Q4 2022 Zepp Health Corp Earnings Call
Speaker 2: Hello ladies and gentlemen. Thank you for standing by for ZEP Health Corporation's fourth quarter and full year 2022 earnings conference call. At this time all participants are in listen-only mode. Today's conference call is being recorded.
Speaker 2: I will now turn the call over to your host, Ms. Grace Zhang, Director of Investor Relations for the company. Please go ahead, Grace.
Speaker 3: Hello everyone and welcome to ZEPP Health Corporation's first quarter and full year 2022 earnings conference call. The company's financial and operating results were issued in a press release via the newswire services earlier today and are posted online. You can also view the earnings press release and the slides.
Speaker 3: referred on this call by visiting the IR section of the company's website at ir.com.com. Participating in today's call, Mr. Wang Huang, our chairman of the board of directors and chief executive officer and Mr. Liang Shenzhen.
Speaker 3: 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 and remain Bloody Greeks.
Speaker 3: made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act.
Speaker 3: 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. Further information regarding this and other risks and uncertainties may be reflected in this video.
Speaker 3: is included in the company's 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.
Speaker 3: except required under applicable law.
Speaker 3: Please also note that steps earlier press release and this conference call include discussions of unaudited cap financial information as well as unaudited non-cap financial information.
Speaker 3: That stress release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures.
Speaker 3: I'll now turn the call over to our CEO , Mr. Wang Huang. Please go ahead.
Speaker 3: Hello everyone. Thank you for joining our call. In 2022, we face substantial micro challenges such as the ongoing COVID-19 pandemic.
Speaker 4: The Ukraine.
Speaker 4: Russia War, global infection, and weakening consumer confidence.
Speaker 4: These factors affected our operations, while in Q4, consumer discretionary spending decreased.
Speaker 4: due to macroeconomic uncertainties, particularly in Europe and the US.
Speaker 4: against this bad job.
Speaker 4: Our fourth quarter revenue came in at RMB 1.1 billing, down 35.5% year-over-year.
Speaker 4: primary due to decreased sales of knee band products.
Speaker 4: our company foresaw the decline of their basic bank market.
Speaker 4: quarters ago and shifted our focus to self-branded watches.
Speaker 4: I am pleased to share with you that our self-branded products accounted for 77.4% of our sales during the fourth quarter, compared to 57.7% in the same period last year.
Speaker 4: We now offer various product lines for our self-branded products, including outdoor, sports and fitness, business and basic watch lines.
Speaker 4: I still remember leading the company through its IPO five years ago.
Speaker 4: Our self-branded products only accounted at roughly 20% for the company's revenue.
Speaker 4: over the past five years.
Speaker 4: we have successfully transformed our business from one which revenue was largely contributed by a single consumer.
Speaker 4: a finger customer.
Speaker 4: to becoming a top global player in the smart, wearable and healthcare services industries.
Speaker 4: Despite medical challenges.
Speaker 4: Our self-branded products showed strong performance during Q4.
Speaker 4: with a 28.5% quarter-over-quarter revenue increase and continued gross margin expansion.
Speaker 4: The success is due to improved sales of our high-margin products and enhanced brand value together with our optimized solid-loop performance.
Speaker 4: to improve sales of our high-margin products and enhance brand value together with our optimized, solidly performant sales channels.
Speaker 4: demonstrating our improved market position. We believe that the smart wearable market has significant growth potential.
Speaker 4: We are confident in the growth trajectory of our Amazfit and ZAP products.
Speaker 4: and we are committed to further expanding our self-branded product line. As we move forward, we will continue to focus on product innovation and optimizing our cost structure to drive profitability.
Speaker 4: and reinforce our business with resilience.
Speaker 4: reinforce our business with resilience.hov.rel slopesparameto call to follow
Speaker 4: The smart variable market has not achieved its full potential yet.
Speaker 4: For example, as we integrate GPT technology into our Zeb OS,
Speaker 4: we are able to offer a highly advanced and personalized experience for our users.
Speaker 4: This allows us to stand out in an increasingly competitive smart variables industry by providing personalized deep insights, coaching, goal tracking.
