Zepp Health Corporation (ZEPP) Q2 2019 Earnings Report, Transcript and Summary

Hello, ladies and gentlemen. Thank you for standing by for Huami Corporation’s Second Quarter 2019 Earnings Conference Call. At this time, all participants are in listen-only mode. Today’s conference call is being recorded. [Operator Instructions] I will now turn the call over to your host, Ms. Grace Zhang, Director of Investor Relations for the company. Please go ahead, Grace.

Hello, everyone. And welcome to Huami Corporation’s second quarter 2019 earnings conference call. The company’s financial and operating results were issued in a press release via newswire services earlier today and are posted online. You can also view the earnings press release and the slides to which we will refer on this call by visiting the IR section of the company’s website at, www.huami.com/investor. Participating in today’s call are Mr. Wang Huang, our Chairman of the Board of Directors and Chief Executive Officer; and Mr. David Cui, our Chief Financial Officer. The company’s management will begin with prepared remarks and the call will conclude with a Q&A session. Mr. Mike Yeung, our Chief Operating Officer, will join us for the Q&A session. Before we continue, please note that today’s discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company’s actual results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the company’s annual report on Form 20-F for the fiscal year ended December 31, 2018 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 under applicable law. Please also note that Huami’s earnings press release and this conference call include discussions of unaudited GAAP financial information, as well as unaudited non-GAAP financial measures. Huami’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 CEO, Mr. Wang Huang, please go ahead.

Hello, everyone. Thank you for joining our earnings conference call today. Solid topline revenue growth and strong profitability continued in the second quarter, as our brand, product lines, footprint and strategic initiatives, all continued to develop and expand globally. Our second quarter revenue was RMB1.0 billion, which represents a 36.6% increase compared to second quarter 2018. Our revenue performance was driven by the extremely successful second quarter launch of the Mi-Band 4. In addition, sales of Amazfit branded smartwatches continued to perform well with our self-branded line now ranking fifth globally in shipments, according to a recent public research report. Furthermore, our overseas expansion is in line with our strategy and expectations. Approximately half of our products were shipped overseas, during the first half of 2019. Mi-Band 4 was launched in the second quarter and it quickly became a blockbuster, with the best sales momentum among all generations of the Mi-Bands. Its global shipment volume exceeded one million units within eight days. The features of Mi-Band 4 are improved significantly from previous versions. The NFC version of Mi-Band 4 is the first version of Mi-Bands to have Xiao’ai, the intelligent voice assistant of Xiaomi IoT ecosystem, installed. We will continue to work closely with Xiaomi on new product releases, to replicate the success we have had with each version of the Mi-Bands. We are confident in the strong market appeal of the Mi-Bands going forward. Our long-term plans with Xiaomi and the popular Mi-Band product line remain unchanged. We look forward to developing and producing future generations of the Mi-Band, including variants targeting different global market segments and customer profiles. In the second quarter, we continued to expand and diversify our Amazfit product lines. In late June and July, we launched multiple smartwatch products with various functionalities designed for different customer demands. To name a few, we launched our second-generation smartwatch, Amazfit Nexo, in June. It is a full-function smartwatch with an Esim communication feature. We also introduced our brand-new watch series, Amazfit GTR, which is designed to target a new growing market segment. While it has the look-and-feel of a traditional watch, the GTR is integrated with smartwatch, as well as powerful sports functionalities. In addition, we launched the Amazfit Bip Lite and Amazfit Verge Lite smartwatches. Their smart-light functionalities, long battery life and competitive price make them ideal choices for first time smartwatch users. Our brand-new ECG version smartwatch targets the fast-rising wearable health tech market. We now have a dedicated healthcare team, responsible for the research and development of our wearable health tech products and services, in addition to the analysis and integration of the biometric datasets. This team includes health care professionals and accredited experts from leading institutions with specializations in cardiovascular health and chronic disease management. We also provide selected healthcare services to our smartwatch users with both complimentary and premium packages. In addition to launching smartwatch products targeting different customer segments, we continued to enhance our IoT life scenario capabilities. For example, the NFC functionality in our smart wearable devices allows users to facilitate a number of common daily activities including, public transportation access, select community space access and smart car ignition, among others. We also entered into a strategic partnership with Tencent Cloud. As part of the partnership, selected Amazfit products will have the capability to install applications like QQ music, QQ and Tencent translation. A significant technology achievement in the second quarter included incorporating with -- incorporating our self-developed AI chip, Huangshan No. 1 into our healthcare-focused smartwatch product line. Health tech enabled smart wearables are a rapidly advancing trend and our breakthrough technology enables critical real-time applications for non-prescription ECG measurement and 24 hours/ seven-day arrhythmia monitoring. We have received very positive customer feedback on our latest products from our customers. These products and the technology powering them, create a concrete foundation for our continued leadership in the development of advanced products in the smart wearables industry. With our growth strategies firmly in place, we will continue to expand our global sales channels and brand recognition, move forward our cooperation with Timex on product development, launch more Amazfit new products and further invest in R&D capabilities. We have full confidence that our competitive new products and well-established product lines will drive appreciable growth for the second half 2019. We expect a much stronger revenue growth in the third quarter, approximately 52.6% to 55.4%, compared with Q3 2018, as indicated in our earnings release guidance. Thank you again for joining today. I will now turn the call over to our CFO, David Cui.

