Xiaomi Corp

Ladies and gentlemen, thank you for standing by and welcome to Xiaomi 2022 First Quartus Results Announcement Conference Call. Today's conference call is being recorded. If you have any objections, you may disconnect at this time. If you have any questions you would like to raise during the Q&A section later, please press star 1 on your telephone keypad to register your questions. Should you wish to cancel your 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 Capital Markets. Please go ahead, Madam.

Good evening, ladies and gentlemen. Welcome to the Investor Conference Hall hosted by Xiaomi Corporation regarding the company's 2022 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 uncertainties and may 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-IFI financial measures that should be considered in addition to, but not as a substitute for, the company's financial prepared in accordance with IFRS. Joining us on the call today are Mr. Wang Xiang, partner and the president of Xiaomi Corporation, and Mr. Alan Lam, vice president and the chief financial officer of Xiaomi Corporation and chairman of Airstar Digital Technologies. To start, Mr. Wang will share recent strategic updates of the company. The year after, Mr. Lam will review the business and financial performance for the third 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. Good evening, everyone. Thank you for joining our third quarter earnings call. Since 2022, our whole industry faced many challenges, including rising global inflation, foreign exchange fluctuation, a complex geopolitical environment, and a COVID resurgences in mainland China. These challenges have not changed materially in the third quarter of 2022 and have continued to impact overall market demand significantly. The global smartphone market declined nearly 10% year over year in the first three quarters of this year. And in this quarter, global smartphone shipment hit the lowest point compared to the third quarter over the past nine years. Despite the challenging environment due to our global scale, our long operating histories in global markets, and our brand and the channel advantages, our business remained resilient. In the third quarter, our total revenue adjusted net profit smartphone shipments, and the smartphone margin all achieved growth quarter over quarter. More so than any other time, in times of difficulty, it is vital to invest in our long-term capabilities to lay the foundation for high-quality sustainable growth. With this in mind, we continue to advance our business strategies and strengthen our foundations. The third quarter, total revenue reached 70.5 billion RMB, with smartphone revenue reaching 42.5 billion, IoT and lifestyle product revenue of 19.1 billion, and the internet services revenue of 7.1 billion. Meanwhile, we have been actively investing in advancing our Smart EV, and other new initiatives. Our adjusted net profit reached $2.1 billion in the third quarter of 2022, which included $829 million of expenses related to Smart EV and other new initiatives. In the complex and ever-changing overseas market, We cooperate openly with our global partners, leveraging our global scale to mitigate single market risks. In the third quarter, we maintain our number three position in global smartphone shipments, with market share of 14%. And in Europe, we rank number two, with market share growing year over year and quarter over quarter to 23%. In this quarter, more than 75 percent of our smartphones shipped to overseas markets, and our smartphone market share ranked top three in 52 markets and among the top five in 64 markets. We further strengthened our position in the premium smartphone market, and our newly launched premium smartphones have been very popular Xiaomi 12S series and a Xiaomi MIX Fold 2 received over 98% and 99% positive ratings, respectively, on JD.com. In this quarter, in mainland China, our smartphone market share in 4,000 to 5,000 RMB price segments grew year over year of 5 percentage points, and it grew over year year over year of two percentage points in RMB 6,000 and above, demonstrating the competitiveness of our premium products. We continue to invest in R&D and strengthen our long-term core competitiveness. In the third quarter, our R&D expenses reached 4.1 billion, an increase of 26 year over year. 26% year-over-year. Among over 30,000 employees at Xiaomi, nearly half are R&D personnel. In terms of SmartEV and other new initiatives, we have invested over 1.8 billion in the past three quarters. Our SmartEV business is advancing smoothly and has established an R&D team of more than 1.8,000 professionals. We believe the global total addressable market for Smart EV exceeds trillions of dollars, while the current market is still very fragmented and very early in its development, leaving plenty of room for us. We have been actively promoting sustainable corporation development In August 2022, Forbes China released its first China ESG50 report to recognize companies that follow best practices in ESG and it lists Xiaomi on its China ESG50 list. In October 2022, Xiaomi was selected into Forbes World Best Employers list for the second consecutive year. In addition, we participated in education equality initiatives in Malaysia, Thailand, Vietnam, and Singapore, providing digital education improvements to local students. We believe it is necessary for us to spread ahead social responsibilities, even against macroeconomic headwinds. In the coming new year, despite the challenges at home and abroad, we remain confident in our ability to seek certainty in times of uncertainty. Thanks to our relentless investment in our core capabilities, our global scale advantage, and our strong cash resources. More importantly, we will remain agile and strategically balance profitability and scale while improving operating efficiency. Meanwhile, we will commit to investing in R&D and long-term driving forces to lay the foundation for healthy and high-quality sustainable growth. And together with all of you, we will fall against the headwinds weather every season, as no winter lasts forever, and no spring skips its turn. With that, I will hand it over to our CFO, Allen, to discuss our third quarter results in greater detail. Allen, please.

