Grace Zhang - IR Wang Huang - Founder, Chairman and CEO David Cui - CFO Mike Yeung - COO.

Thompson Wu - Credit Suisse Arthur Lai - Citi Jimmy Yang - China Renaissance.

Hello, ladies and gentlemen. Thank you for standing by for the Huami Corporation’s Earnings Conference Call for the First Quarter of 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 call over to your host, Ms. Grace Zhang, Investor Relations Manager for the company.

Please go ahead, Grace..

Hello everyone and welcome to Huami Corporation’s earnings conference call for the first quarter of 2018. The company’s financial and operational results were issued in a press release by Huami Newswire Service earlier today and are posted online.

You can also view the earnings press release and the slides which we will offer too on this call by visiting the IR section of the company’s website at www.huami.com/investor. Participating in today’s call will be Mr. Wang Huang, our Founder, Chairman and Chief Executive Officer; and 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 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 previous year ended December 31, 2017 and other public filings as filed with 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 includes discussions of unaudited GAAP financial information, as well as unaudited non-GAAP financial measures.

Huami’s press release contains a recognition of 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..

Hello, everyone. Thank you for joining our earnings conference call for the first quarter of 2018. Our result in the first quarter got the year off to a great start. We exceeded the high-end of our revenue guidance range and also delivered strong profitability.

In Q1, we were very pleased to see revenue grow by 77% year-over-year and the net income increased substantially. The [lower] sales results were driven by continuing rapid growth of both our self-branded products, as well as Xiaomi wearable products.

Market scenario used, combined with advanced technology and attractive price points create compelling demand for our products. Our strong profitability was largely driven by our improved economies of sales, our ongoing focus on supply chain management, and our current control over operating expenses.

Strong sales growth of our Amazfit branded product also contributed to the improvement of our profitability. Now, I would like to briefly discuss our strategy for future growth. At Huami, our overall growth strategy has several parts; expanding international distribution is one key, and represent a large opportunity to grow our business.

We are pleased to see that the shipment volume of our international version product is growing and more and more of our products gain recognition abroad. In addition, we will further invest in our R&D capabilities. R&D is at the core of our business and is critical to our growth.

Our ongoing R&D experts focus on areas to expand and develop new products and strengthen our leading AI technology capabilities. We are also keenly focused on R&D that will help us develop a breakthrough healthcare related wearable product. We see healthcare related wearable products as an excited area for potential growth.

Naturally, our relationship with Xiaomi is important. We are Xiaomi’s sole partner to design and manufacture Xiaomi branded wearable including smart bands, scales and associated accessories. Our relationship with Xiaomi continues to grow stronger and stronger and we continue to work closely with them on new product releases.

Lastly, we have one of the largest biometric database in the industry. Monetizing this large amount of data is another component of our strategy. We call this component our Value Add Services or VAS, and are continuing to broaden the channel for this stream of revenue growth.

In conclusion, with these growth strategies including international expansion, expanding other categories, new product releases and growing vast revenue, we are confident to deliver fulfilled results in the quarters to come. I will now turn the call over to our CFO, David Cui. .

Thank you, Mr. Wang. We are pleased to report strong results to begin the fiscal year of 2018 in what is typically our seasonally slow quarter, in addition to the top line growth and operating efficiency that Mr. Wang highlighted.

In the first quarter of 2018, we recorded an increase of 1.6 million units in total shipments compared to the first quarter of 2017. Clearly, our results show that our multi-dimensional growth strategies are working and we are leveraging our core expenses. I will now go over some of our financial results for the first quarter of 2018.

Revenues increased by 77% to RMB585.9 million year-over-year due to an increase in sales of our self-branded products as well as continued growth in our Xiaomi wearable segment.

We are very pleased with this result and expect continued progress in expanding the contribution from our self-branded products as we build on late last year’s product launch of this product. Our gross profit increased by 98.3% to RMB146.7 million year-over-year. Our gross margin increased 269 basis points to 25% or 22.3% in the first quarter of 2017.

The significant increase was driven by improved economy of scale and a rapid sales growth of our Amazfit self-branded products.

In general, we are positioning Amazfit branded wearables to target a higher income demographic compared with Xiaomi wearable products and our Amazfit branded wearables generally carrying a higher average selling price and higher gross margins. Moving forward, we expect the [transmission] of our self-branded products continues to increase.

