Q2 2020 Huami Corp Earnings Call

You for standing by for who armies corporations second quarter 2020 earnings conference call.

At this time participants are in listen only mode. Today's conference call is being recorded I will now turn the call over to your host Ms. Racetrack director of Investor Relations for the company. Please go ahead Chris.

[music].

Welcome to Homie Corporation second quarter, two Lucky Friday artists Conference call.

The company financial and operating results when you ship Castro Neves Newswire services earlier today and all posted online also view the earnings press release, and a flight to each week.

I always thought on this call that they just either I was actually the company's website at www Dot Dot com Sasha that's true participating on today's call our myself all while our child, though the board of directors to US Chief Executive Officer, and you start they take our Chief financial Officer the companies.

Sure well begin with prepared remarks, I'd call will conclude with such a nice session.

My key all our Chief operating officer will join us for the Q and a session.

Oh, 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 Health Nike 95.

Looking statements involve inherent risks and also to.

As such Albany actual results.

Maybe materially different from the views expressed today, so the information regarding that and other risks and uncertainties. It's included in the Companys annual report on form 20-F for the fiscal year ending December 31st to sell the 19th and other filings.

As filed with the U.S. Securities any tranche Commission the company does not assume any obligation to update any forward looking statements.

As required under applicable law.

Please also note that hobbies earnings press release at this conference call include the Skosh Us audited GAAP financial information as well as all audited non-GAAP financial measures.

He's press release contains a reconciliation of the audit you to non-GAAP mattress [laughter] to the auditing most directly comparable GAAP virus [laughter] all about not call over two hours stable golf all [noise].

[laughter] Hello, everyone.

Thank you for joining owe a news conference call today.

Want to start by highlighting for key take based on the call those financial and operating performance.

But it was a difficult quarter for the industry. We did it will go debit newco in the second quarter unfold.

Yeah at or near the top auto industry cool.

Second.

We are well positioned this our latest new product.

And our go to get to call.

We go into the full run out should you can talk you and holidays.

Sure so called CES and investments in all Andy So continue our active development pace and innovation into trying to talk you bought.

False.

Sure this full all unnoticed offerings.

Partnerships, such as the one no yesterday with Aspen imaging health care.

[laughter] programs to be a solid university they should your partner.

Give me confidence in the future well they insert chotia no side.

Business.

[noise], despite global disruption caused by the Colgate Nike swim and dynamic beat the dead for good growth on both revenue and part of Truman in particular.

Oh amazed trip Brian.

Watch shipments grew 37, you all year.

[laughter] [noise].

This is all feel when its two hours JOL Red Oak Brook assertion.

The condition of our own amazed to Brad.

[laughter] bending sales and marketing strategy.

And now the shifting into second quarter.

Well that be successful ship shall me me back by the fifth generation in the popular all that lie.

I hope.

I wish all todays lunch off our new Zap Brad.

Richard I'll walk health care. So this is Brad.

Today, we are kicking off this up prudent since you're all smart devices.

Beginning with two new smart watches.

We I read injured docs, we are pretty into boxing then that Ryan.

Richard Reid quiet in 2018.

This up all the smallest ecosystem leisure.

As part of it east Riyadh rebranding the consumable phone app towards that.

It's about India U.S.

The first off doesn't mean that models. So you.

We'll be viable in the next me on that Dot com and on Amazon.

This new piled up apart all fall on continued execution on our mission to connect house technology.

In order to build a comprehensive health and fitness ecosystem.

Dol capability in hardware Big data analysis.

Oh, because and add up so did the patients Oh im just as possible.

To tackle these.

Many companies choose to fight solutions from outsized pardon.

Do you chose I wrote a few talk.

Right upping the true shift our south.

I firmly believe one tend not to excel in software without expertise in hardware.

Well I was.

And people, who are really serious about big data so my own sense.

We did about up not only smart devices, but also a I should satisfy our.

Healthcare related Bader and Oh, please and now have a comprehensive eight I Truven health management Paftwo [noise].