Speaker 4: nutrition advice, and health monitoring features.
Speaker 4: always seamlessly integrate within our available devices.
Speaker 4: our dedication to improving the user experience and enhancing overall well-being.
Speaker 4: That's us apart from our competitors.
Speaker 4: and positions us as a leader in the industry.
Speaker 4: by continuing to leverage the power of GPT technology and other cutting edge offerings.
Speaker 4: We are strategically expanding our reach and building long-term value.
Speaker 4: Our company has a long history of investing in cutting-edge technology to enhance our products and services. Several years ago, Presidential
Speaker 4: We invested in LYK2 5 architecture chip technology, and now we are able to use our own in-house designed, low-power, high-performance LYK5 chip for smartwatches.
Speaker 4: This investment has allowed us to improve our smartwatch's performance and battery life.
Speaker 4: We are proud to leverage this technology in conjunction with our AI technology.
Speaker 4: sigma to GPT.
Speaker 4: to offer tailor-made user experience.
Speaker 4: With the power of our LISC-V chips and AI technology, we can significantly enhance users' health and fitness performance.
Speaker 4: We also utilize this technology to optimize user service.
Speaker 4: technology to optimize user service feedback analysis.
Speaker 4: Marketing Data Analysis, AI Coding and Testing.
Speaker 4: allowing us to increase operational efficiency and improve service quality.
Speaker 4: In addition to enabling users to design their own AI-empowered watch faces, we have also developed many apps for the user to use.
Speaker 4: that are automatically designed by AI.
Speaker 4: are automatically designed by AI similar to GTP technology.
Speaker 4: This allows us to offer users a highly personalized experience.
Speaker 4: and set up the parts for our competitors.
Speaker 4: in the smart, valuable industry.
Speaker 4: Soon, we will integrate these technology advancements into our ZAP Sports Coach function to elevate the user experience to new heights.
Speaker 4: Now let's move to our global operations and products.
Speaker 4: Our new self-branded product has an impressive market performance.
Speaker 4: resulting in increased brand recognition among consumers worldwide in Q4.
Speaker 4: Amazfit won NPD's Consumer Electronic Industry Performance Award in the Finest Tracker category for Top E-commerce US Market Share Game. GRAPHIC Please Gallop
Speaker 4: while updating our product competitiveness in the premium market. We also expanded our presence on the global stage by opening our WOSHA office in February .
Speaker 4: We successfully launched the Amazib Falcon globally.
Speaker 4: which received recognition from the global high-end sports professional community.
Speaker 4: and our newly launched Amazit GTS4 and GT-R4 have been well received by consumers worldwide.
Speaker 4: In Q4, we remain concentrated on optimizing our cost structure as we strive for profitability and further enhance business resilience in 2023.
Speaker 4: We will continue with this cost coupling initiatives.
Speaker 4: while balancing cost controls with expenditures to fuel growth.
Speaker 4: And we anticipate that these actions will meaningful, meaningful benefit our business operations in the long run.
Speaker 4: We are extremely confident in our ability to seize market opportunities.
Speaker 4: enhance our product value and continue to deliver additional shareholder value while providing users with more defined and comprehensive healthcare products and services.
Speaker 4: We believe that by optimizing our cost structure and balancing cost controls with investment in growth,
Speaker 4: We can continue to enhance our product value and improve margin.
Speaker 4: Rather than focus solely on quantity, we prioritize
Speaker 4: Quality Close.
Speaker 4: and aim to win the competition in advanced markets like Europe and North America.
Speaker 4: Even in the face of global micro-economic uncertainty, we remain committed to providing cutting-edge technology and products.
Speaker 4: Let's stay at the forefront of wellness solutions.
Speaker 4: Thank you again for joining us today. I will now turn the call over to Leon to go over the highlights of our fourth quarter financial results.
Speaker 5: Thank you, Wang. Greetings everyone. I would like to begin by discussing the key metrics of our fourth quarter financial results.
