Xiaomi Corporation (XIACF) on Q2 2021 Results - Earnings Call Transcript

Aug. 25, 2021 3:28 PM ETXiaomi Corporation (XIACF)1 Comment
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Xiaomi Corporation (OTCPK:XIACF) Q2 2021 Earnings Conference Call August 25, 2021 8:00 AM ET

Company Participants

Wang Xiang - President

Alain Lam - Vice President, Chief Financial Officer and Deputy Chairman of Airstar Digital Technology

Conference Call Participants

Kyna Wong - Credit Suisse AG

Leping Huang - Huatai Securities Co., Ltd.

Gokul Krishnan - JPMorgan Chase & Co.

Yingbo Xu - CITIC

Piyush Mubayi - Goldman Sachs Group, Inc.


Ladies and gentlemen, thank you for standing by, and welcome to Xiaomi 2021 Interim Results Announcement Conference Call. Today's conference is being record. And if you have any objection, you may disconnect at this time. [Operator Instructions]

[Technical Difficulty]

Good evening, ladies and gentlemen. Welcome to investor conference call hosted by Xiaomi Corporation regarding the Company's 2021 interim results. Before we start the call, we would like to remind you that the call may include forward-looking statements, which are underlined by a number of risks and uncertainties and may not be realized in the future for various reasons. Information about general market conditions is coming from a variety of sources outside of Xiaomi. This presentation also contains some unaudited non-IFRS financial measures that should be considered in addition to, but not as a substitute for the Company’s financials prepared in accordance with IFRS.

Joining us on the call today are Mr. Wang Xiang, Partner and President of Xiaomi Corporation; and Mr. Alain Lam, Chief Financial Officer and Vice President of Xiaomi Corporation. To start, Mr. Wang will share recent strategic initiatives of the company. And after, Mr. Lam will review the business and financial performance for the first half of 2021. Following that, we will move on to the Q&A session.

I will now turn the call over to Mr. Wang.

Wang Xiang

Hello, everyone. Thank you for joining our 2021 second quarter earnings call. Firstly, I'm very, very excited to share with you our remarkable results we achieved this quarter. Building on our strong growth momentum, both quarterly revenue and adjusted net profit reached record highs. Our total revenue reached RMB87.8 billion and our adjusted net profit reached RMB6.3 billion, up 64% and 87.4% year-over-year, respectively. We have been included on the Fortune Global 500 list for the third consecutive year, ranking 338 in 2021, up 84 slots from last year.

Our smartphone business achieved significant milestones this quarter. We became the world number two smartphone company in terms of global shipments as we increase the market share across all key regions. Notably, we ranked number one in Europe for the first time and increased our market share in the region to 28.5%.

Our premium smartphones continued to gain popularity and attract new Xiaomi users. In the first half of 2021 alone, our premium smartphone shipments exceeded 12 million units globally compared with around 10 million units in all of 2020. We further advanced our Smartphone × AIoT strategy.

We recently launched multiple exciting new products. This includes Xiaomi MIX 4, our new premium smartphone featuring a sterling full screen display with camera-under-panel. Xiaomi Pad 5 Series, our first tablet since 2018. Xiaomi Sound, our first premium smart speaker, and also CyberDog, our first bio-inspired robotic companion. All of these products reflect our relentless pursuit of technological breakthrough in our premium products.

Our ability to offer innovative technologies comes from our people to recognize employees who have made outstanding contributions. In July, we announced two equity award grants totaling about 190 million shares to about 4,000 participants. We believe this is an important step for us to attract and retain the best talent and allow us to maintain our long-term technology leadership.

We owe our success to our users, and user experience has always been our priority. To celebrate the 10-year anniversary of Mi 1, our first smartphone, we decided to give back to our first group of Mi 1 customers the RMB1,999 they paid to demonstrate our deep gratitude for their support. Going forward, we will continue to be friends with our users and offer the coolest products and services to them.

Now I’d like to invite Alain to discuss our second quarter earnings and the business updates in greater details. Alain?

Alain Lam

Thank you, Xiang. Good evening everyone. Thank you for joining us today for our second quarter 2021 earnings call. As Xiang mentioned, building on our momentum recently, we delivered another set of record setting results in the second quarter. Our revenue and net profit, our global market share, user base and our IoT platform all achieved remarkable growth in this quarter, which I'll discuss in more detail in this presentation.

