Executive Summary / Key Takeaways

• Strategic Transformation Bearing Fruit: Zepp Health (NYSE:ZEPP) has successfully pivoted from an OEM/ODM model to a self-branded, high-margin Amazfit ecosystem, evidenced by a remarkable 46% year-over-year revenue growth in Q2 2025, the first such growth since Q2 2021.
• Technological Differentiation through AI: The company's proprietary Zepp OS, integrated with OpenAI and Google Gemini, provides advanced AI-driven features like Zepp Flow 2.0 and a cost-efficient food log, establishing a competitive edge in the smart wearable market.
• Robust Product Portfolio and Market Share Gains: A tiered product strategy, from the rugged T-Rex series to the lifestyle-oriented Active and Bip lines, and innovative devices like the Helio Strap, is driving market share gains, particularly in Europe where Amazfit ranks second in no-SIM smartwatches in Italy.
• Clear Path to Profitability and Strong Outlook: Aggressive cost management, expected gross margin expansion above 40% in the mid-to-long term, and a robust product launch pipeline underpin management's confidence in achieving profitability, with Q3 2025 revenue guided for 70-79% year-over-year growth.
• Shareholder Value Focus Amidst Undervaluation: Despite a current market capitalization significantly below its net equity value, Zepp Health is committed to its share repurchase program and debt optimization, signaling management's belief in the company's long-term trajectory and value re-evaluation.

The Dawn of a New Era: Zepp Health's Strategic Pivot in the Wearable Market

Zepp Health Corporation, founded in 2013 as Huami and rebranded in February 2021, is undergoing a profound strategic transformation. The company is shedding its legacy as an OEM/ODM provider, primarily for Xiaomi, to emerge as a formidable player in the self-branded smart wearable and health technology sector. This pivot aims to establish Zepp as a "new Garmin type of branded smartwatch company," focusing on its Amazfit, Zepp Clarity, and Zepp Aura brands. This strategic shift is crucial in an industry projected to grow from $70 billion in 2024 to $150 billion by 2029, at a compound annual growth rate of 16.8%. The global smartwatch market, after a 7% decline in 2024, is expected to recover with single-digit percentage growth in 2025, driven by the increasing adoption of AI features and a greater emphasis on comprehensive health data.

Zepp Health's core business revolves around its smart wearable devices, powered by its proprietary Zepp Digital Health Management Platform. This platform integrates the Zepp OS, custom-designed AI chips, advanced biometric sensors, and sophisticated data algorithms to deliver cloud-based, 24/7 actionable insights and guidance. This foundational technology is a key differentiator, enabling Zepp to compete effectively against industry giants.

The competitive landscape for smart wearables is dominated by established players such as Apple (AAPL), Garmin (GRMN), Alphabet (GOOGL) through Fitbit, and Samsung (005930.KS). Apple, with its premium, integrated ecosystem, commands strong brand loyalty but faces challenges in price-sensitive markets. Garmin excels in specialized, durable devices for outdoor activities, known for its robust battery life and GPS accuracy. Alphabet leverages AI and health data analytics through Fitbit, while Samsung focuses on integrated ecosystems with its smartphones. Zepp Health positions itself as an accessible yet technologically advanced alternative, particularly in the fitness and outdoor segments. While Zepp's financial performance, including revenue growth and profitability, has historically trailed these larger rivals, its strategic shift and technological advancements are narrowing the gap.

Technological Edge: AI-Powered Innovation Driving Differentiation

Zepp Health's technological prowess is a cornerstone of its investment thesis. The company's proprietary Zepp OS is at the heart of its innovation, continually evolving to integrate cutting-edge artificial intelligence. The recent upgrade to Zepp OS 5.0, powered by deep integration with OpenAI and Google Gemini, represents a significant leap forward. This integration has led to "substantial advancements in both functionality and performance at a lower cost," making the system faster and expanding its capabilities.

A prime example of this AI integration is Zepp Flow 2.0, which redefines training with voice-controlled workouts, real-time environmental data, and personalized fitness insights, delivering an intuitive, hands-free experience. Furthermore, the Zepp app's camera-powered food log feature, which automatically uploads nutrition data and categorizes calories, has seen its recognition costs reduced to "just 10% of the original" through a hybrid AI solution. This cost efficiency has allowed Zepp to expand the service across Europe and double the daily usage allowance for users. The company has also achieved a "17-fold improvement in speed" for voice command responsiveness on its smartwatches by leveraging open-source technologies like LLaMA.

