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Huami Corporation  (NYSE:HMI)
Q4 2018 Earnings Conference Call
March 14, 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 the Huami Corporation's Earnings Conference Call for the Fourth Quarter and Full-Year 2018. At this time, all participants are in listen-only mode. Today's conference call is being recorded.

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

Grace Zhang -- Director of Investor Relations

Hello, everyone. And welcome to Huami Corporation's fourth quarter and full-year 2018 earnings conference call. The Company's financial and operating results were issued in a press release via newswire services 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. Wang Huang, our Chairman of the Board 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 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 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 these and other risks and uncertainties is included in the Company's Annual Report on Form 20-F for the fiscal year ended December 31st 2017 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 discussions 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 will now turn the call over to our CEO, Mr. Wang Huang. Please go ahead.

Wang Huang -- Chairman of the Board of Directors and Chief Executive Officer

Hello, everyone. Thank you for joining our earnings conference call today. We are proud to report another strong quarter with top line result RMB1.22 billion which exceeded our fourth quarter guidance, getting off to a solid 2018 with the full-year revenue RMB3.65 billion, which grew 78% compared to 2017. In addition to strong sales, we delivered growing profitability. As we focused on competitive product development and efficient business operation, generated adjusted net income of RMB146.5 million in the fourth quarter and RMB474.8 million for the full year.

We continue to experience strong growth of our Amazfit product line, as they contribute a larger portion of our total revenues. Shipments of Amazfit products in 2018 also tripled compared with 2017, which was mainly driven by Amazfit watch product. This tremendous growth is a showcase of how our innovative product design and growing brand awareness stimulates sales.

During the year of 2018, we introduced breakthrough healthcare technology applications in wearables powered by our self-developed AI chip, Huangshan-1, which will also allow us to provide cloud-based healthcare-related services to users in the future. Increasing IoT applications scenario is an important strategy for us to enrich our user experience. During the past year, we launched NFC version product with one-touch payment capabilities for public transportation. In the meantime, our brand new smartwatch product line allows for the integration with different IoT systems to control smart home devices. We will further explore wearable technology scenarios in IoT industries together with current and future partners.

We also entered into new strategic partnerships in the fourth quarter of 2018 and earlier 2019 to foster new product developments in the global markets. In November 2018, we announced a collaboration agreement with Timex, a global leader in watch making in order to leverage their world top product development capabilities and the strong international distribution channels to broaden the reach of our smart wearable products.

In addition, in January 2019, we announced strategic collaboration with McLaren Applied Technologies to lever GPS expertise in auto leasing and use both to develop metrics-driven wearables that will help optimize human performance in this underserved field. We believe collaboration agreement likely will diversify our product lines and distribution channels, improve our visibility in global markets and in turn drive continued growth in revenue.

In addition to strong sales of Amazfit products, we also experienced continued solid demand for Mi Bands. The addition of the new features to the latest generation of Mi Bands help ensure the Mi Band remain at the front -- forefront of the smart band industry. We also continue to experience success in expanding our reach as we develop distribution channels and brand awareness in overseas market. Shipments of international version product accounted for 44.2% of our total shipments in the year of 2018. Moreover, Amazfit brand smartwatch products have been launched in 60 countries as of today. Our collaborations with established international partners and our enhanced overseas sales growth contributed significantly to the -- to touch (inaudible). We remain committed to ensuring our products meet the development -- meet the developing needs of the smart wearables industry and we'll continue to invest in R&D to develop exciting new products and improve existing lines.

In addition, we continue to focus on opportunities presented by the healthcare vertical and are well positioned to benefit from the fast adoption of wearable technology in this growing sector. We continue to involve with PAI Health on partnerships with overseas insurers and large employers in pilot programs for database services. We also expect to expand our relationships with insurance carriers to make easier for their customers to monitor and improve their health.

Finally, as evidenced by the launch of our new Huangshan-1 chip in September of last year, much of our R&D is focused on developing proprietary technologies, that power the development of new products and widen the competitive advantage (inaudible) in the marketplace.

We continue to invest in the development of cutting-edge technologies. As we look forward into 2019 and beyond, our focus is to continue to build -- to build awareness and affinity for the Amazfit brand. We would do this through continued product development and innovation as we utilize our world-class R&D infrastructure, leveraging recently developed collaborative relationships and establishing new partnerships. We will capitalize on existing smart wearable market opportunities especially in the fast emerging smartwatch markets, and further develop a consistent services opportunities.

2018 was a full growth year for Huami and we look forward to the year 2019 with full confidence.

