Xiaomi Corp

Ladies and gentlemen, thank you for standing by and welcome to Xiaomi's 2019 fourth quarter and annual results announcement conference call. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to hand the conference over to your host today, Mr. Steve Lin. Thank you. Please go ahead, sir.

Good evening, ladies and gentlemen. Welcome to the investor conference call hosted by Xiaomi Corporation regarding the company's 2019 annual results. I'm Steve Lin, the director of corporate finance and joint company secretary. Before we start the call, we would like to remind you that this 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 non-IFRS financial measures that should be considered in addition to, but not as a substitute for, company's financials prepared in accordance with IFRS. Joining us on the call today are our President, Mr. Wang Xiang, Senior Vice President, President of International, and CFO, Mr. Shou-Tzu Chu, and our Vice President of Finance, Mr. Richmond Li. To start with, Mr. Wang will share strategic initiatives for the company in 2019, and Richmond will discuss the business segment and financial performance. Once the managers complete their prepared remarks, we'll move on to the Q&A session. I will now turn the call over to Mr. Wang. Good evening, everyone. Thank you for joining our Year 2019 Annual Result Earnings Call. I'm Wang Xiang, President of Xiaomi Corporation. A little bit myself, I joined the company in 2015. Before my current role, I was in charge of the Xiaomi international business, the IP strategy and the legal affairs. So I'm going to be your new friend. In the future, we'll spend more time together. So this is my first time presenting our result together with Sho and Richmond. So I look forward to partnership with you. Actually, 2019 was a very important year for us, just simply because in a few days, Xiaomi is going to celebrate our 10-year anniversary. So probably it's a good time for me to do a little summary about what we have done since we were founded in 2010. So actually, the company was founded in 2010. Two years later, we achieved or surpassed RMB 10 billion RMB as a revenue. And in year 2017, we surpassed 100 billion RMB. Last year, year 2019, the company revenue surpassed 200 billion RMB. Not only that, actually, this is the first time Xiaomi has listed a Fortune Global 500 in August, ranked number 468. Also, we are also listed by a branding organization called BrandZ as the most valuable consumer brand in the world. is a very, very important milestone for us as a 10-year-old company. Let's talk about year 2019. The total revenue was 205.8 billion RMB, up 17.7% year-on-year. A digested net profit was RMB 11.5 billion, up 34.8% year-on-year. And also, I want to mention the major business, for example, the internet service business grow 24.4% year-on-year. And IoT business grow 41.7%. Our smartphone business increased 7.3% in the entire year. Let's talk about the Q4 number. The total revenue in Q4 was 56.5 billion RMB, up 27.1%. The adjusted net profit was 2.3 billion RMB, up 26.5 year-on-year. So also, we have significant increase in our internet service in Q4 last year, which was 41.1%. IoT business increased by 13.5% in 2004. Smartphone business 22.8% growth. So let me highlight some strategic things we were doing in 2019. First thing is we continued to increase our investment in R&D. So from year 2016 to year 2020, our R&D expenses expected to surpass 28.6 billion. And in the year 2019, our R&D expenses was 7.5 billion. Based on our plan, year 2020, this year, we're going to spend more than 10 billion RMB in R&D. So another very important thing is we are successfully get or entered into premium tier smartphone sales business. We launched Mi 10 series in February. So Mi 10 Pro was the first premium-tier smartphone sell at over RMB 5,000. This is the first time we sell premium-priced product. And also, with the long-term RMB investment, actually, we achieved several technology, make several technology achievements. For example, DSOMark. Redmi 10 Pro is the first time we were in the top of the DSOMark on the camera, video, and audio scores. And also, in the entire year 2019, The company executed proven operation strategy because it's 2019 is the technology migration time period from 4G to 5G. In order to promote 5G in the future, actually, we are very carefully managing our inventory and our cash flow. So we have a zero 4G inventory so that we can be very, very ready to aggressively promote our 5G products in year 2020. Another very important thing is in December year 2019, we launched a very important 5G product we call Redmi K30 5G. It was the first 5G product selling at a R&B below R&B 2000. So that product actually got very, very good market response from consumers. So we'll continue to promote the Redmi brand with the extreme performance price ratio and bring the latest technology widely available to the mass consumer. I think at this point of time, the people concerned about the virus, the COVID-19 outbreak has the impact from the virus. Actually, let me do some summary about what we see, the virus, and what is the impact for our near-term and mid-term business. From the supply side, actually, we were suffering during the February timeframe, early February, for the production. Actually, it was a very challenging time to find laborers to resume the factory. But after a month, more than a month's effort, actually, today, as of today, I'm happy to share with you our production capacity, our capability, resumed to 80 