Viomi Technology - Q2 2024

Transcript

Operator (participant)

Hello, ladies and gentlemen, thank you for standing by for Viomi Technology Co., Ltd. earnings conference call for the first half of 2024. At this time, all participants are in listen-only mode. Today's conference call is being recorded. I would now like to turn the call over to your host, Ms. Claire Ji, the IR Director of the company. Please go ahead, Claire.

Claire Ji (Head of Investor Relations)

Hello everyone, and welcome to Viomi Technology Co., Ltd. Earnings Conference Call for the first half of 2024. 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 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 Chief Executive Officer, and Mr. Sam Yang, the Head of our Capital and Strategy 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 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 annual 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 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 while its earnings press release and this conference call includes discussions of an audited GAAP financial information, as well as an audited non-GAAP financial measure.

In addition, while main press release contains a reconciliation of an audited non-GAAP measures to the audited 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 (CEO)

[Foreign language]

Claire Ji (Head of Investor Relations)

Thank you, Mr. Chen. I will quickly translate our founder's remarks before discussing our financial performance for the first half of 2024. Hello, everyone. Thank you for joining us today on our earnings conference call for the first half of 2024. In the first half of 2024, we implemented our focus strategy, prioritizing high quality development, consistently enhancing our operating performance, and returned to a net profit position, specifically by concentrating on our advantageous categories. Our core home water solution products revenue grew by nearly 13% year-over-year, while we further optimized our product structure. As a result, our overall gross margin continued to improve to 24.8% for the first half of 2024, from 22% for the prior year period.

Three cost control measures lead to a year-over-year decline in operating expenses by 19.2%, contributing to a turnaround in net profits, with a net income of RMB 5.6 million and a non-GAAP net income of RMB 16.1 million. Additionally, we maintained a strong cash position, with free cash assets totaling RMB 914.3 million. On July 19th, 2024, we announced a major business reorganization, which is expected to be completed as planned by the end of August. This reorganization demonstrates our commitment to implementing our focus strategy and swiftly improving our operating results. By divesting certain underperforming IoT-related businesses, Viomi will now primarily focus on leveraging its core strength in the water purification sector to elevate our overall operational trajectory.

According to our preliminary estimates, the revenues of the continuous business were more than RMB 800 million, with an estimated income from operations more than RMB 30 million in the first half of 2024. In the short term, this strategic reorganization may lead to a slight reduction in our business scale, but it will further enhance company's profitability, driving healthy and sustainable long-term growth. Following the major business reorganization, Viomi will embrace a new mission: AI for better water. We are dedicated to utilizing AI technology to provide better drinking water solutions for households worldwide. Leveraging our extensive expertise in AI technology application, intelligent hardware, and software development, Viomi has strived to redefine home water solutions and develop a unique equipment plus consumables business model.

We use AI technology to holistically enhance the user's experience, providing remote real-time monitoring of water quality and usage, as well as timely filter replacement reminders, one-click reordering, and DIY replacement options, leading to a higher filter replacement. Our intelligent water waste self-cleaning technology significantly extends filter lifespan and reduces the cost of water purification, making smart water purifiers a reliable, hassle-free, and affordable essential for a healthy lifestyle. As of the end of the first half of 2024, Viomi AI home water solution were used by nearly 5.9 million household users. In terms of the product innovation of the industry-leading technology, Viomi has consistently driven technological breakthroughs over the past decades. We developed a tankless large flux water purifiers that provides fresh drinking water 24/7.

By upgrading the water flux up to 22,000 gallons, we expanded water purifier usage scenario from drinking to cooking, washing vegetables, and more. In addition, we implemented ERO technology to offer sustainable water quality, ranging from pure water to natural mineral water, getting nutrients in healthy living. At the Viomi Spring Water Purifier new product launch event in March 2024, we unveiled the Viomi Kunlun Mineral AI Water Purifier. Its innovative mineralizing filter technology enables the sustained release of beneficial minerals, making the composition of these minerals in the water almost identical to that of natural mineral water, allowing our users to enjoy fresh mineral water at home. Viomi offers a wide range of products covering various home scenarios, from single function filtrations to integrated functions featuring instant heating, cooling, and ice-making capacities, dining, kitchen, living room, and whole house applications.

Our products comprehensively address the increasing global demand for cleaner, fresher, and healthier drinking water. In terms of product manufacturing and technology development, Viomi operates a world-leading water purifier gigafactory, boasting an annual production capacity of 5 million water purifier and 30 million filters. Its highly integrated industrial chain layout, highly automated production lines, high standard clean production workshops, and a fully traceable quality control system facilitate continuous breakthroughs in water purification, achieving an optimal scale efficiency and meeting diverse global market demands. We have established one of the industry's most comprehensive R&D systems, mastering advanced filtration technology and the materials manufacturing process. As a result, we have amassed over 1,600 water purification patents and attract numerous global talents in management, marketing, product development, and quality control.

