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Xiaomi Corporation (01810) Q2 2022 Earnings Call Transcript

1810 Earnings Call - Final Transcript

Xiaomi Corporation (HKEX: 1810) Q2 2022 earnings call dated Aug. 19, 2022

Corporate Participants:

Anita Chan — Head of Investor Relations

Wang Xiang — President, Partner

Alain Lam Sa Wai — Vice President and Chief Financial Officer

Analysts:

Andy Meng — Morgan Stanley — Analyst

Kyna Wong — Credit Suisse — Analyst

Timothy Zhao — Goldman Sachs — Analyst

Hexin Wang — CICC — Analyst

Yingbo Xu — CITIC — Analyst

Thompson Wu — UBS — Analyst

Leping Huang — Huatai International — Analyst

Gokul Hariharan — J.P. Morgan — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Xiaomi 2022 Interim Result Announcement Conference Call. [Operator Instructions]

I’d now like to hand over the conference to your host today, Ms. Anita Chan, Head of Investor Relations and Corporate Finance. Please go ahead, madam.

Anita Chan — Head of Investor Relations

Good evening, ladies and gentlemen. Welcome to the investor conference call hosted by Xiaomi Corporation regarding the company’s 2022 interim results.

Before we start the call, we would like to remind you that the call may include forward-looking statements, which are underlined by a number of risks and uncertainties that 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, Vice President and Chief Financial Officer of Xiaomi Corporation; CEO of Airstar Digital Technology. To start, Mr. Wang will share recent strategic updates of the company. Thereafter, Mr. Lam will review the business and financial performance for the first half of 2022. Following that, we will move on to the Q&A session.

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

Wang Xiang — President, Partner

Yeah. Thank you, Anita. Nice meeting you here again. Thank you for joining our second quarter 2022 earnings call.

In this quarter, our industry has faced many challenges, including rising global inflation, foreign exchange fluctuation, complex geopolitical environment, COVID-19 resurgence in Mainland China, so on and so forth. These challenges significantly impact overall market demand and our financial results for the period. In the face of marketing pressure from both domestic and overseas markets, we remain focused on stabilizing our core business and leveraged our global scale to mitigate risk in any single market, more so than any other time.

In times of difficulty, it is vital to strengthen our core capabilities and invest in R&D and technological innovation to enhance our long-term competitiveness. With this in mind, we continue to advance our business strategies and strengthen our foundation. Our second quarter total revenue reached RMB70.2 billion with smartphone revenue reaching RMB42.3 billion, IoT and the lifestyle product revenue of RMB19.8 billion and the Internet services revenue of RMB7 billion. Meanwhile, we have been actively developing our smart EV and other new initiatives. Our adjusted net profit reached RMB2.1 billion in the second quarter of 2022, which included RMB611 million of expenses related to our smart EV and other new initiatives.

In the complicated and the ever-changing international market, our core advantage is our ability to mitigate risks in any single market with our global scale and footprint. In the second quarter, we maintained our number three position in global smartphone shipments and continue to advance our market position quarter-over-quarter. In the second quarter, our smartphone market share grew quarter-over-quarter to 14% globally, 16% in Mainland China and 22% in Europe. Meanwhile, our smartphone market share ranked top three in 55 markets and among the top five in 77 markets.

We continue to attract new users through our increasing popular new smartphones, both globally as well as in Mainland China. Our global MIUI MAU reached 547 million in June 2022 and our Mainland China MIUI MAU increased for seven consecutive quarters, reaching 140 million. It is worthwhile to note that our overseas Internet services revenue increased by over 50% year-over-year, contributed nearly 24% of total Internet services revenue in this quarter. This is a record high.

We continue to invest in R&D and strengthened our competitiveness with technology breakthroughs and deliver ultimate user experience. In the second quarter, our R&D expenses reached RMB3.8 billion, an increase of 23% year-over-year. Our R&D expenses are expected to reach RMB17 billion this year and more than RMB100 billion over the next five years. Spanning from smartphones to wearable devices from smart homes to smart manufacturer from smart EV to bio robots, Xiaomi has been constantly exploring innovations in various technologies to better connect people in the world and building ever-evolving Xiaomi technologies ecosphere.

We made great progress on smart EV and other new initiatives. Last week, we officially announced that we will adopt our self-developed autonomous driving technology. We plan to invest in R&D of RMB3.3 billion in the Phase 1. We have established the R&D team of more than 500 world-class professionals and plan to create a fleet of 140 test vehicles in Phase 1, aiming to become an industry leader in smart EV by 2024. Meanwhile, we introduced our first self-developed humanoid robot, CyberOne. Robotics is considered the crown jewel of manufacturing. With humanoid robots being the ultimate goal for many across the industry, this new breakthrough represents a milestone in our exploration of new technology frontiers.

