Fireside Chat

Jan 22, 2021

Hello, ladies and gentlemen. Thank you for standing by for Huami Corporation's 2021 Strategy and Outlook Investor Firechat Conference Call. At this time, all participants are in listen only mode. Today's conference call is being recorded. I would now turn the call over to your host, Ms. Grace Shang, Director of Investor Relations for the company. Please go ahead, Grace. Hello, everyone, and welcome to Huami's 2021 Strategy and Outlook Investor Fireflies Chat. We hope you find it informative. Participating in today's call are Mr. Huang Wang, our Chairman of the Board of Directors and Chief Executive Officer Mr. Leon Deng, our Chief Financial Officer and Mr. Mike Yang, our Chief Operating Officer. Management will begin with the prepared remarks and the call will conclude with a 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 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 31, 2019, 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 I will now turn the call over to our CEO, Mr. Huang Wang. Please go ahead. Thank you, Grace. Good day, everyone. Whether it's morning or evening, where you are, Thank you for joining our first slide deck of 2021. My objective Today is to tell you about how our strategy for 2021 is evolving and set the tone for the year, I have some remarks to make and then we will be happy to answer questions. With me on the call today are Liong Deng, our new CFO, who joined October 1 And Mike Yang, our COO, who is based in the U. S. Let's get started. As you probably know, we have a significant position in the global smart health device market. Number 2, in the world by IBC's shipment data, driven by a number of unit strengths. But Huami is still a bit unknown to the border investment community. With these fireside checks, I want to communicate more pro and clarify our position and strategy so that investors Can many more informed evaluations of our potential. I want to focus today on How our strategy is evolving this year and 3 key drivers of our business: Consumer Health Tech, Data analytics and our newest industrial health strategy. CES, the Consumer Electronics Show, just finished last week. Although it was a war show this year, We felt it was a good show for us. We were able to highlight all of the large number of new products We have a question and provide some hints at what may come the rest of this year. I was especially pleased to see that several of our newest products made Best in Show lists from a number of industrial watches, including wearable, TechRadar, digital trends and gadgets and wearables. Even before CES, CNET awarded the new BIP S its Editor's Choice. The BIP Series represents market leading functionality at a value price point, and our GT Series Represents excellent functionality at the premium end of the market. We are very proud To have both of these products recognized, I think that recognition is a The direct result of one of Huami's key business strengths, our pace of innovation. We introduced new products and new models of products, I think, faster than anyone else In the wearable space, last calendar year, we launched 20 new Product models, keeping the product offering fresh and updating with market leading features, Technology and prices has been the key to our success. For example, We shipped 3 different versions of the beep product last year, each with increasing functionality and upgrades. A key part of our 2021 strategy will be to continue our rapid pace of innovation. Although not at last year's record pace, you should expect us to continue to push Better variable technology to low price points and to add new innovations with new functionalities In 2020, We also expanded beyond just smartwatches into earbuds, scales and even home fitness equipment, such as our first chat mill and mirror. New models of these new lines were showcased at Yes. For obvious competitive reasons, I'm not Going to preannounce anything, but you should expect to see Huami continue to expand our range of Products in 2021. This is part of expanding our smart health and wellness ecosystem. Another key change is that we design and build our own AI smart chip for our devices As well as our own sensor array and related algorithms, this gives us Not only a cost advantage, it gives us a time to market speed with new functionality. We can design functionality ahead in our chips and sensors, Which gives us greater speed to market with new tools for consumers and health sponsors. This year, the new Huangshan II AI chip that we developed will start appearing in new devices. The new chip will give our products greater speed, intelligence, functionality and battery life. Shifting to the data analytics side of our business. You have seen recent news from us highlighting some good progress in 2020 for Pie Health and Our data analytics strategy. In mid December, U. S.-based reinsurance company, Jan Reed, announced The results of a study using PiHealth and Elastic for insurance underwriting decisions. Their report concluded that ThaiHealth Analytics provided additional value Beyond traditional tools for underwriting, this gives our marketing experts for Pie Health a significant Boost going into 2021. Insurance companies moved at a careful pace, But 2020 represented a challenging year for insurers, changing and Betting a better climate in 2021 for insurer discussions and I'm expecting more progress in putting our data analytics to work with industry to leverage data from Our more than 30,000,000 active users. Adding to this, Huami was recently granted license to sell insurance in China, which we believe could open up some new partnership revenue opportunities with insurers in China. Also that data analytics is a key part of expanding our Smart health ecosystem, being able to tie insurers, care and wellness providers, Employers, individuals and families