Zepp Well being Company (NYSE:ZEPP) This autumn 2023 Earnings Convention Name March 18, 2024 7:00 PM ET
Firm Members
Grace Zhang – Director of IR
Wang Huang – Chairman of Board of Administrators and CEO
Leon Cheng Deng – CFO
Convention Name Members
Sid Rajeev – Elementary Useful resource Corp.
Operator
Hiya, women and gents. Thanks for standing by for Zepp Well being Company’s Fourth Quarter and Full 12 months 2023 Earnings Convention Name. Presently, all individuals are in listen-only-mode. At present’s convention name is being recorded.
I’ll now flip the decision over to your host, Ms. Grace Zhang, Director of Investor Relations for the corporate. Please go forward, Grace.
Grace Zhang
Hiya everybody, and welcome to Zepp Well being Company’s fourth quarter and full 12 months 2023 earnings convention name. The corporate’s monetary and working outcomes have been issued in a press launch by way of the newswire providers earlier right this moment and are posted on-line. You may as well view the earnings press launch and slides referred to on this name by visiting the IR part of the corporate’s web site at zepp.com.
Taking part in right this moment’s name are Mr. Wang Huang, our Chairman of the Board of Administrators and Chief Government Officer and Mr. Leon Cheng Deng, our Chief Monetary Officer. The corporate’s administration will start with ready remarks, and the decision will conclude with a Q&A session. Mr. Mike Yeung, our Chief Working Officer, will be part of us for the Q&A session.
Earlier than we proceed, please observe that right this moment’s dialogue will include forward-looking statements made beneath the secure harbor provisions of the US Non-public Securities Litigation Reform Act of 1995. Ahead-looking statements contain inherent dangers and uncertainties. As such, the corporate’s precise outcomes could also be materially completely different from the views expressed right this moment. Additional data concerning this and different dangers and uncertainties are included within the firm’s annual report on Kind 20-F for the fiscal 12 months ended December 31, 2022, and different filings as filed with the US Securities and Change Fee. The corporate doesn’t assume any obligation to replace any forward-looking statements, besides as required beneath relevant regulation.
Please do observe that GAAP earnings press launch and this convention name embody discussions of unaudited GAAP monetary data in addition to unaudited non-GAAP monetary data. Zepp’s press launch comprises a reconsolidation of the unaudited non-GAAP measures to the unaudited most instantly comparable GAAP measures.
I’ll now flip the decision over to our CEO, Mr. Wang. Please go forward.
Wang Huang
Hiya, everybody. Welcome and thanks for becoming a member of our name. In 2023, amidst international microeconomy uncertainties, our ROI [ph] oriented technique and ongoing enterprise mannequin transformation started to bear fruit. This technique shift has enabled us to strengthen our dedication to changing into a world supplier of innovative, good, wearable healthcare resolution.
Earlier than we dive into our earnings, I want to spend a while speaking about our technique as we mirror on 2023. Over the previous 2 years, we have now been on a transformative journey to grow to be much less depending on Xiaomi branded merchandise and as an alternative develop a self sufficient firm pushed by its self branded product gross sales. This shift is beginning to present promising outcomes, as evidenced by our two consecutive non-GAAP worthwhile quarters.
2024, constructing on the actions we have now taken previously, we’re excited to be making a strategic leap and harnessing the synergy between our product and gross sales channels. This leap ahead is grounded in three core pillars. First, we’re placing better emphasis on R&D and product pushed improvements the place we are going to totally embrace AI and supply extra modern merchandise that intently align with wants of our key markets.
Second, we’re persevering with to make sure worthwhile development, maximizing the worth we derive from every product confirmed. Guided by this strategy, we’re selecting profitability over scale in some areas, similar to India, which transitioned in 2023 from a loss making market to a worthwhile one. In sure different areas, we’re investing aggressively to achieve market share, aiming to generate long-term returns.
Final however not least, we are going to put money into branding and advertising and marketing communications so as to improve our model presence by welcoming our Amazfit athletes and growing sponsorships of massive sports activities occasions. I consider you will notice the Amazfit model extra seen internationally within the coming quarters. With these three pillars, I’m assured we will propel our frank view and generate the next return from our staff and shareholders in the long term.
