Zepp Health Corporation (ZEPP) Q4 2019 Earnings Report, Transcript and Summary

Hello, ladies and gentlemen. Thank you for standing by for Huami Corporation’s Fourth Quarter and Full Year 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 fourth quarter and full year 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. Huang Wang, 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 provision 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, [2019] 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. Huang Wang. Please go ahead.

Hello, everyone. Thank you for joining our earnings conference call today. 2019 was an outstanding year for Huami marked by accelerated growth, strengthening brand recognition, and robust financial and operational results, all while we solidified our leadership position in the global smart wearable industry along with focusing on our company mission and healthcare strategy. In the fourth quarter, we achieved healthy revenue and net income growth, driven by strong performance from our newly launched products as well as effective sales and marketing outreach. In September 2019, we held our first international launch event at IFA 2019 in Berlin, Germany, introducing two new products to the market. Recently at CES in Las Vegas, to further round out our Amazfit portfolio, we announced another new smartwatch, the Amazfit T-Rex,a device with a military-certified body that is ideal for outdoor enthusiasts. Including these newly launched products, we have now expanded our Amazfit brand to seven smart watch product lines to meet the diversified needs of our wide customer base. We also introduced, from our new TWS product line, Amazfit Power Buds; as well as an innovative product line, Zen Buds a sleep-comfort and health monitoring ear pods. As mentioned, we would not have achieved our sales results without our effective sales and marketing strategy. For example, we seized on high-profile opportunities presented in online shopping festivals, such as the Double 11 Day. And our Amazfit brand ranked number one in the smartwatch market segment with a retail price under RMB1,000, in both sales revenue and volume on JD and TMall platforms. All of this significantly raised our profile and overall consumer awareness of our brand. Our efforts to promote our products also included international expansion through a multi-channel strategy focused on both direct sales and third-party sales channels. Our international shipments continued to climb, as we successfully raised our brand recognition globally. During the year of 2019, approximately 51.6% of our total products sold were shipped overseas. The success of Amazfit sales can be attributed to our own developed channels in both China and overseas. More specifically, we are strengthening our international sales and marketing team, as we, for example, expanded our footprint to over 70 countries with 137 channel customers. In fourth quarter 2019, we entered the largest EU consumer electronics channel MediaMarkt, and we also entered major consumer electronic channels in India, Thailand, Russia and other countries. According to the IDC fourth quarter 2019 report, we are ranked number one in market share for Indian, Indonesian and Spanish markets under the smartwatch category. In the fourth quarter 2019, our shipments to the European market are also increasing rapidly, especially Amazfit watch shipments, which increased by 440.1% in the Western European market including France, Germany, Italy, Spain and UK. In the meantime, our market share ranked number three in both Russia and domestic China, and number six in the U.S. smartwatch market. Excluding the countries we just previously mentioned, Amazfit shipment growth increased 328.5% in the rest of the markets we ship to. We believe with the continuous efforts our team continues to put forth, we can continue this successful growth over the long-term. Next, let me provide highlights on our exciting new business initiatives. At this year’s CES, in addition to new smart watches, we unveiled four new products spanning three verticals that go beyond smart bands and watches: Amazfit Home Studio, a smart gym hub; Amazfit AirRun, a foldable next-generation treadmill; Amazfit PowerBuds, true wireless stereo fitness