Thank you, Xiangzhou. Good evening, everyone. Let me go into more details of our third quarter performance. As Xiangzhou mentioned, in the first quarter, our performance remained resilient despite the ongoing macroeconomic headwinds. Our revenue reached 70.5 billion RMB, and adjusted net profit was 2.1 billion RMB this quarter, which included expenses of 829 million RMB for Smart EV and other new initiatives. Our revenue, as well as our adjusted net profit, both increased quarter over quarter. Our free business segments remain healthy. We ranked number three in terms of global smartphone shipments. The number of connected devices on our AIoT platform increased by more than 40% year over year. And the number of our UIMAU again hit record high, reaching $564 million globally and $141 million in mainland China. In the third quarter, Our global smartphone shipment achieved market share of 13.6%, and our smartphone shipment has increased sequentially over the past two quarters. We have continued to steadfastly execute our smartphone premiumization strategy, and our newly launched smartphone models have earned widespread positive reviews. In the third quarter in mainland China, our premium smartphone shipments increased 14% year-over-year, and our smartphone ASP increased 9% year-over-year. Xiaomi 12S Ultra, which was launched in July, and Xiaomi Mix Fold 2, which was launched in August, generated over 98% and 99% positive ratings respectively on JD.com. During the Double 11 Shopping Festival, Our cumulative paid GMB from all sales channels exceeded 17 billion RMB, and we ranked number one among Android smartphones in terms of both sales volume as well as sales value on each of the major platforms, including Tmall, JD, Pinduoduo, and Douyin. In the AIoT categories, We achieved 147 number one rankings by sales volume or sales value on Tmall and JD. We also continued to make steady progress in our offline retail business despite the continued COVID-19 outbreak, which caused the temporary closures of many of our stores during this quarter. Our retail store GMV increased by 12% year over year during the festival, which included 190 million GMV from our integrated online to offline business. Our integrated online to offline business includes on-demand delivery and in-store pickups from our offline stores based on orders placed online. We continue to increase our R&D investment to strengthen our core competitiveness. In the first quarter, R&D expenses reached 4.1 billion RMB, increasing 26% year-over-year. And the number of granted patents to us exceeded 29,000 globally. We continue to invest in our technology talent, and the proportion of R&D personnel to total employees increased to 48%. Furthermore, Boston Consulting Group named Xiaomi as one among the 50 most innovative companies of 2022. Now let's dive deeper into each segment, starting with smartphones. Ongoing macroeconomic headwinds continue to affect overall smartphone industry demand. And this quarter, global smartphone shipment was the lowest per quarter shipment since 2014. Against this challenging backdrop, our global smartphone shipment increased by 2.8% quarter over quarter to 40.2 million units. achieving a second consecutive quarter of sequential growth. And our smartphone revenue reached 42.5 billion RMB. We are committed to bringing cutting-edge technologies to the mass market at affordable prices. In October, we launched the Redmi Note 12 series, and orders exceeded 350,000 units within the first hour of launch. Within this series, The Redmi Note 12 Discovery Edition is equipped with a 200-megapixel camera and a proprietary 210-watt hypercharge solution that can fully charge the smartphone in only nine minutes. Further demonstrating our pioneering technology. We also launched Xiaomi CD2 with lightweight and attractive design. It is our first smartphone equipped with dual ultra high-definition front cameras which enhanced self-portraits and videos with natural realism and depth of field. We continue to advance our overseas businesses and maintain leading positions in major global markets. In the third quarter of 2022, our smartphone shipment ranked among the top three in 52 markets and among the top five in 64 markets. In this quarter, our market share improved year over year in Europe the Middle East, and Latin America. In Europe, we ranked number two with market share increasing 1.8 percentage points year-over-year to 23.3%. In the Middle East, we ranked number two with 17.6% market share, an increase of 1.3 percentage points year-over-year. In the emerging markets, we ranked number three in both Latin America and Africa. Our global scale and competitive products have attracted more overseas carriers to partner with us. At the same time, we continue to deepen our relationship with existing carrier partners. In this quarter, our carrier channel market share in Europe increased by 1.7 percentage points year-over-year to 19.9%, and our carrier channel market share in Latin America increased by 1.5% year-over-year to 16%. Furthermore, our smartphone market share through carrier channels ranked top three in 38 overseas markets. Let's look at the IoT business. Connected users and devices on our leading consumer AIoT platform continue to grow. As of September 30th, the number of connected devices on our AIoT platform reached 558.3 million, up 40% year-over-year. The number of users with five or more connected AIoT devices reached 10.9 million, up over 35% year-over-year. In September, MAU of our AI Assistant grew 9% year-over-year, and MAU of our