Q3 2021 Zepp Health Corp Earnings Call

Hello, ladies and gentlemen.

Thank you for standing by to does that Pulse Corporation third quarter 2021 earnings Conference call.

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

Today's conference call is being recorded.

I will now turn the call over to your host Ms Grey zone.

Victor of Investor Relations for the company. Please go ahead Grace.

Hello, everyone and welcome to <unk> Health Corporation the clutter.

Earnings Conference call, the company's financial and operating results. What you should know press release Newswire services earlier today and are posted online.

You can also view the earnings press release and the slides.

We will refer on this call by visiting the IR section of the company's website at IR <unk> com.

Participating in today's call are Michelle Fang Wang our chairman of the board of directors.

And Chief Executive Officer, and Mr. Lei Chen.

Our Chief Financial Officer.

The company's management.

We have 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 under the safe Harbor provision of the U S. Private Securities Litigation Reform Act of 1995.

Forward looking statement, yeah, Whoa, Harman risks and uncertainties as such the company's actual.

Results may be materially 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 ending 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 as required under applicable law.

Please also note that that's earnings press release and this conference call include discussions of all audited GAAP financial information as well as all did ship non-GAAP financial information.

That press release contains reconciliation of the audited non-GAAP measures to the audited most directly comparable GAAP measures.

I'll now turn the call over to Al Shale. Mr Song Wang. Please go ahead.

Hello, everyone. Thank you for joining our call.

The first quarter was marked by continued strong performance from our amazing feat and depth branded smart watch it while mi band serious sales weakened due to an earlier launch of the new generation Mi band this year compared with last year.

These factors drove our total net revenue to RMB, one 6 billion in there for a quarter.

28, 1% lower year on year.

We should highlight that our self branded products have hickory in March.

Powerful engine for powering our growth.

Shipments of our self branded products grew by 88, 9% compared with the same period last year.

And accounted for 38.6% of our total net revenues correct.

Craig This is Chad.

The strategic initiatives, we have put in place to actively expand our portfolio.

Brandy amaze paid part of it.

Enhance our sales turnover and grow to the influence of our brand delivering concrete resolve and extending our reach.

Product Texan in international markets is strong and growing.

Over 80% of the self branded products overseas.

And our overseas expansion momentum growing.

I will highlight some of our listen the progress.

In South East Asia Amid street now ranks number two in therapy.

The list of best selling smart valuable brands and in the U S. Our self branded products. She memoir in more than doubled in the first quarter as we continue to expand our reach.

Through large E tail channels like Walmart target can we see in August.

We have also had made significant achievements in Europe.

According to our Internet internal sales data our.

Shipments in Germany increased 150% in the third quarter as well.

The only and expert prop and Veronica more than 150, a flying start.

In Italy, our brand ranking number one in the in the adult smartwatch market.

According to the script.

Remember, Italy T F Caleb part.

To further heighten our brand awareness in China, we formally introduced a Chinese name for amaze fit on the brand.

Sex anniversary.

<unk>.

It is called Yeah walk Mitch.

Which means right.

Pulse ourself.

It can be.

New design logo and a new branded tag line Youll gain reflecting our vision for the brand to become a partner with our users in their life exploration.

Consumers are increasingly karting for smart wearable devices with in pool fundamentally.

Such as easy of use better user experience and longer battery life.

Yeah, we have heated difficult launching new universally popular a captive products and advanced O S that Ms growing market demand.

Most recently in early October.

We launched two brand new amazed me at UDR tree and G T F tree serious.

A quick with our newest in into in country.

Develop smartwatch operating system that's O F.

Both serious spring next generation capabilities to our smart watches with an industry, leading biotech history P. B G sand so that.

And that monitors bra auction level heart rates, just level and sleep car T, providing users with easy to use enhance cows.

Health and sports experience.

Initial adoption of both our new product series has been strong showing increasing momentum in multiple geographies.

We are also extremely proud of our new Zap O S.

And it's in lichte capabilities.

Including exciting energy energy efficiency and open architecture for developers to work seamlessly with our Olaf.

We believe that <unk> will become the cornerstone of our comprehensive health management.

Bob.

Along with the increasing volume of GTR tree and GDS great.

<unk> will bring more unleashed displays and apps.

We continue to enrich our pipeline to offer customers new product that complements our current offerings before.

Before the Es and we.

We will also be introducing a new sleeve less pressure.

Pressure measurement albinism chord puppies.

Working with our amazing fit Judy at sleep flow.

This ebullism can measure blood pressure in 30 seconds.

Providing users with easy convenient accurate readings anytime and anywhere throughout their busy day.

