Viomi Technology Co., Ltd (NASDAQ:VIOT) Q2 2022 Earnings Conference Call August 22, 2022 8:00 AM ET
Company Participants
Xiaoping Chen – Founder, Chairman and CEO
Wickham Thai – Head, Financial
Conference Call Participants
Hildy Ling – Morgan Stanley
Operator
Hello, ladies and gentlemen, thank you for standing by for Viomi Technology Company Ltd’s Earnings Conference Call for the Second Quarter of 2022. At this time all participants are in a listen-only mode. Today’s conference call is being recorded.
I would now like to turn the call over to your host, Ms. [indiscernible], from the company’s IR Department. Please go ahead, Claire.
Unidentified Company Representative
Thank you, Anita. Hello, everyone, and welcome to Viomi Technology Co. Limited earnings conference call for the second quarter of 2022. As a reminder, this conference is being recorded. The company’s financial and operating results were issued in our press release earlier today and are posted online. You can download earnings press release and sign up for the company’s e-mail distribution list by vesting 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. Thai Wickham, the Head of our Financial Department. The company’s management will begin with prepared remarks, and the call will conclude with the Q&A session.
Before we continue, please note that today’s discussion will contain forward-looking statements made under the safe harbor provision of the United States 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 this and other risks and uncertainties is included in the company’s annual report on Form 20-F and other filings as filed with the United States Securities and Exchange Commission.
The company does not assume any obligation to update any forward-looking statement, except as required by law. Please also note that Viomi’s earnings press release and this conference call includes discussions of unaudited GAAP financial information, as well as unaudited non-GAAP financial measures. In addition, Viomi’s press release contains a reconciliation of unaudited non-GAAP measures to the unaudited most directly comparable GAAP measure.
I will now turn the call over to Viomi’s Founder, the 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
[Foreign Language] Thank you, Mr. Chen. I will quickly translate our Founder’s remarks before discussing our financial performance for the second quarter of 2022. Hello, everyone. Thanks for joining us second quarter 2022 earnings conference call.
In the second quarter, our total revenues reached RMB924 million in line with our year’s guidance. The year-over-year decline in revenues was mainly due to two factors. First, this year, we cut off the selling of Xiaomi branded sweeper robot, which had a high prior year base for comparison. Second, since the beginning of this year, owing to the widespread COVID-19 recurrences, market consumption continued to decrease in the second quarter, along with the soft demand industry-wise.
To support the release of premium new products and our high-end brand transformation, we continued to enhance our brand promotion and increase advertising spending during the second quarter. In addition to the launch of a large number of elevators and print ads, we reached more targeted young groups by partnering with Tmall and becoming a co-sponsor of the well-known variety show, Design Ideal Future forecasted on Mango TV platform.
Our investment in branding and product promotions during a relatively weak period in the macro environment resulted in a temporary operating loss in the second quarter but we believe these measures will help us to build a long-term brand awareness. Furthermore, judging from our performance during the 618 shopping festival, and the sales of our high-end products in recent months, our marketing investment over the past few quarters has boosted the contribution of high-end products to ourselves and enhance our trending technology branding position.
In the second quarter, we continue to execute our high-quality business operation strategy. First, continue to streamline SKUs and optimize our product mix. Second, focus on core business and product lines to build fast selling products; and third, implement cost control and efficiency improvement measures in production and supply chain.
This effort lead to ongoing optimization of our business operation with gross margin increasing by about 1% year-over-year, representing consecutive year-over-year improvement since the fourth quarter of 2020, despite COVID-19 recurrences and weak consumer spending exert – exerting considerable pressure on ourselves, we made significant progress in product innovation, channel expansion and strategic cooperation. In addition, we continue to develop our one-stop IoT home solution, further solidifying the foundation for our long-term product enhancements and the branding influx.
