Investing in chips is a long-term strategy that XIAOMI-W must pursue (XIAOMI-W 23Q1 conference call minutes).

XIAOMI-W's Q1 2023 report was released on the evening of May 24, meeting market expectations across all indicators.

Revenue met expectations and profits slightly exceeded Bloomberg's expectations. This was mainly due to the sluggish performance of electronic products such as smartphones, which was already expected by the market. In terms of business performance, smartphones, IoT, and internet services all met market expectations.
In terms of expenses this quarter, $ XIAOMI-W(01810.HK) began cost-cutting measures. Sales, administrative, and R&D expenses were all reduced to a certain extent this quarter, especially sales expenses, which were reduced by more than one billion yuan and were the main source of better-than-expected operating profits.
Inventory turnover was a highlight this quarter, as the company mainly reduced finished and semi-finished products. This greatly optimized the inventory situation of the company's old products.
At the same time, it cannot be ignored that the company's smartphone business lost a significant share this quarter, which is a hidden risk in this financial report. Although the inventory crisis is being resolved, the loss of market share will affect the company's medium- to long-term expectations.

For a detailed interpretation of the financial report data, Dolphin Analyst's article "Reducing Inventory, Losing Market Share, Where Will XIAOMI-W Go?" provides more information.

I. Conference Call Highlights:

1) The main goal of Q1 was to reduce inventory: The overall inventory amount of the company in Q1 this year reached the lowest level in nine quarters.

2) AI large models: The company will not develop general large models like OpenAI, but will use the ability of large models to improve internal work efficiency and even some commercial efficiency.

3) Self-developed chips: The chip business is a problem that the company must address. The company will definitely invest in chips for the long term because it is a strategic control point and the core competence of the company. The company plans to invest in chips for more than 10 years.

II. Full Conference Call Transcript:

2.1 Management Statement

In the just-concluded Q1, the company saw great macroeconomic uncertainty globally and found that overall consumption was moderately recovering. In mainland China, social retail sales in Q1 increased by 5.8% YoY, but the recovery of the consumer electronics industry was not very obvious, and the industry was also in a destocking state. From the perspective of global smartphone shipments, the global smartphone market fell by 13% year-on-year in the first quarter, with the mainland China market falling by 11% and the Indian market falling by 20%. However, if we look at the activation dimension, the global market was in a destocking state in the first quarter. Although the environment was very challenging this quarter, the company's management team resolutely implemented the group's 2023 business strategy - adhering to steady operation, focusing on scale and profit, and adhering to investment.

The company's financial report reflects the company's business philosophy in numbers. In the first quarter, the company's total revenue was RMB 59.5 billion. Although the company's revenue declined year-on-year, the company's gross profit margin reached a new historical high of 19.5%, and the company's operating expenses were also effectively controlled, with a year-on-year decrease of 6%. Therefore, the company's adjusted profit reached RMB 3.2 billion, a year-on-year increase of 13% and a quarter-on-quarter increase of 1.2% - this already includes an investment of RMB 1.1 billion in new businesses, which would be approximately RMB 4.3 billion if this part is excluded.

High-end strategy -

The company's high-end smartphones are becoming more and more powerful, and the company's users are increasingly satisfied. The company's first four products on JD.com all had a satisfaction rate of over 98%, with three of them being 99% and one being 98%, indicating that XIAOMI-W's high-quality product delivery is the result of its capabilities.

In the first quarter, the company's sales of high-end smartphones in mainland China increased by more than 23% year-on-year. In the price range of RMB 4,000-5,000, the company's first-quarter shipment volume ranked first among Android phones, with a market share of over 24%. Last month, the company just released the XIAOMI-W 13 Ultra, which performed very well, with first sales being twice that of the previous generation XIAOMI-W 12S Ultra. This confirms that the company has a very mature methodology in constructing high-end brands and products, which is from leading parameters to leading experiences, emphasizing the deep synergy of software and hardware, and achieving no shortcomings in high-end products. And these concepts have been greatly recognized by users in the products. At the same time, everyone also sees that the company has always insisted on the high integration of technology and humanities in its promotion, achieving leadership in technology, aesthetics, and humanities.

