Zepp Health Corp (ZEPP) 2018 Q3 法說會逐字稿

Hello, ladies and gentlemen. Thank you for standing by for Huami Corporation's earnings conference call for the third quarter of 2018. (Operator Instructions) Today's conference call is being recorded.

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 earnings conference call for the third quarter of 2018. The company's financial and operating results were issued in our 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 team 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 this and other risks and uncertainties is included in the company's annual reports on Form 20-F for the fiscal year ended December 31, 2017, 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 our audited 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 -- our audited 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. We are pleased to report another strong quarter with revenue of RMB 1.07 billion, which exceeded our guidance range by 27.9%. Strong sales of our Amazfit products and Mi Band 3 contributed to our robust top line results. As of November 11, the so-called 11/11 shopping festival of this year, we had sold over 10 million Mi Band 3 since the launch of the product and over 30 million Mi Band 2 in total.

We have had a particular focus on enhancing our overseas sale exports. And during the third quarter, international version of our products contributed 42.7% of total shipments. It is encouraging to see this area of focus yield a growing contribution to our financial results.

In addition to strong revenue growth, we also generated solid profitability during the quarter, posting adjusted net income of RMB 134.2 million. As a result of our effective management of product costs and operating expenses, we remain committed to developing cutting-edge products users love, and our Amazfit brand continues to gain traction. Since introducing the first Amazfit product 3 years ago, our sales of self-branded products grew to RMB 311.3 million in the quarter, up 172.8% from the third quarter of 2017.

During this quarter, we also launched an enhanced NFC version of Mi Band 3, which allows one-touch payment access for public transportation services in more than 160 major cities throughout China as well as virtual access card capabilities to allow easy entry and exit from home, office and other locations.

Moreover, in the third quarter, we were pleased to launch several new products with cutting-edge technology and exciting new features, demonstrating our strong research and development capabilities. We launched a new generation of our Amazfit Health Band 1S that allows for continuous real-time heart rate and heart rhythm monitoring. The band can also detect arrhythmia and provide early warning of atrial fibrillation. This enhanced health band helps us further penetrate the exciting and growing market of medical-related wearables. It also allow us to provide cloud-based health monitoring services to our users, empowered by our recently introduced AI chip, Huangshan-1. Our groundbreaking smart wearable AI chip, Huangshan-1, is the world's first wearable processor integrated with AI neural network. We are confident it will differentiation -- it will differentiate our user experience and significantly accelerate our future cooperation with insurance companies and medical service providers.

In addition, during the third quarter, we launched Amazfit Verge, the latest addition to our smartwatch portfolio and our first smartwatch to be fully integrated with the Xiaomi IoT ecosystem via Xiao Ai intelligent voice assistant. Amazfit Verge comes with a 1.3-inch full-color AMOLED round screen as well as optimized power consumption that provides an industry-leading 5 days of battery life on a single charge. It boasts 11 different activity tracking modes and is capable of making and receiving phone calls directly via Bluetooth-connected mobile phones and displaying real-time messages, including WeChat, and incoming call -- phone call alerts.

As we look to the future, we will continue to invest in the research and development of cutting-edge products for the smart wearable industry. And as we have done in the past, we expect to develop strategic partnerships with leaders in the industry to increase speed to market.

More importantly, we will also focus efforts on our value-add services. In Q3, together with PAI Health, we initiate partnerships with overseas insurers and large employers in pilot programs for database services.

Certainly, our partnership with Xiaomi remains important to us, and we will continue to develop new product while driving sales of current product together.

Our results in the quarter support our confidence in our outlook for the future. We remain focused on our growth initiatives, including capitalizing on international expansion opportunities, expanding our product categories, developing and releasing new products and growing value-add services revenue.

Additionally, we are (inaudible) in ongoing R&D efforts that support our both health care and IoT-related product categories and continuing to execute our strategy to generate long-term value for all of our stakeholders.

I will now turn the call over to our CFO, David Cui.

Thanks, Huang. We delivered strong financial results in the quarter that exceeded our expectations, supported by the growing market share of our Amazfit-branded products and continued early-cycle sales of the Mi Band 3, following its launch in the second quarter. Due to our focus on developing new exciting and cutting-edge products, we see continued opportunity to drive sales growth, both in China and overseas.

Now to the financial details of the quarter. Revenue increased by 126.7% to RMB 1.07 billion from RMB 474.1 million for the third quarter of 2017, primarily due to the increase in the sales of Xiaomi wearable products and self-branded products, driven by increasing market recognition of our products.

Cost of revenues increased by 126.9% to RMB 787.8 million from RMB 347.2 million for the third quarter of 2017. The increase was in line with the rapid sales growth of Xiaomi wearable products and self-branded products.

Gross profit increased by 126.1% to RMB 286.9 million from RMB 126.9 million for the third quarter of 2017. Gross margin of 26.7% was in line with the third quarter of 2017.

