An 'Expense Control' Conundrum: Huami's 1H Net Income Down by 84%
Realizing a 21% year-on-year revenue growth, the smart wearable vendor Huami failed to present an encouraging net income uptick due to the rapidly expended cost and expenses.
Huami's (HMI:NYSE) second-quarter earnings release would be encouraging if one were to only look into the revenue and shipment growth. The total revenue in the second quarter of 2020 reached CNY 1,137.3 million (USD 161.0 million), representing an increase of 9.5% year-on-year. Total units shipped reached 8.9 million, compared with 8.3 million in the second quarter of 2019, a 7.2% increase. With the challenges amid the worldwide pandemic, the product shipment and revenue growth of Huami are promising.
However, companies that are at the growing phase often meet problems of cost management, as the revenue and the expenses expand at the same speed, resulting in a plain profit growth or even net losses. For Huami, the operating income saw a y-o-y decrease of 90% in the second quarter of 2020. The downward trend is primarily caused by the year-on-year increase of 76% in sales expenses and 25% increase in R&D expenses. The 16% increase in the cost of revenues also contributes to the operating income slope. Although the efforts in marketing and R&D have shown a net effect, with several new product launches and the increasing sales volume, the market might expect a higher return on the invested capital with more remarkable revenue growth in the following quarters.
Besides the slope in net profit, another concerning fact is that Huami did not reveal any updates regarding its cooperation agreement with Xiaomi (01810:HK), which will expire in October 2020. Under the agreement that Huami acts as the preferred supplier for Xiaomi's wearable products, Xiaomi contributes at least 70% of Huami's total revenue. Though the CEO in the investor conference said that he is optimistic about the continuation of the business cooperation with Xiaomi, the uncertainty might impede the investors' confidence.
The good news is the company is going to launch a new product line named Zepp, targeting the premium market of consumer electronics. The R&D progress made in line with its healthcare strategies is also remarkable as the services related to heart health insights will be online soon and the Huangshan - 2 chipset will be in mass production by 2021.