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 will now turn the call over to your host, Ms.

Grace Zhang, Director of Investor Relations for the Company. Please go ahead, Grace..

www.huami.com/investor. Participating in today’s call are Mr. Wang Huang, 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 these and other risks and uncertainties is included in the Company’s annual report on Form 20-F for the fiscal year ended December 31, 2017 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 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..

Hello everyone. Thank you for joining our earnings conference call today. We are proud to report another strong quarter with topline results 1.22 Billion RMB which exceeded our fourth quarter guidance, capping off a solid 2018 with the full year revenue 3.65 billion RMB which grew 78% compared to 2017.

In addition to strong sales, we delivered growing profitability, as we focused on competitive products development and efficient business operation, generated adjusted net income of 146.5 million RMB in the fourth quarter and 474.8 million RMB for the full year.

We continue to experience strong growth of our Amazfit product line, as it contributes a larger portion of our total revenues. Shipment of Amazfit products in 2018 almost tripled compared with 2017, which was mainly driven by Amazfit watch products.

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 application scenarios is an important strategy for us, to enrich our user experience.

During the past year, we launched NFC version products 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 early 2019, to foster new product development in the global market.

In November 2018, we announced a collaboration agreement with Timex, a global leader in watchmaking, in order to leverage their world class product development capabilities, and strong international distribution channels to broaden the reach of our smart-wearable products.

In addition, in January 2019, we announced a strategic collaboration with McLaren Applied Technologies, to leverage their expertise in auto racing and e-sports to develop metrics-driven wearables, that will help optimize human performance in these under-served fields.

We believe collaboration agreements like these, 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 new features to the latest generation of Mi Band helped ensure the Mi Band remained at the forefront of the smart bands industry. We also continued to experience success in expanding our reach as we develop distribution channels and brand awareness in overseas markets.

Shipments of International version products accounted for 44.2% of our total shipments in the year of 2018. Moreover, Amazfit brand smart watch products have been launched in 60 countries, as of today. Our collaborations with established international partners and our enhanced overseas’ sales force contributed significantly to such success.

We remain committed to ensuring our products meet the developing needs of the smart wearables industry, and will 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 wearables technology in this growing sector. We continue to work with PAI Health on partnerships with overseas insurers and large employers in pilot programs for data-based services.

We also expect to expand our relationships with insurance carriers, to make it 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 advantages we possess 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 awareness and affinity for the Amazfit brand. We will 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 wearables market opportunities, especially in the fast-emerging smartwatch market, and further develop ecosystem services opportunities. 2018 was a fruitful 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..

For the whole year, our revenues increased by a hefty 78% year-over-year, from 2.05 billion RMB to approximately 3.65 billion RMB. Revenue from Amazfit products increased by 178% in 2018 as compared to 2017.

We are especially pleased with the growth in sales of our Amazfit products which comprised 33% [ph] 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 494.7 million RMB to 939.5 million RMB.

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 312.7 million RMB to 573.7 million RMB. 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, all with the intention to support the research, development and sales of new products planned for launch in 2019.

Resources were also invested during the year to expand our sales effort overseas. Operating income more than doubled for the full year, increasing from 182 million RMB to 365.7 million RMB. The GAAP Net income to Huami totaled 340 million RMB, compared with 167.7 million RMB in 2017.

Non-GAAP Adjusted net income to Huami, which excludes share-based compensation expenses, more than doubled from 2017 increasing from 230.5 million RMB to 474.8 million RMB. Basic and diluted net income per ADS was 5.98 RMB, and 5.41 RMB, respectively, both more than doubling from 2017.

Adjusted basic and diluted net income per ADS was 8.39 RMB and 7.59 RMB, respectively. Now, let’s turn to our outlook.

For the first quarter of 2019, the Company’s management currently expects revenues to be between 750 million RMB and 770 million RMB, which would represent an increase of approximately 28% to 31.4% from 585.9 million RMB for the first quarter of 2018.

This outlook is based on the current market conditions and reflects the Company management’s current and preliminary estimates 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]. The first question today comes from Lewis Wang with Annunciation Research..

Hi, Mr. Wang and the management of Huami. So we are currently interested in your R&D part in the Huangshan chips, and we noticed that you have acquired some company in France.

And could you illustrate more on that part and especially why you couldn't see the revenue on the chips part?.

Yes, this is Mike Yeung. I'm the COO of the company. So my understanding of your question is how will our new chip, Huangshan-1, will impact our revenue. So Huangshan-1 will be our upcoming products in 2019. As David mentioned, we will 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..

The next question comes from Thompson Wu with Crédit Suisse..

Can you guys hear me okay? Hello? Hello?.

Yes. Yes, Thompson, yes..

