Viomi Technology - Q4 2023

Transcript

Operator (participant)

Hello, ladies and gentlemen. Thank you for standing by for Viomi Technology Company Limited's earnings conference call for the second half and full year of 2023. At this time, all participants are in listen-only mode. Today's conference call is being recorded. I will now turn the call over to your host, Miss Claire Ji, the IR director of the company. Please go ahead, Claire.

Claire Ji (Director of Investor Relations)

Thank you. Hello everyone, and welcome to Viomi Technology Company Limited's earnings conference call for the second half and the full year of 2023. As a reminder, this conference is being recorded. The company's financial and operating results were issued in a press release earlier today and are posted online. You can download the earnings press release and sign up for the company's email distribution list by visiting the IR section 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. Sam Yang, the head of Capital Markets and Strategy Department. The company's management will begin with prepared remarks and will continue 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 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-K and other filings are filed with the U.S. Securities and Exchange Commission, and the company does not assume any obligation to update any forward-looking statements except as required by law. Please also note that Viomi's earnings conference, a 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 the unaudited non-GAAP measures to 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 CEO)

Hello, everyone. I am Xiaoping Chen. Thank you all for coming to participate in our 2023 second half year and full year performance conference call. In 2023, we continued to adhere to the focused strategy. The company's product structure obtained further optimization. The operating results have obvious improvements. Full year water purifier consumables product revenue accounted for two. The proportion increased from 32.2% in 2022 to 36.8%. At the same time, benefiting from continuous cost reduction and efficiency improvement, the operating efficiency has also improved significantly.

The gross margin for the second half of the year increased by 2.2 percentage points compared to the same period last year, operating expenses decreased by 33.4% compared to the same period, and the net loss rate narrowed significantly to 2.7%. In the past year, the company actively embraced challenges and made some progress in many aspects. First, strengthen strategic cooperation with major customers, renewed a three-year strategic cooperation agreement with Xiaomi. Second, integrate the company's business, upgrade water purification to an independent strategic business unit, comprehensively enhance water purification R&D, production and sales capabilities, actively layout the entire water purification industry chain, and build two major business sectors of water purification and IoT @ Home that develop synergistically.

Third, strengthen IoT @ Home capability building, enrich whole-house intelligent solutions, embrace uncertainty, and meet the challenges of giants. Fourth, significantly enhance the Viomi brand influence, sign post-95 generation young actress Tian Xiwei as the global brand spokesperson. Fifth, on the channel side, expand all-network and all-channel marketing, actively expand overseas markets. Sixth, the Viomi IoT Technology Park, which has been carefully built over three years, was officially put into use in November 2023, ushering in a new era for Viomi. As the leader in the water purification industry, we have an industry-leading production and research system, master advanced industry filtration technology and consumable manufacturing processes, and have cumulatively applied for more than 1,300 patents. At the same time, our water purification business unit has already become independent.

We have established an independent and complete organizational structure for design, R&D, production, and marketing, attracting a batch of industry top market marketing, management, and product R&D as well as quality control talents' joining, comprehensively improving the market competitiveness of water purification products. In the water purification industry chain end, we focus on building a global leading water purification super factory, constructing a solid industrial foundation and industry barriers.

First, establishing high-level industrial integration capabilities. In Viomi IoT Technology Park, we concentrate the water purification products' components production, complete machine assembly, testing, storage, and logistics and other links into the same building, the same park, effectively reducing production logistics costs, improving production efficiency. Second, having leading industry automation and intelligent water purification production lines, building dark factories in the key components' production links, combining intelligent collection and analysis of full-process production data, continuously perfecting production processes and advanced manufacturing processes. Third, we will further utilize the support of infrastructure, deepen investment in the technology industry, strengthen core components' self-research, self-production, and self-inspection capabilities, providing guarantee for providing high-quality water purification products to users. In the IoT home business direction, we adhere to the AI hub concept, paying more attention to family health monitoring and protection. At the product manager press conference on March 12, we released revolutionary.