Mi Home app grew over 20% year-over-year. In this quarter, revenue from our AIoT business decreased 3.8% quarter over quarter to reach 19.1 billion RMB, primarily due to decrease in revenues from AIoT products, such as air conditioners, partially offset by increase in revenue of smart TVs and laptops. Our smart TV business continued to maintain a leading position globally. In the third quarter, Global shipments of our smart TV grew year over year to reach 3.3 million units against an overall industry decline. We maintained our top five global ranking as overseas smart TV shipment achieved a quarterly high. Overseas shipments, excluding India, grew over 40% year over year. Our smart home appliance business achieved robust growth in the third quarter of 2022, with revenue growing more than 70% year-over-year to achieve another record high. Our air conditioner shipments exceeded 1 million units, increasing over 70% year-over-year. Our refrigerator shipment exceeded 340,000 units, an increase of over 150% year-over-year, achieving a record high. In October, we launched our first Redmi Pad product with a low blue light, eye protection display, offering a comfortable viewing experience. During the same month, we launched Xiaomi Book Air 13, our first laptop with a screen that can be flipped 360 degrees to meet our users' needs in multiple settings. We continue to maintain our lead in wearable products. In the third quarter, our TWS year bus shipments ranked number three, and our wearable bands ranked number two in mainland China. We have been enhancing the connectivity between our wearable products and smartphones, which has made our premium wearable products more appealing and more competitive. In August, we launched our premium Xiaomi Buds 4 Pro and our premium Xiaomi Watch S1 Pro. Among the connected users of these two products, over 50% are users of our premium smartphones. We continue to explore new blockbuster AIoT products. In September, we launched two energy-related IoT products. First, the Mijia outdoor power supply 1000 Pro. which is equipped with a 1 kilowatt hour capacity and 1.8 kilowatt high power output, satisfying the power needs of outdoor activities and home emergency use. Second, we launched the Mijash solar panel 100 watt, which efficiently captures solar power in affordable portable design and is water and dust proof. Now let's look at internet service. In this quarter, our global MAU reached 564 million, an increase of 78 million year-over-year. And Mainland China MAU reached 141 million, an increase of 14 million year-over-year. In addition, our global TV MAU exceeded 54 million, All few metrics achieved record highs. In the third quarter, our Internet services revenue remained stable and reached 7.1 billion RMB, an increase of 1.4% quarter-over-quarter. While macroeconomic and industry-specific headwinds presented challenges, our global advertising and gaming revenues still achieved quarter-over-quarter growth. Notably, This year our gaming business has achieved three consecutive quarters of year-over-year growth. As our overseas user base continues to expand, our overseas internet services revenue achieved another quarterly high of 1.7 billion RMB, up 17.2% year-over-year, and accounted for a record high 24.2% of our total internet services revenue. Benefiting from diversified monetization channels, our advertising business in mainland China and overseas both achieved quarter-over-quarter growth. In mainland China, revenue of brand and performance-based apps increased, driven by a more diversified advertiser base and higher monetization efficiency. Overseas, our performance-based advertising revenue and pre-installation revenue Both, again, hit record highs, driven by Zipper collaborations with global partners and strong content operators. In the third quarter, our mainland China TV internet services revenue reached another quarterly high and accounted for 15% of mainland China internet services revenue. As we further expanded our content offerings, our TV pay subscriber exceeded 5 million, providing an additional source of recurring revenue for our smart TV business. Let's move on to more detailed financials. In the first quarter, total revenue was 70.5 billion RMB, as mentioned before, and 50.5% came from overseas overall. Smartphone revenue was 42.5 billion RMB, IoT revenue was 19.1 billion RMB, and internet services revenue was 7.1 billion RMB. In the first quarter of 2022, overall gross margin reached 16.6%. Smartphone gross margin increased quarter over quarter to 8.9%, mainly due to improvement in gross profit margin in mainland China. IoT gross margin decreased quarter over quarter to 13.5%, mainly due to enhanced promotional efforts of our smart TVs overseas, as well as increased impairment provisions on our inventory. Internet services gross margin decreased quarter over quarter, mainly due to decline in gross profit margin of our fintech business and higher revenue contribution from our gaming business. In this quarter, our operating expense ratio decreased 0.3 percentage points quarter over quarter to 14.5%, mainly due to reduced promotional activities. Excluding EV and other new initiative expenses, our operating expense ratio would have been 13.3% in the first quarter, a decrease of 0.7 percentage points compared to the previous quarter. As we continue to increase our R&D investment, our R&D expense ratio reached 5.8% this quarter. In the past year, we have made progress in managing our expenses. Our total operating expenses this quarter reached 10.2 billion RMBs.