Separately.

We received broad market enthusiasm for our newly launched E bus Amazing power bass pro.

And we are extremely honored to be named as C. F 2022 Innovation Award honoree.

These E bus our not only our wireless active noise cancellation has that also our biosensor device users Cambria that support smart running recognition ear canal heart rate monitoring.

Hearing protection and cervical spine protection.

Adding to our accomplishments in growing our own capabilities.

We believe in the power of collaboration to amplify various shapes.

Our strategic partnership with Xiaomi continues to be important for both parties and we hold our collaboration in high esteem.

At the Mi band serious designed and manufactured by us.

It was steady.

Performance, we are continuing to actively grow our own brand, namely amaze fit and zap to deepen our portfolio of self developed offerings.

Furthering our mission to connect technology and health is a driving force behind our innovation Richard would hope can bring potential device meant for society at large.

By steadily growing our portfolio of amazing products and services, we continue to make progress towards this goal.

We are dedicated to creating quality part of that.

That make people's lives easier.

Enrich their pursuit of healthy living and advance their health and fitness goals.

By leveraging rich technology took her age peripheral products and services.

We are pursuing global house, one step at a time.

Lastly, I am pleased to announce that today our board.

Approve a 20 million share repurchase program.

The share repurchase program demonstrates our confidence to achieve some substantial long term growth as we execute our strategy support by our strong balance sheet and cash generation capability.

We are confident Shewchuk program.

Benefit the gross after company.

And create value for all of our shareholders I will now turn the call over to Leo to go overall highlights of our first quarter financial results.

Thank you Wang as I did last quarter I want to focus on highlighting what I think are the handful of the most important matrix.

In which cells, we're especially pleased with the continuing growth of our own amaze fit and that branded products in the third quarter for each of the first three quarters. This year, we have driven year over year revenue growth in self branded products of 84%, 81% and now 38% in <unk>.

Third quarter, which was a quarter in which we launched no new product and we had pre announced the GTE three coming in the fourth quarter. This presents a strong demonstration that we're continuing to expand our brands globally.

The timing of new product launches all the impacts year over year quarterly sales comparisons last quarter. The pull forward of Xiaomi as new band six gives an extra boost to Q2, because they're new Mi band five shipped in Q3 last year. So for Q3. This year, we had the opposite.

Act.

Like many other companies supply chain issues dampened our third quarter results in a number of ways. For example, we had some name brand at chip suppliers surprise us with last minute supply cuts at the same time like everyone else, we have experienced higher shipping costs and uncertain deliveries both.

In bound and out my over how the effects of the Delta and other variants will play out globally. In Q4, it's very unclear. These challenges have continued into the first part of the fourth quarter and factored into our guidance.

While xiaomi remains a valuable partner, we're pleased to be growing our way into less reliance on products from their channel.

This year's flow of Xiaomi its business has been sick with Nick currently different than 2020, which boosted our second quarter year over year numbers and it was a drag on our third quarter results.

Third quarter 2021 revenue from Xiaomi products was down 45% year over year, RMB 799 million driving the 28% over a decline in total revenue.

As noted before we are optimistic about the fourth quarter, given the new technology and products, we're bringing to the market.

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

Including motor upgrades third.

Third quarter 2021 gross margin of 20 point.

2% was essentially flat with only a 40 basis point difference from the third quarter last year.

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

Voting absolute amounts as well as a percentage of sales.

A portion of these expenses are fixed and so it takes time to continue to gradually reduce expenses.

Well, we have to balance cost controls with fewer gross we have decreased total operating expenses sequentially since last year's third quarter that continues to be my focus.

Third quarter 2021 operating expenses and total Opex all showed the effect of our cost control and balancing efforts.

In absolute amount and as a percentage of sales.

In absolute currency sales and marketing expenses was down 22% R&D was down 37% and G&A was down 32%.

Balancing these costs drove a 30 basis point improvement in operating income as a percentage of sales.

As mentioned before we're continuing to invest in R&D sales and marketing and G&A costs to support growth, but in a more balanced way since Q3 of last year when I cut My board.

Will it be maintaining this balanced approach to expense growth and control in Q4 for a similar run rate.

Net income as a percentage of sales declined slightly year over year with lower interest income and higher interest expenses and a gain in fair value of that investment in the third quarter last year.

Our balance of cash and cash equivalents continued to be strong in the third quarter at RMB, one 2 billion.

Our working capital ratio continue to strengthen in the quarter. We retired our RMB 230 million short term loan.

We're confident in our strategy had financial trajectory as we finish 2021 and look ahead to 2020 to.

