Zepp Health Corporation

Hello, ladies and gentlemen. Thank you for standing by for ZEPP 12th Corporation's first quarter of 2026 earnings conference call. At this time, all participants are in listener-only mode. Today's conference call is being recorded. I will now turn the call over to your host, Ms. Grace Zong, Director of Investor Relations for the company. Please go ahead, Grace.

Hello, everyone. and welcome to ZEP House Corporation's first quarter 2026 earnings conference call. The company's financial and operating results were issued in a press release of the newsletter services earlier today and are posted online. You can also view the earnings press release and the slides referred to on this call by visiting the IR section of the company's website. Presenting today are Warren Huang, our founder and chief executive officer, and Leon Dunn, our chief financial officer. Joining us today, we also have Mike Young, chief operating officer and general manager of North America, and Eric Flanagan, vice president of capital markets for North America. 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 Security Subsidiation Reform Act of 1995. Forward-looking statements involving foreign 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 are included in the company's annual report on Form 20-S for the fiscal year ended December 31st, 2025 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 statement except as required under applicable law. Please also note that that service Press release and this conference call include discussions of unaudited gap financial information as well as unaudited non-gap financial information. That press release contains a reconciliation of unaudited non-gap measures to the unaudited most directly comparable gap measures. I will now turn the call over to our CEO, Mr. Wang Hua. Please go ahead.

