Hello, ladies and gentlemen, thank you for standing by for Viomi Technology Co., Ltd's earnings conference call for the second quarter of 2021. 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 Cecilia Li, the IR Director of the company. Please go ahead, Cecilia.
Thank you operator. Hello everyone and welcome to Viomi Technology Co.
Ltd Earnings Conference Call for the Second Quarter of 2021. As a reminder, this conference is being recorded. The company's financial and operating results were issued in a press release earlier today and 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 to this call Mr. Xiaoping Chen, the Founder, Chairman of the Board of Directors and Chief Executive Officer, and Mr. Weiqiang Cai, the Head of our Finance Department.
Company's management will begin with prepared remarks, and the call will conclude with a Q&A session. Before we continue, please note today's discussion will contain forward-looking statements made under the Safe Harbor provisions of 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. Full information regarding these 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. SEC. The company doesn't assume any obligation to update any forward-looking statements except as required by law.
Please also note Viomi's earnings press release and this conference call also include discussions of unaudited GAAP financial information, as well as unaudited non-GAAP financial measures. Viomi's press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. I will now turn the call over to our Founder and CEO, Mr. Xiaoping Chen. Mr. Chen will deliver his remarks in Chinese, followed immediately by English translation. Mr. Chen, please go ahead.
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Thank you, Mr. Chen. I will quickly translate Chen's remarks before discussing the financial performance for the second quarter of the year. Hello, everyone. Thank you for joining our second quarter 2021 earnings conference call. During the second quarter, we optimized the product portfolio for certain categories and increased sales of new products with higher gross margins, further enhancing our business operations and improving the overall gross margin and profitability. Our second quarter net revenue reached RMB 1.66 billion, with gross margin once again delivering both year-over-year and quarter-over-quarter increases, reaching 21.2%. At the same time, non-GAAP net income attributable to ordinary shareholders of the company increased by 45% year-over-year, significantly improving the profitability. After years of hard working and intense exploration, we have developed a 5G IoT home structure, which integrates a technology framework, AI algorithms, 5G IoT modules, sensors, smart hardware, and cloud storage.
This structure encourages further implementation of our one-stop IoT home solutions, providing our users with smart home appliances, smart home devices, and software services across home scenarios. It enables intelligent interconnection from single products to the entire house, forming an intelligent ecosystem for better living and creating a complete smart home experience for users. To increase our product strategies appeal among younger users, we officially announced our trending technology branding strategy, which is underscored by our products, our channel operations, and marketing. First, with respect to our product offerings, we continue to focus on AI applications and innovation to support our AI household product strategy. Following the successful April with a series of new products including the EROx mineral water purifier, the Space AI air conditioner, the Alpha 2 Plus premium sweeper robot, and iBoard AI smart toilet, which can monitor the human health data.
We recently launched our Super Pro 1,100-gallon water purifier, our Cross 2 X1 AI-enabled range hood, and other new AI products with technology upgrades. Many of these cutting-edge products are leading industry consumption trends. During China's 618 e-commerce shopping festival, many of our products became the very hit and ranked among the top 10 bestsellers, including the Alpha 2 Pro premium robot vacuum cleaner, the Navi 2 UV sterilization air conditioner, and the Neo smart washer and dryer combo. In terms of sales channels, we implemented our larger store, better merchant channel strategy. We have collaborated with high-quality merchants with store operation experience to offer larger experience stores and improve store image. These larger stores provide users with more comprehensive, immersive, scenario-based experiences and services, enhancing our trending technology brand image.
We have established 4S and 5S flagship experience stores encompassing over 200 sq m and 300 sq m respectively in Henan, Hubei, Gansu, Liaoning, and other provinces to offer sales, installation, and after-sales services. Furthermore, this channel strategy promotes bundled sales, decreases customer acquisition costs, and drives our overall offline market growth. According to the National Residential Market Research Report 2020, the total new development apartment transactions nationwide exceeded 150,000 sq m in 2020, which equals more than 10 million units based on our estimation, creating huge potential source of growth for the smart home appliances market. We also increased our investment in branding and marketing, thereby reaching more diverse consumer groups with our omni-channel marketing tools and branding efforts. We invited one of China's top celebrities to become our product spokesperson, enhancing our brand recognition among younger generations.
