Hello, ladies and gentlemen. Thank you for standing by for Huami Corporation 's fourth quarter and full year 2019 earnings conference call. At this time, all participants are in listen-only mode. Today's conference call is being recorded. If you require operator assistance, please press star, then zero. I will now turn the call over to your host, Ms. Grace Zhang, Director of Investor Relations for the company. Please go ahead, Grace.
Hello, everyone, and welcome to Huami Corporation's fourth quarter and full year 2019 earnings conference call. The company's financial and operating results were issued in a press release 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 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 Yang, 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. The company's actual results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the company's annual report on Form 20-F for the fiscal year ended December 31st, 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 contain 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, marked by accelerated growth, strengthening brand recognition, and robust financial and operational results, all while we solidify our leadership position in the global smart wearable industry, along with focusing on our company mission and healthcare strategy. In the fourth quarter, we achieved healthy revenue and net income growth, driven by strong performance from our newly launched products, as well as effective sales and marketing outreach. In September 2019, we held our first international launch event at IFA 2019 in Berlin, Germany, introducing two new products to the market. Recently, at CES in Las Vegas, to further round out our Amazfit portfolio, we announced another new smartwatch, the Amazfit T-Rex, a device with a military-certified body that is ideal for outdoor enthusiasts.
Including these newly launched products, we have now expanded our Amazfit brand to seven smartwatch product lines to meet the diversified needs of our wide customer base. We also introduced from our new TWS product line, Amazfit PowerBuds, as well as an innovative product line, ZenBuds, a sleep comfort and health monitoring ear pods. As mentioned, we would not have achieved our sales results without our effective sales and marketing strategy. For example, we seized on high-profile opportunities presented in online shopping festivals such as the Double 11 day, and our Amazfit brand ranked number one in the smartwatch market segment, with a retail price under RMB 1,000, in both sales revenue and volume on JD and Tmall platforms.
All of this significantly raised our profile and overall consumer awareness of our brand. Our efforts to promote our products also included international expansion through a multi-channel strategy focused on both direct sales and third-party sales channels. Our international shipments continue to climb as we successfully raise our brand recognition globally. During the year of 2019, approximately 51.6% of our total product sold was shipped overseas. The success of Amazfit sales can be attributed to our own developed channels in both China and overseas. More specifically, we are strengthening our international sales and marketing team as we, for example, expanded our footprint to over 70 countries with 137 channel customers. In fourth quarter 2019, we entered the largest Europe consumer electronics channel, MediaMarkt, and we also entered major consumer electronic channels in India, Thailand, Russia, and other countries.
According to the IDC fourth quarter 2019 reports, we are ranked number one in market share for Indian, Indonesian, and Spanish markets under the smartwatch category. In the fourth quarter 2019, our shipments to the European market are also increasing rapidly, especially Amazfit watch shipments, which increased by 440.1% in the Western European market, including France, Germany, Italy, Spain, and U.K. In the meantime, our market share ranked number three in both Russia and domestic China, and number six in the U.S. smartwatch market. Excluding the countries we just previously mentioned, Amazfit shipment growth increased 328.5% in the rest of the markets we ship to. We believe with the continuous efforts our team continues to put forth, we can continue this successful growth over the long term. Next, let me provide highlights on our exciting new business initiatives.
At this year's CES, in addition to new smartwatches, we unveiled four new products spanning three verticals that go beyond smart bands and watches. Amazfit HomeStudio, a smart gym hub, Amazfit AirRun, a foldable next-generation treadmill, Amazfit PowerBuds, true wireless stereo fitness earphones with clip-to-go design, and Amazfit ZenBuds, sleep comfort and health monitoring earphones. With these new products, we are taking an important initial step in building a comprehensive health and fitness ecosystem. We are demonstrating how technology and health can come together, creating further future opportunities and possibilities centered around our company mission. It should be noted that we do not expect meaningful revenue 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 efforts.
We will continue working together with our current close partners, Timex Group and Xiaomi. We are making solid progress with Timex on product development. As we announced last week, our first Timex product, Ironman R300 Coventry Series, has already been launched in the market. We are pleased with this progress we have made with Timex. In the meantime, our long-term plans with Xiaomi and the popular Mi Band product line remain unchanged. We will launch Mi Band 5 this year as planned, and expect it to be another blockbuster following the record-breaking performance of Mi Band 4. I would also like to share with you my thoughts on our healthcare strategy. Healthcare has always been a focus for the company since Huami was founded in 2013.
