This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
Operator
Ladies and gentlemen, thank you for standing by for ZEP Health fourth quarter and four-year 2020 earnings conference call. At this time, all participants are in listen-only mode. Today's conference call is being recorded. I'll now turn the call over to your host, Ms. Grace Song, Director of Investor Relations for the company. Please go ahead, Grace.
Grace Song
Hello, everyone, and welcome to ZEP Health Corporation's fourth quarter and four-year 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.zep.com. Participating in today's call are Mr. Huang Wang, our Chairman of the Board of Directors and Chief Executive Officer, and Mr. Leon Chen Deng, 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 Yang, 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 provisions 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 20F 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. Please also note that ZEPP's earnings press release and this conference call include decisions of unaudited GAAP financial information, as well as unaudited non-GAAP financial information. ZEPP'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.
Huang Wang
Hello, everyone. Thank you for joining our call. 2020 was a remarkable year for all of us. Yet, with all the severe disruptions brought by the global pandemic, I am pleased to report we recorded full-year revenue growth on a year-over-year basis of 10.7% and total stream volume growth 8% for the year, reached 45.7 million units, especially our self-branded products, which rose 20%, reached 4.7 million units. These results are despite a fourth quarter tempered by COVID's impact in several of the international markets we served. Specifically, in Q4, our revenue dips by 6.6% and total shipment volume fell 9.5%, both on a year-over-year basis. We should highlight, however, against the challenges our own brands achieved 31.3% shipment growth in the fourth quarter and continuously strengthened market leadership in countries and regions such as Indonesia and Spain, which we still ranked number one in terms of adult smartwatch shipment. As vaccinations worldwide have begun rolling out in mesh, we are confident that our business will rise again soon in both revenue and shipment volume in 2021, especially our own branded watches, which will become the main engine for the business to grow. Our solid full-year results bear evidence to the soundness of our strategy of connecting health with technology. the broad appeal of our smart health products and services, and our ability to execute in a rapidly changing environment. In 2020, we made significant strides in building out our strategy of connecting health with technology. We identified three pillars that will function and be developed as the framework for our business. These are consumer health technology, data analytics, and industrial health. I'd like to take a few minutes to explain these now. Consumer health technology is the backbone of our business. Our products and services in this portfolio showcase many of our triples that have made us a global leader in the smart variable space, namely commitment to innovation, cutting-edge technology, and speed to market. In 2020, we introduced a record 20-plus new products and upgrade versions. We also branched into new product categories, including earbuds, scales, and home fitness equipment, such as chat mules. Many of these new products were presented at the Consumer Electronics Show, CES, in January, and several of our Amazfit and ZEPP-branded products received Best in Show, Distinction, and Accolade from reviewers in leading publications, including variables, tech radar, digital trends, and gadgets and variables. A key element of our strategy in this segment is to continue to rapidly innovate and bring increased functionality and features to our product at all price points. This has been the bedrock of our success in the variable space, and you can expect more the same from us going forward. Supporting this effort is our ongoing commitment to R&D, which is called to our DNA. Our proprietary designed and built AI smart chip, the Wong Sun. It's a shining example of our prowess in technology that distinguishes us from competitors. Now, in its second generation, the Huangshan 2, introduced in 2020, is the most powerful and fattest AI smart chip for variables of this kind. And we have already begun rolling it out in our products. In the meantime, we are also in the process of developing the new WangSan 3, and we believe we are in the leading position on the AI smart chip industry for variables. Data analytics is the second pillar in our framework and is an integral part in expanding our smart health ecosystem. preliminary targeting insurance care providers and employers. This segment works to utilize our data analysis from more than 30 million active users in partnership with industry to empower better wellness decisions. In this regard, in late 2020, US-based lead insurance company Jen Lee cited study results using analytics from our PI Health unit as providing unit value beyond traditional tools in the underwriting process. Just last week, Jen Lee had another