Q2 2023 Viomi Technology Co Ltd Earnings Call
Participants
Claire Ji
Unidentified Company Representative
Xiaoping Chen; Founder, Chairman & CEO; Viomi Technology Co., Ltd
Unidentified Analyst
Presentation
Operator
Hello, ladies and gentlemen. Thank you for standing by for Viomi Technology Co., Ltd Earnings Conference Call for the first half of 2023. 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 the 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. [Zhu Wen Zhang], the Head of our Capital Market Department. The company's management will begin with prepared remarks, and the call will conclude with a 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-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 earnings press release and this conference call includes discussion of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. In addition, Viomi's press release contains a reconciliation of unaudited non-GAAP measures to the unaudited most directly comparable GAAP 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
(foreign language)
Claire Ji
[Interpreted] Thank you, Mr. Chen. I'll 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 lukewarm consumer sentiment and the company's strategic adjustments during the first half of 2023, our total revenue recorded RMB 1.3 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 a 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 6 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 production lines and end-to-end data collection and analysis.
In July, Guangdong Lizi Technology Company Limited, one of our subsidiaries was designated as a 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 rating, this honor recognizes and affirms our comprehensive strength in the industrial chain of water purification.
In regards to our other product categories, we utilize a flexible combination of OEM and independent R&D to lay out our product mix. And in the meantime, we constantly deepen our investment in and control over core technologies to develop differentiated intelligent and whole house products.
On April 28, 2023, we introduced a series of high-tech products at our Spring New Product Launching Event, featuring enhanced integration of our one-stop IoT @ Home solutions, such as our Master 3 Pro, formaldehyde-removing AI vertical air conditioners and Super 2 Pro, AI vertical air conditioner equipped with fresh air systems, which improves 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 device 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 at 443 with a brand valuation of RMB 13.385 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 to our off-line channels, with off-line consumer market recovering gradually, we participated in several large-scale acquisitions, including the China appliance and electronics were up for 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 these events, we showcased our comprehensive whole health solution to our off-line distributors and attracted consumers to visit and experience an immersive future life, supporting the recovery of our off-line sales. Furthermore, we enrich our product offerings for our overseas markets with new categories accounting for over 60% of our revenues, 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 super 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 high-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. Zhu Wen Zhang to discuss our financial performance. Thank you.
Unidentified Company Representative
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 RMB 1,304.4 million compared to RMB 1,665.4 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 RMB 691.7 million from RMB 884.7 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% or RMB 286.6 million from RMB 281.9 million for the same period last year. The increase was primarily driven by our efforts to focus on water purification products.
Revenues from consumables decreased by 21% to RMB 135.9 million from RMB 172.1 million for the same period 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 RMB 190.2 million from RMB 297.6 million for the same period of 2022, primarily due to the ongoing product portfolio adjustments within this category.
Gross profit was RMB 286.8 million compared to RMB 391.5 million for the same period last year. Gross margin was 22% compared to 23.9% for the same period of 2022. The decline was primarily due to a lower selling price of certain cleanup 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 RMB 361.8 million from RMB 519.4 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 RMB 109.5 million from RMB 158.7 million for the same period of 2022, mainly driven by a decrease in personnel costs and an optimization of our ongoing R&D projects.
Selling and marketing expenses decreased by 33.4% to RMB 213.5 million from RMB 320.7 million for the same period last year, mainly due to a decrease in marketing expenses, logistic expenses and sale-related personnel costs. General and administrative expense decreased by 2.8% to RMB 38.8 million, compared to RMB 39.9 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 RMB 54.9 million and non-GAAP net loss attributable to ordinary shareholders of the company was RMB 53.7 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 had cash and cash equivalents of RMB 691.5 million, restricted cash of RMB 128.1 million, short-term deposits of RMB 260.2 million and short-term investments of RMB 64.3 million.
Claire Ji
Okay. This concludes our prepared remarks. We will now open the call for Q&A, Mr. Chen, our Founder; and Mr. Zhang will join this session and answer questions. Operator, please go ahead.
Question and Answer Session
Operator
(Operator Instructions) And our first question today will come from [Jingsheng Liu] of CICC. Pardon me, please standby for questions. One moment while we connect Jingsheng. Please standby. (Operator Instructions) And once again, we have question from Jingsheng Liu from CICC.
Unidentified Analyst
Okay. Sorry. Thanks for the management. I'm Liu Jingsheng 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 perform in Q1 and Q2? And have we seen any improvement from the consumer demand? And what -- which categories shows good sales in the first half of 2023? That's my first question.
Unidentified Company Representative
Thank you, Miss. Lee, 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 bright 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 a recovery of the consumption market, but such a recovery is still subdued and the overall sales did not meet our expectation. With the competition and the e-commerce platforms getting fiercer, companies are driven to compete with one another with lower price in order to maintain their sales volume. At the end of the day, this competition further reduced the profit margin.
Another observation is that the demand of -- for good quality, durable and differentiated products is increasing in the consumption market. Products with concepts such as ultra-thin, customized, built-in, health care, 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 trending and market-acknowledged features to meet the gradually 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, revenue contribution of large-flux water purifiers increased to 22% compared to 17% in the same period last year. Thank you.
Unidentified Analyst
Okay. 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?
Unidentified Company Representative
In the first half of 2023, we introduced a series of new products at the 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 conditioners and Super 2 Pro AI vertical air conditioners 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 our Master 3 ultra-thin built-in refrigerator and washing machine set, which is currently setting new trends 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 we'll keep on the empowerment of the basic functions of lighting system with our software capability, enabling our intelligent lighting 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 an indispensable part of the whole-house intelligence solutions and will provide visible improvement to the smart home experience of our one-stop IoT solutions.
For second half of 2023, as mentioned earlier, we will continue to explore and capitalize on our strengths and optimize our operations, focusing on the following three aspects: First, we will further deepen our roots in the water purification industry and provide the 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 metrics 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 operational efficiency and expanding our operation channels to further improve operational performance. Thank you.
Unidentified Analyst
Okay. And my last question is about the robotic vacuum. As we all know that the competition of the robotic vacuum cleaner become very clear this year. So how has this business performed in the first half of 2023? And that's my last question.
Unidentified Company Representative
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 cleaner 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 an 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 markets, particularly seeking new commercial opportunities in the emerging markets, especially in the rapidly growing Southeast Asian markets. 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.
Unidentified Company Representative
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 consultants, The Piacente Group. Thank you.
Operator
The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.
