Xiaomi Corporation
Q4 2020 Earnings Call Transcript

Published: 24 Mar 2021

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to Xiaomi's 2020 Fourth Quarter and Annual Results Announcement Conference Call. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to hand the conference over to your host today, Mr. . Thank you. Please go ahead, sir.

[Unidentified Company Representative:]

Good evening, ladies and gentlemen. Welcome to the investor conference call hosted by Xiaomi Corporation regarding the company's 2020 fourth quarter and annual results. I am Investor Relations Director. 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 the company's financials prepared in accordance with IFRS.

[Alain Lam:]

Thank you, . Good evening, everyone. Thank you for joining us today. I'm very pleased to say that our business has delivered a very solid fourth quarter to end 2020, and I’d like to probably share with you our latest business update. As you can see from the press release that we sent out a couple of hours ago, in the full quarter of 2020, we continued our full trajectory as our revenue grew 24.8% year-over-year to reach RMB70.5 billion. We also recorded strong growth in our adjusted net profit, which increased to RMB3.2 billion, which represents a year-over-year growth of 36.7%. In 2020, we achieved record revenue of RMB245 billion, which is up 19.4% year-over-year in a very challenging market, while our adjusted net profit for the period increased to RMB13 billion, which is a record for us and a year-over-year growth of 12.8%. Overall, our business segment delivered solid growth, reflecting the resilience of our business model in a very challenging market. I would also like to highlight the strong performance of our smartphone business in 2020. In particular, in the last quarter of the year our global smartphone shipment maintained our top-three position with a market share of 12.1%, and we achieved the highest year-over-year shipment growth among the top five smartphone companies. Moreover, we expanded our global footprint. As of December 31, 2020, our smartphones were sold in more than a hundred countries and regions globally. We continue to gain our market share in Mainland China. Smartphone shipment rose to 12.2 million units in the fourth quarter of 2020, according to Canalys from 8.1 million units in the fourth quarter of 2019, which was up 51.9% year-over-year. Correspondingly, as you can see from our presentation, our market share in Mainland China rose to 14.6% in the fourth quarter of 2020 versus 10.7% in the fourth quarter of last year. We continue to strengthen our position in the premium smartphone market. In December, 2020, we launched our flagship Mi 11, which was the world's first smartphone to feature the Snapdragon 888 chipset. The shipment of Mi 11 in Mainland China surpassed 1 million units within 21 days of launch.

[Unidentified Company Representative:]

Thank you, Alain. We will now proceed to the Q&A session. Please limit your questions to a maximum of two, so that we could allow more investors to ask their questions.

[Operator:]

Thank you. The Q&A session is now open. . Our first question comes from Gokul Hariharan with JP Morgan Hong Kong.

[Gokul Hariharan:]

My first question is regarding the monetization in overseas markets. Looks like that seems to be picking up quite steadily, what about 12% of revenues in Q3, looks like about 14%, growing at about 55%. Could you talk a little bit about what are the avenues that you're exploring in terms of monetization? And could you also talk a little bit about what is in store for the future? That's my first question. Second question is specific to China. We have seen fairly good market share gains in the last several months, going from 10% to 14%, 15% market share, MAU just starting to grow. So how should we and investors think about the relationship between Xiaomi smartphone share gain, and China MAU growth, given that that’s going to be one of the key drivers for Internet services growth in China? Thank you.

[Wang Xiang:]

Okay. This is Xiang. Maybe I will give my comment and then Alain will add. So the first question is related to the Internet service revenue overseas, right? So I think officially -- we have not officially started the monetization outside of China, but because of our strong growth of our smartphone business, because of the market share increase in many, many regions, especially in the European regions, that will generate very healthy Internet service revenue growth. And at the same time actually we are building partnership with the local players, try to build a ecosystem for the future to further monetize our business, actually our overseas Internet service business overseas -- in overseas market. That's the answer. We'll see a very, very healthy and strong growth in that segment. So the second question is related to?

