Zepp Health Corporation (ZEPP) Earnings Call Transcript & Summary

Hello, ladies and gentlemen. Thank you for standing by for Huami Corporation's July 2020 Fireside Chat Conference Call. [Operator Instructions] Today's conference call is being recorded. I will now turn the call over to your host, Mr. Brad Samson, Vice President of Investor Relations for the company. Please go ahead, Brad.

Thank you, Kate. Hello, everyone, and welcome to Huami's first fireside chat. We hope you find it informative. Participating in today's call are Mr. Wang Huang, our Chairman of the Board of Directors and Chief Executive Officer; Mr. David Cui, our Chief Financial Officer; and Mr. Mike Yeung, our Chief Operating Officer. Management will begin with prepared remarks, and the call will conclude with a 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 year ended December 31, 2019, and other filings 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. I will now turn the call over to our CEO, Mr. Wang Huang. Please go ahead.

Thank you, Brad. Brad joined us at the beginning of June to help us be more responsive to investors in the U.S. I want to use this event outside of our normal earnings results through to talk about our story in the framework of how we think about the industry and where we are going as a company. Our company mission is connecting health with technology. I think everyone agrees that more personalized data can help improve individual's lives, and gives the health care system better information to drive diagnosis and treatment improvements systemically as well as individually. There are several key challenges of further to those objectives. Quality of data collected, joined, valid or accurate conclusions from the data, inertia of the health care system participants to effect the information gleaned from the data, adoption of monitoring technology by consumers, consumer long-term adherence to the health improvement recommendations, payment or reimbursement that support the collection and analysis of health information and delivering related services. Huami's mission is to address many of these challenges with its growing product and services portfolio. To achieve our vision objective of improving health through the application of technology. Starting with the data quality, questions remain in many clinicians' minds about the quality of the data provided by personal health monitoring devices, such as smartwatches, fitness bands and other wearable devices. For example, the class action lawsuit against another industry player over the accuracy of its heart rate data has made it all the more challenging to convince consumers and clinicians of the accuracy and viability -- or validity of heart data. Huami, like several other industry leaders, is working to advance the quality of data collected from personal health devices. That is important because I think many U.S. investors have some misperceptions about the global marketplace. It's not uncommon. For example, to get question, why doesn't apple just been by before? That's the misperception because Apple's phone market share while it's 50% in the U.S. is only 20% globally, which has been pretty consistent for the last 4 years. Of course, you need to be part of the Apple ecosystem to use an Apple Watch. Apple Watch cost is also a challenge in many parts of the world for both individual consumers and for insurance partners. Just in the last 2 weeks, you may have seen the announcement of the second-generation of Huami's Huangshan AI chip that features significant improvements in power savings, data collection and analysis accuracy for them to detect atrial fibrillation 7x faster than Huangshan-1 and 26x faster than competing algorithms. A study done with the Peking University First Hospital last year demonstrated our wearable technology had atrial fibrillation accuracy of 93.27% with PPG. We were the first to launch medical-grade ECG smart wearable product commercially in the industry. PPG technology works 24 hours, 7 days to collect data continuously. We developed our own PPG bio-tracking optical sensor launching the next-generation with the Huangshan AI chip. The new bio-tracker 2 sensor supports 5 biological data engines: heart rate, breathing and oxygen, sleep, exercise and heart health; making it the most versatile and precise biosensor ever developed by Huami. This new algorithm all represent significant improvements in data collection and analysis. All of our products, from the top of the line on down, utilize the same advanced algorithm technologies which increases the accuracy of the data collected to distinguish us from several of our competitors' approaches. I won't go through each of these algorithms from the announcement. If that, I would encourage you to look at the release, which land on June 17. But I will highlight that several of this leveraging our heart rate and cardiovascular disease detection technology from PAI Health and through our minority investment in AliveCor. Both of these are developers of market-leading heart health insights. AliveCor has FDA-approved fibrillation technology. The new Huangshan AI chip and all its new intelligence driven by large data set and AI are great examples of how Huami is among the leaders, improving the quality of data collected as well as the validity and the accuracy of its analysis for action by consumers and