Thank you, Wang. Robust revenue growth momentum continued in the second quarter, increasing 36.6% year-over-year, as the company benefitted from strong global unit sales, particularly with the newly launched Mi-Band 4. During the quarter, we shipped 8.3 million total units, up 53.7% from the same period last year. We believe this topline growth momentum is sustainable and has the potential to continue improving. In addition to the products which we already launched earlier this year, we will soon launch more Amazfit new products with various functionalities in the next quarters. These new product releases demonstrate Huami’s commitment to the needs of global smart wearable consumers and give us the confidence to continue delivering value to our shareholders in the second half of 2019, as Wang mentioned earlier. We will continue to benefit from our expanding overall brand recognition as we enhance our products and services, and continue to penetrate global markets. Also during the second quarter, we continued to make strategic investments in our R&D capabilities, including strengthening our algorithm and cloud services capabilities, in addition to streamlining product development, testing and supply chain management for new launches, all in an effort to ensure we remain on the cutting edge of smart wearable technology. We also continued to make investments to our brand value, by increasing our marketing efforts to promote broader awareness and adoption of our self-branded products. We are confident these investments, along with strong alliances, operational efficiency and a growing global footprint, will help ensure our healthy growth and solid financial performance in both the short- and long-term. Mindful of the length of this call, I will highlight the key financial measures for the second quarter 2019 and encourage you to refer to our earnings press release for further details regarding our financial results. Now, here are some of the highlights of our strong second quarter. Revenues increased by 36.6% to RMB1.04 billion from RMB760.1 million for the second quarter of 2018, exceeding the guidance we provided to the market. Gross profit increased significantly by 40.8% to RMB277.3 million from RMB196.9 million for the second quarter of 2018. Our gross margin of 26.7% reflected a sizeable improvement from our gross margin of 25.9% for the second quarter of 2018. The increase, aside from economies of scale, was driven by our continued improvement in supply chain management. Strong supply chain management has always been a hallmark of our operations and we are continually working to find ways to make it even better. In 2018, we consolidated and streamlined our logistics and supply network activities by establishing a dedicated supply chain management global headquarter in Shenzhen. Here, all relevant teams are under one roof. The ease and speed of communication among teams and with the suppliers and manufacture contractors has further improved our operational efficiency. Now, moving on to expenses. Total operating expenses increased by 89.2% to RMB185.2 million from RMB97.9 million for the second quarter of 2018, reflecting our investment strategy in R&D, branding and marketing channels for long-term returns. Research and development expenses increased by 111.4% to RMB93.8 million from RMB44.4 million for the second quarter of 2018, primarily due to an increase in personnel-related expenses and a rise in intermediate test expenses as several new pipeline products were undergoing rigorous testing. General and administrative expenses increased to RMB51.0 million from RMB32.8 million for the second quarter of 2018. This increase is in line with the growth of the company. As our total revenues and volume of products sold have continued to increase, our selling and marketing expenses have naturally also increased. Selling and marketing expenses increased by 95.2% to RMB40.4 million from RMB20.7 million for the second quarter of 2018, as we intensified our promotion efforts for self-branded products. We also expanded our sales and marketing team to boost our sales efforts globally. Our income before income tax was RMB101.3 million, compared with RMB101.4 million for the second quarter of 2018. The GAAP Net income attributable to the company increased to RMB89.4 million, compared with RMB85.5 million for the second quarter of 2018. Net income attributable to ordinary shareholders of the company increased to RMB89.2 million. Moving down the P&L. Basic and diluted net income per ADS attributable to ordinary shareholders of Huami Corporation was RMB1.46 and RMB1.39, respectively. As a reminder, each ADS represents four Class A ordinary shares. Next, Adjusted net income attributable to Huami Corporation increased to RMB111.7 million from RMB101.6 million for Q2 2018. Finally, adjusted basic and diluted net income per ADS attributable to ordinary shareholders of Huami Corporation was RMB1.83 and RMB1.73, respectively. Relating to cash, as of June 30, 2019, the company had cash and cash equivalents of RMB1.45 billion, compared with RMB1.44 billion as of December 31, 2018. And now to our outlook, looking ahead to the third quarter of 2019, management currently expects net revenues to be between RMB1.64 billion and RMB1.67 billion, which would represent an increase of approximately 52.6% to 55.4% from RMB1.07 billion for the third quarter of 2018. This concludes our prepared remarks. We will now open the call to questions. Operator, please go ahead.

