Hello, ladies and gentlemen. Thank you for standing by for Huami Corporation first 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 Huami Corporation. Please go ahead, Grace.
Hello, everyone, welcome to Huami Corporation's first quarter 2019 earnings conference call. The company's financial and operating results were issued in a press release by 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. 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 provision of the U.S. Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from the views expressed today. Further information regarding this and other risks and uncertainties is included in the company's annual report Form 20F for the fiscal year ending 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 a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. I will 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. After a successful 2018, strong revenue momentum and sustained profitability continue in the first quarter, reflecting the increasing leverage of our rising global brand recognition, strategy, relationships, and customer trust. We are pleased to report another strong quarter with top-line result of RMB 799.6 million, which represents a 36.5% increase compared to the Q1 2018. We are delighted to share that during the first quarter of 2019, our Amazfit smartwatch product shipments ranked fifth globally. According to a recent report published by Counterpoint Research, a well-respected global industry analysis firm. During this quarter, total shipments of Amazfit smartwatch products grew 71.3% compared to Q1 2018. It's very clear our leadership in this segment is strengthening. We believe this growth momentum is sustainable and has improvement potential as we plan to launch multiple Amazfit watch products soon this year.
Covering different price range and with standalone communication functions, which we just co-announced with Qualcomm Technologies this morning, as well as improved healthcare and sports features. Speaking of Amazfit, our products are designed and manufactured to adjust the middle to high-end market and continue to experience strong growth. In Q1, our self-branded products and the other contributed 41.3% of our total revenues. With enhancements and expansion of our overseas sales distribution channels, sales force strategies, and brand recognition, international shipments continue to climb. In January, we announced a strategic collaboration with McLaren Applied Technologies to develop co-branded wearable smart products that will provide users with a comprehensive view of their biometric and activity data. In the meantime, our team is diligently working closely with Timex Group to develop products through the partnership we established late last year.
Our COO, Mike, and I recently had a meeting with Timex CEO and his management team in their headquarters in Middlebury, Connecticut. We adjusted the R&D details of our first joint expert products nearing completion, and the deep collaboration of Timex's full product line. In addition, we also discussed the full product line's U.S. marketing strategy and the working schedule, as well as explored how Timex's strong offline channels can help strengthen our Amazfit brands in emerging markets such as India. We have full confidence in our collaboration efforts with the Timex Group and are excited to be moving forward with them on multiple fronts. In the first quarter, we also broadened our IoT life scenarios. All NFC versions of Huami products now have public transportation connectivity capabilities in over 200 cities in China.
Furthermore, Amazfit products are now upgraded with full Amazon Alexa integration, allowing users all the normal functionalities of the voice assistant. With our achievements in the first quarter, we are excited to continue developing and introducing new products and services, expanding our presence in global markets, and further developing our strategic partnership initiatives. Last, certainly not least, our relationship with Xiaomi remains strong and stable, and we look forward to launching the Mi Band 4 in two weeks. Based on the market data we gathered, we are very confident about the upcoming launch. To capitalize on this product popularity, we already have millions of new Mi Band 4s ready to ship on the official launch date.
Our long-term plans with Xiaomi and the popular Mi Band series include producing future generations of the current band's product line, such as Mi Band 5, as well as various other models targeting different market segments in both high-end and low-end band markets globally. At the same time, our Amazfit products are riding the wave of the rapidly rising global smartwatch market. In the next few months, we will launch more than 10 models of Amazfit watch, covering different market demands and with prices ranging from RMB 299 to RMB 2,000. Our long-term strategy is clear and with conviction. We look forward to the rest of 2019 with full confidence, and we believe we will deliver long-term value to our stakeholders. Thank you again for joining today. I will now turn the call over to our CFO, David Cui.
Thank you, Wang. The company continued its growth momentum with strong year-over-year revenue growth, represented by a 36.5% increase over Q1 2018. Our growth was mainly attributable to global market expansion and overall increased brand recognition. Our results demonstrate the resiliency of our business model, the strong market appeal of our products, and the focus of our management team, all despite uncertainties surrounding macroeconomic trade factors. Looking at how we started the year and now looking ahead, we feel we are well-positioned to continue delivering sustainable growth through creative alliances, global expansion, operational leverage, and operational efficiencies. In 2019, we are laser-focused on developing and delivering new products, especially those in our self-branded products and others, which, as Wang just mentioned, accounted for 41.3% of total revenues in Q1.
