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.

Ladies and gentlemen, we will now open for questions. If you'd like to register for your question, please press star 1 on your telephone. Thank you. Our first question comes from . Please go ahead. Thank you.

Thank you for taking my question. My first question was concerning the premium handsets and the way that it's changing or seemingly changing the internet revenue lines. Could you give us a sense of what percentage of the sales that you were able to book in the first quarter came in from the premium smartphone category and also feel for the premium ARPUs that you've been able to post on the internet revenue lines on the back of that? And my second question is related to the the pattern of normalization that you talked about through the months of April and May. And when you look forward towards the quarter, what is the level of impact that you could foresee in Q2 following a very strong Q1? Thank you.

The first question is related to the premium tier smartphones and ARPU, right? So actually, Yes, we are very happy to see the first result of our Mi 10 series. We launched our product in mid-February during the China, just post-China pandemic, the outbreak, actually. The market response was very, very good. So actually, after two months of launch, we shipped over one million already. This is the first time in Xiaomi history Our selling price reached to $5,000 and above price segment. We are very happy with the result. We'll continue to offer more and more premium flagship devices with the Mi Band. That also gives us confidence on the dual-brand strategy. Regarding to the ARPU, we don't disclose the specific ARPU number by models, but I can share with you For example, the gaming revenue, actually, the ARPOOL from the premium tier smartphone, actually, as a higher ARPOOL, it's very, very easy to understand because of the performance of the device. With the flagship processor, with the optimized graphic processor and the software capability, that works better for the device. complicated games. I think that's understandable. The second question is... Okay, that's a...regarding to the...the second question regarding to the second quarter. Yes, the second quarter will get the heat because If you look at the history, China outbreak happened in late January and early February. At that time, actually, most of the Chinese cities were locked up. But in Europe and India, the outbreak in Europe happened in, I think, early March. So gradually, many of the European cities were locked up. So that gave some impact on the business. India, even more serious, in the late of March, everything was shutting down because of the government policy. We believe that's the right strategy for Indian people. But what I can share is the smartphone product and also some of the ecosystem products actually are kind of resilient. So the people need smartphone much better than the other device. So the first product or market rebound will be smartphone related. So we are very confident with the recovery of the European situation. we are confident that in June timeframe and beyond, we'll see a good recovery. Right now, the number is, based on the current number, the activation, our smartphone activation in Europe is 90% above the normal situation. That's a good signal for us. But the Q2 still, the message in Q2 still a challenging quarter for us. India is kind of, we are still monitoring very closely. India also situation improved a lot in the last maybe 10 days. Right now also we see probably 50% to 60% of recovery, activation, recovery. So we'll continue to monitor the progress.

May I also clarify, when you talk about normalization, when you look at gaming revenue that was so strong in the first quarter, can I just make sure that there was nothing that's normally strong that was booked because of COVID and people staying at home, such that that pattern will not recur in Q2?

Thank you. Yes. For some reason, to be very honest, people spend more time on smartphones, right? they will play more games with the smartphone. But we will, actually, we want to, number one, we will maintain those customers. Of course, we gain those customers, we will maintain them, number one. Number two, for other segments, internet service segments, we also grow. For example, the advertising and other internet services also grow. I think it's a For us, it's an opportunity to grow, to keep those customers in our service.

Next question, please.

Thank you. Our next question comes from Lee Chen Tsai with Morgan Stanley. Just go ahead. Thank you. Thank you for taking my question, and also, first of all, just congrats on the results for first quarter. My first question is actually regarding the overseas markets. So you mentioned that especially the U.S. market has recovered to like 90% of the pre-COVID-19 level. Could you share with us, do you think it's a function of the overall industry recover, or do you think there is a certainty extent of your share gain in this area of the market. And then as for India, you also just mentioned in the past 10 days, we found it quite quickly. So when would you probably expect it could recover to the pre-pandemic level?

Okay, I think that the T1 performance, the performance is due to several reasons. Number one, I think Our business model, in our business model, we are very, very focused on the online channels, right? Both in China and in many of the countries, although there were a lot of lockdowns in many places, but the online channel was still open. So we still, our customers still buy our product through online channels. That's our strength, number one. Number two, I think we always pursue a very, very big performance and price ratio. People who know us will buy our product first. This is, I think, also help us make us less impacted compared to our peers and other industries. Regarding to India, we are very closely monitoring the development there. Now it's 60%. So it highly depends on the situation, the pandemic situation in India and other markets as well.

