Sina Technology News On the morning of March 25, Xiaomi released its financial report for the fourth quarter and full year of 2022. The financial report shows that the company’s total revenue in the fourth quarter reached 66 billion yuan, a decrease of 22.8% from the same period in 2021; its adjusted net profit was 1.5 billion yuan, a 67.3% decrease from the same period in 2021. It includes 1.2 billion yuan in innovative business expenses such as smart electric vehicles.
Throughout 2022, Xiaomi Group’s total revenue will be 280 billion yuan, a year-on-year decrease of 14.7%; adjusted net profit will be 8.5 billion yuan, a year-on-year decrease of 61.4%.
After the financial report is released,Lu Weibing, partner, president and president of the International Business Department of Xiaomi Group, Lin Shiwei, vice president, CFO and chairman of Tianxing Digital, and other executivesAttended the subsequent earnings conference call, interpreted the key points of the earnings report, and answered questions from several analysts.
The following is the transcript of the Q&A session with analysts on the conference call:
Morgan Stanley analyst Andy Meng:My question is again about the mobile phone business. We have seen that many new products have been released by friends in the domestic market recently, including some flagship phones. Will this put pressure on Xiaomi’s domestic mobile phone sales and profit margins? In particular, Mr. Lu and Mr. Lin mentioned just now that Xiaomi’s strategy this year is to pay equal attention to scale and profit. This is my first question. The second question is that our investors have relatively low visibility on the situation of mobile phones in overseas markets, whether it is sales or inventory. Can the management please share with us the latest demand and inventory situation in the market?
Lu Weibing:The first question is about the new products that compete recently. In fact, everyone can see that the current brand is relatively stable, and the product layout and even the release time of each brand are also relatively stable. I think this is a very normal phenomenon after experiencing industry shocks. There are indeed a lot of new product releases in March, and it may be a little stressful (for Xiaomi) in the short term. But from the perspective of the whole year, I think no matter which month the product is released, its impact (on us) will not be too great. Judging from our recent performance and the sales of the Mi 13 series, I think the impact of capital is not that great.
The second question is about overseas markets. In terms of overseas markets, in fact, from the perspective of GfK’s “SO” (competitive advantage and opportunity) in the past two months, I think the market is not too optimistic, and there is no obvious market recovery trend. We still tend to think that the market Recovery will take some time. From this perspective, I think the demand is still not opened. But for Xiaomi, I think our inventory has improved a lot. Mr. Lin also introduced some detailed data in the briefing just now. The main reason is that we increased our inventory clearance efforts last year. At present, our entire inventory is still in a very controllable state, which I personally think is benign.
Lin Shiwei:From the perspective of overall inventory, our inventory in the fourth quarter has dropped to 50.4 billion. Among them, 17.1 billion is raw material inventory, which has obviously dropped from almost 20 billion at the beginning of the year, a drop of 15%. Our cost reached 28.7 billion in the fourth quarter, which is a lot lower than our peak of more than 30 billion in the middle of the year. Under Mr. Lu’s leadership, Xiaomi’s global inventory has improved somewhat. Of course, we are still clearing inventory, including in the first quarter, we are still in the state of clearing inventory. As you can see, there are actually not many problem stocks in Xiaomi, and most of them are stocks that can be solved. So looking forward to this year, we hope that the inventory can be further reduced.
Credit Suisse analyst Kyna Wong:I have two questions. First of all, the company’s strategy this year is to have dual engines and double focus, focusing on reducing costs and increasing efficiency. May I ask the management how to optimize the plan from the perspective of cost? After all, this year we have also seen price pressures in many upstream supply chains, components, etc., or their prices will drop by a relatively large margin. May I ask which part of the device or chip of the management has a larger decline? Where are there more opportunities? Is it a lens part? Or the original memory? Or SoC system-on-a-chip?
In addition, in terms of SoC chips, we see that Arm (Softbank’s chip design solution provider) may adjust their charging methods. If the charging method is changed, will it affect your Xiaomi’s cost reduction and efficiency increase? Because on the one hand, the company needs to control costs, on the other hand, product prices may also need to be adjusted, or the product structure needs to be adjusted, etc. I know that Xiaomi attaches great importance to the high-end product strategy this year, so what kind of improvement or change is expected in the product ASP (average selling price) of Xiaomi’s mobile phone business this year?
