Xiaomi Corp

Ladies and gentlemen, thank you for standing by and welcome to Xiaomi's 2020 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. Yao Chen. 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 2020 fourth quarter and annual results. I am Yale Chang, investor relations director. 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 CellMe. 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. My name is Alethea. My story is true.

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Joining us on the call today are Mr. Wang Xiang, Partner and President of Xiaomi Corporation, and Mr. Alan Lam, Chief Financial Officer and Vice President of Xiaomi Corporation and Deputy Chairman of Airstar Digital Technology. To start, Mr. Lam will share strategic initiatives of the company and review the business and financial performance for the fourth quarter and full year of 2020. Following that, we will move on to the Q&A session. I will now turn the call over to Mr. Alan Lam.

Thank you, Yael. Good evening, everyone. Thank you for joining us today. I'm very pleased to say that our business has delivered a very solid fourth quarter to end 2020. And I would like to use this call to share with you our latest business updates. As you can see from the press release that we put out a couple of hours ago, in the fourth quarter of 2020, we continue our goal trajectory as our revenue grew 24.8% year-over-year to reach 17.5 billion RMB. We also recorded strong growth in our adjusted net profit, which increased to 3.2 billion RMB, which represents a year-over-year growth of 36.7%. In 2020, we achieved record revenue of 245 billion RMB which was up 19.4% year-over-year in a very challenging market, while our adjusted net profit for the period increased to 13 billion RMB, which is a record for us, and a year-over-year growth of 12.8%. All of our business segments delivered solid growth, reflecting the resilience of our business model in a very challenging market. I would also like to highlight the strong performance of our smartphone business in 2020. In particular, in the last quarter of the year, our global smartphone shipment maintained our top three position with a market share of 12.1%. And we achieved the highest year-over-year shipment growth among the top five smartphone companies. Moreover, we expanded our global footprint. As of December 31st, 2020, our smartphones were sold in more than 100 countries and regions globally. We continue to gain our market share in mainland China. Smartphone shipment rose to 12.2 million units in the fourth quarter of 2020, according to Canalist, from 8.1 million units in the fourth quarter of 2019, which was up 51.9% year-over-year. Correspondingly, as you can see from our presentation, Our market share in mainland China rose to 14.6% in the fourth quarter of 2020 versus 10.7% in the fourth quarter of last year.

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We continue to strengthen our position in the premium smartphone market. In December 2020, we launched our flagship Mi 11, which was the world's first smartphone to feature the Snapdragon 888 chipset. The shipment of Mi 11 in mainland China surpassed 1 million units within 21 days of launch. Notably, according to our information, more than 50% of Mi 11 users in the first month after our launch were new Xiaomi users. In 2020 as a whole, we sold about 10 million premium smartphones globally, which in our definition represent retail prices at or above 3,000 RMB in mainland China and 300 Euro in equivalent overseas markets. The relentless pursuit of cutting edge technology is part of our core values. In recognition of this, Teravate Analytics named us among the top 100 global innovators for the first consecutive year. A major testament to our advanced technology capability lies in the charging area. Following the successful launch of the 120 watts wired fast charging and the 80 watts Mi wireless charging technology in 2020, we launched the next generation remote charging technology. which we call Mi Air Charge, in January 2021. This latest technology enables our users to remotely charge smartphones without any cables or wireless charging stands. In February, we launched our first quad-curved waterfall display concept smartphone, which features an 88-degree Heiko quad-curved screen that extends to cover almost the entire frame of the smartphone. With a smartphone body free of ports or buttons, this futuristic design underscores another revolutionary exploration in the next generation of smartphones. And if you have watched the news, we are going to have our next gen product launch next Monday. We are strategically expanding our retail channel as we seek to cover every county across mainland China. and to make our Mi Homes accessible to Mi fans everywhere. As of December 31st, 2020, we had over 3,200 retail stores, which was up over 1,000 stores from the end of September 2020. To ensure high operating efficiency, we are building a fully digitized new retail system to support these Mi Homes. We are deploying our proprietary retail management platform to consolidate and analyze real-time data, including user traffic, including in-store sales, and including our inventory to strengthen our store managers. A lot of people are interested in our internet business. We are pleased to say that during the fourth quarter of 2020, we have completed the reorganization of our internet and software business units. which consolidated our historical internet unit into three major units. Number one, the software and experience department, which focuses on enhancing our user experience and interconnectivity across devices for our MIUI operating system. Number two, the internet business department implements monetization strategies for our internet services, including content distribution, business cooperation, and marketing strategies. And number three, the data services platform is focused on enhancing big data analytics and leveraging our data to improve our business operations. We have appointed our next generation young talent to lead each of these internet departments. We believe this young management team will bring better experience to our users, help our internet service business grow, and create greater value for Xiaomi as a whole in the future. Now with that, let's dive deeper into each of the segments. First, starting with smartphones. In the fourth quarter of 2020, our smartphone revenue increased 38.4% year over year to 42.6 billion RMB, ending the year on a very upbeat note. Smartphone revenue for the year was 152.2 billion RMB, which was up 24.6% year over year. If you look at the operating results in our smartphone business, for both the fourth quarter and for 2020 full year, we achieved year-over-year growth in all of smartphone shipments, ASP, and gross margin. As we increase our smartphone shipment globally, we're also selling a higher proportion of mid to high-end phones and increase our 5G penetration, which helps to lift the average selling prices.

