Earnings Call: Q4 2018

Mar 14, 2019

Hello, ladies and gentlemen. Thank you for standing by for the Yumi Corporation Earnings Conference Call for the Fourth Quarter and Full Year 2018. At this time, all participants are in listen only mode. Today's conference call is being recorded. I would now like to turn the conference over to your host, Ms. Grace Chung, Director of Investor Relations for the company. Please go ahead, Grace. Hello, everyone, and welcome to Huami Corporation's fourth quarter full year 2018 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 slide 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 Chief, Manager of the Board and Chief Executive Officer and Mr. David Tui, our Chief Financial Officer. The company's management will begin with prepared remarks and proved 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 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 difference 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, 2017 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 statement, 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 risk consolidation 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. Sai Wang. Please go ahead. Hello, everyone. Thank you for joining our earnings conference call today. We are proud to report another strong quarter with top line results RMB1.22 billion, which exceeded our 4th quarter guidance. Capping off a solid 2018 with the full year revenue RMB3.65 billion, which grew 78% compared to 2017. In addition to strong sales, we delivered growing profitability as we focused on competitive product development and efficient business operation generated adjusted net income of 146.5 1,000,000 in the 4th quarter and RMB474.8 million for the full year We continue to experience strong growth of our Amazfit product line. As it contributes a large a larger portion of our total revenues. Shipments of Amazfit products in 2018, although tripled compared with 2017. Which was mainly driven by a Macy watch product. This tremendous growth is showcased of how our innovative product design and growing brand awareness stimulates sales. During the year of 2018, we introduced breakthrough healthcare technology applications in wearables powered by our self developed AI chip Huang Fan number 1, which will also allow us to provide cloud based healthcare related services to users in the future. Increasing IoT education scenarios is an important strategy for us. To enrich our user experience. During the past year, we launched NFC version products with one touch payment capabilities for public transportation. In the meantime, our brand new Smartwatch product line allows for the integration with different IoT systems. To control smart home devices. We will further explore valuable technology scenarios in IoT Industries together with current and future partners. We also entered into new strategies partnerships in the fourth quarter of 2018 early 2019 to foster new product development in the global market. In November 2018, we announced a collaboration agreement with Timex a global leader in Watchmaking in order to leverage their world class product development capabilities. And the strong international distribution channels to broaden the reach of our smart wearable products. In addition, In January 2019, we announced our strategic cooperation collaboration with McLaren Applied Technologies to leverage their expertise expertise in auto leasing and e sports to develop metrics driven variables. That will help optimize human performance in this underserved field. We believe collaboration, agreement like this will diversify our product lines and distribution channels. Improves our visibility in global market and in turn drive continued growth in revenue. In addition to strong sales of Amazfit products, we also experienced continued solid demand for Mi Band. The addition of the new features to the latest generation of Mi Band helped ensure the Mi Band remains at the front and forefront of the smart band industry. We also continue to experience success in expanding our reach as we develop distribution channels and brand awareness in overseas markets. Shipments of international merchants products accounted for 44.2 percent of our total shipments in the year of 2018 Moreover, Amazfit brand smartwatch products have been launched in 60 countries. As of today. Our collaborations will with established international partners and our enhanced overseas sales force contributed significantly to such success. We remain committed to ensuring our products meet the development with the developing needs of the smart wearables industry, and we'll continue to invest in R&D to develop exciting new products and improve existing lines. In addition, we continue to focus on opportunities presented by the healthcare vertical and are well positioned to benefit from the fast adoption of variable technology in this growing sector. We continue to work with Thai Health on partnerships with overseas insurers and large employers in pilot programs for database services. We also expect to expand our relationships with insurance carriers to make it easier for their customers to monitor and improve their health. Finally, as evidenced by the launch of our new Huangshan number 1 chip in September of last year, much of our R and D is focused on developing from proprietary technologies that power the development of new products And why didn't the competitive advantage we foresee in the marketplace? We continue to invest in the development of cutting edge technologies as we look forward into 20 19 and beyond. Our focus is to continue to build awareness and affinity for the massive brand. We will do this through continued product development and innovation as we utilize our World Cup R&D Infrastructure. Leveragingrecentlydeveloped Collaborative relationships and establishing new partnerships. We will capitalize on existing smart variables market opportunities, especially in the fast emerging smartwatch markets and further developed ecosystem services opportunities. 