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Huami Corporation (NYSE:HMI)
Q1 2019 Earnings Call
Jun 3, 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 First Quarter 2019 Earnings Conference Call. At this time, all participants are in listen-only mode. Today's conference call is being recorded.

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

Grace Yujia Zhang -- Director of Investor Relations

Hello, everyone, and welcome to Huami Corporation's first quarter 2019 earnings conference call. The company's financial and operating results were issued in our 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. 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 us for the Q&A session.

Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private 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, Form 20-F, for the fiscal year ended December 31, 2018, and other filings as filed with the U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements except as required under applicable law.

Please also note that Huami's earnings press release and this conference call include discussions of our audited 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. Huang Wang. Please go ahead.

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

Hello, everyone. Thank you for joining our earnings conference call today. After a successful 2018 strong revenue momentum and sustained profitability continued in the first quarter, reflecting the increasing leverage of our rising global brand recognition, strategic relationships and consumer trust. We are pleased to report another strong quarter with top line result of RMB799.6 million, which represents our 36.5% increase compared to the Q1 2018.

We are -- we are delighted to share that, during the first quarter of 2019 our Amazfit smartwatch product shipments ranked fifth globally. According to our recent report published by Counterpoint Research a well respected global industry analysis firm. During this quarter, total shipments of Amazfit smartwatch products grew 71.3% compared to Q1 2018. It's very clear our leadership in this segment is strengthening.

We believe this growth momentum is sustainable (ph) and have improvement potential as we plan to launch multiple Amazfit watch products soon this year. Covering different price range and this stand-alone communication functions which we just co-announced with Qualcomm Technologies this morning, as well as improved healthcare and sports features.

Speaking of Amazfit, our products are designed and manufactured to adjust middle to high end market and continue to experience strong growth. In Q1 our self-branded products and other contributed 41.3% of our total revenues. This enhancement and expansion of our overseas sales distribution channels, sales force strategies and brand recognition international shipments continue to climb.

In January, we announced our strategic collaboration with Mclaren Applied Technologies to develop co-branded wearables smart products that will provided users with a comprehensive view of their biometric and activity data.

In the meantime, our team is diligently working closely with Timex Group to develop products through the partnership we established late last year. Our COO, Mike and I recently had a meeting with Timex CEO and his management team in the headquarters in Middlebury, Connecticut. We adjusted R&D details of our first joint export products nearing completion and the deep collaboration of Timex full product line.

In addition, we also discussed full product lines, US marketing strategy and a working schedule, as well as export (ph) how Timex strong offline channels can help strengthen our Amazfit brand in emerging markets, such as India. We have full confidence in our collaboration effort with the Timex Group and are excited to be moving forward with them on multiple fronts.

In the first quarter, we also broadened our IoT life scenario, all NFC versions of Huami products now have public transportation connectivity capabilities in over 200 cities in China. Furthermore, Amazfit products are now upgraded with full Amazon Alexa integration, allowing users all the normal functioning after voice assistant.

With our achievements in the first quarter, we are excited to continue developing and introducing new products and services, expanding our presence in global markets and further developing our strategic partnership initiatives.

Last, but certainly not least, our relationship with Xiaomi remains strong and stable. And we look forward to launching the Mi-Band 4 in two weeks. Based on the market data we gathered, we are very confident about the upcoming launch. To capitalize on this product popularity, we already have millions of new Mi-Band 4 ready to ship on the official launch date.

Our long-term plans with Xiaomi and the popular Mi-Band series includes, producing future generations of the current bands product line such as Mi-Band 5, as well as various other models targeting different market segments, in both high end and the low end band market globally.

At the same time, our Amazfit products are riding the wave of the rapidly rising global smartwatch market. In the next few months, we will launch more than 10 models of Amazfit watch, covering different market demands and with prices ranging from RMB299 to RMB2,000.

Our long-term strategy is clear and is conviction. We look forward to the rest of 2019 with full confidence and we believe we will deliver long-term value to our stakeholders.

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

David Cui -- Chief Financial Officer

Thank you, Wang. The company continued its growth momentum with strong year-over-year revenue growth, represented by a 36.5% increase over Q1 2018. Our growth was mainly attributable to global market expansion and overall increased brand recognition.

Our results demonstrate the resiliency of our business model, the strong market appeal of our products and the focus of our management team, all despite uncertainties surrounding macroeconomic trade factors.

Looking at how we started the year and now looking ahead. We feel we are well positioned to continue delivering sustainable growth, so creative alliances, global expansion, operational leverage and operational efficiencies.

