Xiaomi Group (1810.HK) released its Q4 2022 financial report (ending in December 2022) after the closing bell of Cheung Kong's Hong Kong Stock Exchange on March 24, 2023. The key points are as follows:

Quarterly report core data vs. market expectations:

1) Revenue end: Xiaomi Group - W.HK quarterly revenue of 66 billion yuan, a year-on-year decrease of 22.8%, market expectations (65.3 billion yuan);

2) Gross margin: quarterly gross margin is 17.2%, a year-on-year increase of 0.1pct, market expectations (17.1%);

3) Adjusted net profit: The quarterly net profit realized 21.5 billion yuan, a year-on-year decrease of 67.3%, and market expectations (1.3 billion yuan).

4) Business segment situation:

① Smartphone business: Quarterly revenue of 36.7 billion yuan, a year-on-year decrease of 27.3%; gross margin is 8.2%, a year-on-year decrease of 1.9pct;

②IoT and consumer products business: Quarterly revenue of 21.4 billion yuan, a year-on-year decrease of 14.4%; gross margin is 14.3%, a year-on-year increase of 1.3pct;

③Internet service business: Quarterly revenue of 7.2 billion yuan, a year-on-year decrease of 1.4%; gross margin is 71.5%, a year-on-year decrease of 4.6pct.

For detailed financial report information, please refer to the commentary from the Changqiao Dolphin Jun: "Xiaomi: Falling to the bottom, when will it rise again?"

I. Telephone conference call summary:

1) Overseas smartphone business: The overseas market is still not optimistic, and it will take a while to recover, while inventory has greatly improved;

2) Domestic smartphone market: The overall smartphone market in January-February 2023 was roughly down about 4% year-on-year. From March to the present, I have seen that the overall market is basically flat, and the recovery of consumption has not yet been seen;

3) Mobile phone component cost: Several important major components such as Soc, memory, screen, camera, lens, etc. have seen a trend of cost reduction. The impact of ARM's charges will not be felt in the short term, and the company's phone ASP will continue to rise;

4) AI reserve: Xiaomi's AI team now has about 1,200 people. Xiaoice is actually a specific manifestation of our AI capabilities, and artificial intelligence helps our Xiaoice assistant to support the integration of multiple scenarios such as our phone speakers and future cars. As of December, Xiaoice's global monthly active users have exceeded 115 million;

5) International financial risks: Recently, the banks and companies affected did not have deposits, and most of the banks that the company cooperates with are tier1 banks. Two. Phone Meeting Transcript:

2.1 Management Introduction

1) Progress on High-End Products: In 2022, we have achieved a closed loop of high-end product development from theory to experiment. Specifically, in the imaging aspect, we have established a strategic partnership with Leica and upgraded our imaging strategy with the concept of "beyond human eyes, perceive human hearts." In the latter half of 2022, we have launched three generations of high-end products, including Xiaomi 12SUltra in July, Mix Fold 2 with a folding screen in August, and Xiaomi 13 series in December. The first-month positive review rate for these products on JD.com has all exceeded 98%, which is much higher than the average level of high-end products in the industry.

In 2022, Xiaomi's brand loyalty has exceeded 50%, becoming the top brand in the Android ecosystem. Our product strength is also reflected in our market share. In Q4 2022, we were the top player in the RMB 3000-4000 smartphone market segment in China. In January 2023, we topped the Android market in the RMB 4000-5000 segment, with a market share of 27%.

2) R&D Progress: In 2022, we spent over 16 billion yuan on R&D. From 2017 to 2022, our R&D CAGR has exceeded 38%. In 2023, we expect to spend over 20 billion yuan on R&D, with a total R&D investment of over 100 billion yuan from 2022 to 2026.

As of December 31, 2022, our R&D personnel accounted for nearly 50% of our workforce. We have also acquired over 30,000 patents worldwide, covering over 60 countries and regions.

3) Globalization Progress: In 2022, we ranked third globally in terms of smartphone shipments, with a market share of approximately 13%. This is due to our complete global marketing structure and improved capabilities.

In the European market, we rank top three with a market share of 21%. We are the top player in the Spanish market with a 33% market share, ranked second in Italy and third in France and Germany.