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

David Cui -- Chief Financial Officer

Thank you, Huang. 2018 was an important year for Huami. Not only did we grow revenues by 78%, but we also increased our profitability as we managed costs and operating expenses, and leveraged our increased -- increasing scale. Among our many accomplishments in 2018, we completed our initial public offering in February, which further established Huami in the international wearable marketplace. And our innovative products allow us to meaningfully grow the Amazfit brand in both the Chinese and overseas channels. Our efforts have positioned us well to capitalize on our strong market position to continue our growth in 2019.

Mindful of the length of this call, I will just highlight the key financial measures for the fourth quarter and the full year of 2018, and encourage you to refer to our earnings press release for further details regarding our full-year financial results. Now, here are some of the highlights of our very strong fourth quarter. Revenues increased by 62.7% year-over-year to RMB1.22 billion. This solid gain was propelled primarily by the strong sales of Amazfit's smartwatches and the Mi Band 3 that we launched in June 2018, driven by increasing market recognition of our products globally.

Gross profit increased by 85.2% to RMB309 million from RMB166.8 million for Q4 2017. Our gross margin of 25.2% showed a slight increase from that of the fourth quarter of 2017. Total operating expenses increased by 93.2% to RMB177.8 million from RMB92 million for Q4 2017. These expenses increased primarily due to the recruitment of our new employees as well as the increase in our sales and marketing expenses.

While expanding our business operations globally, we are pleased with our efforts to effectively manage our operating expenses, which increased largely in line with our revenue growth.

Our operating income was RMB131.2 million, up significantly compared with RMB74.8 million for Q4 2017. The GAAP net income to Huami totaled RMB126 million. This compares with RMB72.3 million for Q4 2017. The non-GAAP adjusted net income to Huami, which excludes the share-based compensation expenses, increased by 69.3% year-over-year from RMB86.5 million to RMB146.5 million. Basic and diluted net income per ADS was RMB2.08 and RMB1.97 respectively. Each one of our ADS represents four of our Class A ordinary shares. The adjusted basic diluted and diluted net income per ADS was RMB2.42 and RMB2.30 respectively.

Now let's turn to some highlights of our robust full-year 2018 results. For the whole year, our revenue increased by a hefty 78% year-over-year from RMB2.05 billion to approximately RMB3.65 billion. Revenue from Amazfit product increased by 178% in 2018, as compared to 2017. We are especially pleased with the growth in the sales of our Amazfit product, which comprised 33% of our total revenues for 2018 versus only 21% in 2017. Increasing market recognition and popularity of our products was a significant driver of this growth, as well as continued strong Mi Band sales, in particular, after we launched the Mi Band 3 in the middle of the year.

Gross profit for the year increased by 89.9% year-over-year from RMB494.7 million to RMB939.5 million. Gross margin improved slightly year-over-year, primarily owing to improved economies of scale and the rapid sales growth of our self-branded products.

Total operating expenses increased by 83.5% year-over-year from RMB312.7 million to RMB573.7 million. We managed these expenses in line with our revenue growth and our business expansion strategy. The increase in operating expenses was primarily due to the increase in the number of new staff we hired during the year. We hired new R&D staff and increased our sales force. Also, always the intention to support the research, development, and sales of our new products planned for launch in 2019, resources that were also invested during the year to expand our sales effort overseas.

Operating income more than doubled for the full year, increasing from RMB182 million to RMB365.7 million. The GAAP net income to Huami totaled RMB340 million compared with RMB167.7 million in 2017. The non-GAAP adjusted net income to Huami, which excludes the share-based composition expenses, more than doubled from 2017 increasing from RMB230.5 million to RMB474.8 million. The basic and diluted net income per ADS was RMB5.98 and RMB5.41 respectively, both more than doubling from 2017. Adjusted basic and diluted net income per ADS was RMB8.39 and RMB7.59 respectively.

So now let's turn to our outlook. For the first quarter of 2019, the Company's management currently expects revenue to be between RMB750 million and RMB770 million, which would represent an increase of approximately 28% to 31.4% from RMB585.9 million for the first quarter of 2018. This outlook is based on current market conditions and it reflects the Company management's current and preliminary estimates of the market and operating conditions and customer demand, which are all subject to change.

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

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) The first question today comes from Louis Wang (ph) with Announced Asian Research (ph). Please go ahead.

Louis Wang -- Announced Asian Research -- Analyst

Hi, Mr. Wang and the management of Huami. So -- quite interesting in your R&D parking in the Huangshan chips and we noticed you acquire or some company in the (inaudible) and could you give us little more on that part? And especially, when you could see the revenue on the chips part? Thank you.

Mike Yeung -- Chief Operating Officer

Yes, hi. This is Mike Yeung. I'm the COO of the company. So my understanding your question is, how will be our new chip Huangshan-1 will impact our revenue? So Huangshan-1 is -- will be in our products -- upcoming products in 2019. And we will have, as David mentioned, we have a lot of products in 2019 and Huangshan-1 is a key component of our products. So that will help increase our revenue growth.