Through continuous product adjustments and effective implementation of our focus strategies, we have each achieved a significant success in sales, while steadily enhancing our brand strength. By strategically aligning our sales channels with differentiated products, we have successfully expanded our market share and further promoted our mineral water purifiers. In July, the Viomi AI water purifier ranked third in the water purifier sector, while our new spring product series claimed the top spot in the under-sink water purifier category on China's leading new media platform. Additionally, Viomi ranked 439th place in 2024 China's top 500 brands list, released by the World Brand Lab, with a brand value of RMB 13.336 billion. Following our major business reorganization, global water will become the company's vision.

As a specialized professional company, professional water purification technology company, we aim to deliver fresh and healthy water worldwide, and we will deepen our focus on providing high quality products and solutions to enhance our user satisfaction. First, we will strengthen our collaboration with strategic partners to fully leverage our water purifier gigafactory's capacity advantages. Second, we will increase our water purification products' domestic market penetration, continuing to lead the healthy mineral water trends and promoting the best for household users. Third, we will actively expand in key overseas markets to promote Viomi's global strategy, allow families abroad to enjoy fresh and healthy water through our products. In the meantime, we'll maintain a sufficient capital reserve and ensure stable business growth, providing long-term returns for our users and shareholders. Thank you. That concludes our founder's remarks.

I will now turn the call over to our Head of Capital and Strategy Department, Mr. Sam Yang, to discuss our financial performance. Thank you.

Sam Yang (Head of Capital and Strategy Department)

Thank you, Mr. Chen and Claire. Thank you to everyone for joining us today. I will go over our unaudited financial results for the first half of 2024. Net revenues were RMB 1.04 billion, compared to RMB 1.304 billion for the same period of 2023. The decrease was mainly due to strategic shift in focus toward home water solutions, resulting in decrease in revenues from the IoT at home portfolio, as well as small appliances and others. Revenues from the IoT at home portfolio decreased by 30.3% to RMB 482 million from RMB 691.7 million for the same period of 2023.

The decrease was primarily due to the company's strategic decision to phase out certain underperforming SKUs in smart refrigerators and air conditioners, aiming for more sustainable and a healthy growth. Revenues from home water solutions increased by 12.9% to RMB 323.5 million, from RMB 286.6 million for the same period of 2023. The increase was primarily driven by our intensified focus on water purification products. Revenues from consumables mainly remained stable at RMB 135.8 million, from RMB 135.9 million for the same period of 2023. Revenues from small appliances and others decreased by 48% to RMB 98.9 million, from RMB 190.2 million for the same period of 2023.

Primarily due to the company's ongoing effort to streamline SKUs within these categories. Gross profit was RMB 258.1 million, compared to RMB 286.8 million for the same period of 2023. Gross margin was 24.8%, compared to 22% for the same period of 2023. The increase was primarily driven by the company's effort on expanding revenue contribution of higher gross margin core product categories. Total operating expenses decreased by 19.2% to RMB 292.3 million, from RMB 361.8 million for the same period of 2023. The adjusted operating expenses, excluding share-based compensation, were RMB 281.8 million, representing a year-over-year decrease of 21%- -21.8%.

The decrease was driven by the company's strategic evaluation of resource efficiency and a focus on more advantageous areas to achieve the best operating result. In greater detail, R&D expenses slightly decreased by 1.2% to RMB 109.2 million, from RMB 109.5 million for the same period of 2023. Mainly due to a decrease in stock costs, partially offset by higher share-based compensation expenses, resulting from extension of share incentive plans, expiration term to 20 years. Selling and marketing expenses decreased by 33.1% to RMB 142.9 million, from RMB 213.5 million for the same period of 2023. Mainly due to a decrease in logistics expenses, online platform service fees, and advertising and marketing fees.

A result of the company's rigorous cost control measures, optimization of sales channels, and the refinement of the product mix. G&A expenses increased by 6.2% to RMB 41.2 million, compared to RMB 38.8 million for the same period of 2023. Primarily due to an increase in professional fees, depreciation, and administrative expenses related to operation of the technology park, partially offset by a decrease in the estimated allowance for accounts and notes receivables. Net income attributable to ordinary shareholders of the company was RMB 6 million, and then the non-GAAP net income attributable to ordinary shareholders of the company was RMB 16.5 million. We achieved this great result as we strategically shift efforts towards home water solution products and implementing strict cost control measures. Additionally, our balance sheet remains healthy.

