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Edited Transcript of HMI.N earnings conference call or presentation 14-Mar-19 12:00pm GMT

Q4 2018 Huami Corp Earnings Call

Apr 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Huami Corp earnings conference call or presentation Thursday, March 14, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Cui

Huami Corporation - CFO

* Mike Yan Yeung

Huami Corporation - COO

* Wang Huang

Huami Corporation - Founder, Chairman of the Board of Directors & CEO

* Zhang Grace Yujia

Huami Corporation - Director of IR

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Conference Call Participants

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* Arthur Lai

Citigroup Inc, Research Division - VP and Analyst

* Jing Sun

China Renaissance Securities (US) Inc., Research Division - Analyst

* Lewis Wang

* Thompson Wu

Crédit Suisse AG, Research Division - Research Analyst

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Presentation

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Operator [1]

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Hello, ladies and gentlemen. Thank you for standing by for the Huami Corporation Earnings Conference Call for the Fourth Quarter and Full Year 2018. (Operator Instructions)

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.

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Zhang Grace Yujia, Huami Corporation - Director of IR [2]

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Hello, everyone, and welcome to Huami Corporation's fourth quarter and full year 2018 earnings conference call. The company's financial and operating results were issued in our press release 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. Huang Wang, 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 31, 2017, and other filings as filed with the U.S. Securities and Exchange Commission.

The company does not assume any obligation to update any forward-looking statement except as required under applicable law.

Please also note that Huami's earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Huami's press release contains a 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. Huang Wang. Please go ahead.

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Wang Huang, Huami Corporation - Founder, Chairman of the Board of Directors & CEO [3]

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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 our rock-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. And the focus on competitive product development and efficient business operation generated an 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 they contribute a large -- a larger portion of our total revenue. Shipments of Amazfit product in 2018 also tripled compared with 2017. This was mainly driven by Amazfit Verge product. This matter goes -- is a showcase of how our innovative product design and growing brand awareness generate sales.

During the year of 2018, we introduced breakthrough health care technology applications in wearables powered by our self-developed AI chip, Huangshan-1, which will also allow us to provide cloud-based health care-related services to users in the future.

Increasing IoT application scenarios is an important strategy for us to enrich our near field 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 market. In November 2018, we announced our collaboration agreement with Timex, a global leader in watchmaking, in order to leverage our world-class product development capabilities and the strong international distribution channels to broaden the reach of our smart wearable products.

In addition, in January 2019, we announced our strategic cooperation -- collaboration with McLaren Applied Technologies to leverage their expertise in auto racing and e-sports to develop metrics-driven wearables that will help optimize human performance in this underserved field.

We think collaboration agreements like these will diversify our product line 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 Bands helped ensure that Mi Band remains at the forefront of the smart band industry.

We also continue to experience that -- 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 product has been launched in 50 countries as of today. Our collaborations will -- with established international partners and our enhanced overseas sales force contributed significantly to the -- to such success.

We remain committed to ensuring our products meet the development -- meet the developing needs of the smart wearable industry. And we'll continue to invest in R&D to develop exciting, new products and improve existing lines.

In addition, we continue to focus on opportunities presented by the health care 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-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 [guarding] the competitive advantage we perceive 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 continuous 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 wearable market opportunities, especially in the fast emerging smartwatch market, and further develop a consistent services opportunity.

2018 was a fruitful year for Huami, and we look forward to the year 2019 with full confidence.

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

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David Cui, Huami Corporation - CFO [4]

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Thank you, Huang.

2018 was an important year for Huami. Not only did we grow revenues by 78%, but we also increased our profitability as we managed costs and operating expenses and leveraged our increased -- 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 strong sales of Amazfit's smartwatches and Mi Band 3 that we launched in June 2018, driven by increasing market recognition of our products globally.

Gross profit increased by 85.2% 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 slightly -- 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 to RMB 146.5 million.

Basic and diluted net income per ADS was RMB 2.08 and RMB 1.97, respectively. Each one of the -- our ADS represents 4 of our Class A ordinary shares.

The adjusted basic diluted – and diluted net income per ADS was RMB 2.42 and RMB 2.30, respectively.

Now let's turn to some highlights of our robust full year 2018 results.

For the whole year, our revenue increased by a hefty 78% year-over-year from RMB 2.05 billion to approximately RMB 3.65 billion. Revenue from Amazfit product increased by 178% in 2018 as compared to 2017. We are especially pleased with the growth in the sales of our Amazfit product, 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 to 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 to 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 a new R&D staff and increased our sales force. Also, always the intention to support the research development and sales of our new products planned for launch in 2019, resources were also invested during the year to expand our sales effort overseas.