To target more consumers in cities, we collaborated with Focus Media and Xinchao Media to advertise in around 100 major cities across the nation, as well as three top domestic airline magazines to increase our exposure to high-end consumers. Furthermore, we plan to advertise on television and other channels in the following months. We also strengthened our new channel marketing on social media, including Douyin and the Little Red Book, through short-form videos and KOL live streaming. We expect optimization to strengthen our[audio distortion] trending technology brand positioning as well as grow our customer base. We are also expanding our global market as planned. The overseas expansion of our sweeper robot business is progressing in line with our predictions.
In addition to our previous coverage in more than 10 countries in Europe, Asia, and Australia, we began selling units in India, Saudi Arabia, Thailand, and North European countries in the second quarter. As we shared in our previous earnings call, our products were launched on U.S. Amazon in August, marking our official entry into the North American market. We will continue to expand globally and begin development of the self-operating mode in the second half of this year. Furthermore, our product pipeline includes a series of new sweeper robot products for both domestic and overseas markets. In addition to our automatic dust collection and UV disinfection technology, we are making great strides with laser and optical avoidance technology upgrades. We believe that there are three major drivers that will benefit intelligent transformation and development of the smart home industry.
The main consumer groups in China are undergoing structural transformation. The income of the post-90s generation has increased, the younger generation has become a major consumption driver in China. According to the research conducted by our third-party consultants, the post-90s generation prefers smart technology products and are more likely to demand and purchase smart home appliances. The development of new energy vehicles over the past two years has created an emotional connection between customers and the smart products. Many other industries have also entered the intelligent era. Demand for smart products will drive the development of smart home industry and lead to an increase in consumer acceptance. China's 5G infrastructure has improved greatly over the past two years.
According to a report issued by the Ministry of Industry and Information Technology of Chinese government, the personal user penetration rate of 5G will exceed 40%, and the average annual growth rate of 5G units will exceed 200% by 2023. The minister mentioned that smart life and smart home will be key parts in promoting IoT applications. National policy support will also benefit the development of the IoT smart home industry. We are committed to becoming the leading one-stop IoT home solutions provider while developing our hardcore technology. Looking to the second half of this year, we will continue to improve our products through AI innovation, execute our larger store better merchant channel enhancement strategy, and strengthen our trending technology branding.
With the ongoing development of home smartification in China, we remain confident in our ability to capitalize on opportunities and deliver long-term growth, as well as contribute positively to our consumers' quality of life and industry-wide intelligent transformation. This concludes our founder's remarks. Let's now turn to the detailed financial review of the second quarter of this year, as well as the outlook for the third quarter. The net revenues decreased slightly by 1.5% to RMB 1.56 billion from RMB 1.58 billion for the second quarter last year, and increased by 43% compared to the same period of 2019. The slight year-over-year decrease was primarily due to, first, sales decreases in water purifiers and small appliances resulting from the product portfolio adjustment for margin expansion. Second, a high base effect during the same period of last year due to promotional activities after COVID-19 pandemic's peak.
Revenues from IoT @ Ho me portfolio increased by 7.9% to 1.15 billion RMB from 1.06 billion RMB for the second quarter of last year. The growth was primarily driven by sales increases in certain product series, particularly the Xiaomi brand sweeper robots and the washing machines. Revenue from our home water solutions decreased by 18% to 218.9 million RMB from 366.8 million RMB for the second quarter of last year. The decline was primarily due to a decrease in sales of Xiaomi- branded new water purifiers, resulting from a product portfolio adjustment, though partially mitigated by the sales increases in Xiaomi- branded water purifiers. Due to the product portfolio adjustment in Viomi- branded water purifiers, we achieved year-over-year and quarter-over-quarter increases in the overall growth margin of the home water solutions category.
Revenues from consumables increased by 18.2% to CNY 102.2 million from CNY 86.5 million for the second quarter of 2020, primarily due to the increased demand for our water purifier filter products. Revenues from small appliances and others decreased by 28.8% to CNY 191.5 million from CNY 268.8 million for the second quarter of 2020, primarily due to continued product volume optimization for higher growth margin in this category. Gross profit increased by 46% to CNY 351.8 million, and gross margin was 21.2% compared to 14.3% for the second quarter of last year. The year-over-year increase in gross margin was primarily driven by our efforts to shift the business and product mix toward higher gross margin products. This includes the increased revenue contribution from sales of new Xiaomi branded water purifiers and sweeper robots as well as cost control measures and the margin optimization across product lines.
