Xiaomi Corp

Good evening, ladies and gentlemen. Welcome to the Investor Conference call hosted by Xiaomi Corporation regarding a company's 2021 quarter results. I am Steve Lin, the Director of Core Finance and Joint Company Secretary. Before we start a 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 Xiaomi. This presentation also contains an audited 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 and acting CFO, Mr. Wang Xiang. To start with, Mr. Wang will review the 2021 quarter business and financial performance. Following that, we'll move on to Q&A session. I'll turn the call over to Mr. Wang.

Good evening, everyone. Thank you for joining our 2020 Q1 earnings call. Before we start, I'd like to say that as the world is fighting against the COVID-19 pandemic, our thoughts and the prayers are with everyone, in particular, the people who have been deeply affected. During this difficult time, we seek to provide support, including medical supplies and the cash donations to China and other countries around the world. In the first quarter of 2020, we delivered solid results despite the challenging environment reflecting the strengths and resilience of our business model. In the first quarter of 2020, our total revenue was RMB 49.7 billion, up to 13.6% year-over-year, adjusted Net profit for the period was 2.3 billion, up 10.6%. Our business achieved solid growth across all business segments. Our smartphone revenue was up 12.3% year-over-year. Our IoT and the lifestyle product revenue was up 7.8% year-over-year. And our internet service revenue achieved a remarkable 38.6% growth. Before I go over business performance of each segment, I'd like to provide some key business updates of the group. In Q1 2020, the total revenue was 49.7 being up 13.6%. The first point I would like to talk about the impact of COVID-19 on our business. The first quarter, our global smartphone shipping actually increased, while global smartphone market declined by 13%. We also achieved highest growth among major smartphone companies worldwide, according to Cannabis. Our mainland China business also demonstrated resilience during the pandemic. In March, our mainland China smartphone shipments had already rebounded to the pre-pandemic level, and our smart TV shipments had also rebounded strongly and luckily recovered. Looking ahead, let me summarize the short-term impact of COVID-19 in our different markets. In mainland China, as previously mentioned, our smartphone business has gradually returned to its normal level in March 2020. In India, for example, the strict lockdown measures imposed in late March significantly impact sales. Since the start of May, India has begun to lift the restrictions on production and sales activities in phases. And what we are seeing is that the area where sales have resumed, consumer demand has rebounded in a similar pattern in mainland China. The other overseas markets, lockdown measures are expected to affect our Q2 financials. Even so, we are seeing similar recovery patterns in markets with easing lockdown measures. For example, if you look at the number of daily smartphone activations each week, as of the third week of May, the activations in Europe had returned to over 90% of the daily average in January. We plotted the weekly activation trends across all key international markets. And the third week of May in Europe, as previously mentioned, smartphone activations had returned to over 90% of the pre-pandemic level. In Southeast Asia and the Middle East, smartphone activations had actually surpassed the pre-pandemic level. The market with lowest level was India. which had about around 60% of the pre-pandemic level. The second key point I would like to talk about is our progress of premium smartphones. We launched our Mi 10 series on February 13 in mainland China. Upon its launch, Mi 10 Pro ranked number one in DxOMark for overall camera photo video, and audio performance. Mi 10 series has been well received by the market. Two months after the launch, shipments of Mi 10 series in mainland China had already exceeded one million units. The third key point I'd like to talk about is our overseas business. In the first quarter, Xiaomi further strengthened our presence abroad. Our overseas revenue reached 24.8 billion, up 47.8 year on year, and contributing to half of the total revenue. This is a historical high. At this point, we have become a truly international company. Now, I'd like to further discuss our smartphone business segment. Our smartphone revenue achieved RB 30.3 billion, showing a robust growth of 12.3% year on year, with smartphone shipments totaling 29.2 million units. In the first quarter, we introduced highly competitive 5G smartphone products across different key price points and continued to gain market share in the 5G smartphone market. Our flagship Mi 10 