Not Perfect But Excellent - Xiaomi's 2018 Transcript

Healthcare, Technology, Financials Author: Zekun Wang Mar 21, 2019 04:46 PM (GMT+8)

On Mar 19, 2019, Xiaomi published its annual report. As one of the largest technology companies in China, Xiaomi's performance is of vital importance.

The Managing Team of Xiaomi. Photo: Credit by Xiaomi

Xiaomi (01810) started its “5G+AIoT” strategy from 2019 and changed its organizational structure many times in order to promote its level of technology. March is the time for companies to show their annual reports, and the financial performances of giant Internet companies such as Baidu, JD, Meituan, are highly interested in society. Xiaomi was listed in 2018 in Hong Kong Exchanges and Clearing, this company has lots of “Mi” fans who must be curious about the transcript of this technology magnate.

Performance is Excellent But Not as Good as Expected

Listed on Jul 9, 2019, Xiaomi uploaded a relatively ideal transcript. Xiaomi changed its strategy in 2018. The production structure and publication pace of Xiaomi’s smartphone are different from the previous year. In the past time, Xiaomi published many Redmi series mobile phone in the second half of the year, however, in 2018, no Redmi phone was published after June. Besides the change of its mobile phone business, Xiaomi expanded the IoT business to a large degree. More than 230 million devices (except smartphone and laptop) have been connected to Xiaomi ecological chain. Xiaomi set 5G and AIoT as its two development engines in 2018, and in 2019, Xiaomi started this strategy officially.

Corresponding with its strategy changes, the financial performance of Xiaomi also proves that this company is doing the right things. Xiaomi made revenue of CNY 45.2 billion in 2018 Q2, with a YOY growth of 68.3%. The profit of Xiaomi in 2018 Q2 was CNY 2.1 billion, with a YOY growth of 25.1%. In 2018 Q3, the total revenue of Xiaomi was CNY 50.8 billion, with a YOY growth of 49.1%. The adjusted profit of CNY 2.9 billion, with a YOY growth of 17.3%. In 2018 Q4, according to the latest annual report, the revenue of Xiaomi is CNY 44.4 billion, with a YOY growth of 26.5%. However, comparing with the financial performance of Q3, Xiaomi’s revenue declined 12.6% and was not as high as markets expectation: CNY 46.2 billion.

In 2018, the total revenue of Xiaomi was CNY 174.9 billion, with a YOY growth of 52.6%. The adjusted net profit of Xiaomi was CNY 8.6 billion, and a YOY growth of 59.5%. According to the statistic data from IDC, Xiaomi’s smart phone’s shipment ranked 4th in the world, while the devices connected to the IoT platform of Xiaomi reached 150.9 million, an increased of 193.2% (YOY). Meanwhile, the Internet business of Xiaomi increased by 61.2% (YOY) and earned CNY 16 billion in revenues.

Two Power Engines to Push the Group Moving

Jingzhun (鲸准), a research institution, said in its report that “the market underestimated the Xiaomi Group. In 2020, Xiaomi’s revenue is expected to exceed CNY 300 billion, and the net profit will be more than CNY 10 billion.” The 5G and AIoT, are the two powerful engines that push the company forward. The combination of smartphones, 5G technologies and the AI with the IoT platforms act as strong forces for the Xiaomi group. 

In 2018, Xiaomi made CNY 113.8 billion in its smartphone business, with a YOY growth of 41.3% and a 118.7 million shipment. In 2018, according to IDC’s data, the global shipment decreased by 4.1%. It’s interesting that 31.8% of the smart phone’s revenue came from models with a price higher than CNY 2000, which shows the success of Xiaomi’s pricing strategy. Mi 8 and Xiaomi Mix 3 were popular models in 2018. 

Previously, Xiaomi changed its organizational structure several times, which was regarded as making preparation for its “5G+AIoT” strategy. The committee of technology was founded inside of the group, and LEI Jun (雷军), the founder and CEO of Xiaomi, said that Xiaomi would invest CNY 10 billion in its AIoT business in the next 5 years, which shows the ambition of Xiaomi Group in exploring the new technology. We could have a clear understanding of Xiaomi’s strategy from the revenue structure changes from 2017 to 2018.

In terms of smartphone, Xiaomi changed its strategies in order to keep competitiveness in the market. Xiaomi began to open the high-end market with an increasing retail price of its high-end models. In 2018, Xiaomi focused on its Xiaomi 8 series and Xiaomi Mix series, which are its high-end models. On the segment market of smartphone, Xiaomi made a lot of attempts. In Apr 2018, Xiaomi cooperated with Heisha (黑鲨) technology to publish the Heisha Phone, targeting the mobile-end game players. In Aug 2018, Xiaomi published Poco Phone in India for overseas Geeks. In Nov 2018, Xiaomi announced to cooperated with Meitu and attract more female users.  Although the market of a smartphone has not been good in 2018, Xiaomi adjusted its strategies carefully and finally did a good job.