[noise] doing how flows I didn't know we shouldn't convention in June.

Lodge Libya too.

And upgraded hockey all health monitoring families.

[laughter] significantly in pools.

In fact, if detection of 80 true people operation at night and doing today by 87% and five times those six useful.

Sad, respectively compared to east.

So that's that's there.

We also launched auction bid.

In Naples, Neil medical grade Broxton level measurement for our smart devices.

So at the mall in a second quarter, we launched the new generation I'll, all or biosensor biotech a true.

That's.

Completed the this design phase for our self developed AI chip alongside too.

Well I decided to us mole processing capability than its predecessor, and enables mobile healthcare you're right. It felt an attitude w. further differentiates our future smartwatch products.

The prime to start bought him production all warm sun to default corridor off this year.

And I don't fully Paul I'll turn to trend you want making it a lot of both to our use of true our smart watches.

In July.

I'll wholly owned subsidiary PPI health.

No and the agreement this toward that show coal calibration Asia to incorporate PPI health science buy back activity match it into potentials digital health at Paul.

Later this week.

It will be announcing a follow on expansion of our relationship with potential.

To co develop male consumer solutions that maybe like a random O. Two they argue with US that's about last well I mean.

You know you army is connecting house bit technology strategy, it's broad.

Why we have already achieved significant markets Trish wonder consumer side, all health technology, we have a nascent industrial side of the business.

Focusing on the insurance and magical institutional side of the industry kind of how.

Mike devices.

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Portable less expensive.

And allow us and care provider to aggregate mall medical data for another piece of business.

Hi health.

[laughter] fast if one thinks that Oh [noise].

Yes, if they [noise].

Yeah, I know, a new venture with Aspen imaging health care.

[laughter] pioneering Neil X Ray technology.

We expect to leverage and combine the engineering expertise of both companies getting cooperative product development.

We expect to leverage you our broader international distribution capabilities for Aspen.

And.

We explore potential investment in the company.

Aspen Basespace in Plano, Texas is creating some disruptive technology full medical imaging.

Michcon open or expand new application.

Additionally, we are really pleased to have hobbyist aten Indonesian already been Dol respiratory expert and upper saddle of Chinese [laughter] CAD to me off engineering Dr., Joe Nash shot to establish.

This shows laboratory facilities.

The corporate office lab, that's for the ongoing study all respiratory disease.

[laughter] hybrid dictation management, you'll see.

Bendable devices that leveraging our expertise in small expandable technology.

I add but is and big data biometric analysis.

While the first Har Har turnkey trendy was shot challenging period of four Oh far.

We are proud to all our performance is smart valuable part that's your most.

That's a sharp execution of our Hell Soviet strategy.

The I'm confident that our device human body, we will continue to cry.

The second how often here.

And we look forward to do boring variable to all of our stakeholders.

Thank you again for joining today I'd now turn the call what to our CFO favorite choice.

Thank you all [noise].

The schools for brand Carlos and global sales and marketing strategies served us well into second quarter.

Despite global uncertain times.

The units so both self branded products.

Me Ben Rose to 8.9 million increase soon by 7.2% from the same pure lots here at leading to 9.5%.

Revenue gross I'm, especially pleased with the Oh, especially piece that we remain profitable despite the lower gross margin affected by our product mix.

Second quarter, so the continuing to prioritize British Sanofi investment in R&D, as well as sales and marketing infrastructure.

Pardon me, if I look what sales channel expansion remain critical components of revenue gross.

Well those costs in a short term profitability. We are confident that continue this stupid to expand in these areas coupled with print and cost control in.

Our general operating expense categories, we will lead us to stronger profitability in the long term.

Mark for the land. So if this call I will highlight the key financial measures for the second quarter 20 Twond.

And I encourage you to refer to our earnings press release for further details Riccardi all financial performance.

No here are some of the highlights for our second quarter, Oh, a modest Rx expressed in RMB unless otherwise stated.