And ultimately, it's...

Thank you.

... ... ... ...

ESG initiatives. We have been actively promoting sustainable corporate development. In August, Xiaomi was selected to Forbes China's first-ever China ESG 50 list, which recognizes our efforts in ESG. In October, Xiaomi was named as one of Forbes World's Best Employers for the second consecutive quarter, demonstrating strong endorsement of our practices in talent development as well as social responsibility. We have been actively promoting public welfare initiatives. We responded rapidly to recent natural disasters and made donations to support those in need. In addition, we have been promoting education equality initiatives in countries such as Malaysia, Thailand, Vietnam, as well as Singapore. This concludes our prepared remarks Let's 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 can allow more investors to ask their questions. Meanwhile, we'll read your question in Mandarin followed by English recap. Thanks.

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

Thank you, Mr. Yang and Mr. Alan. We are going to share the financial and financial situation of the third quarter. My question is about the mobile phone. 我们看到从二季度开始 整个智能手机行业都开始了去库存 能否请管理层和我们分享一下 公司在去库存上的一个最新进展 最好能分主要市场 比如中国 印度 欧洲 和我们谈一谈最新的库存情况 同时公司怎么看四季度 整个智能手机的需求 最新的行业情况变化 对于小米四季度的智能手机毛利率 会有哪些影响 Xiaomi has started smartphone inventory stocking since the second quarter this year. Could you share with us the latest progress of the stocking and inventory balance in China and other key overseas markets, including India and Europe? Based on latest observations, what's the smartphone demand outlook in the fourth quarter? And how does the latest industry dynamics affect your gross margin profile in the coming quarters? Thank you very much.

Thank you, Andy. I think if you look at the numbers, I think we are making good progress in decrease our inventory level. So the level decreased by 9% year over year and quarter over quarter. I think it's a It's a very good signal. But regarding to how long to get to the normal level, I think we will continue to utilize the promotion season, like in Q4, to clear the inventory. So we think our inventory level right now is in progress. I think probably end of this year or maybe the first beginning of next year, we'll get to the normal level. We are working very hard on that. By the way, the inventory actually is, I think, I think it's a lot of inventories on the, it's not that inventory. Actually, we are confident that we can clear them up. But it takes a little while.

