Q4 2023 Zepp Health Corp Earnings Call
Hello, ladies and gentlemen.
Operator: Hello, ladies and gentlemen. Thank you for standing by for Zepp Health Corporation's fourth quarter and full year 2023 Earnings Conference. At this time, all participants are in listen-only mode.
Thank you for standing by for <unk> Health Corporation or.
Fourth quarter and full year 2023 earnings conference call.
At this time, all participants are in listen only mode.
Today's conference call is being recorded.
Operator: Today's conference call is being recorded. I will now turn the call over to your host. Miss Gray Sean, Director of Investor Relations for the company, please go ahead. Hello, everyone, and welcome to Zepp Health Corporation's fourth quarter and full year 2023 earnings. 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 structure list and slides referred to on this call by visiting the Investor Relations section of the company's website at duck.com.
I will now turn the call over to your house.
MS Grace Zhang director of Investor Relations for the company.
Please go ahead Grace.
Hello, everyone and welcome to Flophouse Corporation's fourth quarter and full year earnings conference call.
The company's financial and operating results were issued a press release.
Its wire services earlier today and are posted online you can also view the architecturally and fly referred to.
Paul.
The aspect of the company's website.
Hum.
Gray Sean: Participating in today's call are Mr. Wang, Mr. Wang Huang, our Chairman of the Board of Directors and Chief Executive Officer, and Mr. Leon Deng, 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 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 US Private Security Legislation Reform Act of 1995. Overlooking statements involving hurried risks and uncertainties; as such, the company's actual results may be materially different from the new success today. Further information regarding this and other risks and uncertainties are included in the company's annual report on Form 20-F for the fiscal year ended December 31, 2022, and other filings as filed with the U.S. Security and Exchange Commission. The company does not assume any obligation to update any forward-looking statements, except as required Please do note that GAP's early press release and this conference call include discussions of unauthorized GAP financial information, as well as unaudited non-debt financial information. The spreadsheet contains a reconciliation of the unaudited non-debt measures to the unaudited most directly comparable debt measures. I will now turn the call over to our CEO, Wen. Please go ahead.
Today's call are Mr. Huang Wang well, our chairman of the board of Directors and Chief Executive Officer.
Beyond <unk>, our Chief Financial Officer.
The company's management.
I'll begin with <unk>.
Mark.
Hum.
The session.
Yeah, our chief operating officer will join us for the Q&A session.
While we continue please note that today's discussion will contain forward looking statements made under the safe Harbor provisions.
Maybe the Cherokee.
Meanwhile, at Baidu 90 sites.
We're looking statements involve inherent risks and uncertainty.
The company's actual results may be materially different from that.
Okay.
There's information regarding this and other one off items baby in the company's annual report on form 20-F for the fiscal year.
December 31st 2000 partnership and other filings as filed with the U S Securities.
Commission.
The company does not assume any obligation to update any forward looking statements.
As required under applicable law.
Please do note that GAAP earnings press release, and todays conference call.
Discussions of August with GAAP financial information as well.
Obviously, it sounds that financial information.
That's really it's complex because they talk to the ocean. After all the non-GAAP measures should be all audited most directly comparable GAAP measures.
I will now turn the call over to our CEO Len. Please go ahead.
Okay.
Hello, everyone welcome and thank you for joining I'll call in <unk> III.
Wang Huang: Hello everyone, welcome and thank you for joining our call. In 2023, amidst global micro-economy uncertainties, our ROI-oriented strategy and ongoing business model transformation began to bear fruit. This strategy shift has enabled us to strengthen our commitment to becoming a global provider of cutting-edge, smart, and personalized healthcare solutions. Before we dive into our earnings, I would like to spend some time talking about our strategy as we reflect on 2023. Over the past two years, we have been on a transformative journey to become less dependent on Xiaomi branded products and instead develop a self-reliant company driven by its self-branded product sales. This shift is starting to show promising results as evidenced by our two consecutive non-gap paraphysical quarters.
This global macro economy, uncertainties, all why oriented strategy and ongoing business motto transformation began to bear fruit.
The strategy shift has enabled us to strengthen our commitment to becoming a global provider of cutting edge smart wearable health care solutions.
Before we dive into our earnings are light you spend some time talking about our strategy as we intersect on 20 <unk> Street.
Over the past two years, we have been on the transformer.
Former task, Germany to become less.
Pendants on Xiaomi branded products.
Is that the bulk.
Sharply lunch company, driven by south branded product sales.
These.
Shift is.
Starting to show promising results.
Evidenced by our Q codes suck test non-GAAP profit of cortex.
Wang Huang: Looking at 2024, building on the actions we have taken in the past, we are excited to be making a strategic leap and harnessing the synergy between our product and sales channel. This leap forward is grounded in three core pillars. First, we are putting greater emphasis on R&D and product-driven innovation, where we will fully embrace AI and offer more innovative products that closely align with the needs of our key market. Second, we are continuing to ensure profitable growth by maximizing the value we derive from each and every product we sell, guided by this approach. We are choosing profitability over scale in some regions, such as India, which transitioned in 2023 from a loss-making market to a profitable one. In certain other areas, we are investing aggressively to gain market share, aiming to generate long-term returns. Last but not least,
Looking at 2020 full building on the actions we have taken in the past.
We are excited to be making a shack T. J D and harmless thing there is synergy between our product and sales channel.
This leap fallboard is grounded in the coal pillar.
Thus we are putting.
Greater emphasis on R&D and product driven in the leases.
Where we will fully embrace AI.
And offer more innovative product that closely along these nice off our key market.
Second we are continuing.
To ensure a favorable growth Max.
Maximizing the value, we do rise from each and every product show.
Guided by this approach.
We are choosing profitability over scale in some regions, such as India, which.
Transitioned in 2023 for a moderate loss, making market you a profitable one.
