Huami Corporation  (NYSE: HMI) Q1 2020 Earnings Call Transcript

Huami Corporation  (HMI) Q1 2020 earnings call dated May 12, 2020

Corporate Participants:

Grace Yujia Zhang — Director Investor Relations

Wang Huang — Chairman of the Board of Directors and Chief Executive Officer

David Cui — Chief Financial Officer

Analysts:

Kyna Wong — Credit Suisse — Analyst

Yu Jang Lai — Citigroup — Analyst

Robert W. Cowell — 86Research — Analyst

Xudong Chen — CICC — Analyst

Presentation:

Operator

Hello, ladies and gentlemen. Thank you for standing by for Huami Corporation’s First Quarter 2020 Earnings Conference Call. [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.

Grace Yujia Zhang — Director Investor Relations

Hello, everyone, and welcome to Huami Corporation’s first quarter 2020 earnings conference call.

The Company’s financial and operating results were issued in a press release via newswire services earlier today and are posted online. You can also view the earnings press release and the slides to which we will refer on this call by visiting the IR section of the Company’s website at www.huami.com/investors.

Participating in today’s call are Mr. Wang Huang, 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 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 US 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 year ended December 31, 2019, and other filings as filed with the SEC — with the US Securities and Exchange Commission. The Company does not assume any obligation to update any forward-looking statements except as required under applicable law.

Please also note that Huami’s earnings press release and this conference call include discussions of the 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. Wang Huang. Please go ahead.

Wang Huang — Chairman of the Board of Directors and Chief Executive Officer

Hello, everyone. Thank you for joining our earnings conference call today.

Our first quarter revenue continued the robust growth of 36.1% despite the unprecedented challenges created by the COVID-19 pandemic driven by new product launches, increased brand recognition, successful sales and marketing strategies as well as efficient supply chain management. At this year’s CES, which took place in the first quarter, we launched the Amazfit T-Rex, a device with a military certified body ideal for outdoor activity. This broadened our smartwatch portfolio to seven product lines.

We also introduced new product categories, including earbuds or hearables and interactive high-tech treadmills, both significant components in building a comprehensive health and fitness ecosystem as part of our Connect Health with Technology aspirations. While we do not expect meaningful revenue contribution in the near term due to the time it takes to ramp up production and penetrate new market segments, new initiatives like these will create more opportunities for our Company’s future growth. We feel confident in this growth opportunity because wearable technologies and health tech not only help people monitor and check their physical fitness and well-being but also potentially shape new behavior patterns and drive real changes of everyday life. While wearables and health tech offer nearly unlimited applications across a number of product verticals, we have only begun to scratch the surface.

In the meantime, we continue to expand our footprint and have recently continued to make solid headway in international markets. We keenly focus on the market nuances of each key region and adopted a multi-channel strategy, including both direct sales and so third-party sales channels. We are now in more than 70 countries with 137 channel distributors and strong market share, showcasing the strength of our brand globally. According to the IDC fourth quarter 2019 report, we ranked number one in market share for India, Indonesia and Spain under the smartwatch category; number three in Russia and Mainland China; and number six in the US.

In terms of partnerships, our continued partnership with Xiaomi remains productive with the launch of the Mi-Band 5 scheduled later in 2020. Additionally, our close collaboration with Timex has yielded positive results, with the first joint product launched in the first quarter. We should note the sales of our Amazfit branded products [Indecipherable] independent channels which are explored by our own sales and marketing team.

Next, let me further discuss our healthcare strategy and the solid progress we made this year in healthcare. From the inception of our Company, healthcare has been at the core of our mission. In 2020, we continue to build upon the strong foundation we have established by developing our cloud-based healthcare services through [Indecipherable] leading healthcare institutions.

For example, we partnered with the respiratory disease team of Dr. Zhong Nanshan to jointly establish a laboratory for studies on monitoring respiratory diseases using wearable devices. Dr. Zhong is a global leading epidemiologist and an academician of Chinese Academy of Engineering. He plays a significant role as an adviser in managing the COVID-19 epidemic crisis. The focus at this lab is on the early prediction of certain respiratory diseases, specifically COVID-19, and how our smart wearables, with our AI and Big Data advantages, can help establish a cloud service system to provide epidemic prediction and diseases requiring monitoring. As such, we look forward to realizing further potential of our wearable devices in the healthcare industry.

