Zepp Health Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 20, 2024

There are 6 speakers on the call.

Operator

Hello, ladies and gentlemen. Thank you for standing by for ZEP Health Corporation First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. Today's conference call is being recorded. I will now turn the call over to your host, Ms.

Operator

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

Speaker 1

Hello, everyone, and welcome to ZEP Health Corporation's Q1 2024 Earnings Conference Call. The company's financial and operating results were issued in a press release via the newswire 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.zap.com. Participating in today's call are Mr. Wang Wang Shuang, our Chairman of the Board of Directors and Chief Executive Officer and Mr.

Speaker 1

Liang Zheng, our Chief Financial Officer. The company's management will begin with the prepared remarks, and the call will conclude with a Q and A session. Mr. 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.

Speaker 1

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 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, 2023, and other filings as filed with the U.

Speaker 1

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 ZEP's earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non GAAP financial information. GAAP's press release contains a reconciliation of the unaudited non GAAP measures to the unaudited most directly comparable GAAP measures.

Speaker 1

I will now turn the call over to our CEO, Mr. Wang Wang Huang. Please go ahead.

Speaker 2

Hello, everyone. Welcome and thank you for joining our call. Before diving into this quarter's performance, I'd like to recap our transformation journey and set the stage for the year ahead. As we are shifting focus to self branded products and diversifying our offerings today, Our self branded product sales contributed over 85% of total revenue. Our gross margin has nearly doubled over the past 2 years, with recent quarter showing 37% compared to 16% Q1 2023.

Speaker 2

Notably, the MAU of our ZAP application is over 10,000,000, making an early success in our transformation journey. Within our self branded smartwatch category, we offer a diverse range of series tailored to various market needs. These include the lifestyle series, featuring product lines such as Balance and Active. The Adventure series encompassing product lines like T Rex, the performance series encompassing products such as Cheetah and Falcon. And lastly, the essential series housing popular product lines like Beep and Band.

Speaker 2

Each of these series is strategically positioned with clear competitors and price range in mind. This strategic alignment enables us to compete effectively as a key player in the smart wearables market, offering our customers a comprehensive suite of solutions tailored to their diverse needs. As we are heading into 2024 2025 to continue on our transformation journey towards a self reliant company driven mainly by its self branded product sales. We are adapting our product strategy at the same time. Today, I would like to draw your attention to a few of key elements being, to begin with, our flagship balance model within the lifestyle series has solidified a strong market share in the price range of 200 dollars to $2.49 smartwatches in Europe and U.

Speaker 2

S. Markets, marking a $50 increase from the original GT Series 199 dollars price point. Although our price has increased, we noticed that many customers have switched from brands such as Samsung and Apple for the unique features of balance. We are also delighted to observe that the balance model has not only gained popularity among consumers, but has also received high praise from key opinion leaders on social media platforms, demonstrated our cutting edge product capabilities. Our customers are particularly impressed by the long battery life and the sleek attractive industry design of our watches.

Speaker 2

We were the pioneer in the smartwatch industry to incorporate large language model AI technology for handling interactions and responding to user messages. This is positioning us well ahead of our competitors. Differentiation and artificial intelligence has led consumers to recognize our product value at a high price band, which has built strong product momentum in the market. This gives us an opportunity to realize an exponential growth in our revenue in the upcoming peak seasons through our marketing activities. In the Q1, we show a considerable escalation in our brand visibility and outreach.

Speaker 2

Our dynamic digital marketing campaigns, including out of home advertisements in Magic Apple and sponsoring the recent Rotterdam Marathon, have significantly expanded our audience reach, bolstering our market presence and driving our future sales. Next, our active rocker line within the lifestyle series has shown significant growth potential as well. It is an upgrade and continuation of our best selling $99 Mini product line, enhanced by ZEP Ora and ZEP finish tail services, along with the Zap Watch faces and apps ecosystem. This innovation has delivered significant value to our users, enabling us to position the product lines to achieve a $129 selling price and generate better gross margins. More recently, on May 2, we unveiled the new Amazfit Big 5 Unity within the Xcentual series.

