Zepp Health Corporation (ZEPP) Earnings Call Transcript & Summary

Hello, ladies and gentlemen. Thank you for standing by for Huami Corporation's 2021 Strategy and Outlook Investor Fireside Chat Conference Call. [Operator Instructions] Today's call is being recorded. I will now turn the call over to your host, Ms. Grace Zhang, Director of Investor Relations for the company. Please go ahead, Grace.

Hello, everyone, and welcome to Huami's 2021 strategy and outlook investor fireside chat. We hope you find it informative. Participating in today's call are Mr. Huang Wang, our Chairman of the Board of Directors and Chief Executive Officer; Mr. Leon Deng, our Chief Financial Officer; and Mr. Mike Yeung, our Chief Operating Officer. Management will begin with the 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. The 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, 2019, 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. I'll now turn the call over to our CEO, Mr. Huang Wang. Please go ahead.

Thank you, Grace. Good day, everyone. Whether it's morning or evening where you are, thank you for joining our first fireside chat of 2021. My objective today is to tell you about how our strategy for 2021 is evolving and set a tone for the year. I have some remarks to make. And then we will be happy to answer questions. With me on the call today are Leon Deng, our new CFO, who joined October 1; and Mike Yeung, our COO, who is based in the U.S. Let's get started. As you probably know, we have a significant position in the global smart health device market. Number two, in the work by IDC's shipment data, driven by a number of unique strengths, but Huami is a still bit unknown to the broader investment community. With these fireside chats, I want to communicate more pro activity -- proactively and clarify our position and strategy so that investors can make more informed evaluations of our potential. I want to focus today on how our strategy is evolving this year and 3 key drivers of our business; consumer health tech, data analytics and our newest industrial health strategy. CES, the Consumer Electronics Show, just finished last week. Although it was a virtual this year, we felt it was a good show for us. We were able to highlight all of the large number of new products. We have [ a passion ] and provide some hints at what may come the rest of this year. I was especially pleased to see that several of our newest products made best-in-show lists from a number of industrial watches, including wearable techradar, digital trends and gauges and wearables. Even before CES, CNET awarded the new BIP S its Editors' Choice. The BIP Series represents market-leading functionality at value price points. And our GT Series represents excellent functionality at the premium end of the market. We are very proud to have both of these products recognized. I think that recognition is the direct result of one of Huami's key business strengths, our pace of innovation. We introduced new products and new models of products, I think, faster than anyone else in the wearable space. Last calendar year, we launched 20 new product models, keeping the product offering fresh and updating with market-leading features, technology and prices have been the key to our success. For example, we shipped 3 different versions of the BIP product last year, each with increasing functionality and upgrades. A key part of our 2021 strategy will be to continue our rapid pace of innovation, although not at last year's record pace. You should expect us to continue to push better wearable technology to low price points and to add new innovations with new functionalities and features to the top of the Zepp and Amazfit lines. In 2020, we also expanded beyond just smart watches into [ EBUS scales ] and even home fitness equipment, such as our first treadmill and [indiscernible]. New models of these new lines were showcased at CES. For obvious competitive reasons, I'm not going to preannounce anything, but you should expect to see Huami continue to expand our range of products in 2021. This is part of expanding our smart health and wellness ecosystem. Another key change is that we designed and built our own AI smart chip for our devices as well as our own sensor array and related algorithms. This gives us not only a cost advantage, it gives us a time to market speed with new functionality. We can design functionality ahead in our chips and sensors, which gives us greater speed to market with new tools for consumers and health sponsors. This year, the new Huangshan-2 AI chip that we developed will start appearing in new devices. The new chip will give our products greater speed, intelligence, functionality and battery life. Shifting to the data analytics side of our business. You have seen recent news from us highlighting some good progress in 2020 for PAI Health and our data analytics strategy. In mid-December, U.S.-based rate insurance companies generally announced the results of a study using PAI Health analytics for insurance underwriting decisions. Their report concluded that PAI Health analytics provided additional value beyond traditional tools for underwriting. This gives our marketing efforts for PAI Health a significant boost going into 2021. Insurance companies moved at a careful pace, but 2020 represented a challenging year for insurance, changing and distracting from normal business investments and strategies. We are expecting a better climate in 2021 for insurer discussions, and I'm expecting more progress in putting our data analytics towards this industry to leverage data from our more than 30 million active users. Adding to this, Huami was recently granted license to sell insurance in China, which we believe could open up some new partnership revenue opportunities with insurers in China. Note also that data analytics is a key part of expanding our smart health ecosystem. Being able to tie insurance, care and wellness providers, employers, individuals and families together to improve health remains one of our main goals. We will be working to add services and linkages to further expand our ecosystem in 2021. The third key thing I want to highlight today is our new industrial health care strategy. While the consumer health technology business will continue to be a profitable backbone for Huami, we are setting out to build another growth pillar for the business, which will have different and less seasonality than the consumer side. Huami's mission is to connect health with technology, which leaves us wide latitude for how to deliver on that mission. Our company's engineering has focused on miniaturization and health data analytics. I believe the medical imaging space is a place where our expertise can be further applied. Equally important, this is an area of health care that is due for some disruption. For example, in the U.S., the health care systems' payment structure has created significant overuse of imaging, driving up health care costs. In other markets, the cost of large expensive imaging systems has prevented wider applications for patients and clinicians. A number of new technology in x-ray, MRI and ultrasounds show promise to change the locations, applications and causes up medical imaging globally. In recent months, you have seen announcements about Huami partnering with Aspen State Imaging, which is pioneering portable x-ray systems. Last week, you saw that we let Promaxo, latest investment around along with a commercial partnership agreement. Promaxo is pioneering low-field change MRI technology for the doctor's office with an initial focus on urology. We expect to develop a portfolio approach with multiple technologies, applications and partners. There are many ways Huami can enhance its revenue through these partnerships. In the near term, we can generate new revenues by helping sell these products in China and other global markets. As part of this, we expect to help these partners receive approval from the national medical product administration, China's FDA. Through engineering partnership, our AI and algorithm intellectual property may add supplemental revenue opportunities to current or future products of your company. We will explore ways to tie imaging devices into our health ecosystem, which could help generate services or data analytics revenues. We will explore ways to tie imaging or related patients pre- of post-treatment activity or monitoring to our smart consumer devices, which could generate revenue. And as part owners of some of these companies, we stand to benefit from future value creation events. This is a long-term developing area for Huami, but we are excited about the opportunities it presents for supplemental revenue growth, expanding our ecosystem into the industrial side of health care and developing our brand in the health care industry. I hope this has been a good overview for you of how our strategies for growth in our 3 main areas are evolving for 2021. I promise we have some good surprises to come on the consumer side as we continue to drive innovation. I'm hopeful that insurers will get back to more normal business operations this year that can move dialogue forward on our data analytics business. And we are very enthusiastic about our new opportunities to participate in disrupting medical imaging processes and costs. We are going to open the lines up now for questions.