together to improve health Remains one of our main goals. We will be working to add services and linkages to further expand The 3rd key thing I want to highlight today It's our new industrial healthcare strategy. While the Consumer Health Technology business We will continue to be a profitable backbone for Huami. We are setting out To build another growth pillar for the business, which will have different and less Seasonality then the consumer side. Huami's mission is to connect health with technology, which leaves us Why latitude for how to deliver on that mission? Our company's engineering As focus on miniaturization and health data analytics, I believe The medical imaging space is a place where our expertise can be further applied. Equally important, this is an area of healthcare that is due for some disruption. For example, in the U. S, the healthcare systems payment structure has created significant Overuse of imaging, driving up health care costs. In other markets, The cost of large expensive imaging systems has prevented wider applications for patients and Clinician, a number of new technology in X-ray, MRI and Ultrasound show promise to change the locations, applications and courses of Medical Imaging Globally. In recent months, you have seen announcements about Huami Partnering with Aspen State Imaging, which is pioneering portable X-ray systems. Last week, you saw that we let Procter show latest investment Along with commercial partnership agreement, BOMEXO is pioneering low fuel change MRI technology for the doctor's office with an initial focus on urology, We expect to develop a portfolio approach with multiple technologies, applications and partners. There are many ways Huami can enhance its revenue through these partnerships. In the near term, we can generate new revenues by helping sell these products in China and other global markets. As part of this, we expect to help these partners Received approval from the National Medical Products Administration, China's FDA. Through engineering partnership, our AI and algorithm intellectual property may add Supplemental revenue opportunities to current or future products of either company. We will explore ways to tie imaging devices into our health ecosystem, which could help Generate services or data and analytics revenues. We will explore ways to Time, imaging or related patients pre- or post treatment activity or monitoring to our smart Consumer devices, which could generate revenue and as part owners of some This is a long term developing area for Huami, but we are excited about the opportunities It presents for supplemental revenue growth, expanding our ecosystem into the Industrial side of healthcare and developing our brand in the healthcare industry. I hope this has been a good overview for you of how our strategies for growth in Our 3 main areas are evolving for 2021. I promise We have some good surprises to come on the consumer side as we continue to drive innovation. I'm hopeful that insurers will get back to more normal business operations this year that can move dialogue forward on our data analytics business. And We are very enthusiastic about our new opportunities to We are going to open the lines up now for questions. And the first question comes from Clive Chong with Credit Suisse. Hi. Thank you management. This is Kai from Credit Suisse. My first question, I think, Goes to the industrial strategy side. My question is how active Huami will be in these Investment or portfolio companies you have mentioned or in the future, will they Be able to use, I guess, the proprietary algorithm or technology or perhaps even the Huangshan chip? And that is my first question. Yes. Hi, this is Mike Young. Yes, let me I'll try to answer that question. Yes, we will be working very closely together, not only on the sales side, And also on the joint engineering, and that includes the applications of our artificial intelligence As well as our potentially chipsets and sensors, If those are appropriate. So yes, so we will be working together on sales As well as engineering as well as manufacturing together. Okay. Thank you. And I think if you could share also, I guess, some directional, I guess guidance or expectation by the company, which other areas in this industrial healthcare You guys standing to look at, obviously, medical imaging is 1. What kind of the broader picture and what kind of areas we could look at? Thank you. Yes, so right now, we're just started with this new strategy. So for now, we're Focusing on medical imaging, but definitely, we will expand into other areas. But for now, In the short term, we will try to expand more into medical imaging areas first. Okay. Thank you. And I guess my last question relates to, I guess, the monetization of your Chip, Huangshan. I guess part of it will be self utilized into your own products. Are there other monetization plans for your own chipset? Is it going to be sold to 3rd parties or other And do you see, I guess, competition because of that? Or what is the view of the company in terms of the overall strategy for your own chip? Thank you. Yes. We do have plans To also sell our chips and sensors to other IoT companies. Obviously, they cannot be our competitors. But yes, I mean, these are shifts that are general purpose and not that we believe that many IoT companies Can also use these processors and sensors. Okay. Thank you very much, Mike. Yes. Thank you. Thank you. And the next question comes from Michelle Chiang with Kennenet Renaissance. Hi, thank you for taking my question. So my first question is about this industrial So, healthcare business, so what is your longer long term, like the revenue contribution target from this business? Maybe I can comment on that. At this moment, We are still in the investing phase on the industrial health strategy. But obviously, as Huang just