Zepp Health (ZEPP) Q4 2025 earnings call transcript

Hello everyone and welcome to Depp Health Corporation's fourth quarter and full year 2025 earnings conference call. The company's financial and operating results were issued in a press release of the newswire services earlier today and are posted online. You can also view the earnings press release and slides referred to on this call by visiting the IR section of the company's website. Presenting today are Wang Huang, our founder and chief executive officer, and Liang Deng, our chief financial officer. Joining us today, we also have Mike Yang, chief operating officer and general manager of North America, and Eric Fleming, VP of capital markets in North America. Before we continue, please note that today's discussion will contain forward looting statements made under the safe harbor provisions of the U. S. private securities litigation reform act of 1995.

Forward looting statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from the views expressed today. Further information regarding this and other risks and uncertainties are included in the company's annual report on Form 20F 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. We also note that Zapps-Arne's press release and the conference call include discussions of un-audited gap financial information as well as un-audited non-gap financial information. That post-press release contains a reconciliation of the un-audited non-gap measures to the un-audited most directly comparable gap measures.

I will now turn the call over to our CEO, Wen. Please go ahead.

Hello, everyone, and thank you for joining us today. before going into the details of the quarter let me first share how we see that evolving over the past few years we have been transforming that former traditional variable hardware company into what we call a hybrid training platform our goal is not simply to launch competitive devices but to build a border performance system that integrates endurance change and recovery through corporate training intelligence software and data capabilities with that context in mind 2020 5 was a strong year for that for the full year a massive branded product revenue grew 51% year-over-year in the fourth quarter a massive branded product sales grew 45% year-over-year while gross margin reached a record level of 40.3 percent importantly this growth was achieved without relying on heavy discounting during the holiday season these results reflect to the continued progress of our multi-year transformation as we evolve from a volume driven business toward a brand lead and premium focused global company they also demonstrate strengthening pricing power across our portfolio as our product makes continuous shifting toward higher value segments.

Turning into our product highlights, our growth in Q4 was broad-based across both entry-level and premium segments as we continue expanding our portfolio to serve a wider range of users and training scenarios. At CES, we launched Amazfit Active Max, the newest member of the Active family. Active Max fills the gap between our entry-level lifestyle watches and our rugged outdoor series. It targets everyday trainers beginning their fitness journey. features a vibrant AMO lab display long battery life over 170 workout modes and building support for offline maps and training guidance powered by Zapp coach we also recently introduced active 3 premium designed specifically for new and entry-level runners positioned around 169 US dollar price here active max and active 3 premium reinforce the core volume segment of our portfolio while expanding our rich amount users beginning structures training in our premium portfolio the T-Rex and balance series continue to perform strongly in February we launched T-Rex ultra 2 our newest flagship outdoor watch built with grade 5 titanium and designed for extreme durability ultra 2 extends the top end of our portfolio to along the 550 US dollar price level the highest price point in our history products like ultra to enforce the premium positioning of the amazing brand while expanding the styling of our product portfolio On the software side, we continue strengthening our ecosystem through updates to ZappOS.

Features such as biocharge energy monitoring and ZappCoach AI-driven training guidance are now reaching more devices and helping increase engagement, retention, and long-term user value together our Zapp app variables and sensor technologies are creating a stronger ecosystem around our hardware foundation forming what we believe is a growing defensive mode around our platform by increasing switching costs improving user retention and expanding lifetime value under brand side we have also made deliberate investments to elevate our credibility in the global performance sports community This month, we announced a partnership with Josh Kerr, a two-time Olympic medalist and world champion middle distance runner. Josh joins our growing roster of elite athletes including grant Fisher that Henry and Ruth Croft these athletes are not just brand ambassadors they actively use amazing devices such as balance to Hillary and hero strap in their daily training and recovery when world-class athletes rely on our data and training insights to prepare for the highest level of competition it sends a powerful signal about the accuracy credibility and performance capabilities of our technology another important component of our strategy is our collaboration with tyros one of the fattest growing hybrid endurance competition globally at high-loss races around the world including recent events in cities such as fitness and Las Vegas athletes gather in front of their official results screen to capture and share their finished times directly beneath the race results appears presented by Amazfit making Amazfit the most prominent brand integrated into that moment when athletes share those results of course social platforms the brand naturally is breath through athlete generated content rather than paid promotion this is not traditional sponsorship visibility it is infrastructure level exposure embedded directly into the athlete experience more broadly HiROS plays a key role in our hybrid training strategy which integrates endurance change and recovery into one coherent performance system where variable data, training intelligence, and real-world performance validation converge.

