Q2 2021 Zepp Health Corp Earnings Call

Hello, Ladies and gentlemen, thank you for standing by for US. That's helped corporation second quarter 2021 earnings conference call. At this time, all participants are in a listen only mode.

Today's conference call is being recorded.

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

Hello, everyone and welcome to the SAP Health Corporation second quarter earnings Conference call.

Company's financial and operating results or are you shooting a press release via 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 that was visiting the IR section of the company's website and I are the Zap dotcom parties are paid.

In today's call are Mr Hall, our chairman of the board of Directors, and Chief Executive Officer, and Mr. Leon 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 Q&A session.

Four 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 1919, five forward looking statements involve inherent risks and uncertainties.

As such the company's actual results may be materially different found of UC threats.

Right.

And other risks and all of a sudden.

Included in the company.

Annual report on turnkey ASP for the whole.

Oh year ended December 31st 2020, and other filings as filed with the U S Securities and Exchange Commission. The company does not assume any obligation to update any forward looking statement, except required under applicable law.

Please also note that shops earnings press release and this conference call include discussions.

All audit to the GAAP financial information as well as all audited non-GAAP financial information.

<unk> press release contains a reconciliation of the audited non-GAAP measures to the audited most directly comparable GAAP nourish I'll now turn the call to our CEO Mr. Huang.

Hello, everyone.

Thank you for joining our call.

Second quarter results demonstrated strong continued progress on Zap House mission of connecting health with technology.

In our strategic plan to build a company driven predominantly.

By its own brands and powered by our own proprietary technology.

Let me highlight some key examples from the quarter.

In the second quarter, the modest three topping our guidance range.

Our own amaze fit and that branded product revenue continue to grow at 18, 1%, which is last year's same period.

In June.

In the IDC worldwide quarterly valuable device checkout, Zap House, Jeff Brendan Emaciated and Zap watches.

We're recognized as being among the leading shippers up although.

Although.

Smart watches in the first quarter of D C.

This is a tremendous proof point for the progress of our own brands.

It is my strong conviction that the keys to that success, our proprietary smart device technology.

A faster pace of innovation and a broadening line of part of our future says and price points.

Got you if too many different cosmos around the world.

That's not garden to these ponds by being a me too company assembling devices.

The shelf pulse.

I know that being a relentless technology leader is the key path to success.

Two weeks after the end of the quarter in July.

We held our annual developers conference next it's 200 and you're wrong.

I view this as the most important event of the year.

B demonstrate and discuss our new proprietary technology.

This cost future close this off development.

It also serves as a key engineering the cooling event.

This year.

We announced the next generation of our proprietary smart device AI chip.

On to it.

Which also.

Substantial performance increases such as reducing operating power consumption by 56% reducing.

The woman power consumption by 19, 3% and improving improvement in graphic postponement by 67%.

We believe these per wise, many significant competitive advantages.

We also made the much anticipated that.

Announcement of a new operating system for our devices.

O S.

Which also serves as the epic coal often open house management capsule.

Two why did the limitation of many other mobile or small Oh, smart operating systems, such as battery and memory usage.

We develop.

Completely different super efficient and lightweight system.

That is 10, besides this health user experience and privacy protection.

At 55, megabyte, the new Zap O S. It's 110th the size of the company his previous amazed at O F.

And it's 120 <unk>.

The size of Apple Watch O S. A.

The new snap On's Grace a strong platform for third party developers and partners to create engaging and useful apps for our devices.

While the painting.

The exceptional battery life for which our products are known.

We expect to launch this new operating system in devices later this year.

At the developer conference you also privileged pump is at least less profit pressure.

Pressure measurement system for our amazing product.

The new profit pressure capability is a significant differentiator for our product and I expect will be a driver of much interest you know a part of.

Clinical testing at the first hospital, a pecking University demonstrated excellent accuracy in both systolic and diastolic measurements.

The time frame for accepting applications for candidates for clinical trials from external customers of our smartwatch, if so fourth quarter is here.

This is particularly.

