Xiaomi Corp

Ladies and gentlemen, thank you for standing by and welcome to Xiaomi 2022 First Quarter Result Announcement Conference Call. Today's conference is being recorded. If you have any objections, you may now disconnect at this time. If you have any questions you would like to raise during the Q&A section, please press star 1 on your telephone keypad to register your questions. Should you wish to cancel the questions, please press star 2. I'd now like to hand the conference over to your host today, Ms. Anita Chan, Head of Investor Relations and Corporate Finance. Please go ahead, Madam.

Good evening, ladies and gentlemen. Welcome to the Investor Conference Call hosted by Xiaomi Corporation regarding the company's 2022 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 uncertainties that we not realize 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-IFRI financial measures that should be considered in addition to, but not as a substitute for, the company's financials prepared in accordance with IFRIs. Joining us on the call today are Mr. Wang Jiang, partner and president of Xiaomi Corporation, and Mr. Alan Lam, vice president and CFO of Xiaomi Corporation, and also the CEO of Airstar Digital Technology. To start, Mr. Wang will share recent strategic updates of the company, thereafter Mr. Lam will review the business and financial performance for the first quarter of 2022. 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, everyone. Thank you for joining our 2022 first quarter earnings call. In the first quarter of 2022, our industry faced significant challenges from the continued supply shortage of the key components and the researchers supply shortage, resistance of COVID-19 and the global microeconomic headwinds exacerbated by Russian Ukraine situation. These challenges have also impacted our business and affected our financial performances and operating results. However, we are taking steps to optimize cost structure, and improve operating efficiency. More importantly, we are developing the next growth engine through continued investments in new initiatives. We have great confidence in our team and in our product and services. Difficult times remind us of our founding mission, and we will never cease to fulfill our mission of building amazing products at honest prices and to let everyone in the world to enjoy a better life through innovative technology. With that in mind, we continue to advance our business strategies and strengthen our foundation. Our first quarter total revenue reached RMB 73.4 billion. and our IoT lifestyle products business, and the internet service business, maintaining solid growth momentum. Meanwhile, we have been actively developing our smart EV and other new initiatives. Our adjusted net profit reached RMB 2.9 billion in the first quarter, which included RMB 425 million of expenses related to our Smart EV and other new initiatives. Under this challenging environment, we remain resilient due to our global scale. In the first quarter, we maintained our number three position in global smartphone shipments, and we continue to perform well in major regions globally. Our smartphone market share ranked top three in 49 markets and among the top five in 68 markets. Our scale and strategy allow us to benefit from higher growth in overseas markets while mitigating volatility risk in any single market. We continue to invest in R&D to create something new, creative, and better for our users. In the first quarter of 2022, our R&D expenses reached RMB 3.5 billion, an increase of 16% year over year. As a testament to our R&D capability, we continue to deliver industry-leading camera and charging technologies, including our pro-focus imaging and ultra-light video algorithm, which were recently awarded two CVPR NPI award championships, as well as an incredibly fast 120-volt single-cell battery design and our Xiaomi Surge P1 charging IC. Our relentless pursuit of cutting-edge technology has strengthened our position in the premium smartphone market. In this quarter, global shipments of our premium smartphones reached nearly 4 million units, and our smartphone ASP grew 14% year-over-year to RMB 1,189. We ranked number one among Android vendors for smartphone price between RMB 4,000 and 6,000 in mainland China. and as a solid proof that our new retail strategy is taking place. Our offline channel accounted for over 50% of our premium smartphone shipments in mainland China in this quarter. We have continued to attract new users both globally as well as in mainland China. Our global MIUI and MAU reached 529 million in March and that increase of over 100 million MAU from a year ago. And our mainland China MIUI MAU increased for six consecutive quarters, reaching 136 million. With our growing global user base and our diversified revenue streams, our internet service business maintained a solid growth in the first quarter of 2022. Furthermore, our overseas internet services revenue increased by over 70%, contributing nearly 22% of our total internet service revenue in this quarter, a record high. Since last year, we have been focusing building synergies between our businesses while reducing costs. For example, We merged the software department and IoT wearable team into the smartphone department, and we merged the European e-commerce department into the China region. The regionalization of business units will strengthen our smartphone multiplies AIoT strategy, improve operational efficiency, and promote sustainable growth of our business. We also continue to actively promote ESG and public welfare. Last month, we published our 2021 ESG report and set multiple environmental targets, including our targets of energy, greenhouse gas emissions, water resources, and waste management. We work hand in hand with our employees and business partners to overcome difficulties and actively fulfill our social responsibilities. Since the outbreak of COVID-19 in Shanghai in March 2022, we have proactively donated care packages to our employees in Shanghai. Since 2021, we have provided a total of RMB 120 million in subsidies subsidized to our offline store partners in response to the impact of COVID-19. I also want to take this chance to thank medical personnel on the front line. Thank our team and the business partners for their perseverance, and courage, and thank all of our investors, analysts, and friends who have supported us throughout this journey. These times remind us that we might continue to face challenges and uncertainties, but what is certain is that we shall never cease to strive for a better life for our users. and the friends around the world through our innovative technologies. With that, I will hand it over to our CFO Allen to discuss our first quarter results in greater detail.

