Xiaomi Strikes Back

Xiaomi Group (1810.HK) released its third-quarter earnings report for 2023 after the Hong Kong stock market closed on the evening of November 20, 2023 (as of September 2023). The key points are as follows:

Overall performance: Revenue is in line with expectations, and gross margin exceeds expectations. Xiaomi Group's total revenue this quarter was 70.9 billion yuan, a year-on-year increase of 0.6%, which is basically in line with market expectations (70.5 billion yuan). The company's revenue rebounded this quarter, mainly driven by the growth of IoT business and internet service revenue. Xiaomi Group's gross margin this quarter was 22.7%, a year-on-year increase of 6.1 percentage points, exceeding market expectations (21.5%). The increase in gross margin is mainly due to the improvement in gross margin of hardware such as smartphones and IoT this quarter.

Mobile phone business: Effective inventory turnover and record high gross margin. Xiaomi's smartphone business achieved revenue of 41.6 billion yuan this quarter, a year-on-year decrease of 2%, which is in line with market expectations (41.2 billion yuan). Xiaomi's global smartphone shipments increased by 2.5% year-on-year, while the average selling price of smartphones this quarter was 996 yuan, a year-on-year decrease of 5.8%. The gross margin of smartphones reached a new high of 16.6%, mainly due to the upgrade of product portfolio and the reduction of overseas inventory impairment provision.

IoT business: Growth in hardware. Xiaomi's IoT business achieved revenue of 20.7 billion yuan this quarter, a year-on-year increase of 8.5%, which is in line with market expectations (20.4 billion yuan). Although the main IoT business, which is dominated by televisions, declined this quarter, the shipment of tablets, robotic vacuum cleaners, and other businesses drove the growth of the IoT business.

Internet services: Overseas revenue accounts for 30%. Xiaomi's internet services business achieved revenue of 7.8 billion yuan this quarter, a year-on-year increase of 9.7%, slightly exceeding market expectations (7.5 billion yuan). The quarterly revenue and gross margin of the internet business continue to stabilize at over 7 billion yuan and over 70%, respectively. According to Dolphin Research, Xiaomi's ARPU value for domestic users this quarter was 35.92 yuan (a year-on-year decrease of 5.4%), while the ARPU value for overseas users was 4.88 yuan (a year-on-year increase of 21.3%). With the improvement in monetization capabilities of overseas market users, the proportion of Xiaomi's overseas internet business is expected to continue to increase.

Overall, Xiaomi's earnings report this time is quite good. The revenue reached market expectations, and the profit exceeded market expectations significantly. The main reason for the better-than-expected profit this quarter is the outstanding performance of the gross profit margin in the smartphone business.

If we talk about the performance of the core data, it only slightly exceeded expectations. The biggest highlight of Xiaomi this time lies in its inventory. This quarter, Xiaomi's inventory has once again decreased by about 2 billion yuan. The inventory turnover days have dropped to 63.7 days, the lowest level in nearly 11 quarters. Considering Xiaomi's inventory performance, it can be said that Xiaomi has overcome the difficult times, and the company's performance is expected to improve quarter by quarter.

Due to the company's investment of about 1.7 billion yuan in innovative businesses such as automobiles this quarter, if we exclude this impact, Xiaomi's performance in its original business this quarter would have exceeded 6 billion yuan. This means that Xiaomi has "fought" back.

"The stabilization and rebound of revenue + significant increase in profit + continuous decrease in inventory" in this earnings report will undoubtedly bring confidence to investors. However, it should not be ignored that the company's stock price has already risen by more than 30% recently. This already includes some expectations of improved performance.

Considering the valuation of Xiaomi's stock price in relation to the company's performance (after considering the impact of taxes), it has reached around 17 times after this increase, and there is relatively limited room for further increase in the valuation of its original business. On the other hand, the automobile business cannot be achieved overnight. Even if it can reach the scale of Xiaopeng/NIO, the valuation of hundreds of billions of yuan will only have an impact of about 20%-30% on Xiaomi's total market value.

After carefully analyzing Xiaomi's earnings report, Dolphin Research has adjusted its viewpoint: believing that the impressive performance of the earnings report will provide short-term support for the stock price. However, if there is no performance or better-than-expected performance in the automobile business, the upside potential of the current stock price is relatively limited.

Here is Dolphin Research's specific analysis of Xiaomi's earnings report:

1. Overall Performance: Revenue is in line with expectations, gross profit margin exceeds expectations again

1.1 Revenue

In the third quarter of 2023, Xiaomi Group's total revenue was 70.9 billion yuan, a year-on-year increase of 0.6%, basically in line with market expectations (70.5 billion yuan). The company's revenue growth this quarter was mainly driven by the IoT business and internet services. Although the smartphone business still declined by 2% this quarter, the decline narrowed significantly.