Besides the smartphone, Xiaomi paid a lot of attention to AIoT and consumer goods. From 2017 to 2018, the ratio of the AIoT business’s revenue increased by 5.1% and is expected to increase in the future. According to Xiaomi’s annual report, in 2018, the IoT and consumer goods business increased by 86.9%. It’s clear that Xiaomi does not only rely on its mobile phone business to make a profit. With the two powerful engines of the company, Xiaomi may achieve more this year.

Great changes can be seen from the revenue structure of Xiaomi in 2018 Q4. In 2018 Q4, Xiaomi earned CNY 14.9 billion from its IoT business with a YOY growth of 75.4% and a QOQ growth of 38%. However, in 2018 Q4, the IoT business accounted for 33.6% of the whole revenue of Xiaomi Group, which shows the power of the “two engines” of Xiaomi.

In 2018, the revenue of IoT business increased from CNY 23.4 billion to CNY 43.8 billion with a YOY growth of 86.9% because of the rapid increasing requirement of Xiaomi’s ecological chain products such as smart TV, Xiaomi bracelet, Mi+ electric scooter, and Mi+ cleaning robot, etc.

Comparing with the smart phone’s bad market situation with a declining global shipment, the power of IoT, with the help of AI technology, is being recognized gradually. By the end of 2018, there are more than 150 million devices connected to Xiaomi’s IoT platform, with a QOQ growth of 14.7% and a YOY growth of 193.2%.

Xiaomi’s AIoT platform has attracted more and more third-parties. In Dec 2018, Xiaomi cooperated with IKEA to connect IKEA’s smart light productions into Xiaomi IoT platform. In addition, MAU of M+ reached 203 million and more than 50% of them come from non-Xiaomi smartphones. Xiaomi also equipped its IoT with artificial intelligence technology. Xiaoai, the AI assistant, was sold more than 100 million with an MAU of 38 million. Xiaoai has been one of the most active AI interaction platforms in China. Meanwhile, Xiaomi’s smart speaker had a shipment of more than 9 million.

With more devices connected to Xiaomi’s IoT platform, the AI could receive a broader users group, more abundant application scenes, and a stronger data flow. With the 10 billion investment, Xiaomi’s IoT business may achieve more in the future. Currently, Xiaomi opens its IoT platform to a larger degree. On one hand, Xiaomi established a fund with CNY 100 million to welcome the developers to join its IoT platform. On the other hand, Xiaomi cooperated with other third-party cloud platforms to build a larger AIoT platform.

Internet Business: Another Significant Income Source

Xiaomi’s Internet business might be at the point where it could make money in the long term. In 2018, the Internet business’s revenue was CNY 16 billion with a YOY growth of 61.2%. The revenue structure of Xiaomi is varied. Most of the Internet business’s revenue comes from the advertisement which was CNY 10.1 billion, and grew 79.9% (YOY). On the other hand, the revenue of game was CNY 590 million and other services such as Internet finance and E-commerce was CNY 3.2 billion. The varied revenue structure reflects diversification of Xiaomi’s Internet service. Meanwhile, Xiaomi did a really good job in the overseas market.

Firstly, all of Xiaomi’s smartphones are equipped with Xiaomi’s Internet apps. The MAU of MIUI is 242.1 million in Dec 2018, which is a strong support for Xiaomi’s Internet business. Based on MIUI, Xiaomi developed many kinds of apps ranging from games, Internet tools, music and videos, Internet finance, etc.

Secondly, Xiaomi is broadening its Internet services outside MIUI. For example, the Mi Mall and Youpin, as well as the Internet service based on smart hardware. The MAU of Xiaoimi’s smart TV and Xiaomi box grew 55.3% in 2018 Q4, and the MAU reached 18.6 million in Dec 2018. In 2018 Q4, the Internet finance business occupies 11.9% of the Internet business with a YOY growth of 80.5%, and the Youpin E-commerce grew 427.6% (YOY).

Going Abroad: An Exciting Tour in Southeast Asia and Europe

Xiaomi did a really good job in the overseas market. The gross revenue from the overseas market increased to CNY 70 billion with a YOY growth of 118.1%. In addition, the ratio of the revenue from the international market was 40% of the total revenue, while in 2017 the value was 28%.

The increasing shipment of smartphone contributed to the Xiaomi’s global business. According to Canalys’ data, In India, Xiaomi smartphones’ shipment ranked on top during 6 quarters and grew 59.65% (YOY) in 2018. The shipment of Xiaomi’s smartphone in Indonesia grew 299.6% (YOY) and was ranked at second place for the whole of Indonesia’s market. Xiaomi opened more than 500 stores in India and covered more than 1000 after-sell service center in over 600 cities. Besides the mobile phone, Xiaomi also took care of its smart home furnishings. In India, Xiaomi sold more than 1 million Xiaomi TV. Besides the Asian market, Xiaomi also focuses on the European market. The smartphones’ shipment has a YOY growth of 415.2% and ranked 4th place for the Western Europe market. In 2018 Q4, the overseas Internet business of Xiaomi has a YOY growth of 1295.6%. In 2018, Xiaomi introduced Internet services such as video, App store to India and Indonesia.