In silicon other areas, we are investing aggressively to gain market share.
Bank to generate long term returns.
Last but not least.
Wang Huang: We will invest in branding and marketing communications in order to enhance our brand presence by welcoming our Amazfit athletes and increasing sponsorships of big sports events. I believe you will see the Amazfit brand more visible across the world in the coming quarters. With these three pillars, I am confident we can propel our framework and generate a higher return from our employees and shareholders in the long run. In the fourth quarter of 2023,
We will invest in branding and marketing communications in order to enhance al Brian Preston by welcoming our amazed with at least an increasing sponsorships.
Big sports events.
I believe you will see the amazing brand more visible a cough the warmth in the coming quarters.
With these three pillars I am confident we can propel our frame glue and generate a higher return from our employees and shareholders in the long run.
In the false car care.
After 2023.
I'll focus on shelf Dziedzic transformer Shine formation, Cobos, Oh mall, South really land revenues, Jim has gained traction.
Wang Huang: Our focus on strategic transformation towards a more self-reliant revenue stream has gained traction. Aiming at reducing dependency on a single customer, lowering revenue concentration, and shifting our emphasis increasingly on self-branded products, these efforts to become self-reliant have made significant progress. As a result, despite a year-over-year decline in our revenue during the fourth quarter, our self-branded product maintained sequential growth momentum with a quarter-over-quarter growth of 14.8% and contributed to 91% of our top line, up from 77% in the previous year. Notably, our growth margin reached a record high in the fourth quarter.
And with.
Reducing dependency on a single customer Rory revenue concentration and shifting our emphasis increasingly on south Brian did part of that.
At first to become self reliant.
<unk> made significant progress.
As a result, despite a year over year decline in our revenue during the fourth quarter, our self branded products maintained she can show growth momentum this quarter over quarter growth of 14.8.
Hey, my son and contribute it.
Q, 991% of our top line up from 77 of Sun in the previous year.
No debris.
Our gross margin reached a rep.
Call high in the fourth quarter.
Wang Huang: Attendance, to our effective prioritization of profitability over scale. This significant achievement was largely driven by our higher margin self-branded product. The launch of the Amazfit Active and Amazfit Active Edge series in Q4, as well as the Amazfit Balance Special Edition, enhanced our product portfolio and significantly elevated our market presence. At the same time, we will continue to improve our retail channels and enhance our product mix to sustain the higher growth margin trend, leveraging self-branded revenue to bolster the company's overall performance and steering us towards sustained profitability. To further solidify our market leading position in smart variables, In October, we launched two new lifestyle smart watches, the Amazfit Active and the Amazfit Active Edge, in Europe and APEC.
Our past demand.
Our effective.
Prior conversation.
Visibility of what scale.
This significant achievement was largely driven by our higher margin self branded products.
The launch of.
The most active and unless you're active edge can be reversed in Q4.
Hello.
Amongst your balance special edition.
Our patent portfolio and significantly.
Elevated our market christen.
At the same time, we will continue to Peru, Peru, Peru, our retail channels and enhanced our product mix to sustain the higher gross margin trend.
Bridging south branded revenue to bolster the company's overall performance and steering us towards sustained profitability.
To further thought.
I'm going to fly our market leading position in smart variables.
We continue diversifying our product line, yeah to meet evolving market demand.
In October we launched.
Two new lifestyle smart watches.
Mice that active and the amaze fit active ACH.
Europe and APAC.
Wang Huang: These smart watches, prepared for today's urban, urbanized branding, elegance with powerful functionality, incorporate the AI-powered ZAP coach and are effortless integrated into our users' haptic life, as that innovation is at the core of everything we do. To reflect this vision, I would like to highlight some of our success in Smart Wearable Technology at CES 2024. The CES launch of the amazing Helio ring, our first smart ring, underlines our dedication to providing pioneering accessible healthcare solutions. The Amazfit Helio ring is designed to offer parallel recovery support to athletes.
These smart watches.
For today's urban urbanized.
Branding elegance with powerful functionality.
Incorporate the AI powered <unk> coach and effortlessly integrate it into our users hectic locks.
And that innovation is at the core of everything we do.
To reflect this we shouldn't.
Slide two.
Highlighting some of our success in smart wearable technology at CES 2024.
Let's see yes launch off the amaze fit hey, little rain Alistair.
Rain and the likes that.
That occasion to providing pine prairie.
First the BOE health care solution.
The amaze fit Helio reign is designed to offer.
Hello.
Recoveries, the Paul Chew athlete.
These developments in paid termite our commitment to empowering individuals to take control of their house.
Wang Huang: These developments in patronize our commitment to empowering individuals to take control of their health and well-being through our smart variables, building on the momentum of our product expansion. We remain dedicated to elaborating ZAP-OS. We recently introduced ZappOS 3.5 with ZappFlow at MWC Barcelona 2024 in February, a substantial update powered by large language model AI, marking a significant lead in wearable intelligence devices and bringing unprecedented levels of interaction. That flow offers seamless natural language recognition to provide users with exactly what they want, from setting an alarm, deactivating the always-on display feature, to providing feedback on last night's sleep quality, and analyzing the readiness score from the All this can be done by interacting with the watch using human natural language and without the need to memorize any predefined commands.
Well being Chaloux Alice Mark valuable.
Building on the momentum of our product expansion.
Really main bad debt to elaborate.
<unk>, saying is that the left.
We recently introduced <unk> 3.5.
That flow and that Blue C.
Barcelona $10 94 in February.
The initial uptake how the bi large language model.
Marking a significant lead in <unk>.
<unk> intelligent devices, and bringing them, perhaps in pets levels off into action.
That flow offer us some less natural language liquidation to provide users with exactly what they want.
From setting an alarm.
The activating the always on display future to providing feedback on last night's sleep quality and analyzing the readiness skull from the previous day's activities.