2018 was a fruitful year for Huami and we look forward to the year 2019 with full confidence Thank you again for joining today. And I will now turn the call over to our CFO, David Treves. Thank you, Wang. 2018 was an important year for Huami. Not only did we grow revenues by 78%, but We also increased our profitability as we managed cost and operating expenses and leveraged our increased increasing scale. Among our many accomplishments in 2018, we completed our initial public in February, which further established Huami in the international variable marketplace. And our innovative products allow us to meaningfully grow the Amazfit brand in both the Chinese and overseas channels. Our efforts have positioned us well to capitalize on our strong market position to continue our growth in 2019. Mindful of the length of this call, I will just highlight the key financial measures for the fourth quarter and the full year of 2018 and encourage you to refer to our earnings press release for further details regarding our full year financial results Now here are some of the highlights of our very strong fourth quarter. Revenues increased by 62.7% year over year. 2 1,220,000,000. This solid gain was propelled primarily by the strong sales of amazfit smart sports watches and Mi Band 3 that we launched in June 2018, driven by increasing market recognition of our products globally. Gross profit increased by 85.2 percent to 309,000,000 from RMB166.8 1,000,000 for Q4 2017. Our gross margin of 25.2 percent showed a slight increase from that of the fourth quarter of 2017. Total operating expenses increased by 93.2 percent to 177 800,000 from RMB92 1,000,000 for Q4 2017. These expenses increased primarily due to the recruitment of new employees as well as the increase in our sales and marketing expenses. While expanding our business operations globally, we are pleased with our efforts to effectively manage our operating expenses, which increased largely in line with our revenue growth. Our operating income was rmb 131.2000000. Up slightly significantly compared with RMB74.8 1,000,000 for Q4 2017. The GAAP net income to Huami totaled RMB126 million. This compares with RMB72.3 million for Q4 2017. The non GAAP adjusted net income to Huami, which excludes the share based compensation expenses, increased by 69.3% year over year. From RMB86.5 million to RMB146.5 million. Basic and diluted net income per ADS was rmb2.08 and RMB1.97 respectively. Each one of our ADS represents 4 of our Class A ordinary shares. The adjusted basic diluted and diluted net income per ADS was RMB2.42 and RMB2.30, respectively. Now let's turn to some highlights of our robust full year 2018 results. For the whole year, our revenue increased by 58% year over year from RMB 2,050,000,000 to approximately RMB3.65 billion. Revenue from Amazfit products increased by 178% in 2018 as compared to 2017. We are especially pleased with the growth in the sales for our Amazfit products, which comprised 33% of our total revenues, for 2018 versus only 21% in 2017. Increasing market recognition and popularity of our products was a significant driver of this growth. As well as continued strong Mi Band sales. In particular, after we launched the Mi Band 3, in the middle of the year. Gross profit for the year increased by 89.9% year over year, from RMB494.7 million to RMB939.5 million. Gross margin improved slightly year over year, primarily owing to improved economies of scale and the rapid sales growth of our self branded products. Total operating expenses increased by 83.5% year over year from 312.7 1000000 to RMB573.7000000. We managed these expenses in line with our revenue growth, and our business expansion strategy. The increase in operating expenses was primarily due to the increase in the number of new staff we hired during the year. We hired a new R and D staff and increase our sales force. Also, always the intention to support the research development and sales of our new products planned for launch in 2019. Resources were also invested due during the year to expand our sales effort overseas. Operating income more than doubled for the full year increasing from RMB182 1,000,000 to RMB365.7 million. The GAAP net income Tufami totaled RMB340 1,000,000 compared with RMB 167,700,000, in 2017. In non GAAP adjusted net income to Bonnie, which excludes the share based compensation expenses more than doubled from 2017, increasing from 230 point 5,000,000 to RMB474.8 million. The basic and diluted net income per ADS was RMB5.98 and RMB5.41, respectively, both more than doubling from 2017. Adjusted basic and diluted net income per ADS was 8.39 RMB