Operating income more than doubled for the full year, increasing from RMB 182 million to 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 to 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.

So 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% to 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.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question today comes from Lewis Wang with Annunciation Research.

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Lewis Wang, [2]

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Mr. Wang and/or the management of Huami, so are -- so we are kind of interested in your IND (sic) [R&D] or product -- in the Huangshan chips, and we noticed -- or you acquire or -- some company in France. And could you illustrate more on that part and especially why you couldn't see the revenue or -- on the chips part?

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Mike Yan Yeung, Huami Corporation - COO [3]

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Yes, this is Mike Yeung. I'm the COO of the company. So my understanding your question is kind of how will the -- our new chip, Huangshan-1, will impact our revenue. So Huangshan-1 is -- will be in our products -- upcoming products in 2019. And we will have a -- as David mentioned, we will have a lot of products in 2019, and Huangshan-1 is a key component of our products. So that will help increase our revenue growth.

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Operator [4]

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The next question comes from Thompson Wu with Crédit Suisse.

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Thompson Wu, Crédit Suisse AG, Research Division - Research Analyst [5]

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Can you guys hear me okay? Hello? Hello?

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David Cui, Huami Corporation - CFO [6]

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Yes. Yes, Thompson, yes.

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Thompson Wu, Crédit Suisse AG, Research Division - Research Analyst [7]

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Oh, okay. My first question is just about your Amazfit brand. 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.

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David Cui, Huami Corporation - CFO [8]

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I'll try to tackle your questions. In this year, we allocated a lot of resources to expand our overseas market. So we will continue the same effort. In particular, for our own products, our Amazfit products, so we will leverage more on our own channel globally. And we mentioned that in 2019, we will launch multiple -- this is why -- we will launch multiple products in the year. And it's going to be at different time intervals during the year. Certain features include health care features and also the communication features maybe in a different combination, a different format, a different price range so -- to suit different type of customer needs. That's our plan for the year. Is that okay?

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Thompson Wu, Crédit Suisse AG, Research Division - Research Analyst [9]

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Okay, great. Yes, that was very helpful. And for your guidance in first quarter, still very, very healthy growth year-on-year. From a margin perspective, how should we think about the business, particularly in gross margin, as we think about product mix between the Xiaomi Mi Band and also the Amazfit products? And are there any cost pressures from key components that we should be aware about? This is again looking at your first quarter guidance.

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David Cui, Huami Corporation - CFO [10]

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Yes, so for first quarter and for the whole year, we still anticipate revenue growth. And for the first quarter, we all know it's a slow season for us. But still, we will record -- we still expect a healthy growth, as you mentioned. And -- but 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. And for the newer products, we may have different pricing strategies to quickly acquire the market share, things like that. And we will -- all depends on -- all depends the -- what type of a product we launch or the product mix that we launch. The margin could vary, and -- 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 our product, as we experienced when we launched the Mi Band 3, so we did give a huge discount to the market to quickly release the Mi Band 2, right? So we will probably have to do the same thing for Mi Band 3, yes, during the year. So the pressure for the margin always exists, one from competition, one from -- depends on -- or one from the pricing strategy, right? We all know we can control our costs very efficiently. But the retail price -- the pricing strategy will impact our margin also.

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Thompson Wu, Crédit Suisse AG, Research Division - Research Analyst [11]

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Yes. Okay, okay. Then, David, maybe just one more question before I get back into the queue. Just on your headcount budget addition this year. Just how many -- do 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?

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David Cui, Huami Corporation - CFO [12]

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When we had our IPO, our headcount was roughly about 400. So towards the end of 2018, we had about 600 in aggregate globally. And this year, we have a plan to add in more staff because we have multiple products to be launched. So we need -- we will focus on R&D staff. We will add more R&D capabilities. And we also will make more resource -- allocate more resources to our sales and marketing efforts. So this will be the 2 major area we'll have. We do not have a fixed number, but we know we will add more headcounts this year, yes, from 600, yes.

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Operator [13]

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Your next question comes from Arthur Lai with Citi.

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Arthur Lai, Citigroup Inc, Research Division - VP and Analyst [14]

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So I want to follow up with Thompson's question and a more longer-term perspective. Can you share with us if you develop your own [analogy] and also [substitute] more and more ODM model for those watchmaker? And how you utilize the -- this business model, which means that the -- can you start to utilize their big data you collect from their ODM? And also the follow-up question is, in the long term, how this big data analysis to contribute into our company's bottom line. That's my 2 questions.