clinicians, proving that is the purpose of doing clinical research and studies and like other leaders in this space, Huami is very active improving the validity and clinical actionability of the data we can provide. Just a month ago, PAI Health published new clinical proof of the value of its unique heart health algorithm personal activity intelligence from a 15-year longitudinal study of 56,000 people in Dallas. The PAI metric provides actionable intelligence to consumers and clinicians, which can result improved heart health and longevity. Continuing to operate under its own identity, PAI Health is working to establish relationships with insurers and the clinicians to leverage this intelligence to improve member health. We are a member of other joint study relationships and clinical trials with universities, fellow vendors and groups utilizing our wearable technologies and devices. Some of these partnerships include the Huami AI Research Institute with professional -- with Professor Ramesh Jain from the University of California, Irvine. The smart wrist wearable joint lab research team led by a fellow and leading laboratory experts from the Chinese Academy of Engineering. The [ check and field ] joint lab is the Chinese Athletic Association and Brain-computer Intelligent Joint Labs with the University of Science and Technology of China and the Norwegian University of Science and Technology including several of these universities' medical schools. This all help give our data the credibility to provide information and analytics to partners in the health care industry, including insurers, care providers and other service providers. Today, that is a small portion of our revenue, but we believe as we continue to prove the value of the actionable intelligence that can be realized from our data, that part of our business will grow as a percentage of our total revenue. Let me note that proving out the value of the data and algorithms, our products as well as others in the industry, I think, will drive payment and reimbursement when providers and insurers believe in the validity of the data, and what can be done with this? The money will flow to those solutions. Let me switch gears to talking about consumer adoption and long-term engagement. Our view is that consumers are always looking for new features, getting something leading edge and perceiving a good value, whether there's a lot of bang for the buck or having something that is perceived as a luxury item. Huami has multiple strategies for consumer engagements in both our own Amazfit brand and through our partnership of developer and manufacturer of Xiaomi's Mi Band product. We may be the industry's leading driver of value for the dollar. Our Amazfit T-Rex that is just hitting the market in the U.S. is a great example, designed for actual durability. T-Rex features 12 military spec certifications both GPS and GLONASS, 5 atmosphere water resistance and 20-day battery life and is priced at USD 139.99. The latest version of Xiaomi's top-selling Mi Band which we design and manufacture, device is just about to hit the markets in Asia and Europe at an expected price of about USD 45. Our most advanced product as today that is coming this fall. Amazfit X has been accumulating advanced orders on Indiegogo today -- to date, capturing nearly USD 2 million in orders. The X features a 92-degree dramatically curved display with button-less operation. We have detailed videos and photos on Indiegogo if you want to see what's coming. With our proprietary technology and manufacturing scale, Huami is driving the industry's value proposition and doing so profitably using IDC's final numbers for 2019 global shipments of smart watches and fitness trackers. The 42.3 million units of Amazfit, Huami and Timex product which shipped last year accounted for 26% of the global markets. That generated USD 835 million revenue in 2019 and USD 1.29 in fully diluted GAAP earnings per ADS. I also want to emphasize Huami's view that battery life is the killer act for many customers. People have enough things to charge every night without also have to charge their smartwatch too. Plus if it's in the charger, how are you going to monitor your sleep, or how to wake you with a silent alarm. The new Huangshan-2 chip cut power consumption by 50%, which will further extend battery life on the next-generation product that will utilize the chip. If you have done a little research on Huami, you will see that at CES in January, we announced several product line extensions, including Amazfit HomeStudio, a smart gym hub; Amazfit AirRun, a foldable next-generation treadmill; and 2 new hearables, Amazfit PowerBuds and ZenBuds. This was our first time launching new devices at CES. And Mike will come on in a little while to provide some further color on our U.S. growth. I hope this has given you some insight into Huami and how we are approaching the market. I am focused on building this company to lead in R&D that creates high-value health information for consumers and clinicians to use while investing responsibly. We will continue to focus on driving the hardware value equation profitably and part of what we have achieved in the company's short history and very excited about the prospects for the future, based on what we have achieved, especially in the last 12 months. Next up, our CFO, David Cui, have got a few comments to add. David?