I think to answer your, to supplement the answer from Xiangzhong Andy, as you can see from our reported inventory levels, the raw material inventory has stayed at a relatively healthy level. It has increased slightly this quarter because we have to stock up on some of the new SOCs for our product in the second half of the year. So that's the raw material part. But overall, we think that it is at a pretty healthy level. On the finished goods side, I think as we mentioned last quarter, after the 618 event, our infantry in China has largely been normalized, and that hasn't changed this quarter. India, after Diwali, has gone down to a pretty healthy level, although I think it might take another quarter or so for that to be cleared. And in the overseas market, I think it's what Shandong is saying, it will be our major focus for this upcoming quarter as there are several large promotional events that is happening in the international market this quarter. So, as such, I think that we are on the right track. As you can see, our finished goods have come down significantly between the last couple of quarters as part of our efforts. In terms of gross margin, our Q3 gross margin has increased from our Q2 gross margin, partly due to the fact that our The premium products that we launched in China in Q3 carried pretty healthy margins. And as such, I think that that has helped our growth margin overall. In terms of how we look at Q4, we hope that our growth margin will continue to improve. I think, you know, as we work through our inventory level and as we have less impact of provisions of our existing inventory. We think that our gross margin on our smartphone business will get back to a much more healthier level in Google.

Got it. Very helpful. Thank you very much, Jiangzuo and Alindong. Thank you. Thank you, Andy.

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

Hi, Mr. Xiang, Mr. Allen. Good evening. Thank you for answering my question. My question is about the overseas market. Because I see that the overseas market seems to be a relatively large growth track in the mobile phone and IoT track. At the same time, Internet revenue in the overseas market seems to have a slowdown in the first and second quarter. Thank you, Benjamin, for taking my question. And my question will be about the overseas market, which appears to be a growth drag across the smartphone and IoT business lines. And also, if you look at the Internet services revenue, overseas markets, also show a sequential slowdown compared to the first and second quarter this year. Could you maybe share some outlook on how we should look at the growth for the overseas market across different business lines, and specifically for the IoT market, what is the regional breakdown? Thank you.

Yeah, thank you, Timothy. I think we are... In some of the global markets, like Europe, we are growing our market share. Right now, in the European market, we are 23%, even with the macroeconomic downtrends in Europe. So we think we will try to maintain our growth there. And also... The Latin America, we also see the positive trend. And overall, although the global smartphone shipment dropped about 10%, but because of our scale, I think we will find the growth area, continue to put our resources there to grow our business there. So, yeah, Alan, probably you can.

Yeah, look, I think, Timothy, I'll get to the Internet first, and then I'll get to the IoT after. On the Internet side, I think, you know, it's no denying that overall the global ad market has also been not in a particularly robust form this year. I think if you look at the global advertising market, it hasn't been growing that much for this year. So I think despite that, I think given that our users have continued to grow, we have managed to increase our revenue year over year, as well as quarter over quarter. I think that that's something that I think is the overall market that has slowed down, that has caused our internet market internet services revenues have slowed down, but given our user growth is still quite healthy, I think we've been able to outperform the market. I think that's the first one. On the IoT side, obviously, we are certainly hurt by the macroeconomic impact that has impacted the global economy, especially in Europe. I think that the inflation... the forex fluctuations, et cetera, that means that the European demand has softened quite significantly in the IoT market. And as a result, some of the categories like, you know, vacuum robot kina, like our scooters, have seen quite meaningful decline in terms of revenue. And as such, I think that that's something that we've been very, you know, We've been very closely monitoring the situation over there. And obviously, as Xiangzhou mentioned in his opening remarks, we haven't seen that much significant changes in the third quarter. I think we need to, as a result, I think we need to focus on some of these major events that are coming up, Black Friday, Christmas, et cetera, to clear out some of our inventory in the channels to prepare us for next year. And then the next year, we also look forward to kind of doing more product, introducing more SKUs to the international market.

Thank you. And our next question has come from Kina Wong with Credit Suisse. And Kina, please go ahead.

