Xiaomi Corp

Ladies and gentlemen, thank you for standing by and welcome to Xiaomi 2021 First Quarters Results Announcement Conference Call. Today's conference is being recorded. If you have any objections, you may now disconnect. If you have any questions you would like to raise during the Q&A section later, please press star 1 on your telephone keypad. If you wish to cancel the questions, please press star 2. I now would like to hand over to conference to Ms. Your host today, Ms. Anita Chen, Head of Investor Relations. Please go ahead, Ms. Chen.

Good evening, ladies and gentlemen. Welcome to the investor conference hosted by Xiaomi Corporation regarding the company's 2021 third 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 alternatives 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-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. Joining us on the call today are Mr. Wang Xiang, partner and president of Xiaomi Corporation, and Mr. Alan Lam, vice president and CFO of Xiaomi Corporation. To start, Mr. Wang will share recent strategic initiatives of the company. Thereafter, Mr. Lam will review the business and financial performance for the quarter. Following that, we'll move on to the Q&A session. I will now turn the call over to Mr. Wang.

Yeah. Thank you. Thank you, Anita. Hello, everyone. Thank you for joining our 2021 third quarter earnings call. This quarter, actually, under the background of global supply shortage, all our business segments continued to grow. Total revenue reached 78.1 billion RMB, up about 8.2%, and a just net profit reached 5.2 billion RMB up 25.4% year over year. And our global smartphone shipment remained strong despite the shortage of key components. In the third quarter, we ranked number three globally in terms of smartphone shipments. In the first three quarters of 2021, our global smartphone shipment reached 146 million units equivalent to our 2020 full year shipments. This allow us to support our market positions as much as possible across our key market globally. At the same time, our smartphone gross margin reached 12.8% this quarter and increased by 4.4% year over year and 1% quarter over quarter. We continue to strengthen our position in the premium smartphone market. In the first three quarters of 2021, we shipped around 18 million premium smartphones globally. It accounted for more than 12% of total smartphone shipments compared with less than 8% in the same period of last year. The growth of premium smartphone shipment has also led to an increase in our overall ASP. Meanwhile, we are using different product lines to penetrate different target market segments and to attract new Xiaomi smartphone users. Among our new smartphone product launched this year, over half of users are new users. Similarly, our stylish Xiaomi CV attracted over 50% female users. We remain committed to technology innovation to deliver best product and user experience. In China Telecom's 5G smartphone performance test in November, we ranked number one across all price categories, a result of our relentless focus on user needs and R&D investments. In the first three quarters, our R&D expenses reached 9.3 billion RMB up more than 50% year over year. As we continue to make amazing products, actually, we are also strengthening our distribution channels. In online channel, we were the clear leader in the year's double 11 shopping festival. We rank as the number one smartphone brand by sales volume. At the same time, we continue to expand our offline channel. By now, we have over 10,000 stores in mainland China. Going forward, we will seize the growth opportunity in lower tier offline markets and continue to strengthen our market share. This quarter, internet service performance remains strong. In September, our global MIUI MAU reached 486 million. At the same time, our mainland China MIUI MAU increased for the full consecutive quarters, reaching 127 million. As we grow our user base and increase our premium smartphone shipments, internet service revenue and advertising revenue both achieved record highs in this quarter. Furthermore, our overseas internet services revenue contribute to nearly 20% of total internet service revenue. And we are happy to share that as of yesterday, our global MIUI MAU exceeded 500 million users. It took only 10 months for our global MIUI MAU to increase from 400 million to 500 million. And this marks an important milestone for our smartphone times AIoT strategy. I'd like to invite Alan to discuss our third quarter earnings result in greater details.

