Earnings Call: Q3 2019

Nov 12, 2019

Hello, ladies and gentlemen. Thank you for standing by for Halami Corporation's 3rd 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 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. Derek, 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 Yang, 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 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 discussed today. Further information regarding this and other risks and uncertainties is included in the company's annual report on Form 20F for the fiscal year ended December 31, 2018, and as finance 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 measure. I'll now turn the call over to our CEO, Mr. Tang Wang. 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 exclusion of our strategy initiatives, which focus on product diversification, brand elevation and international expansion. Our 3rd quarter revenue was RMB1.86 billion, representing a RMB73 0.3% 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 continue to expand and diversify our immensely product lines with the goal of targeting new customer segments and offering additional applications of usage. Following our release of multiple small valuable products in the second quarter. We recently launched the Amazfit GTS and the Amazfit Stratos 3, the latter of which is an update model of the professional sports watch product line targeting sports insured uses with company's ANSYS sports monitoring functionalities business. We also introduced the actual modern Amazfit X A new concept product, these are prominent curved touch screen shaped like a pleasant 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 1st 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. And in light of our success thus far in driving sales, More overseas products launches are being developed and scheduled in the future. The successful sales achievements in the just past doubles11ecommercefestival also demonstrated our strong domestic market strategy and intentions. This year, our mainstream product sales reached last year's double-eleven whole day sales level in just 1 hour and BBAM4 sales reached 350,000 units in only 10 hours In addition, we landed number 1 in sales revenue as well as volume on both JD and Tmall platforms in the smartwatch market segment, with retail price under RMB1000 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 leverage our expertise in smart valuable hardware and big data and analytics to optimize algorithms for our Cloud Based Healthcare Services at the 2019 Asia Pacific Heart Listen Society, Doctor. Ardong Chen from the Peking University's 1st hospital introduced the hospitals research on the cardio health monitoring by Huami Smart Valables. The research indicates that the accuracy of detecting atrial fibrillation through ECG and Pvg. Using smart wearables has reached 94.76 percent 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 specs in the specific health care related scenarios. We recently launched for detection in some MSP products, which when activated we'll automatically alert the user by vibrating and we'll also send 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 content 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 Panmex 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 after Mi Band, including variations targeting different market segments and customer profiles. In the meantime, We are also collaborating closely with time mix on product development. We plan to launch multiple product lines with comics in the U. S. In earlier 2020. With experts in our self developed AI chip Huangshan number 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 Chang. Thank you, Wang. We are very pleased with our robust financial results in the third quarter Revenues grew 73.3 percent year over year and total shipments reached 13,700,000 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 1st 9 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 4.31.4 percentage points respectively from the second quarter of 2019 and third quarter last year, despite our increase in investment in R And 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 form and solidify a 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. Now 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 3rd quarter 2019 increased by 73.3percentto1.86000000000 from RMB 1,070,000,000 for the third quarter of 2018. Gross profit increased significantly by 63.8 percent to RMB470 1,000,000 from RMB 2 $87,000,000 in third quarter 2018. Our gross margin was 25.2% compared with 26.7 percent 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 percent to 251000000 from 160,000,000 for the 3rd 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 $125,000,000 from $16,000,000 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 remain essentially flat at $17,000,000 compared with $68,000,000 for the third quarter of 2018. Our selling and marketing expenses increased by 75.1percentto57000000 from $32,000,000 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 $228,000,000 compared with $129,000,000 for the third quarter of 2018. The GAAP and the GAAP net income attributable to the company increased increased to 203,000,000 compared with 114,000,000 for the third quarter of 2018. Net income attributable to ordinary shareholders of the company also increased to 203,000,000. Basic and diluted net income per ADS attributable to ordinary shareholders of Huami Corporation was RMB3.31 and RMB3.15, respectively. As a reminder, Each ADS represents 4 Class A ordinary shares. Next, for non GAAP measures. Adjusted net income attributable to Huami Corporation increased to 210,000,000 from 134,000,000 for Q3 2018. Finally, adjusted basic and diluted net income per ADS attributable to ordinary shareholders of Huami Corporation was rmb3.41 and RMB3.25, respectively. Relating to cash, as of September 30, 2019, the company had cash and cash equivalents of 1,720,000,000 compared with 1,440,000,000 at the end of 2018. And now to our outlook looking ahead to the 4th quarter of 2019. The management currently expects net revenues to be between RMB1.93 billion and $1,950,000,000, which would represent an increase of approximately 57.6percentto59.2percentfrom1.2000000000 for the fourth quarter of 2018. This concludes our prepared remarks. We will now open the call We will now begin For the please. And the first question today comes from Clive Chung of Credit Suisse. Please go ahead. 