Q2 2022 Zepp Health Corp Earnings Call
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Hello everyone and welcome to ZEP Health Corporation's second quarter 2022 earnings conference call. The company's financial and operating results were issued in a press release via the New Swire services earlier today and are posted online. You can also view the earnings press release and slides referred to on this call by visiting the IR section of the company's website at IR.ZEP.com.
Participating in today's call are Mr. Huang Wang, our Chairman of the Board of Directors and Chief Executive Officer, and Mr. Liang Chenden, 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 Yang, 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 provision of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involved inherent risks and uncertainties.
As such, the companyís actual results may be materially different from the views expressed today. Further information regarding this and other risks and uncertainties is included in the companyís annual report on Form 20F for the fiscal year ended December 31, 2021, 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 statements except at the ñ
I'll now turn the call over to our CEO , Mr. Huang Wang. Please go ahead. Hello, everyone. Thank you for joining our call. For the second quarter of 2022, we forged ahead, countering the challenges brought about by the ongoing pandemic and the weakness of consumer settlements.
underscored by regional conflicts and microeconomic factors across a number of our markets globally.
Our second quarter revenue was in line with our guidance at RMB 1.1 billing, down 39.6% year over year compared with RMB 1.84 billing in the second quarter of 2021.
But on a positive note, it presented an improvement of 46.4% quarter over quarter from the IMB to $757 million of revenue in the first quarter of 2022.
This year-over-year decline in revenue was primarily attributable to the later timing of our Mi Bank launch this year.
The new generation Mi Bank contributed to just one month of sales in the second quarter of 1992 versus the full quarter sales in the second quarter of 1991.
That said, we were pleased to see our top line improved from the first quarter.
This occurrence despite the subdued retail spending on discretionary items owing to the rising cost of living, worldwide geopolitical events.
lockdowns and other pandemic control measures in China impacting our business.
We expect further sequential improvement in sales going forward.
particularly given the positive sales impact.
For the launch of several innovative self-branded smartwatches.
including Amazfit T-REX2, Amazfit BIP3 and Amazfit BIP3 Pro towards the end of the second quarter.
Furthermore, in the third quarter, we will launch new products in our most popular line, the Amazfit GT series.
Before we further elaborate on our new products and regional achievements, I would like to share some updates on our business operation.
Earlier this year, we optimized our organization structure to improve our operational effectiveness and enhance our customer facing capability.
We also formed an IMCC, Information and Management Construction Committee, to oversee the development of a new generation information management system.
which better serves the post-COVID era working style, including working from home and collaborating across time zones.
This also strengthens our advantages in AI, chip technology, our cloud service in Europe and North America.
built through R&D collaboration.
And our mesh
manufacturing and production capabilities in China.
This approach of systematic optimization makes our organization more flexible, effective and better suited for the comprehensive operational needs of our business units.
We continue strengthening and elaborating our brand identity on the global stage.
accomplishing significant progress in multiple markets. For example, in North America, we enjoyed impressive success during the recent July Amazon Prime Day event.
With sales growing over 100% compared with the same events in 2021, our outdoor smartwatch product line is gaining increasing consumer recognition.
For example, Amazfit Turex 2, our latest, largest outdoor GPS smartwatch designed with outdoor adventures and sports enthusiasts in mind.
is equipped with comprehensive outdoor exploration features, including high precision positioning, optional temperature operating capability, military grade, toughness and optimized route navigation.
At well-known outdoor events,
taking place globally such as escape from agriculture.
The Michael 215k.
Spartan Race
Participants speak highly and share their enthusiasm of our products.
At the same time, our Amazfit Bip product line continue to be popular in Southeast Asia, Latin America and thousands Europe owing to its best value, best price, product philosophy.
despite a microeconomic downturn occurring in many of those markets.
Recently, we launched our ZAP Chorality product in North American markets.
This is invisible in the canal hearing aid for people who have might to moderate healing impairment
Our mission is to just magnetize and normalize
The news of heliumase
empowering those with hearing limitations to take control of their own audio health.
As some of you may have seen that this August , the US FDA finalized a rule change that would create a class of over-the-counter hearing aids available for purchase without prescription or fitting from an audiologist.