Total operating expenses increased by 29.4% to 309.7 million RMB, primarily due to the increase in selling marketing expenses. In more detail, R&D expenses increased by 9.1% to 66.2 million RMB from 60.7 million RMB for the second quarter of last year, primarily due to the increase in R&D expenses related to salaries and expenses. Selling marketing expenses increased by 32.1% to 214.8 million RMB from 162.1 million RMB a year ago, primarily attributable to the increase of advertising and marketing activities in order to enhance the company's branding and market recognition.
G&A expenses increased by 72.6% to RMB 28.8 million compared to RMB 16.7 million for the second quarter of last year, primarily due to an increase of the estimated allowance for accounting notes receivables, together with the low base of that of lease expenses attributable to the lease expense exemption policies in effect during the same period of last year due to the COVID-19. Net income attributable to ordinary shareholders of the company increased by 367.4% to RMB 46.1 million. GAAP net income attributable to ordinary shareholders of the company increased by 44.9% to RMB 59.5 million. Additionally, our balance sheet remains healthy. As of June 30th, 2021, we had cash and cash equivalents of RMB 667.6 million with restricted cash of RMB 21.5 million, short-term deposits of RMB 66.5 million, and short-term investments of RMB 393.8 million. Now let's turn to our outlook.
For the third quarter of 2021, we currently expect net revenues to be between RMB 1 billion, and RMB 1.1 billion. We expect the sales of Xiaomi brand sweeper robot to decrease from the third quarter and the own brand sweeper robot business to achieve faster growth, which will become one of our main categories. The above outlook is based on the current market conditions and reflects the company's current and preliminary estimates of the market and operating conditions and customer demand, which are all subject to change. Well, this concludes our prepared remarks, and we will now open the call for the Q&A session. The Head of our Finance Department, Mr. Weiqiang Cai, will join the session and answer questions. Operator, please go ahead.
Thank you. If you wish to ask a question, please signal by pressing star one on the telephone keypad. If you're using your speakerphone, please ensure that your mute function is turned off. Again, press star one for a question. We will now pause for just 1 moment. Our first question comes from Lillian Lou from Morgan Stanley. Please go ahead.
Thank you. I have three questions. First of all, can you give us a breakdown of the IoT @ Home product portfolio? In particular, how much of the contribution came from the robot sweeper products in the second quarter, and also, what kind of sales momentum are we seeing in July and August in the near term? That's the first one. Maybe I'll just pause, and I will ask the rest of the two questions later.
Okay. Thanks for Lillian's question. About the IoT @ Home portfolio, we have more than 10 small categories, including refrigerators, washing machines, water heaters, sweeping robots, and et cetera. Among these, Viomi-branded refrigerators contributed around 20% revenues of IoT @ Home. Viomi-branded washing machines contributed around 10%, and Xiaomi-branded sweeper robots contributed around 10%. Xiaomi-branded sweeper robot was still the biggest driver for IoT @ Home category due to its low base effect and faster revenue contribution. The revenues from Xiaomi sweeper robot increased by multiple times compared to the second quarter of last year.
Thank you. Any color on the near-term trend in terms of the growth momentum, including water solutions as well? Can we have a little bit of sense?
Yeah. As we mentioned, we continue to execute quality growth and product optimization strategies in the second quarter. We roll out additional new products with higher margin and high ASPs. In particular, some key categories, including, say, the water purifiers. In addition to introducing more high-end Viomi water purifiers, we also shift the focus a bit more on supplying more large Viomi water purifiers with better gross margin. Thus to improve the overall ASP and gross margin, and together, the revenue contribution in the coming quarters.
Okay, thank you. My second question is on the ASP and the margin trend. Do you have any plan for any price changes, i.e., given the rising raw material costs? That's one. I think the implication to margin, because in the second quarter, we have a very good margin improvement with all this mix shift and adjustment on the product portfolio. Are we going to see a similar pattern of margin expansion in the second half?