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We hope to further improve our product mix and achieve greater operating efficiency in 2021, which allows us to improve our smartphone growth margin. In mainland China, we further strengthened our leading position in the online channel. Our online smartphone market share increased to 29.5% in the fourth quarter of 2020, according to third-party statistics, from 17.1% a year ago. Additionally, our sales volumes during the Singles Day and Double 12 shopping festivals in 2020 ranked number one among Android smartphones on all major e-commerce platform, including JD, Tmall, and Suning. As we continue to execute our dual brand strategy, we have become more firmly established in the premium smartphone market. Following the launch of the Mi 10 series, as I mentioned earlier, we expanded our premium brand portfolio with Mi 11, with prices starting from $39.99 RMB, and it was very well received in the market as I previously mentioned. Also, our launches of the Redmi Note 9 series priced at or above 999 RMB demonstrate our commitment to making smartphone, to making 5G and advanced technology accessible to the mass market. Now let's move on to the IoT and lifestyle products. We remain committed to our core smartphone times AIoT strategy, which continue to underpin our successful performance. At the same time, we've been very focused on improving our user experience by reducing our SKU last year. Anyway, leveraging our large user base and leading position in this market, our IoT and lifestyle product revenue increased 8% year over year to 21.1 billion RMB. in the fourth quarter of 2020. As a leading consumer AIoT platform, we further expanded our global AIoT user base during the quarter. As of December 31st, 2020, the number of connected IoT devices on our AIoT platform reached 324.8 million, up 38% year over year. Moreover, The number of users who had five or more devices on Xiaomi's IoT platform exceeded 2 million users for the first time, and it was up 52.9% year over year. In December, our AI assistant had 86.7 million MAU, an increase of 43.5% year over year. Also, our Mi Home app MAU reached 45 million, up 22.1% year over year. In the TV market, we further strengthen our leadership position and further broaden our premium and ultra-large screen TV portfolio. Global shipment of our smart TVs reached 12 million units in 2020.

According to ABC, our TV shipment in the fourth quarter of 2020 of over 27%.