Equipped with millimeter-wave radar technology, the cardiopulmonary detection radar Alpha X achieves uninterrupted, no-dead-angle, non-contact cardiopulmonary detection for family members, combined with one-key report generation, intelligent active alarm, and other functions, which can help users better pay attention to their family's health and protect their family's safety. At the same time, accompanied by the demand for improvement in the stock market's residential living, we have further upgraded the one-stop whole-house intelligent solution and launched the BEST series valued at over CNY 1 million, providing consumers with a more prominent, more tasteful, more personalized, and more intelligent product experience. At the same time, we are also expanding online and global channels.

While perfecting domestic channels, we are focusing on breakthroughs in the overseas market, gradually expanding the product categories supplied to the overseas market, bringing new growth to Viomi's overseas business and enhancing the risk resistance of the overseas business. In addition, we have established strategic cooperation relationships with local leading channels in multiple countries, utilizing their local resource advantages to further improve our sales and service capabilities overseas and promote the sustainable growth of future overseas business. Looking ahead to 2024, the global market has huge potential and opportunities. We will continue to improve operations from four aspects. First, persist in providing healthy water solutions so that users can enjoy choices of multiple water qualities and tastes.

Second, strengthen relationships with strategic partners, further build a global water purification super factory, and perfect the industry chain. Third, further expand channels and overseas markets, and further strengthen the globalization process of profitable brands. Finally, we will continue to improve ultimate efficiency, scientifically balance scale growth, optimize organization and efficiency growth as well as operational improvements, help the company further restore profitability, achieve healthy and sustainable development, and bring long-term value to users and shareholders. Okay, thank you.

Claire Ji (Director of Investor Relations)

Thank you, Mr. Chen. I will quickly translate our founder's remarks before discussing our financial performance for the second half and full year of 2023. Hello, everyone. Thank you for joining us today on our earnings conference call for the second half and the full year of 2023. In 2023, we continued to advance our focus strategy, optimizing our product mix and improving our operating performance through strong strategic execution. Driven by the restructuring of our product mix, the revenue contribution of home water solutions and consumable products increased to 36.8% in 2023, from 32.2% in 2022.

Through cost optimization and operating efficiency improvement, our growth margin increased by 2.2 percentage points, where operating expenses decreased by 33.4% in the second half of 2023 compared to the prior year period, leading to a significantly reduced net loss margin of 2.7%. Over the past years, we have demonstrated resilience in overcoming challenges and achieved significant progress in various areas. First, we deepened strategic collaboration with major clients, including the renewal of a three-year strategic cooperation agreement with Xiaomi. Second, we reorganized our business structure and elevated our water purification department to an independent strategic business unit, comprehensively enhancing our R&D, production, and sales capabilities across the entire water purification industrial chain. Through this strategic move, we now boost two major business segments, AI water and AIoT at home, enabling synergistically development.

Third, we strengthen our capabilities across AIoT home and enrich our whole house enhancing solutions to address uncertainties and challenges from industry giants. Fourth, we boosted the Viomi brand influence with the appointment of Miss Tian Xiwei, a well-known actress in China, as our global brand spokesperson. Fifth, on the distribution side, we expanded both our online sales network and offline channel footprint, while actively pursuing overseas markets. Finally, Viomi's IoT Technology Park, meticulously constructed over three years, was officially inaugurated in November 2023, ushering in a new era of Viomi. As a leading company in the water purification sector, we possess the industry's most extensive manufacturing and R&D facilities and have cumulatively applied for over 1,300 patents in this field by leveraging our expertise in advanced filtration technology and the material production methods.

Meanwhile, we have independently established a comprehensive organizational framework and assembled an outstanding team of top talents across management, marketing, product development, and quality control, encompassing product design, R&D, manufacturing, and marketing, further improving the market competitiveness of our water purification products. We have also established solid industrial advantages and competitive barriers by building a water purification industrial chain anchored by our world-leading water purification super factory. First, we have centralized water purification product component production, leveraging our cutting-edge AIoT technology park and seamlessly integrated both upstream and downstream functions. We perform machine assembling, testing, warehousing, and logistics in a single building in the park, effectively reducing logistic costs and improving production efficiency. Second, we have constructed the industry's leading automated and intelligent production lines for water purification products, featuring a fully automated dark factory for manufacturing certain key components.

