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Huami Corporation (NYSE:HMI)
Q3 2019 Earnings Call
Nov 12, 2019, 7:30 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 Third 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 the Company. Please go ahead, Grace.

Grace Zhang -- Director of Investor Relations

Hello everyone, and welcome to Huami Corporation's third quarter 2019 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. 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 Yan, 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 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 laws.

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. Huang Wang. Please go ahead, sir.

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

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

In the third quarter we achieved outstanding top line and bottom line growth, driven by persistent development and execution of our strategic initiatives, which focus on product diversification, brand elevation and international expansion. Our third quarter revenue was RMB1.86 billion, representing a 73.3% year-over-year increase. Our revenue performance was the result of strong sales from both the Mi-Band 4 and our newly released Amazfit products, as both brand categories become increasingly recognized and desired by global customers.

In the third quarter we continued to expand and diversify our Amazfit product lines with the goal of targeting new customer segments and offering additional applications of usage. Following our release of multiple small wearable products in the second quarter, we recently launched the Amazfit GTS and the Amazfit Stratos 3, the latter of which is an update model of the professional sports watch product line targeting sports enthusiasts [Phonetic] with comprehensive sports monitoring functionalities within. We also introduced the ultra-modern Amazfit X, a new concept product with prominence curved touch screen shaped like a crescent moon which is slated for release in 2020.

Turning back to sales. Our international shipments continue to climb as our focus on expanding brand recognition globally continues to bear positive results. In September we successfully held our first international product launch event at EVA 2019 in Berlin, Germany. We also received numerous global product design awards. In general, we view our overseas marketing campaigns as an essential strategy for our growth and brand promotion. And in light of our success thus far in driving sales, more oversee product launches are being developed and scheduled in the future.

The successful sales achievements in the just passed Double 11 e-commerce festival also demonstrated our strong domestic market strategy and intentions. This year, Amazfit product sales reached last year's Double 11 whole day sales level in just one hour and Mi-Band 4 sales reached 350,000 units in only 10 hours. In addition, we ranked number one in sales revenue as well as volume on both JD and Tmall platforms in the smartwatch market segment with retail price under RMB1,000 as we have completed our product portfolio in this market segment. With the fast-growing market as well as our effective strategies lying ahead, we have great confidence in future product sales both at home and abroad.

Furthermore, in the third [Phonetic] quarter we leveraged our expertise in smart wearable hardware and big data analytics to optimize algorithms for our cloud-based healthcare services. At the 2019 Asia Pacific Heart Rhythm Society, Dr. Chen from the Peking University First Hospital introduced hospitals research on the cardio health monitoring by Huami smart wearables. The research indicates that the accuracy of detecting atrial fibrillation through ECG and PPG using smart wearables has reached 94.76% and 93.27% respectively. This demonstrated that people can manage their cardio health both effectively and remotely through the use of smart wearable devices.

In the meantime, we are continuing to improve our users' experience especially in specific [Phonetic] healthcare-related scenarios. We recently launched fall detection in some Amazfit products which then activated will automatically alert the user by vibrating and will also send a alert message to the pre-configuration emergency contact. We also introduced brand new healthcare VIP services which allows users of our smart wearable product to have tools such as ECG reading and analysis, abnormal cardio notification alerts, quarterly health reports and numerous other tools as part of the various premiums service packages.

We expect services and contents to complement our core revenue stream from smart wearable product sales and become an increasingly important component and contributor to our revenue model and results. Looking ahead, our plan is to keep investing in and improving our R&D capabilities as well as seeking additional strategic partnerships.

In addition, as always, we will continue innovating with our current close partners, Xiaomi and Timex Group. Our long-term plans with Xiaomi on the popular Mi-Band product line remain unchanged. We look forward to developing and producing future generations of the Mi-Band, including variations targeting different market segments and customer profiles.

In the meantime, we are also collaborating closely with Timex on product development. We plan to launch multiple product lines with Timex in the US in earlier 2020.

With experts in our self-developed AI chip, Huangshan-1, our smart wearable product and cloud-based services, we strive to provide users a better experience in both sports and healthcare in order to improve their daily smart lives.

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.

We are very pleased with our robust financial results in the third quarter. Revenues grew 73.3% year-over-year and total shipment reached 13.7 million units, up 67.1% from the same period last year. These results were primarily driven by the rising global demand for both Mi-Band 4 and our newly launched Amazfit products. In the meantime, our first nine months revenue and shipments have already exceeded 2018's whole year performance.

Along with revenue expansion, our operating efficiency also improved in the quarter with operating expense as a percentage of revenue at 13.5%, declining 4.3 percentage points and 1.4 percentage points, respectively, from the second quarter of 2019 and the third quarter last year despite our increase in investments in R&D and brand equity during the quarter. This combined financial and operational improvements, coupled with strong revenue growth, led to bottom line year-over-year growth of 78.7%.