Among Xiaomi Group's major businesses this quarter, the revenue proportions of smartphones, IoT, and internet services were 58.7%, 29.2%, and 10.9%, respectively. The smartphone business is still Xiaomi Group's largest source of revenue.

1.2 Gross Profit Margin

In the third quarter of 2023, Xiaomi Group's gross profit margin was 22.7%, a year-on-year increase of 6.1 percentage points, exceeding market expectations (21.5%).

As Xiaomi's hardware revenue accounts for nearly 90% of its total revenue, the company's gross profit margin is mainly influenced by its hardware products. The increase in gross profit margin is mainly due to the improvement in the gross profit margin of smartphones and IoT hardware. The hardware gross profit margin is still lower than the overall gross profit margin, while the software gross profit margin continues to maintain above 70%.

2. Mobile Business: Effective Inventory Clearance, Record High Gross Profit Margin

In the third quarter of 2023, Xiaomi's smartphone business achieved revenue of 41.6 billion yuan, a year-on-year decrease of 2%. The decline in the company's smartphone business in this quarter is mainly due to the decline in average selling price, and the growth rate of Xiaomi's smartphone shipments has returned to positive.

Dolphin Research has analyzed Xiaomi's smartphone business from the perspectives of volume and price:

Volume: In the third quarter of 2023, Xiaomi's smartphone shipments reached 41.8 million units, a year-on-year increase of 4%.

Among the 1 million smartphones that Xiaomi grew in the same period, the domestic market accounted for an increase of about 50,000 units, while the overseas market accounted for an increase of about 950,000 units. In terms of market share in the third quarter, Xiaomi's market share in both domestic and overseas markets has rebounded.

Price: In the third quarter of 2023, Xiaomi's average selling price for smartphones was 996 yuan, a year-on-year decrease of 5.8%.

The year-on-year decline in Xiaomi's average selling price this quarter is mainly due to the increase in the proportion of shipments to the relatively low-priced overseas market, which structurally lowers the average selling price of the company's smartphones.

In the third quarter of 2023, Xiaomi's smartphone business achieved a gross profit of 6.9 billion yuan, a year-on-year increase of 83.1%. It accounted for 43% of the company's total gross profit.

The gross profit margin of the smartphone business this quarter was 16.6%, a year-on-year increase of 7.7 percentage points. The improvement in the gross profit margin of the company's smartphone business this quarter mainly comes from product upgrades, reduction in inventory reserves in overseas markets, and the decrease in prices of core components.

3. IoT Business: Continued Growth in Hardware

In the third quarter of 2023, Xiaomi's IoT business achieved revenue of 20.7 billion yuan, an increase of 8.5% year-on-year, which is basically in line with market expectations (20.4 billion yuan). The growth of the IoT business in this quarter is mainly driven by the growth of other IoT businesses such as tablets and robotic vacuum cleaners.

Xiaomi's main IoT products mainly include televisions and laptops. In the third quarter of 2023, the revenue of the main IoT products reached 5 billion yuan, a year-on-year decrease of 13.8%. This is mainly due to the decrease in shipments of smart TVs affected by market demand.

In the third quarter of 2023, the revenue of other IoT products of Xiaomi reached 15.7 billion yuan, an increase of 18.2% year-on-year, mainly driven by the growth of tablets, robotic vacuum cleaners, and smart home appliances. The smart home appliance business achieved a year-on-year growth of 11% in the third quarter, reaching 3 billion yuan.

The gross profit of Xiaomi's IoT business in the third quarter of 2023 was 3.69 billion yuan, an increase of 43.4% year-on-year. The gross profit margin of the IoT business in this quarter was 17.8%, an increase of 4.3 percentage points year-on-year. This is due to the growth of high-gross-margin consumer goods such as tablets and certain life consumption products in mainland China.

4. Internet Services: Overseas Revenue Accounts for 30%

In the third quarter of 2023, Xiaomi's internet services business achieved revenue of 7.8 billion yuan, an increase of 9.7% year-on-year, accounting for 10.9% of the company's total revenue, slightly exceeding market expectations (around 7.5 billion yuan).

Specifically, the breakdown of internet services is as follows:

1) Advertising services: It is the largest component of the company's internet services. In this quarter, Xiaomi's advertising services achieved revenue of 5.4 billion yuan, a year-on-year increase of 14.9%. Based on the refined operation of the advertising business and the growth of high-end smartphone users, both domestic and overseas effects and brand advertising have once again achieved year-on-year growth.

