Edited Transcript of HMI.N earnings conference call or presentation 13-Mar-20 12:00pm GMT

In the fourth quarter, we achieved healthy revenue and net income growth, driven by strong performance from our newly launched products as well as effective sales and marketing outreach. In September 2019, we held our first international launch event at IFA 2019 in Berlin, Germany, introducing 2 new products to the market. Recently, at CES in Las Vegas, to further rollout our Amazfit portfolio, we announced another new smartwatch, the Amazfit T-Rex, a device with military certified body that is ideal for outdoor issuer’s business.

Including these newly launched products, we have now expanded our Amazfit brand to 7 smartwatch product lines to meet the diversified needs of our wide customer base. We also introduced from our new TWS product line, Amazfit PowerBuds, as well as an innovative product line, ZenBuds, a sleep-comfort and health monitoring earbuds. As mentioned, we would not have achieved our sales results without our effective sales and marketing strategy. For example, we seized on high-profile opportunities presented in online shopping festivals such as the Double 11 days. And our Amazfit brand ranked #1 in the smartwatch market segment with a retail price under RMB 1,000 in both sales, revenue and volume on JD and Tmall platforms. All of this significantly raised our profile and overall consumer awareness of our brand.

Our efforts to promote our products also included international expansion through a multichannel strategy focused on both direct sales and third-party sales channels. Our international shipments continue to climb as we successfully raise our brand recognition globally. During the year of 2019, approximately 51.6% of our total product sold was shipped overseas. The success of Amazfit sales can be attributed to our own developed channels in both China and overseas. More specifically, we are strengthening our international sales and marketing team as we, for example, expanded our footprint to over 70 countries with 137 channel customers.

In fourth quarter 2019, we entered the largest Europe consumer electronics channel media market. And we also entered major consumer electronic channels in India, Thailand, Russia and other countries. According to the IDC fourth quarter 2019 report, we are ranked #1 in market share for Indian, Indonesian and Spanish markets under the smartwatch category. In the fourth quarter 2019, our shipments to the European market are also increasing rapidly, especially Amazfit watch shipments, which increased by 440.1% in the Western European market, including French, Germany, Italy, Spain and U.K. In the meantime, our market share ranked #3 in both large share and domestic China and #6 in the U.S. smartwatch market, including the — excluding the countries we just previous mentioned. Amazfit shipment growth increased 328.5% in the rest of the markets we ship to. We believe with the continuous effort, our team continues to put forth — we can continue this successful growth over the long term.

Next, let me provide highlights on our exciting new business initiatives. At this year’s CES, in addition to new smartwatches, we unveiled 4 new products, spanning 3 verticals that go beyond smart bands and watches: Amazfit HomeStudio, a Smart Gym Hub; Amazfit AirRun, a foldable next-generation treadmill; Amazfit PowerBuds, true wireless stereo fitness earphones with Clip-to-Go design; and Amazfit ZenBuds, sleep-comfort and health monitoring earphones. With these new products we are taking an important initial step in building a comprehensive health and fitness ecosystem. We are demonstrating how technology and health can come together, creating further future opportunities and possibilities centered around our company mission. It should be note that we do not expect meaningful revenue contribution from these products in the near-term as it will take time for us to ramp up production, market new devices, educate consumers and penetrate new markets.

Now coming to our collaborative efforts. We will continue working together with our current close partners, Timex Group and Xiaomi. We are making solid progress with Timex on product developments. As we announced last week, our first Timex product, Ironman R300 clock series, has already been launched in the market. We are pleased with this progress we have made with Timex. In the meantime, our long-term plans with Xiaomi and the popular Mi Band product line remain unchanged. We will launch Mi Band 5 this year as planned and expect it to be another blockbuster following the record-breaking performance of Mi Band 4.

I will also would like to share with you my thoughts on our health care strategy. Health care has always been a focus for the company since Huami was founded in 2013. In 2019, with our established corporate mission, Connect Health with Technology, we strengthened our focus on health-care-related functionality in our development of smarter devices, proprietary AI chip and cloud services. In 2020, following the execution of a strategic memorandum last year, we will continue developing our cloud-based health care services through further cooperation with Peking University First Hospital for a joint promotion of heart health management programs.

We will also deepen the strategic partnership we established in October 2019 with AliveCor, a transformative cardio care provider using deep learning and explore the opportunity to develop new high-performance ECG form factors to global market. Furthermore, we plan for mass production of our next-generation AI chip, Huangshan-2, which has already completed the initial design phase. Huangshan-2 will be more intelligent than its predecessor and enable more health-care-related functionality to further differentiate our future smartwatch products.

