Xiaomi Corporation
Q3 2020 Earnings Call Transcript

Published: 24 Nov 2020

[Steve Lin:]

Good evening, ladies and gentlemen. Welcome to the Investor Conference Call hosted by Xiaomi Corporation regarding the company’s 2020 Third Quarter Results. I am Steve Lin, Director of Corporate Finance and Company Secretary. Before we start the call, we would like to remind you that this call may include forward-looking statements, which are underlined by a number of risks and uncertainties 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, company’s financials prepared in accordance with IFRS.

[Lei Jun:]

Thank you. Thank you, Steve. Hello, everyone. Thank you for joining our third quarter 2020 earnings call. Before my presentation, actually, I want to take this opportunity to introduce our new member, Alain Lam, who is joining us about one and a half months ago. So, we're happy to introduce him as a new friend -- our old friend to you all. I think many of you may know him well, but yeah -- say a few words.

[Alain Lam:]

Hey, everyone. Good to meet you all over the phone. I joined Xiaomi on October 9th. It's been a very interesting seven weeks since I joined and I look forward to sharing more with you guys, both online and offline. Thank you.

[Lei Jun:]

Thank you. Thank you, Alain. So, actually, this quarter, we delivered another -- a very solid result across all our business segments as we relentlessly focused on the execution of our core strategies. In this quarter, we posted historical highs in both revenue of RMB72.2 billion and adjusted net profit of RMB4.1 billion up 34.5% and 18.9% year-over-year respectively. Our commitment to our core strategy of Smartphone×AIoT continue to underpin our robust performance. I'm very pleased to share that our global smartphone shipments rose to number three in the third quarter of 2020, first time since 2014, actually is a record high market share is about 13.5%. That's a record high in Xiaomi history. We continue to execute our dual brand strategy driving our success in the premium smartphone market, supported by our well received two premium smartphone models, including Mi 10 series, we sold more than 8 million premium smartphones as of October 31st, 2020, driven by a higher percentage of sales from our premium smartphone models, our smartphone ASP maintain an upward trend year-over-year, especially in Mainland China. Our relentless effort to pursue technological innovation bolsters our remarkable achievements in the smartphone market. For example, one of our primary R&D achievements is the camera performance. We achieved the number one position in DXOMARK two times this year. These achievements were made possible as a result of our dedicated team of close to 1,000 camera-focused engineers in nine global R&D centers across the world, from Beijing to Paris, to Tokyo to San Diego.

[Alain Lam:]

Yes, thank you, Lei Jun. Hello, everyone. As I said before, I'm very honored to join this big family of Xiaomi and to share with you our latest results. As you may have read from our press release in the third quarter of 2020, we achieve a record revenue of RMB72.2 billion, which is up 34.5% year-over-year. Adjusted net profit for the period also hit a record high of RMB4.1 billion, which was up 18.9% year-over-year. All of our business segments achieved robust growth, which demonstrates the strength and the resilience of our business. I'd like to share with you some key updates and then walk you through each of our segments performance for the third quarter. The first point that I would like to highlight is our record-breaking performance in global smartphone shipments. In the third quarter, we regained our top three position globally, with an all-time high market share of 13.5% and year-over-year growth of 44.6%, which was the highest among the top five smartphone manufacturers.

[Steve Lin:]

Thank you, Mr. Lam. We'll now proceed to the Q&A session. Please limit your questions to maximum two so we can allow more investors to ask their questions. Thank you.

[Operator:]

Thank you. And our first question is come from Kyna Wong with Credit Suisse. Please go ahead.

[Kyna Wong:]

Thanks Alain, Steve, thanks for taking my question. My first question is about the -- in response to the Honor's , you were independently going forward, what's Xiaomi's strategy to compete with the separated brand, do you see this an opportunity to beat your peers? My second question is about Internet business. In the second quarter, we noticed that the gross margin declines were loss due to my strong gaming which has a lower gross margin, but this quarter we see that Intel and also gaming mix likely to decrease. What's the driver behind to see these gross margins staying relatively stable sequentially? Or should we expect when, like the mix to improve going forward? And the Fintech, what is the strategy for the Fintech going forward because of the some kind of like regulatory change. And also, we see that you're rebranding the business. So what's the strategy going forward in that? Thank you.