Speaker 2

Through the stainless steel appearance and bigger screen, we have brought many user favorite software functions from our mid to high end active and balanced product lines to Unity, and brought richer apps and watch faces through Zappos 3.0 to Unity, strengthening our sub $100 market competitiveness and further expand our market share in markets such as India, Spain and South America. Our proprietary operating system, ZebOS, has been upgraded to version 3.5, integrating the large language model based Zebflow AI system. This brings large language model AI interaction and messaging capabilities to our entire product line, a unique functionality not available in other brands' smartwatches. This has established our brand's image as an innovator in the consumer electronics market. Together, we serve continuously over the air upgrade of the software used in our smartwatches.

Speaker 2

It greatly improves the competitiveness of our smartwatches. As I have mentioned in previous quarters, the rapid application and innovation of large language model AI technology provides our smartwatches products with opportunities to surpass competitors, showcasing our company's execution and creativity and preparing for new opportunities in the smart wearable market. During April, the fishing and running features on the Amazfit Falcon, T Rex Raptor and Cheetah Pro received significant enhancements, enabling users to enjoy the prime season for fishing and running. At the same time, we updated our operating system to AI powered WLS 3.5 across different hardware platforms. All these updates are part of our commitment to providing personalized and advanced health support, empowering users to manage their well-being effectively.

Speaker 2

We view churn apply this AI capability to our sports and outdoor smartwatches within the Performance and Adventure series, bringing innovative experience to athletes and outdoor enthusiasts, and significantly boosting the competitiveness and differentiation of our sports and outdoor product lines. Before this summer's sports season arrives, we will launch advertisements in major global markets to amplify our market presence. We will also collaborate with major global channels like Big Custom, bringing our innovative full range products to users during this summer sports craze to increase our sales for second half of the year. We have many exciting new products in the pipeline for the upcoming months, so stay tuned. Now turning to our exciting new innovative product line, the HALIO ring.

Speaker 2

Our smart rings presents a significant expansion of our user experience, allowing users who prefer not to wear watches while sleeping to obtain 24 hour comprehensive health data monitoring. This enhances recovery for athletes and provides readiness analysis for general users, ensuring a holistic user experience with both smartwatches and smart rings. This marks the beginning of a new era in the market, with us being the 1st smartwatch brand to offer such a solution, placing us ahead of competitors. Last but not the least, after several years of organizational transformation and streamlining our operations, Our company has becoming more global with about 90% of revenue generated from outside China. Our co executives include myself, now oversee operations from offices based in Europe and North America, enabling swift decision making in response to market dynamics and to be more attuned to consumer and market demands.

Speaker 2

The diversity within our team and globalization of our R and D and marketing efforts have empowered us to develop, sell and market our products with greater speed and precision. We believe this consumer centered approach will set us aside in the longer run, Through the above mentioned building blocks, we realized enhanced returns on our product sales, translating into elevated gross margins for the company, while we keep our overall operating costs in check. This financial fortification facilitates increased sales and profitability for our self branded products, and this will bring sustained profitability through self branded products in the future. However, the ongoing transaction of the business is indeed longer and sometimes harder than our initial expectation, and patience is needed. However, we remain optimistic about our strategic direction on both our sales and marketing strategy and upcoming products.

Speaker 2

Our emphasis on cutting edge products and operational excellence combined with expanding our global reach and offering innovative and diverse products and services to our vibrant user community, prepares us for longer term sustainable growth. We are confident this strategy will accept ZEP as a leading healthy growth, self reliant global smart, wearable and healthcare solution provider in time. I will now turn the call over to Leon to go over the highlights of our Q4 financial results.