Louis Wang -- Announced Asian Research -- Analyst

Okay. Thank you.

Operator

The next question comes from Thompson Wu with Credit Suisse. Please go ahead. Mr. Wu, your line is open.

Thompson Wu -- Credit Suisse -- Analyst

Hi, can you guys hear me OK? Hello? Hello?

Mike Yeung -- Chief Operating Officer

Yes. Yes, Thompson, yes.

Thompson Wu -- Credit Suisse -- Analyst

Okay. David, Mike, Wang Huang, good morning and congratulations on a good quarter. My first question is just about your Amazfit brand. I have heard you guys are now shipping the product in over 60 countries. When you think about Amazfit this year in 2019, can you share with us some of your key milestones. What major markets are you still missing? Are there certain types of products that you're missing from the product portfolio? I'd just like to better understand the major milestones you expect in your Amazfit brand in 2019.

David Cui -- Chief Financial Officer

Hi, Thompson, I'll try to tackle your question. In this year we allocated a lot of our resources to expand our overseas market. So we will continue the same effort. In particular, for our own products, our Amazfit products, so we will leverage more on our own channel globally. And we mentioned that in 2019, we will launch multiple -- we'll launch multiple products in the year. It's going to be at different time intervals during the year. Certain features includes healthcare features -- healthcare features and also the communication features. And maybe in a different combination, different format, different price range -- so to suit different type of customer needs. That is our plan for the year.

Thompson Wu -- Credit Suisse -- Analyst

Okay, great. Thanks, David. Yes, that was very helpful, thank you. And for your guidance in first quarter, still very, very healthy growth year-on-year. From a margin perspective, how should we think about the business, particularly in gross margin, as we think about product mix between the Xiaomi Mi Band and also the Amazfit products? And are there any cost pressures from key components that we should be aware about? This is again looking at your first quarter guidance.

David Cui -- Chief Financial Officer

Yes. So for first quarter and for the whole year, we still anticipate revenue growth. For the first quarter, we all know it's a slow season for us. But still we will record -- we still expect a healthy growth as you mentioned. But from our history, you know, when we launch new products or a product upgrades, we have to take some measures, for instance, to quickly sell off our older products. And for the newer products, we may have different pricing strategies to quickly acquire the market share, and things like that. And we will -- all depends on -- all depends the what type of a product that we launch or the product mix we launch. The margin could vary when we launch the new product. For Xiaomi's products also, we do have a plan for newer generations of Mi Band to be launched. When we launched our products, as we experienced when we launched the Mi Band 3, so we did give a huge discount to the market to quickly release the Mi Band 2, right? So we probably have to do the same thing for Mi Band 3, yes, during the year.

Thompson Wu -- Credit Suisse -- Analyst

Okay.

David Cui -- Chief Financial Officer

So the pressure for the margin always exist. One from competition, one from -- depends on -- one from the pricing strategy, right. We all know we can control our costs very efficiently. But the retail prices -- the pricing strategy will impact our margin also, yes.

Thompson Wu -- Credit Suisse -- Analyst

Okay, OK. Thanks, David. Maybe just one more question before I get back into the queue. Just on your headcount budget additions this year just in how many -- do you have a rough idea how many people you want to add to the business this year? What departments are you looking to invest in and I presume a lot of the investments in headcount will be on R&D? Could you give -- just give us a quick update on what your plans are for headcount in 2019? And maybe how that compares with 2018?

David Cui -- Chief Financial Officer

When we had our IPO, our headcount is roughly about 400. So toward the end of the 2018, we had about 600 in aggregate globally and this year we have a plan to add more staff, because we have multiple products that will be launched. So we need -- we will focus our R&D staff. We will add more R&D capabilities and we also -- we'll make more resource -- allocate more resources to our sales and marketing efforts. So these will be the two major area where we will have -- we do not have a fixed number, but we know we will add more headcounts this year from 600, yes.

Thompson Wu -- Credit Suisse -- Analyst

Okay. Okay, great. Again, congratulations on a great fourth quarter. Thank you.

David Cui -- Chief Financial Officer

Thank you, Thompson.

Operator

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

Arthur Lai -- Citi -- Analyst

Hi, Wang Huang and Mike and David, thank you for taking my question. So I want to follow up with Thompson's question and more longer term perspectives. Can you share with us if you could have your own MFG, then also started to more and more OEM model for those watchmaker. And how do you utilize this business model, which means that can you start to utilize the big data you collect from the OEM. And also the follow-up question is, in the long term, how this big data analysis to contribute into our company's bottom line? That's my two question. Thank you.

