Hello, ladies and gentlemen. Thank you for standing by for the Huami 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 Zhang, Director of Investor Relations for the company. Please go ahead, Grace.
Hello, everyone. Welcome to Huami Corporation's Fourth Quarter and 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 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. Wang Huang, our Chairman of the Board 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 on Form 20-F for the fiscal year ended December 31st, 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 reconciliation of the unaudited non-GAAP measures to the audited most directly comparable GAAP measures. I will now turn the call over to our CEO, Mr. Wang Huang. 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, RMB 1.22 billion, which exceeded our fourth quarter guidance, capping off a solid 2018 with a full-year revenue, RMB 3.65 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 RMB 146.5 million in the fourth quarter and RMB 474.8 million for the full year. We continue to experience strong growth of our Amazfit product line, as it contributes a larger portion of our total revenues. Shipments of Amazfit products in 2018 also tripled compared with 2017, which was mainly driven by Amazfit watch product. This tremendous growth is a showcase 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, Huangshan No.1, which will also allow us to provide cloud-based healthcare related services to users in the future. Increasing IoT application scenarios is an important strategy for us to enrich our user experience. During the past year, we launched NFC version product 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 wearable technology scenarios in IoT industries together with current and future partners. We also entered into new strategic partnerships in the fourth quarter of 2018 and early 2019 to foster new product development in the global markets.
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 strong international distribution channels to broaden the reach of our smart wearable products. In addition, in January 2019, we announced a strategic collaboration with McLaren Applied Technologies to leverage their expertise in auto racing and e-sports to develop metrics-driven wearables that will help optimize human performance in these underserved fields. We believe collaboration agreements like this will diversify our product lines and distribution channels, improve our visibility in global markets, 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 version products accounted for 44.2% 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 with established international partners and our enhanced overseas sales force contributed significantly to such success. We remain committed to ensuring our product meet the developing needs of the smart wearables industry, and we 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 wearable technology in this growing sector.
We continue to work with PAI 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 No.1 chip in September of last year, much of our R&D is focused on developing proprietary technologies that power the development of new products and widen the competitive advantage we foresee in the marketplace. We continue to invest in the development of cutting-edge technologies. As we look forward into 2019 and beyond, our focus is to continue to build awareness and affinity for the Amazfit brand. We will do this through continued product development and innovation as we utilize our world-class R&D infrastructure, leveraging recently developed collaborative relationships and establishing new partnerships.
We will capitalize on existing smart wearables market opportunities, especially in the fast-emerging smartwatch market, and further develop ecosystem services opportunities. 2018 was a fruitful year for Huami. 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 Cui.
Thank you, Wang. 2018 was an important year for Huami. Not only did we grow revenues by 78%, we also increased our profitability as we managed cost and operating expenses and leveraged our increasing scale. Among our many accomplishments in 2018, we completed our initial public offering in February, which further established Huami in the international wearable marketplace, and our innovative products allowed 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 to RMB 1.22 billion. This solid gain was propelled primarily by the strong sales of Amazfit smart sports watches and the Mi Band 3 that we launched in June 2018, driven by increasing market recognition of our products globally. Gross profit increased by 85.2% to RMB 309 million from RMB 166.8 million for Q4 2017. Our gross margin of 25.2% showed a slight increase from that of the fourth quarter of 2017. Total operating expenses increased by 93.2% to RMB 177.8 million from RMB 92 million 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 effort to effectively manage our operating expenses, which increased largely in line with our revenue growth. Our operating income was RMB 131.2 million, up significantly compared with RMB 74.8 million for Q4 2017. The GAAP net income to Huami totaled RMB 126 million. This compares with RMB 72.3 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 RMB 86.5 million- RMB 146.5 million. Basic and diluted net income per ADS was RMB 2.08 and RMB 1.97 respectively. Each one of our ADS represents four of our Class A ordinary shares. The adjusted basic and diluted net income per ADS was RMB 2.42 and RMB 2.30 respectively. Let's turn to some highlights of our robust full year 2018 results.
