Earnings Call: Q1 2019

Jun 3, 2019

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 Chung, Director of Investor Relations for Huami Corporation. Please go ahead, Grace. Hello, everyone, and welcome to Huami Corporation's 1st 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.fami.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 Trae, 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 Young, 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 provision of the US 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 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 discussions of unaudited GAAP financial information as well as unaudited non GAAP financial measures. Pharma'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 1st 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 RMB799.6 million, which represents our 36.5% increase compared to the Q1 2018. We are delighted to share that during the first quarter of 20 19, our Amazfit smartwatch product shipments ranked 5th globally. According to our recent report published by Concord Point 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 Coke announced with Qualcomm Technologies this morning, as well as imposed health care and sports features. Speaking of Amazfit, our products are designed and manufactured to adjust the middle to high end market and committing to experienced strong growth. In Q1, our self branded products and 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 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 a meeting with Timex CEO and his management team in their headquarters in Midbury connected Connecticut. We adjusted the R and D details of our first joint expert product nearest competition. And the deep collaboration of Timex's full product line In addition, we also discussed the full product lines, U. S. Marketing strategy and the working schedule as well, explored how Timex 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 cited to be moving forward with them on multiple fronts. In the first quarter, we also broadened our IoT life scenarios or 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 users order normal functionalities after 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 in niche search tips. Last but certainly not least, Our relationship with Xiaomi remains strong and stable and we look forward to launching the Mi Band 4 in 2 weeks. Based on the market data we gathered, we are very confident about the upcoming launch to capitalize on this product's popularity, we already have millions of new Mi Band Falls ready to strip on the official launch date. Our long term plan with Xiaomi and the popular kneeband series includes producing future generations of the current band, product line, such as Mi Band 5 as well as various other models targeting different market segments in both high end and low end. Banned markets globally. At the same time, our Amazfit products are riding the wave of the regularly rising global smartwatch market. In the next few months, we will launch more than pan models of Amazfit Watch, covering different market demands and with prices ranging from RMB299 to RMB2000. 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 Trae. 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 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 one just mentioned, accounted for 41.3 percent of total revenues in Q1. We plan to continue delivering popular products in both our Amazfit line and with the products We developed with valued partners such as Xiaomi and Timex. Finally, With 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. Now here are some of the highlights of our very strong first quarter. Revenues increased by 36.5 percent to 799,600,000 from RMB585.9 million for the first quarter of 2018. Due to an increase in the sales of both domestic 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 percent to Rmb217.5 million from RMB146.7 million for the first quarter of 2018. Our gross margin of 27.2 percent reflected a sizeable improvement from our gross margin of 25% in the first quarter of 2018. The increase, aside from economy scale, was driven branded variables to target a higher income and demographic compared with Xiaomi variable products. So our Amazfit branded variables generally carry a higher average selling price. As our sales mix changes with the record sales growth of our Amazfit self branded products, higher gross margin ensure. The 2nd 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 in 2018, we consolidated and streamlined our logistics and supply network activities by establishing a dedicated supply chain management office in Shenzhen, Tier our relevant teams are under one roof, the ease and speed of communication among teams, has further improved our operational efficiency. Now move to move on to expenses Total operating expenses increased by only 1.5 percent to RMB139.9 million, from RMB137.8 million for the first quarter of 2018. Research and development expenses decreased by 2% to RMB72.4 million, from RMB73.8 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 and D expenses. It's important to recognize here that these R and 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 the blood oxygen level, which will form the basis to growing functionality and the broadened application scenarios for many of our health tech wearable products. This level of technology development requires an appropriate level of infrastructure under resource commitment. Our general and administrative expenses decreased by 8.1% to RMB45.3 million from RMB49.3 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 