Alan, please. Thank you, Xiangzhou. Good evening, everyone. Thank you for joining us today for our third quarter 2021 earnings poll. Our total revenue and adjusted net profit continued to grow despite the global shortage of key components. In the third quarter, we ranked number three globally in terms of smartphone shipments. Our MIUI user base in mainland China, as well as globally, both reached record highs as of September, driving our internet services revenue to set another record. The number of connected devices on our AIoT platform exceeded 400 million for the first time. And the number of users with five or more connected devices also surpassed 8 million for the first time. In the first quarter of 2021, Our total revenue reached 78.1 billion RMB, up 8.2% from a year ago, as all business segments continued to grow year over year. Adjusted net profit increased 25.4% year over year to 5.2 billion RMB. An adjusted net profit margin was a robust 6.6%. By further refining our smartphone user segmentation, we have been attracting new users to Xiaomi. Notably, for many of our new smartphones launched this year, over half of the users are new Xiaomi users. For example, over 70% of Xiaomi mixed fold users and over 60% of Xiaomi 11 series and Xiaomi CD users are new users of Xiaomi. These new users help us increase our internet MAUs in China from 111 million in December of 2020 to 127 million in September 2021. We continue to improve our competitive position in the premium smartphones market. In the first quarters of 2021, our premium smartphone shipments reached approximately 18 million units globally. significantly higher than the 10 million units in all of 2020. In the first three quarters of 2021, we've expanded our premium smartphone market share in mainland China across all price categories. For example, in the 3,000 to 4,000 RMB category, our market share grew 6.4% year over year. In the 4,000 to 5,000 RMB category, Our market share grew by 7.7% year over year. At the same time, models such as Xiaomi 11 Pro, 11 Ultra, and Mix 4 continue to attract new premium users and improve our market share in the $5,000 or above RMB price category. The outstanding performance of our 5G smartphones has also been well recognized by the industry. In the most recent China Telecom 5G smartphone performance test in November, which included tests on speed and stability, Xiaomi and Redmi smartphones ranked number one across all price categories against all of our peers. The result shows the competitiveness of our 5G smartphone products. As Xiangzhong mentioned, we have achieved remarkable results during the Double 11 Shopping Festival. We set new records as our cumulative GMV exceeded 19 billion RMB, an increase of 35% year-over-year. We ranked as the number one smartphone brand by sales volume across the major e-commerce platforms. In the Android 4000 RMB and above category, our premium smartphones ranked number one on JD.com and Tmall. Furthermore, our AIoT products achieved 208 number one rankings across different categories. Also, as Xiangzhu mentioned earlier, we're very happy to share that as of yesterday, our global MIUI MAU exceeded 500 million users. This marks another milestone of our history and demonstrating the strong growth momentum of our user base. We continued to step up our investments in R&D In the third quarter of 2021, our R&D expenses increased by 39.5% year-over-year to reach 3.2 billion RMB. For the first nine months of 2021, total R&D expenses reached 9.3 billion RMB, up 51.4% year-over-year. At the end of the third quarter, we had approximately 14,000 R&D personnel accounting for more than 44% of our total employees. In addition, our total patent applications exceeded 48,000 globally. Our smart EV business has been progressing ahead of schedule since we officially announced our entry in March of this year. So far, we have a team of over 500 people. We expect to continue to execute on our strategies and begin mass production in the first half of 2024. Now let us dive deeper into each of our segments, starting with smartphones. In the first quarter of 2021, despite the global shortage of key components, we managed to increase our smartphone revenue by 0.5% year-over-year to reach 48 billion RMB, while our ASB increased 6.7% year-over-year. Our smartphone market share has maintained an upward trend. In the first quarter of 2021, our smartphone market share was 13.5% globally and 13.8% in mainland China, over above our historical averages. In this past quarter, we launched our Xiaomi CD for fashion-conscious users. With a lightweight and attractive design, Xiaomi's CV has been well received. Since launch, based on our data, over 60% of CV users are new Xiaomi users and over half are female, demonstrating our ability to penetrate new user segments. The Redmi Note 11 series is another exciting new product that offers cutting-edge technology to a wide user base. The Redmi Note 11 Pro Plus comes equipped with a high refresh rate display, ultra-clear camera, and 120-watt fast charger. Since launch at the end of October, sales of the Redmi Note 11 series in mainland China have already exceeded 1 million units. We continue to expand our offline network in mainland China. We currently have over 10,000 offline retail stores, covering over 95% of cities and over 80% of counties in mainland China. will focus on expanding in lower-tier markets as well as improving the efficiency of our offline stores in the future. In the overseas markets, our premium smartphones have gained wide popularity. In the third quarter, our overseas premium smartphone shipments grew more than 180% year-over-year, mainly driven by growth in Latin America, Western Europe, and the Middle East. As a result, our overseas smartphone ASP also saw an year-over-year increase. We maintained the number one position in 11 markets globally and was among the top five in 59 markets in the third quarter, according to Chemnitz. Now let's move on to the IoT and lifestyle products. In the third quarter, our IoT and lifestyle products revenue reached 20.4%. 