Huami Technology, which once stood at the forefront of smart hardware outlets, seems to have fallen into a bottleneck period.
Recently, Huami Technology released its financial report for the third quarter of 2020. During the reporting period, Huami Technology’s total revenue reached 2.235 billion yuan ($0.34 billion), a year-on-year increase of 20% compared to 1.863 billion yuan ($0.28 billion) in the same period last year; compared with 1.137 billion yuan ($0.17 billion), the month-on-month increase was 96.6%.
Although revenue has recovered from the epidemic, Huami Technology’s net profit is still declining. After the release of the financial report, Huami Technology’s pre-market share price fell by 7.6%.
In addition to a year-on-year decline in net profit for the third consecutive quarter, the continuation of the strategic cooperation agreement with Xiaomi has also become a node in the future development of Huami Technology.
Huami Technology, which has a high market share and low profit, is standing in the crossroad. Below, we will try to explain what difficulties it is facing now.
1. Net profit fell 60% year-on-year
After being hit by the epidemic in the first half of the year, Huami Technology’s revenue gradually rebounded in the third quarter.
According to financial report data, Huami Technology’s overall equipment shipments in the third quarter were 15.9 million units, an increase of 16.1% year-on-year from 13.7 million units in the same period of the previous year, and an increase of 78.7% from the previous quarter’s 8.9 million units.
Regarding the rebound in shipments and revenue, Huami Technology founder, chairman and CEO Huang Wang said that the growth is mainly due to the excellent performance of the newly released Mi Band 5 this year, and the excellent performance of its own brand Amazfit watches and earphones. Plus, the company continued bringing its products to more markets.
In the financial report, Huami Technology affirmed the company’s performance in the third quarter. Under the impact of the global epidemic, Huami Technology has maintained steady growth.
According to the financial report, the negative impact of the epidemic on retail sales and the global economy in the third quarter has subsided. China’s gross domestic product (GDP) increased by 5% in the third quarter. Some European retail sectors performed strongly, and the US retail sales increased by 5% in September. The above situation is also the reason for Huami’s growth in the third quarter. Compared with June, device activations in most markets rebounded and increased sharply this quarter.
However, Huami Technology’s net profit continues to decline in the context of the recovery of the business. This is not the first time that Huami Technology has experienced an “upside down” phenomenon in which revenue growth and net profit decline.
In the financial report for the first quarter of 2020, Huami Technology’s revenue was 1.0885 billion yuan ($0.17 billion), an increase of 36.1% compared with 799.6 million yuan ($122.16 million) in the same period last year. The net profit fell from 75.3 million yuan ($11.50 million) in the first quarter of 2019 to 19.2 million yuan ($2.93 million), and profits plummeted by 74.5%. In the second quarter of this year, Huami Technology’s revenue was 1.137 billion yuan ($0.17 billion), a year-on-year increase of 9.5%, but its net profit dropped from 89.4 million yuan ($13.66 million) in the second quarter of 2019 to 13.3 million yuan ($2.03 million), and its profit plummeted 85.1% year-on-year.
In the first three quarters of 2020, Huami Technology did not escape the embarrassing situation of low net profit. “This situation is actually very unreasonable. Take Huami’s competitor Apple Watch as an example. Its share is only half of ours, but they make more money than we.”
According to the latest data from IDC, the total shipments of Apple Watch reached 11.8 million units in the third quarter of 2020, and Apple’s wearable device category contributed $7.9 billion in revenue, including products such as Apple Watch and AirPods. Compared with Huami Technology, although the two shipments are in the same order of magnitude, the revenue is very different.
From the perspective of the financial report, R&D expenses and marketing expenses are one of the reasons for the decline in its net profit. The financial report shows that Huami Technology’s R&D expenses in the third quarter reached 172.9 million yuan ($26.42 million), an increase of 38.8% year-on-year, accounting for 7.7% of revenue, higher than 6.7% in the third quarter of last year. At the same time, Huami Technology also invested a large amount of marketing and sales expenses in the third quarter, reaching 115.6 million yuan ($17.66), an increase of 104.2% year-on-year to promote its own brands globally.
