Xiaomi Corp

Ladies and gentlemen, thank you for standing by and welcome to ShellMate 2021 First Quarter Results Announcement Conference Call. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I'd like to introduce myself, Mr. Anika Chen, Head of Investor Relations. Good evening, ladies and gentlemen. Welcome to Investor Conference Call hosted by ShellMate Corporation regarding the company's 2021 First Quarter Results. Before we start the call, we would like to remind you that the call may include forward-looking statements, which are underlined by a number of risks and activities and may not be realized in the future for various reasons. Information about general market conditions is coming from a variety of sources outside of Xiaomi. This presentation also contains some unaudited non-IFI financial measures. that should be considered in addition to, but not as a substitute for the company's financials prepared in accordance with IFRS. Joining us on the call today are Mr. Wang Xiang, partner and president of Xiaomi Corporation, and Mr. Alan Lam, chief financial officer and vice president of Xiaomi Corporation. To start, Mr. Wang will share recent strategic initiatives of the company Therefore, Mr. Lam will review the business financial performance for the first quarter of 2021. Following that, we will move on to the Q&A session. I will now turn the call over to Mr. Wang.

Thank you. Thank you, Anita. Hello. Hello, everyone. Thank you for joining our first quarter 2021 earnings call. In this quarter, we reported outstanding results across all business segments. Our revenue reached RMB 76.9 billion and adjusted net profit reached RMB 60.1 billion, up 54.7% and 163.8% year over year, respectively. Both revenue and adjusted net profit achieved historical highs. Throughout this quarter, we remain committed to advancing our core smartphone multiplies AIoT strategy. I'm pleased to share that our global smartphone shipments ranked number three for the third consecutive quarter, with market share of 14.1% in this quarter. Notably, we saw explosive growth in Europe and ranked number two in the region for the first time. We continue to strengthen our position in premium smartphone market. In this quarter, we further expanded our premium offerings through the launch of Mi 11 Ultra and Mi Mix Fold, priced above RMB 5999 and RMB 9999, respectively. Our premium smartphones have been well received by the market as shipment exceeded 4 million units globally. in the first quarter of 2021. We continue to deliver cutting edge technologies and a best experience to our users. For example, our Mi 11 Ultra achieved the global number one DxMark position. And the first foldable smartphone Mi Mix Fold features our proprietary C1 image signal processor. making a significant milestone for our imaging technology and leading us to a greater technological aspirations. We also announced our official entry into smart electric vehicle business. The smart electric vehicle represents indispensable components of smart living and entering The smart EV business is a natural choice for us as we expand our smart AIoT ecosystem and pursue one of the largest business opportunities of the next decade. Last but not least, the first quarter, we also introduced our new logo, which presents Xiaomi's new brand identity. We believe the new brand identity will allow more people to feel and understand Xiaomi's corporate philosophy to let everyone in the world enjoy a better life through innovative technology. Now, I'd like to invite Alan to discuss more details of our first quarter earnings and business updates. Alan, please go ahead.

