Earnings Call: Q1 2020

May 12, 2020

Hello ladies and gentlemen. Thank you for standing by. For Huami Corporation's first 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 Singh. Director of Investor Relations for the company. Please go ahead, Grace. Hello, everyone, and welcome to Huami Corporation's 1st quarter 2020 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 Hui, our Chief Financial Officer. The company's management will begin with paired remarks, and the call will conclude with a Q And A session. Mr. Mike Young, our Chief Operating Officer, will join us for the Q And A session. Before we continue, please note that today's discussion will contain forward looking statements on 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 fiscal year ended December 31, 2019. And the other filings as filed with the SEC 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 found in this earnings press release and this conference call include discussions of the 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. Our first quarter revenue continued the robust growth of 36.1% despite the unprecedented challenges created by the COVID 19 pandemic, driven by new product launches, increased brand recognition, successful sales and marketing strategies, as well as efficient supply chain management. At this year's CES, which took place in the first quarter, we launched the Amazfit GE Lex. A device with the military certified body are ideal for outdoor activity. This broadened our smartwatch portfolio to 7 product lines. We also introduced new product categories, including earbuds or hearables and interactive high-tech channels both significant components in building a comprehensive health and Phoenix ecosystem as part of our connect health with technology aspirations. While we do not expect meaningful revenue contribution in the near term, due to the time it takes to ramp up production and penetrate new market segments. New initiatives like this will create more opportunities for our company's future growth. We feel confident in this growth opportunity because valuable technologies and health packs not only help people monitor and check their physical fitness and well-being. But also potentially shape new behavior patterns as drive new changes of everyday life. While wearables and health tech also nearly unlimited applications across the number of product verticals, we have only begun to scratch the surface. In the meantime, we continue to expand our footprint and have recently continue to make solid headwinds in international markets. We currently focus on the market nuances of each key region and adopted a multichannel strategy including both direct sales and third party sales channels. We are now in more than 70 conscious with 137 channel disputeers and strong market share. Showcasing the strength of our brand globally. According to the IDC fourth quarter 2019 report, we ranked number 1 in market share for India, Indonesia, and Spain under the smartwatch category. Number 3, in last year, and mainland China. And number 6 in the US. In terms of partnerships, our our continued partnership with Xiaomi remains productive with the launch of the Mi Band 5 scheduled later in 2020. Additionally, our close collaboration with PanMx have viewed positive results with the first joint product launched in the first quarter. You should note the sales of our Amazfit branded products are through independent channels which are explored by our own sales and marketing team. Next, Let me further discuss our healthcare strategy and the solid progress we made this year in healthcare. From the inception of our company, healthcare has been at the core of our mission In 2020, we continue to build upon the strong foundation we have established by developing our cloud based healthcare services through vertical operation with leading healthcare institutions. For example, we partnered with the laboratory disease teams of Doctor. Zhong Nanshan to jointly establish a laboratory for studies on monitoring respiratory diseases using wearable devices. Doctor. Joan is the global leading epidemic of of epidemic of just and an academic mission of Chinese Academy of Engineering. He played a significant role as an advisor in managing the COVID-nineteen epidemic crisis. The focus at this lab is on the early partition of certain respiratory diseases. Specifically, COVID-nineteen and how our smart developers with our AI and big data advantages can help establish a cloud service system to provide epidemic, prediction and diseases requiring monitoring as such. We look forward to realizing further potential For main space, we published a research article on infectious disease partition based on data from wearable devices in journals of this key dynamic in nature and society by Hindawi. The premise of the published article was that the popularity of wearable devices enables a new perspective for the precaution of the infectious diseases. In this study, we proposed a framework, which is based on the heart rate and sleep data collected from valuable devices to predict the epidemic change of COVID-nineteen in different countries such as Spain and Italy and different cities. The experiment is the impediments result indicated that the prediction models can be utilized to alert the outbreak