In 2019 we are laser focused on developing and delivering new products. Especially those in our self-branded products and others. Which, as Wang just mentioned, accounted for 41.3% of total revenues in Q1. We plan to continue delivering popular products in both our Amazfit line and with the products we developed with valued partners such as Xiaomi and Timex.

Finally, with enhancements and expansion of our overseas sales distribution channels, sales force strategies and brand recognition, we anticipate international shipments to accelerate.

Mindful of the length of this call, I will highlight the key financial measures for the first 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 very strong first quarter.

Revenues increased by 36.5% to RMB799.6 million from RMB585.9 million for the first quarter of 2018, due to an increase in the sales of both Amazfit products and Xiaomi wearable products, driven by the strong market appeal of our products and our global brand recognition.

Our gross profit increased significantly by 48.3% to RMB217.5 million from RMB146.7 million for the first quarter of 2018. Our gross margin of 27.2% reflected a favourable improvement from our gross margin of 25% in the first quarter of 2018.

The increase aside from economy of scale was driven by two main drivers. First, we are positioning Amazfit branded wearables to target a higher income or demographic compared with the Xiaomi wearable products. So our Amazfit branded wearables generally carry a higher average selling price. As our sales mix changes with the rapid sales growth of our Amazfit self-branded products, higher gross margins ensue.

The second driver is 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 consolidate -- In 2018 we consolidated and streamlined our logistics and supply network activities by establishing a dedicated supply chain management office in Schengen. Here, all relevant teams are under one roof. The ease and speed of communication among teams has further improved our operational efficiency.

Now move to -- move on to expenses. Total operating expenses increased by only 1.5% to RMB139.9 million from RMB137.8 million for the first quarter of 2018. Research and development expenses decreased by 2% to RMB72.4 million from RMB73.8 million for the first quarter of 2018, primarily due to a decrease in share-based compensation expenses, which was offset by an increase in personnel related R&D expenses.

It's important to recognize here that these R&D expenses represent an investment in the development and the refinement of new technologies. We believe that this type of investment is critical and will deliver further benefit. For instance, we are developing algorithms to monitor both heart rate and blood oxygen level, which will form the basis to growing functionalities and broaden application scenarios for many of our health tech variable products. This level of technology development requires an appropriate level of infrastructure and resource commitment.

Our general and administrative expenses decreased by 8.1% to RMB45.3 million from RMB49.3 million for the first quarter of 2018, primarily due to a decrease in stock-based compensation expenses, which was offset by an increase in personnel related expenses. As our total revenues and share volume of product suite have continued to increase our selling and marketing margin expenses have naturally also increased.

Selling and marketing expenses increased by 50.5% to RMB22.2 million from RMB14.7 million for the first quarter of 2018, primarily due to an increase in personnel-related expenses and an increase in advertising and promotional expenses, specifically for self-branded products.

Our income before income tax grew significantly, reaching RMB85.6 million, compared with RMB16.5 million for the first quarter of the 2018. Of course, as a natural consequence, our income tax expenses also increased and were RMB10.7 million, compared with RMB 2.7 billion for Q1 2018. This brings us to net income attributable to Huami Corporation, which totaled RMB75.3, compared with RMB14.8 million for the first quarter of 2018. Net income attributable to ordinary shareholders of Huami Corporation increased to RMB74.1 million.

Further down the P&L, basic and diluted net income per ADS attributable to ordinary shareholders of Huami Corporation was RMB1.25 and RMB1.18, respectively. As a reminder, each ADS represents four Class A ordinary shares.

Next, adjusted net income attributable to Huami Corporation, which excludes share-based compensation expenses, increased by 2.7% to RMB95.0 million from RMB92.5 million for Q1 '18.

Finally, adjusted basic and diluted net income per ADS attributable to ordinary shareholders of Huami Corporation was RMB1.57 and RMB1.49, respectively.

Relating to cash, as of March 31, 2019, the company had cash and cash equivalents of RMB1.572 billion, compared with RMB1.44 billion as of the end of 2018.

And now to our outlook. Looking ahead to the second quarter of 2019, management currently expect net revenues to be between RMB990 million and RMB1.01 billion, which would represent an increase of approximately 30.2% to 32.9% from RMB760.1 million for the second quarter of 2018.

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

Questions and Answers:

Operator

Thank you. (Operator Instructions). We will now begin the question-and-answer session. (Operator Instructions) Our first question today comes from Zi Tynn Cheng with CIBC. Please go ahead.

Zi Tynn Cheng -- CIBC -- CIBC

(Foreign Language) Thank you for taking my question. I have one quick question. Since you just mentioned Huami has announced to cooperate with Timex, which is a leading world class watchmaker. I'm interested in what can this cooperation benefit our business for short-term and long term? Could you please tell me more detail about this impressing cooperation? Thank you.