For the whole year, our revenue increased by 78% year-over-year from RMB 2.05 billion to approximately RMB 3.65 billion. Revenue from Amazfit products increased by 178% in 2018 as compared to 2017. We are especially pleased with the growth in the sales of 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 RMB 494.7 million- RMB 939.5 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 RMB 312.7 million- RMB 573.7 million. 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 new R&D staff and increased our sales force. Also, our intention to support the research, development, and sales of our new products planned for launch in 2019. Resources were also invested during the year to expand our sales effort overseas. Operating income more than doubled for the full year, increasing from RMB 182 million- RMB 365.7 million.
The GAAP net income to Huami totaled RMB 340 million, compared with RMB 167.7 million in 2017. The non-GAAP adjusted net income to Huami, which excludes the share-based compensation expenses, more than doubled from 2017, increasing from RMB 230.5 million- RMB 474.8 million. The basic and diluted net income per ADS was RMB 5.98 and RMB 5.41 respectively, both more than doubling from 2017. Adjusted basic and diluted net income per ADS was RMB 8.39 and RMB 7.59 respectively. Now let's turn to our outlook. For the first quarter of 2019, the company's management currently expects revenue to be between RMB 750 million and RMB 770 million, which would represent an increase of approximately 28%-31.4% from RMB 585.9 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 call to questions. Operator, please go ahead.
Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. For the benefit of all participants on today's call, if you wish to ask your question to the company management in Chinese, please immediately repeat your question in English. We will pause momentarily to assemble our roster. Again, if you have a question, please press star then one. The first question today comes from Louis Wang with Annunciation Research. Please go ahead.
Hi, Mr. Wang, and the management of Huami. We are kind of interested in your R&D part in the Huangshan chips. We noticed you acquire some company in France. Could you illustrate more on that part? Especially, when you could see the revenue on the chips part? Thank you.
Yeah. Hi, this is Mike Yeung. I'm the COO of the company. My understanding, your question is in how will our new chip, Huangshan-1, will impact our revenue. Huangshan-1 will be in our upcoming products in 2019. As David mentioned, we will have a lot of products in 2019, and Huangshan-1 is a key component of our product. That will help increase our revenue growth.
Thank you.
The next question comes from Thompson Wu with Credit Suisse. Please go ahead. Mr. Wu, your line is open.
Hi, can you guys hear me okay? Hello? Hello?
Yes. This is Thompson. Yes.
Oh, okay. David, Mike Wang Huang. Good morning. 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 60 countries. When you think about Amazfit 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.
Hey, Thompson. I'll try to tackle your question. In this year, we allocated a lot of resources to expand our overseas market. We will continue the same effort, in particular, for our own products, our Amazfit products. We will leverage more on our own channel globally. 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 different time intervals during the year. Certain features include healthcare features and also the communication features. Maybe in a different combination, different format, different price range. To suit different type of customer needs. That's our plan for the year.
Does that answer your question?
Okay, great. Thanks, David. Yeah, that was very helpful. Thank you. For your guidance in first quarter, still very healthy growth year-over-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 Amazfit products? Are there any cost pressures from key components that we should be aware about? This is again, looking at your first quarter guidance.
Yeah. For first quarter, even for the whole year, we still anticipate revenue growth. For the first quarter, we all know it's a slow season for us, but still, we still expect healthy growth, as you mentioned. From our history when we launch new products or product upgrades, we have to take some measures. For instance, to quickly sell off our older products. For the newer products, we may have different pricing strategies to quickly acquire the market share. Things like that. All depends on what type of a product we launch or the product mix we launch. The margin could vary when we launch the new products. For Xiaomi's products also, we do have a plan for newer generations of Mi Band to be launched.
When we launched that product, as we experienced when we launched Mi Band 3, we did give a huge discount to the market to quickly release the Mi Band 2, right? We probably have to do the same thing for Mi Band 3, yeah, during the year.