To close, I would like to discuss the recent coronavirus outbreak that has been challenging the global. From a business perspective, we have seen part of our supply chain impacted, and we do expect some impact on our operations and financials in the first quarter. David will provide more color in a moment. However, along with our surprising partners, we have gradually resumed normal work operations since mid-February. As a corporation with strong social responsibility, we donated medical supplies such as mask and disinfectants as a show of our support to the regions most affected by the epidemic.

In the meantime, we are collaborating with reputable research institute to leverage our strong AI capability for the health monitoring of our users. The best example will be that we were able to determine that during this recent outbreak, irregular heart rate cases increased significantly, especially in the Wuhan area. In the meantime, powered by our massive data sets and strong AI capabilities, we are currently building an infectious disease prediction system, and we are about to issue a paper on this.

Our donations and technology have been highly recognized by the medical regulator institutions, hospitals, doctors and our customers. This has provide an even deeper business justification for further R&D exploration in health-related technology. With all the efforts we made, our technology and brand is becoming more and more deeply embedded in the health care industry. While acknowledging the recent difficulties we are facing, we are proud of our achievement in 2019 and are confident that our growth initiatives in new products and partnerships, coupled with our strong sales and marketing capability, will help us to achieve another successful year in 2020.

Thank you, again, for joining today. I will now turn the call over to our CFO, David Cui.

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David Cui, Huami Corporation – CFO [4]

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Thank you, Wang. In the fourth quarter of 2019, we continued the trend of strong growth momentum, driven by robust unit sales of both self-branded products and Mi Band 4. We shipped 14.7 million units in the fourth quarter, representing a 59.8% growth from the same quarter last year. Our revenue and net income, attributed to Huami Corporation, increased by 72.4% and 64.5% year-over-year, respectively, demonstrating the growing awareness and adoption of our products by users. During the fourth quarter, we also continued investing in R&D for the development of innovative products in addition to strengthening our sales and the marketing strategy to promote our Amazfit brand.

Mindful of the length of this call, I will highlight the key financial measures for the fourth quarter and full year 2019, and I encourage you to refer to our earnings press release for further details regarding our financial performance. Now here are some of the highlights of our strong fourth quarter. All amounts are expressed in RMB, unless otherwise stated. As previously mentioned, revenues in the fourth quarter 2019 increased by 74.2% (sic) [72.4%] to RMB 2.1 billion from RMB 1.2 billion for the fourth quarter of 2018. Shipments reached 14.7 million in Q4 as compared to 9.2 million in the same quarter of 2018.

Gross profit increased significantly by 62.8% to RMB 503 million from RMB 309 million in the fourth quarter 2018. Our gross margin was 23.8% compared with 25.2% a year ago. The decrease was primarily as a result of deepened promotion during the shopping festival. Moving to expenses. Total operating expenses increased by 60.6% to RMB 285 million from RMB 178 million for the fourth quarter of 2018, reflecting our strategy of consistent investment in R&D with an emphasize on health-care-related product development and testing, talent acquisition, in addition to branding and marketing to enhance the company’s long-term returns.

Research and development expenses increased 64.8% to RMB 140 million from RMB 85 million for the fourth quarter last year, primarily due to an increase in the number of R&D staff as we expanded our product lines and SKUs, our fundamental research in health-care-related features, algorithm, cloud services and AI chip development. We also experienced a rise in testing costs associated with the pipeline products. As a result of our effort, we have launched a series of new Amazfit products in the fourth quarter and at the beginning of this year at CES. We are confident these investments will increase the long-term value for our company, and we expect to enrich our products further in 2020.

Our selling and marketing expenses increased to RMB 63 million from RMB 29 million year-over-year as we made new product release during the CES event, increased advertising and promotion efforts during sales festival and build a larger and stronger marketing and sales team for overseas expansion. We believe our multidimensional efforts could quickly improve our Amazfit brand recognition and deepen our sales penetration globally. General and administrative expenses increased 29.1% to RMB 83 million from RMB 64 million for the fourth quarter last year, primarily due to an increase in professional fees related to improvement of operation management and business expansion and personnel-related expenses, offsetting by a decrease in share-based compensation.