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. But the price range seems pretty similar on some of the higher end ranges for a May fit products. Could you, share some insights on, on the view on, on this? And if there is any risk on for Amazfit on Xiaomi channels? Yeah. This is Mike, Mike Allen. And, so, basically, there are, the differences in terms of, the feature set. The Shopee Smartwatch, for example, they have the the calling function 4g. And, basically, you know, that is more tailored to, you know, scenarios where, you know, you might not have a phone with you. And, 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 health care feature. And, also, in terms of, fashion, in terms of, allerikants. Those are the features we focus on. A sports feature, health care feature, as well as looks and fashion. So whereas the again, the Xiaomi Smartwatch is more focused on communication. So basically it's a slightly different, you know, it's different of our future sets targeting different people. And different scenarios. George, does that answer your question? Yes. And also, so I think, I mean, it said, obviously, you have, products, sold through Xiaomi channels. Is there any risk or impact to that? To directly answer your question, for Alezvi products, our own blood 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. It comes from Arthur Ly of Citi. Please go ahead. Hi, Wangzong and, Vivi and Mike, congrats for the, good results in the quarter. I have 2 questions. So, number 1 is a housekeeping question. Number 2 is a new product So I would like to start from the number 1. So, you mentioned that, this quarter, we shipped 13 point 7,000,000, total product, can you give us some breakdown of, the Xiaomi band product and also your own brand product or the other ODM products as well. And also, can you also comment about the R and D expense? You mentioned that you know, you are the R and D expense ratio increased 107%. This is quite, amazing. And Can you also elaborate what kinds of product you are working on? Thank you. Okay, operator. For the breakdown of our total shipments, as we announced about 20 days ago. In this quarter, we were very successfully shipped, close to 1,000,000, Amazfit products. And that's a total shipments in only 1 quarter. That's historical. And the rest of the shipments are, are Xiaomi's products, Xiaomi's products. And for your R and D breakdown, what I can point out is the OpEx, the OpEx in total, as a percentage of our total revenue actually decreased as compared to the same quarter in 2018. And we were very successfully managed our G And A expense and to compensate that the increase in our R and D investment and also in our, our distribution channel building cost So, as a result of this, our net margin, if you look at our net margin year or 2 year, it's actually slightly increased. Okay. Yeah. So thank you. Thank you, David, for the answer. Actually, don't get us wrong. Actually, we are not trying to better company because you're adding the R and D. Actually, we are, happy to see, you invest for the future. I just want to get some color about, Loews report enrollment because it's actually more forward looking. And, if you look at your, such as a US leading grant, they, they actually invest in a way of those products, such as, TWS, So I'm also, wondering, do you have a plan to explain your product line to, out of the smartband and also a smartwatch? I can answer first and then is Guangzhou, where my view can add on. We do have a pipeline of new products for next year, 2020. And that include, CWS, that's in our radar. But majority of the products are still variables and that does include the TWS. Is that answer a question? Yeah, yeah. Thank you. Thank you. The next question today comes from Meng Kao of Industrial Securities. Please go ahead. Hi, management. This is Muno from Industrial Security. Thank you for taking my question. So my question is that, what's your strategy to promote one with the CF brand. And could you give us some color on the selling and marketing expense in 2020? Yeah. So, for our, a basic brand, Shaji, we will definitely continue to invest and grow our brand, especially Internationally where we are seeing very good adoption of our product right now. And we will doing more product launches internationally as we mentioned earlier in the call. And, for example, in upcoming CES in January. We will have our 1st CES booth presence and promote our products, and ifa last year, this year was also another example. So we'll continue to do more major international product launches to promote our brand. The next question comes from Michelle Vang of China Renaissance. Please go ahead. Hello, management. So I would like to know that because our cooperation, the contract with Xiaomi will end in October next year. So we want to