announcement of a study documenting PI's effectiveness at improving employee health and longevity. We see this as harbingers of growing recognition for the valuable data analytics can bring to the industry. While the pandemic largely consumed the attention of the insurance industry in 2020, We are hopeful 2021 will afford more opportunities for insurers to integrate variable device data analytics into their business. Industrial healthcare is the first area we are developing as part of our framework. This is a long-term development effort. I believe the industrial health technology space represents a tremendous opportunity for us to apply our engineering expertise in precision sensors, biometrics, AI chips, and engineering capabilities focused on miniaturization and health data analysis. I believe this space is also ripe for disruption. Most recently, you have seen the announcement of the partnership agreement and investment with Prometheus, a provider of miniaturized MRI technology targeted initially at urology applications. Just two weeks ago, they received their FDA 510K clearance, which was a very exciting critical step You also should have noted two different announcements about our partnership with RUMINT, a first mover leader in portable x-ray technology. We are working towards private labeling all of their miniaturized x-ray systems for sale in China. In the industrial healthcare segment, In the near term, we will derive incremental revenue from helping sell products in China. In the long term, we plan to engage in select joint research and harness ways to integrate imaging data or imaging devices into our health technologies ecosystem. To better reflect our strategy positioning connecting health with technology, our expanding product portfolio, and our growth in the global industrial healthcare technology market, on February 25th, we announced our name change to ZEP Health Corporation. This name is easy to remember. Transcends languages and cultures. Last but not least, in October, we extended our strategic cooperation agreement with Xiaomi Corporation for an additional three years. As part of the extended agreement, we will continue to receive the most preferred partner status to develop Xiaomi valuable products and enjoy most preferred strategies partnership status for research and development of AI chips and algorithms for variable devices. We are currently working on Mi Band 6 and expect to launch in the near future. In closing, while no one could have predicted the enormous impact COVID has had on the world in 2020. Our results for this year serve as a solid proof point for the resilience of our business. The soundness of our strategy and the broad base appear of our partners. Even though we can still foresee that the COVID still remains our smart, valuable business in the short term, especially in a few European countries, which are our key markets. I am confident that as we continue to execute on our strategy of connecting health with technology, We are well positioned to capture new and exciting opportunities and deliver long-term shareholder value. I will now turn the call over to Leon to go over highlights of our fourth quarter and four-year results. Thank you, Wong.
Jen Lee
I'm going to drill down from Wong's four-year view to talk specifically about the fourth quarter. As I did last quarter, I want to provide some specific color commentary on just a few key metrics. Starting with sales, from my perspective, the company had a great quarter despite renewed impact of the COVID virus reinstituting lockdowns in some of our key European markets for the important holiday period. Our unit sales were up in most of these markets, but they were up not as much as we believe they would have been otherwise. In addition, a second COVID-related impact on the quarter was product deliveries delays in China with some of our new products in the quarter. As a result, Q4 revenue from our own Amazfit and ZEP branded products was up 25% year over year, which we believe could have been even stronger. The third and the largest factor pushing our numbers to the lower end of our guidance range was that sales of Xiaomi products were not as robust as we had hoped for, resulting in a 21% decrease in revenue in the quarter compared to 2019. We believe consumer anticipation of Xiaomi's new model may have factored into this effect. These effects together translated into Q4 revenue of RMB 1.97 billion compared to our guidance range of RMB 1.95 billion to RMB 2.15 billion. One of the important takeaways of the quarter is that we saw strong product sales performance across our pricing spectrum, from the higher end to the value priced. For example, of our own branded smart watch and band products, the more fashion-oriented GT series, in which the newest model sell for $180, comprised 41% of the smart watch and band unit shipments in the quarter. sales of our basic smartwatch series Bip and Pop, in which the newest models sell for around $60 to $70, comprised around 28% of our fourth quarter smartwatch and band unit shipments. We think it is important to highlight that our products appear across a broad spectrum of price points, feature sets, and consumer