Zepp Health - Earnings Call - Q1 2025
May 19, 2025
Transcript
Operator (participant)
Hello, ladies and gentlemen. Thank you for standing by for Zepp Health Corporation's first quarter 2025 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. Grace Zhang, Director of Investor Relations for the company. Please go ahead, Grace.
Grace Zhang (Director of Investor Relations)
Hello, everyone, and welcome to Zepp Health Corporation's first quarter 2025 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 the slides referred to on this call by visiting the IR section of the company's website at [email protected]. Participating in today's call are Mr. Wayne Wang Huang, our Chairman of the Board of Directors and the Chief Executive Officer, and Mr. Leon Cheng Deng, 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 provision of the U.S. Private Securities Litigation Reform Act of 1995.
Forward-looking statements involving current 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 31st, 2024, 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 the earnings release and this conference call include discussions of all audited GAAP financial information, as well as all audited non-GAAP financial information. Zepp's press release contains a reconciliation of the audited non-GAAP measures to the audited most directly comparable GAAP measures. I'll now turn the call over to our CEO, Mr. Wayne Wang Huang. Please go ahead.
Wayne Wang Huang (Chairman of the Board of Directors and CEO)
Hello, everyone. Welcome, and thank you for joining our first quarter 2025 earnings call. We are delighted to announce that this quarter we see a 10% year-over-year growth of amazing revenue, the first time after two years of our transformation period. Before delving into this quarter's results, I would like to emphasize the challenging macro terrain within the consumer electronics sector. Trade frictions and fluctuating tariff policies have not only introduced uncertainty but also prompted us to undertake strategic enhancements to our operations. We proactively diversified our supply chain several years ago, foreseeing geopolitical complexities. Although the recent U.S. tariff exemptions on specific product categories have alleviated some of the immediate pressure, our dual-sourcing model from China and Vietnam remains pivotal in ensuring operational agility. We have expanded our supply chain footprint in Vietnam and are actively exploring opportunities within the NAFTA region.
This initiative aims to mitigate change risks and optimize cost management. Our pricing strategy is tailored to each market and product line. In some instances, we have the flexibility to adjust prices, while in more competitive segments, price increases are challenging. Thus, we approach pricing on a case-by-case basis. Additionally, by offering a broader portfolio of products ranging from high-end to budget-friendly options, we are better equipped to offset potential tariff impacts. In summary, the U.S. represents a significant growth market for our business, accounting for about 15% of our revenue. Currently, tariffs have a minimal impact on our operations, but we remain diligent, closely monitoring the macroeconomic environment and trends, turning to our performance for the first quarter of 2025. Despite the fourth quarter traditionally being the most seasoned for consumer electronics, our overall sales aligned with our guidance.
Notably, Amazfit product sales increased by more than 10% compared to the same quarter last year, underscoring the success of our strategic shift to a more self-reliant, brand-centered approach and sustainable growth. However, due to the seasonal nature of the first quarter, fixed operating expenses were not fully absorbed, either increased sales, putting some pressure on our operating profit. However, the expectation is to be improved in the coming quarter. Now, let's highlight some of our product achievements, which continue to anchor our brand momentum. During the first quarter, we successfully launched the Amazfit Active 2 at CES 2025, which received positive reviews from major media outlets in both Europe and the United States. The new brilliant Active 2 (Round) Premium line expanded our strategic of combining cutting-edge technology with stylish design and leather band and glass screen, catering to the growing demand in the lifestyle smartwatch market.
It features 24/7 health and fitness monitoring, utilizing the latest advanced generation biosensor for enhanced precision in health tracking, includes improved sleep algorithms and 160 sports modes, including support for new sports like skiing. With AI-driven coaching and multi-satellite navigation, it offers seamless smart interactions, elevating the overall user experience. Furthermore, we broadened our market reach with the launch of the amazing Bip 6 in March. The Bip 6 integrates advanced health tracking, biosensing technology, AI coaching, and multi-satellite navigation for offline apps, offering consumers exceptional value at an accessible price point. This product further strengthens our presence in the entry-level segment, aligning with our strategy to cater to a wide range of consumer needs and increase market penetration.
Over the past four months, the successful launches of these smartwatches have secured top positions in the global Amazon's smartwatch ranking, boosting a rating of 4.3, and with the extremely positive scores of 4.6 in the U.S. They have consistently secured spots within the top 50 and frequently ranked among the top 10 on Amazon's smartwatch ranking in the markets of major countries. They also earned rave reviews within the Reddit community. The initial sales momentum of Active 2 and Bip 6 are much stronger than the previous versions. They have gained wide recognition from mainstream offline channels, helped the Amazfit brand keep gaining market share in most competitive smartwatch markets, such as Spain and Italy.
