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Viomi Technology Co Ltd (NASDAQ: VIOT) 2021 third quarter earnings conference call, November 24, 2021, 7:30 AM Eastern Time

Hello, ladies and gentlemen, thank you for waiting for the third quarter 2021 earnings conference call of Micron Technology Co., Ltd. At this point, all participants are in listen-only mode. Today's conference call is being recorded. I will now transfer the call to your host, madam.

Corporate IR Director Cecilia Li. Please go on, Cecilia.

Cecilia Li - Director of Investor Relations

Thank you, operator. Hello everyone, and welcome to the third earnings conference call of Micron Technology Co., Ltd. in 2021. As a reminder, this meeting is being recorded.

The company’s financial and operating results were published in a press release earlier today and posted online. You can download the earnings press release and register the company's email distribution list by visiting the IR section on the company's website ir.viomi.com. Mr. Chen Xiaoping, the founder, chairman and CEO, and Mr. He participated in today's conference call.

Wickham Thai, the head of our finance department. Company management will start with prepared comments, and the conference call will end with a question and answer session. Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve inherent risks and uncertainties. Therefore, the actual results of the company may differ materially from the opinions expressed today. More information about these and other risks and uncertainties is contained in the company's annual report on Form 20-F and other documents filed with the U.S. Securities and Exchange Commission.

Except as required by law, the company assumes no obligation to update any forward-looking statements. Please also note that today’s earnings press release and this conference call include discussions of unaudited GAAP financial information and unaudited non-GAAP financial measures. Viomi's press release contains a reconciliation of the unaudited non-GAAP measures with the most directly comparable unaudited GAAP measures. I will now forward the call to our founder and CEO, sir.

Chen Xiaoping. Mr. Chen will give a speech in Chinese, and then immediately perform an English translation. gentlemen.

Chen Xiaoping-Founder, Chairman and Chief Executive Officer

Cecilia Li - Director of Investor Relations

Thank you Mr. Chen. Before discussing the financial performance in the third quarter of this year, I will quickly translate his previous remarks. Hello everyone.

Thank you for participating in our third quarter 2021 earnings conference call. Our net income in the third quarter reached RMB 1.06 billion, in line with our previous guidance. As we disclosed in the last quarter’s earnings conference call, the third quarter’s revenue fell year-on-year, mainly due to the sharp decline in sales of Xiaomi brand sweeping robots. We maintain steady growth in most other product categories.

In the third quarter, we strengthened our one-stop IoT home solution platform to realize AI-driven IoT home scenarios. At present, we have laid out a complete product line of more than 60 categories. Therefore, we are the only company in the smart home industry that provides a complete one-stop IoT home solution, integrating smart home appliances, smart home equipment and software services. We also continue to optimize our product portfolio and implement our trending technology brand marketing and larger stores, better merchant channel strategies.

In addition, we increased R&D investment, expanded artificial intelligence algorithms and hardware R&D teams, and accelerated artificial intelligence product innovation and technology accumulation. R&D expenses increased by 56% year-on-year. In order to increase brand awareness, we also invested in additional advertising and marketing resources in the third quarter. Due to the substantial increase in R&D and marketing expenses, our bottom line has temporarily declined. Our strategic adjustments and investments have produced positive results, first of which is the continuous improvement of gross profit margin.

Our gross profit margin in the third quarter was 22.7%, an increase both year-on-year and quarter-on-quarter. The second is the continuous improvement of brand awareness. Third, more diversified and more balanced sales channels can handle the sales and services of our smart home products. Our overall business is developing in a high-quality and healthy direction.

Based on industry data and our observations on the smart home appliance industry and the market, we have identified four important industry trends. Therefore, first consumers are more willing to buy home appliances with a wider variety of products, more sophisticated functions, and more advanced functions, especially home appliances such as air purifiers, water purifiers, household cleaners, and all-in-ones that can improve the quality of life. The second is the rapid growth in demand for high-end products. Third, bundling has become popular, especially among the [inaudible] generation.

Fourth, we have observed that users have begun to actively understand and contact smart home products. Driven by technological progress and consumption upgrades, this modification has become a benchmark for the industry and the market. Following this trend, combining market opportunities and strategies, we adjust and improve product research and development, upgrade brands, and improve sales channels. First, in terms of product development, we have formulated product strategies from three aspects: First, increase R&D investment, technological innovation and artificial intelligence applications, and enhance brand influence through product optimization.

Second, we provide users with customized and bundled purchase solutions instead of selling individual products individually, thereby reducing customer acquisition costs and promoting sales growth. In the past few months, the proportion of bundled sales has increased, and orders from 10,000 to 200,000 yuan have increased rapidly. Third, we are currently focusing on scene innovation and will soon improve our smart home category to provide a more comprehensive smart home experience. To this end, this quarter, we invested more resources in artificial intelligence algorithms, software and hardware.