Thank you, Alan. I think I've asked a lot of questions. That's the current business. I'd like to ask about the progress of EV and New Initiative. The cost is 8.3 billion. Of course, there is a control in EV. 那想说那四季度这边 我们费用应该是怎么样去预测会比较合理 然后因为明年也是一个投入期 那整个原先的计划要投的100亿这个 投资在这个生产之前的一个计划 应该我们现在要怎么拿捏呢 就是在现在这种这个MACO的状况 那另外一块就想了解一下 EV 在现在的进度怎么样 因为之前可能跟大家有update了一下 ADAS 这一块的一些field test 就是一些测试 那我们接下来要看到的一些这个 milestone 会有哪一些在明年什么时间点 也是想请教一下 那 let me translate the question in English So I just wanted to ask any directions or like expectation on the expenses for EV and other new initiatives in the fall quarter and the 2023 because the original expectation to spend around a 10 billion RMB before the production of EV is that still on track or it could be like something adjusted due to the macro situations and what should we expect on the next milestone for the EV data, given we know that the ADIS field test is actually ongoing, and then what should we expect in the coming field quarters, time to time? And, yeah, thank you.

Thank you. I think, first of all, the EV expenses will continue to ramp up, right, as we're getting closer to our launch. which we're still expecting in the first half of 2024. So as you can see, in the past three years, our expenses have ramped up gradually, and we expect that to continue in Q4 of this year. So I think that that's the overall. So I think that that's the first question. As we continue to invest in our headcount, as well as our CapEx. I think that expenses will continue to increase. Right now, our R&D team has already exceeded 1,800 people. So we continue to increase the headcount in our EV business. In terms of the development, right now we haven't talked about the development in the public. So probably we'll save that to still in stealth mode at this point. So we have not talked about some of these developments in public. So hopefully you understand. I think we're trying to stay in the low profile now. I think the two things is we continue to expect our first cut to be mass produced in 2024, first half. And then second is our number of employees have exceeded 1,800 people.

Yeah, got you. I just wanted to check if there's any update, but yeah, yeah, we understood. Thank you.

Thank you. And our next question is come from Sohee Su with UBSN. Sohee, please go ahead. Sorry, Zoe, please go ahead for your questions.

Oh, sorry. Can you hear me now? Hello?

Yes, please.

Hi, yes, sorry. Yeah, I think most of my questions were answered earlier, but still want to double check whether you'll be able to share any considerations regarding the manufacturing side of the EV business, whether it will be internal or external. Any comments will be very helpful. Thank you. 我知道大部分前面的问题已经问过了 然后可能可以分享的也有限 但是就想还是想请教一下翔总或者Ellen总 就是在EV的生产端我们有没有什么考量 是可以跟我们参考的 是会内部的去完成制造 还是说会考虑外部的合作 如果有任何可以分享的话 非常感谢 谢谢

We don't have any particular update at this point. I think obviously we are considering different alternatives and we are considering all the possible alternatives. So it's still under consideration.

Sure. Thank you.

Thank you. And our next question is come from Huang Yayun with Citex. And please go ahead.

Thank you, host. Thank you, Mr. An. I actually have a small question. It's about this mobile phone, the毛利率. I see that in the same way, the毛利率 is still falling. And in the same way, the improvement is not very obvious. From the past experience, in normal circumstances, Q2, Q3, Q4, in general, Q3 Q3 profit margin of smartphones dropped a lot and there's no significant improvement quarter on quarter? And what are the main producing factors? And how about the trend of the first quarter?

Thank you. Yeah, I think there are a couple of factors, right? Number one is obviously last year, we're still enjoying a global supply constraint, right? As a result, I think that our mobile and our smartphone shipments as well as our smartphone growth margin. We were enjoying, you know, pretty healthy growth as well as margin. I mean, this year, the situation has obviously changed quite dramatically. So I think that the overall year-over-year, there's a decline, I think, for that reason. In terms of quarter-over-quarter growth, I think that there are, you know, if I look at the three regions, three major areas, right, number one is our China. Our China business, if you look at the gross margin, it has gone to a pretty healthy level given that we have launched some of our premium products over in China. And as you said, there have not been as much promotional events in the first quarter as compared to the second quarter. I mean, that's the first one. Second area is India. So obviously India, third quarter is Diwali, right? As we're preparing for Diwali, as we are launching into Diwali, the gross margin in India in the third quarter tends to be much lower than the second quarter because of the, as well as the fact that we are trying to clean up our infantry, some of the infantry in India. So as a result, I think quarter over quarter, we've seen a decline in terms of gross margin. Overseas market, I think it continues to remain healthy, despite the fact that we've been trying to also make a big effort in terms of clearing our inventory over there. So the overseas market, excluding India, remains reasonably healthy. Again, there was some degradation compared to last year, given that we've been trying to clean up our inventory. as well as the fact that there's some degradation probably over the last quarter, again, because we are making a more enhanced effort to clean up our inventory. And as a result, I think overall you get the result of China better, you know, much better, India a little bit worse, and then overseas kind of flat to a bit worse-ish, right, to get to that level of Q over Q comparison. Does it make sense?