In August 2022, Xiaomi was named on the Fortune Global 500 for the fourth consecutive year and ranked 266, advancing 72 spots from last year. As a global company, we actively practice corporate social responsibility. In July 2022, Xiaomi was selected into Forbes China’s 2022 Best Employers of the Year. Meanwhile, we established Beijing Municipal Natural Science Foundation, Xiaomi Joint Innovation Fund, to support fundamental research in fields, including AI, digital information, smart manufacturing.

Furthermore, we customized the Redmi Note 11E for the elderly to bring convenience to their lives, bring a more elder-friendly and accessible environment with our advanced technology. We believe it is necessary for us to spearhead social responsibility either against macroeconomic headwinds faced with macroeconomic uncertainties and the challenges. What we can do is to firmly execute our core business fundamentals to strengthen our capabilities and to invest in technological innovation and self-improvement. We believe these will lay the foundation for our healthy and sustainable development over the long-term. And together with all of you, our unwavering passion will help us discover opportunities and find the silver lining behind the cloud as we make the world a better place.

With that, I will hand it over to Alain to discuss our second quarter results in greater details. Alain, please.

Alain Lam Sa Wai — Vice President and Chief Financial Officer

Yeah. Thank you, Xiang. Good evening everyone. I’d like to walk you through more details of our second quarter performance. As Xiang mentioned, this quarter we faced multiple challenges in our business, including continued macroeconomic headwinds, which caused global inflation to rise significantly as well as extreme volatility in foreign exchange rates. And in Mainland China, we have witnessed a resurgence in COVID-19, which caused significant disruptions to our offline business. Despite these challenges, we continue to focus on executing our core business strategies and strengthening our long-term competitiveness.

In the second quarter, our revenue reached RMB70.2 billion and adjusted net profit reached RMB2.1 billion, which included expenses of RMB611 million for smart EV and other new initiatives. Our three major business segments remained resilient despite the continued challenging macro environment. We maintained our number three position in terms of global smartphone shipments. The number of connected devices on our AIoT platform increased more than 40% year-over-year. Our MIUI MAU reached 547 million globally and 140 million in Mainland China, both hitting record highs.

Our brand continue to gain recognition worldwide. In August, we were named on the Fortune Global 500 list for the fourth consecutive year and ranked 266, up 72 spots from 2021. In the second quarter of 2022, global smartphone industry shipments dropped nearly 8% quarter-over-quarter. Despite this, our smartphone shipments still achieved quarter-over-quarter growth and we have managed to increase our global market share for two consecutive quarters from 12.5% in Q4 2021 to 13.8% in Q2 2022.

Our investments in premiumization strategy have resulted in increased market share in the premium smartphone market in Mainland China. In this quarter, according to third-party data, our market share in the RMB3,000 to RMB4,000 price segment in Mainland China increased 3.5 percentage points year-over-year to 18.2%. And in the RMB4,000 to RMB5,000 price segment, our market share rose 2 percentage points year-over-year to 15.5%. We delivered strong results during the 618 Shopping Festival. Our cumulative paid GMV from all those channels exceeded RMB18.7 billion during this festival and we ranked number one among Android smartphones in terms of both sales volume and sales value on JD.com, Tmall.com and other platforms. Our IoT and lifestyle products also achieved remarkable results. On JD.com and Tmall.com, we took 148 number one ranking across AIoT categories.

Our new retail strategy in Mainland China has been making good progress. As of June 30, we had over 10,600 offline retail stores and our offline smartphone market share in Mainland China increased to 8% this quarter. Our offline new retail strategy is highly complementary to our premiumization strategy. According to third-party data, in Mainland China, the proportion of our premium smartphone shipments sold through the offline channels increased over 5 percentage points year-over-year this quarter. In addition, our offline stores have helped us cross-sell more IoT products. In this quarter, the proportion of our offline store GMV derived from IoT products increased over 11 percentage points year-over-year. Due to improved efficiency, our average single store GMV in June rose more than 20% compared to December 2021.

Next I’ll discuss our latest technologies in greater detail, some of which we debuted in our launch event last week. Technology advancement is our foundation and we continue to push the frontiers in technological innovation. This year, we expect R&D expenses to reach RMB17 billion, which represents a 40% compound annual growth rate of 2017 and we expect to invest over RMB100 billion in the next five years. At the same time, we are building an ever-expanding technology ecosphere, spanning smartphones, wearable devices, smart home, smart manufacturing, smart EVs and bionic robots to better connect people to the world around them and improve their lives.

In August, we launched our second-generation foldable smartphone, which we call Xiaomi MIX Fold 2, with a revolutionary ultra-slim and lightweight design. Xiaomi MIX Fold 2 features our self-developed Micro Waterdrop Hinge and flexible ultra-thin glass, achieving width of 5.4 millimeter unfolded and the weight of 262 grams and it’s one of the thinnest foldable smartphones in the market. Xiaomi MIX Fold 2 is also equipped with the Eco2 OLED flexible display, which greatly increases light transmittance, while reducing power consumption. Furthermore, it is also equipped with the Snapdragon 8+ Gen 1 processor, the Leica Summicron lenses and MIUI Fold 13, which is designed specifically for foldable smartphones.