Our income before income tax was RMB 237 million compared with RMB 139 million for the same quarter of 2018. The GAAP net income attributable to the company increased to RMB 207 million compared with RMB 126 million for the fourth quarter 2018. Net income attributable to ordinary shareholders of the company also increased to RMB 207 million. Basic and diluted net income per ADS attributable to ordinary shareholders of Huami Corporation was RMB 3.36 and RMB 3.21, respectively. As a reminder, each ADS represents 4 Class A ordinary shares.

Next, for non-GAAP measures, adjusted net income attributable to Huami Corporation increased to RMB 214 million from RMB 146 million for Q4 2018. Finally, adjusted basic and diluted net income per ADS attributable to ordinary shareholders of Huami Corporation was RMB 3.46 and RMB 3.31, respectively. Relating to cash, as of the year-end of 2019, the company had cash and cash equivalents of RMB 1.8 billion compared with RMB 1.4 billion at the end of 2018.

Now let’s turn to some highlights of our robust full year 2019 results. Our revenue increased by 59.4% year-over-year from RMB 3.6 billion to approximately RMB 5.8 billion due to an increased market recognition and popularity of our Amazfit products and continued strong Mi Band sales after we launched the Mi Band 4 in the second quarter of the year. Gross profit increased by 56.2% year-over-year from RMB 939 million to RMB 1.5 billion. Gross margin decreased slightly year-over-year to 25.3%.

Our total operating expenses increased by 50.1% year-over-year from RMB 574 million to RMB 861 million. The increase in operating expenses was primarily due to the increase in R&D and marketing and sales and always the intention to support our strategy, focusing on healthcare-related technology development, expand our Amazfit product portfolio with new products such as GTS, GTR and Amazfit T-Rex, and further strengthen our sales in the overseas market.

Operating income increased 65.8% for the full year, increased from RMB 366 million to RMB 606 million. The GAAP net income to Huami totaled RMB 575 million compared with RMB 340 million in 2018. Non-GAAP adjusted net income to Huami, which excludes share-based compensation expenses, increased 32.8% from RMB 475 million to RMB 630 million.

And now to our outlook. As Wang mentioned earlier, we have seen some impacts on our supply chain side due to the current coronavirus situation. We expect our first quarter results to be affected to some extent by a disruption of parts in our supply chain. However, we have seen gradual recovery of production capacity. Therefore, the impact of supply chain constraint will be mainly felt in Q1 2020. Given the COVID-19 outbreak spread globally, in particular, in the Western European countries, one of our overseas market, we will continue to closely monitor and assess the situation in those regions.

That being said, we still expect we can achieve sustainable growth and profitability in 2020 and beyond through new product initiatives, collaborative opportunities, global expansion and balanced operational expense control. With all things considered, for the first quarter 2020, management currently expects net revenues to be between RMB 980 million and RMB 1.01 billion, which would represent an increase of approximately 22.6% to 26.3% from RMB 800 million in the first quarter of 2019. We hope the entire epidemic situation begins to improve and still have confidence that 2020 will be another successful year for Huami.

This concludes our prepared remarks. We will now open the call to questions. Operator, please go ahead.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Kyna Wong of Credit Suisse.

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Kyna Wong, Crédit Suisse AG, Research Division – Associate [2]

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It’s a very good result. Congratulations. I just wanted to ask, given that the impact of the COVID-19 in terms of the demand weakness in certain countries right now, but especially in Europe, that is also part of your important market in overseas business. So I just wanted to ask the confidence for your 2020 outlook in consider of the growth like magnitude, can we see a better growth rate, like more than first quarter is kind of like year-over-year growth rate in 2020 versus your prior expectations? This is the first question. The second question is about the business cooperation with Timex, given the previous target to launch the product in the first quarter or for the first half. So I wanted to get more update.

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David Cui, Huami Corporation – CFO [3]

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Thank you, Kyna. This is David. Let me take on the first question, and I would like to turn your second Timex question to our COO, Mike. So to your first question, as I explained earlier in the remarks that we are — we were impacted from the supply chain side. And when we march into Q2 — and we are still in March right now, so we do see some impact in our European market, which is 1 of our overseas markets. But we — given that the first half of the year, because of the seasonality of our sales, we would expect that in the later part of the year when the situation improves, we should do our best to catch up for the losses we encountered in the first half of the year. At this moment, we could not promise a number that how much we can achieve because we are still assessing the situation, and the situation is still developing. But we are confident that we are working towards new product releases in the year marching towards our mission, and we should not see significant losses in 2020 as compared to 2019’s financial results.