Speaker 5: Our fourth quarter revenue coming at the lower end of our guidance range, approximately RMB 1.1 billion, reflecting a 35.5% year-over-year decrease. As we all know, this quarter was marked by macro headwinds as ongoing geopolitical tensionsita from the the the the the
Speaker 5: lower discretionary spending persisted, particularly in Europe and the US.
Speaker 5: As a result, consumers remained cautious with their household budgets.
Speaker 5: hearing a recession and inflationary pressures.
Speaker 5: Ourselves in China were also impacted by lower consumer spending.
Speaker 5: specifically during the month of November and December .
Speaker 5: The COVID-19 pandemic outbreak and policies dampened consumer confidence, aimed macro-uncertainty.
Speaker 5: Furthermore, our supply chain was affected by the sudden lifting of COVID-19 restrictions in China.
Speaker 5: causing delays in some of our self-branded product launches.
Speaker 5: Consequently, this has net adverse impact on our first quarter sales as well.
Speaker 5: At the same time, we are encouraged by the bright spots we have seen in many parts of our business.
Speaker 5: As well mentioned our self-branded products comprised to seventy seven point four percent of total sales
Speaker 5: compared to 57.7% for the same period last year.
Speaker 5: Moving forward, we are confident that our self-branded products will gain more traction as we continue to improve our product capabilities and increase brand awareness on a global scale.
Speaker 5: Let's now take a closer look at our gross margin, another bright spot in the quarter's performance.
Speaker 5: Our gross margin can be influenced by various factors such as product mix, product launch timing and product life cycles, including model upgrades.
Speaker 5: Despite the challenges we faced during the quarter, we achieved a year-high gross margin of 20.7%.
compared to 19.3% in Q4 2021 and 19.1% in Q3 2022.
This improvement was mainly driven by the successful launch of our margin-accredited new products.
and the optimization of our product and channel mix. As we continue to implement these proven initiatives, we are confident that we can sustain our positive gross margin trend into 2023.
of our product and channel mix. As we continue to implement these proven initiatives, we are confident that we can sustain our positive gross margin trend into 2023. Turning now to cost.
As we have discussed, costs have been a key focal point for our company, both in terms of their absolute amount and as a percentage of sales. Since Q3 2020, we have been pleased to see a trend towards a decrease in total operating expenses while still making strategic investments to feel growth.
Our company's adjusted operating expenses, excluding share-based compensation, for the fourth quarter of 2022 were RMB 277.6 million.
reflecting a year-over-year decrease of 5.9% and a quarter-over-quarter decrease of 6.1%.
However, if we exclude severance payments of RMB 10 million, our Q4 operating expenses would be RMB 267 million.
While we acknowledge that reducing fixed costs can be challenging, we are taking further steps to control our expenses and have already made good progress in cutting our expenses for our own rates.
Looking ahead, we expect our total operating expenses to reach approximately RMB 250 million or lower in the coming quarters.
which represents a significant decrease of around 20% or more from the average of RMB 300 million per quarter in 2022.
We will continue to right-side our organization and streamline our cost base in order to achieve profitability in the coming quarters.
Spending on R&D in Q4 2022 was R&D 114.3 million, an increase of 21.9% year-over-year, which was partly due to the lower government subsidy received.
If we exclude that factor, our R&D expenses remain slightly down versus the fourth quarter of 2021, thanks to our efficient product development processes.
Selling under marketing expenses were RMB 125.1 million, 17.8% lower year over year, mainly due to pruning of our retail channels in Q4.
At the same time, we continue to make investments selectively in various international markets and sales channel expansion through digital marketing initiatives.
and also partnerships with leading global sales platforms. These investments are critical to drive our long-term organic growth.
Our Q4 expenses were RMB $63.4 million, which is almost in line with the third quarter of 2022, and a 17.5% decline compared with RMB $64.7 million in the fourth quarter of 2021.
We believe that this decrease reflects our execution excellence and reconfirms the effectiveness of our expense control strategies. Our non-GAAP operating results improved throughout the year, in Q4 being the best performing quarter in 2022 from a percentage perspective.
This result demonstrated a sequential improvement in our cost control given Q4's smaller revenue scale.
