Q1 2021 Zepp Health Corp Earnings Call

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Hello, Ladies and gentlemen, thank you for standing by for the Health Corp's first quarter 2021 earnings Conference call. At this time all participants are in listen only mode. Today's conference call is being recorded.

I will now turn the call over to your host MS. Grace Zhang Director of Investor Relations for the company. Please go ahead great.

Hello, everyone and welcome to adapt health first quarter earnings conference call, the company's financial and operating results were issued.

Press release, the newswire services earlier today and are posted online you can also view the earnings press release, and the slides to which we will refer on this call by visiting the IR section of the Companys of upside and I are the dotcom Saks and you asked her.

Participating in today's call are Mr of firewall, our chairman of the board of directors and the Chief Executive Officer, and the Mr. Leo Li Our Chief Financial Officer the.

Company's management will begin with prepared remarks, and the call will conclude with a Q&A session. Mr. Mike Yeung, our Chief operating officer will join us for the Q&A session. Before we continue. Please note that today's discussion will contain forward looking statements made.

Under the Safe Harbor provisions of the U S Private Securities Litigation Reform Act of 1995.

Forward looking statements involve inherent risks and uncertainties as such the company's actual results may be materially different from the views expressed today.

The other information regarding this and other risks and uncertainties is included in the company's annual report.

The form 20-F for the fiscal year ended December 31st 2020, and other filings as filed with the U S Securities and the change Commission the.

The company does not assume any obligation to update any forward looking statements, except the required under applicable law.

Please also note that the steps earnings release.

And this conference call include discussions of all audited GAAP financial information as well as all audited non-GAAP financial information that the press release contains a reconciliation of the audited non-GAAP measures to the audits and most Iraq totally comparable GAAP Tamara.

I'll now turn the call over to our CEO. Mr Hall Wall. Please go ahead.

Hello, everyone. Thank you for joining the Holdco.

The first quarter results demonstrate both the resilience of all of the strategy and the popularity of our brand while at the same time, we are challenged by supply chain and of <unk>.

Sure no dynamics debt well in play due to the global pandemic.

The highlight of the first quarter was the performance of all of self branded part of.

Sherman of <unk>.

The branded product more than doubled in the first quarter compared with the same period a year ago.

They also contribute to 64% of all of the total revenue.

That's the part of acceptance and all.

The key product line.

And I used the Paul B and the.

G T series.

The us our newly launched Chi X product line.

Continued to strengthen.

He used to resolve.

And shift, but amidst challenging market conditions.

And the first quarter, our overseas multi channels continued to be adversely impacted by COVID-19.

Supported by the the best performers of all the shell branded part of it.

In Q1 really caused the slight decline 4% year over year close in total revenue to RMB, one 1 billion.

Despite the decrease in shipments for me the inside ahead of the launch of meat and sea.

And of the pending make related issues continue to well debt ratio and our out of the market.

And I could bring the focus back to our part of especially some new product launches of Tibet.

Functionality and.

Partnerships reachable the.

Expect to push both of our brand's popularity and that's about it revenues.

All of them.

First.

Excluding ore and our mission to connect the house type knowledge.

And the first quarter the continued to build out of our comprehensive health and fitness ecosystem spike in managing our product portfolio.

March the launched yeah most of it she likes probe, which is the latest addition to our outdoor sports and generous of smart watches.

The dispute true love the.

15 minutes, we Guage certification and 100 Mitra what holds true.

The extreme temperatures and condition and have passed the Street addition of performers in Juans tests.

In addition to exciting and functionality such as the block.

Oxygen saturation and measurement system full global navigation satellite system and more than 100 different suppose mode settings.

One of my favorite features.

It's a pretty cheap to monitor sleep quality.

The briefs that caused you to rest and sleep.

Essential elements of.

Physical and mental health.

I'll show you in March.

We continuously seek new ways to create and bedroom for our users reached about two per one reach had pay functionality and amaze fit GTS true and should you are too.

Smart watches.

Rolling this out true majority of our smartwatch portfolio.

And desirable and convenient function to our part of.

We have also been working hard on and strengthening our partnerships and expanding into new ones.

Our strategy Thomas you of Estelle me remains as strong as ever.

We successfully launched Mi band six the sixth generation of these popular product line.

In watch and achieved over 1 million units and global Seamus. This is one months of age.

Large state.

The me basics of Heska aside from its stylish design and some incredible health and related functionality.

So the use of hey measurement of.

They have physical condition anytime anywhere.