The board has approved up to $20 million to repurchase shares. This is primarily to supply the employee incentive stock plan.

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

On the positive side, we have just launched our new GT three products in the fourth quarter, which features our compelling new technologies and capabilities that we are seeing our consumers respond favorably to.

Supply chain challenges, including chip shortages and higher freight costs and delivery uncertainties remain significant questions and caused us to guide conservatively.

For the fourth quarter 2021 management currently expects net revenues to be between RMB 175 billion and RMB 2.0 billion compared to RMB 197 billion in the fourth quarter of 2020.

We will continue to exercise good cost control and expect to continue to report a profit in the fourth quarter. This year.

That outlook is based on current market conditions and reflects the company management's current and preliminary estimates of market and operating conditions and customer demand, which are all source subject 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.

To ask a question you May Press Star then one on your Touchtone phone.

If you're using a speaker phone.

Please please hold your handset before pressing the keys.

Your question. Please press Star then two.

And so the benefit of all participants on today's call. If you wish to ask questions in a company whose management in Chinese.

Let me repeat your question in English.

And today's first question Oh sure Joe.

Please go ahead.

Yeah.

Hi management. Thank you for taking my question I have a couple I'll I'll ask one by one first of all I think given the continued improvement from the amaze fit in terms of revenue contribution.

Now what I wanted to check why are the margin.

Find a particularly significant me koto.

Quarter on quarter against it and Iot.

That's my first question.

Flight I mean actually the margin didn't moved too much quarter on quarter.

It's more of a product mix issue right. So as I mentioned are in the in the previous remarks this quarter. The xiaomi products actually stands for around 60% of our overall revenue right and our self branded products stands for around 40%.

8% to be exact right and the margin a differentiation between the xiaomi and self branded products and its actually a value of one seven to two times I think you can do the math and and then that actually result into the gross margin number.

Off this quarter.

Okay.

Okay.

And.

I think.

I was wondering if there's more color for the.

Oh, the low kind of seasonality shipment I think we already expected that but I think while $9 1 million.

Was.

They'll bid the bid.

The expectation I was wondering if this is from a demand perspective or from kind of a supply.

Bottlenecks given you know dimensions are given the reasons you mentioned in the prepared remarks. Thank you.

Yeah. Okay. No. Thank you that's a good question no. So there are a few issues actually play into the numbers, which we reported today.

I think one of the most important ones is actually chip shortages and surprise last minute supply cuts from a few named branded chipmakers right I have mentioned a few quarters ago that we already made him a long lead time risk price of those.

Key components, but still I mean change or the chipmakers are prioritizing there are supply towards the automakers at the quarter end per se that had a impact a unexpected impact to us but of course, we're doing second sourcing onto an hour.

Components, but last minute changes like such still it takes time for the supply chain to actually recoup on the AR on the situation right. So and also another issue play into that mix is the it's the freight costs and and and also the.

You know that Ashish the sea shipments as well as the air shipments was very tight in Q3 and going into Q4 right. These to a place that important role into the lower Ah self value, which we reported this.

This quarter and so so so to answer your question, it's more of a supply issue rather than a demand.

Demand issue and actually our products has to be sold are very well globally.

Okay.

Okay. Thank you very much.

That's it for me thank you.

I remember that as a reminder to ask a question. Please press Star then one.

Next question comes from Kevin Zhang of China Renaissance. Please go ahead.

Yeah.

Hi, Thank you management for taking my question.

I have two questions.

First as mentioned the company just mentioned.

Currently our own brand in terms of the revenue contribution is already reach our impressive 38%.

Just wondering.

Julie.

Do we have an internal target of how big this eternal percentage will get maybe in the rest of it would be this year or next year and to get there.

What is our strategy.

Cool thank you.

Yeah.

Thank.

Thank you Kevin that's a good question. So yes, you have.

Mentioned correctly that are acute in Q3, the weight of our self branded products is already close to 40%. So to give you a quick answer to your question I think this year, we're aiming at a split of close to 40% south branded and 60% Xiaomi.

Maybe a little bit better than that.

And next year.

It's it's too early to talk about it but I think we're aiming at improving this ratio.

A little bit further I think it probably towards half half.

And thank you too.

You do get to that number I think it's a it's a it's a mixed bag of a few things.

Thanks, which we need to execute very well number one it's definitely the product because where our product innovation driven companies are our we're very proud of our products and our especially that the recent launched a new product. The GT three serious I would definitely recommend you to try it out.

So and the second thing I think it's our distribution network right as we are expanding very fast overseas as our CEO. Just mentioned, we have been very successful in Europe, and the United States and in South East Asia in some of the.