To name a few, in Italy, according to GFK, our market share of NoSIM smartwatch units sales stood at 23.3% in March 2025, ranked as number two in the core wearable smartwatch market, right after 42% of Apple. In Italy and Spain, five products of us are among the GFK Top 25 head lists in March 2025. Just this past weekend, a global brand gained major international visibility when amazing athlete Jasmine Paolini won the Rome Open, becoming the first Italian woman in 40 years to claim the title. Her breakthrough moment generated strong global media attention and spotlighted our amazing Active 2 watch, which evolved during the trophies ceremony and media interviews, along with branded apparel prominently featuring the amazing logo throughout the tournament. We will leverage this momentum to further accelerate growth in our already strong Italian market and expand our influence across the broader sports category.
As we continue to grow our global footprint, moments like these help build long-term brand equity and emotional connection with our expanding user base. Robust sales of these budget-friendly and profound impact on our brand influence and market share not only paves the robust groundwork for the upcoming launch of our mid to high-end products in the following quarter, but also bolsters the confidence of our channel partners. It has significantly broadened our user base and expanded the sales funnel, creating a more promising market landscape for our brand. To summarize, our new product sales in Q1 demonstrated exceptional momentum, reaching the highest level in our product history. The performance not only surpasses previous records but also outpaces our historic best-selling models, including the Bip 5 and the first-generation Active series.
With the production and delivery challenges on the verge of being fully resolved, we expect higher sales in the upcoming quarter from our new product launches. Turning to our technology innovations, both Active 2 and Amazfit Bip 6 are equipped with the latest Zepp OS 4.5, powered by OpenAI. Key features include advanced full voice control, enabling users to adjust settings and check progress hands-free. The messaging experience has also been improved, allowing users to reply using a full keyboard or speech-to-text input, with the system optimizing responses through suggestions or translations powered by large language models. Additionally, we have introduced the camera-powered food log feature in the Zepp Health app, which allows users to take photos of their meals directly in the app. The system automatically uploads nutrition data for seamless meal tracking. This feature is currently available in Europe, the U.S., and Japan.
We remain committed to leveraging open-source technologies such as Llama. Recently, we enhanced the responsiveness of Zepp Health voice commands on our smartwatches, achieving a 17-fold improvement in speed. Additionally, by adopting a hybrid AI solution combining OpenAI and Google Gemini, we reduced the cost of foot recognition in our app's foot log to just 10% of the original. This enables us to expand the service across a wider region in Europe and double the daily usage allowance for users. This agile and strategic technological integration has accelerated the scalability of our health and fitness services, driving both innovation and cost efficiency. As part of our strategic effort to gain greater brand recognition and expand our influence, we have been actively involved in the HYROX community. This year, we participated in HYROX events in Chicago, Taipei, and Shanghai, engaging with a global audience of fitness enthusiasts.
Our partnership with HYROX, where Amazfit serves as the official wearable and timekeeping partner, continues to strengthen our position in the competitive fitness sector. This collaboration allows us to support athletes with advanced wearable technology, which enhances their training and performance. Looking ahead, we plan to expand our presence at HYROX events, further integrating our products into the fitness community through a comprehensive series of brand campaigns and community building initiatives centered around HYROX. The activation rate of our T-Rex 3 device has sustained robust growth both year over year and month over month. Even eight months post-launch, the product has successfully captured the acclaim of sports enthusiasts across an expanding number of regions. This remarkable achievement not only underscores the market appeal of our offering but also paves the way for a strong and promising launch of our upcoming lineup of flagship sports products.
We continue to advance our sports and lifestyle strategy by building brand awareness through event sponsorships and partnerships with top athletes. We are thrilled to welcome five-time Olympic medalist Gabby Thomas and Italian tennis star Jasmine Paolini as our global athlete partners. These partnerships enhance our brand visibility on the world stage while showcasing how amazing smart wearables empower top-tier athletes with data-driven insights to optimize their training, recovery, and overall performance. To repay, through new product introductions, innovations in our software, and continuous investment on our brand awareness and recognition, we have set clear strategic objectives to drive our next phase of growth. These include strengthening our presence in entry-level markets, deepening collaboration and investment with our offline channel partners, expanding brand exposure and community engagement, and ultimately guiding users towards upgrading our mid and high-end product offerings from entry-level Bip Active series towards the Balance and T-Rex series.
