Hello, ladies and gentlemen. Thank you for standing by for Huami Corporation's third quarter 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 third quarter 2019 earnings conference call. The company's financial and operating results were issued in a press release via news wire 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. Wang Huang, 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 Provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from the views expressed today. Further information regarding this and other risks and uncertainties is included in the company's annual report on Form 20-F for the fiscal year ended December 31st, 2018, 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 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. Wang Huang. Please go ahead.
Hello, everyone. Thank you for joining our earnings conference call today. In the third quarter, we achieved outstanding top-line and bottom-line growth, driven by persistent development and execution of our strategy initiatives, which focus on product diversification, brand elevation, and international expansion. Our third quarter revenue was RMB 1.86 billion, representing a 73.3% year-over-year increase. Our revenue performance was the result of strong sales from both the Mi Band 4 and our newly released Amazfit products, as both brand categories become increasingly recognized and desired by global customers. In the third quarter, we continued to expand and diversify our Amazfit product lines, with the goal of targeting new customer segments and offering additional applications of usage.
Following our release of multiple smart wearable products in the second quarter, we recently launched the Amazfit GTS and the Amazfit Stratos 3, the latter of which is an updated model of the professional sports watch product line, targeting sports enthusiasts with comprehensive sports monitoring functionalities. We also introduced the ultra-modern Amazfit X, a new concept product with a prominent curved touch screen shaped like a crescent moon, which is slated for release in 2020. Turning back to sales, our international shipments continue to climb as our focus on expanding brand recognition globally continues to bear positive results. In September, we successfully held our first international product launch event at IFA 2019 in Berlin, Germany. We also received numerous global product design awards. In general, we view our overseas marketing campaigns as an essential strategy for our growth and brand promotion.
In light of our success thus far in driving sales, more overseas product launches are being developed and scheduled in the future. The successful sales achievements in the just past Double Eleven eCommerce Festival demonstrated our strong domestic market strategy and intentions. This year, Amazfit product sales reached last year's Double Eleven whole day sales level in just one hour, and Mi Band 4 sales reached 350,000 units in only 10 hours. In addition, we ranked number one in sales revenue as well as volume on both JD and Tmall platforms in the smartwatch market segment, with retail price under CNY 1,000, as we have completed our product portfolio in this market segment. With the fast-growing market, as well as our effective strategies lying ahead, we have great confidence in future product sales, both at home and abroad.
Furthermore, in the first quarter, we leveraged our expertise in smart wearable hardware and big data analytics to optimize algorithms for our cloud-based healthcare services. At the 2019 Asia Pacific Heart Rhythm Society, Dr. Erdong Chen from the Peking University First Hospital introduced the hospital's research on the cardio health monitoring by Huami smart wearables. The research indicates that the accuracy of detecting atrial fibrillation through ECG and PPG using smart wearables, has reached 94.76% and 93.27% respectively. This demonstrated that people can manage their cardio health both effectively and remotely, through the use of smart wearable devices. In the meantime, we are continuing to improve our users' experience, especially in the specific healthcare-related scenarios. We recently launched fall detection in some Amazfit products, which when activated, will automatically alert the user by vibrating and will also send an alert message to the pre-configuration emergency contact.
We also introduced brand-new healthcare VIP services, which allows users of our smart wearable products to have tools, such as ECG reading and analysis, abnormal cardio notification alerts, quarterly health reports, and numerous other tools as part of the various premium service packages. We expect services and contents to complement our core revenue stream from smart wearable product sales and become an increasingly important component of and contributor to our revenue model and results. Looking ahead, our plan is to keep investing in and improving our R&D capabilities, as well as seeking additional strategic partnerships. In addition, as always, we will continue innovating with our current close partners, Xiaomi and Timex Group. Our long-term plans with Xiaomi and the popular Mi Band product line remain unchanged. We look forward to developing and producing future generations of the Mi Band, including variations targeting different market segments and customer profiles.
In the meantime, we are also collaborating closely with Timex on product development. We plan to launch multiple product lines with Timex in the U.S. in early 2020. With experts in our self-developed AI chip, Huangshan-1, our smart wearable products and cloud-based services, we strive to provide users a better experience in both sports and healthcare in order to improve their daily smart lives. Thank you again for joining today. I will now turn the call over to our CFO, David Cui.