Looking ahead to 2026, we remain focused on strengthening our premium product lineup, expanding our ecosystem through AI-driven training insights and performance technologies, and deepening our engagement with performance focused communities for the first quarter of 2026 we expect revenue in the range of 50 million to 55 million years start representing an increase of 30% to 43% year-over-year this outlook reflects our confidence that the demand we are seeing is not simply seasonal but structural We believe we now have the right combination of products, channels, and cost structure to drive sustainable growth and a clear path towards sustained profitability. As our premium mix continues to expand and higher margin categories scale, we expect our margin profile to continue strengthening with that i will now turn the call over to leo to walk through the financial details leo please go ahead thank you way and greetings everyone thank you again for joining our fourth quarter and full year 2025 earnings call.

In the last quarter of 2025, our revenue rose to $85.2 million, up 43% year-over-year, meeting the upper end of our guidance range. For full year 2025, revenue reached 259 million representing a 41.8 percent year-over-year growth compared with US dollars 183 million in 2024 marking a return to growth trajectory our fourth quarter growth was driven by board-based strength across our diversified portfolio as William mentioned our 2025 Q4 our Amazfit branded product sales increased by 45.4% year over year and 12.4% sequentially, filled by strong execution during the critical Black Friday and Christmas sales seasons, where our brand visibility reached new heights across major e-commerce channels.

Additionally, our established premium lines, specifically the T-Rex and Balance series, continue to see sustained demand further validating our premiumization strategy and boosting our average selling price look ahead we have just started selling of our active 3 premium slash active max and T-rex ultra 2 watches and together with our upcoming new product launches we expect the top-line expansion continues into 2026 turning now to gross margin it was influenced by various factors including product mix product launch timing and product life cycles such as model upgrades in q4 we achieved a record gross margin of 40.4 percent an impressive expansion of 3.6 and 2.2 percentage points compared with same period of 2024 and third quarter of 2025. It is a highlight of this quarter's financial performance and the strongest indicator of our improving brand recognition and supply chain management.

This margin performance was driven by two key factors that I want to elaborate on. First, we realized a highly favorable mix shift with higher contributions from the premium adventure series of our Amazfit branded products. This shift away from lower margin legacy products towards newer high value SKUs naturally elevates our margin profile.

Second, we were able to maintain price integrity even during higher promotional periods like black friday further boosting margins the strong gross margin driven by our product mix modern offset the headwinds we're facing from fx fluctuations memory chips cost increase and tariffs aimed macroeconomic uncertainties. Gross margin in the full year 2025 was 38.3%. We remain on track with our margin expansion strategy initiated in the second half of 2023, and we expect the trend to continue into 2026 as we further optimize our product mix and supply chain efficiency.

Next, expenses. We remain committed to prudent cost management continuing the program we began in 2020 to reduce overall operating costs while investing for growth total non-gap operating expenses for the fourth quarter or thirty seven point one million expenses as a percentage of sales improved by approximately six percent compared to Q4 2024. However, in absolute amounts, it is up by around eight million year over year and quarter over quarter. I will break down the specific driver of this increase to help you understand the quality of our spend Approximately around 1 million is directly attributed to certain fixed channel cost investments to drive direct top-line growth. As we ship more units and generate more revenue, certain variable selling and logistic expenses naturally rise in tandem.