[Operator Instructions] And the first question comes from Clive Cheung with Crédit Suisse.

This is Clive from Crédit Suisse. My first question, I think goes to the industrial strategy side. My question is, how active Huami will be in this investment or portfolio companies you have mentioned or in the future? Will they be able to use, I guess, the proprietary algorithm or technology or perhaps even the Huangshan chip? And that is my first question.

This is Mike Yeung. Yes, let me try to answer that question. Yes, we will be working very closely together, not only on the sales side, but also on the joint engineering, and that includes the applications of our artificial intelligence as well as our -- potentially our chipsets and sensors, if those are appropriate. So yes, we'll be working together on sales as well as engineering as well as manufacturing together.

Okay. And I think if you could share also, I guess, some directional, I guess, guidance or expectation by the company, which other areas in this industrial health care are you guys planning to look at? Obviously, medical imaging is one. What kind of the broader picture and what kind of areas we could look at?

Yes. So right now, we're just started with this new strategy. So for now, we're focusing on medical imaging. But definitely, we will expand into other areas. But for now, in the short term, we will try to expand more into medical imaging areas first.

Okay. And I guess my last question goes to -- relates to, I guess, monetization of your chip of Huangshan. I guess part of it will be self-utilized into your own products. Are there other monetization plans for your own kit set? Or is it going to be sold to third parties or other wearable companies? And do you see, I guess, competition ahead because of that? Or what is the view of the company in terms of the overall strategy for your own check?

Yes. We do have plans to also sell our chips and sensors to other IoT companies. Obviously, they cannot be our competitors. But yes, I mean, these are chips that our general purpose enough that we believe that many IoT companies can also use these processors and sensors.

And the next question comes from Michelle Zhang with China Renaissance.

So my first question is about this industrial health care business. So what is your like long term the revenue contribution target from this business?

