Earnings Call: Q2 2019

Aug 19, 2019

Hello ladies and gentlemen. Thank you for standing by for Huami Corporation's 2nd Quarter 2019 Earnings Conference Call. At this time, all participants are in listen only mode. Today's conference 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 second quarter 2019 earnings conference call. The company's financial and operating results were issued in a press release via newswire service earlier today and are posted online. 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 Quay, our Chief Financial Officer. The company's management will begin with prepared remarks and the call will conclude with the Q And A section. Mr. Mike Yang, our Chief Operating Officer, will join 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 Lit Gation 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 31, 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 discussion 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. Solid top line revenue growth and strong profitability continued in the second quarter. As our brands, product lines, footprint and strategic initiatives, all continue to develop and expand globally. Our 2nd quarter revenue was rmb 1,000,000,000, which represents, 36.6% increase compared to the second quarter 2019 2018. Our revenue performance was driven by the extremely successful second quarter launch of the Mi Band 4. In addition, sales of our mainstream branded smartwatches continued to perform well with our sales branded line, now making fit globally instruments according to the recent public research report. Furthermore, our overseas expansion is in line with our strategy and expectations. Approximately half of our products was shipped to overseas during the first half of twenty nineteen. Mi Band 4 was launched in the second quarter and it quickly became a blockbuster with the best sales momentum among all generations of Mi Band. Its global shipment volume exceed 1,000,000 units within a space. The feature of Mi Band 4 improved significantly from previous version. The NFC version of Mi Band 4 is the first version of Mi Band 2 have still on the intelligent voice assistant of Xiaomi IoT ecosystem installed. We will continue to work closely with Xiaomi on new product releases to replicate the success we have had with each version of the Mi Band. We are confident in the strong market appeal of the Mi Band going forward. 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 variance targeting different global market segments and the customer profiles. In the second quarter, we continue to expand and diversify our Amazfit product lines. In late June July, we launched multiple smartwatch products with various fundalities designed for different customer demands. To name a few, We launched our 2nd generation smartwatch, Amazfit next year in June. It is a full function smartwatch with the eSIM communication feature. We also introduced our brand new watch series, Amazfit GGR, which is designed to target a new growing market segment. While it has the look and feel of the traditional watch, the GTR is integrated with smart watch as well as powerful sports functionalities. In addition, we launched the Amazfit BIP live and amazfit virtual lights, smart watches. There are smart lights, functionalities, long battery life, and the competitive price made them ideal choices for the first time smart watch users. Our brand new ECG version Smartwatch targets the fast rising variable health tech markets. We now have a dedicated healthcare team responsible for the research and the development of of our valuable health tech products and services. In addition to the analysis and the integration of the biometric data set. This team includes healthcare professionals, and accredited experts from leading institutions with specializations in the agilevascular health and chronic disease management. We also provide select healthcare services to our smartwatch users with both complimentary and premium package. In addition to launching smartwatch products, targeting different customer segments, we continued to in enhance our IoT live scenario capabilities. For example, The NFC functionality in our smart wearable devices allows users to facility a number of common daily activities, including public transportation access, select community space access, smart car ignition among others. We also enter into a strategic partnership with Tension Cloud. As part of the partnership selected Amazfit products will have the capability to install applications like QQ Music, QQ, and attention translation. A significant technology achievement in the second quarter included incorporating with incorporating our self developed AI chip Huang san, number 1, into our healthcare focused smartwatch product line. Healthech enabled smart variables are a rapidly advancing chance and our play through technology enables critical real time applications for the prescription ECG measurement and, 24 hours 7 days a listing year monitoring. We have received very positive feedback on our latest products from our customers. This product and the technology powering them creates a concrete foundation for our continued leadership in the development of advanced products in the smart wearable industry. With our growth strategies firmly in place, we will continue to expand our global sales channels and brand recognition. Move forward our cooperation with Timex on product development. Launch more amazing new products and further invest in R&D capabilities. We have full confidence That's our competitive new products and well established product lines. We'll drive appreciable growth for the second half twenty nineteen. We expect a much stronger growth in the 3rd quarter, approximately 52.6% to 55.4% compared with Q3 2018. As indicated in our earnings release guidance. Thank you again for joining today. I will now turn the call over Thank you, Wang. Robust revenue growth momentum continued in the second quarter increasing 36.6% year over year as the company benefited from strong global unit sales particularly with the newly launched Mi Band 4. During the quarter, we shipped 8,300,000 total units up 53.7% from the same period last year. We believe this line growth momentum is sustainable and has the potential to continue improving. In addition to the products which we already launched earlier this year. We will soon launch more Amazfit new products