Comprehensive, intelligent collection and analysis of production data further empowers us to constantly improve the production process. Going forward, we will continue to capitalize on our infrastructure, supported by our IoT technology park, deepen our investment in the water purification industry chain, and strengthen our in-house capabilities across research, production, and inception of core components to provide users with high-quality water purification products. Regarding our IoT home business, we have adhered to the concept of AIoT @ Home and concentrated on monitoring and safeguarding family health. During our recent spring product launch event on March twelfth, we unveiled Alpha X, a cardiorespiratory detection radar equipped with millimeter wave radar technology. This technology enables continuous, comprehensive, contactless monitors of family members' health. Alpha X provides users with intelligent functions, such as one-click report generation and active alerts, empowering them to improve health tracking and safety.

Meanwhile, as demand for improved living increases throughout the housing market, we have further upgraded our IoT, one-stop IoT home solution with the launch of our multi-million dollar Space series, which provides consumers with a stylish, customized, and more intelligent product experience. Meanwhile, we have expanded our distribution network and global channels, growing domestic channels while propelling breakthroughs in overseas markets. We have gradually expanded the range of product offers to our overseas markets, which has spurred new growth in our overseas business and strengthened its resilience to headwind risk. Furthermore, Xiaomi has established strategic partnerships with leading local channels in various countries, utilizing their local resources to further enhance our overseas sales and service capabilities and promote sustainable growth of our overseas business in the future.

Looking forward, we see immense potential and opportunities in the global market, and therefore, we will continue to refine our operations across four areas. First, we remain committed to providing our users with healthy water solutions, allowing them to enjoy an array of water quality and flavor options. Second, we will reinforce collaborations with our strategic business partners, continue to build out our world-leading water purification supermarket, super factory, and strengthen the industrial chain. Third, to further accelerate the globalization of Xiaomi brand, we will continuously develop sales channels and expand overseas markets. Finally, we will continue to improve quality and efficiency, striking a precise balance between scale expansion, organizational optimization, and operational efficiency enhancements. Harnessing these strengths, we will further restore profitability, driven healthy and sustainable development, and create long-term value for users and shareholders. Thank you.

That concludes our founder's remarks, and I will now turn the call over to our Head of Capital Markets and Strategy, Mr. Sam Yang, to discuss our financial performance.

Sam Yang (Head of Capital Markets and Strategy)

Thank you, Ms. Chen and Claire. Thank you to everyone for making time to join us for the earnings conference call today. I will go over our unaudited financial results for the second half and the full year of 2023. Net revenues were CNY 1,189 million renminbi, compared to CNY 1,596.4 million renminbi for the second half of 2022. The decrease was mainly due to a decrease in revenues from IoT at Home portfolio, as well as small appliances and others. Revenues from IoT at Home portfolio decreased by 28% to CNY 529.1 million renminbi, from CNY 735.2 million renminbi for the second half of 2022.

The decrease was primarily due to the streamlining of product offerings, which was achieved by reducing certain SKUs of smart white goods, such as smart refrigerators, smart air conditioners, and smart washing machines. Revenues from home water solutions decreased by 20.5% to CNY 370.4 million, from CNY 399.1 million for the second half of 2022. The decrease was due to the lower volume of water purifiers sold to Xiaomi Corporation. Revenues from consumables decreased by 4.2% to CNY 178.5 million, from CNY 186.4 million for the second half of 2022. The decrease was primarily due to the lower volume of water purifier filters sold to Xiaomi Corporation. Partially offset by the increase of sales volume brand water purifier filters.