Hello, everyone, and thank you for joining us today. We are pleased to begin 2026 with a promising start, delivering another solid quarter. In the first quarter, our mainstream branded revenue grew 33.8% year-over-year, demonstrating exceptional resilience during what is traditionally a software season for the consumer electronics industry. This strong performance was primarily driven by the successful launches of the Amazfit Aptiv Max, Aptiv 3 Premium, and our flagship T-Rex Ultra 2. Delivering this level of goals in a seasonally quieter quarter further enforces our condition that the market opportunity we are capturing is structural rather than cyclical. More importantly, we do not view this quarter simply as a revenue growth story. We see it as another area validation of the structural changes you have been building, stronger premium product mix, improving pricing power, expanding gross margin, and a clearer brand position in performance-oriented training. During our last earnings call, I outline how ZAP Health is evolving into a comprehensive hybrid training platform seamlessly integrating endurance, strength, and recovery through hardware, AI-driven training intelligence, software, and beta. Our 2026 ambition is clear. We aim to build a global leadership position in hybrid training. To advance this strategy, we further deepened our collaboration with HYROX, one of the world's fastest-growing hybrid endurance sports organizations, through a new exclusive three-year global partnership. This expanded partnership enhances the style of athlete experience across training, competition, and recovery. Leveraging a broader portfolio of exclusive smart wearable categories, including smart watches, smart rings, smart cameras, smart glasses, and smart straps. alongside connected app experience, high loss specific training modes, and selected performance data integrations. This partnership represents more than a sponsorship. It is a strategic step for us to participate in and help shape the emerging private training category. By engaging directly with IROC's global athlete community, gym ecosystem, coaches, and race environments, we can build a more authentic connection with users whose training behaviors and strength, endurance, recovery, nutrition, and performance readiness. This gives us a differentiated position in the market other than endurance and general smart lifestyle. While we have the opportunity to build authority around hybrid training, and a more complete training system. We believe one of the most important opportunities is the moment when a user moves from casual checking to more serious training. At that point, the phone ecosystem becomes less important. And the training varies because it's more important. TIROS and gym-based hybrid training help create that moment, allowing a message to enter through app experiences, training content, TIROS-specific modes, and lower-fission products before users make a full device switch. At the recent New York Hyros event, we introduced Balance 3 and Balance Ultra in a real hybrid training environment. This launch setting was intentional. These products are designed for users who balance strength, endurance, recovery, work, stress, and daily life. Powered by hybrid charge energy intelligence in the web app, these brains get a biocharge life load and a training load. into one clear view of personal capacity, helping users better understand when to push, when to recover, and how to maintain consistency over the long term. These activities are important because premiumization is not only about higher price points. It is about building trust in the environments their serious users decide which brand they rely on. By showing up in marathon preparation, trail and expedition environments, and hybrid training communities, Amazfit is strengthening the credibility required to support highly valued products. improved product mix, and long-term pricing power. Our premium racing strategy is strongly supported by our hybrid training positioning. We are already seeing earlier evidence that users are willing to move up the price ladder across certain product families. the things that T-Rex line up. Our highest priced premium models are becoming an increasingly meaningful part of the overall sales mix. This reinforces an important point. Consumers are not choosing a massive story for affordability. In March and April, Our premium QX models priced at $399 and $549 accounted for nearly 50% of total QX family unit sales. As we continue to strengthen our product differentiation and premium brand positioning, Users are showing a growing willingness to engage with Amazfit at more premium price tiers. By embedding hybrid training more deeply into both our hardware and software ecosystem, we are enhancing the perceived value of the Amazfit brand and driving a consistent shift toward higher-end product positioning. This remains one of our key strategic priorities as we move into 2026. In the first quarter, this strategy delivered tangible results. This average selling price point this average selling price increasing more than 20% year-over-year. Notably, even amid rising memory component causes and the broader storage chip price inflection, we were still able to achieve gross margin expansion. Respecting the effectiveness of our product makes improvements and disciplines cause exclusion. In April, we extended this philosophy into one of the world's largest performance communities, running. By adapting our hybrid training methodology to run this, We are enabling them to train more intelligently, improve endurance, and support long-term health and durability. This strategy is embodied in our newly-launched CHIKA 2 lineup, including the CHIKA 2 Pro, a performance-focused watch designed for marathon training, and the Cheetah 2 Ultra, engineered for the most demanding mountain and trail environments, both integrated seamlessly with their coach. These are full suits of running metrics and personalized training plans. recovery insights, and third-party training platform integrations. These devices deliver structural hybrid-style training guidance directly to endurance runners, further strengthening our penetration in the dedicated running segment. Notably, our first quarter growth was for the base across both entry and premium tiers. At the high end, the T-Rex Ultra II, crafted from grade V titanium, elevates our price ceiling to U.S. dollars of $560, marking the scientist in Amazfit's history and further reinforcing our premium-branded positioning. At the same time, in our core value segments, the ActiveMax and Active3 premium positions around the $169 price point of expanding our reach among everyday fitness enthusiasts and entry-level runners beginning their structure training journeys. Most recently, we also introduced HipMax, the latest addition to our most popular entry-level series. Our strategic progress is also reflected in continued market share gains. In the first quarter, we achieved sequential value share expansion across EMEA, the U.S., and Asia Pacific, supported by strong performance across our full product matrix. according to third-party data sources. A mainstay now ranks among the top six smartwatch brands in both the United States and Europe by value share, underscoring the growing global lesson and market change of the brand. to solve it, we continue to strengthen our ecosystem through ZAP OS. Futures such as ZAP Coach, BioCharge, and our expanding of hybrid training and high loss modes are being deployed across a growing range of devices, driving deeper user engagement and retention. As we increasingly tailor our training intelligence for running and other endurance disciplines, our software ecosystem is becoming a key reason users choose and remain loyal to our brand, further widening the competitiveness modes around our platform. Across running, outdoor, and public training, we are increasingly connecting Amazfit products with real performance environments and elite athlete validation. In running, Shiga 2 Pro was supported by major marathon moments in Paris, London, and Boston. including acid-proof points from Yemen river, and . In outdoor, T-Rex altitude continues to gain credibility through high altitude, alpinist, and the real expedition use cases, while increased record strengthens the aspirational outdoor positioning of the T-Rex series. We also continue to build collectability around EV performance moments. During the High North Warsaw Major, a major athlete, Joanna Wierich, completed a clean sweep of all four IROX majors this season, while setting a new IROX world record. We are also supporting Josh Kor's Project 222, his attempt to break the minor world record at the London Diamond League. Together, these moments reflect how Amnesty is showing up at the highest level of both hybrid training and endurance performance. Again, the market is economic backdrop. Our premiumization strategy, expanding pricing power, vertically integrated supply chain, and diversify manufacturing footprint across China and Vietnam provide us with multiple levels to mitigate these pressures. We remain confident that the alignment of our product mix channel strategy and cost structure will support sustainable growth and a clear path towards long-term profitability. Looking ahead to the second quarter, we expect revenue to be in the range of 63 million to 68 million. This outlook reflects continued year-over-year growth supported by demand across our product portfolio, while also accounting for normal shipment timing and product launch facing during the quarter. More importantly, we will continue to focus on the quality of growth, product mix, pricing power, growing across margin structure, and user engagement. rather than only short-term revenue volume. This does. I now turn the call over to Leo to walk through the financial details. Leo, please go ahead.