Mike Yan Yeung -- Chief Operating Officer

Hi. This is Mike Yeung. I'm the COO of the company. Let me answer this question. So as our CEO, Wang mentioned, he and I when -- met with the -- just recently met with the Timex, CEO and management in U.S. And it was a very, very positive and constructive meeting. So the benefit for Huami, obviously, is that, we will roll out multiple models of Timex branded and potentially co-branded smartwatches. And the first of these models we target to release later this year. And we will also have not only multiple models, but also potentially use a multiple brands that's under Timex control, such as, for example, Gas is also a watch brand that is owned by Timex.

So we will roll out multiple models, multiple brands and we will sell, not just in the U.S., but also worldwide as well. And especially, we can also leverage Timex sales and marketing channel online and offline. For example, Timex has a huge offline channel infrastructure in India. And for example, that's something that Huami can leverage by having those channels to potentially sell Amazfit brand, our self-branded products as well in addition to the Timex branded products.

And also this partnership will help us not only sell more devices, but also generate a lot more data that we can potentially use for our data and services monetization plan. Yeah, so that's the answers to your question.

Zi Tynn Cheng -- CIBC -- CIBC

Thank you very much.

Operator

Our next question today comes from Kyna Wong with Credit Suisse. Please go ahead.

Kyna Wong -- Credit Suisse -- Analyst

Hello. Mr. Huang and David. Thanks for taking my questions. And this is my first time to dial-in and ask the questions. So, actually, I wanted to chat by the indications from the recent trade dispute that is escalating. Any impact to the company if they were both ahead in the next term of lease? And besides, I think you must have also concern about the -- any risk in getting the ban or like, the reliance in the U.S. content in your products, et cetera. So this is my first question.

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

Let me try to answer your question. First of all, our sales to the U.S. market only represents a very small portion of our total revenues. It's very insignificant at this moment. And we also check that even for this small amount of sales, we are not on the tariff -- at the target list. So far it's a zero tariff on our products so far. And we do not source that much from the U.S. also for our components and we do not rely on any U.S. technology that are embedded in our products. So, basically in conclusion that we are not so far impacted that much by the current trade situation.

Kyna Wong -- Credit Suisse -- Analyst

Thank you. My next question is about the ASP trend. Along with the increase of their sales contributions from Amazfit, your own brand wearable products. So we should assume that, that brand average will come into raising trend? Or I should also take into account that how much the Mi-Bands will come into different seasonality this year? And another question is about the ForEx impact, if that will also bring into consideration in the ASP and also the cost margin in the coming quarters? Thanks.

Mike Yan Yeung -- Chief Operating Officer

The ASP, right? The ASP for Amazfit products as our CEO just mentioned that, we will launch multiple products later in this year. The retail price range from RMB200 to RMB2,000 and we believe the ASP trend should trend up -- should trend up. And because our current ASP is about only RMB400. So the ASP should trend up.

In terms of the gross margin on our own products. So, so far, our strategy is to acquire more market share and grow faster in terms of total shipments and revenues. And that's our key. And, of course, we also maintain or try to improve our gross margin on our self-branded products.

In terms of the gross margin on Mi-Bands, future generation Mi-Band. And again, we will discuss this with Xiaomi, we will jointly determine our product marketing strategies and then the retail prices could impact our gross margin. Typically, again, in the year of launching new products the margin may fluctuate, but in the long-run, we will achieve higher margin as our goal, given that the product, the revenue mix will change toward more Amazfit products, which has a much higher gross margin, as compared to Mi-Band. So in the long run, we should have a very promising gross margin.

Kyna Wong -- Credit Suisse -- Analyst

Thank you.

Operator

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

Arthur Lai -- Citi -- Analyst

(Foreign Language) So I will translate my question. Number one is, the impact from the -- if the US banned your component, but the implications to investors and (inaudible) share expense of the Xiaomi Smartphone, does that impact you? That's it from my part. Thank you.

David Cui -- Chief Financial Officer

Okay. Thank you, Arthur for your question. Your first question, I mentioned earlier that we source globally, but we -- the percentage of U.S. components is relatively small. So the impact is not that material. In terms of IT, in terms of technology we do not rely on U.S. technology. So that's the first question. The second question is, regarding the changes in the smartphone industry in term -- the impact the Huawei. And I would say that, at least for the smartwatch market segment we still see a significant growth potential, based on the independent market research institutions report that the market still have a 26% CAGR in the next five years. So we still expect that our products sales will at least grow, ride the wave of the market increase. And that is -- and in terms of the overseas market, Huawei may be impacted, but we are not impacted.