We also launched our new premium variable products alongside Xiaomi MIX Fold 2 last week. Our new TWS earbuds, the Xiaomi Buds 4 Pro offer improvements in sound quality, noise cancellation and dimensional audio so that users can experience immersive life-like sound. Our smart watch, Xiaomi Watch S1 Pro provide a truly luxurious experience with its exquisite appearance, full range of fitness mode and multiple health functions, both represent the highest price TWS ear buds and smartphone we have launched today.

In the smart home category, we also vastly upgraded our products to bring healthier smartest appliances to our users. Our large capacity Mijia Dual-Drum Washer Dryer integrate many functions such as separate and simultaneous washing and drying and bacteria and mites removal. Our Mijia Purifying Range Hood uses advance technology to capture smoke fumes and PM2.5 particles to protect air quality, while cooking. Both of these represent our application of innovative science and technology to home appliances.

Last week, we also provided an update on our latest autonomous driving technology. We plan to adopt a self-developed full stack approach, covering driving scenarios, including highways, urban landscapes, parking lot and more. At present, our autonomous driving team has more than 500 employees and we plan to invest RMB3.3 billion in the first R&D phase with the goal of becoming a first-tier player by 2024. We also launched our first full-size humanoid bionic robot CyberOne last week, demonstrating our exploration of new cutting-edge technology. CyberOne is capable of bipedal-motion balancing using mechanical joint motors and full-body control algorithms. Furthermore, it can detect human emotions and reconstruct 3D virtual environments of the real world using our self-developed audio and vision of algorithms.

Next let us dive deep into each segment, starting with smartphones. In this quarter, macroeconomic headwinds as well as COVID-19 resurgence impacted overall smartphone demand and global smartphone industry shipments declined 8% quarter-over-quarter. Against this challenging backdrop, we successfully increased our smartphone shipments by 1.5% quarter-over-quarter to reach 39.1 million units. Our smartphone revenue reached RMB42.3 billion.

We announced our partnership with Leica in May. And in July, we launched the Xiaomi 12s series, our first smartphone series with an imaging system co-engineered with Leica. Xiaomi 12S Ultra is powered by the Snapdragon 8+ Gen 1 processor and two of our proprietary chips, the Surge G1 battery management chip and Surge P1 charging chip, offering faster performances and lower power consumption. Xiaomi 12S Ultra also delivers a truly exceptional imaging experience. It features Leica Summicron lenses and the extra-large Sony IMX989 one-inch image sensor along with the Leica Authentic Look and the Leica Vibrant Look imaging profiles, pushing imaging technology to new heights. It’s outstanding photography experience has won rave reviews. And all three models of our Xiaomi 12S series has achieved over 98% positive ratings on JD.com.

We are committed to bringing cutting-edge technologies to the mass markets. In August, we launched Redmi K50 Ultra, which is equipped with the Snapdragon 8+ Gen 1 processor, a customized 1.5K display that balances image quality with battery life and a 5,000mAh battery with support for 120 watt fast-charging. Despite the challenging macro environment — macroeconomic environment, we continue to advance our overseas business and maintained leading positions in major global markets. In this quarter, our market share improved quarter-over-quarter in Europe, in Mainland China, in the Middle East, in Southeast Asia, Latin America and Africa. Furthermore, our ranking improved quarter-over-quarter in Europe, Mainland China and the Middle East.

As we mentioned before, our scale as well as our global operations help us mitigate volatility risk in any single market. According to Canalys, in the second quarter of 2022, we ranked top three in 55 markets and top five in 67 markets globally. We continue to strengthen our operations in the overseas carrier channel. In this quarter, our carrier channel market share in Europe increased by 1 percentage point quarter-over-quarter to 18%. And our carrier channel market share in Latin America increased by 1.6 percentage points quarter-over-quarter to 19.3%. Furthermore, our smartphone market share through carrier channels ranked top three in 40 overseas markets.

Now let’s look at the IoT business. Performance of our AIoT business was resilient, benefiting from solid growth in Mainland China. In the second quarter, our IoT and lifestyle product revenue reached RMB19.8 billion, up 1.7% quarter-over-quarter. As of June 30, the number of connected devices on our AIoT platform reached 527 million, up over 40% year-over-year. The number of users with five or more connected AIoT devices exceeded 10 million for the first time, up 37% year-over-year. In June, MAU of our AI Assistant reached 115 million, up nearly 13% year-over-year and MAU of our Mi Home App reached 70.8 million, up over 25% year-over-year.

Let’s go into more details on the key IoT categories. In the second quarter, our global smart TV shipments achieved year-over-year growth to reach 2.6 million units against an overall industry decline and we maintained our top five global rank. In Mainland China as well as India, we were able to maintain our number one position.