Offering recommendations for improvement improvement in falling days.
All can be done by into activity.
Is the watch using human natural language and without the need to memorize.
Any pre defined commands.
Additionally, we provide our users with.
Wang Huang: Additionally, we provide our users with consistent software updates. For example, The Amazing Balance now features new training templates, new scheme map functions, and enables smart NFC car payment in Europe, enhancing both the sporting experience and general daily convenience. Our blood pressure measurement software has been expanded to a broader range of products, including the Amazfit Falcon Active Cheetah Pro, Amazfit T-Rex Ultra, Amazfit T-Rex 2, and GTR4. Aiming to deliver personalized and advanced wellness support to a greater number of users, our products' seamless integration of hardware and software not only assists users to improve not only their well-being but also their lifestyle. I'm happy to share a comparison example that comes from one of our Japanese users who found himself lost in a snowstorm during a hiking trip in Mont Blanc.
Consistent software I pace.
For example.
The amazing balance now T shirts, new training tablet.
Neil <unk> vanishes and enables smart and that's C car payment in Europe enhancing.
Enhancing both the sporting experience and general daily convenience.
Al Brown pressure measurement and shop, where have been expanded to a broader range of products.
Including the amaze feet Falcon active shooter pro amaze fit T regs sure.
<unk> <unk>, two and Judy asphalt aiming to deliver personalized and advance roundness supports to a greater number of users.
Our.
Seamless integration of hardware and software not only assist users to improving.
Well being but also our base their life style.
I'm happy to share our comparing example that comes from one of our Japanese user who found himself low enough no storm they already are hiking chip in Mumbai.
Fortunately tree.
Wang Huang: Fortunately, our T-rex cue guided him safely back, to share his experience on Young Max, Japan's leading outdoor app, and even sent us a thank you email. Stories like these fill us with pride as we see our products contribute to the enthusiasm and certification of our users. 2023 leaves behind a tapestry woven with both challenges and opportunities. And some, as we are transforming into a self-reliant company and shifting our strategy from pursuing pure revenue growth to profitability, we have seen a decline in revenue. Despite that, our Amazfit branded products contributed to 74% of our total revenue, compared to 59% in 2022.
Our Q2 guide it him safely back.
Sure he is.
Curious on jump back.
Japan's leading outdoor app and even sent to us.
<unk> E mail store.
Stories, ladies fill us with price.
Ride as we see our products contribute shooter is Suzanne some and certification off al as user.
Yeah.
Gently Chinese tea leaves beihai.
<unk> G woven dispose challenges and try and sum.
As we are transforming in.
Ah self reliant.
Company and shifting our share did you from pursuing pure revenue growth to profitability.
We have seen a decline in revenue despite that.
All amazed fifth branded products contributed CAD, 274%.
Our total revenue.
Compared to 15, 9% in tenders to Andy Chu.
Wang Huang: Furthermore, our efforts translated into a commendable 36% reduction in gap net loss, marking a pivotal shift as we achieved profitability in both Q3 and Q4, leveraging our cost margin and cost management strategy. Another operational milestone in Q4 2023 was the successfully completed mass production of our amazing BEEP watch line at our Vietnam factory. This achievement not only underscores the execution of our multi-sourcing global supply chain strategy but also paves the way for further global expansion. Additionally, we have witnessed a surge in product visibility, particularly on social media platforms and through key opinion leaders' endorsement, including a growing market presence and excitement, and consumer engagement.
Furthermore, our efforts translated into a commendable thirty-six Poseidon.
Sharon in non-GAAP net loss.
King.
Pivotal shift.
So as to be achieved pull up for debate a T. In both Q3 and Q4.
Leveraging our gross margin and cost management strategies.
Another operation no milestone in Q4 2023.
<unk> successfully completed mass production of our amazing Beep watch lie at our Vietnam factory.
These achievements not only underscores the execution of our multi sourcing global supply chain Shat Digi also paves the way for further global expansion.
Additionally.
We have witnessed a surge in product visa Betsy.
Particularly on social media platforms as true key opinion leaders endorsement, including a growing market Bristow and heightened consumer.
Consumer engagement.
Looking to the future, we see a healthy and sustainable growth.
Leon Cheng Deng: Looking to the future, we see healthy and sustainable growth. Trajectory for ZEPP, our relentless drive for innovation and strategic expansion of our product offerings positions us to effectively adjust to the evolving demands of our global user community. Despite the challenges posed by macroeconomic challenges, our focus remains steadfast on bolstering profitability and seeking dynamic opportunities to propel our resilient growth and secure greater bottom-line stability. This approach not only strengthens our competitive edge but also ensures our long-term success in the ever-evolving smart wearable industry. I will now turn the call over to Leon to go over the highlights of our fourth quarter financial results. Thank you, Wei Yan. Greetings, everyone.
So Jack city for Zap.
Our <unk>.
<unk> to less drive for innovation and strategy expansion of our product offering positions.
To effectively adjust the evolving demands of our global user community.
Despite headwinds posed by macro economy challenges, our focus remains steadfast on bolstering profitability I speaking dynamic opportunities to propel our listened in girls.
Cure greater bottler that ability.
This approach not only strengthens our competitive edge, but also ensures our long term success in the ever evolving smock valuable industry.
I mean, now turn the call over to Leo to go over the highlights of our fourth quarter financial results.
Leon Cheng Deng: And thank you again for joining our earnings call today. I would like to start by discussing some key metrics from our financial results for the fourth quarter of 2023. As we have mentioned in the past, the border consumer electronics industry has yet to recover and remains subdued across our geography.
Thank you ware, great teams to everyone and thank you again for joining our earnings call today.
I'd like to start by discussing some key metrics from our financial results for the fourth quarter of 2023.
As we have mentioned in the past the border consumer electronics industry has yet to recover and remain subdued across our geographies.
