ZEPP | Zepp Health Corporation | earnings call 2026-09-01
Verbatim transcript (source: faster-whisper-small.en)

Hello, ladies and gentlemen. Thank you for standing by for ZEP Health Corporation's first quarter of 2026 earnings conference call. At this time, all participants are in listen-only mode. Today's conference call is being recorded. I will now turn the call over to your host, Ms. Grace Zhang, Director of Investor Relations for the Company. Please go ahead, Grace. Welcome to ZEP Health Corporation's first quarter of 2026 earnings conference call. The company's financial and operating results were issued in a press release from 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. Presenting today are Wang Huang, our Founder and Chief Executive Officer, and Leon Deng, our Chief Financial Officer. Joining us today, we also have Mike Yang, Chief Operating Officer and General Manager of North America, and Eric Flaming, Vice President of Capital Market for North America. Before we continue, please note that today's discussion will contain forward-looking statements made under the Safe Harbor Provisions of the U.S. Private Security Certification Reform Act of 1995. Forward-looking statements involving harm 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 20F for the fiscal year ended December 31st, 2025, 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 ZEP's earnings, press release, and disconference calls include discussions of un-audited GAP financial information as well as un-audited non-GAP financial information. ZEP's press release contains a reconciliation of un-audited non-GAP measures to the un-audited most directly comparable GAP measures. I will now turn the call over to our CEO, Mr. Wang Huang. Please go ahead. Hello everyone and thank you for joining us today. We are pleased to begin 2026 with a promising stock delivering another solid quarter. In the first quarter, Amazfit branded revenue grew 33.8% year-over-year, demonstrating exceptional resilience during what is traditionally a softer season for the consumer electronics industry. This strong performance was primarily driven by the successful launches of the Amazfit Active Max Active III Premium and our flagship T-Rex Auto II, delivering this level of goals in a seasonary quieter quarter further invokes our commission that the market opportunity we are capturing is structural rather than secretical. More importantly, we do not view this quarter simply as a revenue growth story. We see it as another earlier validation of the structural changes we have been building. Stronger premium product mix, improving pricing power, expanding growth margin, and a clear brand position in performance-oriented training. During our last earnings call, I outlined how ZAP Health is evolving into a comprehensive hybrid training platform. Similarly, integrating endurance, strength, and recovery through hardware, AI driven training intelligence, software, and data. Our 2026 ambition is clear. We aim to build a global leadership position in hybrid training to advance this strategy. We further depends our collaboration with HyROC, one of the world's fastest-growing hybrid endurance sports organizations, through a new exclusive three-year global partnership. This expanded partnership enhances the HyROC athlete experience across training, competition, and the recovery, leveraging a broader portfolio of exclusive small variable categories, including smart watches, smart rings, smart cameras, smart glasses, and smart straps, alongside connected app experience, HyROC specific training modes, and synaptic performance data integration. This partnership represents more than a sponsorship. It is a strategic step for us to participate in and help shape the emerging hybrid training category by engaging directly with HyROC's global athlete community, gym ecosystem, coaches, and race environments. We can build a more authentic connection with users whose training behaviors, spans, strengths, endurance, recovery, nutrition, and performance readiness. This gives us a differentiated position in the market, other than endurance and general smart lifestyle. While we have the opportunity to build authority-run hybrid training and a more complete completed training system, we believe one of the most important opportunities is the moment when a user moves from casual checking to more serious training. At that point, the form ecosystem becomes less important, and the training value becomes more important. HyROC and gym-based hybrid training help create that moment, allowing amazing to enter through app experiences, training content, HyROC specific modes, and role-efficient products before users make a full device switch. At the recent New York HyROC event, we introduced balance 3 and balance 4 in a real hybrid training environment. This launch setting was intentional. These products are designed for users who balance strengths, endurance, recovery, work, stress, and daily life, powered by hybrid charge energy intelligence in the web app. They bring together bio charge life load and the training load into one clear view of personal capacity, helping users better understand when to push, when to recover, and how to maintain consistency over the long term. These activities are important because premiumization is not only about higher price points, it is about building trust in the environment where serious users decide which brands they rely on. By showing up in management preparation, trail and abdition environments, and hybrid training communities, a main fit is strengthening the credibility required to support higher value products, improved product mix, and long-term pricing power. Our