The newly introduced functions include blood oxygen saturation and monitoring to measure we are using car T and cardio health monitoring to detect Electra heartbeats.

These functions are powered by our self developed AI based agonism of.

Auction bids and.

And live is true respectively.

We are barely even caused the college.

The core sales to resolve some of the Mi band six and at the same time the also walking the SAP.

Tell me, one more exciting and groundbreaking new part of the.

Together with continued strength in our self branded products.

Expect a very strong second quarter.

Liam do you provide more details momentarily.

We also continued to expand our collaboration is leading the search engine choose the smell and health care companies the.

<unk>, the leading hospitals and institutions globally.

On the clinical study to examine the potential benefits of smarter health monitoring equipment.

And improving the quality of life for all the patients.

Chronic heart failure, and reducing the need or the Michigan raised.

For example, one of the hour power projects there.

Collaborating the is the Norwegian and the University of Science and technology called the Nordics.

The knowledge the project is a lesser of cheap based lots of center and mud and did you know the randomized controlled trial.

The secondary prevention and they've had the route.

Had the litigation of patients.

Who has suffered myocardial infarction.

The project will include powerhouse and 750 Patootie participants.

And then yes.

Copy of infection of cloth noise and the next four years.

Our smart watches.

Heartbeat monitoring and oral health management platform.

Being used effectively as part of these clinical studies.

A few comments on our data analysis business.

And an.

Integral part of it.

And expanding our smart health ecosystem.

That's true model and 42 million active users combined piece of our AI and big data analysis capabilities and.

The balance our powerful Pi ebullism.

Allow us to establish a cloud based system that can provide insurers care providers and employers.

Accurately health care and related information to make that took it should that promote wellness and expand our business and lounges and further in the health care industry.

And clothing.

Are we looking for should deliver and loved us. The result in the second quarter and positive by the rising demand. We're all tired of all the expert to concentrate in the wage and enrich our product portfolio the smell.

And the shares for <unk> six.

I am confident that at the because she knew to execute on our strategy of connecting health with technology.

Well positioned to capture new and exciting opportunities and deliver long term shareholder value.

I'll now turn the call over to Leah to Golar will highlights of our fourth quarter financial results.

Yeah.

Thank you well.

And as I did last quarter I want to focus on highlighting what I think a handful of most important matrix study with sales generally from a seasonality perspective, Q1 has always been a soft quarter for us.

However, we had an exceptional quarter in revenue this year from our own and makes that and debt radnet products, which increased 84% in revenue year over year.

Unit growth of self branded products was even higher at 104%.

Emphasizing the impact of the popularity of our higher AD products, such as the G. T series.

You cannot dismiss the health and just.

Maker of inexpensive watches and Thats, where our real global player competing successfully and a wider range of price points.

Given the continuing impact of COVID-19 I think the overall revenue growth of 5% in Q1 is the very solid and reached the top end of our guidance range.

A few areas such as the U S COVID-19 seems to be abating, but in many of our key markets, including many European countries, India, and South American countries COVID-19 spread and restrictions continue to have the impact on our business in the first quarter also affected.

And the quarter, and China subsidies and exemptions from social insurance contributions and it impacted our costs.

And it's often the case timing of new product introductions and this quarter for Xiaomi impacted the quarter Xiaomi product revenue was down 40% year over year in the first quarter large nature of them by the anticipation of the introduction of the beep at six and the second quarter.

The reviews have been positive and expectations for shipping the bad fixed and factors into our strong guidance for Q2.

Q1 demonstrated the continued strength of our high end products. The premium G. T series that sales in the 180 to $200 range comprised 48% of our smart watch and bed unit shipments and the quarter.

The sales of pulp basic smartwatch also continued to be strong in Q1.

That's what the T Rex, including the New T Rex pro the launch during the quarter.

We expect the trend of strong growth for all of them may strength and depth branded products to continue as we expand globally.

Now moving to gross margin gross margin could be affected by product mix product launch timing and product life cycles and.

Including motor upgrades.

First quarter 2021 gross margin stayed at the same 22 five percentage rate as it was in the year ago pre COVID-19 quarter.

As we noted in today's press release gross margin for our old of mace rate and depth rented products varied over the last five quarters between one and the half times the more than double the margin and product fit for Xiaomi.

That trend continued in the first quarter.

That highlights our focus of growing our company branded products and our global expansion to the hub.

All of the overall profitability.

Operating expenses have been a key focus of mine since joining the company in the third quarter last year.

While we have to balance cost controls with fueling growth.

Have decreased total operating expenses for two quarters, the absolute amounts sequentially since the last year's third quarter.