2) Game Revenue: Continued Growth. Xiaomi's game revenue in this quarter reached 1.1 billion yuan, a year-on-year increase of 10%. This marks the company's ninth consecutive quarter of year-on-year growth, mainly due to the company's new operational strategies and refined management of paying users.

3) Other Value-added Businesses: Xiaomi's other value-added business revenue in this quarter reached 1.3 billion yuan, with the financial technology business continuing to shrink.

Looking at the performance of Xiaomi and Apple's value-added businesses, companies that occupy the software entrance have relatively strong risk resistance. The company's internet service business reached a new historical high this quarter.

Dolphin Research has broken down Xiaomi's internet service business into quantity and price:

MIUI User Base: As of September 2023, the monthly active users of MIUI reached 623 million, a year-on-year increase of 10.5%. The growth rate of MIUI users continued to decline this quarter, but the user base still maintained a double-digit expansion rate.

ARPU Value: Based on the number of MIUI users, the ARPU value for a single quarter is calculated. In this quarter, Xiaomi's internet service ARPU value was 12.4 yuan, a 1% year-on-year decrease. The reason for the decrease in Xiaomi's ARPU value this quarter is the structural impact brought by the increase in the proportion of overseas users with relatively low ARPU values.

In the third quarter of 2023, Xiaomi's internet service business gross profit reached 5.77 billion yuan, a year-on-year increase of 13.3%. The gross profit margin of the internet business increased by 2.3 percentage points compared to the same period last year, mainly due to the increase in the proportion of the company's advertising business this quarter.

Compared to other companies in the advertising industry, Xiaomi, with its terminal entrance, maintains a high gross profit margin of over 70% in its internet business. In the era of intensified competition for existing traffic, the internet entrance traffic track has a good structure and unique advantages.

5. Overseas Market: Significant Decline Narrowed

In the third quarter of 2023, Xiaomi's overseas revenue reached 34.7 billion yuan, a year-on-year decrease of 2.5%, accounting for 48.9% of the total revenue.

Among them, overseas internet revenue still achieved a growth of 35.8% this quarter. The decline in the company's overseas revenue this quarter mainly came from the hardware business. In the current quarter, the global macroeconomic instability has directly affected the export of Xiaomi's smartphones and IoT products. Due to a 3% YoY increase in Xiaomi's smartphone shipments in overseas markets (excluding China), the decline in Xiaomi's overseas business is mainly due to the decrease in the average selling price of overseas smartphones.

Due to Xiaomi's business model centered around "hardware + software," although overseas smartphone sales have declined by double digits, the number of overseas software users continues to grow (with the number of new users exceeding the number of replacements). As of the end of this quarter, Xiaomi has already accumulated 623 million MIUI users, with 471 million coming from overseas markets. In other words, although Xiaomi originated from mainland China, overseas users now account for more than three-quarters of its user base.

Due to significant differences between domestic and overseas users, the average revenue per user (ARPU) of overseas users is much lower than that of domestic users, resulting in a structurally lower ARPU level for the company. This quarter, Xiaomi's internet services ARPU was 12.45 yuan, a 1% YoY decrease. The main reasons for this are the growth of overseas users and the decline in domestic ARPU.

According to Dolphin Research's calculations, this quarter, the ARPU of domestic users was 35.92 yuan, a 5.4% YoY decrease, while the ARPU of overseas users was 4.88 yuan, a 21.3% YoY increase.

6.Expenses and performance: Increasing profits quarter by quarter

In the third quarter of 2023, Xiaomi's total expenses amounted to 11.07 billion yuan, an 8.4% YoY increase. The increase in expenses this quarter was mainly due to research and development expenses and management expenses.

Research and development expenses amounted to 4.97 billion yuan this quarter, a 22% YoY increase, accounting for 7% of revenue. The increase in research and development expenses is mainly due to the increase in R&D spending related to innovative businesses such as smart cars. This quarter, the expenses for innovative businesses such as smart cars reached 1.7 billion yuan.

Sales expenses amounted to 4.74 billion yuan this quarter, a 3% YoY decrease, accounting for 6.7% of revenue. In a sluggish market, the company made significant reductions in sales expenses. The decrease in sales expenses has boosted profits.

Management expenses amounted to 1.37 billion yuan this quarter, an 8.8% YoY increase, accounting for 1.9% of revenue. Administrative expenses have increased mainly due to the increase in salaries and professional service fees for administrative personnel.

60 billion yuan in adjusted net profit for the third quarter of 2023, exceeding market expectations (48 billion yuan). From the perspective of the company's operating performance (excluding fair value changes in investments), the company benefited significantly from the significant improvement in the gross profit margin of its mobile phone business this quarter. With the increase in hardware gross profit margin to around 17%, the company's profitability has greatly improved. After the current inventory turnover, the company's performance is expected to continue to improve.