Thank you, Huang. We are very pleased with our robust financial results in the third quarter. Revenues grew 73.3% year-over-year, and total shipment reached 13.7 million units, up 67.1% from the same period last year. These results were primarily driven by the rising global demand for both Mi Band 4 and our newly launched Amazfit products. In the meantime, our first nine months revenue and shipments have already exceeded 2018's whole year performance. Along with revenue expansion, our operating efficiency also improved in the quarter, with operating expense as a percentage of revenue at 13.5%, declining 4.3 and 1.4 percentage points respectively from the second quarter 2019 and the third quarter last year, despite our increase in investment in R&D and brand equity during the quarter. These combined financial and operational improvements, coupled with strong revenue growth, led to bottom-line year-over-year growth of 78.7%.
As we further diversify our product lines, strengthen our service offerings, form and solidify strategic alliance, and grow our global footprint, we are confident in our ability to continue delivering healthy financial and operating performance going forward. Mindful of the length of this call, I will highlight the key financial measures for the third quarter 2019 and encourage you to refer to our earnings press release for further details regarding our financial results. Here are some of the highlights of our strong third quarter. All amounts are expressed in RMB unless otherwise stated. As previously mentioned, revenues in the third quarter 2019 increased by 73.3% to RMB 1.86 billion from RMB 1.07 billion for the third quarter of 2018. Gross profits increased significantly by 63.8% to RMB 470 million from RMB 287 million in the third quarter 2018. Our gross margin was 25.2%, compared with 26.7% a year ago.
The decrease was primarily a result of an increasing proportion of Mi Band 4 in our revenue mix, driven by its continued sales momentum since its second quarter product launch. Moving to expenses. Total operating expenses increased by 56.5% to CNY 251 million from CNY 160 million for the third quarter 2018, reflecting our strategy of investing in R&D, branding, and marketing to enhance long-term returns. Research and development expenses increased by 107.7% to CNY 125 million from CNY 60 million for the third quarter last year, primarily due to an increase in our personnel-related expenses and a rise in cost associated with the testing of new pipeline products. General and administrative expenses in the third quarter remained essentially flat at CNY 70 million, compared with CNY 68 million for the third quarter 2018.
Our selling marketing expenses increased by 75.1% to RMB 57 million from RMB 32 million for the third quarter last year, as we increased advertising and promotional expenses for our new Amazfit products. We also expanded our sales and marketing team to boost our sales efforts globally. Our income before income tax was RMB 228 million, compared with RMB 129 million for the third quarter of 2018. The GAAP net income attributable to the company increased to RMB 203 million, compared with RMB 114 million for the third quarter of 2018. Net income attributable to ordinary shareholders of the company also increased to RMB 203 million. Basic and diluted net income per ADS attributable to ordinary shareholders of Huami Corporation was RMB 3.31 and RMB 3.15 respectively. As a reminder, each ADS represents four Class A ordinary shares. Next, for non-GAAP measures.
Adjusted net income attributable to Huami Corporation increased to RMB 210 million from RMB 134 million for Q3 2018. Adjusted basic and diluted net income per ADS attributable to ordinary shareholders of Huami Corporation was CNY 3.41 and CNY 3.25, respectively. Relating to cash, as of September 30th, 2019, the company had cash and cash equivalents of RMB 1.72 billion, compared with RMB 1.44 billion at the end of 2018. Now to our outlook. Looking ahead to the fourth quarter of 2019, the management currently expects net revenues to be between RMB 1.93 billion and RMB 1.95 billion, which would represent an increase of approximately 57.6% to 59.2% from RMB 1.2 billion for the fourth quarter of 2018. This concludes our prepared remarks. We will now open the call to questions. Operator, please go ahead.
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone 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 our 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 today comes from Clive Cheung out of Credit Suisse. Please go ahead.
Hi. Good evening, management. Thank you for taking my question. My, I think, big question is on the Xiaomi smartwatch competition. Previously, we believe that Xiaomi's smartwatch will be targeted at a different segment compared to our Amazfit products. The price range seems pretty similar on some of the higher-end ranges for Amazfit products. Could you share some insights on the view on this and if there is any risk for Amazfit on Xiaomi channels? Thank you.