Speaker 3

Thank you, Weiwei. Greetings, everyone. Thank you for joining our earnings call. I would like to start by discussing some of the key metrics from the Q1 before diving further into the financial results. In the past quarters, we have been making healthy investments in innovation and our investments remain focused on 2 things, with the first one on attracting new customers and the second one on getting our existing customers to upgradeadding more products to better themselves.

Speaker 3

There are three things I would like to highlight. First is to echo what Wei An just mentioned that we launched the HylioRing in our U. S. Markets and by mid June, we will expand into other markets and with a variation of the Ring, which is tailored to the mass market. This launch give us a foothold into a new multibillion dollar category, which grows at a CAGR of 30% towards 2028, expanding the number of categories we play in and further diversifying ourselves.

Speaker 3

This has been a multiyear investment and we expect it to pay off in space in Q3 and beyond. The second is increasing the brand awareness through more above the line marketing activities in Europe and U. S. A. To drive sales through.

Speaker 3

Most recently, we have the out of the home advertising in Madrid International Airport in Spain, and there will be more TV commercials in Europe's main sports channels coming up as we head into the Eurocap and the Summer Olympics. More consumers will get to know us and we have seen some early data points on the conversion rates improving. Last but not the least, this quarter, we experimented some stimulating additional product sales in our installed base by delivering limited time couponsgift cards to some of our most loyal long tenured customers. We have always trying to explore how we can better use our unique data and insights to deliver more personalized experiences for our customers. The outcome of the promotion surpassed our expectations, affirming the value of our continuous investments in advancing data systems to effectively leverage and maximize our data resources.

Speaker 3

The strategy of offering both new and existing products to our current customer base presents a lucrative revenue potential. This instills confidence in the success of our upcoming product launch in new categories and strengthens our belief in our capacity to expand and elevate this business in the future. I want to emphasize that we remain steadfast in concentrating on what is within our control. We're embarking on a multi year product cycle where we will reap the rewards of our research and development efforts to attract new customers and increase sales to our current customer base. We are strategically positioning the company to enhance our growth trajectory while managing expenses effectively to achieve margin expansion in the upcoming years.

Speaker 3

Now turning to our Q1 2024 sales performance, which broadly aligned with our guidance. Several factors influenced the decline in sales. Firstly, the seasonal patterns typically in our consumer driven sector during Q1. Secondly, the ongoing decrease in Xiaomi product sales. And thirdly, the absence of any new product launches during Q1 2024, unlike the Q1 of 2023, when for instance, we introduced the new GTR Mini.

Speaker 3

Moving on to gross margin, which can be influenced by various factors such as product mix, product launch timing and product life cycles, including model upgrades. As Weiwei has highlighted, the company's gross margin continued its impressive performance in the Q1. At a robust 37%, our first quarter gross margin marks a new historical high, representing a sequential increase from the previous quarters achieved in 3rd Q4 of 2023. This growth in gross margin is predominantly attributable to the higher profitability of our self branded products, as well as a more favorable product mix, including a higher proportion of new products and lower levels of clearance. Looking ahead, together with new product launches planned for the following quarters of 2024, we anticipate this positive trajectory to persist into Q2 and throughout 2024.

Speaker 3

Now let's turn our attention to costs. As we have discussed, cost management remains as a critical area of forecast for our company, both in terms of their absolute amount and as a percentage of sales. Hence, we continue to exercise disciplined control over our expenses during the quarter. Since Q3 2020, we have consistently reduced our overall operating costs, while strategically investing in innovative products and technologies, as well as geographical expansion. As a result, adjusted operating expenses for Q1 2024 were US28 million dollars decreased 11.4 percent compared with Q1 2023.

Speaker 3

Adjusted R and D expenses in the Q1 of 2024 were US12.4 million dollars a decrease of 15.4% year over year. This comprised 31.2% of the revenue. The decrease was primarily attributed to our refined R and D strategies as we consistently assess resources efficiently to maximize return on investment and productivity. Also, we integrated AI based R and D platform to improve our efficiency. At the same time, we're committed to investing in new technologies and suitable AI functions to maintain our competitive edge against our competitors.