International market -

XIAOMI-W is the most complete Chinese smartphone brand in terms of international channel architecture and organizational structure. The company's global scale and strategic depth also help to share the risks of a single market. In the first quarter, the company's global shipments remained in the top three, and its user base continued to grow. This afternoon, the latest good news was released, that is, the company's global monthly active users exceeded 600 million for the first time, which is also a new milestone in the company's global development. In the Chinese market, the company's MAU also reached 146 million.

After the successful launch of the XIAOMI-W 13 series in China, the company's reputation was also very good when it was released overseas at MWC in February, and it is still in a shortage state. At the same time, the company continues to optimize its financial structure and inventory is also constantly decreasing globally. In the first quarter of this year, the overall inventory amount of the company reached the lowest level in nine quarters, which also promoted the growth of the company's cash flow.

In the future, the company will continue to strengthen its basic capabilities, promote local operations in the country, strengthen channel construction and digital construction, and create a safe, efficient, and global financial platform, bringing XIAOMI-W's heartwarming and affordable products to every user around the world.

New Retail——

2021 is a year of rapid expansion for the company's stores, 2022 is a year of effectiveness for the company's stores, and this year is the integration year for the company's XIAOMI-W home stores. The company focuses on improving the operational efficiency of offline stores, expanding the scale of company partners, and integrating resources to a high degree. In the first quarter, the company's offline share of smartphones in mainland China reached 7.9%, a year-on-year increase of 1.4%.

In the first quarter, the GMV of XIAOMI-W's home stores driven by offline smartphones achieved growth both year-on-year and month-on-month, with a month-on-month increase of 60%, and the GMV of monthly single stores was higher than that of the four quarters of last year. At the same time, new retail is also a very powerful support for the company's high-end development. So far, the XIAOMI-W 13 and XIAOMI-W 13Ultra series in offline channels have contributed to more than half of the shipments.

R&D Investment——

Although the industry faces great challenges, the company has always strengthened and continued to invest in research and development. In the first quarter, the company's R&D investment reached 4.1 billion yuan, a year-on-year increase of 18%, including approximately 1.1 billion yuan of investment in innovative businesses such as smart electric vehicles and cars.

Currently, the number of R&D personnel in the company has exceeded half of the total employees, and the number of strategic patents authorized globally by the company has exceeded 30,000. Recently, there is also good news that XIAOMI-W's camera algorithm team won four championships in CVPR, which is the highest award in the field of computer vision globally.

AI Investment——

In April of this year, the company officially formed a large-scale team of AI laboratory and insisted on self-developed core technology. The company has been supplying in the field of AI since 2017, and the investment is also very large. Today, the company has several teams, including AI laboratory, Xiaoai team, camera algorithm team, and autonomous driving team. The company's related R&D personnel in the AI field have exceeded 1,200. The company believes that with technology accumulation, user scenarios, and data accumulation, it will definitely win in this round of AI industrial revolution in the future. At the same time, the company is also very willing to cooperate with potential third parties and adopt strategic investment. Facing the new round of AI revolution in the future, XIAOMI-W has also prepared and will go all out to embrace it actively.

After the first quarter financial report, XIAOMI-W's entire operation is in a very healthy state, whether it is the company's gross profit margin, expense ratio, inventory level, or cash flow, which is the result of the entire management team's resolute implementation of the group's management strategy of emphasizing both scale and profit. At the same time, the company will continue to promote refined management and pursue high-quality development. The company will also adhere to investing in the future and continuously pursue technology, quality, innovation, and other aspects. In the future, the company will continue to implement and consolidate the overall strategy of the entire group, deepen its technology, enhance its brand, upgrade its management, continue to reduce costs and increase efficiency, and create value for XIAOMI-W's users, industry, and partners.