know, like, what is our current relationship with Xiaomi? Thank you. Yes. So, currently right now, again, we are continuing our partnership as before. We are already working on BN5. And we will expect to renew the partnership agreement with Xiaomi. We don't see, right now, we don't see any change in that. So, and again, we expect to renew the agreement sometime early year. Okay. Thank you. CICC. Please go ahead. Thank you for taking my question. Congratulations for the robust result. As we all know, application of health care 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 achievement to share with? Thanks. Actually, our our mission actually is to explore the opportunities in in the health care fields. So this is maybe also maybe it's also our strengths and strengths area. So, it's worth to mention that it is Kwami who actually launched the first ECG commercial variables, even ahead of other our famous competitors. So we our R and D lab are working on other advanced medical fields such as, blood oxygen and blood pressure. And we are, working on those and trying to get the technology approved by China FDA and eventually approved by the U. S. FDA. So we should expect future products in those areas. Thank you. The next question comes from Robert Cowell of 86research. 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, but we are looking at strategic opportunities, investment opportunities and merger acquisition opportunities opportunities globally. And we will use the cash in a a good way. The next question comes from Edward Chen of Hitomi 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. So 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 were launched related to healthcare? Thank you. Yeah, for, healthcare services, actually, there are quite several different kinds of revenue streams, potential revenue streams One is, as we mentioned before, is working with insurance companies and either do a licensing of our algorithm or, in or, you know, data sharing with the user's approval, and our leads generation, savings, we can potentially get a share of the savings in claim costs. So those are various ways that we could work with insurance companies to monetize off of the our health care features and data. The next question comes from Jason Sun of China Renaissance. Please go ahead. Hi, management. Thank you for taking my questions. I have one question. Actually, the market is speculating that Shelby will actually, along several, a bunch of products in December, including the vans, very low end vans and some high end and middle tier watches. So how do you think this will impact the relationship or your product shipment in the first half of next year? Thank you. Thank you, Jason. So as Mr. Huang mentioned in his earlier speech that our long term plans with Xiaomi and the popular Mi Band product line, this will remain unchanged. So we are, looking forward to developing and producing future generations of Mi Band. For Xiaomi. So to be specific that we will launch Miban5 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 So we would consider that. It's just another one more player on the market. And as of this moment, that our total shipments still remains the top 5 or 6 globally. And we our products are unique in terms of features, in terms of the designs. So we are confident that we can develop our business independently and develop our technology and the product associated with technology, for the global consumers. And Jason, just to add more color is that, for example, in this past single state, our we're still, you know, toggling our sales figures. But basically, you know, we have seen a, you know, very strong single stage sale for our Amazfit brand products, even though the Xiaomi smartphone watch you was also for sale. So we've seen, again, very strong sales for for this past W11, probably as many of us, strongest ever, for our company, for our brand, So basically, right now, again, we don't really see that much impact. Yes. Actually, we completed this wild journey. Yes, we in a single day, we now The number 1, in the, under the 100,011,000 MB, price segment, We bid quality. And yes, I think in the future, we will be will be better in above the 1000 MB price range. Okay. So how how do you think how do you think, do you think the, the note, note price then, like, maybe, price of 69 will cannibalize some of the, user base from the like over 100 RMB segmentation? Well, the strongest growth in future based on independent market research is coming from, from the smartwatches. So that's the focus our field, our future focus area. With advanced healthcare features. And in terms of the band, that will be the existing market. So far, you can see, our performance, product performance, you can see the last 2 generations Miban 3 and Mi Band 4 and how we grow that. So we are confident that Mi Band 5 will be a 19 will be another success. And we believe that the lower price RMB69 price ban will be no comparison with our or our band products. As a matter of fact, that the band sounds cheap, but it does involve a lot of the technology. It involves a lot of integration of our R and D integration of our production and supply chain management. And it requires expertise. So we are confident that demand shipments in future generations that will not have much impact. 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. You have further questions, please feel free to contact Huami's Investor Relations department through the contact information provided on our website or the PSN Group, the company's investor relations consultant. This concludes this conference call. You may now disconnect your line.