Xiaomi Corp

Hello, everyone. Thank you for joining our 2021 second quarter earnings call. Firstly, I'm very, very excited to share with you our remarkable results to achieve this quarter. Building on our strong growth momentum, both quarterly revenue and adjusted net profit reached record highs. Our total revenue reached 87.8 billion RMB And our adjusted net profit reached 6.3 billion RMB, up 64% and 87.4% year-over-year, respectively. We have been included on the Fortune Global 500 list for the third consecutive year, ranking 338 in 2021, up 84 slots from last year. Our smartphone business achieved significant milestones this quarter. We became the world number two smartphone company in terms of global shipments as we increased the market share across all key regions. Notably, we ranked number one in Europe for the first time and increased our market share in the region to 28.5%. Our premium smartphones continue to gain popularity and attract new Xiaomi users. In the first half of 2021 alone, our premium smartphone shipments exceeded 12 million units globally, compared with around 10 million units in all of 2020. To further advance our smartphone multiplies AIoT strategy, we recently launched multiple exciting new products. This includes Xiaomi MIX 4, our new premium smartphone featuring a stunning full-screen display with camera under panel. Xiaomi Tab 5 series, our first tablet since 2018. Xiaomi Sound, our first premium smart speaker companion. All of these products reflect our relentless pursuit of technological breakthrough in our premium products. Our ability to offer innovative technologies comes from our people. To recognize employees who have made outstanding contributions in July, we announced two equity award grants totaling about 190 million shares to about 4,000 participants. We believe This is an important step for us to attract and retain the best talent and allow us to maintain our long-term technology leadership. We owe our success to our users, and the user experience has always been our priority. To celebrate the 10-year anniversary of Mi One, our first smartphone, we decided to give back to our first group of ME1 customers the RMB1999 they paid to demonstrate our deep gratitude for their support. Going forward, we'll continue to be friends with our users and offer the coolest product. Now, I'd like to invite Alan to discuss our second quarter earnings. and the business updates, you know, greater details.