Oh, okay. Good Moring and congratulations on the good quarter. My first question is just about your Amazfit brand. I had 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..

I'll try to tackle your questions. In this year, we allocated a lot of 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 products in the year.

It’s going to be at different time intervals during the year. Certain features include health care features and also the communication features maybe in a different combination, a different format, and a different price range, to suit different type of customer needs. That's our plan for the year. .

Okay, great. Yes, that was very helpful. And for your guidance in first quarter, still 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..

Yes, so for the 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 we still expect a healthy growth, as you mentioned.

But from our history, when we launch new products or 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, things like that.

And we will -- all depends on what type of a product we launch or the product mix that we launch, the margin could vary when we launch the new products. For Xiaomi's products, we do have a plan for newer generations of Mi Band to be launched.

When we launch our product, as we experienced when we launch the Mi Band 3, we did give a huge discount to the market to quickly release the Mi Band 2, right? So we will probably have to do the same thing for Mi Band 3 during the year. So the pressure for the margin always exists, one from competition, one from the pricing strategy.

We all know we control our costs very efficiently. But the pricing strategy will also impact our margin..

Yes. Okay, okay. Then, David, maybe just one more question before I get back into the queue. Just on your headcount budget addition this year. Just do have a rough idea of how many people you want to add to the business this year? What departments are you looking to invest in? I presume a lot of the investments in headcount will be on R&D.

Could you just give us a quick update on what your plans are for headcount in 2019, and maybe how that compares with 2018?.

When we had our IPO, our headcount was roughly about 400. So towards the end of 2018, we have about 600 in aggregate globally. And this year, we have a plan to add in more staff because we have multiple products to be launched. So we will focus on R&D staff. We will add more R&D capabilities.

And we will also allocate more resources to our sales and marketing efforts. So this will be the 2 major area we'll have. We do not have a fixed number, but we know we will add more headcounts this year, from 600..

Your next question comes from Arthur Lai with Citi..

I want to follow up with Thompson's question and a more longer-term perspective.

Can you share with us if you develop your own analogy and also subject to more and more ODM model for those watchmakers? And how do you utilize this business model, which means that, can you start to utilize their big data you collect from their ODM? 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 questions..

one is how we work with our OEM partners, and the other is how we can do better data monetization. So yes, when we work with partners like Timex. Not only do we develop differentiated devices for them, but we also have collaboration on the data in-house, in cooperation as well.

And actually, in these kinds 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 this large number of devices that we shipped, we collect tons of data every day.

That's why right now, we're also working with our partners, such as PAI Health, for example, to try to monetize these data by targeting the health care and insurance industry, which we believe has a huge potential for us to monetize these biometrics data that we collect such as heart rate, such as ECG, electrocardiogram.

So our plan is again, to leverage these data and work more closely with our partners to monetize in the health care and insurance industry..

Okay. And one follow-up question.

When you collect big enough data, and you can quantify like how much impact to our company's earning or bottom line? Or can we think about those big data analyses is corporate-branded margin?.

I'll answer your questions.

I think that you want to follow up on of PAI Health strategy, right?.

Oh, no, no. Actually, the contribution to bottom line and also the earnings..

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

[Operator Instructions]. Your next question comes from Jason Sun with China Renaissance..

This is Jason. Just a very quick question on Xiaomi band. Can you elaborate more on Xiaomi band strategy into 2019 and 2020? Because it is speculated that Mi Band 4 will be announced around like March or April. I'm just wondering, Mi Band 4 is still in the pipeline of first half of 2019.

And how do you expect that Xiaomi band growth momentum in units and average selling price improvement in this year?.

Thank you, Jason. For Mi Band 4, it's going to be in this year. It's going to be in 2019, but I'm not sure it's going to be in March and April. But it's going to be in this year. Right now, Mi Band 3 is still hot sell. It still sells really, really well. The margin is not shrinking. The shipments are not shrinking.

So we will work with Xiaomi to pick the right time to launch Mi Band 4 in the year. Yes.

So does that answer your question, Jason?.

But how we can expect the Xiaomi band growth momentum in....

In terms of units, so as you can see, we've gone through 3 generations with Mi Band since we start to working with them, right? Each one of them are successful products, in particular Mi Band 3. Each generation, we learn something, we always do better.

And Mi Band 3, you can take a look at 2018's volume, it's much better as compared to previous version. So we expect Mi Band 4 will have the similar trend. So once we launch Mi Band 4, we expect that product will sell well..

Okay.

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

Of course. You mean the feature? Of course..

Yes..

Every generation product, we will add some more features or making some changes to better serve consumers' needs, yes. And we will also price competitively for sure..

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

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 Piacente Group, the company's investor relations consultant. Thank you.

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

Thank you..

Thank you..

Thank you..

Thank you..