Thank you, Xiangzhou. Good evening, everyone. Thanks for joining us tonight. Let me go through the progress for this quarter in more detail. First of all, in the first quarter, as Xiangzhou mentioned previously, we do face a lot of challenges, including the continued shortage of key semiconductor components, including COVID-19 resurgence in China especially, as well as macroeconomic headwinds, which were exacerbated by the Russian-Ukraine situation. Despite this, we continue to focus on executing our business strategies, and we think we have made very good progress on our smart EV and other new initiatives. In the first quarter, our revenue reached 73.4 billion RMB, and our adjusted net profit was 2.9 billion RMB. The 2.9 billion RMB included expenses of around 425 million RMB for smart EV and other new initiatives. Our free business segments remained healthy. Our smartphone market shares firmly in the top three globally. The number of connected devices on our AIoT platform increased more than 36% year-over-year. And on the UIMAU, with 529 million users globally and 136 million in mainland China, again hit record highs. In the first quarter, as many of you are well aware, global smartphone shipments fell by nearly 11% year-over-year due to many factors that we've cited previously. Despite this challenging market backdrop, we managed to maintain our third position globally with a market share of 12.6%. We continue to strengthen our position in the premium smartphones market. This quarter, we shipped nearly 4 million premium smartphones globally. Driven by our premium strategy, our ASP continued to rise, reaching a quarterly high of 1,189 RMB, up 14% year-over-year. Our premium smartphones have made breakthroughs in both mainland China and overseas. In mainland China, we ranked first among Android vendors in the 4,000 to 6,000 RMB price segment during the first quarter. We also commanded over 50% market share for smartphones equipped with the Snapdragon 8.1 processor in this quarter in mainland China. In the overseas market, we ranked number three in Europe, in terms of premium smartphone brands this quarter. In March, we successfully launched the Xiaomi 12 series overseas, and we've held exclusive events at many places, including the Eibu Tower in Paris, to promote our premium brands. We're constantly pushing the boundary on smartphone performance to provide the ultimate user experience. Our products have achieved very impressive results in the 2021 smartphone assessment published by the three main carriers in China, Telecom, Unicom, and Mobile. Going forward, we'll continue to pursue technology innovation and focus on exceeding user expectations. Our achievements are the result of our continuous investment in R&D. In this quarter, R&D expenses reached 3.5 billion R&D, up 16% year over year. We continue to enrich our talent pool and grow our IP portfolio. As of March 31st, R&D personnel accounted for 44% of our total employees, and we have more than 26,000 brands and patterns globally. We continue to innovate, especially in imaging and charging technologies, and we believe these will further differentiate our products and further improve our user experience. We continue to execute our new retail strategy, In this quarter, we retained our number one position online in the mainland China online market with a market share of 32.3%. At the same time, we continue to expand our offline coverage. As of March 31st, we had over 10,500 retail stores in mainland China. And this is becoming a very important part of our premierization strategy. In this quarter, More than 50% of our premium smartphones were sold offline in mainland China. This year, our focus is on improving our store efficiency. We will deepen cooperation with carriers, integrate sales and services in more locations, enhance staff training, optimize product mix, and cross-sell more IoT products. Furthermore, to broaden our sales channels, we began collaborating with Meituan to offer on-demand delivery of our products in as short as 30 minutes. As of March 2022, there were more than 3,000 e-homes across 276 cities participating in this service through MateOne apps. Next, let's dive deeper into each segment, starting with smartphones. In this quarter, the smartphone industry was affected by many of those problems. many of the factors we mentioned previously. Global smartphone shipment fell 11% year over year. But despite that, we managed to ship 38.5 million smartphone units and maintain our number three position globally. On the other hand, our smartphone ASP increased by 14% to 1,189 RMB. As a result, we achieved smartphone revenue of 45.8 billion RMB this quarter. We continue to expand our smartphone portfolio and our target user base. For our new flagship smartphones, including Xiaomi 12 series, Redmi K50 and Redmi K50 Pro, over 50 of the users came from new users. Our mainland China MAU as a result increased by 17 million year-over-year to 136 million in March 2022. Our CV series continues to appeal to fashion-conscious users. We launched our new CV1S with a very thin and attractive