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Xiaomi Corp (01810) Q1 2021 Earnings Call Transcript

1810 Earnings Call - Final Transcript

Xiaomi Corp  (HKG: 01810) Q1 2021 earnings call dated May. 26, 2021

Corporate Participants:

Wing Ki Chan — Head of Investor Relations

Wang Xiang — President

Alain Lam — Vice President, Chief Financial Officer and Deputy Chairman of Airstar Digital Technology


Leping Huang — Huatai International — Analyst

Kyna Wong — Credit Suisse — Analyst

Andy Meng — Morgan Stanley — Analyst

Gokul Hariharan — JP Morgan — Analyst

Piyush Mubayi — Goldman Sachs — Analyst


Wing Ki Chan — Head of Investor Relations

Ladies and gentlemen, thank you for standing by and Welcome to Xiaomi 2021 First Quarter Results Announcement Conference Call. [Operator Instructions]

I’d like to introduce myself Ms. Wing Ki Chan, Head of Investor Relations. Good evening, ladies and gentlemen. Welcome to Investor Conference hosted by Xiaomi Corporation regarding the company’s 2021 first quarter results. Before we start the call, we’d 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 be realized in the future for various reasons. Information about general market conditions is coming from a variety of sources outside of Xiaomi. This presentation also contains some unaudited non-IFRS financial measures that should be considered in addition to, but not as a substitute for the company’s financials prepared in accordance with IFRS.

Joining us on the call today are Mr. Wang Xiang, Partner and President of Xiaomi Corporation; and Mr. Alain Lam, Chief Financial Officer and Vice President of Xiaomi Corporation. To start, Mr. Wang will share recent strategic initiatives of the company. Mr. Lam will review the business financial performance for the first quarter of 2021. Following that, we will move on to the Q&A session.

I will now turn the call over to Mr. Wang.

Wang Xiang — President

Thank you, Amira. Hello, everyone. Thank you for joining our first quarter 2021 earnings call. In this quarter, we reported outstanding results across all business segments. Our revenue reached RMB76.9 billion and adjusted net profit reached RMB6.1 billion, up 54.7% and 163.8% year-over-year respectively. Both revenue and adjusted net profit achieved historical highs.

Throughout this quarter, we remain committed to advancing our core Smartphone x AIoT strategy. I’m pleased to share that our global smartphone shipments ranked Number 3 for the third consecutive quarter with market share of 14.1% in this quarter. Notably, we saw explosive growth in Europe and ranked Number 2 in the region for the first time. We continued to strengthen our position in premium smartphone market. In this quarter, we further expanded our premium offerings through the launch of Mi 11 Ultra and Mi MIX Fold priced above RMB5,999 and RMB9,999 respectively.

Our premium smartphones have been well received by the market as shipments exceeded 4 million units globally in the first quarter of 2021. We continue to deliver cutting-edge technologies and a better experience to our users. For example, our Mi 11 Ultra achieved the global Number 1 DXOMARK position, and the first foldable smartphone Mi MIX FOLD features our proprietary Surge C1 Image signal processor, making a significant milestone for our imaging technology and leading us to greater technological aspirations.

We also announced our official entry into smart electric vehicle business. The smart electric vehicle represents indispensable components of smart leading. And entering the Smart EV business is a natural choice for us, as we expand our smart AIoT ecosystem and pursue one of the largest business opportunities of the next decade. Last, but not least, the first quarter, we also introduced our new logo, which presents Xiaomi’s new brand identity. We believe the new brand identity will allow more people to feel and understand Xiaomi’s corporate philosophy to let everyone in the world enjoy a better life through innovative technology.

Now, I’d like to invite Alain to discuss more details of our first quarter earnings and business update. Alain, please go ahead.

Alain Lam — Vice President, Chief Financial Officer and Deputy Chairman of Airstar Digital Technology

Thank you, Xiang. Good evening everyone. Thank you for joining us today for our 2021 first quarter earnings call. In the first quarter of 2021, we maintained solid growth trajectory across all business segments. Total revenue grew 54.7% year-over-year to RMB76.9 billion and adjusted net profit grew 163.8% year-over-year to RMB6.1 billion. Our revenue and adjusted net profit, both hit record highs in this quarter.

In this quarter, we maintained a Number 3 position in global smartphone shipments with a market share of 14.1%. Our shipments increased 61.9% year-over-year, the highest growth rate among the top smartphone companies. We have strengthened our position in the premium smartphone market. In March, we released three premium flagship smartphones, Mi 11 Pro, Mi 11 Ultra and Mi MIX FOLD. and all have been well received by the market. To illustrate, from January to April of 2021, total orders for Mi 11, Mi 11 Pro and Mi 11 Ultra exceeded 3 million units. Meanwhile, the Mi 11 Series ranked Number 1 in its category among all Android smartphone series in mainland China. In total, we shipped over 4 million premium smartphones this quarter. Our premium smartphones we define as retail prices at or above RMB3,000 in mainland China and EUR300 in the overseas markets.

