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Huami Corporation (HMI) Q2 2019 Earnings Call Transcript

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Huami Corporation (NYSE: HMI)
Q2 2019 Earnings Call
Aug 19, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, ladies and gentlemen. Thank you for standing by for Huami Corporation's Second Quarter 2019 Earnings Conference Call. At this time, all participants are in listen-only mode. Today's conference call is being recorded. [Operator Instructions]

I will now turn the call over to your host, Ms. Grace Zhang, Director of Investor Relations for the Company. Please go ahead, Grace.

Zhang Grace Yujia -- Director, Investor Relations

Hello, everyone, and welcome to Huami Corporation's second quarter 2019 earnings conference call.

The Company's financial and operating results were issued in a press release via newswire service earlier today and are posted online. You can also view the earnings press release and the slides to which we will refer on this call by visiting the IR section of the Company's website at www.huami.com/investor.

Participating in today's call are Mr. Huang Wang, our Chairman of the Board of Directors and Chief Executive Officer, and Mr. David Cui, 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 Yeung, our Chief Operating Officer, will join for the Q&A session.

Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provision of the US Private Securities Litigation Reform Act 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 is included in the Company's annual report on Form 20-F for the fiscal year ended December 31, 2018, and other filings as filed with the US Securities and Exchange Commission. The Company does not assume any obligation to update any forward-looking statements except as required under applicable law.

Please also note that Huami's earnings press release and this conference call include discussion of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Huami's press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures.

I'll now turn the call over to our CEO, Mr. Huang Wang. Please go ahead.

Wang Huang -- Founder, Chairman of the Board and Chief Executive Officer

Hello, everyone. Thank you for joining our earnings conference call today.

Solid top line revenue growth and strong profitability continued in the second quarter as our brand, product lines, footprint [Phonetic] and strategic initiatives, all continued to develop and expand growth rate. Our second quarter revenue was RMB1.0 billion, which represents a 36.6% increase compared to the second quarter 2018.

Our revenue performance was driven by the extremely successful second quarter launch of the Mi-Band 4. In addition, sales of our Amazfit branded smartwatches continued to perform well, with our self-branded launch now ranking fifth globally in shipments according to the recent published research reports. Furthermore, our overseas expansion is in line with our strategy and expectations. Approximately half our products were shipped to overseas during the first half of 2019.

Mi-Band 4 was launched in the second quarter, and it quickly became our blockbuster, with the best sales momentum among all generations of Mi-Bands. Its global shipment volume exceeded 1 million units within [Indecipherable]. The feature of Mi-Band 4 improved significantly from previous version. The NFC version of Mi-Band 4 is the first version of Mi-Bands to have Xiao AI, the intelligent voice assistant of Xiaomi IoT ecosystem installed.

We will continue to work closely with Xiaomi on new product releases to replicate the success we have had with each version of the Mi-Band. We are confident in the strong market appeal of the Mi-Band going forward. Our long-term plans with Xiaomi and the popular Mi-Band product line remain unchanged. We look forward to developing and producing future generations of the Mi-Band, including variants targeting different global market segments and customer profiles.

In the second quarter, we continued to expand and diversify our Amazfit product lines. In late June and July, we launched multiple smartwatch products with various functionalities designed for different customer demands.

To name a few, we launched our second generation smartwatch, Amazfit Nexo, in June. It is a full-function smartwatch with the eSIM communication feature. We also introduced our brand new watch series Amazfit GTR, which is designed to target a new growing market segment. While it had the look and feel of the traditional watch, the GTR is integrated with smartwatch as well as powerful sports functionalities. In addition, we launched Amazfit Bip Lite and Amazfit Verge Lite smartwatches. Their smartlite [Phonetic] functionalities, long battery lives and competitive price make them ideal choices for the first-time smartwatch users.

Our brand-new ECG version smartwatch targets the fast-rising wearable health tech markets. We now have a dedicated healthcare team responsible for the research and development of our wearable health tech products and services. In addition to the analysis and the integration of the biometric data sets, this team includes healthcare professionals and accredited experts from leading institutions with specializations in the cardiovascular health and chronic disease management. We also provide selected healthcare services to our smartwatch users, with both complementary and premium package.

In addition to launching smartwatch products, targeting different customer segments, we continue to enhance our IoT life scenario capabilities. For example, the NFC functionality in our smart wearable devices allows users to facilitate a number of common daily activities, including public transportation access, select community space access, smart car ignition, among others. We also entered into a strategic partnership with Tencent Cloud. As part of the partnership, selected Amazfit products will have the capability to install applications like QQ Music, QQ and Tencent translation.