As previously mentioned revenues in the second quarter 2020.

Increased by 9.5% to 1.1 through 7 billion RMB.

From a 1.039 billion RMB for the second quarter of 29 Kim.

The only gross in the quarter was 7.2%.

And the for the first quarter of tons and tons.

Was 18.7%.

Gross profit decreased by 8.6% to 253.4 million RMB from 277.3 million RMB in a second quarter 29 Kim.

Gross margin was 22.3% compared with 26.7% a year ago.

Gross margin can be affected by a product mix.

Different products have different margin contributions.

It is kind of change over the life for product.

In the second quarter 2020, total gross margin was positively affected by a higher mix percentage of upon me branded products.

Also the by a higher makes up for lower margin products shifted to show me.

And part discounts and promotions for some older products in the transition to the new me about five.

Next I want with these cost impact of call it nine king our business.

Took corona harder is continuing to have a significant negative effect on retail sales in all areas of the award.

Most of product categories.

Sort of second quarter for example, although trying to recover and opened many retail establishments midway through the second quarter.

Number of you show route retailers reported that that so personal were slow to return to be pricing second quarter results.

In the Americas and Europe continued.

Or researching toll like.

Infection rates capped a many stores closed.

Also kept ammonia show person out of the stores.

Many retailers <unk> deals to your inventory is oh orders during the second quarter.

These all affected to our second quarter results.

Sought after he leaves due to the put them in that slowed a manufacturer of products into first quarter.

I've been resolved with minimal lingering impacts in the second quarter.

Well go for.

Army is working with its channel partners absolutely.

Still evaluate or change their market strategies.

Such as shifting focus to online sales.

On the men retail models.

Well the army has some work direct Oh I sales channels. The vast majority of our revenue flows so through this retail partners channel trials.

Before the pandemic [laughter].

Industry expectations that were forced strong demand and the continued to grow so for smart Smart house technology for many years.

Aside from the disruption.

And resetting of consumer purchasing Massa choices, we see no evidence indicates that.

I got trends have been materially changed.

What are by personal choice ore body encouragement from those who pay for oral care. The war is increasingly focused on improving helps.

In the near term.

With all the reports of people getting mean, we'd still really locked up.

What do you think.

There are maybe uptick in demand for smart house technology in different geographies as people are focused on their house.

In addition.

The company is engaged in research and development related to the detection of cold with 19 inspection through its internal R&D team as well as it with some of its University research partnerships.

Now moving to expenses.

The search on the relevant <unk> expenses increased to 25% to 117.2 million RMB.

From 93.8 million RMB photos second quarter last year.

As a percentage of sales R&D expense only increased 170 basis points to 10.3% in the second quarter.

We are striving for beauty Hot UPOP here R&D team.

For a future gross.

The increase was primarily due to increased the number of R&D stuff otherwise you must summit in health care REIT related features algorithms, Paul services shouldn't research and new products development actually Terry all our mission.

On the was also up that's the we are aiming to launch a series of new products in the second half of <unk>.

Thank you 20 to expand our customer base, so we target different a geography and price points.

Oh, so some marketing expenses increased by 76.6%.

Cool 71 point Threemillion RMB.

40.4 million in RMB for the second quarter last year.

Our percentage of sales basis sales and marketing expense.

Rose to 6.3% of revenue, we're supposed to 3.9%.

In a year ago quarter.

Do you increased the was primarily due to expanding international markets outside of China for or amazed good branded products, including the increases in advertising and promotional expenses. They were a holiday sales and promotional events.

Growth in personnel related expenses.

In June we organized our first.

Innovation convention to pitch and our current research frees up to the public and opened our first on liquid Oh fly retail store in Beijing.

All for domestic consumers the opportunity to have a first hand in person experience, we saw apart accent and viewed our press.

We have a strategy to open a number they slow patients globally, a number of days are.

Independent authorized.

Dealers.

Second quarter, Twentytwenty general and administrative expenses increased to 9% pool 55.4 million RMB from 51 million R&D for the second quarter last year.