design, powerful beauty mode photography features, and smooth user experience. Since launch, over 50% of its users were new Xiaomi users. We continue to advance our overseas business and maintain leading positions in major markets. As you can see from this chart, Our market share this quarter improved from last quarter in Europe, in India, Southeast Asia, as well as Latin America. Our global operations and our global scale help us mitigate volatility risk in any single market. According to Canada, in the first quarter of 2022, we ranked top three in 49 markets globally and top five in 68 markets. We continue to build up our overseas carrier channel. In the first quarter, we shipped over 5.7 million smartphones to overseas carrier channels, an increase of more than 10% year over year. In this quarter, our carrier channel market share in Europe increased to 17% from 16.8% in 2021. And in Latin America, our market share in Q1 increased to 17.7%, from 12.3% during the same period. In this quarter, our market share through carrier channel ranked top three in 38 overseas markets. On the IoT side, despite the effect of macro headwinds, COVID-19, and continued shipping logistical challenges, our IoT business still achieved steady growth. In the first quarter, IoT revenue reached 19.5 billion RMB, an increase of 6.8% year-over-year. Notably, gross margin of our IoT business reached a record high of 15.6%. As of the end of March, the number of connected devices on our AIoT platform reached 478 million, up over 36% year-over-year. The number of users with five or more connected IoT devices reached 9.5 million, up 39% year-over-year. MAU of our AI Assistant reached 150 million in March, up 24% year-over-year. And MAU of our Mi Home app reached 65.8 million, up 34% year-over-year. Let's go into more details on some of the key IoT categories. Despite year-over-year decline in the overall TV market, both globally and in mainland China, we again achieved year-over-year growth against the industry trend in our smart TV business. In the first quarter, we shipped almost 3 million units of smart TVs globally, up 15% year-over-year. We ranked number one in mainland China for 13 consecutive quarters and top five globally. The growth in our TV shipment also led to an increase in our TV internet revenue, which I'll mention later. Our smart white goods business is also growing rapidly and also penetrating the premium market. In the first quarter, revenue of smart white goods grew by more than 25% year-over-year. We continue to launch new premium products this year, such as the smart AC with ventilation, vertical, and the 630-liter super refrigerator crystal edition, allowing us to tap the huge potential in the premium white goods market. On the tablet side, our Xiaomi Pad 5 series continues to be a top seller globally. Since its launch in August 2021, global shipments of our Xiaomi Pad 5 series have exceeded 2 million units. Tablets have become one of the top IoT categories in terms of revenues. And our tablet shipments ranked top three in mainland China in the first quarter. We also continue to be a leader in the variable product category. In March, we launched our Genshin Impact co-branded TWS earbuds, which have been very highly popular. In Q1, our TWS earbuds shipments ranked number three globally and number two in mainland China. Now let's look at internet services. Our global and mainland China MAU both reached record highs I mentioned previously. In March, our global MAU reached 529 million, an increase of over 100 million year-over-year. And the mainland China MAU reached 136 million, an increase of 17 million year-over-year. Also worth mentioning is our TV MAU, which has exceeded 15 million for the first time in March. Despite an uncertain industry environment in mainland China, we continue to expand our user base and grow our internet services revenue through multiple monetization channels. In the first quarter, internet revenue reached 7.1 billion RMB, up 8.2% year over year. Our advertising revenue reached 4.5 billion RMB, up 16.2% year over year. mainly due to the growth of search revenue, as well as performance and brand advertising. We also continue to expand the number of gaming partners and improve our gaming monetization efficiency, which helps drive the growth of our gaming revenue. As our global user base continues to expand, our overseas internet business has maintained strong growth. In the first quarter of 22, Overseas internet services revenue reached 1.6 billion RMB, up 71.1% year-over-year, and accounted for 21.9% of total internet services revenue. In March, the MAU in Western Europe and Latin America increased by more than 60% and 70% year-over-year . I want to talk about growth drivers of our advertising business. This quarter, both our performance and brand advertising revenue, as well as our search revenue, both grew year over year. Performance and brand advertising revenue continue to grow in mainland China, driven by our expanding advertiser base and our higher monetization efficiency. At the same time, overseas performance and