Leon Cheng Deng: This is partially due to sluggish demand for high-value consumer electronics products, such as TVs and mobile phones, coupled with challenging economic conditions in parts of the EMEA and APEC regions. However, we saw some modestly improved performance in the smartwatches for outdoor slash sports category, though the market remains highly competitive, aimed at these challenges with steadfastly adhering to our strategic plan. This holiday season, we took an unconventional approach by launching that extended pre-Christmas promotion on selected products.
This is partially due to a sluggish demand for high value consumer electronics products, such as TV and mobile phones, coupled with challenging economic conditions in parts of EMEA and APAC region.
However, we saw some modestly improved performance in the smart watches for outdoor sports category.
Though the market remains highly competitive.
And there's challenges, we're steadfastly adhered to our strategic plan.
This holiday season.
Unconventional approach by launching that extended pre Christmas promotion in selected products.
Leon Cheng Deng: Traditionally, we focus on offering discounts centered around Black Friday and Cyber Monday. However, this year, we decided to align with consumer expectations for ongoing discounts throughout the holiday season. This strategy resonated well with our consumers. We met our own sales expectations while delivering strong gross margins for the quarter. All of this is a testament to our strong brand, our great product lineup, and the value that our products can offer. However, given that this successful promotion occurred later in the fourth quarter, it is likely that it might have advanced some cells from Q1 of 2024. This Q1 is typically our slowest quarter of the year.
Additionally, we're focused our offering is centered around black Friday cyber Monday. However, this year, we decided to align with consumer expectations.
Ongoing debt discount throughout the holiday season.
This strategy resonated well with our consumers would have met our own self expectations well.
Delivering strong gross margins for the quarter.
All of this is a testament to our strong brand our great product lineup and the value that our product called for.
However, given that the successful promotional occurred later in the fourth quarter. It is likely that it might have about some sales from Q1 of 2024.
Q1 is typically our slowest quarter of the year, whereas the update a more cautious outlook for the revenue projections in the upcoming quarter.
Leon Cheng Deng: We're adopting a more cautious outlook for revenue projections in the upcoming quarter. However, I would like to emphasize that we are laser focused on the areas within our control. We're holding our market share steady without sacrificing gross margin. As we stand at the start of a multi-year product cycle, we're beginning to harvest the benefits of our research and development investments. This allows us to branch into new categories and introduce innovative products, such as the Helio ring we unveiled at CES, with more announcements planned for the coming quarter. We're also broadening our distribution channels to align with where our customers prefer to shop. Additionally, we're reinventing our brand marketing and activation to tap into sports and address a new audience. As Wayne highlighted earlier, you will see our brand featured more prominently at sports events, and we will welcome more athletes to join our Amazfit family.
I would like to emphasize that we are laser focused on the areas within our control.
We're holding our market share steady without sacrificing gross margin.
As we stand at the start of a multi year product cycle, we're beginning to harvest the benefits of our research and development investment.
This allows us to branch into new categories and introduce innovative products.
Such as the Haley array, we unveiled at CES with more announcements planned for the coming quarters.
We're also broadening our distribution channels to align with where our customers prefer to shop.
Additionally, we're reinventing our brand marketing and activation to tap into a sports and address new audiences.
As way of highlighted earlier, you will see our brand featured more prominently I sports events, and we will welcome more ethylene to join our family.
That's the strategic positioning of the company.
Leon Cheng Deng: That strategic positioning of the company aims to accelerate our growth while managing expenses carefully to ensure margin expansions in the years to come. Now turning to Q4 results, our overall sales for the quarter were U.S. dollars $85 million slash RMB $66 billion, aligned with the lower end of our guidance, as we navigated the technical challenges in our categories and the highly promotional environment. This reduction in sales was influenced partially by our strategic decision to prioritize profitability over scale, with foreign exchange fluctuations also having a negative impact.
To accelerate our growth, while managing expenses carefully to ensure margin expansion in the years to come.
Now turning to Q4, so our overall sales for the quarter was U S dollars $85 million slashed RMB.
Barely.
With the lower end of our guidance.
As we navigate the cyclical challenges in our categories and the highly promotional environment.
This is a reduction of yourself with influenced partially by our strategic decision to prioritize profitability over scale.
Foreign exchange fluctuations also having a negative impact.
In markets like China, and India, our business motto mirrors. This emphasis on profitability over scale. The shift has resulted in these markets turning net profit positive in 2023.
Leon Cheng Deng: In markets like China and India, our business model mirrors this emphasis on probability over scale. The shift has resulted in these markets turning net profit positive in 2023. For the more Despite year over year revenue declines in our self-branded products, we achieved positive quarter over quarter revenue growth, convincing us that our strategic approach will empower our business for long-term sustainability and resilience. Moving on to gross margin, which can be influenced by various factors such as product mix, product launch timing, and product lifecycle, including model upgrades. As Weiya indicated earlier, our Q4 2023 gross margin reached an impressive 34.7%, surpassing Q3 and marking the highest gross margin in the company's history. This statement can be attributed to a favorable product mix, a higher proportion of new product launches, such as a MaceFit active and a MaceFit active edge series, and reduced clearance activity.
Furthermore, despite year over year revenue decline in our self branded products, we achieved positive quarter over quarter revenue growth.
Anything else that our strategic approach will empower our business long term sustainability and resilience.
Moving onto gross margin, which can be influenced by various factors such as product mix product launch timing and product lifecycle, including Moto upgrades as way I indicated earlier, our Q4 2023 gross margin reached an impressive 34 points.
The pricing Q3, marking the highest gross margin in the company's history.
This can be attributed to a favorable product mix.
Higher proportion of new product launches such as our main actors and active X series.
Reduced.
Activity.