Our market share in the premium smartphone category in mainland China grew considerably to 16.1% in the first quarter, up from 5.5% in the first quarter of 2020. Our achievement in the premium smartphone market is underpinned by our relentless pursuit of technology innovation. For example, the Mi 11 Ultra achieved a DXOMARK score of 143 for overall camera performance and ranked Number 1 globally. In addition, it debuted a jointly developed GN2 sensor. the largest smartphone camera sensor currently on the market.

In terms of charging technology, Mi 11 Ultra debuted the silicon-oxygen anode battery, which enables faster charging in a thinner smartphone body and set a new benchmark with 67 watts wireless charging performance.

Our Mi MIX FOLD is another example of our pursuit of technology innovation. It is equipped with our proprietary Surge C1 image signal processor, which uses advanced algorithms for auto focus, auto exposure and auto white balance, significantly enhancing the image quality. Additionally, it is the world’s first smartphone to use liquid lens technology, which combines macro and telephoto capabilities in a single lens. In terms of display, it is equipped with a flexible 8.01-inch OLED screen, featuring Xiaomi’s own color calibration algorithm with impressive color accuracy.

In Q1, we further improved our Number 1 online leadership position in China, with our online market share doubling to 38% from 18.5% in the first quarter of 2020. Meanwhile, we rapidly expanded our offline retail presence. As of the end of April, we had over 5,500 retail stores in China, an increase of over 2,300 stores compared to the end of December 2020.

As Xiang Wang said, we’ve also elevated our brand and stepped up our promotional efforts globally. In March, we launched our new Xiaomi logo with a new alive branding against it, which expresses the relationship between life and technology. At the same time, we invested in brand building in key global markets. In February of this year, massive screens of our Mi 11 smartphone were displayed on three landmark buildings, including Dubai’s Burj Khalifa, London’s BFI IMAX, and Bangkok Central World. This move demonstrates our efforts to expand into the overseas premium market.

On March 30, we’ve also made one of our most important decisions in our corporate history, which was our official entry into the smart electric vehicle business. We will establish a wholly-owned subsidiary with an initial investment of RMB10 billion and expect to invest around $10 billion over the next 10 years. We believe offering quality smart EVs will help us build a closed loop smart living ecosystem and fulfill our vision to let everyone in the world enjoy smart living anytime, anywhere.

We also believe that we have unique advantages to support the Smart EV business, including our Internet business model, our extensive experience in software and hardware integration, our broad user base, our powerful brand, our distribution channels, and our investment in prior technology surrounding smartphones, which will also be applied to Smart EVs and with our abundant cash resources. These factors will contribute to our future success in the Smart EV sector.

I’d like to give everyone an update with regards to our litigation with the US Department of Defense. As you may have seen from this morning’s announcement, the US District Court issued a final order this morning vacating the US DoD’s defamation of Xiaomi as a CCMC, a Communist Chinese Military Company. In vacating this defamation, the court formally lifted all restrictions on US person’s ability to purchase or to hold our securities. We are very grateful for everyone’s trust and support, and we will continue to relentlessly build amazing products with honest prices to let everyone in the world enjoy better life through innovative technology.

Now let’s dive deeper into each segment starting with Smartphones. In the first quarter, our Smartphone revenue grew 69.8% year-over-year to RMB51.5 billion, our highest quarter ever. Our global smartphone shipments reached a record high of 49.4 million units, up 69.1% [Phonetic] year-over-year. Our Smartphone gross margin also rose to 12.9%, due to improved product mix and fewer discount activities as a result of the [Indecipherable].

Let’s take a closer look at the mainland China market. In the first quarter, our smartphone market share in mainland China rose to number four. According to Canalys, during the quarter, our smartphone shipment in mainland China reached 13.5 million units, a year-over-year increase of 74.6% and with a market share of 14.6%. This is supported by the continued success of our dual-brand strategy, targeting different user segments. For example, our Mi MIX FOLD with prices starting from RMB9,999 caters to the business executives and power users. To reach the younger generation and female users, we launched our Mi 11 Lite and for gamers, we unveiled our Redmi K40 Gaming series, their prices starting from RMB1,999. We believe that this strategy will help us capture greater market opportunity by satisfying the unique demands of the different user groups.

With respect to the IoT and lifestyle product business, our revenue increased by 40.5% year-over-year to RMB18.2 billion in the first quarter of 2021. As the leading global consumer AIoT platform, the number of connected IoT devices on our AIoT platform reached 351 million, up 35.6% year-over-year. Moreover, the number of users who had five or more devices on Xiaomi’s AIoT platform reached 6.8 million, up 48.9% year-over-year. Our AI assistant MAU reached 93 million, an increase of 31.9% year-over-year. Lastly, our Mi Home app MAU reached 49.2 million, which was up 22.8% year-over-year.