In the first half of this year, we launched a series of new artificial intelligence products, including omni-directional space air conditioners, high-quality sweeping robot Alpha 2 Plus, EyeBot series vacuum cleaners, and 800-1200 gallon Super series high-flow water purifiers. We also launched the Cyber​​ series of smart wet and dry vacuum cleaners in September. All of these products showed strong sales performance in the third quarter, pushing gross profit margins to continue to rise. In addition, we have also launched new SKUs in the smart home category, such as EyeLink 2T smart locks with AI face recognition technology.

We continue to increase our research and development efforts, and we will launch new high-end smart home products in new product categories in the next few months. In addition, we will launch an exciting new artificial intelligence product line next year, including smart homes, smart kitchens, water purifiers and cleaning products. Secondly, in order to enhance the brand's influence, in the first half of this year, we invited one of China's top celebrities, Deng Lun, to become our global brand ambassador, establishing our Trend Micro brand status. We cooperate with Focus Media and Shijiazhuang Cultural Media to broaden omni-channel marketing and advertising activities, including anniversary advertising, print media, television and social media, to increase our brand awareness and exposure.

We have also conducted high-quality content marketing on content platforms such as Douyin and Kuaishou [inaudible]. The search frequency of our brands on major search engines has risen. Our internal data shows that post-90s users and users from new first- and second-tier cities have increased in the past few months. Third, we increased our exposure and sales in new channels such as Pinduoduo, Douyin and Kuaishou. We have established dedicated teams for these new sales channels to increase traffic and attract more young consumers.

Our short video marketing and KOL live broadcast have increased brand awareness and promoted sales growth. The revenue contribution of these new channels has also increased in the past few months. The fourth is offline channels, continue to implement the strategy of large stores and excellent business, and provide users with one-stop IoT home solutions, integrating bundled purchases, scene-based shopping experience, installation, and after-sales service. These efforts have also strengthened our Trend Micro brand positioning.

In the second half of the year, we will accelerate the layout of 4s and 5s stores nationwide. In September, we opened a new 460 square meter Viomi flagship store [inaudible], and in October we opened a new 760 square meter 5s experience store in Shenyang CBD, becoming the largest Viomi experience store in China. We will open more large-scale 4s and 5s Viomi experience stores across the country. Finally, we are also expanding overseas business through channel upgrades, diversified operating models, and product category expansion. Recently, we have cooperated with well-known agents in Germany, Russia, Malaysia, and Northern Europe to transform our overseas channels from small distributors to high-quality international sales agents.

We plan to use their local resources, reputation and import sales experience to optimize our overseas business operations. Following the successful opening of the first self-operated store on Amazon in the United States in August, we also plan to explore the self-operated model in more regions. We are preparing to open our online store on Amazon in Europe, and will launch sweeping robot products in the near future.

In addition, we will also provide overseas customers with wet and dry smart vacuum cleaners and sweeping robots with new functions. Looking to the future, we will expand our global business to more countries and regions to seize the huge growth opportunities in the field of cleaning products. We have completed the first step of a one-stop IoT home solution platform by building a comprehensive product line across home scenarios, and now we will focus on product intelligent upgrades and scenario application innovation. Looking ahead, we will continue to improve our product portfolio and further stabilize our gross profit margin recovery.

We will also increase investment in artificial intelligence applications, upgrade the Trend Micro brand, expand bundling sales and services, improve overall business operation quality, and create long-term value and returns for users and shareholders. This concludes our founder's comment. Let us now turn to our detailed third quarter financial review and our fourth quarter outlook. Net income was RMB 1.06 billion, compared with RMB 1.49 billion in the third quarter of last year.

The net income was in line with the company's previous guidelines, and the main reason for the decrease was the sharp decline in sales of Xiaomi brand sweeping robots and the adjustment of the product mix due to the expansion of profit margins of other categories. Revenue from the IoT Home portfolio dropped by 39.3% to RMB 643.5 million from RMB 1.06 billion in the third quarter of last year. The main reasons for the decline were the first is the decline in sales of Xiaomi brand sweeping robots; the second is the adjustment of the product mix for the expansion of profit margins of some categories. Revenue from our household water solutions increased by 7.9% to RMB 157 million from RMB 145.4 million in the third quarter of last year.

The increase was mainly due to the company's product portfolio adjustment in this category, which helped increase sales and demand for new and larger flow water purifiers, as well as the expansion of gross profit margin. Consumables revenue increased by 11.7% to 79.6 million yuan from 71.3 million yuan in the third quarter of last year, mainly due to the increase in demand for the company's water purifier filtration products. Small household appliances and other revenues decreased by 15.9% from RMB 209.9 million in the third quarter of last year to RMB 176.5 million, mainly due to the company's continued optimization of its product portfolio to achieve higher gross profit margins in this category. Gross profit was RMB 239.7 million, compared with RMB 254.3 million in the third quarter of last year.