Thank you, Xiangzhu. Good evening, everyone. Thank you for joining us today for our 2021 first quarter earnings call. In the first quarter of 2021, we maintained solid growth trajectory across all business segments. Total revenue grew 54.7% year over year to 76.9 billion RMB, and adjusted net profit grew 163.8% year over year to 6.1 billion RMB. Our revenue and adjusted net profit both hit record highs in this quarter. In this quarter, we maintained a number three position in global smartphone shipments with a market share of 14.1%. Our shipment increased 61.9% year over year, the highest growth rate among the top smartphone companies. We have strengthened our position in the premium smartphone market. In March, we released three premium flagship smartphones, the Mi 11 Pro, Mi 11 Ultra, and Mi Mix Fold, and all have been well received by the market. To illustrate, from January to April of 2021, total orders for Mi 11, Mi 11 Pro, and Mi 11 Ultra exceeded 3 million units. Meanwhile, the Mi 11 series ranked number one in its category among all Android smartphone series in mainland China. In total, We shipped over 4 million premium smartphones this quarter. Our premium smartphones were defined as retail prices at or above 3,000 RMB in mainland China and 300 Euro in the overseas markets. Our market share in the premium smartphone category in mainland China grew considerably to 16.1% in the first quarter, up from 5.5% in the first quarter of 2020. Our achievement in the premium smartphone market is underpinned by our relentless pursuit of technology innovation. For example, the Mi 11 Ultra achieved a DxO mark score of 143 for overall camera performance and ranked number one globally. In addition, it debuted a jointly developed GN2 sensor, the largest smartphone camera sensor currently on the market. In terms of charging technology, Mi 11 Ultra debuted the silicon oxygen battery, which enables faster charging in a thinner smartphone body and sets a new benchmark with 67 watt wireless charging support. Our Mi Mix Fold is another example of our pursuit of technology innovation. It is equipped with our proprietary search C1 image signal processor, which uses advanced algorithms for auto focus, auto exposure, and auto white balance, significantly enhancing the image quality. Additionally, it is the world's first smartphone to use liquid lens technology, which combines macro and telephoto capabilities in a single lens. In terms of displayed, It is equipped with a flexible 8.01 inch OLED screen, featuring Xiaomi's own color calibration algorithm with impressive color accuracy. In Q1, we further improved our number one online leadership position in China, with our online market share doubling to 38% from 18.5% in the first quarter of 2020. Meanwhile, we rapidly expanded our offline retail presence. As of the end of April, we had over 5,500 retail stores in China, an increase of over 2,300 stores compared to the end of December 2020. As Jiangyong said, we've also elevated our brand and stepped up our promotional efforts globally. In March, we launched our new Xiaomi logo, with the new Alive branding identity, which expresses the relationship between life and technology. At the same time, we invested in brand building in key global markets. In February of this year, massive screens of our Mi 11 smartphone were displayed on three landmark buildings, including Dubai's Burj Khalifa, London's BFI IMAX, and Bangkok Central World. This move demonstrates our efforts to expand into the overseas premium markets. On March 30th, we've also made one of our most important decisions in our corporate history, which was our official entry into the smart electric vehicle business. We'll establish a wholly owned subsidiary with an initial investment of 10 billion RMB and expect to invest around 10 billion US dollars over the next 10 years. We believe offering quality smart EV will help us build a closed-loop smart living ecosystem and fulfill our vision to let everyone in the world enjoy smart living anytime, anywhere. We also believe that we have unique advantages to support the smart EV business, including our internet business model, our extensive experience in software and hardware integration, our broad user base, our powerful brand, our distribution channels, and our investment in prior technology surrounding smartphones, which can also be applied to smart EVs, and with our abundant cash resources. These factors will contribute to our future success in the smart EV sector. I'd like to give everyone an update with regard to our litigation with the U.S. Department of Defense. As you may have seen from this morning's announcement, The U.S. District Court issued a final order this morning vacating the U.S. DOD's destination of Xiaomi as a CCMC, a communist Chinese military company. In vacating the destination, the court formally lifted all restrictions on U.S. persons' ability to purchase or to hold our securities. We are very grateful for everyone's trust and support. and we will continue to relentlessly build amazing products with honest prices to let everyone in the world enjoy a better life through innovative technology. Now let us dive deeper into each segment, starting with smartphones. In the first quarter, our smartphone revenue grew 69.8% year over year to 51.5 billion RMB, our highest quarter ever. Our global smartphone shipment reached a record high of 49.4 million units, up 69.1% year over year. Our smartphone gross margin also rose to 12.9% due to improved product mix and fewer discount activities as a result of supply shortage. Let's take a closer look at the mainland China market. In the first quarter, our smartphone market share in mainland China rose to number four. According to Canalyst, during the quarter, our smartphone shipment in mainland China reached 13.5 million units, a year-over-year increase of 74.6%, and with a market share of 14.6%. This is supported by the continued success of our new brand strategy, targeting different user segments. For example, Our Mi Max Fold, with prices starting from $99.99, catered to the business executives and power users. To reach the younger generation and female users, we launched our Mi 11 Lite. And for gamers, we unveiled our Redmi K40 gaming series, with prices starting from $19.99, R&B. We believe that this strategy will help us capture greater market opportunity by satisfying the unique demands of the different users groups. With respect to the IoT and lifestyle product business, our revenue increased by 40.5% year-over-year to 18.2 billion RMB in the first quarter of 2021. As the leading global consumer AIoT platform, The number of connected IoT devices on our AIoT platform reached 351 million of 35.6% year-over-year. Moreover, the number of users who had five or more devices on Xiaomi's AIoT platform reached 6.8 million of 48.9% year-over-year. Our AI Assistant MAU reached 93 million, an increase of 31.9% year-over-year. Lastly, our Mi Home app MAU reached 49.2 million, which was up 22.8% year-over-year. We continue to expand and upgrade our IoT product portfolio to offer the best user experience and to further promote interconnectivity across devices. In the first quarter, we launched new products with distinctive features, including Mi Laptop Pro 15, featuring a super-retina OLED display with 3.5K resolution, and Mi Router AX9000 with dedicated 5G eSports spectrum. In the smart home category, we launched our Mi Smart Air Conditioner with Ventilation, with prices starting at $3599. It is an innovative next-generation air conditioner that takes clean, fresh air from the outside and to effectively lower indoor carbon dioxide levels, bringing to our users a more healthy and comfortable experience. It also doubles up as an air purifier that achieved 19.9% air sterilization. This smart air conditioner is also the industry first to win a Red Dot Design Award. In mainland China, our IoT products deliver outstanding results across multiple categories. This shows that we have become an increasingly important part of our users' daily life. Notably, our air purifiers rank number one with 52.5% market share. Our meat bands rank number two with market share of 37.5%. Our smart locks rank number one with market share of 28%. 