Second, we recorded around 5 million year-end provisions non-cash adjustment for potential bad debt and business model optimization as part of our ongoing risk management strategy and another US dollar 1 million investments in patent fees and brand protection to safeguard our intellectual properties and ensure long-term business success in total six million finally and most importantly we strategically invested around 1 million in front-loaded marketing initiatives including upfront costs for elite athletes sponsorships such as partnerships with Olympic medalist Josh Kerr as well as some investments on marketing and branding activities that filled the adoption of new products launches as you can see except for the first element majority of the cost increase are not structural cost increases we expect lower operating costs relative to revenue in 2026 at least one-off cost of normalized and we realize further cost efficiencies by line item adjusted research and development expenses were US dollars 10.2 million remained relatively stable quarter over quarter and year over year we continue to invest in a series of cutting-edge products as well as new technologies including AI to maintain our competitive edge against our peers at the same time we'll focus on refined research and development approaches as we consistently evaluated resources efficiency to optimize return on investment and productivity adjusted selling and marketing expenses were 15.6 million reflecting the front-loaded branding investment I just mentioned.

We're seeing a strong return on investment for these marketing dollars as evidenced by our market share gains in U. S. and Europe. At the same time, we consistently pushed retail profitability and channel mix improvement. Adjusted GNA expenses were $11.3 million compared with U. S. dollars $6.1 and U. S. dollars $6.5 million in the same period of 2024 and third quarter of 2025.

The increase is mainly driven by the year-end provisions I mentioned above. Excluding those, GNA expenses remained flat through the year. We continue to streamline overhead, maintaining disciplined cost control while improved operating efficiency.

Total adjusted operating expenses were U. S. dollars $123 million in 2025 compared with U. S. dollars $110 million for the full year 2024. The increase is directly attributable to the reasons I explained above. Adjusted operating expenses for 2025, excluding these, would be U. S. dollars $110 million. We will maintain our cost-conscious approach and remain committed to investing in R&D and marketing activities to ensure our long-term competitiveness. In Q4, adjusted net loss attributed to Debt Health was US dollars 6.4 million compared to adjusted net loss of US dollars 22.5 million in the fourth quarter of 2024. The net loss in Q4 was mainly a result of running operating results more than offset by 2 million deferred tax asset provision and a 6 million one-off provisions.

Full-year adjusted net loss attributed to the company was US dollars 31.5 million compared with the adjusted net loss of US dollars 56.7 million for 2024. The net loss for 2025 were mainly from deferred tax asset provision, one-time specially identified provisions, and operating loss from the first half of the year 2025. In terms of our balance sheet and working capital, we continue to manage our inventory rigorously. strategic risk purchases of key components for the future, our inventory balances decreased to US dollars 72.8 million compared with US dollars 87.7 million as of Q3 2025, reflecting our ongoing improvements in inventory management. As of December 31st, 2025, our cash and cash equivalent stood at $113 million compared to U. S. dollars $103 million as of Q3 2025 and $111 million as of December 2024.

We delivered another quarter of positive operating cash flow, further strengthening our liquidity position. This consistent cash generation capability provides ample runway for us to invest and seize potential market opportunities. In terms of capital structure, our overall long-term and short-term debt levels remained relatively consistent following the restructuring we completed in Q1 2025. However, you may notice a sequential increase in our reported debt levels in Q4 as a result of refinancing short-term debt into long-term debt, capitalizing on favorable rates to minimize interest payments. While we are focused on reducing our overall debt level over the longer term, there may be temporary fluctuations in debt levels quarter to quarter due to timing of refinancing and repayment activities. Since the beginning of 2023, we have cumulatively retired US dollars 58 million of debt and will continue to optimize the capital structure going forward.