mentioned, We want this business to become a growth pillar of Huami. So in the future, we see a good potential of this business also forming a significant part of our business. But at this moment, the contribution of this business will be relatively small. Okay. Thank you. And my second question is about your Amfit products, like your Can you repeat your question because I didn't quite get it? Yes, yes, sure. Yes, so my second question is about your offline distribution channel plan for the Amfit products. Okay. Yes. So as you can see in 2020, in the financials, we have already Spent a significant amount of the marketing and sales money into expanding the offline channels of Amazfit products for this year, right? So that's also one of the reasons if you look at the OpEx spending for 2020 versus 2019, you see A significant increase over there. And we have actually strengthened our offline distribution channels, both In China and overseas for Amazfit products this year quite significantly. But Having said that, we also face certain setbacks because of the COVID virus impact. And if you look at Europe and the U. S, these markets, the offline channel is pretty much closed, right, because all those countries are back into lockdown. So that's the reason we will continue to push for the offline channel Expansion into this market for next year for 2021, sorry. And This should be when the virus is over, this should be also contributes to our top line growth in these markets. Okay. Thank you. Thank And the next question comes from Jimmy Yang with Congest. Hi, management. Thanks for taking my question. This is very insightful sharing. My first question is regarding your medical imaging business. So can you give me a little bit more introduction on who are your clients, Who are you going to sell this product to in Mainland China? And maybe give us some of the more color in understanding the total addressable market in this business, how big it could be in China? Thanks. Yes. So this market is quite big, actually not in China, but globally. With these partnerships, yes, we can help our partners to expand their market share in China, but I'd love to I'll reiterate, it's not just China market that we are working together. We are actually in a global partnership with these companies. But As far as potential enterprise customers, it could be hospitals, clinic, Because due to the pandemic, every all the countries, including China, It's very focusing on building up their health infrastructure, which is everybody a lot more aware of that. And Just for example, in China, a lot of currently still a lot of people still rush to the cities, to the hospitals because there's not enough good clinics spread in the rural area, for example. And that creates a lot of congestion and overcrowding. And so The government has the intention to try to build up the infrastructure spread across all regions, I'll bring it up on more clinics so that to reduce these overcrowding in the city's hospitals. So this is an example where we could potentially sell into these new clinics that's I know assets are being created across the country. And also, Because of the cost reduction and also the miniaturization, potential miniaturization of these devices, They could also be used in new scenarios, not just inside the clinical hospitals, but potentially, For example, portable x-ray, it could be used in emergency scenes Accidents, or accidents, seems like an accident area, for example. So there As far as the total amount of dollar in revenue, Sorry, but in markets potential size, we believe it's in the we don't have the exact number, but it should be in the 1,000,000,000 of dollars in terms of total market size. Did that answer your question? Thanks. Just Yes. Thank you very much. Just one more thing to add here. So you are saying that you want help the PROMAXO To apply for the CFDA, RIA Chinese FDA, how long do you think that will take? Yes. I think also, usually from our First of all, these companies like Plomexo, these companies you work with, they're already they either already have the U. S. FDA approval or they're already in the process of applying for it. So that helps a lot. For example, Asthem Medical Imaging, one of the partners we work with, they already have a US FDA approval. So with that, the process would take we expect it should be faster. Prolexo is The process of getting U. S. FDA approval, they don't have it yet, but very soon. But if based on our experience, Again, if they already have FDA approval, these type things are probably again, it depends on the device And case by case maybe 12 to 18 months, it could be faster depending on the device, yes. Thank you, Mike. My second question is actually regarding all of your called non consumer electronics business, it's very encouraging to see Huami expanding to a lot of areas. But When do you think we can see kind of meaningful revenue contribution from your non consumer electronic business, for example, the insurance business, The medical imaging business into our P and L? Thank you. I think you should be able to see some of that Starting to kick in second half of twenty twenty one. Okay. Okay. Thank you very much. And then my last question is regarding your traditional cash cow customer electronic business. So we know that 2020 is kind of a tough year for us. The COVID stopped a lot of things and our margin seems to be It rolled a little bit compared with 1 year before. So in 2021, if things are going well, what kind of recovery, especially in the margin side, could we expect? I think it's still and we don't want to give official Forward looking target for the year, we actually never does that. But I Ken, give you a few indications where we're heading to. So obviously, the overall wearable market is still in the growth, Right. So I think we should definitely grow more than the market. So