premium vision strategy is strongly supported by our hybrid training positioning. We are already seeing earlier evidence that users are willing to move up the price ladder across certain product families. Within the T-Rex lineup, our higher priced premium models are becoming an increasingly meaningful part of the overall sales mix. This reinforces important points. Consumers are not choosing a main fit story for affordability. In March and April, our premium T-Rex models priced at $399 US dollar and $549 US dollar accounted for nearly 50% of total T-Rex family unit sales. As we continue to strengthen our product differentiation and premium brand positioning, users are showing a growing willingness to engage with a main fit at more premium price tiers. By embedding hybrid training more deeply into both our hardware and software ecosystem, we are enhancing the perceived value of the main fit brand and driving a consistent shift toward higher end product positioning. This remains one of our key strategic priorities as we move into 2026. In the first quarter, this strategy delivers tangible results with average selling price increasing more than 20% year-over-year. Notably, even amidst rising memory components causes and broader storage chip price inflection, we were still able to achieve gross margin expansion, restricting the effectiveness of our product mix improvement and this brand cost execution. In April, we expanded this philosophy into one of the world's largest performance community, running. By adapting our hybrid training methodology to run this, we are enabling them to train more intelligently, improve endurance, and support long-term health and durability. This strategy is embodied in our newly launched Chita2 lineup, including the Chita2 Pro, a performance-focused watch designed for marathon training, and the Chita2 Ultra, engineered for the most demanding mountain and trail environments, both integrated seamlessly with that coach with a full suit of running matrix and personalized training plans, recovery insights, and third-party training platform integrations. These devices deliver structured hybrid-style training guidance directly to endurance runners. Further, strengthening our penetration in the dedicated running segment. Notably, our first quarter growth was for the base across both entry and premium tiers. At the high end, the Chita2 Ultra2, crafted from grade 5 titanium, elevates our price ceiling to US dollar 550, marking the highest in amethyst history and further reinforcing our premium-runted positioning. At the same time, in our core value segments, the active max and active 3 premium positions around the $169 price point are expanding our reach among everyday finished in services and entry-level runners beginning their structure training journeys. Most recently, we also introduced BIP-MAX, the latest addition to our most popular entry-level series. Our strategic progress is also reflected in continued market share gains. In the first quarter, we achieved sequential value share expansion across EMEA, the US, and Asia Pacific, supported by strong performance across our full product matrix. According to third-party data sources, Amazfit now ranks among the top six small watch brands in both the United States and Europe by value share, underscoring the growing global resonance and market change of the brand. Turning to software, we continue to strengthen our ecosystem through VAPOS. Proprietary features such as VAP Coach, BioTorch, and our expanding suite of hybrid training and high-loss modes are being deployed across a growing range of devices, driving deeper user engagement and retention. As we increasingly tailor our training intelligence for running and other endurance disciplines, our software ecosystem is becoming a key reason users choose and remain loyal to our brand, further widening the competitiveness modes around our platform. Across running, outdoor, and hybrid training, we are increasingly connecting Amazfit products with real performance environments and elite athlete validation. In running, Shida 2 Pro was supported by major marathon moments in Paris, London, and Boston, including athlete-proof points from Yeman Grisber, Emmanuel Petros, and Rory Linklett, a link letter. In outdoor, T-Rex Altitude continues to gain credibility through high attitude, alpineness, yaw's coach, and the rear expedition use cases, while Grisber's boycott strengthens the aspirational outdoor positioning of the T-Rex series. We also continue to build credibility around elite performance moments. During the high-loss workshop, a major athlete, Joanna Vieric, completed a clean sweep of all four high-loss majors this season while setting a new high-loss world record. We are also supporting Joss Kour's project 222. His attempt to braid a mild-war record at the London Diamond League. Together, these moments reflect how Amazfit is showing up at the highest level of both hybrid training and endurance performance against a microeconomic backdrop. Our premiumization strategy, expanding pricing power, vertically integrated supply chain, and diversify manufacturing footprint across China and Vietnam, provide us with multiple levels to mitigate these pressures. We remain confident that the enlightenment of our product mix, channel strategy, and cost structure will support sustainable growth and a clear path toward long-term profitability. Looking ahead to the second quarter, we expect revenue to be in the range of 63 million to 68 million. This outlook reflects continued year-over-year growth supported by demand across our product portfolio, while also accounting for normal shipment timing and product launch facing during