20.9 billion RMB, up 15.5% year-over-year. In particular, overseas IoT and lifestyle products revenue reached a historical high, even though there were challenges with respect to overseas shipping logistics costs, which has impacted some of the IoT products overseas. As the global leading consumer AIoT platform, we continue to expand our global IoT user base By the end of September, the number of connected IoT devices on our AIoT platform exceeded 400 million for the first time, up 33.1% year over year. Moreover, the number of users who had five or more devices on our AIoT platform exceeded 8 million for the first time, up 42.8% year over year. Our AI Assistant MAU reached 105.1 million in September, an increase of 34.1% year-over-year. Also, our Mi Home app MAU reached 59.9 million of 39% year-over-year. In the smart TV category, we are rapidly expanding our global footprint. In the third quarter, global shipments of our smart TV reached 3 million units despite the impact of increased panel prices. and we ranked top five globally. In India, our smart TV ranked number one for the 13th consecutive quarter. In mainland China, we ranked number one overall for the 11th consecutive quarter. And since launching our new OLED products in August, our OLED TV have ranked number one for two consecutive months, demonstrating our achievement in the premium segment. We have made continuous efforts to penetrate the high-end white goods market. We believe we can capture significant opportunities by enhancing traditional white goods with smart technologies, while making our premium products available to the mass market. As an example of this effort, we launched our first premium smart refrigerator in October 2021, which supports connectivity with our MeHome app, as well as our AI smart assistant. Also during the Double 11 Shopping Festival, our home appliances products achieved record sales. On JD.com, as you can see, we ranked number three in the overall home appliances category by sales value, outpacing other players like Geely. Notably, in the smart AV with ventilation category, which we have talked about in the previous earnings call, Xiaomi ranked number one in terms of both sales volumes as well as sales value. We've continued to make progress in the variable areas. In the first quarter, according to candidates, we were the global number two vendor in variable bands. As we execute our smartphone times AIoT strategy, we strive to offer our users the coolest variable product. such as our Xiaomi Buds 3 Pro and Redmi Watch 2, while enhancing connectivity with our smartphones. Now let's talk about our internet services. In the third quarter, our global internet user base continued its strong growth momentum to reach another record high. Our MIUI global MAU increased by 32% year-over-year 485.9 million in September, while our MIUI, MAU, and Mainland China reached 127.3 million, an increase of 3.3 million users from June of 2021. And as Xiangzhong said earlier, our global MIUI, MAU exceeded 500 million a couple of days ago. Just to recap, in the first nine months of the year, the UI MAU in mainland China increased by more than 16 million. Our global TV MAU also continued to grow rapidly, increasing over 33% year over year. As our global and mainland China user base continues to grow, revenue from internet services achieved another record high, reaching 7.3 billion RMB in the first quarter. up 27.1% year-over-year. Our advertising revenue reached another quarterly high of 4.8 billion RMB, up 44.7% year-over-year. Gaming revenue also grew 25% year-over-year to reach a billion RMB, our first year-over-year growth in the past year. Let me elaborate further on our advertising and gaming business. Our advertising revenue is mainly derived from app pre-installation, by search, and by performance-based and brand advertisements. In the third quarter, pre-installation revenue per smartphone in mainland China increased by over 50% year-over-year, driven by increased premium smartphone shipments. In the overseas market, search revenue increased over 200% year-over-year, and performance-based and brand advertising revenue increased over 100% year-over-year. driving our significant growth in advertising business. For online games, contract terms are now comparable with the same period last year. Furthermore, higher Apple contribution from our premium as well as our gaming smartphone users help drive solid revenue growth. Our overseas internet services revenue also continued its rapid growth and achieved a record high In the third quarter, overseas internet services revenue increased 110% year-over-year, accounting for 19.9% of our total internet services revenue. Going forward, we'll deepen our collaboration with global business partners and further enrich our overseas services offerings. Now let's move on to more detailed financials. As we mentioned before, in the third quarter, total revenue reached 78.1 billion RMB. By segment, smartphone revenue grew 0.5% year over year to 47.8 billion RMB. IoT products revenue grew to 20.9 billion and internet services revenue grew 27% to 7.3 billion. Overseas revenue increased 2.8% year-over-year to 40.9 billion RMB, accounting for 52.4% of our total revenue. Our overall gross margin increased year-over-year and quarter-over-quarter to 18.3%. This increase was mainly driven by highest mark on gross margin, which reached 12.8% in Q3. and increased contribution from the internet services segments, which achieved 73.6% gross margin. As we mentioned before, we continue to invest in R&D in the third quarter. As you can see, our overall operating expense ratio was 12.2%, which was mainly driven by R&D expense ratio increased to 4.1%. In the third quarter, Our cash resources remain abundant at 98.1 billion RMB. Let me provide you with an update on our ESG initiative. Number one, we continuously strive to protect our users' data and privacy and hold ourselves to the highest standards. Our efforts have been recognized by the British Standard Institution. which has granted the KiteMark certification to our Mi 360-degree home security camera. Furthermore, in this quarter, we screened more than 85,000 apps in our mainland China Xiaomi App Store for data collection violations and rectified any issues immediately. We also understand our social responsibility extends far beyond our products and services. In response to natural disasters in the Henan and Shanxi provinces, Xiaomi Foundation donated 15 million RMB and 10 million RMB to the respective areas. In July, we also donated 1 million euros to those affected by the flood disasters in Germany, Netherlands and Belgium. We also strive to give back to our community through education. In November, the Xiaomi scholarship was launched to the second batch of universities in China to support eligible students. In the future, as we grow our business, we'll continue to give back to our community and fulfill our corporate social responsibilities. This concludes our prepared remarks. We'd 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.

