Hello, ladies and gentlemen. Thank you for standing by for Huami Corporation's second quarter 2020 earnings conference call. 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, Ms. Grace Zhang, Director of Investor Relations for the company. Please go ahead, Grace.
Hello, everyone, and welcome to Huami Corporation's second quarter 2020 earnings conference call. The company's financial and operating results were issued in a press release by 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 this and other risks and uncertainties is included in the company's annual report on Form 20-F for the fiscal year ended 31st December , 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'll 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. I want to start by highlighting four key takeaways from the quarter's financial and operating performance. First, in what was a difficult quarter for the industry, we delivered good revenue growth in the second quarter and first half, at or near the top of the industry group. Second, we are well-positioned with our latest new product and others yet to come as we go into the fall run up to year-end holidays.
Third, the consistent investments in R&D should continue our active development pace and innovation into 2021. Fourth, recent insurer wins for our analytics offerings. Partnerships such as the one announced yesterday with Aspen Imaging Healthcare, and progress with our university research partners give me confidence in the future for the institutional side of our business.
Despite global disruptions caused by the COVID-19 pandemic, we delivered good growth on both revenue and product shipments. In particular, our Amazfit brand smartwatch shipments grew 30% year-over-year in the second quarter. This result bears witness to our strong value proposition, recognition of our own Amazfit brand, and expanding sales and marketing strategy.
Another achievement in the second quarter was that we successfully shipped Xiaomi's Mi Band 5, the fifth generation in the popular product line. I hope everyone saw today's launch of our new Zepp brand, which is our healthcare services brand. Today, we are kicking off with a premium tier of smart devices, beginning with two new smartwatches. We are reintroducing the Zepp brand, which we acquired in 2018, with a broader smart ecosystem vision. As part of this, we are rebranding the consumer phone app to Zepp as well in the U.S.
The first of the new Zepp models, the E, will be available in the next week on zepp.com and on Amazon. These new products are part of our continuous execution on our mission to connect health with technology. In order to build a comprehensive health and fitness ecosystem, strong capability in hardware, big data analysis, algorithms, and product certifications are all indispensable. To tackle this, many companies choose to find solutions from outside suppliers.
We chose a road a few took, developing the solutions ourselves. I firmly believe one cannot excel in software without expertise in hardware and vice versa. People who are really serious about big data should make their own sensors. We develop not only smart devices, but also AI chips, sensors, healthcare-related data, and algorithms, and now have a comprehensive AI-driven health management platform.
During our first AI Innovation Convention in June, we launched RealBeats 2, an upgraded cardio health monitoring algorithm, which significantly improved the effective detection of atrial fibrillation at night and during the day by 87% and 564%, respectively, compared to its predecessor. We also launched OxygenBeats, which enables near medical-grade blood oxygen level measurement for our smart devices.
Furthermore, in the second quarter, we launched the new generation of our biosensor, BioTracker 2 as well as completed the design phase for our self-developed AI chip, Huangshan 2. Huangshan 2 has more processing capability than its predecessor and enables more healthcare-related functionalities that will further differentiate our future smartwatch products. We plan to start volume production of Huangshan 2 in the fourth quarter of this year, and by the first half of 2021, making it available to our users through our smartwatches.
In July, our wholly-owned subsidiary, PAI Health, announced an agreement with Prudential Corporation Asia to incorporate PAI Health's science-backed activity metric into Prudential's digital health app, Pulse. Later this week, we will be announcing a follow-on expansion of our relationship with Prudential to co-develop new consumer solutions that may be made available to their users, as well as Huami's. As you know, Huami's connecting health with technology strategy is broad.
While we have already achieved significant market shares on the consumer side of health technology, we have a nascent industrial side of the business. Focusing on the insurance and medical institutional side of the industry can help us make devices smaller, portable, less expensive, and allow us and care providers to aggregate more medical data for analytics services. PAI Health's recent success is one example.
Yesterday, we announced a new venture with Aspen Imaging Healthcare, which is pioneering new X-ray technology. We expect to leverage and combine the engineering expertise of both companies in cooperative product development. We expect to leverage our broader international distribution capabilities for Aspen. We will explore potential investment in the company. Aspen, which is based in Plano, Texas, is creating some disruptive technology for medical imaging, which can open or expand new applications.
We are very pleased to have partnered with internationally renowned respiratory expert and a fellow of Chinese Academy of Engineering, Dr. Zhong Nanshan, to establish research laboratory facilities. The purpose of this lab is for the ongoing study of respiratory disease rehabilitation management using wrist-wearable devices. That's leveraging our expertise in smart wearable technology, AI algorithms, and big data biometric analysis.
While the first half of 2020 was a challenging period for all of us, we are proud of our performance in smart wearable product shipments and the strong execution of our health service strategy. We are confident that our device shipment volume will continue to climb in the second half of the year, and we look forward to delivering value to all of our stakeholders. Thank you again for joining today. I will now turn the call over to our CFO, David Cui.