Total operating expenses increased by 121% to RMB 160.3 million from RMB 72.5 million for the third quarter of 2017.

Research and development expenses increased by 70.1% to RMB 60 million from RMB 35.2 million for the third quarter of 2017, primarily due to the increase in cost related to recruitment and hiring of new employees.

General and administrative expenses increased by 148.3% to RMB 68 million from RMB 27.4 million for the third quarter of 2017, primarily due to the increase in personnel-related costs, foreign exchange fluctuation and professional service fees associated with business expansion and being a public company.

Selling and marketing expenses increased by 226.8% to RMB 32.3 million from RMB 9.9 million for the third quarter of 2017, primarily due to an increase in advertisement promotion expenses for self-branded products and an increase in salary compensation.

Operating income was RMB 126.6 million compared with RMB 54.4 million for the third quarter of 2017. Income before income tax was RMB 129.4 million compared with RMB 57.7 million for the third quarter of 2017.

Income tax expenses was RMB 21.1 million compared with RMB 7.5 million for the third quarter of 2017.

Net income attributable to Huami Corporation totaled RMB 113.8 million compared with RMB 50.2 million for the third quarter of 2017. Net income attributable to ordinary shareholders of Huami Corporation increased to RMB 109.1 million compared with RMB 14.8 million for the third quarter of 2017.

Our basic and diluted net income per ADS attributable to ordinary shareholders of Huami Corporation was RMB 1.89 and RMB 1.79, respectively, compared with RMB 0.85 and RMB 0.82, respectively, for the third quarter of 2017. Each ADS represents 4 Class A ordinary shares.

Adjusted net income attributable to Huami Corporation, which excludes share-based compensation expenses, increased by 93.1% to RMB 134.2 million from RMB 69.5 million for the third quarter of 2017. Our adjusted basic and diluted net income per ADS attributable to ordinary shareholders of Huami Corporation was RMB 2.23 and RMB 2.11, respectively, compared with RMB 1.27 and RMB 1.22, respectively, for the third quarter of 2017. Each ADS represents 4 Class A ordinary shares.

As of September 30, 2018, the company has -- had cash and cash equivalents of RMB 967.4 million compared with RMB 366.3 million as of December 31, 2017.

Now let's turn to our outlook. For the fourth quarter of 2018, the company's management currently expects revenues to be between RMB 1.12 billion and RMB 1.15 billion, which would represent an increase of approximately 48.8% to 52.8% from RMB 752.6 million for the fourth quarter of 2017. This outlook is based on the current market conditions and reflects the company management's current and preliminary estimates of market and operating conditions and customer demand, which are all subject to change.

This concludes our prepared remarks. We will now open the call to questions. Operator, please go ahead.

(Operator Instructions) And the first question comes from Arthur Lai with Citi.

This is Arthur Lai from Citigroup. So first, I'm glad that we see your strong quarter and also maybe strong revenue growth. I have 2 question. The first question is, as David said, right now, our cash and cash equivalent in the third quarter already reached over USD 900 million (sic) [RMB 900 million]. And I want to ask how management will utilize this -- the greater position. That's my first question.

Sure. Thank you, Arthur. In terms of the future use of the cash, we have different strategies. One is we will continue to invest in our R&D activities and continue to build up our overseas sales channels and promoting our Amazfit brands. And of course, we will also invest in our general operations, which include our hardware and our app, our cloud services across the board, all these operations. In addition to that, we will continue to look into M&A opportunities that we have been doing in the past. Thank you.

Okay, yes. That's very good. So the second question is a follow-up question to maybe Huang Wang and Mike. So I think company already has a plan to launch the Huangshan yi hao. So what's this AI chip can have a potential in the future? And also, I also read the news you also launch the Huami health care cloud. So can you also give us a vision of how big this service would be? That's the second question, yes.

This is Mike. So regarding the Huangshan-1 chip, again, this is our industry first-leading AI chip integrating our health algorithms. So -- and it's not only the features, the functions are very good. But because again, because this is our own chip, we can very -- manage it very cost-effectively. So we will certainly try to roll out new products soon with this chip. So the -- your second question about the Huami health care, API, right?

Cloud, yes.

Yes. So for the cloud, basically, this has always been our strategy, to expand our revenue stream into services, data and services monetization. So as you've probably seen the -- we make the -- a few acquisitions or investments recently, which is including, for example, the partnering with PAI Health to go after opportunities in the insurance industry and to help manage health risk. So all these are -- would be a big opportunity for -- we see a big potential growth for us in the data monetization space by partnering with the insurance companies and also big enterprises as well.

(Operator Instructions) And the next question comes from Thompson Wu with Crédit Suisse.

I have 3 questions. The first question, I want to go back to Arthur's question about M&A. I guess can you specifically talk about what types of acquisitions are interesting to Huami Technology? Is it access to new vertical markets? Is it new channel partners? Is it third-party brands? Can you give us more color as to what types of acquisitions in the direction that Huami might look into? That's my first question.