Yes. We observed the raw material costs still increased in the second quarter, but in a relatively mild way compared to the previous months. This also contributes to the increase of ASPs across the industry, as well as for some of our products. About the margin, we have started some advertising and marketing activities since the second quarter to enhance our branding, positioning, and recognition. We will invest in more selling and marketing expenses compared to last year, but in a prudent and reasonable way. Such expenses will increase, thus lower the margin. As we have taken product optimization strategy and the overall gross margin has been improving and we're looking forward to continuing improving. We think this will mitigate certain impact of the increased operating expenses on net profit margin.
We don't see the material cost increase will impact on the margin to the first quarter, and we have taken serious cost control measures, and we don't see any material impacts from such kind of cost impacts.
Thanks a lot. My last question is on the new product strategy. I think Mr. Chen in the opening remark mentioned quite a few new products being innovated and put in market in second quarter and the first half. What kind of strategy in terms of how we actually make all these new SKUs a more meaningful contribution to the revenue? [Non-English content]
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Yeah, I'm translating Mr. Chen's comments. We have these innovative products this year. The first of this series of innovative products can help us to make the margin expansion, which you can see from the first quarter and second quarter, and make our product portfolio more diverse. Second, some SKUs of these innovative products, such as the Super Pro and the YOA water purifier, as well as the all-direction air conditioner, can also help increase the revenue contributions in the categories respectively. We think these new SKUs and the margin expansion can also help us to improve the overall gross margin of our business, as well as to help drive our overall growth. Thank you
Thanks, that's all my questions.
Next question comes from Wei He from CICC. Please go ahead.
Hi, thank you for the presentation. I have two questions here. The first is that we noticed the company has done a lot promotion recently, like cooperating with Focus Media. We can also see the trend from the financial report. Do we expect a higher selling and marketing expense ratio this year? Would it be even higher in the second half of this year? Can you share with us the promotion plans or strategy with more details?
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I'll quickly translate. Since last year and the first half of this year, we can see among the younger generations, they are more likely to get to know and use the smart home products. Smart home is a hotter topic among them. Recently, we invited one of China's very popular celebrities as our product spokesperson, and we also do a lot of advertising on this. You can see in 分众 and Xinchao Media, to help us to increase the brand recognition. You mentioned the increase on the selling marketing expenses, we see such investment in advertising and marketing will indeed increase such expenses. This will be partially mitigated by some of our sales structure optimization as well as some cost control measures.
In the second half this year, we will also continue to invest in some related expenses on advertising, and we will do the advertising on television and some other channels. From the internal data, we can see that our brand recognition has increased due to all of these marketing and advertising tools. We hope this will also help us to increase our branding image. Thank you.
Okay. Thank you. My second question is about the overseas market. Can you give us a more detailed update about overseas distribution channel development, both online and offline? Also, are there any negative impacts due to the shortage of shipping containers?
Okay. I will answer the question. In the first quarter of 2020, and the first quarter of this year, as we mentioned, we already entered into more than 10 countries in Europe, Asia, Middle East and Australia. The past few months, we also expanded into additional 8 countries, including India, Thailand, Saudi Arabia, and other European countries, and the U.S. Our exported products are sold on both online and offline channels and the most through our franchises. We sold our products to those franchises, and they sell on their offline as well as online channels. In the North American market, we just launched the U.S. Amazon store, and we are also seeking cooperation opportunities for offline channels that we can have this year, but depending on the further selling conditions on Amazon.
As for the question about the shortage of shipping containers, yes, it did some impacts for some delayed orders, but we optimized the manufacturing and delivering timing, as well as we plan to set out some locally the warehouses to mitigate the impact. Generally, it doesn't cause any material impacts on our overseas market.
Okay. Thank you for answering. That's all my questions.
Thank you.
Great. Next question comes from Vincent Yu from Needham & Company. Please go ahead.
Hi, management. Thanks for taking my question. I have two questions. Actually, analyst has already mentioned, but I would like to discuss a little bit more. The first one is that looks like we missed our guidance range this quarter. Can management talk more about which segments didn't perform as well as we previously expected? Did our portfolio optimization contribute to the top-line miss as well? The second question is, I also want to touch about the margins. In our understanding, can management share with us how did the raw material trends in August compare to second quarter? Do we think that we have seen the peak in terms of raw material prices? Thank you.
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Okay, I will translate the comments for your second question first about your raw material accounts. We are already observed the fluctuations of raw material accounts like demonstrating more stable when entering in August. As the industry expects, we also think the raw material account has been relatively high position and will not likely to increase a lot.