Thank you, William. Greetings, everyone. Thank you again for joining our first quarter 2026 earnings call. Let me start with revenue. In the first quarter of 2026, our revenue was US dollars 51.5 million, up 33.8% year over year, in line with our guidance range. As Wayne mentioned before, this growth was driven primarily by our new product launches, such as ActiveMax, ActiveStreet Premium, and T-Rex Ultra 2. even as the first quarter is traditionally a low season for consumer electronics business. Turning to gross margin, our performance continued to reflect a combination of factors, including product mix, launch timing, and normal product lifecycle dynamics, such as model upgrades. In the first quarter, gross margin was 37.7%, an expansion of 0.4% compared with Q1 2025, and moderated from the record high 40.4% achieved in Q4 2025. There are two important points worth highlighting. First, the first quarter is traditionally the period whereby we refresh our entry-level product portfolio, which naturally carries a lower gross margin and therefore weighed on the sequential comparison. Second, during the quarter, we absorbed some higher memory component costs, as well as the impact of unfavorable foreign currency exchange fluctuation. Despite these headwinds, we still delivered year-over-year gross margin expansion, where gross profit increased 35.3%, to US dollar 19.4 million. This demonstrates the resilience of our operating model and the continued improvement in our brand positioning. Before turning to expenses, let me briefly address the macro backdrop. On memory, we expect higher memory costs to create near-term pressure on gross margins. Driven by the industry-wide transition from DDR4 to DDR5 and high bandwidth memory. As AI and data vendor demands continue to tighten supply, we began preparing for this environment in early 2025 by securing supply through diversified sourcing channels to support the manufacturing continuity. And we are also using our engineering expertise to optimize memory requirements across current and future products without compromising performance or customer experience. While this is a real headwind, we have multiple levers to help mitigate the impact, including continued increases in average selling prices and a potential refund of previously paid IEPA-related tariffs, which could provide some in-offsets. We believe we're managing this challenge from a position of preparation and discipline, while staying focused on driving sustainable revenue growth and improved profitability. Now turning to expenses, we remain committed to prudent cost management program, which will begin in 2020, Total adjusted operating expenses for the first quarter were U.S. dollars $35.7 million compared with U.S. dollars $31.5 million in Q1-25 and U.S. dollars $37.1 million in Q4-25. Out of the year-over-year increase of the U.S. dollars $4.2 million, there's a translation difference of approximately US dollar 1.8 million on operating expenses in the first quarter of 2026, due to euro and RMB appreciation to the dollars. Then US dollar 1.4 million is directly attributable to certain e-commerce platform charges, which was a kind of fixed ratios sales channel charges to drive revenue growth. Remaining U.S. dollar 0.6 million was primarily due to front-loaded investments in marketing and branding activities such as CES and HIROX. Excluding U.S. dollar 6.2 million of one-off provisions, fourth quarter 2025 operating expenses were approximately U.S. dollar 30.9 million. The sequential increase of U.S. dollar 4.8 million was primarily driven by a U.S. dollar 1.8 million foreign exchange impact, as mentioned above, and a U.S. dollar 1.4 million increase in R&D investment to support new products launches in upcoming quarters, and a U.S. dollar 0.5 million of front-loaded marketing and branding investments, and lastly, 0.2 million in severance costs related to targeted initiatives to enhance organizational efficiency. Going forward, we'll maintain a cost-conscious approach while continuing to invest in R&D, marketing, and branding activities that support our long-term competitiveness. Let me break down the year-over-year and sequential comparison by line item. Adjusted R&D expenses were US$11.9 million compared with US$11.5 million in the first quarter of 2025 and US$10.2 million in the fourth quarter of 2025. Out of the sequential increase of US$1.7 million, US$0.3 million was attributed to foreign currency translation differences. The remaining $1.4 million increase was due to investment in new products that will be launched in the coming quarters. We continue to invest in a series of cutting-edge products and new technologies, including AI, to maintain our competitive edge. while consistently evaluating resource efficiently to optimize our return on investment and productivity. Adjusted selling and