We achieved record quarterly revenue and adjusted net profit this quarter. In the second quarter, our total revenue grew 64% year-over-year to RMB87.8 billion. Our GAAP net profit grew 83.9% to RMB8.3 billion and our adjusted net profit grew 87.4% year-over-year to RMB6.3 billion.

We have built Xiaomi into one of the most recognizable brands worldwide. Xiaomi has been included on the Fortune Global 500 list for the third consecutive year. This year, we ranked 338, up 84 slots from last year. We were also selected among BrandZTM Top 100 Most Valuable Global Brands again for the third consecutive year, and we ranked 70 this year, up 11 slots from last year.

If you look at our smartphone market share, in the second quarter, we achieved the number two position in smartphone shipments with a market share of 16.4%. Our global smartphone shipment increased 82.9% year-over-year, which again was the highest growth rate among the top smartphone companies.

Similarly, we continued our stellar growth in the mainland China smartphone market. Despite a year-over-year decline in the overall market, our mainland China smartphone shipment grew 35.1% year-over-year again, the highest growth rate among the top smartphone vendors. As a result of this, we rose to the number three position and improved our market share to 16.8% in the last quarter. The robust performance of our smartphone business was supported by our increasingly competitive position in the premium smartphone markets.

Our premium smartphone shipment exceeded 12 million units globally in the first half of 2021 alone compared with around 10 million units in all of 2020. If you look at this chart, we've expanded our market share in mainland China across multiple premium price categories from RMB3,000 and above. Our ability to continuously innovate in the premium segment is due in large part to our investment in R&D. In the second quarter of 2021, our R&D expenses increased by 56.5% year-over-year to reach RMB3.1 billion.

The latest example of our technology innovation is well represented by our Xiaomi MIX 4, our flagship premium smartphone that we launched on August 10. Equipped with the camera-under-panel technology, MIX 4 has a full screen display that allows the front camera to be completely hidden under the screen. It is also the first domestic smartphone to support the UWB Point to Connect technology, enabling seamless connectivity with our AIoT products, such as our smart TV and our smart speakers.

We also launched CyberDog in August, which exemplifies our achievements in AI and robotics. CyberDog leverages Xiaomi's smartphone imaging technology to proceed its surroundings and its advanced AI is capable of countless tasks and personalized interactions. It is build upon open-source algorithms and will formally establish a robotics laboratory along with an open-source community for engineers to share their latest innovations.

On the smart manufacturing side, we've also achieved major breakthrough. In July 2021, we officially broke ground on our Smart Factory Phase II in the Changping district of Beijing. Leveraging our Phase I R&D capabilities, the new Smart Factory will have an annual production capacity of 10 million premium smartphones and is expected to begin production by the end of 2023. We are confident that our Smart Factory will leverage our cutting-edge technologies to demonstrate transformative efficiency gains for China manufacturing industry.

As Xiang mentioned, we recognized that our people are key towards technology leadership. In July, we announced two separate share award grants to employees who share our mission and values and have made outstanding contributions to our business. On July 2, we awarded over 17 million shares to over 3,900 young engineers, fresh graduates and other core staffs. On July 5, we awarded over 119 million shares to 122 technology specialists, our core management and the initial recipients of our new 10-year entrepreneur program. We believe these share awards will help us attract and retain the best talents and motivate them to create a long-term value for us.

An update on our Smart EV business. Since our announcement, we have been focusing on building the best team for this important initiative. In the last couple of months, we have received over 20,000 applications for our Smart EV business. In particular, we announced 500 new positions in July for our self-driving division to develop L4 autonomous driving technology in-house.

Today, as many of you may have noticed, we also announced that we will acquire a company called Deepmotion, one of the leading providers of L4 autonomous driving technology. We are very confident that we'll continue to attract the best talent to this very new and important business.

With that overview, let’s dive deep into each of our segments starting with smartphones. In the second quarter, our smartphone business continued to grow rapidly, revenue grew 86.8% to RMB59.1 billion our highest ever. Our global smartphone shipment reached a new record high of 52.9 million units up 86.8% year-over-year. In mainland China, we continued to expand our offline channel. As of the end of 2021, the total number of our retail stores in mainland China exceeded 7,600, an increase of 3,100 stores from March. Many of these new stores are set up in the lower tier cities, which have allowed us to penetrate new markets and expand our market share.

