Q4 2020 Zepp Health Corp Earnings Call
Hello, Ladies and gentlemen, thank you for standing by for his debt health fourth quarter and full year 2020 earnings conference call.
At this time all participants are in listen only mode. Today's conference call is being recorded I'll now turn the call over to your host Ms Grace Zhang director of Investor.
The relations for the company. Please go ahead Grace.
Hello, everyone and welcome to <unk> Health Corporation's fourth quarter, and full year 'twenty 'twenty earnings Conference call.
Company's financial on ultimate.
That's what you should press release Newswire services earlier today and are posted online you can also.
With the earnings press release, and the slides to which we will refer on this call by visiting the IR section of the company's website at Www Dot Dot com cash investor.
Participating in today's call are Mr. Huang Wang our channel of the board of directors and Chief Executive.
Officer and Mr. Li on Chen our Chief financial.
Financial Officer.
The company's management will begin with prepared remarks, and the call will conclude with a Q&A session. Mr. Mike Yeung, our chief operating officer will join us on for the Q&A session.
Before we continue please note that today's discussion will contain forward looking statements made on there the safe Harbor provisions of the U S. Private Securities Litigation Reform Act of 1995 forward looking statements involve inherent risks and also couch it as.
As such the company.
Show results may be materially different.
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.
And at December.
At 31st 2019.
<unk> and other filings as filed with the U S securities on it.
Channel Commission the company does not assume any obligation to update any forward looking statements, except as required under applicable law.
Please.
I will note that <unk> earnings press release, and this conference call include decisions of our audited GAAP financial information as well as our audited non-GAAP financial information.
<unk> press release contains a reconciliation of the on audited non-GAAP measures to the on audit and most direct.
Also on the comparable GAAP measures.
I'll now turn the call over to our CEO. Mr Hall. Please go ahead.
Hello, everyone. Thank you for joining our call 'twenty 'twenty was a remarkable year for old blobs Yep, Oh, the severe disruption.
Broad.
The global pandemic I am pleased to report we recorded two year revenue growth on a year over year basis of 10, 7% and total Schuman volume rose, 8% for the year reached.
Rough she 5.7 mailing units.
Especially our self branded products, which are low.
Penn T per se.
So on 7 million units.
These results are despite a full quarter temper it by Covid impact.
In several of the Indonesian market visa.
Specifically in Q4, our revenue dip by $6 six per cent and total shipment volume fell.
Nikon, 5% both on net.
Year over year basis.
We should highlight however.
Against the challenges our own brands achieved.
So tier one partner, 3% shipment growth in the fourth quarter and continuously strengthened market leadership in countries and regions, such as Indonesia and.
Yes.
Which of these do ranking number one.
In terms of adult smartwatch Sherman.
S. Vaccinations worldwide has begun rolling out in match, we are confident that our business will rise again should in both.
In spite of a new and shipment volume in 2021.
Especially our own branded watches which will become.
The main engine for the business to growth.
Our solid full year results being evidenced to the SCHUNK ness of our.
Our strategy of connecting house, Mrs Technology, the broad appeal of our smart health products and services.
And our debt our ability to execute in a rapidly changing changing environment.
In 'twenty 'twenty he made.
<unk> run efficacy strides in building out our strategy of connecting house with technology node.
No the break.
We identified three pillars that will function and be developed as the framework for our business day.
As a consumer health Tech.
Technology data analytics and industrial house.
Right to pay a few minutes to explain this now.
Consumer health technology is the backbone of our business.
Our products and services in this portfolio.
The thing is many of our troubled debt.
That have made us a global leader in the smart available space, namely commitment to innovation cutting edge technology and speed to market.
In 2020, we introduced a record.
20, plus new products and upgrade bushes, we also branched into new product categories, including ear buds scales and home fitness equipment share.
Chat meals.
Many of these new products well at present.
At the consumer Electronics show CES in January and several of our amazing fit and that branded products, let's see best in show distinction and I call. It from new viewers in leading publications.
Including valuable Tech radar digital trends and gadgets and Wearables.
A key element of our strategy in this segment is to continue to rapidly innovate and bring increased functionality and features to our.
Our powder at all price points.
This has been the bedrock of our success in the variable space and you can expect more the same from us going forward.
Supporting this effort is our ongoing commitment to R&D.
<unk>, Inc, which is core to our DNA on.
Sure.
Per our big Glittery designed and built.
He is smart chip the Wong Sun is Shining example of the of our Provost in technology that distinguish us.