Alan. Okay. Thank you, Changjo. Good evening, everyone. Thank you for joining us today for our second quarter 2021 earnings call. As Changjo mentioned, building on our momentum recently, we delivered another set of record-breaking results in the second quarter. Our revenue and net profit, our global market share, user base, and our IoT platform all achieved remarkable growth in this quarter, which I'll discuss in more detail in this presentation. We achieved record quarterly revenue and adjusted net profit this quarter. In the second quarter, our total revenue grew 64% year-over-year to 87.8 billion RMB. Our gap net profit grew 83.9% to 8.3 billion RMB. And our adjusted net profit grew 87.4% year-over-year to 6.3 billion RMB. We have built Xiaomi into one of the most recognizable brands worldwide. Xiaomi has been included on the Fortune Global 500 list for the third consecutive year. This year, we ranked 338, up 84 slots from last year. We were also selected among BrandZ's total top 100 most valuable global brands, again for the third consecutive year. And we ranked 70 this year, up 11 spots from last year. If you look at our smartphone market share, in the second quarter, we achieved the number two position in smartphone shipment with a market share of 16.4%. our global smartphone shipment increased 82.9% year-over-year, which again was the highest growth rate among the top smartphone companies. Similarly, we continued our stellar growth in the mainland China smartphone market. Despite a year-over-year decline in the overall market, our mainland China smartphone shipment grew 35.1% year-over-year, again the highest growth rate among the top smartphone vendors. As a result of this, we rose to the number three position and improved our market share to 16.8% in the last quarter. The robust performance of our smartphone business was supported by our increasingly competitive position in the premium smartphone market. Our premium smartphone shipment exceeded 12 million units globally, in the first half of 2021 alone, compared with around 10 million units in all of 2020. If you look at this chart, we've expanded our market share in mainland China across multiple premium price categories from 3,000 RMB and above. Our ability to continuously innovate in the premium segment is due in large part to our investment in R&D. In the second quarter of 2021, our R&D expenses increased by 56.5% year over year to reach 3.1 billion R&D. The latest example of our technology innovation is well represented by our Xiaomi Mi 4, our flagship premium smartphone that we launched on August 10th. Equipped with the camera under panel technology, Mix 4 has a full-screen display that allows the front camera to be completely hidden under the screen. It is also the first domestic smartphone to support the UWB point-to-connect technology, enabling seamless connectivity with our AIoT products, such as our smart TVs and our smart speakers. We also launched CyberDock in August, which exemplifies our achievements in AI and robotics. DataDoc leverages Xiaomi smartphone imaging technology to perceive its surroundings and its advanced AI is capable of countless tasks and personalized interactions. It is built upon open source algorithms and will formally establish a robotics laboratory along with an open source community for engineers to share their latest innovations. On the smart manufacturing side, We've also achieved a major breakthrough. In July 2021, we officially broke ground on our smart factory phase two in the Changping district of Beijing. Leveraging our phase one R&D capability, the new smart factory will have an annual production capacity of 10 million premium smartphones, and it's expected to begin production by the end of 2023. We are confident that our smart factories will leverage our cutting-edge technologies to deliver transformative efficiency gains for China manufacturing industry. In July, we announced two separate share award grants to employees who share our mission and values and have made outstanding contributions to our business. to over 3,900 young engineers, fresh graduates, and other core staff. On July 5th, we awarded over 119 million shares to 122 technology specialists, our core management, and the initial recipients of our new 10-year entrepreneur program. We believe these share awards will help us attract and retain the best talents and motivate the and motivate them to create a long-term value for us. An update on our smart EV business. Since our announcement, we have been focusing on building the best team for this important initiative. In the last couple of months, we have received over 20,000 applications for our smart EV business. In particular, we announced 500 new positions in July for our self-driving division to develop L4 autonomous driving technology in-house. Today, as many of you may have noticed, we also announced that we will acquire a company called DeepMotion, one of the leading providers of L4 autonomous driving technology. We are very confident that we'll continue to attract the best talent to this very new and important business. With that overview, let's dive deeper into each of our segments starting with smartphones. In the second quarter, our smartphone business continued to grow rapidly.

Revenue grew 86.8% to $59.1 billion, up 86.8% year over year.