As you can see our offline smartphone market share in mainland China increased to 7.8% last quarter. While we continue to expand our offline presence, our online channel also set new records. During the 618 e-Commerce Festival, our cumulative paid GMV exceeded RMB19 billion, an increase of 90% year-over-year. The order volume of our smartphone ranked number one among Android smartphones on JD.com, Tmall and Suning. Furthermore, our IoT product achieved a total of 158, No.1 rankings across various platforms by order value or by order volume.

Turning now to our significant achievement in the overseas markets. According to Canalys, in the second quarter, we increased our smartphone market share in all key regions where we operate. In particular, our ranking in Europe climbed to the number one position for the first time. Furthermore, our market share rankings in Asia Pacific, the Middle East and Africa rose number one, number two, and number three, respectively. Our smartphone market share ranked number one in 22 markets worldwide and was among the top five in 65 markets. It's also worth noting that we ranked number one for the first time in 10 new markets this quarter.

I like to further highlight the excellent results we achieved in Europe. We ranked number one for the first time in Europe with a market share of 28.5% as our smartphone shipment increased 70.1% year-over-year. In Spain, we ranked number one for six consecutive quarters, as our market share reached 41.2%. In Italy and France, our ranking surged to the number one position with market share of 35% and 29.7%, respectively, as our shipment grew over 80% year-over-year in both countries.

Now let's move on to the IoT business. Our IoT and lifestyle product revenue increased by 35.9% year-over-year to RMB20.7 billion in the second quarter. Our global leading consumer AIoT platform continues to expand. The number of connected IoT devices on our IoT platform reached 374.5 million, up 34% year-over-year. Moreover, the number of users who had five or more devices on our AIoT platform reached 7.4 million, up 44.5% year-over-year. In June 2021, our AI assistant MAUs surpassed 100 million for the first time and reached 102 million, an increase of 30.2% year-over-year.

As the number one TV brand in mainland China, we continued to launch new and innovative products, especially in the premium category. In August, we launched a premium Xiaomi TV Master 77-inch OLED, which featured for the first time the UWB technology. In the second quarter, our global shipment of smart TVs reached 2.5 million units. According to AVC, our TV shipments ranked number one in mainland China for the 10th consecutive quarter and among the top five globally.

To further expand our multi-screen ecosystem, we launched the Xiaomi Pad 5 Series in August, our first tablet since 2018. The Xiaomi Pad 5 Pro features highly attractive hardware specifications, including the Qualcomm Snapdragon 870 processor and 11-inch 2.5K display, 67-watt fast-charging and customized keyboard and pen accessories. It is seamlessly integrated with our MIUI for Pad operating system, which offers optimized support for over 300 mainstream apps further improving user experience.

We also recently launched our first premium smart speaker, which we call, Xiaomi Sound. The speaker offers high-resolution certified audio with dynamic tuning by Harman for an immersive and realistic sound experience. It also features the UWB technology, which enables them to connect with our smartphone seamlessly.

Our IoT and lifestyle products segment also continued its rapid growth trajectory in the overseas market. In the second quarter, overseas revenue from IoT increased by 93.8% year-over-year. Our smart TVs enter new overseas markets and are now sold in more than 40 markets globally. Many of these IoT products have gained popularity overseas. For example, overseas revenue from our electric scooters, our smart wristbands, smart watches and desktop monitors have grown over 100% year-over-year in the overseas market.

Now let's move on to our Internet Services segment. Our global internet user base continued to grow rapidly and drive our Internet Services business. In June, our MIUI MAU increased by 32.1% year-over-year to 453.8 million. While our mainland China MAU rose to 124 million, increase of 5.3 million users from the end of March. Our global TV MAU also grew over 34% year-over-year. As our global user base continues to grow, revenue from our Internet Services segment reached RMB7 billion in the second quarter, up 19.1% year-over-year. Our quarterly advertising revenue hit another historical high and reached RMB4.5 billion, which also contributed to the increase in our gross margin in the Internet Services segment to record high of 74.1%.

Our overseas internet services continued its strong growth momentum, and we see significant potential to further penetrate the overseas market. In the second quarter, overseas internet services revenue increased 96.8% year-over-year and accounted for 15.6% of our total internet services revenue. Our MIUI MAU in some of the key overseas regions continued to grow rapidly. For example, our Western Europe MAU grew more than 60% year-over-year and our Latin America MAU grew over 125% year-over-year, respectively. Going forward, we will further diversify our overseas internet services offering and enhanced our user experience.