brand advertising revenue hit another quarterly high, due to stronger operations of our content and services business. This quarter, search revenue hit another record high. In mainland China, hot topics such as the Winter Olympics drove a year-over-year increase. In the overseas market, improved monetization capability and our expanding MAU base drove search revenue to another record high. Pre-installation revenue in mainland China declined year-over-year due to lower smartphone shipments. Overseas, pre-installation revenue actually increased year-over-year as we expanded into more markets with our global partners. Next, I will talk about our TV internet business, which is gaining traction. In this quarter, China TV internet revenue accounted for about 15% of China internet services revenue. TV internet revenue mainly comes from TV value added services and TV advertising. For TV value added services, which is mainly our subscription business, we have expanded our content to cover sports, kids, and family programming, driving revenue to a quarterly cost. Meanwhile, driven by luxury goods and high-end automobile brand advertising, TV advertising revenue also grows significantly. As the number one TV brand in mainland China, we believe there's huge monetization potential for us within internet services and TV. Now let's move on to more detailed financials. First, let's take a look at the top-line performance of each of the sectors. In the first quarter of 22, total revenue was $73.4 billion. Smartphone revenue was 45.8 billion, IOT was 19.5, and internet services revenue was 7.1 billion. In the first quarter, overseas revenue accounted for 51.1% of our total revenue. In the first quarter, overall gross margin reached 17.3%, a decline of 1.1 percentage point year over year. Smartphone gross margin declined to 9.9% this quarter, mainly due to promotional sales of certain smartphone models. Growth margin of our IoT business hit a record high of 15.6%, mainly due to lower prices of key components, such as display panels. Internet services growth margin was 17.8%, and the decline was mainly due to higher revenue contribution from lower margin advertising businesses. We maintain high operating efficiency while continue to invest to increase our R&D investments. In the first quarter of 22, overall operating expense ratio was 13.6%, which included expenses of 425 million RMB for smart EV and other new initiatives. R&D expense ratio was 4.8%. we'll continue to implement prudent financial policies and optimize our core structure to enhance our operating efficiency. Since last year, we have been focusing on building synergies between our businesses. As Xiangzhong mentioned previously, we have put our software department as well as our wearable business department into the smartphone department. We've also merged the Yoping e-commerce business into the China region business. Furthermore, we combine our data services platform and our group IT department into group IT departments. These organization adjustments, we believe, will strengthen our smartphone times AIoT strategy, improve our operational efficiency, and promote the sustainable growth of our business in the long term. Our cash resources remain robust, reaching 95 billion RMB as of the end of March. I will provide an update on our ESG initiatives. We continue to incorporate ESG into our operations and management. In April of this year, we published our fourth annual ESG report and disclosed multiple KPIs. Notably, our 2021 greenhouse gas emission data has been verified by the British Standard Institution. We have set multiple environmental goals this year. We aim to reduce per capita energy consumption by 5% in 2026 compared to 2020. And we aim to reduce per capita greenhouse gas emissions by 4.5% over the same period. In terms of water resources, our goal is to not exceed the 2020 per capita water consumption level. With regards to waste management, we aim to categorize non-hazardous waste and safely dispose 100% of hazardous waste through qualified organizations. We have also been actively promoting public welfare. In January, Xiaomi Foundation Limited in Hong Kong announced an expected donation of 10 million RMB over the next five years to set up the Xiaomi Sports Scholarship to support teenage athletes. In April, Beijing Xiaomi Foundation and Peking University jointly launched the Peking University Xiaomi Innovation Fund to support cutting-edge research. To help the people who are in need, Beijing Xiaomi Foundation offers assistance to multiple regions affected by COVID-19 in mainland China, including a 1 million RMB donation to Beijing in May. Going forward, we'll continue to give back to society. Lastly, We are committed to using technology to help the public prepare against natural disasters globally. In March, we officially launched the Earthquake Early Warning smartphone function in Indonesia to help provide users with precious time to take protective measures in the event of an earthquake. This concludes our prepared remarks. We'd like to open the call up for questions from investors.