Within the fourth quarter of 2023, our concentrate on strategic transformation in the direction of a extra self sufficient income stream has gained traction, aimed toward lowering dependency on a single buyer, decreasing income focus and shifting our emphasis more and more on self branded merchandise. These efforts to grow to be self relent have made important progress.
In consequence, regardless of a year-over-year decline in our income through the fourth quarter, our self branded merchandise maintained a sequential development momentum with a quarter-over-quarter development of 14.8% and contributed to 91% of our prime line, up from 77% within the earlier 12 months.
Notably, our gross margin reached a file excessive within the fourth quarter, a testomony to our efficient prioritization of profitability over scale. This important achievement was largely pushed by our increased margin self branded merchandise.
The launch of the Amazfit Energetic and Amazfit Energetic Edge collection in This autumn, in addition to the Amazfit Stability particular version, enhanced our product portfolio and considerably elevated our market presence. On the similar time, we are going to proceed to show our retail channels and improve our product combine to maintain the upper gross margin development, leveraging self branded income to bolster the corporate’s total efficiency and steering us in the direction of sustained profitability.
To additional solidify our market main place in good variables, we proceed diversifying our product lineup to satisfy evolving market demand. In October, we launched two new way of life good watches, the Amazfit Energetic and the Amazfit Energetic Edge in Europe and APAC. These good watches tailor-made for right this moment’s city – urbanized branding class with highly effective performance, incorporates the AI powered Zepp Coach and effortlessly combine into our customers hectic lives.
At Zepp, innovation is on the core of all the pieces we do. To mirror this imaginative and prescient, I want to spotlight a few of our success in good wearable expertise at CES 2024. The CES launch of the Amazfit Helio Ring, our first good ring, underlines our dedication to offering pioneering accessible healthcare options. The Amazfit Helio Ring is designed to supply unparalleled restoration assist to athletes. These developments in patronize our dedication to empowering people to take management of their well being and nicely being by our good variables.
Constructing on the momentum of our product growth, we stay devoted to leveraging Zepp OS. We lately launched Zepp OS 3.5 with Zepp Circulate at MWC Barcelona 2024 in February, a considerable replace powered by massive language mannequin AI, marking a big leap in wearable intelligence gadgets and bringing unprecedented ranges of interplay.
Zepp Circulate gives seamless pure language liquidation to offer customers with precisely what they need, from setting an alarm, deactivating the all the time on show characteristic to offering suggestions on final night time’s sleep high quality and analyzing the readiness rating from the day prior to this’s actions and providing suggestions for enchancment within the following days. All could be executed by interactivating with the watch, utilizing human pure language and with out the necessity to memorize any predefined instructions.
Moreover, we offer our customers with constant software program updates. For instance, the Amazfit Stability now options new coaching templates, new ski map capabilities and permits good NFC automobile cost in Europe, enhancing each the sporting expertise and normal day by day comfort.
Our blood strain measurement software program has been prolonged to a broader vary of merchandise together with the Amazfit Falcon, Energetic Cheetah Professional, Amazfit T-Rex Extremely, Amazfit T-Rex 2 and GTR 4, aiming to ship customized and superior wellness assist to a better variety of customers. Our merchandise seamless integration of {hardware} and software program not solely assists customers to enhancing their nicely being, but additionally elevates their way of life fashion.
I am joyful to share a evaluating instance that comes from one in every of our Japanese customers who discovered himself low [ph] in a snowstorm throughout a climbing journey in Mont Blanc. Thankfully, our T-Rex 2 guided him safely again. He shared his expertise on Yamap, Japan’s main outside app, and even despatched us a thanks e mail. Tales like these fill us with satisfaction as we see our merchandise contribute to the keenness and satisfaction of our customers.
2023 leaves behind a tapestry woven with each challenges and triumphs. As we’re reworking right into a self sufficient firm and shifting our technique from pursuing pure income development to profitability, we have now seen a decline in income regardless of that our Amazfit branded merchandise contributed to 74% of our whole income in comparison with 59% in 2022. Moreover, our efforts translated right into a commendable 36% discount in non-GAAP internet loss, marking a pivotal shift for us as we achieved profitability in each Q3 and This autumn, leveraging our gross margin and value administration methods.
