Xiaomi Phone Conference: Significant Progress Made in the Past Few Years, Latest Release of 5G Chip by Competitors Will Not Have a Major Impact

On Tuesday, August 29th, Xiaomi released its Q2 earnings report for the period ending June 30th. Despite the sluggish overall market conditions, Xiaomi demonstrated impressive performance resilience. In Q2, it achieved a revenue of 67.5 billion yuan, surpassing market expectations of 65.8 billion yuan, with a 4% decline compared to the same period last year (702 billion yuan), but a 13.2% increase MoM. It achieved an adjusted net profit of 5.1 billion yuan, exceeding market expectations of 4.1 billion yuan, with a significant YoY increase of 147% and a QoQ growth of 59%. In the first half of this year, Xiaomi's adjusted net profit reached 8.4 billion yuan, approaching the level of adjusted net profit for the entire previous year.

After the release of the earnings report, Xiaomi's management provided comments on the quarterly performance and addressed market concerns.

Regarding the frozen 4.8 billion yuan by the Indian government, Xiaomi's CEO, Lei Jun, responded that the funds were only frozen and not confiscated, and they are actively seeking legal resolution. Lei Jun stated that Xiaomi's operations in India have always been legal and compliant, and they are actively communicating with local government departments. Despite the lengthy process, Xiaomi believes in the fairness and independence of the Indian judiciary. Lei Jun also mentioned that Xiaomi's business adjustments in the Indian market have shown significant effects, and in the future, there will be new changes in Xiaomi's market share and product structure in India.

Furthermore, Lei Jun stated that Xiaomi's progress in the field of smart electric vehicles is going smoothly, even exceeding expectations in recent developments. The plan to start mass production and launch in 2024 remains unchanged.

Lei Jun emphasized that Xiaomi's actual investment in smart electric vehicles will be even greater. Xiaomi aims to enter the global top five in the future and has made long-term arrangements for self-research and self-development. They have also built their own car factory, so the cash flow investment is higher than the disclosed figures.

The following is a transcript of a conference call:

Q1 In the context of weak global smartphone sales in Q2, Xiaomi successfully achieved a MoM recovery in sales. What are the sales prospects for the domestic and overseas markets in Q3? A competitor has just released a new 5G chip (referring to the Kirin 9000s used in the HUAWEI Mate 60 Pro). What impact will it have on Q3 sales? And in the long term, what impact will it have on the competitive landscape?

A: There will be continued MoM improvement in sales in Q3, and Xiaomi's capabilities have undergone significant changes. We have noticed the release of new products by competitors. The Chinese market has always been fiercely competitive. With Xiaomi's progress over the past few years, regardless of what competitors do, the most important thing for Xiaomi is to focus on doing its own things well, such as improving its capabilities, delivering excellent products, providing good user services, and enhancing established strategies. Therefore, Xiaomi's overall strategic direction will not undergo any changes, and we believe that the product release schedule and sales expectations will not be greatly affected.

Q2 The company's own inventory has significantly decreased in Q2. Has channel inventory also returned to normal?

A: Both Xiaomi's own inventory and channel inventory have been fully adjusted and are currently in a very healthy state. Due to the increase in sales recently, there is currently a shortage situation in various markets.

Q3 The gross margin in Q2 reached a historical high. What impact will the increase in prices of displays, memory, and other components have on the gross margin in the second half of the year?

A: Xiaomi has advantages in cost within the industry. Firstly, there is the scale effect, and secondly, there is an improvement in resource capabilities. Take dual screens as an example. So far, only Xiaomi has been able to achieve domestic production of dual screens, which has significant cost advantages compared to external procurement.

Xiaomi has also achieved independent research and development in components such as camera modules and motors. Good technology means lower costs.

The increase in memory costs mainly comes from suppliers proactively reducing production, and only some product prices have risen. Xiaomi has sufficient strategic inventory reserves, so the short-term impact will not be significant. Future cost factors will not have a major impact on Xiaomi's gross margin.

Q4 The overall price of raw materials is decreasing. Will this increase the industry's discount intensity and affect Xiaomi's retail prices?

A: The decline in raw material costs has basically bottomed out, and the overall market prices have also reached the bottom. The decrease in raw material prices only means that people can buy smartphones with larger memory for the same amount of money, and it will not cause a significant decline in Xiaomi's retail prices.

Q5 The domestic IoT business performed very well in Q2. Did the overseas IoT business also show signs of recovery?

A: The domestic market is supported by several strong categories such as tablets and major appliances, so the performance in the past few quarters has exceeded normal levels. However, from the overall market perspective, the recovery of the consumer electronics industry is slow, and the situation is not very optimistic. Overseas markets have been adjusting inventory, but now the inventory pressure has eased. It is expected that the performance of the overseas IoT market will rebound in 2024.

Q6 What are the prospects for the advertising and gaming businesses in the future?

A: The domestic advertising market is still growing, and the proportion of high-end users is increasing, which is conducive to the increase of ARPU value. The growth of MAU has also attracted many new ad placements overseas. We initially served domestic apps going global, and later, as our operational capabilities became stronger, we also attracted many international app placements.

In terms of gaming, it also benefits from the growth in the number of high-end users. The ARPU of games on high-end smartphones may be three to four times higher than that of games on mid-range and low-end smartphones. As the proportion of high-end smartphones increases, it also greatly helps overall gaming revenue.

Q7 What are the plans for the future implementation of AI products? Will there be products similar to AI phones?

A: In terms of large models, we focus on lightweight and localized deployment. Currently, the large models tested on mobile devices are already running smoothly, and we have also upgraded Xiao Ai, which has received good feedback from the tests.

Currently, AI applications are mainly used internally within the company, such as for fine-tuning store operations and completing product matching tasks.

Q8 Will Xiaomi enter the African market in the future?

A: Apart from the US market, we have entered markets worldwide. We have already achieved a leading position in Europe, with market share second only to Samsung and Apple. Our remaining task is to focus on high-end products. Currently, our market share in the Middle East is 17%, and our goal is to reach 25%. Additionally, there are significant opportunities in markets such as Latin America.

Africa can be divided into North Africa, South Africa, and Sub-Saharan Africa, which includes Central Africa, East Africa, and West Africa. Currently, we hold the second-largest market share in North Africa, while our market share in South Africa is in single digits, indicating substantial room for growth. Xiaomi has already started making efforts in Nigeria and Kenya, which are part of Sub-Saharan Africa.

Q9 After 5G and camera capabilities, smartphones have been lacking significant selling points. Can AI become the next big selling point? If so, how does Xiaomi plan to promote it?

A: Xiaomi may not consider AI as a standalone selling point in the future. AI is a technology that ultimately manifests itself in the form of functionality or product experience. Large-scale models can be widely applied in smartphones, such as the integration of Xiao Ai and large-scale models, or the combination of AI and MIUI. When we release future products, you will see many AI-related features being implemented.