Q3 2020 Huami Corp Earnings Call

Ladies and gentlemen, thank you for standing by for on Me Corporation third quarter 2020 earnings Conference call.

At this time, all participants are in listen only mode.

Today's conference call is being recorded a.

I will now turn the call over to your host Ms. growth strong director of Investor Relations for the company. Please go ahead Greg.

Hello, and welcome to a call Me Corporation third quarter, a compete on <unk> earnings Conference call.

<unk> financial and operating results for sure.

That's a pretty sad newswire services earlier today and a posted on <unk>.

I will also be a <unk> earnings press release and a slide.

Slide two a which we will refer on this call by a they depend on I always talk show on the company's website at Www Dot Com moved on calls Sasha that's true participating on today's call are mr., a wall or chilled out a board of directors, a chief Executive Officer, Mr. <unk> Chen.

Our Chief Financial Officer.

The Companys management.

I will begin with prepared remarks on the call, we'll conclude with up to one day session.

Mike Young our Chief operating officer will join us for the Q on a session before.

Before we continue.

Please note that today's discussion will contain forward looking statements made although the safe harbor provision on the U.S. private securities. They keep day shied away from a liking Nike on site for looking statements. He won't hold on risks at all so T as such the Companys actual results maybe Mike.

Sure a really different from the views expressed today.

Further information regarding this and other risks and also compete is included in the Companys annual report on form 20-F put a fit hole you're on good at December 31st a 2009 channel at.

And other financing as filed with the U.S. Securities on the Exchange Commission.

The company does not a feel any obligation to update any forward looking statements, except as required under applicable law.

Please also note that promise on his press release on this conference call include a discussion of all audited GAAP financial information as well as auditing no GAAP.

I show a measured Tommy.

From a press release contains a reconciliation of the all audited non-GAAP measures to the on audited most directly comparable GAAP measures all mountains, a call Overqualify day Youre, so far a wall. Please go ahead.

[laughter] Hello, everyone.

Thank you for going on warnings corpus call It a day.

We are pleased to report another quarter of solid financial results.

Hi largest side revenue growth.

Could you person you Oh, you that's a exceeded our expectation despite subscribing shoes due to the Cobi nitrogen South park partially.

Since then and resolved.

Oh, a topline results.

Complemented by a button a lot broke a bit abilities.

Good day.

[laughter] testifies to the loans in those all follow a portfolio of small class health products and services.

Oh, it efficient, although there's a lot of flow capability.

That's a launch five new smart watch a part of you know so called.

I'm pleased to be out there both on pace.

True.

That's true yes.

Oh says Oh, a Kim a future according to Uh huh.

And our product portfolio is well positioned for the global hit true.

A holiday season.

[noise] innovation.

It's always been so coal pulse on what the next day.

It drives all on the day above them and.

As a post how a comprehensive health and fitness ecosystem.

Refracting day, you called it a number of new product upgrades and launches into a broker in September we upgraded our most popular book product line.

So do you see a Judy all smart watches.

Numerous technology it is both a necessity.

No.

So a upgraded bullshit a four weeks it could this be true that's a cold but auction will carry on.

Among other important a completion Brock.

Oh gosh this situation data, yes, and it's just it's does show a metric used to want to freezing kartik.

Our cloud because force very.

Very good I'll be amazed EBIT GTR to a sale.

Well, it's a best of luck smart they had a both a also upgraded our newly launched.

Biotech a true PBG, Chris you flow by seven Hartley sense, though.

If the book suppose by biological data engine and that's a both.

Well, it's a true a precise filed a sense, though [noise].

Yes, I loved your balance.

We also launched how a new aftermarket zep, Brett as previously announced in August.

So that's a long brings a whole comprehensive and professional health and fitness Masterman dispute is true use a lot.

Leveraging our chief a small medical technology.

So call it a.

We also extended our cooperation agreements with our strategic.

The teacher part show me.

It's a me Ben.

Just on important part, allowing to us and to the global value focus a market.

And we are pleased to continue to won't be a show me on that product line.

Now turning to our global expansion I suppose.

Our main state product achieved strong markets puts you shouldnt in many on the international market we saw book.

According to the I.D.C. live Paul Yeah.

I've been pushing.

A number one market share in Spain, and Indonesia Force that we'll call it does.

Yes, I do you see.

Second quarter to talk a baby.

Maybe just a pure is a 353.7 per cent gross debt.

India market.

And 241.6 per se.

End of that's done would go on a box it.