One other operational milestone in This autumn 2023 was the efficiently accomplished mass manufacturing of our Amazfit Bip watch line at our Vietnam manufacturing unit. This achievement not solely underscores the execution of our multi-sourcing international provide chain technique, but additionally paves the way in which for additional international growth. Moreover, we have now witnessed a surge in product visibility, notably on social media platforms and thru key opinion chief’s endorsements, together with a rising market presence and heightened shopper engagement.
Trying to the longer term, we see a wholesome and sustainable development trajectory for Zepp. Our relentless drive for innovation and strategic growth of our product choices positions us to successfully regulate the evolving calls for of our international person neighborhood. Regardless of headwinds posed by macroeconomic challenges, our focus stays steadfast on bolstering profitability and looking for dynamic alternatives to propel our resilient development and safe better backside line stability. This strategy not solely strengthens our aggressive edge, but additionally ensures our long-term success within the ever-evolving good wearable trade.
I’ll now flip the decision over to Leon to go over the highlights of our fourth quarter monetary outcomes.
Leon Cheng Deng
Thanks, Wang. Greetings, everybody. And thanks once more for becoming a member of our earnings name right this moment. I want to begin by discussing some key metrics from our monetary outcomes for the fourth quarter of 2023.
As we have now talked about previously, the border shopper electronics trade has but to get better and stays subdued throughout our geographies. That is partially as a consequence of a sluggish demand for top worth shopper electronics merchandise similar to TV and cellphones, coupled with difficult financial circumstances in components of the EMEA and APAC areas.
Nevertheless, we noticed some modestly improved efficiency within the smartwatches for outside/ sports activities class, although the market stays extremely aggressive. Geared toward these challenges, we steadfastly adhered to our strategic plan.
This vacation season, we took an unconventional strategy by launching that prolonged pre-Christmas promotion in chosen merchandise. Historically, we centered on providing reductions centered round Black Friday and Cyber Monday. Nevertheless, this 12 months we determined to align with shopper expectations for ongoing reductions all through the vacation season.
This technique resonated nicely with our shoppers. Now we have met our personal gross sales expectations whereas delivering sturdy gross margins for the quarter. All of this can be a testomony to our sturdy model, our nice product lineup and the worth that our merchandise can supply. Nevertheless, provided that the profitable promotion occurred later within the fourth quarter, it’s seemingly that it may need superior some gross sales from Q1 of 2024. Since Q1 is often our slowest quarter of the 12 months, we’re adopting a extra cautious outlook for the income projections within the upcoming quarter.
I want to emphasize that we’re laser-focused on the areas inside our management. We’re holding our market share regular with out sacrificing gross margin. As we stand at first of a multiyear product cycle, we’re starting to reap the advantages of our analysis and improvement investments. This permits us to department into new classes and introduce modern merchandise such because the Helio Ring we unveiled at CES, with extra bulletins deliberate for the approaching quarters.
We’re additionally broadening our distribution channels to align with the place our prospects favor to buy. Moreover, we’re reinventing our model advertising and marketing and activation to faucet into sports activities and tackle new audiences. As Wang [ph] highlighted earlier, you will notice our model featured extra prominently at sports activities occasions and can welcome extra athletes to affix our Amazfit household. Such strategic positioning of the corporate goals to speed up our development whereas managing bills fastidiously to make sure margin expansions within the years to return.
Now, turning to This autumn gross sales, our total gross sales for the quarter was US$85 million/0.6 billion, aligned with the decrease finish of our steering as we navigated the technical challenges in our classes and a extremely promotional atmosphere. This discount in gross sales was influenced partially by our strategic resolution to prioritize profitability over scale, with overseas alternate fluctuations additionally having a unfavourable impression.
In markets like China and India, our enterprise mannequin mirrors this emphasis on profitability over scale. The shift has resulted in these markets turning internet revenue optimistic in 2023. Moreover, regardless of year-over-year income declines in our self branded merchandise, we achieved optimistic quarter-over- quarter income development, convincing us that our strategic strategy will empower our enterprise long-term sustainability and resilience.