Our significant technology achievements in the second quarter included incorporating our self-developed AI chip, Huangshan-1, into our healthcare focused smartwatch product line. Health tech enabled smart wearables are a rapidly advancing trend and our breakthrough [Phonetic] technology enables critical real-time applications for the non-prescription ECG measurement and 24 hours, seven days arrhythmia monitoring.

We have received very positive feedback on our latest products from our customers. These products and the technology powering them creates a concrete foundation for our continued leadership in the development of advanced products in the smart wearable industry.

With our growth strategies firmly in place, we will continue to expand our global sales channels and brand recognition, move forward our collaboration with Timex on productive development, launch more amazing new products and further invest in R&D capabilities. We have full confidence that our competitive new products and the well established product lines will drive accelerated [Phonetic] growth for the second half 2019. We expect much stronger growth in the third quarter, up approximately 52.6% to 55.4% compared with Q3 2018, as indicated in our earnings release guidance.

Thank you, again, for joining today. I will now turn the call over to our CFO, David Cui.

David Cui -- Chief Financial Officer

Thank you, Wang.

Robust revenue growth momentum continued in the second quarter, increasing 36.6% year-over-year, as the Company benefited from strong global unit sales, particularly with the newly launched Mi-Band 4.

During the quarter, we shipped 8.3 million total units, up 53.7% from the same period last year. We believe this top line growth momentum is sustainable and has the potential to continue improving. In addition to products which we already launched earlier this year, we will soon launch more Amazfit new products with the variable [Phonetic] functionalities in the next quarters. These new product releases demonstrate Huami's commitment to the needs of global smart wearable consumers and give us the confidence to continue delivering value to our shareholders in the second half of 2019, as Wang mentioned earlier.

We will continue to benefit from our expanding overall brand recognition as we enhance our products and services and continue to penetrate global markets. Also, during the second quarter, we continued to make strategic investments in our R&D capabilities, including strengthening our [Indecipherable] and cloud services capabilities in addition to streamline product development, testing and supply chain management for new launches, all in an effort to ensure we remain on the cutting edge of smart wearable technology. We also continued to make investments to our brand value by increasing our marketing efforts to promote broader awareness and adoption of our self-branded products.

We are confident this investment, along with strong alliance, operational efficiency and a growing global footprint will help ensure our healthy growth and solid financial performance in both the short and long term. Mindful of the length of this call, I will highlight the key financial measures for the second quarter 2019 and encourage you to refer to our earnings press release for further details regarding our financial results.

Now, here are some of the highlights of our strong second quarter. Revenues increased by 36.6% to RMB1.04 billion from RMB760.1 million for the second quarter of 2018, exceeding the guidance that we provided to the market. Gross profit increased significantly by 40.8% to RMB277.3 million from RMB196.9 million for the second quarter of 2018. Our gross margin of 26.7% reflected a sizable improvement from our gross margin of 25.9% for the second quarter of 2018. This increase, aside [Phonetic] from economies of scale, was driven by our continued improvement in supply chain management.

Strong supply chain management has always been a hallmark of our operations, and we are continually working to find ways to make it even better. In 2018, we consolidated and streamlined our logistics and supply chain network activities by establishing a dedicated supply chain management headquarter -- global headquarter in Shenzhen. Here, all relevant teams are under one roof. The ease and speed of communication among teams and with the suppliers and the manufacturer contractors has further improved our operational efficiency.

Now moving on to expenses. Total operating expenses increased by 89.2% to RMB185.2 million from RMB97.9 million for the second quarter of 2018. Reflecting our investment strategy in R&D, brand and the marketing channels for long-term returns, research and development expenses increased by 111.4% to RMB93.8 million from RMB44.4 million for the second quarter of 2018, primarily due to an increase in our personnel related expenses and a rise in intermediate tax expenses as several new pipeline products were undergoing rigorous testing.

General and administrative expenses increased to RMB51 million from RMB32.8 million for the second quarter of 2018. This increase is in line with the growth of our Company.

As our total revenues and the volume of products sold have continued to increase, our selling and marketing expenses have naturally also increased. Selling and marketing expenses increased by 95.2% to RMB40.4 million from RMB20.7 million for the second quarter of 2018. As we intensified our promotion efforts for self-branded products, we also expanded our sales and marketing team to boost our sales efforts globally.

Our income before income tax was RMB101.3 million compared with RMB101.4 million for the second quarter of 2018. The GAAP net income attributable to the Company increased to RMB89.4 million compared with RMB85.5 million for the second quarter of 2018. Net income attributable to ordinary shareholders of the Company increased to RMB89.2 million.

Moving down the P&L, basic and diluted net income per ADS attributable to ordinary shareholders of Huami Corporation was RMB1.46 and RMB1.39 respectively. As a reminder, each ADS represents four Class A ordinary shares. Next, adjusted net income attributable to Huami Corporation increased to RMB111.7 million from RMB101.6 million for Q2 2018. Finally, adjusted basic and diluted net income per ADS attributable to ordinary shareholders of Huami Corporation was RMB1.83 and RMB1.73 respectively.