the quarter. More importantly, we will continue to focus on the quality of growth, product mix, pricing power, growing across margin structure, and user engagement, rather than only short-term revenue warming. With that, I now turn the call over to Leo to walk through the financial details. Leo, please go ahead. Thank you, Wei-Yen. Great things, everyone. Thank you again for joining our first quarter 2026 earnings call. Let me start with revenue. In the first quarter of 2026, our revenue was US dollars 51.5 million, up 33.8% year-over-year, in line with our guidance range. As Wei-Yen mentioned before, this growth was driven primarily by our new product launches, such as ActiveMax, Active3 Premium, and T-Rex Ultra 2. Even as the first quarter is traditionally a low season for consumer electronics business. Turning to gross margin, our performance continued to reflect a combination of factors, including product mix, launch timing, and normal product lifecycle dynamics, such as model upgrades. In the first quarter, gross margin was 37.7%, and expansion of 0.4% compared with Q1 2025, and moderated from the record high 40.4% achieved in Q4 2025. There are two important points worth highlighting. First, the first quarter is traditionally the period whereby we refresh our entry-level product portfolio, which naturally carries a lower gross margin and therefore wait on the sequential comparison. Second, during the quarter, we absorb some higher memory component costs, as well as the impact of unfavorable foreign currency exchange fluctuation. Despite these headwinds, we still deliver year-over year gross margin expansion, where gross profit increased 35.3% to US dollar 19.4 million. This demonstrates the resilience of our operating model and the continued improvement in our brand positioning. Before turning to expenses, let me briefly address the macro backdrop. On memory, we expect higher memory costs to create near-term pressure on gross margins driven by the industry-wide transition from DDR4 to DDR5 and high bandwidth memory. As AI and data center demand continues to tighten supply, we began preparing for this environment in early 2025 by securing supply through diversified sourcing channels to support manufacturing continuity. We are also using our engineering expertise to optimize memory requirements across current and future products without compromising performance or customer experience. While this is a real headwind, we have multiple levers to help mitigate the impact, including continued increases in average selling prices and a potential refund of previously paid IEPA-related tariffs, which could provide some in offsets. We believe we are managing this challenge from a position of preparation and discipline, or staying focused on driving sustainable revenue growth and improved profitability. Now turning to expenses, we remain committed to prudent cost management program, which we began in 2020. Total adjusted operating expenses for the first quarter were US dollars 35.7 million, compared with US dollars 31.5 million in Q125, and US dollars 37.1 million in Q425. Out of the year-over-year increase of the US dollar 4.2 million, there's a translation difference of approximately US dollar 1.8 million operating expenses in the first quarter of 2026, due to euro and R&B appreciation to the dollars. Then US dollar 1.4 million is directly attributable to certain e-commerce platform charges, which was a kind of fixed ratio sales channel charges to drive revenue growth. Remaining US dollar 0.6 million was primarily due to front-loaded investments in marketing and branding activities, such as CES and HiROCs. Excluding US dollars 6.2 million of one-off provisions, first quarter 2025 operating expenses were approximately US dollars 30.9 million. The sequential increase of US dollar 4.8 million was primarily driven by a US dollar 1.8 million foreign exchange impact, as mentioned above, and a US dollar 1.4 million increase in R&D investment to support new products launches in upcoming quarters, and a US dollar 0.5 million of front-loaded marketing and branding investments, and lastly 0.2 million in severance costs related to targeted initiatives to enhance organizational efficiency. Going forward, we'll maintain a cost conscious approach while continuing to invest in R&D marketing and branding activities that support our long-term competitiveness. Let me break down the year-over-year and sequential comparison by line item. Adjusted R&D expenses were US dollar 11.9 million compared with US dollar 11.5 million in the first quarter of 2025, and the US dollar 10.2 million in the fourth quarter of 2025. Out of the sequential increase of US dollar 1.7 million, 0.3 million was attributed to foreign currency translation differences. The remaining 1.4 million increase was due to investment in new products that will be launched in the coming quarters. We continue to invest in a series of cutting-edge products and new technologies, including AI, to maintain our competitive edge, while consistently evaluating resources efficiently to optimize our return on investment and productivity. Adjusted selling and marketing expenses were US dollar 16.4 million compared with 13.8 million in the first quarter of 2025 and 15.6 million in the fourth quarter of 2025. Of the year-over-year increase, approximately 0.8 million was attributed to foreign exchange translation differences. Another 1.4 million was directly attributable to fixed channel costs that scale with our revenue growth, and the remaining 0.4 million was allocated to promotions and branding initiatives that filled the adoption of our new products. Compared to Q4 2025, selling and marketing