Shifting on to gross margin, which could be influenced by numerous elements similar to product combine, product launch timing and product lifecycles, together with mannequin upgrades. As Wang indicated earlier, our This autumn 2023 gross margin reached a powerful 34.7%, surpassing Q3 and marking the very best gross margin within the firm’s historical past. This achievement could be attributed to a positive product combine, the next proportion of recent product launches similar to Amazfit Energetic and Amazfit Energetic Edge collection and decreased clearance actions. Importantly, we anticipate this optimistic development in gross margin to increase into Q1 and all through 2024.
Now, let’s flip our consideration to prices. As we have now mentioned, price administration stays as a important space of focus for our firm, each when it comes to their absolute quantity and as a share of gross sales. Therefore, we proceed to train disciplined management over our bills through the quarter.
Since Q3 2020, we have now persistently decreased over working prices, all whereas strategically investing in modern merchandise and applied sciences, in addition to geographical growth. In consequence, non-GAAP working bills for This autumn stood at US$27 million RMB191 million, comparable with Q3 2023 and in keeping with the steering which we offered.
Adjusted analysis and improvement bills within the fourth quarter of 2023 was $11 million, a lower of 30.8% year-over-year. This comprised 12.8% of income versus 10% for a similar interval in 2022. The lower was primarily attributed to our refined analysis and improvement methods, as we always entry assets effectively to maximise return on funding and productiveness.
Additionally, we built-in an AI-based R&D platform to enhance our effectivity. On the similar time, we’re dedicated to investing in new applied sciences and AI capabilities to keep up our aggressive edges towards our friends.
Adjusted promoting and advertising and marketing bills within the fourth quarter of 2023 was US$12 million, a 12 months over 12 months lower of 31%. These bills accounted for 14.3% of revenues in comparison with 11.6% in the identical interval in 2022. The discount in quantity was primarily as a consequence of our ongoing efforts to enhance profitability and refine our gross sales channel combine.
Along with the in depth enhancement of our retail channels, such efforts additionally included a strategic allocation of workers all through our gross sales area. Moreover, we launched Amazfit Wellness Wonderland at a pop up retailer in Berlin to highlight wellness through the vacation season. We showcased our model idea by a collaboration with Siciliano Up to date play on the launch of the Amazfit Stability particular version watch, drawing important media consideration.
This idea was additionally highlighted within the Zepp Well being’s 10 years of innovation marketing campaign. We’re dedicated to creating good investments in advertising and marketing and branding initiatives that may gas our longer development.
Adjusted G&A bills amounted to US$4.Zero million within the fourth quarter of 2023, a year-over-year decline of 37.8%. These bills represented 4.8% of revenues in contrast with 4.3% in 2022. This lower in absolute quantity was largely attributed to our efforts in optimizing personnel and implementing strict price management over administrative bills.
Trying forward, our dedication to prudent price administration will proceed within the coming quarters, with anticipated prices remaining at or under our present ranges. We’ll preserve our strategic investments in R&D actions and market bills to make sure our long-term competitiveness, hanging a steadiness between strictly monitoring discretionary spending and making strategic funding important for our long-term development.
In This autumn 2023, we reported an adjusted working revenue of US$2.Four million, RMB17 million, which features a non-cash USpercent3.5 million valuation allowance of deferred tax belongings versus the working lack of US$Eight million in the identical interval final 12 months on account of the growth in our self branded merchandise gross margin and our streamlined working bills.
Now, turning to the steadiness sheet, as of December 31, 2023, our money and money equivalents together with restricted money steadiness totaled roughly US$140 million/ RMB1 billion. This positions us with ample runway to capitalize on potential advertising and marketing alternatives and put money into our enterprise development.
Now we have additionally centered on managing our working capital effectively. We stored stock ranges regular at US$ 85 million, RMB600 million, the bottom degree within the firm’s historical past. We’ll proceed to handle stock ranges tightly as we climate the macroeconomy.
In This autumn coupled with working income and environment friendly working capital administration, we achieved optimistic working money circulate. This marks our sixth consecutive quarters of optimistic working money circulate and we anticipate to proceed this place within the coming quarters.
Since Q2 2023, we have now initiated the retirement of parts of our brief and long run debt portfolio, efficiently retiring US$4.Eight million, RMB34 million of debt in Q2 and USD16 million, RMB170 million in Q.Three In This autumn, we proceed to cut back our debt ranges by one other US$12 million, RMB 84 million. As our working money continued to strengthen, we supposed to do extra within the coming quarters.