Thank you, Wang. The strength of our brand, products, and global sales and marketing strategies served us well in the second quarter, despite global uncertain times. The unit sales of both self-branded products and the Mi Band rose to 8.9 million, increasing by 7.2% from the same period last year, and leading to 9.5% revenue growth. I'm especially pleased that we remain profitable despite the lower gross margin affected by our product mix.
Second quarter saw the continued prioritization of investment in R&D, as well as sales and marketing infrastructure, as product development and sales channel expansion remain critical components of revenue growth. While this cost impacts the short-term profitability, we are confident that continued strategic spend in these areas, coupled with prudent cost control in other general operating expense categories, will lead us to stronger profitability in the long term.
Mindful of the length of this call, I will highlight the key financial measures for the second quarter 2020. I encourage you to refer to our earnings press release for further details regarding our financial performance. Here are some of the highlights of our second quarter. All amounts are expressed in RMB, unless otherwise stated. As previously mentioned, revenues in the second quarter 2020 increased by 9.5% to RMB 1.137 billion, from RMB 1.039 billion for the second quarter of 2019. Unit growth in the quarter was 7.2%. For the first quarter of 2020 was 18.7%. Gross profit decreased by 8.6% to RMB 253.4 million, from RMB 277.3 million in the second quarter 2019. Our gross margin was 22.3%, compared with 26.7% a year ago.
Gross margin can be affected by product mix, as different products have different margin contributions, and this can change over the life of a product. In the second quarter 2020, total gross margin was positively affected by a higher mix percentage of Huami-branded products, offset by a higher mix of lower-margin products shipped to Xiaomi, and by discount promotions for some older products in the transition to the new Mi Band 5.
Next, I want to discuss impact of COVID-19 on our business. The coronavirus continued to have a significant negative effect on retail sales in all areas of the world and in most product categories through the second quarter. For example, although China recovered and opened many retail establishments midway through the second quarter, a number of Asia retailers reported that shoppers were slow to return, depressing second quarter results.
In the Americas and Europe, continued or resurging COVID infection rates kept many stores closed, and also kept many shoppers out of the stores. Many retailers reduced inventories and orders during the second quarter. This all affected our second quarter results. Product delays due to the pandemic that slowed manufacture of products in the first quarter have been resolved, with minimal lingering impacts in the second quarter.
Looking forward, Huami is working with its channel partners flexibly as they reevaluate or change their market strategies, such as shifting focus to online sales and on-demand retail models. While Huami has several direct online sales channels, the vast majority of our revenue flows through this retail partner's channels. Before the pandemic hit, industry expectations were for strong demand and continued growth for smart health technology for many years.
Aside from the disruption and resetting of consumer purchasing method choices, we see no evidence to indicate that mega trends have been materially changed. Whether by personal choice or by encouragement from those who pay for our care, the world is increasingly focused on improving health. In the nearer term, with all the reports of people gaining weight during lockdowns, we think there may be upticks in demand for smart health technology in different geographies as people refocus on their health.
In addition, the company is engaged in research and development related to the detection of COVID-19 infection through its internal R&D team, as well as with some of its university research partnerships. Moving to expenses. Research and development expenses increased 25% to 117.2 million RMB from 93.8 million RMB for the second quarter last year.
As a percentage of sales, R&D expense only increased 130 basis points to 10.3% in the second quarter. We are striving for building up a top-tier R&D team for our future growth. The increase was primarily due to an increase in the number of R&D staff and a rise in investment in healthcare-related features, algorithms, Clive services, chip research, and new products development as we carry out our mission. R&D was also up as we are aiming to launch a series of new products in the second half of 2020 to expand our customer base as we target different geographies and price points. Our sales and marketing expenses increased by 76.6% to RMB 71.3 million from RMB 40.4 million for the second quarter last year. Our percentage of sales basis, sales and marketing expense rose to 6.3% of revenue versus 3.9% in the year-ago quarter.
The increase was primarily due to expanding international markets outside of China for our Amazfit-branded products, including increases in advertising and promotional expenses during holiday sales and promotional events and growth in personnel-related expenses. In June, we organized our first AI Innovation Convention to present our current research result to the public and open our first Amazfit offline retail store in Beijing to offer domestic consumers the opportunity to have a first-hand in-person experience with our products and build our brands.
We have a strategy to open a number of these locations globally. A number of these are as independent authorized dealers. Second quarter 2020 general and administrative expenses increased 9% to 55.4 million RMB from 51 million RMB for the second quarter last year, reflecting primarily an increase in exchange rate fluctuations, professional fees for business management, and depreciation and amortization expenses, offset by the decrease of share-based compensation.