Thank you, Alan. We will now proceed to the Q&A session. Please ask no more than one question at a time so that we could allow more investors to ask their questions. Meanwhile, please read your questions in Mandarin, followed by English recap. Thank you.

Thank you. The question and answer session is now open. To register your questions, please press star 1 on your telephone keypad. Should you wish Should you wish to cancel the questions, please press star 2. Our first question is come from Andy Monk with Morgan Stanley. Andy, please go ahead.

谢谢翔总和艾伦总和我们分享一季度的金银和财务情况。 我们也关注到在过去这个季度中有各种不可控的意外因素,非常的不容易。 那我的问题是关于手机板块的。 在一季度我们看到手机的出货量同比和环比都有下滑。 For smartphone businesses, there's gross headwinds in the first quarter. What's the management's take on the demand outlook in the following quarters? Do we expect continuous weakness or there's a chance of recovery? Regarding the smartphone margin, we have also observed year-over-year decline this quarter. How should we think about the margin outlook in the coming quarter? Thank you very much.

So thank you, Andy, for your question. So I think because of the uncertainty in the global environment and also COVID, So we are still closely monitor the development and carefully making our forecast. So I think in Q1, what happened is, was the, first of all, the shortage of the entry level SOCs. So that hit us because we have, we have a lot of volume in India, in Europe, and in many, many regions. So that's a problem. But in Q2, actually, we see the improvement of the supply. But we also see the uncertainty for the macroeconomic environment and the political and also geopolitical environment. So we are still watching closely. So I think regarding the gross margin.

Let me supplement some of Zhang Zhong's answers. I think for Q2, obviously, there's still a lot of macro uncertainty with respect to the market. But that will continue to monitor both, of course, in China, as well as in the overseas market. Obviously, we expect the supply to be better in Q2. And also, there are major events, such as 618, the shopping event in China, which will help the smartphone shipments in the second quarter. So we do see some of these promotional events as key catalysts to drive our smartphone shipments in Q2. That's number one. In terms of the gross margin, if you look at the gross margin in Q1, it's declined slightly from the Q4 level, which was 10.1% to 9.9% this quarter. We think that there were some promotions that we did in Q1 to clear up our inventory to better position ourselves for the rest of the year when supplies become more plentiful. Obviously, last year in Q1, I think I also mentioned to a lot of the investors that last year we were benefiting in a way our gross margin benefited from a lack of supply, severe lack of supply in the market, plus the fact that there were not a lot of promotional activities that happened in the market. So I hope that answers your question, Andy.

Okay, got it. Thank you very much.

Thank you. And our next question is coming from Kanna Wong with Credit Suisse.

And Kanna, please go ahead. Thank you. I have a question about IoT. First of all, I saw that the profit margin of IoT in the second quarter reached 15.6%. I want to say that the reason for this is that we can take a look at it. I want to ask about the cost margins. in the IoT business that improved to 15.6%. Is this a sustainable level in the coming quarters? And what's the reason more like data breakdown we could get will be appreciated? And when to see this overseas IoT cells to recover post-lockdown easing that may help the logistic, improve the logistic challenges? Thank you.