[Alain Lam:]

China MAU

[Wang Xiang:]

Of course in China, you see, we have very healthy MAU growth, and also not only because of the MAU increase and also because we are driving more high and premium tier smartphones that will also help to generate higher ARPU from the Internet services, for example, gaming and other services. And also we continue to increase our MAU not only on smartphones, but also on smart TVs. That's also helped us to have a more service opportunities to our users. That's a major reason for the growth.

[Alain Lam:]

Hi, Gokul, it’s Alain. To supplement what Xiang has said, in a couple of ways. In the overseas market obviously we’re exploring different ways of monetizing further, whether it is gaming, whether it’s advertising. We saw quite healthy growth in our browser business actually in the overseas market. So that's number one that we'll continue to explore other ways to monetize that further. But as you can see, I think the growth in our user base allowed us to have extract a higher percentage of our Internet services business in the overseas market. In China I mean, obviously we understand a lot of analyst concerns about our Chinese monetization and that's why we decided to put in the January 2021 MAU numbers. As I said -- as I mentioned before, the Mi 11, a lot of the users come from new Xiaomi users, which allow us to grow our MAU base and we continue to see quite healthy trends in February and in March of that MAU numbers. So that's point number one. Point number two is on the premium side we've also seen a much higher monetization in our premium smart phones versus our entry level smartphones in terms of Internet service, right? I think, the gaming revenue as we look at Mi 11 versus some of the other phones, it has monetized very well. In fact, it's multiple times over some of the other phone models, number one. Number two is also, I think, if you look at the pre-low revenue -- pre-low ARPU coming from the premium smartphones, is also much higher than the other kind of entry level smartphones. So with that, I think hopefully, as we continue to penetrate the premium side of the market, we continue to see higher monetization in our Internet services revenue. I mean at the same time, I'll caveat by saying that we've also been trying very hard to improve user experience by streamlining some of our advertising space. So, I think this is kind of a balancing act, but I think we’ll see very healthy advertising revenue this year. Gaming has been -- I think we have to see the effects from some of the revenue sharing model going away. And then we hope growth will starting second half of this year. And then I think that, we are obviously exploring other monetization avenue like Xiang said in the TV market where we have a very good market share.

[Operator:]

Our next question comes from Chen Xudong of CICC.

[Chen Xudong:]

My first question is about gross profit margin. Your gross profit margin in fourth quarter is very strong, especially for smartphones, which increased to 10.5%. What’s behind this positive change? And how much of foreign exchange affected? And how can we forecast gross profit margin in 2021 since there is some prices of semis or raw materials goes up a lot? That's my first questions. And then I’ll have a follow-up.

[Wang Xiang:]

Yes, we have a very strong growth margin increase in Q4. I think the reason, the major reason is number one, the product mix, while we are shipping more and more premium tier smartphones to the market. So that’s generated more profit. That's one. Number two is -- that’s product mix. Number two is, because of the shortage, so we were not very aggressive on marketing or promotions. So that's also helped us to have supply. I think we want to carefully use our resources. We hope we can maintain healthy gross margins.

[Chen Xudong:]

And my second question is about the offline store. Since offline store will be a very key strategy to improve premium end market especially in China, could you tell us what's your plan and strategy for opening those stores, especially in third tier or fourth tier cities in China?

[Wang Xiang:]

We have a plan to cover all the countries of China with Xiaomi stores. So we are on track to build those stores. By the end of 2020, we have 3,200 stores, right? So actually, we keep adding the numbers, you see the increased rate will be very high. So that's one side, we continue to build more stores. Actually, even more importantly, not only building more stores, but also we use our -- we do our own system to manage the stores. We will have a -- we designed a system to track the traffic, and also the sales of each store so that we can improve the efficiency of the sales channel. This is long-term strategy for Xiaomi offline sales, the Xiaomi offline sales. I think, in the 2021, we will build more and more stores in the tier two, in the tier three, tier four, tier five cities to cover almost every company, that’s the goal.