Our adjusted net loss in the quarter was RMB 60.3 million, compared with RMB 52 million in the fourth quarter of 2021. In the fourth quarter, the company wrote down RMB 30.1 million valuation allowance of deferred tax assets.
Excluding share-based compensation, the one-off severance packages, and the deferred tax asset impact, the adjusted net loss was RMB 20.1 million in the fourth quarter.
Now turning to the balance sheet, our cash flow has remained strong thanks to our enhanced efficiency in working capital management. In Q4, we generated positive cash flow from operations.
Some of which were used to retire in short-term debt.
During the fourth quarter, we continue to manage our inventory with precision.
successfully reducing our inventory balance to RMB 1 billion compared to RMB 1.25 billion at the end of 2021 and down from its peak of RMB 1.5 billion in 2022.
In November 2021, the board approved the allocation of up to US dollars 20 million toward a share with purchase program.
In Q4 2022, we continued our repurchase program, a testament to our ongoing confidence on our long-term growth perspective.
We have bought back USD 10.3 million worth of shares by the end of December and we intended to carry out with this buyback program.
bought back USD 10.3 million worth of shares by the end of December and we intended to carry out with this buyback program. Moving on to our outlook.
In light of ongoing macroeconomic challenges, our guidance for the first quarter of 2023 currently projects net revenue to be between RMB $0.6 billion and RMB $0.75 billion.
compared with RMB $0.76 billion for this first quarter of 2022.
Please note that this outlook reflects continued uncertainty around the potential effects of the COVID-19 pandemic on sales.
and lower discretionary consumer spending, especially in our international markets, aimed at global macro weakness.
However, we have seen some positive signs.
and the year may be somewhat back and loaded as we gradually release our new products.
This concludes our prepared remarks.
We will now open the call for questions. Operator, please go ahead. Thank you. We'll now begin the question and answer session.
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For the benefit of all participants on today's call, if you wish to ask your question to the company's management in Chinese, please immediately repeat your question in English. At this time, we will pause momentarily to assemble our roster. The first question comes from Lisa Lee.
with alpha research.
Please go ahead.
Thank you, thank you, Benjamin, for taking my questions. I have two questions. The first one is your fourth quarter margin looks quite strong. What has driven this performance with the improvement due to self-branded products? And secondly, what has driven this performance with the improvement due to self-branded products?
How do we think about the full year 2023 in terms of revenue growth, gross margin, SDMA, etc. Thank you.
Thank you, Lisa. I mean, let me quickly come back on your first question. Yes, the gross margin improvement in Q4 is majority driven by the gross margin performance of the self-branded product.
So there are two things to it. Number one, we improved on the product mix. As we mentioned that in the past, the Xiaomi products has always been standing for a majority part of our revenue base, but in Q4 2022, it's actually reversed.
actually our self-branded product stands for more than 77% of the overall mix for the quarter. So I think product mix definitely plays a role and you all know that our self-branded products carries a higher margin than the Xiaomi branded products. Number two is also on the channel mix.
So what we did in Q4 and also in the second half of 2022 is to gradually pruning our channel, our retail partners. We tried to look at the probabilities selectively on the retail partners.
and try to prune those ones which are not making money. So, in essence, the product and channel mix has been one of the reasons driven the overall gross margin up for the company for the Q4. And we see this trend.
to continue in 2023. And then on 2023 full year, normally we don't guide for the full year performance. We only guide for the upfront one quarter performance. But I think I could give you a few...
some colors on how we look at the full year. So I think at this moment we're cautiously optimistic about the full year because according to IDC data and some other third-party market research institutions report
the overall wealth of market for 2023 is still pointing to a small growth. I think it's a single digit growth for the full year for 2023. And then what I can say is that
our market share among the global players has remained relatively stable and also improving in the course of 2022. So we're cautiously optimistic about the full year of 2023, but however...
I think the year is probably going to be a little bit back and loaded, because also from a seasonality perspective, the high season, south season for our industry always centered around Q3 and Q4.