I think A couple of answers to your question, McKenna. One is on the IOT gross margin. In the second quarter, our IOT gross margin, you know, benefited because of lower, some of the lower cost due to, in some of our components. For example, display panels. So our TV business benefited from the lower cost. So that drives our gross margin to be higher. Also, some of our new categories like PATH, you know, white goods, obviously, I think those are relatively, those carry relatively higher margins, gross margins. But that is helpful to our, you know, accretive to our gross margin overall. Looking forward, I think, you know, it will depend on some of these input prices. It obviously will drive our gross margin, which, you know, they've done historically as well. I think that's number one. Number two is our overseas IoT business does suffer from the continued logistical challenges overseas. So that has, you know, slowed down the growth of our overseas IoT business. That's number one. But also another factor that impacts our overseas IoT growth was the, you know, the certain macroeconomic headwinds, especially impacting Europe. So I think that obviously we expect that the logistical challenges to improve over time. But one thing that we are a bit uncertain about is whether the economy is going to recover as fast because obviously the war is still ongoing. It has impacted a lot of factors like foreign exchange as well as the inflation in those areas, especially in Europe. But that's something that we'll continue to monitor very, very closely.

Thank you. Thank you. And our next question is come from Timothy Cha with OfficeX. And Timothy, please go ahead.

Thank you, Mr. Xiang and Alan. My question is also about IoT. We see some more detailed numbers in the first quarter, such as The number of devices connected or the number of users with more than five devices, these data actually achieved a relatively strong growth, but our IOT income increase is actually relatively weak. How should we understand the difference between these two sets of data? In addition, can the IOT management level help us to look at the trend of our IOT income this year? Then we start from the product side, because this year's red light may have some uncertainty in various regions. What strategies will we have at the product side to drive the growth of IOT? Thank you, management. My question is also related to IoT. We see in the first quarter some detailed numbers such as the number of connected devices or the users with over five devices. All those numbers actually had a very significant growth, but in terms of the revenue, the IoT revenue was relatively soft. Could management help understanding the difference between these two data theories? And also, can management help to provide some outlook for the IoT revenue for this year, given the uncertainty of the macroeconomy? From the product perspective, what kind of the strategy that we can have to drive the IoT revenue growth? Thank you.

I think one of the major challenges for the IoT growth is the, I think, two major reasons. Number one is the higher transportation cost. that will hurt our, the growth and even the profit. I think the secondly is that the uncertainty in the Europe, right? Right now the living cost has increased due Ukraine, Russian-Ukraine war. So the demand is softening. So that's another uncertainty. But we still have a lot of very good hot selling products in China and the rest of the world. In China, for example, we have very good growth. or the shipment in the TVs, right, and also the washing machines and other products. So in Europe, actually, our major key seller will be the vacuum cleaner and also the scooters. And also we are trying to sell more and more TWS earbuds and try to get the smartwatch market as well. So I think that's the outlook for the opportunities for the Q2 and Q3 for the rest of the year. So Alan, maybe you...

I think, Tim, one is obviously, as I mentioned in the previous question, the overseas IoT opportunity remains quite big from our point of view. We need to get more SKUs over there. Some of them have shown slowdown due to what's going on in Europe. Some of them have slowed down because of what's happening with the economy overall. But, you know, if these things normalizes, hopefully it will help our, you know, IoT growth to pick up again. I think that's number one. We continue to introduce new categories, you know, new growth categories in China, like our tablets, like our white goods. And then also, I might have mentioned that on the other call as well, that, you know, one of the key, you know, initiated for IoT is to get those into our offline retail network as well. I think we've been trying to get more IoT categories SKUs into our offline network. And I think that numbers will show that the IoT is becoming more important in terms of the sales through our offline distribution network. So we're still quite optimistic. I mean, obviously, there are some challenges overall, but we're still optimistic that the IoT business will continue to be a very important business for us.

Thank you. And our next question has come from Wenhan Jing with CICC. And, Hanjing, please go ahead.

Thanks for taking my question. Could management share your opinion about our competitive strengths in Africa and the Latin American markets and our expansion strategy in these two markets this year. Thank you.

So overall, I think we are doing good in the Q1, and the many, many markets, Latin America is one of them. So in the total market, actually, right now, our market share in Latin America is... I think around 15%. So that market is very big. So it's a carrier-driven market. We have established a good partnership with the major carriers in that market. So I think we are number one in Colombia. And also Mexico, we also have a very big growth. So I think the potential there is huge. Right now, the major player in Latin America right now is Samsung, Motorola, and Apple. So I think with the partnership with the retail channel and the carrier channels, I think we have a lot of room to grow. So from 2020, we only had around 5%. But 2021, we were over 12%. But now we are even growth more in Latin America. I think it's going to be one of the major growth area for Xiaomi in this year and the next couple of years. I think Africa, we are trying to bring more and more 4G devices into Africa. Because Africa right now, some of the countries, they have a 5G network. A majority of the carriers, they are still in the 3G. So we are trying our best to optimize the cost structure so that we can provide our 4G devices to serve consumers in Africa. The market there is huge.