expectations. Revenue from our self-branded products grew mid-teens to mild 30 percentage points each quarter in 2020, and we expect that trend to continue. Now moving to gross margin. Gross margin can be affected by product mix, product launch timing, and product life cycles, including model upgrades. The 480 basis point decrease in gross margin from a year ago fourth quarter was predominantly driven by lower margins on products produced for Xiaomi, and to a lesser extent on our own branded products, from discounting to run-out order products and holiday promotional discounting. Next, I want to provide additional color on operating expenses. Total operating expenses trended up through the first three quarters of 2020, but in the fourth quarter decreased sequentially in both absolute amount as well as the percentage of sales. This was the result of the cost control measures we discussed in last quarter's call to prioritize the highest return activities in all expense areas. When reduced sequentially, total fourth quarter operating expenses were up 8.9% year-over-year, reflecting sales and marketing investments in additional headcounts, as well as marketing and support for global expansion of our self-branded products. I'm sure you noted in our release the threefold increase in the number of countries in which we had 100,000 or more device activations in this year's fourth quarter compared to 2019. The increase in sales and marketing expenses year over year was offset by reductions in R&D and G&A expenses. we believe R&D is mostly scaled to continue driving our new product developments in 2021, which we know is a key factor to our success. Given the uncertainties of the pandemic for the foreseeable future, we're going to continue to manage operating expenses to a percent of sales, targets at about where we are now, in order to drive profitability. Reported net income as a percentage of sales was 5.8% for fourth quarter compared to 9.8% in a year ago fourth quarter. Q4 net income benefit from a net year-over-year increase of RMB 56.5 million in gain from deconsolidation of a subsidiary, which is a result of a 2017 partnership with an electric toothbrush company in China. The company's cash position continues to be strong finishing the fourth quarter with a cash and cash equivalence of RMB 2.27 billion, up 26% from December 31, 2019, but down from September 30, 2020. The sequential decline was driven mainly by working capital swings and investments in industrial health companies such as HyperFi and Promacio. Looking forward to guidance, there remains much uncertainty globally about the pandemic. While vaccination rates are rising, risks from different strains are being discussed, and there are concerns with losing restrictions and resuming travel. Europe is currently looking like it will stay largely closed for the near term, while in the U.S., a number of states have dropped mask mandates and college spring break seems to be back in swing, which risks driving new surges. Our guidance reflects this continuing uncertainty as well as first quarter seasonality. For the first quarter 2021, management currently expects net revenue to be between RMB 1.0 billion and RMB 1.15 billion. That outlook is based on the current market conditions and reflects the company management's current and the preliminary estimates of market and operating conditions and customer demand. which are all subject to change. This concludes our prepared remarks. We'll now open the call to questions. Operator, please go ahead.
Operator
Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. For the benefit of all participants on today's call, if you wish to ask your question to the company's management in Chinese, please immediately repeat your question in English. The first question is from Clive Cheung from Credit Suisse. Please go ahead.
Clive Cheung
Hi, management. Thanks for taking my question. My first question is in regards to, I guess, the lower than expected sales in fourth quarter. I think Leon mentioned that that partly it was due to the, I guess, waiting for the new generation of the products. So the question is, do you see this as an extension of the replacement cycle as a risk to your company, and if there is any structural change in the demand? That's my first question. Thank you.
Jen Lee
Clive, I think I can take this question. The answer to your question is no, right? So as I just explained in the script, Xiaomi's sales job for this quarter is very much driven by, number one, COVID, especially in the international markets. And number two, there's certain expectation on the new products, which is going to be launched very soon, right? So from that perspective, I think what we experienced in Q4, we think it's very much a seasonality pattern rather than a structural issue. I guess, I mean, our forecast for 2021 and also for Q1, the outlook reflects that point. And also we believe we should have a solid 2021 outlook based on what we've prepared in Q4 and Q3 for the product introductions.
Clive Cheung
Okay, thank you very much. Just to follow up to that question, I guess, could you remind us what is the current state in terms of geography for Huan Mi Band products?