Yeah. This is Mike Yeung. Basically, there are differences in terms of the feature set. The Xiaomi smartwatch, for example, they have the calling function.
4G.
4G. Basically, that is more tailored to scenarios where you might not have a phone with you. Currently, that scenario is quite new to many users. For us, we mostly target the smartwatches. We have a lot of sports feature as well as a lot of healthcare feature. Also, in terms of fashion, in terms of elegance, those are the features we focus on. Sports feature, healthcare feature, as well as looks and fashion. Whereas, again, the Xiaomi smartwatch is more focused on communication. Basically, it's different feature sets targeting different people and different scenarios. Does that answer your question?
Yeah. I think Amazfit obviously have products sold through Xiaomi channels. Is there any risk or impact to that?
To directly answer your question, for Amazfit products, our own brand products, majority of them did not go through Xiaomi's channel. We have successfully built our own channel, and we are still expanding our distribution channel right now.
Okay. Thank you very much.
Next comes from Arthur Lai of Citi. Please go ahead.
Hi, Wang Huang and David Cui and Mike Yeung. Congrats for the good results in the Q3. Number one is a housekeeping question. Number two is a new product question. I would like to start from the number one. You mentioned that this quarter we ship 13.7 million total product. Can you give us some breakdown of the Mi Band product and also your own brand product or the other ODM product as well? Also, can you also comment about the R&D expense? You mentioned that the R&D expense actually increased 107%. This is quite amazing. Can you also elaborate what kinds of product you are working on? Thank you.
Okay. Arthur. For the breakdown of our total shipments, as we announced about 20 days ago, in this quarter, we very successfully shipped about 1 million Amazfit products. That's the total shipments in only one quarter. That's historical. The rest of the shipments are Xiaomi's products. For your R&D breakdown, what I can point out is the OPEX in total as a % of our total revenue, actually decreased as compared to the same quarter in 2018. We very successfully managed our G&A expense and to compensate that, the increase in our R&D investment and also in our distribution channel building cost. As a result of this, our net margin, if you look at our net margin year-to-year, it's actually slightly increased.
Okay. Yeah. Thank you. Thanks, David, for the answer. Don't get us wrong. Actually, we are not trying to badger company because you add in the R&D. We are happy to see you invest for the future. I just want to get some color about those product roadmap, because investors are actually more forward-looking. If you look at such as Huawei as a leading brand, they actually invest in the wearable product a lot, such as TWS headset. I'm also wondering, do you have a plan to expand your product line to all of the smart band and also smartwatch?
I can answer first, then if Wang Huang or Mike, you can add on. We do have a pipeline of new products for next year, 2020. That includes TWS. That's in our radar. Majority of the products are still wearables, and that does include the TWS. Does that answer your question?
Yeah. Thank you.
Thank you.
The next question today comes from Meng Cao of Industrial Securities. Please go ahead.
Hi, management. This is Meng Cao from Industrial Securities. Thank you for taking my question. My question is that, what's your strategy to promote Xiaomi's self-brand? Could you give us some color on the selling and the marketing expense in 2020? Thank you.
For our basic brand strategy, we will definitely continue to invest and grow our brand, especially internationally. We are seeing a very good adoption of our product right now. We will do more product launches internationally as we mentioned earlier in the call. For example, in upcoming CES in January, we will have our first CES booth presence and promote our products. IFA this year was also another example. We'll continue to do more major international product launches to promote our brand.
Okay. Thank you.
The next question comes from Michelle Wang of China Renaissance. Please go ahead.
Hello, management. I would want to know that because our cooperation, the contract with Xiaomi will end in October next year. We want to know what is our current relationship with Xiaomi. Thank you.
Yes. Currently, right now, again, we are continuing our partnership as before. We are already working on the Band 5, and we expect to renew the partnership agreement with Xiaomi. Right now, we don't see any change in that. Again, we expect to renew the agreement sometime early next year.
Okay, thank you.
The next question comes from Xutong Chen of CICC. Please go ahead.