The company's in-house designed main watch SoC chips, now utilized in the T-Rex 3, Active 2, and Bip 6 models, have reached a milestone of one million units in usage. This close integration of hardware and Zepp OS has resulted in "better graphic performance and computing speed as well as lower power consumption," providing a "more unique competitive edge compared to competing products, achieve a faster time to market, and a guaranteed supply chain." These quantifiable benefits directly contribute to Zepp's competitive moat, enabling higher Average Selling Prices (ASPs), lower manufacturing costs, and ultimately, better margins and market positioning against rivals. This technological roadmap is central to Zepp's long-term growth strategy, allowing it to offer advanced features at accessible price points, challenging competitors who often require premium subscriptions for similar functionalities.

Strategic Transformation and Operational Momentum

Zepp Health's transformation journey is evident in its product strategy and operational execution. The company's core product lines—T-Rex, Balance, and Bip/Active—embody its "training, recover, evolve" philosophy. The adventure series, spearheaded by the T-Rex smartwatch, has maintained its competitive edge with sustained volume growth. The T-Rex 3, launched in Q3 2024, was "crafted with a strategic approach to directly challenge the industry-leading sports and outdoor watches offered by our competitors," and its robust demand even led to temporary supply constraints.

The Q2 2025 launch of the Balance 2 smartwatch and the Helio Strap further exemplifies this strategy. The Balance 2, priced at $299, is positioned as the "most premium offering in Amazfit's mainstream lineup to date," consolidating capabilities typically requiring multiple watches from competitors. The Helio Strap, Amazfit's first screen-free fitness, recovery, and sleep tracker, has garnered "extensive praise from KOLs and high customer acclaim," recognized as the "most accurate heart rate monitoring device" among tested wearables. Crucially, it offers subscription-free health monitoring, contrasting with competitors' products that often demand over $200 per year in premium subscriptions. This product carries a "very healthy gross margin" on par with the company's overall margin. The entry-level Bip 6 and Active 2 series continue to see steady growth, expanding brand awareness and reinforcing the resilience of Zepp's tiered product strategy.

Operationally, Zepp Health has proactively diversified its supply chain with a dual sourcing model from China and Vietnam, actively exploring opportunities in the NAFTA region. This flexible strategy has effectively mitigated the impact of trade uncertainties and shifting tariff policies. For instance, the estimated full-year 2025 tariff impact of $2 million to $3 million is expected to be "fully offset by global operating efficiency gains," largely by shifting U.S.-bound production to Vietnam. The company's integrated sports community strategy, leveraging global athletes like Gabby Thomas, Jasmine Paolini, Derrick Henry, and Rod Farvard, alongside collaborations with emerging sports communities like HYROX, has significantly boosted global brand recognition. Amazfit's dedicated HYROX app, offering tailored health metrics, is a unique functionality in the market. This multi-layered marketing approach, including strong performance during Amazon Prime Day (second most improved wearable brand in the U.S.A. year-over-year, 60% sales surge in EMEA), underscores the effectiveness of its branding efforts.

Financial Performance and Liquidity: A Turning Point

Zepp Health's financial performance in Q2 2025 marked a significant turning point. The company reported a remarkable 46% year-over-year increase in revenue to $59.4 million, with all revenue contributed by the Amazfit brand. This is the first quarter of year-over-year revenue growth since Q2 2021, signaling the successful execution of its strategic transformation. This impressive growth was primarily driven by strong demand for the Bip 6 and Active 2 series, as well as the continued success of the T-Rex 3 series.

Gross margin, a critical indicator of the company's shift to higher-value products, reached 41% in Q3 2024, the highest in the company's history. While Q2 2025 saw a slight dip to 36.2% due to a higher proportion of lower-margin entry-level products and clearance of older Balance 1 models, management anticipates gross margin expansion in the second half of 2025, with a long-term goal of exceeding 40%. For the full year 2024, the gross margin was 38.5%, a substantial increase from 26.2% in 2023.