[Operator Instructions] The first question comes from Kyna Wong of Credit Suisse. Please go ahead.

Hello. Good evening, management. Thanks for taking my questions. I have two questions. The first question is about the ASP trends. Because in the second quarter we see the ASPs actually declined due to the mix. And it is because Mi-Band for that they ramping the shipment and also some of the product adjustments in the second quarter. But along with the new product launch like in the June and also July, what should we expect in the ASP trend in the second half? That is first questions. The second question is about the gross margin, I think, David, actually mentioned about a life supply chain management, but given the ASP decline, but we see a gross margin indeed improved in the second quarter. What should we expect in the coming quarters with the new product launch, because initially the volume for the smartwatches may not be light, so, I mean, in the scale. So should we expect like the margin to be more stable or trending down? Thank you.

Thank you for the question. With respect to your first question, regarding ASP, in second quarter we continue to sell Mi-Band 3 while we launched our Mi-Band 4 in June. So a large number of Mi-Bands were sold. So before launching Mi-Band 4, we did provided promotions to the users of Mi-Band 3. That may impact the ASP. In Q2 and earlier, in July, we did launch a new Amazfit product. But in Q2 we did not benefit much from the sales of this Amazfit new products. But the new product launches will set up the foundation for Q3 and the quarters after. So this explains the fluctuation of our ASP in Q2. With respect to the ASP trend in Q3, we believe that given the expected increase of the sales of Amazfit products, the revenue mix should change. That should rebalance in the ASP trend. Also that should offset potential margin losses on Mi-Band given the Amazfit products has higher margin. So, with respect to your second question, GP margin, we believe that margin should remain stable in the third quarter because we do have to balance between the Mi-Band margin and the Amazfit margin.

Thank you.

Yeah.

The next question comes from Xudong Chen of CICC. Please go ahead.

[Foreign Language] Thank you for taking my questions and congratulations on the strong results. According to the third-party statistics, the shipment of the Mi-Band 4 reached to 1 million in seven days after it launched in June, which is amazing. My question is, will the company continue to cooperate with Xiaomi in the future, and will the company still produce Mi-Band 5 in the next-generation? Thank you.

The answer is yes. We are actually developing Mi-Band 5 with Xiaomi

Okay. And…

Okay. Thanks.

Thanks.