The European market is operator-dominated, making it difficult to breakthrough. Currently, we hold third place, and the barriers to entry for the top three positions are high since the market share of the fourth-ranked player is below 5%. This position has laid a very good foundation for our further growth in high-end products. In 2022, over 75% of our smartphone users are from overseas markets. In the future, we will continue to strengthen our overseas capabilities, focus on stable operations, control risks and deepen our strategic markets. At the same time, we will promote our high-end products in key strategic markets globally, and build a safe and efficient global operating platform. 4) New retail in China: In 2022, new retail was impacted by the pandemic's effect on offline traffic. However, we still completed offline channel layout and store efficiency very well, and GMV achieved counter-cyclical growth. In January and February 2023, the average monthly single-store GMV increased by over 30% compared to Q4 2022. In 2022, we withstood pressure and solidified our abilities, laying a very good foundation for our high-end development. By February 2023, offline channels contributed to 55% of sales for our high-end Xiaomi 13 series and 65% for mix fold. The higher the price of the product, the more important and significant the role of offline sales. In 2022, our main focus for offline stores was on improving efficiency.

Firstly, we trained and nurtured personnel. Xiaomi and our partners hired over 20,000 people in 2021. It is difficult to develop them to fully understand Xiaomi's products and our media management. We completed this task satisfactorily in 2022.

Secondly, we integrated carrier business with Xiaomi's new retail. We closely cooperated with the three major carriers, whose business landed on Xiaomi's homes, giving corresponding commissions to our partners. This was a significant contribution to our partners' profits.

Thirdly, we converged online and offline businesses. In Q4, online orders accounted for over 20%.

Organizational structure: In 2022, we faced many challenges and conducted numerous reviews and reflections.

At the beginning of 2023, we established two committees:

One is the Group's management committee, which coordinates business strategic planning, budgeting, and daily operations.

The other is the Group's human resources committee, which is more specialized in human resources construction, coordination between human resources and business. This is also a significant step forward for Xiaomi, which will help significantly increase the quality and efficiency of our decision-making, while taking into account the rapid response of our business and long-term system construction, which is of great significance for our company's long-term performance.

2023 macro outlook: We believe that the macro environment will improve and the consumer electronics market will begin to recover in 2023, but risks and challenges still exist, and comprehensive recovery still requires time. In this situation, Xiaomi proposes the management philosophy of scale and profit diseases, continuously improving our internal efficiency, finely managing our profit targets at the execution level, and strengthening our budget. At the same time, we will seize some favorable factors in 2023, such as the stabilization of exchange rates and the improvement of inventory crises, and strengthen our risk control, focusing on stable management.

We maintain a cautious optimism for the 2023 market, but more importantly, we have strong confidence in Xiaomi's strategy. In 2022, we faced challenges, but because under these challenges, our abilities have undergone a transformation, but we believe that it will take some time for these abilities to translate into commercial results. 2.2 Q&A Analyst Q&A

Q1: How does Xiaomi's domestic mobile phone sales volume and profit margin look this year with regards to the mobile phone business? How about overseas mobile phone market inventory and sales?

A1: The layout and even timing of each brand's products are relatively stable. When an industry enters a mature phase, it is a very normal phenomenon. There were indeed many new products released in March, so there may be some pressure in the short term. However, looking at the whole year, the month in which a product is released actually does not have that much impact. Therefore, from our recent profits and sales of our Xiaomi 13 series, the impact is not significant.

The overseas market is still not too optimistic, and there is still no evident trend of a rebound. We still believe that it will take some time for the market to recover, so from this perspective, our demand has not opened up yet.

However, our inventory has greatly improved, mainly because we increased our efforts to clear inventory last year. Currently, our entire inventory is in a very manageable and basically benign state. There are not many problematic inventories, and in fact, most of the inventories can be resolved. Therefore, we are also hoping that our inventory will continue to decrease further this year.

Q2: How does the cost optimization (price change) of mobile phone components look? What impact does ARM's pricing adjustment have and what changes are expected for this year's overall mobile phone ASP?

A2: At present, the whole market is generally oversupplied, so we see that there is still a trend of cost reduction for some important and large components such as SOC, memory, screens, cameras, lenses, etc. Currently, since the supply-demand relationship has not changed, we have not yet seen a rebound in costs. Therefore, there is still considerable potential for cost reduction. At the same time, I also think that we have strengthened our management internally. Xiaomi developed very quickly in 2013, so we believe that there is still a lot of management dividend that we can tap into. I suggest that these two aspects be combined in order to better exploit our potential.

As for ARM's charges, any charge would require a long period of time to actually materialize, and this period may not be on an annual basis in the short term. Therefore, I at least think that it will not have an impact on our costs in the short term. In the long run, it may need to be looked at in detail because this is a particularly complicated issue that is difficult to describe in a sentence.