US from competitors.
Now in its second generation the walk on to introduced in 'twenty 'twenty is the most powerful and sat is AI smart chip.
For valuables of discount.
And we have already begun.
E Ouch in our policy.
In the meantime, we are also in the process of developing the new one century.
And we believe we are in the leading position on the AI Smart chip industry falls out of those.
Data on that it takes just a second pillar in our framework and is an integral part in expanding our smart health ecosystem.
Per our Minatory.
Pocketing issue.
Care providers and improve.
Employers.
The second man books to utilize our data on narratives from modern.
Third E mailing at active users in partnership with industry to empower that took boundless dishes.
In this big GAAP.
In.
In late Tianjin Tanti U S based insurance company January sides.
Cited Saudi resolve using analytics from our Pi House unit.
For Whiting units value beyond traditional tools in the underwriting process.
Yes.
Just last week January had another announcement on.
Our standard documenting pies effect this at improving employee health and longevity.
We see these as high because of growth.
Moving recognition for the value valuable data on narratives can bring to the industry.
While the pandemic largely consumed the attention all day.
Insurance industry in 'twenty 'twenty via Hoelzel, 2021 view a flawed.
More opportunities for insurers to integrate wearable device data analysis into their business.
Industrial Health care is the first area, we are developing as part of our framework.
This is a long term development effort.
I believe the index, you health technology space and it presents a churn tomatoes opportunity for us to apply our engineering expertise.
In precision sensors.
Metrics AI chips and engineering.
Capability focused on many cool Ization and health data analysis.
I believe this space, it's also ripe for disruption.
Most recently you have seen the announcement.
The partnership agreement and in.
Persimmon with Panamax show a provider of miniaturized M on technology targeted initially at ULA logic applications.
Two weeks ago daily sieve that FDA five 10-K clearance.
In which was a very exciting critical step.
You also have noted two different announcements about our partnership with Roche.
Movement.
Our first mover leader in portable X Ray technology.
We are.
Our working to was private labeling of their miniaturized X Ray systems for sale in China.
In the industrial health care segment.
In the near term, we view did drive incremental revenue.
Revenue from helping sell products in China.
In the long term he prime to engage in select jointly shirt and harness ways to integrate imaging day data or imaging devices into our health technologies in car system.
To better reflect our strategy positioning connecting health with technology.
Our expanding product portfolio and our growth in the global industrial health care technology market.
On February 25th we announce.
Our name change to that house cooperation. This name is easy to remember Sharon says languages and cultures.
Last but not least in October we extended our share digit cooperation agreement with.
Salmi Corporation for an additional three years.
As part of the extended agreement, we will continue to receive the most preferred partner status to develop sell me valuable potash and enjoy most preferred strategies.
<unk> partnership status for research and development of AI chips and algorithms for wearable devices.
We are currently working on Mi band sticks and expect to launch in the near future.
In closing while.
No one could have predicted.
In nominal.
Impact Covid had on the war in 2020, our result for this year serve as a solid proof points for the lessor loans of our business.
The song this.
Our strategy and the broad base appear on our part us even though we can still see that the COVID-19 still remains our smart valuable business in the salt from especially in a few European countries.
<unk>.
Our key markets.
I am confident that as we continue to execute on our strategy of connecting health with technology, we are well positioned to capture new and exciting opportunities and deliver long term shareholder value.
<unk> now turn the call over to Leo to go on highlights of our fourth quarter and full year results.
Thank you you want on a going to draw it down from one four year view to talk specifically about the fourth quarter I said debt last quarter I wanted to provide.
I have a specific color commentary on just a few key metrics starting with sales from my perspective, the company had a great quarter, despite renewed and impact of the Covid virus reinstituting lockdowns in some of our key European markets for the important holiday period our unit.
<unk> sales were up in most of these markets, but they were up not as much as we believe they would have been otherwise. In addition, a second COVID-19 related impact on the quarter with product deliveries delays in China with some of our newer products in the quarter as a result Q4 revenue from.
So it makes it a debt branded products was up 25% year over year, which we believe could have been even stronger.
Third and the largest factor pushing our numbers to the lower end of our guidance range was that sales of Xiaomi products were not as robust as we had hoped for.
Our Saudi in <unk> 21 per cent decrease in revenue in the quarter compared to 2019, we believe consumer anticipation of Xiaomi its new model may have factored into this effect.
These effects together translated into Q4 revenue of RMB 197 billion compared to.
