Zepp Health Corp Q4 FY2025 Earnings Call

Ladies and gentlemen, thank you for standing by for Zepp Health Corporation's Fourth Quarter and Full Year 2025 Earnings Conference Call. Today's 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.

Hello, everyone, and welcome to Zepp Health Corporation's Fourth Quarter and Full Year 2025 Earnings Conference Call. The company's financial and operating results were issued in our press release on 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 Leon Deng, our Chief Financial Officer. Joining us today will also be Mike Yeung, Chief Operating Officer and General Manager of North America; and Eric Flemming, VP of Capital Markets in 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 Securities Litigation Reform Act of 1995. Forward-looking 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 20-F for the fiscal year ended December 31, 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 Zepp's earnings press release and the conference call includes discussions of unaudited GAAP financial information as well as our audited non-GAAP financial information. Zepp's press release contains a reconciliation of the unaudited non-GAAP measures to the most directly comparable GAAP measures. I will now turn the call over to our CEO, Wang. 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 Zepp evolving. Over the past few years, we have been transforming Zepp from a traditional wearable hardware company into what we call a hybrid training platform. Our goal is not simply to launch competitive devices, but to build a broader performance system that integrates endurance, strength and recovery through hardware, training intelligence, software and data capabilities. With that context in mind, 2025 was a strong year for Zepp. For the full year, Amazfit branded product revenue grew 51% year-over-year. In the fourth quarter, Amazfit branded product sales grew 45% year-over-year, while gross margin reached a record level of 40.3%. Importantly, this growth was achieved without relying on heavy discounting during the holiday season. These results reflect the continued progress of our multiyear transformation as we evolve from a volume-driven business toward a brand-led and premium-focused global company. We also demonstrate strengthening pricing power across our portfolio as our product mix continuously shifts 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 T-Rex Outdoor series. It targets everyday trainers beginning their fitness journey. It features a vibrant AMOLED display, long battery life, over 170 workout modes, and built-in support for offline maps and training guidance powered by Zepp Coach. We also recently introduced Active 3 Premium, designed specifically for new and entry-level runners, positioned around the USD 169 price tier. Active MAX and Active 3 Premium reinforce the core volume segment of our portfolio, while expanding our reach among users beginning structured 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 around the USD 550 price level — the highest price point in our history. Products like Ultra 2 reinforce the premium positioning of the Amazfit brand while expanding the reach of our product portfolio. On the software side, we continue strengthening our ecosystem through updates to Zepp OS. Features such as BioCharge, energy monitoring, and Zepp Coach AI-driven training guidance are now reaching more devices and helping increase engagement, retention and long-term user value. Together, our Zepp app, wearables and sensor technologies are creating a stronger ecosystem around our hardware foundation. From what we believe is a growing defensive moat around our platform by increasing switching costs, improving user retention and expanding lifetime value. On the 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, Tyler Andrews and Ruth Croft. These athletes are not just brand ambassadors, they actively use Amazfit devices such as Balance 2, Helio Ring and Helio 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, this sends a powerful signal about the accuracy, credibility and performance capabilities of our technology. Another important component of our strategy is our collaboration with HYROX, one of the fastest-growing hybrid endurance competitions globally. At HYROX events, racers around the world, including recent events in cities such as Phoenix and Las Vegas, athletes gather in front of their official results screen to capture and share their finished time. Directly beneath the race results appears 'presented by Amazfit,' making Amazfit the most prominent brand integrated into that moment. When athletes share those results across social platforms, the brand naturally spreads through athlete-generated content rather than paid promotion. This is not traditional sponsorship visibility. It is structural level exposure, embedded directly into the athlete experience. More broadly, HYROX plays a key role in our hybrid training strategy, which integrates endurance, strength and recovery into one coherent performance system, where wearable 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 USD 50 million to USD 55 million, 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 into higher-margin categories at scale, we expect our margin profile to continue strengthening. With that, I will now turn the call over to Leon to walk through the financial details. Leon, please go ahead.