Leon Cheng Deng: Importantly, we anticipate this positive trend in gross margin to extend into Q1 and throughout 2024. Now, let's turn our attention to cost. As we have discussed, cost management remains a critical area of focus for our company, both in terms of their absolute amount and as a percentage of sales. Hence, we continue to exercise disciplined control over our expenses during the quarter.
Importantly, we anticipate this positive trend in gross margin to extend into Q1 and throughout 2024.
Now, let's turn our attention to cost.
We have discussed cost management remains a critical area of focus for our company.
In terms of their absolute amount and as a percentage of sales.
We continue to exercise disciplined control over our expenses during the quarter.
Leon Cheng Deng: Since Q3 2020, we have consistently reduced overoperating costs, all while strategically investing in innovative products and technologies, as well as geographical expansion. As a result, non-GAP operating expenses for Q4 stood at U.S. dollars 27 million, RMB 191 million, comparable with Q3 2023 and consistent with the guidance which we provided. I guess that research and development expenses in the fourth quarter of 2023 will be dollars 11 million, a decrease of 30.8% year over year. [inaudible] 12.8% of revenue versus 10% for the same period in 2022. The decrease was primarily attributed to our refined research and development strategies as we constantly access resources efficiently to maximize return on investment and productivity. Also, we integrated an AI-based R&D platform to improve our efficiency.
Q3, 2020, we have consistently reduced over operating costs.
All while strategically investing in August to have product and technology as well as geographical expansion.
As a result, non-GAAP operating expenses for Q4 stood at USD 27 million RMB 191 million comparable with Q3, 2023, and consistent with the guidance, which we provided.
Adjusted research and development expenses in the fourth quarter of $2023.
Dollars.
Melia, a decrease of 38% year over year.
This comprised.
12, 8% of revenue versus 10% for the same period in 2022.
The decrease was primarily attributed to our research and development strategy as we constantly access resources efficiently to maximize return on investment.
Productivity.
Also we're integrated AI based R&D platform to improve our efficiency.
Leon Cheng Deng: At the same time, we're committed to investing in new technologies and AI functions to maintain our competitive edges against our peers. Adjusted selling and marketing expenses in the fourth quarter of 2023 were US dollars 12 million, a year-over-year decrease of 31 percent. These expenses accounted for 14.3% of revenues compared to 11.6% in the same period in 2022. The reduction in amount was mainly due to our ongoing efforts to improve profitability and refine our sales channel mix. In addition to the deep enhancement of our retail channels, such efforts also included a strategic allocation of merchandise throughout our sales region. Additionally, we launched an A-suite wellness wonderland and a pop-up store in Berlin to spotlight wellness during the holidays. We showcased our brand concept through a collaboration with Sicily Nano Contemporary Play at the launch of the Amazfit Balance Special Edition watch, drawing significant media attention.
At the same time, we're committed to investing in new technology, and AI functions to maintain our competitive edges.
Our peers.
Adjusted selling and marketing expenses in the fourth quarter of 2023 U S dollars call familiar.
Year over year decrease of 31%.
These expenses accounted for 14.3 of revenues compared to 11, 6% in the same period in 2022.
Reduction in the amount was mainly due to our ongoing efforts to improve profitability and refining our sales channel mix.
Additional to the ink desk enhancement of our retail channels.
Efforts also included a strategic allocation of stuff throughout our sell through should Additionally, we launched amazed with wellness Wonderland and a pop up store inked in Berlin to spotlight walnuts during the holiday season.
We showcased our branch concept through a collaboration with Sicily nano cause temporary play at the launch of their makes that balance special edition watch.
<unk> significant media attention.
Leon Cheng Deng: This concept was also highlighted in the Zepp Health 10 Years of Innovation campaign. We are committed to making smart investments in marketing and branding initiatives that will fuel our longer-term growth. Just this GNA expenses amounted to U.S. dollar 4.0 million in the fourth quarter of 2023, a year-over-year decline of 37.8%; this expenses represented 4.8% of revenues compared with 4.3% in 2022. This decrease in absolute amount was largely attributed to our efforts in optimizing personnel and enforcing strict cost control over administrative expenses.
This concept was also highlighted in that house 10 years of innovation campaign.
We are committed to making smart investments in marketing and branding initiatives that will fuel our long term growth.
Adjusted SG&A expenses.
Amounted to U S dollar for zero.
Million in the fourth quarter of 2023, a year over year decline of 37, 8%.
These expenses represent it.
Four 8% of revenues compared with four 3% in 2022.
This decrease in absolute amount.
I'll actually attribute it to our efforts being offset by <unk> personnel and enforcing strict cost control.
Over administrative expenses.
Looking ahead, our commitment to cost.
Leon Cheng Deng: Looking ahead, our commitment to product cost management will continue in the coming quarters with anticipated costs remaining at or below our current levels. We'll maintain our strategic investments in R&D activities and marketing expenses to ensure our long-term competitiveness, striking a balance between strictly monitoring discretionary spending and making strategic investments critical for our long-term growth. In Q4 2023, we reported an adjusted operating profit of US dollars 2.4 million, RMB 17 million, which includes a non-cash US dollars 3.5 million valuation allowance of deferred tax assets, versus an operating loss of US dollars 8 million in the same period last year as a result of the expansion in our self-rendered products cross margin and our streamlined operating expenses. Now turning to the balance sheet, as of December 31, 2023, This positions us with ample runway to capitalize on potential marketing opportunities and invest in our business growth. We have also focused on managing our working capital efficiently.
Cost management will continue.
In the coming quarters with anticipated costs remaining.
Oh below our current levels, we will maintain our strategic investments in R&D activity.
And marketing expenses to ensure our long term competitiveness striking a balance between strictly monitoring discretionary spending and making strategic investments critical for our long term growth.
In Q4, 2023 we reported adjusted operating profit of U S dollars to $4 million.
