Zepp Health Corporation Q1 2023 Earnings Call
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Hello, ladies and gentlemen. Thank you for standing by for ZEP Health Corporation's first quarter 2023 earnings conference call.
At this time, all participants are in listen-only mode.
Today's conference call is being recorded. I will now turn the call over to your host, Ms. Grace Zhang, Director of Investor Relations for the company. Please go ahead Grace.
Hello everyone and welcome to ZEPP House Corporation's first quarter 2023 earnings conference call. The company's financial and operating results were issued in a press release of the news wire 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.com.com.
participating in today's call are Mr. Wang Zhang, our chairman of the board of directors and chief executive officer, and Mr. Liu Yang Chenzhen, our CFO . The company's management will begin with prepared remarks and the call will conclude with a Q&A session. Bounding ARC come into focus at this Howeverly
Mr. Mike Young, our Chief Operating Officer will join us for the Q&A session.
Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Security Legal Station Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainty. 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 are included in the company's annual report on Form 20-S for the fiscal year ended December 31, 2022, and other filings filed with the U.S. Securities and Exchange Commission.
The company does not assume any obligation to update any forward-looking statements, except as required under a Pecceo Law.
Please also note that ZEP's early press release and the conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial information. GAAP's press release contains reconciliation of the audited non-GAAP measures.
to the unordered and most directly comparable GAAP measures .
I will now turn the call over to our CEO , Mr. Wang Fang. Please go ahead.
Hello everyone.
Hello everyone. Thank you for joining our call.
In the first quarter, we recorded revenue of RMB 645.2 million with RMB 391 million from our self-branded products in RMB 254 million.
from the Xiaomi ODM business.
Our total revenue declined at cost. Thank you.
consumers limited
discretionary spending due to water, geopolitical and macroeconomic conditions in Europe andcase the agenda.
As we mentioned in the earlier quarters, we anticipate that the Xiaomi ODM business will diminish further and that our self-branded product line will become the main growth driver in the future.
In the quarter, we made progress globally by strengthening our go-to-market capabilities and increasing brand awareness.
This is along with the value of our product.
growth, higher shipments and multi-share gains with 20% increase in the Southeast Asia and the East Asia region. Spies experiencing a decline.
in the consumer electronics device market. During the first quarter of 2023, you maintain our
optimism that macro headwinds will subside.
and we expect to see a market recovery during the second half of the year.
to see a market recovery during the second half of the year. Furthermore, sow new TR
Another cause for automation is that
The channel list recently forecasted an increase in the smartwatch market in 2023.
We strongly believe in AMESIS long-term potential in the smartwatch market, presenting a significant opportunity to both
sales by enhancing our product competitiveness.
by leveraging our vertical integrated mixed-size phase chip and ZAP-OS in all product lines.
We can reduce product costs and improve product growth profit margins. Our high-end products offer similar performance to premium competitors but at a higher level.
fraction of the most of the cost and this longer battery life.
This all helps us generate higher revenue and profit margins along with our integrated supply chain and efficient R&D.
We will secure our position in the 100 to 200 US dollar market segment while expanding into premium segments and enhancing our sales channels and supply chain management.
for increased profitability.
With these enhancements now implemented.
I am thrilled to share that our new products have achieved a remarkable 34.6% margin in the current quarter.
We remain confident that the overall margin will improve in the future as we work towards achieving a more optimal inventory level.
Mo¡ » Arena.
The rapid implementation of OpenAI
of OpenAI's
LLM technology sets us apart from our competitors in the industry.
By utilizing both watches,
powered by generated AI, we will position ourselves as a trailblazer in the market.
Emphasizing our advanced grade technology rather than traditional sports watches.
emphasizing our advanced grade technology rather than traditional sports watches. For example,
As we mentioned last quarter, we have been the industry pioneer in integrating GBT technology into our products and services.
Such as thatap, coach and zap Aura on March twenty nine.
We launched the beta version of an iPad ZAP coach.
Chat function for Amazfit Falcon user.
Powered by this constantly learning and evolving.