First quarter 2021, total operating expenses was up year over year, reflecting our investments and new product development and global market expansion.

Given the timing of investments also the head of the sales result will continue to manage some expenses of a percentage of sales basis over a longer window of the year.

We don't want of staff critically type of the investments that paid off of the future quarters.

With that in mind first quarter R&D expenses increased year over year, reflecting investments in products that will depart in the busier second half of the year.

Sales and marketing expenses were up year over year, reflecting investment and global growth for all of it makes it and death branded products R&D sales and marketing and G&A costs are down sequentially, either from the third quarter, 2020 high point of from the fourth quarter.

We reported a net loss for the first quarter based on the effects of I have described above.

Our guidance for Q2, we expect a return to GAAP profitability.

The company's cash position continued to be strong, finishing the first quarter with a cash and cash equivalents of RMB, one 1 billion compared to RMB. Two 3 billion at December 31, 2020 the C.

Sequential decline was primarily driven by RMB eight 6 billion of used to compete the minority stake acquisition in Jiangsu Ito of high Tech company in China.

Also invested and some extra chip inventory as a partial hedge on chip availability for the rest of this year as well as some higher inventory for our company branded products. That's the way we're short on some products several quarters last year.

Looking forward to guidance there remains much uncertainty globally about the pandemic, which we have factored into our guidance along with some sequential seasonal improvement and contribution from the Xiaomi Mi bad fix.

For the second quarter of 2021 management currently expects net revenues to be between RMB, One 7 billion and RMB, one 8 billion.

The ranch project, a growth rate of 50% to 58% year over year from the 'twenty 'twenty and second quarters, RMB, one point and one 4 billion.

That outlook is based on the card the market conditions and reflects the company's management's current and preliminary estimates of market and the operating conditions and customer demand.

Which all subject to change.

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

We will now begin the question and answer session to ask the question you May Press Star then one on your telephone keypad.

And if you're using a speakerphone. Please pick up your handset. The quick question. The key switch all of your question. Please press the Jive N T.

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

Once again that starts and wanted if you'd like to ask a question.

The first question comes from class chunk of credit Suisse.

Thank you and management for taking my question I think my question, the logging and based on the OPEC structure, which.

Obviously explore.

Explained, but I just want to get a bit more called the obviously in terms of structure.

And it made a price of 20% to 27% total revenue of this is a I think of historical high for the company. So in terms of this kind of level of intensity in terms of for example in the R&D.

Is this a once off and what do we see what should we expect for the rest of the year and turns off of OPEC timing.

Could you share a little bit on that thank you.

Yes Clive.

And let me take this question.

If you look at the absolute amount of opec's, starting from Q3, 2020 I think we were hovering around 380 million to Q4 around 310, and then to Q1 at 300 O H and if those numbers, which I remember them.

And if those are correct. So from the absolute amount perspective, the OPEC. The number are kept on the trading down over three quarters time right.

But OPEC theres, a fixed and the variable portion of it the what we are seeing.

See in Q1 is largely a seasonality issue issue. If you may right because of the revenue. If you look at last year Q3, Q4, what's the around RMB 2 billion range and then in Q1. This year is actually around one point and what barriers.

So so yes from a price.

Oh path, that's the percentage of sales perspective, Q1, it looks really high but as the cells is going to trend up in the upcoming quarters. We believe that these percentage of opec's as a percentage of sales is going to go down.

Big time in the upcoming quarters right and if you look at the absolute amount I think the OPEC the amount of its going to hover around the same level of Q1 or even lower than Q1.

I hope that answers your question.

Yeah Yeah.

Yeah that does and I think I wanted to follow up particularly on the R&D and obviously, we know we're investing a lot and kind of the health care technology. So do we have a budget for the full year and and in 2000 and triangle one.

Yes, I think from a as a percentage of sales perspective, R&D, there's the seasonality as I just mentioned it right, but overall I think you kind of look at the R&D as a percentage of sales.

And very much similar to what we spent in <unk>.

The year, 2020 and obviously, we just mentioned we don't want to stop any time critical investments, which we believe that the future we kind of reap more benefits all of that.

Okay.

Okay. Thank you very much.

I'll go back to the kind of thinking.

Yeah.

The next question is from Andre and at Citi.

Oh, Thank you for taking my question and the given you have of 1.7 to one point could be again, a revenue guidance could you share with the some of the breakdown between a and B band and that's the Suez, So part of those or or any guidance on the use of.

And the group's growth.

Okay.