4.8%, and I can keep going on the list. Meanwhile, the IoT segment continued to grow in the overseas markets. In the first quarter, revenue from our IoT products in the overseas markets increased 81.1% year-over-year as we strengthened our brand and increased our penetration in the key markets. We continue to enrich our overseas IoT portfolios and introduce a variety of cool products, such as our Mi electric scooter Pro2, Mercedes AMG Petronas F1 Team Edition. Our IoT product portfolio has great potential in the overseas market, which we believe will be a key driver of future growth in our business. With respect to the internet services segment, revenue from internet services reached 6.6 billion RMB, UP 11.4% YEAR-OVER-YEAR. OUR ADVERTISING REVENUE HIT A HISTORICAL HIGH THIS QUARTER, RISKING 3.9 BILLION RMB, PRIMARILY DUE TO HIGHER PRE-INSTALL AND SEARCH REVENUE ON OUR PREMIUM SMARTPHONES. GAMING REVENUE DECREASED YEAR-OVER-YEAR, AS MENTIONED BY XIANG ZHONG, MAINLY DUE TO THE HIGHER BASE IN THE PRIOR YEAR, DUE TO THE STRONG GAMING INDUSTRY PERFORMANCE DURING THE PANDEMIC. ALSO, Revenue from our other value added services decreased as we voluntarily reduced the risk on our FinTech business. If you look at our global internet user base, it has continued to grow and drive our internet services business. In March of 2021, the global MAU of MIUI increased 28.6% to 425.3 million, while the MAU in mainland China rose to 119 million, up 6.4% year over year. Our TV value added service offerings continue to expand and include video entertainment, e-learning, kids mode and karaoke, providing diversified content to a wide user group. During the pandemic, our education channel also offered live streaming educational courses for free. providing a convenient learning option for kids at home. In the overseas market, our internet services revenue increased 50% year-over-year in the first quarter, accounting for 13.8% of total internet services revenue. This was driven by increasing overseas smartphone shipments and the expansion of our overseas business. Notably, the MAU in Western Europe grew 95.5% year-over-year, And our Mi browser business is also expanding in the key overseas markets. Talking about the overseas business, in the first quarter, our overseas revenue increased 50.6% year-over-year to 37.4 billion RMB, which accounted for 48.7% of our total revenue. According to Canada's, our smartphone market share ranked number one in 12 markets in the first quarter, and ranked in the top five in 62 markets worldwide. For instance, in Spain, we ranked number one for the fifth consecutive quarter, and we also ranked number one in Russia for the first time this quarter. We have further expanded our scale in the key overseas regions. Our smartphone market share in Europe climbed to number two for the first time this quarter. Our ranking in Latin America and Middle East both rose to number three, and we maintain our number two position in Asia Pacific. I would like to further highlight our excellent performance in Europe this quarter. As I mentioned before, we ranked number two for the first time in Europe, with a market share of 22.7%, as our smartphone shipment increased 85.1% year over year. In Spain, our smartphone market share reached 35.1%. And in Italy, our ranking surged to number two with a market share of 25.2%. We also maintained our number three positions in France and Germany, with year-over-year growth exceeding 100% in both markets. We continue to deliver strong results in both the carrier and online channels overseas. In the first quarter, excluding India, our overseas smartphone shipments through the carrier channel exceeded 5 million units, up more than 310% year-over-year. As of March 31st, we've cooperated with over 150 carrier channels worldwide. At the same time, our smartphone market share in Western Europe carrier channel surged to 11.3%. compared to 7.4% in the fourth quarter of 2020. In the online channel, our overseas smartphone shipment, excluding India, also exceeded 5 million units, up more than 100% year over year. Now let's move on to the financials. In the first quarter, as I mentioned before, our revenue reached 76.9 billion. up 54.7% year-over-year and 9.1% quarter-over-quarter. In particular, revenue from smartphones grew to 51.5 billion RMB, up 68.9% year-over-year and 20.8% quarter-over-quarter. Revenue from IoT and lifestyle products reached 18.2 billion, up 40.5% year-over-year. Our revenue from internet services reached 6.6 billion RMB, representing an increase of 11.4% year-over-year and 6.4% quarter-over-quarter. As you may have noticed, our growth margin has shown strong growth momentum during the last quarter. Our overall growth margin increased to 18.4% in the first quarter. And if you look at the gross margin for our smartphone segment, it grew to 12.9% in the first quarter from 8.1% in the prior year. The gross margin for IoT and lifestyle product increased to 14.5%, and the gross margin for internet services segment increased to 72.4%. During the quarter, We continue to step up our investments in brand building and R&D. Our R&D expenses increased by 61% year over year to 3 billion RMB. We remain dedicated to pursuing the cutting edge technology for our business. And we expect to recruit another 5,000 engineers in 2021. We saw robots grow in our adjusted net profit in this quarter. We reached a new record high of 6.1 billion RMB, up 163.8% year-over-year, and 89.4% quarter-over-quarter. And our adjusted net profit margin climbed to 7.9% in the first quarter, from 7, sorry, from 4.6% in the same period of 2020. We maintain our efficient approach to managing our working capital. Our AR turnover days decreased to 13 days in the first quarter of 2021. The inventory turnover days were 65 days in the first quarter, and our AP turnover days increased to 111 days in the first quarter. Overall, our cash conversion cycle was very healthy at negative 33 days. Last but not least, our strategic investments enable us to generate additional earnings growth. We continue to enrich our investment portfolio. For example, in the first quarter, we invested in Dong Yi Ru Shen Home Decoration, a premium home decoration solutions provider, which also established strategic cooperation with our AIoT smart living ecosystem. As of the end of the first quarter, we had invested in more than 320 companies. We generated an after-tax net gain of around 400 million RMB from the disposal of investment during the quarter. And as of the end of the first quarter, the total value of our investment is close to 70 billion RMB, which if you look into it on a per share basis represent about 3.3 Hong Kong dollar per share. We will continue to leverage our resources and our ecosystem to invest in more ecosystem companies, further empowering the entire manufacturing industry in China.