Lu Weibing:Indeed, one of our very important strategies is to reduce costs and increase efficiency. From the current point of view, I think the entire market is still in a state of oversupply, so in several important components, such as SoC, memory, screen, camera, lens, etc., we still see a downward trend in cost. From the current point of view, because the supply and demand relationship has not changed, we have not seen the cost rebound. Therefore, I think Xiaomi still has great potential in terms of cost reduction. At the same time, our internal management has also been strengthened. In the past 13 years, Xiaomi has developed very fast, and we still have a lot of management dividends to tap. I believe that if these two aspects are done together, Xiaomi should still have great potential to be tapped.
As for the Arm charges you mentioned, since I haven’t seen any specific reports, I can only give a relatively general answer here. From my understanding, I think it may take a very long period for any fee to be implemented at the end, and this period may even be based on “years”. Therefore, I think at least in the short term, (Arm fee changes) should not have an impact on our costs; as for the long term, because this is a particularly complicated issue, it is difficult to summarize it in one sentence.
As for ASP, Xiaomi’s ASP is expected to rise further this year, mainly due to Xiaomi’s promotion of high-end products both in China and overseas. Therefore, I still have confidence in the rise of ASP.
Lin Shiwei:You can see from our data that Xiaomi’s annual ASP has actually reached a record high. Mr. Lu also said just now that the proportion of Xiaomi’s high-end line will be further increased in the future. In addition, the performance of Mi 13 Pro, which we recently released overseas, also exceeded expectations. So on the whole, everyone is very welcome to Xiaomi’s new high-end mobile phones, especially our cooperation with Leica in Europe, I think it has also attracted a lot of new users. We also hope to release more competitive high-end mobile phones in overseas markets in the future, which will also bring room for improvement in Xiaomi’s overall ASP.
Credit Suisse analyst Kyna Wong:My second question is about Xiaomi’s Internet business in 2023. After a period of time, we may see the recovery of the Internet industry, and platforms and manufacturers are also vigorously promoting sales. For Xiaomi, does the management see that current companies, companies, brands, and manufacturers are willing to place more advertisements on Xiaomi’s platform? In addition, Xiaomi’s game business has maintained growth for six consecutive quarters. Will we continue to expect better growth in this area this year? After all, the Internet business has a relatively large support for the company’s overall gross profit, so I would like to ask the management’s relevant views.
Lin Shiwei:Looking back on 2022, I think the market is still relatively difficult, but you can also see that Xiaomi’s Internet business is relatively stable. We even found for the first time that Xiaomi has a certain increase overseas, and Xiaomi users continue to increase. Someone in the investment community once said that the life cycle income of high-end mobile phones is higher than that of low-end mobile phones. Therefore, as the proportion of Xiaomi’s high-end mobile phones is getting higher and higher, this is still helpful to our Internet business.
As for how to look at the market. We have also recently seen the announcements made by some Xiaomi customers at the end of the year. They may still be in the stage of reducing costs and increasing efficiency, but I also see that they believe that the situation in the second half of the year will be relatively optimistic. So if the market is doing well, then it will definitely help our Internet business revenue. But in the short term, I think they will still be in the period of reducing costs and increasing efficiency. Hopefully it will grow in the future.
game aspect. In fact, we have also seen that the market is improving, and there are signs of opening up both in terms of licensing and version numbers. This is good news for us.
Finally, I still want to emphasize that the number of Internet users has been increasing. The number of users worldwide has reached more than 500 million, and the number of users in China is also about 140 million. If we can manage these existing users well, these will become opportunities for Xiaomi in the Internet business in the future.
Goldman Sachs analyst Timothy Zhou:I have two questions from my side that I would like to ask the management. First of all, I remember that in the last performance meeting, the management shared its outlook on China’s mobile phone sales in 2023. With the opening of the epidemic in China, does the management now have any updated outlook for the sales of the Chinese mobile phone market in 2023? The second question is about the gross profit margin of mobile phones. What level does the management currently think the gross profit margin of mobile phones can reach in 2023? If it is broken down, it comes from high-end, the reduction of upstream costs, the reduction of supply, and even the contribution of exchange rates, etc. Can the management share with us how these factors contribute to the increase in gross profit margin?