谢谢。 Thank you. And our next question is come from Wang Hanjing with CICC. Hanjing, please go ahead.

好的,谢谢蒋总,艾伦总。 这是我的问题啊,我这边有一个小的问题吧, 就是想请教一下我们智能家电那块的情况。 We see that revenue of smart large-term appliances increased over 17% year-over-year. which is much higher than the 25 growth rate in the first half of the year. So could management share the reason for this strong growth, and what is your long-term development strategy for this category? Thanks.

Yeah, I think... Thank you for the question. Actually, I think for the air conditioner, actually, we have a very good product, but also we thank for the weather. So actually... We ship a lot of air conditioners to the market because of the weather and a very good product. And others, we are also working very hard to find the best setting features, refrigerator and washers. So they are also doing good as a start. Actually, the good progress for us is we Our Mi Home, actually offline channels, actually sell a lot of big appliances, wide product, through our offline channels. This is also a very good signal so that we can sell not only smartphones, wearables, but also big appliances in our offline channel. And also, We are using the platform, the internet platforms, online platforms, to combine the online platforms with our offline stores. That's also helped to drive the revenue growth for the bigger appliances.

One of the key things, as Tango mentioned, is obviously whether... In China, it was extremely hot in the third quarter. And as a result, our air conditioners, despite dropping, volume dropping, shipment dropping, Q over Q, but still a massive increase from our Q3 of last year because of the supply and insertion demand due to the weather. But at the same time, I think we are getting more competitive in our products. Last year was obviously... We're still ramping up this business, and as a result, I think you've seen a significant increase in our growth. Also, I think that in terms of strategy, I think we've been much more focused on premium products this year. I think if you look at our strategy going forward, we'll continue to focus on the premium segment of these white goods products, which means that we're probably more focused on higher ASP products And as a result, it will also help our overall revenue as well as ASPs.

Okay, thank you.

Thank you. And our next question has come from Le Ping Huang with Huatai Security. Le Ping, please go ahead.

Okay. 我想问一下蒋总关于2023年的手机市场的一些看法 您在opening remark上提到上个季度手机出货量是 9年以来最差的三季度 我也很吃惊这个数字 您作为手机市场老兵或者非常有经验的一位 管理者怎么看明年的市场 我们到底需要什么样的功能 才能吸引消费者重新来买手机 I have a question about the smartphone market outlook in 2023. I was quite surprised that Xiangzhu mentioned that this last quarter was the worst quarter in the last nine years. and in the smartphone market. So what are the new features we require to attract this consumer to buy the new phones? And what are the opportunities and challenges for Xiaomi to achieve sustainable earning growth in this market?

Thank you. Thank you for the question. Actually, this is very much related to the global market. the total size of the market. So in the last quarter, actually, the global market dropped almost 10%. So that's why it's the lowest quarter in the past nine years. And also in China, actually, the total market dropped 11%, even worse. But I think it will get back to the normal. But we still see a lot of uncertainties because of the global economy. Many, many factors to impact the total market. For example, the inflation and also the U.S. versus other currencies. So we are very closely monitoring the dynamic of the global trend. But we remain confident because I think with our strategy, we are going to continue to invest in the mid- and high-tier products. But at the same time, we will also continue to offer a lot of very, very competitive market for the global users from the entry level to meat level products. So we are prepared for the recovery. So we remain confident on that. So we just need to closely monitor the dynamic. Another area we can see is the Q3, if you compare Q1, Q2, Q3, you can see our Sherman steadily grow quarter over quarter, although the growth rate is not very high. But you see the resilience of our market.