AI chat capability, ZEP coach chat can provide users with abundant personalised and updated exercise recommendations.
In recent quarters,
We have implemented, refreshed,
marketing and product strategies that include creating communities for sports and outdoors
strategies that include creating communities for sports and outdoors ensure this
By leveraging generative AI technology, we have not only supported the growth and development of AI technologies, but also the development of AI technologies.
and the growth of AI technology. We have not only supported the growth and development of Atlas.
both in zero distance and outdoor in zero distance.
but also builds a thriving user community in the sports and outdoor sector.
This has resulted in a
in the organic spread of positive word of mouth and distribution.
which had further boosted the
our brand and reputation in the mid to high-end market.
As a result, we have also gained brand premium in the mid to low-end market, driving higher profit margins in the future.
Alongside our endeavors to equip our products with cutting-edge technologies,
We have also been striving to expand our product portfolio.
aiming to offer more diverse products to address different co-hosts, centers, health, and life-dial needs.
In Q1 we launched
the amazing T-Rex I'll show, our ultimate outdoor GPS smartwatch.
March 10th.
It received positive feedback from outdoor sports insurances.
for each logic design, premium materials and 160 plus sports modes.
We have other exciting part of crime.
for the year ahead aiming to bring the one features to more users.
For example, on May 4th, we released a significant firmware update.
for the Amazit T-REX2 smartwatch. It includes heart rate recovery information,
pelole Magic.
Actitudes, water temperature, slope, and automatic slope analysis.
This enhancement improves the user experience.
making our smartwatches reliable, awareness companion for indoor and outdoor activities.
For the past few months in 2023,
We have seen some signs of economic recovery in certain markets.
That said, the fragile economic environment in many other markets remains an uncertain factor.
sampling, consumer confidence, and potentially
our sales performance in the coming quarters.
Nevertheless, we remain confident in our strategy described in the
a bust and we believe this is the right path leading to the company's sustainable growth.
as we aspire to become a leading global healthcare solution provider. And it will enable us to deliver incremental value to our users and shareholders.
Thank you again for joining us today. I will now turn the call over to Leo to go over the highlights of our first quarter financial results.
Thank you, Wang. Greetings, everyone. Let me walk you through some key metrics of our first quarter 2023 financial results.
In the first quarter, we recorded revenue of RMB 645.2 million within our guidance range and down 14.8% year-over-year.
The decrease was mainly due to the global macroeconomic uncertainties that dampened discretionary consumption in the first quarter.
According to Candelas, the value of the global wearable markets, including basic band, basic watch, and smartwatch, decreased by 8% in the first quarter.
and more specifically, the Basic Banned subcategory lost more than 30%.
Also, as I mentioned a few times before, Q1 is typically the lowest seasonal quarter of our financial year. Before diving into our financial performance, I would like to provide a brief overview of the macro environment.
In the first quarter, we experienced a shift in China's COVID-0 policy.
The reopening disrupted our new product launch schedule due to factory closures.
As a result, we had to postpone the release of some of our new product lines to subsequent quarters, which had a negative impact on our Q1 sales. At the same time, consumer spending was rather tippet.
especially as the pendulum has swung away from goods and toward travel and services as the consumer enjoys some of the activities that they were deprived of during the pandemic.
The consumer electronics space in particular continues to experience softness to this matter, which together with the geopolitical risks in Europe , pressure on our top line in North America and Europe . Despite the challenging start of the consumer electronics market during the first quarter of 2023.
we remain optimistic about the smart wearable market's recovery in the second half of the year.
Despite these headwinds mentioned above, as Wang just mentioned, in some of our global markets, our self-branded products achieved encouraging year-over-year sales growth during the quarter. Thanks to our enhanced brand value and product features, we remain confident in our ability to drive our self-branded products to the market.
approach to optimizing our product and sales channel portfolio, the gross margin for our self-branded products remained relatively healthy.