[Alain Lam:]

I think in respect to our offline store strategy, obviously, we are approaching it from a relatively asset-light approach as well. We rely on a lot of our partners to open the stores. And we will support it with our system to enable them to achieve the same level of operating efficiency that we’re achieving in our own stores. So, I think that the plan is obviously to build it -- to have an aggressive plan of building the store network out to compete with some of our competitors. But at the same time, I think we will maintain a relatively asset-light approach. And -- but using our systems enables our partner to achieve the same level of operating efficiencies.

[Operator:]

Thank you. Our next question comes from Kyna Wong with Credit Suisse. Please go ahead. Thank you.

[Kyna Wong:]

Thanks for taking my questions. So, the first question, actually, I would like to ask on the strategy of the company in order to acquire some of the ecosystem company like -- just the announcement of Zimi. So I would like to know the intention and how to complete this co-proposal in the IoT business. That's the first question in terms of IoT strategy. The second thing is about, we see the growth in the IoT business, seems a bit lower in terms of third quarter recovery. What's the reason behind and how should we see the growth momentum in 2021? What's the plan for the product launch and how the company achieve further product expansion and also market expansion? Thanks.

[Wang Xiang:]

Sure. Thanks, Kyna. I think on Zimi, I think I will note a couple of things and thanks for pointing this out. We did release a circular today that said we're going to apply remaining 50.1% of Zimi that we didn't own already. So first of all, as a background, we spent -- it required US$100 million last year to acquire 27.4% of Zimi, which -- because we have some existing ownership which took us to 49.9%, that was last year. And this year, we're spending close to US$200 million to acquire the remaining portion, which if you do the math, it's actually the same valuation as the year ago, when Zimi had continued to grow. The reason for acquiring Zimi is because we do think that they have a number of core competence that we like, especially in terms of IoT that not only is the product development capability, they also have their own kind of supply chain management system that can help us. And so I think that we will selectively look at portfolio further. Second with respect to IoT business, I think two things impacted the growth this year. Number one is, obviously, the pandemic, which delayed the rollout of some of the larger white good products earlier part of this year, which we’ve seen picking up in the second half. Second is, we have been trying to optimize the number of SDKs to focus on those that are more focused -- connected to our smartphone business. That's why we have deliberately tried to manage the number of SKUs that we have in our portfolio. One to further enhance the interconnectivity with the smartphone and second to help enhance user experience, like how we do it through our Internet business. In the first quarter of this year, we have already seen a very significant pickup in the IoT business. I think, especially the 50s and so some of the white goods are in the first half -- in the first quarter before Chinese New Year. We've seen some of them shipping very well. And as you can see on TV, which we launched Redmi TV last month, I think it’s also been selling quite well. We're seeing a pretty significant recovery in that business in the first quarter. And also the second thing is obviously, as I mentioned before in my prepared remarks, we have seen -- we're going to expand aggressively into the overseas business. We already had a pretty significant business last year in the overseas IoT business. And we'll continue to focus on that, again, leveraging on our smartphone market share, our brand name to get more of our IoT products overseas.

[Operator:]

Our next question comes from Yingbo Xu with CITIC.

[Yingbo Xu:]

My first question is about the Internet sector. Take the Internet sector as an overall, we find that the cellphone companies face difficulties in the same area in the second quarter -- second half last year. But however, we still got double-digit increase in Internet revenue. So we think that is good. Could you please give us more colors on this year's Internet revenue increase? This is my first question. And the second one related to AIoT. We noticed that some third-party AIoT part companies is trying to enlarge their exposure in AIoT area to empower or enable more home appliance companies to be connected in this area. So how do you see this kind of competition with our AIoT? Considering the competition will we be more ambitious in the AIoT area? And what's more, how do -- another question, how we consider about another AIoT like auto, because auto is very interesting AIoT area investors are curious about? Thank you.