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

Thank you. Thank you for the question. I have two questions. The first one is about the internet business. We see that a strong momentum in the advertising business and also gaming is picking up. And we see overseas contribution also increase like over 100% over here in the third quarter. Could management give us some kind of outlook in the internet business in the fourth quarter and also third half next year? Because the overall, as we think that it's important to know the growth momentum going forward. As the MAU has already achieved the kind of certain level that potentially contributes to the internet business. in the next few quarters as well. The second question is about smartphone side. I think we know that the chip shortage is hard to relieve in the near term, but any improvement in the fourth quarter and what should we expect on the full year shipment? Is the $119 million a reasonable target for us? And should we also expect, what should we expect the target for 2022 if the chip tightness is actually improving in the second half next year? Thank you.

Thanks, Tina. Let me try to take the first question, and then I'll let Shandong take the second question. Respect to the growth in the internet business, Number one, I think, is driven by the increase of our global internet users. As we said before, our Q3 MAU reached 486 million, which means an increase of over 100 million in 2021 alone. In the first three quarters, our China MAU increased by 16 million. And so a huge part of the increase in internet services obviously driven by the increased number of our user base as well as our shipment base. I think that's number one. Number two is the increased percentage of our premium smartphones as our overall premium smartphone portfolio. As we demonstrated in the chart, one of the charts, premium smartphones do drive higher gaming output. also drives higher pre-installation revenue. And so the move towards more premium smartphones for Xiaomi will also increase our advertising internet services revenue. Number three is also the gaming revenue, as we talked about. In the past four quarters, we've been hit by some changes in the contract terms with some of our providers, suppliers, and Q3 is the first quarter that we're able to compare apples to apples in the past five quarters. And so as a result, we're very encouraged to see that our gaming revenue has increased year over year. Number four, you talk about overseas. I mean, obviously overseas is a function of the user base in the overseas market. We talk about the increase in revenue from our search business in the overseas market. And so I think that that will continue to contribute to our revenue as well as our net income. Lastly, I think the TV, I should mention that we mentioned, we talked about the TV MAUs. The TV internet revenue has also contributed to the significant increase due to some of the memberships, et cetera, that we've seen a year-over-year increase. In the future, we continue to be optimistic. So obviously, I think as you mentioned, there's a lot of regulatory headwinds which are facing some of our peers as well, which were well-recognized. But at the same time, I think given the strong shipments that we have, the increased number of new users on Xiaomi's platform, the premium users on Xiaomi's phones, And to the extent that we can continue to improve customer experience, customer services, we believe that we will continue to see, you know, hopefully continue to see a healthy growth in the internet business.