Meanwhile, gross margin for Xiaomi products declined significantly in the quarter as a result of its multi-year pricing strategy. Above factors combined drove our overall gross margin to 15.9% in the first quarter, down lowered by 2.5%.
by 4.2% year-over-year and 4.8% versus previous quarter. We believe with the launch of our new higher margin products and continued pooling of our low ROI products and cellos, the gross margin of our self-branded products will expand further.
for the remainder of the year.
Now let's look at our costs, as we have always mentioned in our past earnings costs.
Costs remain a main forecast for the 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 toward a decrease in total operating expenses while still making strategic investments in new products, technologies, and footprint expansions to fuel our long-term growth. In Q1, we made good progress in cutting the growth of our new products and our new products in 2020.
decrease of 13.3%.
non-GAAP operating expenses decreased to RMB 229.8 million, which is the lowest level in the past two years.
As a percentage of revenue, our first quarter adjusted operating expenses rate decreased by 3.3 percentage points year over year. Going forward, we'll continue to manage our expenses in a disciplined manner and enhance our operating efficiencies. We need to cut our expenses run rate to approximately 3.5% in the year.
non-GAAP R&B 200 million or lower in the coming quarters, which represents a significant decrease of around 33% or more from the average of R&B 300 million per quarter in 2022.
as we aim for our turnaround in profitability in the coming quarters.
Spending R&D in Q1-23 was R&D $117.9 million, decreasing by 19.5% year-over-year. Benefiting from our enhanced R&D efficiency, it is also worth mentioning that R&D expenses now account for near-term costs.
RMB 86 million, declined by 16.6% year over year, as we carefully review our sales channel strategy while still investing opportunities with higher ROIs to fuel growth. You want GNA expenses.
or RMB 49.9 million, lowered by 14.2% versus RMB 58.2 million in Q1 2022, and down by 6.5% compared with RMB 53.4 million in Q4 2022.
due to optimization delayering and strong cost control measures. We believe that our progress in cost optimization is a strong testament to our execution capability and will benefit our long-term growth.
Thanks to decreased operating expenses, our adjusted operating loss narrowed by 10.9% year-over-year. However, our reduced costs did not fully offset the impact of a smaller revenue scale and lowered gross margin for Xiaomi products during the quarter.
Our adjusted net loss in the first quarter was RMB 112.7 million versus a loss of RMB 75.7 million in the first quarter of 2022.
while our Q1 2022 loss includes a $60.6.3 million investment income generated by our sci-fi investment.
We will continue to enhance our cost control policies by implementing more comprehensive measures, specifically targeting areas such as travel expenses, personnel-related costs, and other expenditures incurred by the company.
simultaneously we're dedicated to refining our product pricing strategy to optimize both our gross margin and sales revenue ultimately leading to an improvement in our bottom line performance.
Despite a bottom line loss, our cash flow remains strong thanks to our working capital management efficiency.
We have sustained positive operating cash flow for three consecutive quarters since Q3 2022. Now, turning to the balance sheet, cash and cash equivalent restricted cash and the term deposits.
as of March 31, 2023, with RMB 1 billion, the improvement from RMB 973 million as of December 31, 2022.
As we continue to execute our precise inventory management strategy, we further reduce our inventory balance to RMB 800 million by the end of the quarter from RMB 1 billion at the end of the year 2022. And it is the lowest level in the past six quarters.
In November 2021, the Board approved the allocation of up to US$20 million toward a shared repurchase program.
In Q1, 2023, we continued our repurchase program as we remain confident in our business prospects in the longer term.
We have bought back USD 11.1 million worth of shares by the end of March 31, 2023, and we intend to carry on with this buyback program.
Now, let's discuss our outlook. In light of the ongoing geopolitical and macroeconomic challenges, our guidance for the second quarter of 2023 currently projects net revenue to be between R&B 650 million and an R&B 850 million.
Compared to RMB 1.1 billion for the second quarter of 2022. We expect roughly 65 to 75% of the revenue will be contributed by our self-rendered products in the second quarter.
Please note that this outlook reflects continued uncertainty around lower discretionary consumer spending, especially in our international markets and global macro-economic weakness. That said, we have seen some positive signs and much of the year lies ahead of us.