First, with regards to our products, we introduced a series of new AI products at our strategic new product launch event in March, including Space Pro, our all-space AI air conditioner featuring formaldehyde removal; Boss, our large-screen refrigerator with AI fitness functionality; our Royal series of AI laser interactive smart screens incorporating 4K ultra high definition display; Super 2, our 2000 gallons super large-flux water purifier which generates ultra-micro bubbles to remove pesticide residues; and our Royal series of AI twin-tub washing machines. Among them, the air conditioner, water purifier, and interactive smart screen came to market in the second quarter.
In addition, we also introduced a series of new smart home devices, such as EyeLink, our smart lock with upgraded 3D facial recognition technology, as well as HomePad Plus, our AI screen-based control interface for managing all smart home appliances across scenarios. These new AI-equipped products provide our consumers with a superior smart home experience and have received favorable market feedback and reviews.
Furthermore, sales growth and product influence among our mid- to high-end products are also increasing. During the recent domestic 618 shopping festival, some of our mid-to-high-end products topped the e-commerce sales charts in their respective categories, such as our Space series of air conditioners, Super series of water purifiers and 21Face AI large-screen refrigerators.
Meanwhile, based on our one-stop IoT home solutions, we are accelerating the implementation of our premium bundled home solution offerings nation-wide. After our offline merchants in the first quarter signed whole-home solution orders ranging from RMB200,000 to RMB400,000 with customers in Beijing, Guangzhou, Changsha and Kunming to some offline merchants in Chengdu, Zunyi, Yinchuan and certain other cities followed suit in the second quarter, recording multiple high-end whole-home solution orders exceeding RMB200,000 and RMB300,000.
Our consumers’ recognition and adoption of our premium AI products and our bundled home solution offerings are a testament to the success of our phased transformation into a premium brand and our investment in research and development for our AI products.
The successful launch of our new AI product, which received positive market feedback, and the smooth adoption of bundled home solution offerings would not possible without our team efforts in technological innovation and product research and development.
As of June 30, 2022, our accumulated global patent applications and registered patents reached more than 5,400 and 3,300, respectively. Our research and development achievements have also been recognized by industry and professional institutions. In July, AI range hood, a visual detection module won the 23rd China Patent Excellence Award. Also in April, we took the silver at 8th Guangdong Patent Award with one of our water purifiers with the integrated water wind module technology. This award are not only the recognition of our technological innovation capability but also the affirmation of our intellectual power difference.
Second, we continue to execute our large store in emerging channel strategy. In the second quarter, we collaborated with our newly signed offline merchants and opened additional Xiaomi 4S and 5S starship stores in provinces including Hunan, Anhui and Guizhou in the second. This flagship stores enhanced our training technology, brand positioning through unified store front separation and an immersive scenario experience and help implement our one-stop IoT home solution.
Also our overseas business in the second quarter, [indiscernible] international macro environment including the increase of oil and backload material piece prices led to sluggish demand in the European market and brought certain challenges for our overseas sales. At the same time, we made positive for West and China optimization and our mid-to-high-end transformation. We have established a stable cooperation with newly joined large international agent and expanded the market in Southeast Asia with the trend of high-end wafers sold overseas.
The sales population of the mid-and-high-end mobile has further increased. As we progress through 2022, we will further enrich the product offering of intelligent clean products and simultaneously roll out some other categories of products in overseas markets.
Third, we continue to deepen our strategic cooperation with more channels in the second quarter to promote the integrated and stable development of the smart home industry. In the first half of this year, we reached partnerships with Jingdong.com, Tmall and China Telecom.
In May, we expanded our strategic cooperation with Kuka, one of the leading domestic home design enterprises. [indiscernible] Voimi will jointly integrate smart home ecology and the whole health of customization business while accelerating the public popularization of our one-stop ILD home solution to facilitate the integration, intelligence and quality upgrading of home scenarios.
In addition, we are exploring strategic cooperation with additional channels and the company to create a more convenient and smart leading experience and promote the development of smart home ecology for family. We successfully navigated challenges caused by the pandemic and weak macro industry environment in the first half of the year and made progress in developing new products and enhancing brand awareness, moving forward, we will continue to focus 4 aspects; first, streamlining SKUs and the continuously optimizing product portfolio; second, devoting more resources to improving product competence, building by selling products and providing a more immersive scenario experience.