share 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 percent to RMB22.2000000 from 14 RMB0.7 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 85,600,000 compared with RMB 16,500,000 for the first quarter of 2018. Of course, as a natural consequence, our income tax expenses also increased and were rmb10.7 million compared with RMB2.7 million for Q1 twenty eighteen. This brings us to net income attributable to Huami Corporation, which totaled RMB75.3 million tempered with RMB14.8 million for the fourth quarter of 2018. Net income attributable to ordinary shareholders of Huami Corporation increased to RMB74.1 million. Turning down the P and L, basic and diluted net income per ADS attributable to ordinary shareholders of Huami Corporation was rmb 1.25 and RMB1.18 respectively. As a reminder, each ADS represents 4 Class A ordinary shares. Next, adjusted net income attributable to Huami Corporation which excludes share based compensation expenses, increased by 2.7% to 95 point 0,000,000 from RMB92.5 million for Q1 2018. Finally, adjusted basic and diluted net income per ADS attributable to ordinary shareholders of Huami Corporation was RMB1.57 and RMB1.49 respectively. Relating to cash, As of March 31, 2019, the company had Cash and cash equivalents of RMB1.57 billion compared with RMB1 RMB0.44 billion as of the end of 2018. And now to our outlook, looking ahead to the second quarter of 2019. Management currently expects net revenues to be between RMB990 1,000,000 and rmb1.01 billion, which would represent an increase of approximately 30.2 percent to 32.9 percent from 7 60 point 1,000,000 for the second quarter of 2018. This concludes our prepared remarks. We will now open Thank you. Please. Our first question today comes from ashutong Ching with CIBC. Please go ahead. Thank you for taking my question. I have one quick question. Since you just mentioned, Huami has announced to cooperate with Tamiq which is a leading wood cost, 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 impressing corporation? Thank you. Hi. This is Mike Young. I'm the COO company. Let me answer this question. So as our CEO, Wang mentioned, he and I, when met with the, just recently, I met with the Timex Sealed Management in U. S. And, it was a very, very positive and constructive meeting. So the benefit for Kwami obviously is that we will rolled out multiple models of Timex branded and potentially co branded, smart watches. And the first of these models, we target to release later this year. And we will also have not only multiple models, but also potentially, use multiple brands that's under, you know, a Timex controls such as, for example, gas is also a watch brand that is owned by Timex. So we will roll out multiple models, multiple brands and, and we will sell, not just in the US, but also Worldwide as well. And especially we can also leverage, Timex sales and marketing channel, online, 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 a Macy's brand, our self branded products as well, in addition to the, Timex branded products. And 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, data and services monetize it a lot. Yeah. So that the answers your question. Our next question today comes from Keno 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. So, actually, I wanted to chat by the indications from the recent trade dispute that is escalating and the impact to the company, like if that were supposed to add to in the next, tariff lease. And, and besides, I think investor also concerned about the any risk in getting the ban or the reliance the US content in your products, etcetera. So 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. Is very insignificant at this moment. And we also checked that even for this small amount of sales, we are not on the tariff, the target list. So far is a 0 tariff on our products so far. And we do not source that much from the U. S. Also on our for our components. And we do not rely on any U. S. Technology that that are embedded in our products. So 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 their sales contributions from, amazing fits your own brand, wearables partners. So we should assume that the brand average will come into raising trend, or I should also take into account how much the meat brands will come in into different seasonality this year. And another question is about the forward impact, if that will also bring into your consideration in the ASP and also the margin in the coming quarters? Thanks. ASP, right? The AIP for mes feed products as our CEO just mentioned that we will launch more products later in this year, the retail price range from 200 to 2000. And we believe that the ASP trend should trend up should trend up. And, and, because our current, our current ASV is about only 400. So the ASP should trend up. In terms of, in terms of the gross margin on our own product, So so far, our strategy is to acquire more market share and grow faster in terms of total shipments and the revenues. And that's our priority. And of course, we also maintain or try to improve our, the gross margin on our self branded products. In terms of the gross margin on eBags, a future generation eBags, And again, we will discuss this with, with Xiaomi. We will jointly determine our product and marketing strategies. And then that the retail price could impact could impact our gross margin. Typically, again, in the year of launching new products and the margin may fluctuate But in the long run, we will achieve a higher margin and that's our goal. Given that the product, the revenue mix will will