Xiaomi executives interpret Q3 financial report

Xiaomi released its financial report for the third quarter of 2022 yesterday. The financial report shows that the company’s total revenue in the third quarter was 70.47 billion yuan, a year-on-year decrease of 9.7%; adjusted net profit was 2.12 billion yuan, a year-on-year decrease of 59.1%; including innovative business expenses such as smart electric vehicles of 829 million yuan.

After the release of the financial report, Wang Xiang, partner and president of Xiaomi Group, Lin Shiwei, vice president, CFO, and CEO of Tianxing Digital Technology, Sun Qian, vice president of finance, Wang Hua, general manager of the public relations department, and other executives attended the two subsequent earnings conference calls. Interpreted the key points of the financial report and answered questions from several reporters.

The following is the transcript of the question-and-answer session of analysts and reporters in this conference call:

Reporter: I saw that the financial report shows that Xiaomi’s adjusted net profit reached 2.1 billion, but its operating profit and profit for the period were negative. Can the management explain the reason behind this? In addition, it is easy to see from the financial report that Xiaomi's revenue and shipments this quarter have improved on a quarter-on-quarter basis. But the management also mentioned in the briefing just now, how should Xiaomi maintain its competitiveness against the backdrop of continued macroeconomic pressure?

Wang Xiang: Looking at our performance in the third quarter, I think the good thing is that our mobile phone shipments, revenue, and gross profit margin of mobile phone shipments have all improved slightly. It's actually a very positive signal for us. I think the main reason for the year-on-year decrease is that compared with last year, it has indeed decreased. We were also out of stock in the third quarter of last year, and the growth last year was indeed relatively good. But judging from the chain comparison this year, we have stabilized the situation. Our pressure comes from global inflation, interest rate hikes, exchange rate fluctuations, etc. These factors have brought us a lot of uncertainty, and have also had a certain impact on demand. Domestic (influencing factors) are mainly the recurrence of the epidemic, which has had a great impact on us. The above factors have contributed to today's situation. Of course, there are other factors. Compared with the third quarter of last year, due to the shortage of goods, the gross profit at that time was relatively higher. Since last quarter, we have gradually paid attention to how to clear the inventory, and have achieved certain results, but inventory clearance also requires some resources. All these factors have contributed to the discrepancies in the data we see now.

Looking ahead, we still have room for growth in overseas markets. In the third quarter, we still had a certain growth in the European market, and Xiaomi’s overall ranking was stable at No. 2, and its market share also increased. This is some positive news and good signs. We will continue to strengthen our strength in these fields and markets. Invest in and refine operations.

Lin Shiwei: Just now you mentioned that Xiaomi's adjusted profit reached 2.1 billion, but according to IFRS (International Financial Reporting Standards), we are negative. The main reasons include the decline in the fair value of our company's investment portfolio and regular investment companies. If you look at other companies with more investment, you may also see (similar situations). First, the performance of the stock market is not very good now, so the prices of some of our listed companies have been lowered, which will affect the fair value of our overall investment portfolio; second, we also have some companies that have not yet been listed. Value adjustments were made because the overall investment market was depressed. Both points are non-cash adjustments for the company. Since our listing, the company has been making similar adjustments. No matter whether the fair value of the investment portfolio rises or falls, we will take this part out and give the adjusted net profit.

Financial Associated Press reporter: I have three questions here. The first question is about products. Can the management reveal the sales performance of Mi 12S Ultra? What is the updated plan for the follow-up Xiaomi MIX FOLD series products? The second question is about instant retail. We have observed that Xiaomi has online stores on Meituan, Ele.me, and JD.com. What are the company’s targeted strategies for improving real-time retail? Such as operation or cooperation methods, etc. The third question is, what plans and strategies does Xiaomi have in the future in terms of boosting Chinese Internet companies to go overseas? In the next period of time, in which markets will Xiaomi's own international business have greater opportunities? Which business will become a new growth point?