Our smart white goods business is growing steadily and making good progress in the premium markets. In this quarter, revenue of our white goods business grew by more than 25% year-over-year and achieved a record high. Shipments of air conditioners exceeded 1.2 million units in the second quarter, an increase of over 35% year-over-year. Furthermore, cumulative shipments of air conditioners in the first seven months of 2022 already exceeded the 2 million units we shipped in 2021. Meanwhile, our refrigerators and washing machines are also gaining market recognition. In this quarter, refrigerators shipment reached approximately 116,000 units, an increase of 30% year-over-year and washing machine shipment exceeded 240,000 units.

Last week, we launched our new tablet, Xiaomi Pad 5 Pro, featuring a 12.4-inch 2.5K display, Snapdragon 870 processor, 20 megapixel front camera on the long side and ultra-long battery life. It also comes equipped with MIUI Pad 13, which offers customized system functions adapted for tablets, offering a compelling experience for both office use as well as entertainment.

We continue to be a leader in wearable products globally. Our TWS shipments ranked number three globally and our ranking in Mainland China rose to the number one position in the second quarter. Furthermore, our Xiaomi Smart Band 7 Pro has been well received with its brand new design. It features a large rectangular display with a thin lightweight design as well as a built-in GPS, 117 fitness modes and all day health tracking. Since launched in July, it has shipped more than 400,000 units in Mainland China.

Now let’s look at the Internet services. In this quarter, our global and Mainland China MAU both achieved record highs. Our global MAU in June reached 547 million, an increase of 93 million year-over-year. And our Mainland China MAU reached 140 million, an increase of 16 million year-over-year. In addition, our global TV MAU reached 53 million, showing very healthy growth momentum. Our Internet services revenue remained stable despite pressures in Mainland China. In this quarter, Internet services revenue reached RMB7 billion.

Our Internet services gross margin rose 2.3 percentage points quarter-over-quarter to 73% as a result of higher revenue contribution from the advertising business. Our global advertising revenue remained stable despite the decline in industry advertising budget in Mainland China. Thanks to the expansion of our overseas user space, especially in the developed markets, our overseas Internet services revenue achieved a quarterly high. In this quarter, overseas Internet services revenue reached RMB1.7 billion, up 52.1% year-over-year and accounted for a record high 23.9% of total Internet services revenue.

Benefiting from multiple monetization engines, our advertising business enjoyed solid performance. In this quarter, performance and brand advertising revenue in Mainland China was down quarter-over-quarter due to the impact of COVID-19, which resulted in lower advertising budget. However, our overseas ad revenue hit another quarterly high, driven by strong operations of our content and services. Our global search revenue has continued to achieve record highs now for the eight consecutive quarters. Besides the growth in Mainland China, improved monetization capability and our expanding MAU base in the overseas market have also helped our overseas search revenue to achieve another quarterly high.

Furthermore, as our pre-installed units increased and as we work with more global partners, our pre-installation revenue in both Mainland China and overseas markets increased quarter-over-quarter. Our TV Internet services revenue continued its robust growth momentum. Driven by enriched content and expanded user scenarios, our TV value-added services revenue increased by about 25% year-over-year.

Now let’s move on to the more detailed financials. First, a look at the top-line performance of each segment. In the second quarter, total revenue was RMB70.2 billion and 48.4% came from overseas. Smartphone revenue was RMB42.3 billion, IoT revenue was RMB19.8 billion and Internet services revenue was RMB7 billion. In the second quarter of 2022, our gross margin reached 16.8%. Smartphone gross margin decreased year-over-year to 8.7%, mainly due to enhanced promotional efforts to clear our inventory, especially during the 618 Shopping Festival in Mainland China as well as an increase in costs due to U.S. dollar appreciation.

IoT gross margin increased year-over-year to 14.3%, mainly due to decreased price of key components such as display panels. Smartphone and AIoT gross margin decreased quarter-over-quarter due to enhanced promotional efforts during the 618 Shopping Festival. Internet services gross margin decreased slightly year-over-year to 73% as a result of lower pre-installation revenue related to smartphone shipments and increased quarter-over-quarter driven by higher contribution from our advertising business. In the second quarter, overall operating expense ratio was 14.8%, which included expenses related to smart EV and other new initiatives of RMB611 million. We’ll continue to invest in R&D and our R&D expense ratio reached 5.7% in this quarter. Our cash resources remained robust, reaching RMB102.5 billion as of June 30.

Lastly, I would like to provide an update on our ESG initiatives. We actively practice corporate social responsibility and feel honored to have been recognized for our efforts. In July, Forbes placed Xiaomi on its 2022 Best Employer of the Year list and we were named as China’s Best Employer of the Year, China’s Most Sustainable Employer of the Year and China’s most Digitally Responsible Employer of the Year. Furthermore, we won the Best ESG in the Technology Hardware sector in II’s 2022 Asia Pacific Ex-Japan Executive Team awards.

