Hello, ladies and gentlemen, thank you for standing by for Viomi Technology Co., Ltd. Earnings Conference Call for the Third Quarter of 2020. At this time, all participants are in listen-only mode. Today's conference call is being recorded. I would now like to turn the call over to your host, Ms. Cecilia Li, the Senior IR Manager of the Company. Please go ahead, Cecilia.

Thank you, Operator. Hello, everyone, and welcome to Viomi Technology Co., Ltd earnings conference call for the third quarter 2020. 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 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 Chief Executive Officer; and Mr. Shun Jiang, the Chief Financial Officer. The 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 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 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. 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 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 Viomi's Founder and CEO, Mr. Xiaoping Chen. Mr. Chen will deliver his remarks in Chinese, followed immediately by English translation. Mr. Chen, please go ahead.

[Foreign Language]

Thank you, Xiaoping. This is Shun, Viomi's CFO. I'll quickly translate Mr. Chen's remarks before discussing our financial performance for the third quarter of 2020. Hello everyone. Thank you for joining our earnings conference call for the third quarter of 2020. Under the backdrop of the meaningful industry recovery and rebounding consumer demand in the post-pandemic landscape, we continued our strong growth momentum in the third quarter, with net revenues increasing by 39% year-over-year to around RMB1.49 billion, exceeding our previous guidance once again. Over the past two years, as part of our 5G IoT strategy, we have been developing a 5G IoT technology, protocol and algorithm framework for the home environment, including sensor technology, AI algorithms and smart hardware. In 2020, we accelerated the introduction of our strategic 5G IoT products and services under this framework. In May, amongst many strategic products and services, we introduced our 21Face Interactive Smart Screen TV and Home SaaS concept, which marked the comprehensive implementation of IoT @ Home across all home scenarios and screens. Following this, at a recent product launch event in October, we launched state-of-the-art IoT chip modules, CPE or customer premise equipment, router products, and our home pads screen-based control interface, further strengthening 5G IoT smart connection capabilities for the home environment. We are fully confident that the increasing penetration and adaptation of 5G technology, our 5G IoT focused strategy will help us maintain a leadership position in this rapidly evolving industry. To this point, we continue to expand our value-added businesses and content applications. At our recent 5G IoT product launch event, we also announced additional enhancements to our line of 21Face large screen refrigerators and further expanded related content partnerships. Following our previous cooperation with various entertainment and media platforms, including Kugou Music, online video platform, iQIYI;…

That concludes our Founder’s comments. Now let's turn to the detailed financial review of our third quarter results, as well as the outlook for the fourth quarter and full-year of 2020. As Xiaoping discussed, net revenues were RMB1.49 billion, an increase of 39% compared to the same period of last year, once again demonstrating the strength of our diversified business mix, as the industry began to recover from the impact of COVID-19. Revenues from our Viomi part of the business increased by 46.5% to RMB861.9 million for the third quarter of 2020, representing around 58% of our total revenues for the quarter. Revenues from IoT @ Home portfolio increased by 72.5% to RMB1.06 billion from RMB614.8 million for the third quarter of 2019, primarily due to the continued successful rollout of certain new product categories, in particular, sweeper robots and air conditioning systems. Third quarter sales from high-margin Viomi-branded sweeper robots, which we expect to be a key growth driver going forward, demonstrated multi-fold increases, both on a year-over-year, as well as quarter-over-quarter basis, and represented around 45% of overall revenues in the quarter. Revenues from our home water solutions part of the business decreased by 32.2% to RMB145.4 million. The decline was primarily due to year-over-year decreases in average selling prices, particularly of Xiaomi-branded water purifier products. This effect was partially mitigated by the successful introduction of and significant increasing sales in sales of our new series of Viomi-branded water purifier products. Revenues from Viomi-branded water purifier products nearly doubled in the third quarter and are on track to more than double in the fourth quarter, both on a year-over-year basis. Viomi-branded water purifiers are expected to contribute over 20% of our total Home Water Solutions business, and over 3% of our total revenues in the second-half of 2020,…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Hanli Fan of Morgan Stanley. Please go ahead.

Hi. Thank you. Ms. Chen and Mr. Jiang and Cecilia. This is Hanli from Morgan Stanley. Thanks for the briefing. I have two questions. The first question is on some recent business update, particularly by channel, so your offline channel and online channel post-COVID-19. So what's your kind of offline channel recovery pace, as you can see in recent months? And also for the online channel, for some of the competitors, we can see some growth slowdown post-COVID-19. So how do you observe your online channel sales growth in the last few months post-COVID? So that's my first question. And my second question is coming for the next year outlook. Because Mr. Jiang mentioned some outlook for next year just now, but I just want to dig into that, for example, your top line by kind of like any numerical projection for us for now. And also, you mentioned your gross margin expansion, and I would also want to know more about kind of like net margin. So how would the gross margin, as well as your expenses would affect your kind of like bottom line margin, net margin? So those are my two questions. Thanks for management.