In 2019, with our established corporate vision, Connect Health with Technology, we strengthened our focus on healthcare-related functionality in our development of smarter devices, proprietary AI chips, and cloud services. In 2020, following the execution of a strategic memorandum last year, we will continue developing our cloud-based healthcare services through further cooperation with Peking University First Hospital for the joint promotion of heart health management programs. We will also deepen the strategic partnership we established in October 2019 with AliveCor, a transformative cardio care provider using deep learning, and explore the opportunity to develop new high-performance ECG form factors to global market. Furthermore, we plan for mass production of our next generation AI chip, Huangshan 2, which has already completed the initial design phase. Huangshan 2 will be more intelligent than its predecessor, and enable more healthcare-related functionality to further differentiate our future smartwatch products.
To close, I would like to discuss the recent coronavirus outbreak that has been challenging the globe. From a business perspective, we have seen parts of our supply chain impacted, we do expect some impact on our operations and financials in the first quarter. David will provide more color in a moment. However, along with our supply chain partners, we have gradually resumed normal work operations since mid-February. As a corporation with strong social responsibility, we donated medical supplies such as masks and disinfectants as a show of our support to the regions most affected by the epidemic. In the meantime, we are collaborating with reputable research institutes to leverage our strong AI capability for the health monitoring of our users. The best example will be that we were able to determine that during this recent outbreak, irregular heart rate cases increased significantly, especially in the Wuhan area.
In the meantime, powered by our massive data sets and strong AI capabilities, we are currently building an infectious disease prediction system, and we are about to issue a paper on this. Our donations and technology have been highly recognized by the medical regulatory institutions, hospitals, doctors, and our customers. This has provided an even deeper business justification for further R&D exploration in health-related 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 Cui.
Thank you, Wang. In the fourth quarter of 2019, we continued the trend of strong growth momentum driven by robust unit sales of both self-branded products and Mi Band 4. We shipped 14.7 million units in the fourth quarter, representing a 59.8% growth from the same quarter last year. Our revenue and net income attributed to a Huami Corporation increased by 72.4% and 54.5% 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 the 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 and full year 2019, and 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 strong fourth quarter. All amounts are expressed in RMB, unless otherwise stated. As previously mentioned, revenues in the fourth quarter 2019 increased by 74.2% to RMB 2.1 billion from RMB 1.2 billion for the fourth quarter of 2018. Shipments reached 14.7 million in Q4 as compared to 9.2 million in the same quarter of 2018. Gross profit increased significantly by 62.8% to RMB 503 million from RMB 309 million in the fourth quarter of 2018. Our gross margin was 23.8% compared with 25.2% a year ago. The decrease was primarily as a result of deepened promotion during the shopping festival. Moving to expenses.
Total operating expenses increased by 60.6% to RMB 285 million from RMB 178 million for the fourth quarter of 2018, reflecting our strategy of consistent investment in R&D with an emphasis on healthcare-related product development and testing, talent acquisition, in addition to branding and marketing to enhance the company's long-term returns. Research and development expenses increased 64.8% to RMB 140 million from RMB 85 million for the fourth quarter last year, primarily due to an increase in the number of R&D staff as we expanded our product lines and skills, our fundamental research in 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 million from RMB 29 million year-over-year, as we made new product release during the CES event, increased advertising and the promotion efforts during sales festival, and built a larger and stronger marketing and sales team for overseas expansion. We believe our multidimensional efforts could greatly improve our Amazfit brand recognition and deepen our sales penetration globally. General and administrative expenses increased 29.1% to RMB 83 million from RMB 64 million for the fourth quarter last year, primarily due to an increase in professional fees 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 million, compared with RMB139 million for the same quarter of 2018. The GAAP net income attributable to the company increased to RMB207 million, compared with RMB126 million for the first quarter 2018. Net income attributable to ordinary shareholders of the company also increased to RMB207 million. Basic and diluted net income per ADS attributable to ordinary shareholders of Huami Corporation was RMB3.36 and RMB3.21 respectively. As a reminder, each ADS represents four Class A ordinary shares. For non-GAAP measures, adjusted net income attributable to Huami Corporation increased to RMB214 million from RMB146 million for Q4 2018. Adjusted basic and diluted net income per ADS attributable to ordinary shareholders of Huami Corporation was RMB3.46 and RMB3.31 respectively.
Relating to cash, as of the year-end of 2019, the company has cash and cash equivalents of RMB 1.8 billion, compared with RMB 1.4 billion at the end of 2018. Let's turn to some highlights of our robust full year 2019 results. Our revenue increased by a hefty 59.4% year-over-year from RMB 3.6 billion to approximately RMB 5.8 billion due to an increased market recognition and popularity of our Amazfit products and continued strong Mi Band sales after we launched the Mi Band 4 in the second quarter of the year. Gross profit increased by 56.2% year-over-year from RMB 939 million to RMB 1.5 billion. Gross margin decreased slightly year-over-year to 25.3%. Our total operating expenses increased by 50.1% year-over-year from RMB 574 million to RMB 861 million. The increase in operating expenses was primarily due to the increase in R&D and marketing and sales.