Moreover, by the top of December 31, 2023, we had repurchased shares value $12.9 million. We stay dedicated to proceed our buyback program within the fourth quarter and within the quarters following that, underscoring our confidence within the firm’s future and our dedication to delivering long-term worth to our shareholders.
Trying forward as I discussed earlier than, Q1 is historically a smooth quarter for us. Due to this fact, our Q1 steering vary is projected to be US$42 million to US$49 million, RMB300 to RMB350 million, with self branded merchandise accounting for about 90% of the income.
In conclusion, the fourth quarter offered challenges that we overcame by prioritizing profitability over scale. This technique, combines our disciplined strategy to price administration, has been instrumental in attaining encouraging efficiency and delivering a second consecutive quarter of non-GAAP profitability for us. As we glance forward, we stay assured that these strategic initiatives will proceed to ship long-term worth to our traders and shareholders, in addition to our staff. Thanks all in your time. I might now prefer to open the decision for any questions. Operator, please go forward.
Query-and-Reply Session
Operator
Thanks. We’ll now start the question-and-answer session. [Operator Instructions] Our first query right this moment will come from Nicolette Jones [ph] of Brooks Investments. Please go forward.
Unidentified Analyst
Hello. I’ve two questions. Please might administration present extra particulars on the outlook for 2024 and the primary quarter? And for my second query, I would like to search out out extra in regards to the firm’s regional technique?
Wang Huang
Nicolette, I imply, in case you might repeat the second query yet one more time for me, please.
Unidentified Analyst
Oh, sure. Hello. I would prefer to – extra particulars on the regional technique.
Wang Huang
Okay. On the regional technique. Thanks. So let me take this query, I feel in your first query, on the outlook for first quarter, and likewise on 2024, I feel on the primary quarter, I simply talked about that usually it’s a comparatively smooth quarter for the buyer electronics trade. Due to this fact, our steering for the primary quarter was between the vary of $42 million to $49 million, or RMB equal to RMB300 to RMB350 million for the highest line. And usually our steering stops at giving the steering just for the income. However on this name, I feel I need to present some colour on full 12 months 2024, as you requested.
I feel wanting on the full 12 months 2024, if we begin from the large image, each IDC and Catalyst truly are projecting total market worth development for the smartwatch sector, which is the sector which we’re working in, of single digit, excessive single digit development for 12 months 2024. Due to this fact, I feel our income development goal for 2024 at this juncture, to one of the best of our information, is definitely going to be on par with or increased than the general market development for our self branded merchandise on the highest line, proper. So I feel that is the steering on the 2024 for the complete 12 months, for the gross sales.
And coming to gross margin. As you heard what we simply talked about, that our total gross margin share as a share of gross sales truly hovered within the second half of 2023 of someplace between 30% to 35%. And we anticipate this gross margin to increase within the upcoming quarters and all through 2024. Due to this fact, I feel it is cheap that you could possibly anticipate that our gross margin efficiency goes to be a minimum of on par with second half of 2023, and even increased than that, proper.
After which the final lacking puzzle of that is truly the working price, which is, I feel we have now talked about that the run price of our quarterly working price is round RMB200 million-ish. And we have now truly maintained this run price for greater than 4 quarters all through 2023. And we have now been demonstrating that we’re in a position to stick to this price degree and adjusted this degree if we’d like within the 12 months to return. So I feel that ought to offer you a sense on the place the 12 months 2024 would convey us on the underside line on this case.
I feel that ought to offer you assess [ph] on the primary quarter steering and the complete 12 months 2024. Then I am truly coming to your second query, which is our regional technique. I feel for lots of analysts, together with your self following us, you should know that majority of our gross sales income is definitely coming from the abroad market, with greater than half of the income coming from the EMEA area. After which for the rest, we have now half of that popping out of USA and the opposite half popping out of Asia Pacific area, proper.
So – and I feel taking a look at 2024, there are a couple of large occasions in entrance of us being the Olympics in Paris in Europe, and likewise the European cup, which is a soccer sport additionally in July – and June July time-frame in Europe. So Europe shall be a giant sports activities 12 months for us. And for certain, we may even financial institution on these large sports activities occasions so as to enhance our gross sales for the corporate. And to not point out that USA truly stands as one other brilliant spot for development for us as a result of we have now made fairly some development within the offline channels in US. For instance, we’re featured in Greatest Purchase, Goal and plenty of offline channels, and likewise together with Walmart in US at this second. And we’re truly increasing into extra shops and likewise extra offline channels within the USA as we communicate, which we consider in 2024, we should always see an affordable development popping out of USA for us as nicely.