Yeah. Yeah. So the second question is related to the supply and also the forecast. Actually, everybody knows during the entire year 2021, we are facing the challenge of supply shortage. Actually, the second half of 2021, the challenge is even bigger. So, but even with the serious supply situation, actually we have achieved actually record high shipment. In the first three quarters, actually, the total shipment is over 146 million. It's equivalent to the entire last year shipment, actually. It's a, I think it's a very, very good result. Actually, Q3 and also Q4, the challenge is even bigger, as I mentioned earlier, but I think we can, We are working very closely with our suppliers to try to get more supply as much as possible. I think 190 million is a good number, but we still work very hard to try to get more. So I think, yeah, so it's getting the middle of the Q4, right? We are working very hard. So for next year, actually, we see very good, how to say, the momentum of the improvement. But unfortunately, in the first half, actually, we still see some structural challenges in the first half, Q1 and Q2. But the entire year 2022, the supply situation will will be very much improved. So we are working very hard for the supply for Q1 and Q2, especially for the 4G devices. Right now, we are in more than 100 different markets, actually. Many of our markets, the consumer really need a lot of 4G devices. even in the developed market like Europe. So we are working very hard for that supply. So overall, it's good, but as I mentioned, the first half will be a challenge. We'll maintain very high growth for the year 2022.

I think, Tina, just to contextualize some of what Xiangjing just said, if you look at our shipments in the first three quarters of the year, we've already reached $146 million, which was comparable to the entire 2020. If you look at our revenue from smartphones in the first nine months of this year, it has already exceeded the whole of 2020. So despite overall shipments being flat in the global markets, we have achieved very considerable growth in our smartphones this year. So that's why we are very encouraged by the results. So I think that's point number one. Point number two is obviously, as we mentioned in the last couple of conference calls already, in the global supply shortage situation, we're also able to maintain a fairly healthy gross margin. So if you look at our smartphone gross margin this quarter, is back to 12.8%, which is comparable to what we achieved in the first quarter. So I just want to point those numbers out to you.

Got you. So 2022 sounds good to maintain good growth for 2022. Yeah, I understand that. Thank you. Thank you. Thank you, Adam.

Thank you. And our next question has come from Andy Monk with Morgan Stanley. And please go ahead.

Thank you, Xiangzong. Thank you, Alanzong. I have two questions. So the first question is related to the AIoT business. We have seen the margin see a slight decline on quarter-over-quarter basis. So is it possible for Xiaomi to raise the ASP of the AIoT product and try to pass through the cost pressure? And can we say this will help us to improve the margin? Or basically, the margin is more likely to stay at the current level without much improvement in the foreign quarters? Okay, this is my first question. My second question is related to the smartphone. We have highlighted two products in our presentation, which is the Xiaomi Civic and the Redmi Note 11 series. So basically, I want to check, you mentioned about the positive feedback on those new products, but compared with the models we launched earlier this year, what's the key improvement we have achieved on those two models? And what are the key areas we want to do better in the future? And also, if you can share a bit more regarding the offline channel, which like a product is selling better and why is that? And do we figure out how to play this offline promotion or just like selling the popular models, et cetera? That will be very helpful. Thank you.

so uh yeah the first question related to the aiot profit margin uh so uh during the entire uh 2021 actually we we we have i just mentioned the challenges the supply right uh but on the aiot side i think uh there is another challenge with the logistic transportations the transportation cost is very high, increased significantly. So that will give us some impact on the international profit margin generated from the international market and also because of the slow response of the transportation. So they also give some impact on the revenue side for the international market. And also because of the supply shortage, so some of the cost of our AIoT devices increased significantly. That gave us a temporary impact on the profit margins. This is what I see. Probably Alan you can.