Third, creating more off-line immersive consumption and facilitating the implementation of our one-stop IoT home solution to lay out the foundation for user experience improvement and the long-term brand value development. Fourth, implementing more disciplined cost and expense control measures to lay a solid foundation for long-term healthy growth and create value for our customers and shareholders in the long run.
Thank you. That concludes our Founder’s remarks. Now Mr. Thai Wickham, Head of our Finance Department, will go over our second quarter 2022 unaudited financial results and the third quarter outlook in more detail.
Wickham Thai
Thank you. Now I will go over the detail of unaudited financial results of the second quarter of 2022.
Net revenues were RMB924.2 million compared to RMB1,658.9 million for the second quarter of 2021 net revenues in line with the company’s previous guidance. In addition to the overall weaker consumption environment, the decrease was mainly due to the complete cutoff sell shop Xiaomi branded with the robots this year as well its high prior year base for comparison, and the ongoing product portfolio adjustments and some categories.
Revenues from IoT and home portfolio decreased by 54.2% to RMB524.5 million from RMB1,146.3 million for the second quarter of 2021. The decline was primarily due to the complete cut off of sales of Xiaomi-branded sweeper robots, as well SKU adjustments for some categories.
Revenues from home water solutions decreased by 17.4% to RMB180.9 million from RMB218.9 million for the second quarter of 2021. The decline was primarily due to the decreased demand of water purifiers.
Revenues from consumables decreased slightly by 1.9% to RMB100.3 million from RMB102.2 million for the second quarter of 2021.
Revenues from small appliances and others decreased by 38.1% to RMB118.5 million from RMB191.5 million for the second quarter of 2021, primarily due to the product portfolio adjustment within this category, and decreased demand of small appliances products.
Gross profit was RMB204.5 million compared to RMB351.8 million for the second quarter of 2021. Gross margin increased to 22.1% from 21.2% for the second quarter of 2021, primarily driven by the Company’s continued efforts to shift the business and product mix toward higher gross margin products, and partially offset by the decreases in selling prices of some products for clean-up due to the product portfolio adjustment in this quarter.
Total operating expenses decreased by 14.6% to RMB264.6 million from RMB309.7 million for the second quarter of 2021, primarily due to the year-over-year decrease in selling and marketing expenses.
In more detail, research and development expenses increased by 20.4% to RMB79.7 million from RMB66.2 million for the second quarter of 2021, mainly due to the increase in research and development experts and related salaries and expenses, as well as the increased input in new product development.
Selling and marketing expenses decreased by 24.6% to RMB162 million from RMB214.8 million for the second quarter of 2021, mainly due to the decrease in marketing expenses, partially offset by the increased expenses on advertising activities that enhance the Company’s branding recognition.
General and administrative expenses decreased by 20.3% to RMB22.9 million compared to RMB28.8 million for the second quarter of 2021, primarily due to the decrease in estimated allowance for accounts and notes receivables recognized in the current period.
Net loss attributable to ordinary shareholders of the Company was RMB39.6 million compared to net income attributable to ordinary shareholders of the Company of RMB46.1 million for the second quarter of 2021.
Non-GAAP net loss attributable to ordinary shareholders of the Company was RMB33.9 million compared to non-GAAP net income attributable to the ordinary shareholders of the Company of RMB59.5 million for the second quarter of 2021.
Additionally, our balance sheet maintained healthy. As of June 30, 2022, the company had cash and cash equivalents of RMB816.3 million restricted cash RMB46.8 million short-term deposits of RMB10 million and short-term investments of RMB237 million.
Now let’s turn to our outlook. For the third quarter of 2022, we currently expect net revenues to be between RMB740 million and RMB840 million. We estimate that the year-over-year change in revenues will be mainly due to the uncertainty pertaining to the potential effects of the COVID-19 recurrences, as well as the potential impact of overall market demand in the third quarter of 2022.