With that said, I also want to point out that at the Mi Band 2 which is the key product for us is (inaudible) end of this life cycle and as we anticipate the launch of the next generation of products with Xiaomi, we are actively managing our inventory of the Mi Band 2.

Total operating expenses increased by 73.6% to RMB137.8 million from RMB79.4 million in the first quarter of 2017. The company’s successful IPO and the amendment of certain lasting schedules of our previously granted option seekers and acceleration of expense recognition in this quarter is excluding share based compensation expenses.

The total operating expenses remained steady compared to the first quarter of 2017. Research and development expenses increased by 82.3% to RMB73.8 million from RMB40.5 million from the first quarter of 2017, primarily due to an increase in the share based compensation expenses to retain R&D personnel.

General and administrative expenses increased by 72.9% to RMB49.3 million from RMB28.5 million for the fourth quarter of 2017, primarily due to an increase in share based compensation expenses to retain certain senior management.

Similarly, selling and marketing expenses increased by 41.8% to RMB14.7 million versus RMB10.4 million for the first quarter of 2017, primarily due to an increase in salary compensation and share based compensation expenses to retain sales and marketing personnel.

Operating income was – this is our current operating income was RMB8.8 million, which improved significantly with an operating loss of RMB5.4 million for the first quarter of 2017. Net income attributable for Huami Corporation totaled RMB14.8 million, compared to a net loss of RMB4.5 million for the first quarter of 2017.

Basic and diluted net income per share attributable to ordinary shares of Huami Corporation was RMB0.05 and RMB0.05 respectively compared to a basic and diluted net loss per share of RMB0.23 and RMB0.23 respectively for the first quarter of 2017.

Our adjusted net income attributable to Huami Corporation which excludes share based compensation expenses increased by 817.5% to RMB92.5 million from RMB10.1 million for the first quarter of 2017. As of March 31, 2018, the company has cash and cash equivalent on hand of RMB1.12 [billion] compared with RMB366.3 million as of the year end of 2017.

All-in-all, we are pleased with our results for the first quarter of 2018, and our growth strategies couple with our expanding and improving product lineups will allow us to continue to deliver excellent results in the quarters to come. Now, let’s turn to our outlook.

For the second quarter of 2018, the company currently expects revenue to be between RMB650 million and RMB675 million, which would represent an increase of approximately 32.4% to 37.4% from RMB491.1 million for the second quarter of 2017.

This outlook is based on the current market conditions and reflects the company’s current and preliminary estimate of 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. .

[Operator Instructions] And the first question comes from the line of Thompson Wu from Credit Suisse. Please go ahead. .

Going back to Q1 results, can you give us a quick breakdown on the growth and shipments for the Mi Band product and also Amazfit?.

Thompson, I will take your question. As you can see our total shipment in the first quarter is about 4.8 million in total. So included in this, Xiaomi’s product shipment is (inaudible) above 4.2 million shipment, and the rest is our own branded product shipment. .

And then, maybe you can give some color for the Amaz branded product.

Can you give us maybe some idea of what products are doing well within your key markets?.

This quarter is an excellent quarter for us in terms of our own brand sales. So included in this self-branded products are Amazfit watch, the Amazfit [Pace] product sells really well. That itself has exceeded 0.25 million shipments for that particular product. .

And then maybe moving to June guidance, very strong topline growth going in to a transition period in terms of product and seasonality, could you give us some color in terms of what’s driving the topline, maybe from a unit and also an [ASP] perspective, and also the mix between the Mi Band product and your higher ASP Amazfit brand products?.

In Q1 the primary driver is our own product, of course the Mi Band, Million, Xiaomi product also increased, but our own product sales increased a lot faster, so that drives Q1 growth. In terms of a product mix, we’ve seen over 30% of our revenue were generated from our own products in this quarter.

And for Q2, we would see the same trend that product, our own product will – the percentage will continue to climb. So this will improve, I would say, will improve our gross margin because of our own product at higher gross margin, and ASP is also higher as compared to Xiaomi’s products..

And the maybe one last question, for stock based comp in Q1, if my math is correct, it was around 70 million to 80 million. .

Up to (inaudible). .

Does that seem a little bit higher than maybe what we are thinking? Is that expense that we can see every quarter going forward?.

No, it’s not. I can explain a little bit on this particular number, because in the prior two to three years we granted options or restricted shares to our employees, and a lot of them have been reacted because two, three years have already gone by. And there’s another condition for exercise ability of this option, which is, first of all, IPO.