2.2Q&A

Q1: Regarding the mobile phone sector, what is the impact of the 618 promotion strategy on the three core indicators of second-quarter shipments, average selling price, and gross profit margin? What is the outlook for overseas market shipments in the second quarter?

A1: XIAOMI-W has been promoting IPD, which is product lifecycle management. The company plans a product's lifecycle, its opening price, when it should be discounted, and so on before it is launched.

When the company calculates the sales volume, revenue, gross profit margin, cost rate, and net profit of its products, it follows this logic. Therefore, please rest assured that all price promotions are within the company's original product planning price range and within the company's overall budget range. It will not affect the company's estimated mobile phone gross profit margin for the whole year.

In the first quarter, the company's main goal was to reduce inventory and make the company's operations healthier. Therefore, from the perspective of shipments, the company's market share has decreased to some extent. However, if we look at the activation dimension, the company's share is actually increasing. Therefore, from the perspective of internal management, the company's most important indicator is the activated market share because as long as there is activation, there will be shipments in the future.

Based on this, the company will see that there is a particularly important series overseas, namely the Redmi Note series. The release of the Note12 generation was delayed by one quarter, which had a certain impact on the company's overseas ISP. But after the release of Note12 in April, the global sales are very good. Note is the company's flagship series. So I think the second quarter, in terms of the company's overseas market, should be relatively optimistic.

Q2: Can you break down the domestic and foreign channel situation? How does the company view the speed of inventory replenishment in 2Q?

A2: As you can see from the company's financial report, the company's inventory has decreased significantly. Currently, both XIAOMI-W's own inventory and the company's channel inventory are in a very healthy and benign state, so please rest assured.

Currently, **the company's entire industry chain is still in a downward trend in terms of cost. Regarding inventory, the company will make different stocking strategies for different categories based on its judgment of future markets, raw material cost reductions, and supply situations. Q3: Recently, there have been some restrictions on memory. What preparations has the company made?

A3: Currently, the overall memory prices are slowly declining, and there are no signs of a price rebound. The company has always had some strategic reserves in terms of memory, but the reserve strategy will vary depending on different stages and trends. Today, regardless of how memory is, it will not have a particularly large impact on the company's overall costs for the year.

Q4: What progress has the company made regarding AI large models? Which user needs will be given more attention? Do you think large models will drive the demand for machine replacement?

A4: XIAOMI-W has a clear understanding and decision regarding AI large models.

The first is that the company will not develop general large models like OpenAI. This is what I think is a clear understanding of the company. However, XIAOMI-W will actively embrace large models because the company still believes that in the future, whoever owns the users, data, and application scenarios will be the beneficiaries of these large models.

Secondly, the company will also use the capabilities of large models to improve the company's internal work efficiency and even some commercial efficiency. Therefore, the company's AI large model team has been established, and they have already started some work. I think everyone will gradually see some results that the company will launch in the future.

In terms of large models, the company will focus on self-research and development. At the same time, the company will also use its investments to look at introducing third parties to help the company's development. So these companies all hold a relatively open attitude.

Q5: Is there further room for optimization of operating expenses? What is the outlook for operating expenses for the whole year?

A5: In terms of expenses, everyone can see that the company's expenses have decreased significantly.

There are mainly several aspects. The first is that the company has reduced its marketing expenses, which is closely related to the company's procurement cost reduction. Currently, overall marketing expenses are relatively low, but it does not mean that the company's investment in some areas has decreased.

The second point is that the company's operating expenses have also decreased significantly, so reducing costs and increasing efficiency still play a significant role in the company. In the past, XIAOMI-W's development speed was very fast, but the company also found that there were some internal management wastes. Therefore, by reducing costs and increasing efficiency to optimize these, I think it is also reflected in the company's expenses. Reducing costs and increasing efficiency is a continuous daily work of the company, so everyone will see some optimization space in the company's expenses this year.