Now let's move on to more detailed financials. As mentioned earlier, our total revenue reached RMB87.8 billion in the second quarter, up 64% year-over-year and 14.2% quarter-over-quarter. While all of our three key segments demonstrated strong growth on a year-over-year and on a quarter-over-quarter basis. Revenue from our smartphone grew to RMB59.1 billion. Revenue from our IoT and lifestyle products reached RMB20.7 billion and revenue from our Internet Services segment reached RMB7 billion. Overseas revenue increased 81.6% year-over-year to RMB43.6 billion accounting for 49.7% of our total revenue.

Talking about our gross margin. Our gross margin reached 17.3% in the second quarter and our gross margin for our smartphone, IoT and Internet Services segment was 11.8%, 13.2% and 74.1%, respectively. Gross margin from our smartphone and IoT segment decreased on a sequential basis mainly due to enhanced promotional efforts during the online shopping festival in the second quarter of 2021. Our quarterly adjusted net profit again reached a new record high of RMB6.3 billion, up 87.4% year-over-year and 4.2% quarter-over-quarter. Our adjusted net profit climbed to 7.2% in the second quarter from 6.3% in the same period of 2020.

Due to our high operating efficiency, our operating expense ratio in the second quarter remains stable at 11.1%. We continued to generate strong operating cash flow. In the second quarter, our adjusted operating cash flow reached RMB8.1 billion, while our capital expenditures were around RMB700 million. Our strong cash flow allow us to optimize our capital structure and we have returned some of the cash back to our shareholders in the form of stock repurchases. In 2021 year-to-date, we repurchased a total of 208 million shares, around HKD5.4 billion.

Primarily due to our strong operating cash flow and our capital market financing activities, our total cash resources reached over RMB111 billion as of the end of the second quarter. We continuously explore suitable investment opportunities across different industry verticals and our investments enable us to create long-term strategic value, while generating additional earnings growth for us.

During this quarter, we generated an after-tax net gain of RMB1.1 billion from disposal of some of our portfolio investments. As of the end of the second quarter, we have invested in more than 330 companies and the total value of our investments reached RMB74.5 billion, representing around HKD3.57 per share. As the world's second largest smartphone company, we are fully committed to leveraging our scale and efficiency and drive a more sustainable economy that supports our users, our employees, our company and our planet.

I'd like to take this opportunity to give an update on our ESG strategy. We firmly believe in leading by example and are proud to integrate ESG factors into our product and services, into our corporate governance structure, and in our overall brand. Xiaomi joined the United Nations Global Compact in 2020 and support the Sustainable Development Goals adopted by the United Nations.

We benchmark ourselves against international best practices and have implemented ESG strategies in relation to our green operations, our circular economy, workplace diversity and employee development, public welfare, data protection and more. To boost our employees’ sustainability awareness, we actively promote our ESG framework to all of our stakeholders, including upstream and downstream business partners. We have set up a corporate governance committee, which coordinate ESG and Green Finance-related matters, prioritizing our sustainability targets according to the unique characteristics of our business and our industry.

In July 2021, we published our 2020 sustainability report and the Green Finance Framework, which are all available on our website. We also issued our inaugural 30-year green bond, which was the first green bond issuance by any Asia TMT companies. As an important component of our ESG strategy, we have very strict privacy protection and data security.

In June 2021, we held a Security and Privacy Awareness Month to raise our employee awareness in data security and privacy protection. This company-wide event lasted for 30 days and had over 12,000 offline staff visits. In the second quarter, we also released a set of security and privacy white papers for smartphones, for our MIUI system and for our AIoT product, along with our 2020 transparency report, which is published for the first time. In the future, we'll continue to hold ourselves to the highest standard with regard to the cybersecurity compliance and user privacy protection.

This concludes our prepared remarks. We would now like to open the call for questions from investors.

Unidentified Company Representative

Thank you, Alain. We will now proceed to the Q&A session. Please limit your questions to a maximum of two, so that we could allow more investors to ask their questions. Operator?

Question-and-Answer Session


Thank you. The question-and-answer session is now open. [Operator Instructions] And our first question is coming from Kyna Wong with Credit Suisse. Please go ahead.