Jen Lee
I think the... the... The Xiaomi products, I think China remains as a key market for the Xiaomi products, and also the international market is playing a bigger and bigger role. I think overall, if you take our own self-branded Xiaomi products together, Europe and the international market overtakes the Chinese market as our biggest region of sales.
Clive Cheung
Okay, got it. Thank you.
Operator
Again, if you have a question, please press star, then 1. The next question is from Andre Lin from Citigroup. Please go ahead.
Andrew
Hi, management team. Thank you for taking my question. And I have a question regarding the recent acquisition of Econ. Can you please share with us your strategy or your plan on the new acquisition and the timetable if possible. Thank you.
Jen Lee
Yeah, maybe I will answer this question. I will take this one again, Andrew. So there's a few things on eTone, right? So number one, eTone is actually a minority state investment which we had invested in January. So it's not a Q4 event. It's rather than a Q1 event. And then we also don't consolidate eTone in our financial results. And number two, eTone has its own core business. And I'm not sure if you have noticed that they recently, I think it's last week, published their annual result. And then the net income of eTone actually in 2020 grew by more than 20% versus 2019. And the third thing which I want to mention here is also very much in line with what we disclosed before. We want to leverage the rationale behind taking this minority stake in Ito is that we want to leverage Zep Health's core capabilities as well as Ito's access to Chinese domestic capital market. And then by joint hands, Zep and Ito, we're going to expand the healthcare ecosystem for China market in the longer term. I think that's everything we can say about Yitong at this moment.
Andrew
Thank you. And I have a follow-up question. And given you have provided yourselves guidance for the first quarter, can you please also share with us the unit forecast or current status in the first two months of this year and also the when do you think the contribution of the new generation of mid-term will kick in and so that will drive the seasonal sales in this year? Thank you.
Jen Lee
Yeah, so I think we have guided, we have given the outlook for 2021 Q1, and you just heard that. Last year, at the same period, I think our turnover was around 1.0% 9 billion RMB. And then this year, we guide around 1 billion to 1.15 billion. So we think there's a high chance that our revenue is going to fall between this range. And the first two months trend actually provides some confidence on this outlook, right? And looking at the Xiaomi's new product, I cannot say too much about the exact timing, but the only thing I can tell you is that the Mi Band 6 is coming out very, very soon.
Andrew
Okay, got it. Thank you. I have no further questions.
Operator
The next question is from Joy Lee from Investor Securities. Please go ahead.
Joy Lee
Thanks for taking my question. Congratulations on this quarter performance in spite of the unfavorable environment. I have several questions to follow up. My first question is about health monitoring. Could the management team give us more color on how we cooperate with insurance companies like social insurance or even hospitals? I think this could be a potentially huge market.
spk05
I think I'll invite Mike to answer. Yeah, this is Mike Young. Yes, let me try to answer the question. Yeah, so as Wang mentioned in the script, the data analytic is one of our strengths, pen pillar, especially the PI technology and algorithm which we acquired. When we work with the insurance companies, basically PI can provide value in at least a couple of ways. First is PI can help increase customer engagement for the insurance companies because monitoring the PI score, PI health, can be a customer engagement tool to increase the customer engagement for the insurance company. Secondly, because PI is scientifically proven with many years of study and a large compilation, insurance companies can use PI score as a factor in their actuary formula to help in their underwriting. whether it's for health insurance or for life insurance, both can use the PI score to help them improve their underwriting. So this is a second way that we're working with insurance companies to integrate the PI technology. And also, Jen Rhee, who we mentioned earlier, has given, has made a lot of study and published that the PI score is a very effective tool for both of these services for the insurance companies. Is that an extra question?
Joy Lee
Yes. Thank you. And my second question is that it's easy to understand that company's advantage in to-be market since the company's product resembles a third-party hardware supplier with leading technology. However, I wonder how to build a stronger brand recognition and what is the target shipment or revenue mix between Xiaomi and self-branded products?