Regarding ASP, we expect that it will continue to rise this year due to the high-end push that we are implementing in China and overseas, as well as new users that we have gained through collaborations such as the one with Leica in Europe. Therefore, we have confidence in the increase of ASP. Q3: What is the situation of Internet service business in 2023?

A3: If we look at 2022, the market is still quite challenging, but our Internet business is relatively stable. This is because, first, we have some incremental users overseas and the user base is constantly growing. The revenue of high-end mobile phones is higher than that of low-end phones, and as the proportion of high-end phones increases, this is helpful to our Internet business.

Secondly, some of our clients' end-of-year announcements emphasize cost reduction and efficiency improvement, but the second half of the year is expected to be relatively optimistic, so if the market is good, there will definitely be expectations of revenue growth for our Internet business.

The third is games. In terms of games, we have seen that the market has been improving all the time, and the normalization of the issue of publishing of game versions is a good news for us. Our Internet users have been growing all the time, with over 500 million users worldwide and around 140 million users in China. Therefore, if we operate our stock users well, there are still opportunities for us in the Internet in the future.

Q4: The sales volume and gross profit margin of intelligent phones in China in 2023 and the outlook?

A4: The sales volume of mobile phones in China has decreased by about 4% year-on-year when the first two months of this year are combined. From March to now, we have seen that the overall market is basically stable, with a year-on-year decline of 2%-3%. From this perspective, we believe that the consumer market has not fully recovered yet, and we expect to see a recovery in the second half of the year.

This year, we believe that our gross profit margin will increase and grow, but it is difficult for us to say in detail how much the high-end contribution is, or how much cost reduction and efficiency improvement contribute, or how much impact the exchange rate has. However, we believe that these factors should all have a comprehensive effect, which should be approximately these two.

In addition, the appreciation of the US dollar last year brought us an impact of about 1%-2% on gross profit margin, so if it is restored, our gross profit margin may be previously above 10%. Therefore, if the exchange rate is relatively stable and the market is stable, you may guess that our mobile phone profit margin this year may be above 10%.

Q5: How do you expect the opening of offline stores and the GMV?

A5: In 2021, we focused on rapid store expansion and in 2022, we focused on store efficiency improvement. This year, we will focus on store integration. Therefore, we will regard store integration as a particularly important aspect. Especially, we will gradually expand the store of strategic partners, make it more professional and specialized in store management, as well as enhance the effect of scale. This is a very important point for us this year. On specific strategies, we will continue to improve our store efficiency as we did in 2022. Our measures in 2022 were very effective, but they are far from complete. I believe they will continue to be effective and will have an impact in 2023.

In addition to this, we also aim to increase the scope of non-mobile products. As you may have seen, last year we experienced very rapid growth in the field of household appliances, particularly in the air conditioning sector, which still has a lot of room for growth. However, if you visit one of our Xiaomi stores, you will notice that there is usually only one refrigerator or washing machine on display. If we increase the number of products available, there is a lot of potential for growth. I think there is still plenty of room for growth in the non-mobile aspect of our business.

Upgrading our stores has two benefits. Firstly, it will lead to better customer flow, as only high-end products can attract customers to come in and visit the store. Secondly, it will significantly increase our store's GMV and improve our profitability. After implementing these measures, I believe Xiaomi stores will reach new heights in 2023 with our upgraded high-end products.

Q6: How is the progress of the car business?

A6: We are basically on schedule with the car production. According to Lei Jun, we are doing better than expected and have made significant progress. Winter testing has also been successfully completed. Therefore, as of today, everything seems to be going smoothly, and we are on schedule.

Q7: What are the company's AI reserves and prospects? How can we seize the opportunity?

A7: Xiaomi has made many attempts in AI deep learning. We have adopted a strategy of parallel multiple technology routes, from large models to landing which face many challenges. However, I believe the success of ChatGPT has given us a lot of information. We have accumulated a lot of experience in this area, and currently, Xiaomi's AI team has about 1,200 people.

In the medium to long-term, we have been developing our AI capability for six years with Xiao Ai as a model. In terms of user experience, we have accumulated long-term reusable experience. In the future, we will continue to study large models and introduce more advanced capabilities, including exploring multimodal capabilities.