of COVID-nineteen in advance. Which can be the foundation for health surveillance system with valuable devices. In addition, we signed a cooperation agreement with the China Atlantic Association in March to become the official partner of China's National Chat And Field Team in the smart wearable industry. With our accumulated big data in sports, healthcare, at our chat record in smart hardware research and development. We look forward to helping the development of professional aesthetics. This collaboration also allows us to showcase the high quality of our products and help our marketing efforts. And we will continue to offer professional sports checking services to all of our users. In summary, while we were while we experienced some impact from the COVID-nineteen pandemic. We are confident that underlying demand for our products remains strong with our brand rising popularity. Our strengthening sales channels and new product innovations and live extensions in the works. We believe that the valuable technology will further shape the healthcare industry. Why are helping people enjoy better healthcare services? We are excited about our unit positioning in connecting health based technology. And the strong market potential in front of us We will look to continue investing in R&D And Sales And Marketing functions to deliver sustainable growth and healthy profitability once the impact from the pandemic eases. Thank you again for joining today. I will now turn the call over to our CFO, David Choi. Thank you, Wang. We are pleased with the resilience of our first quarter revenue growth during these uncertain times. We achieved solid unit sales of both self branded products and the Mi Band 4 shipping 7,600,000 units in the first quarter, a 35.7% rise from the same period last year. Despite the impact of the COVID-nineteen pandemic, that many other companies are also facing. We still kept our robust revenue growth of 36.1 percent and we remained profitable in this challenging time period. This was driven by increasing brand awareness and adoption of our products by users, both domestically and in overseas market. During the first quarter, we continued to push investment in both R&D And Sales And Marketing. As product and innovation and sales channel integrate integrity are key components of our success. While we have seen some manufacturing shortage due to disruptions to our supply chain during the quarter, as we discussed during last quarter's earnings call, We are optimistic of stronger profitability in the longer term. Offered the pandemic along with its impact runs its course. Mindful of the length of this call, I will highlight the key financial measures for the quarter 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 first quarter All amounts are expressed in RMB unless otherwise stated. As previously mentioned, Revenues in the first quarter 2020 increased by 36.1% to RMB 1,100,000,000 from RMB 800,000,000. For the first quarter of 2019. Gross profit increased by 12.5% to RMB244.6 million from RMB217.5 million in the first quarter of 2019. Our gross margin was 22.5 percent compared with 27.2 percent a year ago. The gross margin decrease was attributable to the change of product mix and sales promotion in previous product versions, especially for Mi Band 4 in anticipation of the launch of a newer generation product. Moving to expenses. Total operating expenses increased by 60.2 percent to RMB224.1 million from RMB139.9 1,000,000. For the first quarter of 2019, reflecting our strategy of consistent investment in R&D. With an emphasis on health care related products, development and testing talent acquisition, in addition to branding and marketing to enhance our company's long term returns. Research and development expenses increased 63.5 percent to 100 rmb18.3 million from RMB72.4 million for the first quarter last year. We are striving for building up a top tier R and D team for our future growth The increase was primarily due to an increase in and arise in investment in healthcare related features, algorithms, car services, chip research and new product development as we carry out our mission. We aim to launch a series of new products in the upcoming quarters of this year. General and administrative expenses increased 12.3% to RMB50.9 million from RMB45.3 1,000,000 for the first quarter last year. This was primarily due to an increase in personnel related expenses and professional fees related to improving management operations, offsetted offset by a decrease in share based compensation expense and foreign exchange rate fluctuation. Our selling and marketing expenses increased to RMB 54,800,000 from RMB 22,200,000 for the fourth quarter last year, primarily due to an increase in personnel related expenses, and an increase in advertising and promotional expenses for new market exploration and a series of expansion starting 2019 and continue to carry out our plan during this year. In January 2020, we unveiled 4 new products spanning 3 verticals that go beyond smart beds and watches, including Amazfit home studio, a smart gene hub, a massive air run, affordable next generation treadmill, amensurate power bus, true wireless studio fitness earphones with click to go design and Amazfitgen bus, sleek comfort and health monitoring