Zepp Health Corporation

Hello, ladies and gentlemen. Thank you for standing by for ZEPP Health Corps' first quarter 2021 earnings conference call. At this time, all participants are in listen-only mode. Today's conference call is being recorded. I will now turn the call over to your host, Ms. Grace Yang, Director of Investor Relations for the company. Please go ahead, Grace.

Hello, everyone, and welcome to ZEPP Health's first quarter 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, ir.com. Participating in today's call are Mr. Huang Wang, our Chairman of the Board of Directors and Chief Executive Officer. and Mr. Leon Teng, 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 20-F for the fiscal year ended December 31, 2020, 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 required under applicable law. Please also note that ZAP's earnings release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial information. ZAP's press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. I will now turn the call over to our CEO, Mr. Huang Wang. Please go ahead.

Hello, everyone. Thank you for joining our call. Our first quarter results demonstrate both the resilience of our strategy and the popularity of our brand while at the same time, we are challenged by supply chain and the multi-channel dynamics that were in play due to the global pandemic. The highlight of the first quarter was the performance of our self-branded products. Humans of self-branded products more than doubled in the first quarter compared with the same period a year ago. They also contribute to 64% of our total revenue. As the product acceptance on our key product lines, such as Amazfit Pop, Beep, and the GT series, as well as our newly launched T-Rex product line, continued to strengthen. These results were achieved amidst challenging market conditions. In the first quarter, our overseas market channels continued to be adversely impacted by COVID-19. Supported by the robust performance of our self-branded products, In Q1, we recorded 5.4% year-over-year growth in total revenues to IMB $1.1 billion, despite a decrease in shipments for Mi Band 5 ahead of the launch of Mi Band 6. As all of the pandemic-related issues continue to walk their way through and out of the market, I would like to bring the focus back to our partners, especially some new product launches as well as functionality and partnerships which we expect to push both our brand's popularity as well as revenues outwards. First, executing on our mission to connect health with technology. In the first quarter, we continued to build out our comprehensive health and fitness ecosystem by enriching our product portfolio. In March, we launched the Amazfit T-Legs Pro, which is the latest addition to our outdoor sports series of smart watches. It is built to last with 15 military grades certifications and 100-meter waterproof for extreme temperatures and conditions and has passed three additional performance endurance tests. In addition to exciting functionalities such as the blood oxygen saturation measurement system, four global navigation satellite systems, and more than 100 different sports mode settings, One of my favorite features is its ability to monitor sleep quality. We believe that quality rest and sleep are essential elements of good physical and mental health. Also in March, as we continuously seek new ways to create value for our users, we started to provide WeChat Pay functionality in Amazfit GTS2 and GTR2 smartwatches. Rolling this out to the majority of our smartwatch portfolio adds a desirable and convenient function to our products. We have also been working hard on strengthening our partnerships and expanding into new ones. remains as strong as ever. We successfully launched Mi Band 6, the sixth generation of its popular product line, in March and achieved over 1 million units in global treatments within one month of its launch date. The Mi Band 6 has, aside from its stylish design, some incredible health-related functionalities so that users pay measurements of their physical conditions anytime, anywhere. The newly introduced functions include blood oxygen saturation monitoring to measure breathing quality and cardio health monitoring to detect irregular heartbeats. These functions are powered by our self-developed AI-based algorithms, auction bits, and real-based tools, respectively. We are very encouraged by the great sales results from the Mi Band 6, and at the same time, we are also working with Xiaomi one more exciting and groundbreaking new product. Together, this continued strength in our self-branded products. We expect a very strong second quarter. Lyon will provide more details momentarily. We also continue to expand our collaboration with leading research institutes as well as healthcare companies. We partnered with leading hospitals and institutions globally. on a clinical study to examine the potential benefits of smart health monitoring equipment in improving the quality of life for outpatients with chronic heart failure and reducing their readmission rates. For example, one of our projects is collaborating with the Norwegian University of Science and Technology called Norlex. The Norlex project is a legislative-based, multi-center, and multi-regional randomized controlled trial for secondary prevention and rehabilitation of patients who have suffered myocardial infarction. The project will include 12,000 750 participants with myocardial infarction across Norway in the next four years. Our smartwatches, its heartbeat monitoring and overall health management platform are being used effectively as part of these clinical studies. A few comments on our data analytics business, which is an integral part in expanding our smart health ecosystem. Access to more than 42 million active users combined with our AI and big data analysis capabilities, as well as our powerful PI algorithms, allows us to establish a cloud-based system that can provide insurers, care providers, and employers with aggregate healthcare-related information to make better decisions that promote wellness and expand our business branches further in the healthcare industry. In closing, we're looking forward to delivering robust results in the second quarter, and powered by the rising demand for our products, our efforts to constantly innovate and enrich our product portfolio, as well as the change from Mi Band 6. 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 first quarter financial results.