and 7.59 RMB, respectively. So now let's turn to our outlook. For the first quarter of 2019, the company management currently expects revenue to be between RMB750 million. And RMB770 1,000,000, which would represent an increase of approximately 28 to 31.4 percent from RMB585.9 million for the first quarter of 2018. This outlook is based on current market conditions and reflects the company management's current and preliminary estimates of market and operating conditions and customer demand, which are all subject to change. This concludes our prepared remarks. We will now open the questions. For the benefit of all participants please immediately The first question today comes from Lewis Wang with Annunciation Research. Please go ahead. Hi. Or Mister Wong, and the or the management of Huami. So or so we are kinda interesting in your or IND or park in, in the function chips. And, we noticed, are you acquire, or some company in the front? And, could you illustrate more on that part and especially, when, when you could see the revenue or on the chips part. Thank you. Hi, this is. I'm the COO of the company. So my understanding, your question is, and how will our new chip Huangshan-one will impact our revenue. So Huangshan-one will be in our products, upcoming products in 2019. And we will have, as David mentioned, we have a lot of products in 2019 and Huazawa is a key component of our product. So that will help increase our revenue growth. Thank you. The next question comes from Thompson Wu with Credit Suisse. Please go ahead. Mister Wu, your line is open. Hi. Can you guys hear me okay? Hello? Hello? Yes. This sounds good. Yes. Okay. David, Mike, Fongdong, good morning and congratulations on a good quarter. My first question is just about your Amazfit brand. I think I had heard you guys are now shipping the product in over countries. When you think about MA's fit this year in 2019, can you share with us some of your key milestones What major markets are you still missing? Are there certain types of products that you're missing from the product portfolio? I'd just like to better understand, the major milestones you expect in your Amazfit brand in 2019? It's Hamzah. I'll try to tackle your question. In this year, we allocated a lot of resources to expand our overseas market. So we will continue the same effort, in particular, for our own products our Amazfit products. So we will leverage more on our own channel globally. And we mentioned that, in 2019, we will launch multiple, not just one, we will launch multiple products in the year, it's going to be at the different time intervals during the year. The certain features includes, health care features. Healthcare features and also, also the communication features. Maybe in a different combination, different format, different price range. So to suit different different type of customer needs. That's our plan for the year. Yes, that was very helpful. Thank you. And for your guidance in first quarter, still very, very healthy growth year on year. From a margin perspective, how should we think about the business, particularly on gross margin as we think about product mix between the, Xiaomi Mi Band and also the MA stick products. And are there any cost pressures from key components that we should be aware about? This is again looking at your first quarter guidance. Yes. So for first quarter, even for the whole year, we still anticipate, revenue growth. Revenue growth. For the first quarter, we all know it's a slow season for us. But still we will record, we still expect a healthy growth as you mentioned. But from our history, you know, when we launch new products, or product upgrades, we have to take some measures, for instance, to to, to quickly sell off our older products. And, for the newer products, we may have different pricing strategies. To quickly acquire the market share, things like that. And we will all depends it depends on what type of product that we launch or the product mix that we launch. The margin could vary, could vary, and could vary when we launched the new products. For for Xiaomi's products also, we we do have a plan for newer generations of Mi Band to be launched. When we launched our products, as we experienced when we launched MidBank 3. So we did give a huge discount to the market, to quickly released the Mi Band 2, right? So we probably have to do the same thing for Mi Band 3, yes, during the year. So, the price, the pressure for the margin always exists, one from competition, one from from, depends on when from the pricing strategy, right? We all know we can grow our costs very efficiently. But the retail price, the pricing strategy will impact our margin also. Yes. Okay. Okay. Thank you, David. Maybe just one more question before I get back into the queue. Just on your headcount budget additions this year, just how many do you have a rough idea of how many people you want to add to the business this year what departments are you looking to invest in? I presume a lot of the investments in headcount will be on R&D. Could you guys just give us quick update on what your plans are for headcount in 2019 and maybe how that compares in 2018? When we had our IPO, our headcount is roughly about 400. So towards the end of 2018, we we had about 600 in aggregate globally. And this year, we we have a plan to add in more