Gross profit margin increased from 17.1% in the third quarter of last year to 22.7%, mainly due to the company's continued efforts to shift its business and product portfolio to products with higher gross profit margins. Total operating expenses increased by 28.2% year-on-year to RMB 290.3 million, mainly due to the increase in research and development expenses and sales and marketing expenses. Specifically, R&D expenses increased by 56.1% from RMB 52.7 million in the third quarter of last year to RMB 82.2 million, mainly due to the increase in R&D experts and related wages and expenses, as well as the increase in R&D investment. New product. Sales and marketing expenses increased by 20.4% to RMB 183.4 million from RMB 152.2 million a year ago, mainly due to increased advertising and marketing activities to enhance the company's brand and market awareness.

General and administrative expenses were RMB 24.7 million, an increase of 15.2% from RMB 21.4 million in the third quarter of last year. This was mainly due to the increase in the estimated provision for accounts receivable and bills and the increase in rental expenses due to the expansion of workplaces. The net loss to the company’s common shareholders was RMB 29.3 million, and the non-GAAP net loss attributable to the company’s common shareholders was RMB 22.2 million. In addition, our balance sheet remains healthy. As of September 30, 2021, we had cash and cash equivalents of 771.7 million yuan, restricted cash of 25.6 million yuan, short-term deposits of 67 million yuan, and short-term investments of 463.5 million yuan.

Let us now turn to our outlook. In the fourth quarter of this year, we currently expect net income to be between RMB 1.2 billion and RMB 1.3 billion. We expect the sales of Xiaomi brand vacuum cleaners to continue to decline in the fourth quarter, and the private brand vacuum cleaners business will achieve rapid growth and become one of the main categories. The above-mentioned outlook is based on current market conditions and reflects our current and preliminary estimates of market and operating conditions and customer needs, all of which may change.

This concludes our prepared comments. We will now start a conference call for the question and answer session. Mr. Wickham Thai, the head of our finance department, will attend the meeting and answer questions.

[Operator Instructions] The first question today comes from Lillian Lou and Morgan Stanley. please continue.

Lillian Lou - Morgan Stanley - Analyst

[Foreign Language] I have two questions. The first is about the results of the third quarter. With revenues falling by nearly 30%, what are the reasons for the substantial increase in R&D and marketing expenses? What-how do we see the balance between revenue and profit margin control in the fourth quarter? The second question is about the prospects of the overseas sweeping robot business. What is the possible fourth quarter and so on? Any bottlenecks and related costs we see from overseas transportation? Thank you.

Chen Xiaoping-Founder, Chairman and Chief Executive Officer

Cecilia Li - Director of Investor Relations

I will translate Mr. Chen's comments as soon as possible. Therefore, we observe from the market that from the second half of last year to this year, users have begun to take the initiative to learn about and contact smart home products. So we think it’s time to seize market opportunities.

We also think that this modification is very-a trend of the entire industry and the market, so we hope to invest more in R&D and sales and marketing expenses. So for the above slide-side, we took the initiative to reduce the sales of Xiaomi robot vacuum cleaners. As you know, the gross profit margin of this business is relatively lower than that of other businesses, so we have reduced the sales of Xiaomi vacuum cleaners in order to obtain a healthier gross profit margin and profit margin recovery. In terms of expenses, the year-on-year increase in R&D expenses was about 56%, and we are also [inaudible] sales and marketing expenses.

But we believe that in the near future, research and development expenses will return to the current relatively normal level. We will still like to invest in sales and marketing, but will increase our brand awareness to a stable and moderate degree. So what are we doing to seize future opportunities and enhance our IoT smart home solutions. This is feedback from our founder.

Lillian Lou - Morgan Stanley - Analyst

Wickham Thai - Finance Director

Let me first introduce the overseas sales progress that Lilian mentioned earlier. In the past few months, we have seen the growth of the overall overseas market relatively slow compared to the strong growth in the first quarter. This is caused by several factors. First, due to strong consumer demand during the post-COVID-19 period, distributors have purchased a large number of cleaning products, resulting in high inventory levels since the second quarter.

Secondly, the shortage of containers and labor resources in overseas ports did affect the upload of products and caused some order delays. We expect this situation to continue in the second half of this year, and we are taking some measures to mitigate the impact and promote growth. On the one hand, based on our understanding of overseas markets, the prices of these containers will not continue to rise sharply. On the other hand, we will cooperate with more current international sales agents, which will help us use local resources and reputation to increase sales.

Third, as overseas consumers' consumption network of cleaning products becomes more diversified, we will add new categories and SKUs to meet additional demand and drive overall overseas sales. We will continue to expand to other countries and regions where we expect potential market growth. Thank you.