We continuously strive to improve accessibility options and strengthen our data security. For accessibility, Xiaomi unveiled the My Own Voice project, which create a unique and customer voice for users with speech disorders using our self-developed text-to-speech technology. Meanwhile, we collaborated with the Xinyang Government to customize the Redmi Note 11E for the elderly and bring convenience to their lives.

With respect to data security, we launched Xiaomi Electric Scooter 4 Pro, which is the world’s first scooter with pro level certification in Underwriter Laboratories IoT Security Rating. All these demonstrate our commitment to using technology for good and our mission of letting everyone in the world enjoy better life through innovative technology.

Finally, we have always been committed to public welfare initiatives. After the flood disaster in Henan Province in July last year, Beijing Xiaomi Foundation reconstructed 79 village schools and modernized their teaching equipment. In August, we donated RMB1 million to Hainan Red Cross Society to support the pandemic prevention and control there and the procurement of related supplies. We also try to give back to our community through talent development. Recently, Beijing Xiaomi Foundation has committed to donate RMB500 million to Beijing Municipal Natural Science Foundation Committee to support research and education. In addition, since February of this year, Xiaomi Young Scholar Program has been rolled out to over 10 universities in Mainland China, including Peking University and Tsinghua University.

This concluded our prepared remarks. Let’s open the call to questions from investors.

Anita Chan — Head of Investor Relations

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question is come from Andy Meng with Morgan Stanley. Andy, please go ahead.

Andy Meng — Morgan Stanley — Analyst

[Foreign Speech]

I will do the English translation. My question is related to the smartphone volume and gross margin. In the second quarter, the smartphone shipment has seen slight increase versus first quarter, but the gross margin has seen quarter-over-quarter decline. The management have mentioned June 18 promotion and FX issue. Looking into the third quarter, we have seen the continuous launch of high-end smartphone models, including Xiaomi 12S series, MIX Fold 2. Will those high-end products into this positive impact on the gross margin? Given there is no June 18 promotion festival in the third quarter, how should we think about the smartphone volume and gross margin trends in the coming quarters? Thank you.

Alain Lam Sa Wai — Vice President and Chief Financial Officer

Thanks, Andy. Let me try to answer your question in English. As I mentioned in my prepared remarks, so obviously there are few factors that drove the decline in gross margin in Q2. 618, I think is one. Obviously, that’s a big festival in China. The FX — the U.S. dollar appreciation obviously increased our cost versus last year. And so that has also impacted our gross margin somewhat.

In addition to that, last year — I mean, I think it’s worth mentioning that in Q2 of last year, obviously, we have a number of high-end products launching in that quarter. This year due to the fact that we are waiting for the new Qualcomm chipsets to be shipped, the new 8+ Gen, we delayed our launch, the launch of our premium products, the Ultra, the 12S series, etc., to the third quarter of this year. And as a result, I think they are more old products that we’re trying to sell and clear in second quarter, which had — which has caused the margin to decline.

Now looking forward to the second half, obviously, we were trying to make sure that the gross margin will stay at a healthy level with the new products that we’re launching, with some of these new products that we’ll be launching in the overseas market, etc., we will hopefully be able to maintain our gross margin at a healthier level. But in terms of the shipment forecast, obviously, we are trying to — with the — it depends on a lot of factors in the market, but obviously, we are hoping that the second quarter will be better than the first quarter as usual.

Wang Xiang — President, Partner

Second half.

Alain Lam Sa Wai — Vice President and Chief Financial Officer

Second half will be better than first half as usual normal with the fact that there are a lot of overseas events, including Diwali, including the Double 11 event, including the Black Friday, Christmas, etc., etc. So in the normal market cycle, the second half for smartphone shipment tends to be better than the first half.

Andy Meng — Morgan Stanley — Analyst

Okay. Thank you very much.

Operator

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

Kyna Wong — Credit Suisse — Analyst

Thanks for taking my question. So I have a follow-up question on the smartphone business as well. We see the inventory — we find two things. One is the provision of inventory impairment that increased in the first half. And what kind of the inventory the company has applied a provision to wipe out? The second thing is we see the inventories — finished goods actually up 35% year-over-year as well, in which that we — how should we expect in the second half along with the new product launch and also the sales promotion in the second half as well? How that will impact to the gross margin, which I [Indecipherable] second half to be seeing a healthy level. But what should we understand that implication from the inventory perspective?

[Foreign Speech]

Alain Lam Sa Wai — Vice President and Chief Financial Officer

Yeah. Thanks, Kyna. Thanks for your question. In terms of our provision for inventory — provision for impairment for inventory, we strictly followed the IFRS accounting standards. And for the long-dated inventory, we will be taking provisions on those long-held products. So obviously, once we sell those products, and depending on how much we provisioned, we’ll be able to — well, if we are selling [Phonetic] more than we provisioned, then we’ll be able to reclaim it back, right? But that’s something that, as many people highlighted and as Xiang also highlighted, we spent Q2 clearing some of our old inventory, but there is still something that we need to clear out over time. Obviously, we also said that during the 618 festival, we have been successful in clearing a lot of those inventories, especially in China. So in China, our inventory has come down to a pretty healthy level at this point in time, right?