Xiao Ai represents the embodiment of our AI capability. Artificial intelligence has helped us in various channels such as mobile phones, speakers, and future car integrations. As of December, Xiao Ai had over 115 million monthly active users worldwide. The rich experience of implementing large models has given us a competitive advantage in the AI era. Therefore, we are very concerned, and we believe that Xiao Ai's accumulation will play a very good role in the long-term implementation of multiple businesses. Q8: How to deal with and view possible international financial risk fluctuations?

A8: The simplest response is that we have no deposits in the banks that have recently been affected, which is the first thing that concerns everyone.

Most of the banks we collaborate with are tier 1 banks. We monitor the market on a daily basis to ensure that our money is not subject to huge risks. This is a fundamental aspect of managing our fund. We also tried to repatriate the money as much as possible before, and this is a style of managing our fund from our headquarters. In the future, of course, we will continue to monitor changes in the market, which are significant. However, what can be said is that we have always maintained a very stable and resolute plan, and we have not invested much in explicit direct financial architectures or other strange financial tools. Therefore, relatively speaking, our management is still very stable.

Q9: Investment and output of overseas market expansion? Outlook for benefits?

A9: Some key points to share:

We can see that last year there was a lot of pressure, and every brand faced significant challenges. Some brands have withdrawn from some countries, but Xiaomi has maintained the most complete infrastructure layout globally, which is crucial for the fast recovery of Xiaomi's overseas business after the market rebound.
The global market is indeed very large, diverse, and fragmented. If we focus on some markets, we used to look at whether the market was big or not, and the consumption power or product structure of the market. In recent years, geopolitical opportunities have become a particularly important factor, and we also factor in risk. Therefore, we select our strategic markets based on these three dimensions: low risk, a large population, and strong purchasing power. The combination of these three elements forms our segmentation of the global strategic market.

Based on this dimension, we have selected about 20 countries around the world as our strategic markets and will make relatively heavy, long-term investments in these markets. We believe that long-term investment in these markets will yield very good returns. I am not only confident in our high-end strategy but also in our smartphone becoming an AIoT strategy. If we do not make these investments, it would be very difficult to achieve both of these strategies. This is the future we have identified, and so far, the promotion of these strategies has been very smooth. I firmly believe that with our promotion, Xiaomi will create a particularly strong global financial platform, which will deliver Xiaomi's constantly replenishing good products quickly and efficiently to global consumers. This is a particularly long-term strategy. We will operate our business to be more refined in the future, including our recently established Economic Committee and Human Resources Committee. This is a very important part of our future cost reduction and efficiency improvement efforts. Therefore, why do we need to break down each country and analyze it separately? If we optimize and refine our operations, we will undoubtedly invest in areas or countries where we believe there will be a return. This is a key part of refined operation.

Regarding cost reduction and efficiency improvement, of course, you will see that there has been some reduction in personnel in our financial statements, but at the same time, we are also investing in other areas or markets where we see potential returns. This includes our automobiles, our major regions, and future overseas regions. Thus, we have a combination of both gains and losses. At the same time, I personally believe that personnel optimization is only one part of it. In fact, there are many different ways we can reduce costs and improve efficiency. According to the principle of refined operation, how do we improve our market expansion? How do we invest in improving our R&D efficiency? How do we improve our operations? We carefully examine every important cost. Of course, personnel is the biggest cost, but I want to give everyone the feeling that we not only focus on personnel, but we also focus on other aspects of our operations to improve efficiency.

Q10: What is the trend of the mainland/overseas revenue ratio? What are the prospects and the learning experience in the home appliance business?

A10: Regarding Q4, where China's mainland business accounted for 53% of the revenue, short-term adjustments of the ratio may have been due to short-term business strategies. However, in the long term, we still believe that there is a lot of room for growth in overseas markets. This is because the development of the overseas market is relatively behind the Chinese market. We started to enter the overseas market in 2014, and in the past three years, we encountered many difficulties in managing the overseas market. Thus, overall, we believe that there is still a lot of room and potential to tap in terms of management of the overseas market. Therefore, I believe that because of the market size potential, it is far greater than our mainland China market. For example, the proportion of Aiot in the overseas market is still much lower than in our Chinese market, so there is still a very, very large space for the overseas market in the future.

I have great confidence in the overseas market because there is still a gap between the high-end progress, sales of our Aiot products, refinement of our management, and our Chinese market. Therefore, I believe that through our efforts, we can certainly tap into this potential.