The guidance range of RMB 195 billion to RMB 2.15 billion.
One of the important takeaways of the quarter is that we saw strong product sales performance across our pricing spectrum.
From the higher end to the value priced for example of our own branded.
Debt smartwatch and band products, the more fashion oriented G. T series in which the newest motto sell for 180 U S dollars comprised 41% of the Smart watch and band unit shipments in the quarter.
Sales of our basic smartwatch series based on pulp in which.
The newest model sell for around 60 U S dollars to 70 U S dollars comprised around 28% of our fourth quarter Smartwatch and bed unit shipments. We think it is important to highlight that our products appeal across a broad spectrum of.
Price points.
Feature sets and consumer expectations.
Revenue from our self branded products grew mid teens to mouth 30 percentage points each quarter in 2020, and we expect that trend to continue.
Now moving to gross margin gross margin can be affected by product.
Product mix product launch timing on product life cycles, including model upgrades. The 480 basis point decrease in gross margin from our year ago fourth quarter was predominantly driven by lower margins on products produced for Xiaomi and to a lesser extent on our own branded products.
From discounting to run out older products and holiday promotional discounting.
Next I wanted to provide additional color on operating expenses.
Total operating expenses trended up through the first three quarters of 2020, but in the fourth quarter decreased sequentially in both.
Absolute amount as well as a percentage of sales.
It was a result of the cost control measures, we discussed in last quarter's call to prioritize the highest return activities in all expense areas.
While reduced sequentially total fourth quarter operating expenses were up $8 nine.
9% year over year, reflecting sales and marketing investments in additional head count as well as marketing and support for global expansion of our self branded products.
I'm sure you noticed in our release the threefold increase in the number of countries in which we had 100 sales.
On more device Activations in this years fourth quarter compared to 2019.
The increase in sales and marketing expenses year over year was offset by reductions in R&D and G&A expenses. We believe R&D is most lease scaled to continue driving our new product.
Developments in 2021, which we know is a key factor to our success.
Given the uncertainties of the pandemic for the foreseeable future, we're going to continue to manage operating expenses to a percentage of sales targets at about where we are now in order to drive profitability.
Reported net income as a percentage of sales was five 8% for fourth quarter compared to nine 8% in a year ago fourth quarter Q4, net income benefit from the net year over year increase of RMB $56 5 million in gain from desktop deconsolidation of.
Sit here, which is the result of 2017 partnership with the electric Toothbrush company in China.
The company's cash position continues to be strong, finishing the fourth quarter with a cash and cash equivalents of RMB, two 7 billion up 26% from December 30.
2019, but down from September 32020.
The sequential decline was driven mainly by.
Working capital swings and investments in industrial health companies, such as Hypersound and per Masimo.
Looking forward to guidance there remains much.
Uncertainty globally about the pandemic, while vaccination rates are rising risks from different strength are being discussed and there are concerns with losing restaurant restrictions and resuming travel.
Europe is currently looking like it will stay largely closed for the near term while in the U.
For a number of states have jumped mask mandates and college spring break seems to be back each week, which risks driving new searches.
Our guidance reflects this continuing uncertainty as well as first quarter seasonality for.
For the first quarter of 2021 management currently expects net.
Net revenue to be between RMB 1.0 billion and RMB 1.15 billion.
That outlook is based on the current market conditions and reflects the company management's current and preliminary estimates of market and operating conditions and customer demand, which are all subject.
The us to change.
This concludes our prepared remarks, we'll now open the call to questions. Operator. Please go ahead.
Thank you we will now begin the question and answer session Jessica.
To ask a question you May Press Star then one on your Touchtone phone from.
Using a speakerphone please pick up your handset before pressing the keys.
Subject to withdraw your question please per store than two.
For the benefit of all participants on today's call. If you wish to ask your question to the company's management and Chinese. Please immediately repeat your question in English.
The first question is from Clive Cheung from.
Credit Suisse. Please go ahead.
Hi management. Thanks for taking my question on my first question is in regard to I guess yeah.
Lower than expected so in full force.
Ah I think it'd be on mentioned.
Hum it was due to.
I guess waiting for the new generation of <unk>.
The products.
So the question is do you see this oh the extension of the placement cycle.
On this company and if there is any structural change.
Uh huh.
My first question. Thank you.
A class I think I can take this question.
The answer to your question is no right. So is that just expense I explained in the script a xiaomi sales job reported this quarter is very much driven by number one COVID-19, especially in the international.