Failures Are Important: Analysis of The Loss in Q4

It’s undeniable that Xiaomi did a good job in 2018, but we found that in 2018 Q4, both the revenue and the growth rate of Xiaomi decreased. In 2018 Q4, Xiaomi faced a QOQ decline in its revenue, gross profit, and adjusted net profit. The smart phone’s shipment decreased by 25% (QOQ), too. What factors lead to a decrease in its revenue and shrink of its business is of vital importance.

Firstly, the relatively bad market environment in 2018. According to IDC’s data, in 2018, the global shipment of smartphones decreased by 4.1%, which shows an inactive market. Although Xiaomi was ranked at 4th place in smart phone’s shipment, the market reaction may not satisfy. Xiaomi explained that the decrease in its sales volume is because only Mix 3 and Xiaomi Play were published in Q4.  Models with a higher sales volume, for example, Redmi Note 7 and Xiaomi 9, would be published in 2019 Q1. However, according to IDC, Xiaomi has lost control of the Chinese market since 2018 Q2. Although the sales volume and shipment in India market was increasing, the growth rate declined. The Chinese market’s negative sales performance has a strong effect on Xiaomi and in 2018 Q4, the total growth rate of the sales volume of Xiaomi’s smartphones for the whole world is 1%.


Secondly, the profit of smartphones was not high enough. Although Xiaomi announced in its annual report that 38% of its smartphone revenue comes from phones priced more than CNY 2000, the average price of Xiaomi’s phone decreased from CNY 1052 in Q3 to CNY 1005 in Q4.

The average prices of Xiaomi’s phones are close to CNY 1000. In Xiaomi’s annual report, it announces that “Xiaomi has a stable market share in the middle-end and high-end smartphone market”, however, according to the average price, we could hardly agree with that.

Xiaomi is proud of its performance-cost ratio and in its annual report, Xiaomi said that the gross profit margin of the hardware business of Xiaomi is less than 1% in 2018. During the past years, Xiaomi separated its sub-brand, Redmi, which focuses on the performance-cost ratio. Xiaomi, however, would keep on pursuing innovation and “extreme user experience”. In 2018, with the price’s cutting down of Oppo, Vivo, and Honor, Xiaomi gradually loses its advantages in low-end phones. Due to the large stock of smartphones, Xiaomi should increase its retail prices in order to make a higher profit.  However, even after the average retail price of Xiaomi increased by 17%, there’s was not a great increase in its profit.

With the increasing of its ASP, the profit of Xiaomi decreased as it shows in the chart. In 2017 Q4, the net profit per phone is CNY 60. However, in 2018 Q4, the ASP increased CNY 1005 but the net profit increased CNY 1, to 61. It seems like the increase of Xiaomi’s ASP is caused by the increasing cost of its supply chain.

Thirdly, the competition from other manufacturers. In 2018 Q4, many other magnates published the new models. Xiaomi faced competition not only from Honor and Vivo but also from international magnates such as Apple. Although the people that Apple is targeting are different from those of Xiaomi, the iPhone XS could at least attract some potential users of Xiaomi.


Fourth, the production capacity. Xiaomi 9 sold out within 1 minute after its publication. LEI Jun (雷军), the founder and CEO of Xiaomi, promised that the inventory of Xiaomi 9 would be more than 1 million. On Mar 19, the day which Xiaomi would publish its annual report, Xiaomi 9 were sold out within 1 minute again. The production capacity greatly limited Xiaomi’s development in Q4.

Stop pushing me all the time! If we don’t have 1 million Xiaomi 9 as inventory, I will go to Xiaomi’s factory to tighten the screws! —LEI Jun


Future: Keep Climbing with the help of 5G+AIoT

In 2019, Xiaomi started its dual engines strategies with 5G+ AIoT. According to Xiaomi’s annual report, Xiaomi will keep its multi-brand strategy and invest more companies in innovation and supply chain field. Besides, Xiaomi will keep focusing on the AIoT field and invest CNY 10 billion in the next 5 years.

Xiaomi will keep exploring the international markets and apply its successful experience in India and to other markets, like, Indonesia. In terms of retail ability, Xiaomi would build an all-channel retail network in China. In addition, Xiaomi will actively develop its IoT Internet services such as TV Internet services and overseas Internet services, while broadening its Internet finance and Youpin E-commerce to other non-Xiaomi smartphone users.

As one of the largest technology companies in China, Xiaomi provides technology devices and AIoT related services. With an increased revenue and R&D investment, Xiaomi has the ability to gain more achievements in the future. The era of 5G has arrived and the two engines of Xiaomi are turning on. Although there are still many difficulties for Xiaomi overcome, but we still have great confidence in this technology flagship.