Earnings Call: Q4 2019

Mar 13, 2020

Hello, ladies and gentlemen. Thank you for standing by for Huami Corporation's 4th 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. 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 4th Quarter and Full Year 2019 Earnings Conference Call. The company's financial and operating results were issued in a press release by newswire service earlier today. And are posted online. You can also view the earnings press release and the slides to which we will refer on the call by visiting the IR section of the company's website at www.farming.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 Choi, our Chief Financial Officer. The company's management will begin with prepared remarks, and the call will conclude with a Q And A session. Mr. Mike Yeung, 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 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 the other risks and on businesses included in the company's annual report on Form 20 F for the fiscal year ended December 31, 2018, and other filings 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. 2019 was an outstanding year for Huami, market by accelerated growth, strengthening brand recognition and robust financial and operational results. All while we solidify our leadership position in the global smart available 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 outreached. In September 2019, We held our 1st international launch event at EVA 2019. In Berlin, Germany introducing 2 new products to the market. Recently, at CES in Las Vegas to further round out our Amazfit portfolio we announced another new smartwatch, the A base with G Lex, a device with a military certified body that is ideal for outdoor insurance business, including this newly launched product We have now expanded our Amazfit brands to 7 smartwatch product lines to meet the diversified needs of our wide customer base. We also introduced from our new TWS product line, Amazfit Power Bus as well as an innovative product line, Zen Bus, a sleep comfort, app, 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 days. And our mainstream brands ranked number 1 in the smartwatch market segment. With a retail price under RMB1000. In both sales revenue and volume on JD and Tmall platforms. All of this significant raised our profile and overall consumer awareness of our brand. Our experts to promote our products also included international expansion through a multichannel strategy focused on both direct sales and third party sales channels. Our international shipments continue to climb as we successfully raise our brand recognition globally. During the year of 2019, approximately 51.6% of our total products showed was shipped overseas. The success of our main suite 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 euro consumer electronics channel, media market. And we also enter major consumer electronic channels in India, Thailand, Russia, and other countries. According to the IDC fourth quarter 2019 report. We are ranked number 1 in market share for Indian, Indonesian and Spanish markets under the smartwatch category. In the fourth quarter of 2019, our shipments to the European market are also increasing rapidly especially amazfit watch shipments, which increased by 4 40 0.1% in the Western European market, including French, Germany, Italy, Spain, and UK. In the meantime, our market share record number 3 in both Russia and domestic China. And number 6, in the U. S. Smartwatch market. Including the, excluding the countries we just previously mentioned. Amazfit shipment growth increased 328.5 percent in the rest of the markets we shipped to. We believe with the continuous efforts, our team continues to push forward. 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 smartwatches, we unveiled 4 new products spanning three verticals that go beyond smartphones and watches, Amazfit Home Studio as Mark Jim Hop, a mixed with Aaron, our foldable next generation chat mail Amazfit pompous true wireless stereo fitness earphones with grip to go design. And amazing zone bus, 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 note that we do not expect meaningful revenue contribution 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 access. We will continue working together with our current close partners, Timex Group and Xiaomi. We are making solid progress with Timex on product developments. As we announced last week, Our first Panmex product, Ironman R300 Cost III 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 plan will sell me and the popular min band product line remains 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 will also would like to share with you my thoughts on our health care strategy. Healthcare has always been a focus for the company since Huami was founded in 2013. In 2019, with our established corporate vision, connect health with technology, We strengthened our focus on health care related functionality in our development of smart devices. Proprietary, AI, chips, and cloud services. In 2020, following the exclusion of a strategic memorandum last year, we will continue developing our cloud based healthcare services through further cooperation with Packing 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 a live call. A transformative cardiovascular care provider using deep learning and explore the opportunity to develop new high performance BGG form factors to global market. Furthermore, we plan for mass production of our next generation AI Chips Huang san 2. Which has already completed the initial design phase. Huang Chu will be more intelligent than if pretty predecessor and enable more healthcare related personality to further differentiate our future smartwatch products. To close, I would like to discuss the recent coronavirus outbreak that has been challenging the global. 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 cooperation with strong social responsibility. We donated medical supplies such as masks and disinfectants as a show of our support to the religious most affected by the epidemic. In the meantime, we are collaborating with reputable research institute to leverage our strong AI capability for the health monitoring of our users. The best example will be that we were able to determine that during this recent outbreak, illiquid in regular hardware 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 practitioner system, and we are about to issue a paper on this. Our donation, our donations and technology have been highly recognized by the medical regulators, institutions, hospitals, doctors and our customers. This has provide an even deeper business justification for further R And D exploration enhance related technology. 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 Trae. 