I feel that’s, in a nutshell, the place we play within the regional construction, and to not point out that in Asia Pacific area, we have now markets whereby we additionally see an awesome potential, for instance, Thailand, Japan, Taiwan, et cetera, et cetera, the place we expect we will additionally make a giant leap on our income within the 12 months to return.
Unidentified Analyst
Thanks.
Operator
Our subsequent query right this moment will come from Sid Rajeev of Elementary Useful resource Corp. Please go forward.
Sid Rajeev
Hello. Congratulations in your sturdy outcomes. I’ve a few questions. In your steadiness sheet, you might have near $250 million in investments. Market cap is simply $75 million. So it looks like the market just isn’t recognizing the worth of investments you might have in your books. What’s your plan with these investments on a long run foundation? Any plans to divest a minimum of a portion of it within the close to time period?
Leon Cheng Deng
Sure, I feel you’re referring to the China A-Inventory listed firm, which we invested and we took a minority share in that firm. I feel that firm, in case you take a look at it, it’s truly positioned into the vertical integration of our large plan for the wearables, as a result of that firm, to be particular, truly is making the sensors and producing the chips for not solely us, but additionally different wearable producers for the smartwatch product.
After which sooner or later, I feel having this firm as A-listed firm in China has its profit as a result of it can’t solely provide items to us, but additionally it will possibly provide items to many different ecosystem firms which need to play within the wearable area.
And I feel this can be a little bit much like the Apple chip technique, however the one distinction is that Apple does not open it to the others. And we as a participant and a robust participant within the smartwatch area, we want to truly open up extra to the ecosystem inside China on the wearables area, proper. And I feel additionally having this listed firm in China would profit this firm and our firm on the precise semiconductor push which we will get from the Chinese language market. And it is a extremely aggressive market.
And to some extent, I feel in case you take a look at the market worth of the A-listed firm, multiply our shareholding, the worth is already greater than our market cap per se, proper? Which is sadly there’s one thing within the equation which doesn’t play or the worth needs to be totally unleashed so as to understand the complete worth of this firm.
Sid Rajeev
Received it. Thanks.
Leon Cheng Deng
However we have now no intent to promote that stake at this second of time.
Sid Rajeev
Okay. Your money place could be very sturdy. Somebody would anticipate you to be paying down your debt prior to what you have been doing. How a lot of debt would you pay down this 12 months?
Leon Cheng Deng
I feel total in 2023, as I discussed, truly we paid down greater than two, if I bear in mind clearly, I feel greater than RMB200 million in debt. And at this second in time, in case you take a look at our steadiness sheet, we have now hardly any brief time period debt and we solely have some long run debt. However majority of that long run debt is definitely for the acquisition of the stake within the China listed firm. After which we have now additionally pledged the shares so as to make that buy. So in essence, that does not play into the well being of the general money steadiness I’ve on Zepp Well being, proper.
And in case you take a look at 2024, we even have related intent because the chance I simply talked about., and I give an image on how 2024 can be wanting like. I feel along with the optimistic working money influx, we’re fascinated by retiring related quantity or greater than what we did in 2023, in 2024 on the debt portfolio. And that may make us, if we do this by the top of 2024, that may give us no debt or near no debt scenario by 12 months finish.
Sid Rajeev
Okay, good. Thanks a lot, Leon. Thanks, Sid.
Leon Cheng Deng
Thanks, Sid.
Operator
Thanks. As there aren’t any additional questions now, I would like to show the decision again over to the corporate’s IR Director, Grace Zhang, for closing remarks.
Grace Zhang
Thanks as soon as once more for becoming a member of us right this moment. If in case you have additional questions, please be at liberty to contact Zepp Well being investor relations division by the contact data offered on our IR web site. This concludes this convention name. Chances are you’ll now disconnect your line. Thanks.
Operator
The convention has now concluded. Thanks for attending. And chances are you’ll as soon as once more now disconnect.