Okay. This is Mike again. So our M&A strategy -- again, it's not necessarily acquisition, it could just be investment as well -- is essentially focusing on the following type of opportunities. One is obviously technology companies that could help improve and enhance our product, so companies with good technological IPs that we can leverage. The second type is companies that can help us -- investment or acquisition that can help us expand our market growth not just in China but also oversees, so investments in channels, for example, as well as marketing partners. So that's the second type, is to help accelerate our global expansion. And then the third type of investment would be more focused on help expanding our non-hardware revenue, for example, our -- or data or services kind of companies that can help us to accelerate our growth in the data monetization area. So those are the 3 types of companies that we're looking at.

Okay, that was very helpful. My second question is also going back to Arthur's question about the Huangshan-1S (sic) [Huangshan-1] chip that you developed. Are there specific technologies or algorithms that allow you to deliver certain features in this health band that other health bands do not deliver? I'm trying to understand if this IP in this chip allows you to differentiate your product versus competing products in market.

Yes. So basically, again, we are using this chip to enable us a few things. First of all, again, this chip is done by us, so in terms of costs and negotiating with different vendors, I think this chip will help us to do that because it's our own IP. And secondly, our requirements for performance and also with the low-power consumption, that's also very key, and we want to continue to maintain that. And so we feel that with our own investment and -- we can control -- we can really optimize the chip to our needs, optimized for our products. And for example, the ECG algorithm is right now enabled in a chip instead of running in the cloud or on the software. So we are able to enable the -- leverage the chip to do a lot more faster and more optimized calculation. And so again, a better cost control.

That's very helpful. Appreciate that. My third question -- I have a few more, but I'll get back into the queue. My last question maybe is for David. I think currency has been an obstacle for many of the Chinese hardware companies, some domestically but also oversees. Just maybe has currency been a headwind for your business in both the third quarter? And then in light of your fourth quarter guidance, which is very, very strong growth from the Mi Band and self-branded products, Amazfit, how should we think about margin structure for fourth quarter? Whatever color you could provide us would be very helpful as it relates to currency.

In terms of the impact of the currency fluctuation, we did not feel very material impact, reason being that for our overseas sales, so we -- our products were merely sold through Xiaomi and also through distribution channel domestically and certain online sales. We -- basically, we didn't change our selling price, which were all set with -- in RMB. So when you -- when the consumers see our products overseas, typically that has been going through layers of markups. So the retail price may be impact a little bit, but they were not impacting us. This is from the sales side. From the procurement side, and we do have overseas procurement, but it's not that material either. When Chinese currency is devaluating too much, we feel -- we may feel a little bit. But now the RMB is stabilizing at below RMB 7, so basically, we didn't see material impact on our P&L. Of course, there's not much impact on our margin either. So if our margin does fluctuate, that must be for some other reasons, yes.

Okay, okay. Because -- I asked that because I think there's some questions about particularly in overseas markets, in India where currency is also devaluing fairly quickly, it seems to be a headwind from -- for a lot of major brands that are looking to grow in the region. I guess how are you -- is there a different strategy to manage pricing versus currency? Are you going to raise pricing in India to offset some of the marketing pressure? How are you thinking about FX, specifically in India, if I may ask?

Yes. So our products were sold to India market through Xiaomi. Basically, Xiaomi is our distributor customer. So we only settle with Xiaomi, and then Xiaomi will sell it to Indian market. So currency, we did not see any price adjustments between Xiaomi and us.

And the next question comes from [Ling Wei Kwang] with GF Securities.

All right, then the next question comes from Joyce Wei (sic) [Joy Wei] with 86Research.

My question was regarding the mix of the Xiaomi-branded product and also your self-branded product shipments. And then can you share us -- can you help us understand the ASP change. The ASP increased nicely year-on-year, but we also noticed that the ASP declined sequentially. Can you provide some color on this front? Is it related to the mix shift? Or is it related to that Xiaomi asking for higher revenue share, et cetera?

Yes. So in this quarter, in Q3, both. We experienced strong sales of Xiaomi products because we launched Mi Band 3 in early June of this year. So that drive our major -- drive our revenue growth this quarter. So currently, our -- the revenue mix is about -- in this quarter is about 30%-70% split. For the 9 months in this year, it's about 35%. That's the revenue split. In terms of the ASP, because we continue to sell Mi Band 2 at discount, that may impact the Xiaomi products ASP in this quarter. And for Amazfit products ASP, it's purely because of the revenue mix also because we have multiple products in this category. Certain popular, well-sold products are priced lower, so that changed the ASP. However, the margin for both Xiaomi products and Amazfit products did not suffer, yes.

(Operator Instructions) All right, as there are no questions at the present time, I would like to return the floor to the company for any closing comments.

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. Thank you.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.