Mike Yeung -- Chief Operating Officer

Yes, hi, this is Mike. So I think -- my understanding your two question. One is, how we work with our OEM partners and the other is how -- longer term how we can do better data monetization. So when we work with partners like Timex, not only do we develop some differentiated devices for them, but we also have collaboration on the data and cloud incorporation as well. And actually in these kind of partnerships, Huami also provides our cloud and data capabilities to our branding partners. So we are not only just providing the device manufacturing capability. And secondly, with all these large number of devices that we ship, we collect tons of data every day. So that's why right now we are also working with our partners such as PAI Health, for example, to try to monetize this data through -- by targeting the healthcare and insurance industry. And which we believe has a huge potential for us to monetize these data -- biometrics data that we collect such as heart rate, such as ECG -- electrocardiogram. So our plan is again leverage these data to and work more closely with our partners to monetize in the healthcare and insurance industry.

Arthur Lai -- Citi -- Analyst

Okay. And can you -- one follow-up with -- when you collect big enough data, and can you quantify like, how much impact will be to our company's earning or bottom line? Can we think about both big data analysis is -- carry the higher corporate blended margin? Thank you.

David Cui -- Chief Financial Officer

I think your -- I'll answer your questions, you follow on PAI Health's strategy, right. So --

Arthur Lai -- Citi -- Analyst

No, no. Actually -- the contribution to bottom line and also the earning.

David Cui -- Chief Financial Officer

In our current forecast that we did not really include any revenues or profits of from this type of data monetization yet, this -- but we do see a huge potential for this type of a service -- service revenues. We could see that, maybe not in the near term, we could see that maybe in 2020, if we are a pilot program with which this insurers can work out.

Arthur Lai -- Citi -- Analyst

Okay. Okay, thank you.

Operator

(Operator Instructions) The next question comes from Jason Sun with China Renaissance. Please go ahead.

Jason Sun -- China Renaissance -- Analyst

On the very good result, this is Jason. Thank you for taking my question. Just a very quick question on Xiaomi band. Can you elaborate more on Xiaomi band strategy into 2019 and 2020? Because we -- it is speculated that Mi Band 4 will be launched around like March or April. I'm just wondering Mi Band 4 is still in the pipeline of first half of 2019 and how we expect that Xiaomi band growth momentum in units and average selling price improvement in this year? Thank you.

David Cui -- Chief Financial Officer

Thank you, Jason. For Mi Band 4, it's going to be in this year. It will be in 2019. But I'm not sure, it's going to be in March and April. But, it is going to be in this year. So, right now, Mi Band 3 is still hot sale -- is still -- so really, really well. The margin is not shrinking, the shipments are not shrinking. So we will pick -- work with Xiaomi to pick the right time to launch Mi Band 4 in the year. Yes. So, does that answer your question, Jason?

Jason Sun -- China Renaissance -- Analyst

How we can expect the Xiaomi band (multiple speakers).

David Cui -- Chief Financial Officer

Yes, in terms of the units, right. So, as you can see we have gone through work with Xiaomi, we've gone through three generations of Mi Band, right. Each one of them are a successful product. In particular, Mi Band 3, each generation we learn something, we always do better. And Mi Band 3, we -- you can take a look at 2018's volume, right. So it's really much better as compared to previous version. So we expect Mi Band 4 will be a similar -- will have similar trend. So once we launch Mi Band 4, we expect that product will sell well.

Jason Sun -- China Renaissance -- Analyst

Okay. Are we going to see any average selling price improvement on Mi Band 4?

David Cui -- Chief Financial Officer

Of course, you mean the feature, of course.

Jason Sun -- China Renaissance -- Analyst

Yes.

David Cui -- Chief Financial Officer

There are always -- every generation products that we will add some more features or making some changes to better suit the consumers needs and we will price it competitively for sure also, yes.

Jason Sun -- China Renaissance -- Analyst

Okay, thank you.

David Cui -- Chief Financial Officer

Yes, thanks.

Operator

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

Grace Zhang -- Director of Investor Relations

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

Operator

This conference has now concluded. You may now disconnect your line. Thank you.

David Cui -- Chief Financial Officer

Thank you.

Grace Zhang -- Director of Investor Relations

Thank you.

Duration: 41 minutes

Call participants:

Grace Zhang -- Director of Investor Relations

Wang Huang -- Chairman of the Board of Directors and Chief Executive Officer

David Cui -- Chief Financial Officer

Louis Wang -- Announced Asian Research -- Analyst

Mike Yeung -- Chief Operating Officer

Thompson Wu -- Credit Suisse -- Analyst

Arthur Lai -- Citi -- Analyst

Jason Sun -- China Renaissance -- Analyst

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