In mainland China, we continued to expand our offline channel. As of the end of 2021, the total number of our retail stores in mainland China exceeded 7,600, an increase of 3,100 stores from March. Many of these new stores are set up in lower-tier cities, which have allowed us to penetrate new markets and expand our market share. As you can see, our offline smartphone market share in mainland China increased to 7.8% last quarter. While we continue to expand our offline presence, our online channel also set new records. During the 2018 e-commerce festival, our cumulative paid GMB exceeded 19 billion RMB, an increase of 90% year over year. The order volume of our smartphone ranked number one among Android smartphones on JD.com, Tmall, and Suning. Furthermore, our IoT product achieved a total of 158 number one rankings across various platforms by order value or by order volume. Turning now to our significant achievement in the overseas markets. According to Canalyst, in the second quarter, we increased our smartphone market share in all key regions where we operate. In particular, our ranking in Europe climbed to the number one position for the first time. Furthermore, our market share rankings in Asia Pacific, the Middle East, and Africa rose to number one, number two, and number three respectively. Our smartphone market share ranked number one in 22 markets worldwide and was among the top five in 65 markets. It's also worth noting that we ranked number one for the first time in 10 new markets this quarter. I'd like to further highlight the excellent results we achieved in Europe. We ranked number one for the first time in Europe with a market share of 28.5%, as our smartphone shipment increased 70.1% year over year. In Spain, we ranked number one for six consecutive quarters, as our market share reached 41.2%. In Italy and France, our ranking surged to the number one position with market shares of 35% and 29.7% respectively, as our shipment grew over 80% year-over-year in both countries. Now let's move on to the IoT business. Our IoT and lifestyle product revenue increased by 35.9% year-over-year to 20.7 billion RMB in the second quarter. Our global leading consumer AIoT platform continues to expand. The number of connected IoT devices on our IoT platform reached 374.5 million, up 34% year over year. Moreover, the number of users who had five or more devices on our AIoT platform reached 7.4 million, up 44.5% year-over-year. In June 2021, our AI-assisted MAUs surpassed 100 million for the first time and reached 102 million, an increase of 30.2% year-over-year. As the number one TV brand in mainland China, we continue to launch new and innovative products, especially in the premium category. In August, we launched a premium Xiaomi TV Master 77-inch OLED, which featured for the first time the UWB technology. In the second quarter, our global shipment of smart TVs reached 2.5 million units. According to ABC, our TV shipment ranked number one in mainland China for the 10th consecutive quarter and among the top five globally. To further expand our multi-screen ecosystem, we launched the Xiaomi Pad 5 series in August, our first tablet since 2018. The Xiaomi Pad 5 Pro features highly attractive hardware specifications, including the Qualcomm Snapdragon 870 processor, an 11-inch 2.5K display, 67-watt fast charging, and customized keyboard and pen accessories. It is seamlessly integrated with our new UI for pad operating system, which offers optimized support for over 300 mainstream apps, further improving user experience. We also recently launched our first premium smart speaker, which we call Xiaomi Sound. The speaker offers high resolution certified audio with dynamic tuning by Harman for an immersive and realistic sound experience. It also features the UWB technology, which enabled them to connect with our smartphone Siemens. Our IoT and lifestyle product segment also contains its rapid growth trajectory in the overseas market. In the second quarter, Overseas revenue from IoT increased by 93.8% year-over-year. Our smart TVs enter new overseas markets and are now sold in more than 40 markets globally. Many of these IoT products have gained popularity overseas. For example, overseas revenue from our electric scooters, our smart wristbands, smart watches, and desktop monitors have grown over 100% year-over-year in the overseas market. Now let's move on to our internet services practice. Our global internet user base continues to grow rapidly and drive our internet services business. In June, our UIMAU increased by 32.1% year-over-year to $453.8 million. While our mainland China MAU rose to 124 million, increased of 5.3 million users from the end of March. Our global TV MAU also grew. As our global user base continues to grow, revenue from our internet services segment reached 7 billion RMB in the second quarter, up 19.1% year over year. Our quarterly advertising revenue hit another historical high and reached 4.5 billion RMB, which also contributed to the increase in our gross margin in the internet services segment to rack the high of 74.1%. Our overseas internet services continue its strong growth momentum, and we see significant potential to further penetrate the overseas markets. In the second quarter, overseas Internet service