Talking primarily increased exchange rate fluctuations professional fees for business management, and depreciation and amortization expenses.

Offset by a decrease of share based compensation.

Our total operating expenses increased by 32% to 244 million RMB from 185.2 million R&D for the second quarter of turnkey 19.

Total operating expense represented a 21.5% of revenue in the second quarter 2020 compared to 17.8% in the a year ago quarter.

And 20.6% in Q1 Twentytwenty.

Reflects the affecting our strategy a consistent investment in R&D with and emphasize on health care related product development and testing talent acquisition. In addition to branding and marketing tool yeah. Hence our company is long term returns.

Yes.

Operating income for the second quarter, Twentytwenty was 9.4 million RMB down from 2.1 million RMB into it you're a year ago quarter.

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Primarily by the year over year, an increase of 31 million RMB in sales and marketing expense and 23 million RMB in R&D.

Relating to cash.

As of June Thirtyth Twentytwenty, the company had cash and cash equivalents of 2.6 billion RMP compared with 1.8 billion RMB as of December 31st a 29 kit.

Now, let's turn to our awful.

For the third quarter Twentytwenty management currently expects net revenues to be between 2.1 billion RMB.

And 2.15 billion RMB, which would represent an increase of.

Approximately 13% to 16% from the third quarter of 29 Kim.

Oh, it's based on the current market conditions.

And if that's the company management's current and preliminary estimates are for market and operating conditions and consumer demand, which are all subject to change.

This concludes our prepared remarks, we'll now open the call two questions. Operator. Please go ahead.

Thank you will begin we'll now begin the question any into recession to ask a question. You May proceed Star then one on your Touchtone phone.

Isn't he speakerphone, please pick up your handset before pressing the keys to withdraw your question. Please press Star then too.

First question comes from CLO, Oh excuse me.

For the benefit of all participants on today's call. If you wish to ask your question to the company's management Chinese.

Please immediately repeat your question in English. Our first question comes from close to young from Credit Suisse. Please go ahead.

Hi management. Thank you for taking my question I have three small questions.

Yes, the sales and marketing expenses in second quarter I you spoke about the expansion in Channelinsight can we on can can you speak a little bit about where these expenses has gone into a they kinda expansion and if there's any.

Civic updates on that my second question is on R&D or what kind of expectation Oh, what kind of level of R&D should we expect in the second half or 2020, ending 2021 and lastly.

What is the current status with the contract renewal with Sean.

Thank you very much.

[noise]. So [laughter]. Thank you for your question.

Mr is perspective to our sales and marketing expenses we.

We we launched a multiple products are in the one Huff a 2020 and then we attended does he asked at the beginning of this year and we also hired.

Multi pull up for personnel, so in sales and marketing tool.

Cool pool, how cost to build the channel in Europe also in Southeast Asia and the we also add a few new stuff.

The U.S. so our strategy is to sell.

Our products and also hopefully in fuel Troy.

Expanded the used tool.

Well its car services into the global markets. So given the put them. It is going away in those regions and though we're sending out our stuff and.

We're setting up a new companies in those countries, so I'm, where our way to.

First they seem to girls.

So that's how we expanded our sales and marketing dollars.

Well, yes regarding our R&D expense again, so we spend.

[noise] money in adding new qualified R&D just stuff.

So we.

Yeah.

New style a fairly quick.

In the latter part of last year and first half of this year, we anticipated that the b the R&D expense gross a wheel.

Relatively moderate as compared to a they already are purist. So a in the second half of this year and the early or 2021. So.

Well, we will not see significant increase in our R&D expense.

Given that our revenue should pick up in Q3 in Q4.

With respect to show me his contract so what I can say right now is our relationship with Xiaomi is deeper than.

That's just a vendor relationship. This is a we all know and and the show me.

Oh, so has seen significant ownership interest in plumbing and.

And it's important to understand the general counterpart, we're talking about.