expenses increased by 0.9 million, out of which 0.4 million was attributable to the appreciation of foreign currencies against the dollar, and the remaining half a million was due to front-loaded investments in marketing and branding activities, such as CES and HiROCs. At the same time, we continue to push retail profitability and channel mix improvement, including meticulous refinement of our retail channels and disciplined staffing arrangements across our sales regions. Adjusted GNA expenses were US dollar 7.4 million compared with 6.2 million in Q1 2025 and 11.3 million in Q4 2025. The year-over-year increase reflected approximately 0.3 million of foreign exchange translation differences and 0.2 million in brand and intellectual property protection related fees. Excluding the US dollar 6.2 million of non-recurring provisions in the fourth quarter, GNA expenses were 5.2 million in Q4 2025. The sequential increase of US dollar 2.1 million was mainly attributable to 1.1 million of negative foreign exchange impact, as well as 0.2 million severance cost as part of the targeted initiatives to enhance organizational efficiency. We continue to streamline our GNA and drive operation efficiency. With higher revenue and improved year-over-year gross margin, partially offset by higher operating costs and unfavorable foreign exchange translation differences, our operating loss narrowed to 6.3 million compared with 17.2 million in the first quarter of 2025. Adjusted net loss was 17.9 million or 34.8 percent of sales compared to 18.1 million or 41.0 percent of the sales in the first quarter of 2025. Turning to the balance sheet and working capital, we continue to manage our inventory rigorously, ending the quarter with inventory of 62.8 million down from 72.8 million as of Q4 2025. We ended the quarter with 103.2 million in cash and cash equivalents, nearly flat compared with 103.8 million a year ago and lower than 112.9 million at the end of 2025, with the sequential decline driven primarily by our net operating losses and partially offset by improved working capital management. Turning to our capital structure, total debt, including both short-term and long-term debt, remained broadly stable both sequentially and year-over-year. We continue to actively manage our debt maturity profile and financing costs. As debt approaches maturity, we evaluate prevailing market interest rates and available credit capacity to refinance or extend the duration of our borrowings while appropriate. The change in the mix between short-term and long-term debt in the first quarter of 2026 was primarily driven by accounting classification as certain borrowing originally maturing in late 2026 or 2027 were reclassified from long-term debt to short-term debt due to their remaining maturity profile. Importantly, while the classification between short-term and long-term debt may fluctuate from quarter to quarter, our long-term focus remains on maintaining discipline control over total debt levels and optimizing our debt duration and interest expenses over time. Since the beginning of 2023, the company has cumulatively retired 46.7 million of debt and will continue to optimize the capital structure for the company. We also remain committed to our share repurchase program. As of March 31, 2026, we had repurchased 17 million out of the 20 million authorized program. We view this program as an effective use of capital that aligns with our focus in delivering sustainable long-term value to shareholders. Finally, our outlook for the second quarter of 2026, we expect revenue to be in the range of US $63 million to US $68 million, representing year-over-year growth of approximately 6% to 14%. This outlook reflects continued year-over-year growth supported by demand across our product portfolio while also accounting for normal shipment timing and product launch facing during the quarter. More importantly, we will continue to focus on the quality of the growth rather than only short-term revenue volume with a healthy margin profile, disciplined cost control, and continued operational improvement. We are well positioned to deliver sustainable growth and create long-term value for our shareholders. Thank you all for your time today. I will now open the calls for questions. Operators, please go ahead. Thank you. If you would like to ask a question, please press star than one on your telephone keypad. If you would like to withdraw your question, please press star than two. Once again, that's star than one if you have a question. Today's first question comes from Sid Rajeev with Fundamental Research Corp. Please go ahead. Thank you. Congratulations on the strong Q1 revenue growth. In the last earnings call, Leon, you guided to potentially nine product launches this year, the same as last year, with four announced so far. Should we expect about five more this year? Am I in the correct ballpark? Yes, I think in the end, we probably would have more than nine, but there are many new product launches still on the way. Okay. Where do you see opportunities to reduce cost? Because it seems like it's difficult to cut R&D or marketing or branding expenses at this point. No, that's not entirely right. So you see that the R&D expenses year over year actually increased a bit. It is because of the new product launches, which we have to prepare for it. And I think towards the end of Q2, you will see that R&D expenses more going down because I think by the end of the first half, we'll probably go through majority of the new product launches, which we have scheduled for the year. Although there's going to be a bit left for the second half of the year, but I think you have witnessed that there's