Many have paled the news as a great relief from millions of hard of hearing Americans who often find these expensive medical devices out of reach.
The US FDA's final rules
allows Americans with mild to modern hearing impairments to easily purchase hearing aids from community pharmacists or online retailers.
potential potentially making hearing aids new digital
Block basket and
We also introduced a new AI-based sleep aid music subscription service. Our app utilizes real-time biometric data, in particular heart rate.
graduate from our wearable devices to automatically compose high-quality customised rhythm to help our users fall asleep faster and holistically improve their sleep quality.
This is the first time that our products have...
Please rotate from being data checking devices to being healthcare solution providers.
We have already launched this service in North American Legion.
Before I conclude, I must briefly mention our DevOS ecosystem.
important strategic asset.
central to our open health management platform.
It has a completely different design philosophy from Apple Watch iOS and Android Wear.
If we prioritize
prioritize longer battery life.
from 10 to 30 days depending on the device.
so that users can continuously monitor their health condition.
Giving ZAP-OS focus on designing for continuous health monitoring.
This OS will evaluate
It's developed into new forms in the future.
such as supporting the invisible in the canal hearing aid devices.
We continue to encourage users worldwide to join our ZephOS ecosystem.
Breathing It would support and inspire them to manage their health and fitness and enjoy a fuller life.
In addition, our inclusive and innovative ZLF ecosystem
has attracted worldwide developers from around the globe to design apps and watch faces.
For now of course. In fact. In fact.
Surprising to me, some developers have...
even develop interactive game watch face.
based on the API which we have not yet officially opened.
to help nurture this thriving developer community further. We are hosting the first ever SAP OS Global Online Hack Soil from June 1 to August 31, 2022.
In summary,
Our second quarter revenue improved from the first quarter.
which highlights our execution capabilities, product strengths, and this crime business management approach.
even though the micro-environment remains challenging with ongoing geographic conflicts and COVID lockdowns.
in the face of all those challenges.
We continue to strive to improve our R&D, marketing capabilities and business operating effectiveness.
with our recent product launches.
I am
optimistic
that we can deliver even stronger results in the second half.
Despite the significant headwinds, I remain as proud as ever of our team as we accomplish some major milestones.
This includes launching our first medical grade product in a new product category, our invisible in canal hearing aid, as well as introducing our first AI empowered health management subscription service, our AI music flip aid service.
Thank you.
These innovations have not only expanded our product category, but also helped us transform our business model from a pure device sales company to a healthcare management subscription provider.
We view this accomplishment as a strategic upgrade into a new blue ocean market.
As mentioned earlier, our organizational restructuring strengthens the sharing of our hardware platforms resources across different business units.
The use of the ZAP OS operating system
and AI technology.
Yes.
Restructuring not only reduces redundant R&D investment and human resource costs, but also improves our overall operational effectiveness and the competitiveness of our tech.
This laid the foundation for us to quickly launch our new invisible in the canal hearing aid product line and the AI subscription service. In the meantime, both this new structure and the layering...
help our senior management team stand closer to our users and facilitate a faster and better decision-making process.
We now have a better view of the market as well as the capability to fulfill its needs by using our leading technology.
Using our current integrated information system enables our NDEs in the EU to
the US and China to launch more health-related products in distinct categories and...
distribute our products worldwide through diverse global channels.
So, assisting our over 40 million online MAU to benefit from more opportunities to enjoy our subscription services.
As our amazing branded smart variables shipment is growing rapidly worldwide, we keep acquiring new users who pay significant attention to their health.
We are forming a user community with increasing user thickness.
Our youth...
of continuous investment in applying AI technology to monitoring and solving health problems.
appearing more fruits
combining smartwatch technology and health data.
We have gained unique advantages in hearing aids and clip aid music subscription services.
I smell ads.
Reduce user acquisition costs.
From smart bands to smart watches, we are now expanding into more healthcare product categories and online services.
This.
Harris, the beginning of a new stage for ZAP-Health, and it united the process of forming the flywheel effect.