Our total operating expenses increased by 32% to RMB 244 million from RMB 185.2 million for the second quarter of 2019. Total operating expense represented 21.5% of revenue in the second quarter 2020, compared to 17.8% in the year-ago quarter and 20.6% in Q1 2020, 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 our company's long-term returns.
Our operating income for the second quarter 2020 was RMB 9.4 million, down from RMB 92.1 million in the year-ago quarter, driven primarily by the year-over-year increase of RMB 31 million in sales and marketing expense, and RMB 23 million in R&D. Relating to cash, as of June 30, 2020, the company had cash and cash equivalents of RMB 2.6 billion, compared with RMB 1.8 billion as of December 31st, 2019.
Let's turn to our outlook. For the third quarter 2020, management currently expects net revenues to be between RMB 2.1 billion and RMB 2.15 billion, which would represent an increase of approximately 13%-16% from the third quarter of 2019. The outlook is based on the current market conditions and reflects the company management's current and preliminary estimates of a market and operating conditions and consumer demand, which are all subject to change. This concludes our prepared remarks. We will now open the call to questions. Operator, please go ahead.
Thank you. We'll now begin the question and answer session. To ask a question, you may press star one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star two. 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. Our first question comes from Clive Cheung from Credit Suisse. Please go ahead.
Hi, management. Thank you for taking my question. I have three small questions. The first being the sales and marketing expenses in the second quarter. You spoke about the expansion in channels. Can you speak a little bit about where these expenses has gone into the channel expansion, and if there is any specific updates on that? My second question is on R&D. What kind of expectation, or what kind of level of R&D should we expect in the second half of 2020 and in 2021? Lastly, what is the current status with the contract renewal with Xiaomi? Thank you very much.
Thank you for your question, Cloud. With respect to our sales and marketing expenses, we launched multiple products in the one half of 2020, and then we attended CES at the beginning of this year. We also hired multiple personnel in sales and marketing to help us to build the channel in Europe, also in Southeast Asia. We also add a few new staff in the U.S. Our strategy is to sell our products, and also hopefully in future, we expand it into the healthcare services into the global markets. Even the pandemic is going away in those regions, and we are sending out our staff, and we're setting up new companies in those countries. We're on our way for the future growth. That's how we spend our sales and marketing dollars.
Regarding our R&D expense, again, we spend money in adding new qualified R&D staff. We add new staff fairly quick in the later part of last year and first half of this year. We anticipated the R&D expense growth will relatively moderate as compared to the earlier periods. In the second half of this year and early 2021, we will not see significant increase in our R&D expense, given that our revenue should pick up in Q3 and Q4. With respect to Xiaomi's contract, what I can say right now is our relationship with Xiaomi is deeper than just a vendor relationship. This is, we all know. Also has a significant ownership interest in Huami. It's important to understand that the general contract we are talking about with Xiaomi is just about the blanket terms and conditions associated with being a preferred vendor.
We negotiate specific contracts for each product we develop for them, such as the new Mi Band 5. That's how we have done business with Xiaomi in the past, and expect it to continue in the future. Although I have no additional update beyond that, but we are optimistic that we should be able to negotiate with Xiaomi to sign a similar framework contract with Xiaomi and continue our strong relationship with Xiaomi along the way. Thank you.
Thank you very much.
Thank you very much, David.
Thanks.
The next question comes from Xudong Chen from CICC. Please go ahead.
Hi, management. Thank you for taking my questions. I think you just start a new brand named Zepp, which focus on the smart equipment for sports use. I wonder what your strategy is for this product line. My second question is, I think you also cooperate with Prudential in PAI Health. Could you give me more information about this cooperation? Thanks.
Sure.
Yeah, hi.
I will try I'm sorry, is it?
Go ahead, David. Why don't you go ahead?
Sure. I'll maybe just try to answer the first question regarding Zepp brand, and then I will leave the second question to Mike to answer. Zepp is a brand-new brand we introduced to the market. It is our digital health solution brand with wearable technology in it. We launched this new brand, in Zepp. We hope that we can speak to a little different audience. Amazfit, right now, is aimed more at every day, and Zepp aims a little dressier with the style in terms of the product features and materials. As you know, our mission is to connect health with technology. Currently, we are launching new products under Zepp brand. In future, we hope that we can build the Zepp line, not just for the hardware, but also for providing health solutions globally. Mike?
Yes. Thank you, David. Yeah, regarding the partnership with Prudential, actually, you've probably seen an announcement, a press release earlier, between Prudential Asia and PAI Health, which is, again, our wholly-owned subsidiary. Basically, it's an expansive partnership. The press release that we released earlier talked about how Prudential will incorporate PAI Health's health science-backed activity metric algorithm into Prudential's digital health app, which is Pulse.