both for our That applies to our watch and band business, right? And if you look at the margin, Obviously, in the past, we have a significant of the revenue, which is consists of the Xiaomi band And then our own branded products actually is the other part of that business. In the past, it has always been around 70% Xiaomi 30% own branded business. We think in 2021, this paradigm is going to more shift towards More own branded products rather than Xiaomi branded products. And then our own branded products obviously carries a higher gross margin. So from that perspective, we're expecting the 2021 gross margin to expand versus the 2020 number. But again, this all there's uncertainties around COVID And then we saw more and more places back into lockdown and in United Kingdom, they're talking about locking down until summer. So what I just mentioned is very much dependent on if we can get the vaccine And then the business can be restored to a normal course of business by the second half of twenty twenty one. So for whatever reason, The COVID situation because most of our key markets are outside China, right? So That is actually one of the uncertainties and caveat to the segment which I just gave. Thank you very much, Leo. That's very helpful. Thank you. And the next question comes from Arsalan Luch with Yes. Hi. Thanks a lot for taking my call. I'm a private retail investor in Huami and I also cover And analyzed Chinese stocks including yours on the YouTube channel. So I'm really glad that, Hany is open to the voice of retail investors And communicating, yes, openly here with this Fire Jet. So thank you for that. That's really interesting to learn About the 3 key drivers for 2021. And I've got 3 questions along to that. And my first one It's actually to the new CFO, Leon Dung. With those new 3 drivers outlined, Are you looking to make some changes to the way you are reporting the business, for instance, In the earnings calls and so on, more reflecting those data Or numbers, for instance, about we hear today about the numbers of users and data collected and so on, in regards To those new 3 drivers and so what are KPIs that you are thinking about and targets aligned with that? Do you can we expect That you are talking more about these points going forward. I think answer is yes. And for example, we're definitely thinking about giving more transparencies on the breakdown of different products in our annual report. But you know that we do have certain SEC and Accounting requirements on how you want to disclose certain business units performance. So we also need to be in compliance with that. So yes, within the areas that We which is in our control and we will for sure in the coming quarters to give you more color on those growth drivers, which we just mentioned. Okay, excellent. That's good to know. And The question related to that, actually, where does the recent deal or partnering with Itong High-tech Technologies Actually fits in those three drivers that you just outlined. I think It actually fits on everything which we just mentioned. But since the transaction of Itone is still being approved By the Chinese regulator or in the process of that. So we don't want to say too much beyond that at this point of time. Our long term strategy is to better serve the Chinese market. And also, we believe that Itau and Our acquisition of a minority stake in Ito will for sure yield future value on that. Okay. Thank you. And, yes, my last question and related to that is actually about Huami's internal capabilities to execute on some of those plans that you Outline, so for instance, we heard today about that Huami has now the license for insurance business in China, which I think is massive. But My question is like, could you give more flavor on how good are actually the internal capabilities of Huami, for instance, when it comes Data analysis or also software and to make sense of this opportunity in the insurance area or Is Huami more going in this partnership mode? So how much is inside Huami and how much is going through the partnerships? Thank you. I think Kwami has been very strong on the software and data analytics side, because we are The number 1 in the wearables domain and the wearables is not talking about hardware, it's talking about hardware and software app algorithm altogether, Right. And because of that, we actually entered into all those domains, for example, on insurtech And on the hardcore healthcare industrial health part, right? And if you think about it, Everything is building on our core technology and our core competence on the algorithms, on the software, on the supply chain capabilities we currently have, right? So I guess That is actually for sure the first thing we want to leverage our core capabilities In all the things which we're going to do. And if you look at, for example, on the insurance company or on the partnerships, Which we're going to do, one of the key building block is when we do the when we tap into the insurance company, When we get the insurance license, we always have a partnership or we always hire internal people from people from the insurance industry, for example, in our company. So take, for example, Pie Health, which is 1 of the acquisition, which we did in Canada. So we not only acquire the algorithm, the software capabilities, we also acquire Knowledges and people who are very good in knowing this industry, right? And the same goes for the healthcare industry as well. When we partner with those partnerships, obviously, it's with the intention that in the future, We'll also hire people internally or building on the competence these people and the team It's currently having to actually and adding on the Huami's core capabilities and make those smaller Thank you. As there are no further questions now, I would 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.