revenue increased 96.8% year-over-year and accounted for 15.6% of our total Internet services revenue. Our MIUI MAU in some of the key overseas regions continue to grow rapidly. For example, our Western Europe MAU grew more than 60% year-over-year. And our Latin America MAU grew over 125% year-over-year respectively. Going forward, we will further diversify our overseas Internet services offering and enhance our user experience. Now let's move on to more detailed financials. As mentioned earlier, our total revenue reached $87.8 billion in the second quarter, up 64% year-over-year. and 14.2% quarter-over-quarter. All of our three key segments demonstrated strong growth on a year-over-year and on a quarter-over-quarter basis. Revenue from our smartphone grew to 59.1 billion RMB. Revenue from our IoT and lifestyle product reached 20.7 billion RMB. And revenue from our internet services segment reached 7 billion RMB. Overseas revenue increased 81.6% year-over-year to 43.6 billion RMB, accounting for 49.7% of our total revenue. Talking about our gross margin, our gross margin reached 17.3% in the second quarter, and our gross margin for our smartphone IoT and Internet services segment was 11.8%, 13.2%, and 74.1% respectively. Worth margin from our smartphone and IoT segment decreased on a sequential basis, mainly due to enhanced promotional efforts during the online shopping festival in the second quarter of 2021. Our quarterly adjusted net profit again reached a new REC supply of 6.3 billion RMBs. up 87.4% year-over-year and 4.2% quarter-over-quarter. Our adjusted net profit climbed to 7.2% in the second quarter from 6.3% in the same period of 2020. Due to our high operating efficiency, our operating expense ratio in the second quarter remained stable at 11.1%. We continue to generate strong operating cash flows. In the second quarter, our adjusted operating cash flow reached 8.1 billion RMB, while our capital expenditure were around 700 million RMB. Our strong cash flow allowed us to optimize our capital structure, and we have returned some of the cash back to our shareholders in the form of stock purchase. In 2021, year to date, we will purchase a total of 208 million shares, around 5.4 billion Hong Kong dollars. Primarily due to our strong operating cash flow and our capital market financing activities, our total cash resources reached over 111 billion RMB as of the end of the second quarter. We continuously explore suitable investment opportunities across different industry verticals. And our investments enable us to create long-term strategic value while generating additional earnings growth for us. During this quarter, we generated an after-tax net gain of 1.1 billion RMB from disposal of some of our portfolio investments. As of the end of the second quarter, we have invested in more than 330 companies, And the total value of our investment reached 74.5 billion RMB, representing around 3.57 Hong Kong dollar per share. Last but not least, as the world's second largest smartphone company, we are fully committed to leveraging our scale and efficiency and drive a more sustainable economy that supports our users, our employees, our company, and our planet. I'd like to take this opportunity to give an update on our ESG strategy. We firmly believe in leading by example and are proud to integrate ESG factors into our products and services, into our corporate governance structure, and in our overall brand. Xiaomi joined the United Nations Global Compact in 2020 and supports the sustainable development goals adopted by the United Nations. We benchmark ourselves against international best practices and have implemented ESG strategies in relation to our green operations, our circular economy, workplace diversity, employee development, public welfare, data protection, and more. To boost our employees' sustainability awareness, we actively promote our ESG framework to all of our stakeholders, including upstream and downstream business partners. We have set up a corporate governance committee, which coordinate ESG and green finance-related matters, prioritizing our sustainability targets according to the unique characteristics of our business and our industry. In July 2021, we published our 2020 sustainability report and the green finance framework, which are all available on our website. We also issued our inaugural 30-year green bond, which was the first green bond issuance by any Asia T&T company. As an important component of our ESG strategy, We have very strict privacy protection and data security. In June 2021, we held a security and privacy awareness month to raise our employees' awareness in data security and privacy protection. This company-wide event lasted for 30 days and had over 12,000 offline staff visits. In the second quarter, We also released a set of security and privacy white papers for smartphones, for our MIUI system, and for our AIoT product, along with our 2020 transparency report, which is published for the first time. In the future, we'll continue to hold ourselves to the highest standards with regard to cybersecurity compliance and user privacy protection. This concludes our prepared remarks. We would now like to open the call for questions from 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. Operator.