We have devoted more resources to our AI speaker and routers to enhance smartphone connectivity and to enhance interactive experiences. As you can see, the global shipment of our AI speakers exceeded 10 million units in 2020. Global shipment of our router exceeded 15 million units in 2020. Both of them achieved leading market share in the Chinese market. We have also expanded our overseas footprint for IoT and lifestyle products as our brand has become more recognizable globally. Our IoT and lifestyle products were sold in more than 80 countries and regions in 2020. And products such as Mi Band, Mi Robot Vacuum Cleaner, and our electric scooters continue to be well-received by overseas users. Looking ahead, we plan to capture a greater share of these overseas markets and bring a broader range of novel and innovative IoT products to an even bigger user base in the global market. Now let's move on to the internet services segment. In the fourth quarter of 2020, our internet services revenue increased 8.4% year-over-year to 6.2 billion RMB. In this quarter, our advertising revenue hit an historical high of 3.7 billion RMB, an increase of 23.1% year-over-year. Also, in the fourth quarter, our internet service margin rise to 68.4%, which was an historical high, due to a significant contribution from our advertising revenue, and as our FinTech growth margin has recovered from the lows in the early part of 2020. Our global MIUI MAU increased 28% year-over-year to $396.3 million in December 2020. In Mainland China, the MAU of MIUI grew from $109.4 million in September 2020 to $111 million in December 2020 and further expanded to $114.5 million in January of 2021. which underscore a growing trend in our user base. Furthermore, if you look at our Smart TV and Mi Box business, the MAU increased 48% year-over-year to over 40 million in December of 2020. We want to deliver the best quality user experience to our users. If you look at our latest MIUI 12.5 system, it enhances user experience further and further protects user privacy. To highlight a few improvements, the UI 12.5 is faster, lighter, and smoother, and has an improved dynamic design and interface. To increase privacy protection, it provides fuzzy location and other functions to avoid unnecessarily disclosing sensitive user information. An important feature of The UI is also to facilitate cross-device collaboration, seamlessly synchronizing work between smartphones and laptops, which will see increasing features in 2021 as we launch our new series of laptop products. Our internet business overseas continues to grow rapidly. In the fourth quarter of 2020, overseas internet revenue increased 55.1% year-over-year and accounted for 14.1% of our total internet services revenue. This growth was boosted by increasing overseas smartphone sales volume and the expansion of our overseas user base. Talking about overseas, let's turn to the overseas market. In the fourth quarter, our overseas revenue grew 27.6% year-over-year to 33.8 billion RMB. Revenue from the overseas market reached 122.4 billion RMB in 2020, up 34.1% year-over-year. Our smartphone market position remains solid in major markets worldwide, with our market share ranking number one in eight markets globally and among the top five in 54 markets. according to candidates. Particularly, I would like to highlight our success in Europe. We ranked top three in Europe for the first consecutive quarter, while gaining strong growth momentum in Latin America. In the fourth quarter of last year, our smartphone shipment in Europe climbed 33.9%, and we had a market share of over 15%. Notably, We ranked number one in Central and Eastern Europe for the first time ever. And our smartphone shipment in the region increased 17.5% year over year, with a market share close to 25%. We also retained our top spot among top three in Western Europe, as our smartphone shipment rose 57.3% year over year. Lastly, talking about Latin America, our smartphone shipment in Latin America surged 215.4% to achieve a market share of 9%, ranking number four in the region. As an effort to increase our market share in the overseas market, I would like to highlight two channels. Number one is our online channel. We ship more than 16 million smartphones through the online channel in the overseas markets. This is more than a 90% jump year-over-year. If you look at our carrier channel, in the overseas market, our smartphone shipment has already exceeded 9 million units, which represents a growth of over four times year-over-year. And if you look at the market share, it has increased to 7.4% in the fourth quarter of 2020. In the next few slides, I'd like to discuss our financials. As I mentioned before, in the fourth quarter, our revenue reached 70.5 billion RMB, which is up 24.8% year-over-year. In the fourth quarter, revenue from smartphones increased 38.4% year-over-year to 42.6 billion RMB. Revenue from IoT and lifestyle products grew to 21.1 billion RMB, which was up 8% year-over-year, and 16.2% quarter-over-quarter, while revenue from Internet services reached 6.2 billion RMB, which was up 8.4% year-over-year and 7% quarter-over-quarter. Despite the pandemic and the global economic uncertainties, our total revenue increased 19.4% year-over-year, to reach 245.9 billion RMB in 2020, which was driven by strong momentum in our smartphone business, as well as healthy performance from our IoT and internet services segments. Overall, our growth margins showed continuous improvements. Our overall growth margin increased to 16.1% in the fourth quarter of 2020, compared with 13.9% in the same period of 2019. and 14.1% in the prior quarter. If you look at the gross profit margin for our smart home segment, it has rose to 10.5% in the fourth quarter from 7.8% in the fourth quarter of 2019, which was mainly due to the improvement of our product mix. The gross profit margin for our IoT and lifestyle products increased from 9.4% in the fourth quarter of 2020 to 12.4% strong growth in our IoT product with higher gross profit margin. As I mentioned before, the gross profit margin of our internet services segment increased to 68.4% in the full quarter due to a higher revenue contribution from our advertising business.