Okay.
The pressure for the margin always exists. One from competition. One from the pricing strategy, right? We all know we control our costs very efficiently. The retail price, the pricing strategy will impact our margin also. Yeah.
Okay. Thank you, David. Maybe just one more question before I get back into the queue. Just on your headcount budget additions this year, 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 just give us a quick update on what your plans are for headcount in 2019 and maybe how that compares with 2018?
When we had our IPO, our head counts roughly about 400. Towards the end of 2018, we had about 600 in aggregate globally. This year, we have a plan to add in more staff, because we have multiple products to be launched. We will focus on R&D staff. We will add more R&D capabilities, and we also will allocate more resources to our sales and marketing efforts. This will be the two major area we will have. I do not have a fixed number, but we know we will add more headcounts this year. Yeah. From 600. Yeah.
Okay. Okay, great. Again, congratulations on a great fourth quarter. Thank you.
Thank you, Thompson.
The next question comes from Arthur Lai with Citi. Please go ahead.
Hi, Huang and Mike and Cui. Thank you for taking my question. I want to follow up with Thompson's question and more longer-term perspective. Can you share with us if you develop your own ASIC, then also start to do more and more ODM model for those watchmakers and how you utilize this business model? Which means, can you start to utilize their big data you collect from their ODM? 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.
Hi, this is Mike. I think my understanding your two question, one is how we work with our OEM partners, and the other is longer term, how we can do better data monetization. When we work with 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. In these kind of partnerships, Huami also provides our cloud and data capabilities to our branding partners. 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.
That's why right now we're also working with our partners, such as PAI Health, for example, to try to monetize this data by targeting the healthcare and insurance industry, and which we believe has a huge potential for us to monetize these data, biometrics data that we collect, such as heart rate, such as ECG, electrocardiogram. Our plan is, again, leverage these data and work more closely with our partners, to monetize in the healthcare and insurance industry.
Okay. One follow-up is, when you collect big enough data, and can you quantify that, how much impact will be to our company's earning or bottom line? Can we think about those big data analysis carry the higher link corporate branded margin? Thank you.
I think your answer, your questions still follow on the PAI Health strategy, right?
No. Actually, the contribution to the bottom line and also the earnings.
In our current forecast, we did not really include any revenues or profits from this type of data monetization yet. 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 our pilot program with these insurers can work out.
Okay. Thank you.
Again, if you have a question, please press star then one. The 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 Xiaomi Band. Can you elaborate more on Xiaomi Band strategy into 2019 and 2020? Because it is speculated that Mi Band 4 will be announced around March or April. I'm just wondering, Mi Band 4 is still in the pipeline of first half of 2019? How do you expect that Xiaomi Band growth 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 will be in 2019, I'm not sure it's going to be in March and April, it's going to be in this year. Right now, Mi Band 3 is still hot sell. It still sells really, really well. The margin is not shrinking. The shipments are not shrinking. We will work with Xiaomi to pick the right time to launch Mi Band 4 in the year. Yeah. Does that answer your question, Jason?
How we can expect the Mi Band growth momentum-
In terms of the units, right? As you can see, we have, work with Xiaomi, gone through three generations of Mi Band, right? Each one of them are successful products. In particular, Mi Band 3. Each generation, we learn something, we always do better, Mi Band 3, you can take a look at 2018's, the volume, right? It's really much better as compared to previous version. We expect Mi Band 4 will have similar trend. Once we launch Mi Band 4, we expect that product will sell well.
Okay. Are we going to see any average selling price improvement on Mi Band 4?
Of course. You mean the feature? Of course.
Yeah.
Every generation products, we will add some more features or making some changes to better suit consumers needs. Yeah. We will price competitively for sure also. Yeah.
Okay. Thank you.
Yeah, thanks.
As there are no further questions, I would like to turn the call back over to the company 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. Thank you.
This conference has now concluded. You may now disconnect your line. Thank you.
Thank you.
Thank you.
Thank you.