[Lei Jun:]

Okay. Thank you. Thank you for the question. So, actually, we heard the news from the media. So, actually, Xiaomi was born from the very competitive environment back to China 10 years ago. So we are -- we have a strategy to expand our business, not only in China, but to many, many different countries in the markets. I believe we have a right strategy. The strategy, we will focus on the strategy we are having now, which is number one from the product side. So we got the Smartphone×AIoT strategy focused two major areas. Smartphone as a cornerstone, but also the AIoT, millions of consumer IoT products in our system so that we can have a multiplier effect, we'll do that. Also, we will continue to invest into technologies like a camera, like a chargers, continue to invest into the technology area, so that we can have the ability to keep inventing new things to offer – continue to offer a good product not only for China domestic market, but for the overseas market as well. I think we will focus on those strategies. We will focus on the growth potential, not only in China, but also in many different markets like Europe. As Alain just mentioned, we have achieved a significant growth in the last quarter, actually, since early this year actually we see the continued growth of our business in many, many markets. European market is one good example, and also Latin America, and also Southeast Asian countries, while we are keeping our position in Indian market. So we are very confident, we will grow market share in those markets. And also, we will definitely monitor any market dynamics to us as a very normal environment for us. I don't see any change in our strategy. We should focus on the product, focus on the customers and also focus on the channel -- channels, online channel and offline channels. So this is one -- this is our position. And then regarding -- a question regarding on the gross margin rates, I think you asked about, like with Fintech and gaming are growing slower this quarter, other than our gross margin improved, because traditionally, Fintech and gaming were lower gross margin, I think this was a good question. So, in the past few quarters, I think we explained that Fintech did have a negative impact to our gross margin, because of the regulatory environment together with COVID-19; we have additional credit allowance in the past quarter. We have been actively controlling the risks since then. And we have the close the following all the compliance -- compliance all the regulations on them, On the sort of the credit perspective, is on the upward trend. But I think this quarter we also talk about for gaming, because of the change in the customer mix, because gaming gross margin was lower this quarter. So, I think with all these factors together, the gross margin was flat compared to last quarter. We think the current gross margin reflect the current state of the business situation across each business segment Internet service. Going forward, depending on the product mix on how to -- so I think that's the answer to your gross margin question. Overall, Fintech, we believe having a stronger regulation is beneficial for the development in that entire industry. Since the beginning of our business, we have been closely following all the regulations; we have all the necessary licenses in related finance. We have been strictly following all the no matter interest rate on the different type of those relationships. So we believe internet, finance constantly to be very good business for us long-term. And in the additional to and we talked about in the announcement, the current focus in addition to retail finance, consumer finance, we're also actively to believe Supply Chain Finance, which we believe leveraging or large supply chain relationship and our technology capability should offer good growth prospects going forward.

[Kyna Wong:]

Thank you.

[Operator:]

Thank you. And our next question is comes from Leping Huang with CICC. Please go ahead.

[Leping Huang:]

Okay. Thank you for taking my question. So I have two questions. One is about the, your future room of growth in the smartphone business. So you outperform the market quite a lot in both in China and overseas. So -- and achieve a very good muggish in a few European countries. So looking forward where you think your major room of growth? And what is the reasonable market share you plan to achieve including Europe and in South America? This is my first question. And the second question is that we see that the internet business is roughly Q-on-Q flat at least since the beginning of this year. So how we should look the internet business going forward? And what's the correlation between the growth of your MAU and growth of your smartphone user base versus the internet? So how or the other way how many quarter we need to wait before we can see strong growth on internet? Thank you.

[Lei Jun:]

Yeah, thank you. Thank you for the question. The first question is regarding to the future growth, the trend. So, actually, I see very big room for us to grow. Although, we have achieved a very high growth rate in a quarter three of 2020. Given Europe as an example, right now, although, we reached the top three position in European market. Actually, if you look at the market share, we are still in the 12%, 13% range. So that means we have a big room to grow even in Europe, right? Right now we are -- another example is that right now, we are number one in Spain, right? Our market share in Spanish smartphone market in Q3 was about 34%. It’s a very high percentage. But compared to other regions, other countries, we are still below 20%, or in the 10%, 10-plus-percent. So, that's a huge growth areas. That's Europe. So -- and you’re talking about the Latin American market, it’s huge market, even bigger markets space for us to grow. Right now, we are only in the -- maybe -- in some countries we are 10%, some countries maybe below 10%. We see a huge potential. We are in Latin American market only a year, only one year. So we just established our partnership in the offline channels, online channels and carrier channels as well. So we keep investing in those markets. So we see -- also see a very big potential to grow. Indian market, we are -- right now we have -- we are number one for I think 13 quarters already. So we will -- we see in Indian market actually, there -- there's about, I think, 130 million to 150 million smartphones every year. But the particular growth areas at the same time, actually we have -- the Indian market, you can also see another 150 million feature phones. So that means, we have a lot of work to do, right? We should continue to innovate to make a very cost effective high-performance smartphones to serve the Indian consumers. We should go build the channels down to the countryside, the villages to serve the people there so that they can be equipped with a mobile internet so that we can -- we hope we can change their lives and help them to have a better life with the access to the internet. This is our plan. So overall, I think we have -- we're very, very optimistic about the future growth for the next maybe five years.