Lu Weibing:The data we see now is like this: this year, China’s mobile phone market fell by about 4% year-on-year in January and February. So far in March, the broader market is likely to be roughly flat. From a comprehensive perspective in the first quarter, there may still be a slight decline year-on-year, about 2-3 points of decline. From this perspective, we still believe that the consumer market has not fully recovered. As for whether the recovery will happen in the second half of this year, we hope so. These are my views on the overall market.
Indeed, we believe that Xiaomi’s gross profit margin will increase and grow this year, but it is difficult for us to share with you the contribution of various factors in detail, such as the contribution of high-end, or the increase in cost reduction, etc. But we believe that these factors will have a combined effect.
Lin Shiwei:If we only look at the gross profit margin of mobile phones, we probably fell at around 9% last year. Compared with the five-year average (about 8.6%), the situation last year has improved. But 2021 is a very high year (gross profit margin of mobile phones), and there will be market supply problems in that year, so I won’t go into details here. If you look at the gross profit margin of Xiaomi’s mobile phones, the impact of the appreciation of the US dollar on our gross profit rate last year was about 1-2 percentage points. I didn’t show the actual data, but it was about 1-2 points, and the inventory price drop probably affected about one point. From this point of view, in fact (Xiaomi’s mobile phone gross profit margin) may have already exceeded 10%, and we have not counted these recent expected impacts. If the exchange rate is relatively stable, or considering the impact of last year’s profit margin and exchange rate on us, if the market is relatively stable, from this perspective, our mobile phone gross profit rate may actually be above 10%.
CICC analyst Hanjing Wen:First of all, I read that Xiaomi’s annual report also mentioned that the growth in January and February of this year was very fast. I would like to ask the management what ideas are there for Xiaomi’s offline stores this year? For example, the planning of store opening, the improvement of GMV (gross merchandise transaction), and the combination with the strategy of high-end mobile phones, etc. The second question, I also want to ask the management about the car manufacturing that everyone is more concerned about. At the Xiaomi Investor Day at the beginning of the year, Mr. Lei (Lei Jun) also shared with you the progress of Xiaomi’s car manufacturing. As time goes by, everyone’s attention is getting higher and higher. I would like to ask Mr. Lu and Mr. Lin, what can you share about Xiaomi’s automobile business management office?
Lu Weibing:In fact, I also shared it on the last investment day. In 2021, we called it “rapid store opening and expansion”. In 2022, we focused on improving the efficiency of stores, and this year we are doing store integration. Therefore, we will regard the integration of stores as a particularly important task, especially we will gradually increase the expansion of the stores of strategic partners, so that they can play a more professional and professional store management and improve their economies of scale. This is a very important point in our strategy this year.
In addition, we will continue the store efficiency improvement work that Xiaomi will do in 2022. Our store efficiency improvement measures in 2022 are still very effective, but I think it is far from complete. I believe it will continue to work in 2023. In addition, there is another point that we need to increase the infrastructure of non-mobile products. You can also see that Xiaomi’s growth in major appliances last year was very rapid, especially in products such as air conditioners and washing machines. I think there is still a lot of room for growth. But if you go to Mijia, you will find that there may be basically only one refrigerator or one washing machine sample in each Mijia store. If it is added to two or three sets, in fact, the space among them is very large. To sum up, I think we still have a lot of room for improvement in terms of non-mobile phones and in Mi Home.
Of course, I believe that with the progress of Xiaomi’s high-end, high-end will have two aspects (positive impacts) on Mi Home: the first aspect is that high-end will bring a very good courage, only high-end hot products can It can attract people to the store; the second aspect is that it (high-end) will greatly increase the GMV of the store and improve profitability. I believe that after all the measures are implemented, Mi Home will reach a new level in 2023.
Regarding the Xiaomi car you mentioned, it can be said that we are fully advancing according to the previously set schedule. According to Mr. Lei, this is called “exceeding expectations”. It can be said that we are actually better than the original schedule in many cases. Judging from the current situation, I think our car manufacturing is still going smoothly according to the schedule.