Our global sales strategy is not just covering the U.S. market, which is one of our primary target market. And we -- but also our primary markets includes Southeast Asia and European countries is a global strategy. So we will see -- we are not impacted and that we still anticipate a significant growth in the year and the year to come globally.

Arthur Lai -- Citigroup Inc -- Analyst

Thank you, David.

Operator

Our next question today comes from Ian Lau (ph) with Industrial Securities. Please go ahead.

Ian Lau -- Industrial Securities -- Analyst

Hi, Huang and David. Thanks for taking my question. I heard about your newer product launch will be held next week. Just a quicker question about your product launch during the rest of the year. So what's the new product for the Q2 and Q3? And how expect the Mi-Band 4's performance and shipment when they are compared with the Mi-Band 3? Thanks.

Mike Yan Yeung -- Chief Operating Officer

So, for the Mi-Band, as our CEO mentioned that, we will launch very, very soon, in two weeks. So we -- I'm not -- I cannot disclose too much details about the features, but I can guarantee that there are some very, very attractive feature improvements. And we are confidence that this Mi-Band 4 will be another successful product and that's Mi-Band. And for Amazfit products, also starting this month we will -- in series we will launch multiple products, always in this year. And the products will be primarily smartwatches targeting different features, including the stand-alone ease communication features and that was embedded with Qualcomm platforms, and also with health features. And with different price or interest in targeting different consumers needs. And some of them are light weighted, but basically we are very confident that this product will bring our sales to the next level, primarily will be in the two half of this year.

Ian Lau -- Industrial Securities -- Analyst

Thank you very much.

Operator

Our next question today comes from Robert Cowell with 86Research. Please go ahead.

Robert Cowell -- 86Research -- Analyst

Hi, management. Thank you for taking my question. I actually have two. The first one I wanted to ask is about your international sales. And specifically, if we can get a percentage of international sales? And then also just some color on what channels are driving the international sales? And then the second question is about your cash balance. So, I think another good quarter of strong earnings and you're continuing to build cash, company also announced that it's selling new shares in April. So I'm just wondering what are the plans for the cash balance, are there large investment you'll want to make or what not? Thank you.

David Cui -- Chief Financial Officer

Yeah. So in terms of the international sales that's starting later last year. We intensified our international sales effort and primarily targeting three markets, Southeast Asia, Europe and the U.S. markets. So we've already seen some results so far and we -- historically we rely on export distributors to conduct international business. Right now, we have some direct sales staff in this primary markets. And we are taking different sales strategies in different markets. For instance, we've already have a very multi layers of sales efforts in Europe and in Southeast Asia we leverage more on the local famous e-commerce platform. In the U.S. we already have refused with famous offline sales channels such as Best Buy. So we are in the progress to build multi-tier international sales channels. That's your number one question.

And number two question is regarding our cash balance. Yes, the amount of cash we have so far, half of them are actually raised from our IPO and the rest of the money are actually the cash generated from operations. We do need that much cash to expand our sales channel, also we need them as cash to build up our R&D team, because we need to launch more and more products, not just this year, but also in 2020 and the year after. And also we need to break through our health related technologies, including blood oxygen and better our algorithm and our current products also. And also in addition to that, we also look into potential merger acquisition opportunities. This we've mentioned that multiple times that we need to expand our upstream and downstream to -- upstream and downstream channels. So, this is -- so, we also need some cash to confess the already expanded operations as a working capital. So in terms of the new share, Robert, you mentioned that new share. Our recent offer in April was not really for the company to get money. If we didn't really risk, we only took about 10% of the proceeds.

So the primary reason for this transaction is really to facilitate our institutional -- we see investors to exit, one, their neutral -- their VC funds may have a due date. They have a due date to exit from their IPO portfolio companies. So that's the primary reason.

Robert Cowell -- 86Research -- Analyst

Okay. Thank you very much, David.

Operator

If there are no further questions, now I'd like to turn the call back over to Grace Zhang for any closing remarks.

Grace Yujia Zhang -- Director of 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 consultant. So this concludes this conference call. You may now disconnect. Thank you.

Duration: 44 minutes

Call participants:

Grace Yujia Zhang -- Director of Investor Relations

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

David Cui -- Chief Financial Officer

Mike Yan Yeung -- Chief Operating Officer

Zi Tynn Cheng -- CIBC -- CIBC

Kyna Wong -- Credit Suisse -- Analyst

Arthur Lai -- Citi -- Analyst

Arthur Lai -- Citigroup Inc -- Analyst

Ian Lau -- Industrial Securities -- Analyst

Robert Cowell -- 86Research -- Analyst

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