Viomi Technology Co., Ltd (NASDAQ:VIOT) Q2 2023 Earnings Call Transcript August 24, 2023
Operator: Hello, ladies and gentlemen. Thank you for standing by for Viomi Technology Company Limited Earnings Conference Call for the First Half of 2023. At this time, all participants are in listen-only mode. Today’s conference is being recorded. I will now turn the call over to your host, Ms. Claire Ji, the IR Director of the company. Please go ahead, Claire.
Claire Ji: Thank you, Allison, and hello, everyone. And welcome to Viomi Technology Company Limited earnings conference call for the first half of 2023. As a reminder, this conference is being recorded. The company’s financial and operating results were issued in the 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 visiting the IR section of the company’s website at ir.viomi.com. Participating in today’s call are Mr. Xiaoping Chen, the Founder, Chairman of the Board of Directors and the Chief Executive Officer; and Mr. Jinling Zhang [ph], the Head of our Capital Markets Department. The company’s management will begin with prepared remarks and the call will conclude with a Q&A session.
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Before we continue, please note that 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 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 U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements, except as required by law. Please also note that, Viomi’s earning press release and this conference call include discussion of unaudited GAAP financial information, as well as unaudited non-GAAP financial measures.
In addition, 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 English translation. Mr. Chen, please go ahead.
Xiaoping Chen: [Foreign Language]
Claire Ji: Thank you, Mr. Chen. I will quickly translate our Founder’s remarks before discussing our financial performance for the first half of 2023. Hello, everyone. Thank you for joining us today on our earnings conference call for the first half of 2023. Constrained by both a lukewarm consumer sentiment and the company’s strategic adjustments during the first half of 2023. Our total revenue recorded RMB1.3 billion, representing a decrease of 20% year-over-year, while gross margin declined by 1.9 percentage points year-over-year. However, as we continue to streamline our organizational structure and enhance operational efficiency, our operating results is on our way of recovery. We see a year-over-year decline of 30.3% in operating expenses and a 1.4-percentage-point decrease in net loss margin.
Over the past six months, we enhanced our product mix by focusing on core product categories, driving an increase in the revenue contribution of our water purification products to 22% from 14% a year ago. We believe that optimizing our product category structure will benefit the sustainability of our long-term development. Additionally, we have achieved market-leading industrial chain capabilities in the water purification products. We have independently mastered advanced filtration technology and material manufacturing processes, empowering us to research, develop and produce core components. Moreover, we have developed a comprehensive set of proprietary solutions, including the capability of complete machine assembly, customized automated product production lines and end-to-end data collection and analyze.
In July, Guangdong Lizi Technology Company Limited, one of our subsidiaries was designated as the national-level specialized and innovative, ‘Little Giant enterprise, owing to its remarkable R&D and innovation capabilities in the water purification industry. As one of the highest-level and most authoritative nationwide enterprise evaluation ratings, this honor recognizes and affirms our comprehensive strength in the industrial chain of water purification. In regards to our other product categories, we utilized a flexible combination of OEM and independent R&D to lay out our product mix. And in the meantime, we constantly deepened our investment in and control over core technologies to develop differentiated, intelligent and whole-house products.
On April 2000 — April 28, 2023, we introduced a series of high-tech products at our Spring New Product Launching Event, featuring enhanced iterations of our one-stop IoT home solutions, such as our Master 3 Pro formaldehyde-removing AI vertical air conditioner and Super 2 Pro AI vertical air conditioner equipped with a fresh-air system, which improve the indoor air quality to protect users’ health. We also debuted our Master 3 ultra-thin built-in refrigerator and washing machine set, which is currently setting a new trend in the home decoration industry, as well as Master 3 Pro gas-electric hybrid water heater, our brand-new intelligent lighting system within our smart home devices category also made a debut. Turning to our brand. We were proud to be included on the list of 2023 China’s Top 500 brands, ranked 443rd [inaudible] worth of brand valuation of RMB3.385 billion.
There are only two brands in the smart home sector that made their way on this ranking. We are honored to be one of them. This is a powerful recognition of our brand leading position in the industry. As with — as our offline channels, with offline consumer market recovering gradually, we participated in several large scale acquisitions, including the China Appliance & Electronics World Expo AWE held in Shanghai in April, and Shenzhen Creative Week held in May and the China International Building Decoration Fair held in Guangzhou in July. During this event, we showcased a comprehensive whole-house solution to our offline distributors and attracted consumers to visit and experience an immersive future lives, supporting the recovery of our offline sales.
Furthermore, we enrich our product offering for our overseas markets with new categories accounting for over 60% of our revenue overseas, which effectively made up for the decline in sales of smart cleaning products in overseas markets. With the widespread adoption of new energy vehicles and smart terminal devices, as well as the breakthrough in generative AI technology, we believe the era of intelligence has arrived, integrating AI’s power into whole-house intelligence will not only enable a revolutionary user experience, but also inspire unprecedented creativity across the whole-house intelligent industry. With our hi-tech and fashionable brand positioning, we see Viomi is at the forefront of this revolution. By steadily improving our products’ perception of space and environment and upgrading our AI voice interaction technology, we have successfully transitioned our whole-house intelligence from the era of control, which emphasizes connectivity, to the era of perception, characterized with active intelligence and proactive service.