Thank you. And our next question has come from Shi Yingbo with CTEK. And Yingbo, please go ahead.

Thank you. Thank you, Mr. Wang. I have a question about cars. We see that this season's My question is related to auto industry. And we saw that there have been like 425 million R&D expense on auto and related new initiatives. So what's the whole wheel for the whole year's expense in this area? And could you please give us more color on the auto sector? Thank you.

Yeah, Yingbo, thanks for the question. I think most of the 425 is in R&D. Most of it. Obviously, there's some G&A expenses as well. There's some G&A personnel involved, right? But there's no sales and marketing at this point. So the bulk majority of that 425 is included in R&D expenses. So you can think about, you know, literally the whole thing in that category. And that answers your questions. We'll continue to spend on EV this year. The expenses will probably ramp up as we continue to ramp up our business. Right now, we have around 1,200 people at this point in time, and that will continue to ramp up as the year progresses. You know, we have not disclosed any plans for the entire 2022, but you expect that number to ramp up through this year.

So the Q1, actually, you may have the question that in Q1 we spent 420 million RMB. Actually, we will continue to invest into the RMB of the EV. So you can expect our investment into The EV business is going higher in Q in the rest of the year. The rate will be higher in the rest of the year. I think a majority, as Alan mentioned, the majority will be the R&D cost.

Thank you. Our next question is come from Le Ping Guang with Huatai Securities.

Le Ping, please go ahead. Thank you. Thank you for taking my question. So my question is about what the COVID-19 19, the quarantine and the control issues, what impact on your smartphone, IoT, and the internet business on the first quarter and on the second quarter? Thank you.

Definitely, the Shanghai, the COVID-19 in Shanghai gave some impact to our business because we have a lot of stores in Shanghai, right? So we have to, the store closed, all stores closed. That will hit our business. And also the Shanghai, not only consumer market for us, actually there are some components manufacturing capabilities also give us some impact. Not only in Shanghai, but even in Hong Kong, in Guangdong area, in Q1, actually they all had hit by the COVID. So that the challenge for us is the first is will be the, was the ground transportation, right? Hong Kong is a very important hub for us to, for our smartphone transportation through the air. freight transportation. So that gave us some problems in January, February, March. So I think the problem is gradually improved because of the COVID situation in Hong Kong and the Shenzhen have been improved a lot. So we almost solved that problem. But Shanghai still, we still have some problems in Shanghai. We're working very hard with our suppliers, including the manufacturers and also even the transportation companies to improve the logistics support in that area. So we hope that in Q2 we can solve that problem.

Thank you. And our next question has come from Guko Reharan with JPMorgan. And Guko, please go ahead.

Hey, thank you for taking my question. Can you talk a little bit about China, smartphone market share? I think we've dropped down to number five, although even though it was a launch quarter for me, could you talk a little bit about what are the market share dynamics you're seeing, competition in China, smartphones, and what is our kind of path back to kind of going back to like top three that we enjoyed for some brief time earlier last year?

Yeah, thanks Coco. I think a couple of things to note is number one is obviously the overall market in China in terms of shipment in the first quarter was obviously underperformed for the market. For the market decreased by 11%. I think China's market decreased by 18%. So overall the Chinese market has deteriorated more dramatically than the overall market as a result, number one. Number two is, as Xiangzhong, I think, earlier mentioned, we do have continued to suffer from the lack of chipset, especially on the lower end segment. So on the lower end segment, we do see a continued shortage of the chipset. Number three is we continue to grow our premium segment. The premium segments, obviously, we still have a decent market share as we put into our slides. Between 4,000 and 6,000 among the Android players, we are actually number one. And our high-end, you know, Gen 8 product was sold extremely well. So I think we do suffer a bit on, you know, I mean, obviously, more competition is obviously more intense towards the mid to lower end. and we're also suffering a little bit on this sort of stuff. Does that make sense?