Relating to cash, as of June 30, 2019, the Company had cash and cash equivalents of RMB1.45 billion compared with RMB1.44 billion as of December 31, 2018.

And now to our outlook. Looking ahead to the third quarter of 2019, management currently expects net revenues to be between RMB1.64 billion and RMB1.67 billion, which would represent an increase of approximately 52.6% to 55.4% from RMB1.07 billion for the third quarter of 2018.

This concludes our prepared remarks. We will now open the call to questions. Operator, please go ahead.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Kyna Wong of Credit Suisse. Please go ahead.

Kyna Wong -- Credit Suisse -- Analyst

Hello. Good evening, management. Thanks for taking my questions. I have two questions. The first question is about the ASP trends. Because in the second quarter we see the ASPs actually decline due to the mix, and it is because the like Mi mix [Phonetic] -- I must say Mi-Band for the -- ramping the shipment and also some of the product adjustment in the second quarter. But along with the new product launch like in the June and also July, what should we expect in the ASP trend in the second half? That is the first question.

The second question is about the gross margin. I think David actually mentioned about supply chain management. But given the ASP decline, do you see gross margin in these improve in the second quarter? What should we expect in the coming quarters with the new product launch? Because initially, the [Indecipherable] for the smartwatches may not be like -- I mean, in the scale. So should we like expect the margin to be more trending -- more stable or trending down? Thank you.

David Cui -- Chief Financial Officer

Thank you for the question. With respect to your first question, regarding ASP, in second quarter -- in second quarter, we continued to sell Mi-Band 3 [Indecipherable] we launched our Mi-Band 4 in June. So a large number of Mi-Bands were sold. So in -- before launching Mi-Band 4, we did provide promotions to the users of Mi-Band 3. That may impact the ASP. In Q2 and earlier -- in July, we did launch a new Amazfit product. But we -- in Q2 we did not benefit much from the sales of this Amazfit new products. But this -- but the new product launches will set up the foundation for Q3 and the quarters after. So this explains the fluctuation of our ASP in Q2.

With respect to the ASP trend in Q3, we believe that given the expected increase of the sales of Amazfit products, the revenue mix should change. That should rebalance in the ASP trend. Also, that should offset potential marginal losses on Mi-Band, given the Amazfit products has higher margin. So the -- with respect to your second question, GP margin, we believe the margin should -- it should remain stable quarter -- in the third quarter because we do have to balance in between -- between the Mi-Band margin and the Amazfit margin.

Kyna Wong -- Credit Suisse -- Analyst

Thank you.

David Cui -- Chief Financial Officer

Yeah.

Operator

The next question comes from Zhou Dong Chen [Phonetic] of CICC. Please go ahead.

Xudong Chen -- CICC -- Analyst

[Foreign Speech] Thank you for taking my questions and congratulations on the strong results. According to the third-party statistics, the shipment of the Mi-Band 4 reached 1 million in seven days after launched in June, which is amazing. My question is, will the Company continue to cooperate with Xiaomi in the future and will companies still produce Mi-Band 5 in the next generation? Thank you.

Wang Huang -- Founder, Chairman of the Board and Chief Executive Officer

The answer is yes. We are actually developing Mi-Band 5 with Xiaomi. The answer is yes.

Xudong Chen -- CICC -- Analyst

Okay. And...

Wang Huang -- Founder, Chairman of the Board and Chief Executive Officer

Okay. Thanks.

David Cui -- Chief Financial Officer

Thanks.

Operator

Okay. The next question comes from Arthur Lai of Citi. Please go ahead.

Arthur Lai -- Citigroup Inc -- Analyst

Thank you, management team. And yeah, we saw the revenue result was quite good, up 36%. And can you give us more color on the oversea shipments and also how you think of the shipment from the north [Phonetic] country? Will we roll out more countries in the future? Thank you.

Wang Huang -- Founder, Chairman of the Board and Chief Executive Officer

Thank you, Arthur. More than -- certainly the -- over half of our product shipments were actually overseas shipments. This is in line with our historical records. That means the overseas sales also increase when our overall revenues increase. And in terms of the country penetration, we are still covering -- targeting the European market and the Southeast Asia market. We also -- we are also working on the US market also. So the -- we did make some progress, but it's going to take time. But our focus -- we did make significant progress in the European market. And in the one half, we spent a lot of effort in those -- in those regions. And later in the year, we will intensify our efforts in those regions.

Arthur Lai -- Citigroup Inc -- Analyst

Yeah. And one small follow-up is in the Europe and US market, will the product carry a higher ASP advantage? Thank you.