As of June 30th, 2024, the company had cash and cash equivalents of RMB 701.6 million, restricted cash of RMB 206.9 million, short-term deposits of RMB 142.6 million, and short-term investments of RMB 60.1 million. Now, let's turn to our outlook. For the full year of 2024, we currently expect revenues of the continuing business to be between RMB 1.7 billion and RMB 1.9 billion. Income from operations of the continuing business to be between RMB 110 million and RMB 130 million.

The above outlook is based on our current market conditions, and it reflects the company's current and the preliminary estimate of the market, and operating conditions and customer demand, all of which are subject to change. Thank you.

Claire Ji (Head of Investor Relations)

Okay, this concludes our prepared remarks. We will now open the call for Q&A. Mr. Chen, our founder, and Mr. Yang, will join this session and answer questions. Operator, please go ahead.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star and then two. For the benefit of all participants on today's call, if you wish to ask a question to management in Chinese, please immediately repeat your question in English. Our first question comes from Jizen Li. Please go ahead.

Jie Li (Executive Director)

Hi, hello. Hey, thanks for the management. I'm Jizen Li from CGCC, and I have three questions about the results, and I'll ask them one by one. Okay, as for the first one is, as for the home water solution business, can you introduce what is the result of both the volume and the ASP? And how did the Viomi brand and Viomi brand products perform successfully? Thank you. That's my first question.

Sam Yang (Head of Capital and Strategy Department)

Okay, thank you. Let me just get to your question. As for the home water solution business, we had a 13% increase in revenue for the first half of 2024, compared to the same period of last year. Mainly due to further focus on home water solution business, as well as deepening our strategic cooperation with Viomi on this category. Through continuous product adjustment and the effective implementation of our focus strategy, we have achieved significant success in sales, while steadily enhancing our brand strength. By strategically aligning our sales channel with differentiated products, we have successfully expanded our market share and further promoted our mineral water purifiers. In July, the Viomi AI Water Purifier ranked third in the water purifier sector, while our new spring product series claimed the top position in the under-sink water purifier category on China's leading new media platforms.

Additionally, Viomi ranked 439th in the 2024 China's top 500 brands list released by the World Brand Lab, with a brand value of RMB 15 billion. We will maintain close cooperation with our strategic partners, while expanding differentiated channels and the products to jointly increase the penetration rate of the water purifier market and make AI water purifier as essential for the better life. Thank you. Please go on.

Jie Li (Executive Director)

Okay, thank you. My second question is, what is your purpose of divesting IoT business? And what are the remaining categories now? And can you explain why do you choose this, categories to remain? And can you also introduce some financial results of the remaining categories? Thank you.

Sam Yang (Head of Capital and Strategy Department)

It's a very good question. The business with divesting a certain underperforming IoT business, so that we can quickly restore our operations and get the company back to a benign status, and certain IoT business has showed a trend of contraction in scale during the past few years, which to a certain extent, has dragged down our overall operating efficiency. Therefore, we have started to streamline and focus on more proactive way in 2023, and invested our resources in more advantageous product categories. As we mentioned in the beginning at the ER for the first half of 2024, based on our preliminary estimate, the estimate of revenue of continuing business was no less than RMB 500 million. With the estimated income from operation more than RMB 50 million for the first half of 2024.

Also, we estimate the top line of the continuing business will reach between RMB 1.7 billion to RMB 1.9 billion for the full year of 2024, with the income from the operation between RMB 110 million to RMB 130 million. Next, we plan to sort out the overall revenue structure with the new home water solution business, consumables, and other appliances and services. Although it's not finalized yet, the new home water solution business will include under-sink water purifiers, pipeline water dispensers, free installation products like tap water dispensers, smart kettles, as well as centralized water purification and softening systems, and water heaters covering home scenarios, including kitchen, living room, bathroom, and whole house water system. Thank you. Please go on.

Jie Li (Executive Director)

Okay, thank you, and my last question is, what does the management expect to see improved after this divestment, and what will be the focusing points in the future? Thank you. That's my last question.

Sam Yang (Head of Capital and Strategy Department)

Okay. The business we divest are certain underperforming IoT business. Our fundamental has turned around. Earnings will improve significantly and get the company back to benign stability. As we mentioned in the before, based on our preliminary estimate, the revenue of the continuing business were more than RMB 800 million, with the estimated income from operation more than RMB 50 million for the first half of 2024. The full year guidance of the continuing business is between RMB 1.7 billion-RMB 1.9 billion in top line, and RMB 110 million-RMB 130 million of the income from operations. As we can see, the rest of the income of our business will strengthen our overall scale in short term, but will produce significant improvement on the operation result end.