airphones. Our income before income tax was RMB20.3 million, compared with RMB85.6 million, for the first quarter of 2019. Net income attributable to ordinary shareholders of company decreased to RMB19.2 million. Next, for non GAAP measures, Adjusted net income attributable to Huami Corporation decreased to RMB25.5 million, from RMB 95,000,000 for Q1 twenty nineteen. Relating to cash and cash equivalents as of March 31, 2020, the company had cash and cash equivalents of a RMB2.5 billion compared with RMB1.8 billion as of December 31, 2019. Now let's turn to our outlook. In the second quarter, as the COVID-nineteen outbreak continues to impact the global economy, we expect for second quarter 2020. Management currently expects net revenues to be between RMB1 billion to RMB1.05 billion. The above outlook is based on the current market conditions and reflects the company's management's current and the preliminary estimates for market and operating conditions. And customer demand, which are all subject to change. So this concludes our prepared remarks. We will now open the call to please press star then one on your touchdown phone. If you're using your handset or if you're using a speaker phone, we ask that you please pick up your handset before pressing the key. Ask your question to the company's management in Chinese. Please immediately repeat your question in English. Please hold while we poll for questions. And today's first question comes from kind of with Credit Suisse. Please go ahead. Good evening. Good morning. Okay. Thanks for taking my questions. I have two questions so far. Under, 2020 outlook, I think, right now, we, we, we, we understood that the COVID-nineteen impacting the overseas market in the quarter. And then with some as a price issue in the first quarter as well, what will be the outlook so far that, I mean, the 2020 work company actually tried to control and to achieve, even under this, uncertainty driven by COVID 19 in the over this market. I think this is the first thing that is with regard to the outlook. The second is I, could you share with us if any target on the shipment on the smartphone and also smartwatch, especially smartwatch this year, if you see, like, any adjustment for your original expectation Thank you for your question. With regarding our first question, we provided a guidance for the 2nd quarter which is near term, we can we can better estimate In the longer term, in particular, in the second half of this year, the impact of the COVID-nineteen, we cannot estimate it. And for a certain accuracy. So, it really depends on how the situation develop, we couldn't we couldn't estimate. But we do see some positive sign that, in Europe, in China, our primary markets are the situation is getting better. We would hope that and our sales of our products will picking up in the second half. And we do expect that we will release a number of new products during this year in anticipation of the market recovery for for the rest of the year. So regarding your second question, the shipment, estimates for for our smartwatch products. And again, it really relates to the first question. We couldn't really couldn't really estimate and really depends on the COVID-nineteen situation. But, may I ask, like, if you see any signs that, that customers, I would say, consumers is actually increasing awareness on the health care such that they will try to buy, like, the smartwatch or smart bank to measure the health situations. Yeah, I think I think throughout this, like COVID 19 outbreak, I think there will be some positive support not only just because the containment is, like, getting better, but all the development in the COVID-nineteen is more under control, etcetera. But do you see, like you say, awareness in health care from human beings or well-being, the awareness on well-being will be helpful to, right, for your important sales? Absolutely. Absolutely. We do see, for the COVID-nineteen pandemic, we do see increased awareness globally and not just the demand of our products in future, but also general awareness do increase the possibility that we could introduce future future services also. And as our CEO mentioned in the previous quotations that Huami do engage a number of discussion, research, and work with a top tier scientists in China and also, global partners to step into, to take on these opportunities. Because our mission is to connect the health with connects health with technology. So this do the COVID 19 pandemic do introduce an opportunity Thank you. I, I come back and then look, with other question later. Thanks. Sure. Thank you. And our next question today comes from Arthur Lay with Citi. Please go ahead. Hi, management. Can you hear me clearly? Yes. Hi, Arthur. Hi. Hi. Thank you. So I have a 2 question. I would like to ask a 1 by 1. The first one is that we, noticed that the company, actually had a strong quarter one revenue, despite the, the virus outbreak. Can you share with, what, the underlying driver. I guess you mentioned one thing is, you do some promotion. And, what else or you do in order to, maintain a revenue? That's my first question. Thank you. Okay. So 2 primary drivers for our revenue growth despite of COVID-nineteen pandemic. Number 1 is that we continue to enjoy a higher demand on Mi Band