to 90 percent of the normal level. as end of March 2020. And let me talk a little bit about the mainland China market. During early February, actually because many cities are locked down, the shopping malls closed, so the demand was affected very, very heavily. But starting from late February, we see a very strong rebounce of the market. So up to now, the China smartphone market recovered about, I think it's around 80% to 90% of the January consumption. It's a very good signal. And also it tells us smartphone may be, we call the rigid demand. So people actually need smartphones to communicate, even during the virus timeframe, when they spend more time with families at home. And the overseas market right now is in the outbreak period. We see a lot of serious situations happening in Europe, in India, and other parts of the world. I think the market will be, the impact will be expected in Q2, year 2020. I think May, April and May mostly. And the demand likely be deferred rather than lost. Based on the experience in China, smartphone demand is resilient and will be rebound quickly. With a strong global foothold and continuous expansion into new markets, the long-term growth prospect is in act. We remain confident for the rest of the year. So regarding to the Internet service, we see both time span and the value added service revenue grew strongly. advertising budget from certain client vertical were impacted. But the general Internet service was not impacted heavily. So I think this is the overall picture of year 2019. So I would like to invite Richmond to give you details in the different business units for the business. Hello, everyone. I'm Richmond Li, VP of Finance at Xiaomi. I will now walk you through our business segment performance, as well as key financial indicators. First, our smartphone segment delivered solid performance in 2019, as the revenue reached $122.1 billion, an increase of 7.3% year-on-year. with smartphone shipments totaling at 124.6 million units. In the fourth quarter of 2019, smartphone revenue was 13.8 billion, an increase of 23% year-on-year. We also want to highlight that in the fourth quarter of 2019, we achieved the highest year-on-year growth of smartphone shipments among the top five smartphone companies, according to Canada. In 2019, our smartphone's new brand strategy achieved very remarkable results. On one hand, Xiaomi's brand focused on pioneering advanced technologies and successfully established itself in the high-end smartphone market. After unveiling the Mixed RF of 5G, a concept phone featuring surround display, we launched our flagship 5G smartphone models, the Mi 10 and the Mi 10 Pro, in February 2020. Mi 10 series offers ultimate performance experience across all functions by deploying in the leading processor, display, camera, and across the charging technology. As Xiangzong just mentioned, Mi 10 series is well received by our customers. On the other hand, Redmi brand offers production with ultimate price-performance ratio to the mass market. In 2019, Redmi also launched its first 5G smartphone, Redmi K30 5G. and followed by the Redmi K30 Pro factory, which it was launched last week. Redmi has launched competitive products across different price points, from $699 to $4,000. Let's move on to the IoT segment. This year has seen strong growth of our IoT and lifestyle product segments. As we continue to grow our IoT product portfolio and enhance and the connectivity across our products. The IoT and laptop products revenue was 62.1 billion in 2019, an increase of 41% year-on-year. While the revenue in the first quarter was 19.5 billion, up 31% year-on-year. As one of the global leading consumer IoT platforms, we continue to expand our IoT user base At the end of 2019, the number of connected devices on our IoT platform, including the smartphone and laptops, reached 235 million units, an increase of 56% year-on-year. The number of users who have five or more devices connected to Xiaomi's IoT platform reached 4.1 million, an increase of 77 year-on-year. We have achieved leading positions in key IoT products that are critical to our IoT platform. Among lots of popular products we offer, Xiaomi TV is one of the star products. In 2019, our global TV shipments reached 12.8 million units, an increase of 52% year-on-year. According to ABC, we are the number one TV brand in China, in mainland China, with about 20% of market share of shipments in 2019. and we shipped over 10 million units in mainland China last year, setting a very good industry record. Our smart TV ranks number five globally and number one in India. In 2020, we will offer our smart TV in more countries and regions. Besides the TV, Xiaomi also leads the market of wearable bands, ranking number one globally. According to Kennedy, Our wearable band treatment reached 35.6 million units, an increase of 55 percent year-on-year, with global market share of 21 percent. Also, meanwhile, our old AI assistant, Xiaoye Gongxue, had 50.4 million MAU in December 2019, an increase of 56 percent year-on-year. The AI assistant supports new functions, including continuous conversation innovative graphical and voice user interface, AI smartphone assistant, and voice print recognition. The newly added functions received highly positive responses by our users. Moving over to the internet service segment, in 2019, internet services revenue reached 19.8 billion, up 24% year-on-year. For the first quarter, The revenue was 5.7 billion, an increase of 41% year-on-year. Of that, advertising revenue grew