Gratifying for me personally.

Three years ago on the on the IPO Road show and Investor Ask Me, then a smartwatch would be able to measure blood pressure I told him it would take three years.

And I'm very proud that we have now done it.

Maybe you know Zap health you know that another key part abolished apogee is to expand our range of smart product beyond watches.

Recent announcements.

Enforce our progress on these fronts also.

In July 2021 we launched a nice be powered bus Pearl ear buds, featuring true wireless stereo with powerful multi scenario active noise cancellation and the west house monitoring functions.

Including Sylvie Cool watch bra and hearing protection.

We recently re launched our brand new children's Smartwatch product line.

Which allow us to enter a niche market, we have not adjusted before.

Beyond providing basic children's smartwatch functionality, our partners focus on motivating children to go outdoors and participate in sports activities, which will also help events.

My my opioid for the next generation.

Yeah.

This product will be sold in China combined with the policy guidance of Chinese education regulatory agencies I believe this part of our focus is on health and suppose to mistakes liberum.

Liberalist primary school children from a large number of outside totaling classes and will be supported by users and government agencies.

We do not announce product, but I do want to say that we have many exciting things in store for later this year and everyone at the company looks vulnerable to a surprising and delighting our users.

Yeah.

Recent announcements also demonstrated continuing progress in our data analysis business.

Why are these recent announcements.

Prime moderately they've got development toward a pilot.

Tireless towards creating future revenue streams recently announced agreements with really Brazil suggest B R continue our progress on this front.

What is second.

What are the developments and that is.

Yeah.

Two is the company moving quickly in building its own brands that drive its financial performance.

We started the company, we leverage partnerships to develop and build products for others.

Why don't we have a way to go to both becoming less reliant on those products for Xiaomi and others. The progress of this quarter. So it gives some good confidence in our path to having our own part of driving our financial results.

I am incredibly proud of what we have accomplished.

In just a few short years.

And equally proud of my team.

N.

I have strong confidence in our future as we continue to be leaders in key technology pays off innovation.

Great.

And creativity.

In designing products and functionality that customers find compelling.

I'll now turn the call over to Liam to go with highlights of our second quarter financial results.

Thank you well I said that last quarter I wanted to focus on highlighting what I think are the handful of the most important matrix starting with cells, whereas especially pleased with the continuing growth of our own amaze fit zap branded products globally the pandemic.

<unk> slowed that growth in 2020, but the year over year results for the first two quarters of 2021 showed year over year growth rates of 84% and 81% in the last two quarters for self branded products.

While noted the best is yet to come this year with new products and functionality that we believe will continue to drive our growth.

<unk> of our business.

Launch of the new Mi band six in the quarter provide a strong growth in our xiaomi product shelf as well as we're working with Xiaomi the exciting next generation products as we speak.

In fairness I do also want to point out the timing impact of the launch of the new Xiaomi Mi band six in the second quarter. This year instead of the third quarter, which it did last year.

Xiaomi sales fluctuations over the quarters create some fluctuations in the companies over ourselves and that to some extent overshadows the self branded product sales performance.

Which also affects our guidance for the third quarter.

Overall the trend, we're seeing speaks to our long term strategy to grow our self branded products faster and shift the balance to our own products lessening the reliance on products developed for others.

On the pandemic vaccine nations and lifting up the COVID-19 restrictions in some markets helped our second quarter.

Holiday effects of the Delta and other variants will play out globally in the second half of this year is still very uncertain and that reflects the our guidance as well.

Product trends, we discussed on last quarter's call continued in the second quarter. The G. T series and the paper pulp basic smartwatch series, representing different ends of our product line together compromised comprised approximately 78% of the company's self branded product revenue.

<unk>.

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

<unk> Mato upgrades second quarter 2021, gross margin of 22% was essentially flat with only a 30 basis points difference from the second quarter last year SEC.

Current quarter total gross margin was primarily kept in check by the larger increase in Xiaomi unit volume compared to our company branded products.