series 5G smartphone models run in the top three by sales volume in RMB 4,000 to 6,000 premium segment, according to the third-party statistics. Our high-end-priced models, Redmi K30 Pro series and the Mi 10 Lite 5G series, also expanded our 5G portfolio. In the first quarter, our 5G smartphone market share reached 14% in mainland China, according to the third-party statistics. Because of our high 5G penetration rate, premium smartphone rollouts and growth in developed markets. Our smartphone ASP has increased by a great extent. In the first quarter of 2020, our smartphone ASP increased by 7.2% year-on-year, with a 13.7% year-on-year growth in the overseas markets and an 18.7% year-on-year growth in mainland China. On top of product rollouts, we launched our latest version of MIUI. We caught a new eye with many technological breakthroughs. The highlights include our remarkable and proprietary animation technology, which brings our users ultimate visual experience, and our enhanced privacy protection capability, which has won multiple highly renowned privacy protection certificates. Now let's move on to the IoT segment. Our IoT lifestyle products revenue was RMB 13 billion in the first quarter of 2020, up 7.8% year over year. The lower than previous growth rate was mainly due to impact of the pandemic, especially for certain product categories, such as large home appliances. In the first quarter of 2020, Xiaomi continued to expand our global leading consumer IoT platform. According to iResearch, Xiaomi was the largest consumer IoT platform in the world in terms of number of connected IoT devices as of December 31, 2019. December further grew to 262 million units as of March 23rd, 2020, up 42.6% year over year. Moreover, the number of users who have five or more devices connected to the company's IoT platform reached 4.6 million, an increase of 6.7.9%. In March 2020, our AI system had 70.2 million MAU, an increase of 54.9% year-over-year. In March 2020, our Mi Home app had 40 million MAU, an increase of 53.4%. Let's talk about TV. Our smart TV business continues to maintain its leading position in both mainland China and the overseas markets. In the first quarter, global smart TV shipments reached 2.7 million units, up 3%, despite the decline in global TV market, according to ABC. The first quarter of 2020, we ranked the number one in mainland China for five consecutive quarters. As a leader in the smart TV market, Xiaomi continues to explore the future of smart TVs. In March 2020, we launched the Redmi Smart TV Max 98, priced just RMB 1,999 yuan. It brings ultra-large high-end TVs to the mass market per second. Although certain product categories that require installation, such as large home appliances, were affected during the pandemic, many of our key IoT products maintained strong growth during this challenging time. In Q1, sales of our Wi-Fi router increased by 124%. Sales of our TWS, AirPods, wristbands, mean electric scooter and robot vacuum cleaner increased by 619.6%, 56%, 40.7%, and 40%, respectively. According to CanadaList, we ranked number one in terms of a wearable band, electric scooter shipments, and the third in terms of TWS shipments. globally in 2019. Moving on to internet service segment. In the first quarter, internet service revenue reached 4.9 billion, up 38.6% year over year. Revenue from advertising, online gaming, and other internet value-added services grew by 16.6%, 80.5%, and 52.1% respectively. Our user base continued to increase in Q1 2020. In March, global MIUI and MAU increased by 26.7% to 330.7 million, while MIUI and MAU maintained of mainland China reached 111.5 billion, an increase versus previous quarter. Our smart TV MAU, meanwhile, grew by 46.8% to 30.4 million, and our paid users grew by 53.7%. year on year to 4.3 million. Advertising. Our advertising business remains solid in a difficult environment. Well, advertising budget was decreased. Our advertising revenue reached RMB 2.7 billion, a year on year growth of 16.6%. The growth was mainly driven by, number one, diversified monetization methods, including search, pre-installation, and then news feeds. Number two, diversification of advertising customers. Number three, optimization of our recommendation algorithms. Number four, rapid growth of overseas internet advertising revenue. Those are the four major drivers for the advertising business growth. Gaming. In the first quarter, our online gaming revenue increased by 80.5% to RB 1.5 billion, mainly due to, number one, fast-growing online gaming market in mainland China. Number two, higher online gaming average revenue per user from premium smartphone users. Diversification is a key growth driver for our internet service revenue. In the first quarter of 2020, our internet service revenue, coming from outside of advertising and gaming, including