earphones with Clip-to-Go design; and Amazfit ZenBuds, sleep-comfort and health monitoring earphones. With these new products, we are taking an important initial step in building a comprehensive health and fitness ecosystem. We are demonstrating how technology and health can come together, creating further future opportunities and possibilities centered around our company mission. It should be noted that we do not expect meaningful revenue contributions from these products in the near term, as it will take time for us to ramp up production, market the new devices, educate consumers and penetrate new markets. Now, turning to our collaborative efforts. We will continue working together with our current close partners, Timex Group and Xiaomi. We are making solid progress with Timex on product development. As we announced last week, our first Timex product, Ironman R300 [clock] series, has already been launched in the market. We are pleased with this progress we have made with Timex. In the meantime, our long-term plans with Xiaomi and the popular Mi-Band product line remain unchanged. We will launch Mi-Band 5 this year as planned and expect it to be another blockbuster following the record breaking performance of Mi-Band 4. I would also like to share with you my thoughts on our healthcare strategy. Healthcare has always been a focus for the company since Huami was founded in 2013. In 2019, with our established corporate mission, Connect Health with Technology, we strengthened our focus on healthcare related functionality in our development of smart devices, proprietary AI-chip and cloud services. In 2020, following the execution of a strategic memorandum last year, we will continue developing our cloud-based healthcare services through further cooperation with Peking University First Hospital, for the joint promotion of heart health management programs. We will also deepen the strategic partnership we established in October 2019 with AliveCor, a transformative cardio care provider using deep learning, and explore the opportunity to deliver new high-performance ECG form factors to global markets. Furthermore, we plan for mass production of our next generation AI chip Huangshan-2, which has already completed initial design phase. Huangshan-2 will be more intelligent than its predecessor and enable more healthcare related functionality to further differentiate our future smartwatch products. To close, I would like to discuss the recent coronavirus outbreak that has been challenging the globe. From a business perspective, we have seen parts of our supply chain impacted, and we do expect some impact on our operations and financials in the first quarter. David will provide more color in a moment. However, along with our supply chain partners, we have gradually resumed normal work operations since mid-February. As a corporation with strong social responsibility, we donated medical supplies such as masks and disinfectants, as a show of our support to the regions most affected by the epidemic. In the meantime, we are collaborating with reputable research institutes to leverage our strong AI capability for the health monitoring of our users. The best example would be that we were able to determine that during this recent outbreak, irregular heart rate cases increased significantly, especially in the Wuhan area. In the meantime, powered by our massive datasets and strong AI capabilities, we are currently building an infectious disease prediction system, and we are about to issue a paper on this. Our donations and technology have been highly recognized by the medical regulatory institutions, hospitals, doctors, and our customers. This has provided an even deeper business justification for further R&D exploration in health related technologies. With all the efforts we made, our technology and brand is becoming more and more deeply embedded in the healthcare industry. While acknowledging the recent difficulties we are facing, we are proud of our achievements in 2019 and are confident that our growth initiatives in new products and partnerships, coupled with our strong sales and marketing capability, will help us to achieve another successful year in 2020. Thank you again for joining today. I will now turn the call over to our CFO, David Cui.