Given our confidence in the company's strong fundamentals and sustainable growth trajectory we are reaffirming our commitment to our share repurchase program in 2026. we view the program as effective use of capital that aligns with our focus on delivering sustainable long-term value to shareholders before we talk about guidance i would like to walk you through some of the key macroeconomic and industrial specific factors we are currently facing including the recent memory chip movement. While we are not immune to memory cost inflation, it is important to note that our products have modest memory requirements compared to other categories like PC and phones. Consumers don't choose our products based on memory configurations. They choose us for the experiences and accuracy we deliver.

Furthermore, we manage our entire BOM cost holistically. While memory costs have risen somewhat, our vertically integrated supply chain provides us with multiple levers to optimize our overall cost structure. We are continuously focused on driving efficiency throughout the supply chain by leveraging our scale and integration. Additionally, we have intentionally increased inventory levels of certain key components, including risk buys, to ensure we can meet long-term demand. Our strong relationships with suppliers allow us to align with anticipated product demand and while supply chain challenges are inevitable we confident in our ability to navigate them lastly and most importantly as demonstrated in past quarters we have seen a steady increase in the average selling price of our products we firmly believe that compared to our competitors our pricing still has ample room to grow In fact, price increases have more than offset the rise in memory costs and helped us in navigating through macroeconomic uncertainties.

Finally, our outlook for the first quarter of 2026. We are entering the year with strong momentum. Despite the first quarter traditionally being a slower season for the consumer electronics industry, we expect revenue to be in the range of 50 million to 55 million, representing year-over-year growth of approximately 30 to 43%. This guidance reflects our current visibility into our order book and strong sell-through trends in our key markets.

With strong financial fundamentals, a clear path to continue margin expansion and solid operational discipline, we're well positioned to deliver profitable growth and create long-term shareholder value. Thank you all for your time today. I will now open the call for questions. Operator, please go ahead.

I think it's around similar products, maybe slightly more. So if I'm not mistaken, last year we have launched around nine products or so, and this year probably is at the same quantum of that or maybe slightly more.

we are not that much exposed to the currency fluctuations on the dollars right I think a lot of our production is diversified in Asia in different places and if you look at our markets we are very strong in Western Europe markets as well as the US markets. So, yeah, to some extent, the dollar strengthened up. It's actually giving us some tailwind instead of the headwind.

I think if you look at the selling and marketing expenses, as we just mentioned, in some places, we actually front-loaded some of the expenses into the high seasons because we want to prepare for the upcoming new product launches. for example and that should normalize over the quarters because it's very much driven by the product launch windows and the cadence we have applied another one is the GNA cost because you have seen that GNA cost keep on going down for us and then I think there's also room to improve over there and the last one is R&D but I think we on one hand we need to invest R&D to sustain the new product launches I just mentioned you asked about the numbers right on the other hand we see a lot of places whereby we could adopt AI AI to actually improve our efficiency on R&D.

Okay, thank you, Seth.

Sorry, I didn't get the first question clearly. If you can repeat the first one.

Okay. So, thank you. On the first one, on the Adventure Series, you see that we have launched many new products in 2025 throughout the year. So, we have launched the T-Rex 3 Pro, and we have also launched the T-Rex Ultra 2 in February, right? And then we have some of the new products also in the T-Rex family lined up in 2026.

And obviously, the Adventure Series actually also helped us to elevate our overall product mix and also helped us to improve our ASP for the company. So Adventure Series is playing more and more important role in the overall mix we have.

So I think it will continue to be like that in 2026. And with regard to your second question on Heliostripe and the rings, helio stripe has made a great performance and a debate in 2025 and it has been the most popular if not the most popular products among that price range in our portfolio but I think on the other hand we didn't manufacture enough of the heliostripe to cater for the Q3 and Q4 high seasons and we are actually resolving the supply chain on that and and in 2026 you should see more of the manufacturing of those devices and and they should see that the market demand to be satisfied on the heliostripe on the other hand we're also working on the next generation of those as we speak.

So stay tuned for the second half of this year.

Thank you.

Thank you once again for joining us. We hope you have a great day. You may now disconnect. Thank you. Thank you.