Zepp Health Corporation: FY2022 Form 20-F Summary
Business context and reporting period
This is an annual Form 20-F for the fiscal year ended December 31, 2022, filed April 24, 2023. It is not a standalone fourth-quarter filing; the source provides full-year results and year-end balances. Zepp develops and sells smart wearable devices, primarily under Amazfit and Zepp brands, and manufactures Xiaomi-branded wearable products through contract manufacturers. The Cayman Islands holding company consolidates PRC variable interest entities through contractual arrangements.
The company shipped approximately 20.3 million wearable devices in 2022 and reported 36.2 million average mobile-app monthly active users and 326.4 million registered users at year-end.
Key financial metrics
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Revenue | RMB4,142.9 million | RMB6,250.1 million | Down 33.7% |
| Gross profit | RMB803.1 million | RMB1,305.6 million | Down 38.5% |
| Gross margin | 19.4% | 20.9% | Down 1.5 percentage points |
| Operating income/(loss) | Loss of RMB410.2 million | Income of RMB93.9 million | Turned to loss |
| Net income/(loss) | Loss of RMB289.0 million | Income of RMB137.0 million | Turned to loss |
| Net loss attributable to Zepp | RMB288.3 million | Net income of RMB137.8 million | Turned to loss |
| Basic loss per share | RMB1.17 | Basic income per share of RMB0.55 | Turned to loss |
Amounts above are based on U.S. GAAP. The filing translates FY2022 amounts at RMB6.8972 per US$1.00; FY2022 revenue was approximately US$600.7 million and net loss attributable to Zepp was approximately US$41.8 million.
Revenue mix, margins and expenses
- Xiaomi Wearable Products revenue declined 49.2% to RMB1,697.1 million, representing 41.0% of revenue, versus 53.5% in 2021. Shipment volume declined from approximately 28.5 million to 14.0 million units.
- Self-branded products and others revenue declined 15.9% to RMB2,445.8 million, representing 59.0% of revenue. Shipment volume declined from approximately 7.6 million to 6.3 million units.
- Xiaomi product gross margin was 17.8%, compared with 17.6% in 2021. Self-branded gross margin fell to 20.5% from 24.7%, driving the overall margin decline.
- Research and development expense was RMB517.1 million, up 0.4%; selling and marketing expense was RMB460.3 million, up 5.0%; general and administrative expense was RMB235.9 million, down 8.7%.
- Operating expenses increased slightly to RMB1,213.4 million, or 29.3% of revenue, from RMB1,211.7 million, or 19.4% of revenue.
Cash flow, liquidity and debt
| Metric | FY2022 | FY2021 |
|---|---|---|
| Cash used in operating activities | RMB787.6 million | RMB232.4 million |
| Cash used in investing activities | RMB42.3 million | RMB1,069.3 million |
| Cash provided by financing activities | RMB289.2 million | RMB551.1 million |
| Cash, cash equivalents and restricted cash at year-end | RMB973.3 million | RMB1,509.5 million |
| Total assets | RMB5,267.6 million | RMB6,085.5 million |
| Total liabilities | RMB2,582.7 million | RMB3,152.1 million |
The operating cash outflow primarily reflected RMB910.7 million of accounts-payable settlement, partly offset by improved inventory and prepaid-expense management. Inventories declined to RMB1,021.9 million from RMB1,249.3 million, while accounts receivable increased to RMB682.1 million from RMB537.1 million.
As of December 31, 2022, bank borrowings totaled approximately RMB1.2 billion, consisting of RMB512.0 million of short-term borrowings and RMB684.2 million of long-term borrowings. Notes payable and other obligations totaled RMB456.4 million. The company reported RMB1.789 billion of unused credit lines and compliance with all financial debt covenants. It believes available cash and anticipated operating cash flow will cover needs for at least 12 months, although FY2022 operating cash flow was significantly negative.
Material changes versus the prior comparable period
- Revenue fell sharply because of lower Xiaomi product sales, particularly Mi Band sales, and lower self-branded shipment volumes.
- Gross margin compressed, principally because of weaker self-branded product margins and unfavorable product mix.
- The company moved from operating and net income in 2021 to substantial operating and net losses in 2022.
- Operating cash flow deteriorated from negative RMB232.4 million to negative RMB787.6 million.
- Long-term investments increased to RMB1,686.6 million, including the equity-method investment in Jiangsu Yitong. The company recorded a RMB51.8 million fair-value gain on long-term investments and a RMB13.9 million impairment loss.
- The company repurchased 10.2 million Class A ordinary shares in 2022 for RMB45.4 million and paid a special cash dividend of approximately RMB40.0 million in April 2022.
- Headcount declined from 1,227 at year-end 2021 to 987 at year-end 2022, including 564 research and development employees.
Guidance, outlook, commentary and risks
The filing does not provide quantitative FY2023 or quarterly guidance. Management states that it intends to expand Amazfit and Zepp, develop international distribution, continue research and development, and focus future Xiaomi collaborations on profitability and return on investment. A new Xiaomi business cooperation agreement was signed in February 2023 for a term ending in January 2025; the strategic cooperation agreement granting preferred-partner status was scheduled to expire in October 2023.
- COVID-19 disruptions, lockdowns, component shortages, logistics delays and weaker consumer demand affected 2022 and may continue to affect operations.
- Xiaomi remains a significant customer and distribution channel, although its revenue contribution declined to 41.0%. The relationship, pricing, product launch requirements and renewal terms remain material to results.
- The company relies on contract manufacturers and third-party suppliers, including limited sources for certain chips and sensors.
- The PRC VIE structure is central to the business: VIEs contributed 61.2% of consolidated revenue in 2022 and hold key assets, licenses and operations. Investors own the Cayman holding company rather than equity in the VIEs.
- PRC regulatory, data-security, privacy, cybersecurity, foreign-exchange and overseas-listing requirements remain evolving. The company disclosed prior app rectification notices and a RMB0.5 million cybersecurity-related fine paid in 2021.
- The company believes it was a passive foreign investment company for U.S. federal income tax purposes in 2022 and likely will remain one unless circumstances change.
- The PCAOB removed mainland China and Hong Kong from its inspection restriction list in December 2022, so the company did not expect to be identified as an HFCAA Commission-Identified Issuer after filing this report; future inspection access remains a risk.
- Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2022. The company remains exempt from auditor attestation because it is an emerging growth company.
Most important facts for an investor to verify
- Whether revenue and shipment trends stabilized after the 2022 decline, particularly Xiaomi volumes and self-branded product margins.
- Whether operating cash flow can return to positive levels and whether the stated liquidity coverage remains adequate in light of debt maturities and negative FY2022 cash generation.
- The terms, renewal status and economic impact of the Xiaomi strategic and business cooperation agreements.
- The enforceability and regulatory status of the VIE contractual arrangements and the location and availability of cash held by PRC entities and VIEs.
- The valuation, liquidity and impairment exposure of the RMB1.69 billion long-term investment portfolio, including Jiangsu Yitong and Level 3 investments.
- Potential effects of PRC data-security, cybersecurity, CSRC filing and cross-border data-transfer requirements.
- The company’s PFIC status and related U.S. tax consequences for ADS holders.