We continue to expand and upgrade our IoT product portfolio to offer the best user experience and to further promote interconnectivity across devices. In the first quarter, we launched new product with the thing that features including Mi Laptop Pro 15″ featuring a Super Retina OLED display with 3.5K resolution and new Router AX9000 with dedicated 5G eSports spectrum.

In the smart home category, we launched our Mi Smart Air Conditioner with Ventilation with prices starting at RMB3,599. It is an innovative next-generation air conditioner that takes clean fresh air from the outside and to effectively lower indoor carbon dioxide levels, bringing our users a more healthy and comfortable experience. It also doubles up as an air purifier that achieved 99.9% air sterilization. This smart air conditioner is also the industry first to win a Red Dot Design Award.

In mainland China, our IoT products delivered outstanding results across multiple categories. This shows that we have become an increasingly important part of our users’ daily life. Notably, our air purifiers ranked Number 1 with 52.5% market share. Our Mi bands ranked Number 2 with market share of 37.5%. Our smart locks ranked Number 1 with market share of 24.8%, and I can keep going on the list.

Meanwhile, the IoT segment continued to grow in the overseas market. In the first quarter, revenue from our IoT products in the overseas market increased 81.1% year-over-year, as we strengthened our brand and increased our penetration in the key markets. We continue to enrich our overseas IoT portfolio and introduced a variety of cool products, such as our Mi Electric Scooter Pro 2 Mercedes-AMG Petronas F1 Team Edition. Our IoT product portfolio has great potential in the overseas market, which we believe will be a key driver of future growth in our business.

With respect to the Internet Services segment, revenue from Internet Services reached RMB6.6 billion, up 11.4% year-over-year. Our advertising revenue hit a historical high this quarter reaching RMB3.9 billion, primarily due to higher pre-install and search revenue on our premium smartphones.

Gaming revenue decreased year-over-year as mentioned by Xiang Wang, mainly due to the higher base in the prior year, due to the strong gaming industry performance during the pandemic. Also, revenue from our other value-added services decreased as we voluntarily reduced the risk on our fintech business. If you look at our global Internet user base, it has continued to grow and drive our Internet Services business. In March of 2021, the global MAU of MIUI increased 28.6% to 425.3 million, while the MAU in mainland China rose to 119 million, up 6.4% year-over-year.

Our TV value-added service offerings continue to expand and include video entertainment, e-learning, kids mode and karaoke, providing diversified content to a wide user group. During the pandemic, our Education channel also offered live streaming educational courses for free, providing a convenient learning option for kids at home.

In the overseas markets, our Internet Services revenue increased 50% year-over-year in the first quarter accounting for 13.8% of total Internet Services revenue. This was driven by increasing overseas smartphone shipments and the expansion of our overseas business. Notably, the MAU in Western Europe grew 95.5% year-over-year. And our Mi Browser business is also expanding in the key overseas markets.

Talking about the overseas business, in the first quarter, our overseas revenue increased 50.6% year-over-year to RMB37.4 billion, which accounted for 48.7% of our total revenue. According to Canalys, our smartphone market share ranked Number 1 in 12 markets in the first quarter and ranked in the Top 5 in 62 markets worldwide. For instance, in Spain, we ranked Number 1 for the fifth consecutive quarter, and we also ranked Number 1 in Russia for the first time this quarter.

We’ve further expanded our scale in the key overseas regions. Our smartphone market share in Europe ranked Number 2 for the first time this quarter. Our ranking in Latin America and Middle East both rose to Number 3, and we maintain our Number 2 position in Asia Pacific.

I would like to further highlight our excellent performance in Europe this quarter. As I mentioned before, we ranked Number 2 for the first time in Europe with a market share of 22.7%, as our smartphone shipment increased 85.1% year-over-year.

In Spain, our smartphone market share reached 35.1%. And in Italy, our ranking surged to Number 2 with a market share of 25.2%. We also maintained our Number 3 position in France and Germany with year-over-year growth exceeding 100% in both markets.

We continue to deliver strong results in both the carrier and online channels overseas. In the first quarter, excluding India, our overseas smartphone shipments through the carrier channel exceeded 5 million units, up more than 310% year-over-year. As of March 31, we cooperated with over 150 carrier channels worldwide. At the same time, our smartphone market share in Western Europe carrier channel surged to 11.3% compared to 7.4% in the fourth quarter of 2020. In the online channel, our overseas smartphone shipment, excluding India, also exceeded 5 million units, up more than 100% year-over-year.

Now let’s move on to the financials. In the first quarter, as I mentioned before, our revenue reached RMB76.9 billion, up 54.7% year-over-year and 9.1% quarter-over-quarter. In particular, revenue from smartphone grew to RMB51.5 billion, up 68.9% [Phonetic] year-over-year and 20.8% quarter-over-quarter.

