CTI20 Notes – Xiaomi 4Q18 earnings

Disclaimer: These notes are shared for informational and educational purposes only. THIS IS NOT INVESTMENT ADVICE.

These notes were composed on April 7, 2019 for the China Tech Investor podcast episode 20, listen on anchor.fm. Xiaomi is traded under 1810 in Hong Kong and ADRs under XIACY.

Revenue growth

Source: Xiaomi Q4’2018 investor presentation
** IoT and lifestyle includes laptops and TVs

International revenue reached RMB 70 billion, YoY growth of 118.1%, about 40% of total revenues.

Xiaomi (and Huawei) is growing in an industry that is shrinking. That means they are gaining market share.

Source: Xiaomi investor presentation, IDC

They have increased their AI patent applications in the 3 year period ’16-’18 significantly from ’13-’15.

Source: Xiaomi investor presentation, Nikkei.com

Some new products launched in 2018, IoT and Lifestyle segment:

  • Air conditioner (July 2018)
  • Washing machine (Dec 2018)

Key IoT products, excluding TVs and laptops:

  • Wearable watch
  • Electric scooter
  • Floor sweeping robot

IoT platform has 151 million connected devices as of Dec 2018, YoY growth of 193.2%

Teaming up with IKEA

All IKEA smart lighting products can be connected to Xiaomi IoT platform and controlled by Xiaomi AI Assistant and Mi Home App

Interesting note: 50%+ Mi Home App users are non-xiaomi phone users

Internet Services

Source: Xiaomi investor presentation

International Market Share

  • #1 in India for six quarters, Canalys estimates just south of 30% market share
  • #2 in Indonesia, 21% market share, after Samsung with 24.5% market share
  • By shipment growth, #4 in Western Europe. BUT market share still low (3.2%) compared to Samsung (32%), Apple (26%) and Huawei (20%)

Financials

Lei Jun’s April 25, 2018 blog post: “At the Mi 6X launch event in Wuhan earlier today, we promised our users that our hardware business, including smartphones, IoT and lifestyle products, will have an overall net profit margin that will never exceed 5%.”

Source: http://blog.mi.com/en/2018/04/25/xiaomis-hardware-business-will-have-an-overall-net-profit-margin-that-will-never-exceed-5-percent/

And the same pledge from Xiaomi Chairman’s letter to shareholders:

Source: http://www3.hkexnews.hk/listedco/listconews/SEHK/2018/0625/01810_3375336/E105.pdf

Some financials here:

Source: company filings, Hullx calculations

Inventories saw a spike upward. An increase in inventories, especially finished goods could mean three things: (1) products are not selling as fast as in prior periods, (2) management decided to boost inventories for expected future sales, or (3) a bit of both.

Management addressed this on the call and in their annual filing. It seems they are trying to “get ahead” of the negative implications of increasing inventories.

“…an increase in inventories of RMB4.9 billion. The increase in inventories was due to the decline in sales of our smartphones in the fourth quarter of 2018 and our procurement in preparation for the new product launches. Our inventories as of January 31, 2019 declined 12% comparing to that as of December 31, 2018, according to management accounts, primarily attributed to the increase in sales of our smartphones post the launch of new smartphone models. Our inventory turnover days was 55 days in January 2019, excluding the inventories related to real estate business, according to management accounts.”

Free Cash Flow:

  • Cash used in operations: RMB 6.2 billion
  • Less Capex of RMB 2.3 billion
  • Gives, free cash flow of Negative RMB 8.5 billion
  • Cash and Cash equivalents was RMB 30.2 billion, ST bank deposits were RMB 1.3 billion

Earnings Call notes

Lei Jun started off talking about revenue growth, IDC rankings, design awards, quality improvements…

Multi-brand strategy: Redmi and Xiaomi

  • Redmi will pursue the highest price-performance ratio with the best quality in the market.
  • Xiaomi will be used to penetrate the mid to high-end market.

— Are they that different?

Lei Jun spent some time talking about demand for Xiaomi 9 outstripping demand. He addressed a rumor that the company is purposefully withholding supply, announcing Xiaomi 9 supply is likely to exceed 1.5 million units by end of this month (March). — Comment: Kind of odd addressing customers on a quarterly earnings call.

Question: ARPU trend. Q4 sequential quarter decline in advertising revenue and ARPU

“Revenue from our internet services segment decreased by 14.6% from RMB4.7 billion for the third quarter of 2018 to RMB4.0 billion for the fourth quarter of 2018, primarily due to decreased advertising revenue.” (company filing excerpt)

Answer: (1) international internet services is lower, but international has added MAU (the denominator in ARPU) and (2) China domestic advertising market, gaming in particular affected them.

Question: 2018 smartphone gross margins took a dip. Should we expect margins to revert back to 2017 or continue in line with 2018?

Answer: Because we promised we will make no more than 5% income margin on hardware, before we went public, our goal internal actually is to make 2% to 3% in the future, so the number that we focus on is hardware net income margin.

Lei Jun: 我们的目标就是两三个点所以我不是特别关心毛利。My translation: Our goal is 2% to 3% so that’s why I don’t care about the gross profit.

Lei Jun (CEO and Founder) has three main focuses:

  1. Net promoter score, a reflection of customer satisfaction
  2. Smartphone shipments
  3. Deepen internet services offering