Speaker 3

Our adjusted selling and marketing expenses for Q1 2024 were US10.5 million dollars down 10.9% year over year and accounted for 26.3 percent of total revenue. The reduction in amount was mainly due to our ongoing efforts to improve profitability and refine our sales channel mix. Furthermore, we initiated out of home campaign in Madrid and sponsored the Rotterdam Marathon, actions that will contribute significantly to bolstering our brand presence, particularly among our target consumers. We're committed to making smart investments in marketing and branding activities that will fuel our longer growth. Our adjusted G and A expenses in Q1 2024 were US5.3 million dollars lowered by 1.5% year over year, owing to disciplined cost control initiatives.

Speaker 3

We have maintained a prudent approach with the overall adjusted operating costs at or below $28,000,000 consistent with Q3 and Q4 2023 levels and in line with our guidance. Looking ahead, we remain committed to cost management, anticipating that costs will stay at their current levels or lower in the coming quarters. We continue to invest in R and D activities and marketing expenses to bolster our long term competitiveness, while closely scrutinizing discretionary spending. We have lost a loss in our operating results in the Q1, primarily due to seasonal driven cost coverage issues. This performance represents an improvement over 2023 Q1.

Speaker 3

Adjusted loss narrowed by 20 0.4% versus Q1 2023. Now turning to the balance sheet, at March 31, 2024, our overall cash balance stands at US1 US132.3 million dollars providing us ample runway to invest and capitalize on potential market opportunities. On the working capital management front, we remain steadfast in our commitment to practicing disciplined working capital management. Despite the P and L loss, we have achieved positive operating cash flow for the 7th consecutive quarter. In Q1 2023, we have initiated the retirement of portions of our shortlong term debt portfolio.

Speaker 3

Since then and including Q1 2024, we have successfully retired US46.7 million dollars of debt. As our operating cash flow continues to strengthen, we intend to do more in the coming quarters. In keeping with our commitment to delivering long term value to our shareholders, we'll continue our buyback program throughout 2024. In conclusion, while we faced some challenges in Q1, our focus on optimizing our revenue structure, reducing our reliance on a single customer, expanding our self branded products and diversifying our product offering positions, as well to become a self reliant global smart wearable and healthcare solution provider, driving our long term sustainable growth. In Q2 2024, we anticipate revenue to range between US40 dollars to US55 $1,000,000 with an uptick quarter over quarter expected in sales on our self branded products.

Speaker 3

We'll continue the stock repurchase program to demonstrate the confidence of our strategy. Thank you once again for your time. I would now like to open the call for any questions. Operator, please go ahead.

Operator

Thank you. We will now begin the question and answer session. Your first question comes from Sid Rajeev with Sentimental Resource Corp. Please go ahead.

Speaker 4

Hi, gentlemen. Pleased to see the growth in gross profit and improvement in EPS. I have a few questions. You are expecting growth in full year revenue from self branded units with results back end loaded. But Leon just mentioned that you might see an uptick in revenue in Q2.

Speaker 4

But just to give I was wondering if you could give more color. Would we see cell panel units softer in Q2, Q3 and a spike in Q4? Or you would start seeing improvement earlier on?

Speaker 3

Hi, Sid. Let me take this question. So I think you would normally our business follows a seasonal pattern whereby Q1 is always the lowest in the year for us. And then from Q2 onwards, the business will start to recover and Q3 and Q4 are traditionally the high seasons for us. So you will see uptick of the revenue in Q2.

Speaker 3

That's why we also guided a higher range than Q1. And then the I think the you will see a material increase of the revenue starting from Q3 and Q4 because number 1, this also had into the traditional high seasons for Europe and USA and also it couples with our new product launch window, which is also around the June, July all the way towards the September months.

Speaker 4

Thank you. Since you don't provide segmental revenue, I was wondering if you could give or if you're able to share the top 2 revenue generating product lines and what percent of revenue do they contribute?