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, all of which are subject to change.
Unidentified Company Representative
This concludes our prepared remarks. We will now open the call for Q&A session. Our Founder and Mr. Thai will join this session and answer questions. Operator, please go ahead.
Question-and-Answer Session
Operator
[Operator Instructions] The first question today comes from Hildy Ling with Morgan Stanley. Please go ahead.
Hildy Ling
Hi, thank you, management for the presentation. I have three questions, allow me to ask. So the first one is about the expectation for the second quarter – not for the second quarter, but the second half of this year in terms of the sales and also margin expectation, and what do you think about the key drivers behind the such sales expectation? So this is the first question.
The second one is about the overseas market expansion or overseas sales. We are seeing that the macro has been quite volatile. But Europe market – the European market is quite weak, but the U.S. market has been relatively more resilient and there seems to be a little bit of improvement in the inflation as well or less pressure from that. What do you think about the overseas trend – overseas sales trends nowadays and what’s your expectation in the second half of the year?
The third question is about the robotic – robot vacuum segment. How is that performing in the first half of this year? And how do you see for this segment to perform in terms of the demand in the second half? [Foreign Language]
Wickham Thai
Okay. Thanks for Hildy’s questions. For the first question regarding the sales and margin expectation, yes in terms of revenue guidance for the second half of this year, as usual, we don’t give specific guidance, especially under the macro environment with more uncertainties due to COVID-19 and the macro market but we expect the revenues to be driven for several perspectives.
First, the sales of our new high-end products have been increasing, increasing over the past several months and some SKUs hit the best solidness during major promotion season. We estimate our AI-centric premium products will help to drive the lead to long-term revenue growth.
Second, we have been preparing for exporting additional product categories, including some base compliance to overseas market in the near future, which will partially or partly mitigate the impact from the re-consumer finance and help drive the growth in the short term.
With respect to gross margins, we still estimate it to maintain a stable level. Let’s say, at least over 20% for the whole year. As we will continue to promote premium products with higher margins and take product portfolio adjustments, we expect the overall gross margin to be a reasonable level in the midterm.
For the second question about the overseas sales, from our observation, we estimate the overall overseas consumer demand will still be relatively weak not only in the U.S. but especially in Europe. As we see, due to the international geopolitics, the increase in prices of crude oil and raw materials alongside the falling euro exchange rate, the overall consumer sentiment in euro is relatively low, and we expect this to turn into the second half of this year.
While we are taking some actions to mitigate the impacts of weak consumer sentiment in overseas market, first we see the Southeastern Asian market is relatively dynamic and we see a growing market with great potential. So at this moment, we will increase the sales of our products in Southeastern Asia.
Second, in the following months, will start to sell additional product categories in additional sweeper robots, which we think could help drive the growth for our overseas markets. We will share more details regarding this due course.
For the third question about our sweeper robotics, the sales of our own branded sweeper robots were relatively weak compared to the same period of last year mainly due to the overseas market, including international geopolitics, the increasing prices of crude oil and raw materials alongside with the euro exchange rate, such we mentioned just now.
Euro is very – we expect to this trend to the second half of this year. However, as we discussed previously, we are making some efforts to mitigate this impact. Like we will increase the sales in Southeastern Asian market. And second, in the following months, we will sell additional product packages in addition to sweeper robots like some big businesses, which we will share more details regarding this in due course. Thank you.
Hildy Ling
[Foreign Language] Sorry, allow me to follow up a little bit of a question. In terms of the revenue and net profit contribution, how much of it is coming from overseas market? And if we think about the in the future, is company planning to expand – put more focus in the domestic market or put more focus in the overseas market? Thank you.