Operating expenses has been a key focus of mine since joining the company in the third quarter last year, both in absolute amounts as well as a percentage ourselves.

A portion of these expenses are fixed so it will take time to continue to gradually reduce expenses, while we have to balance cost controls, which fueling growth. We have decreased total operating expenses sequentially since last year's third quarter and that continues to be my focus.

Second quarter, 2021, operating expenses, including R&D sales and marketing and G&A expenses and total Opex will all it down on a percentage of sales basis.

But on the absolute amount basis or on a well up to meet the demands of the business and some additional long term incentives for retaining key talent as the Chinese market has become incredibly competitive.

I view this as a good and reasonable partnership between finance operations to strive for efficiency, but to be flexible where it is in the best long term interests of the business.

Excluding those stock based incentives opex declined year over year.

Net income attributed to that power Corporation for the second quarter was RMB $92.6 million compared to RMB $13.3 million in the year ago second quarter.

This benefited from a year over year increase of RMB 13, 5 million of investment income and RMB $24.8 million of net income from equity method investments.

Our balance of cash and cash equivalent continued to be strong in the second quarter and we expect this trend to continue into the second half of this year.

Looking forward to the guidance, let me outline key factors were taken into consideration.

There remains much uncertainty globally about the pandemic as mentioned earlier and we expect most of our new self branded products introductions to occur in the fourth quarter.

I've already noted the timing of the Nuomi bad six product launch this year versus last year.

Also expecting somewhat lower volumes for the year compared to 2020.

D C has to be predicting lowering demand for bank products as entry level start smartwatch as prices come close to bank prices.

But this transition was anticipated and for our funding of the company, we have focused our developing our own products.

Brent globally.

Quarterly path may not always be smooth, but we have confidence in the longer term vision of the company in which we're driving the company and its financial performance on the strength of our own branded products.

For the third quarter 2021 management currently expects net revenues to be between RMB, One 6 billion and RMB, one 8 billion compared to RMB, two 2 billion in third quarter 2020.

We will continue to exercise good cost control and expect to continue to report a profit in the third and fourth quarter. This year, the higher profitability of our self branded products helps our cost coverage and long term helps us in this transition.

That outlook is based on the tight market conditions and reflects the company's management's current and prime revenue.

Great.

Estimates of market and operating conditions and customer demand, which are 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 a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys.

Is it any time your question has been addressed and you would like to withdraw your question. Please press Star then two.

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

Okay.

And the first question today comes from Clive Cheung with Credit Suisse. Please go ahead.

Hi, Good evening management, congratulations on a strong second quarter results. My first question is on the guidance am I think this came out a little bit lower than expectation I guess liana already outlined some of the key reasons, but could you elaborate more on this.

Second half turns in terms of our products because it.

It is always I guess my expectation that the the product launches are more second half heavy and how does that play out now versus I guess macro conditions and my second question is on.

On the investment incomes.

I guess are there is searching a million.

On our investment income and then 24 on our equity method investments could you give us the background of the east and then how we should expect these going forward, particularly in the second half of 2021. Thank you.

High class.

Thank you for your questions. So let me try to answer the easy ones I'll start with the second question the.

Net investment income.

Income for the two things, which you just mentioned are in assets, mainly coming from the toothbrush investments, which we made in 2017, if I remember correctly and Ah we still have a sizable stake left of this company and then together with how this company.

<unk> is progressing well tied to triple down on our stake of this conference.

So so I think you'll still see some of that coming onto our way in the coming quarters.

So then coming back to the guidance of Q3 the value. It may look a little bit low compared with same period last year, but I just mentioned in the in the in the in the in the prepared remarks that a lot of that is driven by the new.

Product sales, which happened last year on the Xiaomi Mi band five and then this year that the new product introduction for Xiaomi is actually pre pound by a quarter into Q2.

Right and then on the other hand, our self branded products are very much Q4 happy this year versus last year I think we had a pace whereby there is a bit happened in Q3, and there were a bad habit in Q4.

So yes. The first answer to that question is it's very much driven by seasonality.