The company has also made significant strides in cost management. Since Q3 2020, Zepp has aggressively reduced its overall operating costs, aiming for a run rate of approximately $25 million per quarter. In Q2 2025, adjusted operating costs were $26 million, a decrease from $32 million in Q1 2025, demonstrating progress towards this target. This disciplined approach has helped narrow the adjusted operating loss to $4.9 million in Q2 2025, a 42% improvement year-over-year. Research and development expenses in Q2 2025 were $10.3 million, reflecting continued investment in AI and new technologies to maintain a competitive edge. Selling and marketing expenses increased by 15.1% year-over-year to $12 million, supporting brand recognition and sales growth.

From a liquidity perspective, Zepp Health maintains a solid position. As of June 30, 2025, the cash balance stood at $95 million. The company successfully refinanced a significant portion of its short-term debt into long-term instruments with more favorable interest rates and a two-year duration during Q1 2025, significantly reducing near-term liquidity pressures. Since Q1 2023, Zepp has cumulatively retired $68.0 million of debt, including $11.5 million repaid in Q1 2025. This proactive capital structure optimization, coupled with strong working capital management, positions the company for future growth and investment opportunities.

Outlook and Growth Trajectory

Zepp Health's outlook for the third quarter of 2025 is robust, with revenue expected to be in the range of $72 million to $76 million, representing a substantial 70% to 79% year-over-year growth compared to $42.5 million in Q3 2024. This optimistic guidance is underpinned by several key drivers: the continued strong performance of the entry-level Bip 6 and Active 2 series, a full quarter of sales from the recently launched Balance 2 and Helio Strap, sustained popularity of the T-Rex 3 series, and anticipated new product launches. Management has indicated plans to "refresh all our major product lines" with "one to two new products every quarter" in 2025, a significant acceleration from previous years.

Gross margins are projected to expand in the second half of 2025, driven by a more favorable product mix with a higher proportion of mid-to-premium tier products. The company's commitment to cost management remains steadfast, with full-year 2025 operating expenses expected to be at or below 2024 levels, and the estimated $2 million to $3 million tariff impact fully offset by operating efficiency gains. This disciplined approach, combined with strong revenue growth, is expected to drive a "boost in profitability" in the second half of 2025. Management explicitly stated that in the "upcoming 2 years or mid- to long term, you should expect our gross margin to further expand above the 40%."

Risks and Competitive Dynamics

Despite the positive momentum, Zepp Health faces several risks. Macroeconomic headwinds and fluctuating consumer discretionary spending could impact sales, particularly in price-sensitive segments. While the company has proactively diversified its supply chain to mitigate tariff impacts, geopolitical uncertainties remain a concern. Supply constraints, as experienced with the T-Rex 3 and Helio Strap due to unexpectedly high demand, highlight the challenges of scaling production for popular new products. Intense competition from established players like Apple, Garmin, Alphabet, and Samsung, who often offer larger-than-usual discounts, could pressure Zepp's pricing and margins.

However, Zepp's competitive positioning is strengthening. Its focus on delivering advanced features at accessible price points, exemplified by the Balance 2 consolidating capabilities of multiple competitor watches and the Helio Strap offering subscription-free premium features, provides a distinct value proposition. The T-Rex 3 is already being hailed by media and YouTubers as a "Garmin Fenix killer," indicating its strong standing in the premium outdoor segment. In key markets like Italy, Amazfit has captured 23.3% of the no-SIM smartwatch market, ranking second only to Apple. The company's unique AI-powered Zepp OS and custom SoC chips offer a technological edge in performance, power consumption, and time-to-market, which are crucial differentiators in the crowded wearable space.

Conclusion

Zepp Health Corporation stands at a pivotal juncture, having successfully navigated a challenging transformation to emerge as a revitalized player in the smart wearable market. The company's strategic pivot to a self-branded, high-margin Amazfit ecosystem, underpinned by significant technological advancements in AI and a robust product pipeline, is clearly yielding results. The remarkable 46% year-over-year revenue growth in Q2 2025, coupled with aggressive cost management and an expanding gross margin, signals a clear path toward sustained profitability.

With a strong outlook for Q3 2025, driven by a balanced product launch cadence and continued market acceptance of its innovative devices, Zepp Health is well-positioned to capitalize on the growing demand for AI-powered health and fitness solutions. While competitive pressures and macroeconomic uncertainties persist, the company's proactive supply chain diversification, strategic marketing, and commitment to shareholder value through debt optimization and share repurchases underscore a confident management team. For discerning investors, Zepp Health represents a compelling opportunity in a growing market, poised for a significant value re-evaluation as its strategic vision continues to unfold and its technological leadership solidifies its market position.