In terms of — you mentioned the finished goods being much higher in our inventory this quarter, a lot of this is due to the overseas markets. The overseas market, the inventory has stayed relatively high. And as we mentioned, this is due to some of the lower consumption power in the overseas market due to inflation, due to FX, etc., etc., which we won’t go into. We will obviously spend second half trying to dissolve some of these finished products using a number of means, including promotions, including adjustment to our production schedules, etc., etc., to remain — to take that back down to a more normal level.

It’s also fair to say that if we look at the inventory funnel, although it is high, we don’t think that — we think that a lot of these are not really big problem for us. A lot of these I think can be cleared with sufficient measures. So I hope that answered your question.

Kyna Wong — Credit Suisse — Analyst

Thank you.

Operator

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

Timothy Zhao — Goldman Sachs — Analyst

[Foreign Speech]

Thank you, Xiang and Alain, for taking my question. My question is about the Internet services revenue. Could management provide some guidance or outlook on how we should look at the MAU and advertising revenue growth into the second half this year, especially as China’s macro become more stabilized in second half? How should we look at the advertising revenue in the second half in China?

And also related to this, because premium phone is quite important for the Internet services revenue growth. Could management share some color on the proportion of premium phone shipments as a percentage of total shipment in the second quarter? And whether we have any target to achieve for this year? Thank you.

Alain Lam Sa Wai — Vice President and Chief Financial Officer

Thanks, Timothy. Let me address your questions and then see if Xiang have more to add. In terms of our Internet service and in terms of MAU, obviously, as you can see that our MAU has continued to grow pretty healthy. We added close to 19 million MAUs globally. We added 40 million MAUs in China over the last year. And if you look at the past two quarters, in China alone we added close to 10 million — over 10 million MAUs. So that shows that a lot of the new users are coming to Xiaomi are willing to try out our phones, especially the premium smartphones that we offer. And that was — that will set a very strong foundation for our Internet services revenue going forward, both in China as well as in the overseas market.

So obviously, in the near-term, we are, in China especially, the overall ad budget has not been healthy, as you know, given the COVID, given some of the regulatory constraint and whatnot had impacted the overall ad budget. I think that’s something that we’ve noted many times in the past. This quarter, the sudden lockdown of certain cities in China has caused the brand ad budget to drop as well. So what we’ve seen is — and I see that coming from several of our peers as well mentioning that the brand advertising budget has come down in the second quarter of this year. So that has cut the overall size of the growth. But at the same time, as we mentioned that we’ve seen quite healthy growth coming from the overseas market with the help of the MAU growth that we’ve seen.

I think in the second quarter — in the second half, I think we have to see how the market develops. Obviously, the overall ad budget for this year I don’t think people are having a pretty robust forecast, and obviously that will filter down to us. But at the same time, I think the overseas market has been quite healthy for us, especially if we continue to add MAUs to our user base. So I hope that answered your first question.

In terms of the second question, with respect to the premium smartphones, the one focus that we have this year is to improve the quality of our premium smartphone. I mean, that’s a very important focus for this year. And I think that as you can see from the recent launches of the 12S as well as our Fold product, I think those have received pretty good review from our users. I think that’s something that we prioritized this year, making sure that these premium smartphones are of high quality. And I think that’s something that will set us up with our brand image as well as set us up for much improved premium smartphone shipments in the coming quarter.

The other thing is, obviously, we did not compare it year-over-year also because there was some delay in our schedule this year because of the launch of Qualcomm. So that’s something that we don’t think is quite comparable with what we disclosed in the first half of last year.

Wang Xiang — President, Partner

Yeah. Actually the improved market share of high-end smartphones is sort of a long effort. So we will continue to make improvement in the overall quality of the high-end smartphones. So we see a good sign from the market that we get a very, very positive feedback from the market about our 12 Ultra, 12S and also Fold. I think that’s a very — give us the confidence that we will continue to be [Indecipherable] And also the high-end smartphone can also help us to drive the Internet service revenue. So we will continue to improve the user experience so that in the longer term we can grow the Internet service revenue. The good signal is that will continue to increase the MAU in China and outside of China. And as Alain just mentioned, so we’ll keep growing the overseas Internet service revenue, that’s also very, very good for us.

Timothy Zhao — Goldman Sachs — Analyst

Thank you.

Operator

Thank you. And our next question is come Hexin Wang with CICC. Hexin, please go ahead.

Hexin Wang — CICC — Analyst

[Foreign Speech]

For the Internet business, could management share the driver for the strong growth of Internet business in overseas market for third quarter and our long-term strategy for the overseas Internet business? And we are very interested about our robot, CyberOne. Could management share some color about our long-term strategy in this area? Thank you.