Looking ahead to the second quarter of 2025, we are optimistic about achieving our first year-over-year growth of overall sales since 2021, which will be a significant turning point for our company. The anticipated growth is driven by product innovation, strengthened partnerships, and an expanding global presence. At the same time, we remain vigilant of the macroeconomic challenges and uncertainties. Our strategy to navigate these complexities includes further optimizing our supply chain, strengthening broader brand positioning, and enhanced product differentiation. These efforts will ensure Zepp Health remains resilient and competitive in the evolving smart wearable market. I believe 2025 will be a fruitful year for Zepp. I will now turn the call over to Leon to go over the highlights of our first quarter financial results.
Leon Cheng Deng (CFO)
Thank you, Wayne. Greetings, everyone. Thank you again for joining our first quarter 2025 earnings call.
Let me start by highlighting some key metrics from our financial results for the first quarter of 2025. I would like to share some of our supply chain strategy first. We operate in a dynamic global environment influenced by macroeconomic factors and changing tariffs. However, we're well-positioned due to past actions. Echo to what Wang just mentioned, we shifted most U.S.-bound productions from China to Vietnam in past years, limiting our exposure to China tariffs. Our remaining China tariffs exposure is limited to a few accessories like packing boxes and chargers, which are a very small part of our business. These moves give us production flexibility and optionality as new tariff structures take shape.
Currently, we're seizing the opportunity of the temporary Vietnam tariff halt by ramping up production, scenario planning with manufacturers for origin flexibility, collaborating with partners and retailers to shield consumers, and accessing pricing and promotion strategies to keep products more appealing while optimizing gross profit. We believe these strategic arrangements will enhance our operational resilience. With a strong balance sheet, a nimble operational posture, and an experienced team that is executing with discipline, we're setting ourselves up for fruitful performance in 2025. Now, let's turn to the financials. In Q1, our sales come in line with the guidance range we provided. Notably, we achieved 10.2% year-over-year growth in Amazfit branded products, which reflects the strong market reception of our newly launched models, Active 2 and Bip 6. This marks the first year-over-year growth on Amazfit branded products we have achieved since the start of our transformation journey.
We consider it a significant milestone as we are confident this positive momentum will persist through the second quarter and expand well beyond as we have more new products lined up for the remainder of the year. Turning to gross margin, it was influenced by various factors, including product mix, product launch timing, and product lifecycle such as model upgrades. In Q1 2025, we achieved a gross margin of 37.3%, which is higher than both Q4 2024 and Q1 2024, largely driven by new product launches. During the quarter, gross margin was negatively impacted by the additional 20% U.S. tariff on China-made products, which reduced our gross margin by approximately 1% point. Excluding the tariff impact, gross margin would have reached 38.4%. Looking ahead, we expect the gross margin expansion to continue into the rest of 2025. Now, let's turn our attention to costs.
We remain steadfast in our commitment to cost management, continuing with the program that we began in 2020 Q3 on reducing overall operating costs. Operating expenses for the first quarter totaled $31.5 million compared to $29.3 million in Q4 2024 and then $27.8 million in Q1 2024. The $2.2 million quarter-on-quarter increase mainly reflects higher R&D expenses as we continue to invest in new product development, along with increased selling and marketing expenses to support our Q1 launches. Compared to Q1 2024 last year, operating expenses increased by $4 million year-over-year. This increase includes approximately $3 million in higher selling expenses driven by $1.7 million spent on digital marketing campaigns and new product launch events, and $1.4 million invested in strengthening our sales channels. Additionally, we faced around $1.0 million in foreign exchange headwinds during the quarter.
We will maintain our cost-conscious approach in the upcoming quarters to keep the overall operating cost at the level between $25-$27 million per quarter. Concurrently, we remain committed to investing in R&D and marketing activities to ensure our long-term competitiveness. R&D expenses in the first quarter of 2025 were $11.5 million, a decrease by 3.4% year-over-year. The decrease was a result of our refined research and development approaches. As Wayne previously mentioned, we're committed to investing in new technologies and AI-like open-source technologies to secure our long-term technology leadership. Selling and marketing expenses in the first quarter of 2025 were $13.8 million, an increase by 31% year-over-year. This increase was primarily driven by the $1.7 million spent on digital marketing campaigns and new product launch events, and then $1.4 million invested in strengthening our sales channels.
