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

Q2 2019 Huami Corp Earnings Call

Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Huami Corp earnings conference call or presentation Monday, August 19, 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

* Wang Huang

Huami Corporation - Founder, Chairman & 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

* Joy Wei

86Research Limited - Analyst

* Kyna Wong

Crédit Suisse AG, Research Division - Associate

* Xudong Chen

China International Capital Corporation Limited, Research Division - Associate

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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 Huami Corporation's Second Quarter 2019 Earnings Conference Call. (Operator Instructions) Today's conference call is being recorded. (Operator Instructions)

I will now turn the call 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 Second Quarter 2019 Earnings Conference Call. The company's financial and operating results were issued in our press release via newswire service 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 of Directors 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 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 reports on Form 20-F for the fiscal year ended December 31, 2018, 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 applicable law. Please also note that Huami's earnings press release and this conference call include discussion 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 unaudited most directly comparable GAAP measures.

I'll now turn the call over to our CEO, Mr. Huang Wang. Please go ahead.

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Wang Huang, Huami Corporation - Founder, Chairman & CEO [3]

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Hello, everyone. Thank you for joining our earnings conference call today. Solid top line revenue growth and strong profitability continued in the second quarter as our brands, product lines, footprint and strategic initiatives, all continued to develop and expand globally.

Our second quarter revenue was RMB 1.0 billion, which represents a 36.6% increase compared to the second quarter 2019 -- 2018. Our revenue performance was driven by the extremely successful second quarter launch of the Mi Band 4. In addition, sales of Amazfit-branded smartwatches continued to perform well with our self-branded line now ranking fifth globally in shipments, according to the recent popular research report. Furthermore, our overseas expansion is in line with our strategy and expectations. Approximately half of our products were shipped to overseas during the first half of 2019.

Mi Band 4 was launched in the second quarter and it quickly became our blockbuster with the best sales momentum among all generations of Mi Band. Its global shipment volume exceeded 1 million units within 8 days. The future of Mi Band 4 improved significantly from previous version.

The NFC version of Mi Band 4 is the first version of Mi Bands to have Xiao'ai, the intelligent voice assistant of Xiaomi IoT ecosystem, installed. We will continue to work closely with Xiaomi on new product releases to replicate the success we have had with each version of the Mi Band. We are confident in the strong market appeal of the Mi Band going forward.

Our long-term plans with Xiaomi and the popular Mi Band product line remain unchanged. We look forward to developing and producing future generations of the Mi Band, including various -- targeting different global market segments and the customer profile.

In the second quarter, we continued to expand and diversify our Amazfit product lines. In late June and July, we launched multiple smartwatch products with various functionalities designed for different customer demands. To name a few, we launched our second-generation smartwatch, Amazfit Nexo, in June. It is a full function smartwatch with e-Sim communication feature. We also introduced our brand-new watch series, Amazfit GTR, which is designed to target a new growing market segment. While it has the look and feel of the traditional watch, the GTR is integrated with smartwatch as well as powerful sports functionalities. In addition, we launched Amazfit Bip Lite and Amazfit Verge Lite smartwatches. They are smart lite functionalities, long battery life and the competitive price make them ideal choices for the firsthand smartwatch users.

Our brand-new ECG version smartwatch targets the fast-rising wearable health tech market. We now have a dedicated health care team responsible for the research and the development of our wearable health tech products and services.

In addition to the analysis and the integration of the biometric data sets, this team includes health care professionals and accredited experts from leading institutions with specializations in the cardiovascular health and chronic disease management. We also provide selective health care services to our smartwatch users with both complementary and premium package.

In addition to launching smartwatch products, targeting different customer segments, we continued to enhance our IoT life scenario capabilities. For example, the NFC functionality in our smart wearable devices allows user to facilitate a number of common daily activities, including public transportation access, select community space access, smart car ignition among others. We also entered into a strategic partnership with Tencent Cloud as part of the partnership selected Amazfit products will have the capability to install applications like QQ Music, QQ and Tencent translation.