marketing expenses were $16.4 million compared with $13.8 million in the first quarter of 2025 and $15.6 million in the fourth quarter of 2025. Of the year-over-year increase, Approximately $0.8 million was attributed to foreign exchange translation differences, and another $1.4 million was directly attributable to fixed channel costs that scale with our revenue growth, and the remaining $0.4 million was allocated to promotions and branding initiatives that fueled the adoption of our new product. Compared to Q4 2025, selling and marketing expenses increased by $0.9 million, out of which $0.4 million was attributable to the appreciation of foreign currencies against the dollar, and the remaining half a million was due to front-loaded investments in marketing and branding activities, such as CES and HIROX. At the same time, we continue to push retail profitability and channel mix improvement, including a meticulous refinement of our retail channels and disciplined stocking arrangements across our sales regions. Adjusted G&A expenses were U.S. $7.4 million, compared with $6.2 million in Q1 2025 and $11.3 million in Q4 2025. The year-over-year increase reflected approximately $0.3 million of foreign exchange translation differences and $0.2 million in brand and intellectual property protection related fees. Excluding the U.S. dollar $6.2 million of non-recurring provisions in the fourth quarter, G&A expenses were $5.2 million in Q4 2025, The sequential increase of U.S. dollar $2.1 million was mainly attributable to $1.1 million of negative foreign exchange impact, as well as $0.2 million severance cost as part of the targeted initiatives to enhance organizational efficiency. We continue to streamline our GNA and drive operation efficiencies. with higher revenue and improved year-over-year gross margin, partially offset by higher operating costs and unfavorable foreign exchange translation differences, our operating loss narrowed to $6.3 million compared with $17.2 million in the first quarter of 2025. Adjusted net loss was $17.9 million or 34.8% of sales, compared to 18.1 million, or 41.1% of the sales in the first quarter of 2025. Turning to the balance sheet and working capital, we continue to manage our inventory rigorously, ending the quarter with inventory of 62.8 million, down from 72.8 million as of Q4 2025. We ended the quarter with $103.2 million in cash and cash equivalents, nearly flat compared with $103.8 million a year ago and lower than $112.9 million at the end of 2025. With the sequential decline, driven primarily by our net operating losses and partially offset by improved working capital management. Turning to our capital structure, total debt, including both short-term and long-term debt, remained broadly stable both sequentially and year-over-year. We continue to actively manage our debt maturity profile and financing costs. As debt approaches maturity, we evaluate prevailing market interest rates and available credit capacity to refinance or extend the duration of our borrowings while appropriate. The change in the mix between short-term and long-term debt in the first quarter of 2026 was primarily driven by accounting classification as certain borrowing originally maturing in late 2026 or 2027 were reclassified from long-term debt to short-term debt due to their remaining maturity profile. Importantly, while the classification between short-term and long-term debt may fluctuate from quarter to quarter, our long-term focus remains on maintaining discipline control over total debt levels and optimizing our debt duration and interest expenses over time. Since the beginning of 2023, the company has cumulatively retired $46.7 million of debt and will continue to optimize the capital structure for the company. We also remain committed to our share repurchase program. As of March 31, 2026, we had repurchased $17 million out of the $20 million authorized program. We view this program as an effective use of capital that aligns with our focus in delivering sustainable long-term value to shareholders. Finally, our outlook for the second quarter of 2026. We expect revenue to be in the range of $63 million to $68 million. representing year-over-year growth of approximately 6% to 14%. This outlook reflects continued year-over-year growth supported by demand across our product portfolio, while also accounting for normal shipment timing and product launch phasing during the quarter. More importantly, we will continue to focus on the quality of the growth rather than only short-term revenues. volume. With a healthy margin profile, disciplined cost control, and continued operational improvement, we are well positioned to deliver sustainable growth and create long-term value for our shareholders. Thank you all for your time today. I will now open the course for questions. Operators, please go ahead.