Countries, we're already a market share number one positions are in on the smart watch sector right.

And last but not.

The least I would say, it's definitely are our people and our we have a very strong team on innovation and on supply chain working in different parts of China and also globally. So I think these three plays into the confidence that we can.

Do you need to believe that we can definitely execute execute better next year.

Alright, Thank you Neil.

So I'd like to follow up another question.

Quite curious about the gross margin part as you mentioned this year weird.

A lot of hardware industry are getting hit by component shortages in various logistical challenges.

I was just wondering ideally.

Do we have that speaker of normalize.

Gross margin of our cellphone bread.

Future and to get there who says what are we still missing or are you talking about the normalization of the supply chain or.

We have to reach a critical scale.

What do you think that scale will be for us to reach that normalized margin.

Ah Yeah. So let me let me let me try to answer the first part of your question I think for our self branded products. We're looking at somewhere a range between 25% to 35% are also gross margin on.

On our self branded products right. So that is ranch, we're looking at them, sometimes I mean, it depends on the seasonality. This number may fluctuate, but this is actually the range, we're looking at and a D. A.

You are looking at are the things, which is going to impact on that number I think seasonal pattern, placing to erode because yeah. If you look at the promotional period. For example, the 11 are the double 11 in China and then the question myself et cetera, et cetera, and then obviously.

Are you you want to get rid off those products at a much cheaper price. So you may.

May have a impact on the E S. P. A.

But on the other hand, it also coupled with the new product launch and are now in consumer electronics industry. When you launch a new product that that a specific S. K U R. A product will carry definitely are higher than our normalized gross margin number right. So it's a mix.

The problem and it is also a seasonal pattern, which we're working towards but obviously it depends on the new product launch it depends the normalized our supplier chain pattern as what we mentioned away experienced a lot of last minute surprises although way.

Actually prepared for it to some extent and thirdly, it's really and also the uncertainty of the lives on the Covid.

I'm not I don't want to.

Downplayed this issue because in Q3 and when we think the situation is really getting improved and all of a sudden you saw the cases are showing in China as well as in Europe, and I think in Netherlands recently went into a partially locked up right. So all of that issues.

[noise] play into the gross margin outlook for for next year, but I think I have to give you enough color on the gross margin.

Number four ourself ready product.

Alright, Thank you very clear.

I'll get back in the question queue. Thank you.

Thank you.

Awesome Awesome Marceau Lynch was Dong Jin. Please go ahead.

Yes. Thanks for taking my question. My first question would be around the hardware, particularly the new self branded products like the <unk> GT three pro.

And what would you say is the competitive advantage against let's say like the Huawei watch free which seems to have a similar offering.

Oh, that's a good question myself.

Yeah, and not a product person per se, but I will try my best to answer your question.

I think the most differentiating factor of our G. T. Three pro is the Zap O S right as Hal mentioned in his.

The script I mean, that's I'll ask is really a cutting edge operating system, which allows a lot of third party apps to be built on it and also from a size perspective, it's really really small compare with the utter a mainstream operating systems, which you can find in the watch market.

Right.

And that in turn translates into a longer battery life.

Which you know that we're pretty good at it with the low power Bluetooth connection and also the power consumption is actually a prolonged in the G T three series and and and the last but not the least important wise is the design right.

We have a beautiful he designed to G T three pro which a curved screen and it attracts a lot of our consumers and it received a very very very good reviews from the Chinese consumers, which are very critical per se a J D.

And that's why I asked in the.

The T mall, which is the Alibaba platform.

I think those are the key things, which I would like to highlight but also we have the palm beach functionality, which are our CEO just mentioned that as well so that all plays into the product mix.

Okay. Thank you and my second question would be are there any updates on the value added services like the insurance part or something related to other b to B services.

For that question I would like to ask our CFO Mike to answer.

Yes.

So we are still continuing.

Our pilots with a large insurance company and.

And at the same time, Oh Wow. These pilots are going where.

Discussing with them about the.

Long term contracts in India and India.

And the other.

This is the revenue model so but.

L B.

The Oh.

The pilots will need to be.

Finish before.

We will really truly indication do you.

A long term contract but that.

With that the pilots are going very well right now according to the criteria.

Thank you.

Ladies and gentlemen, there are no further questions now I'd like to determine.

The call back over to the company for closing remarks.

Thank you once again for joining US today, if you have southern questions. Please feel free to contact our Investor Relations Department. This concludes this conference call. Thank you.

Hello, Ladies and gentlemen, this concludes today's conference call with US what's your lines and have a wonderful day.