With that, I will now turn the call over to Leo to go over the highlights of our second quarter financial results.
Thank you, Wang. Hello, everyone. I would like to start by highlighting some of the key metrics driving DEPS development for this quarter.
Before providing further details on our financial performance,
the global impact of the COVID-19 pandemic, which continued in the second quarter of 2022, especially the fresh lockdowns in China that affected the retail stores sales and brought challenges to our supply chain globally.
Shortages of electronic components and chips for different industries persisted and accordingly affected the company's supply and production cycle.
Separately, escalating geopolitical strife among countries, nobody believes the conflict between Russia and Ukraine is creating turbulence, dampening consumer confidence, and causing inflation leading to a slowdown in consumer discretionary spending.
These adverse conditions weigh on our revenues generated and our overall gross margin.
Together, these factors have affected our Q2 results.
and continue to impact our ongoing second half 2022 performance.
Despite these ongoing headwinds, our Q2 revenue was RMB 1.1 billion and in line with guidance.
which consists of 42.9% self-branded product sales and 57.1% Xiaomi product sales versus 32.7% of self-branded product sales and 67.3% of Xiaomi product sales in the same period last year.
However, our sales were affected by the timing of the new product launches compared with the same period last year. Mi Band 6 2021 launch generated sales throughout the second quarter of last year, whereas this year's launch of the Mi Band 7 only bought sales revenues in June .
Likewise, as the launches of the new Amazfit T-Rex 2, the Amazfit BIP3 and BIP3 Pro take place toward the end of the second quarter. Hence, their boost to self-branded product revenue will only be visible in the second half of the year.
On a sequential basis, second quarter 2022 revenue was better than first quarter 2022, and our operating profit also improved, reconfirming our solid execution capabilities.
Now let's turn to the second quarter gross margin, which can be affected by the product mix, product launch timing, and product lifecycles, including model upgrades.
Our Q2 gross margin was 17.9%, 2.2% lower than the first quarter of 2022, and 4.1% lower than the last year's same period.
Lower gross margin in the second quarter of 2022 resulted from higher outbound freight cost globally, the adverse impact of currency depreciation, and the promotions for our previous generation products to prepare for the new product launches.
Turning now to cost.
which has been a key focal point for the company, both in terms of absolute amount, as well as a percentage of sales.
Well, we have to balance cost controls carefully with expenditures to feel growth.
We have already seen a decreasing trend in total operating expenses since Q3 2020.
As a portion of operating expenses is fixed,
and it takes time and creativity to reduce them gradually, we expect to achieve further cost reduction in absolute terms for the remainder of the year.
Going forward, we'll continue to resize our operating expenses from their current level in order to deliver profitability in the coming quarters.
First, as mentioned by Wang, we also have streamlined our organization structure in the past quarters, aiming to bring down our fixed cost break-even point and prepare for recovery in the coming periods.
Moreover, we started to apply a strict return on investment based and modularized approach in our day-to-day operations to drive faster decision making while becoming more service oriented and customer centric.
Second quarter 2022 non-GAAP operating expenses or RMB 296.4 million.
Spending on non-gapped R&D in Q2 2022 was R&D 123.3 million, a decrease of 7.4% year-over-year, as we reduced research and development costs by pursuing a smarter and leaner approach.
Q2 now gaps selling and marketing expenses for RMB 100.
7 million, increased by 4.7%, compared with Q1 2022, and 9.3% year-over-year.
The increase was due to the e-commerce online advertisement promotions for our self-rendered products.
Q2 non-GAAP GNA expenses was RMB 6.60 million, 27.2% higher compared with first quarter of 2022 and 9.3% higher than same period last year.
It was largely attributable to the revaluation of operating working capital resulting from exchange rate fluctuation.
If we exclude the impact of the currency fluctuation, GNA expenses were relatively flat quarter over quarter.
As our revenue improved sequentially and expenses remained largely flat, adjusted operating loss for the second quarter of 2022 improved to RMB 98 million compared to the loss of RMB 142.4 million in the first quarter 2022.
Our adjusted net loss in the second quarter was RMB 94.4 million compared with RMB 75.7 million in the first quarter.