'cause a tribute by outgrowing Brendan definition, strengthening sales and marketing strategies, a Dutch the true distribution channel.

Our international shipments as a percentage of total was 49.5% in the flow Coker.

Even our largest market like youre looking at the E Bay on view on their does impact on Cobi nights you.

Well I mean, a jami device activation data for those.

Did you lose share outgrow brightree should be.

So from a fold increase in the number of countries.

Sizeable activation in the broker called on this year.

Well, it's just a loss either.

Starting in September.

True up our most popular a smart watch loans.

There may be a.

And the amazed beetroot, yes.

Become available for purchase in America had a war 2800 warm on the tail stone debt.

The first time that consume a pen biden at Walmart store.

We believe there's much all fit between these value priced lung and Wal Mart target salt per well.

We are pleased to have expanded our retail channel.

Distribution. This just a lot of partner and be a cute exporting [noise], though.

Oh, a truly a few smith on for global large channel.

It's worth remembering that the goal, though Mike.

And that does make a true.

Personal health awareness value.

Value embraced before the pandemic.

And the last 10 months, a broad awareness true, though to a couple of times level.

Also note that leading industry.

No that's it.

A a unified in day, a full tough for continued a strong demand for a small compatibles well into the future.

The variety of form factors keeps expanding and we all do spending right along obviously.

The global opportunities remain robust full bombing, especially this all a part of Marquis position oldest presenting exceptional value and features that at every price on this.

Neil product and so this is there a bar Goldman as well as Joe a graphic expansion how old part of our continued execution on our connected health technology strategy.

In a dip in addition, yes.

Yeah, now doing a a.

A cut because they make the should powder.

Cooperative with more than 20 different hockey those the should interest you and pharmaceutical companies in both China and overseas too.

To help margin to use a health condition by using our a small compatible devices.

To name a few.

Yeah, now walking me a <unk>.

The.

So from a.

A fit is a hockey, though a long Joe's medical college, and Dr., Joan Gosh on Tim on a chosen asthma or are you wanting project.

<unk> identifies V S. A T area of interest while a useless.

And a walking to the Stat book Sleep Medicine centre in the U.S. and audits to collect more data and perform well.

Not at this.

So on my objective on these occurred to me, it's just a products.

It will be.

True offer all a useless goal.

Imagine a health care. So this is including a pretty busy one day and more comprehensive health condition analysis in the future net.

Leveraging our device its ability to debt here Hi card you take a consistent free from every model regardless of price.

On a final topic I want to know.

Look he wanted him a dishes.

At all on Board meeting last Friday, we added a nail it depends on the latter [noise].

True I'm useful.

I'm very pleased.

Mr. Bean see recently retired a from leading worldwide net sales at Texas instruments.

Greed should join our board.

That's an independent a director thing, though on the board audit compensation and nominating and corporate average.

Corporate governance committees.

Next I want to formally introduce our new Chief Financial Officer, Mr. Leal from those.

On comes to you well I mean from Royal Philips.

Yeah. He was most missionary global head of finance.

Full phase, it's a full phillips.

Domestic Uh huh.

They should.

He brings to a 17 years up expenses.

Curious, if you're not counting financial management.

Manufacturing.

It's back to on a going up and many other key international markets.

Yeah.

A teacher traject shouldn't dispute is that I believe will help wami, especially in our next phase of growth Neil they'll come true. Your book Why me a nice call me after that to a happy view, a pop up about him and looking for cash.

Your leadership a b.

We continue to execute a.

Good growth a business the floor is yours.

Thank you all I'm not exactly to join the or from your family I believe that with my global consumer House experience like a helped a company focused on managing a sustainable growth.

On me has grown very fast and as many opportunities on both the house on fitness sector on consumer industrial sites on health care.

Greetings, putting off my 17 years of strategic operational financial and now Tony management experience at Philips will be focusing on continuing to improve from management processes plenty and financial controls.

Hi, Ted I anticipate looking on areas such as working capital management cash flow on return on invested capital I also look forward to a leveraging my experience to help manage the company's global expansion in the future. So lets begin talking about a third quarter results, which sells the Kobe 19 virus.

Continue to challenge companies on their business plan around the world a both helped on her twomey third quarter during the summer quarter called Big cases, a basic in many regions I know a loud local economies to open a lot more per.

People called outside to exercise on to live their lives that what's good for the industry on why me shipped a 15.9 million units in the quarter, a 16.1% from a year ago. So a quarter on driving a revenue increase of 20% the largest portion of that increase was driven.