As we further diversify our product lines, strengthen our service offerings, form and solidify strategic alliances and grow our global footprint, we are confident in our ability to continue delivering healthy financial and operating performance going forward. Mindful of the length of this call, I will highlight the key financial measures for the third quarter of 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 third quarter. All amounts are expressed in RMB unless otherwise stated. As previously mentioned, revenues in the third quarter 2019 increased by 73.3% to RMB1.86 billion from RMB1.07 billion for the third quarter of 2018. Gross profit increased significantly by 63.8% to RMB470 million from RMB287 million in the third quarter 2018. Our gross margin was 25.2% compared with 26.7% a year ago. The decrease was primarily a result of an increasing proportion of Mi-Band 4 in our revenue mix driven by its continued sales momentum since the second quarter product launch.

Moving to expenses. Total operating expenses increased by 56.5% to RMB251 million from RMB160 million for the third quarter 2018, reflecting our strategy of investing in R&D, branding and marketing to enhance long-term returns. Research and development expenses increased by 107.7% to RMB125 million from RMB16 million for the third quarter last year, primarily due to an increase in our personnel related expenses and a rise in cost associated with the testing of new pipeline products.

General and administrative expenses in the third quarter remained essentially flat at RMB70 million compared with RMB68 million for the third quarter of 2018. Our selling and marketing expenses increased by 75.1% to RMB57 million from RMB32 million for the third quarter last year as we increased advertising and promotional expenses for our new Amazfit products. We also expanded our sales and marketing team to boost our sales efforts globally.

Our income before income tax was RMB228 million compared with RMB129 million for the third quarter of 2018. The GAAP net income attributable to the Company increased to RMB203 million compared with RMB114 million for the third quarter of 2018. Net income attributable to ordinary shareholders of the Company also increased to RMB203 million. Basic and diluted net income per ADS attributable to ordinary shareholders of Huami Corporation was RMB3.31 and RMB3.15 respectively. As a reminder, each ADS represents four Class A ordinary shares.

Next, for non-GAAP measures. Adjusted net income attributable to Huami Corporation increased to RMB210 million from RMB134 million for Q3 2018. Finally, adjusted basic and diluted net income per ADS attributable to ordinary shareholders of Huami Corporation was RMB3.41 and RMB3.25 respectively.

Relating to cash, as of September 30, 2019, the Company had cash and cash equivalents of RMB1.72 billion compared with RMB1.44 billion at the end of 2018.

And now to our outlook. Looking ahead to the fourth quarter of 2019, the management currently expects net revenues to be between RMB1.93 billion and RMB1.95 billion which would represent an increase of approximately 57.6% to 59.2% from RMB1.2 billion for the fourth 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. We will now begin the question-and-answer session. [Operator Instructions] And the first question today comes from Clive Cheung of Credit Suisse. Please go ahead.

Clive Cheung -- Credit Suisse -- Analyst

Hi, good evening, management. Thank you for taking my question. My I think big question is on the Xiaomi smartwatch competition. Previously, we believe that Xiaomi's smartwatch will be targeted at a different segment compared to our Amazfit products. But the price range seems pretty similar on some of the higher-end ranges for Amazfit products. Could you share some insights on the view on this and if there is any risk for Amazfit on Xiaomi channels? Thank you.

Mike Yan Yeung -- Chief Operating Officer

Yeah, this is Mike Yan. So basically there are differences in terms of the feature set. The Xiaomi smartwatch, for example, they have the calling function, 4G and basically that is more tailored to scenarios where you might not have phone with you, and currently that scenario is quite new to many users. For us, we mostly target the smartwatches. We have a lot of sports feature as well as a lot of healthcare feature. And also in terms of fashion, in terms of elegance. Those are the features we focus on: sports feature, healthcare feature, as well as looks and fashion. So whereas -- again, the Xiaomi smartwatch is more focusing on communication. So, basically it's a slightly different -- it's different feature sets targeting different people and different scenarios. Does that answer your question?

Clive Cheung -- Credit Suisse -- Analyst

Yeah. And also I think Amazfit obviously have products sold through Xiaomi channels. Is there any risk or impact to that?

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

To directly answer the question, for Amazfit products, our own brand products, majority of them did not go through Xiaomi's channel. We have successfully built our own channel and we are still expanding our distribution channel right now.

Clive Cheung -- Credit Suisse -- Analyst

Okay. Thank you very much.

Operator

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

Arthur Lai -- Citi -- Analyst

Hi, Huang Wang and David and Mike, congrats for the results in the quarter three. I have two question. So number one is a housekeeping question, number two is a new product question. So I would like to start from the number one. So you mentioned that this quarter we shipped 13.7 million total products. Can you give us some breakdown of the Xiaomi brand product and also your own brand product or the other OTN [Phonetic] products as well? And also can you also comment about the R&D expense?