I will show me is just about the plant a plan to terms and conditions associated with being a preferred vendor.

So we negotiated specific contractor for each product, we develop affords them.

Such as the New me Bye bye.

Data, how we have done business.

As shown me in the past then expect that to continue in the future.

So although I have no additional opted beyond that but but the we are.

Let's take that.

We.

Should be able to negotiate it though is to show me to sign up similar a framework a contract with Shami and continue our strong relationship with show me.

Along the way.

Thank you. Thank you very much.

Thank you very much in it.

Thanks.

The next question comes from Xudong Chen from C. I see see please go ahead.

Hi management. Thank you for taking my question I think you just thoughts on your brand names.

Well, we focus on the small equipment for sports you I Wonder what do you foresee product line and my second question. If I I think you all who could operate with who then you are you sure would imply here could you give me more information about the Corporation thing.

Sure.

I will start up.

I'm sorry is that.

Oh I'm sorry.

Sure. So I I well, maybe just try to offer to purchase first question regarding SAP, Brent and then I will leave to set some question.

ER.

To Mike cancer. So sad is a brand new brand we introduced to the market is Oh, our digital house.

Solution.

Brand with variable technology, and so we launched this new brand.

Yeah, we hope data because speaks to a little different audience.

And.

Maybe you see there right now is aimed a more at every day and SAB aims to lead the Dressier was a style in terms of.

Parlak futures.

Materials so.

We and I I see you know that we are mission is to connect a house or what it was technology. So would currently we are launching a new policy or.

Under Seth Brad, but your future we hope that we can build the SEC line I'm not just for the for the hardware, but also for providing house of solutions.

Ah globally.

Mike.

Yes. Thank you David Yeah regarding the partnership with for 10 show a actually Oh, you probably a few announcement a press release earlier, you know Oh, no potential Asia in pilot, which is again our.

Wholly owned subsidiary basically yeah, it's a oh.

<unk> expenses partnership.

The press release, Oh that we released earlier I talked about a potential incorporate ice show a health a five respect to be metric.

With them into.

The potential slippage there.

Which is calls a which is oh right now you know how about over 6 million downloads.

Yeah Yeah.

In a big calls we did all over Asia.

And that is of course.

That's reduces about but from a will be also or working with potential to expand our partnership and which will be a Dallas and then second press release, Oh, Bursley and basically Oh, we will.

Yes, each other so products and services to cross sell Upsells.

About two to each oh, two to each other's customers.

And Uh huh.

On both health and well.

Products and services.

Well for our joint though users consumers.

And that you'll hear more news about so more expensive.

Partnership again, assuming that's getting that press release later this week.

Thanks.

The next question comes from Tony thing from Ita. Please go ahead.

Who makes good sense, both chemo my call Oh Wow two questions. The first question is a youre a the maximum.

T. I you all are still in the go to call her.

How big of a little color about Gogo Coke ROIC over time and I'll work in the market and also hall about sales recovery or what the market.

I mean, that's a delicate situation.

Oh, My second question, how about Oh, gosh Mommy off do you, though so the culture. So thank you.

Okay. So we did provide us trial, a strong I'm focused on for Q3.

Because a we we do anticipate that.

A a strong sosa recovery overseas market mm and also in domestic market. So we will see a more shouldn't <unk> Mi Ben me Ben products that but we see even more stronger.

Hi recovery for our branded or own branded products.

Yes, that's why you can see sequentially that we we doubled our.

For Q3, and similarly, we anticipated that that Q4, a should should be also oh strong. So that's the results of that we should see a strong second half of turnkey today.

So our gross margin regarding all gross margin.

As you can see in Q2, our margin was in ER Doc worried because the way because see in June we ship, we launched I'm even five.

So also during this period the way.

Per why did the deeper discount me, but for out which attract our or gross margin. So in Q3 Q4, we will see a we will see the product mix.

Change.

Minions dad, where you will.

Sell more me about five worse is a rebound me about four or so that well see a show me.

