Source: Wall Street News Author: Cao Zexi, Zhao Ying

On May 24, Xiaomi released its performance report for the first quarter of 2023. Financial data showed that in the first quarter, Xiaomi's revenue was 59.5 billion yuan, down 18.9% from the previous year; net profit was 4.2 billion yuan, far exceeding the estimate of 2.54 billion yuan.

Gross margin reached a record high of 19.5%; global mobile phone shipments remained in third place, with a market share of 11.3%.

Subsequently, Xiaomi held an earnings call for the first quarter of 2023. Xiaomi Group President Lu Weibing and CFO Lin Shiwei attended the conference call.

On the call, Xiaomi said:

• Thanks to the improvement of the product structure, especially the increase in the proportion of middle and high-end products, gross margin has increased dramatically.

• As the efficiency of offline stores increases, this year will be a very rewarding year for Xiaomi's new retail.

• The inventory reduction strategy formulated last year was basically completed in the first quarter.

• The car building business is progressing well and continues to advance according to previous expectations.

• AI technology will empower every Xiaomi business.

• Gross margin is expected to continue to rise this year.

• The development of the major appliance business will focus on intelligence.

• The chip business has been long and difficult, but I am still confident.

1. High-end products increase gross profit margin

Answer: We did see some year-on-year decline in revenue in the first quarter, mainly due to the decline in the global market and the challenges we faced in the Indian market, but everyone has already seen a significant increase in our profits. I think there are several main measures.

The first is that our gross margin has increased to the highest point since the last five or six quarters. Mainly thanks to improvements in the product structure, the proportion of our high-end products, especially those used in China, is getting higher and higher. In terms of the scale of high-end phones, Xiaomi has already bridged some gaps with corresponding friends and merchants. Our scale has greatly increased, and scale effects have begun to show.

The second is our cost, which is the cost reduction and efficiency we talked about. I think it's already starting to play a role.

The third is the risk of resisting the single market brought about by business diversification. I think we have had some such improvements in our operations.

Our net profit was 3.2 billion dollars, an increase of 121.3% over the previous month, so we saw a significant increase in profit. If you exclude 1.1 billion dollars of new business expenses, the year-on-year ratio of core business profits will be more obvious.

Looking ahead, we will continue to maintain this year's business philosophy and continue to focus on profitability and scale, but at the same time, we will also continue to increase our investment in R&D to increase our long-term competitiveness.

2. This year will be a very rewarding year for Xiaomi's new retail

Answer: This year, we are mainly aiming for store integration and improving store efficiency. Coupled with high-end support, it should be said that in the first quarter, the GMV of our stores also reached a new high in the past few quarters.

We have several measures this year. The first is to make our partners want to achieve more large-scale operations. After store integration, let it have more stores, so the scale effect will be better.

The second is to continue deepening some of the original efficiency improvement measures, such as streamlining the operator business. As for our online retail, we will also promote the implementation of some service businesses. In fact, these are of great benefit to store operations.

The third is the continuous promotion of high-end, which has greatly improved the overall profitability of stores. In fact, we have also made very good progress in major appliances this year. In particular, starting in April, the air conditioning business has already started, and May and June should be the peak season for air conditioning.

These may have a very positive impact on the overall operation of our stores to promote customer flow, promote connections, and promote user loyalty. So I believe this should be a very rewarding year for Xiaomi's new retail.

3. The problem of inventory reduction was basically solved in the first quarter

Answer: The first sale of the Xiaomi Mi 13 was twice that of the Xiaomi Mi 4s, so we will be more aggressive in stocking up. The overall market performance of Xiaomi 13 products far exceeded our expectations. It did not far exceed expectations; it far exceeded expectations.

Why is it popular and has received such a high level of response? I think there are the following points: The first is investment in technology. You can see that although every company released products such as so-called video flagships this year, Xiaomi has actually left its rivals behind in terms of video concepts, technology accumulation, user experience, etc. This is the result of our technological accumulation and user insight over the years.

The second is the accumulation with various leading global partners. Most of the technology is jointly developed by us, so it takes about three years for the preparation of the technology. In fact, even if the opponent knows that we want to do this, in fact they can't keep up if they want to do it, because he also needs a technical planning period of about three years.