Revenue from IoT and lifestyle products reached RMB18.2 billion, up 40.5% year-over-year. Our revenue from Internet Services reached RMB6.6 billion, representing an increase of 11.4% year-over-year and 6.4% quarter-over-quarter.

As you may have noticed, our gross margins have shown strong growth momentum during the last quarter. Our overall gross margin increased to 18.4% in the first quarter. And if you look at the gross margin for our Smartphone segment, It grew to 12.9 % in the first quarter from 8.1% in the prior year. The gross margin for IoT and lifestyle products increased to 14.5% and the gross margin for Internet Services segment increased to 72.4%.

During the quarter, we continued to step up our investments in brand building and R&D. Our R&D expenses increased by 61% year-over-year to RMB3 billion. We remain dedicated to pursuing the cutting-edge technology for our business. And we expect to recruit another 5,000 engineers in 2021.

We saw robust growth in our adjusted net profit in this quarter. We reached a new record high of RMB6.1 billion, up 163.8% year-over-year and 89.4% quarter-over-quarter, and our adjusted net profit margin climbed to 7.9% in the first quarter from 4.6% in the same period of 2020.

We maintain our efficient approach to managing our working capital. Our AR turnover days decreased to 13 days in the first quarter of 2021. The inventory turnover days were 65 days in the first quarter, and our AP turnover days increased to 111 days in the first quarter. Overall, our cash conversion cycle was very healthy at negative 33 days.

Last but not least, our strategic investments enabled us to generate additional earnings growth. We continue to enrich our investment portfolio. For example, in the first quarter, we invested in Dongyi Risheng Home Decoration, a premium home decoration solutions provider, which also established strategic cooperation with our AIoT smart living ecosystem.

As of the end of the first quarter, we had invested in more than 320 companies. We generated an after-tax net gain of around RMB400 million from the disposal of investments during the quarter. And as of the end of the first quarter, the total value of our investments is close to RMB70 billion, which if you look into earn-out per share basis represent about HKD3.3 per share. We will continue to leverage our resources and our ecosystem to invest in more ecosystem companies, further empowering the entire manufacturing industry in China.

Wing Ki Chan — Head of Investor Relations

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

Questions and Answers:


Thank you. The Q&A session is now open. [Operator Instructions] And the first question comes from Huang, Leping with Huatai. Please go ahead. Thank you.

Leping Huang — Huatai International — Analyst

Okay. Thank you for taking my question. My first question is about the chip shortage and the inventory issue. So — I think chip shortage has been a major problem for the tech industry for last few months, but we also see some weakness in the smartphone demand, especially in China and India recently. And when I look at your financial statement, you have a large increase in raw material inventory, but a large decline in the finished goods inventory. So can you comment on this, Alain, at this point of time, what is mainly — your view on the impact of the chip shortage and inventory and what’s the impact on your future growth? Thank you.

Wang Xiang — President

Yeah. Thank you. Thank you for the question. Actually, the shortage is — happens every three to four years in the semiconductor industry. But this time, it’s stronger because of many, many factors. One factor is the pandemic, right. So we are working very hard with our suppliers, try to how to stay optimize our supply situation and do some preparation for the future.

So we are — that’s why we are — I think we are — our inventory level is in the healthy — I think in general is very healthy. So, yeah, we do some preparations for the shortage for the second half in the raw materials. Yeah, that’s for sure. But overall — we are — I don’t see any issues for this year. It’s not going to be a major problem even with the shortage actually. We think we can still have a big or significant increase compared to the year 2020. So that’s the — this question.

So your second part of the question is how long it’s going to last, right? I think to be very honest, I think for this entire year ’20 and ’21, I don’t think the issue will be resolved within this year. So we can expect maybe second half of next year, the supply environment will be changed because this is a — the whole industry is working very hard actually to try to improve the manufacturing capacity, not only for the SoC suppliers, but also memory, also display, the whole industry actually is working on that, I think maybe second half of next year, it will be improved. This is our will.

Regarding to — the market actually we know, we recently we noticed, there are some companies or some research agents or institutions, they are seeing the soft demand for the — in the China market for smartphone. So we are monitoring the market environment very closely. So far, we don’t change our plan. We will keep our plan for 2021, but we are closely monitoring the market demand — dynamic. Yeah, that’s my…

Alain Lam — Vice President, Chief Financial Officer and Deputy Chairman of Airstar Digital Technology

I think a couple of additional points. I think one, obviously, I think the entire street not just in our industry, but also in other industries, we are seeing chip shortage that I think the auto industry, for example, due to a demand-shock, right, because there is more demand from EV fuel, EV players, laptop players due to the pandemic, as there has been an increase in demand and then the suppliers flow or flowing catching up right because of the pandemic, they haven’t really spent that much capex in terms of building new capacity. So I think it will take a while for that to normalize, something that probably takes to next year for the chip shortage [Indecipherable]. Purposely as Xiang also mentioned, right, number one, we have been investing strategically, right, as you noticed some of our raw material inventory has increased. At the same time, I think the fact was our — as you also see the finished goods inventory has dropped because we are — our products remain very popular with our user base. From a management standpoint, we are trying to optimize our product portfolio, we’re trying to optimize our — make sure that we strategically optimize our margin as well in our business, due to enhanced product portfolio as a result.