You mentioned that you had -- the R&D expense has increased 107%. This is quite amazing. And can you also elaborate what kinds of product you are looking up? Thank you.

David Cui -- Chief Financial Officer

Okay, Arthur. For the breakdown of our total shipments, as we announced about 20 days ago, in this quarter we were very successfully shipped close to -- about 1 million Amazfit products and that's total shipments in only one quarter. That's historical. And the rest of the shipments are Xiaomi's products.

And for the R&D breakdown, what I can point out is the OpEx in total as a percentage of our total revenue actually decreased as compared to the same quarter in 2018 and we were very successfully managed our G&A expense and to compensate that the increase in our R&D investment and also in our channel distribution, channel building cost. So as a result of this, our net margin -- if you look at our net margin year-over-year, it actually slightly increased.

Arthur Lai -- Citi -- Analyst

Okay. Yeah. So -- thank you. Thank you for the answer. If you don't get us wrong, actually we are not trying to bitter [Phonetic] the Company because you are adding to R&D. Actually we are happy to see you invest for the future. I just want to get some color about those product roadmap because you [Indecipherable] more forward-looking. And if you look at your -- such as US leading brand, they actually invest in a wearable [Indecipherable] such as TWS headsets. So I'm also wondering do you have a plan to expand your product line to [Indecipherable] smart band -- or smart watch.

David Cui -- Chief Financial Officer

I can answer first and then if Wang Huang or Mike, you can add on. We do have a pipeline of new products for next year, 2020, and that include TWS. It has in our radar. But majority of the products are still wearables and that include TWS. Does that answer your question?

Arthur Lai -- Citi -- Analyst

Yeah, yeah. Thank you.

David Cui -- Chief Financial Officer

Thank you.

Operator

The next question today comes from Meng Cao of Industrial Securities. Please go ahead.

Meng Cao -- Industrial Securities -- Analyst

Hi, management. This is Meng Cao from Industrial Securities. Thank you for taking my question. So my question then is, what's your strategy to promote [Indecipherable] brand and could you give us some color on the selling and marketing expense in 2020? Thank you.

Mike Yan Yeung -- Chief Operating Officer

Yeah. So for our Amazfit brand strategy, we will definitely continue to invest and grow our brand especially internationally. We are seeing a very good adoption of our product right now, and we will do more product launches internationally as we mentioned earlier in the call. And for example in upcoming CES in January, we will have our first CES booth presence and promote our products. And IFA last year -- this year was also another example. So we will continue to do more major international product launches from our brand.

Meng Cao -- Industrial Securities -- Analyst

Okay, thank you.

Operator

The next question comes from Michelle Zhang of China Renaissance. Please go ahead.

Michelle Zhang -- China Renaissance -- Analyst

Hello management, I want to know that because our cooperation, the contract with Xiaomi will end in October next year. So I want to know like what is our current relationship with Xiaomi. Thank you.

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

Yes. So, currently right now, again, we are continuing partnership as before. We are already working on Mi-Band 5 and we will -- we expect to renew the partnership agreement with Xiaomi. We don't see right now -- we don't see any change in that. So -- and again, we expect to renew the agreement sometime early next year.

Michelle Zhang -- China Renaissance -- Analyst

Okay. Thank you.

Operator

The next question comes from Xudong Chen of CICC. Please go ahead.

Xudong Chen -- CICC -- Analyst

Thank you for taking my question. Congratulation for the robust results. As we all know, application of [Indecipherable] or medical use of smartwatch and other wearable devices is very hot recently. My question is, will Xiaomi consider to go into those fields? Are there any plans or recent achievement to share with? Thanks.

David Cui -- Chief Financial Officer

Actually -- our mission actually is to explore the opportunities in the healthcare field. So this is maybe also -- maybe it's also our strength area. So it's worth to mention that it is Huami who actually launched the first ECG commercial wearables even ahead of other famous competitors. So our R&D lab are working on other advanced medical fields such as blood oxygen and blood pressure, and we are working on those and trying to get the technology approved by China FDA and eventually approved by the US FDA. So we should expect future products in those area.

Xudong Chen -- CICC -- Analyst

Okay. Thank you, David.

David Cui -- Chief Financial Officer

Thank you.

Operator

The next question comes from Robert Cowell of 86Research. Please go ahead.

Robert Cowell -- 86Research -- Analyst

Hi, management. My question is about priorities for the use of cash. It seems there is a pretty significant cash balance at this point.

David Cui -- Chief Financial Officer

Yes, Robert. We are accumulating a lot of cash so far. But we are looking at strategic opportunities, investment opportunities and merger/acquisition opportunities globally and we will use the cash in a good way.

