Earnings Call Transcript - ZEPP Q3 2025

Operator, Operator

Hello, ladies and gentlemen. Thank you for joining Zepp Health Corporation's Third Quarter 2025 Earnings Conference Call. Today's call is being recorded. I will now pass it over to your host, Ms. Grace Zhang, Director of Investor Relations for the company. Please go ahead, Grace.

Grace Yujia Zhang, Director of Investor Relations

Hello, everyone, and welcome to Zepp Health Corporation's Third 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 slides referred to on this call by visiting the IR section of the company's website at ir.zepp.com. Participating in today's call are Mr. Wang Wayne Huang, our Chairman of the Board of Directors and Chief Executive Officer; and Mr. Leon 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 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 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 Zepp's earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial information. Zepp's press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. I will now turn the call over to our CEO, Mr. Wayne Wang Huang. Please go ahead.

Wang Huang, CEO

Thank you all for joining us today. I'm delighted to report that Zepp Health delivered another exceptional quarter with revenue grew 78.5% year-over-year, underscoring the ongoing effectiveness of our strategic brand and product evolution. We also turned our cash balance from outflow to inflow, a critical operational milestone. These results once again validate the strength of our strategy, the competitiveness of our products and the growing global recognition of the Amazfit brand. Our exceptional Q3 performance was fueled by our well-executed multi-tier product strategy, which drove consistent gross margin growth quarter-over-quarter. In September, we launched our flagship Amazfit T-Rex 3 Pro, which was well received by users and the endurance outdoor community with enhanced durability, advanced navigation and outdoor safety features setting new premium outdoor benchmarks. Our earlier launch Balance 2 and Helio Strap continued performing well, offering advanced analytics and better usability for daily training. Entry-level lines maintained steady sales across key global channels, underscoring Amazfit's strong positioning across consumer segments. Our gross margin continued to expand sequentially, growing from 36.2% to 38%, thanks to effective mix management and strong ongoing execution of our margin improvement initiatives that began in late 2023. Operating expenses remain prudent as we balance continued investment in R&D with selective marketing spending to support brand visibility. These improvements demonstrate our commitment to operational discipline while maintaining innovation momentum on which Leon will provide more details later. The Amazfit T-Rex 3 Pro launch was the highlight of the quarter, designed for endurance athletes and outdoor adventures. The new model introduces key upgrades that elevate the user experience such as enhanced durability, advanced navigation, and improved outdoor safety features, providing exceptional precision and reliability in challenging terrain. The metal made its global debut during UTMB race week in Chamonix, where Amazfit ambassadors and elite trail runners used the watch for real-time checking and recovery optimization. Notably, Ruth Croft earned first place in the UTMB 2025 Women's division, marking a historic win and powerful validation of our product performance. Beyond hardware, the T-Rex 3 lineup continues to evolve through firmware upgrades that add new HYROX training modes, merging training and competition into one integrated experience. Our Balance 2 and Helio Strap, representing the perfect synergy of advanced analytics and everyday usability, continued to perform strongly following their Q2 debut. During the quarter, Balance 2 updates introduced new training modes, including HYROX PFT and ultramarathon, improved data visualization, plug-in cycling speedometer connectivity, and refined UI features such as one-tap display and optimized digital quant feedback. Our entry-level Bip 6 and Active 2 series continued to contribute stable volume across key global channels, maintaining strong sell-through performance and solidifying Amazfit's position across diverse user tiers. Beyond hardware, we advanced our