Speaker 3

I think majority, as Wayne just mentioned, so we have a few different series which covers different type of product ranges where we play, right? I think if you are thinking about the biggest revenue contributor, it's definitely the essential product ranges, which are the BIPs and the BAND, which are also from a quantity perspective, the best selling product series for us, right, that should account for around 40% of the total revenue base for ourselves. And then the next one to it would be the balance at the active line, which are in essence our Samsung and Apple competitors. These are the also the biggest portion of our revenue where it's coming from. And I think Wayne just mentioned, we were able to increase the ASP of these products by roughly $30 to $50 on average over the past 1 year 1.5 years period.

Speaker 3

And this part of the product sales would account for roughly another 30% to 40% of our total revenue. And the remainder 20% to 30% actually goes to our so called Performance and Adventure series, which are the running watches, for example, the Cheetah Pro and also our outdoor ranges, the famous T Rex ones. So these are also our very high ASP product ranges, which we use to compete with, for example, the Apple Watch Ultra and the Garmin watches. So I think that's overall should give you some feeling on our product mix.

Speaker 4

Yes, sure. How about geographical distribution? I think last year you had 25% of revenue from North America, Europe accounted for 50%. Is it similar or has it skewed more to North America?

Speaker 3

I think at this moment, if you look at Q1, that still is the case. Europe stands for 50%, Asia Pacific and North America stands for another 50% in general. But we do see growth potential in Asia Pacific and U. S. Coming up this year.

Speaker 3

Although I think the impact of that you will see more clearly towards the second half of the year. That's why we say also our result is a little bit back end loaded. We do see probably we are going to fortify Europe and then the growth will be more coming from Asia Pacific and North America.

Speaker 4

Okay. Just final question, any updates on the non compliance letter from the NYSE? I know you're doing your buybacks. Of course, you have the reverse split that you can do anytime and resolve this issue. Anything else that you have in the pipeline, any updates?

Speaker 3

No, I think the only thing which I can say is that the non compliance letter is just a technical thing. And as you just mentioned, there's definitely technical ways which can resolve that. But the management where I'm representing is actually very confident in maintaining our U. S. Main board listing status.

Speaker 3

So I think this is a thing which we also mentioned in our press release that we will try to tackle that in time.

Speaker 4

Thank you, Leon. I'm looking forward to your Q2.

Speaker 3

Thank you, Zit.

Operator

Thank you. Your next question comes from Nicolette Jones with Brookfield Investments. Please go ahead.

Speaker 5

Hi, management. Thank you for taking my questions. I have a number of questions. So I'd like to start off. Firstly, regarding the high gross margin levels, can management provide insights into whether these margins are sustainable in the upcoming quarters?

Speaker 3

Yes, Nicola. So, yes, let me take this question because it's about the gross margin, right? So what you can see is that starting from Q3 2023, our gross margin for the overall company has been consistently above the line of 30%. So if I remember clearly, Q3 2023, our gross margin was 33% and then it turned up to 35% in Q4 2023 and then now we stand at around 37% in Q1 2024. So we have shown 3 quarters of a gross margin improvement trend because of our transformation journey, which is more focusing on the self branded products.

Speaker 3

And of course, there is a product mix issue, there is also a channel mix issue, which allow us to actually delivering higher than what we achieved in the previous years on the gross margin percentage SSLs. So if you look at Q1 2024, our gross margin is at 37%, that is more than doubly the gross margin performance which we achieved in Q1 2023 last year, right? And we are confident that through the new product launches, which we have lined up in the upcoming months, We also launched a few new products in May, right. And also in June, there's going to be also new products as we mentioned in the presentation earlier, all the way towards Q3, Q4, together with the new product launches. And you know that new product launches actually cover or offers a higher gross margin both from absolute amount perspective, also from a percentage perspective than the older ranges.