Thank you, Wang. In the fourth quarter of 2019, we continued the trend of strong growth momentum, driven by robust unit sales of both self-branded products and Mi-Band 4. We shipped 14.7 million units in the fourth quarter, representing a 59.8% growth from the same quarter last year. Our revenue and net income attributed to Huami Corporation increased by 72.4% and 64.5% year-over-year respectively, demonstrating the growing awareness and adoption of our products by users. During the fourth quarter, we also continued investing in R&D for the development of innovative products, in addition to strengthening our sales and marketing strategy to promote our Amazfit brand. Mindful of the length of this call, I'll highlight the key financial measures for the fourth quarter and full year 2019, and I encourage you to refer to our earnings press release for further details regarding our financial performance. Now, here are some of the highlights of our strong fourth quarter. All amounts are expressed in RMB, unless otherwise stated. As previously mentioned, revenues in the fourth quarter 2019 increased by 72.4% to RMB2.1 billion from RMB1.2 billion for the fourth quarter of 2018. Shipments reached 14.7 million in Q4 as compared to 9.2 million in the same quarter of 2018. Gross profit increased significantly by 62.8% to RMB503 million from RMB309 million in the fourth quarter 2018. Our gross margin was 23.8% compared with 25.2% a year ago. The decrease was primarily a result of deepened promotion during the shopping festival. Moving to expenses. Total operating expenses increased by 60.6% to RMB285 million from RMB178 million for the fourth quarter of 2018, reflecting our strategy of consistent investment in R&D with an emphasis on healthcare related product development and testing, talent acquisition, in addition to branding and marketing to enhance the company’s long-term returns. Research and development expenses increased 64.8% to RMB140 million from RMB85 million for the fourth quarter last year, primarily due to an increase in the number of R&D staff as we expanded our product lines and SKUs, our fundamental research in health -- healthcare features, algorithm, cloud services, and AI chip development. We also experienced a rise in testing costs associated with the pipeline products. As a result of our effort, we have launched a series of new Amazfit products in the fourth quarter and at the beginning of this year at CES. We are confident these investments will increase the long-term value for our company, and we expect to enrich our products further in 2020. Our selling and marketing expenses increased to RMB63 million from RMB29 million year-over-year, as we made new product release during the CES event, increased advertising and promotion efforts during sales festival, and built a larger and stronger marketing and sales team for overseas expansion. We believe our multi-dimensional efforts could greatly improve our Amazfit brand recognition and deepen our sales penetration globally. General and administrative expenses increased 29.1% to RMB83 million from RMB64 million for the fourth quarter last year, primarily due to an increase in professional fees related to improve -- improvement of operation management and business expansion, and personnel-related expenses, offsetting by a decrease in share-based compensation. Our income before income tax was RMB237 million compared with RMB139 million for the same quarter of 2018. The GAAP net income attributable to the company increased to RMB207 million compared with RMB126 million for the fourth quarter of 2018. Net income attributable to ordinary shareholders of the company also increased to RMB207 million. Basic and diluted net income per ADS attributable to ordinary shareholders of Huami Corporation was RMB3.36 and RMB3.21, respectively. As a reminder, each ADS represents four Class A ordinary shares. Next, for non-GAAP measures. Adjusted net income attributable to Huami Corporation increased to RMB214 million from RMB146 million for Q4 2018. Finally, adjusted basic and diluted net income per ADS attributable to ordinary shareholders of Huami Corporation was RMB3.46 and RMB3.31, respectively. Relating to cash, as of the year end of 2019, the company had cash and cash equivalents of RMB1.8 billion compared with RMB1.4 billion at the end of 2018. Now, let’s turn to some highlights of our robust full year 2019 results. Our revenues increased by a hefty 59.4% year-over-year from RMB3.6 billion to approximately RMB5.8 billion, due to an increased market recognition and popularity of our Amazfit products and continued strong Mi-Band sales, after we launched the Mi-Band 4 in the second quarter of the year. Gross profit increased by 56.2% year-over-year from RMB939 million to RMB1.5 billion. Gross margin decreased slightly year-over-year to 25.3%. Our total operating expenses increased by 50.1% year-over-year from RMB574 million to RMB861 million. The increase in operating expenses was primarily due to the increase in R&D and marketing and sales, all with the intention to support our strategy focusing on healthcare related technology development, expand our Amazfit product portfolio with new products such as GTS, GTR, and Amazfit T-Rex, and further strengthen our sales in the overseas market. Operating income increased 65.8% for the full year, increasing from RMB366 million to RMB606 million. The GAAP Net income to Huami totaled RMB575 million compared with RMB340 million in 2018. Non-GAAP adjusted net income to Huami, which excludes share-based compensation expenses, increased 32.8% from RMB475 million to RMB630 million. And now to our outlook. As Wang mentioned earlier, we have seen some impacts on our supply chain side due to the current coronavirus situation. We expect our first quarter results to be affected to some extent by a disruption of parts in our supply chain. However, we have seen gradual recovery of production capacity. Therefore, the impact of supply chain constraint will be mainly felt in Q1 2020. Given the COVID-19 outbreak spread globally, in particular in the Western European countries, one of our oversea markets, we will continue to closely monitor and assess the situation in those regions. That being said, we still expect we can achieve sustainable growth and profitability in 2020 and beyond, through new product initiatives, collaborative opportunities, global expansion, and balanced operational expense control. With all things considered, for first quarter 2020, management currently expects net revenues to be between RMB980 million and RMB1.01 billion, which would represent an increase of approximately 22.6% to 26.3% from RMB800 million in the first quarter of 2019. We hope the entire epidemic situation begins to improve and still have confidence that 2020 will be another successful year for Huami. This concludes our prepared remarks. We will now open the call to questions. Operator, please go ahead.