Leping Huang — Huatai International — Analyst

The second question, it sounds like, I asked the same question maybe definitely many years ago, so your room of growth, you actually delivered very strong growth in last many years. When calculated the number, you’ve already shipped 15 million units of smartphones this quarter. If you multiplied by four, it’s 200 million versus [Indecipherable] 200 million reach, I think you already very close to global Number 2. And so, when you plan your geographical expansion and the way you claim your product mix, so where’s the room coming from now? And especially do you plan to enter markets like the United States? And do you plan to have a much bigger market share in the premium segment, like which countries dominated by your F1 [Phonetic] assumption?

Alain Lam — Vice President, Chief Financial Officer and Deputy Chairman of Airstar Digital Technology

Yeah, actually, we see a lot of room to grow in many, many markets, taking Europe as an example. Right now, entire Europe we ranked Number 2. This is a significant milestone for us. We — our market share now in entire Europe is over 20%, but we still think we still have a good room to grow, because we’re watching Europe. Our market share is less than 20%, I think it’s above 18% — maybe 18%, so Western Europe, we see very big room to grow there. So we are right now, we are Number 1 in Spain for five consecutive quarters with market share above the 35%. We are Number 2 in France, Italy, Number 3 in Germany, all those market, we all see a huge potential to further grow. So that’s a one area.

Another angle is we — our growth in the carrier channel, we’re very, very strong in Q1 2021. We just started carrier business. We have a — our market share in carrier channels still very low, but we — our growth is over 100%, maybe 300% in Q1. It’s a very strong growth. You see the trend that we’re going to grow our smartphone shipment in the carrier channels, that’s another potential.

So if you look at the China market, right, we are above 40%, 33% in China online market, but we are still not very high. We don’t have a very high market share in the offline market of China. So that’s why we are putting a huge effort to establish our offline channels and the retail stores across the country. So that’s another big area to grow. Other example, including Russia, including Latin America, we also see a very strong potential to grow.

So yeah, we are happy to share that last year, we shipped 140 — maybe over 140 million units, but this year, even with the shortage, I think we’re very confident to have a significant growth in smartphone market.

And US market, US market is always very, very attractive to everyone. So we are — right now, we put our focus on the European market, not — instead of North American market because of resources issue. We will continue to increase our investment in R&D, so that we have more resources, then we can maybe — we are prepared, we will go to North American market. We don’t have a — so far, we haven’t announced any plan yet. But that market definitely attractive market to us in the future.

Leping Huang — Huatai International — Analyst

Okay. Thanks. Thank you very much.


Thank you. Our next question comes from Kyna Wong with Credit Suisse in Hong Kong. Thank you.

Kyna Wong — Credit Suisse — Analyst

Thanks for taking my questions. Congratulations for such good, strong results, and I have two questions, one is about the smartphone gross margin, which already reached 12.9%. It is a very encouraging level. And we want to see is like how much is actually from the fewer sales promotion, better mix and also somehow if there is any impact which is from some finished goods that are already [Indecipherable] based on lower cost that right now your cost may increase because of chip crisis and what should we expect like going forward in the coming quarters, because I think the chip crisis will stay this year and probably will resolve second half next year as I think somebody mentioned. So is that a sustainable margin level? So this is the first question.

The second question is about the Internet Services, because we do see the advertising and also advertising revenues grew very strongly like 46% and Gaming also actually I think, the expectations illustrate it, because it’s like up 24.8% on a high base last year, because last year is actually due to lockdown in China, but I mean we see Gaming got like impact on commission base, that may change and also high base still achieve such high growth here. So I just wonder if like that is because the better mix in the smartphones and/or like expanding your channel in internet business and when should we expect normalization in this impact because they are — they continue to decline, I mean, for some time, then it should be like getting less impacted overall Internet business. So, these are my two [Indecipherable] questions. Thanks.

Wang Xiang — President

Thank you. Thank you for the question. I will take the first one and Alain will answer the second one. So the first one is regarding to the gross margin, the sustainability of the gross margin, right. So I think our — as a company we — right now, our focus still to increase our market share globally. We’re not targeting to increase the gross margin. The gross margin is good. We like gross margin, but our first priority is to enlarge our market to increase our customer base.

So I think we achieved a very good gross margin for the last quarter and this quarter because we have a very good or much better product, and a product mix. We have many, many — very strong mid and higher tier products that contribute good reasonably the gross margin. And also during the shortage, right, everyone in the market were all not very aggressive on pricing. That also help us to maintain the healthy margin, but overall, we’ll focus more on the customer base and market share instead of the margin, but with very good product and the product mix, I think we will have a healthy — we will maintain a healthy gross margin and profit.