with the variable functionalities in the next quarters This new product releases demonstrate Huami's commitment to the needs of global smart variable consumers and give us the confidence to continue delivering value to our shareholders in the second half We will continue to as we enhance our products and services and continue to penetrate global markets Also during the second quarter, we continued to make strategic investments in our R and D capabilities, including strengthening our algorithm and cloud services capabilities, in addition to streamline product development, testing and supply chain management for new launches, All in an effort to ensure we remain on the cutting edge of smart wearable technology We also continued to make investments to our brand value by increasing our marketing efforts to promote broader awareness and adoption of our self branded products We are confident this investment along with strong alliance, operational efficiency and a growing global footprint will help ensure our healthy growth and solid financial performance in both short and long term. Mindful of the length of this call, I will highlight the key financial measures for the second 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 second quarter. Revenues increased by 36.6% to RMB 1,040,000,000 from RMB760 rmb0.1 million for the second quarter of 2018 exceeding the guidance that we provided to the market. Gross profit increased significantly by 40.8% to RMB277.3 million from RMB 196.9 1,000,000 for the second quarter of 2018. Our gross margin of 26.7 percent reflected a sizeable improvement from our gross margin of 25.9 percent for the second quarter of 2018. This increase, aside from economies scale was driven by our continued improvement in supply chain management. Strong supply chain management has always been a hallmark of our operations and we are continually working to find ways to make it even better. In 2018 we consolidated and streamlined our logistics and supply chain network activities by establishing dedicated supply chain management headquarteringlobalheadquarterin Shenzhen. Here, our relevant teams are under one roof. The ease and speed of communication among teams and with the suppliers and manufacturer contractors has further improved our operational efficiency. Now moving on to expenses. Total operating expenses increased by 89.2% to RMB185.2 million from RMB97.9 million for the second quarter of 2018. Reflecting our investment strategy in R&D, brand and marketing channels for long term returns, Research and development expenses increased by 111.4 percent RMB293.8 million from RMB44.4 million for the second quarter of 2018. Primarily due to an increase in our personnel related expenses in intermediate tax expenses as several new pipeline products were undergoing rigorous testing. General and administrative expenses increased RMB251 1,000,000 from RMB32.8 million for the second quarter of 2018. This increase is in line with the growth of our company. As our total revenues and the volume of products sold have continued to increase our selling and marketing expenses have naturally also increased. Selling and marketing expenses increased by 95.2 percent to RMB40.4 million from RMB20.7 million. For the second quarter of 2018. As we intensified our promotion efforts for self branded products. We also expanded our sales and marketing team to boost our sales efforts globally. Our income before income tax was RMB101.3 billion, compared with RMB101.4 million for the second quarter of 2018. The GAAP net income attributable to the company increased to RMB89.4 million. Compared with RMB85.5 million for the second quarter of 2018. Net income attributable to ordinary shareholders of the company increased to RMB89.2 million. Moving down the P and L, basics and diluted net income per ADS attributable to ordinary shareholders of Harmony Corporation was RMB1.46 and RMB1.39 RMB, respectively. As a reminder, each ADS represents 4 Class A ordinary shares. Next, adjusted net income attributable to Huami Corporation increased to 111 RMB1.7 million from RMB101.6 million. For Q2 twenty eighteen. Finally adjusted basic and diluted net income per ADS attributable to ordinary shareholders of Huami Corporation was rmb 1.83 and RMB1.73, respectively. Relating to cash, as of June 30, 2019, the company has had a cash and cash equivalents of RMB1.45 billion compared with RMB1.44 billion as of December 31, 2018. And now to our outlook, looking ahead to the third quarter of 2019. Management currently expects net revenues to be between RMB1.64 billion and RMB1.67 1,000,000,000. Which would represent an increase of approximately 52.6 percent to 55.4 percent from 1.07000000000rmb for the third quarter of 2018. This concludes our prepared remarks. We will now open the call We will now begin session. Please press star your question to the company's management in The first question comes from Kaina Wong of Credit Suisse. Please go ahead. Hello. Good evening, management. Thanks for taking my questions. I have two questions. The first questions is about the ASP trend because in the 2nd quarter, we see the, ASPs actually, declined due to the mix And it is because they, like, me makes, I would say, me me ban for that, like, ramping the shipment and also some of the product adjustment in the second quarter. But along with the new product launch, like in the June and also July, what should we expect in the ISP trend in the half of that is first questions. The second question is about the gross margin. I think David actually mentioned about it like supply chain management. But given the ASP decline, but, we see gross margin in these improved, in the second quarter, what should we better in the coming quarters with the new product launch because I, initially, the modem for the smartwatches may be like so, I mean, in the scale, so should we like that, like, the margin to be more, try more stable or trending done? Thank you. Thank you for the question. With respect to your first question regarding ASP, in second quarter, in second quarter, we continue to sell Mi Band 3, while we launch our Mi Band 4 in June. So, a large number of MeeBans were sold. So, in before launching Mi Band 4, we did provide us promotions to the users of MiBank 3. That may impact the ASP. In Q2 and earlier in July, we did launch new Amazfit products. But we in Q2, we did not benefit