Lin Shiwei:Mr. Lu also said in the previous briefing just now that after the epidemic, we saw that the GMV of Xiaomi in January and February increased by more than 30% compared with the GMV in the fourth quarter of last year. This is the improvement of our store efficiency. Although it is unfair to say this, it is obvious that Xiaomi’s GMV in January and February is higher than that of every quarter last year, which can be said to be a very obvious recovery.
In addition, in terms of high-end mobile phones, we also mentioned that the Xiaomi Mi 13 series accounted for more than 55% of offline stores. The GMV of Xiaomi IoT stores is also getting higher and higher. In addition, operators’ entry into Mi Home, our other service products, and the “trade-in” business are all progressing simultaneously, and the progress is good so far. This is the current state of the store.
In terms of car manufacturing, Mr. Lu has already talked about it very clearly just now, so I won’t repeat it here.
Huatai Securities analyst Leping Huang:I have two questions. The first question concerns the AI side. Recently, the market is very concerned about the impact of ChatGPT on the industry. I have seen that the strategy that Xiaomi has been mentioning in the past few years is “Smartphone × AIoT”. May I ask the management, how is the company’s specific business and technical reserves in AI? How will Xiaomi grasp the development opportunities brought by ChatGPT in the future? The second question is that the international financial market has fluctuated greatly in the past month or so, including the collapse of the Silicon Valley Bank and so on. I would like to ask the management, because Xiaomi has a very wide global business and may still have a lot of investment business, what is the current exposure status of these? How will management respond to global financial market volatility in the future?
Lu Weibing:Let me answer ChatGPT’s question. ChatGPT is really popular recently, and Xiaomi is also very concerned about it. Everyone knows that Xiaomi has made many attempts in AI large-scale models, and we have also adopted a strategy of paralleling multiple technical routes. For example, everyone is very familiar with Xiao Ai, which is actually a typical application scenario where large models are implemented. We will face many challenges in the process from the large model to the landing, but the success of ChatGPT has given us confidence, and we have a lot of accumulation in this area. For example, Xiaomi’s AI team now has almost 1,200 people. In the medium and long term, we have worked on Xiaoai for six years, and we have accumulated long-term and reusable experience in terms of user experience. In the future, we will continue to do large-scale model research and introduce more advanced large-scale model capabilities, including the ability to explore multi-modality, intelligent cockpit interaction, etc. This is our medium and long-term plan.
Next, I would like to talk about Xiao Ai, a classmate of Xiaomi. It is actually a concrete manifestation of Xiaomi’s AI capabilities. Artificial intelligence has helped Xiao Ai to support the integration of multiple scenarios such as mobile phones, speakers, and future cars. As of December, Xiao Ai’s global monthly active users have exceeded 115 million. The rich landing experience of large models gives Xiaomi more competitive advantages in the AI era. So we are very concerned about it, and at the same time believe that the accumulation of Xiao Ai will play a very good role in the long-term implementation of Xiaomi’s multi-business in the future.
Lin Shiwei:The second question is about the impact of fluctuations in the international financial market on Xiaomi. One of the simplest responses is: none of us have deposits at the most recently affected banks. This is also a question that everyone is more concerned about.
Most of the banks we cooperate with are leading banks, and we are monitoring the market every day to ensure that our money will not take huge risks. This is also the basis of the company’s management of funds. We have also mentioned on other occasions before that we will try our best to get the money back and hand it over to the headquarters for unified management. This is the “style” of Xiaomi’s fund management. In the future, we will continue to monitor market changes, after all, such changes are very large. We will always maintain a steady and advanced business plan to maintain a stable operation.
Citi analyst Yayuan Huang:I have two follow up questions. The first question is that at the investor day at the beginning of the year, Mr. Lu shared Xiaomi’s optimization of offline retail channels in overseas markets. I would like to ask the management, what benefits does the management hope to achieve when Xiaomi builds more overseas localized basic services? Because overseas construction will also bring relatively large cost input, how will the management evaluate the final benefit cost?