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Mike Yan Yeung, Huami Corporation – COO [4]

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This is Mike. To answer your question about Timex, we are still on track in our development — product development schedule with the Timex product. In fact, we just launched the first of our cooperative product, the Timex Ironman R300 clock series, just recently. And as Wang and David mentioned, China’s production line is slowly coming back to normal. So we still expect that in the first half of this year we will continue to roll out more collaborative products with Timex in the first half of this year as originally scheduled. So in terms of the impact of the virus for our Timex products, the impact is relatively minor, yes.

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Operator [5]

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The next question comes from Arthur Lai from Citi.

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Yu Jang Lai, Citigroup Inc, Research Division – Director & Analyst [6]

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Congrats for the maybe good December quarter growth. I have 2 small question. One is, my investors, they have been waiting for the big data analytics business. And can management, Chairman Huang or Mike, give us some update about the AI intelligence project with the University Hospital. And how you see this potential business in the future? This is my first question. And my second question is, can you also quantify the shipment breakdown among the India market and also EU market or APAC market? We understand that, actually, the EU market still make a very small portion of your business. But what — appreciate you give us a breakdown in those regions.

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Mike Yan Yeung, Huami Corporation – COO [7]

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Arthur, this is Mike. Yes. So I’ll address your first question, and I’ll let David to answer your second question. So regarding the partnerships with the academic institutions, we are actually doing a lot. For example, we are currently working with Stanford University on a sleep research. And we view that this is a tremendous opportunity for — because sleep is a very common problem, and there’s a lot of health care revenue opportunities in this area. So we are actively engaging in — for example, in the sleep research project with Stanford University. We also have been engaging with the Norwegian Institute (sic) [University] of Science and Technology, NTNU, on improvement, for example, of the pie algorithm for — to enhance it, so that you could adjust for people with different chronic diseases such as people with high blood pressure or people with diabetes. We are working with them to modify or enhance the pie algorithm, so that it could be more appropriate to be used by these people with chronic diseases. So we are continuously working with research institutions, academic institutions, on these type of beta analysis to improve our algorithms and enhance our products. David, do you want to answer the second question?

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David Cui, Huami Corporation – CFO [8]

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Sure. Sure. Arthur, thank you for your question. Regarding your second question, Europe is one of our market, which may — which represents about 1/3 — approximately 1/3 of our overseas sales. And remember that even though we experienced a significant growth in EU countries, which includes France, Germany, Italy, Spain and U.K., and we also has a very strong presence in Eastern European countries, like Russia, and we also ranked — we are also the frontrunner in domestic China also. Another thing I want to mention that we are also expanding into the U.S. market, and we are ranked #6 in the U.S. smartwatch market. And besides all those countries, we also expand into the rest of the countries. And in those countries, we also grow rapidly. So right now, it seems that Italy was impacted most. And France, Germany and those countries also had some identified cases, but we would assume that these countries will place a lot of efforts in containment of the diseases. And we foresee that our second quarter will be impacted. But starting Q3, and the sales will go back to normal, and we are still confident our sales in the global market.

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Operator [9]

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(Operator Instructions) The next question comes from Robert Cowell of 86Research.

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Robert W. Cowell, 86Research Limited – Analyst [10]

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I actually have 2. The first 1 is about the gross margin. I’m interested in some of the different factors impacting your gross margin in 4Q and how we should be thinking about the gross margin trajectory into next year. And then the second question is about temperature sensors. Have you ever launched a product with a body temperature sensor in it? And is that something that you all would consider doing in the future?

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David Cui, Huami Corporation – CFO [11]

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Sure. I will take your first question. And then, Mike, would you please take on the second question on the product? And your first question regarding gross margin fluctuations, I can tell you that for both Xiaomi products and the Amazfit brand products, the margin — for Xiaomi’s products, the margin wasn’t fluctuated that much. And our Amazfit product, the margin actually improved from prior years, given that we launched multiple new products in the year. The reasons for the blended margin fluctuation is because the Xiaomi’s Mi Band 4 sales was very strong. The revenue mix changed a little, and that Xiaomi’s products, the margin is lower as compared to Amazfit products. So therefore, the blended margin decreased slightly as compared to 2018. So going forward, we would expect the margin will be relatively stable, and that’s our objective for this year.

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Mike Yan Yeung, Huami Corporation – COO [12]

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Okay. And about the second question, the answer is that no, not yet. We did not have a product with temperature sensor yet. But we are working on such a product right now, yes. So that’s the answer to your second question.