technology ecosystem on multiple fronts. A major milestone this quarter was Zepp Health's acquisition of core assets from Wild.AI, a pioneering women's wellness platform. Wild.AI uses informed analytics to optimize performance, recovery and nutrition across all stages of women's life. Integrating these capabilities into our ecosystem will enable Amazfit to deliver more personalized physiology-aware coaching experiences to female athletes while maintaining compatibility with third-party wearables. We also continue to integrate Zepp OS and Zepp Pro, building on the advances of Zepp OS 5.0, enhancing AI-driven training insights and expanded integration with platforms like Strava and TrainingPeaks, offering users more connected and data-rich performance feedback. These improvements also powered the latest firmware updates across Balance 2 and T-Rex 3. In addition, the long-awaited BioCharge feature upgrade has arrived on Balance 2, integrating synchronized biometric data streams to calculate your energy levels throughout the day. BioCharge is a personalized body energy management feature that continuously analyzes your energy levels by integrating data from your nighttime sleep, daytime naps, exertion, and stress indicators. Separately, we are proud to share that Amazfit received RED Network Security certification from SCS. This recognition reflects our commitment to user privacy, product safety, and international compliance, further strengthening global consumer trust in our products. Our athlete and community initiatives continue to strengthen Amazfit brand equity worldwide. Athletes are now contributing to our product development process, ensuring that our sports watches are designed by athletes for athletes. In Japan, we proudly welcome Ota Aoi as Amazfit's first Japanese brand ambassador. Furthermore, we continue to expand our presence in major global and regional sports communities. During the quarter, we strengthened our presence in global and regional sports communities through continued partnerships with HYROX. We expanded our HYROX athlete roster, welcoming returning athlete Hunter McIntyre alongside new competitors. This expansion underscores our commitment to supporting both established champions and emerging talent in functional fitness racing while integrating athlete insights into product development. Additionally, we participated in the HYROX Beijing event, engaging local fitness communities and reinforcing our brand's global empowerment of athletes. Over the past several years, Zepp Health has completed a structural transformation of both its product and profit model. Our brand has also been significantly strengthened and reshaped with clear positioning as a sports and performance technology brand. Today, our portfolio covers every tier from entry to premium with healthy profit margins and distinct positioning. Our high-end offerings, the T-Rex 3 Pro have delivered strong performance, proving robust market acceptance for our premium line. Meanwhile, our Balance, Active, and Bip lines continue to deliver steady growth across global channels. Alongside this, our expanding Helio ecosystem featuring Helio Ring, Helio Strap, and future Helio innovations has built a strong and scalable framework that supports our long-term competitiveness and sustainable growth. This solid foundation provides us with strong confidence heading into the fourth quarter and 2026, as we continue to execute on our strategy and deliver lasting value to both users and shareholders. Entering the final quarter of 2025, we are confident in our continued growth, supported by a strong product pipeline, margin improvement initiative, and disciplined execution. Despite a challenging macroeconomic environment, our strategic focus on sports tech and holistic health ecosystem is delivering early results. We anticipate Q4 revenue to be between USD 82 million and USD 86 million, delivering 38% to 45% year-over-year growth. This growth reinforces our optimism in sustaining top-line momentum and achieving greater operating leverage. What continues to fuel our success is our dual commitment, creating long-term value for shareholders and empowering users through innovative technology. Thank you for your trust and support. I will now turn the call over to Leon to go over the highlights of our third quarter financial results.