a lot of new product which has been launched already, including the active max, active premium, T-Rex Ultra 2, and now with the balance and cheetah. And I think this first half of the year is actually from a product launch perspective, a launch heavy first half. Therefore, R&D expenses is actually a little bit higher than before, but it should trim towards the norm starting from the second half of the year and going forward. On the other hand, we are also investing a bit or with front-loaded some of the marketing expenses into Q1 and Q2. For example, we are hosting the Balance 3 product release in High Rocks New York, which is a high-profile event. And that's all tied into the event timing, so to say. And I guess because of that, we spent some of the marketing expenses and branding-related expenses more towards and skewed towards the first half of the year. And that should also be averaged down in the second half of the year. So, and not to mention GNA expenses, I think you will see a step down already in Q2 and going towards Q3 and Q4. So I guess we still stand behind the run rate of around 30 million a quarter or even lower than that, which you kind of witnessed for the rest of the last year as we go. That's good to hear. Just one more question if I may. Is there for other industry players raising product prices to offset some of these higher memory costs? Yes, to some extent, because we noticed that our competitors are also raising price, and not to mention Garmin, right? But we compare with a lot of our competitors, our pricing at this point of time is still relatively low. So I think we have more room to raise the price compared with our competitors. But nevertheless, I think we are focusing on the product itself, right? So raising the price is definitely not the final goal. In the end, we want to actually present to the user the best product with the best user experience and best features at the best price which they can get out of the market. So I think that is the goal that we want to strive for. Perfect. Thank you so much. Thank you, Seth. Thank you. And our next question today comes from Frank Dugan at Brookes Investments. Please go ahead. Hi, Leon. Congratulations on the first quarter performance. My first question would be around the fee to revenue guidance, and if you could talk more about that, and how do you do the profitability of the portfolio? Yeah, Frank, thank you. We don't give the guidance on the full year, but hopefully I can give you some color to it later on. But with regard to Q2, we just mentioned it is actually between 63 to 68 million, which is roughly a growth of 6% to 14%. But however, you see this number is actually accounting for the normal shipment timing and product launch facing during the quarter. So if we, let's say if we have certain products which we initially wanted to produce and sell in Q2, and for some reasons, we couldn't manufacture those in time and meet the time window for the sales, it might slip into Q3. And I think we have one or two examples of that, which happens in Q2, which kind of impact our revenue forecast for Q2. But however, we actually, our long term strategy and our target for the year remains still on the profitable growth paths, because we see given Q1 and Q2, we see a continued year over year growth. And also this year over year growth is supported by the demand across our product portfolio on a board base. We believe that heading into the second half of the year, we should be able to continue number one, the growth path, and number two, if and for the 2026 full year, for sure we're looking at a profitable growth over 2025. I hope that gives you some color for the future. Yeah, thanks, Leon. And yeah, one more question around the new three year global HiROC partnership. How do you plan to leverage that to drive long term monetization? The HiROCs, as you know, is actually part of, or it actually is one of the bigger trends on hybrid training. We kind of explained just now that we would like to establish our authority in hybrid training through working very closely with HiROCs. It actually comes into two folds. Number one is as the participants of HiROCs increase, I think they increased by a lot over the past years. And I would believe that it's going to continue to increase in the future. And looking at the New York HiROCs is the participants is as many as the participants of New York Morrison. So I think number one is we would definitely want to deepen our relationship with HiROCs and try to make the feature working better with HiROCs. For example, on helping the HiROCs athletes to track their timing, and then to deliver a better timing every time they race. And hopefully that would also make us and then establish the authority of our brand in HiROCs. And also, as Weyen just mentioned, we by doing that, we would like to become users choice when they look beyond their current watch. Because for a normal user, consumer, there's a moment of time that they start considering a serious spot, be it running, be it hybrid training, be it whatever it is. We want to actually by establishing the authority in HiROCs to become users choice once they become a serious on a specific sports in their journey of when they grow up. That's actually what we want to do through HiROCs. Thank you. As there are no further questions, I'd like to turn the call back over to the company's IR director, Grace Song, for closing remarks. My second will join us today. If you have further questions, please feel free to contact ZEPPEL's semester relations department. Thank you. Thank you. This concludes this conference call. You may now disconnect your line. Thank you and have a pleasant day.