Hello, ladies and gentlemen. Thank you for standing by for Zepp Health Corporation's Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Today's conference 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 second quarter 2024 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. Wayne Wang 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 US 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, 2023, and other filings as filed with the US 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. That press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. I'll now turn the call over to our CEO, Mr. Wang Huang. Please go ahead.

Hello, everyone. Welcome and thank you for joining our call. To begin, I would like to provide an update on our strategic transformation. Our second quarter results aligned with expectations with an increase in Amazfit branded product sales and achieving a high gross margin. Despite a year-over-year decline in sales, our net loss for the first half narrowed. With several new products slated for launch in the second half of the year, we firmly believe that the worst time of our transformation is behind us. The progress we have achieved is centered on three key pillars. First, we are investing in new technologies, including AI, to meet the needs of our customers and maintain a competitive advantage against our peers. Second, we focus on product innovations and profitable growth. We plan to launch our hit products during the upcoming IFA events. In addition, we are enhancing the global visibility of our Amazfit branded products through sponsorship of major sports events and partnerships with renowned athletes to expand our roster of international representatives. Now let's delve into the three pillars as we witness the transformative impact of AI applications in the industry. According to the latest analyst reports, AI is both enhancing existing use cases and creating new ones, significantly boosting user loyalty. Zepp Health is leveraging AI to transform sports and health experiences. This quarter, we launched Zepp OS 4.0 in integrating OpenAI's GPT-4 into our Amazfit smartwatches for safer and more useful responses, enhancing their role as wellness companions. Key features of Zepp OS 4.0 include an upgraded Zepp Flow with intelligent language interactions and new health-focused mini apps. Zepp OS 4 is now available for Amazfit Balance and Amazfit Active, with support for other models coming later in 2024. Moreover, our R&D team has made significant breakthroughs in…

Thanks, Wayne. Greetings, everyone. Let me walk you through some of the key metrics of our second quarter financial results. Over the past two years, the entire consumer electronics sector has been facing significant challenges. We have observed that the pressure of discretionary spending, especially in an inflationary environment, is also creating headwinds for our operations. Additionally, major brands like Apple and Samsung offered larger-than-usual discounts during the past prime day in certain regions, highlighting the competitiveness of the industry landscape. However, we are cautiously optimistic to see that, according to IDC Research, overall smart wearable market will return to growth in this year, with AI-enabled health insights and GenAI services as the growth drivers. Our focus has always been on positioning ourselves effectively in the current market. This is why we are prioritizing profitability, aiming to maximize profits from our self-branded product sales, and continuing with the cost transformation initiatives we implemented in previous quarters. It's also worth highlighting that we entered the smart ring category recently, as it represents a $2 billion plus market that is growing at a high-double-digit rate in the upcoming years. Simultaneously, we'll be entering into the Open Wearable Stereo earbud segment, which will deliver substantial growth in the Bluetooth headphone market. Now turning to sales, echoing Wayne's statement, we believe the most challenging phase of our transformation is behind us. The three key pillars driving our progress are applying new technologies, particularly with a focus on AI, product innovations with profitable growth, and enhancing global visibility through major sports sponsorship and marketing efforts. We are particularly excited about our expanding self-branded product offerings, which position us for long-term growth as a global leader in smart wearables and health care solutions. For the second quarter, our overall sales aligned with our guidance with a…

[Operator Instructions]. The first question today comes from Sid Rajeev with Fundamental Research Corp.

First of all, great to see the spike in sequential sales growth of self-branded units. But I guess the real surprise was the continued improvement in gross margins. What's really driving this? Is it higher product prices, cost optimization or something else? I know you gave some reasons. I was trying to find out what exactly or what's the main reason for this increase. And the second thing is with new product launches, can you bring it up to the 45% to 50% range?