Thanks, Hanli. I'll take those two questions. First question on the sales channel trends and recovery and outlook. So as discussed during the earnings call just now, sales recovery in general has been quite healthy. You would have seen we've reported nearly 40% year-over-year growth, mainly on the back of new product launches, as well as a pickup in overall consumer activity and industry-wide sales channel recovery. So, in terms of channel breakdown, we have not seen major structural changes in terms of overall online channel traffic trends, which you may have seen in quite robust earnings results by the major e-commerce retailers in the last couple of weeks. Our core online channels remain a key sales channel for us for this year, as well as the year ahead, so still very positive trends, as well as feedback from the online channels. So the offline channel performance is also definitely stabilized since the difficult times in the first-half of this year. And we have once again, reinitiated our efforts towards growing our offline points of sales. So also, as discussed just now, we have historically focused more on standalone franchise Viomi experience stores for our offline presence. As we continue to increase our brand presence and recognition, we have initiated plans to greatly increase our overall points of sales in the offline channels, particularly through cooperation with many of the O2O outlets of the major e-commerce retailers, such as JD and Tmall. And we're also continuing to discussions in relation to additional partnerships with retail leaders, such as Hunan Friendship, as well as Gome and Suning. So in terms of our standalone stores, we'll continue to optimize our franchise structure, as well as look to opportunistically opens additional stores. But I think the most of the offline point of sales…

Thank you. That's very detailed. Thank you so much.

Next question comes from Xudong Chen of CICC. Please go ahead.

I have two questions. And first one is you just mentioned you have just started the export business. Can you give me more colors about the overseas market like your product, go to the other countries? And what's the condition now? And my second question is, can you share more colors on the key drivers of the IoT product portfolio and the business forecast for 2021? That's my two question. Thank you.

Yes. So I'll first touch upon the export business. Our export business, we have just recently started to put a more strategic emphasis on the initial markets that have had shown quite good initial success, includes towards the Southeast Asian as well as Eastern European markets. The initial product categories that we've been selling to these markets are more towards the small appliances side of the business, and in particular, our sweeper robot business. So a large portion of our existing export markets consist of our existing Viomi-branded sweeper robot products. Going forward, we have recently hired a new team just to focus on this export business. I think we will continue to leverage upon our success in the small appliances business, particularly for sweeper robots, increase our SKUs for this product categories for the export markets as well, and also look to expand our export range. For example, into water purifiers, as well as perhaps some other white good products as well. So your second question on IoT products. So I think this is how we look at our IoT portfolio and IoT strategy. So it formed this 5G and IoT concept, one very important part of our brand and product differentiation. Over the past several years, we've been very much devoted to implementing IoT, 5G IoT strategic framework in terms of products, protocols, as well as algorithms. You would have seen, we've launched quite a number of 5G and IoT related products over the past several months. We feel that such newly launched products are a very important part of brand identity, and how consumers and customers and end consumers are able to differentiate our brand and products from peers. These products, of course, also build upon our comprehensive IoT @ Home platform, enhancing the overall connectivity and also creating network effects and synergies with our existing IoT enabled product portfolio within our concept of [Indiscernible] IoT @ Home, which is our vision for the 5G IoT interconnected home scenario. So we will leveraging upon this platform, we will then continue to strengthen and build upon such a platform, and then being able to entrench really our brand identity and then getting a head start and being able to adapt to rapidly changing consumer trends and lifestyle demands.

So, our penetration into 5G IoT will consist of two key phases over the next year or so. So number one, for all our screen based products, in particular the large screen refrigerator and interactive smart screen, all of these will transition into 5G IoT, next generation 5G IoT technology in the first-half of next year. And then throughout the year will gradually implement this technology across our entire product portfolio to achieve close to full penetration across our product portfolio by the end of next year.

Okay. Thank you.

Thank you.

The next question comes from Joy Wei of 86Research. Please go ahead.

Thanks for taking my questions. I have a follow-up on your 5G IoT strategy. You have been putting out a pretty comprehensive 5G IoT portfolio. So how do the management project the tipping point of 5G IoT? Will the 5G IoT market see a big growth in 2021? And so what level of investment is needed in order to achieve the lien position in this market in terms of like R&D, CapEx, marketing spending, et cetera? Secondly, can management elaborate more on your internet service monetization opportunity, as we have seen that you made a lot of partnership with Internet companies? Thank you.