Which right now have over 6 million downloads in I think 12 regions all over Asia. That is what the first press release is about. We'll be also working with Prudential to expand our partnership, and which will be announced in a second press release very soon. Basically, we will leverage each other's products and services to cross-sell, up-sell to each other's customers. On both the health and associated wealth products and services for our joint users, consumers.
You'll hear more news about this more expansive partnership again very soon in a second press release later this week.
Thanks.
Yes.
The next question comes from Tony Zhang from Haitong. Please go ahead.
Hello, management. Thanks for taking my call. I have two questions. The first question is, the management is expecting quite strong sales in the third quarter. Can we give a little more color where this strong growth comes from? Is it from China or overseas markets? How about the sales recovery in overseas market amid such a pandemic situation recently? My second question is, how about the gross margin outlook in the third quarter? Thank you.
Okay. We did provide a strong forecast for Q3 because we do anticipate that a strong sales recovery overseas market and also in the domestic market. We will see more shipments of Mi Band products, but we see even more stronger recovery for our own branded products. That's why you can see sequentially that we doubled our forecast for Q3. Similarly, we anticipated that Q4 should be also strong. As a result of that, we should see a strong second half of 2020. Regarding our gross margin, as you can see in Q2, our margin wasn't that great because in June, we launched Mi Band 5. Also during this period, we provided a deeper discount on Mi Band 4, which dragged down our gross margin.
In Q3 and Q4, we will see the product mix change, meaning that we will sell more Mi Band 5 versus Mi Band 4. That we'll see Xiaomi Mi Band's margin will climb. Also for our own branded margin, we will see will remain strong. My best estimate is that we will see a little bit higher gross margin in Q3. Thank you.
The next question comes from Michelle Zhang from China Renaissance. Please go ahead.
Thank you management for taking my question. I have two questions. The first one is, could you please give me more color on the net income guidance for the third quarter? The second question is, could you please share more regarding the geographic sales distribution of Amazfit products? Also an update of the current situation in Europe and in India. Thank you.
At this moment, I may not be able to provide an accurate net income guidance. What I can say is that we will take extreme measure on controlling our operating expenses in the second half. You will not see the same growth rate in operating expenses as compared to our revenue growth. What I can say is that the net margin for second half will significantly improve as compared to the first half.
That's what I can comment. In terms of the geographic distribution for Xiaomi's products, we don't have the exact number, but we know a large portion of Mi Band was shipped overseas. For Amazfit-branded products, we shipped even more to overseas. The geographic distribution will be primarily to European markets and the second will be to the Southeast Asia market.
We sell our products to many countries and including North America. The primary markets are European markets and the Southeast Asia market. We see the pandemic situation improves. Remember that we do have roughly about half of our products were sold online in those markets. We do see a lot improvements in our sales in global markets.
Thank you.
Thanks.
The next question comes from Robert Cowell from 86Research. Please go ahead.
Hi, management. Thanks for taking my question. I'd like to ask about pricing. In the second quarter, I guess the blended average selling price was down a little bit year-on-year. You mentioned some discounting related to Mi Band 4 in anticipation of the launch. How is the pricing on Mi Band 5 relative to previous generations, and what kind of trend do you expect from pricing going forward?
Well, in Q2, we shipped more Mi Band 4 than Mi Band 5. We did provide deeper discount on Mi Band 4. That's the reason to drag down the ASP in Q2. In Q3, we definitely ship more Mi Band 5 than Mi Band 4. I'm pretty sure that the ASP will climb. The retail price for Mi Band 5 is higher than Mi Band 4. Also, as a product new to the market, we do not provide discount on Mi Band 5. I would say you get the regular price on Mi Band 5. That's all I can say.
Thank you. Thanks.
The next question comes from Andre Lin from Citi. Please go ahead.
Hi, management. Thank you for taking my question. I have one question. Regarding the next quarter's guidance, can you share a little bit color on the product mix? How much contribution will coming from Mi Band? I have a follow-up. Thank you.
Yeah. I would expect similar product mix as usual, given that sales for both Xiaomi and self-branded products are strong, and I would expect it at 70/30 split.
Thank you. Could you share a little bit about the life cycle pattern on the new generation of the product? Usually, the product sales are peak during the first few quarters after launch and then gradually decline. Could you share about your expectation on this generation? Thanks.
Well, regarding Mi Band, we have a much shorter product cycle in terms of launching new products. Between Mi Band 3 to Mi Band 4, Mi Band 4 to Mi Band 5, it's about a year we launch new products. With respect to Amazfit products, Zepp products, so we will have much quicker upgrades, and we have varieties of older products and new products, and maybe we have at least a year we should have upgrades on these products. If not, we will launch new products. It is much faster. You will see pipelines of new products under these new brands coming out.
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 Zepp Health's investor relations department. This concludes this conference call. You may now disconnect your line. Thank you.