Let me start with the easy ones. As you heard from Wayne’s script, we have a lot of exciting new product launches lined up for the upcoming month, especially in IFA. You heard about the OWS earbuds. You heard about the new T-Rex watches, and you also heard about the ring. And we also have some exciting innovations on the way. And all of these products will carry a very healthy gross margin to the magnitude of over 45% or 50%, depends on the product line we're talking about. So these are the new product launches, which is due for the second half of this year. Coming back to your first question, that's also one of the reasons which drives the gross margin of the company, continuously improved quarter on quarter for the past four quarters. I think to a big part, this is coming from optimizing the product mix. But also, it's like I said, more new products, which has been launched recently, less products which is on clearance. That definitely helps our overall gross margin performance. On the other hand, we're also doing retail channel mix. For example, we cut the bleeders on those channels, which doesn't make money. And by doing so, through optimizing the retail channel mix as well as our product mixes, together with the new product launches, which is lined up in the second half of the year, we're confident that we can continue on the gross margin improvement trend for the upcoming quarters.

My next question is, you have a lot of new products planned. So to make it easier for us to track, are you able to give us a number, as in how many new products or updated products planned this year versus last year?

I think we have at least three, if not four, products which are scheduled to be launched in the second half of the year. And last year, same period, I think we have two products, if I remember clearly.

The first half of this year, you had two, right?

No, the first half of this year, we only had one. You can count one and a half because we launched the Bip 5 Unity which is a different variable of the Bip 5.

I know you don't provide segmental revenue by region, but did you notice any material change in sales in any region, particularly, last quarter?

No, I think we have told you before that United States still remains as a region whereby we see a lot of potential growth from. And also, we have seen some breakthroughs in Europe, like what Wayne mentioned in Germany and France. And we have worked with the key accounts such as Decathlon in those countries. And in Asia Pacific, specifically in China, we have seen a very good growth from China, and we have put in a lot of marketing efforts to promote that as well.

Just one question finally. Could you provide an update on the status with NYSE given the non-compliance notice you received a few months back?

We have ultimately until October 31st to rectify this issue. And as we have communicated before, we are committed to resolve this through either organically the share price to push above $1 or, if needed, a reverse split. So we're confident that before that date, we'll be regaining the compliance.

The next question comes from Nicolette Jones [ph] with Brooks Investments [ph].

I just have two questions. I'd also like to just dig in a little bit more about the new product map and some of your thinking behind your product decisions. And then in addition, I'd like to find out more information on the net income trend.

Maybe I take the easy ones, Nicolette. Obviously, the net income trend, you have noticed that it has been on uptrend. Quarter on quarter, it's improving. If you look at the first half of this year, the net income obviously is much better than the same period of last year. I think it was an improvement of 15%, to that magnitude. And we are actually looking or targeting at improvement also for a second half of this year. So hopefully, throughout the year, we can come back to profitability. That's always the target which we have been striving for. And coming back to your first question on the new products and the thinking behind it, I think you have heard us saying that in the upcoming IFA, which is in September, we're going to launch a new watch. Our most popular outdoor smartwatch, T-Rex, is up for an update. Actually, a lot of new functionalities will be added to that watch. And we are also going to launch a new OWS earbuds. OWS is a very popular concept. It's basically talking about open-end headset, which you can wear without feeling it. It's very different from the AirPods, which is made by Apple. And according to the market research, the OWS earbuds is going to be a fast growing segment in the Bluetooth headset market in the upcoming years. So, we are quite excited to have that product add to our lineup. And you also heard that we have the Helio Ring, and we're going to put Helio Ring into more geographies and also into more sizes, especially the smaller sizes, which are more tailored for the mass market and mass consumers. So I think we are going to be one of the only players, if not the only players, who have the smartphone coupled with the ring coupled with the OWS headphones and maybe some other form factors, because we have always been saying that we're trying to offer a full suite of wearable devices, smart wearable devices, so that our users can have a one-stop shop on better controlling and understand their health conditions. So I think this is always the concept what we try to bring this company to. So we want to be smart wearable player not only restricted to smart watch, per se, and we want to offer a complete suite of health care services to the users. So that's the whole theme behind the new products which we are going to launch. I'm not sure if I answered your question correctly or…?

No, that's really informative actually. It's much more color.

As there are no further questions, I'd like to turn the call back over to the company's IR director, Grace Zhang, for any closing remarks. Thank you once again for joining us today. If you have further questions, please feel free to contact Zepp Health investor relations department through the contact information provided on our IR website. Thank you.