On May 1, we published a research article on infectious disease prediction based on data from wearable devices in journals of Discrete Dynamics in Nature and Society by Hindawi. The premise of the published article was that the popularity of wearable devices enables a new perspective for the precaution of the infectious diseases. In this study, we proposed a framework which is based on the heart rate and sleep data collected from wearable devices to predict the epidemic strength of COVID-19 in different countries such as Spain and Italy and different cities. The experiment’s results indicated that the prediction model can be utilized to alert the outbreak of COVID-19 in advance, which can be the foundation for a health surveillance system with wearable devices.

In addition, we signed a cooperation agreement with the China athletic association in March to become the official partner of China’s national champion team in the smart wearable industry. With our accumulated big data in both healthcare and our track record in smart hardware research and development, we look forward to helping the development of professional athletics. This collaboration also allows us to showcase the high quality of our products and help our marketing efforts, and we will continue to offer professional sports tracking services to all of our users.

In summary, while we experienced some impact from the COVID-19 pandemic, we are confident the underlying demand for our products remains strong with our brands’ rising popularity, our strengthening sales channels and new product innovations and line extensions in the works. We are pleased that the wearable technology will further shape the healthcare industry while helping people enjoy better healthcare services. We are excited about our unique positioning in connecting health with technology and the strong market potential in front of us. We will look to continue investing in R&D and sales and marketing functions to deliver sustainable growth and healthy profitability once the impact from the pandemic eases.

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

David Cui — Chief Financial Officer

Thank you, Wang.

We are pleased with the resilience of our first quarter revenue growth during these uncertain times. We achieved solid unit sales of both self-branded products and the Mi-Band 4, shipping 7.6 million units in the first quarter, a 35.7% rise from the same period last year. In spite of the impact of the COVID-19 pandemic that many other companies are also facing, we still kept our robust revenue growth of 36.1%, and we remained profitable in this challenging time period. This was driven by increasing brand awareness and adoption of our products by users both domestically and in overseas markets.

During the first quarter, we continued to push investment in both R&D and sales and marketing as product innovation and sales channel integrity are key components of our success. While we have seen some manufacturing shortage due to disruptions to our supply chain during the quarter, as we discussed during last quarter’s earnings call, we are optimistic of stronger profitability in the longer term after the damage along with its impact runs its course.

Mindful of the length of this call, I will highlight the key financial measures for the quarter 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 first quarter. All amounts are expressed in RMB, unless otherwise stated. As previously mentioned, revenues in the first quarter of 2020 increased by 36.1% to RMB1.1 billion from RMB0.8 billion for the first quarter of 2019.

Gross profit increased by 12.5% to RMB244.6 million from RMB217.5 million in the first quarter of 2019. Our gross margin was 22.5% compared with 27.2% a year ago. The gross margin decrease was attributable to the change of our product mix and sales promotion in previous product versions, especially for Mi-Band 4 in anticipation of the launch of a newer generation product.

Moving to expenses. Total operating expenses increased by 60.2% to RMB224.1 million from RMB139.9 million for the first quarter of 2019, reflecting our strategy of consistent investment in R&D, with an emphasis on healthcare-related product development and testing talent acquisition, in addition to branding and marketing to enhance our Company’s long-term returns.

Research and development expenses increased 63.5% to RMB118.3 million from RMB72.4 million for the first quarter last year. We are striving for building up a top tier R&D team for our future growth. The increase was primarily due to an increase in the number of R&D staff and a rise in investment in healthcare-related features, algorithms, cloud services, chip research and new product development as we carry out our mission. We aim to launch a series of new products in the upcoming quarters of this year.

General and administrative expenses increased 12.3% to RMB50.9 million from RMB45.3 million for the first quarter last year. This was primarily due to an increase in personnel related expenses and professional fees related to improving management operations, offset by a decrease in share-based compensation expense and foreign exchange rate fluctuations.

Our selling and marketing expenses increased to RMB54.8 million from RMB22.2 million for the first quarter last year primarily due to an increase in personnel related expenses and an increase in advertising and promotional expenses for new market exploration and a series of new product releases.

We hired more sales staff with heavy experience in overseas market expansion starting 2019 and continue to carry out our plan during this year. In January 2020, we unveiled four new products spanning three verticals that go beyond smart bands and watches, including Amazfit Home Studio, 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.

Our income before income tax was RMB20.3 million compared with RMB85.6 million for the first quarter of 2019. Net income attributable to ordinary shareholders of the Company decreased to RMB19.2 million. Next, for non-GAAP measures, adjusted net income attributable to Huami Corporation decreased to RMB25.5 million from RMB95 million for Q1 2019.