[Wang Xiang:]

Sure. Let me take the Internet question first. I think we’ll continue to see a pretty healthy growth in our Internet business this year. I think obviously, our Internet business has a lot of different components. And I think last year, the growth was certainly impacted by our fintech business because as we try to -- as we continue to reduce our balance sheet usage, so you've seen a corresponding decrease in revenue in our fintech business. But I think in the second half of last year, we’ve already seen although the revenue decreased -- continued to decrease for fintech business on a year-over-year basis, but the margin has improved, as we shifted to a more kind of a platform business as opposed to a balance sheet business. And we expect that to continue this year. So if you look at our Internet business this year, we are quite optimistic, but we'll get hit in a couple of ways I think. Number one in our gaming business, when year-over-year comparison in the first half will be very difficult, just given last year it was a good first quarter in the gaming business due to the pandemic. And also on the fintech business, again, as we continue to shrink our balance sheet usage the top line will decrease, but the margin will continue to improve. So I think that’s the first part. Second part is obviously as we mentioned before, as our shipments continue to grow, we do expect the advertising revenue to pick up as a result and as our premium segment of our smartphone continue to grow, we do expect the revenue to increase disproportionately versus some of the entry phones. And also on the TV side, as we continue to maintain our leadership position in TV, we are looking at beyond just kind of advertising is there other ways to monetize in terms of content and other sources. So I think that we are quite optimistic about the Internet business as a whole. In terms of the AIoT competition I mean obviously, I think our success has certainly led to many of our competitors wanting to get into this area. I think we are differentiated in a couple of ways. Number one is obviously, the connectivity that we are exploring to all of our AIoT businesses, AIoT products with our smartphones. So not only are we just producing kind of a value for money consumer electronics products, but we’re also exploring the interconnectivity between devices and between our cell phones, right? So that's something that I think will have a competitive advantage over some of the other players that simply make one product or a couple of products, they don't have the portfolio to compete with us, right? I think that's the first part. Second part obviously, as you know, we do our ecosystem product, AIoT product a lot from our investments, from our ecosystems. And so I think we do have a big network of people doing R&D for us. So it's not just our own R&D. I mean obviously we have to have our own full R&D, but at the same time, through our 300 plus investee companies, more than a hundred are focused on ecosystem products. I think we're using that and leveraging their R&D capability, leveraging their networks to help us build better products for our users.

[Alain Lam:]

Just add one more thing. We are putting a lot of efforts to improve the user experience, with our smartphones and AIoT products. So not only in the connectivity side, but also user experience. So for example, a smartphone can very, very easily and smoothly connect to different screens to share content among different screens and the devices. And also we use one simple app to manage all the IoT products, wearables in your home, on the go. So I think that's the uniqueness of our business. We’ll continue to invest into that area. We are still the largest AIoT platform in the world. So yes, we will focus on the user experience. I think that’s the strength of us.

[Yingbo Xu:]

Thanks Xiang and Alain. Could you just please talk a little more on auto?

[Alain Lam:]

So see we made announcement. We made a notice, right, in the Hong Kong…

[Wang Xiang:]

Yes, we put out an announcement saying that we haven't really established an internal project on making electric vehicles. So, there's not much else we can say about that at this point.

[Operator:]

Thank you our next question comes from Fang He with HSBC, please go ahead, thank you.

[Fang He:]

Thanks for taking my question. I have two. The first is about the GP margin on the smartphone. So given the current very tight chip supplies and also some chip shortages across the supply chain. So, just wonder what's the strategy for Xiaomi to secure enough -- sufficient chip supply and whether there's any cost pressures related to our smartphone and IoT business? Thanks.

[Alain Lam:]

So, yes, right now, we are in the shortage, not only us, the whole industry is in the challenge of the shortage. So this is -- I think in the -- this is very normal in the semiconductor industry, every couple of years, maybe three, four years, the industry will have the similar challenges. But this time, it’s very, very serious. So what we can do is, we work with our suppliers very, very closely to optimize the supply, and also the -- carefully manage our product launch schedule so that we can make up, how to say, to mesh with the supply to continually improving efficiency, carefully use the capacity or resources we have. Another thing I want to mention is, we actually have a very, very strong growth in the 2021. So even during the shortage we'll continue to grow our businesses. We'll see a strong growth. We are working with the major suppliers very, very carefully. So we are -- I think we stay confident for the year 2021 for the business growth not only smartphones, but also in IoT products in China and also out of the China.