Supplement: From the perspective of reducing costs and increasing efficiency, the company established two committees, the Operating Committee and the Human Resources Committee, at the beginning of the year. Both committees are under the guidance of the company to strictly control the company's expenses and look at how to improve the company's operational efficiency and other directions. I hope everyone can see the results of the company's control in this area. Q6: Regarding overseas inventory, when will sell in and sell out be balanced?

A6: Starting from the second quarter, the company's overseas sell in and sell out are almost balanced, so the company made a bigger effort to reduce inventory in the first quarter. Therefore, the second quarter can basically be balanced, so everyone doesn't need to worry.

Q7: Regarding new retail, are there any successful cases/strategies as a guide for the company?

A7: In terms of new retail, the data for the first quarter is good, and April is also good. I think this is largely due to the launch of XIAOMI-W 13Ultra, which is still out of stock since its launch because its average price is 6,500 yuan, so it has a very good overall promotion effect on the entire XIAOMI-W home.

In May and June, the company believes that it is also the peak season for air conditioners. XIAOMI-W is the only mobile phone brand in the Chinese market that has achieved online and offline promotions. In the past, when online price wars were fought, offline was a disaster and sales would drop significantly. However, after several years of new retail construction, XIAOMI-W has synchronized online and offline promotions. Therefore, in offline sales, the company will also have a significant increase in sales during the 618 promotion. Therefore, the second quarter of XIAOMI-W new retail is still optimistic.

Regarding the expansion of XIAOMI-W new retail overseas, I just went to Southeast Asia and Hong Kong. Let me give you a simple example. The company's store in Mong Kok, Hong Kong, which I visited the day before yesterday, had a turnover of about 12 million yuan in April, which is very good. Because I went there in the morning, they told me that when it comes to weekends, the store is almost crowded. In Thailand, the mobile phone retail industry in malls already accounts for 40% of the entire market, and the proportion will be even higher in the Philippines. Especially in Southeast Asia, people like to go to malls, so going to malls is particularly advantageous for XIAOMI-W's new retail. XIAOMI-W's development in various countries is also good, but there is indeed a certain gap with China in terms of the digital closed-loop of news retail.

So I think I personally hold an optimistic attitude towards the global development of XIAOMI-W new retail.

Q8: Regarding the company's thoughts and ideas on AI in the IoT field?

A8: As a terminal company, XIAOMI-W must be committed to integrating AI technology with its business. Xiao Ai is a very important IoT voice access point for XIAOMI-W. Currently, the company has done some demos with the GPT model, which has improved compared to before, and the company will push it to the market at the appropriate time in the future. In addition, as MIUI spreads to more devices and its own capabilities become stronger, as the company's underlying ecological capability, the company's ability to integrate MIUI with AI technology will become stronger and stronger in the future. Q9: What are the strategies for improving monetization in internet business? What is the outlook for the gross profit margin of the company's internet business in the future?

A9: The main growth of monetization in internet business comes from pre-installation and advertising. Due to the healthy shipment volume of the company's mobile phones, the number of pre-installations has also continued to increase. In addition, the company is committed to developing new customers, and overseas local new customers of internet business have been a very important part of the company's overseas internet revenue growth in the past one or two years. In addition to helping Chinese apps go global, the company is currently cooperating with global apps and some local apps, which brings good revenue reports. The gross profit margin of the internet business reached 70% this quarter, which is relatively healthy. The main growth points come from the high-speed growth of some high-gross game company partner businesses and high-gross advertising placements, which synergistically drive the overall game gross profit margin of the company to a stable increase.

Q10: How do you view the phenomenon of second-hand mobile phones? What is the expectation for the steady-state capacity of the domestic mobile phone market?