So what will be the normal level of smartphone shipment globally based on your experience? So this year, it's a very abnormal level because of the macroenvironment.

Yeah, I think it's just 10%, right? If you want to get normal, you have to grow 10% from current level and then steadily get to the normal. So we're still in a lot of uncertainties. We don't know when we can see the recovery. But we're seeing that the rate of declining is kind of stabilized.

OK, thank you. Very clear.

Thank you. And our next question is come from Goko Hariharan with JP Morgan and Goko. Please go ahead.

Yeah, thanks for taking my question. My question is slightly similar to what Leping asked. So for China smartphone, if you look at the numbers this year, we are running at about 270 to 80 million units. Overall install base is 1.3 to 1.4 billion users. So roughly we are running at something like a five year replacement cycle, which we have never really seen in the past. So could you talk a little bit about what is your expectation for what is a steady state number for China smartphones? And when do you expect a bit of a recovery? Like what are you penciling in for 2023 for China smartphones? Do you expect some recovery next year? Or you think that it's still going to be relatively muted compared to 2022. Thank you.

Well, I think Coco, I think to answer your question, I think Xiangdong actually answered a very similar question just now.

I think very specific to China, to be honest.

Right. Your question is China or your question is

Yeah, specific to China, specific to China, because the replacement cycle in China at least numerically looked extremely long, four and a half to five years, which I think we have never seen in any market. So just wanted to understand your perspective on this.

Well, look, look, you know, I think that we think that this year, we think that next year, right, will roughly be the same as this year, I think at best. I'm not sure that the 1.3, 1.4, I think that's something that we need to verify that. But obviously, from an overall macro perspective, we expect that next year will probably stay at a similar level. One thing is obviously the development of a second-hand market in China. Some people are buying second-hand phones in China. The second one is obviously the extending life cycle of each phone. But, I mean, I've seen some surveys recently that suggest that it's probably two to three years as opposed to four to five. But I think against this macro environment, we continue to stay relatively conservative in terms of estimating the overall size of the market for next year.

So based on the third-party company, DCI's data, actually the life cycle for a smartphone right now in 2022 is 27 months compared to 22 months in 2017. So that's their thing. OK.

That's helpful. Thank you.

Thank you. And we will now invite the last question. And the last question comes from with Orient Securities. And please go ahead.

Hi. 我这边是关于那个零售渠道这一块 就是我们的这个线下渠道 在今年也是不断的受到这个疫情的影响 特别是在中国这边 那如果说疫情在明年结束了 那对于我们的这个高端手机 还有包括IoT的产品 会有什么样的一些正面的影响 因为我们知道这个高端手机 还有IoT 可能在线下渠道 会有一个更好的用户体验吧 Currently, our retail channel is facing pandemic challenges. If the pandemic is over next year, what will be the positive impacts to the sales of premium phones and IoT products? Thank you.

Yeah, I think if we can solve the pandemic issue So I think you will see a very positive effect. Because right now, we have almost 2,000 stores staying closed because of the pandemic. And also, right now, based on the latest data, actually half of our high-end smartphones are shipped from our offline channels. So right now, we maintain about 10,000 stores. So you will see a very good potential to grow our smartphone if the pandemic is over. for the year 2023?

Can we propose it will be highly related to the number of stores? Like currently we have 10,000, and if we increase the number to 12,000, then can we expect something like 20%? Or how do we... quantify the number?

I think right now our strategy or plan is to optimize the store. Optimize the, actually to improve the efficiency of each store. Not just simply add the number of stores, but we will do optimization for our geographic coverage. and the focus on increasing the efficiency of each store. Of course, compared to our competitors, we have much less stores in China, but we still believe we should. There is a big room for us to improve our efficiency of each store. That's the focus for us right now.

OK, got it. Thank you, Xiangzuo.

Thank you.

Thank you.

Thank you. And this concludes today's conference call. And thanks again for joining us. And you may now disconnect.

Thank you very much.

Thank you.