Q1 net income included a 6.
T6.3 million investment income generated by our sci-fi investments.
Whereas our Q2 investment gain included income from fair value changes investment and pick up profit from equity measured investment at R&D 52k.
We'll continue applying a disciplined approach and strive to return to profitability in Q3 2022.
Now turning to the balance sheet.
Cash and cash equivalents are restricted cash as of June 30, 2022, or RMB 997.1 million.
reflecting our strict working capital control practices.
Our inventory balance for the second quarter of 2022 was slightly better than the first quarter of 2022. We have introduced a more precise inventory management strategy to better serve the current business going forward.
In November 2021, the Board approved the allocation of up to $20 million toward a shared repurchase program. In Q2 2022, we continued the repurchase program reflecting our confidence in our growth strategy as financial performance.
We have bought back USD 8.8 million worth of shares until June 30, 2022 and intended to carry on with this buyback program.
Lastly, I would like to discuss our outlook.
In light of the ongoing challenges, our guidance for the third quarter of 2022 currently projects net revenue to be between RMB 1.2 billion and RMB 1.5 billion.
compared with RMB 1.6 billion in the third quarter of 2021.
Please note this outlook reflects the continued uncertainty of the potential effects of the COVID-19 pandemic on the cells.
as well as the lower discretionary consumer spending.
especially in our international market.
Given this outlook, we will continue to apply strict cost control measures and disciplined working capital management.
Given this outlook, we will continue to apply strict cost control measures and disciplined working capital management through 2022.
Please note that this guidance is based on existing market conditions.
and reflects the management's current and preliminary estimates of the market and operating condition.
as well as 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.
Nick?
Hello?
Thank you.
Yes, please go ahead.
Lisa Lee is the first baker.
So I PLE for the of befthat is.
What are you so weak?
Now let's move to Yang Liu of TF Securities for the first question.
Okay, okay. Thank you. Hi, management. Congratulations for the first or second quarter. Very good result. I have two questions.
First, it's about your Mi Band 7. We noticed it has launched at the end of June . So could you share some color about the shipmenting last two months? And how can we expect the Mi Band 7 shipment this year? Thank you.
Yeah, so we, as we mentioned previously, Mi Band 7 was only launched in June , and I think we have a very good result in the first weeks when we launched the Mi Band 7. From a company perspective, the sales of June doesn't fully reflect the potential of Mi Band 7 sales because we're still constrained to some extent by the chip shortages.
which is more a supply issue rather than a demand issue.
Therefore, we expect that MiBAN7 cells in Q3 and Q4 is going to be stronger than the MiBAN6 cells at the similar period versus last year.
However, I need to caution here because we have noticed also a downtrend on the overall band global market size from Q2. The Q2 number we haven't received yet, but we have received from different sources from IDC and other market intelligence companies. They're all pointing to 30% to 40%.
decline of global band cells in the first quarter of this year. So I think that also continues into the second quarter of this year and probably is going to persist into the second half of this year.
So I think that's a little bit of the color for Mi Band 7.
Okay, okay, thank you. And I have another question about new market. We think AR is very likely to boost in the near term. So I wonder how you think about this market and will that launch any AR products in the future?
No, I think it's too early to talk about our future roadmap, but I think AR is definitely a market whereby if you follow the news and the media a little bit, most of the companies see the watch or the band on the wrist as a proto to play into the VR and AR market. So from that perspective, the wearable product categories.
has a better lead into this market from a hardware perspective compared with many others.
And we are actually one of the biggest wearable companies in the world. So for sure, AR is definitely on our roadmap. But with regard to the exact product timing, sorry I couldn't say too much in today's call.
Okay, okay. Thank you.
Thank you. Again, if you have a question, please press star then 1.
Also as a reminder...
If you do ask your question in Chinese, please repeat it in English.
Our next question will be from Lisa Lee of Alpha Research. Please go ahead.
Thank you. Thank you, Majumon, for taking my question. I have three questions. The first one is for your self-branded products. Can you please discuss your recent progress and strategy in the international market?