The third is our Xiaomi CS series last year, the Xiaomi Mixfold series, the Xiaomi 13 at the beginning of this year and the end of last year, and the launch of the Xiaomi 13r this time. Our performance in terms of flagship has been very steady, which shows that we have mastered the methodology for making high-end products and will continue to release high-end flagship products in the future.

Also, let me talk about the inventory and stocking situation. Our inventory was at a very healthy level this quarter. It was a low point since the past five quarters, and it was quite a bit lower than last year. Last year, I said that this year we must reduce our inventory. We basically solved this problem in the first quarter.

Overall, the supply chain is still on a downward trend in costs. Future cost reductions will be very beneficial. We will adopt different preparation strategies according to the needs of different devices.

4. Vehicle construction is progressing well, AI technology empowers business development

Answer: First, let's talk about the progress of car building. The progress is still very good, so it will go public in the first half of next year according to the original plan.

Well, the second one is that everyone is particularly concerned about, based on speculation that some of Xiaomi's investment in AI is still relatively early, such as our Xiaoai speaker.

Thanks to Xiaomi's investment in AI, the people and abilities of our autonomous driving team basically come from our original AI team, so when we have the ability to start a new business, we can start quickly.

Currently, the AI team consists of more than 1,200 people, investing in AI, including AI Laboratories, Xiao Ai's classmate, including our cameras and autonomous driving.

Our internal management has also had a lot of discussions. We still have a few decisions and perceptions. One is that we won't make a big GM model like OPPO, but Xiaomi will actively embrace it.

We believe that in the future, whoever has users, who has data, and who has the user's usage scenarios will probably have a better advantage.

I think the first thing in terms of the big model is to deeply integrate the business and collaborate with the business. For example, we have combined with Xiaoai to make our products and services more intelligent.

Furthermore, AI technology is used to improve our internal efficiency and improve our overall commercial efficiency. Here are some of our basic thoughts in this regard.

We also believe that I think Xiaomi should do a good job; we are still in a good position. All the modelling companies in the industry may also invest in one or two companies. We are always looking at this opportunity.

5. Can the trend of increasing gross margin be maintained?

Answer: The first question is our gross profit margin. First, the further increase in our share of high-end phones is beneficial to gross margin. The proportion of our high-end phones in China is probably already more than 25% of our shipments. This is a very healthy model. Second, the reduction in raw material costs has also optimized the structure of costs. Third, last year we were affected by a number of external factors, including exchange rate fluctuations, which have slowly declined this year. Also, inventories continued to increase last year, and the decline now will also have a certain impact on gross margin. Furthermore, the gross margin of major appliances has been further increased, which has also helped increase the gross profit margin of IoT.

The second question is the outlook for gross margin. Some of the factors that plagued gross margin last year should be greatly improved this year. Overall, the gross margin for 2023 is helpful. The cost drop just now is also helpful to our cost structure, so this year's overall gross margin is quite optimistic.

Also, thanks to our strategy, how can we further increase the proportion of our high-margin products and eliminate some low-margin products? This is the focus of this year's business.

As for the third question, you asked about expenses. Core business expenses fell 14% year on year in the first quarter, and our operations will be more refined in the future. At the same time, our cost of selling has also been reduced. But we won't give up R&D; R&D investment will continue. So the reason for the drop in fees may be that we look more closely at other costs.

Your last question is to ask us what are the reasons why the average selling price of mobile phones fell year over year and increased month-on-month. The first is whether overseas markets have been clearing inventory for a quarter. This is the main reason. Second, our high-end overseas phones, such as the Xiaomi 13, were released two months late this year, etc. This is one reason for the year-on-year decline. The reason for the month-on-month increase is simple. The Xiaomi 13 was still popular with many users when it was launched at the beginning of the year. As the share of high-end continues to rise, it is helpful for our overall average selling price to rise month-on-month.

6. How can Xiaomi's home appliance business compete with traditional home appliance manufacturers?

Answer: It is true that our consumer electronics business should have entered a particularly good state. Everyone can see our large-scale profits, and our users' reputation continues to rise.