We plan to continue delivering popular products in both our Amazfit line and with the products we develop with valued partners such as Xiaomi and Timex. Finally, with the enhancement and expansion of our overseas sales distribution channels, sales force strategies, and brand recognition, we anticipate international shipments to accelerate. Mindful of the length of this call, I'll highlight the key financial measures for the first 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 very strong first quarter. Revenues increased by 36.5% to RMB 799.6 million from RMB 585.9 million for the first quarter of 2018, due to an increase in the sales of both Amazfit products and Xiaomi wearable products, driven by the strong market appeal of our products and our global brand recognition.
Our gross profit increased significantly by 48.3% to RMB 217.5 million from RMB 146.7 million for the first quarter of 2018. Our gross margin of 27.2% reflected a sizable improvement from our gross margin of 25% in the first quarter of 2018. The increase, aside from economy of scale, was driven by two main drivers. First, we are positioning Amazfit-branded wearables to target a higher-income demographic compared with the Xiaomi wearable products. Our Amazfit-branded wearables generally carry a higher average selling price. As our sales mix changes with the rapid sales growth of our Amazfit self-branded products, higher gross margins ensue. The second driver is 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 network activities by establishing a dedicated supply chain management office in Shenzhen. Here, all relevant teams are under one roof. The ease and speed of communication among teams has further improved our operational efficiency. Move on to expenses. Total operating expenses increased by only 1.5% to RMB 139.9 million from RMB 137.8 million for the first quarter of 2018. Research and development expenses decreased by 2% to RMB 72.4 million from RMB 73.8 million for the first quarter of 2018, primarily due to a decrease in share-based compensation expenses, which was offset by an increase in personnel-related R&D expenses. It's important to recognize here that these R&D expenses represent an investment in the development and the refinement of new technologies. We believe that this type of investment is critical and will deliver further benefit.
For instance, we are developing algorithms to monitor both heart rate and blood oxygen level, which will form the basis to growing functionalities and broaden application scenarios for many of our health tech wearable products. This level of technology development requires an appropriate level of infrastructure and a resource commitment. Our general and administrative expenses decreased by 8.1% to RMB 45.3 million from RMB 49.3 million for the first quarter of 2018, primarily due to a decrease in stock-based compensation expenses, which was offset by an increase in personnel-related expenses. As our total revenues and sheer volume of products sold have continued to increase, our selling and marketing expenses have naturally also increased. Selling and marketing expenses increased by 50.5% to RMB 22.2 million from RMB 14.7 million for the first quarter of 2018, primarily due to an increase in personnel-related expenses and increase in advertising and promotional expenses.
Specifically for self-branded products. Our income before income tax grew significantly, reaching RMB 85.6 million, compared with RMB 16.5 million for the first quarter of 2018. Of course, as a natural consequence, our income tax expenses also increased and were RMB 10.7 million, compared with RMB 2.7 million for Q1 2018. This brings us to net income attributable to Huami Corporation, which totaled RMB 75.3 million, compared with RMB 14.8 million for the first quarter of 2018. Net income attributable to ordinary shareholders of Huami Corporation increased to RMB 74.1 million. Further down the P&L, basic and diluted net income per ADS attributable to ordinary shareholders of Huami Corporation was RMB 1.25 and RMB 1.18 respectively. As a reminder, each ADS represents four Class A ordinary shares.
Adjusted net income attributable to Huami Corporation, which excludes the share-based compensation expenses, increased by 2.7% to RMB 95.0 million, from RMB 92.5 million for Q1 2018. Finally, adjusted basic and diluted net income per ADS attributable to ordinary shareholders of Huami Corporation was RMB 1.57 and RMB 1.49, respectively. Relating to cash, as of March 31st, 2019, the company had cash and cash equivalents of RMB 1.57 billion, compared with RMB 1.44 billion as of the end of 2018. Now to our outlook. Looking ahead to the second quarter of 2019, management currently expects net revenues to be between RMB 990 million and RMB 1.01 billion, which would represent an increase of approximately 30.2%-32.9% from RMB 760.1 million for the second quarter of 2018. This concludes our prepared remarks. We will now open the call to questions. Operator, please go ahead.