Jen Lee
Yeah, that's a good question. Now, so I think you have seen our 20F in 2019. The current weight between Xiaomi and self-branded products is around 70%, 30% from an absolute revenue value perspective, right? And I think gradually throughout the year, we're seeing this trend gradually moving for more self-branded products in the weight versus Xiaomi, although the moving is gradual, right? So because Xiaomi was such a big contribution factor to our top line and any move for our self-branded product to gain the weight actually require the self-branded product's sales or revenue growth to be doubled or tripled the Xiaomi growth rate in order to change that mix, right? So to answer your question, I think starting from Q3 and going into Q4 and Q1, we're seeing this self-branded product mix in the overall sales mix taking place. So the self-branded products as an overall company's portfolio is gradually gaining weight. But as I just mentioned, Any changes to a significant amount will require a few quarters for you to see such significant or structural change.
Joy Lee
Okay, got it. And my third question is about the pain rate of your health service. Could you share us the current pain rate and how this rate would go up in the future? And how would that contribute to our revenue mix?
Jen Lee
I think it's, as we mentioned before, most of these services or health services are, I think there are two things. One is actually the Pi Health and Prudential and the J&R type of insurance tech type of cooperation. So these type of, the revenue out of these type of services is going to come out in the second half of 2021 based on our latest forecast. And then if you're talking about the more industrial health, as what we mentioned today early on in the script, the investments of the X-ray machines, MRI machines, that's going to be long-term investments and it's going to be very much self-sustaining, like the business model of white labeling, right? And in order for you to see a significant revenue of that part of the business coming up, probably it's going to be a year out. So probably you will see something coming up in early 2022 or mid-2022. That's our best estimation at this moment in time.
Joy Lee
Okay, got it. And I have one last question is how the shipment volume of second generation of Huangshan and with the industrial shortage impact the supply of our chips?
Jen Lee
I think we cannot disclose the specific information on a product line or so, but as we mentioned in the script early on, that the Huangshan 2 is being rolling out to all the self-branded of our products as we go, right? So that progress is being carried out as we speak. And then, yes, we also have noticed that there's a shortage of the IC chips across the industry. And for that reason, we're also piling up some of the inventories for the key components of the IC chips, also for our smart watch products. So you will see a little bit of that in the inventory number of our balance sheet, probably in Q1.
Joy Lee
Okay, got it.
Operator
I have no further questions. Thank you. The next question is from Jackie He from China Renaissance. Please go ahead.
Jackie He
Hi, Benjamin. Thank you for taking my question. I only have a little question. For the next quarter or the whole year, could you give us some guidance on the shipments and ASP for Xiaomi ICF branded products? Thanks.
Jen Lee
Yes. Now, so I think we have already given the outlook for Q1. And then on the full year basis, normally we don't give that outlook. But I think based on what we see and also there's a caveat on how bad the COVID is in the national market and how fast we can resume the back to normal type of working pattern. We believe at this moment that the full year sales growth for the company overall taking the Xiaomi plus the self-branded products should be at least at the same pace of the growth rate of 2020, if not more. On the ASP part, ASP is actually one of those metrics that is affected by timing of product introductions and seasonality, as well as the product mix changes. So So we want to be very careful about its use. So for the full year, if you look at the combined ASP, it declined slightly versus last year, versus 2019. The ASP for Xiaomi products for the year was flat, and the ASP for our own branded products was up dramatically. And we think the ASP trend for our own branded products will continue to expand in the coming quarters. I hope that to some extent answers your questions.
Jackie He
I see. That's really helpful. Thank you.
Operator
As there are no further questions, I'd like to turn the call back over to the company for closing remarks.
Grace Song
Thank you once again. Thank you once again for joining us today. If you have further questions, please feel free to contact ZAP's Investor Relations Department This concludes this conference call. You may now disconnect your lines. Thank you.
Operator
This concludes this conference call.
Disclaimer