by 18%, online gaming grew by 44%, and the other internet services grew by 104%. Such solid growth is supported by our expansion of the user base. In December 2019, The global MIUI-MAU increased by 28% year-on-year to 310 million, while MIUI-MAU mainland China accounted for 109 million. Besides the smartphone, our smart TV-MAU also grew by 49% year-on-year to 27.7 million. Last year, despite the challenging macro environment in China, as our advanced advertising business achieved consecutive quarter-on-quarter growth. This increase was mainly attributed to our consistent improvements in our mobile internet apps, which boost their MAUs. And this is further because of our efforts to increase the monetization because of the diversification of our advertising customer base and optimization of our recommendation algorithm. Diversification is a key growth driver of our internet service revenue. For the first quarter of 2019, our internet service revenue, outside of advertising and gaming from mainland Chinese smartphones, increased by 112% year-on-year. And this accounts for 43% of our total internet service revenue. This business refers to our FinTech business and U-Ping e-commerce platforms. TV internet services, and overseas internet services. Next, moving on to our international business. The overseas market offers us tremendous growth room. In 2019, we further expand our global footprint with overseas revenue account for 44% of our total revenue. Overseas revenue was 91.2 billion in 2019. and the increase of 30% year-on-year. Our smartphones were sold in over 90 markets, and our smartphones ranked top five for 45 markets. In the fourth quarter of 2019, our overseas revenue increased by 41% year-on-year to $26.4 billion, and this accounts for 47% of the total revenue. We witnessed the growth across all regions where we operate, but India is still our single largest overseas market achievement. In the fourth quarter of 2019, we maintained the number one position for 10 consecutive quarters with market share of 29%, according to IDC. We also gained the market share in Western Europe. According to Canada, in the fourth quarter of 2019, We ranked number four in Western Europe, with smartphone shipment growing 115% year-on-year. In Spain, we were the number one, the number two with 23% of market share, and just 1% less than the number one. We also ranked number four in France and Italy. After reviewing the performance of business segments, I'd like to share some financial metrics with you. First is our gross profit margin. Compared to the year 2018, smartphone gross margin increased from 6.2% to 7.2%. The IoT and laptop products gross margin increased from 10.3% to 11.2%. And the gross margin for internet services remains 5. In terms of expenses, our operating expenses ratio increased from 9.1 percent to 10.2 percent. This is mainly attributed to our elevated investment in R&D activities, as well as the branding activities in overseas markets. In 2019, our R&D expense increased by 30 percent year-over-year. For the working capital, our matrix remains healthy, compared to the fourth quarter of 2018. In the fourth quarter of 2019, our inventory turnover days decreased from 65 days to 54 days. And accounts receivable turnover days decreased from 14 days to 17 days. Accounts payable turnover days decreased from 115 days to 101 days. The cash flow results were very strong in 2019 as well. The adjusted operating cash flow was $27.1 billion for the full year 2019 and $11.3 billion for the first quarter of 2019. Accordingly, our cash position was further boosted. Cash resources amounted to $66 billion by the end of 2019. And with our investment portfolio, and the book value is $30 billion. And our office and other real estate, the book value is $11.3 billion. And then deducting the financial debt of $17.6 billion. Then as a result, our net cash as assets were about $89.7 billion by the end of 2019, increased by $25 billion from 2018. The strong balance sheet, should enable us to well position in front of any unexpected market change. Last, I want to talk about our investment performance. As of December 13, 2019, we have invested in more than 290 companies with an aggregate blue value of about $30 billion. An increasing number of our investing companies have gone public. In February 2020, the global rock, Shidou Keji, one of our investing companies, was successfully listed on the star market in China and became the first ecosystem partner company of ours to lead on the A-share market. We believe that this is a recognition to our ecosystem business model by the A-share capital markets. As our business continues to grow, we believe that more and better companies will go public in the future. And that's why we want to reiterate our pledge. Our mission is to build amazing products with honest price to let everyone in the world to enjoy a better life. In 2018, as approved by our board, we pledged to our existing and potential users That's starting from 2018. Xiaomi's hardware business, including smartphone and IoT products, would have an overall net profit margin that now exceeds 5%. And for this year, 2019, our hardware business was profitable and with an overall net profit margin which is less than 1%. So this is to fulfill our pledge. This is my prepared remarks. Thank you very much. Thank you, Richman. We'll now proceed to the Q&A session. In order to allow more people to ask questions, please limit your questions to a maximum of two.

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