Thank you, Alan. We will now proceed to the Q&A session. Please leave your questions for 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. And the first question comes from Hua Liping with Huatai. Please go ahead. Thank you.

OK. Thank you for taking my questions. My first question is about the chip shortage and the inventory issues. chip shortage has been a major problem for the tech industry for the last few months, but we also see some weakness in the smartphone demand, especially in China and India recently. And when I look at your financial statement, I saw you have a large increase in your raw material inventory, but a large decline in the finished goods inventory. So can you comment, Xiangdong, can you comment on this, at this point of time, What is the manager's view on the impact of the chipset shortage and inventory, and what's the impact on your future growth? Thank you.

Thank you. Thank you for the question. Actually, the shortage happens every three to four years in the semiconductor industry. But this time, it's stronger because because of many, many factors. One factor is the pandemic, right? So, yeah, we are working very hard with our suppliers, try to, how to say, optimize our supply situation and do some preparations for the future. So, yeah, we are, that's why we are, I think we are, inventory level is in the in the healthy I think in general is healthy it's very healthy so yeah we do some preparations for the shortage for the second half in the raw materials yeah that's that's for sure but in overall we are we I don't see any issues for for this year it's not going to be a major problem. Even with the shortage, actually, we think we can still have a big or significant increase compared to year 2020 and 20. So that's this question. So your second part of the question is how long is going to last, right? I think, to be very honest, I think for this entire year, year 20 and 21, I don't think the issue will be resolved within this year. So we can expect maybe second half of next year, the supply environment will be changed because the whole industry is working very hard actually to try to improve the manufacturing capacity, not only for the SOC suppliers, but also memory, also display the whole industry actually is working on that I think maybe second half of next year's will be will be improved this is our will regarding regarding to the the market actually we know we recently noticed there are some companies or some receive research agent agents or institution they are saying the soft demand in the China market for smartphones. So we monitor the market environment very closely. So far, we don't change our plan. We will keep our plan for 2021, but we closely monitor the market demand dynamic.