Our significant technology achievements in the second quarter included incorporating with -- incorporating our self-developed AI chip, Huangshan-1, into our health care-focused smartwatch product line. Health tech-enabled smart wearables are rapidly advancing trends and our breakthrough technology enables critical real-time applications for the prescription ECG measurement and 24-hour 7 days arrhythmia monitoring.

We have received very positive feedback on our latest products from our customers. This product and the technology powering them creates a concrete foundation for our continued leadership in the development of advanced products in the smart wearable industry. With our growth strategies firmly in place, we will continue to expand our global sales channel and brand recognition. Move forward our cooperation with Timex on product developments, launch more amazing new products and further invest in R&D capabilities. We have full confidence that our competitors' new products and well-established products like (inaudible) appreciate both gross for the second half 2019. We expect a much stronger growth in the third quarter, approximately 52.6% to 55.4% compared with Q3 2018 as indicated in our earnings release guidance.

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. Robust revenue growth momentum continued in the second quarter, increasing 36.6% year-over-year, as the company benefited from strong global unit sales, particularly with the newly launched Mi Band 4. During the quarter, we shipped 8.3 million total units, up 53.7% from the same period last year. We believe this top line growth momentum is sustainable and has the potential to continue improving.

In addition to the products which we already launched earlier this year, we will soon launch more Amazfit new products with wearable functionalities in the next quarters. This new product releases demonstrate Huami's commitment to the needs of global smart wearable consumers and give us the confidence to continue delivering value to our shareholders in the second half of 2019, as Wang mentioned earlier.

We will continue to benefit from our expanding overall brand recognition, as we enhance our products and services and continue to penetrate global markets. Also during the second quarter, we continued to make strategic investments in our R&D capabilities, including strengthening our (inaudible) and cloud services capabilities in addition to streamline product development, testing and supply chain management for new launches, all in an effort to ensure we remain on the cutting edge of smart wearable technology.

We also continued to make investments to our brand value by increasing our marketing efforts to promote broader awareness and adoption of our self-branded products. We are confident this investment, along with strong alliance, operational efficiency and a growing global footprint, will help ensure our healthy growth and solid financial performance, in both the short and long term.

Mindful of the length of this call, I will highlight the key financial measures for the second quarter 2019 and encourage you to refer to our earnings press release for further details regarding our financial results. Now here are some of the highlights of our strong second quarter.

Revenues increased by 36.6% to RMB 1.04 billion from RMB 760.1 million for the second quarter of 2018, exceeding the guidance that we provided to the market. Gross profit increased significantly by 40.8% to RMB 277.3 million from RMB 196.9 million for the second quarter of 2018. Our gross margin of 26.7% reflected a sizable improvement from our gross margin of 25.9% for the second quarter of 2018. This increase, aside from economies of scale, was driven by our continued improvement in supply chain management. Strong supply chain management has always been a hallmark of our operations, and we are continually working to find ways to make it even better. In 2018, we consolidated and streamlined our logistics and supply chain network activities by establishing a dedicated supply chain management headquarter in -- global headquarter in Shenzhen. Here, our relevant teams are under one roof. The ease and speed of communication among teams and with the suppliers and the manufacturer, contractors has further improved our operational efficiency.

Now moving onto expenses. Total operating expenses increased by 89.2% to RMB 185.2 million from RMB 97.9 million for the second quarter of 2018, reflecting our investment strategy in R&D, brand and marketing channels for long-term returns.

Research and development expenses increased by 111.4% to RMB 93.8 million from RMB 44.4 million for the second quarter of 2018, primarily due to an increase in our personnel-related expenses and a rise in intermediate test expenses as several new pipeline products were undergoing rigorous testing.

General and administrative expenses increased to $51 million from RMB 32.8 million for the second quarter of 2018. This increase is in line with the growth of our company. As our total revenues and volume of products sold have continued to increase, our selling and marketing expenses have naturally also increased. Selling and marketing expenses increased by 95.2% to RMB 40.4 million from RMB 20.7 million for the second quarter of 2018. As we intensified our promotion efforts for self-branded products, we also expanded our sales and marketing team to boost our sales efforts globally.