The second reason I think I also mentioned just now is the uncertainty of the Covid Shoutout variant, we cannot predict to what extent that's going to impact our sales for the second half of this year.

However on.

A full year basis, we're still expecting that on a full year revenue year on year basis, we're still going to grow versus last year.

I hope that answers the question.

Yeah, Okay very clear thank you bill.

The next question comes from Andrea <unk> with Citi. Please go ahead.

Oh, hi, Thank you for taking my question.

I have a few questions regarding the non-GAAP that just then.

And I have noticed that there is.

And for media and R&D.

The non-GAAP basis, how should we.

That's amazing.

That number in the next few quarters thrown out.

Well that's that will be.

That'd be clean of all going forward.

So that's a question regarding the third quarter right.

Do you feel you have a 1.6 billion to $1.8 billion revenue guidance, how should we think about that for example, the kid and self funded product and.

Xiaomi, but thank you.

Okay.

Thank you.

So all of the R&D adjustments I think you're referring to the share based compensation amount correct.

Oh, yes.

No. So so the share based compensation amounts actually happens every single quarter and some in certain quarters. It was a little bit lower in certain quarters. It was a little bit higher but I think on average you.

You can yamato to blocking a number between 15 million to 20 million per quarter.

The SBC.

Our expenses.

But however, as I said I mean, because this is very much linked to the bonus cycle to the to the payment of the employees. So in certain quarters, probably we don't have any any certain quarters will have a significant amount. That's why we're talking about the non-GAAP adjustments in our financials as well.

Yeah.

Thank you I'm sorry, Okay, and then on the third quarter.

Split between our self branded Xiaomi products.

I think what I can say at this moment is that our self branded products will continue the growth rate, which we kind of see in the past quarters.

If I think.

From last year Q3, you saw their trend.

That our self branded products start to accelerate I think last year Q3, the base was around four to five.

400 to 500, getting if I remember correctly by heart.

In Q3, we will continue our high double digit percentage growth on our self branded products.

So that speed and the trend is continue to to go in the second half of this year and on the other hand, the xiaomi volume and revenue.

It's still subject to certain market conditions and also Uh huh.

I mentioned, a few times that the fitness, but product category is becoming a mature category and also if you look at the IDC report the overall market size.

This bad market also it's showing a decline rather than increase quarter on quarter.

There's going to be some limitations on how much we could grow on the xiaomi band revenue per se, but however.

We have the self branded products, which is the growth and that should provide a good cost coverage for our profitability going forward.

Thank you very clear thank you very much.

The next question comes from Robert Mckay with Blue Lotus. Please go ahead.

Hi, there thanks for taking my questions. So just first of all congratulations on your children's Smartwatch launch in third quarter and also those innovations that you made with a separate western Europe associated longtime.

And I also look forward to seeing what's happening in the fourth quarter and you mentioned that you have a lot of.

Surprises coming in the fourth quarter, and so I actually really want a basketball if that is right. Now you have a tie up with Xiaomi Mi pad and I'm wondering if you have any other kind of tie ups with xiaomi on other types of products because as he mentioned smartphones are declining and so what you want us to be as other tie ups smart.

These kids watches is that something that might be possible, if not in fourth quarter, but in the future.

Yeah no so.

Thank you for the question I think it's a very good question.

We just mentioned in the prepared remarks, we also mentioned that we have.

Some exciting product with Xiaomi, which is being developed as we speak right. So.

So and and and.

Unfortunately, these are under confidentiality agreement, so I cannot say too much about it.

But I think we have a good strategic our partnership with Xiaomi on the wearable market.

So.

I have two.

Now ask you to just waiting to be surprised.

[laughter], Okay. Thank you I'm waiting to be surprised I do have some other questions. If that's okay.

So as you know.

Kind of sees himself as a like a health company and so.

It isn't really a limited to smartphones and smart watches.

So we're wondering if there's any kind of other medical grade products.

You might have in store and if so the progress is on that.

There are a few right. So I think what one just mentioned in his script that.