Alain Lam — Vice President, Chief Financial Officer and Deputy Chairman of Airstar Digital Technology

So yeah, look, I think, Kyna, on the Internet Services, the advertising, as you noted, has performed very well. Part of it is really due to the growth of premium smartphone within our portfolio, right, obviously command a much higher pre-installed as far as much higher revenue potential.

On the Gaming side, it has done very well. I mean, I think seasonally, Q1 has always been a strong kind of Gaming quarter anyway with many people at home during Chinese New Year. But it also exceeded the Q4 by quite a lot. I mean, I think as I mentioned in previous call, it’s hard to compare with year-over-year, given that the particular factors in Q1 of last year. There is always hard to beat that number, but we’re very glad that it beat the Q4 numbers by a pretty healthy margin. Also, as you rightly pointed out, the move to premium smartphone was we generated a higher gaming GMV as we showed in previous quarters.

On the pretax [Phonetic] side, again as I said before, it’s always hard to — it’s again hard to compare year-over-year given there is a part different business model compared to a year ago. So that’s why we try not to compare it year-over-year, but I think as we continue to decrease our group of balance sheet as you continue to decrease the overall use of a — of the loan product, I think you probably see a more healthier pickup in the second half of next year. It’s also kind of dependent on all these regulations that are going on. I think we are trying to do everything we can to compare with — for the regulators who have set for. And so, it may still have some trust in the overall fintech model before it settles down due to the ongoing regulatory scrutiny.


Thank you. Our next question comes from Andy Meng with Morgan Stanley in Hong Kong. Thank you.

Andy Meng — Morgan Stanley — Analyst

Thank you, Xiang Wang and Alain for the detailed presentation and congratulations on the great results. I’m Andy from Morgan Stanley. I have two questions, I’ll ask the first question, is focusing on the offline expansion. We know Xiaomi having opened a lot of new stores offline, I want to know what’s the latest like a status regarding the operation, is the high inventory turnover strategy working well or do we receive any pushback?

And in recent days, we also noticed that we’re having started some promotion on certain smartphone products. So whether our online and offline will apply the same promotion or do you have different strategy, and for the offline, if they have already built inventory based on the previous like the price when we’re having the promotion, were the offline also having the same price cut promotion or the distributor have to bear this inventory caused by themselves? So, this is my first question. Thank you.

Wang Xiang — President

Yeah, this is a very good question. This a complicated question, maybe let me — let me answer the second half, the second part of the question. Actually, this time actually, we have done a lot change in the offline strategy. So, we synchronized online and offline. Whenever we do a promotion, no matter it’s online or offline, that’s one action. So, we will do this — we will do the same promotion at the same time with same price, the synchronized. We can synchronize this time because we do a lot of changes, lot of innovations, right. Actually, we developed a system, which can track the pricing, the sell-in and the sell-out real time for every store. So, that’s why we can manage the promotion very, very efficiently.

So, the situation in the past is, because without the technology, how to say, that the tools sometimes we cannot synchronize the price on and offline. That creates some problems to our partners, but this time, the situation will be changed with the technology. So, I think we are seeing the acceleration of the offline stores build up. So, up to now, I think the latest number show that we have over 5,500 stores in operational already. So, we continue to build stores in the very higher paced. So, I remember last year, we had a — end of last year, we had 3,000 stores. But now we have 5,500 stores. So, we’re going to build much more stores by the end of this year, probably over 10,000 stores. So, we want to cover every, how to say, the [Indecipherable] in China. So, with the technologies, with the partners, I think we are able to do it. So, with those stores, we can build our, how to say, point of sales. So, with the point of sales, we can sell a lot of — lot more phones, which online channel cannot cover.

So, I just mentioned earlier, we have 38% of our online — China online smartphone ship — online smartphone market. But the offline, we still have a lot big room — much bigger room to grow. So, with the 10 million or even 50 million stores in the future or more stores, we can cover those territories to let those people living in those small villages chance to buy our product more conveniently. So, that’s our plan.

Alain Lam — Vice President, Chief Financial Officer and Deputy Chairman of Airstar Digital Technology

Thank you, Xiang Wang. My second question is based on communication with investor, I think most people definitely very exciting about the first quarter upbeat results, but at same time, we’re worried about the second quarter or even second half slowdown. What will be the company’s strategy in the second quarter or second half, try to sustain the strong performance no matter from the revenues, shipments and the margin perspective?

Something we are discussing like possibility, like for example, we have the weakness in India distancing, the macro-driven, we cannot control the outbreak of COVID, but is it possible to ship more volume to like other market with high growth potential like Europe. In that case, if the Europe market, the margin is higher than India, it could even generate a better profit for the company. So, those are the potential solutions. But I think the company, the management, probably will have more to share with us to let us know what will be the company’s operating strategy in the second quarter or the second half of this year? Thank you.