Okay, got it. Maybe one small question on the TV monetization. Could you talk a little bit more about the details in terms of how does ARPU compare with China smartphone ARPUs, and is that something that is going to be a meaningful driver for your internet services business going forward?

Well, I think a few things. One is, as I mentioned in my prepared remarks, there are two parts of this revenue. One is the subscription revenue, which comes from new buying programs, buying IT packages or increasingly Tencent video packages or Bilibili packages, et cetera, or Mango packages. That one we like because it's obviously a recurring revenue base for us. And given our large in-store base in China, it has, you know, the fact that it's growing nicely is very encouraging. I think that that's something that you, something that we would like to, you know, to see that it's growing. Even though the ARPU pieces may not be as significant as smartphone ARPU per se, but it is very much a recurring revenue for us. I think that's number one. But that, you know, obviously we need to split revenue with IT and other content providers, right? So that's the first thing. Second part is the advertising, brand advertising revenue. And that's something that we are working with, you know, fairly different advertising base compared to our smartphone business, right? And our smartphone business, a lot of these are ROI driven, performance-driven, maybe e-commerce, maybe gaming company, et cetera. On the TV side, as you know, we've been focusing much more on large-screen TVs, selling more to the middle-high-end demographics in China. And it also allowed us to attract brand advertisers, whether it's luxury goods, whether it is, you know, the major brands, consumer brands, et cetera. So that's something that we've seen that is actually growing quite well, especially in the last quarter, right? Especially in Chinese New Year, a lot of people stay at home, watch TV and whatnot. That is something that we need to watch a bit more closely going forward because of the lockdown of some of these things. it may actually have some impact on that brand advertising business. So that's something we need to continue to watch, that that's not recurring revenue per se. So that's how we look at the TV business overall. But we're optimistic, given that we have a large install base, mostly, you know, large screen TV uses, and that's something that we, and also more recurring revenue for us.

Got it. Thank you.

Thank you. And our next question has come from John Choi with Daiwa. And John, please go ahead.

Thank you very much for taking my question. My question is on advertising. You know, we noticed that, you know, you guys did very well this quarter, both on performance-based and search. You know, could you elaborate the, you know, reason why? Is it more because of your MAU of your MAU users has increased? You did say, you know, both for performance, you had a stable YOY growth on diversified customer base and higher monetization. I want to have more details there. And also in the search on the Olympics, would that also see a sequential decline in the coming quarters, both for performance and search, given that the macro situation in China is also challenging? Thank you.

We do see kind of, you know, you'll hear from the other folks as well, right? The ad budget overall is under pressure in China. I think there's no question about that. I think given what happened to the macro economy, what happened in the, you know, in some of the more regulations and whatnot, you do see more pressure coming on the ad budget side overall in China. I think that's number one observation. Number two is I think we do benefit from a higher number of user base, right? And that obviously helps us attract more advertisers to our platform. So I think that's one of the major drivers for both the performance ads as well as the search ads, right? In terms of hot topics, we do see a significant pickup in traffic due to some of these topics that are quite permanent. Winter Olympics being one of them in Q1. Whether that will continue in Q2, obviously there's no Winter Olympics. We hope there are other topics that will pick up, that will help user interest. But that's something that's obviously more, it depends on, you know, something that is out of our control. But something that is in our control is obviously a number of users that will continue to be new users to Xiaomi, number one. Number two is the increased percentage of premium smartphone users in that user base. I think that that will also help drive a higher R pool overall for that advertising business. Obviously, the other thing that we've seen quite healthy growth is the overseas business, as we mentioned, both because we've added 100 million users to our platform, and that obviously helps some of the advertising revenue over there, too. So, those are the three things that I hope answer your question.

Yeah, one thing I want to add is, Actually, we keep adding the MAUs for the VUI in China and outside of China. So that means we got more new users through our mid- and high-tier smartphones through the offline channels. We keep getting the new users from those channels. That's a very, very good signal for us good news for the monetization of the internet service site. The overseas market is the same. It will continue to grow our users, user base in Europe, in other territories, so now we can generate more internet revenue, no matter it's from the search or other uh, other channels.