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We continue to step up our investments in brand building and R&D. Our operating ratio climbed to 13.4% in the fourth quarter of 2020, from 12.1% in the same period of 2019. Our R&D expenses totaled $9.3 billion in 2020. which was up 23.5% year over year. As a summary, our adjusted net profit went up to $3.2 billion in the fourth quarter of last year, which was up 36.7% year over year. And our adjusted net profit margin grew to 4.5% in the last quarter of last year. For 2020, despite increased investment, our adjusted net profit reached a record high of 13 billion RMB, up 12.8% year-over-year, and represent an overall net profit margin of 5.3% for the year. At the same time, we maintain our efficient approach to managing our working capital. Notably, our AR turnover days were relatively steady at 15 days in the fourth quarter of last year. The inventory turnover days was 58 days in the fourth quarter, compared with 54 days in the third quarter. The cash conversion cycle was very healthy at minus 30 days. We continue to generate strong operating cash flow in our business. In the fourth quarter, net cash generated from operating activities totaled 13.3 billion RMB, when the adjusted operating cash flow was 11.9 billion RMB. Net cash generated from operating activities reached $21.9 billion in 2020 and was $16.3 billion if you exclude the impact of our FinTech business. Our enhanced cash position set us up with a solid foundation to capture better market opportunities. As you can see from this chart, as of the end of last year, we had cash resources of over 100 billion RMB. which was up 63.5% year over year, thanks to strong operating cash flow and our financing in the capital markets. Our strategic investments make remarkable achievements with an increasing number of our invested company having gone public in both mainland China and overseas in 2020. As of December 31st, 2020, we had invested in over 310 companies. In 2020, we generated an after-tax net gain of 2.2 billion from disposal of investments. As of the end of last year, the total value of our investments reached 67.3 billion RMB, which represents 3.2 Hong Kong dollars per share. will continue to build on our resources and advantage and invest aggressively to empower our ecosystem companies, which we believe will generate deep business synergy and steer the evolution of smart manufacturing over time. Finally, I'd like to give everyone an update with regard to the ongoing litigation in the US. On January 14th of this year, the US Department of Defense designated Xiaomi as a communist Chinese military company, or CCMC, which would have prohibited U.S. investors, U.S. persons, from investing in our securities. We believe that this destination is unlawful, and as such, on January 29th, we filed proceedings in the U.S. District Court against this destination. On March 12th, as all of you may have seen, the court has agreed and has granted our motion for preliminary injunction, thereby removing restrictions on purchasing and holding Xiaomi securities by U.S. persons. We do believe that this decision, the decision to designate us as a CCMC, is arbitrary and capricious, and the judge agreed with us. We will continue to request that the court permanently remove that designation, and we will keep everyone updated of new developments. With this, we've concluded our prepared remarks. We'd like to open it up for questions from the investors.

Thank you, Alan. 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.

Thank you. The Q&A session is now open. To register your questions, please press star 1 on your telephone keypad. Should you wish to cancel your question, please press star 2.

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Our first question comes from Goko Hariharan with JPMorgan Hong Kong. Please go ahead. Thank you.

Thanks for taking my question. Congrats on the good results, management team. My first question is regarding... The monetization in overseas markets looks like that seems to be picking up quite steadily, was about 12% of revenues in Q3, looks like about 14%, growing at about 55%. Could we talk a little bit about what are the avenues that you're exploring in terms of monetization? And could we also talk a little bit about what is in store for the future? That's my first question. Second question is specific to China. We have seen fairly good market share gains in the last several months, going from 10% to 14%, 15% market share. MAU is just starting to grow. So how should we and investors think about the relationship between Xiaomi's smartphone share gain and China MAU growth, given that that's going to be one of the key drivers for internet services growth in China? Thank you.