Okay. Thank you. And my second question is regarding the gross margin on the Internet service. because it looks like because gaming is so strong, so that should have, and also together with the advertising, that should have some, the positive impact to the gross margin, but instead, gross margin looks like a decline. So could you just give us what's the brand new mix here, especially for the others, and just within these categories, which is, if there is any gross margin decline, which is the part that we see the more impact from.

Thank you. Maybe I can answer and also elect Steve to add more. I think, yes, the gross margin, the gross rate of the, the gross margin percentage-wise is not the, It's below the expectation. The real reason is actually during the pandemic, our syntax business actually was in the challenging time. We want to minimize our risk, so we reached the bar. And also, we see a lot of challenges there. So that's one of the reasons the gross margin was not as high as we expected. I think that's the major reason. Maybe Steve can add more.

Yeah, so I think the gross margin was 57.1% this quarter, which is lower compared to last quarter and also from your perspective. So I think the main reason is what Xiangzong mentioned, is the declining gross margin of our fintech business. Because of the pandemic, to be conservative, we have to increase the loan loss provisions to cope with the situation. So I think that is the biggest reason. I think there's also a reason on the product mix. So if you observe, I think this quarter, the growth of gaming and the growth of other value-added service outgrow advertising. So among or at least segment, advertising has the highest gross margin. So from a product perspective, if the percentage of advertising decrease, that will also cause a decrease in gross margin.

Yeah. Okay. Thank you.

Next question. Next question, please.

And this question comes from Li Peng Huang with CICC. Please go ahead. Thank you.

Okay. Thank you for taking my question. The first question is about the... after this pandemic in China. So what's your latest view on the 5G adoption rate in China this year for the market and for yourself? Actually, the company strategy will continue to drive the 5G adoption in China and the market where it has the 5G. So that's why we launched in January, we launched the first model, Redmi K30 5G. It's the first model, as I mentioned, below RMB $2,000. We'll continue to drive that. I think the carrier, if you want to drive a new market in the wireless industry, based on the past experience, there are two challenges. Number one is the technology adoption, the coverage, right? I believe all the three Chinese carriers, they will accelerate the network build-up. They will build more base stations across the country. So that will improve the signal coverage significantly in the rest of the year. That will help drive the 5G adoption. That's the number one. Number two is the Hence, the terminal price. The terminal cost is critical for the new technology adoption because you have to reach to the mass market. You have to drive more people to use it, to buy it. Then you can drive more applications, better ecosystem. So we are determined to invest into the 5G market to grow the 5G subscribers together with our partners. specifically the operators. And also, among all the Chinese vendors, we have a 14%, right? The total 5G smart... 26%. Yeah, 26% of our smart console award the 5G device. And in the 5G adoption, actually, we are 14%. The second question is, you mentioned that you see the demand is recovering in both Europe and India. So how about the supply side? Because I think most of the smartphone in India are made in India, right? Does your production in India recover? And how the, I remember in the end of March, there was some logistic issues between China and Europe. How this works now? Yeah, the China supply ecosystem, I think, is 100% recovered already. In India, I think it's still at the very early stage. The Indian government just lifted the restriction gradually, actually. So we are working right now very hard with our manufacturing partners to get the workers back to the factory and help to ramp up the production. That's what we are doing now. This takes some time, but we are working very hard on that. So we all faced a similar, I'd say, short-off inventory issue when the market recovered by the, you know, enough product to sell. Yes, unfortunately, yes. We had some, we prepared everything. But, yeah, the production just restarted. The factory just reopened, so we are working very hard on that. At the same time, monitor the pandemic situation in that market. Okay. Thank you very much. Actually, this is an encouraging message because the Indian market recovered almost 60%. It's a good signal, but we need to work very hard on the supply side. Okay. Okay.

Thank you. Our next question comes from Robert Chang with Band of America and Merlin. Just go ahead. Thank you.