Apart from R&D and marketing costs, Huami Technology’s product gross profit margin is also declining. According to its financial report, Huami Technology’s product gross margin in the third quarter was 20.6%, compared with 25.2% in the third quarter of last year.
Regarding the decline in gross profit margin, Huami Technology explained that this is because gross profit margin and gross profit are affected by product structure, because different products have different gross profit contributions and will change during the product life cycle.
In the third quarter of 2020, the total shipments of Xiaomi and its own-brand products were the same as the same period last year. But the decline in gross profit margin was mainly due to the decline in the profit margin of Xiaomi products compared to the same period last year.
“The price of the fourth generation and the fifth generation of the Xiaomi Mi Band is the same. But the cost of the fifth generation is higher than that of the fourth generation.” Li Qiang believes that the rising cost of the Mi Band is the key to affecting the gross profit margin of Huami Technology’s products.
At present, the problem of low profits has also attracted the attention of Huami Technology. Facing the situation of increasing revenue but not profit, Huami Technology CFO Deng Cheng said that the company will control expenditures in the next quarter and focus on projects with higher investment returns. All these management measures are focused on the company’s long-term development.
2. Huami cannot do without Xiaomi
“Huami’s profit is not up, and another very important reason is its dependence on Xiaomi.” Li Qiang said that Huami Technology initially separated from Xiaomi for the independent development of smart hardware business.
Judging from the financial report, at present, Huami Technology’s revenue mainly comes from its own brand Amazfit and the foundry for Xiaomi wearable devices. In terms of revenue ratio, Huami’s own brands currently account for less than half of revenue despite an increase compared to before. This also means that Huami is still relying on Xiaomi to contribute revenue. And Xiaomi’s cost-effective route and sharing model are also destined for Huami Technology to be unable to obtain high profits from the business associated with Xiaomi.
The deep bond with Xiaomi revolves around the entire history of Huami’s technological development. Judging from the financial data disclosed by Huami Technology in the past, in the four years from 2015 to 2018, Xiaomi’s revenue contribution to Huami accounted for 97.1%, 92.1%, 82.4% and 59.7%, respectively.
It is not difficult to see from the data that the proportion of this income has been declining year after year. The reason is that on the one hand, Huami has increased its investment in its own brand Amazfit. On the other hand, Xiaomi is reducing the amount of Huami’s foundry.
Huami Technology CEO Huang Wang also said in a media interview, “Huami must learn to walk independently, and the Xiaomi ecological chain is just to help us incubate.” Huami is transforming, and it does not want to rely too much on Xiaomi.
Objectively speaking, “de-Xiaomitization” means that Huami will have more competition in the same industry with Xiaomi. Based on past experience, it is still difficult for Huami Technology to go to Xiaomi at the business level.
Li Qiang believes that Xiaomi has already stepped into the smartwatch market. This move will make Huami Technology even more embarrassed, and both parties will face direct competition in the same industry. “Although Xiaomi’s watch business is not Huami’s rival, the two cannot avoid market competition in the future. The addition of Xiaomi will make the smartwatch market with giants such as Apple and Huawei more competitive. This is a bigger challenge,” he said.
In the third quarter of 2019, Huami Technology’s shipments exceeded the 10 million mark to reach 13.7 million units, a year-on-year increase of nearly 70%. But after the release of the Mi Band 4, Xiaomi’s impact on Huami’s performance was once again highlighted. So in the 2019 annual financial report, the revenue from Xiaomi’s business accounted for 72.2% of Huami Technology’s revenue.
From the perspective of Huami Technology’s product route, it is continuing to make efforts to “de-Xiaomitization”. At present, China is trying to conquer the high-end market. Both the Amazfit GTR 2 and Amazfit GTS 2 launched by it are above 1,000 yuan.