Wang Huang -- Founder, Chairman of the Board and Chief Executive Officer

Actually, no. Actually, no. So the domestic sales and overseas sales carry similar margin. Because, we do leverage some overseas sales channels, so we allow more profit to those channel players. And -- but the retail price should be higher in those -- overseas.

Arthur Lai -- Citigroup Inc -- Analyst

Okay. Thank you.

Wang Huang -- Founder, Chairman of the Board and Chief Executive Officer

Thanks, Arthur.

Operator

The next question comes from Lee Yang [Phonetic] Lowe [Phonetic] of Industrial Securities. Please go ahead.

Lee Yang Lowe -- Industrial Securities -- Analyst

Hi, management, thanks for taking my question. Really have two questions. The first one is about your marketing strategy. I know that Huami has released many products since the second quarter, which is very attractive to consumers. But actually we haven't seen the large-scale advertising. So can you introduce the marketing strategy for the new products? So this is my first question. And the second question is about your overseas sales team. I wonder how many people are currently in your overseas sales team and how we can expect the number of team member increase in the future. Thank you.

Wang Huang -- Founder, Chairman of the Board and Chief Executive Officer

As to your first -- the second question first, we -- our sales team is about 100 people right now. Our total number of employees just exceeded 800. And among the roughly about 100 sales force, we should say half of them are focusing on overseas sales. It's in line with our revenue distribution. And we do have sales staff in the key regions, the key markets, in Europe, in Southeast Asia and also in the US. And we -- when our revenue continue to grow, we may have to add more sales staff. That's our plan.

And then, in terms of our marketing strategy, yes, you're right. We do not spend a lot of advertisement dollars yet. And this is because our strategy is to rely on -- rely on the channel players, the distributors in each countries. And then we also rely on our online -- online channels. So we do pay channel fees to the e-commerce players in China and also in certain overseas markets. And the reason we are doing that is advertisement could cost too much. And we -- one, since our total number of shipments are still low at this moment, to most effectively use our marketing dollars, we adopt this strategy. So, we let the distributors in a channel to make money and rely on the distributors to spread the -- spread to the market and to build our brand recognition this way. And then in future, we may do some targeted advertisement. But it's not in a very heavy scale.

Lee Yang Lowe -- Industrial Securities -- Analyst

Okay. Thanks.

Wang Huang -- Founder, Chairman of the Board and Chief Executive Officer

Thanks.

Operator

The next question comes from Joy Wei of 86Research. Please go ahead.

Joy Wei -- 86Research -- Analyst

Congratulations to this earnings result. Can you give us a breakdown between Xiaomi and self-branded products, including metrics like shipment, revenue and gross profit? And the second question is, can you share with us the future product pipeline? For example, are we launching the Mi-Band 5 next year or the year after next year? Thank you.

Wang Huang -- Founder, Chairman of the Board and Chief Executive Officer

In terms of retail [Phonetic], I will say about a 70-30 split. Given that our new -- our Amazfit products, they are all launched toward the end of the quarter. So we didn't really benefit that much in Q2. So in Q2, we [Indecipherable] we still primarily sell our old Amazfit products. But -- so, this is a 70%-30% split. And then again, our Amazfit products enjoyed much higher gross profit margin as compared to Xiaomi's products. So the spread is about 10%. It's about 10%. So you could do the calculation -- the breakdown calculation on the gross profit.

And in terms of Mi-Band 5, we do not have -- we do not have a fixed time when we're going to launch Mi-Band 5. But I would say that we have already started working on Mi-Band 5 with Xiaomi and it's not going to take that long. So we just launched Mi-Band 4, but potentially toward the [Indecipherable] of next year, we may launch Mi-Band 5.

Joy Wei -- 86Research -- Analyst

Thank you.

Wang Huang -- Founder, Chairman of the Board and Chief Executive Officer

Thanks, Joy.

Operator

As there are no further questions now, I'd like to turn the call back over to the Company for closing remarks.

Zhang Grace Yujia -- Director, Investor Relations

Thank you once again for joining us today. If you have further questions, please feel free to contact Huami's Investor Relations department through the contact information provided on our website or The Piacente Group, the Company's investor relations consultants.

Operator

[Operator Closing Remarks]

Duration: 38 minutes

Call participants:

Zhang Grace Yujia -- Director, Investor Relations

Wang Huang -- Founder, Chairman of the Board and Chief Executive Officer

David Cui -- Chief Financial Officer

Kyna Wong -- Credit Suisse -- Analyst

Xudong Chen -- CICC -- Analyst

Arthur Lai -- Citigroup Inc -- Analyst

Lee Yang Lowe -- Industrial Securities -- Analyst

Joy Wei -- 86Research -- Analyst

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