Dolphin Research Xiaomi Group historical articles review:

Earnings Season

August 29, 2023 conference call "Inventory turnover completed, impairment reversed to increase profit (Xiaomi 2Q23 conference call)"

August 29, 2023 earnings report review "India's robbery, Huawei's rebirth, can Xiaomi rise again?"

May 25, 2023 conference call "Investing in chips is a long-term strategic necessity for Xiaomi (Xiaomi 23Q1 conference call summary)"

May 24, 2023 earnings report review "Reduced inventory, lost market share, where will Xiaomi go?"

March 25, 2023 conference call "Effective inventory turnover, demand recovery still not here (Xiaomi 22Q4 conference call)"

March 24, 2023 earnings report review "Xiaomi: Falling to the bottom, when will it be able to stand up?"

November 23, 2022 conference call "Inventory digestion begins, supply and demand balance (Xiaomi 22Q3 conference call)"

November 23, 2022 earnings report review "Xiaomi has been lying down for too long, finally about to see the "light"" 2022 August 19 Conference Call "How will management explain the comprehensive decline in the financial report? (Xiaomi 22Q2 conference call)"

2022 August 19 Financial Report Review "Layoffs can't save Xiaomi's numerous predicaments"

2022 May 19 Conference Call "What did Xiaomi's management say about its internal and external difficulties? (Xiaomi 22Q1 conference call)"

2022 May 19 Financial Report Review "Xiaomi with internal and external troubles is not the best choice"

2022 March 22 Conference Call Summary "After a mediocre financial report, what did Xiaomi Group's management say? (Minutes of the conference call)"

2022 March 22 Financial Report Review "Xiaomi that is average: Tasteless to eat, too wasteful to toss"

2021 November 30 Conference Call Summary "What will Ideal Auto rely on to compete with Xiaomi, who just released an EV model shortly after? (Conference call minutes)"

2021 November 23 Conference Call "Does shortage lead to smartphone decline? Listen to how Xiaomi management explains it (Xiaomi Conference Call)"

2021 November 23 Financial Report Review "Where was Xiaomi heading with its ups and downs?"

2021 August 26 Conference Call "What did Xiaomi's management discuss after its outstanding achievements?"

2021 August 25 Financial Report Review "Don't doubt it anymore, Xiaomi once again ascended to the top"

2021 May 26 Financial Report Review "With an excellent record, will Xiaomi be included in the MSCI World Index?" March 25, 2021 Phone Conference: "How Xiaomi Responds to Chip Shortages, Slow Internet of Things (IoT) Development, and Car Manufacturing?"

On March 24, 2021, Earnings Report Review: "What's Going on with Xiaomi, with Expectations So Poor That It Makes People Doubt Life?"

In-depth Analysis

December 1, 2022: "Xiaomi: The 'Three Arrows' that Reversed the Dilemma"

June 17, 2022: "Consumer Electronics: Apple Stands Strong, Xiaomi Struggles"

December 1, 2021: "Honour's Siege, Xiaomi Faces Another 'Life and Death Crisis'"

November 24, 2021: "Behind Xiaomi's Sharp Decline, Where Did the Problem Arise?"

June 11, 2021: "2021, Xiaomi's Transformation"

March 16, 2021: "A Turnaround for Xiaomi, Finally Breaking Free from Bad Luck?"

Live Broadcasts

May 24, 2023: "Xiaomi Group's Q1 2023 Earnings Conference Call"

March 25, 2023: "Xiaomi Group's Q4 2022 Earnings Conference Call"

November 23, 2022: "Xiaomi Group's Q3 2022 Earnings Conference Call"

August 19, 2022: "Xiaomi Group-W (01810.HK) Q2 2022 Earnings Conference Call" On May 19, 2022: Xiaomi Group-W (01810.HK) 2022 Q1 Results Conference Call

On March 22, 2022: Xiaomi Group (1810.HK) 2021 Q4 and Full Year Results Announcement

On December 28, 2021: Lei Jun x Su Bingtian · Xiaomi New Year Live Broadcast

On November 23, 2021: Xiaomi Group (1810.HK) 2021 Q3 Results Conference

On September 15, 2021: Unleash the Magic - Xiaomi New Product Launch Event

On August 25, 2021: Xiaomi Group-W (01810.HK) 2021 Interim Results Release Conference

On August 10, 2021: Lei Jun's Annual Speech 2021

On May 26, 2021: Xiaomi Group (1810.HK) 2021 Q1 Results Conference Call

On March 30, 2021: Xiaomi Spring New Product Launch Event Day 2

Risk Disclosure and Disclaimer for this article: Dolphin Research's Disclaimer and General Disclosure