We also engaged with rising sports stars like Gabby Thomas and Jasmine Paolini to improve our brand awareness. At the same time, we consistently pushed our retail profitability and channel mix improvement. We're committed to investing effectively and efficiently in marketing and branding expenses to ensure our sustainable growth. G&A expenses were $6.2 million in the first quarter of 2025, compared with $5.4 million in the first quarter of 2024. The increase was largely attributed to foreign exchange headwinds. Adjusted operating loss for the first quarter of 2025 was $17.2 million compared to adjusted operating loss of $13.1 million for the same period of 2024. The first quarter is typically the season with the lowest sales, which resulted in the inability to fully cover the operating costs.
As of March 31, our cash balance stood at $104 million compared to $110 million in Q4 2024. Despite a net loss in the quarter, our cash balance only declined by roughly $6 million thanks to our enhanced working capital management and improved cash conversion cycle, offsetting the cash burn. We also made solid progress in our capital structure. During the quarter, we successfully refinanced a significant portion of our short-term debt into long-term instruments with a more favorable interest rate and a two-year duration. This move significantly reduced our near-term liquidity pressure and improved our overall balance sheet flexibility. During Q1 2023, we have initiated the retirement of our short/long-term debt portfolio. As of Q1 2025, the company has retired a total of $67.8 million of debt cumulatively, with another $11.5 million repaid in Q1 2025.
As the capital structure would be further optimized as our operating cash flow strengthened, we're pleased to reconfirm our commitment to the share repurchase program for 2025. We believe our current valuation continues to represent an attractive opportunity and reflects our confidence in the company's long-term fundamentals. Turning to our outlook for the second quarter, we expect revenue to be in the range of $50 million-$55 million, showing significant year-over-year revenue growth of 23%-35%, along with the efforts we have made over the past years to cut operating expenses, diversify our supply chain, and reduce costs. We anticipate a boost in profitability during the second quarter. Additionally, we remain focused on driving operational efficiencies and expanding our supply chain beyond China to reduce costs and mitigate external risks.
At current tariff rates, we estimate the tariff impact in 2025 full year would be approximately $2-3 million. However, this impact is expected to be fully offset by global operating efficiency gains. To provide some color on expectations for the balance of 2025, we have many exciting products lined up for the remainder of the year, which will continue to drive our revenue growth for the rest of the year, witnessed by our strong sales performance guided for Q2 2025. We expect our full year 2025 operating expenses to be at or below its level versus 2024. We expect to offset tariff cost headwinds with operating efficiency gains, continued supply chain diversifications outside China. The initiatives we undertook in 2024 to reduce operating expenses and improve gross margins are bearing fruit.
We're focused on launching a significant number of new products in 2025 and 2026 to restore growth and profitability to our business. Thank you all for your time today. I will now open the call for questions. Operator, please go ahead.
Operator (participant)
Thank you. We will now begin the question and answer session. To ask a question, please press star, then one. To withdraw your question, please press star, then two. If you are using a speakerphone, please pick up your handset before pressing the keys. The first question today comes from Sid Rajeev from Fundamental Research Corp. Please go ahead.
Sid Rajeev (VP Head of Research)
Hi, thank you. I was wondering if we could get more color on the impact of tariffs as U.S. exports are produced in Vietnam. Is it fair to say your products are currently subject to a 10% tariff?
Also, given the 90-day pause, what happens if the tariff is increased to 46% in July? How are you planning that impact?
Leon Cheng Deng (CFO)
Yes, Sid, very good question. As I just mentioned, we are expecting the full year tariff impact would be around $2-3 million in total. However, this impact is to be offset fully by our global operating efficiency gains. If you look at it, there are two folds. Number one is even at the environment whereby China-U.S. tariff is sky high. I think at the height of it, it was more than 145%. Our category as a smartwatch is exempt from such a tariff impact. Certain electronics products are exempt from the tariff impact between China and U.S., even at the height of the tariff situation between China and U.S.
Our second scenario is to use Vietnam as a backup of the dual sourcing to provide goods for our U.S. business. If you take a step back, we're actually supplying U.S. with Vietnam and the rest of the world from China. Number one, we are expecting after the 90-day pause, the situation between U.S. and Vietnam will be coming back to a normal level, maybe at 10%. Number two, even if it doesn't come back, I think given the recent choose between China and U.S. and our product category is exempt from the tariff impact, I think our tariff situation for the U.S. business for the rest of the year would be in a controllable manner.
However, we're also going to use the upcoming 90 days or so to front-load some of the inventories into our U.S. warehouse to prepare for the Q4 sales so that we can actually lock down this number, which I just mentioned to you, on tariff. Overall, I don't think it's going to be a big impact for us if you look at what is going on for today. Yes, the uncertainty remains, and we're also looking at over mid to long-term to do a triple sourcing, for example, in the NAFTA region, which has been mentioned by Wayne. That's a little bit over a mid to long-term.