Wang Xiang: The high-end products we launched this year have been mentioned by Lin Shiwei just now, including Mi MIX FOLD, Mi 12 series, and especially Mi 12S Ultra. Their reputation in the industry is very good, and the praise rate of Jingdong is 99%. , 98% such a level. These are the two high-end mobile phones with the best reputation since we entered the high-end line in 2010. I think these products are still in short supply at present.

We have also been summing up experience and (exploring) how to do a good job in high-end (line). After all, making high-end (line) is not achieved overnight, it is not just one or two products. From 2010 to 2022, we have also learned a lot in these years, with successes and lessons. Generally speaking, our high-end strategy is more solid. We did not disclose the specific sales figures before, but through the favorable rate and the sales data of Xiaomi's products above 4,000 yuan, you can judge the approximate sales.

About instant sales: We have cooperated with several major platforms, including Meituan, Ele.me, and JD. This is a new exploration. How to make full use of our offline resources and combine these large platforms to provide our users with faster and better services is a very good attempt, and the results of the first phase are also good. At present, JD Daojia and Meituan have access to more than 3,500 stores, and Ele.me has access to more than 1,500 stores. In addition to mobile phones, all products on sale in Mi Home stores include major appliances, ecological chains, etc. All products are already online as long as the store can deliver and distribute goods. If we want to fully develop this channel, the most important thing is to be able to complement each other's advantages and to be able to serve and manage customers around Mi Home's life circle faster. This is very good coverage, our basic goal is to reach consumers within a range of 3-5 kilometers. This is also a good attempt, and Xiaomi will continue to increase operations and investment in this area.

International business: IoT products, including mobile phone products, we will continue to bring more IoT products to overseas markets. At present, Xiaomi has been continuously promoting our IoT products in Europe, especially in some developed or moderately developed countries and regions. I think TV is a very good category. We have entered many countries, especially in Europe and the Asia Pacific. Xiaomi will continue to push our smart TVs to Europe and other places, and we will do better coverage of other hot-selling products, such as robot vacuums.

Lin Shiwei: I also mentioned several numbers in the briefing PPT, so I will repeat them here. We have not announced Xiaomi's shipments, but you can see that our high-end mobile phone ASP (average selling price) increased by about 9% year-on-year, and high-end mobile phone shipments increased by 14% year-on-year. These two data are the performance of Xiaomi in the high-end line in the third quarter.

Second, about direct selling retail. We have cooperated with every major platform, including JD.com, Meituan, Ele.me, etc. During the "Double Eleven" period, we contributed about 190 million GMV (gross merchandise volume), especially now that the epidemic is repeated, which is also beneficial to stores. It is a great help and contributes a lot to their GMV.

Third, about overseas markets. Wang Xiang also mentioned a lot just now. Last quarter, Xiaomi's overseas revenue accounted for about 50.5% of the group's overall revenue. This is also our overseas layout. We will definitely continue to move forward next year, but due to the different developments in different regions, the specific plan is still under discussion.

Reporter: The epidemic has recurred recently. Will this affect the production days of Xiaomi's factories in the mainland? Lastly, management just mentioned whether Xiaomi will save costs? Many technology companies now save capital expenditures through layoffs. Does Xiaomi have a layoff plan for this year and next?

Wang Xiang: The epidemic will have a certain impact not only on us, but on all industries. For example, our processing plants will have a short-term impact due to the epidemic. At present, we are still able to work closely with processing plants and the government to help our factories maintain production while controlling the epidemic. The impact definitely exists, and it is the same for everyone, but I think the impact on Xiaomi is still within the controllable range.

Cost reduction and efficiency increase are what we have been doing since last year. We have been working on reducing costs and increasing efficiency since the beginning of this year, and you have already seen some results. We are now making further plans on how to improve human efficiency and reduce costs. For next year's development and overall performance improvement next year, we will continue to carry out work on cost reduction and efficiency increase.

