Earnings Call: Q3 2018

Nov 26, 2018

Hello, ladies and gentlemen. Thank you for standing by for Wami Corporation's earnings conference call for the third quarter of 2018. 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. Ray Chung, Director of Investor Relations for the company. Please go ahead, Grace. Hello, everyone, and welcome to Huami Corporation's earnings conference call for the third quarter of 2018. 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. Dotcom/investor. Participating in today's call are Mr. Huang Wang, our Chairman of the Board of Directors and Chief Executive Officer and Mr. David Tui, our Chief Financial Officer. The company's management team will begin with prepared remarks and the call will conclude 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 provisions 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 these 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 US 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. Me'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, Ms. Huang Wang. Please go ahead. Hello, everyone. Thank you for joining our earnings conference call today. We are pleased to report another strong quarter with revenue of RMB1.07 billion. Which exceeded our guidance range by 27.9%. Strong sales of our Amazfit products and Mi Bandry contributed to our robust top line results. As of November 11, the so called double 11 shopping festival of this year. We had sold over 10,000,000 kneeb entry since the launch of the product and over 30 Miriam Mi Band 2 in total. We have had a particular focus on enhancing our overseas sale experts And during the first quarter, international version of our products contributed 42.7% of total shipments. It is encouraging to see these areas our focus yields a growing contribution to our financial results. In addition to strong revenue growth, we also generated solid profitability during the quarter posting a adjusted net income of RMB 134.2 million. As a result of our effective management of product costs and operation expenses. We remain committed to developing cutting edge product user love and our amazing brands continues to gain traction. Since introducing the 1st Amazfit product 3 years ago, Our sales of self branded products grew to RMB 311.3 million in the quarter, up 172.8 percent from the 3rd quarter of 2017. During this quarter, we also launched, enhanced NFC version of Mi Band 3, which allows 1 touch payment access for public Transportation Services in more than 160 Major Cities throughout China. As well as virtual access car capabilities to allow easy entry and exit from home office and other locations. Moreover, in the third quarter, we were pleased to launch several new products with cutting edge technology and exciting new features. Demonstrating our strong research and development capabilities. We launched a new generation of our Amazfit health ban One is that allows for continuous real time heart rate and heart rhythm monitoring. The banks can also detect a listener and provide early warning of atrial fibrillation, this enhanced health plan, helped us further penetrates the exciting and growing market of medical related wearables. It also allow us to provide cloud based health monitoring services to our users. Empowered by our recently introduced AI chip Huang sign number 1. Our core our groundbreaking smart wearable AI chip contact number 1 is the word 1st variable processor integrated with AI Neural Network. We are confident it will differentiation, it will differentiate our users' experience and significantly accelerate our future cooperation with insurance companies and medical service providers. In addition, during the first quarter, we launched an Amazfit Vurch, the latest addition to our Smartwatch portfolios. And our first smartwatch to be fully integrated with the Xiaomi IoT ecosystem via CLI intention voice assistant. Amazfit version comes with a 1.3 inch Volcharter AMOLED round screen, as well as optimized power consumption that provides an industry leading 5 days of battery life on a single charge. It boasts 11 different activity tracking modes and it's capable of making a receiving phone call directory via bluetooth, connected mobile phones and displaying real time messages, including VChat and incoming calls phone call alerts. As we look to the future, we will continue to invest in the research and development of cutting edge products for the smart wearable industry. And just as we have done in the past, we expect to develop such partnerships with leaders in the industry to increase speed to market. More importantly, we will also focus efforts on our value add services. In Q3, together with Thai Health, we initiated partnerships with overseas insurers and large importers in pilot programs for database services. Certainly, our partnership with Xiaomi remains important to us. And we will continue to develop new products via joint sales of current products together. Our results in the quarter support our confidence in our outlook for the future. We remain focused on our growth initiatives, including capitalizing on international expansion opportunities, expanding our product categories, developing and releasing new products and growing value at services revenue. Additionally, we are lesser routes in ongoing R and D experts that support our sports, health care, and IoT related product categories and continuing to execute our strategies to generate long term value for all of our stakeholders. I will now turn the call over to our CFO, David Tree. Thanks, Elong. We delivered strong financial results in the quarter that exceeded our expectations, supported by the growing market share of our Amazfit branded products and continued early cycle sales of the Mi Band 3 following its launch in the second quarter. Due to our focus on developing new exciting and cutting edge products, we see continued opportunity to drive sales growth both in China and overseas. Now to the financial details of the quarter. Revenue increased by 126.7 percent to 1,070,000,000 RMB from 474,100,000 for the third quarter of 2017, primarily due to the increase in the sales of Xiaomi wearable products. And self branded products, driven by increasing market recognition of our products. Cost of revenues increased by 126.9 percent to RMB787.8 million, from RMB347.2 million