Through this reorganization, we can concentrate our resources to focus fully on the company's most powerful water purification field, and further improve the brand influence of Viomi AI Water in the following three aspects. First, we will strengthen our collaboration with strategic partners to fully leverage our water purifier gigafactories competitive advantage. Second, we will increase our water purification products, domestic market penetration, continuing to lead healthy mineral water trends and promoting access for household users. Third, we will actively expand in key overseas markets, such as North America and Southeast Asia, to promote Viomi's global strategy, enable families abroad to enjoy fresh and healthy water through our products. Thank you.

Operator (participant)

Okay, the next question comes from Hunter Diamond with Diamond Equity Research. Please go ahead.

Hunter Diamond (Equity Research Analyst)

Hi, congratulations on the results. Some of my questions were already answered, but, I have a few more. My first question was: What are the expected impacts of extended filter lifespan technology on customer retention and recurring revenue, considering the reduced need for frequent filter replacements?

Sam Yang (Head of Capital and Strategy Department)

Through the application of AI technology, we hope to enhance the customer experience. Excuse me, can you hear me? Okay.

Hunter Diamond (Equity Research Analyst)

Yes. Continue.

Sam Yang (Head of Capital and Strategy Department)

Increase acceptance of water purifiers and reduce the cost of water purification. The increasing installed base will bring in recurring revenue from consumables. According to our observation, the market size and the penetration rate of China household water purifier market maintain a low level for a long time. Lots of customers switch to other ways to get purified water and do not change the filter, mainly because of the frequently changing filters, causing a lot of problems and extra cost. This is due to a low degree of product intelligence, so that customers cannot have a clear expectation of the lifespan of the filters and cannot replace the filters by themselves. We can change it. Let's just take one 1,200-gallon Kunlun AI water purifier, for example. It's one of our best-selling products. It comes from two filters.

One is the composite filter with two-year lifespan. Selling price is around RMB 300, and the other is, RO filter, with average lifespan of, 5 years-6 years. Selling price is around RMB 900. For a family with daily usage of the water, of, 10 liters water, assuming they are using the water purifier for eight years, the annual cost for the filters is less than RMB 230. This is, very attractive and, has, obviously advantage comparing to bottled water. You can do one click to make the water through the app, change the filter by DIY with three seconds. It's pretty simple and easy. We believe it will bring more and more people to purchase and continue to use water purifiers, increasing the installation rate and, guarantee an acceptable customer consumption.

In short, at Viomi, we elevate AI for better water, using AI technology to make better water and durable, reliable products, promoting the customers' increase in healthy awareness, and allow more customers to use AI purifiers to improve the quality of the living. Further, improve the penetration rate of the household market. In the meanwhile, bring high quality and sustainable scale growth of the company. Thank you. Please go on.

Hunter Diamond (Equity Research Analyst)

Great. Thank you. And my next question was, can you provide more details on Viomi's, omni-channel marketing and service, supporting the expansion into international markets, particularly the U.S., where competition is very strong?

Sam Yang (Head of Capital and Strategy Department)

Right. Thank you. That's a very good question. Regarding the China expansion, with our existing omni-channel marketing and service compatibility, combined with our accumulated strength in water purification, manufacturing, R&D, and product strength, will help us to explore the North American market. At present, we have both domestic marketing and after-sales service systems, covering both online and offline channels, including the sales channels of mainstream e-commerce platforms, as well as live streaming sales on new media platforms. We are also actively expanding the overseas market. Besides the original European and Southeast Asia market, we are taking steps to expand the North American market. We see that the household water purifier in North America has great potential, and also it's a great challenge. We have the industry-leading Gigafactory as our strong quality assurance.

Using AI technology to develop water purifiers, our overseas users can also download the app for device management, real-time monitoring the water quality and usage, DIY replacement of the filters, reducing the maintenance cost. Meanwhile, we have enriched reserves of technology to embrace, customize the product development demand around the world, all of which has built up solid support for Viomi to expand in the global market. Thank you, Hunter.

Hunter Diamond (Equity Research Analyst)

Great. Thank you for the detailed answers. That's all I have for questions. Thank you.

Operator (participant)

That concludes our question and answer session. I would like to turn the conference back over to management for any closing comments.

Claire Ji (Head of Investor Relations)

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 our investor relationship consultant, the Piacente Group. Thank you. Goodbye.

Sam Yang (Head of Capital and Strategy Department)

Thank you.

Xiaoping Chen (CEO)

Thank you. Bye-bye.