By the Shami band five on we also began shipping on a number of our own a brand new products as well on just described.

Right. The virus heard us was in some supply challenges, which left us a short all from new balmy product inventory in a number of locations on.

Force that delay on some offer a new product launches from the beginning to the and on the third quarter.

Moving to say on the impact on the virus when I talk about the look I had a guidance.

But first I want a focus on just a few key numbers, including gross margin on operating expenses that I think on the most important for understanding what happened in a corner on.

That's a shape our outlook.

Gross margin can be affected by quite a mix product launch timing on product lifecycles, including model upgrades, a 460 basis point decrease in gross margin from a year ago quarter, what's a predominantly driven by a dose effect.

They are a specific case gross margin can be impacted by the proportional split between products, which we make on how to show me and also the products, we're bringing to market on their own brands.

Split off products between Xiaomi and from me, what's the same or even a year ago quarter, reflecting nearly identical patterns of old model winding down on a new model <unk> a quantity shipments for show me in.

In this years quarter that was a new xiaomi beep on five.

Gross margin on Shomi products in 2023rd quarter was 400 basis points lower than a year ago quarter. This much larger volume on for Shami product versus our own branded products in a quarter was a primary driver on the overall no a gross margin.

Let me next highlight operating expenses as has been true all day year sells a marketing see on T., a net expenses have been a year over year quite significantly in some areas. As you saw in today's press release, R&D was up 38.8% year over year.

On a comprised a 7.7 per cent off the revenue compared to 6.7 per cent a year ago cells.

So it's a marketing expense. This was up 100 on a 4.2% year over year on comprised 5.2% of revenue compared to a three point per cent a year ago.

She a nine increased 30.8% year over year, comprising 4.1% off the revenue compared to.

3.7, a year ago.

R&D has achieved a scale, which we believe could continue to drive strong new product development going forward. So it's a marketing expenses vary from west seasonality on obviously it is important to support a key selling season.

The year on holidays on as we expand geographically.

But we expect to apply some additional process to prioritize Sal said marketing investments with a highest south impact on a return on investment so with a fourth quarter on into the next year.

Total operating expenses in a third quarter 2020 was up 51.3% year over year.

From a pricing 17% of revenue compared to 13.5% a year ago quarter.

Given the uncertainties of the data for the foreseeable future, we're going to manage operating expenses to a percentage of sales target at about where are they on now.

In order to maintain profitability the.

The Companys cash position continues to be strong, finishing the third quarter with cash on cash and equivalents of RMB 2500, a 56 million up 42% from December 31st to solve a Nike.

It's a sad the new resurgence of cases in our key markets on Europe on Russia, and the U.S. a increasingly a an increase in the other areas.

Caused us to temper our outlook for fourth quarter sales, how the impact of the virus will play out through the holidays. It's a very I'll start to retailers in several key geography. After weve opening during the summer a facing new locked on according to many recent media reports our guidance roughly.

Alex This a certainty for fourth quarter to 2020 match fund a currently expects net revenues to be between RMB 1.95 billion on RMB 2.15 billion.

That outlook is based on the current market conditions and reflects a company managements current and preliminary estimates of market on.

Operating conditions on customer demand.

Were true all subject to change this.

This concludes our prepared remarks, well now open the call to questions. Operator. Please go ahead.

Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset it's more pressing the keys to withdraw your question. Please press Star then too.

As a benefit of all participants on today's call. If you wish to ask your question to the company's management in Chinese. Please immediately you repeat your question in English at this time, we will talk momentarily to assemble the roster.

The first a question today comes from a kind of a long of credit Suisse. Please go ahead.

Since claims for taking my questions I have a fly a maybe two to three questions nice so its a first one's actually won a judge as you know a golf margin on.

A good I also on I heard I see Oh part the mix is the main reason, but do you think that this is also more loans at all not seen you feel going into a full quarter and all showed a first half from next year. Because we also see the a a we also see somebody is a cheap pushing more on pushing harder.

HM promotion for those promotion and also a on your on gene part a in the Iraqi business. So I think they want to a drive they'll be possibly on the iota business for a second half and also it next year and so what these becomes a more like a long lasting I mean.

On to like a coming quarters a.

In terms of these like a show me poured a mix issue and I also want a true if there's any impact from the currency a that's a force change a in terms on the margin a because sites. A we also see be a I'd be a bifurcation this past quarter and going forward any impact on this as a first we did a two.