Thank you. If you would like to ask a question, please press star then 1 on your telephone keypad. If you would like to withdraw your question, please press star then 2. Once again, that's star then 1 if you have a question. And today's first question comes from Sid Rajeev with Fundamental Research Corp. Please go ahead.

Thank you. Congratulations on the strong Q1 revenue growth. In the last earnings call, Leon, you guided to potentially nine product launches this year, same as last year, with four announced so far. Should we expect about five more this year? Am I in the correct ballpark?

Yes. I think in the end, we probably would have more than nine. But, yeah, there are many new product launches still on the way.

Okay. Where do you see opportunities to reduce costs? Because it seems like it's difficult to cut R&D or marketing or branding expenses at this point.

No, that's not entirely right. So you see that the R&D expenses year over year actually increased a bit. It is because of the new product launches, which we have to prepare for it. And I think towards the end of Q2, you will see that R&D expenses more going down because I think by the end of the first half, we'll probably go through majority of the new required launches which we have scheduled for the year. Although there's going to be a bit left for the second half of the year, but I think you have witnessed that there's a lot of new products which have been launched already, including the ActiveMax, ActivePremium, T-Rex Ultra 2, and now with the Balance and Cheetah. And I think this first half of the year is actually, from a product launch perspective, a launch-heavy first half. Therefore, R&D expenses is actually a little bit higher than before. But it should trim towards the norm starting from the second half of the year and going forward. On the other hand, we are also investing a bit or we front-loaded some of the marketing expenses into Q1 and Q2. For example, we are hosting the balance three product release in High Rocks New York, which is a high-profile event, right? And that's all tied into the event timing, so to say. And I guess because of that, we spent some of the marketing expenses and branding-related expenses more towards and skewed towards the first half of the year. And that should also average down in the second half of the year. So not to mention G&A expenses, I think you will see a step down already in Q2 and going towards Q3 and Q4. So I guess we still stand behind the run rate of around 30 million a quarter or even lower than that, which you kind of witnessed for the rest of the last year as we go.

That's good to hear. Just one more question, if I may. Is that for other industry players, raising product prices to offset some of these higher memory costs?

Yes, to some extent, because we noticed that our competitors are also raising price, not to mention Garmin, right? But we, compared with a lot of our competitors, our pricing at this point of time is still relatively low. So I think we have more room to raise the price compare with our competitors. But nevertheless, I think we are focusing on the product itself, right? So raising the price is definitely not the final goal. In the end, we want to actually present to the user the best product with the best user experience and best features at the best price which they can get out of the market. So I think that is the goal that we want to strive for.

Perfect. Thank you so much. Thank you, Peter.

Thank you. And our next question today comes from Frank Dugan at Brooks Investments. Please go ahead.

Hi, Leon.

Congratulations on the first quarter performance. My first question would be around the Q2 revenue guidance, and if you can talk more about that, and how do you view the profitability of the portfolio? Yeah, frankly, thank you. We don't give the guidance on the full year, but hopefully I can give you some powder to it later on. But with regard to Q2, we just mentioned it is actually between 63 to 68 million, which is roughly a growth of 6% to 14%. But however, you see this number is actually accounting for the normal shipment timing and product launch facing during the quarter. If we, let's say, if we have certain products which we initially wanted to produce and sell in Q2, and for some reasons we couldn't manufacture those in time and meet the time window for the sales, it might slip into Q3. And I think we have one or two examples of that, which happens in Q2, which kind of impact our revenue forecast for Q2. However, we actually, our long-term strategy and our target for the year remains still on the profitable growth path because we see, given Q1 and Q2, we see a continued year-over-year growth. and also this year-over-year growth is supported by the demand across our product portfolio on a board base. We believe that heading into the second half of the year, we should be able to continue, number one, the growth path, and number two, if and for the 2026 full year, for sure we're looking at a profitable growth over 2025. I hope that gives you some color for the future. Yeah, thanks, Leon. And yeah, one more question around the new three-year global high-risk partnership. How do you plan to leverage that to drive long-term monetization? The HIROX, as you know, is actually part of or it actually is one of the bigger trends on hybrid training, right? We kind of explained just now that we would like to establish our authority in hybrid training through working very closely with HIROX, right? it actually comes into two folds number one is as the participants of HIROX increase I mean they increased by a lot over the past years and I would believe that is going to continue to increase in the future and looking at the New York HIROX is actually the participants is as many as the participants of New York Marathon, right? So I think number one is we would definitely want to deepen our relationship with HIROX and try to make the feature working better with HIROX, for example, on helping the high rocks athletes uh to track their timing and then to uh to deliver a better timing every time they race um and and and that's the the and hopefully that would also make us and then establish the authority of our brand uh in high rocks and and and and and also as Wayan just mentioned, by doing that, we would like to become users' choice when they look beyond their current watch. Because for a normal user, consumer, there's a moment of time that they start considering a series of spots, be it running, be it hybrid training, be it whatever it is. We want to actually by establishing the authority in HIROX to become users' choice once they become serious on a specific sports in their journey. of when they grow up, right? That's actually what we want to do through HIROX. Right. Thank you.

Thank you. As there are no further questions, I'd like to turn the call back over to the company's IR director, Greg Song, for closing remarks.

Thank you once again for joining us today. If you have further questions, please feel free to contact the Health Investor Relations Department. Thank you.

Thank you. This concludes this conference call. You may now disconnect your line. Thank you and have a pleasant day.