The second question is that Xiaomi also carried out a certain degree of personnel optimization last year, and there will be a similar situation in the Internet industry. Judging from the situation at the time, relevant costs may be involved. But judging from this year, will Xiaomi’s expense ratio in various aspects such as sales personnel have a better decline in 2023?
Lu Weibing:Let me share with you about the expansion of overseas markets. I took the team out for about 20 days after the Spring Festival, and visited six countries in three regions. This is also the first time I have led such a large team out after the epidemic. Indeed, due to the epidemic, there is a lack of communication and communication between our headquarters and the front line. Although we will have a lot of videos, it still cannot replace face-to-face. After going out this time, I personally have gained a lot.
First of all, we saw that last year, it can be said that we encountered a lot of pressure, and every brand encountered a lot of pressure. Some brands have withdrawn from some countries, but Xiaomi still insists on having the most complete infrastructure layout in the world in my opinion. I think this is a very important foundation for the rapid development of Xiaomi’s overseas business, especially after the market picks up. This is one aspect. In addition, the global market is indeed very large, diverse, and fragmented. How to choose a focus in such a market? If we put it in the past, we would basically consider it from two dimensions: the size of the market, the consumption capacity of the market or the structure of the product. As geopolitics has gradually become a particularly important factor in recent years, we will actually add the factor of risk. Therefore, based on these three dimensions, we then choose a strategic market for Xiaomi. In other words, the risk (this market) should be low, the population base of the market should be large, and the purchasing power should be strong. Global Strategic Market Segmentation.
Based on this dimension, we selected more than 20 countries around the world as Xiaomi’s strategic markets. In these markets, companies will make relatively heavy investments. We believe that long-term investment in these markets will definitely have very good long-term returns. It is not only very important to the company’s high-end strategy, but also to the implementation of Xiaomi’s mobile phone AIoT strategy. Without these investments, both the high-end strategy and the implementation of AIoT will be very difficult.
After several rounds of identification, I think from the current point of view, the promotion of this strategy is very stable and smooth. I firmly believe that with the advancement of the strategy, Xiaomi will form a particularly strong, which we internally call a “safe and efficient global financial platform.” The establishment of this platform will quickly and efficiently send Xiaomi’s continuous stream of good products to consumers around the world in the future. This is a particularly long-term strategy.
As for the question of personnel optimization you mentioned and the related fees and costs, Lin will always answer this question.
Lin Shiwei:Mr. Lu’s answer just now raised a very important point, that is, Xiaomi will operate our business in a more refined manner in the future, including Xiaomi’s recent establishment of an economic committee and a human resources committee. very important part of it. So why do we treat each country separately? If we want to achieve more refined operations, we will definitely invest in places, regions or countries that the company believes will be rewarding, which is also part of refined operations. This is my supplement to Mr. Lu’s answer just now.
About cost reduction and efficiency increase. You can see from our report that the company’s staff has actually decreased. But at the same time, we are also investing in other battlefields that we think will be rewarding, including automobiles, some future overseas launches, etc., so in fact, we are entering and exiting. I personally think that personnel optimization is only part of it. There are actually many different (strategies) for companies to reduce costs and increase efficiency. According to the principle of refined operation, how to improve market launch, how to invest and improve the company’s R&D efficiency, how to improve the company’s operation, etc. From this perspective, it is not just the optimization of personnel. Generally speaking, we look at every important expense very carefully. Of course, personnel is the big head, but what I want to say is that the company not only pays attention to personnel, but also pays great attention to operation, hoping to improve the efficiency of our operation.
Orient Securities analyst Jian Kuai:My first question may be similar to the one just now. We have seen that in the fourth quarter, Xiaomi’s revenue in mainland China accounted for 53.4%. This figure is actually the quarter with the highest revenue in mainland China in the past three years. This may have something to do with factors such as the relatively complicated international situation. Mr. Lu also mentioned just now that Xiaomi still has to make various efforts overseas to maintain Xiaomi’s global advantages. Based on these factors, what does the management think will be the future trend of Xiaomi’s revenue share in mainland China and overseas?
My second question is, we see very good results in 2022 in the major appliances business of the company. Does management have any experience in this area to share? In addition, how can these successful experiences of Xiaomi be used as a reference for other businesses?