[Fang He:]

And then my second question is about your offline versus online distribution channels. Given you ramped up the offline channels in the lower tier cities, do you have any target regarding the sales contribution from offline in China in this year, and/or maybe in the coming few years? And also, what's the implication on the margin side? Do we see any positive or negative impact from these sales mix changes?

[Alain Lam:]

So, our target is to have a Xiaomi store in every country of China. This is our plan for China domestic market. So we are working on this plan, on the execution side. So we see a strong momentum for the increase of offline stores, not only the number of stores, but also the IT system to manage those stores. So that we design our systems so that we can track on daily basis our activations, sell-in, sell-out, so that we can improve efficiency. That's the key part of our business model. So yes, this is what we are doing now. So, yes, I think you see our -- the gross margin increase in Q4 is because of the shortage and also the product mix. But we will continue to optimize our cost structure, so that we can offer more and more, very, very attractive products to consumer, that’s it, that’s our plan.

[Fang He:]

And just a very quick follow-up on the Zimi acquisition. So just to make sure we're clear that it is consolidated starting from this month or it will not be consolidated? And is that possible to discuss a bit about their revenue size last year?

[Alain Lam:]

Yes, thanks. Well, I mean, we still have to go through the final process before closing. We are hopeful that the closing will be in the first quarter of this year. So after that we'll consolidate Zimi as a 100% owned subsidiary, but it's not going to be a very significant impact to our P&L.

[Operator:]

We now have the last question, which will come from Robert Cheng with Merrill Lynch in Hong Kong.

[Robert Cheng:]

My question is on the Internet side. I think in the fourth quarter the Internet gross margin reaching to 68.4%. This is much higher than the third quarter, even the same time last year. At that time it was basically only 60% to 63%. So we want to know, what the main reason, high margin on the Internet business and can we expect this kind of margin going forward? And also on the Internet is basically on the revenue growth side, because if we're looking at this year, the value added revenue in fourth quarter, value added revenue actually declined 11%. And the -- so we going forward are looking at that business -- I mean, the only one has high growth being advertisement, so -- and the gaming is actually -- is also now really growing. So can we say I mean, because of Alain mentioned about I mean being very positive on Internet. So can we say that really high growth there, more kind of on advertisement? Okay, I think that’s my questions.

[Wang Xiang:]

Thanks, Robert. I think as I mentioned before, I think Q4 the gross margin for the Internet business was really driven by product mix in a way, right, being the advertising revenue being a bigger -- a pretty high proportion of that business, number one. And also number two is the fintech business, as I mentioned before, has improved in the gross margin over the few quarters. Is that sustainable going forward? We would like to think that, over time, we would like to make sure that the Internet business become more balanced in terms of that portfolio, with a fair mix from advertising with a fair mix from games, and other value added services. So with that, I am not -- obviously I’d like to say we can achieve a higher gross margin, but I’d like to optimize our portfolio as well. And make sure that we have a healthy mix between advertising and gaming and other value added services. If that makes sense?

[Robert Cheng:]

Probably another follow-up is also on the margin side. Because I mean like Xiang said right now, I mean basically a lot of components, utilities, especially ICs, how do you think about the impact because of a lot of components, ICs recently go higher, chipset and there are all these components. I mean do you expect this impacts margin on the basically second quarter or even whole year, this year?

[Wang Xiang:]

I think yeah, we will continue to optimize the cost of our hardware devices. That's for sure. We'll continue to do that. But we know during the shortage a lot of increase of our costs. We may have to pass part of the cost increase to the consumer of the different cases -- in the different cases. So we will continue actually to monitor the cost impact on our hardware. But far we are doing okay. We feel pressured but we are looking okay.

[Operator:]

Thank you, this concludes the conference call today. Thanks again for joining us. You may now disconnect. Good night.

[Wang Xiang:]

Thank you very much.

[Alain Lam:]

Thank you.