Kyna Wong

Thank you. Congratulations for such strong results. So I have two questions. The first question is about the internet business. So we would like to know about the outlook for the second half internet business as advertising business continues to benefit some MAU or ARPU increase and also [indiscernible]. Can we expect normalized effect on gaming business terms and also Fintech controlling the second half, so that the outlook for the second half internet business will be very encouraging? And what do you think about the positive impact from the – as a number one brand in Europe smartphone market and also 22% market share in the Western Europe and into your internet business? I mean, this is the first part.

Alain Lam

Okay. Thanks Kyna. On the internet business, we also see our advertising business obviously benefiting from a couple of trends; number one, our increased install base and number two, our premium smartphone market penetration. So if you look at our install base, as you can see our MAU reached 124 million at the end of last quarter and as well as our premium smartphone shipment over 12 million units in the first half of this year. So we'll continue to benefit from the increased install base as well as the increased percentage in our premium smartphone.

I mean, obviously, there will be some challenges because there's a lot of regulatory restriction in the mainland China market, including which impacts some key sectors that invest a lot in advertising. And also with the new data privacy laws and obviously if we do accessing the impact that it has on our business. Overall, we are very positive on the advertising business and we believe that it will continue to grow.

On the gaming side, we've seen improvement in our gaming business. As we look at our first quarter results so far, we've seen a pickup into terms of growth in terms of our gaming business. We also benefited from some of our products. For example, we launched the K40 Gaming series in the second quarter and we've seen pretty significant gaming revenue on those products versus a more general smarthphone. So we continue to be very focused at second half of the year. We’ve seen an improved growth in the gaming sector.

On the Fintech side, we've seen continued improvements in our gross margins in our Fintech business. As we move from a more balance sheet heavy model to a more balance sheet light model, we've seen improvement and obviously the improvement in the credit market in China obviously benefited in that initiative as well. So we've seen very healthy margin for our Fintech business in the first half and we'll continue to see healthy margin in the second half.

In terms of the overseas internet, I think as we show on the chart, the overseas internet market has showed a very strong growth in the first half and represented a very strong percentage of our overall internet business. We are still not quite monetizing the users at this point. I think at this point, it's all about market share at this point. So we'll continue to watch the monetization opportunity, especially in the Western European market. We want to make sure that the user experience are good before we start to monetize our users over there. So I hope that answers your question.

Kyna Wong

Yes. Thank you. So I have another question more about the outlook for the second half [indiscernible] because we consider advertisements continued demand in China, at least so far, I mean, like high single-digit and also the raising competition was on there. What should we expect? Because we see the company has already set a target as a number one smartphone in three year. So what should we expect going forward on the strategy to boost the market share and also the presence in China as well?

Alain Lam

Yes. So let me take your second question. This is regarding to the second half forecast. Actually, we continue to see the business opportunity, the growth opportunity for smartphone shipment globally. But real challenge for everybody actually not only for us is this supply shortage. So we are working very hard to get more supply to support the different requirements from different regions and markets. And also I think we have to manage the growth in more than I think over about 100 different markets. So we want to be – we need to be working very hard for the supply. So that's one potential challenge for us. And also in China markets, specifically, we need to continue to execute our offline strategy so that we can have more coverage.

So right now we have over 7,000 retail stores in mainland China, we will continue to grow that number. So that's a long-term thing. So once we build a store, we need to train the sales and help the store globally. But it also takes time for a new store to become a real profitable or high output stores. So this is another challenge. I think we are confident that if we continue to execute a strategy to grow the number of stores and also to help the stores grow with our software, the tools, we're confident that we will continue to grow our business in China as well. The overall – let me summarize, number wise, we need to deal with the shortage issue. Secondly, we need to continue to execute our strategy for the offline, especially in China. The overseas market, I think, we have over 100 different markets. We need to maximize our usage of the supply. I think, I hope this answers your question. Thank you.

Kyna Wong

Thank you.


Thank you. And our next question is coming from Leping Huang with Huatai Securities. Please go ahead.

Leping Huang

Okay. Thank you for taking my question. So my first question is also related to smartphone. I think like you mentioned that Xiaomi want to become a global number one smartphone company by volume in three years. So if I understand correctly, the current number one player, Samsung’s roughly 300 million units per year shipment, and you are roughly 200 million units. So in order to achieve this global number one, so where you think that you can get this most of the additional volume in next few years, so which market and which segment?