Okay. Thank you. Yeah, my first question is about smartphones. I just want to get a sense, like, because of you, you have explained that our market shut down and reopened. And can we say in the second quarter that smartphone humans First quarter, can we take care of some quarter-by-quarter growth? And then also can help give us a sense on the growth situation in China market and the overseas. Because in the first quarter, you really see the ASP and the growth margin on smartphone, both of them have increased. Can we see this kind of uptrend in the second quarter or third quarter? Thank you.

So we don't give any specific guidance on the shipment for K2. But we are actually, as I mentioned, April was very, very challenging because of the pandemic, because of the lockdown. But we see a very fast recovery in Europe. We see a pretty good recovery in India right now. So we are working very hard on the market recovery. I think the key is in the second half of May and also June. Yes, June. So yeah, we remain confident and also monitor the environment very carefully. This is what we can do.

And also, we see the ASP and margin for the smartphone in the second quarter in person.

I'd like Steve to answer the question regarding the margin.

So I think the ASP increased 7.2% this quarter year-on-year. And the travel is clear. I think one is the 5G smartphone. I think in the In the beginning of the year, we always talk about 5G smartphones because the higher bond costs, the ASP will be higher. So I think that is a very clear driver in China that will continue to sustain from a year-on-year perspective. I think the second one is also the premium smartphones. So the higher precision premium smartphones also help OASP increase both in China and overseas markets. So that's, I think, from a year-on-year perspective, a lot of those drivers are still true. But, of course, if you look from it, you also have to consider product mix, right? So, for example, I think Sean earlier mentioned about what we're trying to do is use our efficiency to continue to bring the 5G smartphone price to a lower price point to enable more people to enjoy the 5G technology. So also need to consider in that factor when you think about ISPs. Overseas, what we're seeing, the driver has always been the mix between the developed market and the emerging market. So a market like Europe will naturally have a higher ASP versus a market like India. So if the growth rate in the developed markets like in Europe is faster than regions like India, then naturally the overseas ASP will increase. So that's on the ASP side. So the gross margin for smartphone this quarter was 8.1%. So it increased both from a quarter-to-quarter perspective and also from a year-on-year perspective. So there's not a lot of difference in the gross margin driver that we talked about. I think Q4 was typically lower because of seasonality. So relatively, I think the first quarter gross margin for smartphone was quite normal.

Okay, but then I have another question on internet. Because of the, I mean, you mentioned about advertisement sometimes very high growth in first quarter even had the virus situation. And because it sounds like a lot of internet companies are spending on advertising this year, it actually has some decreasing. But how come your advertising business is completely free growth? I mean, how do you work? um like a visibility or or uh the forecast for this year and also the same thing because you mentioned about slow down um i mean over slower growth uh from syntax um i just want to know about uh you guys like expectations okay uh let me uh i will answer the uh first half so uh

you talk about the question related to the advertising revenue growth, right? Other internet companies, they decreased their forecasting from the advertisement. So actually, we did several things in Q1, and we'll continue to do that. Number one, we diversified or we increased our customer base for the advertisement. Instead of serving the major, the big internet companies, we developed many, many vertical markets, new vertical market for us so that we work with those vertical market players very, very closely, number one. So that's an increase. Number one. Number two, actually, after years of effort, we continue to optimize our recommendation algorithm so that we can offer more efficient recommendations to every customer so that we can get a better return for both our customers and ourselves. That's the two, I think, two major reasons for us. to grow our advertising revenue. So the second half is indicated to me. Yeah, FinTech. I think Steve already explained the FinTech. Yeah, continue.

So on the advertising, I just want to supplement that. I think there's another factor is we're just more diversified. So in addition to China, right? I think a lot of peers compared to other China companies. So while the China advertising market is challenging, more overseas advertising is actually growing very fast. So I think having the fast-growing overseas also helped us to achieve that growth in the first quarter. Thank you. Very important. As for the sort of the FinTech outlook, right, so I think we can sort of disclose the FinTech number. I think the only number we share is Yongping FinTech TV Internet and Overseas, right? These four, which are less related to the China smartphone, view at a rate of 71.5%. So you'll see the internet service continues to diversify, and these segments continue to grow very fast. So that also included FinTech. But I think in reality, I think we also mentioned in the last quarter call is we do realize, although we see the very long-term prospect of the fintech business for Xiaomi, I think in the short term, we realize that there's a pandemic situation and the overall credit environment in China is also more challenging. So I think starting from the fourth quarter, we start to control the fintech business. We have lowered the approval rate of our new customer and control the credit quality. But from a year-on-year perspective, there's growth. But from a Q-on-Q perspective, I think for fintech, we will, for this year, at least for a short time, we'll try to control the pace.