Thanks. I'll initially take these two questions, and Mr. Chen may have some supplements. So the first question on the tipping point of 5G IoT, so in terms of the tipping point, we believe the industry transformation will be an ongoing process. And we're currently still in the early adopter phase. However, we do expect consumer and market attention to tip extremely quickly. I think a very good example of this is what we have recently seen in the electric vehicle market. And this is why, we've been devoting additional efforts towards marketing especially, as well as product development and innovation in firmly establishing ourselves as a first mover in 5G IoT within this industry. So, you can think of 5G IoT as a subset of the overall kinds of home appliances industry at the moment, similar to how electric vehicles are a subset of the overall automobile industry. And I think, it is a very defined trend that the penetration as well as the contribution of these next generation technologies will increase over time. And when the tipping point will be, we think will be in the near-term, which is why we’ve been making such brand positioning as well as R&D investment. So Mr. Chen will supplement a couple of points on this aspect. On next question.

Yep, sir. Just a supplement on your first question on the tipping points Mr. Chen added three points. So number one, as you may know all of the telecom companies, especially the three large telecom companies in China very much rapidly rolling out the base station. So 5G IoT coverage is definitely expanding at a rapid rate. So once the coverage becomes very mainstream, and of course, consumers will adopt the processes more. Second is, of course, the product adaptation and the product base. So to be able to leverage these technologies, we believe that you need screen-based products to be able to provide our users with content and the best experience to capitalize on the 5G and IoT experience, which is why I think the 21Face refrigerator, our interactive smart screen TV, these as well as our home pad, recently launched home pad switch products, these will become very important enablers of 5G IoT in the home environment. And then third, of course, 5G IoT also, following on from the rollout, of course, due to the speed that this technology is able to offer will be able to offer much more content and a better experience for consumers as opposed to previous generation technology, which of course will further accelerate adaptation or adoption. So that was the first question. On your second question on monetization of some of these IoT products, so we believe there are many opportunities for monetization. So at the moment, we are very much focused on enhancing the consumer experience and increasing penetration, as well as overall installed base of our products to get consumer buying, especially the early adopters, on the capabilities as well as the experience of our products. So that's why, as you would have seen over the past couple of quarters,…

Thank you.

Next question comes from Vincent Yu of Needham & Company. Please go ahead.

Thank you, management. Congrats on the good quarter. I have three questions. The first one is to go on the export business cushion, any comments on the product pricing for the export business? Will there be any pricing premium versus the domestic markets? And do we have any revenue contribution expectations in 2021? Second question is about the Double 11 [indiscernible] sales, day sales. Can we share any comments on the preliminary results for our Double 11 [indiscernible] sales? Can we share any figure on gross rates? And did our newly released product attain new sales? And how were they received? And also for these promotion we think its impact on our gross margin trend for the fourth quarter. And third question is on the product line. I think you mentioned it a little bit, and I want to ask if we can get more details. And looking to 2021 is there any product category in particular we're most excited about? Thanks.

Thank you. I'll take those questions. So the first one on the export market, as discussed represented around 10% of our Viomi-branded business in the third quarter, which is around 4% to 5% of our overall revenues, has been growing extremely quickly. But of course, our overall business has also been growing extremely quickly. At the moment, it's focused mainly on smaller appliances, in particular sweeper robots. But as discussed, we're also looking to expand not only our regional coverage, but also the product categories that we will export going into next year. So, we probably believe that at the current stage that the export business will grow faster than the domestic business for next year, and will likely be close to 10% of our overall revenues for next year. In terms of pricing, I think currently, it's predominantly sweeper robot products. We have a range of sweeper robot products as well for the mass market as well as mid to high end as well. There is no significant or material difference in terms of the ASPs for the export versus the domestic business. So, for your second question on the Double 11 sales, as well as kind of the performance of some key product categories. So as discussed during the call, towards the latter part of the third quarter, and in particular the fourth quarter, we made a gradual shift towards greater emphasis on quality of growth and economy undergoing our product premiumization and SKU optimization phase, which is reflected in our fourth quarter guidance. So the Double 11 sales festival, I would say was still successful and very much focused on some of our core, newly identified growth categories. So some of our best performing products were some of the various newly launched products and key focused products,…

Thank you very much.

There are no further questions. Now, I'd like to turn the call back over to Cecilia Li for any closing remarks.

Thank you once again for joining us today. If you have further questions, please feel free to contact our Investor Relations department through the contact information on our website or The Piacente Group, our Investor Relations consultant. Thank you all. Have a good one.

Thank you, everyone.

Thank you.

This concludes the conference call. You may now disconnect your line. Thank you and have a nice day.