Our income before income tax was RMB 101.3 million compared with RMB 101.4 million for the second quarter of 2018. The GAAP net income attributable to the company increased to RMB 89.4 million compared with RMB 85.5 million for the second quarter of 2018. Net income attributable to ordinary shareholders of the company increased to RMB 89.2 million.

Moving down the P&L, basic and diluted net income per ADS attributable to ordinary shareholders of Huami Cooperation was RMB 1.46 and RMB 1.39, respectively. As a reminder, each ADS represents 4 Class A ordinary shares.

Next, adjusted net income attributable to Huami Corporation increased to RMB 111.7 million from 1.1 -- RMB 101.6 million for Q2 2018.

Finally, adjusted basic and diluted net income per ADS attributable to ordinary shareholders of Huami Corporation was RMB 1.83 and RMB 1.73, respectively.

Relating to cash, as of June 30, 2019, the company has had a cash and cash equivalence of RMB 1.45 billion compared with RMB 1.44 billion as of December 31, 2018.

And now to our outlook. Looking ahead to the third quarter of 2019, management currently expects net revenues to be between $1.64 billion and $1.67 billion, which would represent an increase of approximately 52.6% to 55.4% from RMB 1.07 billion for the third quarter of 2018.

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 Crédit Suisse.

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

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I have 2 questions. The first question is about the ASP trend. Because in the second quarter, we see the ASPs actually declined due to the mix. And it is because the Mi mix -- I'm sorry, Mi Band for the ramping shipment and also some of the product adjustment in the second quarter. But along with the new product launch, like, in June and also July, what should we expect in the ASP trend in the second half? That is first question.

The second question is about the gross margin. I think David actually mentioned about it like supply chain management, but given the ASP decline, we see gross margin indeed improved in the second quarter, what should we expect in the coming quarters with the new product launch because initially the volume for the smartwatches may not be like -- so -- I mean, in the scale, so should we like expect like the margin to be more trending -- more stable or trending down?

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Wang Huang, Huami Corporation - Founder, Chairman & CEO [3]

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Thank you for the question. With respect to your first question regarding ASP, in second quarter, we continued to sell Mi Band 3, while we launched our Mi Band 4 in June. So a large number of Mi Bands were sold. So in -- before launching Mi Band 4, we did provide promotions to the users of Mi Band 3. That may impact the ASP.

In Q2 and earlier in July, we did launch new Amazfit products, but we -- in Q2, we did not benefit much from the sales of these Amazfit new products, so -- but this -- but the new product launches will set up the foundation for Q3 and the quarters after. So this explains the fluctuation of our ASP in Q2.

With respect to the ASP trend in Q3, we believe that given the expected increase of the sales of Amazfit products, the revenue mix should change, that should rebalance the ASP trend. Also, that should upset potential margin losses on Mi Band given the Amazfit products has higher margin.

So the -- with respect to your second question, GP margin, we believe the margin should remain stable quarter -- in the third quarter because we do have to balance in between the Mi Band margin and the Amazfit margin.

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Operator [4]

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The next question comes from Xudong Chen of CICC.

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Xudong Chen, China International Capital Corporation Limited, Research Division - Associate [5]

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(foreign language) Congratulations on the strong results. According to the third-party statistics, the shipment of the Mi Band 4 reached 1 million in 7 days after launched in June, which is amazing. My question is will the company continue to cooperate with Xiaomi in the future? And will company still produce Mi Band 5 in the next generation?

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Wang Huang, Huami Corporation - Founder, Chairman & CEO [6]

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The answer is yes. We are actually developing Mi Band 5 with Xiaomi. The answer is yes.

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Operator [7]

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The next question comes from Arthur Lai of Citi.

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Arthur Lai, Citigroup Inc, Research Division - VP and Analyst [8]

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Yes, we saw the revenue result was quite good, up 36%. And can you give us more color on the overseas shipment? And also, how do you think of the shipments from the North Country? Will we roll out more countries in the future?