Thank you, Wang. 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% year-over-year growth, compared with USD 183 million in 2024, marking a return to growth trajectory. Our fourth quarter growth was driven by broad-based strength across our diversified portfolio. As Wang mentioned, our 2025 Q4 Amazfit branded product sales increased by 45.4% year-over-year and 12.4% sequentially, fueled 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. Looking ahead, we have just started selling our Active 3 Premium / Active MAX and T-Rex Ultra 2 watches. Together with our upcoming new product launches, we expect the top-line expansion to continue 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%, an impressive expansion of 3.6 and 2.2 percentage points compared with the same period of 2024 and the 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 elevated 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 more than offset the headwinds we're facing from FX fluctuations, memory chip cost increases and tariffs—amid 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-GAAP operating expenses for the fourth quarter were $37.1 million. Expenses as a percentage of sales improved by approximately 6% compared to Q4 2024. However, in absolute terms, the amount is up by around $8 million year-over-year and quarter-over-quarter. I will break down the specific drivers 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 logistics expenses naturally rise in tandem. Second, we recorded around $5 million year-end provisions and noncash adjustments for potential bad debt and business model optimization as part of our ongoing risk management strategy and another USD 1 million investments in patent fees and brand protection to safeguard our intellectual properties and ensure long-term business success — in total $6 million. Finally, and most importantly, we strategically invested around $1 million in front-loaded marketing initiatives, including upfront costs for elite athlete sponsorships such as partnerships with Olympic medalist Josh Kerr, as well as some investments in marketing and branding activities that facilitated the adoption of new product launches. As you can see, except for the first element, the majority of the cost increase are not structural cost increases. We expect lower operating costs relative to revenue in 2026, as these one-off costs normalize and we realize further cost efficiencies. By line item, adjusted research and development expenses were USD 10.2 million, remaining 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 focus on refined research and development approaches as we consistently evaluate resource 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 the U.S. and Europe. At the same time, we consistently pushed retail profitability and channel mix improvement. Adjusted G&A expenses were $11.3 million compared with USD 6.1 million and USD 6.5 million in the same period of 2024 and the third quarter of 2025. The increase is mainly driven by the year-end provisions I mentioned above. Excluding those, G&A expenses remained flat through the year. We continue to streamline overhead, maintaining disciplined cost control while improving operating efficiency. Total adjusted operating expenses were USD 123 million in 2025 compared with USD 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 items, would be USD 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 Zepp Health was USD 6.4 million, compared to an adjusted net loss of USD 22.5 million in the fourth quarter of 2024. The net loss in Q4 was mainly a result of operating results more than offset by a $2 million deferred tax asset provision and a $6 million one-off provision. Full year adjusted net loss attributed to the company was USD 31.5 million compared with the adjusted net loss of USD 56.7 million for 2024. The net loss for 2025 were mainly from deferred tax asset provisions, 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. Despite strategic risk purchases of key components for the future, our inventory balances decreased to USD 72.8 million compared with USD 87.7 million as of Q3 2025, reflecting our ongoing improvements in inventory management. As of December 31, 2025, our cash and cash equivalents stood at $113 million, compared to USD 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 USD 58 million of debt, and we'll 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 an 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 industry 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 PCs 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 RISC-V, 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're 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 continued margin expansion and solid operational discipline, we are 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.

Your first question comes from Sid Rajeev with Fundamental Research.

Congratulations on the strong revenue growth and the new product launches. Also nice to see you're anticipating robust revenue growth in Q1. How many new products are you planning to launch this year compared to last year? Just a rough idea is fine.

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

Okay. And how are you preparing for the recent spike in the U.S. dollar?

We are not heavily exposed to the currency fluctuations in the dollar. A lot of our production is diversified across Asia in different places. And if you look at our markets, we are very strong in Western Europe as well as the U.S. So yes, to some extent, the dollar strengthening is actually giving us some tailwind instead of a headwind.

Okay. Just one more question, if I may. Regarding operating expenses, you did a good job in stabilizing or even cutting costs in some areas. Which specific areas do you think there is room for further reductions?

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. 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 G&A cost because you have seen that G&A costs have come down for us, and I think there's also room to improve over there. And the last one is R&D. But I think on one hand, we need to invest in R&D to sustain the new product launches I just mentioned. On the other hand, we see a lot of places whereby we could adopt AI to actually improve our efficiency in R&D. You asked about the numbers, right? We will provide more color in our disclosures, but the areas I mentioned have potential for further optimization.

Your next question comes from Peter with Brooks Investments.

I have two questions. If you could provide more color on the sales performance of the Adventure series? And second, if you can share more about what's the plan for the Amazfit Strap and Ring for this year?

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

Right. Yes, if you can provide more color on the sales performance of the Adventure series. And the second question would be what's the plan for Helio Strap and the Helio Ring.

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, 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 Helio Strap and the Helio Ring. Helio Strap has had great performance and traction in 2025, and it has been one of the most popular products in that price range in our portfolio. But I think on the other hand, we didn't manufacture enough of the Helio Strap to cater for the Q3 and Q4 high seasons, and we are actually resolving the supply chain on that. In 2026, you should see more of the manufacturing of those devices and you should see the market demand satisfied on the Helio Strap. On the other hand, we are also working on the next generation of those as we speak. So stay tuned for the second half of this year.

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.

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

Thank you.