[Operator Instructions]. For the benefit of all participants on today’s call, if you wish to ask your question to the company’s management in Chinese, please immediately repeat your question in English. [Operator Instructions]. The first question comes from Kyna Wong of Credit Suisse. Please go ahead.

I just wanted to ask, given that the impact of the COVID-19 in terms of demand, weakness in certain countries right now, especially in Europe, that is also part of your important market in the overseas business. So, I just wanted to ask the confidence for your 2020 outlook in consider of the growth rate magnitude, can we see a better growth rate, more than the first quarter, of year-over-year growth rate in 2020, versus your prior expectations? This is the first question. The second question is about the business cooperation with Timex, given the previous target to launch the product in the first half, I wanted to get more update? Thanks.

Thank you, Kyna. This is David. Let me take on the first question and I would like to turn your second Timex question to our COO, Mike. So, to your first question, as I explained earlier in the remarks that we were impacted from the supply chain side and when we march into Q2, and we're still in March right now. So, we do see some impact in our European market, which is one of our overseas markets. But given that the first half of the year, because of the seasonality of our sales, we would expect that in the later part of the year when the situation improves, we should do our best to catch up for the losses we encountered in the first half of the year. At this moment, we could not promise a number that how much we can achieve, because we are still assessing the situation and the situation is still developing. But we are confident that we are working towards new product releases in the year marching towards our mission and we should not see significant losses in 2020 as compared to 2019’s financial results.

This is Mike. To answer your question about Timex, we are still on track in our product development schedule with the Timex product. In fact, we just launched the first of our cooperative product, the Timex Ironman R300 clock series just recently. And as Huang and David mentioned, China's production line is slowly coming back to normal. So, we still expect that in the first half of this year we will continue to roll out more collaborative products with Timex in the first half of this year as originally scheduled. So, in terms of the impact of the virus for our Timex products, the impact is relatively minor.

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

I have two small questions. One is, my investors have been waiting for the big data analytics business. And can management Chairman Huang or Mike give us some update about the AI intelligence project with University and Hospital. And how you see this potential business in the future? This is my first question. And my second question is, can you also quantify the shipment breakdown among the India market and also EU market or APAC market? We understand that actually the EU market still make a very small portion of your business. But appreciate if you could give us a breakdown in those regions? I’ll stop here. Thank you.

Hi, Arthur. This is Mike. Yes, so I will address your first question and I’ll let David to answer your second question. So, regarding the partnerships with the academic institutions, we are actually doing a lot. For example, we are currently working with Stanford University on a sleep research. And we view that this is a tremendous opportunity, because sleep is a very common problem and there's a lot of healthcare revenue opportunities in this area. So, we're actively engaging in, for example, the sleep research project with Stanford University. We also have been engaging with the Norwegian Institute of Science and Technology, NTNU, on improvement, for example, the pie algorithm, so that you could adjust for people with different chronic diseases, such as people with high blood pressure or people with diabetes. We are working with them to modify or enhance the pie algorithm, so that it could be more appropriate to be used by these people with chronic diseases. So, we're continuously working with research institutions, academic institutions on these types of beta analysis to improve our algorithms and enhance our products. David, you want to answer the second question?

Sure. Hi, Arthur. Thank you for your question. Regarding your second question, Europe is one of our markets, which represents approximately one-third of our overseas sales. And remember that, even though, we experienced significant growth in EU countries which includes France, Germany, Italy, Spain and UK. And we also have very strong presence in Eastern European countries, like Russia. We are also the frontrunner in domestic China. Another thing I want to mention that, we are also expanding into the U.S. market and we are ranked number six in the U.S. smartwatch market. And besides all these countries, we also extend into the rest of the countries. And in those countries, we also grow rapidly. So right now, it seems that Italy was impacted most, and France, Germany and those countries also have some identified cases. But we would assume that these countries will place a lot of efforts in containment of the diseases and we foresee that our second quarter will be impacted. But starting from the third quarter, the sales will go back to normal, and we are still confident in our sales in the global market.

[Operator Instructions]. The next question comes from Robert Cowell of 86Research. Please go ahead.

I actually have two questions. The first one is about the gross margin. I'm interested in some of the different factors impacting your gross margin in 4Q and how we should be thinking about the gross margin trajectory into next year? And then the second question is about temperature sensors. Have you ever launched a product with a body temperature sensor in it? And is that something that you would consider doing in the future?