For the more, as we mentioned last quarter, the year may be somewhat back and loaded as we gradually release our new products. And with that, I would open it up for questions. Operators, please go ahead.
Thank you. We'll now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad.
If you're using a speaker phone, please pick up your handset before pressing the keys.
If at any time your question has been addressed and you would like to withdraw your question, please press star then two.
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 Nicola Jones with Brooks Investments. Please go ahead.
Thank you for taking my questions. So I have three questions. Firstly, can you please provide some color on the revenue trend of self-branded products in the second quarter and beyond? And then secondly, I'd like to ask if you can discuss factors that impacted your margins in the first quarter.
and Martin Outlook in the remainder of the year. And lastly, I'd like to understand a bit more about the revenue breakdown by region. Thank you.
Yeah, it's a lot of questions. So let me start with the first question. I think it's on the self-branded product margin, I'm sorry, I think it's around self-branded product revenue outlook for Q2 and
the quarters ahead of us correct? Yes, thank you. I think as we just guided, we were looking at roughly 650 million, Rd 650 million and the Rd 800 to the 15 million.
mid number over there. In essence, we're looking at the second quarter revenue, which is going to be around 750 million RMB.
And out of that, 70% would be our self-branded products. If that number is correct, I think that is actually going to be indicating that our self-branded products revenue is going to start to grow versus the same period.
of last year. And looking ahead, we have mentioned a few times that we're actually transforming more into a self-branded driven revenue kind of company rather than in the past.
have already started to, you have already seen this trend, but I think after a few quarters, especially Q2, Q3, Q4, this year, you will start to see a solid trend of majority of our sales revenue is going to be generated by a self-granted products.
well, we still have a small portion of their Xiaomi and ODM products revenue. And in return, that sales mix change is going to help us to deliver a higher gross margin. So I think that naturally goes into your second quarter, which is on the
into one, our new product sales gross margin is around 35%, which is a lot higher than what we have sold in the past. Now, but our overall gross margin for the self branded products in quarter one was still flat year over year, largely because we still have some of the old inventories from the previous generation products, which we carried over from previous years, which we tried to sell off. And I think we're coming, and that's why you also see our inventory.
balance decreased dramatically in the past six quarters. And we're now at 800 million worth of inventory, which is if you put it into perspective, that's just equivalent to the sales outlook of a quarter out sales for us. And I think coupled with the...
clearance of the old inventory which come more or less to an end right now, plus the newly launched product of self-branded products which is going to take its shape in quarter two and ultimately into the high season of Q3 and Q4.
we see the gross margin of our self-branded products as well as the overall gross margin is going to shoot up or continue to improve in Q2 and ultimately in Q3 and Q4.
I think that should answer your second question and your third question, if I remember clearly it's about the revenue breakdown by region. I think we have mentioned several times that our biggest sales region for our self-branded products.
is in Europe and that actually stands for around 60% of the overall self-branded revenue for us. And in many of the big European countries, for example Spain and Italy, we hold a very dominant market share position in those countries.
So, and we will continue to expand in Europe , especially in the east part of Europe as well as in the countries like traditionally a very strong on brand awareness for our premium competitors, for example Apple and the Samsung brands.
you're you're more looking at countries like Germany and UK etc etc. Right? And apart from Europe I think we also see United States as well of the countries and regions which can give us quite a growth opportunity because we have been operating in the North America market.
for roughly close to two years, less than two years. And we have already developed our market share from zero towards 11%. That's actually ranked ourselves among the top five players in the US. So I think US will continue to push up after Europe .
as one of the Asia-Pacific countries, and then they also play as an important part of our self-benefit revenue. And last but not the least is China. And I think we also want to play smartly in China by selling selectively our premium products in China.
over there. So that altogether hopefully would give you a view on where we're going to push for this year's revenue for self-branded products.
Thank you. That's very helpful. Thank you. you.
The next question comes from Lisa Lee with Alpha Research.
from Lisa Lee with Alpha Research. Please go ahead.