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Mike Yan Yeung, Huami Corporation - COO [15]

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Yes, this is Mike. So yes, I think my understanding your 2 question: one is how we work with our OEM partners or -- and the other is how -- longer term, how can we do better data monetization. So yes, I mean, we work with partners like Timex. Not only do we develop differentiated devices for them, but we also have collaboration on the data in-house, in cooperation as well. And actually, in these kind of partnerships, Huami also provides our cloud and data capabilities to our branding partners. So we are not only just providing the device manufacturing capability. And secondly, with all this large number of devices that we ship, we collect tons of data every day. So yes -- that's why right now, we're also working with our partners, such as PAI Health, for example, to try to monetize these data with -- through the -- by targeting the health care and insurance industry and -- which we believe has a huge potential for us to monetize these data -- biometrics data that we collect such as heart rate, such as ECG, electrocardiogram. So our plan is again leverage these data to -- and work more closely with our partners to monetize in the health care and insurance industry.

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Arthur Lai, Citigroup Inc, Research Division - VP and Analyst [16]

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Okay. And can you -- one follow-up is, when you collect big enough data, and can you quantify like how much impact would be -- to our company's earning or bottom line? Or can we think about those big data analysis is -- carry the higher, I mean, corporate-branded margin?

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David Cui, Huami Corporation - CFO [17]

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I think your -- I'll answer your questions, your follow-on of PAI Health strategy, right? So...

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Arthur Lai, Citigroup Inc, Research Division - VP and Analyst [18]

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Oh, no, no. Actually, the contribution to bottom line and also the earnings.

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David Cui, Huami Corporation - CFO [19]

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In our current forecasts, we did not really include any revenues or profits from this type of data monetization yet. This -- but we do see a huge potential for this type of service revenues. We could see that maybe not in the near term. We could see that maybe in 2020, if we -- our pilot program with these insurers can work out.

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Operator [20]

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(Operator Instructions) Your next question comes from Jason Sun with China Renaissance.

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Jing Sun, China Renaissance Securities (US) Inc., Research Division - Analyst [21]

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This is Jason. Just a very quick question on Xiaomi band. Can you elaborate more on Xiaomi band strategy into 2019 and 2020? Because we -- it is speculate that Mi Band 4 will be announced around like March or April. I'm just wondering, Mi Band 4 is still in the pipeline of first half of 2019? And how do you expect that Xiaomi band growth momentum in units and average selling price improvement in this year?

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David Cui, Huami Corporation - CFO [22]

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Thank you, Jason. For Mi Band 4, it's going to be in this year. It's going to be in 2019, but I'm not sure it's going to be in March and April. But 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. So we will pick -- work with Xiaomi to pick the right time to launch Mi Band 4 in a year. Yes. So does that answer your question, Jason?

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Jing Sun, China Renaissance Securities (US) Inc., Research Division - Analyst [23]

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But how we can expect the Xiaomi band growth momentum in...

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David Cui, Huami Corporation - CFO [24]

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Oh, in terms of the -- yes, yes, in terms of units, right? So as you can see, we have gone through -- work with Xiaomi, gone through 3 generations of Mi Band, right? Each one of them are successful products, in particular Mi Band 3, yes. Each generation, we learn something, we always do better. And Mi Band 3, we -- you can take a look at 2018's -- the volume, right? So it's really much better as compared to previous version. So we expect Mi Band 4 will be a similar -- will have similar trend. So once we launch Mi Band 4, we expect that product will sell well.

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Jing Sun, China Renaissance Securities (US) Inc., Research Division - Analyst [25]

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Okay. Are we going to see any -- are we setting price improvement on Mi Band 4?

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David Cui, Huami Corporation - CFO [26]

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Of course. You mean the feature? Of course. There are -- the...

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Jing Sun, China Renaissance Securities (US) Inc., Research Division - Analyst [27]

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Yes.

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David Cui, Huami Corporation - CFO [28]

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Every generation product, we will add some more features or making some changes to better shield (sic) [serve] consumers' needs, yes. Oh, we will price competitively for sure also, yes.

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Operator [29]

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

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Zhang Grace Yujia, Huami Corporation - Director of IR [30]

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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

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Operator [31]

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This conference has now concluded. You may now disconnect your line. Thank you.

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David Cui, Huami Corporation - CFO [32]

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Thank you.

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Mike Yan Yeung, Huami Corporation - COO [33]

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Thank you.

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Zhang Grace Yujia, Huami Corporation - Director of IR [34]

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Thank you.

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Wang Huang, Huami Corporation - Founder, Chairman of the Board of Directors & CEO [35]

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Thank you.