Thank you. The question and answer session is now open. To register your questions, please press star 1 on your telephone keypad And if you wish to cancel the questions, you can press star 2. And our first question has come from with Credit Suisse. And please go ahead.

Thank you. Congratulations for such strong results. So I have two questions. The first question is about the internet business. So we would like to know about the outlook for the second half internet business as advertising business continues to benefit from like MAU or Apple increase and also smartphone treatment increase, et cetera. Can we expect normalized effect on gaming business terms and also FinTech with control in the second half so that the outlook for the second half internet business will be very encouraging? And what do you think about that positive impact as a number one brand in Europe smartphone markets and also 22% market share in Western Europe, I mean, to your internet business. I mean, this is the first part. Thanks.

Okay. Thanks, Tina. On the internet business, we obviously, our advertising business, obviously benefiting from a couple of trends. Number one, our increase in store base, and number two, our premium smartphone market penetration. So if you look at our install base, as you can see, our MAU reached $124 million at the end of last quarter, as well as our premium smartphone shipped over 12 million units in the first half of this year. So we'll continue to benefit from the increase in install base, as well as the increased percentage in our premium smartphone. You know, I mean, obviously, there will be some challenges because there's a lot of regulatory restrictions in the mainland China market, which impacts some key sectors that invest a lot in advertising. And also with the new data privacy laws, obviously we're still assessing the impact that it has on our business. But overall, we are very positive on the advertising business, and we believe that it will continue to grow. On the gaming side, we've seen improvement in our gaming business. As we look at our third quarter results so far, we've seen a pickup in terms of growth in terms of our gaming business. We also benefited from some of our products. For example, we launched the K40 gaming series in the second quarter, and we've seen pretty significant gaming revenues. on those products versus a more general market. So we continue to be very hopeful that second half of the year we'll see improved growth in the gaming sector. On the fintech side, we've seen continued improvement in our growth margin in our fintech business. As we move from a more balance sheet heavy model to a more balance sheet light model, We've seen improvement, and obviously the improvement in the credit market in China obviously benefited in that initiative as well. So we've seen very healthy margins for our fintech businesses in the first half, and we'll continue to see healthy margins in the second half. In terms of the overseas Internet, I think as we show in the chart, the overseas Internet market has – has shown very strong growth in the first half and represented a very strong percentage of our overall internet business. We are still not quite monetizing the users at this point. I think at this point it's all about market share at this point. So we'll continue to watch the monetization opportunity, especially in the Western European market. We want to make sure that the user experience are good before we start to monetize our users over there. So I hope that answers your question.

Yes, thank you. So I have another question more about the outlook for the second half of our function because we consider the chip tightness continue demand because in China, at least so far, I mean, still like down, has no digit. Also, the way think competition was on there, what should we expect? I mean, because we see the company has already set the target as the number one smartphone brand in three years. So what should we expect going forward? And the strategy could boost the market share and also the presence in China as well.

Yeah. So let me take your second question. This is regarding to the second half forecast. Actually, we continue to see the digital opportunity, the growth opportunity for smartphone shipment globally. But real challenge for everybody, actually, not only for us, is the supply shortage. So we are working very hard to get more supply, to support the different requirements from different regions and markets. And also, I think... we have to manage the growth in more than, I think, over about 100 different markets. So we need to be working very hard for the supply. So that's one potential challenge for us. And also in China market specifically, we need to continue to execute our offline strategy so that we can have more coverage. So right now we have over 7,000 retail stores in China. We'll continue to grow that number. So that's a long-term thing. So once we do the store, we need to train the... the sales and help the store grow. It also takes time for a new store to become a real profitable or high growth, high output stores. So this is another challenge. I think we are confident that if we continue to execute the strategy to grow to grow the number of stores and also grow with our software. The tools, we are confident that we will continue to grow our business in China as well. Overall, let me summarize. Number one, we need to deal with the shortage issue. Secondly, we need to continue to execute our strategy for the offline, especially in China. The overseas market, I think we have over 100 different markets. We need to maximize our usage of the supply. So I think, I hope this answers your question.

Thank you. Thank you.

Thank you. And our next question has come from Ni Ping Huang with Huatai Securities. Please go ahead.

Okay. Thank you for taking my question. So my first question is also related to smartphone. I think Nathan mentioned that Xiaomi wants to become a global number one smartphone company by volume in three years. So if I understand correctly, the current number one player at Samsung is roughly 300 million units per year shipment, and you are roughly 200 million units. So in order to achieve this global number one, so where do you think you can get this most of the additional volume in the next few years? Which market and which segment?

Yeah. So I think we see still we see a lot of new opportunities for us. Yeah, although we are number one in Europe for the first time, We'll continue to see a lot of space to grow, even in Europe. Outside of Europe, actually, if you look at the growth rate, you can see we have a very big potential in Latin America, Africa as well. So we'll continue to supply the right product for those regions. So that's for the market opportunity site. But in order to be number one, I think we also need to continue to invest into more R&D resources. Now, this year, our R&D investment is going to be $13 billion. The second quarter, actually, we have a very high gross R&D investment in the second quarter. I think we'll continue to invest in the third quarter and the fourth quarter so that we can make sure we invest enough on the R&D side. So we'll continue with the R&D resources, continue to innovate in many, many different technology areas Actually, Alan just mentioned, in the Mix 4, actually, we brought new technologies. We got the camera and the panel, and also UWB. We continue to bring more and more new technologies into the smartphones and also the ecosystem products. So, yeah, I think in the long term, I think we are confident that we see the opportunities, and we are confident that within three years, we can achieve the goal set by our chairman and CEO to be number one globally.