Moving forward, we will continue to explore and capitalize on our strengths to optimize our operations, concentrating on the following three areas. First, we will further deepen our roots in the water purification industry and roll out more industry-leading products, creating value for consumers with higher quality, more advanced technology and more comprehensive services. Second, we will keep focusing on fine-tuning our product mix and improving and iterating our whole-house intelligent product matrix to elevate our products’ intelligent experience and deliver more helpful and user-friendly one-stop IoT home solutions. Last but not least, we will deepen our industrial layout, heighten our cost controls, increase our operational efficiency and strengthen our product competitiveness to further improve operational performance.
At the same time, we will maintain sufficient capital reserves to support these goals and consolidate our brand to drive robust and sustainable growth, sparing no effort to create long-term value for all of our users and shareholders. Thank you. That concludes our Founder’s remarks. I will now turn the call over to our Head of Capital Markets, Mr. Jinling Zhang to discuss our financial performance. Thank you.
Jinling Zhang: Thank you, Mr. Chen and Claire, and thanks to everyone for joining us today. I will go over our unaudited financial results for the first half of 2023. Our net revenues were RMB1,304.4 million, compared to RMB1,665.4 million for the same period of last year. The decline was mainly due to a decrease in revenues from the IoT@Home portfolio, as well as small appliances and others. Revenues from the IoT@Home portfolio decreased by 21.8% to RMB691.7 million from RMB884.7 million for the same period of 2022. The decline was primarily due to the streamlining of SKUs in smart refrigerators and smart sweeper robots. Revenues from home water solutions increased by 1.7% to RMB286.6 million from RMB281.9 million for the same period of last year.
The increase was primarily driven by our effort to focus on water purification products. Revenues from consumables decreased by 21.0% to RMB135.9 million from RMB172.1 million for the same period of last year. The decrease was primarily due to the decrease in the sales volume of water purifier filters sold to Xiaomi. Revenues from small appliances and others decreased by 36.1% to RMB190.2 million from RMB297.6 million for the same period of 2022, primarily due to the ongoing product portfolio adjustment within this category. Gross profit was RMB286.8 million, compared to RMB391.5 million for the same period of 2022. Gross margin was 22.0%, compared to 23.9% for the same period of 2022. The decline was primarily due to a lower selling price of certain clean-up products and was partially offset by increasing sales of higher gross margin products as a result of product portfolio adjustments.
Total operating expenses decreased by 30.3% to RMB361.8 million from RMB519.4 million for the same period of 2022, mainly attributable to the streamlined organizational structure and overall improved operational efficiency. In greater detail, research and development expenses decreased by 31% to RMB109.5 million from RMB158.7 million for the same period of 2022, mainly driven by a decrease in personnel costs and optimization of our ongoing R&D projects. Selling and marketing expenses decreased by 33.4% to RMB213.5 million from RMB320.7 million for the same period of last year, mainly due to a decrease in marketing expenses, logistic expenses and sales related personnel costs. General and administrative expenses decreased by 2.8% to RMB38.8 million, compared to RMB39.9 million for the same period of 2022, primarily due to a decrease in personnel costs, partially offset by an increase in the estimated allowances — allowance for accounts and notes receivables.
Net loss attributable to ordinary shares — ordinary shareholders of the company was RMB54.9 million and non-GAAP net loss attributable to ordinary shareholders of the company was RMB53.7 million despite the decrease in revenue scale, our loss from operations narrowed by 43.6%, indicating an improvement in our operational efficiency. Additionally, our balance sheet remained healthy. As of June 30, 2023, the company’s cash and cash equivalents of RMB691.5 million, restricted cash of RMB128.1 million, short-term deposits of RMB260.2 million and short-term investments of RMB64.3 million.
Claire Ji: Okay. This concludes our prepared remarks. We will now open the call for Q&A. Mr. Chen, our Founder; and Mr. Jinling will join this session and answer questions. Operator, please go ahead.
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Q&A Session
Operator: Thank you. [Operator Instructions] And our first question today will come from Jingsheng Liu of CICC. Please go ahead. [Operator Instructions] And once again, we have a question from Jingsheng Liu from CICC. Please go ahead.
Jingsheng Liu: Okay. Sorry. Thanks for the management and this is Jingsheng Liu from CICC and I have three questions about the result and I will ask them one by one. So the first question is, how did the quarterly revenue performed in Q1 and Q2? And have we seen any improvement from the consumer demand and what — which categories showed good sales in the first half of 2023? Thank you. That’s my first question.