Yeah, that's my... I think a couple of additional points. I think one, obviously, I think the entire street, not just in our industry, but also in other industries, we are seeing chip shortage, right? I think the auto industry, for example, due to a demand shock, right? Because there are more demand from these new EV players Laptop players due to the pandemic have been increasing demand. And then the supply was slowing catching up, right, because of the pandemic. They haven't really spent that much capex in terms of building new capacity. So I think that will take a while for that to normalize. As Xiangzhong said, probably take till next year for the chip shortage to ease. So obviously, as Xiangzhong also mentioned, right, number one, we have been investing strategically. As you noted, some of our raw material inventory has increased. At the same time, I think the fact was our, as you also see, the finished goods inventory has dropped because our products remain very popular with our user base. I mean, from a management standpoint, we are trying to optimize our product portfolio. We are trying to optimize our, you know, to make sure that we strategically optimize our margin as well in our business due to enhanced product portfolio as a result.

The second question, Xiangzhuang, and I think I asked the same question maybe roughly one year ago. So your room of growth, you actually deliver very strong growth in the last one year. When you calculated the number, you already shipped 50 million units of smartphones. this quarter, if you multiply by four, it's $200 million, versus Samsung, it's only $300 million, which I think you are already very close to global number two. And so when you plan your geographical expansion and when you plan your product mix, so where's the room coming from now? And especially, do you plan to enter a market like the United States? And do you plan to have a much bigger market share in the

premium segment like which country is dominated by your employing the Samsung thank you yeah actually see a lot of room to grow in many many markets take a Europe exit as an example right now entire Europe we run number two this is significant milestone for us we our market share now in entire Europe is over 20% But we still think we still have a good room to grow because in Western Europe, our market share is less than 20%. I think it's about 18%, maybe 18%. So Western Europe, we see very big room to grow there. So right now, we are number one in Spain for five consecutive quarters with market share about 35%. We're number two in France, in Italy, number three in Germany. All those markets, we all see a huge potential to further grow. So that's one area. Another angle is our growth in the carrier channel. were very, very strong in Q1 2021. We just started carrier business. Our market share in carrier channels is still very low, but our growth is over 100%, maybe 300% in Q1. It's a very strong growth. You see the trend that we're going to grow our smartphone shipment in the carrier channels. That's another potential. So if you look at the China market, we are about 40%, 33% in China online market. But we are still not very high, we don't have a very high market share in offline market of China. So that's why we are putting huge effort to establish our offline channels and retail stores across the country. So that's another big area to grow. Other example including russia including latin america we we also see a very strong potential to grow so uh yeah we are happy to uh to share that last year we ship 140 maybe over 140 million units but but this year even with the shortage i think we will very confident to uh to to to have a significant growth in smartphone market. And U.S. market. U.S. market is always very, very attractive to everyone. So we are, right now, we put our focus on the European market instead of North America market because of resources issue. we will continue to increase our investment in R&D so that we have more resources. Then we can maybe, when we are prepared, we will go to another market. We don't have a, so far we haven't announced any plan yet. But that market definitely attractive market to us in the future.

Thank you very much.

Thank you. Our next question comes from Tina Wong with Credit Suisse in Hong Kong. Thank you.

Thanks for taking my question. Congratulations for such a good, strong result. And I have two questions. One is about the smartphone cost margin, which already reached 12.9%. It's very encouraging. level and we wanted to see is like how much is actually from the fewer sales promotion by techniques and also somehow if there's any impact is a trip from some finished good that already is a trip based on lower cost but right now your cost may be increased on these chip tightness and what should we expect like going forward in the in the like coming quarters because I think the chip tightness will still stay this year and properly will resolve second half next year, as I mentioned. So is that a sustainable margin level? So this is the first question. The second question is about the internet business, because we do see the advertising and also advertising revenue grew very strongly, was like 46%. And gaming also actually exceeds, I think, the expectation in the street because it's like up 24.8% on a high base last year, because last year is actually due to lockdown in China. But I mean, we see gaming got like impact from the commission base, let me change and also high base but still achieve a such high growth here. So I just wonder if like, that is because the better making the smartphones and or like expanding your channel in internet business? And when should we expect the normalization in the FinTech impact? Because they continue to decline for some time and it should be like getting less impact to the overall internet business. So this is the two directions of my question.

Thank you. Thank you for the question. I will take first one and Alan will answer the second one. So the first one is regarding to the growth margin, the sustainability of the growth margin, right? So I think as a company, right now our focus still to increase our market share globally. We're not targeting to increase the growth margin. The growth margin is good. We like growth margin, but our first priority is to enlarge our market, to increase our customer base. I think we achieved a very good gross margin for last quarter and this quarter because we have a very good or much better product and a product mix. We have many, many very strong main and higher tier products that's contributed reasonably the gross margin. And also, during the shortage, right, everyone in the market was all not very aggressive on pricing. That also helped us to maintain a healthy margin. But overall, we will focus more on the customer base and market share instead of the margin. with very good product and the product mix, I think we will have a healthy, we'll maintain a healthy growth margin and profit.