Sure, I will take your first question. And then Mike, would you please take on the second question on the product? And your first question regarding gross margin fluctuations and I can tell you that for Xiaomi’s products, the margin wasn't fluctuated that much. And our Amazfit product margin actually improved from prior years given that we launched multiple new products in the year. The reason for the blended margin fluctuation is because Xiaomi’s Mi-Band 4 sales was very strong. The revenue mixed has changed a little and that Xiaomi's products margin is lower as compared to Amazfit products. So therefore, the blended margin decreased slightly as compared to 2018. So, going forward, we would expect the margin will be relatively stable. That's our objective for this year.

Okay. And about the second question the answer is that, no, not yet. We did not have a product with temperature sensor yet. But we are working on such a product right now. So that's the answer to your second question.

The next question comes from [Edward Chen of Hitomi International]. Please go ahead.

So, I have two questions. The first one is that, given the quite a high base, as you mentioned, very strong sales from the Xiaomi product, what the management think about the growth driver for this year, especially in the first quarter, given the demand situation right now overseas? And my second question is on just the future focus of our company. So, we see we launched a number of new products including the smart trials and products like that. So, I just want to know what are the focus or the plans are for the company going forward?

Thank you, Edward, for your question. Let me take on the first question for the growth driver and I will turn to Mike to answer your question regarding the new products. The growth driver going forward will still be two legs. So, we still have a very strong relationship with Xiaomi. We will continue to working with Xiaomi to launch new Xiaomi bands. As our CEO, Huang Wang mentioned earlier that we will launch Mi-Band 5 in 2020. So, we would still expect that the band sales will continue to be strong. And the second key driver will be from our Amazfit products, we geared up our efforts in sales, marketing and also brand building exercise. So, we would expect that we will grow faster in Amazfit products as compared to Xiaomi's products. So, two primary drivers that will continue to guarantee our success in this year. Mike?

Okay, thank you, David. So, in terms of our product focus, first of all, we’ve always been focusing our products on health and fitness. So, that's all the products that we do will have features for health and fitness. Now, in addition to geographic expansion, broadening our product portfolio is also one of our growth strategy. As we identify proven good business opportunities in certain areas. For example, in the U.S., Peloton has shown that there is a market for indoor sports equipment. And in this case we feel that this is an area that we can also produce a product for and expand into that area. But in the near-term, our bread and butter product focus will still be smart watches, smart band. And those smart watch and smart band still continue to drive the majority of our revenue. But as we identify new opportunities, again, which has health and fitness functionalities, we will deliver new products in these areas. Such as, for example in CES, we launched the earbud. The earbud market is proven to be growing very fast, as evidenced by Apple EarPod. And similarly, as I mentioned, Peloton has proven that there's a market for indoor sports equipment. And that's why we are rolling out products in these new categories to try to capture new market share and broaden our product portfolio. But again, all the products roll out and developed will focus on fitness and health.

The next question comes from Michelle Zhang of China Renaissance. Please go ahead.

So, my first question is for Amazfit product, could you please discuss about the current offline channel distribution plan and what kind of penetration we are targeting to reach among all the Amazfit product shipment this year?

Sure. So, our new plan for the year will be launching more Amazfit brand products. We may also introduce new branding products. All of them will be self-branded products. Our strategy will be continuing to expand into overseas market, not necessarily just the European market, we will also consider the U.S. market, as well as the Southeast Asia market and India market. And we expect a significant growth in terms of total new products and total shipments in 2020. The total number of shipments under our own brands as compared to Xiaomi's Mi-Band products will be less significant because the Mi-Band will be mass sales with much lower average selling price and our products will be priced much higher. So, that will drive our revenue growth and drive our revenue mix. So, this is our strategy, Michelle.

So, another question is, can management provide some guidance on the features, upgrade trend this year for Amazfit products? Thank you.

So, as I mentioned, that we will launch multiple products and then the multiple products will target different layers of consumers. And the features will be mixed but will have a healthcare focus. And that will be in line with our long-term strategy.

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 line. Thank you.