Revenues from small appliances and others decreased by 40.5% to CNY 164 million, from CNY 275.6 million for the second half of 2022. Primarily due to the ongoing product portfolio adjustment within this category. Gross profit was CNY 282.7 million, compared to CNY 345.6 million for the second half of 2022. Gross margin was 23.8% compared to 21.6% for the second half of 2022. The increase was primarily driven by the company's effort to shift the product mix toward higher gross margin products, such as water purifier and filters, and partially offset by a decrease in the selling price of certain clearance products as a result of the product portfolio adjustment.

Due to operating expenses decreased by 33.4% to CNY 344.3 million from CNY 517.1 million for the second half of 2022. Primarily attributable to the streamlining of the organizational structure and overall improved operational efficiency. In greater detail, R&D expense decreased by 19.7% to CNY 113.4 million from CNY 141.2 million for the second half of 2022. Mainly due to a decrease in R&D expert and related salaries and expenses. Selling and marketing expenses decreased by 36% to CNY 188.2 million from CNY 294.1 million for the second half of 2022.

Mainly due to a decrease in online platform services, the logistics expenses, and the sales-related personnel costs. G&A expenses decreased by 47.8% to CNY 42.7 million from CNY 81.8 million for the second half of 2022. Primarily due to the fact that a significant amount of additional expected credit loss allowance was made against a third party, third customer, actually, in the second half of 2022. Net loss attributable to ordinary shareholders of the company was CNY 28.7 million, and then the non-GAAP net attributable to ordinary shareholders of the company was CNY 30.9 million. Despite the decrease in revenue scales, our net loss attributable to ordinary shareholders of the company narrowed by 84%, demonstrating improvement in our operational efficiency. Additionally, our balance sheet remained healthy.

As of December 31, 2023, the company had cash and cash equivalent of CNY 491.7 million, restricted cash of CNY 144.6 million. Short-term deposits of CNY 365.8 million, and short-term investment of 30.4 million. Next, let's please discuss key financial results for the full year of 2023. Net revenues were CNY 2,193.4 million, compared to CNY 3,232.7 million for 2022. Revenues from IoT at home portfolio decreased by 24.6% to CNY 1,220.9 million, from CNY 1,619.9 million for 2022.

Revenues from home water solutions decreased by 11.3% to CNY 604 million from CNY 681.1 million for 2022. Revenues from consumables decreased by 12.3% to CNY 314.4 million from CNY 358.4 million for 2022. Revenues from small appliances and others decreased by 38.2% to CNY 54.1 million from CNY 573.3 million for 2022. Gross profit was CNY 569.5 million, compared to CNY 737.1 million for 2022. Gross margin was 20.8%, equals the same as 2022.

Total operating expenses decreased by 31.9% to CNY 706.2 million, from CNY 1,036.5 million for 2022. In greater detail, R&D expenses decreased by 25.7% to CNY 222.9 million, from CNY 300 million for 2022. Selling and marketing expenses decreased by 34.7% to CNY 401.8 million, from CNY 614.9 million for 2022. G&A expense decreased by 33% to CNY 81.5 million, from CNY 121.7 million for 2022.

Net loss attributable to ordinary shareholders of the company was 84.7 million CNY, and non-GAAP net loss attributable to ordinary shareholders of the company was 84.6 million CNY.

Yeah, this concludes our prepared remarks, and we will now open the call for Q&A. Mr. Chen, our founder, and Mr. Sam Yang, our Head of Capital Markets and Strategy, will join this session and answer questions. Operator, please go ahead.

Operator (participant)

Thank you. 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, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then two. And for everyone on today's conference call, if you wish to ask your question to management in Chinese, please immediately repeat your question in English. We will pause for just a moment while we assemble our roster. And today's first question comes from Hunter Diamond at Diamond Equity Research. Please go ahead.

Hunter Diamond (CEO)

Hi, everyone. Firstly, congratulations on the results. My question is: With the recent strategic move of relocating the smart water purification system facility to the Viomi Internet of Things Technology Park, can you provide insights into the new product development pipeline? More specifically, what innovative product launches can stakeholders anticipate in the water purification segment over the next two quarters? And how do these align with Viomi's broader innovation and growth strategy?