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 14,700,000 units in the 4th 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 will highlight the key financial measures for the fourth quarter 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 4th quarter. All amounts are expressed in RMB unless otherwise stated. As previously mentioned, revenues in the fourth quarter 2019 increased by 74.2% to rmb2.1 1,000,000,000 from RMB1.2 billion for the fourth quarter of 2018. Shipments reached $14,700,000 in Q4 as compared to $9,200,000 in the same quarter of 2018. Gross profit increased significantly by 62.8 percent to RMB503 1000000 from rmb309000000 in the fourth quarter of 2018. Our gross margin was 23.8% compared with 25.2 percent 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 1,000,000 from RMB178 million for the fourth quarter of 2018. Reflecting our strategy of consistent investment in 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 percent to RMB140 1,000,000 from RMB 85,000,000. For the fourth quarter last year, primarily due to an increase in the number of R and D staff, as we expanded our product lines and skills. Our fundamental research in health Healthcare related 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 RMB 63,000,000 from 29 1,000,000 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 quickly improve our amazfit brand recognition and deepen our sales penetration globally. General and administrative expenses increased 29.1 percent to RMB83 1,000,000. From RMB 64,000,000 for the fourth quarter last year, primarily due to an increase in professional fee related to improvements 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 1,000,000 compared with rmb139 1,000,000 for the same quarter of 2018. The GAAP net income attributable to the company increased to RMB207 1000000, compared with RMB126 1,000,000 for the fourth quarter 2018. Net income attributable to ordinary shareholders of the company also increased to 207,000,000 RMB. Basic and diluted net income per ADS attributable to ordinary shareholders of Huami operation was RMB3.36 and RMB3.21, respectively. As a reminder, each ADS represents 4 Class A ordinary shares. Next, 4 non GAAP measures adjusted net income attributable to Fami Corporation increased to RMB214 1,000,000 from RMB 146 1,000,000 for Q4 2018. Finally, adjusted basic and diluted net income per ADS attributable to ordinary shareholders of Huami Corporation was RMB3.46 and RMB3. RMB31, respectively. Relating to cash, as of the year end of 2019, the company has had cash and cash equivalents of RMB 1,800,000,000 compared with RMB 1,400,000,000 at the end of 2018. Now, let's turn to some highlights of our robust full year 2019 results. Our revenue increased by a hefty 59.4 percent year over year, from RMB3.6 billion to approximately RMB5.8 1,000,000,000 due to an increased market recognition and popularity of our Amazfit products and continued strong VBET sales. After we launched Mi Band 4 in the second quarter of the year. Gross profit increased by 56.2 percent year over year from RMB939 1,000,000 to RMB 1,500,000,000. Gross margin decreased slightly year over year to 25.3%. Our total operating expenses increased by 50 point RMB574 million to RMB861 1,000,000. The increase in operating expenses was primarily due to the and always the intention to support our strategy focusing on health care 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 0.8% for the full year increased from RMB366 1,000,000 to RMB606,000,000. The GAAP net income to Huami totaled RMB575 1,000,000 compared with RMB340 million in 2018. Non GAAP adjusted net income to Huami, which excludes share based compensation expenses, increased 32.8 percent from RMB475 1,000,000 to RMB 6 rmb30 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-nineteen outbreak spread globally in particular in the Western European countries, one of our overseas market. 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 the 4th quarter 2020, management currently expects net revenues to be between RMB 980,000,000 and RMB1.01 billion, which would represent an increase of approximately 22.6percentto26.3percent from RMB800 million in the first quarter of 2019. We hope the entire EBIT 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 questions. Session. On today's please immediately repeat your question in The first question comes from Kaina Wong of Credit Suisse. Please go ahead. Hi. Thanks for taking my questions. It's a very good result. Congratulations. I just wanted to ask, given that the impact from the COVID 19 in terms of demand weakness in certain countries right now, but, especially in Europe that is also part of your important market. In overseas business. So I just wanted to ask the confidence for your 2020 outlook in computer of the growth, like, magnitude, can we see a better growth, growth rate, like, more than, like, 1st quarter this kind of like the overall growth rate in 2020 versus your pie oil expectation. This is the first question. The second question is about the business, cooperation with timing. Given the periods that you target to launch the portal, in the first quarter or for the first half. So I wanted to get more updates. Thanks. Thank you, Tina. This is David. Let me take on the first question and I would like to turn your second time and question to our COO, Mike. So to your first question, as I explained earlier, in the remarks, that we are 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. And but we given 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, 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, a saying the situation. And the situation is still developing, but we are confident that we are working towards new product releases in the year. March into us are mission, and we should not see significant, losses in 2020 as compared to 2019's financial results. Hi. This is Mike. To to answer your question about Timex, we are, still on track in our development, the product development schedule with the Timex products. In fact, we just launched the first our of our co cooperative product, the Timex Ironman, R300 cross series, just recently. And, as, Ryan 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 the impact of the virus for for our Timex products, the impact is a relatively minor. Yeah. Thank you. The next question comes from Arthur Ly from Citi. Please go ahead. Hi, thank you management team for taking my question. Congrats for the maybe good and third quarter growth. I have 2 small questions. One is, my in investor, they had been, waiting for the big data analytics business, and can, management, chairman Huang or my give us some update about the AI intelligence, projects with the university 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 yield market still make a very small portion of, your business. But, what, appreciate you give us a breakdown in those regions. Stop here. Thank you. Hi, Arthur. This is Mike. Yeah. So I'll adjust your first question and, on the 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 as a tremendous opportunity, for, because