Yeah, I think Andy on the IoT side as Xiangzhou mentioned, uh you know we we do have some products uh that we normally sell to the overseas market that's been delayed or that's been you know cancelled due to the shipment costs into the overseas market so that i think that's the first point and what that means is we also shifted some of the product mix between china as well as the overseas market that's the second point right and china as you know It's predominantly dominated by some of the larger white goods products, such as TV, right, such as TV and laptops. And obviously TV and laptops, due to kind of the high OC prices, carry lower margins. And so I think it's just a math function, right? I think as OC price, people are already seeing OC price dropping a lot. Significantly, in fact. And so, you know, it does help in terms of the gross margin in future periods. And as we can see, the overall shipping cost also has been normalizing, and so it will also help the overall margin in the future periods. So I think that's the first question. I think the second question is with respect to CV and Redmi Note 10, Note 11. I think first of all, the CV product is really made for a different demographics, a demographics that we haven't really targeted previously, which is the, depression-conscious female demographics. And as I mentioned in my prepared remarks, the female users we estimated to be around half of the buyers. Probably some of the other buyers gave it to their girlfriends and wives. We don't know, but the percentage could be high. And so I think from our data, we already targeted a kind of a new demographic that we haven't touched before. Second is we targeted the CVE products a lot into the offline channels. And so this is also our first try into trying, you know, different types of products into different channels. We're very encouraged. I mean, obviously, I think it would take time for us, like our premium products, to get used to serving the high-end premium users as well as the female demographics. So hopefully the next series of the CVE products will be much more competitive. I think that's something that we would like to see. In terms of the Redmi Note 11 series, obviously we've been improving the performance, but at the same time we also increased the price. I think that the price range that we offered our Redmi Note 11 was much higher than previously. So I think you can see that we're also trying to broaden the reach using this Redmi Note 11 product. And so this is something that we are trying. Your last question is respect to the offline channel. The offline channel, I think this year, we've added a lot of new stores. We are over 10,000 now. I think the next stage for us to focus on is really to increase the efficiency of these stores or increase the productivity of these stores. I think that a lot of these new stores, you know, are open for less than three to six months, and that it takes time to ramp up these stores. I think an important focus for us is to improve the productivity of each of these stores in the near future.

Thank you very much.

Thank you. And our next question is come from Paish with Goldman Sachs, and please go ahead.

Thank you for taking my question. Just picking up from the store point that you talked about, Alan, could you take us through, you've expanded the store number by more than a factor of three. Could you take us through what's prompted that expense expansion that we're observing? And give us a feel of whatever the initial feedback has been on the ability to sell through and market share gains you're seeing in the offline space. And also give us a feel for whether this is coming in at the higher end, versus the overall ASP or at another price point versus the overall ASP. Second is what have been the key learnings for you from building out this retail presence from the standpoint of how effective your sales force has been and how good the quality of the smartphone overall is versus the high end of the market. And third is more specific to how we should be thinking of the expenses related to EV, where I noticed you've fleshed out how many people had applied for and how many have started to work in that segment. Could you take us through what that cost point is at this stage and how that's likely to evolve and how we should think about that and baking that into our numbers?

Thank you. Thanks to you. On the offline store expansion, as we mentioned previously, we are significantly lower in terms of number of stores versus our peers. If you look at OPPO and Vivo, each of them has probably 200,000 sales points in China. At this point, we're still very, very low in terms of where we are. Obviously, we believe that we can be more efficient, and we don't need to have that many stores to achieve their market share. But I think if you compare the market share per store, I think we are much higher versus OPPO and Vivo at this point in time. Key lessons learned, obviously, Number one is that these stores need time to ramp up. If you think about 10,000 stores, we are hiring 10,000 employees into Xiaomi. We assume one store manager per store, right? And that puts significant pressure on training these people, on getting them up to speed, on getting them familiar with selling Xiaomi products, et cetera, et cetera. So we have to implement a lot of training sessions a lot of training sessions for them to learn about our style, our culture, how to sell the product, et cetera. So obviously it takes longer, it takes a while for these stores to get ramped up. I think that's one of the key lessons learned. And so for the next few months, I think we are spending considerable effort trying to ramp up the profitability, the productivity of these stores. I THINK WHAT WE'VE BEEN ENCOURAGED TO SEE OBVIOUSLY IS OUR BUSINESS PARTNERS BECAUSE A LOT OF THESE STORES ARE NOT OPENED BY US, ARE OPENED BY OUR BUSINESS PARTNERS, AND WE ARE, WE, YOU KNOW, AND THEY WILL ONLY OPEN MORE STORES WITH US IF THEY MAKE MONEY, RIGHT? AND WE'VE BEEN TALKING ABOUT THIS ROI MODEL FOR A WHILE NOW, WHICH WE THINK IS WORKING BECAUSE IF YOU LOOK AT THE NUMBER OF AVERAGE STORES OPEN PER PARTNER, THAT NUMBER HAS BEEN INCREASING. So at the beginning, each partner probably opened like three-ish stores for us. In the most recent data that we collected, they're opening more than five stores with us. And that's something that we are encouraged to see because obviously they're making money. Otherwise, they won't be opening that many stores with us. So that's something that we'll continue to work on, increase the productivity of each store, improve the returns of each partner so that they will continue to build their network with us. In terms of EV expenses, right now it's still relatively small compared to other parts of our business. So that's why we are not breaking that out at this point. I think this year will continue to be low versus where our other businesses are. But as we grow the business, we are also thinking about how to better disclose the expenses related to EV so that analysts and investors will have a better view. So stay tuned on that. We are not quite ready yet, but when we are ready, we'll let you know. I think, sorry, one last point you mentioned. So obviously, we do see a higher percentage of premium products sold in our offline stores. Yes, I think that that's something that we've observed as well. So that's why as we continue to push our effort into the premium site, premium smartphone site, these stores will also be very, very helpful in that distribution.