Claire Ji (Director of Investor Relations)

Okay, thank you, Hunter. I will briefly translate the question to Chinese. "..." About this question, Mr. Sam will answer the question in representation of the management.

Sam Yang (Head of Capital Markets and Strategy)

Recently, we proudly released our new product, Viomi AI Mineral Water Purifier, Kunlun. With the advanced technical method and strictly selected high quality mineral resources, we successfully realized the slow precipitation of minerals of purification filters in a long-lasting and steady state, which makes the filtered water contain six kind of beneficial mineral elements, and also the same as the natural mineral water. Especially, the strontium content in our filtered water can reach the level of twice of the national standard for national mineral water. With the consumption of upgrading the popularization of the concept of healthy drinking water, people's demand for drinking water gradually changed from clean water to healthy water. By launch of Kunlun, we aim to lead the trend and break through the development of the water purified industry, targeting at the new generation of consumers pursuing a healthy lifestyle.

Moving forward, we are follow the route of producing mineral water, enrich the related product mix, and provide customers with healthy water solutions for different scenarios. In addition, we have built the Viomi Water Purification Super Factory to achieve a highly integrated industrial chain, featuring a fully automated dark factory for manufacturing key component, which will improve our production efficiency and enhance the cost advantage. Furthermore, the comprehensive intelligent connection and analysis of production data empowers us to constantly improve our product production progress and achieve the technological breakthroughs. These things, combined together, support us to continually provide better solutions for our use of major demand and establish solid industrial advantages and competitive barriers. Thank you. Please go ahead.

Hunter Diamond (CEO)

Great. Thank you. And then the next question, just moving beyond the water purification segment, can you shed some light on Viomi's strategic initiatives for its existing product segments? So what key developments or strategic pivots are you planning to drive growth, enhance Internet of Things integration, and maintain the competitive advantage across your existing portfolio?

Claire Ji (Director of Investor Relations)

Hunter speaks in foreign language.

Sam Yang (Head of Capital Markets and Strategy)

Thank you, Hunter and Claire. I will answer this question. As more and more players gather in this field of whole housing intelligence with different solutions to present and interpret the concept, each players has to face growing challenges as well as opportunities in this industry. Viomi has built up unique one-stop AI at home solutions, combined hardware, software, solutions, design and services, and the number of cumulative household users has reached 8.4 million globally. We adhere to the concept of AI helpful, continually upgrading our solutions from the dimensions of health, intelligence, and security. In this circumstance, we keep optimizing our product portfolio and focusing our product differentiation.

In the second half of 2023, we launched a series of outstanding new products, like the upgraded Viomi AI air conditioning, air conditioner Super 3, which can intelligently adjust the ambient temperature according to the different stage of sleep, improving the comfort level and sleep quality. In addition, we unveiled Alpha X, a cardiorespiratory detection radar equipped with the millimeter-wave radar technology, which realized the continuously comprehensive contactless monitoring of family members' health. Alpha X provided our users with intelligence functions such as one-click report generation and active alert, empower them to improve health tracking and safety. We also launched the new intelligent door lock, Master 3 Max, which is equipped with the palm vein recognition technology, providing users a higher level of security guarding.

Meanwhile, as the demand for improved living increased throughout the housing market, we have further upgraded our one-stop AI at home solution with the launch of a multi-million dollar Space series, which provided the customer with the stylish and the customized and more intelligent product experience. Thank you.

Hunter Diamond (CEO)

Great. Thank you for taking my questions. And again, congratulations on the results.

Operator (participant)

Thank you. Our next question comes from Jingjin Li with CICC. Please go ahead.

Jingjing Li (Treasury Specialist)

Hello. Okay, thank you, Claire. Congratulations for the results. I'm Jingjin Li from CICC, and I have three questions, and I will ask them one by one. My first question is, I wonder, how did the quarterly revenue perform in Q3 and in Q4? And have we seen any improvement of IoT business? And except for the water purifier, which categories are sold well in 2023? And that's my first question. Thank you.

