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..

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, 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 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. In the third quarter, we achieved outstanding top-line and bottom-line growth driven by persistent development and execution of our strategic initiatives, which focused on product diversification, brand elevation, and international expansion.

Our third quarter revenue was 1.86 billion RMB, 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 consumers.

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 smart wearable products in the second quarter, we recently launched the Amazfit GTS and Amazfit Stratos 3 – the latter of which is an update model of the professional sports watch product line, targeting sports enthusiast with comprehensive sports monitoring functionalities within.

We also introduced the ultra-modern Amazfit X, a new concept product with a prominent curved touchscreen 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 IFA 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 oversea product launches are being developed and scheduled in the future.

The successful sales achievement in the just passed double 11 ecommerce festival also demonstrated our strong domestic market strategy and intentions. This year, Amazfit products sales reached last year’s double 11 whole day sales level in just one hour, and Mi band 4 sales reached 350 thousand 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 smart watch market segment with retail price under 1,000 rmb, 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 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. Erdong Chen from the Peking University First Hospital, introduced the hospital’s research on the cardiac health monitoring by Huami smart wearables.

The research indicated 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 cardiac health both effectively and remotely, through the use of smart wearable devices.

In the meantime, we are continuing to improve our users’ experiences especially in specific healthcare related scenarios. We recently launched Fall-Detection in some Amazfit products, which when activated, will automatically alert the user by vibrating, and will also send an alert message to the pre-configured emergency contact.

We also introduced brand new healthcare VIP services, which allows users of our smart wearable products to have tools such as ECG reading and analysis, abnormal cardiac notification alerts, quarterly health reports and numerous other tools as part of various premium service packages.

We expect services and content to complement our core revenue stream from smart wearable product sales and become an increasingly important component of 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 and 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 U.S. in early 2020.

With efforts in our self-developed AI chip, Huangshan-1, our smart wearable products 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..

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-month 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 revenues reaching 13.5%, declining 4.3 and 1.4 percentage points respectively from the second quarter 2019 and the third quarter last year, despite our increasing investment in R&D and brand equity during the quarter.

These 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'll highlight the key financial measures for the third 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 strosng 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 1.86 billion from 1.07 billion for the third quarter of 2018. Gross profit increased significantly by 63.8% to 470 million from 287 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 its second quarter product launch. Moving to expenses.

Total operating expenses increased by 56.5% to 251 million from 160 million for the third quarter of 2018, reflecting our strategy of investing in R&D, branding and marketing to enhance long-term returns.

Research and development expenses increased 107.7% to 125 million from 60 million for the third quarter last year, primarily due to an increase in personnel-related expenses and a rise in costs associated with the testing of new pipeline products.

General and administrative expenses in the third quarter remained essentially flat at 70 million compared with 68 million for the third quarter of 2018. Our selling and marketing expenses increased by 75.1% to 57 million from 32 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 228 million, compared with 129 million for the third quarter of 2018. The GAAP Net income attributable to the Company increased to 203 million, compared with 114 million for the third quarter of 2018.

Net income attributable to ordinary shareholders of the Company also increased to 203 million. Basic and diluted net income per ADS attributable to ordinary shareholders of Huami Corporation was 3.31 RMB and 3.15 RMB, 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 210 million from 134 million for Q3 2018. Finally, adjusted basic and diluted net income per ADS attributable to ordinary shareholders of Huami Corporation was 3.41 and 3.25 RMB, respectively.

Relating to cash, as of September 30, 2019, the Company had cash and cash equivalents of 1.72 billion compared with 1.44 billion at the end of 2018.

And now to our outlook…Looking ahead to the fourth quarter of 2019, management currently expects net revenues to be between 1.93 billion and 1.95 billion, which would represent an increase of approximately 57.6% to 59.2% from 1.2 billion for the fourth quarter of 2018. This concludes our prepared remarks. We will now open the call to questions.

Operator, please go ahead….

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..

Hi, good evening management. Thank you for taking my question. I think big question is on the Xiaomi smartwatch competition. Previously we believed that Xiaomi 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..

Yes. This is Mike, Mike Yeung. And so basically there are differences in terms of the feature set. The Xiaomi smartwatch, for example, they have the calling function….

4G..

4G. And basically that is more tailored to scenarios where you might not have the phone with you. And currently that scenario is quite new to many users. For us, we mostly target the smart watches. We have a lot of sports feature as well as a lot of health care feature, and also in terms of fashion, in terms of elegance.