Thank you. And our next question has come from with JP Morgan. And please go ahead.

Thanks for taking my question. My first question is about competition in China. It seems like Honor has come in and taken a fair bit of market share in a short period of time. How do you see competition evolve now that there are four local brands competing for market share? How does Xiaomi plan to kind of uh gain for the market share in addition to the offline push uh in the in the next uh let's say 12 to 18 months i think previously we've talked about potentially getting to high teens to 20 market shares we were there in first half of the year seems like there has been a little bit of a slip edge in q3 uh could you talk a little bit about how we think market share evolves in china um second is on the overseas internal business Alan, I think you talk a little bit more in detail about advertising growth in overseas. Could you also get some more details on where is the revenue coming from overseas? Is it primarily coming from the higher ARPU areas like Europe, or is it more broad-based in terms of the overseas instant revenues? Thank you.

yeah regarding to the the competition actually we have a lot of competition actually we respect every competitors in this market China is the the most competitive market I think we wish instead of looking what competitor competitors are doing actually we we should focus more on on ourselves to improve the user experience, the quality of our product, improve the channel coverage. I think that's the way we are doing it. So actually focus on our key strengths. I think one of the strengths we have is we have the scale. Right now we have, last year we have almost 150 million smartphone ship to the global market, we have that scale. Scale means we have a higher efficiency, right? We have a better cost structure. That's a key strength we have. And also we optimize everything in terms of the R&D and also the channel cost. So that's what we are doing now. I think we are confident that in the future, while we are building our coverage offline in China, we'll continue to improve the efficiency. And I think we are confident we can compete with anyone more efficiently. It takes a little while for us to establish the offline channels in China. But actually, we are still the leader in the online market. And also, we have a very broad global market. So I think that's all our strengths.

I think, Goku, a couple of other points. Obviously, In Q3, our market share was lower than Q2. I think one of the key reasons was really the strong performance by the iPhone 13. I think it actually managed to squeeze all the Android players down in terms of their market share. So I think that that's the first factor. They're still very, very strong. Second thing is, obviously, if you look at some of the recent market shares that we have in the Chinese market, we've seen last week, we've seen 16.5%. Two weeks ago, we've seen 18.6%. So as the November 11 festival plays out, we've been able to achieve a pretty high market share on a weekly basis in China. Our third point is also, I mean, I think this is a point that we made for the past couple of quarters already. As we are facing supply shortage, we are also trying to optimize our product portfolio globally, because we do have 100, you know, markets to take care of. And so we also been strategically, I mean, allocating our resources globally to make sure that we are satisfying as much as we can or the channel demand, you know, under the constraint supply that we are getting. So I think that that kind of address your question on the market share. With respect to the overseas internet revenue, I mean, frankly speaking, we haven't been doing a lot of monetization, although some of these search revenue, pre-installation revenue comes naturally. But obviously, we've been focused on growing our user base. And as I mentioned earlier, I think this past nine months, we increased our user base by over 100 million. And so the user base increase is actually helpful to our Internet revenue. In terms of regions, I do think that if you look at the breakdown, the higher ARCO obviously comes from the more developed markets, such as Western Europe, of Latin America, you know, than over Southeast Asia, et cetera. So I think you do see similar trends with respect to the economic development reflected in the overseas internet services.

Thank you. Thank you.

Our next question is come from Wang Hanjin with CICC. Thank you.