Relating to cash and cash equivalents, as of March 31, 2020, the Company had cash and cash equivalents of RMB2.5 billion compared with RMB1.8 billion as of December 31, 2019.

Now let’s turn to our outlook. In the second quarter, as the COVID-19 outbreak continues to impact the global economy, we expect our overseas sales demand will be affected. With all things considered for second quarter 2020, management currently expects net revenues to be between RMB1 billion to RMB1.05 billion. The above outlook is based on the current market conditions and reflects the Company’s management’s current and preliminary estimates of market and operating conditions and customer demand, which are all subject to change.

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

Questions and Answers:

Operator

[Operator Instructions] And today’s first question comes from Kyna Wong with Credit Suisse. Please go ahead.

Kyna Wong — Credit Suisse — Analyst

Good evening and good morning. Okay. Thanks for taking my questions. I have two questions so far on the 2020 outlook. I think right now — we understood that the COVID-19 impacting the overseas market in the quarter and then with some supply issue in the first quarter as well. What will be the outlook so far — I mean, in 2020 will Company actually try to control and to achieve even under this uncertainty driven by COVID-19 in the overseas market? I think this is the first thing with regard to the outlook.

The second is, could you share with us any target on the shipments on the smart band and also smartwatch, especially smartwatch this year? If you see like any adjustment for your original expectation? Thank you.

David Cui — Chief Financial Officer

Thank you for your question. Regarding your first question, we provided a guidance for the second quarter which is near-term and we can better estimate. In the longer term, in particular, in the second half of this year, the impact of the COVID-19, we cannot estimate it for a certain accuracy. So it clearly depends on how the situation develops. We couldn’t estimate. But we do see some positive signs in Europe, in China, our primary markets, the situation is getting better. We would hope that sales of our products will picking up in the second half. And we do expect that we will release a number of new products during this year in anticipation of the market recovery for the rest of the year.

So, regarding your second question, the shipment estimates for our smartwatch products — and, again, this is really related to the first question — we couldn’t really estimate, and really depends on the COVID-19 situation.

Kyna Wong — Credit Suisse — Analyst

May I ask, like, if you see any signs that consumers is actually increasing awareness on the healthcare such that they will try to buy like a smartwatch or smart band to measure their health situations? Yeah, I think, for all this like COVID-19 outbreak, I think there will be some positive support not only just because the containment is getting better, but [Indecipherable] development in the COVID-19 are more under control and such, do you see like this awareness in healthcare from human beings — or the awareness on well-being will be helpful for your product sales?

David Cui — Chief Financial Officer

Absolutely, absolutely. We do see — from the COVID-19 pandemic, we do see increased awareness globally, not just the demand of our products in future, but also the general awareness to increase the possibility that we could introduce future services also. As our CEO mentioned in the previous quotations that Huami do engage a number of discussion and research and work with top-tier scientists in China and also global partners to step into — to take on these opportunities because our mission is to connect health with technology. So this too, the COVID-19 pandemic do introduce an opportunity for us.

Kyna Wong — Credit Suisse — Analyst

Yeah. Got you. Thank you. I come back with other question later. Thanks.

David Cui — Chief Financial Officer

Sure. Thank you.

Operator

And our next question today comes from Arthur Lai with Citi. Please go ahead.

Yu Jang Lai — Citigroup — Analyst

Hi, management. Can you hear me clearly?

David Cui — Chief Financial Officer

Yes. Hi Arthur.

Yu Jang Lai — Citigroup — Analyst

Hi. Thank you. So I have two questions. I would like to ask one by one. The first one is, we noticed that the Company actually had a strong quarter one revenue despite the virus outbreak. Can you share with us the underlying drivers? I guess you mentioned one thing is you do some promotion and [Indecipherable] effort in order to maintain revenue. That’s my first question. Thank you.

David Cui — Chief Financial Officer

Okay. So, two primary drivers for our revenue growth despite of COVID-19 pandemic. Number one is, we continued to enjoy higher demand on Mi-Band products. So, the shipments of Mi-Band 4 continued to grow year-to-year. This is number one. Number two is, we do see significant demand increase of our smartwatch — Amazfit smartwatch. So, we see an increase in that. So the combination of these factors to offset — by the impact of the crisis.

Yu Jang Lai — Citigroup — Analyst

Yeah. Okay. And the second question is more like new products. So we know that you highlight you already develop a chip business. Can you update us on any new business and also the feature?