Thank you. 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. We will now begin the question-and-answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed or you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question today comes from Xudong Chen with CIBC. Please go ahead.
Hello, Wang Huang. Hello, David. Hello, Yu Jia. I would like to ask a question. I would like to ask about the specific situation of our company's cooperation with Timex. Thank you for taking my question. I have one quick question. Since you just mentioned Huami has announced to cooperate with Timex, which is a leading world-class watchmaker, I'm interested in what can this cooperation benefit our business for short-term and long-term. Could you please tell me more detail about this impressive cooperation? Thank you.
Hi, this is Mike Yeung. I'm the COO of the company. Let me answer this question. As our CEO, Wang, mentioned, he and I just recently met with Timex CEO and management in the U.S., it was a very positive and constructive meeting. The benefit for Huami, obviously, is that we will roll out multiple models of Timex-branded and potentially co-branded smart watches. The first of these models we target to release later this year, we will also have not only multiple models, but also potentially use multiple brands that's under Timex control, such as, for example, Guess is also a watch brand that is owned by Timex. We will roll out multiple models, multiple brands, we will sell not just in the U.S. but also worldwide as well. Especially we can also leverage Timex sales and marketing channel online and offline.
For example, Timex has a huge offline channel infrastructure in India. And for example, that's something that Huami can leverage by having those channels to potentially sell Amazfit brand, our self-branded products as well, in addition to the Timex-branded products. Also, this partnership will help us not only sell more devices, but it will also generate a lot more data that we can potentially use for our data and services monetization as well. Yeah. I hope that answers your question.
Thank you very much.
Our next question today comes from Kyna Wong with Credit Suisse. Please go ahead.
Hello, Mr. Huang and David. Thanks for taking my questions and yeah, this is my first time to dial in and ask the questions. Actually, I wanted to chat by the implications from the recent trade bill that is escalating, any impact to the company, like if the wearables are added in the next tariff list. Besides, I think investors are also concerned about any risk in getting a ban or the reliance in the U.S. content in your products, et cetera. This is my first question.
Let me try to answer your question. First of all, our sales to the U.S. market only represents a very small portion of our total revenues. It's very insignificant at this moment. We also checked that even for this small amount of sales, we are not on the tariff, the target list so far. It's a zero tariff on our products so far. We do not source that much from the U.S. also for our components, and we do not rely on any U.S. technology that are embedded in our products. Basically, in conclusion, that we are not so far impacted that much by the current trade situation.
Thank you. My next question is about the ASP trend. Along with the increase of the sales contributions from Amazfit, your own brand wearables products. We should assume that the brand average will come into a raising trend. Or I should also take into account how much the Mi Brands will come in into different seasonality this year. Another question is about the forward impact, if that will also bring into your consideration in the ASP and also the gross margin in the coming quarters. Thanks.
The ASP, right? The ASP for Amazfit products, as our CEO just mentioned, that we will launch multiple products later in this year. The retail price range from RMB 200-RMB 2,000, and we believe the ASP trend should trend up. Because our current ASP is about only RMB 400, the ASP should trend up. In terms of the gross margin on our own products, so far our strategy is to acquire more market share and grow faster in terms of total shipments and revenues. That's our priority. Of course, we also maintain or try to improve our gross margin on our self-branded products. In terms of the gross margin on future generation Mi Band, again, we will discuss this with Xiaomi. We will jointly determine our product marketing strategies, then the retail price could impact our gross margin.
Typically, again, in the year of launching new products and the margin may fluctuate. In the long run, we will achieve a higher margin, and that's our goal, given that the revenue mix will change towards more Amazfit products, which has a much higher gross margin as compared to Mi Band. In the long run, we should have a very promising gross margin. Yeah.
Thank you.
Our next question today comes from Arthur Lai with Citi. Please go ahead.
Firstly, congratulations on your quarter results. You were able to maintain such good performance while controlling your OPEX. I think investors globally have significant concerns about the tech sector. First, regarding the supply chain, could you provide an update on Huami's reliance on components from the U.S. and how much there is? We also know that the company has its own in-house chip, the Huangshan 1. Will this provide a better competitive edge in the future? That's the first question. The second question is, we have recently seen some changes with our partner, Huawei. There may be some shifts in their mobile business internationally. I want to know if this will have an impact on Huami when it begins to affect Xiaomi's phone business. This question actually came from an investor, and I'm relaying it. I will translate my question.