Apart from the Smart watch and bank products. We also have a very interesting line of Tw headphones.

And it's not only have the traditional noise canceling.

The mainstream functionalities people has we also have the teed up as headphones.

Equipped with the PPG sensor, which is kind of measure the heart rates on your had pulse right. So there are a few of those are coming to the market or in the pipeline, which we're in the we're trying to make it and regarding the medical devices. I think we also just mention that.

In the July call.

Friends the developer conference that we have the cutting.

Cutting edge.

Now squeeze blood pressure measurement capability, which is going to be put into our next generation watch later this year right. So that is I mean black pressure functionality by definition that is a medical great product and then a similar to what.

I put watch.

Doing well have to go through our medical certification on those things if we have to sell right.

This is just one of the examples and I think we have a few of that would you think about making.

Which is on the product pipeline for the future quarters.

Okay. Great. Thank you those are really great answers. Thank you I do have one more question.

Actually our income.

As to what our clients asked earlier your third quarter guidance I thought it was pretty strong considering you don't have any new product launches this quarter.

So I'm wondering where you're seeing that strength coming from us.

I know you mentioned earlier that you're you're seeing a lot of growth from yourself branded products.

I was wondering what kind of quotes or are we seeing what kind of course will be seen from your xiaomi Mi band mid third quarter.

Yeah, no the Xiaomi Mi band for the corner, probably it's going to be a decline. That's what if you do the math you probably cant do that because last year's same period.

We have the Mi band five launch and then this year. He has been pretty pumped to to Q2 right. But then the decline will be to a big extent made up by our self branded products growth right and then I just answered a class on them.

His question is going to be a high double digit growth.

Flowers to help run their course.

Okay.

That makes sense, okay, so you're just saying how.

Is it growth in fact quarter over quarter or year over year.

But that's a quarter over quarter.

With that I'll, close where you versus last year coped with that.

Oh, okay. Okay, So Q3 versus Q3 last year.

Yes, that's that Q3, yeah, that's Q3.

2021 versus Q3 2020.

Okay great.

If youre talking about quarter on quarter growth there there should be.

Okay, so because if you're if you're saying that there's a quarter or so.

Year over year double digit doesn't that mean that quarter over quarter, maybe a slight decline.

Not Mexico appeared smartwatch with no not necessarily okay, okay not necessarily okay. Thank you okay.

Okay. Thank you very much.

As a reminder, if you have a question. Please press star then one to be joined into the queue.

The next question comes from my so much with Dawn. She please go ahead.

Yeah.

Congrats and thanks for taking my question. My question is regarding the news around the insurance business and partnering with Zurich, Brazil, and Ergo, China life.

Sure.

Well, maybe elaborate what will be the revenue business model around this.

It's connected to that what makes you confident that the data from the variables its useful for those insurance companies that you're partnering up with things.

I put this question I'll refer to Mike.

Yes, hi, thanks for the question, yes. The currently are with the Zurich, Brazil.

Other insurance.

Insurance companies were going through there.

Pilots with them and.

And a big Oh.

And you will come after the pilots are finished.

We have oh.

Zurich and in US for example, we have already bought.

Yes releases about our corporation about the deal.

The pilot content.

Uh huh.

It's actually a pick up.

Oh, great demonstration that the insurance companies.

Our.

Data, including the pie, how SCOR art can really help them with their business.

<unk> for example are all helping to make health insurance pricing based on.

Real time health behavior.

Through data collected by Wearables so.

Also the pilot will help us to gain more insight and more.

Oh.

Improvements that the insurance companies will need for us to help them implement.

After the pilot.

So oh.

Most of.

The revenue impact would probably be after the pilots are finished the.

The pilots are Oh range from.

Oh six months to 12 months Oh.

Our ratio and we have multiple pilots.

Multiple insurance companies right now.

Does that answer your question.

Yeah think of them more specifically on <unk>.

So worried about like when would be the first revenue showing up but rather like.

This model start like what's the idea behind it in terms of.