[Alain Lam:]

Yeah. And the second question regarding the flat fee on internet service revenue, right. So we talked about the reason for the slower revenue growth this quarter was mainly one because we're actively controlling the risk -- capacity. And second is because of the gaming business. And third is as mentioned, we see a very, very good momentum and a strong potential for user again. So I think we will focus more on user acquisition, then resulting on the monetization. We will focus more on user experience to gain more users. But going forward, we do see a lot of growth prospects for internet business. I think first, as you grow your shipment, you will start to accumulate more users. So with that, we see a very strong potential for that. And second, talk about this quarter our oversea internet service revenue grew rapidly. Overseas internet revenue grew over 75% year-on-year this year and accounted for about 12% of our internet service revenue already. And third, as we increase our shipment in the higher and premium smartphone market, based on our data, we do see smartphone advertising, smartphone internet service revenue on high-end phones as much higher than normal. So that would naturally also drive the ARPU. And fourth, we didn't talk much, but this quarter the TV internet service revenue was also very strong. As we continue to be number one in China in terms of smartphone shipments, we are accumulated more and more users. On the same time, we are improving our monetizing capability, so together we do see a very strong potential for TV internet service. We believe all of these will give us a very large growth potential for internet service business. But I think at the moment, as mentioned, I think focus is really on the user acquisition.

[Lei Jun:]

Yes, user acquisition is the most important thing. We don't even started the monetization in the overseas market yet. But you can see from our report, actually the internet revenue from overseas market grow very, very fast. But we definitely will focus on the user acquisition in the coming years.

[Leping Huang:]

Okay. Thank you very much.

[Operator:]

Thank you. And our next question is come from Piyush Mubayi with Goldman Sachs. Please go ahead.

[Piyush Mubayi:]

Thank you for taking my question. My first question is about the China MAU progression, which has dropped slightly on a quarter-by-quarter basis, even though your market share has gained quite significantly. And that is also not made progress when we look at it on a year-on-year basis. So how do we co-relate or how do we draw the correlation between customer improvement that we're seeing, and the fact that this line has not improved over the same period of time, despite the significant market share gains we've seen with your smartphone volumes? That's my first question. The second question concerns, how you think of market share on a worldwide basis as well as back at home. If you could just take us through, so you've got a peak market share in Spain in the 30s, you've got very high market share in India. And overall, you've done very, very well in many countries, how do we go from there to looking at your market share in the countries where you don't have that market share and going back to China overall market share as well as 5G market share. So if you could just give us a qualitative assessment of how you think through those points that would be fantastic? Thank you very much.

[Lei Jun:]