Number one is the impact if the U.S. bans the U.S. component, what's the implication to investors? Second would be, if Huawei gains share at the expense of Xiaomi smartphone, what's the impact to you? That's it on my part. Thank you.
Okay. Thank you, Arthur, for your question. For your first question, I mentioned earlier that we source globally, but the percentage of U.S. components is relatively small. The impact is not that material. In terms of IP, in terms of technology, we do not rely on U.S. technology. That's the first question. The second question is regarding the changes in the smartphone industry, the impact to Huawei. I would say that at least for the smartwatch market segment, we still see significant growth potential based on the independent market research institutions report. The market still have a 26% CAGR in the next five years. We still expect that our product sales will at least ride the wave of the market increase. In terms of the overseas market, Huawei may be impacted, but we are not impacted.
Our global sales strategy is not just covering the U.S. market, which is one of our primary target markets. Also, our primary markets includes Southeast Asia and European countries. It's a global strategy. We would say we are not impacted, and we still anticipate significant growth in the year and the year to come globally.
Thank you, David.
Our next question today comes from Ian Lau with Industrial Securities. Please go ahead.
Hi, Wang Huang, David. Thanks for taking my question. I heard about the new product launch will be held next week. Just a quick question about your product launch plan the rest of the year. What's the new product plan for the Q2 and Q3? How we expect the Mi Band 4's performance and shipment when we compare it with the Mi Band 3? Thanks.
For the Mi Band, as our CEO mentioned, that will launch very soon.
In two weeks.
In two weeks. I cannot disclose too much details about the features, but I can guarantee that there are some very attractive feature improvements, we are confident that this Mi Band 4 will be another successful product. That's Mi Band. For Amazfit products, also starting this month, in series, we will launch multiple products all within this year. The products will be primarily smartwatches covering different features, including the standalone eSIM communication features, that was embedded with Qualcomm platforms and also with health features and with different price ranges targeting different consumers' needs. Some of them are light-weighted. Basically, we are very confident that this product will bring our sales to the next level, primarily will be in the second half of this year.
Thank you very much.
Our next question today comes from Robert Coller with 86Research. Please go ahead.
Hi, management. Thank you for taking my question. I actually have two. The first one I wanted to ask is about your international sales and specifically if we could get a percentage of international sales, also some color on what channels are driving the international sales. The second question is about your cash balance. I think another good quarter of strong earnings, and you're continuing to build cash. Company also announced that it's selling new shares in April. I'm just wondering, what are the plans for this cash balance? Are there large investments you all want to make or whatnot? Thank you.
In terms of international sales, starting later last year, we intensified our international sales effort and primarily targeting 3 markets: Southeast Asia, Europe, and the U.S. market. We've already seen some results so far, and historically, we rely on export distributors to conduct international business. Right now, we have some direct sales staff in these primary markets, and we are taking different sales strategies in different markets. For instance, we've already had very multi-layered of sales efforts in Europe and in Southeast Asia. We leverage more on the local famous e-commerce platform. In the U.S., we've already had breakthroughs with famous offline sales channels such as Best Buy. We are in the progress to build multi-tier international sales channels. That's your number one question. Number two question regarding our cash balance.
Yes, amount of cash we have so far, half of them actually were raised from our FPO. The rest of the money are actually the cash generated from operations. We do need that much cash to expand our sales channel. Also, we need that much cash to beef up our R&D team because we need to launch more and more products, not just this year, but also in 2020 and the year after. We need to break through our health-related technologies, including blood oxygen, and better our algorithm in our current products, also. In addition to that, we also look into potential merger acquisition opportunities. This we've mentioned multiple times, that we need to expand our upstream and downstream channels. We also need some cash to cope with the already expanded operations as a working capital.
In terms of the new share, Robert, you mentioned that new share. Our recent offer in April was not really for the company to raise money. We didn't really raise. We only took about 10% of the proceeds. The primary reason for this transaction is really to facilitate our institutional VC investors to exit. One, their VC funds may have a due date to exit from their IPO portfolio companies. That's the primary reason.
Okay. Thank you so much.
As there are no further questions, I'd like to turn the call back over to Grace Zhang 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. Thank you.