Leon Cheng Deng, CFO

Thank you, Wayne. Greetings, everyone. Thank you again for joining our third quarter 2025 earnings call. The macroeconomic landscape has had some impact on our Q3 performance. On the tariff front, the situation has remained stable, and we have made the necessary short-term adjustments to our business model. Moving forward, we are focused on long-term structural supply chain optimizations. Additionally, we have increased inventory in key product lines to meet strong customer demand and mitigate potential tariff-related risks, which explains the slight increase in our inventory levels this quarter. Regarding memory chips, we have seen prices more than double this year due to supply constraints and increased demand, especially in the AI sector. While memory chips represent a relatively small part of our overall bill of materials, we have secured supply at favorable pricing to mitigate the impact. We'll continue to monitor market conditions and adjust our plans accordingly. Now, let's turn to financials. In the third quarter of 2025, our revenue increased 78.5% year-over-year to $75.8 million, meeting the upper end of our previous guidance as the Amazfit branded ecosystem continued to gain traction. Echoing Wayne, this performance represents strong market reception for the T-Rex 3 Pro launched in September as well as continued strength from Balance 2 and Helio Strap, both introduced in the second quarter. In addition, the sustained popularity of our entry models, including Bip 6 and Active 2, provided steady sales volume. These positives were partially offset by Helio Strap supply constraints and typhoon-related shipment delays late in the quarter. Looking ahead, we have just started selling our T-Rex 3 Pro 44-millimeter version on October 25th. Together with our upcoming new product launches, we expect the top line expansion to continue into the holiday season. Turning to gross margin, it was influenced by various factors, including product mix, product launch timing, and product life cycles such as model upgrades. In the third quarter, we reported a gross margin of 38.2% or 39.4%, excluding the impact of tariffs. This represents a 2.4% decrease compared to 40.6% in Q3 2024. The year-over-year decline was primarily driven by three factors related to our entry-level products. First, these products were priced lower than the previous generation to drive revenue growth which resulted in a lower margin. Second, Prime Day discounts were applied to expand our customer base, further impacting margins. Third, as a part of our annual product cycle refreshment cycle, the current entry-level models are nearing the end of their life cycle and were offered at promotional prices. Despite these factors, the T-Rex product line showed strong margin performance with the launch of the T-Rex 3 Pro in September, helping to offset the impact of Prime Day discounts on the T-Rex 3. Sequentially, gross margin improved by 2% compared to Q2 2025, driven by a higher contribution from the new products and a more favorable product mix. This was partially offset by promotions on entry-level products as well as the impact of front-loaded shipments ahead of the U.S. tariffs on China-manufactured goods. We remain on track with our margin expansion strategy initiated in the second half of 2023 and expect further progress as new product launches gain scale. Now let's turn to costs. We remain committed to prudent cost management, continuing the program we began in Q3 2020 to reduce overall operating costs. Adjusted operating expenses for the third quarter totaled $28.6 million and 37.7% of sales compared to $28.6 million and 67.3% of sales in the third quarter of 2024 and $26.4 million and 44.4% of sales in the previous quarter. It remained stable compared with last year. The $2.2 million quarter-over-quarter increase was primarily driven by foreign exchange rate fluctuations. However, by maintaining a cost-conscious approach, we're moving towards a run rate of approximately $25 million per quarter for operating costs. Concurrently, we remain committed to investing in R&D and marketing activities to ensure our long-term competitiveness. Adjusted R&D expenses in the third quarter of 2025 were USD 10.2 million, increased by 1.5% year-over-year and remained stable quarter-over-quarter. At the same time, we focused on refined R&D approaches, as we consistently evaluated resource efficiency to ensure maximum return on investment and productivity. Adjusted selling and marketing expenses were $11.9 million in the third quarter of 2025, increased by 0.5% year-over-year and decreased by 1% quarter-over-quarter. This year-over-year increase was primarily due to front-loaded brand and channel investments ahead of the holiday season. We also expanded the Amazfit athlete roster by signing several new athletes during the quarter, including elite trail runners, Ruth Croft, and marathoner Ota Aoi, Amazfit's first Japanese brand ambassador to further elevate our brand recognition. At the same time, we consistently pushed for retail profitability and channel mix improvement. We are committed to investing efficiently in marketing and branding to ensure our sustainable growth. Meanwhile, adjusted G&A expenses were $6.5 million in the third quarter of 2025, flat year-over-year and with a modest sequential increase from the second quarter of 2025, primarily reflecting normal foreign exchange fluctuations. Excluding these effects, G&A expenses will remain stable or slightly lower over the past three quarters, as we continue to streamline overhead and maintain disciplined cost control while improving operating efficiency. As a result, we achieved operating breakeven in the third quarter of 2025, a significant improvement versus Q3 2024 when adjusted operating loss was $11.3 million. This marks a key milestone in our path to sustained profitability, and we expect to be operationally profitable in the fourth quarter of 2025. As of September 30, our cash balance stood at $103 million compared with $95 million in Q2 2025. Inventory levels increased slightly during the quarter as the company strategically built up stock in key product lines to prepare for upcoming product launches and Q4 consumer electronics peak season. Cash balance increases were primarily driven by improved working capital and enhanced operational efficiency. We expect the cash balance to continue to grow in Q4 2025. In terms of capital structure, the overall long-term and short-term debt levels remained consistent following the restructuring we completed during the first quarter. We refinanced a significant portion of our short-term debt into long-term instruments with a more favorable interest rate and a two-year duration, which significantly reduced near-term liquidity pressure and enhanced our overall capital structure. Since the beginning of 2023, the company has cumulatively retired $64.5 million of debt. Going forward, we will continue to optimize the capital structure for the company. We maintained our commitment to our share buyback program, underscoring our confidence in Zepp Health's long-term fundamentals and growth trajectory, and our focus on delivering value for shareholders. Finally, our outlook for the fourth quarter of 2025, we expect revenue to be in the range of $82 million to $86 million, representing a 38% to 45% year-over-year growth compared to $59.5 million in the fourth quarter of 2024. We are thrilled to move into the next stage of our growth, building on our positive momentum heading into Q4 and 2026. Thank you all for your time today. I will now open the call for questions. Operator, please go ahead.

Operator, Operator

Your first question comes from Sid Rajeev with Fundamental Research Corp.

Siddharth Rajeev, Analyst

Congratulations on another strong quarter. I have a few minor questions. The press release mentioned supply constraints on the Helio Strap. Do you mind giving more color on this?