Maybe I can comment on that. At this moment, we are still in the investing phase on the industrial health strategy. But obviously, as Huang just mentioned, we want this business to become a growth pillar of Huami. So in the future, we see a good potential of this business, also forming significant part of our business. But at this moment, the contribution of this business will be relatively small.

Okay. And my second question is about your Amazfit products like your plan for the offline distribution channel of Amazfit products this year?

Can you repeat your question because I didn't quite get it.

Yes, yes. Yes, sure. Yes. So my second question is about your off-line distribution channel plan for the Amazfit products.

Okay. Yes. So as you can see in 2020, in the financials, we have already spent a significant amount of the marketing and sales money into expanding the offline channels of made split products for this year, right? So that's also one of the reasons. If you look at the OpEx spending for 2020 versus 2019, you see a significant increase over there. And we have actually strengthened our off-line distribution channels, both in China and overseas for Amazfit products this year quite significantly. But having said that, we also faced certain setbacks because of the COVID virus impact. And if you look at Europe and the U.S., these markets, their offline channel is pretty much closed, right, because all those countries are back into lockdown. So that's the reason we will continue to push for the offline channel expansion into this market for next year -- for 2021, sorry. And this should be -- when the virus is over, this should be also contributing to our top line growth in these markets.

[Operator Instructions] And the next question comes from Jimmy Yang with Comgest.

This is very insightful sharing. My first question is regarding your medical imaging business. So can you give me a little bit more introduction on who are your clients who are going to sell this product to -- into China? And maybe give us some a little bit more color in understanding the total addressable market in this business? How big it could be in China?

Yes. So this market is quite big. Actually, not in China, but globally. So with these partnerships, yes, we can help our partners to expand their market share in China, but I'd like to reiterate, it's not just China market that we are working together. We are actually in a global partnership with these companies. But as far as potential enterprise customers, it could be hospitals, clinics because due to the pandemic, every -- all the countries, including China, is very focusing on building up their health infrastructure, which is everybody's a lot more aware of that. And just, for example, in China, a lot of -- currently, still a lot of people still rush to the cities, to the hospitals because there's not enough good clinics spread in the rural area, for example. And that creates a lot of congestion and overcrowding. And so the cost center have the intention to try to build up the infrastructure, spread it across all regions, building up more clinics so that to reduce this overcrowding in the city's hospitals. So this is an example where we could potentially sell into these new clinics that's being created across the country. And also because of the cost reduction and also the miniaturization, potential miniaturization of these devices that could also be used in the new scenarios and not just inside the clinics and hospitals. But potentially, for example, portable x-ray. It could be used in emergency things or accidents -- things like an accident area, for example. So there could be new scenarios where these -- due to the miniaturization of these devices can be used. As far as the total amount of dollar in revenue -- sorry, not, in market potential size, it's -- we believe, it's in the -- I don't have exact number, but it should be in the billions of dollars in terms of total market size.

Yes. Just one more thing to add here. So you are saying that you won't help the Promaxo to apply for the CFDA, right, Chinese FDA? How long do you think that would take?

Yes. I think also, it -- usually, from our experience -- first of all, these companies like Promaxo, these companies' workflows, they're already -- they either already have the U.S. FDA approval or they are already in the process of applying for it. So that helps a lot. For example, Aspen Medical Imaging, one of the partners we work with, they already have a U.S. FDA approval. So with that, the process will take -- we expect it should be faster. Promaxo is in the process of getting U.S. FDA approval. They don't have it yet but very soon. But if -- based on our experience, again, they already have the FDA approval, these kind of things, probably -- again, it depends on the device and case by case, maybe 12 to 18 months, it could be faster depending on the device, yes.

My second question is actually regarding all of your so-called non customer electronics business. It's very encouraging to see Huami expanding into a lot of areas. But when do you think we can see kind of meaningful revenue contribution from your non-consumer electronics business, for example, the insurance business, the medical imaging business into our P&L?

I think you should be able to see some of that starting to kick in, in second half of 2021.

Okay. Okay. And then my last question is regarding your traditional cash cow, customer electronics business. So we know that 2020 is kind of a tough year for us. The COVID stopped a lot of things. And our margin seems to be eroded a little bit compared with 1 year before. So in 2021, if things are going well, what kind of recovery, especially in the margin side, could we expect?