Speaker 3

So that's why we say it actually gives us the confidence that together with the new product launches and our consistent effort in refining our product mix and channel mix, we're confident that our gross margin percentage is going to expand in the quarters to come.

Speaker 5

Thank you. So moving on, given that the start of 2024 was slower than expected, could management share more color on your perspective for the full year outlook?

Speaker 3

Yes. Normally, we don't guide for our full year performance and also our revenue number. But I think what we are looking at is that, yes, it's a slow start for Q1 and we hope that we are going to and you already see in the guidance that we actually guide a little bit higher for Q2. And then as I just explained to Sid, in Q3, Q4, normally these are our high seasons. So last year, full year, if I remember, clearly our total revenue actually stands at around $350,000,000 for the full year.

Speaker 3

So I think this year we're also looking at a range somewhere between $200,000,000 to $300,000,000 for our top line. So we and we are looking at doing our best to actually turning because we have told you and others that we the ultimate goal which we would like to achieve is to actually sustain the company's profitability through the self branded product sales, right. So actually we hope by the end of this year we're going to deliver on that target.

Speaker 5

Great. Thank you. Again referring to a question that Sid asked, I'd like to understand more about the recent noncompliance notice on the New York Stock Exchange due to the trading price of your ADS is falling below the required threshold. Could you elaborate on the steps that ZEP is planning to take during the cure period to regain compliance? And yes, are you considering a reserve share split or other

Speaker 3

options? Yes. I think I have already explained that quite clearly TUSET. We believe that this is a technical thing and there is a technical solution to it. And the company and the management is actually working very hard on resolving that.

Speaker 3

Per per se. And our commitment to continuing with the U. S. Main board listing status is there. So I think we are very confident that during the cure period, we're going to resolve this matter.

Speaker 5

That's great. Thank you. And then now moving on to new developments with the HALIO ring, Could you elaborate on its updates regarding product features and sales volumes?

Speaker 3

Yes. So I think HelioRing obviously is a new form factor of the wearable devices, which we launched, we actually announced this product in CES beginning of this year. And by May we start shipping the product. So we're still at the earlier stage of ramping up the sales as we go. And I also mentioned before that we're going to launch this product in Europe and Asia Pacific regions in the coming months as well.

Speaker 3

So what you will see is that we should be able to start shipping this ring in volume more towards the end of June and then potentially this one could slip into July, which is going to be Q3 sales. We do have high hopes of this product because the HelioRing because of the form factor, because a lot of people don't like to sleep with watch, right. They don't like the feeling of something which is on their wrist, but wearing a ring would give you or would resolve that issue and still allow you to actually monitor your vitals 20 fourseven. So during the day you can wear the watch and the ring and we also offer infusion functionalities that both statas would combine and merge and become more accurate. And then at night, if you are not wearing your watch, you can just do with only the ring.

Speaker 3

So we'll be the only smartwatch brand who is going to offer that solution couples the ring and the watch together. So basically you're actually getting into a one stop shop to monitoring your vitals to take care of your health and actually to get a readiness analysis through our app. So actually more and more we would like to actually provide this type of new innovative products to the consumers, so they can actually better control and prevent any issues of their health in the future.

Speaker 5

Yes, interesting. Thank you. I have just one last question for management. Could you clarify if the reported MAUs of 10,000,000 include users from your Xiaomi collaboration?

Speaker 3

No. So this number, the 10,000,000 which has mentioned by Weiwei and in before was only talking about the MAUs for our Amazfit branded, which is our self branded products. And including Xiaomi that would add another $20,000,000 to $25,000,000 to it. So basically our total MAU at this moment for the company is actually around 30,000,000 to 35,000,000 users MAU.

Speaker 2

MAU.

Operator

Thank you. 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 that Investor Relations the investor relations department through the contact information provided on our IR website. This concludes this conference call. You may now disconnect your lines. Thank you.

Powered by Quartr
Earnings Conference Call
Zepp Health Q1 2024
00:00 / 00:00