Great. It's very good. Ambitious time. So the second question is about your smart EV business. So we see a lot of news. recently about your smart EV business, including today's announcement of the decommotion. So do you have a more clear plan to share with investors about what will be the scale of the stuff and what's the relationship between your EV business from the R&D structure with your smartphone business and what's the decommotion's role that the company you're acquiring today in this easy plan. Thank you.

Yeah, why don't I take that? So, respect to the motion, we did file an announcement today. So, a lot of the information are included in that announcement. But just to summarize, the total considerations that we are going to pay for the acquisition is going to be 77.4 million US dollars, right? A lot of this will be in terms of stock. A lot of these payments will be deferred until certain milestones are hit. And so, therefore, we want to make sure that we are retaining and motivating this team. So that's the first point. Second point is we do believe that the company is very attractive to us. The company is – let me find the information. The company is an autonomous driving technology company. It's focusing on providing the full stack software solutions for the ADAC and automated driving applications. We believe that there's a lot of synergies with the technology with our EV initiative. So I think it tells you a couple of points. Number one is... we will grow our EV business. And as I said in our prior remarks, we've been very focused on hiring the right team for the EV business at this point in time, formulating our strategy, formulating our product strategy, et cetera, et cetera. But at the same time, we're not afraid to acquire and integrate other teams if we find that those will help us accelerate our plan. And so I think that this this will prove to you that we are very focusing on attracting and retaining these experts and talent. And we are making very, very good progress in that regard.

What's the overall picture of the EV business you can share with us today?

Look, we are still studying. We are still... uh, formulating the team. Uh, we think that we are ahead of our schedule. I would believe that we have been ahead of our schedule. And so, um, and so, um, you know, we are, we're making very good progress, but I mean, if there are more details you can share, we'll definitely share those.

Yeah. Thank you. I think, uh, what we can share is right now we are, we are focusing on three things. Number one, as, uh, Alan just mentioned, uh, we, uh, we, we, we hire, uh, We try to find the best talent we can find. We need a world-class team to execute. This is very important. Secondly, we are doing a lot of evaluations and analysis for the location. Where are we going to build the car, build our first car, vehicle, EV, And also, we are continuing to... Actually, we started to, how to say, to define what's going to be our first product, which customers we're going to target for. So right now, as Adam mentioned, we are on track. So we are confident that we can... Yeah, we can...

achieve what we were as a client. Thank you. Thank you. Thank you. And our next question has come from Goku Krishnan with J.P. Morgan. And please go ahead.

Yeah, hi. Thanks for taking my question. This is Goku from J.P. Morgan. First of all, can I ask a little bit more on the supply limitations and the chipset shortage? I think even today we saw some headlines about Xiaomi having to pull some models in certain markets because of the shortage. Could you help us understand what is the extent? Is it limiting your shipments by 5%? Is it limiting your shipments by 20% when we look at the second half of the year? And what is your estimate at this point in time in terms of where we can see, uh, uh, where, where would this issue get resolved? Uh, is it sometime end of this year or is it going to persist in the next year as well? Uh, that's my first question.

So, uh, The challenge for us, not only for us, actually, this is a challenge for the whole electronics, consumer electronics industry, and even for the EV industry. This is a global shortage of 100 different markets. The requirements of, actually, demand is very strong, and the requirement is very, very different. So the challenge is to manage the dynamic. So at this moment, I cannot share the quantified impact, but overall, I think it's on track. We are working very, very hard trying to get more supply and then try to allocate the supply we have got allocate them to the right markets. That's the challenge we are dealing with. So, yeah, this is the world I can answer.