So so and yes, I can't give you a feeling for what it is right. So if you look at our self branded products and I think as management and we're quite happy to see the trend continues to actually it started in Q3 last year and in Q4.

We had a good run up of our self branded products I think as it ramped are close to 1 billion AR revenue in AR in Q4.

But in Q1, I think that trend also continues right and so.

So if you remember our seasonality of our full year sales weight perspective, Xiaomi has bee the 70% of our revenue and the self branded has always been the 30% I think starting from Q4, we see that trend structurally changing of more self branded products.

Taking the weight are higher and that mix right. So I think Q1, and it's it's it's probably a little bit the two the extreme we are a self branded products actually sense, the roughly 70% of the total overall mix a force in Q1, but obviously.

Mentioned, the Xiaomi partnership has been a close and and <unk>.

And and very close for us.

Does meet that six and as we launched I think by the end of Q1 has received very good ratings and also the sales has been a very good I think we achieved the 1 million unit sales of just a few days after we launched the debt.

Right. So so to answer your question. If you look at Q2, obviously, the the bad fixed sales is going to fewer of some of that growth, which we projected but also of our self branded products will also take the same shape.

And it's going to be of strong growth for all of our self branded products in Q2 as well.

I hope that gives you some feeling of why we guided the such a number for Q2.

Understood. Thank you.

Could you share a bit of on.

On the the rough breakdown or on the and should the union grows so that we can have a bit of sitting on the gross margin and package.

Thank you.

I think you I think that so Q1. This year, if you look at Xiaomi assets right at the 70% itself rather than the 30% share.

Me and I think for Q4.

The Europe, you're going to be looking at 60 of 50% to 60% and xiaomi and the rest of won't be self branded.

And so that the also applies.

Two of the second quarter revenue.

Yeah. So if you look at second quarter revenue and.

And I'd say, the xiaomi will be.

That's for 50% to 60% of what we guided for Q2 and.

And the rest of the will be south rented.

And that's the very clear thank you very much.

Again, if you have a question. Please press star then what the.

The next question comes from MS, Michelle Zhang of China rest of Renaissance.

I think the management for taking my question, so I'd like to understand up all of that cause the jam items for both sides of the xiaomi and rounded the corner of that going forward like a leather and make sure Xbox and it could be stable or that there is still a trend for them to go off of that.

Okay.

Michelle we'd never die the.

The ITM for four hour floor of guidance going forward, but I can't give you of feeling right. So as I mentioned the E.

Before the self branded products gross margin for the past five quarters had been always be one five times to two times, the xiaomi product margin right and you know the xiaomi product margin, we have disclosed before in the Ah <unk>.

15% to 17% range of a also a I think its around that range right so going forward and.

And I think you kind of see this impact in the past quarters already gradually changing right and our gross margin has been going down from Q3 to Q4 and then now in Q1. Its the start to trend up I think we're expecting this trend to continue in the second the quarter.

As well as into the second half of this year.

Okay. Thank you and my second question off line.

The revenue breakdown in terms of.

Geography, and also the online offline and distribution channel.

And I beg your pardon.

Yeah, and I think the question I suppose.

You are south breakdown in terms of lack of our geography and also are the proportion of your online and offline distribution and also the trend going from the work.

Okay. Okay. Thank you so no. So so so so so so xiaomi is it's the business day.

And our book is actually a business to business.

A bit of salt for US right. So so I think putting xiaomi as a site. If you look at the self branded products. So yeah, I'm only talking about the self branded products right.

Europe is actually our biggest Ah Ah Ah market and then I think followed by China U S and the rest of the world right.

And and and and I see no debt, there sort of restrictions and Lockdowns of Europe and that continues in Q1. So we were hampered a little bit by the sales are are the offline channel our sales Europe right and that also applies to many of the many parts of the world.

Where we operate so so to answer your second part of the question at this moment majority of the self branded products are selling through the online channel right, but we expect that as the COVID-19 is the AP and AR for example, the United States and also we see a good trend.

And in Europe, because of the Lockdown has been relaxed to sort of extent and we believe that the offline channel sales will also play a bigger role in the second half of this year.

Okay. Thank you so much.

The next question comes from.

And that's G O N E.

Yeah.

Okay.

Okay.

Okay at this time and no further questions.

Okay.

Okay.

And I'd like to turn the call back over to accompany parts of the company for closing remarks.

Okay.

And thank you once again for joining us today and you still have further questions. Please feel free to.

Cash SAP Health Investor Relations Department. This concludes this conference call. Thank you.

Yes.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.