Robert Cowell -- 86Research -- Analyst

Thank you.

David Cui -- Chief Financial Officer

Thanks, Robert.

Operator

The next question comes from Edward Chen of TOMI [Phonetic] International. Please go ahead.

Edward Chen -- TOMI International -- Analyst

Hi, management, congrats for the good results. I just want to follow up on the healthcare services that you're focusing on. So I wonder if management could give us a bit more color on sort of what the business model look like in terms of the services that were launched related to healthcare. Thank you.

David Cui -- Chief Financial Officer

Yeah. For healthcare services, actually there are quite different -- several different kinds of revenue streams, potential revenue streams. One is, as we mentioned before, is working with insurance companies and either to a licensing of our algorithm or data sharing with the users approval and/or leads generation. Savings -- we can potentially get a share of the savings in claim costs. So those are various ways that we could work with insurance companies to monetize off of the -- our healthcare features and data.

Edward Chen -- TOMI International -- Analyst

Okay. Thank you.

Operator

The next question comes from Jason Sun of China Renaissance. Please go ahead.

Jason Sun -- China Renaissance -- Analyst

Hi, management. Thank you for taking my questions. I have one question. Actually, the market is speculating that Xiaomi will actually announce several -- a bunch of products in December, including the bands, very low-end band and some high-end and middle tier watches. So how do you think this will impact the relationship or your product shipment in the first half of next year? Thank you.

David Cui -- Chief Financial Officer

Well, thank you, Jason. So, as Mr. Huang mentioned in his earlier speech that our long-term plans with Xiaomi and the popular Mi-Band product line, this will remain unchanged. So we are looking forward to developing and producing future generations of the Mi-Band for Xiaomi. So, to be specific at that, we will launch Mi-Band 5 in next year for Xiaomi. This is a strong indicator that we will continue to work with Xiaomi and continue the strong relationship with Xiaomi.

In terms of what you mentioned that Xiaomi may launch multiple future products, so we would consider that it's just one more player on the market. And as of this moment, our total shipments still remains the top five or six globally and we -- our products are unique in terms of features, in terms of the designs, so we are confident that we can develop our business independently and develop our technology and the products associated with the technology for the global consumers.

Mike Yan Yeung -- Chief Operating Officer

And Jason, just to add more color is that for example in this past single state, we are still totaling our sales figures, but basically, we have seen a very strong single state sale for our Amazfit brand products even though the Xiaomi smartwatch was also for sale. So we've seen again very strong sales for this past Double 11 probably -- as a matter of fact, strongest ever for our Company, for our brand. So basically right now, and again, we don't really see that much impact with the Xiaomi smartwatch.

Jason Sun -- China Renaissance -- Analyst

Thank you.

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

Yeah, actually we compete with Huawei [Phonetic] and Xiaomi. Yeah. We -- in a single day, we are now the number one in the -- under the RMB1,000 price segment. We beat Huawei and I think in the future, we will be better in -- above the RMB1,000 price range.

Jason Sun -- China Renaissance -- Analyst

Okay. So how do you think -- do you think the low priced band like maybe priced at RMB69 [Phonetic] will cannibalize some of the user base from the like over RMB100 [Phonetic] segmentation?

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

Well, the strongest growth in future based on independent market research is coming from the smartwatches. So that's the focus -- our future focus area with advanced healthcare features. And in terms of the band, that will be the existing market. So far, you can see our performance -- product performance, you can see the last two generations, Mi-Band 3 and Mi-Band 4 and how we grow that.

So we are -- we are confident that Mi-Band 5 will be another success, and we believe that the lower priced RMB69 price band will be no comparison with our band products. As a matter of fact, the band sounds cheap, but it does involve a lot of the technology, involves a lot of integration of our R&D, integration of our production and supply chain management and it requires expertise. So we are confident that the band shipments in future generations will not that much impact.

Jason Sun -- China Renaissance -- Analyst

Thank you, Wang Huang, David and Mike. Thank you.

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

Okay. Thank you.

Operator

As there are no further questions now, I'd 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's Investor Relations department through the contact information provided on our website or The Piacente Group, the Company's Investor Relations consultant. [Operator Closing Remarks]

Duration: 42 minutes

Call participants:

Grace Zhang -- Director of Investor Relations

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

David Cui -- Chief Financial Officer

Mike Yan Yeung -- Chief Operating Officer

Clive Cheung -- Credit Suisse -- Analyst

Arthur Lai -- Citi -- Analyst

Meng Cao -- Industrial Securities -- Analyst

Michelle Zhang -- China Renaissance -- Analyst

Xudong Chen -- CICC -- Analyst

Robert Cowell -- 86Research -- Analyst

Edward Chen -- TOMI International -- Analyst

Jason Sun -- China Renaissance -- Analyst

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