Our cash and number two they're sort of expectation on the new products, which are going to be launched very soon right. So so from that perspective, I think what we experienced in Q4.
We think it's very much a seasonality pattern rather than a structural issue.
National money.
I guess I mean, our our forecast for 2021 and also for Q1 are the outlook reflects that point and also we believe we should have a solid 2021 based on what we prepared in Q4 and Q3 for the product.
And production.
Yeah.
Okay. Thank you very much on just a follow up to that question I guess could you remind us on Wednesday.
So geography for us.
On band products.
I think the.
The.
The debt the the the Xiaomi products I think China remains as our key markets for the Xiaomi products and also the international market is playing a bigger and bigger role I think overall, if you take our Oh self branded.
And the Xiaomi products together, Europe, and the international market Overtakes, the Chinese market at our biggest region of sales.
Okay got it thank you.
Yeah.
Again.
If you have a question. Please press Star then one the net.
Question is from Andrea <unk> from Citigroup. Please go ahead.
Uh huh.
Taking my question.
Got a question regarding that read them.
Can you please share with instruments.
Again to your home or your plan on the Newark with vision and time payroll if possible.
Yeah, maybe I will answer this question I would take this one.
Again Andrew.
So there's a few things on Ito right. So number one ito is actually.
Alrighty state investment, which we had invested.
Investing in January so it's not a Q4 event rather than a Q1 event and then we also don't consolidate Ito in our financial result, and number two each one has its own core business and I'm not sure. If you have noticed that the.
On Monday suddenly I think it's last week published their annual result, and then B a day net income up Ito actually in 2020 and grow by more than 20% versus 2019.
And the third thing, which I want to mention it here. It's also very much in line with what we disclosed before.
They've been we won't elaborate Jane debt that the rationale behind taking this on.
Minority stake. He told is that we want that leveraging that health core capabilities as well as he told us excess to Chinese domestic capital market and then buy join hands on Ito were going to expense.
Per ecosystem for China market in the longer term right I think that's everything we can say about ito at this moment.
Oh, Thank you and.
From a follow up question and give it you.
Provided yourselves a guidance for the first quarter can you. Please also share with us the unit.
Polkas or programs day, they've seen their first two months away from this year and also the when they're using the contribution of the nuclear Navy if you know.
Brokerage.
And so that was idled or Susan or sales.
This year.
Thank you.
Yeah. So I think we have guy that Oh, we have given the outlook for 2021, our Q1 and you just heard that last year at the same period I think our turnover.
Over around 1.09 billion RMB and then this year, we guide around 1 billion to 1.15 billion. So we think there's a high chance that our revenue is going before it between this range in the first two months.
A trend actually provides some confidence on.
On this outlook right.
And looking at the Xiaomi <unk>, new product I cannot say too much about the exact timing, but ah.
The only thing I can I can tell you is that.
They should be back six is coming out very very soon.
Okay got it thank you.
I have no further questions.
The next question is from Joy Lee from Investor Securities. Please go ahead.
Thanks for taking my question congratulations on this quarter performance in spite of the.
And favorable environment I have several questions to follow up on me.
First question is about house monitoring could imagine on Magnum pink give us more color on how we cooperate with insurance company like.
Social insurance or even hospitals thinks this could be a potentially huge market.
I think Mike to answer.
Yeah. This is Mike Yeung, Yes, Ah Yeah, let me try to answer the question, yes, So oh.
Hum Wang mentioned in the script the data analytic is one of our strength.
Especially the debt.
Pi technology in up with them.
We acquired.
Uh huh.
We work with the insurance companies Oh Wow.
Based on basically pie can provide value in.
Elisa.
At least a couple of net.
Hum waste.
First is our Pi can help increase customer engagement.
The reinsurance companies.
Because oh.
Monitoring the pie score.
Or per house.
It's a cash that can be a customer engagement tool to increase.
Customer engagement.
For the insurance company secondly.
Secondly, because price.
Scientifically proven with many years of study and a large population.
Interest.
Companies can use pipe score.
A factor in there.
Actually from aligned to help in their underwriting whether it's a force.
For health insurance or for life insurers are both can use the pi score.
To help them.
Proof.
Interest riding well so.
So this is a second way that.
We're looking at interest insurance companies to.
To integrate the technology.
And.
Also January we mentioned earlier has stuck I'll give me a pass.
Make a lot of stuff.
And.
Published.
Net debt.
The high school is a very effective tool for both of these.