RMB 17 billion, which includes a noncash U S dollars $3 5 million valuation allowance of deferred tax assets versus the operating loss of U S. Dollars 8 million in the same period last year as a result of the expansion in our self branded products.
Margin and our streamlined operating expenses.
Now turning to the balance sheet as of December 31, 2023, our cash and cash equivalents, along with restricted cash balance totaled approximately U S dollars $140 million.
Slash RMB 1 billion.
This position.
US with ample runway to capitalize on potential marketing opportunities and invest in our business growth.
We have also focused on managing our working capital efficiently, we kept inventory levels steady at U S dollars 85 million RMB 600 million the lowest level in the company's history.
Leon Cheng Deng: We kept the inventory level steady at US dollars 85 million, RMB 600 million, the lowest level in the company's history, and will continue to manage inventory levels tightly as we weather the macroeconomy. Thank you for, coupled with operating profits and efficient working capital management. We achieved positive operating cash flow. This marks our sixth consecutive quarter of positive operating cash flow, and we expect to continue this position in the coming quarter. Thanks Q2 2023. We have initiated the retirement of portions of our short and long-term debt portfolio, successfully retiring US dollars 4.8 million, RMB 34 million of debt in Q2, and USD 16 million, RMB 170 million in Q3. In Q4, we continue to reduce our debt levels by another US dollars 12 million, or RMB 84 million. As our operating cash continues to strengthen, we intend to do more in the coming quarters. Furthermore, by the end of December 31, 2023, we will have repurchased shares worth $12.9 million.
We'll continue to manage inventory levels tightly actually whether the macro economy.
In Q4, coupled with operating profits and efficient working capital management, we achieved positive operating cash flow.
This marks our sixth consecutive quarters of positive operating cash flow and.
And we expect to continue with this position.
In the coming quarters.
Since Q2 2023, we have to be initiated the retirement of a portion of our short and long term debt portfolio.
Fully retiring U S dollars $4 8 million RMB $34 million of debt in Q2, and USD 16 million RMB $170 million in Q3, and Q4, we continued to reduce our debt levels, but in another U S dollars 12 million RMB.
The $84 million.
Our operating cash continue to strengthen we intended to do more in the coming quarters.
Furthermore, by the end of December 31st.
The 'twenty to 'twenty, three we have repurchased shares worth dollars $12 9 million.
Leon Cheng Deng: We remain committed to continuing our buyback program in the fourth quarter and in the quarters following that, underscoring our confidence in the company's future and our commitment to delivering long-term value to our shareholders. Looking ahead, as I mentioned before, Q1 is traditionally a soft quarter for us. Therefore, our Q1 guidance range is projected to be U.S. dollars 42 million to U.S. dollars 49 million, RMB 300 to 350 million, with self-branded products accounting for about 90% of the revenue. In conclusion, the fourth quarter presented challenges that we overcame by prioritizing profitability over scale.
We remain committed to continue our buyback program in the fourth quarter and in the quarters.
Following that underscoring our confidence in the company's future and our commitment to delivering long term value to our shareholders.
Looking ahead as I mentioned before Q1 is traditionally a soft quarter for us. Therefore, our Q1 guidance range is projected to be U S dollars $42 million to U S dollars 49 million RMB.
RMB $300 million to $315 million.
We're self branded products accounting for about 90% of the revenue.
In conclusion, the fourth quarter presented challenges that we overcame by prioritizing profitability over scale. This strategy combines our disciplined approach to cost management have been instrumental in achieving encouraging performance.
Leon Cheng Deng: This strategy combines our disciplined approach to cost management as the instrumental in achieving encouraging performance and delivering a second consecutive quarter of non-gap profitability for us. As we look ahead, we remain confident that these strategic initiatives will continue to deliver long-term value to our investors and shareholders, as well as our employees. Thank you all for your time.
Delivering a second consecutive quarter of non-GAAP profitability for us.
As we look ahead, we remain confident that these strategic initiatives will continue to deliver long term value to our investors and shareholders as well as our employees.
Thank you all for your time I would now like to open the call for any questions. Operator. Please go ahead.
Operator: I would now like to open the core for any questions. Operators, please go ahead. Bye. We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone key. If you are using a speaker phone, please pick up your handset before pressing the key.
Thank you.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If you weren't using a speaker phone please pick up your handset before pressing the keys.
Operator: 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, in particular. [inaudible] Our first question today will come from Nicolette Jones of Brooks Investments. Please go ahead.
It was strong 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 and Chinese cities.
Immediately repeat your question in English.
Once again it is.
Star and then one to ask a question.
Our first question today will come from Nicholas Chen of <unk>.
Investments. Please go ahead.
Yeah.
Hi, I have two questions. Please.
Nicolette Jones: Hi, I have two questions. Could management please provide more details on the outlook for 2024 and the first quarter? And for my second question, I'd like to find out more about the company's regional strategy. Nicola, I mean, if you could repeat the second question one more time for me, please.
Could management provide more details on the outlook for 'twenty 'twenty four I missed.
First quarter.
And then my second question I'd like to find out more about the company's regional strategy.
A nickel I mean, if you could repeat the second question one more time for me. Please.
Nicolette Jones: Oh yes, hi, I'd like more details on the regional strategy. Unknown Attendee Okay, on the, Thank you. Now, so let me take this question. I think on your first question about the outlook for the first quarter and also for twenty twenty four, I think about the first quarter. I just mentioned that, typically, it is a relatively soft quarter for the consumer electronics industry. Therefore, our guidance for the first quarter was between the range of dollars forty two million to forty nine million or RMB equivalent to three hundred to three hundred fifty million for the top line. And normally, our guidance stops at giving guidance only for revenue. But in this call, I think I want to provide some color for the year twenty twenty four.
Oh, Yes, hi, I'd like to add more details on the regional strategy.