Jinling Zhang: Thank you, Ms. Liu, for your question. As the first quarter always comes at a flat season with lower revenue scale. It takes around 40% of the revenue in the first half of 2023. In the first quarter, we pushed hard on SKU streamlining and down market product clearance, which resulted in a lower profit margin than the same period last year. But on the right side, the total SKU number decreased by 30% and thus the overall age of the inventory also decreased accordingly, which helped us get better prepared for the big promotion season. About the market demand during the 618 promotion season, we did observe the recovery of the consumption market, but such recovery is still subdued and the overall sales did not meet our expectations.
With the competition on the e-commerce platforms getting fiercer, companies are driven to compete with one another with lower price in order to maintain their sales volume, and at the end of the day, this competition further reduced the profit margin. Another observation is that, the demand for good quality, durable and differentiated products is increasing in the construction market, products with concepts such as ultra-thin, customized building, healthcare and energy conservation are becoming more popular among the young generation consumers. Therefore, in the future, we will keep focusing on optimizing our product mix, mainly by expanding the percentage of those products with better profit margins such as our water purifiers and smart kitchen products and lay out more products with changing end market acknowledged features to meet the greatly recovering market demands.
And back to your question on sales, our air conditioners and water purifiers achieved quite good sales performance during the 618 season. As the peak season of air conditioners came in earlier than past years, we observed an increase in sales of air conditioners starting from March this year and the revenue contribution of such products to the total revenue increased from 15% same period last year to 18% this year. In the meantime, as we put more efforts on promoting water purifier products, the revenue contribution of large flex water purifiers increased to 22%, compared to 17% in the same period last year. Thank you.
Jingsheng Liu: Okay. Thank you. And my second question is, what is the pipeline for the new products launched this year and will the company launch any new category products and what will be the business focus on the second half of this year? Thank you.
Jinling Zhang: In the first half of 2023, we introduced a series of new products at the Spring New Product launching events, featuring enhanced rations of our one-stop IoT home solutions, such as our Master 3 Pro formaldehyde-removing AI vertical air conditioner and Super 2 Pro AI vertical air conditioner equipped with fresh air system, both of which improved the indoor air quality and benefit the health of our users’ family members. We also debuted on our Master 3 ultra-thin built-in refrigerator and washing machine set, which is currently setting new chains in the home decoration industry. With respect to the new product category, we recently launched a series of intelligent lighting system products. We creatively empowered and will keep on the empowerment of the basic functions of lighting systems with our software capability, enabling our intelligent lending system products to satisfy different needs of our users in different scenarios and easily go with the different or customized home decorating designs.
We believe that the intelligent lighting system is indispensable part of the whole-house intelligence solutions and will provide reasonable improvement to the smart home experience of our one-stop IoT solutions. For the second half of 2023, as mentioned earlier, we will continue to explore and capitalize on our strength and optimize our operations, focusing on the following three aspects. First, we will further deepen our roots in the water purification industry and provide consumers with more products of higher quality, leading technology and with more comprehensive services. And second, we will remain focused on fine-tuning our product mix and iterating our whole-house intelligent product matrix to deliver more helpful and user-friendly one-stop IoT home solutions and improve our users’ home experience.
Third, we will keep deepening our industrial layout, strengthening our ability in cost control, increasing our operation efficiency and expanding our operation channels to further improve operational performance. Thank you.
Jingsheng Liu: Okay. Thank you. And my last question is about the robotic vacuum. As we all know that the competition on the robotic vacuum cleaners become very fierce this year. So how has this business performed in the first half of 2023. Thank you. That’s my last question.
Jinling Zhang: Thank you. The business scale of our robotic vacuum cleaners has shrunk largely since last year. Such shrinking is mainly caused by the overdependence of our robotic vacuum cleaners in the overseas market, especially in the Europe. During the geopolitical crisis and foreign currency fluctuations occurred in the first half of 2023 in the European market, our sales of sweeper robots suffered a significant drop, especially in the second quarter. In the second half of 2023, we expect the sales of sweeper robots to have a slight rebound with the influences of these headwind factors gradually getting relieved since July this year. But to be frank, we haven’t seen any clear signals of recovery in this product category, neither overseas, nor domestic and the competition is getting fiercer day-by-day.
Nevertheless, being essential part of our one-stop whole-house intelligence solution, we will keep this product line and provide several models mainly through OEMs. In the meantime, to make up for the decline in overseas sales of our robotics vacuum cleaners. On one hand, we enriched our product categories offered in the overseas market and the revenues brought about by these new categories accounted for over 60% of our overseas market revenues in the first half of 2023. On the other hand, we are also making efforts to explore our overseas market, particularly seeking new commercial opportunities in the emerging markets, especially in the rapidly growing Southeast Asian market. Thank you.
Operator: And that concludes the question-and-answer session. I would like to turn the call back over to management for any additional or closing remarks.
Claire Ji: Okay. Thank you once again for joining us today. If you have any further questions, please feel free to contact us through the contact information on our website or our Investor Relationship Consultant, The Piacente Group. Thank you.
Xiaoping Chen: Thank you.
Operator: The conference has now concluded. Thank you for attending today’s presentation and you may now disconnect.