Thank you. Regarding to your first question is about the MAU, right. So actually, this has stabilized, the MAU -- our MAU is stabilized, is around 110, 108, 109, right. But the little difference is because of the time of the way you do the calculation of statistics, there's a time difference cost, but not the number difference, so stabilizes. We will continue to drive the local domestic China market share. So actually, China is a very unique market. So we are growing our market share online. But China has a huge offline market. And we need to build our stores, not only the Tier 1 cities, but we have to get into the Tier 3, Tier 4, Tier 5, Tier 6 cities, it takes time for us to build our Xiaomi stores, our authorized stores and also other stores have covered those rural areas. This takes a little time, but we will continue to drive the market share growth in the online channel. But at the same time, we have a plan to improve our offline coverage starting from this year. So it takes a little time. But in the overseas market is more complicated. Every market is different. So for example, in the European market, European markets, mainly, this is the offline market, online only represent, I think less than 10%. So -- but we're still working very closely with the online channels. Amazon, in many countries, cities in France for example, and also other online channels in Europe, use those channels to do a lot of marketing a lot of communications with our fans and customers. But at the same time, actually, we invest a lot in that in building the partnership with the traditional offline channels, which are the major channels for the smartphone sales. For example, a media market, media market is the largest, maybe the largest smartphone retail channel. So we have built a very, very strong partnership with the media market, in many, many European countries, from Germany, to Spain, to Italy, to many other countries, there are several others like a media market. So we also build our Xiaomi authorized stores. In overseas market, we have I think over 700 stores. So across the different regions, Europe, as I mentioned Europe is offline driven market. But if you talk about the Indonesia market, it's a -- thousands of the mom and pop stores, it's a IR market, you have to cover those hundreds of thousands of very small stores across the nation. So we use another strategy to cover those markets. We see very good growth from Indonesia market in Q3 that's the result of building a model to cover the IR channel in Indonesia. Indian market is similar, but Indian market has a very strong online channels and offline channels online channel close to 50%. So you need to have a more balanced approach, if you want to be successful in India. So it's a very different from country to country. I think we know we're through -- I think three years after we understand. We learn a lot from different models. So I think we'll continue to invest into different types of market. Right now, we have established a system to cover the major market, including Europe, Latin America, Middle East, and Southeast Asian countries, and India. So yes, we are -- we are very optimistic or confidence for the future growth, especially for the next two to three years.

[Piyush Mubayi:]

Thank you.

[Operator:]

Thank you. And our next question is come from Gokul Hariharan with JPMorgan. And please go ahead.

[Gokul Hariharan:]

Yes. Hi. Thanks for taking my question, and congrats on the good results. First of all, if you could give a little bit more color on the Fintech business, now that you are kind of reconfiguring the business, how should we think about the extent of some of credit pressures, etcetera? I think Alain you mentioned that some of the credit pressures are starting to kind of bottom out as we look at the next year or so, on the Fintech side. How do we think about the thrust of growth? Is it going to be still mostly consumer lending related? Or do we see more areas on the digital banks on the other areas like Supply Chain Finance, et cetera, start to become more prominent? That's my first question. Second question, I know that it is early days, but since you call out the overseas revenues for internet for the first time, and it's not a small number, either 12% of your overall numbers. Could we talk a little bit more in terms of the avenues of monetization that we are using in these overseas markets, given that we don't really have absolute presence in many of these markets, given the prevalence of global Playstore? Thank you.

[Alain Lam:]

Yes. Why don't -- hey, Gokul why don't take the first question on the Fintech business? As we announced about a month ago, with our new Fintech strategy, we are focusing on three areas, consumer finance being one of them. We are increasingly going into the supply chain financing, as we see a lot more kind of positive, regulatory headwinds in that market. But more importantly, we do believe we have very unique advantages in that area. And the third area is technology transfer, obviously, to use our technology to enable some more financial institutions to get into the supply chain financing side. So, on the consumer finance, as you have seen in our -- in our results, and in the past two quarters, we have been changing the loan balance, which -- we're seeing the light at the end of the tunnel, I think we're seeing improvement in that business, in the past few months. Supply chain financing is obviously an area that we are going to focus on, again, given the fact that we have pretty unique advantages in that area, given that a lot of them are either our suppliers, or suppliers of our 12 suppliers. So we've seen -- we've seen good data of their production in that area. And also that, a lot of them are rely on working capital to put their businesses, which we think we can help the process become more, more efficient using data, and using our technological advantage, technology advantages. So that's an area that, I think you'll hear more from us in the future about the progress in that area. I think that's something that we are -- we are -- we are quite focusing on. And then the third stage is obviously as the technology become more advanced, as the system become more advanced, we also want to export that technology to enabled our more, more financial institutions to join the game there. So that's the -- that's the Fintech -- that's the Fintech business. On the overseas internet businesses, yes, of course, of course, we don't have the advantage of some of the bigger players in terms of App Store, and what not, but we do have significant revenue coming from advertising, as well as from preload in that area at this point in time.