Okay. The next question comes from Arthur Lai of Citi. Please go ahead.

Thank you, management team. And yeah, we saw that revenue results were quite good up to 36% and can you give us more color on the oversea shipments? And also how do you think of the shipment from the Northern country? Will we rule out more countries in the future? Thank you.

Thank you, Arthur. More than just a little bit over half of our total shipments were actually overseas shipments. This is in line with our historical records. That means the overseas sales also increased when our overall revenue increase. And in terms of the country penetration, we are still covering the European market and the Southeast Asia market. We are also working on the U.S. market. We did make some progress, but it’s going to take time. But our focus, we did make a significant progress in the European market. And in the one half, we spent a lot of effort in those regions and later in the year, it will intensify our efforts in those regions.

Yeah.

I think the one small follow up is in Europe and the U.S. market, will the product carry the higher AP and margins? Thank you.

Actually, no, so the domestic sales and overseas sales carry similar margin, because we do leverage some overseas sales channels. So we allow more profit to those channel players, but the retail price should be higher in those overseas markets.

Okay. Thank you.

The next question…

Thanks, Arthur.

The next question comes from Yee Ian Lau [ph] of Industrial Securities. Please go ahead.

Hi, management. Thanks for taking my question. Truly have two questions. The first one is about your marketing strategy. I know that Huami has released many products since the second quarter, which is very attractive to large consumers. But actually we haven’t seen the large scales on advertising. So can you introduce the marketing strategy for the new products? So this is my first question. And the second question is about your overseas sales team. I wonder how many people are currently in your overseas sales team and how we can expect the number of team member increase in the future? Thank you.

To answer your second question first, our sales team is about 100 people right now, our total number of employees just exceeded 800. And among the -- roughly about 100 sales force and we should say half of them are focusing on overseas sales is in line with our revenue distribution. And we do have sales staff in the key regions, key markets, in Europe, in Southeast Asia and also in the U.S. And when our revenue continues to grow, we may have to add more sales staff. That’s our plan. And then in terms of our marketing strategy, yes, you are right. We do not spend a lot of advertisement dollars yet. And this is because our strategy is to rely on the channel players, the distributors in each country and then we also rely on our online channels. So we do pay channel fees to the e-commerce players in China and also in certain overseas markets. And the reason we are doing that is advertisement could cost too much and since our total number of shipments are still low at this moment to most effectively use our marketing dollars. We adopt business strategy. So we let distributors in the channel to make money and rely on the distributors spread to the market and to build our brand recognition in this way. And then in future, we may do some a targeted advertisement. But it’s not in a very heavy scale.

Okay. Thanks.

Thanks.

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

Congratulations to these astonishing results. Can you give us a breakdown between Xiaomi and self-branded products, including metrics like shipment, revenue and gross profit? And the second question is, can you share with us [about] [ph] the future product pipeline, for example, are we launching the Mi-Band 5 next year or the year after next year? Thank you.

In terms of breakdown, I will say about 70%/30% split, and given that our new unmeasured products, they are all launched towards the end of the quarter. So we didn’t really benefits that much in Q2. So in Q2 majorly, we still primarily sell our old Amazfit products. So this is a 70%/30% split. And then, again, our Amazfit products enjoyed much higher gross profit margin as compared to Xiaomi’s products. So the spread is about 10%, let’s says about 10%. So you could do the breakdown calculation on the gross profit. And in terms of Mi-Band 5, we do not have a fixed time when we are going to launch Mi-Band 5. But I would say that we have already started working on Mi-Band 5 with Xiaomi and it is not going to take that long. So we just launched Mi-Band 4, but potentially towards the end of next year, we may launch Mi-Band 5.

Thank you.

Thanks, Joy.

As there are no further questions now, I’d like to turn the call back over to the company for closing remarks.

Thank you once again for joining us today. If you have further questions, please feel free to contact Huami’s Investor Relations Department through the contact information provided on our website or The Piacente Group, the company’s investor relations consultant.

This concludes this conference call. You may now disconnect your lines. Thank you.