It's sort of idea to underwrite the business insurance for instance, together or would you even consider launching their own insurance and.

Insurance partners kind of just partnering on that side or is it for instance at Stubhub is looking to kind of feed the data into the system. So they have like gets you know getting a revenue stream for the data or any specifics on that that you can share at this point yes.

So oh.

Ah Ah Ah different.

Partnerships with different insurance companies, some insurance companies look to use the.

Our our data and our pet health technology to do customer to do better customer acquisition and generate more customer engagement with the insurance companies applications.

Other pilots that we're engaged with thought they are using.

Our data.

Two to try to do better underwriting.

And then also set.

More appropriate health insurance pricing based on data that they gathered.

All in all from our Oh.

Smart wearables, so a different insurance companies.

Actually have different objectives.

Objectives for our Oh Pi health data.

We also are.

We're engaging with some insurance companies to work on corporate wellness, our corporate wellness health.

And that is also oh.

Leveraging.

So you got to.

Our monitor.

The health of the employees so.

So there are different Oh, Oh Oh.

Engagement and.

Objectives that we can accomplish with Pothouse put insurance company.

Alright, Thats really interesting I'm sorry, My last question would be then.

Oh excuse me allow me to add one more thing to it I think oh.

As Mike just mentioned.

Motto, its almost everything which [laughter], which you just mentioned are there's one more thing. We have is that we also have a brokerage license in China and we also would not rule out the possibility that in the future we'll do that.

The insurance program ourselves right, but then I think the short answer to it is that a different monetization waste, we're exploring and where according to the outcome of those different pilot program, we should be able to identify a key revenue stream coming out of the insurer.

Our progress here.

Thanks, a lot that's really insightful and quite honestly on my.

My last question to that is like where would you see somehow it's fitting into this new government regulation. Some strategies. Here also you know thinking about regulation surround insurance or health data and so on.

Yeah. That's a good question. So first it's not my position to comment on the government policies and regulations, but as a company. There are a few things I could comment on until number one is we definitely position the security and privacy.

The customer user data security and privacy as the most important things in our day to day work right.

Example, where compliance with Europe. The G. D. P. R were compliant in United States on paper and we do local data storage as well right. So all of those Rus I regulations on data storage were compliant in almost every country, we operate with and they said that.

So quite key in our management agenda. So that's number one.

Number two I think if you're looking at the the Chinese regulation towards insurance I think the government definitely want it.

Technology to be part of the let's say the traditional insurance.

Our industry right. So.

They are basically there are different.

Rules and regulations, which is which has been published in the course of this year for example, a traditional insurance company, a neat and can buy a so called third party.

Sofas, a tally house or.

Something like a powerhouse.

Type of a digital health products or services to couple with the traditional insurance program right.

And given our unique expertise and what just Mike explained here, we think we're well positioned to capture this opportunity going forward.

And I don't know whether or not youre, referring to the latest regulation change in China the online education.

Education business or E Commerce, I'm, not an entertainment business per se, but I think what Josh us apart from those business is that we are a maker of smart health devices right versus the other guys. Yeah just.

Doing E Commerce and online entertainment stuff right.

And I think the long term goal of the Chinese government and also governments around the world is too.

2222 to tackle the global aging problem to get more tools and equipment to work the consumer which is affordable. So they can do self quantification and then to monitor their health to our strategy to connect health with technology also position us towards that.

Arnaud.

<unk> vision like the governments of the global commodity is going to do.

So I think that's just a few cents from our side.

But let me also just accurately that are at our board level are we do have a port level Committee.

Composed of independent Board directors are it's a big data and.

On user privacy Ethics Committee.

This is helpful best corporate governance for our company so again.

Playing with all the different international Oh all.

User data privacy regulations, where we operate so we have a very very strong corporate governance regarding user privacy.

So our data set.

<unk>. Thank you.

Thanks, a lot.

As there are 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 further questions. Please feel free to contact Investor Relations Department. This concludes this conference call. Thank you.

Yeah.

Yeah.

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