for the third quarter of 2017. The increase was in line with directed sales growth of Xiaomi wearable products and self branded products. Gross profit increased by 126.1 percent to RMB286.9 million, from RMB126.9 million for the third quarter of 2017. Gross margin of 26.7 percent was in line with the third quarter of 2017. Total operating expenses increased by 121 percent to Rmb160.3 million from RMB72.5 million for the third quarter of 2017. Research and development expenses increased by 70.1% to 60 1,000,000 from RMB35.2 million for the third quarter of 2017. Primarily due to the increasing costs related to recruitment and hiring of new employees. General and administrative expenses increased by 148.3 percent to RMB68 1,000,000 from RMB27.4 million for the third quarter of 2017, primarily due to the increase in personnel related costs, foreign exchange fluctuation and professional service fees associated with business expansion and being a public company. Selling and marketing expenses increased by 2 26.8 percent to RMB32.3 million from RMB9.9 million for the third quarter of 2017. Primarily due to an increase in advertisement promotion expenses for self branded products and an increase in salary compensation. Operating income was RMB126.6 1,000,000 compared with RMB54.4 million for the third quarter of 2017. Income before income tax was RMB129.4 million compared with RMB57.7 million for the third quarter of 2017. Income tax expenses was RMB21.1 million compared with RMB7.5 million. For the third quarter of 2017. Net income attributable to Huami Corporation totaled 113,800,000 RMB compared with 50,200,000 RMB for the third quarter of 2017. Net income attributable to ordinary shareholders of Huami Corporation, increased to RMB109.1 1,000,000 compared with RMB14.8 million, for the third quarter of 2017. Our basic and diluted net income per ADS attributable to ordinary shareholders of Huami Corporation was RMB1.79, respectively, compared with RMB0.85 and RMB0.82, respectively, for the third quarter of 2017. Each ADS represents 4 Class A ordinary share. Adjusted net income attributable to Huami Corporation, which excludes share based compensation expenses increased by 93.1 percent to RMB134.2 million from RMB69.5 million for the third quarter of 2017. Our adjusted basic and diluted net income per ADS attributable to ordinary shareholders of Huami Corporation was RMB2.23 and RMB2.11 respectively compared with RMB1. 27 RMB1.22 respectively for the third quarter of 2017. Each ADS represents a forecast 8 ordinary shares. As of September 30, 2018, The company has had cash and cash equivalents of RMB967.4 million, compared with RMB366.3 million as of December 31, 2017. Now let's turn to our outlook. For the fourth quarter of 2018, the company's management currently expects revenues to be between RMB1.12 billion and RMB1.15 1,000,000,000, which would represent an increase of approximately 48.8% to 52.8 percent from RMB752.6 million for the for the fourth quarter of 2017. This outlook is based on the 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. Operator, please go ahead. Session. And the first question comes from arthur Lai with Citi. Hi, management team. This is Arthur Life on the Citigroup. So first, come greater with your strong quarter and also very strong revenue growth. I have 2 questions. The first question is as David said, right now our cash and cash equivalents in the third quarter already reached over 900,000,000 And I want to ask how management will utilize this liquidity Cision? That's my first question. Thank you. In terms of the, future use of the cash, we have different strategies One is we will continue to invest in our R&D activities. And continue to build up our overseas sales channels and promote promoting our amazfit brands. And of course, we will also invest in our general operations which includes our hardware and our apps our cloud services across the board, all these operations, in addition to that, we will continue to look into, M And A opportunities. That we have been doing in the past. Thank you. Okay. Yeah. Thank you. That's very good. So the second question is your follow-up question to maybe Guangdong and Mike. So, I think company already has a plan to launch the Huangshan IHao. So, what's this AIP can have a potential in the future. And also, I also read a news, you also launched Huami Health Care Cloud. So can you also give us a vision of how big this service will be That's the second question. Yes, thank you. Hi, Arthur. This is Mike So regarding the Huangshan, one chip, again, this is our industry 1st leading AI chip integrating our health algorithms So, and it's not not only the features, the functions are very good. But because, again, it's because it's our own chip. We can very manage it very cost effectively. So we will certainly plan to roll out new products soon with this chip. So the your second question about the army health care API, right? Cloud, yeah. Yes. So for the cloud, basically, it has always been our strategy to expand our revenue stream into our services, data and services monetization. So as you've probably seen, we make the a few acquisitions or investments recently, which is including, for example, partnering with PIEHealth to go after opportunities in the insurance industry. And to help manage our health risks. So all this would be a big opportunity for we see a big potential growth for us in the data monetization space partnering with insurance companies and also at big enterprises as well. Thank And the next question comes from Thompson Wu with Credit Suisse. Management team, Hong Kong, Mike, David Good morning. Congratulations again on the very good quarter, very strong growth and very good margin support in the third quarter. I have three questions. The first question, I want to go back to Arthur's question about M and A. I guess, can you specifically talk about what types of acquisitions are interesting to Huami? Technology? Is it access to new vertical markets? Is it new channel partners? Is it third party brands. Can you give us more color as to what types of acquisitions in the direction that Huami might look into? That's my first question. Okay. Hi, Thompson. This is Mike again. So, our M and strategy, again, it's not necessarily acquisition. It could just be investment as well. It's essentially focusing on the following type of opportunities. 