So in this case, I think over a full year, we're still seeing probably our revenue is going to be cautiously optimistic but more skewed towards the second half of this year. On the gross margin, I have mentioned that our gross margin performance is going to be
We have seen that there's increasing trend quarter by quarter in 2022. And we expect that I think 2022 Q4 we add the quarter with 20.7%. I think we see this trend.
gradually improving also into 2023. So we also think the product mix and the channel mix is going to continue to improve for our company.
on the cost, operating cost overall. I think I also just mentioned that we have managed to tune the cost down to a level in Q4, whereby if you exclude the severance cost, it stands at $270 million RMB per quarter.
Well, the full-year run rate was 300 million per quarter for 2022. And we expect that this number is going to be further tuned down to a level of 250 million per quarter or even lower per quarter for 2023.
So overall, I think given all the things which I just mentioned, we think we are on a good track to return to profitability in 2023, hopefully in the second half of the year.
If not earlier. That's very clear. Thank you. And if I may, can I add one more question? Can you also discuss your performance in different regions? For example, now we're seeing, I guess, the recovery trends in China.
but not so much in Europe and North America. Can you talk about your performance in different regions?
and give us more colors there. Thank you.
Okay, now I think, yes, in China you see gradually recovering trends, although relatively slow in Q1 2023. And I think this is going to improve.
as we go in the year. But China actually stands to a small part of our overall self-branded product portfolio. Our biggest market is actually in the European markets, whereby we are kind of impacted a little bit.
by the discretionary income cut because of the inflation pressures in Europe and also to some extent by the Ukraine and Russia war. We're actually mitigating that and in February this year we even opened a regional office in Warsaw.
has went up quite dramatically during the year in Poland especially. And we see that in southern Europe market we are also actually maintaining our share and improving our share. So Europe has and will remain as a cornerstone for our regional performance.
the fitness tracker category for the top e-commerce US market share gain in 2022. Actually, we gained the market share from nowhere to a double digit number in the course of 2022. So we think USA will continue to act as a growth engine for ourselves.
what we currently have. So I think there, yes, we're living in inflationary and consumer discretionary cuts type of environment, but however we still see bright spots in different parts of the world whereby we believe there's still a huge potential for us to tap in 2020.
three and be out. Thank you. The next question comes from Ian Luo with Tianfeng Securities. Please go ahead.
Hi management, thank you for taking my question. Congratulations to the fourth quarter. Very good result. I have two questions. First is about your gross margin. We have noticed many IC press have fallen significantly.
since dusty and how can we measure the impact on the company's gross margin? Thank you
Yeah, Ian, thank you. I think in so far, at least in Q1, we haven't seen too much of a price decrease or in other words the benefits of IC price going down, which should in turn translate into a better margin.
already a few quarters before the current quarter. So I think insofar we didn't see too much of that benefit in our gross margin. But as you mentioned, we noticed that there's a cost price going down for the IC in the industry and I think in the coming quarters we probably would see that benefit.
and we think this is a very good opportunity for DevOps. Could you give us a more detailed outlook on your product future plan about the ShareGPT application? Thank you.
Yeah, no, chatGPT is actually a very interesting thing, but it's not only a buzzword for us. It really has been used in many parts of our operation. So I think there are two folds to it. Number one is we have applied chatGPT to the application.
in our basic processes. Think about consumer care. Think about listening to consumers' insights. Think about linking the APIs towards our research and the development processes and help us.
to find out errors and code better for example. So I think we have integrated chatGPT in our basic day-to-day working processes in our company because we have always been a technology-driven company.
and we use most advanced technology whenever we saw there's a potential to it. Number two, I think which is different than the other parties. So for example, if you look at Apple, they also have a chat GPT application.
But the only thing what it does is basically running CheckTPT on the watch instead of on the phone. And then it's just a different platform. But what we have done is we have integrated CheckTPT into our ZEP OS. And in turn, that actually helps us to...
tailor and look at the user's data and help users to make a tailor-made program. And for example, on the watch faces, getting to know their insights, sleep insights, on AI coaching, goal tracking, etc., etc., is better than watch faces.
Thank you, thank you very much.
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 ZEPH's investor relations department through the contact information provided on our website. This concludes this conference call. You may now disconnect your line. Thank you.