Okay, this is Xiang. Maybe I will give my comment, and then Alan will add. So the first question is related to the internet service revenue overseas, right? So I think officially, we have not officially started the monetization outside of China, but because of our strong growth of a smartphone business, because of the market share increase in many, many regions, especially in European regions, that will generate very healthy internet service revenue growth. And at the same time, actually, we are building a partnership with the local players to try to build an ecosystem for the future to further monetize our services. our business, actually, overseas, internet service business overseas, the overseas market. That's the answer. We see a very, very healthy and strong growth in that segment. So the second question is related to MAU. Of course, in China, you see we have very healthy MAU growth. And also, not only because of the MAU increase, and also because we are driving more high-end and premium-tier smartphones, that will also help to generate higher output from the Internet services, for example, gaming and other services. And also, we continue to increase our... And may you not only on smartphones, but also on smart TVs. That's also helped us to have more service opportunities to our users. That's the major reason for the growth.

Yeah, hey, Coco. It's Alan. I supplement what Xiangjiong has said in a couple of ways. In the overseas market, obviously, we're exploring different ways of monetizing further, whether it is gaming, whether it's advertising, We saw quite healthy growth in our browser business, actually, in the overseas market. So that's number one, and we'll continue to explore other ways to monetize that further. But as you can see, I think the growth in our user base allows us to extract a higher percentage of our internet services business in the overseas market. In China, obviously, we understand a lot of your analysts' concerns about our Chinese monetization And that's why we decided to put in the January 2021 MAU numbers. As I mentioned before, the Mi 11, a lot of the users come from new Xiaomi users, which allow us to grow our MAU base. And we continue to see quite healthy trend in February and in March of that MAU numbers. So that's part number one. Point number two is on the premium side, we've also seen a much higher monetization in our premium smartphones versus our entry-level smartphones in terms of internet service. I think the gaming revenue, as we look at Mi 11 versus some of the other phones, it has monetized very well. In fact, it's multiple times over some of the other phone models, number one. Number two is also, I think, if you look at the preload revenue, preload Apple coming from the premium smartphones. It's also much higher than the other kind of entry-level smartphones. So with that, I think hopefully as we continue to penetrate the premium side of the market, we continue to see higher monetization in our internet services revenue. At the same time, I'll caveat by saying that we've also been trying very hard to improve user experience by, you know, by... by streamlining some of our advertising space. So, you know, I think this is kind of a balancing act over the year. But I think we see very healthy advertising revenue this year. You know, gaming has all, I mean, has been, you know, I think we have to see the effect from some of the new revenue sharing model going away. And then before the growth will start, I think, second half of this year. And then I think that, you know, we're obviously exploring other other monetization avenue, like Xiangzhong said, in the TV market where we have a very good market share.

Got it. That's very helpful. Thank you very much.

Thank you. On this question comes from Chen Shudong of CICC. Please go ahead. Thank you.

Hi, management. Thank you for taking my question. My first question is about the gross profit margin. Your gross profit margin in fourth quarter is very strong. especially for smartphones, which increased to 10.5 percent. What's behind this positive change, and how much of foreign exchange affect this, and how can we forecast growth margin in 2021, since there is some prices of semis or raw materials goes up a lot? That's my first question, and I will have a follow-up.

Thank you. So, yes, we have a very strong growth margin increase in Q4. I think the major reason is number one, the product mix. While we are shipping more and more premium tier smartphones to the market, so that generates more profit. That's a product mix. Number two is because of the shortage. So we were not very aggressive on marketing or promotions. So that's also helped us to have a higher gross margin. I think in the future, we'll continue to offer more and more premium tier smartphones. So we will, even during the pandemic, the challenge period of the supply. I think we want to carefully use our resources. We hope we can maintain a healthy growth margin.

Okay, thanks. And my second question is about the offline store. Since offline stores will be a very key strategy to improve premium and market, especially in China, could you tell us what's your plan and strategy for opening those stores, especially in third-tier or fourth-tier cities in China? Thanks.

We have a plan to cover all the countries of China with Xiaomi stores. So we are on track.

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So one side, we continue to build more stores.

Actually, even more importantly, not only building more stores, but also we built our own system to manage the stores. We designed a system to track the traffic and also the sales of each store so that we can improve the efficiency of the sales channel. This is a long-term strategy for Xiaomi offline sales, for Xiaomi offline sales. I think in 2021, we will build more and more stores in the Tier 3, Tier 4, Tier 5 cities to cover almost every country. That's the goal.

