Zepp Health Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 20, 2023

There are 4 speakers on the call.

Operator

Hello, ladies and gentlemen. Thank you for standing by for ZEP Health Corporation's Third Quarter 2023 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.

Operator

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

Speaker 1

Hello, everyone, and welcome to ZEP Health The company's financial and operating results were issued in a press release were the news to our services earlier today and are posted online. You can also view the earnings press release and slides referred to on this call by visiting the IR section of the company's website at ir.com. Participating in today's call are Mr. Wang The company's management will begin with prepared remarks and the call will conclude with a Q and A session. Mr.

Speaker 1

Mike Young, our Chief Operating Officer, will join us for the Q and 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.

Speaker 1

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 are included in the company's annual report on Form 20 F for the fiscal year ended December 31, 2022, 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.

Speaker 1

Please also note that ZEP's earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non GAAP financial information. ZEP's press release contains a reconciliation of the unaudited non GAAP measures to the unaudited most directly comparable GAAP measures. I'll now turn the call over to our CEO, Mr. Wang Huang Song. Please go ahead.

Speaker 2

Hello, everyone. Welcome to ZAPEL's 3rd quarter 2023 Earnings conference call. In the Q3, we achieved a business turnaround, returning to profitability after enduring 6 consecutive quarters of last year. Despite a year over year decline in revenue, Our high margin self branded product contribution to our top line now accounted for approximately 80% compared to the average of around 40% for the previous 5 years. This accomplishment reaffirms the effectiveness of our operational strategy and the early success of our business model transformation.

Speaker 2

Before delving into the details, I would like to provide recap of our business model transformation, which has taken nearly 2 years to bring us to Our current position, this transformation has involved departing from a business model that heavily rely on a single customer for the majority of our revenues is that We aim to establish ourselves as a self reliant global smart wearable and Healthcare Solutions Provider. Throughout this transformative phase, We have recognized the importance of enhancing the quality of our revenue streams. This transition signifies as it liberates shift from Pursuing sheer growth to a steadfast commitment to achieve profitability, our strategic focus It's centered on improving our gross margin and ultimately guiding us towards Sustained profitability and future growth. Notably, our Q3 performance indicates an early success on this journey. While Xiaomi branded product Sales faced persistent industry wide headwinds.

Speaker 2

Our self branded products sustained Sequential growth momentum is 12.3 percent quarter over quarter revenue growth. This was driven by our expanded AI Power product portfolio And average branded influence worldwide, resulting in a rise in product adoption Our self branded product revenue increased by 28.4% 79% respectively year over year. It's also worth mentioning that We turned net profit positive for the Chinese and Indian markets during the 3rd quarter As we remain focused on high quality growth with effective region specific Sales expansion and cost reduction strategies. Amid our business model transformation, we This strategic shift from result in a significant surge in our gross margin, Reaching a historic high of 33.9% in Q3, These achievements is fueled by R and D breakthroughs, such as our Industry design, industry leading GPS check technology and continuous update zOS, Supporting our premium product lines and elevating our ASP, thereby Enhancing our product competitiveness, the expansion in gross margin is also A result of persistent efforts to improve overall operational efficiency. Looking ahead, We remain dedicated to refining our retail channels and product mix to sustain this Profitable growth for our future, while employing a profitability Oriented approach to our business operations this quarter.

Speaker 2

We also remain focused on Leveraging our R and D capabilities to enrich and iterate our product and service Offering to attract a broader community of users. In September, We launched the Amazfit Balance, previously known as the Amazfit GT Series, a powerful smartwatch that enables users to track the ultimate balance between life, walk And wellness is seamlessly integrated, advanced features for health, fitness and lifestyle. Specifically, Amazfit Balance features integration with ZapCoach, a chat AI Power Fitness Coaching service, ZEP overall for AI Power Group and wireless services and ZEP pay for convenient NFC Contilas Payments, notably, is Amazfit's inaugural smartwatch to house a certified medical device blood pressure monitoring app in China. Moving forward, we are expanding the back pressure measurement software from the balanced product line This integration augments the overall value of our smartwatches In comparison to other Chinese competitors, we only utilize biometric Measurements on specific models for blood pressure. We believe our approach is more convenient And applicable across our entire watch series, in October, We also unveiled the Amazfit Active and Amazfit Active Edge, both tailored For modern day city consumer, featuring an elegant appearance and powerful functionality with our AI powered ZAP coach.

Speaker 2

Amazfit Active is an ideal companion For people trying to live a healthy and active lifestyle. Meanwhile, The top, stylish, umazfit active edge infuses Our LifeSci series with new vitality, allowing users to express their identity and personality through its unique design. We still have many amazing new products underway We are currently which we consider the core value of Amazfit watches. Successful sections has taken place In Societe, Germany and Madrid, Spain with more city campaigns lined up. We invite users to join these sections, share feedback on our product and collectively We will have committed that vacate for the users of Amazfit smartwatches.