Lin Shiwei: I would like to add two points. For the time being, the epidemic has little impact on our current production. As long as there are no major problems in South China (where Xiaomi's main production capacity is), the impact will be fine. In addition, as we said just now, our expenses have been decreasing, and we will continue to pay attention to these figures and explore how to improve human efficiency. You may see that compared with the second quarter, the number of our employees has actually increased month-on-month. This quarter, many fresh graduates came to Xiaomi Group. At the same time, we also have some new business investments. But all in all, we will continue to pay attention to how to improve human efficiency.

Bloomberg reporter: I have a follow-up question. Could you ask the management to look forward to the shipments in the Chinese market in the fourth quarter and the overall progress of the Chinese market? In addition, the epidemic has actually affected China's IoT devices. What is the management's assessment of China's overall situation in the fourth quarter? I also saw that Xiaomi IoT has actually made some big moves, such as some equipment investment, etc. In the context of the overall downturn, is Xiaomi's supply sufficient?

Wang Xiang: About the fourth quarter. Judging from our performance in the third quarter and the second quarter, Xiaomi's shipments are basically stable, and it can be said that there is a steady increase, which is a good side. However, there are still uncertainties in the overall macroeconomy and the industry, so we are always paying attention. There are also several other favorable environments and opportunities in the fourth quarter, and "Double Eleven" is one of them. "Double Eleven" Although the market has fallen, our performance is still good. There are "Black Friday" and Christmas in overseas markets and Diwali in India. These are all positive effects in the fourth quarter. But as I said, there are still uncertainties in the overall macro situation, including the situation of epidemic prevention and control. Therefore, we must pay close attention to the development of the overall situation in real-time.

As for the Internet side, I believe we are relatively stable.

You also mentioned the release of Xiaomi’s energy storage products just now, and we still got a lot of positive feedback. This is an emerging market. We released Xiaomi's first outdoor power supply (Mijia Outdoor Power Supply 1000Pro), and also released a foldable solar battery, and the market feedback is good. We will continue to closely monitor the home energy storage market. The first is to pay attention to the needs of consumers for camping and camping, and then carefully study how to do better. Since Xiaomi also makes electric smart cars, we actually pay very deep attention to the entire industry chain, including batteries and peripheral industries. We have made relevant layouts, and we will also do in-depth research and serious preparations.

Lin Shiwei: Regardless of the macroeconomic changes in the fourth quarter, Xiaomi's global layout still helped us diversify a lot of risks. For example, our overseas shipments accounted for 78% of this quarter. You can also see that Xiaomi's friends (shipping volume) ratio is far lower than ours, so our global layout and our scale are still helpful in combating risks.

Jiemian News reporter: I have two questions here. The first question is for the domestic market. Since the release of Mi 12 last year to this year's Mi 12S series, from the perspective of social platforms and e-commerce platforms, the overall recovery of word of mouth is relatively obvious. However, the sales volume in the domestic market from the first quarter to the third quarter still did not quite catch up, hovering at the fifth position. I would like to ask the reason for this contrast in the management, has Xiaomi conducted a relevant analysis internally?

The second question is about the overseas Indian market. Since the beginning of this year, OPPO, Vivo, OnePlus, and Samsung, are all very strong, and their market share is also increasing. But in fact, India used to be a very strong part of Xiaomi's overseas market, and now the competition has become more and more fierce. How does Xiaomi view the current situation?

Wang Xiang: We have done a lot of reviews on the high-end market. To sum up, our high-end market, especially high-end brands, takes time to gradually reach. In the past, everyone thought that "quick wins can be achieved with one or two products" is incorrect. So what we are doing now is making steady progress, so that high-end products not only focus on parameters but more importantly, focus on user experience and reputation. It is precise because of this understanding that there are two relatively high-end products of Xiaomi today.

At the same time, we also realize that even with these two relatively good products today, Xiaomi still needs to continue to improve the user experience and brand. We are strategically patient, and we don't expect to completely win the high-end market with just one or two products, but these two products have given us great confidence, and we have learned a lot. We will continue to launch high-end products using what we learn about these two products.