Okay. Good evening, management. Thanks for taking my question. And I have two questions. The first one is about the overseas smartphone market, especially in India and Europe. So could management share the future channel strategy of these two markets? And how will Xiaomi increase the ASP of smartphones in these two markets? And the second question is a follow-up question about EV business. We see that recently the company registered the second car company. So could management update EV business such as the number and focus area of R&D team and the construction of the blind chain? Thanks.

Yeah, I think, yeah, every market actually is different. Specifically, Europe actually will continue to execute the channel strategy we are using right now. So in Europe, actually, there are half and half market in terms of the market share. Half is the open market. We sell the product, our smartphones, our IoT products through the open channel. That means the big chain stores, like a media market, and others, right? We sell our product through that channel. And other smaller channels, that's an open market. That still represents 50% of the European market. Another half will be the carrier market. Actually, we have been establishing a partnership with the global carriers, especially European carriers. So we'll continue to grow that market. Still, up to now, our market share in the carrier channel still have a lot of room to grow. So especially in the higher tier product, this high-end product, we'll continue to strengthen the partnership with our partners, with our carrier partner to help them and help ourselves to increase the market share in the high tier segment. That's a very important thing to do. In Indian market, it's different. Indian market actually, online market is close to 40%. The online market is the highest market share globally among all the countries. So we'll continue to strengthen our position online market through meet.com and also our partners, including the Amazon and Flipkart. But at the same time, we will continue to grow the offline channels in the Indian market. The Indian market actually is the mom and pop stores. There are thousands of those stores. covering the uh the cities and also the rural areas will continue uh to to improve the coverage we use a very uh high efficient uh methodology to cover those those uh areas i will continue to to to do that so this year actually our challenge in india is the the shortage and also pandemic give us a very big challenge on the manufacturing side as well as the channel side as well. So I think next year is looking to be improvement in supply and also the pandemic, we hope. We see a very big potential to grow our market share in both Europe and India, as well as the Latin America and the Southeast Asian countries.

Yeah, on the EV side, unfortunately, there's not much to update. I think we've been spending time and efforts on defining our product, as well as the product design, as well as reaching out to some of our supply chain partners, or starting to reach out to our supply chain partners. But beyond that, I think there's not much to say. I mean, obviously, you've seen that we've registered a couple of companies, you know, obviously, from a corporate structure perspective. we also need to set up the copper structure. And so that has been progressing, you know, on schedule.

Okay, thanks a lot.

Thank you. We now invite the last question, and the question has come from with CTIC, and please go ahead.

Thanks for taking the question. My first question is about the overseas internet revenue, we are very glad to find that overseas internet revenue keep on acceleration on increase. And also when we calculate the overseas pool, it keep on increasing quarter on quarter. So my first question is that, could you please give us some color on the forecast of the internet business, especially the overseas internet business? And my second question is about AIoT business. We find that we have launched a new refrigerator and washing machine has been launched for a while. So could you please give us some forecast for about next year's AIoT revenue increase? So thank you.

On the overseas internet question, Again, what we've been trying to do is to increase our number of users in the global market at this point in time. Again, if you look at the average ARPU in the overseas market, it remains quite small, quite low. But at the same time, because we have such a large user base, we've been able to get a pretty significant revenue from the internet services side. And going forward, we're optimistic that we'll continue to increase the number of users that we have in the overseas market. And as a result, I think it will continue to grow quite naturally. So I think that answers your first question. On your second question with respect to the AIoT business, I think we've been trying to, you know, trying to improve our product mix as well as improve each category of our products over time. So for example, This year we've seen a very popular product on the air conditioner side. We've seen very good responses on the premium refrigerator. We've seen very good responses from our pad. And we've seen very positive feedback from our variable business as we improve the activity between them as well as our smartphones. So we've been encouraged by some of these product lines that we have. continued improvement and continued popularity among our users. And that's something that we'll continue to do. But, you know, as you know, AIoT is a very diversified business line. We do have a lot of SKUs. Some of them will be doing better. Some of them will be doing worse in one year. So over time, I think it kind of, you know, we will continue to see, we are quite optimistic we'll continue to see growth in this area overall.

And also, I think as we ship more and more high-end products to the overseas market, actually, it will improve the internet service as well.

Thank you, Xiangzhuo and Alan. Thank you.

Thank you. Thank you, everyone. This concludes today's conference call, and thanks again for joining us. You are now disconnected.

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