Okay on the regional strategy. Thank you not so let me take this question I think on your first question on the outlook for first quarter and taught and also on 'twenty 'twenty four I think the first quarter I just mentioned that typically it is a relatively soft quarter for the <unk>.
Consumer electronics industry. Therefore, our guidance for the first quarter was between the range of $1 42 million to 49 million or RMB equivalent to a $300 million to $350 million for the topline anomaly our guidance.
At giving the the guidance only for the revenue.
But.
In this call I think I I I want to provide some color four year 'twenty 'twenty four as you asked.
Leon Cheng Deng: As you asked, I think looking at the full year twenty twenty four, if we start from the big picture, both IDC and Catalyst actually are projecting overall market value growth for the smart watch sector, which is the sector we're operating in, of single digit, high single digit growth for year twenty twenty four. Therefore, I think our revenue growth target for 2024, at this juncture, to the best of our knowledge, is actually going to be on par with or higher than the overall market growth for our self-branded products on the top line, So I think that's the guidance for 2024 for the full year for the sale. And coming to gross margin, as you heard what we just mentioned, our overall gross margin percentage as a percentage of cells actually hovered in the second half of 2023 was somewhere between 30 to 35%.
I think looking at the full year 2024, if we start from the Big picture, both IDC and catalyst actually are projecting overall market value growth for the smart watch.
Sector, which is the sector, which we're operating in a of a single digit high single digit growth.
For.
For year 2024.
Therefore, I think our revenue growth target for 2024 at this juncture.
To the best of our knowledge is actually going to be on par with or higher than the overall market growth for our self branded products on the topline.
Right. So I think that's the the guidance on the 'twenty 'twenty four for the full year for themselves and call me to gross margin.
As you heard.
What we just mentioned that our overall gross margin.
<unk>.
As a percentage ourselves actually hovered in the second half of 2023 of them are somewhere between 30% to 35% and we expect this gross margin to expand in the upcoming quarters and throughout 2024.
Leon Cheng Deng: And we expect this gross margin to expand in the upcoming quarters and throughout 2024. Therefore, I think it's reasonable that you could anticipate that our gross margin performance is going to be at least on par with the second half of 2023 or even higher than that. Right. And then the last missing puzzle piece of this is actually the operating cost, which is, I think we have mentioned that the round rate of our quarterly operating cost is around RMB 200 million. And we have actually maintained this round rate for more than four quarters throughout 2023.
Therefore, I think it's reasonable that you could anticipate that our gross margin performance is going to be at least on par with second half of 2023 or even higher than that.
Right and then the last missing peso off this is actually the operating cost which is I.
I think we have mentioned that the run rate of our quarterly operating cost is around RMB 200 million.
And we have actually maintained this run rate for more than a full quarter throughout 2023, and we have been demonstrating that we're able to keep up with this cost level and digest at this.
Leon Cheng Deng: And we have been demonstrating that we're able to keep on with this cost level and adjust this level if we need to in the year to come. So I think that should give you a feeling for where the year 2024 would bring us on the bottom line in this case. I think that should give you a sense of the first quarter guidance and the full year 2024. Then I'm actually coming to your second question, which is about our regional strategy. I think for a lot of analysts, including yourself, following us, you must know that the majority of our sales revenue is actually coming from the overseas market, with more than half of the revenue coming from the EMEA region. And then for the remainder, we have half of that coming out of the USA and the other half coming out of the Asia-Pacific region. And I think looking at 2024, there are a few big events in front of us, being the Olympics in Paris, in Europe, and also the European Cup, which is a soccer game, also in July and the June-July timeframe in Europe.
At this level, if we need them in the year to come.
So I think that should give you a feeling where they're taught year towards 'twenty four would bring us a on the bottom line in this case.
I think that should give you assess the first quarter guidance at the full year 2024.
I'm I'm actually coming to your second question, which is our regional strategy.
I think for a lot of analysts including yourself following us.
You you must know that majority of our SaaS revenue is actually coming from the overseas market.
With more than half of their revenue coming from the EMEA region, and then for the remainder we have half of that coming out of the USA and the other half coming out of the Asia Pacific region right.
So and I think looking at a 'twenty 'twenty four there are few big events in front of us being the Olympics in Paris in Europe, and also the European Cup, which is a soccer game.
<unk> are also in July.
June July timeframe in Europe, So Europe won't be a big sports year for us and for sure. It was also back on that.
Leon Cheng Deng: So Europe will be a big sports year for us, and for sure, we'll also bank on those big sports events in order to boost our sales for the company. And not to mention that the USA actually stands as another bright spot for growth for us because we have made quite some progress in the offline channels in the U.S. For example, we are featured in Best Buy, Target, and many offline channels, and also in Walmart in the U.S. at this moment. And we're actually expanding into more stores and also more offline channels in the USA as we speak, which we believe in 2024 we should see reasonable growth coming out of the USA for us as well. I think that is, in a nutshell, where we play in the regional structure and not to mention that in the Asia-Pacific region, we have markets where we also see great potential, for example, Thailand, Japan, Taiwan, et cetera, et cetera, where we think we can also make a big leap in our revenue in the year to come. Thank you. Our next question today will come from Sidra. [inaudible] Please go ahead. Hi, congratulations on your strong results. I have a couple of questions.
Those big sports events in order to boost our selves.
Sales for the company.
And not to mention that USA actually stands as another bright spot for growth for us because we have made.
Made quite some advancement in the offline channels in U S. For example, we are are featured in best buy target.
And many offline channels.
And also including Walmart.
E U S. At this moment and we're actually expanding into more stores and also more offline channels in the USA as we speak which we believe.
<unk> 'twenty 'twenty four we should see a reasonable growth coming out of our USA for us as well.
I think that he is in a nutshell, where we play in the regional structure and not to mentioned that the Asia Pacific region. We have markets whereby we also see a great potential for example, Thailand, Japan, Taiwan et cetera et cetera.