Speaker 2

We would be delighted to have you participate in these sessions as well. At that, innovative minds are the driving force needed to advance the integration of Technology, especially on the ZEP OS. To that end, we recently sponsored CalHEX, the world's largest collegiate HEXO, for the 2nd consecutive year. This event's wealth of tech talent presents an opportunity for us to discover bright new minds and ideas, Thereby, imparting us to fulfill our mission, we will continue to involve ZabOS and increasingly rolling out our new updates to users to grow the user base. Alongside our ongoing product catalog expansion, we consistently enhance our product Experienced by rolling our software updates, digital adoption and the evolution of ZOS, We are offering more regular updates to our users than before.

Speaker 2

For example, We released 3 major updates for Amazfit Gx2 in the 3rd quarter. 1st, our official system upgrade to ZLS 2.1 1, brought users of fresh interface and new interactive experiences. Then, We also delivered a targeted sports mode upgrade and upgraded algorithm, Enabling users to check their official status in real time. The stem is true for our Notably, German Management Champion, Hedrick Pfeiffer has teamed up with us for his for management season to showcase the performance and features of Amazfit Cheetah Pro, further Elevating our brand influence and enlarging our user base. Furthermore, We continued to leverage AI to drive our success, applying AI technology to both our products and services as well as our daily operation.

Speaker 2

Advenced by our latest product launches, We are integrating our AI powered features such as ZappCoach and Zapplera into more of our Products and services to help users train and manage as they are held effectively. Additionally, We continue to adopt GPD technology to facilitate our software development and Looking ahead, we remain committed to providing our flourishing global user community with our As the macro environment remains challenging, we are striving to maintain and increase our profitability, We are also actively exploring opportunities to drive our top line growth to enhance our product value and attract A broader range of users. As we help more people manage their lives and well-being With our intelligent healthcare solution tools, we remain confident of achieving healthy, sustainable growth. Thank you again for joining us today. I will now turn the call over to Leon to go over the highlights of our 3rd quarter

Speaker 3

Thank you, Wang. Greetings, everyone, and thank you for joining our earnings call today. I would like to start by discussing some of the key metrics from our financial results for the Q3 of 2023. As noted before, we believe that we have been in a post pandemic downswing in the cycle for our categories that may not yet to be at its end. Our performance varies on a regional basis.

Speaker 3

Revenue in the Americas continued to be strong or partially offset by the softer performance in EMEA and APAC, reflecting the particularly difficult macroeconomic environment affecting both regions, which impacted our retailers' Selling growth. Throughout the year, we saw the reduction in channel inventories levels, which put us in a healthy channel inventory position across our channels and geographies as we enter the holiday season. As I lived through multiple times in my 20 years intact, we fully expect that consumer behavior will normalize in time and our focus on innovation, execution and exciting product roadmap will result in us returning to revenue growth in time. In Q3 2023, we recorded revenue of RMB0.6 billion, in line with our guidance range, down by 50% year over year. This decline was mainly driven by lower Xiaomi branded product sales.

Speaker 3

During the quarter, our revenue generated from Xiaomi branded products decreased by 77%, where our self branded products experienced a 26% decrease, partially due to the timing of the new product introductions As we will launch Amazfit Active and Amazfit Active Edge products in Q4 this year and also in part due to our strategic approach to prune both channel and product mix. However, Despite the revenue decline, as Wang mentioned, We achieved a return to profitability and realized a Q3 2023 net income of RMB3 1,000,000 compared with a net loss of RMB17 1,000,000 for the Q3 last year and a net loss of RMB17 1,000,000 for the Q2 of 2023. Moving on to our gross margin, which can be influenced by various factors such as product mix, product launch timing and product life cycles, including model upgrades. Our gross margin for the 3rd quarter stands at a record high of 33.9%, almost doubled compared with the same period last year. This achievement is largely attributed to the strategic transformation Driving us to focus more on Makefit branded products, especially the higher ASP series and the reduced clearance activities.

Speaker 3

Although the gross margin on Xiaomi branded products experienced a decline, The gross margin on our self branded products, which now contributes to more than 90% of our total gross profit, More than compensated for this weakness resulting in improvements in the 3rd quarter gross margin compared with the 2nd quarter. We're confident that with this positive momentum alongside new product introductions planned for the upcoming month As well as a moderated level of the clearance activity, we should be able to sustain the further expansion of our company's gross margin. Turning now to costs. As we have discussed, cost has been a key focal point for our company, both in terms of their absolute amount and as a percentage of sales. Hence, we continue to control expenses In a disciplined manner during the quarter, since Q3 2020, we have been pleased to see a downtrend In total operating expenses, while still making strategic investments in new products, Technologies and footprint expansion to fuel our long term growth.