Chen Xiaoping-Founder, Chairman and Chief Executive Officer

Lillian Lou - Morgan Stanley - Analyst

The next question is Xungwilli Wie and CICC. please continue.

Thanks to the management for the introduction. This is Judy Wei from CICC. I have a question about promotion strategy. We have Deng Lun as our brand ambassador and how it works.

Can you briefly introduce the sales situation during Double 11 this year? And your outlook for next year's consumption and sales trends. [foreign language]

Chen Xiaoping-Founder, Chairman and Chief Executive Officer

Cecilia Li - Director of Investor Relations

I will translate Mr. Chen's statement. So we invited-we invited Deng Lun as our spokesperson, because we see that this is in line with our brand positioning for trending technology. And Deng Lun is very popular among young people, especially those born in the 90s, so he can endorse our brand and help us increase brand awareness.

And besides inviting Deng Lun to be the spokesperson, we also put a lot of advertisements in [inaudible] and [inaudible] media, and also made a lot of advertisements on some social media. We also do content marketing in some things like [Inaudible] On, you can see the brand awareness on these social media and platforms. We have also seen an increase in brand awareness in offline channels, and we can also see an increase in the search frequency of our brand in some search engines such as Baidu. In terms of performance, yes, during the Double 11 Shopping Festival, we can see that the sales contribution of our new mid-to-high-end products has increased a lot, especially the bundled sales of refrigerators and kitchen products. So in general, we think that Deng Lun as our spokesperson is a good direction for us, and we have also seen the effect of doing so-it can be seen from our sales performance.

Therefore, we hope that all these marketing and sales activities can continue to better improve our brand awareness. Thank you.

Wickham Thai - Finance Director

Yes. We will share the growth prospects for 2022. Due to various factors, we expect to achieve steady growth next year. First of all, we have seen an increase in the sales contribution of new products in the past few months, and we have a new AI product series in preparation.

We expect the new products to drive long-term, healthier business growth and enhance our brand influence. Second, we expanded our offline store portfolio and enriched our online sales channels to help increase overall sales. Third, we invested more advertising and marketing resources in the second half of this year, and observed that-the soft increase in brand awareness and the increase in brand awareness will help promote sales growth. We see some uncertainties in the market and the macro economy, especially the impact on the real estate industry, which may lead to a decline in home decoration demand next year.

OK. Thank you. This is all I have.

The next question comes from Vincent Yu and Needham and Company. please continue.

Vincent Yu - Needham and Company - Analyst

[Foreign language] Hi, management. Thank you for answering my question. I have two questions. The first question is about bundling, as we mentioned many times in the prepared comments.

What percentage can management share-the percentage of bundled sales in our third quarter revenue, or the percentage of orders in our total orders? Like these bundled services, we see that the macro role of the US market is somewhat weak. How will we view the future trends of these bundled sales? My second question is about our growth margins and our sales-related sales strategies. Because we have healthy profit margins, we have given up some products with lower gross profit margins.

Therefore, considering that we may encounter greater pressure from raw materials, will we adopt the same strategy, or will we consider it as an ASP trend or our profit margin trend? Thank you.

Chen Xiaoping-Founder, Chairman and Chief Executive Officer

Cecilia Li - Director of Investor Relations

I will translate quickly first. Therefore, when we are developing a one-stop home solution, we are changing or transforming the traditional model of selling a single product to sell the solution. So for online channels, most of our sales are sold through individual packaging, but for offline channels, we can see that more than 50% of sales come from bundled sales, just like more than three products. Not long ago, one of our customers just bought a bundled product—a product worth more than RMB 250,000.

Therefore, it does have an impact on our industry. We can see that the overall home decoration [inaudible] also has some impact on the overall home and health industry. But as we launch more mid-to-high-end products and promote more bundling sales, we think this can reduce the impact and increase the purchase volume per customer. Thank you.

Wickham Thai - Finance Director

Yes. In terms of raw material prices, since the overall price of raw materials is already at a relatively high level and the possibility of an increase is unlikely, we do not expect that the cost of raw materials will have a significant impact on our operating results. We will continue to take cost control measures to slow the increase. In terms of ASP, in fact, we have already begun to formulate a pricing strategy for next year. We expect the overall churn rate to increase relatively because we expect the sales contribution of new products with higher ASPs and higher profit margins to increase.

Vincent Yu - Needham and Company - Analyst

This concludes our Q&A session. Now, I want to transfer the call back to the company to get any concluding remarks.

Cecilia Li - Director of Investor Relations

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

Cecilia Li - Director of Investor Relations

Chen Xiaoping-Founder, Chairman and Chief Executive Officer

Lillian Lou - Morgan Stanley - Analyst

Wickham Thai - Finance Director

Vincent Yu - Needham and Company - Analyst

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