For your first question about the guideline, the second quarter revenue and the third quarter guidance. We are shifting our focus on the product portfolio adjustment for the second quarter and the third quarter. We have like two main points. First, we will increase the sales of some new products with potential growth, and it will take some time to increase the revenue contributions of these new products and the SKUs. Second, we will investing more R&D resources in our own branded products, in particular like robot, water purifier and home devices. We can see that in long term, these categories and products can help us to drive the overall growth in long term. Overall in the third quarter, we will be also conservative about our sales and the guidance, and still remain the focus on the product portfolio adjustments. I hope that helps. Thanks.
[Non-English content]Thanks management. Let me follow one more question.
We mentioned that we are investing in new stores, hiring new spokesperson. Have these expenses already incurred in second quarter 2021? Will we see sales and marketing expenses on a year-to-year basis grow faster than the total revenue growth? Thank you.
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Okay, for the selling and marketing expenses, they have on operating expenses and margins. For the investment in the offline channels, as you know, we cooperate with the merchants to open the offline stores and the merchants themselves to take care of the store operation and that won't like reflect it in our operating expenses. It's one on this part. For selling marketing, we have been conducted the advertising and revising the salesperson just the second quarter. We already put some of the selling marketing expenses in the second quarter. In the second half of this year, we will have some ongoing expenses on this part. Compare the first half of this year, the expenses will increase, but we also see the effect from our internal data, like see all of these advertising activities also help our sales online and offline.
We think this is in effect, and we will continue to do such advertising activities in the second half. Okay. Thank you.
Thank you very much. Very clear. Thank you. Thank you. Very clear. Thank you.
Next question comes from Xu Guofeng from Blue Lotus. Please go ahead.
Thank you. I would like to ask, will overseas market revenue play an increasingly important role for Viomi? Does management believe that overseas sales will continue to grow? With the easing of COVID-19 restrictions in various countries, will overseas growth slow down a bit?
Will international sales play an increasing role? Does the management see international growth continuing? With the easing pandemic measures, has international growth slowed a bit? Thank you.
Our overseas market performance in Q1 and Q2 this year has been quite good. This is mainly due to the exports of small robotic vacuum cleaners, which have shown good growth in unit price, profit, and scale. If we say the first half of the year performed well, because the exports of China in the first half of the year benefited from the epidemic. There were some problems in the supply chains overseas, the orders exported from China increased. In the second half of the year, the epidemic worldwide has experienced some setbacks, we will still maintain a prudent management of exports. I think there is still quite a lot of uncertainty. The development of this kind of international relationship and this epidemic is actually quite uncertain.
Judging from the current customers we are in contact with, it is actually relatively good. From online and offline sales, local sales, relatively speaking, compared to before, we should still maintain a relatively good growth trend. It should be a significant growth, but we will still maintain a relatively prudent attitude towards this matter.
Okay. For the first half of this year, we can see there were robust sales. The sales were programmable in the overseas market. That's due to the post-pandemic situation in some of the overseas countries. Entering into the second half of this year, we also see the pandemic situation take some changes over time, and we remain conservative, and we see there are indeed some uncertainties in the global market. So far, from the sales data we see internally, the sales performance is good and in our expectation. We still are conservative about the selling in the overseas market. We will also take very good measures and a prudent way to make any promotion and marketing activities overseas. Thank you.
I have one more question. You mentioned that in August you will carry out sales in North America. A analyst also asked about sales in the United States. I want to ask, are there any specific marketing strategies in the United States to help Viomi stand out in the U.S. market? I mean, is there any particular strategy for marketing in the U.S. market? Thank you.
Thank you. In terms of the U.S. market, as you know that our products were just officially launched last week on Amazon store. On one part, we will cooperate with some local third-party operator, to operate our Amazon store together, so they know better about the operation guidelines on Amazon as well as the American customers' culture. On the other hand, we also will start to do some marketing and PR activities on the U.S. market, such as the KOL recommendations. We already have zero-like measures on the pipeline to do that, to help us promote the sales in the U.S. market.
Okay. Thank you.
Yeah.
As there are no further questions now, I will turn the call back over to Cecilia Li for closing remarks.
Thank you once again for joining us today. If you have further questions, please feel free to contact us with the contact information on our website or the Cassidy Group, our investor relations consultant. Thank you all. Have a good one.