I think with respect to our offline store strategy, obviously, we are approaching it from a relatively asset-light approach as well. We rely on a lot of our partners to open the stores and we support it with our system to enable them to achieve the same level of operating efficiency that we achieve in our own stores. So I think the plan is obviously to build it, you know, to have an aggressive plan of building the store network up to compete with some of our competitors. But at the same time, I think we will maintain a relatively asset-like approach, but using our system to enable our partners to achieve the same level of operating efficiency, if that makes sense.

Thanks. That helped a lot. Thank you.

Thank you. Our next question comes from Kina Wong with Credit Suisse. Please go ahead. Thank you.

Thanks for taking my questions. So the first question, actually, I would like to ask, the strategy of the company in order to acquire some of the ecosystem company, like just the announcement of Zimi. So I would like to know the intention and how to complete the LISCO portfolio in the IoT business. That's the first question in terms of IoT strategy. The second thing is about We see the growth in the IoT business sounds a bit lower in terms of third quarter recovery. What's the reason behind and how should we see the growth momentum in 2021? What's the plan for the product launch and how the company to achieve further product expansion and also market expansion? Thanks.

Sure. Thanks, Kina. I think on ZMI, I'll note a couple of things, and thanks for pointing this out. We did release a circular today that said we're going to acquire the remaining 50.1% of ZMI that we didn't own already. So first of all, as a background, we spent $100 million last year, U.S. dollars, to acquire 27.4% of ZMI. because we have some existing ownership, which took us to 49.9%. That was last year. And this year, we're spending quite $200 million to acquire the remaining portion, which if you do the math, it's actually the same valuation as a year ago when Zimmy has continued to grow. The reason for acquiring Zimmy is because we do think that they have a number of core competence that they would like. especially in terms of IoT, the R&D and product development capabilities in the IoT segment, particularly in power management, which will help us achieve a, you know, which we can leverage with our own IoT portfolios that we manufacture, you know, as well as, you know, whether we can have the, you know, battery management systems to help us further lower costs. So I think that that will help us enhance our ecosystem competitiveness in the future. And also, I think they have, not only is their product development capability, they also have their own kind of supply chain management systems that can help us. And so I think that we will selectively look at other opportunities, although obviously there's nothing in mind at this point. But as we further develop our smartphone times AIOT strategy, I mean, obviously it's core to own some of the core IP and R&D capabilities so that we can build out that portfolio further. Second, with respect to IoT business, I think two things impacted the growth this year. Number one is obviously the pandemic, which delayed the rollout of some of the larger kind of white good product earlier part of this year. which we're seeing picking up in the second half. Second is we have been trying to optimize the number of SDKs to focus on those that are more focused, connected to our smartphone business. That's why we have deliberately tried to manage the number of SKUs that we have in our portfolio. One, to further enhance the interconnectivity with the smartphone, and second, to help enhance user experience, like how we do it for our internet business. In the first quarter of this year, we have already seen a very significant pickup in the IoT business. I think especially the peak season for some of the white goods are in the first quarter before Chinese New Year. We've seen some of them shipping very well. And you can see our TV, which we launched our Redmi TV last month. I think it's also been selling quite well. We're seeing a pretty significant recovery in that business in the first quarter. And also the second thing is obviously, as I mentioned before, In my prepared remark, we have seen or we are going to expand aggressively into the overseas business. We already have a pretty significant business last year in the overseas IoT business, and we'll continue to focus on that, again, leveraging on our smartphone market share, our brand name, to get more of our IoT products overseas.

Thank you very much.

Thank you. Our next question comes from Yingbo with Citix. Please go ahead. Thank you.

Thanks for taking my questions. My first question is about the Internet sector. Take the Internet sector as an overall. We find that the cell phone companies feel difficulties in the BAME area in the second quarter, second half last year. However, we still got a double-digit increase in internet revenue. So we think that that is good. Could you please give us more colors on this year's internet revenue increase? This is my first question. And the second one related to AIoT, we noticed that some third-party AIoT path companies is trying to enlarge their exposure in AIoT area to empower or enable more home appliance companies to be connected in this area. So how do you see this kind of competition with our AIoT? And considering the competition, will we be more ambitious in the AIoT area? And what's more, another question, how we consider about another AIoT area? like auto, because auto is a very interesting AIoT area investors are curious about. Thank you.