I mean, Koko, I think one clarification is I'm not sure where this cutting orders is coming from. Yeah. So I think we're still on track.

Got it, understood. Second question on the internet services. I think some of the most broad-based companies in China have warned about a little bit of slowdown in advertising, given some of the regulatory pressures and some other industries which are heavy advertisers starting to see some regulatory impact. I think you guys have been growing very rapidly, especially in Q2 for advertising. How do you think about advertising revenue in particular in the second half of the year and the tailwinds and the headwinds that you're seeing there, especially as you are also increasing the ARPU of your own smartphones in China? Maybe the second part of that is the mix seems to be very heavy advertising at this point in time. Is that something that we should continue to expect over the next maybe two to three quarters? Or do we see a more balance mix of other value-added services and gaming also kind of coming through.

Yeah, as I said before, I think it is more a balance between having a bigger, larger user base, shipping more products year over year in each quarter, and then getting more product shift in the premium segments. Obviously, I think all those factors will lead to a higher advertising revenue, balanced by some of the difficulty faced in some of the sectors or the lesser spending in some of the sectors due to regulatory pressures. And so I think that that's a balance between those two factors. But overall, I think we still expect to see continued growth in our advertising revenue due to our larger install base. I think that's point number one. In terms of your second question, I think we've said this in the last two quarters as well, which is we obviously love to see a more balanced internet services portfolio, both advertising, gaming, as well as other businesses. And so, you know, we think that we are hopeful that it will be that case, but that's something that we are working towards. I mean, obviously, in the near term, with the higher smartphone growth, I think it will naturally lead to a higher advertising revenue.

Okay. Thank you very much.

Thank you. Just to remind everyone, if you wish to ask a question, please press star 1 on your telephone keypad. And our next question has come from Yingbao Xu with CITIC, and please go ahead.

Thanks, Xiangzhou and Ellen, for taking that question. I have two questions. The first one is about our competitors and new models. We have seen Xiaomi market share increase in the second quarter and also the number of MIUI users in mainland China keep increasing. However, we still see that the competitors like Honor Brand has played very strong in the market. So my first question is how we plan for the competition in the next half of this year, especially like our new models launch plans.

So I think we are focusing more on the product and the offline channels build up in China mainland market. So as I mentioned earlier, so we have over 7,000 stores. So we need more than 7,000 stores. We continue to build our offline coverage. So it takes time for us to build more stores. I think that's one challenge. We are working very hard on that. Secondly, we're focusing on the right product. And so we want to offer the right product to the consumers. And also, it takes time for us to not only grow the store base, but also help the stores to gain market share or to grow their smartphone shipment from every store. It takes time for a new store to become a mature store. So also it takes time for us to train the store managers and also the sales people people working in the store. So also, it takes a lot of time. So we are confident in the long term with the right coverage and also the right product, I think we can compete. I think our focus is on our site. The competition, I think in China market, there's never a lack of competition. competitors. We were born from a competition environment, so we will continue to focus on product and also offline channels. I think this is what we are doing now. In the global market, actually, I think we see so many new opportunities, growth areas, so we'll continue to execute this strategy.

Got it. Yeah, thank you. My second question comes from the stores. You mentioned that to keep opening the stores. And the other data we noticed that is about the efficiency of the single stores. It seems that those stores opened before last year performed relatively good. When we calculate the performance of the newly opened stores, especially we can consider all the stores as a total. it seems that the sales efficiency seems to drop a little bit. I know that need a time to improve, but how we see the improving in the second half for the sales efficiency of single storage? Thank you.

Yeah, thank you. Thank you for the question. Actually, I mentioned actually, so one of the challenges, is to train the new store to become a mature store, including the training for the employee, the store managers, and also the sales guys working in the new store. And it also takes time for the consumers to be familiar with the new store. I think that's number one. Number two, we will continue to, how to say, to upgrade the software, the tools we are offering to the stores so that we can use the data and use the tool to improve the efficiency of the operation. I think of those, the two major areas, we are working very hard.

Yeah, thank you very much, Xiangzhuang. It's very helpful. Thank you.