Regarding the home appliance business, everyone can see that our home appliance business, especially our air conditioners, have grown rapidly, but we are not yet a major player in this market. Currently, we are approximately fifth place in the air conditioner market and sixth place in the refrigerator market. Therefore, this indicates our potential. Last year, we achieved such good results thanks to the fact that we have been doing these businesses for several years. Based on our experience, it takes us about 3 to 4 years to complete the learning curve for a new business category or industry. Any industry we enter always has a learning curve that we have to overcome. After 3 to 4 years, we can basically master it. Once we pass this learning curve, we know where our focus should be. Last year, we benefited from our investment in self-developed technology. In terms of resources, we invested heavily and we were able to master the core technologies in this category, which became our advantage and control point. For example, we developed our own system for air flow in air conditioners. We also mastered the design of this air flow structure, which is a core technology. We are gradually expanding our resources and technology in refrigerators and washing machines, which is very important.

The second area of benefit is capacity exploration. We are very competitive in terms of manufacturing capacity within the industry, and we have strong cooperation partners. This has allowed us to substantially reduce costs and improve quality.

The third area of benefit is the advantage of Xiaomi homes. If you visit a Xiaomi home today, you will find that we have at least two air conditioners mounted on the wall, one on the bottom, one standing, and a Leshi product. Although we still have few refrigerators and washing machines, we have already made great use of this advantage. As we move toward high-end home appliances, customers still want to go to physical stores to see, touch, and experience the products. Last year, we laid a solid foundation and I believe that it will continue to play a huge role in the next few years. After all, I think the market space is still very, very large for us.

In 2022, our revenue in China was 50.8% and overseas was 49.2%, which is almost a 50/50 split. Although the quarterly product structure and other aspects mentioned by Mr. Lu will be impacted by new product releases at press conferences, the overall trend is still relatively equal between the two markets.

#End of content#

Dolphin Xiaomi Group Historical Article Review:

Earnings Season

March 24, 2023, Financial Report Commentary "Xiaomi: Falling to the bottom, when will it rise again?" On November 23, 2022, Conference Call: "Inventory Starts to Digest, Supply and Demand move towards equilibrium (Xiaomi 22Q3 Conference Call)" and Financial Report Review: "Xiaomi has been lying down for too long, and it's finally going to see the light" were released. On August 19, 2022, Conference Call: "How will the management explain the comprehensive decline in financial reports? (Xiaomi 22Q2 Conference Call)" and Financial Report Review: "Layoffs cannot save Xiaomi's heavy predicament" were released. On May 19, 2022, Conference Call: "What does Xiaomi's management say about the internal and external problems it's facing? (Xiaomi 22Q1 Conference Call)" and Financial Report Review: "Internal and external troubles, Xiaomi is not the optimal choice" were released. On March 22, 2022, Conference Call Summary: "Xiaomi Group: After the mediocre financial report, what does the management say? (Conference Call Summary)" and Financial Report Review: "Xiaomi is average: tasteless and a waste to abandon" were released. On November 30, 2021, Conference Call Summary: "With Xiaomi releasing pure electric models before and after, what is the ideal car doing to compete? (Meeting Minutes)" was released. On November 23, 2021, Conference Call: "How does Xiaomi's management explain the decline in phone sales due to shortages? (Xiaomi Conference Call)" and Financial Report Review: "The ups and downs, where is Xiaomi going?" were released. On August 26, 2021, Conference Call: "Xiaomi Group: What did the management talk about after the beautiful report card?" was released. invite-code=032064)》

2021August25 Financial Report Review "Stop doubting, Xiaomi is climbing to the 'altar'"

2021May26 Financial Report Review "Prominent achievements, is Xiaomi coming to 'Davis Double Click'?"

2021March25 Telephone Meeting "Lack of chips, slow progress of Internet/IoT, making cars? This is how Xiaomi responds!"

2021March24 Financial Report Review "The difference is so big that it makes people doubt their lives. What's wrong with Xiaomi?"

Deep

2022December1 "Xiaomi: Three Arrows of Reversing the Dilemma"

2022June17 "Consumer Electronics 'ripe', Apple tough, Xiaomi bitter"

2021December1 "Honour attacks the city, Xiaomi falls into 'life and death crisis' again"

2021November24 "Behind Xiaomi's sharp drop, where did the problem arise?"

2021June11 "2021, Xiaomi 'undergoes transformation and upgrade' | Dolphin Investment Research"

2021March16 "Dolphin Investment Research | Just as peaks and turns, has Xiaomi finally got rid of bad luck?"

Live stream