Lu Weibing:Just now you mentioned that the business in mainland China accounted for 53% of the business in the fourth quarter. I think the proportion adjustment in a certain short-term quarter may be related to short-term business strategy adjustments: for example, we launched the Mi 13 series, which was released earlier by about In one month, the marketing proportion of this series in mainland China will naturally increase; for example, in overseas markets, we have taken the initiative to reduce inventory and so on.These are short-term strategic adjustments
In the long run, we still believe that there is a lot of room for overseas markets, because the overall development of overseas markets is later than that of the Chinese market. Xiaomi only started to enter the overseas market in 2014. In the past three years, the company’s management of overseas markets has still created many difficulties. Therefore, on the whole, we believe that the company still has a lot of space and potential to tap in the management of overseas markets. After all, the size of the market is there, and it is far larger than mainland China. The proportion of Xiaomi’s overseas AIoT is much lower than that of the Chinese market. So I think there should still be a lot of room for overseas markets in the future.
At present, I also serve as the president of Xiaomi’s international department, so I have also arranged several business trips this year, hoping to visit all important markets around the world. I am still very confident in the overseas market, because whether it is the progress of high-end, the sales of AIoT products, or the refinement of management, there is actually a gap between (overseas markets) and the Chinese market. So I also believe that through hard work, we will be able to unearth our potential.
The second question is about the major appliance business. You have also seen that Xiaomi’s major appliance business, especially our “empty refrigerator”, has achieved very large growth. In my impression, air conditioners seem to have achieved a 50% increase, and refrigerators should have a 100% increase. But in fact, you can see that today, Xiaomi is not a major player in the (major home appliance) market. In my impression, we should rank around fifth in the “air conditioner” vertical category, and the “refrigerator” vertical category may be Ranked around sixth. There are many more ahead of us. There is still a big gap between us and the first and second place in the industry. It also speaks to our potential.
Xiaomi’s large home appliance business achieved such good results last year thanks to several factors.
First, basically we have been doing these businesses for several years. Based on our experience, it may take 3-4 years for Xiaomi to complete the learning curve of categories and industries for a new business, because before entering any After the industry, there are always several inflection points that we need to cross, and it takes about 3-4 years to grasp it. After crossing the inflection point, we know where to focus. The situation last year was that thanks to the investment in self-developed technology (it should be said that Xiaomi’s investment in self-research is still relatively heavy), and we have mastered the core technology of this category and the commanding heights and control points of key technologies. Taking the air conditioner as an example, we have mastered the self-developed system to explore how the air conditioner can make the flow of air more effective. The design of this structure is the core technology. We have mastered these technologies. Similarly, we are steadily expanding in terms of refrigerators and washing machines. From this perspective, Xiaomi’s self-developed technology is very important.
Second, mining capacity. It can be said that Xiaomi cooperates with particularly competitive and relatively strong partners in the industry to increase production capacity and manufacturing capabilities, while greatly reducing costs and improving quality.
Third, I think Mi Home has a special advantage. If users come to Mi Home today, you will find that there are at least two Xiaomi air conditioners hanging on the wall, and a vertical one under it; although Xiaomi’s refrigerator and washing machine are still small, I think they have already played a particularly big role. role. Especially for high-end home appliances, users always go to the store to have a look, touch and experience it.
These aspects are the foundation we laid last year. In the next few years, I believe they will still play a huge role. After all, I think from the perspective of market space, Xiaomi still has a very large space. Like my home, I basically replaced all the appliances in my home with Xiaomi ones. I think this impression is particularly good.
In summary, I am still very confident in Xiaomi’s home appliance business. It not only increases the company’s revenue and profits, but also improves Xiaomi’s user structure and increases user stickiness. I’m very confident in this one.
Lin Shiwei:I’ll add a few more figures. From a full-year perspective, last year (2022) Xiaomi’s revenue in China was 50.8%, and overseas revenue was 49.2%. In fact, it is almost the same as the year before last, and it is still 50-50. However, Mr. Lu also mentioned that the product structure in different quarters will be affected by the release of new products. But generally speaking, I think it is still 50-50, and I think this is also a possible trend in the future.
As for IoT, Mr. Lu has already made it very clear, so I won’t add any more. (over)