Wang Xiang

Yes. So I think we see – still we see a lot of new opportunities for us. Yes, although we are number one in Europe for the first time, we'll continue to see a lot of space to grow even in Europe. Outside of Europe, actually, if you look at the growth rate, you can see we have a very big potential in Latin America, Africa as well. So we'll continue to supply the right product for those regions. So that's for the market opportunity side. But in order to be number one, I think we also need to continue to invest into more R&D resources. Now this year, our R&D investment is going to be RMB13 billion. The second quarter, actually, we have a very high gross R&D investment in the second quarter. I think we'll continue to invest in third quarter and the fourth quarter so that we can make sure we invest enough on the R&D side. So we'll continue with the – R&D resources continue to innovate in many, many different technology areas. Actually, Alain just mentioned, in the MIX 4, actually, we brought new technologies, we got the camera-under-panel, and also UWB. We'll continue to bring more and more new technologies into the smartphones and also the ecosystem products. So yes, I think – in the long-term, I think we're confident that we can – we see the opportunities and we are confident that within three years, we can achieve the goal set by our Chairman and CEO to be number one globally.

Leping Huang

Okay. Great. It's very good, ambitious time. So the second question is about your smart EV business. So we see a lot of news recently about your smart EV business, including today's announcement of the DeepMotion. So do you have a more clear plan to share with investors about for product what will be the scale of the stuff? And what's the relation between your EV business for the R&D structure with your smartphone business? And what's DeepMotion's goal, the company you acquired today, in this EV plan? Thank you.

Wang Xiang

Yes. Why don't I take that, Leping. So with respect to Deepmotion, we did filed a announcement today, so a lot of the information are included in that announcement. But just to summarize, the total considerations that we are going to pay for the acquisition is going to be US$77.4 million, right? A lot of that will be in terms of stock, a lot of these payments will be deferred until certain milestones are hit. And so therefore, we want to make sure that we are retaining and motivating this team, so that's the first point.

Second point is we do believe that the company is very attractive to us, right. The company is – let me find the information. The company is an autonomous driving technology company, is focusing on providing the full-stack software solutions for ADAS, an Automated Driving Applications. We believe that there's a lot of synergies with the technology with our EV initiatives. So I think it tells you a couple of points. Number one is, we will roll out EV business. And I said in our prepared remarks, we've been very focused on hiring the right team for the EV business at this point in time, formulating our strategy, formulating our product strategy, et cetera, et cetera. But at the same time, we are not afraid to apply it and integrate other teams if we find that those will help us accelerate our plan right. And so I think that this will prove to you that we are very focusing on attracting and retaining these experts and talent, and we are making very, very good progress in that regard.

Leping Huang

So what's the overall picture of the EV business you can share with us today or?

Alain Lam

Look, we are still studying. We are still formulating the team. We think that we are ahead of our schedule. We believe that we have been ahead of our schedule, and so we're making very good progress. But, if there are more details, you can definitely share those.

Leping Huang

Yes. Thank you.

Wang Xiang

I think, what we can share is right now we are focusing on three things. Number one, as Alain just mentioned, we hire the – we tried to find the best fit – and then we can find. We need a world class team to execute. This is very important. Secondly, we are doing a lot of the valuations analysis for the location, right, where we're going to build our first car – vehicle EV. And also we continued to – actually we started to, I'd say, to define what's going to be our first product, these customers who we’re willing to target. So right now, as Alain mentioned that we are on track. So we are confident that we can achieve what we will as planned.

Leping Huang

Thank you very much.


Thank you. And our next question is coming from Gokul Krishnan with JPMorgan. Please go ahead.

Gokul Krishnan

Yes. Hi. Thanks for taking my question. This is Gokul from JPMorgan. Maybe first of all, can I ask you a little bit more on the supply limitations and the chipset shortage? I think even today we saw some headlines about Xiaomi having to pull some models in certain markets because of the chip shortage. Could you help us understand what is the extent – is it limiting your shipments by 5%? Is it limiting your shipment by 20%, in terms when we look at the second half of the year? And what is your estimate as a point in time in terms of where it will be – where would this issue get resolved? Is it sometime end of this year or is it going to process through the next year as well? That’s my first question.

Wang Xiang

Thank you, Gokul for your question. Actually, the challenges for us, not only for us, actually, this is a challenge for the whole consumer electronics industry and even for the EV industry, this is a global shortage. The challenge for us is, right now we are in 100 different markets right. The requirements are – actually demand is very strong and the requirement is very, very different. So the challenge is to manage the dynamic. So at the moment, I cannot tell, I cannot share the classified impact, but overall, I think is on track, but we are working very, very hard trying to get more supplies and then try to allocate the supply we have got and allocate them to the right markets. That’s a challenge we are dealing with. Yes, this is where I can answer.