Wang Xiang — President

Yeah. Actually, because we have multiple markets, that means we have big room to play to optimize our supply, I think last year, our strengths. So, we definitely will optimize our supply to help our channels and the regional market. We’re doing — we are working very hard on that.

So, India market actually, the — right now the challenge is the pandemic. The whole company is doing very hard, try to do our best to contribute to the society to, how to say, to help them on the difficult challenges. But at the same time, we will use the different channels try to ship smartphones. In India, actually, there are many, many provinces, they are 100% lockdown, but there are another part of the — half of the country, the — because still this online channel, they ship products. We are working with those channel partners to ship our smartphones to the people who may need it during the pandemic. The manufacturing right now has stabilized. So, yeah, we are working with our partner there, trying everything possible to stabilize to get the supply. At the same time, we will optimize our supply chain, that’s the very important thing for us.

Andy Meng — Morgan Stanley — Analyst

Thank you very much, Xiang Wang.

Wang Xiang — President



Thank you. Our next question comes from Gokul Hariharan with JP Morgan in Hong Kong. Thank you.

Gokul Hariharan — JP Morgan — Analyst

Yeah, thanks. Congrats on the great results. First question I had was on smartphone. Given the aggressive push into the offline channel, especially in China, do you start to feel the need to potentially create offline specific product or specific brands like some of your competitors who have much bigger market share at one point in time in China had done. Is that something that we are thinking about as we start to increase our presence in offline?

Wang Xiang — President

Actually we — right now, we are using the same product portfolio to sell the same product portfolio online and offline. So, we know that — we notice that for the mid and high tier products, maybe many consumers, they want to feel and touch, they want to buy from offline. Yeah, we are making that effort to do a better demo, so that our customers even in the rural areas can see the device, can feel and touch the device before they made their purchasing decision. This is what we’re trying to do. But we are still maintaining the same product portfolio for online and offline.

Gokul Hariharan — JP Morgan — Analyst

So, you don’t see the demand for different kind of product portfolio offline so far from the distributors or are your customers?

Wang Xiang — President

So, we — our offline model actually, as we — we build the stores together with our partners. We are not using the traditional distribution channel a lot. Actually, we work directly with the retailers, the partners to build a store in the Tier 1, Tier 2, Tier 3, Tier 4, Tier 5 cities in the countries. So, in the Tier 1 cities, actually we have our store, our flagship store in the shopping malls, right. But in Tier 6 to Tier — Tier 4 to Tier 6 cities, maybe we — normally, we find a partner to build a store together with us.

So, we are — actually, we are very responsible for finding a place to hire their staff and do some of the decorations, renovations for the store, but Xiaomi, we will offer — we will send store manager, that’s on our payroll, our own employee to be the store manager and also we help them on the furnitures, the decorations, the billboards and the more importantly, we provide the tools, I just mentioned, very powerful tool for retail, so that we help our partner to manage their inventory and the promotion, so that they can focus their effort to sell the product. So, that’s the new bonding [Phonetic].

Gokul Hariharan — JP Morgan — Analyst

Okay. That’s very clear. My second question is on the Internet services. I mean, the gross margin we are seeing is probably the highest we’ve seen for quite some time. What goes into the gross margin mix? Is it just that advertising is a much higher margin product compared to everything else? And also from a growth perspective, could we see first half of this year to be kind of like a broadened in terms of year-on-year growth for Internet services and expect the reacceleration that’s beginning into second half of this year given the Internet finance-related scale down probably lastly then?

Wang Xiang — President

Yeah, look, Gokul, I think the combination, right, I think the gross margin being high in first half — in the first quarter was one that you rightly said, the advertising gross margin. I think second is the fintech, the recovery of the fintech gross margin as well where I think, remember last year, first quarter is probably lot of loan provisions and whatnot, right. And so, the margin was not as good and it dragged down the overall margin. And this year, this first quarter even though, that the overall revenue for the fintech business was lower, but the margin has actually ticked up at the — at the credit cycle in China improved, right. I think so those are I think that the two key factors, right.

I think in terms of what’s going to happen for the Internet services over the year, I do — I mean over this year, I do think that you start to see that picking up in the next three quarters, as we continue to generate a good proportion of revenue coming from the advertising business, right, as our base continued to grow and as our MAU, nobody asked us MAU questions so far this quarter. So, you guys must be happy with that. And as our China MAU continues to grow, that outflow bring a higher percentage of revenue from advertising overall and then, the Gaming recovery as well as the or normalized comparison, that’s why the fintech comparison being more normalized. We will certainly see the second half of the Internet services being better than the first half.

Gokul Hariharan — JP Morgan — Analyst

Got it. Thank you very much.