Leon Cheng Deng, CFO

Yes, Sid. I mean, I have mentioned the issue has a few folds. Number one is there is a memory chip issue, which impacts the whole industry and the lead time for those is actually getting quite long if we want to secure enough quantity of that. Obviously, Helio Strap is a very popular product well received by consumers and customers all over the world. So we have a shortage in essence in every region in which we operate. So it's more constrained by the supply volume rather than the demand. And then the other thing is we also have encountered a few things like the typhoon in the Southern East China area towards the quarter end, which also put the already constrained situation a little tighter. So I think that's the situation we have around the Helio Strap. But we are actually working towards resolving those. So you will see that situation improving in Q4 and into Q1.

Siddharth Rajeev, Analyst

And you don't give segmental revenues by region. But just to get an idea regarding the impact of tariffs, would you say North America still accounts for approximately 15% of total shipments?

Leon Cheng Deng, CFO

I think so. So I think it's around 15% to 20%. But actually, we have communicated our dual sourcing strategy, whereby we supply the majority of the products in the U.S.A. from Vietnam, right? So the tariff impact on that is relatively small, if not zero.

Siddharth Rajeev, Analyst

And with respect to product launches, was the T-Rex Pro the only product launched last quarter? Can you give us some numbers, how many launched last quarter, how many expected in Q4?

Leon Cheng Deng, CFO

Yes, I can provide the number for Q3. Unfortunately, I can't share more details about Q4 at this time. In Q3, we only launched the T-Rex 3 Pro, specifically the 48-millimeter version during the EFAT and UTMB in September. That was the sole new product for Q3. However, the Helio Strap and Balance 2 were released in June and were available for the entire quarter. Looking ahead to Q4, we have started selling the T-Rex 3 Pro 44-millimeter version as of October 25th. As for additional new products, I encourage you to be patient, and information will be provided in due time.

Operator, Operator

Your next question comes from Dylan Chu with Point72 HK.

Dylan Chu, Analyst

Congrats on the strong quarter. Two questions from my side. Number one, just around new product momentum and holiday sales as related to that Q4 guide. Could you please give us a bit more color on the T-Rex 3 Pro launch as well as the 44-millimeter initial feedback so far? How would you compare that versus last year's T-Rex 3? And what's your current view on the holiday season demand signals? What's your overall plan for the holiday season? And sort of related to that, given the strong new product pipeline as well as the supply chain improvement you mentioned, and we can see on the balance sheet you're proactively building inventory. Is there any reason to be extra conservative in terms of Q4 guidance? Because this year, the Q-on-Q guidance implies a slightly lower growth compared to historical guidance. So this is my first question.

Leon Cheng Deng, CFO

Thank you, Dylan. That’s quite a comprehensive question. Let me break it down. First, regarding the holiday season sales, our current signals are quite encouraging. This positive outlook reflects in our guidance. As for our guidance approach, we tend to be somewhat cautious with our numbers. For Q2, we estimated a range of 72% to 76%, ultimately achieving 75.8%. Moving on to Q4, we are seeing strong demand for our new products, including the Helio Strap and the T-Rex 3. In response to the second part of your question, the T-Rex 3 Pro has received favorable feedback for both the 48-millimeter and 44-millimeter versions. However, I lack sufficient data to identify a trend since the 44-millimeter version has only been sold for a week, primarily in China. We have observed a steady increase in activation on a daily basis. As for the T-Rex 3 Pro 48-millimeter, since its launch, it is performing exceptionally well, even surpassing the launch performance of the T-Rex 3 from last year. This is notable, especially considering the T-Rex 3 Pro’s price is double that of the T-Rex 3. Overall, this is a promising trend for us, and we plan to maintain that momentum into Q4 and throughout the holiday season. This should provide you with insight into our holiday season outlook and the performance of different product categories in the coming months.

Dylan Chu, Analyst

Second question is on your channel strategy into 2026 and beyond. There seems to be a significant amount of white space, both online and offline, in terms of channel opportunities. We can see recently the brand.com traffic has increased quite a bit and the offline presence continues to expand a little bit. So could you please give us a bit more color in terms of how you want to grow your channel reach into Q4 and next year? Just any thoughts around the low-hanging fruits and your focus channels would be helpful.