However, from the recent performance of Huami Technology, Huami Technology is still unable to leave Xiaomi in a short period of time. On October 21 this year, Huami Technology announced that its strategic cooperation agreement with Xiaomi will be extended for another three years. According to this extension, Huami will maintain its current best partner status in the development of Xiaomi wearable products. According to the agreement, the two parties will also establish an optimal strategic partnership in the development of AI chips and algorithms for wearable devices.
“Huami wants to become independent, but its strength does not allow it.” An insider of a smart hardware company told Bullet Finance.
3. Can Health Functioncs save Huami?
Huami’s dilemma is also closely related to the fierce competition in the smart device wearable market.
After experiencing explosive growth in 2019, the smart wearable device market has gradually returned to stability. Affected by the epidemic, the growth rate of the smart wearable device market has also slowed slightly.
According to statisitics, from 2014 to 2019, China’s smart hardware terminal product shipments have generally increased year by year. But the annual growth rate has fluctuated many times. In 2018, there was even a slight negative growth. This means that the cake of the smart hardware market will no longer expand dramatically, and there will be more people sharing the cake.
After the Chinese market entered the stable zone, going overseas became one of Huami’s strategies. At present, Huami Technology’s overseas business has gradually improved. The financial report shows that in the third quarter of 2020, Huami Technology’s overseas shipments accounted for 49.5%, and overseas markets have become Huami Technology’s new growth points.
However, Huami Technology’s living environment is not comfortable after going to sea. According to the latest data from Strategy Analytics, Apple Watch expanded its lead in the first quarter of this year, with shipments of 7.6 million units and a market share of 55%. South Korea’s Samsung ranked second with 1.9 million shipments and a market share of 13.9%. Garmin ranked third with shipments of 1.1 million units and a market share of 8%. In other words, although the overseas business has gradually stabilized, from the perspective of market share, Huami Technology still faces strong oppression by the three giants.
While the main business was under pressure, Huami Technology also began to seek new stories in the field of health.
In September of this year, Huami Technology launched Amazfit GTR 2 and Amazfit GTS 2 stylish smartwatches equipped with blood oxygen saturation measurement function at the Amazfit2020 autumn new product launch.
In addition to the independent Amazfit brand that has been self-developed for many years, Huami is also exploring more possibilities for a “dual brand” strategy in the health field. On November 18, at the Huami Technology Global Conference, two years after the digital health management brand Zepp was acquired by Huami Technology, it announced the launch of its flagship smartwatch Zepp Z and smartwatch Zepp E. In the future, it will be committed to creating a borderless professional health management platform.
Huami Technology officially stated that after Zepp “returns”, Huami’s original Amazfit will be positioned as a smart wearable hardware product brand, and Zepp will serve as another independent brand to a professional digital health management platform that includes hardware, software and services. In the future, Zepp and Amazfit will coexist and develop as two independent brands. But there are certain differences in their core target audiences and brand positioning.
Li Qiang believes that the current challenges facing Huami Technology are still severe. On the one hand, the continued epidemic in Europe and North America has restricted Huami’s development in overseas markets; on the other hand, although Huami has been on the track in the health field of wearable devices, Huami Technology’s entry has not been the first advantage, and the business has not achieved a substantial lead.
“At present, Huami’s big health business is still in the investment period and requires high research and development expenses. And when the big health business can start hematopoiesis is still unknown, Huami first needs to maintain stable performance,” He added.
From the previous official statement of Huami Technology, it is not difficult to find its strategic confidence and firmness in the direction of research and development. Huang Wang once “set the tone” for Huami Technology’s attitude towards research and development in an interview in September.
He believes that corporate development needs to adhere to “long-termism”-Huami’s performance growth in the first half of the year has benefited from the investment made 3 years ago, 5 years ago or even longer. Similarly, Huami’s current investment in research and development “will inevitably establish long-term growth in the next 3, 5, or even 10 years.”