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Operator [13]

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The next question comes from [Edward Chen] of [Hitomi International].

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Unidentified Analyst, [14]

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Congrats for the good results. So I have 2 questions. The first one is that, given the quite a high base, as you mentioned, very strong sales from the Xiaomi product, what do management think about the growth driver for this year, especially in the first quarter, given the demand situation right now overseas? And my second question is on just the future focus of our company. So we see we launched a number of new products, including the smart trials and products like that. So I just want to know what are the — maybe the focus on the client that — for the company going forward?

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David Cui, Huami Corporation – CFO [15]

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Thank you, [Edward], for your question. Again, let me take on the first question for the growth driver, and I will turn to Mike to answer your question regarding the new products. The growth driver going forward will still be two legs. So we still have a very strong relationship with Xiaomi. We will continue to launch — working with Xiaomi to launch the new Xiaomi bands. As our CEO, Huang Wang, mentioned earlier that we will launch Mi Band 5 in 2020. So we would still expect that the band sales will continue to be strong. And the second key driver will be from our Amazfit products. We geared up our efforts in sales, marketing and also brand-building exercise. So we would expect that we will grow faster in Amazfit products as compared to Xiaomi’s products. So 2 primary drivers will continue to guarantee our success in this year. Mike?

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Mike Yan Yeung, Huami Corporation – COO [16]

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Okay. Thank you, David. So in terms of our product or product focus, well, first of all, we have always been focusing our products for — on health and fitness. So that’s — all the products that we do will have a features for health and fitness. Now in addition to geographic expansion, broadening our product portfolio is also one of our growth strategy. As we identify proven, good business opportunities in certain areas — for example, in the U.S., Peloton has shown that there is a market for indoor sports equipment. And in this case, we feel that this is an area that we can also produce a product for and expand into that area. But in the near term, our bread and butter product focus will still — you see still be smartwatch and smartpen. And those smartphone and smartpen — smartwatch and smartpen will still continue to drive the majority of our revenue. But as we identify new opportunities, again, which has health and fitness functionalities, we will deliver new products in these areas. Such as, for example, in CES, we launched the earbud, which is — the earbud market is proven to be growing very, very fast, as evidenced by the Apple EarPods. And similarly, as I mentioned, the Peloton has proven that there’s a market for indoor sports equipment. And so that’s where we are rolling out products in these new categories to try to capture new market share and broaden our product portfolio. But again, all the product will go out and we will develop will have a focus on fitness and health.

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Operator [17]

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The next question comes from Michelle Zhang of China Renaissance.

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Michelle Zhang, China Renaissance Securities (US) Inc., Research Division – HK Analyst [18]

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(foreign language) So my first question is for Amazfit products. Could you please discuss about the current offline channel distribution plan? And what kind of penetration we are targeting to reach among all the Amazfit product shipment this year?

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Wang Huang, Huami Corporation – Founder, Chairman & CEO [19]

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David, (foreign language)

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David Cui, Huami Corporation – CFO [20]

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Sure. So our new plan for the year, we’ll be launching more Amazfit brand products. We may also introduce a new branding products. All of them will be self-branded products. Our strategy will be continue to expand into overseas market, not necessarily just the European market. We will also consider the U.S. market as well as the Southeast Asia market, India — and India markets. And we expect a significant growth in terms of total new products and the total shipments in 2020. The total number of shipments under our own brands as compared to Xiaomi’s Mi Band product will be less significant because the Mi Band will be a mass sales with much lower average selling price. And our products will be priced much higher. So that will drive our revenue growth and drive our revenue mix. So this is our strategy, Michelle.

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Michelle Zhang, China Renaissance Securities (US) Inc., Research Division – HK Analyst [21]

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Yes. Okay. So another question is the management provide some guidance on the features upward trend this year for Amazfit products.

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David Cui, Huami Corporation – CFO [22]

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So as I mentioned, that we will launch multiple products and then the multiple products we will target different layers of consumers and the features will be mixed. But we’ll have a health care focus, and that will be in line with our strategy — long-term strategy.

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Operator [23]

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As there are no further questions now, I’d like to turn the call back over to the company for closing remarks.

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Zhang Grace Yujia, Huami Corporation – Director of IR [24]

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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 Piacente Group, the company’s Investor Relations consultant. This concludes this conference call. You may now disconnect your lines. Thank you.