Okay, thank you. Yeah, I appreciate it.

Next question, please.

Our next question comes from Gokul Hariharan with J.P. Morgan. Please go ahead. Thank you.

Hi, thanks for taking my question.

My first question is on the internet side. When I look at your DUI reported number of subscribers of NAU, almost two-thirds of it is now outside of China. And Steve, you just mentioned some of the advertising businesses starting to grow quite fast in overseas markets. Could you give a little bit more color on how that is progressing, maybe especially in the two big overseas markets that you're in? Europe, probably a higher ARPU market, but a newer market for you, as well as India, probably a lower ARPU market, but a much more established market where you'll be number one for years plus.

Thanks a lot for that question. So we just talked about oversea advertising actually driving the growth in the first quarter. We didn't disclose the detailed number, but our oversea internet service is still growing very fast, driven by both the growth in users and also the growth in our crew. The progress, I think, we're very happy as a company, we're very happy with the progress of overseeing internet service. Right now, I think in the past we talked about the different stages of developing overseeing internet service. The first stage is obviously developing a large enough user base, which right now in India we have. But in a lot of overseas markets, I think the focus is still more on the user rather than monetization. And the second phase is to give up service. So I think on that front, we continue to do, and we see the progress each quarter. I think in this quarter, I think we share a number that we're quite happy with. If you look at globally within the Xiaomi smartphone, our browser actually becomes the number one browser among globally, you know, smartphones. So with the more service penetration on that, we'll be able to start to monetize a bit more. But, of course, in a lot of key markets we have, like India, I think the overall online advertising market is still quite small. I think another thing we are also actively doing is to continue to increase or oversee advertising customer base. So in addition to leveraging big advertising platforms for them to sell or inventory, we are also making very good progress on building the relationship with advertisers. On that, we'll also be able to further drive up the output we have. So that's what we can share.

Thanks. Okay. Thank you. My second question is on China market share. I think there seems to be a little bit of an aging sign initially on 5G. But could you think about it? I mean, the market is so consolidated now with four players, basically four local players dominating the market. What are the strategies apart from just the product side, I think, which you've talked about quite a few times? Could you talk a little bit about what you're trying to do from addressing the channel gaps or any of the I think in China, we continue to build our online, strengthen our online and offline channels. For example, offline, we have around 2,000 stores. So we continue to strengthen those coverage by improving the efficiency, deliver our product to the store with the most efficient way. That's a very important part of our business model. We always want to deliver or offer very high performance devices with affordable prices. So efficiency will be the key. We'll continue to do that. And also, I think we will have a partnership with the carriers, for example, for the 5G adoption for this year. This is also what we are going to do in 2020 in China. Overseas market, I think in Europe, for example, we have been... In 2020, actually, we started building a partnership with With our carrier partners in Europe, since early 2019, we continue to grow or strengthen our partnership in 2020. We will see more and more partnership with global carriers in Europe and in many other markets as well. That's a very important channel strategy for us in the international market.

Okay, thank you.

Thank you.

The question comes from Thompson Moore with UBS. Please go ahead.

Thank you. Thank you for taking my question. I hope you are both doing very well in this current environment. I just have one last question. I think we've covered a lot of ground this evening. The one area I wanted to focus on is on Latin America. There's a little bit more language in your results talking about the profits you're making in that region. I think now you are a top five vendor specifically in Latin America. Could you just talk a little bit about the new channel strategy both on carriers distribution but also on production and supply chain? I know that's generally been a pretty challenging market to break into, given some of the tax and import tax issues. So just on Latin America, can you walk through your strategy there?