much from the sales of this Amazfit with new products. So but this but the new product launches will set up the foundation for Q3 and the quarters after. So this explains the fluctuation of our ASP in Q2 back to the ASP trend in Q3, we believe that given given the expected increase of the sales of Amazfit products, the revenue mix should change that should rebalancing the ASP trend. Also that should should offset potential margin losses on me bank. Given the Amazfit products has higher margin. So the with respect to your second question, GP margin, we believe we believe the margin should remain stable quarter in the third quarter, because we do have to balance in balancing between the mid band margin and the base feed margin. Thank you. Yes. The next question comes from zhudong Chen of CICC. Please go ahead. Thank you for taking my question and congratulations on a strong result. According to the 3rd party statistics, the shipment of the Mi Band 4 reached 1,000,000 in 7 days after a launch in June, which is amazing. My question is will the company continue to cooperate with Xiaomi in the future? And will companies still produce Mi Band 5 in the next generation? Thank you. The answer is yes, we are actually developing event by which Xiaomi. The answer is yes. Thanks. Okay. The next question comes from Arthur Ly of Citi. Please go ahead. Thank you, management team. And, yeah, we sold the revenue result was quite good, up 36%, and can you give us more color on the overseas shipments? And also, how do you think of the shipments from the North Country will we roll out more countries in the future? Thank you. Thank you, Arthur. More than just a little bit over half of our total shipments were actually overseas shipments. This is in line with our historical records. That means the overseas sales also increased, when our overall revenue increased, And in terms of the country penetration, we are still covering targeting the European market and also the Southeast Asia market. We are also working on the U. S. Market also. So we did make some progress, but it's going to take time. But our focus, we did make a significant progress in the European market. And, in the 1 half, we spent a lot of effort in those regions and later in the year, we will be satisfied. We'll intensify 1st in those regions. Yes. Yes. And the one small follow-up is in the Europe and the U. S. Market, will the product carry the higher AP and margin? Thank you. Actually no, actually no. So the domestic sales and overseas sales carry similar margin, because because we do leverage, leverage some overseas sales channels. So we allow more profit to those channel players And but the retail price should be higher in those in overseas. Okay. Thank you. Thanks, Walter. The next question comes from yi Yang Lo of Industrial Securities. Please go ahead. Hi, management. Thanks for taking my question. I truly have two questions. The first one is about your marketing strategy. I know that Huami has released many products since the second quarter. Which is very attractive to consumers. But actually, we haven't seen, the large scales on advertising. So can you introduce the marketing strategy for the new product? So this is my first question. And the second question is about your overseas team. I wonder how many people are currently in your overseas sales team and how we can expect a number of team member increase in the future? Thank you. I'll take the second question first. So we our sales team is about 100 people right now. Our total number of employees just exceeded the 800 and, among the, roughly about 100 Salesforce. And, We should say half of them are focusing on overseas sales. Is in line with our revenue distribution. And we do have sales staff in the key regions, key market markets, key markets in Europe in Southeast Asia and also in the US. And we, when our revenue continue to grow, we may have to add more sales staff. That's our plan. And then in terms of our marketing strategy, yes, you're right. We do not spend a lot of advertisement dollars yet. And this is because our strategy is is to rely on the channel players, the distributors, in each countries. And then we also rely on our online online channels. So we do pay, pay, the channel fees to the e commerce players in China and also in certain overseas markets. And the reason we are doing that is advertisement could cost too much. And we and 1, since our total number of shipments are still low at this moment to most effectively use our marketing dollars and we adopted this strategy. So we let the distributors in a channel to make money and rely on the distributors to to spread the spread to the market and to build our brand recognition this way. And then in future, we may we may do some targeted advertisement, but it's not in a very heavy scale. Okay, thanks. Thanks. The next question comes from Joy Wei of 86Research. Please go ahead. Congratulations to this joining through that. Can you give us a breakdown between Xiaomi and Self branded products, including metrics like shipment, revenue and gross profit? And the second question is, can you share us with us the future product pipeline? For example, are we launching the Meet and 5 net year or the year after next year? Thank you. In terms of breakdown, I would say about, 7, 730 split. Seventy-thirty split. And given that, the our new our administrative products, they are all launched towards the end of the quarter. So we didn't really benefit that much in Q2. So in Q2, we materially majority we still primarily sell our old electric products. But but so this is a seventy-thirty percent split. And then again, our MSP products enjoyed a much higher gross profit margin. As compared to Xiaomi's products. So the spread is about 10%, it's about 10%. So, you could do the calculation breakdown calculation on the gross profit. And in terms of the Mi Band 5 we do not have a fixed time when we're going to launch Mi Band 5. But, but I would say that we have already started working on event 5, with Xiaomi and that is not going to take that long, that long. So we just launched Midland 4, but potentially towards the later of next year, we may launch Mi Band 5. Thank you. Thanks Troy. 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 PSN Group, the company's investor relations consultant. This concludes this conference call. You may now disconnect your lines. Thank you.