Thank you, Wang. I only have a few comments to add. First, I want to update guidance. On our May 13 earnings announcement, I noted that we were pleased with the resiliency of our first quarter revenue growth. That resiliency continued in the second quarter although we continue to feel the effects of the pandemic. Our guidance for the second quarter 2020 revenue on the May 13 call was for RMB 1.0 billion to RMB 1.05 billion or roughly USD 142 million to USD 149 million. Today, I'm raising our guidance to RMB 1.1 billion to RMB 1.14 billion. In U.S. dollars, that is approximately USD 156 million to USD 161 million. I will provide all the details on the quarterly call in August, which we currently expect on/or about the 18th. Huami has grown tremendously, and I'm proud of the numbers that we have posted. Our IPO materials began with 2015 financials showing RMB 896 million revenue, and we grew to RMB 5.8 billion last year, a CAGR of 59.6%. In 2015, we reported a fully diluted loss of RMB 1.22 per share or USD 0.70 per ADS. We became sustainably profitable in 2017. And last year, we reported RMB 2.24 per share or USD 1.29 per ADS. Cash flow from operations last year grew to RMB 428 million or USD 61 million. I know there is hidden scrutiny of Chinese companies accounting practices. We take accounting practices and financial controls seriously. If you look at -- look up my bio, I went to college in Canada and worked in the U.S. both as an auditor for Ernst & Young in California and in key accounting roles in several public companies. Before coming to Huami in 2017, I was the CFO of 2 other Chinese companies, 1 traded on the Hong Kong Exchange, the other later listed on NASDAQ in the U.S. I hold the CPA certificates in the U.S. and Canada. In addition, I want to note that Huang and the Board are mindful of good governance with the example of having recently created a new board committee to oversee our privacy policies and practices, the artificial intelligence and big data ethics committee. Let me stop there and give Mike a chance to provide a few operations highlights. I'll be happy to answer questions when we get to the Q&A at the end. Mike?

Thanks, David. Hello, everyone. I want to respect everybody's time. So we'll be brief. But I do want to touch on a few operational highlights, especially here in the U.S. As the COO of the company, I'm based in Cupertino. Starting globally, as the company has expanded into new markets outside of China and Asia, it took some time to get established and start to develop some real market presence, especially if you're being careful about the spend rate. The U.S. market is a great example of that for Huami. Over the last couple of years, we have been working on building the U.S. team and developing channel partners. As a result, 2020 seems to be a year of reaching critical mass and accelerating our business in the U.S. market. In addition to expanding distribution channels, the greater number of new exciting products is helping accelerate U.S. business. The strong value proposition of all our products is a factor in any market we enter. Because of our proprietary technology, such as our AI chips, biosensors and data algorithms, our pace of innovation and our manufacturing scale, Huami's Amazfit smartwatch products offer very strong values at their price points. For example, our popular Bip series start $60 and the new Bip S is fully featured with color, GPS, heart rate sensor, swim-proof and 40-day battery life at $70. Competitive U.S. products at this price point are black and white without GPS or even heart rate. The new T-Rex that Wang noted is another great example, delivering an outstanding feature set at the $140 price point. As we compare our products to others', you see that Huami strives to be a value driver in this space in the U.S. and elsewhere around the world. These new products are just coming into the U.S. distribution. Amazfit products are now available online through BestBuy, Amazon, several other specialty online retailers and through our own Amazfit website, which you can find at us.amazfit.com. I'm excited to note that we are also expecting to be available in Walmart stores in the U.S. coming September. We're happy to have become recognized among the top 5 smartwatches in the U.S. market share in the first quarter. This year, we pretested some of our new products on Indiegogo to gauge consumer interest and give us some feel for potential demand. The Indiegogo campaign for Amazfit X and elegant titanium alloy, curved screen and buttonless smartwatch and the Amazfit ZenBuds, sleep-assisting earbuds are wrapping up. The Amazfit X has generated almost USD 2 million in preorders, which we find very encouraging. ZenBuds has generated nearly $1 million so far. Distribution continues to grow in European and Asian markets, but I'm going to save those highlights for the quarterly call next month. On the business services side, Wang already noted our subsidiary PAI Health's unique health -- heart health algorithm-driven program for insurers and other population managers. These kinds of business services with analytics that derive actionable information from biometric data is an important part of our future business plans. Whether acquired, internally developed or developed with research partners, as Wang described, the company is building a portfolio of proprietary algorithms around which we plan to build business services for the health care industry. We will keep you apprised of these developments in the future. Thank you for your attention. We're ready for -- to open up the call to questions. Operator?

[Operator Instructions] Our first question comes from Donald Hooker of KeyBanc.

Great. A quick question for you guys. Can you maybe elaborate a bit on how the COVID-19 outbreak has impacted, kind of, sales for you guys, maybe sales cycles, decision-making by various counterparties that you deal with?

This is David Cui. I will take a crack on your question. So the pandemic actually did have impact on our sales and also on our supply chains at earlier of this year. And now with the supply chain and the manufacturing of our products has resumed fully because they are based in China. And also, we see positive signs of recovering of our sales channel, both domestically in China and in the overseas market, including the Southeast Asia market and the European market. And our strategy to -- on this is to continue our long-term strategies -- execution of our long-term strategies and continue to make investment in our R&D effort and our sales and marketing effort because we see the pandemic is -- the impact will be very short term, and we have a very strong operational cash flow. And we see future growth rather than only the short-term impact.