Okay, so it's a good question. Actually, we started investing in Latin American market in the, I think in the early 2019, So our headquarter, we built our first office in Mexico. So the Latin American market is very fragmented. As you mentioned, there's many, many different countries, but except Brazil, they are all Spanish-spoken territory. So because we can, yeah, that's good. For us, because we have many, many friends in Spain, we can share a lot of content with Espanyol. So that's good. And also in Mexico specifically, it's a carrier-driven market. There is the biggest wireless operator called American Movie. In Mexico, it's called Telcel. They represent, I think, maybe 90%. I think around 90% of the Mexico market, we are building a partnership with them. We have a Xiaomi store. We have a shopping shop in their store. We have Xiaomi stores. We build our offline channels on our own, and also we build a partnership with the American movie. That's one example. We'll continue to do that. In many other countries, we build our Xiaomi stores and also work with the carriers because in Latin America, the 70%, maybe 60% to 70% of the smartphone market are through carrier channels. We will work with our carrier very, very closely. Brazil is an exception. Brazil is Portuguese. language spoken country. So it's a different, but we have not, we don't have, they have regulations on the local manufacturing. We have not do local manufacturing yet. We have a Xiaomi store there to demonstrate our product, just demonstrate and to sell product. We focus more on the Spanish-spoken countries at the moment.

Okay. And I guess just to follow up on that, for the time being, most of the strategy is really focused on carry relationships on smartphones. It will require a little bit more time to roll out the IoT portfolio. Is that correct?

Actually, this is very, very important. Almost every carrier, they all are very, very interested in doing a partnership with us on the ecosystem products. The challenge for both of us is several things. Number one is the local certification. It takes a lot of time because every country, every market, they They have different certification requirements. We have to do it one by one. It takes time and engineering effort. That's number one. Number two, a lot of carrier partners, they want us to do some kind of customization for them, even for the ecosystem IoT products. This also takes time. We are working with them. We'll solve the problem one by one. I think it will happen. It takes a little time.

Actually, we'll take one more question. Please pick up the next question.

Sure. And the last question comes from Tina Wong with Credit Suisse. Please go ahead. Thank you. Thank you. Thanks for taking my question as a last question. But can I try to ask two small questions? First is about because there's some fears of China retaliation in regard to the Huawei restrictions. Also worry about any risk in banking or any restrictions on call come to affect your smartphone business. I think this is the first one. The second is actually about the cash flow in the first quarter that we see a large outflow and would like to have more detailed explanation from the company. Thank you.

Thank you for the question. Actually, in Xiaomi's spirit or the vision, we want to be a friend to everyone. We are a very, very important technology partner for Qualcomm, for Google, and also a good partner for many, many European technology companies. So we are working with them very, very closely. We don't see any reason that we don't strengthen, continue to strengthen the partnership. This is number one. And also, our vision is to change or improve people's lives through our innovation. The innovation is combined by our own technology innovation together with our partners. So in that sense, I don't see any reason that we don't we don't continue to do the strength in the partnership. So everything so far is going well. So that's the, we are very confident we will go to, now we are in 90 different markets. I think we'll add more market in the future.

And I was just about the cash flow question. I think there's a larger operating cash flow outflow in the first quarter this year. So I think there are a couple of points. I think first quarter is typically the low season of the cash flow. So if you look at a company history, operating cash flow generation is very strong. As a lot of you guys follow, we have a negative cash conversion cycle, meaning when we grow revenue, actually it should be operating cash inflow, assuming all the working capital base reasoned cost does. And so from a FOIA perspective, it has been a very strong in cash flow generation. First quarter is typically a low season. And the reason is because a lot of purchase was made in Q4 that we need to pay the supplier in first quarter. So that's a typical case. I think for this quarter, I think there's a few specific other situation considerations. I think one is in preparation of 5G, which have higher bill of material, the payable we have was higher. That's coupled with lower receivable, the lower cash received this quarter because of the pandemic. So because of the pandemic, we get less money from customers typically this quarter. So that's one. And the second is the inventory also increased quarter by quarter. But inventory increase was really not a big issue. It was mainly by the pandemic, I think Xiangdong mentioned it earlier during the presentation. The increase in inventory is really in the raw material. So because of the production disruption, so we have a lot of raw material not produced into finished goods in the first quarter. So that caused the absolute amount of increase, which again is a cash outflow. OK. Thank you. Yeah. So this will conclude the call tonight. Thanks, everyone, for joining.

Thank you. Thank you for joining.

Thank you for participation. This concludes the conference.