Alain Lam Sa Wai — Vice President and Chief Financial Officer

Let me first address that and then Xiang can talk about the robot. On the overseas Internet revenue, we mentioned a few factors that has brought the growth in the overseas Internet revenue. Number one is our pre-installation. As the shipments — as our smartphone shipments continue to increase in the overseas market, the ARPU which we were able to achieve on a per installed smartphone has also increased. So that has helped the pre-installation revenue to increase. Second is our search revenue. As our MAU continues to grow, the search revenue, the search volume will grow. And as a result, our search revenue continues to improve. I think this is quite straightforward.

Also I think to note that in the search revenue, revenue coming from a user in the more developed market is higher than coming from — than a user coming from a developing market. So as we have more users in the developed market using our search engines or using other people’s search engines, we’re able to receive a share of that revenue — of search revenue.

As we look forward, we do think that there are still a lot of room to grow the overseas Internet revenue. And because we are continuing to penetrate our market share, continue to increase our market share, we got to Europe, we’ve got to number two in Europe this quarter. So we think that there is still a lot of room to improve our monetization in those areas. At the same time, we are also exploring other ways of monetization, not just advertising. We have scope to improve our monetization, for example, in gaming, in literature, etc. Those are the stuff that we have been exploring.

Xiang, do you want to answer the question?

Wang Xiang — President, Partner

And also, as we continue to increase our market share in Europe, especially in Western European market, that will also help us to increase our Internet service revenue. Also regarding to the robotics, so I think this is — the CyberOne is also — although it’s a second generation of our category, but still very, very early stage. So actually we — the initial idea is to create an open platform so that — let more engineers get involved or get interested into those areas that can help us in the longer term and also we can also let a lot of the engineers outside Xiaomi also participate those innovation. So that’s also — the current CyberOne is also very, very — in a very early stage. The cost is still very high. So we will continue to invest and to explore for the future.

Hexin Wang — CICC — Analyst

Thank you.

Operator

Thank you. And our next question is come from Yingbo Xu with CITIC. Yingbo, please go ahead.

Yingbo Xu — CITIC — Analyst

[Foreign Speech]

Could you please give us more colors about the IoT market and overseas market? Thank you.

Wang Xiang — President, Partner

On the IoT market side, this quarter — the upside is that we enjoyed pretty healthy growth in the China market Q-over-Q driven by some of the new products that we launched which are super competitive, including smart white goods, including our pad product which continues to be very competitive and our wearable products. The low light is the overseas IoT market. As we said last year I believe, some of our overseas businesses, IoT business was hit by very high logistical costs, which continues to stay high as the fuel cost continue to increase. So that’s one that has hurt our shipments to those market as well as our pricing in those markets.

Second is some of the macro factors that we’ve talked about, including high inflation, high interest rate, etc., has really hit the consumption for a lot of our users in the overseas market. So they cut down on some of the discretionary electronic spent such as our robot cleaners, our scooters, etc. So I think that’s something that we’ve seen what happened this quarter. Obviously, as we said previously, we all think that IoT in the overseas market is a huge market.

So we continue to be optimistic that the market will rebound in the future. But obviously, in the short-term, I think they have to be grappled with some of the factors we mentioned about high inflation, even high U.S. dollars, which obviously caused the consumption power to drop as well as some of these geopolitical uncertainty that has limited the outflow of U.S. dollars in some of these more developing countries. So I think that hopefully these macro factors will come and go, Yingbo, and then we’ll be able to see the growth pick-up again in the overseas market.

Anita Chan — Head of Investor Relations

Operator, next question, please.

Operator

And our next question is come from Thomas Wu with UBS. Thomas, please go ahead.

Thompson Wu — UBS — Analyst

Hello, Xiang, Alan. Thank you again for allowing me to ask a question. Just a very quick one. In the overseas smartphone businesses, especially in Latam, India and Africa, can you give us a quick update on demand and overall environment?

[Foreign Speech]

Wang Xiang — President, Partner

Yeah. We will continue to be very, very positive on the growth potential in many, many international markets, for example, the Latin American market and other nation which market Latin America, India and Africa. So, Africa and Latin America, right now we are doing very good. So I think we’ll continue to grow our business in Latin America and Africa, India also.

So once we solve the supply issues in India, I think we will take the Diwali to ship lot of products into that India market. In the first half actually, we had some issues on the entry level supply. So I think now we are — we have the improvement and we will continue to work with our partners online and offline in the second half, especially on the Diwali. So yeah, I think — yeah, that’s the question.

Alain, do you have anything?

Alain Lam Sa Wai — Vice President and Chief Financial Officer

Thompson, I think the questions that you have is the — I don’t know is the overall demand or you’re seeing our demand. So I think the overall smartphone market I think in many of these areas that you talked about this year in Q2 has seen year-over-year drop just like the — there is a global market. I think that for us, obviously, we talk about some of the areas that we’ve been focusing on such as Latin America. India, I think that there is obviously more competition coming through.