Sure. Let me take the Internet question first. I think we'll continue to see a pretty healthy growth in our Internet business this year. I think, I mean, obviously our Internet business has a lot of different components. And I think last year the growth was certainly impacted by our FinTech business because as we continue to reduce our balance sheet usage, so you've seen a corresponding decrease in revenue in our FinTech business. But I think in the second half of last year, we've already seen, although the revenue decreased, continued to decrease for FinTech business on a year-over-year basis, but the margin has improved as we shifted to a more kind of platform business as opposed to a balance sheet business. And we expect that to continue this year. So if you look at our Internet business this year, we are quite optimistic, but we'll get hit in a couple of ways, I think. Number one, in our gaming business. when year-over-year comparison in the first half will be very difficult, just given last year it was a good first quarter in the gaming business due to the pandemic. And also on the fintech business, again, as we continue to shrink our balance sheet usage, the top line will decrease, but the margin will continue to improve. So I think that's the first part. Second part is obviously, as we mentioned before, as our shipments continue to grow, we do expect the advertising revenue to pick up as a result. And as our premium segment of our smartphone continues to grow, we do expect the revenue to increase disproportionately versus some of the entry phones. And also on the TV side, as we continue to maintain our leadership position in TV, we are looking at, you know, beyond just kind of advertising, is there other ways to monetize in terms of content and other sources. So I think that we are quite optimistic about the internet business as a whole. In terms of the AIoT competition, obviously I think our success has certainly lead to many of our competitors wanting to get into this area. I think we have differentiated in a couple of ways. Number one is obviously the connectivity that we're exploring for all of our AIoT businesses, AIoT products with our smartphones. So not only are we just producing kind of a battle for money consumer electronics products, but we're also exploring their interconnectivity between devices and between our cell phones. So that's something that I think will have a competitive advantage over some of the other players that simply make one product or a couple of products. They don't have the portfolio to compete with us. I think that's the first part. Second part, obviously, as you know, we do our ecosystem product, AIoT product a lot. from our investments, from our ecosystems. And so I think we do have a big network of people doing R&D for us. So it's not just our own R&D. I mean, obviously, we have to have our own core R&D. But at the same time, through our 300-plus investing companies, more than 100 are focused on ecosystem product. I mean, I think we're using that and leveraging their R&D capability, leveraging their network to help us build a better product for our users.

Yeah. Just add one more thing. We are putting a lot of efforts to improve the user experience with our smartphones and ALT products. So not only in the connectivity side, but also the user experience. So for example, the smartphone can very, very easily and smoothly connect it to different screens to share content among different screens and devices. And also, we use one simple app to manage all the IoT product of wearables in your home on the go. So I think that's the uniqueness of our business. We continue to invest into that area. We are still the largest AIoT platform in the world. So, yeah, we will focus on the user experience improvement. I think that's the strength of us.

Okay. Thanks, Xiangzhuang and Alan. Could you please talk a little bit more on Auto?

So, yeah, we made an announcement. We made a notice, right, in the Hong Kong.

Yeah, so we put out the announcement saying that we haven't really established an internal project on making electric vehicles. So there's not much else we can say about that at this point.

Yeah. Got it. That's helpful. Thank you. Thank you. Our next question comes from Frank Hurt with HSBC. Just go ahead. Thank you.

Thanks for taking my question. I have two. The first is about the GP margin on the smartphone. So given the current very tight chip supplies and also some chip shortages across the supply chain, so just wonder what's the strategy for Xiaomi to secure enough sufficient chip supplies and whether there's any cost pressures related to our smartphone and IoT business. Thanks.

So yes, right now we are in the shortage. Not only us, the whole industry is in the challenge of the shortage. So I think this is very normal in the semiconductor industry. Every couple of years, maybe three to four years, the industry will have the similar challenges. But this time, It's very, very serious. But what we can do is we work with our suppliers very, very closely to optimize the supply and also carefully manage our product launch schedule so that we can make up, how to say, to match for the supply to continue to improve the efficiency, carefully use the capacity or resources we have Another thing I want to mention is we actually have a very, very strong growth in the 2021. So even during this shortage, we'll continue to grow our business. We'll see a strong growth. We are working with the major suppliers very, very carefully. So we are...