Thank you for taking my question. Congratulations for the robust result. As we all know, application of healthcare or medical use of smartwatch and other wearable devices is very hot recently. My question is, will Huami consider to go into those fields? Are there any plans or recent achievements to share with? Thanks.
Actually, our mission is to explore the opportunities in the healthcare field. This is maybe also our strength area. It is worth to mention that it is Huami who actually launched the first ECG commercial wearables, even ahead of other famous competitors. Our R&D lab are working on other advanced medical fields, such as blood oxygen and blood pressure. We are working on those and trying to get the technology approved by China FDA, and eventually approved by the US FDA. We should expect future products in those area.
Okay. Thank you, David.
Thank you.
The next question comes from Robert Cowell of 86 Research. Please go ahead.
Hi, management. My question is about our priorities for the use of cash. It seems there's a pretty significant cash balance at this point.
Yes, Robert. We are accumulating a lot of cash so far. We are looking at strategic opportunities, investment opportunities, and merger acquisition opportunities globally. We will use the cash in a good way.
Thank you.
Thanks, Robert.
The next question comes from Edward Chen of Haitong International. Please go ahead.
Hi, management. Congrats for the good results. I just want to follow up on the healthcare services that we're focusing on. I wonder if management could give us a bit more color on sort of what will the business model look like in terms of the services that will launch related to healthcare. Thank you.
Yeah. For healthcare services, actually, there are several different kinds of potential revenue streams. One is, as we mentioned before, is working with insurance companies and either do a licensing of our algorithm or data sharing with the user's approval, and leads generation savings. We could potentially get a share of the savings in claim costs. Those are various ways that we could work with insurance companies to monetize off of our healthcare features and data.
Okay. Thank you.
The next question comes from Jason Shen of China Renaissance. Please go ahead.
Hi, management. Thank you for taking my questions. I have one question. Actually, the market is speculating that Xiaomi will actually announce a bunch of products in December, including the bands, very low-end bands, and some high-end and middle-tier watches. How do you think this will impact the relationship or your product shipment in the first half of next year? Thank you.
Oh, thank you, Jason. As Mr. Huang mentioned in his earlier speech, our long-term plans with Xiaomi and the popular Mi Band product line, this will remain unchanged. We are looking forward to developing and producing future generations of Mi Band for Xiaomi. To be specific, that we will launch Mi Band 5 in next year for Xiaomi. This is a strong indicator that we will continue to work with Xiaomi and continue the strong relationship with Xiaomi. In terms of what you mentioned that Xiaomi may launch multiple future products, we would consider that it's just one more player on the market. As of this moment that our total shipments still remains the top five or six globally and our products are unique in terms of features, in terms of the designs.
We are confident that we can develop our business independently and develop our technology and the product associated with the technology for the global consumers.
Jason, just to add more color, is that for example, in this past single day, we are still totaling our sales figures. Basically, we have seen a very strong single-day sale for our Amazfit brand products. Even though the Xiaomi smartwatch was also for sale. We've seen, again, very strong sales for this past Double 11, probably as a matter of fact, strongest ever for our company, for our brand. Basically, right now, again, we don't really see that much impact with the Xiaomi smartwatch.
Yeah.
Okay
We compete with Xiaomi. Yeah. In a single day, we now the number 1 under the CNY 1,000 price segment. We beat Huawei. Yeah, I think in the future, we will be better above the CNY 1,000 price range.
Okay. Do you think the low price band, maybe price of RMB 69, will cannibalize some of the user base from the over RMB 100 segmentation?
The strongest growth in future, based on independent market research, is coming from the smartwatches. That's our future focus area, with advanced healthcare features. In terms of the band, that will be the existing market. So far, you can see our product performance. You can see the last two generations, Mi Band 3 and Mi Band 4, and how we grow that. We are confident that Mi Band 5 will be another success. We believe that the lower price, 69 RMB price band, will be no comparison with our band products. As a matter of fact, that the band sounds cheap, but it does involve a lot of technology, involves a lot of integration of our R&D, integration of our production and supply chain management, and it requires expertise. We are confident that the band shipments in future generations will not that much impact.
Thank you, Wang Yong, David, and Mike. Thank you.
Thank you.
Thank you.
As there are no further questions, I'd like to turn the call back over to the company for any 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.