The golf margin that's questions. The second one is about the a.

We say di di di di sells them on Doble patents, because I I'm, a C.D. site Oh sounds a marketing is and also the R&D expenses continue to increase and but he a a macys solace is actually a.

Taking some time to a pickup and Oh, some is due to a COVID-19, but.

How to like how could we expect that the debt that you massman in the R&D on those or south on marketing and be a half a thing in a feel a true. So yeah just wanted to chat these debt.

Since.

Okay not a thank you very much there was a good question. So let me try.

I tried to answer the first question first right on a gross margin I think you're right that a it is always shami go to provide high quality cost in fact, a products to the end customers and we continue to also pack cutting edge functionalities on sensors into our product right. That's also a.

Why we keep on selling our products better that's always a then that's the previous generation right. So a it is true that the gross margin from the Chowmi by a five is actually lower than a deeply that's a generation last year. However, we actually looking for scale on operating leverage from there.

Jami product line on the other had you also noticed shot a our own brands salaries also picking up right now on breast cells is actually a relative carries a relatively high gross margin compared to the shami product right same day and a with the effort on the put on.

Shipments of our own brands and also the continued growth on the show me products in the next year, we at least expect a gross margin to stay at the current level, if and maybe in the second half of next year to expand a little bit.

I think that also is on the gross margin part on the currency part I think we're more looking at the a natural hedge situation because a indiana, we sell a quite.

Quite a bit off their products overseas and we see the dollars and also most of our purchase also paid in dollars. So in this case, a setting a law the Chinese market because that is not subject to R&D a fluctuation on the foreign exchange.

Yes on that dollar impact I think is relatively minimal to us. So I don't see any a baby adverse currency impact coming out of dollars.

So I guess that's come true on the gross margin part a two coming back on only a question on Opex right. I think we are always a long term kind of a thinking on would apply to that two hour a management and a how we manage our business going forward.

Right. So a there's some saying say never a waste a crisis right. So he takes time, we try to a in fact I had a one time and a.

Try to build the foundation for our product launches for next year and also to build a net worth of our distribution channels overseas for a next year a we.

We believe a.

That was the a a core another area, it's a little bit.

Getting [laughter] a away a that is it is good a I did and that probably is going to be a second half of next year that will be the time that you will see a rip out of our football on us.

Thank you.

Yeah.

As a reminder, if you do have a question. Please press Star then one the next question comes from Joe We have industrial Securities. Please go ahead.

Okay. Thanks for taking my question. My first question is a cut a.

House monitoring a monte.

Monitored a function turns smart watches and smart balance into a more widely used devices like T. W. Your flow and what are the co. Various on these two kinds of products. We have so many codes certification that differentiate our products from others and that is my first question.

[noise] I I think [laughter], probably I will be the percent of I'll say a question I guess.

Yes, we see a adopting a consumers to adopt a more and more a the usage of a health monitoring functionalities on a smart watch a during a pandemic right. So that's why you see also our a competitors are on.

ER on the usage of a the data on the rest are picking up right.

On whether or not it will become a tw asked market I think it's too early to tell a but as you see both Apple and other big brands. They have their a actually packing a more and more functionality east or like a a.

Like a E G a net.

Stuff like a a field to a max into a there a watch list I think it's a good sign and then a a and also a trend on where the industry is moving right and yes, there's definitely a barrier to it because you have the difference between a house that fitness they a device and.

On a medical device right and then I think a the medical device part where on a par if not better than our key competitors right.

And with regard to if there's any core barriers the usage of such a data I think the at the FDA approval and a the medical devices approval, a it's going to set us apart a.

Between a cash on health and fitness player and a a serious health player, which we want to be in a future.

Okay.

Okay. Thank you.

My second question is that that's a loss and on his mentioned R&D investments. He is rather than say kind a past nine months. This year, a could management a give more color on what we invest in and how can we improved a property on a forward device.

Oh, no. So on the R&D actually there's a lot of information on which we could disclose a little bit more a and.

And I would just definitely a refer you to the a press release this which we did a I'd.

Beginning on this year around April may timeframe on what we have invested I think we have a investing a high we're happy about that eating a lot of a new functionalities, which will be used in our next generation products.

And a not to mention that we have actually a maybe you don't know we were almost a refreshed all the product lines, which were a comedy has four hour on Brad a bite out of this year, we have launched a so many products in the course of this quarter, a which should set us apart and also.

Like a great a foundation for next year.

