we wanted to invest in more R&D and selling and marketing expenses. So for the top slide -- side, we proactively decreased sales of Xiaomi sweeper robots. As you know, the gross margin of such business is relatively lower than the others, so we decreased the sales of Xiaomi sweeper robots to have a more healthy gross margin and margin recovery. And in terms of expenses, the year-over-year increase of R&D expenses is around like 56% and we also are [Inaudible] selling and marketing expenses.

But we think in the near future, the R&D expenses will be back to a relatively normal level now. And we will still like invest in selling and marketing but in a stable and a softer extent to enhance our brand awareness. And so what are we doing to capture the opportunities in the future and to enhance our IoT smart home solution. That's the feedback from the -- from our founder.

Lillian Lou -- Morgan Stanley -- Analyst

[Foreign language]

Wickham Thai -- Head of Finance

I will introduce the overseas sales progress Lillian just mentioned. For the past few months, we saw the overall overseas market demonstrating a relatively softer growth compared to the robust growth in the first quarter. This is due to several factors. First, due to the strong consumer demand during the post COVID-19, the distributors purchased a large volume of cleanliness products resulting in high stocking levels since the second quarter.

Secondly, this shortage of containers and labor resources in the overseas ports did impact on the uploading of products and caused some order delays. We expect such situation will continue in the second half of this year while we are taking some measures to mitigate the impact and drive the growth increase. On one side, from our knowledge of overseas markets, the price of these containers this won't continue to go up to a larger extent. And on the other side, we will enter corporation with more now international sales agents, which will help us to increase sales by leveraging the local resources and reputation.

Thirdly, as the overseas consumer net toward cleanliness product more diversified, we will increase the new categories and SKUs to cater the additional demand and drive the overall overseas sales. We will continue to expand additional countries and regions where we expect to have potential market growth. Thank you.

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

[Foreign language]

Lillian Lou -- Morgan Stanley -- Analyst

[Foreign language]

Operator

The next question Xungwilli Wie with CICC. Please go ahead.

Unknown speaker

Thank you for the management's presentation. This is Judy Wei from CICC. And I have a question for the promotional strategy. And we have had Deng Lun as our brand spokesperson and how it works.

Also can you introduce briefly about the sales during this year's Double 11 festival? And what's your outlook for next year's consumption and sales trends.[Foreign language]

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

[Foreign language]

Cecilia Li -- Director of Investor Relations

I will translate Mr. Chen's statements. So we invited to -- we invited Deng Lun as our spokesperson because we're seeing that's in line with our brand positioning of trending technology. And Deng Lun is very popular among young people, especially the post '90s generation, so he can endorse our brand as well as to help us to increase our brand awareness.

And except that we invited Deng Lun as a spokesperson, we also are investing a lot of the advertisement in [Inaudible] and the [Inaudible] media, and we also do a lot of advertisement on some social media and we also do the content marketing on some like [Inaudible] and you can see that the brand awareness on these social media and platforms. And we also see the brand awareness increase in offline channels and we can also see the searching in -- the search frequency of our brand increasing in some search engines such as Baidu. And from the performance, yeah, the Double 11 Shopping Festival, we can see the sales contributions of our new mid to high end products increase a lot, especially the bundle sales such as the refrigerators and kitchen products. So overall we think it's very good direction for us to Deng Lun as our spokesperson and we also see the effects of that -- can see from that from our sales performance.

So we hope all of these marketing and selling activities can -- do continue to have to drive our brand awareness better. Thank you.

Wickham Thai -- Head of Finance

Yeah. We will share the growth outlook for 2022. We estimate to deliver a stable growth for next year due to several factors. First as we see the sales contribution of new product has increased in the past few months and we have new series of  AI products on the pipeline.

We expect the new products to drive long-term and healthier business growth and enhance our brand influence. Second, we expand the offline store portfolio as well as diversify online sales channels to help increase the overall sales as well. Third, we invested more advertising and marketing resources in the second half of this year, and observed in -- the soft increased brand awareness and despite the improved brand recognition will help to drive the sales growth. We see some uncertainties of market and macro economy in particular the impacts on real estate industry, which may result in the decreased needs of decorating homes for the next year.

Thank you.

Unknown speaker

OK. Thank you. That's all for me.

Operator

The next question comes from Vincent Yu with Needham and Company. Please go ahead.

Vincent Yu -- Needham and Company -- Analyst

[Foreign language]Hi, management. Thanks for taking my question. I have two questions. The first question is about the bundled sale as we mentioned multiple times in our prepared remarks.

Can management share how much percent -- what percentage the bundled sale is in our third quarter revenue, or order like a percentage of our total orders? And will these bundled service, we are seeing some weakness in the macro role U.S. market. What will we think about the trend of these bundled sales going forward? And my second question is about our growth margin and our sales -- associated sales strategy. As we are like have healthy margin while at the same time we are giving up some product items which have less gross margin.

So concerning that we might encounter more pressure from the raw material side, are we going to adopt the same strategy going forward or will we think about that or margin trends for us as an ASP trend? Thank you.

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

[Foreign language]

Cecilia Li -- Director of Investor Relations

I quickly translate first. So, as we are developing our one-stop home solutions, so we are changing or say transforming the traditional mode of selling individual products to sell the solutions. So for the online channels, so most of our sales deal through the individual packs selling but for the offline channels, we can see that over 50% of the sales are from the bundled sales, which are like over three products. And not long ago, like one of our customer just purchased the bundled -- the products like over RMB 250,000.

So in terms of -- there really have been impacts on our industry. We can see the overall home decorating [Inaudible] have also caused some impacts on the overall home and health industry. But as we roll out more mid to high end products, as well as promoting more bundled sales, we think this can mitigate impacts and can improve the purchase amount per customers. Thank you.

Wickham Thai -- Head of Finance

Yeah. Regarding the price of raw materials, as the overall price of raw materials has already at relatively high point and not going up for a much higher chance, we don't expect the raw material cost would cause significant impacts on our operating results and we will continue to take cost control measures to mitigate the increase. In terms of ASP, actually we have commenced to develop a pricing strategy for the next year. We expect the overall churn will go up in a relative stand as we expect an increase of the sales contribution of our new products with higher ASPs and higher margins.

Thank you.

Vincent Yu -- Needham and Company -- Analyst

Thank you.

Operator

This concludes our question-and-answer session. Now I'd like to turn the call back over to the company for any closing remarks.

Cecilia Li -- Director of Investor Relations

Thank you once again for joining us today. If you have any other questions, please feel free to contact us through the contact information on our website or The Piacente Group, our investor relations consultant. Thank you all. Have a good night.

Operator

[Operator signoff]

Duration: 54 minutes

Call participants:

Cecilia Li -- Director of Investor Relations

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

Lillian Lou -- Morgan Stanley -- Analyst

Wickham Thai -- Head of Finance

Unknown speaker

Vincent Yu -- Needham and Company -- Analyst

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