Wang Xiang — President

Thank you.


Thank you. Our next question comes from Piyush Mubayi with Goldman Sachs in Hong Kong. Thank you.

Piyush Mubayi — Goldman Sachs — Analyst

Thank you. Can I just dwell on the last point you just made in response to Hari’s question about the MAU. So, if I look back at all the orders for the last three years, you’ve never grown your MAU in China the way it’s grown in the first quarter, it’s probably explains the strength of the quarter’s Internet revenue and — as well as the higher gross margin. If you just take us through what was so different about this quarter that led to almost an 8 million add when we’ve never seen anything, even I think you’ve got to go back three years to see a number at 5 million a long, long time ago. What was different in the quarter that made that difference?

And also you talked about the premium that you earn with higher-end smartphones. Could you give us a feel for, is it the factor three, or factor four, or factor five that comes through because of the high-end customer who comes on board?

And my third question is on the smartphone side, you build out the vastly improved distribution network in the offline space. Can you give us a feel for what percentage of the offline business — offline sales of smartphone you’re capturing? Also give us a feel for how much — how this premium end of customer base is coming onboard? Where is it coming onboard from online, offline, or is it just a simple fact that you’ve got a far better range of smartphones or is it with the Mi 11, it was really three products being launched simultaneously that led to 3 million sales. So, just take us through the dynamics that you would firstly? Thank you.

Alain Lam — Vice President, Chief Financial Officer and Deputy Chairman of Airstar Digital Technology

Yeah, Piyush, let me try and then Xiang Wang can add to it. I think first of all, the growth in users as we previewed in our previous call was really due to a large number of new Xiaomi users, right, people who haven’t used Xiaomi phones before, right. So, Xiaomi 11, for example, was very popular and last quarter, we did talk about a large percentage of those buyers being new Xiaomi users, right. The new phones we launched are trying to address different user base as well, right, whether it’s the premium end users, whether business users, whether it’s the female demographics, whether it is the gamers, right. So, we are — our product lined up, not just more product, but also kind of different products offsetting different segments and different demographics. And I think that’s probably key to attracting a lot of our new users to Xiaomi, they haven’t previously used Xiaomi phone before, right. So, I think that leads to a larger number of new users. A large number — a large increase in MAU for this quarter, right. So, that’s the first question.

Second question is, to give you a sense of advertise difference between premium phones and kind of the mid to low-end phones. I mean, we can tell you that, like for example, pre-installed, right, which is not a big part of the advertising revenue, but just an illustration, right. I mean, we probably see three to five more apps that we can pre-install on a Xiaomi phone versus a Redmi phone. I just give you an illustration. So, in terms of the space and people willingness to buy those things that we offer. In terms of unit pricing as well, I think you probably see a 10% to 20% difference in terms of unit price for each of those apps, right.

So, factoring people, a larger number of apps being pre-installed and people willing to buy and a higher ARPU or higher unit price for each of those apps that give you sense, right, in terms of how much we can generate, not to mention the other revenue like search and gaming and whatnot, right. So, I hope that — I mean it’s probably, not four times or five times, I don’t think, but it’s a decent premium, right.

In terms of the offline smartphone sales and online smartphone sales, look, I think the offline sales is still very early for us, right. We are what, 5,500 [Phonetic] stores, right — right now.

Wang Xiang — President

5,500 stores.

Alain Lam — Vice President, Chief Financial Officer and Deputy Chairman of Airstar Digital Technology

Yeah, 5,500. But if you look at our competitors, they’re probably more like 50,000 to 100,000 stores, right. So, we feel very early, and if you look at our market share in the offline market, it’s still very low, right and so — even though our online market share is very high right now. So, I think it’s across all channels and obviously, we’re still selling more offline — online and offline at this point in time, but we want to change the ratio, right. That’s why we want to build 10,000 plus stores this year, right, to capture the opportunity systematically.

Wang Xiang — President

And also, you see, actually online market represent probably 30% of the entire China smartphone shipments, right. The offline is 70%. In those 70% right now, we are only probably 7% — maybe 7-something-percent of the share, so that means we have huge, huge room to grow in the offline market if you want to be Number 1, right. So, we — that’s why we are working very hard on the offline strategy and execution.

So, I think one of the issue for us is we are in the — as Alan mentioned, we are in very early stage of the offline development. Like the coverage is our current priority, we want to increase the coverage. We want that people who buy our product, they can find a store, our store in the — especially in the rural areas, not only Tier 1, Tier 2, Tier 3 cities, but those countries and towns, right. So, we got to make the coverage there. So, I visit after the early May, I visit Hebei province, I visit towns and the villages, I see the demand there. So, we must have coverage to build the — covering in those areas, so that we can sell, make actual sales in those areas. So, that’s a — that means a huge potential for us.

Piyush Mubayi — Goldman Sachs — Analyst

All right. Thank you.


[Operator Closing Remarks]


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