Alain Lam

Gokul, I think one clarification. I'm not sure where this cutting orders is coming from. So I think we are still on track.

Gokul Krishnan

Got it. Understood. Second question on the internet services. I think some of the more broad based companies in China warned about a little bit of slow down in advertising given some of the regulatory pressures and some other industries with their heavy advertisers starting to see some regulatory impact. I mean, you guys have been growing very rapidly if we seem to do more advertising. How do you think about advertising revenues in particular in second half of the year and the tailwinds and the headwinds that you're seeing there, especially as you are also increasing the ARPU of your own smartphones in China? Second, maybe second part of that is, the Mi seems to be very heavy advertising at this point in time even something that we should continue to expect over the next maybe two to three quarters, or do we see a more balanced mix of other value-added services and gaming also kind of coming through?

Wang Xiang

Yes. Gokul, as I said before, I think it is more a balance between having a big – larger user base, shipping more products year-over-year in each quarter and then getting more product shipped in the premium segments, right. And obviously I think all those factors will lead to higher advertising revenue, right, balanced by some of its difficulty phase in some of the sectors or the lesser spending in some of the sectors due to regulatory pressures, right. And so I think that's the balance between those two factors, but overall, I think we still expect to see continued growth in our advertising revenue due to our larger install base. I think that’s point number one.

In terms of your second question, I mean, I think we've said this in the last few quarters as well, which is, we obviously love to see a more balanced internet services portfolio both advertising gaming as well as other businesses. And so we think that we are hopeful that it will be the case. But that's something that we do. I mean, obviously in the near-term with the higher smartphone group, I think will lead to naturally to a higher advertising revenue.

Gokul Krishnan

Okay. Thank you very much.


Thank you. [Operator Instructions] And our next question is coming from Yingbo Xu with CITIC. Please go ahead.

Yingbo Xu

Thanks Xiang and Alain for taking the question. I have two questions. The first one is about our competitors and new models. We have seen Xiaomi market share increase in the second quarter and also the MIUI user – number of MIUI user in mainland China keep increasing. However, we still see that the competitors like Honor brand has played very strong in the market. So my first question is how we plan for the competition in next half of this year especially like our new models launch plan?

Wang Xiang

So I think we are focusing more on the product and offline channels build-up in China mainland market. So as I mentioned earlier, so we have over 7,000 stores, but we need more than 7,000 stores. We continue to build our offline coverage. So it takes time for us to build more stores. I think that's one challenge that we are working very hard on that. Secondly, we are focusing on the right products and so we want to offer right product to the consumers. And also it takes time for us to not only grow the store base, but also help the stores to gain market share or to grow their smartphone shipment from every store. It takes time for a new store to become a mature store. So also it takes time for us to join the store managers and also the sales people working in the store, so also it takes a lot of time.

So we are confident in the long-term work with right coverage and also the right product. I think we can compete. I think our focus is on our site, the competition, I think in China market there's never a lack of competitors. We were born from a competition environment, so we'll continue to focus on product and also offline channels. I think this is where we are doing now. In the global market, actually I think we are – we see so many new opportunities in those areas, so we'll continue to execute a strategy.

Yingbo Xu

Got it. Yes. Thank you. My second question comes from the store. You mentioned that keep opening the stores and the other data we noticed that is about efficiency of the single store. It seems that those stores opened before last year performed relatively good, when we see or calculate the performance of the newly open stores, especially we consider all the stores as a total. It seems that sales efficiency seems to drop a little bit. I know that need a time to improve, but how we see that improving in the second half for the sales efficiency of single stores? Thank you.

Wang Xiang

Yes. Thank you for the question. Actually, I mentioned actually, so one of the challenges is to train the new store to become a mature sport, right. Including the training for the employee, the store managers, and also the sales guys working in the new store and also takes time for the consumers to be familiar with the new store, right. I think that's the number one. Number two, we will continue to obviously to upgrade the software, the tools we are offering to the stores so that we can use the data and use the tool to improve the efficiency of the operation. I think that those are the two major areas that we are working very hard.

Yingbo Xu

Yes. Thank you very much Xiang Wang. It’s very helpful. Thank you.


Thank you. And our next question is coming from Piyush with Goldman Sachs. Please go ahead.