Thank you. And our next question is come from tourist with common sex and please go ahead.

Thank you for taking that question. If I look at the offline presence and the market share you talk about, could you just give us a feel for what percentage of your overall volumes is through that? And if you look at that market share and the number of stores you've laid out, what is the number of stores you would need to roll out in the country to get to the number one position three years out from now, I suspect you would have to match the market leader in the offline space to be able to get to that number. And that's the reason for the ask. The second question I have is centered around your gaming revenue, where you talked about a decrease due to the revised commercial terms. Is this a new revision or is this a revision that we've seen at work for a and it should now stabilize as you can start to see that move forward. Thank you.

Yeah. So the first question is regarding to the offline coverage. Right now we have over 7,000 stores. So I think we need much more than 7,000 stores. So right now our offline market share is based on the Q2 numbers, around 7.3, 7.8%. So I think you see that we have a great space to grow. So in China market specifically, there are about probably 70% Around 70% of the smartphone ships are sold coming from the offline stores. And the 30% is from the online channels. So right now, we only have 7% of the offline stores. You see the potential. So our competitors, they have much more stores than we have. So we will continue to grow the number of stores, number one. Number two, we will figure out a way. I think we are in the right track to improve, continue to improve the store efficiency so that we can sell more smartphones from the offline stores. I think this is what we are doing now.

Yeah, like, Piyush, I think, respectively, the offline network. I'm not quite sure we need the same number of stores as the number one guys to get to number one. I think our model has proven that it is working and it is very efficient compared to our competitors, our peers. And so therefore, we are hopeful that we don't need that many stores to achieve the same result. I think that's to answer your first question. To answer your second question, I think on the gaming revenue side, I think Yes, the commercial terms were the ones that we talked about last year. And so therefore, as I mentioned earlier, we are beginning to see growth picking up again on the gaming sector.

The revenue share adjusted growth rates in gaming on a year-on-year basis for Q2. I realize the type of numberless.

Let me get back to you on that. I don't think we have that number.

Thank you. Thank you. We are now invited to the last question, and the question has come from Ken Chin Kwan with CICCM. Please go ahead.

Hi, management. Congratulations on the very strong results. I've got two quick questions. The first one is about our mixed smartphone position. We think the pricing of our new mixed model smartphone is higher than the previous ones. Should we share more details on the positioning of the mixed series? And I wonder... When we expand more series of our Mi brand? Thank you. This is my first question.

Okay. So actually we position Mix as the pioneer of the latest technology. So if you remember that a couple of years ago, when we launched our first mixed product, which is a full display, which is the world's first full display phone, even ahead of everyone. So that phone actually was collected by several art museums in Europe, including Pompidou Museum and a museum from Germany and also Denmark. So we'll continue... That brand, I think last year, or early this year, we launched our technology we were using in that form. So this time, also, we add, we call it a cup, camera under panel technology. It's also a difficult technology which can be used in the smartphone, especially for the front And also, we bring UWB to that smartphone, to the mix, and also they can improve the features, not only on the smartphone, but also the connectivity between smartphone and IoT products. So that's a mix. So the Mi series, Mi series is traditional high-end product for Xiaomi. So we always bring the best user experience to that series. For example, the previous launch, Mi 11 Ultra, actually in that phone, there were the world's number one quality camera in that phone. Number one in the DSO benchmark. But we'll continue to maintain mixed series and mixed series to bring different kind of user experience to the consumers. I think that can answer your question. Thank you.

Thank you. My second question is about our China's offline channels. I think we've seen that we expand really fast in our domestic offline channels. I wonder... where we keep this fast speed like in next year and how we control or shall we say plan the pace of our offline expansion. Thank you.

I think we will continue to improve in the store efficiency, number one. Number two, improve the coverage. That means we need to build more stores to cover more territories domestic market. Also, continue to improve on the tools we are providing to those stores. Those are the three important things we will be working on even for the next year.

Okay, thank you. Very clear. Thank you, Xiangzhu.

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