Always the intention to support our strategy focusing on healthcare-related technology development, expand our Amazfit product portfolio with new products such as GTS, GTR, and Amazfit T-Rex, and further strengthen our sales in the overseas market. Operating income increased 65.8% for the full year, increased from RMB 366 million to RMB 606 million. The GAAP net income to Huami totaled RMB 575 million, compared with RMB 340 million in 2018. Non-GAAP adjusted net income to Huami, which excludes share-based compensation expenses, increased 32.8% from RMB 475 million to RMB 630 million. Now to our outlook. As Wang mentioned earlier, we have seen some impacts on our supply chain side due to the current coronavirus situation. We expect our first quarter results to be affected to some extent by a disruption of parts in our supply chain. However, we have seen gradual recovery of production capacity.
Therefore, the impact of supply chain constraint will be mainly felt in Q1 2020. Given the COVID-19 outbreak spread globally, in particular in the Western European countries, one of our overseas market, we will continue to closely monitor and assess the situation in those regions. 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 first quarter of 2020, management currently expects net revenues to be between RMB 980 million and RMB 1.01 billion, which would represent an increase of approximately 22.6% to 26.3% from RMB 800 million in the first quarter of 2019. We hope the entire epidemic situation begins to improve and still have confidence that 2020 will be another successful year for Huami. This concludes our prepared remarks. We will now open the call to questions.
Operator, please go ahead.
We will now begin the question and answer session. To ask a question, you may press star then 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 then 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. At this time, we will pause momentarily to assemble our roster. The first question comes from Kyna 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. Especially in Europe, that is also part of your important market in overseas business. Just wanted to ask the confidence for your 2020 outlook in consider of the growth magnitude. Can we see a better growth rate? More than first quarter is kind of like year-over-year growth rate in 2020 and versus your prior expectations? This is the first question. The second question is about the business cooperation with Timex. Given the period they target to launch the product in their first quarter or for the first half, I wanted to get more updates. Thanks.
Thank you, Kyna. This is David. Let me take on the first question, I would like to turn your second Timex question to our COO, Mike. To your first question, as I explained earlier in the remarks, that we were impacted from the supply chain side. When we march into Q2, we are still in March right now. Given that the first half year, because of the seasonality of our sales, we would expect that in the later part of the year, when the situation improves, we should do our best to catch up for the losses we encountered in the first half of the year. At this moment, we could not promise a number that how much we can achieve because we are still assessing the situation.
The situation is still developing. We are confident that we are working towards new product releases in the year, marching towards our mission. We should not see significant losses in 2020 as compared to 2019’s financial results.
Hi. This is Mike. To answer your question about Timex, we are still on track in our product development schedule with the Timex products. In fact, we just launched the first of our cooperative product, the Timex Ironman R300 cross series just recently. As Wang and David mentioned, China's production line is slowly coming back to normal. 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. In terms of the impact of the virus for our Timex products, the impact is relatively minor. Yeah.
Thank you.
The next question comes from Arthur Lai from Citi. Please go ahead.
Hi. Thank you, management team, for taking my question. Congrats for the very good December quarter growth. I have two small questions. My investor, they have been waiting for the big data analytics business. Can management, Chairman Huang or Mike, give us some update about the AI intelligence project with university hospital, and how you see this potential business in the future? This is my first question. My second question is, can you also quantify the shipment breakdown among the India market and also EU market or APAC market? We understand that actually, the EU market still makes a very small portion of your business. Appreciate you give us a breakdown in those regions. Stop here. Thank you.
Hi, Arthur. This is Mike. I'll address your first question, and I'll let David to answer your second question. Regarding the partnerships with the academic institutions, we are actually doing a lot. For example, we are currently working with Stanford University on sleep research. We view that this is a tremendous opportunity because sleep is a very common problem. There's a lot of healthcare revenue opportunities in this area. We are actively engaging, for example, in the sleep research project with Stanford University. We also have been engaging with the Norwegian University of Science and Technology, NTNU, on improvement, for example, of the PAI algorithm to enhance it, so that you could adjust for people with different chronic diseases such as people with high blood pressure or people with diabetes.
We are working with them to modify or enhance the PAI algorithm so that it could be more appropriate to be used by these people with chronic diseases. We are continuously working with research institutions, academic institutions, on these type of data analysis to improve our algorithms and enhance our products. David, do you want to answer the second question?