products. So, so the shipments of Mi Band 4 continue to grow year to year. And this is number 1. Number 2 is we do see a significant demand increase. Of our smartwatch, a mid speed smartwatch. So we see an increase in that. So the combination of these factors do offset it by the reduced by the impact. Of the crisis. Okay. The second question is more like a new product. So, we know that you highlight you do, you already developed the chip business. Can you update us, any new business, and also the feature in the future? You mean the new product features, right? Yeah, yeah, yeah. The new watch features and also the IC features. You, I think, like, last quarter, hongshong mentioned that you also have a 2nd generation IC PayPal and anything you want to update to the investor? As of today, this year, we've already launched a couple of new products, which has been released. So So and then in the upcoming, we have more products, but we can't really disclose much of the details in terms of the technical specifications, but we do see some new products with the health related features. And of course, Finis and ECG features, those are the old features. But we do have new features to add on. That's it. Okay. And of course, you mentioned Of course, we mentioned earlier that we do have to release we do have plans to release MeetUp 5 We've had 5 in the year. And, we know that the the coronavirus, they they they will impact the you know, the, the people's, block, broad execution, significantly. So do you think, in our, the upcoming product, can we detect you know, Sheyong, the broader action, you know, through your product? Well, that's one of our near term products. Our next question today comes from Robert Cowell with 86Research. Please go ahead. Hi management. Thanks for taking my question. I'd like to ask about the, the gross margin. So, what are the factors kind of impact seeing the gross margin in 1Q both on a year on year and quarter on quarter basis. And then as we get into 2020, what do you expect in terms of trend on the gross margin? Right. So the, so, the gross margin was primarily impacted by the Niband Niband discount that we provided to our channels. In the quarter. And for the gross margin of administrative products, that wasn't changed much from this quarter, from quarter to quarter. The primary reason was the Mi Band 4 because of the COVID 19 situation. And then we we both Xiaomi and us, we wanted to give a higher discount to the to the channel, to the channel, given that we will soon release Niban5. In the long run, we would assume that new products, we will achieve better economy scales in the later part of the year. And also with a higher retail price, and depends on this pricing strategy, we would we would think for Xiaomi's products will continue to provide a reasonable margin on that. And then for our mainstream new products, we still strive to keep or even increase a little bit of our margin. Thank you very much. And our next question today comes from Shudam Chen with CICC. Hi, management. Thank you for taking my questions. And David, you just said you see some recovery in China market, and there are still some uncertainties outside China. Can you give us more color for this? And especially in India and the other, like, Western Europe since there are some lockdown in India and some store closings in those regions? And I will have a follow-up. Thanks. All right. First of all, I want to reemphasize that for Amazfit products, we primarily rely on our own independent sales channel to achieve the sales. And overseas is our primary market. So you can see a higher percentage of our products that were shipped overseas. And therefore, markets like Europe did impact our first quarter 2nd quarter, but we do see positive signs that countries like Spain, Italy are opened up. And we we do see we do see that in quarter 3, starting quarter 3, we should see some seamless demand coming back. So that's one of our primary market, right. And then the second market will be our domestic market for domestic market, we invested heavily in in domestic market channels right now. So, hopefully, even sometime we should we should see some sales rebound for our Amazfit products. And in terms of the India market, it is, that country is impacted greatly, but India sales in India wasn't, wasn't, represents transferred represents a significant percentage of revenue. So, so we will have to see how India goes. Okay, thanks. And my second question is, you just said you will release me by 5 in this year? And did you see is this, Tom, did you see the delay for those new products pipeline and R and D delay due to the COVID 19 impact? Thanks. No, we don't. Actually, our R and D, actually write off for Chinese New Year, our R and D stuff our supply chain staff were out back. And so we are now, our Shenzhen Global Hardware Center our R and D research, our R and D center in Hawaii and Beijing, we are fully operational So, the so the R and D wasn't impacted. So we will release our products on time. Thank you. 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 Investor Relations department Through the contact information provided on our website for the PSN Group, the company's investor relations consultant. This concludes the conference call. You may now disconnect your lines.