Piyush Mubayi

Thank you for taking the question. If I look at the offline presence and the market share you talk about. Could you just give us a feel for what percentage of your overall volumes is through that? And if you look at that market share the number of stores you laid out, what is the number of markets – number of stores you would need to rollout in the country to get to the number one position three years out from now? I suspect you would have to match the market leader in the offline space to be able to get to that number. And that's the reason for the [indiscernible]. The second question I have is centered around your gaming revenue. Well, you talked about the – decreased due to the revised commercial terms. Is this a new revision? Or is this a revision that we've seen at work for a couple of quarters already and it should now stabilize as you can start to see that move forward? Thank you.

Wang Xiang

Yes. So the first question is regarding to the offline coverage. Right now, we have over 7,000 stores. So I think we need a much more than 7,000 stores. So right now our offline market share based on the Q2 numbers is around 7.8%. So I think, you see that we have a great space to grow. So in China market, specifically, there are about, probably 70% - around 70% of the smartphone shipments are sold coming from the offline stores, and the 30% is from the online channel. So right now we only have 7% of the offline stores to see the potential. So our competitors, they have a much more stores than we have, so we will continue to grow the number of stores, number one. Number two, we'll figure out a way, I think we are in the right track to continuously improve the store efficiency, so that we can sell more smartphones from the offline stores. I think this is what we are doing now.

Alain Lam

Yes. Piyush, I think with respect to the offline network, I'm not quite sure we need the same number of store as number one guide to get to number one. I think our model has proven that it is working, and it's very efficient compared to our competitors out here, and so therefore, we are hopeful that we don't need that many source to achieve the same results. I think that will answer your first question. To answer your second question, I think on a gaming revenues, I think – yes, the commercial teams were the ones that we talk about last year. And so, therefore, as I mentioned earlier, we are beginning to see growth picking up again on the gaming sector as we are comparing apples-to-apples.

Piyush Mubayi

I wonder if you could share with us the revenue share adjusted growth rates in gaming on a year-on-year basis for Q2. I realize it's hard to…

Alain Lam

Let me get back to you on that. I don't think we have the number.

Piyush Mubayi

Thank you.


Thank you. We will now – last question, and the question is coming from [indiscernible] with CICC. Please go ahead.

Unidentified Analyst

Hi management. Congratulations on the very strong results. I've got two quick questions. The first one is about how MIX smartphone position. We think the pricing of our new MIX model smartphone is higher than the previous one. Could you share a more details on the positioning of the MIX Series? And I wonder, when we extend [indiscernible]. Thank you. This is my first question.

Wang Xiang

Okay. So actually, we positioned MIX as the pioneer of the latest technology. So if you remember that a couple of years ago, we launched our first MIX product, we have full display with the – first a full display phone even ahead of everyone. So that phone actually was collected by several art museums in Europe, including Pompidou museum and a museum from Germany and also Denmark. So we'll continue that brand. I think last year or early this year we'll launch our MIX. It’s a foldable product, which is also very difficult on latest technology we’re using in that fall.

So this time also we [indiscernible] camera and their panel technology. It's also a difficult technology, which can be used in the smartphone especially for the front camera. And also we will bring UWB to that smartphone to the MIX and also they can improve the features not only on a smartphone, but also the connectivity between smartphone and IoT – AIoT products. So that's on MIX.

So the Mi Series, Mi Series is traditional high-end products for Xiaomi. So we always bring the best user experience to that series. For example, the previous launch of Mi 11 Ultra. Actually, in that form, there were – number one quality camera in that phone, number one in the DXOMARK benchmark, but we're continuing to maintain MIX Series and Mi Series to bring different kind of user experience to the consumers. I think that answers your question. Thank you.

Unidentified Analyst

Thank you. My second question is about the China’s offline channels. I think we've seen that we expand really fast in our domestic offline channels. I wonder, we keep the fast speeds likely in next year and how we control, or shall we say, plan the pace of our offline expansion? Thank you.

Wang Xiang

I think, we'll continue to improve in the store efficiency, number one. Number two, improve the coverage. That means we need to build more stores to cover more territories in China domestic market. Also, continue to improve on the tools we are providing to those stores. So those are the three important things we will be working on even for the next year.

Unidentified Analyst

Okay. Thank you. Very clear.


This concludes the conference call today. Thanks again for joining us and you may now disconnect.

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