Sure. Hi, Arthur. Thank you for your question. Regarding your second question, Europe is one of our markets, which represents approximately one-third of our overseas sales. Remember that even though we experienced significant growth in E.U. countries, which includes France, Germany, Italy, Spain, and U.K. We also have a very strong presence in Eastern European countries like Russia. We are also the front-runner in domestic China also. Another thing I want to mention that we are also expanding into the U.S. market, and we are ranked number six in the U.S. smartwatch market. Besides all these countries, we also expand into the rest of the countries. In those countries, we also grow rapidly. Right now, it seems that Italy was impacted the most. France, Germany, and those countries also had some identified cases.
We would assume that these countries will place a lot of efforts in containment of the diseases, and we foresee that our second quarter will be impacted, but starting Q3, and the sales will go back to normal, and we are still confident our sales in the global markets.
Okay, thank you.
Thank you.
Again, if you have a question, please press star then one on a touch-tone phone. The next question comes from Robert Cowell of 86Research. Please go ahead.
Hi, management. Thanks for taking my question. I actually have two. 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. The second question is about temperature sensors. Have you ever launched a product with a body temperature sensor in it? Is that something that y'all would consider doing in the future?
Sure. I will take your first question, Mike, would you please take on the second question on the product? Your first question regarding gross margin fluctuations, I can tell you that for both Xiaomi's products and Amazfit brand products, for Xiaomi's products, the margin wasn't fluctuated that much, and our Amazfit product margin actually improved from prior years, given that we launched multiple new products in the year. The reasons for the blended margin fluctuation is because the Xiaomi's Mi Band 4 sales was very strong. The revenue makes the change a little, Xiaomi's product's margin is lower as compared to Amazfit products. Therefore, the blended margin decreased slightly as compared to 2018. Going forward, we would expect that the margin will be relatively stable. That's our objective for this year.
Okay. About the second question, the answer is that no, not yet. We did not have a product with temperature sensor yet. We are working on such a product right now. Yeah. That's the answer to your second question.
Okay, great. Thank you both.
Thanks.
The next question comes from Edward Chen of Hitomi International. Please go ahead.
Hi, management. Congrats for the good results. 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 management think about the growth driver for this year, especially in the first quarter, given the demand situation right now overseas? My second question is on just the future focus of our company. Since we see we launched a number of new products, including the smart treadmills and products like that. I just want to know what are maybe the focus on the product lineup for the company going forward. Thank you.
Thank you, Edward, for your question. Again, let me take on the first question for the growth driver, and I would turn to Mike to answer your question regarding the new products. The growth driver going forward will still be two legs. We still have a very strong relationship with Xiaomi. We will continue working with Xiaomi to launch new Xiaomi bands. As our CEO Huang Wang mentioned earlier, that we will launch Mi Band 5 in 2020. We would still expect that the band sales will continue to be strong. The second key driver will be from our Amazfit products. We gear up our efforts in sales, marketing, and also brand building exercise. We would expect that we will grow faster in Amazfit products as compared to Xiaomi's products. Two primary drivers will continue to guarantee our success in this year. Mike?
Okay. Thank you, David. In terms of our product focus, well, first of all, we have always been focusing our products on health and fitness. All the products that we do will have features for health and fitness. Now, in addition to geographic expansion, broadening our product portfolio is also one of our growth strategies. As we identify proven good business opportunities in certain areas, for example, in the U.S., Peloton has shown that there is a market for indoor sports equipment. In this case, we feel that this is an area that we can also produce a product for and expand into that area. In the near term, our bread and butter product focus will obviously still be smartwatch and smart band. Those smartwatch and smart band will still continue to drive the majority of our revenue.
As we identify new opportunities, again, which have health and fitness functionalities, we will deliver our new products in these areas. For example, in CES, we launched the earbud. The earbud market is proven to be growing very fast, as evidenced by the Apple AirPods. Similarly, as I mentioned, Peloton has proven that there's a market for indoor sports equipment. That's why we are rolling out products in these new categories to try to capture new market share and broaden our product portfolio. Again, all the products 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 China Renaissance. Please go ahead.
Hi, management. Thank you for taking my question. 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 Amazfit product shipment this year? Thank you.
Sure. Our new plan for the year, we'll be launching more Amazfit brand products. We may also introduce the new branding products. All of them will be self-branded products. Our strategy will be continue 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. 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 Mi Band products, will be less significant because the Mi Band will be a mass sale with much lower average selling price. Our products will be priced much higher. That will drive our revenue growth and drive our revenue mix. This is our strategy. Michelle.
Yeah. Okay. Thank you. Another question is, could management provide some guidance on the features upgrade trend this year for Amazfit products? Thank you.
As I mentioned, that we will launch multiple products, the multiple products will target different layers of consumers, the features will be mixed, but will have a healthcare focus, that will be in line with our long-term strategy.
Okay. Thank you.
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'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.