sleep is a, you know, it's a, it's a, a very common problem, and there's a lot of, healthcare revenue opportunities in this area. So, you know, we are actively engaging, in, for example, in the state research project with Stanford University. We also have been engaging with the, leveraging Institute of Science And TNU on improvement, for example, of, the, pie algorithm. For, to to to enhance it, so that, you could, address, for, people with different, chronic diseases, such as, people with the high blood pressure or people with, diabetes, you know, we we, working with them to, 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 are continuously working, with, research institutions, academic institutions, on these, type of, data analysis to improve our algorithms and enhance our, our products. David, you want to sort of second question? Sure. Hi, Oscar. Thank you for your question. Regarding your second question, Europe is one of our market, which may represent, which represents about 1 third, approximately 1 third of our overseas sales And, remember that even though we experienced a significant growth in EU EU Countries and we, which includes France, Germany, Italy, Spain and UK. And we also, has a very strong presence in Eastern European countries like Russia. And we also, ranked we are also the front runner in domestic China also. Another thing I want to mention that we are also expanding into the US market. And we are ranked number 6 in the U. S. Smartwatch market. And besides all these countries, we also expand 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 had 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 2nd quarter will be impacted, but, but starting Q3 and the sales will go back normal and we are still confident, our sales in the global markets. Great. Thank you. The next question comes from Robert Cowell of 86 Research. Please go ahead. I actually have 2. 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 y'all would consider doing in the future? Sure. I 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 both show me the products and, basically brand products, the margin And for Xiaomi's products, the margin wasn't fluctuated that much. And our domestic product margin at actually improved from prior years given that we launched multiple new products in the year. The reason for the blended margin fluctuation is because because the Xiaomi's Mi Band 4 sales was very strong. The revenue mix change a little. And that Xiaomi's products, Xiaomi's products margin is lower as compared to amazpeed products. So therefore, the blended margin decreased slightly as compared to 20 So going forward, we would expect the margin will relate 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. Yeah. So, that's the answer to your second question. Okay, great. Thank you, both. Thanks. The next question comes from Edward Jen of Hitome International. Please go ahead. Hi, management. Congrats for the group results. 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 do you mentioned in thinking about the 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 a few focus of our companies. We see we launch a number of new products including the, the SmartTrails and products like that. So I just want to know what are the maybe the focus on the pipeline of for the company going forward? Thank you. Thank you, Albert for your question. Again, 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 be will still be 2 legs. So we still have a very strong relationship with Xiaomi. We will continue to launch working with Xiaomi to launch a new Xiaomi band 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 mid speed products. We, geared up our efforts, in sales, marketing and also brand building exercise So we would expect that we will grow faster in administrative products as compared to Xiaomi's products. So 2 primary flavors will continue to, to guarantee our success in this year. Mike? Okay. Thank you, David. So, in terms of our product, or product focus, well, first of all, we I've always been focusing, our products for on on health and fitness, you know, so, that's, you know, all the products that we do will, have, a, features for health and fitness. Now, in addition to geographic expansion, boarding our product portfolio, it's also one of our growth strategy. As we identify, proven good business opportunities in certain areas, For example, in the U. S, Paloton has shown that there is a market for indoor, equipment. And in this case, we, we feel that the, the, this is an area that, we could also produce a product for, you know, and expand into that area. But in the near term, our bread and butter products, focus will still, obviously, still be smartwatch and smart fan. And, those smartphone and smart band, smartwatch and smart band will still continue to drive the majority of our revenue. But, as we identify new opportunities, again, which has, health and fitness, functionalities. We will, delivering new, of our new products, in these areas, such as, for example, you see, as we launched, the, air bot, which is, the air bot market is proven to be going very, very fast. As evidenced by the Echo AirPOC. And similarly, as I mentioned, the Palatine has proven that there's a market for indoor, sports equipment. And so that's why we are rolling up, products in these new categories. To, to, to, to try to capture, new market share and broaden our product portfolio. But, all, again, all the product, rollout that we will develop will have a focus on, fitness and health. Okay. Thank you very much. Thank you. The next question comes from Michelle Zhang of Trianda Renaissance. Please go ahead. So my first question is, for Amazfit products, could you please discuss about the current offline channel distribution plan? And what kind of penetration we are targeting to reach among all the M6 product shipment this year? Thank you. Sure. So our new our new plan for the year, we will be launching more, administrative brand products. We may also introduce the new branding products All of them will be self branded products and our strategy will be continued 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 markets. And we expect a significant growth in terms of total new products and the total shipments in 2020. The total number of shipments under our own brands as compared to Xiaomi's mid band products will be, will be less significant because the mid band will be a 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? Yes. Okay. Thank you. So another question is management provides some guidance on the features upgrades trend this year for Amazfit products? Thank you. So as I mentioned, we will launch multiple products. And then the multiple products that we would target different layers of consumers and the features will be mixed, but we'll have a healthcare focus and that will be in line with our strategy. A 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.