So. Yeah, look, I think, you know, on the internet services, the advertising, as you noted, has performed very well. part of it is really due to the growth of premium smartphones within our portfolio, right? I mean, obviously, it commands a much higher pre-installed as well as much higher revenue potential. On the gaming side, it has done very well. I mean, I think seasonally, Q1 has always been a strong kind of gaming quarter anyway with many people at home during Chinese New Year. But it also exceeded... the Q4 by quite a lot. I mean, I think, as I mentioned in previous call, it's hard to compare with year-over-year, given the particular factors in Q1 of last year. So it's always hard to beat that number, but we're very glad that it beat the Q4 numbers by a pretty healthy margin. And also, as you rightly pointed out, The move to premium smartphone also generate a higher gaming GMB, as we showed in previous quarters. On the FinTech side, again, as I stressed before, it's always hard to, it's again hard to compare year over year, given there's quite a different business model compared to a year ago. So that's why we try not to compare it year over year. But I think as we continue to decrease our use of balance sheet, as you continue to decrease the overall use of the loan product. I think you probably see a more healthier pickup in the second half of next year. It also kind of dependent on all these regulations that are going on. I think we're trying to do everything we can to comply with what the regulators have said for us. And so it may still have some trust in the overall FinTech model. before it settles down due to the ongoing regulatory scrutiny.

Thank you. Our next question comes from Andy Man with Morgan Stanley in Hong Kong. Thank you.

Thank you, Xiangzong and Alan, for the detailed presentation, and a congratulation on the great result. I'm Andy from Morgan Stanley. I have two questions. I'll ask the first question. it's focusing on the offline expansion. We know Xiaomi having opened lots of new store offline. And I want to know what's the latest status regarding the operation. Is the high inventory turnover strategy working well, or do we receive any pushback? And in recent days, we also noticed that we having started some promotion on certain smartphone product. So whether our online and offline will apply the same promotion, or they have different strategy. And for the offline, if they have already built inventory based on the previous like the price, when we having the promotion, will the offline also having the same price cut, promotion, or the distributor have to bear this inventory cost by themselves? So this is my first question. Thank you.

Yeah. This is a very good question. It's a complicated question. Maybe let me answer the second half, the second part of the question. This time, actually, we have done a lot of change in the offline strategy. So we synchronized online and offline. Whenever we do a promotion, no matter it's online or offline, that's one action. So we will do the same promotion at the same time with the same price. It's synchronized. We can synchronize this time because we do a lot of changes a lot of innovations right actually we we we develop a system which can track the pricing the selling and sell out real time for every store so that's why we can manage the price the the the promotion very very efficiently so the situation in the past because without the technology other say that the tools sometimes we cannot synchronize the price on an offline I'll create some problems for our partners but this time the situation will be changed with the technology so I think we are seeing the acceleration of the offline source build up so up to now I think the latest numbers show that we have over 5,500 stores in operation already. So we continue to build the stores in a very high pace. So I remember last year, we had, end of last year, we had 3,000 stores. But now we have 5,500 stores. So we're going to build much more stores by the end of this year, probably over 10,000 stores. So we want to cover every, how to say, the tons in China. with the with the the technology with the technologies with the the partners I think we were able to do it so with those stores we can build our how to say the self pure point of cells so with the point of cells we can we can we can sell a lot of lot more phones which online channel cannot cover so I just mentioned earlier we have a three thirty eight percent of online China online smartphone ship online smartphone market but the offline we still have a lot big room much bigger room to grow so with the 10 million or even 15 million stores in in the future or more stores we can cover those territories to let those people living in those small villages, towns to buy our product more conveniently. So that's our plan.

Thank you, Xiangdong. My second question is based on communication with investor, I think most people definitely very exciting about the first quarter upbeat result. But at the same time, we're worried about the second quarter or even second half slow down. What will be the company's strategy in the second quarter or second half to try to sustain the strong performance, no matter from the revenue, shipment, and the margin perspective? Something we are discussing like possibility, like for example, we have the weakness in India. There's something macro-driven. We cannot control the outbreak of COVID. But is it possible to ship more volume to other market with high growth potential like Europe? In that case, if the Europe market margin is higher than Indian, it could even generate a better profit for the company. So those are the potential solutions. But I think the company, the management probably will have more to share with us to let us know what will be the company's operating strategy in the second quarter or the second half of this year. Thank you.