Speaker 3

In Q3, our non GAAP operating expenses stood at RMB180 1,000,000, the lowest level since Q3 2019 and better than the guidance we previously provided. Our R and D expenses in the Q3 of 2023 for RMB75 1,000,000 decreased by 41% year over year. This comprised 12.4 percent of revenues versus 10.6% for the same period in 2022. The decrease is largely attributed to our refined research and development approaches as we We're committed to investing in new technologies and AI to maintain our competitive edge against our peers. Our selling and marketing expenses for the Q3 of 2023 were RMB70.6 million, a 43% decrease year over year, owing primarily to our retail channel mix improvement.

Speaker 3

At the same time, we continue to invest strategically in our brand and execute ROI driven marketing strategies. Our G and A expenses for the Q3 of 2023 were RMB48 1,000,000, down by 8.9% year over year compared with RMB52 1,000,000 in Q3 2022, Simultaneously, we'll continue to invest in research and R and D activities and marketing initiatives Our operating results pivoted to a profit of RMB11 1,000,000 compared to In Q2 2023, as a result of the expansion of our self branded products gross margin and streamlined operating expenses. As we entered the traditionally high holiday season, We expect to realize operating profit in Q4. Now turning to the balance sheet. Cash and cash equivalents and restricted cash as of September 30, 2023, totaled approximately RMB1 1,000,000,000, provide us with sufficient runway to seize potential marketing opportunities and invest in our business growth.

Speaker 3

We have also focused on managing our working capital efficiently. We kept inventory levels steady at RMB $787,000,000 consistent with Q2 2023 and remains at a multi year low level. We'll continue to manage inventory levels tightly as we weather the macro economy. In Q3, Coupled with operating profits and efficient working capital management, we achieved positive operating cash flow. This is our 5th consecutive quarter of positive operating cash flow, and we expect to continue with This Q2 2023, We started to retire part of our shortlong term debt portfolio and retired $35,000,000 of debt.

Speaker 3

In Q3, we continued to reduce our debt levels by another RMB117 1,000,000. As our operating cash flow continue to strengthen, we intend to do more in the coming quarters. Furthermore, by the end of September 30, we had repurchased shares worth US12.3 million dollars We remain committed to continuing our buyback program in the Q4, underscoring our confidence in the company's future and our commitment to delivering long term value to our shareholders. Looking into the future, Our revenue guidance for Q4 is projected to be in the range of RMB600 to RMB850 1,000,000. We anticipate that the trend of quarter over quarter growth in self branded product sales will continue, Contributing to an improving overall performance, our focus on profitability as well as strengthening our self branded products performance remains unwavering.

Speaker 3

In conclusion, the Q3 presented us with both challenges and opportunities. While external factors played a significant role, Our strategic approach to prioritizing profitability over scale, our focus on self branded products Thank you all for your attention. And I will now open the call for any questions you may have. Operator, please go ahead.

Operator

Thank you. We will now begin the question and answer session. Please immediately repeat your question in English. Our first question comes from Nicolette Jones of Brooks Investment. Please go ahead.

Speaker 1

Hello. Thank you for taking my questions. I actually have two questions. Firstly, Is this margin level sustainable? And secondly, in terms of profitability, can you sustain profitability in the 4th quarter?

Speaker 3

Yes. Thank you, Nicolas. I mean, let me take these two questions. I think as we mentioned before, the gross margin portfolio of our company It's actually improved quite a bit throughout the year. You saw that our gross margin actually jumped In Q2 versus Q1 and also versus last year, we were high of 22%.

Speaker 3

And thereafter, in Q3, our gross margin further improved to 34% roughly, right. And this is actually due to a mix of Product mix improvement and retail channel mix improvement in our gross margin management. And as we head into Q4, which is traditionally the high season for our product categories. And then also, as I mentioned, We launched quite some new products starting from second half of this year and these New products also carry a much higher gross margin than what the old products used to carry before. So therefore, I think given the high season in Q4, given the product mix improvement we're doing and give us the relative Moderate clearance activities, which we're going to do, but obviously we're going to do some in Black Friday and the Christmas season to catch the doubt.

Speaker 3

We still expect that Q4 gross margin We'll continue at the Q3 level and maybe a little bit even further expand further in Q4. So I think that should give you a feeling for the gross margin portfolio for Q4, how that looks like. With regard to The profitability in Q4, we normally don't guide on that. But I think as you hear, I mentioned that Given the high season of Q4 and the improved gross margin performance of the company And we also intended to streamline our cost at its current level or even lower. We believe that these all gives us A good chance in delivering our Q4 operating income, which would allow us to continue the performance improvement trend throughout the year.

Speaker 2

Thank

Operator

As there are no further questions now, I'd like to turn the call back over to the company's IR Director, Grace Zhang for closing remarks.

Speaker 1

Thank you once again for joining us today. If you have further questions, Please feel free to contact JEP's Investor Relations department through the contact information provided on our IR website. This concludes this conference call. You may now disconnect your line. Thank you.

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Zepp Health Q3 2023
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