Leon Cheng Deng, CFO

Yes. It's a good question. So what we noticed is that in the past quarters, our online presence and also the channel online have been growing very fast, to some extent, even outpacing the growth we see on the offline channels, right? Because traditionally, we were very strong on offline channels. Now you see that Amazon and our own dot-com website are actually growing very fast. And maybe it also has something to do with the strategy, which we had to go premium, whereby most of the products, if you see, which are performing very well, are T-Rex 3, T-Rex 3 Pro, Balance 2, which are above $300 products, right? So I think looking into next year and the next quarter, obviously, the online part will continue to play a significant role in our growth trajectory because Amazon and also our dot-com website still have a lot of potential to perform next year versus this year. We see a lot of demand and push from Amazon and a lot of aggressive plans have been built up as we speak, right? So I think number one trend is definitely online, and online will continue to grow. We haven't seen the ceiling yet. So that trend for sure will definitely continue. On the other hand is the offline channel. What you noticed or maybe that kind of explained why we were a little bit more prudent or conservative on the numbers we guide is that we have some supply constraints for example, on Helio Strap. And we also have issues when launching the first batch of the new products; we try to prioritize online over offline. Obviously, we want these products to be seen by online users first before they go mainstream and into channels like Best Buy and Target, right? And which means there's still a lot of potential to get into the offline channels. Once we have enough supply of our products, for example, on T-Rex 3 Pro and Helio Strap, the moment we resolve the supply issue, we will definitely push for a bigger reach in the offline channels for next year. So I think in essence, we see big opportunities both online and offline. And obviously, if we drive a bigger growth online, that will give a better gross margin portfolio versus the offline channel, right? So I think that’s how you should look at the channel mix going forward. And I hope that gives you a feeling for such a picture on how we are going to evolve in the upcoming quarters.

Operator, Operator

Your next question comes from Yuan Zhu with Guosen Securities.

Yuan Zhu, Analyst

Congratulations on your results. I have two questions. The first relates to your outlook for Q4 regarding your top line guidance. What are your underlying assumptions for price growth and volume growth? And what's your approach to discounting during this period? And also, could management share if any marketing initiatives are planned for Q4? How should we think about the trajectory of sales and marketing expenses next quarter?

Leon Cheng Deng, CFO

Let me address your questions one by one. First, regarding our outlook for Q4, we've provided our guidance, and we aim to be cautious with our estimates, as evidenced by our Q2 guidance and its realization. We expect Q4 to be a solid holiday season since it's typically the peak quarter of the year when people purchase gifts. We're working to raise the average selling price, as you can see in our quarter-over-quarter efforts. Additionally, with the launch of the Balance 2 priced around $300 and the T-Rex 3 Pro close to $400, we intend to increase prices and enhance our gross margin. As we've observed, our margin performance improved by 2% from Q2 to Q3, and we anticipate further expansion in Q4, although this may be slightly countered by necessary discounting and promotional activities, which unfortunately many in the industry are doing. We'll approach this selectively, focusing on specific consumer segments and product categories rather than across the board, and we'll assess the return on investment for any discounts we implement. From a marketing investment standpoint, our marketing expenses have remained stable at around $10 million to $11 million per quarter. Our plan for Q4 aligns with this, as we will carefully evaluate each investment. If a marketing initiative doesn't demonstrate a solid return on investment, we won't pursue it. Conversely, when opportunities arise, we tend to increase marketing spending to leverage higher growth, as we did in Q3. If such an opportunity presents itself in Q4, we would certainly consider it, as we believe that driving growth and increasing market share are crucial right now. I believe I've covered all the points you raised, but please remind me if I've overlooked anything.

Yuan Zhu, Analyst

Yes, it's very clear. And my second question is on the product roadmap. Just a follow-up, will there be any other new product launches this year? And if we look further ahead, could management share your plans for product iteration next year? Are there any plans to expand the lineup further perhaps with running smartwatches or smart training, and where the pace of new product launches become more intensive next year?

Leon Cheng Deng, CFO

I believe I have addressed the question about new products. In Q3, we launched T-3 Pro, and just a few days ago in Q4, we started selling the 44-millimeter version. That's certainly one of the new products for Q4. There will be a few more new products in the pipeline for this quarter, but I can't share too much detail right now. As for next year, I've mentioned before that we continue to maintain a rhythm of launching 2 or 3 new products each quarter. Typically, we refresh our entry-level lines in Q1, follow with the more competitive Apple and Samsung alternatives in Q2, and focus on the T-Rex and sports lines in Q3. I expect next year to have a similar pace and volume of product launches as this year. I encourage you to be patient regarding the exact products we will release, but I assure you they will be exciting.

Operator, Operator

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 comments.

Grace Yujia Zhang, Director of Investor Relations

Thank you, once again, for joining us today. If you have further questions, please feel free to contact Zepp Investor Relations department through the contact information provided on our website. Thank you.