And the second one, the new businesses that you discussed such as the medical grade hearing aid and the sleep aid service seems pretty exciting. Can you please share with us more about the market potential for these new products and services, as well as how do you plan to monetize? And lastly, I would be grateful if you can provide some guidance for the second half of the year in terms of both the top line and margin fund. Thank you.
Thank you very much. I think I will try to take your question one by one. I will start with the self-branded products and how we're going to drive it internationally. I think as we mentioned in the script early on, we have launched a few new products which are the blockbusters of our existing self-branded product lines. For example, we have launched a new product line which is called the blockbusters of our existing self-branded products.
the more value segment, the BIP3 and BIP3 Pro products, together with the outdoor segment, which is the T-Rex 2 outdoor Ruck watch, which is actually a competitor of Garmin watch, as well as in September , we're going to launch our GT4, which is actually a yearly renewal of our flagship line of this.
to address different consumers.
So this, we think, the new product introductions were actually well positioned to capture the rebound of the consumer demand because, as you see,
And you all know that first half of the year, most of the time is not a big sales season, but heading into Q3 and Q4, where you prepare for the Black Friday, as well as the Christmas shopping season, these are the time whereby you can more make a success based on your new product introduction, right? So I would say number one is definitely the new product introductions on our smartwatches and band.
And number two, also heading into your second question on the new businesses, I think Wang just mentioned there are two milestone achievements which we made in this quarter. One is the in the canal hearing aid devices and the other one is the sleep AI algorithm, right, as the internet type of services.
The hearing aid devices, let me just spend a few minutes on that, is really an innovative product because a lot of the consumer paying on that is that a lot of people they have hearing problems but they don't want the other people to see it. The traditional hearing aid devices is very bulky and the moment you wear it...
everybody on the street will notice that you have some sort of a hearing problem. Our product is actually trying to build out the TWS technology which we have gained in making a TWS devices in our company and then build out that is actually a specific form factor, very small, which you can put in the canal and then...
people can wear it without people around it noticing that they're wearing a hearing aid devices.
In August , the FDA just issued a new regulation to allow for the over-the-counter cells for the hearing aid devices in the United States. If you know the market a little bit, the hearing aid was a very closed market, which was dominated by five manufacturers of hearing aid devices in the past. And now this FDA new ruling actually opens the door for
innovative wearable companies like us to also get into this domain and try to disrupt this domain. So from a market potential perspective we really see this as a self-paid market which is probably going to start more from the affluent consumers in United States and in Europe and later on maybe we'll bring it back to to China.
And then I can also point you to a company which is also listed. It's called Eargo. And this company has been very successful in launching similar products and selling it in the United States. So I think we have high hopes on the hearing aid devices sales, and then we think this is actually building on our capabilities to help the company to actually go into a blue ocean kind of market. community here in the world
And then the other one is the sleep AI algorithm, which you probably also know that a lot of consumers have sleeping problems, I do have that, right? And most of the apps or devices they can do right now is not to tailor towards this consumer's specific need, but what we can do is because we have the wearables and we have the algorithm, through this service you can have the feedback loop.
to train and get to your personalized algorithm to help you to sleep better and focus better and rest better.
We also think this is going to be an interesting exploration into an internet type of services, which we always wanted to do because we have a lot of vitals being monitored through different form factors of the devices. We also have very high hopes on this business would take off in developed markets and then later to China. are going to be quite high to better situations on the company side.
So that, I think, should answer your second question. And with regard to the last question of second half top-line guidance, we don't guide for more than a quarter, but what I can say is that based on the current information we have, we are expecting a flat or better than last year's sales for the second half of this year. So, we are expecting a flat or better than last year's sales for the second half of this year's sales for the second half of this year's sales for the second half of this year's sales
I think that should give you some flavor on what we're looking at.
That's very helpful. Thank you, Leah.
Operator, is there any other questions on the line?
No, at this time there are no further questions so we're going to return to the company side for closing remarks.
Thank you once again for joining us today. If you have further questions, please feel free to contact the Investor Relations Department through the contact information provided on our website. Thank you.
Thank you for joining us.
Thank you. Thank you for attending today's presentation. The conference is now concluded. You may disconnect.