1 is obviously technology companies that could help improve and enhance our product. So companies with good technological IPs that we can leverage. The second type is companies that can help us investment or acquisition that can help us expand our market growth, not just in China, but also overseas So investments in channel, for example, as well as marketing partners, So that's the 2nd type is to help accelerate our global expansion. And then the 3rd type of investment would be more focused on, help expanding our non hardware revenue, for example, or data services, kind of companies that can help us to accelerate our growth in the data monetization area. So those are the 3 types of companies that we're looking at. Okay. Thank you, Mike. That was very helpful. My second question is also going back to Arthur's question about the Huang Sun, one S chip that you developed. Are there specific technologies or algorithms that allow you to deliver certain features in this health plan that other help bins do not deliver. I'm trying to understand if this IP in this chip allows you to differentiate your product versus competing products in market? Yes. So basically, again, we are using this chip to enable us a few things. First of all, again, this chip is by us, so in terms of costs and negotiating with the different vendors, I think this will help us to do that because it's our own IP. And secondly, our requirements for, performance and also with the low power consumption. That's also a very key and we want to continue to maintain that. And so we feel that with our own investment and we can control, we can really optimize the chip to our needs, optimize for our product. And for example, the ECG algorithm is right now enabled in a chip instead of running in the cloud or on the software. So we are able to enable the leverage the chip to do a lot more faster and more optimized calculation as well as, again, a better cost control. That's very helpful. Thank you, Mike. Appreciate that. My third question, I have a few more, but I'll get back into Q. My last question maybe is for David. I think, currency has been an obstacle for many of the Chinese hardware companies selling domestically, but also overseas. Just maybe has, has currency been a headwind for your business in both the 3rd quarter? And then in light of your 4th quarter guidance, which is very, very strong growth, from the knee bed and self brand products that may fit. How should we think about margin structure for 4th quarter, whatever color you could provide us would be very helpful as it relates to currency. Hi, Thompson. In terms of the impact of currency fluctuation. We did not feel very material impact. Reason being that, for our overseas sales. So we, our products were mainly sold through, Xiaomi and also through, distribution distribution channel domestically. And certain online such an online and online sales and we basically we didn't change our selling price, which were all set for the in RMB. So when you when the consumers see our products overseas, typically that has been going through layers of markups. So the retail price may be impact a little bit, but but they were not impacting us. This is from the sales side. From the procurement side, And we do have overseas procurement, but it's not that material either. 1, the one Chinese currency is devaluating too much we feel we may feel a little bit, but now the RMB is stabilizing at below 7. So basically, we didn't see material impact on our P and L. Of course, there's not much impact on our margin either. So if our margin does fluctuate, that must be for some other reasons. Yes. Okay. Okay. Thank you, David. I asked that because I think there's some questions about particularly in overseas markets in India where currencies also to valuing fairly quickly seems to be a headwind from for a lot of major brands, that are looking to grow in the region. I guess, how are you, is there a different strategy to manage pricing versus currency, are you going to raise pricing in India to offset some of the margin pressure how are you thinking about FX specifically in India, if I may ask? Our products were sold to Indian market through Xiaomi, basically Xiaomi is our distributor customer. So we only settled with Xiaomi and then and then Xiaomi will sell it to in the market. So, currently we did not see any price adjustments between Xiaomi and us. Okay, that's perfect. Thank you, David. Thank you very much. And the next question comes from Lingwei Huang with GS Securities. Please go ahead your line is live. All right. Then the next question comes from Joyce Wei with 86research. Hello, management. Thanks for taking my questions. Congratulations to your solid performance during the quarter. My question was regarding the mix of the Xiaomi branded products and also your self branded product shipments? And then can you share us can you help us understand the ASP change as ASP increased nicely year on year, but We also noticed that the ASP declined sequentially. Can you provide some color on this front? Is it related to the mix shift or is it related to that Xiaomi asking for higher revenue share, etcetera? Thanks. Yeah. So in this quarter, in Q3, both, we experienced a strong strong sales of Xiaomi products because we launched Mi Band 3 in early June this year. So, that drive our major, drive our revenue growth this quarter. So currently, our the revenue mix is about in this quarter, it's about 30%, 70% split. For the 9 months, in this year, it's about 35%. After the revenue split. In terms of the ASP, because we, we continue to sell Mi Band 2 at discounts that may impact the Xiaomi products AIP in this quarter. And for Amazfit products, ASP, it's purely because of the revenue mix also. Because we have multiple products in this category. Certain popular well sold products, are priced lower. So that changed the ASP. However, the margin, the margin for both Xiaomi products and, basically products did not suffer. Thank Alright. As if there are no more questions at the present time, I would like to return the floor to the company for any closing comments. 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 for the Piacente Group, the company's investor relations consultant. Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.