Speaker 6

[Foreign language.]

Claire Ji (Director of Investor Relations)

Mr. Sam, please go ahead.

Sam Yang (Head of Capital Markets and Strategy)

Thank you. I will answer this question. In general, the performance of the Q3 and Q4 both achieved optimization in gross margin, reaching 23.8%, with 2.2 percentage point higher than the second half of 2022, and a 1.8 percentage point higher than the first half of 2023. On product side, other than the water purification product, we saw an increased revenue contribution rate among our smart kitchen and bathroom appliances, especially the water heaters, as we released the several new products among this segment, and we received positive feedback from the market. At our spring launch event in March 2023, we released the Master 3 Pro, a gas-electric hybrid AI water heater, which brings users new bathing experience with rapid heating, constant water temperature, and a sensorless seal.

In terms of the number of users, the number of globally cumulative householder users increasing steadily, and the percentage of householder users with at least two connected products reached 23% by the end of 2023. Thank you.

Jingjing Li (Treasury Specialist)

Okay, thank you. And my second question is, what is our operating strategy in 2024? And will it focus on products or focus on channel operation? And what is the whole business outlook for 2024? Thank you.

Sam Yang (Head of Capital Markets and Strategy)

Okay, let me just answer this directly. Our strategy for 2024 will be still focusing on our core products and aiming for a high quality development. We will devote our effort on product differentiation and the channel diversity. On the product side, we will further focus on our product category with differentiation. With respect to water purification products, we introduced the new AI mineral water purifier, Kunlun, at our spring launch event in March 2024, redefine water purification with our advanced technology. We put more effort on water heaters and kettles, alongside the concept of whole house water systems. In talking about the channel side, we will focus on improving the return on investment for online channels, and actively develop new channels, both online and offline, with horse racing mechanism to establish win-win business.

We will further utilize professional business operating team on the major online channels to improve the ROI and enhance the company's operational efficiency. Let's talk about the overseas side. In addition to enriching the product category we offered, we have deepened strategic cooperation with the leading local channels in various countries, utilizing the resources to further enhance our overseas sales and service capacities, and also promote our sustainable goals of our overseas business in the future. In conclusion, we aim to refine our operations in the following aspects. First, we will continue to optimize our revenue structure, increasing the revenue contribution of our core products, and further optimize gross margin. Second, we will further deepen collaboration with Xiaomi, supporting the recovery of our revenue scales. Third, we expect to see faster growth in overseas channels, new social media channels and offline channels, which will further diversify our revenue sources.

Okay, thank you. Please.

Jingjing Li (Treasury Specialist)

Okay. And my last question is, I wonder, what is the expense plan for 2024? And which areas should we input more resources and money on? And that's all for my question. Thank you.

Sam Yang (Head of Capital Markets and Strategy)

Okay, thank you. Let me just answer you directly. We will stick to strict cost control method and severely monitor the return of investment, ensuring the further optimization of our operational performance in 2024. We will allocate the resources in target key channels. First, we will put weight on investment in water purification product in online new social media channels such as Douyin and Kuaishou, to reinforce the brand recognition among users and increase the market penetration of our products. Second, at the offline channel end, we will jointly develop the sales channels and promote the AI transformation of the home appliance in cooperation with the major shopping centers for home appliances, as well as the JD offline stores and other e-commerce platforms.

With respect to water purification products, we are also exploring channels relatively independent from each category in order to provide customer better product demonstration and long-term service support. Last but not least, about the overseas market, we are strengthening our cooperation with and support to local distributors, upgrading the intelligence level and increasing the brand exposure of product offered in the overseas market. Thank you.

Operator (participant)

Thank you. This concludes our question and answer session. I would like to turn the conference back over to management for any additional or closing comments.

Claire Ji (Director of Investor Relations)

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 relations consultant, the Piacente Group. Thank you all for the conference.

Sam Yang (Head of Capital Markets and Strategy)

Thank you.

Operator (participant)

Thank you. This concludes today's conference call. You may now disconnect your lines and have a wonderful day.