About overseas markets: In fact, we still have a lot of room to make high-end products, but due to the overall economic situation, fuel prices, inflation, exchange rate changes, etc., we still adopt a steady and steady approach to steadily promote the development of our high-end line. But our strategic determination is very great. No matter what happens, we will steadily promote the development of Xiaomi's high-end products. We not only pay attention to the quantity but also pay attention to the profitability of the product. This is the case with high-end products.

And when it comes to the Indian market, we have maintained a leading edge in the Indian market for quite a long time in the past, perhaps since 2017. The current competitive situation has not changed much, and it has always been very fierce competition. This is also the status quo in the Indian market. The problems facing the Indian market may be due to geopolitical factors. Due to the impact of the epidemic and the overall economic situation, the Indian market has also declined, which has also intensified competition. Therefore, we still need to stabilize the Indian market, especially because the current economic environment is uncertain. We will pay attention to the quality of Xiaomi's operations in India.

Lin Shiwei: Why our sales in mainland China did not increase, I think the reason is the continued sluggish sales of the market. Everyone knows that this year's mobile phone shipments in China have dropped a lot compared to last year, and we have also been affected to a certain extent. However, Xiaomi's products have a good reputation, which will be of great help to our future products, and also establish a good foundation for Xiaomi's new products next year. As the broader market recovers, I believe we will gain more market share.

In India, frankly speaking, the market in India is also relatively sluggish. Other brands may grab a certain market share, but Xiaomi's strategy in India is to pay equal attention to profitability and shipments, rather than just focusing on market share.

Journalist: First of all, considering the current situation of the overall mobile phone market, what is the current rhythm of Xiaomi's new product release? Will there be a bias towards high-end products in the fourth quarter of this year and next year? Or will it tend to launch relatively mid-range and low-end mobile phones? The second question is that Wang Xiang just mentioned the inventory issue. How long do you expect the inventory to return to a relatively healthy and normal level? The third question concerns investment. We have seen that some other technology companies in the mainland have withdrawn part of their investment. Does Xiaomi have any adjustment plans in this regard? What are the future plans?

Wang Xiang: We have indeed made a lot of strategic investment and layout, and we will definitely deal with the assets invested by the company at the right time.

When it comes to overall product launches, we still basically release products at our own pace. We have two big brand series, one is the Xiaomi series and the other is the Redmi series. While promoting high-end, we are not ignoring the Redmi series and the mass market. The mass market is still a very important market for us in the world, covering most of the markets in developed and developing countries around the world. Therefore, the launch of high-end products is done step by step, and we will promote the high-end market with a long-term development strategy. Xiaomi will still release products at its own pace every quarter. We will release new products at the end of the year, and we are currently in the process of intensive preparations.

As for the clearance of inventory, I also communicated with friends from the media last quarter. We have been using the big promotion seasons, including "Double Eleven", Christmas and "Black Friday" to clear the inventory in the overall channel. We hope that the fourth quarter of this year and the first and second months of next year will turn our capital level into a healthy one.

Lin Shiwei: In the past few years, our mobile phone products have actually achieved full coverage, that is to say, different price points and different series, including Xiaomi's MIX series, Civi series, as well as Redmi's Note series, K series, etc. We want to achieve The most important thing is that all price points are covered to meet the needs of users at different levels. We will continue to work in this direction next year to cover as many different users as possible.

Investment: Xiaomi is different from other major mobile phone and Internet companies, and most of our investment may not be so high. As you can see, in fact, we will have some investment income every quarter, and we have been looking for the right time to resell the previous investment.

Wang Xiang: Let me add another figure about inventory. At present, Xiaomi's overall inventory is in the process of declining, especially after these major promotional festivals, the current inventory has decreased by 9% year-on-year and month-on-month. This is still a relatively good situation.

The Paper: The management also mentioned the inventory issue just now, and I have a follow-up question here. I know that Xiaomi's inventory problem has attracted more attention in the last quarter. According to this year's financial report, the inventory problem in the third quarter has actually been relatively improved. Could you ask the management to share with us what methods and methods the company has used to improve Xiaomi's inventory problem? What is the current specific improvement situation? What effect did shopping festivals such as "Double Eleven" play on the inventory of Xiaomi mobile phones?