[Lei Jun:]

Actually, we haven't started the monetization business from the -- from the overseas marketing yet. But we have seen a very good result for some of our apps. So for example, the browser in some of the regions, our browser -- our browser has a higher MAU, than Google's Chrome. So that's a good signal for us. So right now, we are focused still on the user acquisition, number one. Number two, we want to -- we want to improve the user experience so that we can -- we can keep the customer in our ecosystem. So we continue to improve the user experience. So we continue to add to the user experience between smartphones and our IoT products. So that's why we launched several features, Mi Share right. With Share, you can easily use your smartphone to control your IoT devices, for example, music, right, you're getting closer to the smart speakers, AI speakers, your music will automatically make a transfer from your smartphone to the AI speaker, and vice versa, right? This -- the music in the -- in your home can easily transfer into your smartphone when you go out. So, this kind of feature and also we were using another technology kind of technology called UWB. So with your smartphone, you can easily point your smartphone to your TV, and then you can easily turn your smartphone to a controller or you can transfer your content from your smartphone to the TV, the similar feature. So, we will continue to improve the user experience so that we can keep the customer. And then we will think about the monetization in the future. But although, we have not started, but still see a very good trend for the internet, overseas internet revenue growth. Yes.

[Gokul Hariharan:]

Got it. Thank you. Thank you very much both Lei Jun and Alain.

[Operator:]

Thank you. And our next question is come from Frank He with HSBC. And please go ahead.

[Frank He:]

Hi, good evening, Alain and Lei Jun. Thank you for taking my question. So my first question is about your long-term sales momentum. Given we do see the second wave also wave COVID-19 across the globe. So do you see any sales impact in the past two months, especially in Western Europe? And, and also supply chain indicating some auto slowdown in Q4 in general, for Android 10. So, just wondering, if you really do see some similar type of seasonality. This is first question. And second question is about the your IoT GP margin because we reached a record high 14% GP margin in the segment, do we see -- it should be a new norm to learn to project your GP margin in IoT or they should be turned to low-teens in the coming few quarters? Thank you.

[Lei Jun:]

Okay. I can say for the first question, I can say like that, the COVID-19 definitely impacted our business in 2020, especially in the first quarter and the second quarter. We see -- we have seen the recovery from the third quarter. But it's definitely impact. But as I mentioned several times in the past, actually smartphone business kind of a resilient, right, people would need a smartphone, especially in the difficult time period. So demand is there. But we are that -- we are facing several challenges despite the COVID-19. For example, the supplier shortage -- supply shortage is the one and the COVID-19 definitely is another one. So we are closely monitor the status of the pandemic in Europe, in India. We hope that personally hope, actually, as a little optimistic, because the vaccine is almost ready. But this winter is going to be, I hope is going to be the last winter for the pandemic. So, we remain optimistic for the next year. As Alain just mentioned, we see the light at the end of the tunnel, right. So we are working very hard. We try to help in the Q1 -- try to help to solve the problem. The pandemic issues in China, in Wuhan and also we have done some things -- for India, even European countries with our technology and our effort. I think it will be over, it's a near term thing. Yes. The second question --

[Alain Lam:]

IoT margin -- as for the IoT gross margin, right. So I think Xiaomi we are having a very strong position in IoT, the whole IoT industry. We are having a lot of leadership in China IoT market across a lot of different categories. We are also expanding over the applied IoT market. So while we're doing this, you will see a lot of the products we are growing right now. For example, in the small home appliance category, these naturally have higher gross margins than some of the products we traditionally have, for example, like Notebook and TV. So I think on the product mix side this is pointing to benefiting on the gross margin. And the other number we share on this quarter is we're oversea IoT business also grew rapidly over the IoT tend to have higher gross margins than in Mainland China. So with that, also a benefit for gross margins, but overall, I think from IoT, again, it's very similar to what we talked about smartphone, I think is still relatively early in terms of the industry development. For us, the key is still getting used to improving the experience and to gain more user as opposed to really optimizing the gross margin. But I think despite not accurately doing so, because of the shipping product mix and the geography, it helps us on the gross margin.

[Frank He:]

Thank you very much.

[Alain Lam:]

Due to the time constraint, we will now take the question from the last investor.

[Operator:]

So, management and we don't have questions at this point in time. So, if you would like to any closing remarks to our investor.

[Lei Jun:]

Yes. I want to say thank you. So, we are happy to achieve the good result. But we are actually -- we are working very hard for to prepare for the Q3, and also more importantly the year 2021. There are challenges down the road. I think the supply shortage is this one of the issues near term. We're working very hard on that. And also we continue to hire more engineers to send more the people to different market and region so a lot of work to do. I want to take this opportunity to thank everyone in the call for your support, your understanding, and your questions to help us to help us to improve in many, many areas. Thank you.

[Steve Lin:]

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

[Operator:]

Thank you, presenters. Thank you for participation. The conference call has been concluded. Thank you for your participation.