Sid Rajeev (VP Head of Research)
Right. The $2-$3 million, your estimate, that is based on a 10% tariff, not the 46%?
Leon Cheng Deng (CFO)
That is based on roughly a 10% tariff, yes.
Sid Rajeev (VP Head of Research)
Okay. Thank you. What are you seeing in the market these days? Are you and your competitors planning or raising prices, passing costs to consumers? What are your thoughts on that?
Leon Cheng Deng (CFO)
Now, we're not going to rule out all the possibilities, but I think we're not going to be the first mover in this if we look at, and we'll definitely monitor the situation on, for example, Apple or Garmin and all the competitors of us. If they make a move on pricing, for example, we probably would consider that. Again, since the impact would be relatively limited for us, I don't think we're going to make big adjustments on our pricing strategies. As I said, we're going to evaluate our pricing strategies on a region-by-region and country-by-country basis, and we're going to make the adjustment where needed.
Sid Rajeev (VP Head of Research)
Okay.
In terms of OpEx, your goal to get to $25-$27 million a quarter, when can you realistically achieve this, and what areas would you cut to get to that number?
Leon Cheng Deng (CFO)
I think realistically, you will see a big reduction in Q2 already. I think in Q2, we're quite confident that we're heading back to a normalized manner. Why you see such a high amount or relatively high amount in Q1 is because of some of the product launch events which took place in Q1 in a big manner, which is not going to happen in our recurring manner, if you want. Also, we're impacted by $1 million of currency FX headwind, which we are also hedging. That hedge contract in Q2 is actually turning into a profit.
I think overall, I think you will see a first good sign of the cost going down in Q2 already.
Sid Rajeev (VP Head of Research)
Okay. Just one final question, Leon, if I may. Last year, you had one product release. And then this year, from now to end of the year, how many new products or upgrades are you planning?
Leon Cheng Deng (CFO)
I could not tell you an exact number, but I think I have alluded to it in the previous call as well. This year, we are aiming to refresh all our major product lines in the different quarters ahead of us. If you look at Q1, we have already launched Active and Balance. If you look at May, we are actually preparing for some new product launches in China. We have many exciting products, and that many is definitely more than two in the upcoming quarters to come.
Sid Rajeev (VP Head of Research)
Thank you so much, Leon.
Leon Cheng Deng (CFO)
Thank you, Sid.
Operator (participant)
As a reminder, if you would like to ask a question, please press star, then one to join the question queue. The next question comes from Nicolette Jones from Brooks Investments. Please go ahead.
Nicolette Jones (Company Representative)
Thanks for taking my questions. Sid has actually asked most of them, but I just wanted to sort of get in more detail into the full year 2025 performance. If you could just give us some sort of further sort of color on how you see the full year panning out.
Leon Cheng Deng (CFO)
Yeah. Yes, normally we do not guide for a full year number, but this time I can definitely say a few things about it.
I think we have explained to, and as Sid just asked, we have many exciting new products lined up for the remainder of the year, which from a sales perspective will continue to drive our revenue growth for the remainder of the year. As you can see, our Q2 guidance for the sales growth is already up by 23%-35%, if not more than that. That is from a sales perspective. I think as we're heading into the second half of this year, and traditionally for consumer electronics business, also the second half of the year is the high seasons as we're heading into Black Friday, Christmas, Double 11, whatever you name it. We think the revenue growth trend would definitely go up for the remainder of the year.
You also noticed that our gross margin expansion journey has been growing, and we will continue that journey as well. I am expecting the gross margin will hover around the current level and higher as we head into the remainder of the year. The last thing of the puzzle is definitely the costs. As I explained just now, I think Q1 is a little bit of an outlier in the whole cost story, which we have communicated before. As a full year perspective, we are expecting the full year cost for G&A plus R&D plus marketing expenses to be in line or lower than the 2024 full year cost. With that, I think we are going to try to offset the tariff cost headwinds with operating efficiency gains. Hopefully, that will not have any negative impact on our gross margin.
We are quite confident that 2025 would be, as Wayne mentioned, a fruitful year for us if we execute as we planned.
Nicolette Jones (Company Representative)
Many thanks.
Leon Cheng Deng (CFO)
Okay.
Operator (participant)
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.
Grace Zhang (Director of Investor Relations)
Thank you once again for joining us today. If you have further questions, please feel free to contact Zepp Health's Investor Relations Department through the contact information provided on our IR website. Thank you.
Leon Cheng Deng (CFO)
Thank you.
Operator (participant)
This concludes the conference call. You may now disconnect your lines. Thank you.