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Wang Huang, Huami Corporation - Founder, Chairman & CEO [9]

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Thank you, Arthur. More than -- just a little bit -- over half of our total shipments were actually overseas shipments. This is in line with our historical records. That means the overseas sales also increased when our overall revenue increased.

And in terms of the country penetration, we are still covering -- targeting the European market and also the Southeast Asia market. We are also working on the U.S. market also. So the -- we did make some progress, but it's going to take time, but our focus -- we did make a significant progress in the European market. And in the one half, we spent a lot of effort in those regions. And later in the year, we'll intensify our efforts in those regions.

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Arthur Lai, Citigroup Inc, Research Division - VP and Analyst [10]

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Yes. And one small follow-up is, in the Europe and the U.S. market, will the product carry a higher fee and margin?

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Wang Huang, Huami Corporation - Founder, Chairman & CEO [11]

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Actually, no. So the domestic sales and overseas sales carry similar margin because we do leverage some overseas sales channels. So we allow more profit to those channel players and -- but the retail price should be higher in those -- in overseas.

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Operator [12]

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Next question comes from [Ye Yang Lo] of Industrial Securities.

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Unidentified Analyst, [13]

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Actually, I have 2 questions. The first one is about your marketing strategy. We know that Xiaomi has released many products since the second quarter, which is very attractive to our consumers. But actually, we haven't seen the large-scale advertising. So can you introduce the marketing strategy for the new product? So this is my first question.

And the second question is about your overseas sales team. I wonder how many people are currently in your overseas sales team? And how we can expect number of team member increase in the future?

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Wang Huang, Huami Corporation - Founder, Chairman & CEO [14]

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I'll take your second question first. So our sales team is about 100 people right now. Our total number of employees just exceeded 800 and among the -- roughly about 100 sales force, and we should say half of them are focusing on overseas sales. It's in line with our revenue distribution. And we do have sales staff in the key regions, key markets in Europe, in Southeast Asia and also in the U.S. And when our revenue continue to grow, we may have to add more sales staff, that's our plan.

And then in terms of our marketing strategy, yes, you are right, we do not spend a lot of advertisement dollars yet and this is because our strategy is to rely on the channel players, the distributors in each countries and then we also rely on our online channels. So we do pay channel fees to the e-commerce players in China and also in certain overseas markets. And the reason we are doing that is advertisement could cost too much and we -- and one -- since our total number of shipments are still low at this moment to most effectively use our marketing dollars, we adopt this strategy. So we let the distributors in the channel to make money and rely on the distributors to spread the -- spread to the market and to build our brand recognition this way. And then in future, we may do some targeted advertisement, but it's not in a very heavy scale.

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Operator [15]

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The next question comes from Joy Wei of 86Research.

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Joy Wei, 86Research Limited - Analyst [16]

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Congratulations to the strong earnings result. Can you give us a breakdown between Xiaomi and self-branded products, including metrics like shipment, revenue and gross profit?

And the second question is, can you share us -- with us the future of product pipeline? For example, are we launching the Mi Band 5 next year or the year after next year?

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Wang Huang, Huami Corporation - Founder, Chairman & CEO [17]

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In terms of breakdown, I would say about 70-30 split, given that the -- our new -- our Amazfit products, they are all launched towards the end of the quarter so we didn't really benefit that much in Q2. So in Q2, we materially -- we still primarily sell our old Amazfit products, but -- so this is a 70%-30% split. And then, again, our Amazfit products enjoyed much higher gross profit margin as compared to Xiaomi's products, so the spread is about 10%, it's about 10%. So you could do the calculation -- breakdown calculation on the gross profit.

And in terms of Mi Band 5, we do not have a fixed time when we are going to launch Mi Band 5, but I would say that we have already started working on Mi Band 5 with Xiaomi and is not going to take that long. So we just launched Mi Band 4, but potentially towards the later of next year, we may launch Mi Band 5.

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Operator [18]

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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 [19]

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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 consultants. This concludes this conference call. You may now disconnect your line. Thank you.