There. We think we can also make a big leap of our revenue in the year to come.
Thank you.
Our next question today will come from Sidra team are fundamental for resource Corp. Please go ahead.
Hi, Congratulations on your strong results I have a couple of questions on your balance sheet.
Sidra: We have closed, Unknown Attendee, Lisa Lee, Zepp Health, Unknown Attendee... the value of the investments you have on your books. What's your plan with these investments? On a long-term basis, any plans to divest? Yes, I think you were referring to the Chinese A-Stock listed company in which we invested, and we took a minority share in that company. I think that company, if you look at it, it is actually placed into the vertical integration of our big plan for wearables because that company, to be specific, is making the sensors and producing the chips for not only us but also other wearable manufacturers for the smart watch product. In the future, I think having this company as an A-listed company in China has its benefits because it can not only supply goods to us but also supply goods to many other ecosystem companies that want to play in the wearable domain.
You have close to $250 million in investments.
The gap was just $75 million. So it seems like the market is not recognizing that.
That message that you have on your books.
What's your plan with these investments on a long term basis any plans to divest at least a portion of it in the near term.
Yes, I think you're referring to the China, a stock listed company, which we invested and we took a minority shares in that company I think.
That company, if you look at it.
It is actually a place into the vertical integration of our a big plan for the Wearables because that company to be specific actually is a making the sensors and are producing the chips are for not only us but also other.
Wearable manufacturers.
For the Smart watch product right and then in the future I think having this company.
As a listed company in China has its benefit because it cannot only supply goods to us, but also he kind of supply goods to many other ecosystem companies.
Which one are at play in the wearable domain and I think this is a little bit similar to the <unk>.
Sidra: I think this is a little bit similar to the Apple chip strategy, but the only difference is that Apple doesn't open it to others, and we, as a player and a strong player in the smart watch domain, would like to actually open up more to the ecosystem within China in the wearables domain. And I think also having this listed company in China would benefit this company and our company in the specific semiconductor push that we're going to get from the Chinese market. And it's a highly competitive market.
To the Apple a chip strategy, but they only differentiation that apple doesn't opening it to the others and we as a player in this and a strong player in the Smart watch domain, we would like to actually open up more to the ecosystem within China.
The Wearables domain right.
And I think are.
Also having this listed company in China would benefit.
This company and our company this specific semi conductor push which which we're going to get from the Chinese market and it's a highly competitive market.
Leon Cheng Deng: So, and to some extent, I think our if you look at the market value of a listed company and multiply our shareholding, the value is already bigger than our market cap, per se, right, which is, unfortunately, there's something in the equation which does not play. Got it. Thanks. But we have no intent to sell that stake at this moment of time. Your cash position is very strong, you know, and someone would expect, "How much of that would you pay down?"
So and <unk>.
To some extent.
I think our would be if you look at the market value of the eight listed company multiply our shareholding.
<unk> value is already bigger than.
The our market cap per se right, which is unfortunately, there's something in.
A question, which does not play a art.
The value has to be fully unleashed in order to realize the full value of this company.
Yeah.
Got it. Thanks, we have no intent to two two to sell that stake at this moment of time.
Okay.
Your gas position is very strong you know.
One would expect you to be paying down your debt sooner than you know what you've been doing how much of that would you pay down this year.
Sidra: I think overall, in 2023, as I mentioned, actually, we paid down more than two, and if I remember correctly, I think more than 200 million RMB in debt. And at this moment in time, if you look at our balance sheet, we have hardly any short-term debt, and we only have some long-term debt, but the majority of that long-term debt is actually for the purchase of the stake in the Chinese listed company, and then we have also pledged the shares in order to make that purchase. So, in essence, that doesn't play into the health of the overall cash balance I have on Zepp Health, and if you look at 2024, we also have similar intent as the probability I just mentioned, and I give a picture of how 2024 would be looking. I think together with the positive operating cash inflow, we're thinking about retiring a similar amount or more than what we did in 2023 in 2024 on the debt portfolio, and that will make us, if we do that by the end of 2024, that will give us a no debt or close to no debt situation by year end.
I think overall in 2023 as I mentioned actually with pay down more than two Ah if I remember clearly I think more than 200 million RMB in debt and at this moment in time, if you look at our balance sheet, we have hardly any.
Short term debt.
We only have.
Some long term debt, but the majority of that long term debt, it's actually for.
For the purchase of the stake in the China listed company and then we have also pledged their shares.
In order to make that purchase the only assets that doesn't play into the Ah that the that the that the health of the overall cash balance I have that power right.
And if you look at 'twenty 'twenty four we also have similar intent as the profitability I just mentioned.
If a picture on how 'twenty 'twenty four would be looking like I think together with the positive operating cash inflow, where thinking about retiring similar amount or more than what we did in 2023 in 2024.
The debt portfolio and that will make us if we if we did if we do that by the end of 2024 that will gives us no debt or close to note that situation.
Right.
Okay perfect. Thank you so much Neil.
Leon Cheng Deng: Okay, perfect. Thank you so much. Unknown Attendee.
Thank you Sid.
Gray Sean: Thank you. If there are no further questions now, I'd like to turn the call back over to the company's IR director for closing remarks. Thank you once again for joining us today. If you have further questions, please feel free to contact Zepp Health's Investor Relations Department through the contact information provided on our IR website.
Thank you.
There are no further questions now I'd like to turn the call back over to the company's IR director, Chris Jones for closing remarks.
Thank you once again for joining us today, if you have further questions. Please feel free to contact Taphouse.
Sort of a nation partners through the contact information provided on our website.
Operator: This concludes this conference call. You may now disconnect your line. Thank you. The conference has now concluded. Thank you for attending, and you may once again disconnect.
This concludes this conference call you may now.
Your line. Thank you.
The conference has now concluded.
Thank you for attending and you may once again nowadays cannot.