fintech, e-commerce, TV internet, and overseas internet services, continue its strong growth momentum with 7.1%, 7.5% year-over-year, and representing 38.1% of our total internet service revenue. Next, let's move on to our overseas students. In the first quarter, we continue to expand our global footprint Revenue from overseas market in the first quarter of 2020 amounted to RMB 24.8 billion, an increase of 47.8% year over year. And for the first time, accounting for half of our total revenue. That's a very important milestone. Following our continuous internationalization In Denver, our overseas smartphone shipments achieved remarkable growth in the first quarter of 2020. Let's give a few examples. In Latin America, Europe, and Africa, our smartphone shipments grew by 236.1%, 58.3%, and 284.9% year-on-year, respectively, according to Canonist. In particular, Western Europe, in an overall declining smartphone market of 19%, we achieved year-on-year growth of 79% by shipment, becoming the only company with positive year-on-year growth rate among the top four vendors, according to Canada's. Also, for the first time, we have become number one smartphone brand in Spain with 28% market share and a year-over-year growth of 46% by shipments, according to cannabis. In India, we continue to expand our market share, and we were the number one smartphone brand in terms of shipments for the 11th consecutive quarter. We have also leveraged our strengths in India to expand to adjacent markets. For example, in Q1, we ranked number one in Nepal for the first time in terms of shipments with a market share of 30.9%. Now I'd like to go over the financials. We achieved financial performance in the first quarter of 2020. Our revenue increased by 13.6% year-on-year. Our gross profit increased 44.9% year-on-year. If you subtract our gross profit by operating expenses, the figure grew 109.6%. Our adjusted net profit was 2.3 billion, which grew by 10.6%. Note that our profit was impacted by foreign exchange loss of RMB 503 million this quarter. We have witnessed an upward trend in our overall gross margin from 11.9% in the first quarter of 29 to 15.2% in the first quarter of 2020. In the past quarter, the gross margin of our smartphones, IoT, and the lifestyle products and the internet service reached 8.1%, 13.4%, and 57.1% respectively. During the pandemic outbreak, we also effectively controlled our operating expenses. from RMB 6.9 billion in the last quarter of 2019 to 5.3 billion in the first quarter of 2020, which implies a decrease in our OPEC ratio from 12.1% in Q4 2019 to 10.6% in Q1 2020. Our working capital also remained healthy and efficient in Q1. Compared to Q1 2019, our accounts receivable turnover days remained stable at 13 days. Our account payable turnover days increased from 96 to 121 days. while our inventory turnover days increased from 65 to 71 days. Let me elaborate on the reason for the increase of the inventory days, which was impacted by the pandemic. If you look at the absolute inventory level, our inventory, excluding the prevention of impairment, 34.8 billion, only slightly more than 33.5 billion in the first quarter of 2020. The increase was mainly from raw materials inventory, which increased from 15.4 billion to 22.2 billion because of the production disruption in 2021, 2020. The finished goods inventory, on the other hand, declined from RMB 18 billion to RMB 12.6 billion. So while overall inventory days increased, from the operational perspective, we were actually short of supply. Last but not least, I would like to briefly talk about our investment performance. As of March, March 31st, 2020, we have invested in more than 300 companies with an aggregate book value of approximately RMB 32.3 billion, representing year-on-year growth of 11.4%. In May 2020, One of our investing companies, Kingsoft Cloud, successfully listed on NASDAQ with a market capitalization of US dollar 4.8 billion on the day of its IPO, with Xiaomi owing 30.8% of its share. In conclusion, Xiaomi is still in the rapid growth stage. And unfortunately, like many other businesses, we are facing certain challenges this year due to the epidemic. Nevertheless, the demand of our smartphone and IoT products have proved to be resilient. We have also compared with life impacted because of our advantages. In online channels, our value proposition is offering users a superior price to performance and diversified businesses. Looking forward, the pandemic is expected to impact our business performance in Q2 2020. However, with gradual lifting of the lockdown measures, we have witnessed a quick rebound in many of the markets where we operate. This ends my prepared remarks. We shall now open the line for questions.

Thank you, Mr. Wong. In order to allow more questions from more investors, please limit your questions to a maximum of two.