The second question is, I noticed that in the third quarter of this year, the overall cost of Xiaomi's smart electric vehicle and other innovative businesses reached 829 million yuan. I would like to ask the management, whether Xiaomi's new business investment has affected the overall performance of the company? In the car-making business, does Xiaomi have any new progress that can be disclosed?

Wang Xiang: At present, our inventory in China has returned to a healthy level. Whether it is "Double Eleven", or any promotional season before "Double Eleven", there is no particularly big problem with inventory. We will now use several important festivals in the fourth quarter to deal with overseas inventory issues. Overall, we don't have what we call "sluggish inventory," which means we don't have inventory that would cause a lot of problems. I also mentioned just now that Xiaomi's inventory has dropped by 9% month-on-month.

We still have some inventory in preparation for the fourth quarter stocking. With the end of the fourth quarter sales, you will also see a decline in inventory. As I just mentioned, Xiaomi will return to a healthy level by the end of this year and early next year. The same problem may appear every year. Don’t worry, we will pay close attention to Xiaomi’s inventory level. We should have a solution now.

About building cars. First of all, we hope to achieve formal mass production in the first half of 2024. Judging from the current progress, our progress is still very smooth. We are very confident. Lin Shiwei also mentioned in his report just now that Xiaomi has more than 1,800 R&D personnel for car manufacturing. These are our own personnel. It also shows our confidence and determination. You have also seen the data we disclosed. The investment in new business in the third quarter was 830 million, and the total investment in the first three quarters was 1.86 billion. Our investments have been calculated very carefully, and we have been investing in an efficient way. The efficiency and scale of the company's current investment will not have a significant impact on the group's operations.

Hong Kong Economic Daily reporter: Let me follow up on the issue of Xiaomi making cars. I see Xiaomi's total headcount continuing to grow this year. About how many people are responsible for making cars? Does the management predict the timetable for the recovery of mobile phone shipments?

Wang Xiang: As I said just now, these 1,800 people are all research and development personnel of trams, so we still attach great importance to research and development. We must do our best to ensure that Xiaomi's first car can be successful, and of course, it must be released on time.

As for when the smartphone market can return to normal annual growth levels, I think there are several factors. The most important factor is to look at the global economy and market situation. Uncertainty still exists. For example, inflation in the United States, the global economy, etc., all of which have a very significant impact on smartphone shipments and also have an impact on global consumer confidence. So everything depends on the situation, we will closely monitor the situation and prepare for growth. This is what we are currently doing.

I don't think any economist in the world has reached a consensus (on when the economic environment will recover), and in the long run, we will definitely come out of the trough because the economy is cyclical. Everyone believes that we will get out of the trough, but we don't know exactly when. What we need to do in the short term is to keep a close eye on and be prepared. This is my personal opinion.

Lin Shiwei: Compared with the second quarter, the number of our employees did increase in the third quarter, and most of them are fresh graduates. Some went to the automotive (department) and some went to other departments. Xiaomi still has a relatively complete training plan for fresh graduates.

We have also talked with many experts about the recovery of the mobile phone market, but everyone still has different opinions. The most important thing is that we have encountered many problems this year, both at home and abroad. As for when the problem will be resolved, it will not only affect the single industry of mobile phones, but also the overall consumer industry.

Wang Xiang: In fact, uncertainty is the biggest challenge at present. what is certain Certainty is what we can control. What are the things we can control? That is to use this opportunity to continue to do a good job in our basic investment, capacity building, and R&D capacity building. Not just cars, but also mobile phones and IoT infrastructure. We are going to use this time to prepare, the whole group is very sure of that. To make the such an investment well, we actually need to optimize our cost structure, operational efficiency, human efficiency, etc. Many friends have asked similar questions just now. Xiaomi is very firm in this field, and we also have a very deep understanding and consensus.

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