change towards a more, a massive product which has a much higher gross margin as compared to Mi Band. So in the long run, we should have very promising, gross margin, yeah. Our next question today comes from Arthur Lay with Citi. Please go ahead. I'll make, maybe, I'll make, I'll make, I'll make, I'll make, I'll make, I'll make, a without, No. So I mean, for the going in the city, just the United Chondu, that will make it also complete your data, you know, health data content, and how I'm gonna pay a way line, you know, Oh, without the So I will translate my question. Number 1 is the impact from the, if the U. S. Banned the your component, what's the indication to investors? And second would be, if Huawei gain share in terms of a Xiaomi smartphone, let's say, impact to you, that's it on my call. Thank you. Okay. Thank you, Arthur. For your question. For your first question, I mentioned earlier that we we source globally, but we, the percentage of the U. S. Components is relatively small. So the impact is not that material. In terms of IP, in terms of technology, we do not rely on U. S. Technology. So So that's the first question. The second question is regarding the changes in the smartphone industry in term, but the impact to Huawei and 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% cater in the next 5 years. So we still expect that our our products, sales will at least, grow right the way of the market increase. And in terms of the overseas market while we 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. And we but also our primary markets include Southeast Asia And European Countries. Is a global strategy. So we would say we are not impacted and we still anticipated 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, Hong Kong. David, thanks for taking my question. I heard about the new product launch we held next week. A quick question about your product launch plan that you are selling here. So, what's the new product plan for the Q2 and Q3? And how it expect the Mi Band 4's performance and shipment when we compare with the Mi Band 3? Thanks. So the, for the Mi Band, as, our CEO mentioned that we will launch very, very soon. In 2 weeks. In 2 weeks. So, we I'm not, I cannot disclose too much details about the features, but I can guarantee that there are some a very, very attractive future improvements. And we are confident that this Miban 4, will be another success for products. And that's, that's, e band. And for military products, also starting this month, we will in series, we will launch multiple products always in this year. And the products will be primarily smartwatches covering different features, including the standalone eSIM communication features, And that was embedded with Qualcomm platforms. And also with health features. And with different price ranges targeting different consumers' needs. And some of them are lightweighted. Basically, we would we are very confident that this product will will bring our sales to the next level. Primarily, we'll be in the 2 half of this year. Our next question today comes from Robert Cola with 86research. Please go ahead. Hi, management. Thank you for taking my question. I actually have 2. The first one I wanted to ask is about your international sales? And specifically, if we could get a percentage of international sales? And then also just some color on what channels are driving the international sales. And then the second question is about your cash balance. So 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. So I'm just wondering what are the plans for this cash balance Are there large investments y'all want to make or whatnot? Thank you. Yes. So, in terms of the 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. So we've already seen some results. So far, And we 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 a very multilayer sales efforts in Europe and in Southeast Asia, we leverage more on the local famous e commerce platform. In the U. S, we we already have break shoes with famous offline sales channels such as Best Buy. So we are in the progress to build multi tier international sales channels. That's your number one question. And number 2 question regarding our cash balance. Yes, we're an amount of cash that we have so far, half of them are actually were raised from our IPO and the rest 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 them as cash to beef up our R and D team because we need to launch more and more products, not just this year, but also in 2020 and the year after. And also, we need to break through our our health related technologies, including flat oxygen and better our algorithm in our current product also. And 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, to upstream and downstream channels. So, so this is a this so we also need some cash to to cope with the already expanded operations as a working capital. So, in terms of the new new share, Robert, you mentioned that new share, our recent recent offer in April was not really for the company to lose money. If we didn't really risk, we only took about 10% of the proceeds. So the primary reason for this transaction is really to facilitate our institutional VC investors to accept 1, their mutual their VC funds we have a due date to accept from their IPO portfolio companies. So that's the primary reason. And there are no further questions. Now I'd like to turn the call back over to Grace Chung 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 PSN Group, the company's Investor Relations Consultants. So this concludes this conference call. You may now disconnect. Thank you.