And so some people asked whether — Y-o-Y our market share dropped in India, but that’s also due to some of the supply in the lower end market, which we don’t have. And so we don’t think that losing market share is a lot — at all detrimental to our business. In Latin America, obviously, you’ve seen that our shipment despite the overall market difficulty has continued to increase quarter-over-quarter and we’ve been able to pick up market share in those areas. Does it make sense?

Wang Xiang — President, Partner

Yeah. For example, in Latin America, our market share grew by 3%. I see the shipment increased 24%. We think it’s very, very healthy. In Colombia, we’re keeping number one position. And also, Chile, we maintained our number two position. So I think there is still a lot of potential in Mexico, Brazil and other countries in Latin America.

Anita Chan — Head of Investor Relations

Operator?

Operator

Thank you. And our next question is coming Leping Huang with Huatai. Leping, please go ahead.

Leping Huang — Huatai International — Analyst

Thank you for taking my questions.

[Foreign Speech]

So Xiaomi maintained a very high operating efficiency in last few years, including the gross margin 17.7% and 10.9% for the operating margin last year, because I see that the revenue was — digital revenue declined, we see operating efficiency was declining last few quarters. I fully understand that you need to balance the future investment especially on electric vehicle, but I want to know how you keep the balance in between the investment and operating efficiency in this difficult time? Thank you.

Wang Xiang — President, Partner

So actually, we are — we continue to invest into the R&D. So if you look at the R&D investment volume actually has increased significantly. So I think the challenge for us is because of the demand issue, our revenue dropped. So that will impact the efficiency. So that’s the issue. But we continue to — we are very, very confident in long-term. So we will continue to invest into the R&D, including the mid and high-tier products and the new initiatives. So we believe that that will help us in the longer term. And at the same time, of course, we will do everything possible to increase our shipments and our market share in China and also in many, many other strategic regions, like I just mentioned, Latin America, Europe and China.

Leping Huang — Huatai International — Analyst

Do you have minimum requirement on this operating margin the way you operate the company? Thank you.

Alain Lam Sa Wai — Vice President and Chief Financial Officer

I think — I mean, obviously like a lot of our peers, we’re also trying to control costs as well. If you look at the disclosure on our headcount, you will see that we reduced our headcount Q2 versus Q1. Not a lot, but obviously, the effect will take some time to come through to the bottom line. Obviously, at the same time, while we are reducing our headcount, we are also increasing our headcount in some of these new areas like electric vehicles. But they will take time for these effects to come. So we are doing like what a lot of our peers in the industry are doing, trying to extract more efficiency into our business, number one, while balancing the increase in expenses related to the new initiatives. So I think that’s one.

Two is obviously, we’re also trying to improve the core profitability of our business, the profitability of our core business at the same time. We think that there is a lot of room to grow our operating profit. And so that’s something that we are looking to do in the future.

And the third thing is, in terms of the pocket we have been mind, I mean obviously, if you look at historically, our operating margins have been in kind of the 10% to 12% area. The operating expense ratio was about 10% to 12% area. And so this is something that if we see the improved — environment improved, well, we’d like to get back to that level.

Leping Huang — Huatai International — Analyst

Okay. Thank you very much. Thank you.

Operator

Thank you. We will now invite the last questions. And the question is coming from Gokul Hariharan with J.P. Morgan. Gokul, please go ahead.

Gokul Hariharan — J.P. Morgan — Analyst

Yeah. Thank you. My question is regarding EV. So it looks like Xiaomi is following more of a full stack strategy on the EV development, including in-house manufacturing, developing the full autonomous driving stack, etc. Could we talk a little bit about how Xiaomi decides what to do in-house, what to go out with other vendors given that in the smartphone side and other IoT devices, you had taken a very asset-light and more partner-centric kind of approach to address this market? And also on the autonomous drive, would you consider Xiaomi given that you showcased your solution recently, what us — should we think of Xiaomi as competitor to Baidu, Apollo or Huawei or you’re going to be more like a partner to those softwares and the companies? Thank you.

Alain Lam Sa Wai — Vice President and Chief Financial Officer

I think, Gokul, on the EV side, we look at all possibilities. I think as you can see from the past, we’ve done some of these we’ve done self-development, we’ve also acquired companies like Deepmotion, we’ve also invested in a lot of these related technology companies through our investments team. So I think we are taking a fairly flexible approach in terms of — open approach, I should say, I shouldn’t — I should say, open, in terms of whether we do it in-house, whether we partner whether we use investments and the vehicle, etc., etc. I think that’s something that we look at all possibilities and we find the best thing for us to do, I’ll put it this way. So that’s how we approach this. Number one. Number two, in terms of autonomous driving technology, at this point in time, I think we are just looking to use all these technology in-house for our own car. We haven’t thought about licensing out to other people or enabling other technologies. So this is also similar approach that we take in our smartphone business. So I hope that answers your questions.

Gokul Hariharan — J.P. Morgan — Analyst

Okay, understood.

Operator

[Operator Closing Remarks]

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