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I think we stay confident for year 2021 for the business growth, not only smartphones, but also IoT products in China and also outside of China.

Okay. And then my second question is about the offline versus online distribution channels. Given you ramped up the offline channels in the lower tier cities, do you have any target regarding the sales contribution from offline in China in this year or maybe in the coming few years? And also, what's the implication on the margin side? Do we see any positive or negative impact from this sales mix changes?

So our target is to have a Xiaomi store in every county of China. This is our plan for China domestic market. So we are working on this plan on the execution side. So we see a strong momentum for the increase of our offline stores. not only the number of stores, but also the IT system to manage those stores so that we design a system so that we can track on daily basis of our activations, sell in, sell out, so that we can improve the efficiency. That's the key part of our business model. So yeah, this is a what we are doing now. So yeah, I think you see the gross margin increase in Q4. This is because of the shortage and also the product mix. But we'll continue to optimize our cost structure so that we can offer more and more very, very attractive product to the consumer.

Okay, thank you. And just a very quick follow-up on the ZMI acquisition. So just to make clear that it is consolidated starting from this month, or it will not be consolidated? And is that possible to discuss a bit about the revenue size last year? Thank you.

Yeah, thanks. Well, I mean, we still have to go through the final process before closing. We are hopeful that the closing will be in the first quarter of this year. So after that, we'll consolidate ZMI as a 100% owned subsidiary. But, you know, it's not going to be a very significant, you know, impact to our PMU.

Okay. Thank you very much.

Thank you. We now invite the last question, which will come from Robert Chen with Merrill Lynch in Hong Kong. Please go ahead. Thank you.

Okay.

Yeah, thank you. Thanks, Benjamin, on the good result. My question is on the Internet side. I think in the fourth quarter, the Internet growth margin reached into 68.4%. This is much higher than the third quarter, even the same time last year. At that time, it was basically only 60% to 63%. So we want to know what's the main reason on a high margin on the internet basis. And can we expect this kind of margin going forward? And it's also on the internet, it's basically on the revenue growth side. Because if we're looking at this year, Um, the, the, the value added revenue, uh, in fourth quarter value added revenue, um, actually declined 11%. Um, and, uh, the, the, so, so if we're going forward to looking at the business, um, I mean, the only one has higher growth as an advertisement. So, and the gaming is actually, it's also not really growing. So can we say, I mean, because of Alan's mission about, I mean, CMA positive on internet. Can we say the really high growth via more content from advertisement? Okay, I think that's my question. Thank you.

Yeah, thanks, Robert. I think, I mean, as I mentioned before, I think Q4, the growth margin for the Internet business was really driven by product mix in a way, right, being the advertising revenue being a bigger factor. you know, a pretty high proportion of that business, number one, and also number two as the fintech business, as I mentioned before, has improved in their gross margin over the few quarters. Is that sustainable going forward? We would like to think that, you know, over time we would like to make sure that the Internet business become more balanced in terms of their portfolio, right, with a fair mix from advertising, with a fair mix from games and other value-added services. So with that, I mean, obviously, I'd like to say we can achieve a higher gross margin, but I'd like to optimize our portfolio as well and make sure that we have a healthy mix between advertising and gaming and other value-added services, if that makes sense.

Okay. Yeah. Probably another follow-up is also on the margin side because of the, I mean, like Xiangjiong say right now, I mean, basically a lot of components in shortage, especially IC. Have you think about the impact because of a lot of component pricing recently is all go higher, the chipset and the CCR, this component. I mean, do we expect this will impact margin on the, on the second quarter or even the whole year, this year. Thank you.

Yeah. So I think, yeah, we will continue to optimize the cost of our hardware devices. That's for sure. We'll continue to do that. But we know during the shortage, a lot of increase of our cost because of the shortage. To be very honest, we will do our best to offer the best price we can to our consumers. But sometimes we may have to pass part of the cost increase to the consumer on the different cases, in the different cases. So we will continue actually to monitor the cost impact on our hardwares. But so far, we are doing okay. We feel pressure, but we are working okay.

Okay. Yeah. Thank you. Yeah. Mm-hmm.

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

Thank you very much. Thank you. Thank you.