I think I'll talk about some of our basic strategies for major appliances. From a technical perspective, we will continue to do our own research. You can see our televisions, air conditioners, refrigerators, washing machines, etc. over the past few years. We have continuously invested in research and development to master the core technology and key control points.

In terms of product strategy, we will speed up and increase the intelligent transformation of traditional home appliances. Xiaomi will not make a product exactly like everyone else; we will take advantage of our intelligence and connectivity. This can facilitate the rapid transformation of these products.

In terms of business strategy, we will continue to promote the popularization of high-end products, because we now see that there are many home appliances, and I think they may still be sold at sky-high prices, so we will continue to popularize high-end products.

This year's 618, pre-sales began yesterday, and our air conditioner accidentally made it to the first place in e-commerce sales. I was still very surprised. Therefore, I think our electronics business must thank everyone for their trust and support for all of our appliances.

Additionally, we focus on the balance between scale and profit. I think profit is equally important to scale. This is the grand strategy of our entire group. However, when we go specifically to each category, we will have a different style of play. We will combine the two most important factors. The first factor is what stage of development the industry is in, because some industries may be in a period of maturity, some industries may be in a period of rapid growth, and it may not be the same. The second one will be based on Xiaomi's position in the industry.

I think these two factors may be different. Combining these two factors, we will form strategies for different categories. We may balance scale and profit for some products, but there are categories that are developing rapidly. Maybe we will prioritize scale and profit second.

7. What is the reason for the year-on-year decline in Internet business revenue in the first quarter? How to guarantee the long-term profitability of the Internet business?

Answer: If you look at it month-on-month, overall Internet business revenue in the first quarter declined slightly.

I think there are a few main reasons for the decline. The first is our other internet revenue, which includes our fintech and self-operated e-commerce revenue, which dropped by about 9 percentage points over the previous year, mainly because this part of the business is in a shrinking state.

Second, advertising revenue fell slightly, about 3% year over year.

Gaming, on the other hand, showed significant growth. Our game business showed a three-digit year-on-year increase, but the overall growth of the game industry was not very fast, and the performance of our game business was superior to the general market. I think there are a few reasons. The first is that we have increased the monetization capabilities of a few of our games. The second is the enhancement of our own operating capabilities, such as how can we increase the number of paying users and how can we improve our efficiency. This is because our Internet B department has done a lot of work, accumulated a lot of experience, and enhanced the monetization ability of users. The third point is the increase in the proportion of high-end users. As the share of our high-end users increases, the revenue of high-end users in our games will actually be several times higher than that of middle- and low-end users. Therefore, as the share of high-end users increases step by step, the game revenue they bring will also increase further.

As for the long-term profitability of the Internet sector, the first is to maintain an increase in the proportion of our high-end users. I think this is very important. The second is to improve operational efficiency. We have done a lot of data analysis and modelling in the Internet department to improve our monetization capabilities. The third is the continued growth of our MUI, which lays the foundation for our internet business.

8. The positioning and progress of Xiaomi's self-developed chips?

Answer: It is true that chips are also a topic that everyone is particularly concerned about. We saw the end of Youshang's chip project, and we did express regret, but on the other hand, it also shows that making chips is not easy; it should be said that it is very difficult, so I think I also respect every brave attempt.

Xiaomi actually pays great attention to chips. Everyone knows that we have tried our own chip research since 2014, and everyone knows that it really wasn't all smooth sailing throughout the process. However, I don't think Xiaomi's determination to invest in chips has wavered in any way. Everyone has also seen that we have launched a number of self-developed chips over the past few years. These chips have greatly promoted the functionality of our terminals.

Xiaomi will unswervingly invest in chips, and this is a very important decision for us. At the same time, we need to fully recognize the difficulty, long-term, and complexity of chip investment. We must follow the development rules of the chip industry. We cannot make quick gains, nor can we achieve them overnight. We still need to prepare for a protracted war and prepare for long-term struggle. We should look at this from the perspective of 10 to 20 years. Furthermore, the purpose of all our chips is to improve the competitiveness of our terminals, enhance the experience of our users, and enhance the competitiveness of our products.

Xiaomi will definitely continue to invest in training.

We also hope that everyone will give us more encouragement and be more tolerant. There is more than just applause on this path; I think more possibilities are ups and downs, failures, and setbacks.

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