Services from issuance companies.
Does that answer your question.
Yes, Thank you and my.
Study impression is that it's easy to understand that company's advantage, Inc. To be market things are company's product resembles a third party a hardware supplier with leading technology. However, I wonder how to build a stronger brand recognition and what is the target shipment or revenue mix between.
Xiaomi and self branded product.
Yeah. That's a that's a good question now so I think you have seen our 20-F in 2019, the current weighted between Xiaomi and self branded products is around 70% 30.
Second question from.
On the absolute revenue value perspective right.
And I think in Q gradually throughout the year, we're seeing this trend gradually moving for a more self branded products in the weight versus xiaomi, although the movie is gradual.
Per se. So you guys Xiaomi was such a big contribution factor to our top line and any move force for our self branded product to gain the weight actually require the self branded products our sales our revenue growth to be.
Double or triple the Xiaomi.
Right, our gross rate in order to change that mix right stool. So to answer your question I think starting from Q3, and then going into Q4 and Q1, we're seeing this self branded product mix.
In the overall sales mix our take.
Taking place so the self branded products as our overall company's portfolio is gradually gaining weight.
But as I just mentioned any changes to a significant amount all require a few quarters.
For you to see.
<unk> has such a significant structural change.
Okay got it.
And my third question is bound to paying rate of your house surveys or could you share us the current pain right and how this rate would go up in the future and how would that contract neutral.
We're on a revenue mix.
I think it's as we mentioned before most of these surface. Our health services are I think there are two things one is actually the debt the powerhouse and Prudential.
And then the debt Jan Reed type of.
Insurance a tech type of a corporation. So these type of the revenue out of these type of services is going to come out.
22nd half of 2021 based on our later.
Based on forecast right and then if you're talking about the more industrial health as what we mentioned today are early on in the script and the investments of the X Ray machines MRI machines, that's going to be a long term investing our investments and then he is going to be.
Such a self sustaining.
The business model of White labeling right on.
And in order for you to see a significant revenue of that part of the business.
On the up I, probably is going to be a year out so probably you will see something coming up in early.
Early 2022 Ah.
Or or mid 2022, that's our best estimation at this moment in time.
Okay got it and I have one last question is how is the ship and rolling off.
Second generation of function and where the industry.
As true shop.
Shortage impact the supply of our chips.
I think we cannot disclose the specific information on our product lying ourselves, but as we mentioned in the script early on that the wash on too is being rolling out too.
To all of the self branded of our products as we go right. So that progress is Ah is being carried out as we speak and then yes. We also have noticed that there's a shortage of the IC chips are across the industry and for that reason we're also.
Pulling up some of the inventories for the key components of the IC chips also for our smartwatch products.
So you'll see a little bit of that.
The inventory number.
About <unk> of our balance sheet, probably in Q1.
Okay got it I have no further questions in queue.
The next question is from Jacky <unk> from China Renaissance. Please go ahead.
Yeah.
Hi management. Thank you for taking my question and Alan Chris on legal questions.
Food in that quarter on hold here.
Paul you gave us some guidance on the shipments and ASP for Xiaomi on self branded products.
Yes, no. So I think we have already given the outlook for Q1, and then on the full year basis normally we don't give that outlook, but I think Ah.
Kind of what we see and also there's a caveat on how bad the COVID-19, even national market and how fast we can resume.
Back to normal type of.
Working pattern, we believe at this moment that the for yourselves the growth for the company overall is taking.
Based on <unk>, plus the self branded products should be at least at the same pace of the growth rate off 2020.
If not if not more right.
On the E. S. P. Part ASP is actually one of those matrix that is.
Affected by timing on product.
The shops inside and seasonality as well as the product mix changes. So so so so we want to be very careful about eqs. So for the full year. If you look at the combined <unk> S. P. A declined slightly versus last year with most of 2019, the ASP per xiaomi products for the year was flat.
Instead on the S people, our own branded products was up dramatically.
So on and we think the ASP trend for our own branded products will continue to expand in the coming quarters I hope that to some extent also for your questions.
Yeah.
Thank you.
As there are no further questions I'd like to turn the call back over to the company for closing remarks.
Okay.
Thank you once again, thank you want to hang on for China.
If you have found on culture.
But I feel free to contact our Investor Relations Department. This concludes this conference call you may now disconnect.
This has come at you on I. Thank you.
Yeah.
This concludes this conference call you may now disconnect your lines. Thank you.
Please.
Okay.
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Yeah.
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