Thank you, Wong. As I did last quarter, I want to focus on highlighting what I think a handful of most important metrics. Starting with sales, generally from a seasonality perspective, Q1 has always been a soft quarter for us. However, we had an exceptional quarter in revenue this year from our own Amazfit and ZEP branded products, which increased 84% in revenue year over year. Unit growth of self-branded products was even higher at 104%. emphasizing the impact and popularity of our higher-end products, such as the GT series. You cannot dismiss Zip Health as just a maker of inexpensive watches and bands. We are a real global player competing successfully at a wider range of price points. Given the continuing impact of COVID, I think the overall revenue growth of 5% in Q1 is very solid and reached the top end of our guidance range. In a few areas, such as the US, COVID seems to be abating. But in many of our key markets, including many European countries, India, and South American countries, COVID spread and restrictions continue to have an impact on our business in the first quarter. Also affecting the quarter in China, subsidies and exemptions from social insurance contributions ended, impacting our costs. As is often the case, timing of new product introductions in this quarter for Xiaomi impacted the quarter. Xiaomi product revenue was down 40% year over year in the first quarter, largely driven by the anticipation of the introduction of the Mi Band 6 in the second quarter. The reviews have been positive and expectations for shipping Mi Band 6 factors into our strong guidance for Q2. Q1 demonstrated continued strength of our high-end products. The premium GT series that sells in the $180 to $200 range comprised 48% of our smartwatch and band unit shipments in the quarter. The sales of Bip Pop basic smartwatch also continued to be strong in Q1. as was T-Rex, including the new T-Rex Pro that launched during the quarter. We expect the trend of strong growth for our Amazfit and Zepp branded products to continue as we expand globally. Now moving to gross margin. Gross margin can be affected by product mix, product launch timing, and product life cycles, including model upgrades. First quarter 2021 gross margin stayed at the same 22.5% rate as it was in the year-ago pre-COVID quarter. As we noted in today's press release, gross margin for our own Amazfit and DEP branded products varied over the last five quarters between one and a half times to more than double the margin on products built for Xiaomi. That trend continued in the first quarter. That highlights our focus on growing our company-branded products and our global expansion to enhance our overall profitability. Operating expenses have been a key focus of mine since joining the company in the third quarter last year. While we have to balance cost controls with fueling growth, we have decreased total operating expenses for two quarters in absolute amounts sequentially since last year's third quarter. First quarter 2021 total operating expenses was up year over year, reflecting our investments in new products development and global market expansion. Given the timing of investments offered ahead of the sales result, we'll continue to manage some expenses on a percentage of sales basis over a longer window of the year. We don't want to stop critically timed investments that paid off in future quarters. With that in mind, First quarter R&D expenses increased year over year, reflecting investments in products that will debat in the busier second half of the year. Sales and marketing expenses were up year over year, reflecting investment in global growth for our Amazfit and ZEP branded products. R&D sales and marketing and G&A costs were all down sequentially, either from the third quarter 2020 high point or from the fourth quarter. We reported a net loss for the first quarter based on the effects I have described above. With our guidance for Q2, we expect a return to gap profitability. The company's cash position continued to be strong, finishing the first quarter with a cash and cash equivalents of RMB 1.1 billion compared to RMB 2.3 billion at December 31st, 2020. The sequential decline was primarily driven by RMB 8.6 billion used to compete the minority stake acquisition in Jiangsu Yitong high-tech company in China. We also invested in some extra chip inventory as a partial hedge on chip availability for the rest of this year, as well as some higher inventory for our company-branded products, as we were short on some products several quarters last year. Looking forward to guidance. There remains much uncertainty globally about the pandemic, which we have factored into our guidance, along with some sequential seasonal improvements and contribution from the Xiaomi Mi Band 6. For the second quarter 2021, management currently expects net revenues to be between RMB 1.7 billion and RMB 1.8 billion. That range projects a growth rate of 50% to 58% year over year, from the 2020 second quarter's RMB $1.14 billion. That 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 subject to change. This concludes our prepared remarks. We will now open the call to questions. Operator, please go ahead.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the key. 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 in the company's management in Chinese, please immediately repeat your question in English. At this time, we will pause momentarily to assemble our roster. Once again, that's star then 1 if you'd like to ask a question. The first question comes from Clive Chung at Credit Suisse.

Thank you, management, for taking my question. I think my question is largely based on the OPEC structure, which obviously Leon already explained, but I just want to get a bit more color. Obviously, in terms of structure, it made up 27% of social revenue. This is, I think, a historical high for the company. So in terms of this kind of level of intensity, for example, in R&D, is this a once-off? What do we see? What should we expect for the rest of the year in terms of OPEX planning? Could you share a little bit on that? Thank you.

Yeah, Clive, I mean, let me take this question. If you look at the absolute amount of OPECs, starting from Q3 2020, I think we were hovering around 380 million to Q4 around 310, and then to Q1 at 308, if those are numbers which I remember, if those are correct. So from an absolute amount perspective, the OPECs number kept on trending down. over three quarters time but OPEX there's a fixed and variable portion of it what we are seeing in Q1 is largely a seasonality issue if you may because the revenue if you look at last year Q3 Q4 it was around RMB 2 billion range and then in Q1 this year it's actually around 1.1 billion So, yes, from OPEX as a percentage of sales perspective, Q1 looks really high, but as the sales is going to trend up in the upcoming quarters, we believe that this percentage, OPEX as a percentage of sales, is going to go down big time in the upcoming quarters, right? And if you look at the absolute amount, I think the OPEX amount is going to hover around the same level of Q1 or even lower than Q1. I hope that answers your question.