Yeah. Actually, because we have multiple markets, That means we have a big room to play to optimize our supply. I think that's our strength. So we definitely will optimize our supply to help our channels and the regional market. We are working very hard on that. For Indian market, actually, right now the challenge is the pandemic. The whole company is doing very hard, trying to do our best to contribute to the society to, how to say, to help them on the difficult challenges. But at the same time, we will use the different channels, try to ship smartphones In India, actually, there are many, many provinces. They are 100% locked down, but they are another part of the half of the country. They can still use online channel to ship products. We are working with those channel partners to ship our smartphones to the people who may need it during the pandemic. The manufacturing right now is just stabilized. So, yeah, we are working with our partner there, trying everything possible to stabilize the supply. At the same time, we will optimize our supply chain. That's a very important thing for us.

Thank you very much, Xiangdong. Yeah.

Thank you. Our next question comes from GoCo Harry Herman with JP Morgan in Hong Kong. Thank you.

Yeah, thanks. Congrats on the great results. First question I had was on smartphone. Given the aggressive push into the offline channel, especially in China, do you start to feel the need to potentially create offline specific products or specific brands, like some of your competitors who had much bigger market share at one point in time in China had done? Is that something that we are thinking about as we start to increase our presence in offline?

actually we we right now we are using the same product portfolio to sell the same product portfolio online and offline so we know that we notice that for the mid and high-tier product maybe many consumers they want to do it in touch they want to buy from offline yeah we are we are we are making that effort to to do a better demo so that our customers, even in the rural areas, can see the device, can feel and touch the device before they make the purchasing decision. This is what we are trying to do. But we are still maintain the same product portfolio for online and offline.

So you don't see the demand for different kind of product portfolio offline so far? from the distributors or your customers?

So our offline model actually is we build the stores together with our partners. We are not using the traditional distribution channel a lot. Actually, we work directly with the retailers, the partners, to build the stores. in the tier 1, tier 2, tier 3, tier 4, tier 5 cities and the counties. So in the tier 1 cities, actually, we have our store, our flagship store in the shopping malls, right? But in tier 4 to tier 6 cities, maybe normally we find a partner to build a store together with us. So actually, they are responsible for finding a place to hire their staff and do some of the decorations, renovations for the store. But Xiaomi, we will send a store manager. It's on our payroll, our own employee to be the store manager, and also We help them on the furnitures, the decorations, the billboards. And more importantly, we provide the tools I just mentioned. Very powerful tool for retail. So that we help our partner to manage their inventory and the promotion. So that they can focus their effort to sell the product. So that's the new path.

Okay, that's very clear. My second question is on the internet services. I think the gross margin we're seeing is probably the highest we've seen for quite some time. What does the gross margin make? Is it just that advertising is a much higher margin product compared to everything else? And also from a growth perspective, should we see the first half of this year to be kind of like the bottom in terms of year-on-year growth for internet services and expect a reacceleration as we get into the second half of this year, given the internet finance related scale down is probably largely done?

Yeah, look, Koko, I think the combination, right, I think the gross margin being high in the first quarter was one, as you rightly said, the advertising gross margin. Yeah. I think second is the FinTech, the recovery of the FinTech gross margin as well, right? I think we remember last year, first quarter was probably a lot of loan provisions and whatnot, right? And so the margin was not as good, and it dragged down the overall margin. I think this year, this first quarter, even though, you know, the overall revenue for the fintech business was lower, but the margin has actually ticked up as the credit cycle in China improved. Right? So those are, I think, the two key factors. Right? I think in terms of what's going to happen for the internet services OVER THE YEAR, I DO, I MEAN, OVER THIS YEAR, I DO THINK THAT, YOU KNOW, YOU START TO SEE THAT PICKING UP IN THE NEXT THREE QUARTERS, YOU KNOW, AS WE CONTINUE TO GENERATE A GOOD PROPORTION OF REVENUE COMING FROM THE APPETIZING BUSINESS, RIGHT, AS OUR BASE CONTINUES TO GROW AND AS OUR MA, NOBODY ASKED US MAU QUESTIONS SO FAR THIS QUARTER, SO YOU GUYS MUST BE HAPPY WITH THAT. AS OUR CHINA MAU CONTINUES TO GROW, that that will probably bring a higher percentage of revenue from advertising overall. And then the gaming recovery as well as the, or normalized comparison, as well as the FinTech comparison being more normalized. We will certainly see the second half of the internet services being better than the first half.