I think it's still -- and we don't want to give official forward-looking target for the year, we actually never does that. But I can give you a few indications where we're heading to. So obviously, the overall wearable market is still in the growth, right? So I think we should definitely grow more than the market. So both for our -- that applies to our watch and band business, right? And if you look at the margin, obviously, in the past, we have a significant of the revenue, which is -- consists of the Xiaomi band. And then our own-branded products actually is the other part of that business. In the past, it has always been around 70% Xiaomi and 30% own-branded business. We think in 2021, this paradigm is going to more shift towards more own-branded products rather than Xiaomi-branded products. And then our own-branded products, obviously, carries a higher gross margin. So from that perspective, we're expecting the 2021 gross margin to expand versus the 2020 number. But again, this all -- there's uncertainties around COVID. And then we saw more and more places back into lockdown and in United Kingdom, they're talking about locking down until summer. So what I just mentioned is very much dependent on if we can get the vaccine, and then the business can be restored to a normal course of business by the second half of 2021. So if for whatever reason, the COVID situation, because most of our key markets are outside China, right? So that is actually one of the uncertainties and caveats to the statement, which I just gave.

And the next question comes from [indiscernible] with [indiscernible].

Yes. I'm a private retail investor in Huami, and I also cover and analyze Chinese stocks, including yours, on my YouTube channel. So I'm really glad that Huami is open to the voice of retail investors here and communicating, yes, openly here with this fireside chat. So thank you for that. It's really interesting to learn about the 3 key drivers for 2021. And I've got 3 questions along to that. And my first one is actually to the new CFO, Leon Deng. With those new free, yes, drivers outlined, are you looking to make some changes to the way you're reporting the business, for instance, in earnings calls and so on, more reflecting those datas or numbers, for instance, about -- we hear today about the numbers of users and data collected and so on in regards to those new free drivers. And so what are KPIs that you are thinking about and targets aligned with that? Do you -- can we expect that you are talking more about these points going forward?

I think answer is yes. And for example, we're definitely thinking about giving more transparencies on the breakdown of different products in our annual report. But you know that we do have certain SEC and accounting requirements, how you want to disclose certain business units performance. So we also need to be in compliance with that. So yes, within the areas that we -- in our -- which is in our control, and we will, for sure, in the coming quarters give you more color on those growth drivers, which we just mentioned.

Okay. Excellent. That's good to know. And the question related to that, actually, where does the recent deal or partnering with Yitong High-Tech technologies actually fits in those 3 drivers that you just outlined?

I think it actually fits everything, which we just mentioned. But since the transaction of Yitong is still being approved by the Chinese regulator, we're in the process of that. So we don't want to say too much beyond that at this point of time. Our long-term strategy is to better serve the Chinese market. And also we believe that Yitong and our acquisition of a minority stake in Yitong will, for sure, yield future value on that.

Okay. And yes, my last question then related to that is actually about Huami's internal capabilities to execute on some of those plans that you've outlined. So for instance, we hear today about -- that Huami has now the license for insurance business in China, which I think is massive. But my question is like, could you give more flavor on how good are actually the internal capabilities of Huami, for instance, when it comes to data analysis or also software and to make sense of this opportunity in the insurance area? Or is Huami going in this partnership mode? And so how much is inside Huami and how much is going through the partnerships?

I think Huami has been very strong on the software and data analytics side. Because we are actually the #1 in the wearables domain. And the wearables is not talking about hardware, it's talking about hardware and software app algorithm altogether, right? And because of that, we actually entered into all those domains, for example, on Insurtech and the hard-core healthcare industrial health part, right? And if you think about it, everything is building on our core technology and our core competence on the algorithms on the software, on the supply chain capabilities we currently have, right? So I guess that is actually, for sure, the first thing, we want to leverage our core capabilities in all the things, which we're going to do. And if you look at, for example, on the insurance company or on the partnerships, which we are going to do, one of the key building block is when we do the -- while we tap into the insurance company when we get the insurance license, we always have a partnership or we always hire internal people from -- or people from the insurance industry, for example, in our company. So take, for example, PAi Health, which is one of the acquisition, which we did in Canada. So we not only acquire the algorithm, the software capabilities, we also acquire knowledges and people who are very good in knowing this industry, right? And the same goes for the health care industry as well when we partner with those partnerships, obviously, it's with the intention that in the future, we'll also hire people internally or building on the competence these people and then the team is currently having to actually -- and adding on the Huami's core capabilities that make those smaller start-up like type of company bigger. I hope that answers your question.

Thank you. As there are no further questions now, I will like turn the call back over to Grace Zhang for any closing remarks.

Thank you, once again, for joining us today. If you have further questions, please feel free to contact Huami's Investor Relations department. This concludes this conference call. You may now disconnect your lines. Thank you.