David Cui — Chief Financial Officer

You mean, the new product features, right?

Yu Jang Lai — Citigroup — Analyst

Yeah, yeah, yeah. The new watch features and also the IC features. I think like last quarter, Wang Huang mentioned that you also have a second generation IC chip. Anything you want to update the investor?

David Cui — Chief Financial Officer

As of today, this year we’ve already launched a couple of new products, which have been released. And upcoming, we have more products, but we can’t really disclose much of the details in terms of the technical specifications. But we do see some new products with the health-related features and of course the fitness and ECG features. Those are the old features, but we do have new features to add on.

Yu Jang Lai — Citigroup — Analyst

Got you. [Speech Overlap]

David Cui — Chief Financial Officer

And, of course, you mentioned — sorry — of course, we mentioned earlier that we do have plans to release Mi-Band 5 in the year.

Yu Jang Lai — Citigroup — Analyst

And we know that the coronavirus, they will impact the people’s blood oxygen significantly. So, do you think in our upcoming product, can we detect the [Indecipherable] blood oxygen through your product?

David Cui — Chief Financial Officer

That’s one of our near-term products.

Yu Jang Lai — Citigroup — Analyst

Okay. Thank you.

David Cui — Chief Financial Officer

Thanks.

Operator

Our next question today comes from Robert Cowell with 86Research. Please go ahead.

Robert W. Cowell — 86Research — Analyst

Hi, management, thanks for taking my question. I would like to ask about the gross margin. So, what are the factors kind of impacting the gross margin in 1Q, both on a year-on-year and quarter-on-quarter basis? And then, as we get into 2020, what do you expect in terms of trend on the gross margin? Thank you.

David Cui — Chief Financial Officer

Right. So, the gross margin was primarily impacted by the Mi-Band discount we provided to our channels in the quarter. And for the gross margin of Amazfit products, that wasn’t changed much from quarter to quarter. The primary reason was the Mi-Band 4 because of the COVID-19 situation. And then both Xiaomi and us, we wanted to give higher discount to the channel given that we will soon release Mi-Band 5.

In the long run, we would assume that new products will achieve better economy of scale in the later part of the year and also with higher retail price — and depends on the pricing strategy, we would think for Xiaomi’s products, we will continue to provide a reasonable margin on that. And then for our Amazfit new products, we still strive to keep or even increase a little bit of our margin.

Robert W. Cowell — 86Research — Analyst

Thank you very much.

David Cui — Chief Financial Officer

Robert, yeah.

Operator

And our next question today comes from Xudong Chen with CICC. Please go ahead.

Xudong Chen — CICC — Analyst

Hi, management, thank you for taking my questions. And David, you just said you see some recovery in China market and there are still some uncertainties outside China. Can you give us more color for this, and especially in India and other like Western Europe since there are some lockdown in India and some store closings in both regions? And I will have a follow-up. Thanks.

David Cui — Chief Financial Officer

Right. First of all, I want to reemphasize that for Amazfit products, we primarily rely on our own independent sales channel to achieve the sales. And overseas is our primary market. So you can see higher percentage of our products were shipped overseas. Therefore, markets like Europe did impact our first quarter and second quarter. But we do see positive signs that countries like Spain and Italy are open up and we do see that in quarter three — starting quarter three, we should see some consumers demand coming back. So that’s one of our primary markets. Right?

And then the second market would be our domestic market. For domestic market, we invested heavily in domestic market channels right now. So hopefully, even some time, we should see some sales rebound for our Amazfit products.

And in terms of the India market, that country is impacted greatly. But sales in India doesn’t represent a significant percentage of revenue. So we will have to see how India goes.

Xudong Chen — CICC — Analyst

Okay. Thanks. And my second question is, you just said you will release Mi-Band 5 in this year. And did you see, this time, did you see the delay for those new products pipeline and R&D delay due to the COVID-19 impact? Thanks.

David Cui — Chief Financial Officer

No, we don’t. Actually our R&D — actually right after Chinese New Year, our R&D staff, our supply chain staff were all back. So we are now — our Shenzhen global hardware center, our R&D center in Hefei and Beijing were fully operational. So the R&D wasn’t impacted. So we will release our products on time.

Xudong Chen — CICC — Analyst

That’s great. Thanks.

Operator

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

Grace Yujia Zhang — Director Investor Relations

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 PSM Group, the Company’s investor relations consultant. This concludes the conference call. You may now disconnect your line. Thank you.