Got it. Yeah.

Thank you very much. Thank you. Thank you. Thank you. Our next question comes from Hugh Mubai with Goldman Sachs in Hong Kong. Thank you.

Thank you. Can I just dwell on the last point you just made in response to Hari's question about the MAU? So if I look back at all of your quarters for the last three years, you've never grown your MAU in China the way it's grown in the first quarter. It probably explains the strength of the quarter's Internet revenue as well as the higher gross margins. Could you just take us through what was so different about this quarter that led to almost an 8 million ad when we've never seen anything even, I think you've got to go back three years to see a number at 5 million a long, long time ago. What was different in the quarter that made that difference? And also, you talked about the premium that you earn with a high-end smartphone. Could you give us a feel for is it a factor of three, a factor of four, a factor of five that comes through because of the high-end customer who comes on board? And my third question is on the smartphone side, you built out a vastly improved distribution network in the offline space. Can you give us a feel for what percentage of the offline business, offline sales of smartphone you're capturing? Also give us a feel for how much, how this premium end of customer base is coming on board. Where is it coming on board from, online, offline? Or is it just the simple fact that you've got a far better platform a range of smartphones, or it was with the MI11, it was really three products being launched simultaneously that led to three million sales. Could you just take us through the dynamics that you observed, please? Thank you.

Yeah, Piyush, let me try, and then Xiangzhong can add to it. I think, first of all, the growth in users, as we previewed in our previous call, was really due to a large number of new Xiaomi users. people who haven't used Xiaomi phones before. So Xiaomi 11, for example, was very popular. And last quarter we did talk about a large percentage of those buyers being new Xiaomi users. The new phones we launched are trying to address a different user base as well, whether it's the premium end users, whether it's business users, whether it's the female demographics, whether it is the gamers, So we are a product lined up, not just more product, but also kind of different products targeting different segments and different demographics. And I think that's probably key to attracting a lot of new users to Xiaomi that haven't previously used Xiaomi phone before. So I think that leads to a larger number of new users, a large increase in MAU for this quarter. So that's the first question. Second question is to give you a sense of advertised difference between premium phones and kind of the mid- to low-end phones. I mean, we can tell you that, like, for example, pre-installed, which is not a big part of the advertising revenue, but just an illustration. I mean, we probably see three to five more apps that we can pre-install on a Xiaomi phone versus a Redmi phone. Just to give you an illustration. So in terms of the space and people's willingness to buy those spaces that we offer. In terms of unit pricing as well, I think you probably see a 10% to 20% difference in terms of unit pricing for each of those apps, right? So factor into both a larger number of apps that you can pre-install or people willing to buy and a higher ARPU or a higher unit price for each of those apps. Does that give you a sense right, in terms of how much we can generate, not to mention the other revenue like search and gaming and whatnot, right? So I hope that, you know, I mean, it's probably not four times or five times, I don't think, but it's a decent premium, right? In terms of the offline smartphone sales and online smartphone sales, look, I think the offline sales are still very early for us, right? we are what, 5,500 stores right now. 5,500 stores. Yeah, 5,500. But if you look at our competitors, they're probably more like 50,000 to 100,000. Maybe 100,000. 100,000 stores, right? So we're still very early. And if you look at our market share in the offline market, it's still very low, right? And so even though our online market share is very high right now, Um, so, so I, I, I think it is across all channels. Um, and obviously we're still selling more offline, uh, online than offline at this point in time, but we want to change the ratio, right? That's why we want to build, you know, and thousand plus stores, uh, this year. Yeah. Right. Uh, to capture the opportunity. Does that make sense?

Yeah. And also, uh, uh, and also you see, uh, actually online market, uh, represent probably 30% of the entire China smartphone shipments, right? The offline 70%. In those 70%, right now, we are only probably seven, maybe seven something percent of the share. So that means we have huge, huge room to grow in the offline market, if you want to be number one, right? So that's why we are working very hard on the offline strategy and execution. So I think one of the issue for us is we are in the, as Alan mentioned, we are in very early stage of the offline development. Actually, coverage is our current priority. We want to increase the coverage. We want to let people who buy our product, they can find a store, our store, especially in the rural areas, not only tier one, tier two, tier three cities, but those counties and towns, right? So we got to make the coverage there. So I visit, after the early May, I visit Hebei province. I visit town and the villages. I see the demand there. So we must have a coverage to build the covering in those areas so that we can make actual cells in those areas. So that means huge potential for us.

Thank you.

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