stuff because we have multiple products to be launched. So we need we will focus on R&D stuff. We will add more R&D capabilities And we also, will, make a more resource allocate more resources to our sales and marketing efforts. So this will be the 2 major area we will have. We we do, well, I do not have a fixed number, but we know we we will add more headcounts this year, yes, from 600, yes. Okay, great. Again, congratulations on a great fourth quarter. Thank you. The next question comes from Arthur Lai with Citi. Please go ahead. Hi, Wang Zhong and Mike and Ravi. Thank you for taking my question. So, want to follow-up with Thompson's question and a more longer term perspective. Can you share with us if you you know, develop your own, energy and also, stuff to do more and more ODM. Model for those watchmakers and, how you utilize, you know, the this business model, which means, that the can you, start to, utilize their big data you collect from their OBM. And also, the follow-up question is in the long term, how this big data analysis, to contribute into our company's bottom line? That's my two questions. Thank you. Yes, hi. This is Mike. So, I think my understanding, your 2 questions. One is how we work with our OEM partners and the other is how, longer term, how we can do better data monetization. So when we work with, being a partners like timex, not only do we develop differentiated devices for them, but we also have collaboration on the data and cloud in cooperation as well. And, actually, in, in, in, in, in these kind of partnerships, Fami also provides our cloud and data capabilities to our branding partner. So we're not only just providing the device manufacturing capability. Secondly, with all these large number of devices that we ship, we collect tons of data every day. So that's why right now we're also working with our partners. Such as, you know, PIEHealth, for example, to try to monetize these data with through the, by targeting the health care and insurance industry. And which we believe has a huge potential for us to to monetize these data biometrics data that we collect such as heart rate, such as ECG, electrocardiogram, So our plan is, again, leverage these data to and work more closely with our partners to monetize in the healthcare and insurance industry. Okay. And can you, one follow-up is, when you collect, big enough data, And can you, quantify that, how much impact would be to our company's a lean or bottom line? Or, can we think about those big data analysis is k. Read a higher name, corporate oriented margin? Thank you. I think your answer your questions, you'll follow on a pie health strategy, right? So the contribution to the bottom line and also the in our current, forecast, we did not really include any revenues or profits from this type of data monetization yet. This but we do see a huge potential, for this type of service revenues we could see that. And maybe not in the near term, we could see that maybe in 2020, if we are power program with these insurers can work out. Okay. Okay. Thank you. Next question comes from Jason Sun with China Renaissance. Please go ahead. On the very good result. This is Jason. Thank you for taking my question. Just a very quick question on Shelby Ben. Can you elaborate more on Xiaomi Bank strategy into 2019 2020? Because we it is speculated that Miban 4 will be, announced around like March or April. I'm just wondering, Mi Band 4 is still in the pipeline. Of first half of twenty nineteen and how we expect that Xiaomi Bank gross momentum in units and average selling price improvement in this year. Thank you. Thank you, Jason. For Mi Band 4, it's going to be in this year. It's going to be in 2019 but I'm not sure it's going to be in March April, but it's going to be in this year. Right now Mi Band 3 is still hot sell. It's still, sells really, really well. The margin, is not shrinking the shipments not shrinking. So we will pick, work with Xiaomi to pick the right time to launch Mi Band 4 in a year. Yes. So is that answer your question, Jason? So how we can that the off show me then in terms of the units, right? So As you can see, we have gone through work with Xiaomi, gone through 3 generations of, Mi Band, right? Each, each each one of them are successful products, in particular, Mi Band 3. Each generation, we learn something. We always do better and Mi Band 3, we we, you can take a look at 2018, the volume, right? So it's really really much better as compared to previous version. So we expect Mi Band 4 will be be a similar, similar we'll have similar trend. So once we launch Mi Band 4, we expect that product will sell well. Okay. Are we going to see any resetting price improvement? On the event for? Of course, you mean the future? Of course. Average generation products that we will add some more features or making some changes to, to better suit, can consumer's needs, yes. Or we will price competitively for sure also, yes. Okay. Thank you. Yes, thanks. For any closing remarks. Thank you once again for joining us today. If you have further questions, please feel free to contact Huami Investor Relations department through the contact information provided on our website or the Piacente Group, the company's investor relations consultant. This conference has now concluded. You may now disconnect your line. Thank you.