Xiaoping Chen
[Foreign Language] I’ll quickly translate Mr. Chen’s answer. We are quite optimized about our overseas revenues for the second half of the year. As we mentioned before, except of the cleaning products, we plan to introduce new categories of products by these appliance to overseas markets, and we are looking for the overseas revenue percentage to achieve more than 20%, although the revenue percentage of the overseas market of the first half of the year is around10%. Thank you.
Hildy Ling
[Foreign Language]. Thank you very much. That’s all for me. Thanks.
Operator
The next question comes from [Alex Wang] with CICC. Please go ahead.
Unidentified Analyst
Thank you for your presentation at me. My first question is how is the company’s current cooperation with Xiaomi? What is the contribution from the top tier to Xiaomi in the company’s revenue? What is the outlook for related future revenue growth? Will the future cooperation continue to expand or adjust?
And my second question is, in terms of the smart home solution, what is the contribution of the new smart home solution in the company’s revenue. Could you give me information about how the updated demand account for the revenue? My third question is, in the second quarter of 2022, is there any performance pressure brought from the real estate? How does the company view the impact from the real estate industry in the future in China? [Foreign Language]
Wickham Thai
Okay. Thank you for questions. For the first question about Xiaomi business, firstly, we always maintain stable cooperation with Xiaomi and the revenue contribution of Xiaomi-branded business has been stabilized around 40% over the past several quarters, and we expect it to maintain at this level in short to midterm.
In terms of categories we cooperate, despite the Xiaomi brand sweeper robots we scaled back due to our relevant source strip. We don’t have material changes on other categories we cooperate.
We currently cooperate on home water solutions, smart kitchen products and some other small currencies. We will maintain the current cooperation and see if we have further reciprocal opportunities to explore cooperation and additional categories.
And for the second question about the home solution, first of all, the IoT at home solution offering is one of our selling metrics with bundled sales and certain services and so it’s not separately calculated as a revenue disclosure sector. The premium bundle offerings we recently started promoting mainly through our off-line merchants.
As we previously shared, our offline merchant partners – our offline market size home solution orders ranging from RMB200,000 to RMB400,000 with customers in Beijing, Guangzhou, Changsha and Kunming in the first quarter and accomplished multiple high-end whole home solution orders assisting RMB200,000 and RMB300,000 in the second quarter in Chengdu, Zunyi, Yinchuan and some other cities.
And regarding your question about the impact from real estate, we are not directly impacted by it as we don’t have direct cooperation with real industry or in terms of declaration for households. But our sales are indirectly impeded to second degree as an influence on the overall demand for home appliances for new apartments.
We observed the impact on the overall industry’s trending mill as some cities have implemented policies to stimulate real estate industry, though it takes time to recover. In addition, within the home appliances industry, in particular, the smart home trends demand is less dependent on the real estate than before with the increasing young people starting to replace the old ones with the smart home products.
So we think the size of incremental housing markets and smart home industries also rely on the stock housing market, which is more flexible than traditional home plans industry. Thank you.
Xiaoping Chen
[Foreign Language] Okay. I will quickly translate – basically translate our Founder’s response. So for the first question, our cooperation with Xiaomi is quite stable by now and in the near future. And now we – recently, we are working on new cooperations to introducing new categories to the market. And we are looking forward, the Xiaomi part revenue would be increasing to our total revenue.
And about the second question, – the three small questions are actually one topic of the macro environment, the growth industry is decreasing. It brings a new challenge to our company and to detail the new supply to being out the new consumer needs we aim to improve the unit price per customer.
And we are looking forward for the – we are looking forward to enhance the bundled sales offering, and we are looking towards this – on those sales of revenue to be 30% industry-wide. Thank you.
Unidentified Company Representative
Okay. That concludes our response to your questions. Thank you.
Operator
As there are no further questions now, I’d like to turn the call back over the company for any closing remarks.
Unidentified Company Representative
Okay. Thank you, once again, for joining us today. If you have further questions, please feel free to contact us through the contact information on our website or The Piacente Group, the company’s Investor Relations consultant.
Operator
This concludes this conference call. You may now disconnect your line. Thank you for attending.
Be the first to comment