I think that's just a guy that's off a few R&D investments, which we did and a and a and if you need to know more a please feel free to send a question to our IR or a car.

Okay, and then we'll have to get back to you.

Okay. Okay. Thank you and I have a one last question a week, we've heard that from you have some cooperation with a maybe insurance company to promote our health care solution could the management share more details on that.

Yes, hi, a from piece a.

Okay got it Mike.

Okay, sorry, a yeah, yeah, yeah, Oh, so a yet so a we are starting to see a insurance oh on a company's a it.

So you.

You may have hurt in a week.

A partner currently in Asia.

Potential Asia a way.

They are they contribute an hour a pie technology algorithm a in.

Two there.

They are a pulse app, which is there a consumer app that will be launched in a over 11 a country.

Countries in Asia a.

And that's just a beginning well a partnership with them. We also a partner with them on a data analysis and also a you know a cross selling a products.

And we also a are.

You know a working on a similar type of deals models a.

The only a nation setting a.

You on North America.

So I said Europe, a and.

And Oh on Oh, you will see a oh.

Oh, no announcements soon but we have a lot, but gosh I was trying to steal yeah.

Okay. Okay. Thank you.

And that's going on.

Mm.

Again, if you have a question. Please press Star then one the next question is a follow up from kind of a long at credit Suisse. Please go ahead.

[laughter] for taking my questions. So I noticed that they say, yeah, hi, EPS the large increase from <unk> stock based compensation need a so called her expense.

Just wanted to get more idea about the on the patterning going forward on that.

We also expect a.

A second I mean time thing that there will be some notch stock based compensation expenses, even though it will not be any outside the a oh I just a an expense due on a chip no. The I mean, the pattern going forward.

Well should we expect on that dense.

Yeah and.

Well, we shall we expect these a similar level in a fourth quarter or so.

So I I think the increase this quarter is actually what we mentioned in the a press release that it's primarily due to the increasing share based compensation, which would give to a few key or a to some key a employees right.

Whether or not it's going to a at the same level on a it's going to a.

But ER cateno into Q4, a I think at this moment my on say no because the a that's a previous one on what you saw a is it's pretty much a one off which I tie it back to some incentive scheme, which we had a.

At this moment net to the best of my knowledge I don't see any a thing in Q4 popping up.

Okay. Thanks.

Next question comes from a shell is from out of China Renaissance. Please go ahead.

Hi, Thank you management for taking my question. So I have two questions. The first learnt a its.

I want to know about the comments about progress on the decrease in true no extensions for Amazon is a car that yeah. They took a lot of my first question on Keith.

[noise] kick a excuse me can you repeat your first question.

Yeah sure. So my first question, Hey, a thought the current status of the a distribution channel expansion for Amazon range or that.

Okay, No I get a so we have actually a very meaningful progress on the I'm a bit products channel building in the third quarter, a as we mentioned our stock products, a beep and T.D.S. entered more than 2800, Walmart stores in the third quarter on where on.

So now serving a more than 70 countries and our sales team covering different regions. A we have a strong process seemed a a universal a large platforms like Amazon a fleet card and aliexpress well also cooperate a waste a lot of local type partners like a reliance in.

Yeah, and a Swiss know a Russia a.

These are only just a few examples a self our straw overseas channel.

We'll continue to strengthen our global a distribution has seen a coming quarters.

Okay. Thank you and my second question is about a the management a outlook for the shipment growth what's been a show me bands and also on speed contacts from next year. Thank you.

[noise] a normally we don't a guide a for the next year, but I can give you some flavor on what it is right I think on a higher level with a global bad market is becoming a relative in mature markets. So we would anticipate that any bad product a share.

The bad product shipment on a a an a and b to somehow stabilize a little bit or with moderate growth going forward [noise], but on the IDE. A had you know the S.P. off our own products at a much higher than desktop the XARTEMIS. So I would expect that our on product shipment will continue to grow alongside with the growth.

Margin expansion, so, but however, I need to caution you that the Kobe Nike virus still has a impact on a global market and we don't know whenever that is going to stop. So therefore, there's still quite some uncertainty around that topic.

I hope that answers your question I'll give you a at least some flavor on what it is.

Yeah, Yeah sure. Thank you think if a match.

As there are no further questions now I'd like to turn the call back or was it a company for closing remarks.

Oh. Thank you once again for joining US today. If you have a follow up question. Please feel free to contact on these Investor Relations Department. This concludes this conference call and then I'll just come back on line on Q.