Yeah. Yeah, that does. And I think I want to follow up particularly on R&D. Obviously, we know we're investing a lot in kind of the healthcare technology. Do we have a budget for the full year in 2021?

Yes. I think as a percentage of sales perspective, R&D, there's a seasonality, as I just mentioned, right? But overall, I think you can look at the R&D as a percentage of sales very much similar to what we spent in year 2020. And obviously, we just mentioned we don't want to stop any time-critical investments, which we believe that in the future we can reap more benefits on that.

Okay. Thank you very much. I'll go back to the group. Thanks.

The next question is from Andre Unitsity.

Thank you for taking my questions. And given you have 1.7 to 1.8 billion revenue guidance, could you share with us some of the breakdown between Medend as well as your self-branded products or any guidance on the Unicorps guide?

So, Andre, yes. I can give you a feeling for what it is, right? So, if you look at our self-branded products, I think as management, we're quite happy to see the trend continues. Actually, it started in Q3 last year. And in Q4, we had a good run-up of our self-branded products. I think it's around... close to 1 billion revenue in Q4. But in Q1, I think that trend also continues, right? So if you remember our seasonality, our full year sales weight perspective, Xiaomi has been the 70% of our revenue and the self-branded has always been the 30%. I think starting from Q4, we see that trend structurally changing of more self-branded products taking the weight higher in that mix, right? So I think Q1 is probably a little bit to the extreme. Self-branded products actually stands roughly 70% of the overall mix for us in Q1. But obviously, as I mentioned, the Xiaomi partnership has been close and very close for us because Mi Band 6, as we launched, I think, by the end of Q1, has received very good ratings, and also the sales has been very good. I think we achieved 1 million unit sales just a few days after we launched the product. So to answer your question, if you look at Q2, obviously the Mi Band 6 sales is going to fewer some of that growth which we projected. but also our self-branded products will also take the same shape, and it's going to be a strong growth for our self-branded products in Q2 as well. I hope that gives you some feeling on why we guided such a number for Q2.

Understood. Thank you. And could you share a bit on the rough breakdown or on the shipment unit growth? so that we can have a better fitting on the gross margin implications.

Thank you. I think Q1 this year, if you look at Xiaomi and self-branded, it's 70% self-branded and 30% Xiaomi. I think for Q4, probably you're going to be looking at 50% to 60% Xiaomi, and the rest will be self-branded.

So that also applies to the second quarter revenue.

Yeah, so if you look at second quarter revenue, I'm saying Xiaomi stands for 50% to 60% of what we guided for Q2, and the rest will be self-branded.

That's very clear.

Thank you very much.

Again, if you have a question, please press star then one. The next question comes from Michelle Zhang at China Renaissance.

Thank you, management, for taking my question. So I'd like to understand about the GM guidance for both Xiaomi and the branded products going forward, like whether we should expect it to be stable or that there's still a trend for them to go up with it.

Michelle, we never guide IGM for our guidance going forward, but I can give you a feeling, right? So as I mentioned before, the self-branded products gross margin for the past five quarters has always been 1.5 times to two times the Xiaomi product margin, right? And you know the Xiaomi product margin we have disclosed before is in the 15% to 17% range of, I think it's around that range, right? So going forward, I think you can see this impact in the past quarters already gradually changing, right? Our gross margin has been going down from Q3 to Q4, and then now in Q1, it's starting to trend up. I think we're expecting this trend to continue in the second quarter as well as into the second half of this year.

Okay, thank you. And my second question is about your revenue breakdown in terms of your geography and also your online, offline distribution channel.

I beg your pardon?

My second question is about your sales breakdown in terms of your geography and also the proportion of your online and offline distribution and also the trend going forward.

Okay. Thank you. So Xiaomi is a business. In our book, it's actually a business-to-business for us. So I think Putting Xiaomi aside, if you look at the self-branded products, so here I'm only talking about the self-branded products, right? Europe is actually our biggest market, and then I think follows by China, U.S., and the rest of the world. And as you know, there are certain restrictions and lockdowns in Europe, and that continues in Q1. So we were hampered a little bit by the sales or the offline channel sales in Europe. And that also applies to many parts of the world where we operate. So to answer your second part of the question, at this moment, majority of the self-branded products are selling through the online channel. But we expect that as the COVID is abating in Europe, for example, United States, and also we see a good trend in Europe because the lockdown has been relaxed to a certain extent. We believe that the offline channel sales will also play a bigger role in the second half of this year.

Okay, thank you so much.

The next question comes from . OK. At this time, there are no further questions.

OK.

I'd like to turn the call back over to the company for our closing remarks.

Thank you once again for joining us today. If you have further questions, please feel free to contact ZEP Health's Investor Relations Department. This concludes this conference call. Thank you.

This conference is now concluded. Thank you for attending today's presentation. You may now disconnect.