Me bands the margin a will climb.

And also for our own brand to a margin we will see will remain strong. So yeah. Mike My best estimate is that we will see.

Well, we'll see.

A little bit a higher gross margin in Q3.

Thank you.

The next question comes from Michelle's, saying from China Renaissance. Please go ahead.

Hi, Thank you management for taking my question. So I have two questions. The first one if I could you. Please give me more color like on the net income guidance like for de Sac commentary on the second question age I could you. Please share more regarding the a geographic south distribution and anticipate that.

And also an update I'll see current situation in Europe, and India and Q.

[noise], so ah, but at this moment I may not be able to provide and accelerated or net income guidance, but what I can see is that.

We will take a extreme measure oh controlling our operating expenses in the second half.

And you will not see.

Huh.

The same girls treated in operating expenses.

As compared to our revenue gross so I'm, what I'm trying to see is that the net margin for a second half will significantly improved as compared to the first half.

Because that's what I can comment in terms of the G.O. profit distribution or a foreign show me is products.

We have the exact a number but with no.

A large portion of me bad were shipped overseas.

And for an amazing branded products, we ship or even more to overseas. So de Joe profit distribution will will be.

Primarily to European markers and.

Second it won't be too he southeast Asia market, and we all we sell our products to over.

Too many countries and including North America. So so the primary amount because our European markets and on the South East Southeast Asian markets, and we see deep per dynamic.

Situation improves and remember that we do have a roughly about half of our popular sold online.

In those markets. So so we do see a lot improvements.

HM in our sales HM.

Global markets.

Thank you.

Thanks.

The next question comes from Robert Channel from 86 Research. Please go ahead.

Hi management. Thanks for taking my question I'd like to ask about pricing. So a in the second quarter I guess the the blended.

Average selling price was down.

I'm, a little bit year on year.

And you mentioned discounting related to me that's four in anticipation of a launch.

How is the pricing on me then five relative to.

Previous generation and what kind of trend do you expect.

And pricing going forward.

Well.

In Q2.

We shipped a and B C.

He killed who we shipped a more leap and for them.

You bet five so where did provide deeper discount only bed for so that's a reason to drive down the ASP in Q2. So you think you fight. So we definitely should more me about five.

Dan Eva for so I'm pretty sure that the U.S.P. It will cry.

And ER the retail price, even though are for me, but what about five is higher than anybody for and also as a new products HM.

As a products and new to the market or the we'd do not provide discount keep on me, but I. So.

I I will say I will say you get the regular price on me about fine so.

As I was handset.

Thank you.

Yes.

The next question comes from Andre Lin from Citi. Please go ahead.

Oh, Hi, Mike. Thank you for taking my question I have a one question.

Regarding the next quarter inside and you should have been called pardon me how much contribution barrels.

Well coming from Ben.

And I have a lot.

Yeah.

I would expect it similar product mix as you real.

Given that.

Well sales for both.

Well show me, a self brunt of hot products are strong and and a I would expect into 77th is certainly split.

Thank you and reduce your little bit about Oh lifecycle pets and on the new generation product you did a lot on shows a peak during the first few quarters actually launch and then they go to decline and the Jewish.

About.

Oh, the expected challenges generation.

Well regarding regarding me Ben we have we have.

Are we.

We have much shorter.

A product cycle in terms of Ah you know launching new products.

At between you and me been beaten the bands read only about four you about four told me about five it's about a year, we launch new products and with respect to a nascent products.

Seth products. So we will have a much quicker.

Bruce and a we have the varieties of an older products and new products and we will.

Maybe we have at least a year, we should have operated Oh, this products and and if not it we will launch new products. So it's a much faster and you will see a pipeline something.

New product under this new brands coming out.

Is there no further questions now I'd like to turn the call back over to the company for closing remarks.

Thank you once again for joining us today, if you have for her passion. Please feel free to content Army C met terminations Department. This concludes this conference call you may now be commenting on line. Thank you.

[music].