Thank you for taking my question. I have two questions. The first one is on the very strong margin that you just mentioned for your new products. You said it was around 35% in the first quarter. I'm just wondering what are the drivers behind this performance?
and are there any further upside to this member? And the second question is on the run rate of your operating expenses, you, I think, talks about a target of 200 million on the adjusted basis in the coming quarters.
But I noticed in the first quarter, your total operating expenses have reached around 225 million, I think, on the adjusted basis. So are you being a little bit conservative on this target? And what is your run rate currently? Thank you.
Yeah, so let me try to answer the easy ones. Let's start with the wrong rate of the expenses that I'll get back to the margins because that's probably is gonna be a little bit longer story here. Yes, you're right, Lisa. So if you look at our 2022 and 2021 quarterly expenses, wrong rate, we're around 300 million R&B per quarter.
So, which is adding up the R&D, GNA plus the sales and marketing expenses altogether. So, this is actually one of the key KPIs, the management play a lot of focus into our day to day operation. So, we have done a few things.
in line with our revenue scale. So that's definitely the one which we did in the past quarters. I think that's more or less coming to the end. And the second one is what we did is to look at our expenses.
based on a so-called ROI return investment approach. And we always look at the discretionary expenses in a way that whenever we could save, we ask people to be a little bit more cautious in, for example, traveling, for example, spending.
a so-called platforming approach whereby we look at our vertically integrated chips, OS, and everything together and try to lower the overall cost of delivery on our products. So that all translates into a lower R&D expenses, a lower
and per quarter and then we have already achieved that number and we have over delivered in a since this quarter on R&B 200, around 229 million for the quarter. And we're as we mentioned in our prepared remarks.
We're looking at operating expenses, round rate of 200 million for the year. And yes, I still think by applying a more target approach, like what I just described, we still have room to push for a little bit lower than that number.
that this moment we're more looking at a run rate of 200 million R&B per quarter for now.
And going back to your first question on the margin, and then the margin development for our products for this year, I think there are a few drivers. Number one is that we are actually looking at, as you know, we have three different.
product lines which are targeting different type of consumers right number one is our so-called spots and outdoor range which is supported by our watch like the T-Rex and Falcom theories these are the so-called the the the the the apple ultra and gardening
And these watches actually have gained great attractions in the marketplace right now. And we want to actually deepen on building on those reputations we generated through these watches and also the functionalities we have achieved out of these watches. And we want to actually use these type of...
reputation to sell our and increase our ASPs of our overall product portfolio at large. And number two is actually what I mentioned just now on applying a vertical integrated supply chain as well as a vertical integrated supply chain.
the chips, the OS, and the R&D effort altogether. So called platforming approach in our R&D, right? In the past, if you have 10 platforms, then in essence, you need to spend the money 10 times. But if you can actually single everything into one platform.
than you are going to reduce your cost dramatically. And at the same time, deliver a user experience and functionalities much better than a scattered software and hardware landscape in the past. So I think with that second lever on vertically integration,
we should be able to gain market share in those price segments between $100 and $200 range, which is also the part which our competitors like Huawei, like Xiaomi and other brands.
There's a fierce competition over there, but I think through a vertical integration and a pure player, we should have a better competitive edge over there. So number one is to increase the ASP on our premium watches. Number two is to use our vertical integrated system.
system platforms and everything to increase our competitiveness on the no-orteer price points so that we can actually gain market share at the bottom from the Xiaomi Huawei and Samsung guys and as a top from Apple and the Gaming guys. Now all together.
that should be the path on how we're going to increase our cross margin for our products in the future.
should be the path on how we're going to increase our cross margin for our products in the future.
Yes, it did. Thank you. As there are no further questions now, I'd like to turn the call back over to Grace John for any closing remarks.
Thank you, I'm again for joining us today. If you have further questions, please feel free to contact JAPS and RESTO Relations Department through the content information provided on our website. This concludes this conference call, and may now disconnect your line. Thank you. Again, the conference has now concluded.