Those are the features we focus on, sports feature, health care feature, as well as looks, design and fashion. So, whereas, again the Xiaomi smartwatch is more focused on communication. So basically it's a slightly different, our feature sets targeting different people and different scenarios.

Does that answer your question?.

Yeah. I think Amazfit, obviously, have products sold through Xiaomi channels.

Is there any risk or impact to that?.

To directly answer your 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..

Okay. Thank you very much..

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

Hi, Huang Wang and David and Mike, congrats for the good results in the third quarter. I have two questions. So number one is a housekeeping question. Number two is a new product question. So I would like to start from the question number one. So you mentioned that this quarter we shipped 13.7 million total products.

Can you give us some breakdown of the Xiaomi Band product and also your own brand product, or the other ODM product as well? And also can you also comment about the R&D expense? You mentioned that the R&D expense actually increased 107%. This is quite amazing. And can you also elaborate what kinds of products you are working on? Thank you..

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 one million Amazfit products. And that's the total shipments in only one quarter. That's historical. And the rest of the shipments are Xiaomi's products.

And for your 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 distribution channel building costs.

So as a result of this, our net margin, if you look at our net margin year-to-year, which is actually slightly increased..

Okay. Yeah. So, thank you. Thanks David for the answer. Actually don't get us wrong. Actually we are not trying to beat the company, because you're adding R&D. Actually we are happy to see you invest for the future. I just want to get some color about products roadmap because you mentioned actually more forward looking.

And if you look at your -- such as U.S. leading brands, they actually invest in a wearable product a lot such as TWS headsets.

So, I'm also wondering do you have a plan to expand your product line to all of the smart bands and also smartwatches?.

I can answer first and then if Huang Wang or Mike Yeung can add on. We do have a pipeline of new products for next year 2020. And that include TWS. That's in our radar. But majority of the products are still wearables and that does include the TWS.

Does that answer your question?.

Yes, yes. Thank you..

Thank you..

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

Hi, management. This is Meng Cao from Industrial Securities. Thank you for taking my question. So my question is that, what's your strategy to promote Huami's CES brand? And could you give us some color on the marketing expense in 2020? Thank you..

Yes. So for our Amazfit brand strategy, we will definitely continue to invest and grow our brand, especially internationally. We are seeing 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 to promote our products. And IFA this year was also another example. So we'll continue to do more major international product launches to promote our brand..

Okay. Thank you..

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

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

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

Okay. Thank you..

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

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

Actually our mission actually is to explore the opportunities in the healthcare field. So this is 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 some of our other famous competitors.

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 U.S. FDA. So we should expect future products in those areas..

Okay. Thank you, David..

Thank you..

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

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

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..

Thank you..

Thanks, Robert.

The next question comes from Edward Chen of Hitomi International [ph]. Please go ahead..

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

Yes. For healthcare services actually there are several different kind of revenue streams, potential revenue streams. One is, as we mentioned before is, working with insurance companies and either do a licensing of our algorithm and data sharing with the users' approval and on our 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 our health care features and data..

Okay. Thank you..

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

Hi management. Thank you for taking my questions. I have one question. Actually the market is speculating that Xiaomi will actually launch a bunch of products in December including the bands very low-end bands 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..

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 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 feature products, so we would consider that it's just one more player on the market.

And as of this moment, that our total shipments still remains the top five or six globally. And 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..

And Jason, just to add more color on that, for example, is this just past Singles Day, we're still totalling out our sales figures. But basically, we have seen a very strong Singles Day sale for our Amazfit brand products even though the Xiaomi smart watch was also for sale.

So we've seen again, very strong sales for this past Double 11 probably as a matter of fact, the strongest ever for our company, for our brand. So basically right now, again, we don't really see that much impact with Xiaomi smart watch..

Yes. Actually we compare this without Xiaomi. In the Single Day sale, we're now the number 1 in the under the RMB1,000 price segment. We beat Huawei. And yes I think in the future we will be better above the RMB1,000 price range..

Okay.

Do you think the low-priced band, for example, which is priced at RMB69 will cannibalize some of the user base from the one that is over RMB100 segmentation?.

Well the strongest growth in future is based on independent market research is coming from the smart watches. So that's 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 product performance.

You can see the last two generations Mi-Band 3 and Mi-Band 4 and how we grow that. So 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 that the band sounds cheap, but it does involve a lot of 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..

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

As there are no further questions now I'd 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's Investor Relations department through the contact information provided on our website or the Pearson Group, the company's Investor Relations consultant. This concludes this conference call. You may now disconnect your lines. Thank you..