Upon IPO these options were exercisable based on the accounting rule all this – and amortize the cost that were charged immediately upon the IPO that’s why it all occurred in Q1. So in future it is going to be something like this..

And the next question comes from Daisy Yu from (inaudible) Securities. Please go ahead..

I have two questions here, the first one is with regard to the overseas expansion plan, could you please share why the leverage of Xiaomi is that much more to (inaudible) or you think other channels, and what percentage of cash do you expect to come from overseas in 2018 in the next few years.

And my second question is in terms of the growth percentage in our domestic market.

Do you plan to open more customer experience stores in the next few years?.

What’s your first question?.

My first question is regarding the overseas expansion plan..

Overseas expansion plan, okay. Yes, our Xiaomi’s product and our products will go overseas, that’s one of our key strategies. So as you know Xiaomi has been successful in expanding in to Indian market and Indonesian market.

So our product is going with Xiaomi’s product, go in to those markets, and we will continue to build - this relationship will continue to expand internationally. And the second question? It’s a difficult question, because our shelves were initially made through Xiaomi and then Xiaomi will introduce our products globally.

So, our best estimate is, this will be good going about 30%, we will be approaching 40% internationally, yes. .

My question is regarding our domestic markets and would you plan to open more customer experience towards our products?.

Currently we have been successful in terms of building our own sales channel. So a certain percentage of our own product would sell through Xiaomi’s channel and then we were leveraging both online and offline channel to distribute our product.

So certainly we are considering to test the market to see if we can open one or two real store, but this is not going to be in the near future, but we are considering those..

And the next question comes from Arthur Lai from Citi. Please go ahead..

First of all, I think this quarter result is actually quite good in terms of the shipment revenue, and also investors actually are very focused on the VAS that Wang Huang just mentioned, the Value Added Service. So can you talk more about how our company is going to execute with VAS trend, this is my first question..

Arthur, this is Mike Yeung, let me address that question. So first of all, year-over-year our value added services revenue actually increased quite a lot. Although as a percent of overall revenue is still small, but the year-over-year increases is quite big, quite encouraging.

And secondly, right now besides expanding more partnerships in-app advertising, we are also too – this is development and other M&A efforts to partner with more and more partners not only in China but globally to expand the VAS opportunities. A lot of those discussions are still in the work, so we cannot announce yet.

But there’s a lot of business development going on in those areas. .

My next question is one follow-up question is the break down shipment, so how is the breakdown of the overseas and China in terms of March quarter shipment?.

We don’t have that absolute number yet, but we know it’s about 40%..

40% in overseas?.

Yes..

Okay and 60% China. Okay, and also Mike I want to also cover up one more VAS question. In the last quarter we felt a much bigger Amazfit quarter.

So does it imply we have a higher revenue potential from the Amazfit product, because we know that in the Amazfit you can totally modify the data? Is that the right way to think about it?.

I think that’s the right logic, because our Amazfit product has in general more features than the Xiaomi brand of products, for example our smartwatches have microphone for example and one of our existing band have [NFC], so obviously all these extra features increases the business development opportunities for us to monetize.

So as we sell more our higher feature, better feature products then obviously the VAS opportunities on these products will increase..

[Operator Instructions] And our next question comes from Jimmy Yang from China Renaissance. Please go ahead..

Hello management this is Jimmy, first I’d congratulate on a very strong quarter result. I have two questions; the first question is regarding the discount ratio on the Mi to the channel in the Q1 ’18, because we all know that the Mi Band 2 product has reached the end of the product cycle.

So, is that right that we were giving like more higher product discount to the channel and the ASP of the Mi Band product in the 1Q ’18 is decreasing?.

Yes, our sales team is working with Xiaomi to push Mi Band through the market. Certainly we did provide certain discount rebates to our distributors. This potentially will impact the gross margin.

But having said that, we will consider the increase in our own brand of products with higher margin to compensate the margins in Q2, so we do anticipate impact to Q2, but it’s not going to be that significant. .

And the second question is regarding the OpEx, and more color on the non-GAAP OpEx for the remaining quarters?.

For the remaining quarters?.

Yes, in the year..

What we were trying to manage is the OpEx as a percentage of revenue. We will not see that percentage go up, we will try to keep it at the same percentage, while continuing to invest in R&D, continuously invest in R&D and in sales and marketing efforts. .

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

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

And this concludes the conference call. You may now disconnect your lines. Thank you..