A10: For any category that reaches maturity, the rise of the second-hand market is a very natural phenomenon. Currently, due to the improvement of mobile phone quality, the second-hand mobile phone market is prosperous. The company estimates that China produces about 100 million second-hand mobile phones each year, and the replacement of low-end mobile phone market share is relatively obvious. For XIAOMI-W, the first thing is to promote new machine sales and do a good job of old-for-new work; the second is to do a good job of maintaining and operating old users, providing good after-sales service and optimizing user experience.

Regarding the overall Chinese mobile phone market in 2023, I (Lu Weibing) think the decline will be within 5%, but if it is good, I think it may be about 2%-3% decline, so the Chinese market will be maintained at about 265 million, and 260-270 million is basically the same.

Q11: What are the company's current market share and profit margin targets in the Indian market? What are the new growth points to make up for the missing market share in the Indian market?

A11: From a business perspective, the company is in a relatively healthy state in India today-with a market share of about 17% in the first quarter. I think the company does not have a particularly clear requirement for market share or profit in India, and I believe that the healthy state of the entire business is the top priority.

Q12: Regarding semiconductor mobile chips, domestic friendly competitors have recently terminated their chip business. Does this have any impact on XIAOMI-W's future strategy? If the company develops the mobile chip business, what is the overall strategy/high-end strategy?

A12: Everyone feels very sorry, but at the same time, it also fully illustrates that the chip business is really not easy, and the company respects this attempt. XIAOMI-W actually invested in the chip business very early, starting in 2014 and now has nearly ten years of time. The company has also paid a high price and has many painful lessons, but it has given the company several inspirations-one is that the chip industry has its own industry rules, which has strong long-term characteristics. At this time, I think it is difficult to make breakthroughs in a short time through huge capital investment or human investment. So companies must fully recognize the long-term, complex, and arduous nature of chip business investment.

The second cognition is that chips play a very, very important role in the development of the company's core business, especially the company's terminal business. So chip business is not a matter of whether or not XIAOMI-W will do it, it is a problem that the company must do.

You don't have to worry about the company's determination to invest in chips. That is to say, the company will definitely invest in chips for a long time because it is a strategic control point and the core competence of the company. The company plans to invest in chips for more than 10 years.

Regarding 3 nanometers, the industry will enter 3 nanometers this year, and it will be widely popularized next year. Compared with 4 nanometers, the cost of 3 nanometers will indeed increase significantly. This increase will certainly affect the cost of the company's future chips. However, because the current chips will take a relatively long time from mass production to delivery, the company is also observing. I think there is still no direct impact on the current situation.

Q13: How do you see the pulling effect of the new products of MIJIA on subsequent demand?

A13: For new products in the ecological chain, the company will introduce some cool products to users in a timely manner, so it will also introduce some new categories and explosive products, hoping that everyone will like them.

Financial Report Season

May 25, 2023 Financial Report Review "Reducing Inventory, Losing Market Share, Where Will XIAOMI-W Go?"

March 25, 2023 Telephone Conference "Inventory Turnover Is Effective, Demand Recovery Has Not Yet Arrived (XIAOMI-W 22Q4 Telephone Conference)"

March 24, 2023 Financial Report Review "XIAOMI-W: Falling to the Bottom, When Can It Stand Up?"

November 23, 2022 Telephone Conference "Inventory Begins to Digest, Supply and Demand Move Toward Balance (XIAOMI-W 22Q3 Telephone Conference)"

November 23, 2022 Financial Report Review "XIAOMI-W Has Been Lying Down for Too Long and Is Finally About to See the "Light""

On August 19, 2022, conference call "How will management explain the comprehensive decline in the financial report? (XIAOMI-W 22Q2 conference call)" was held.

On August 19, 2022, financial report review "Layoffs cannot save XIAOMI-W from its heavy predicament" was published.

On May 19, 2022, conference call "What did XIAOMI-W management say about its internal and external difficulties? (XIAOMI-W 22Q1 conference call)" was held.

On May 19, 2022, financial report review "XIAOMI-W is not the best choice with internal and external troubles" was published.

On March 22, 2022, conference call summary "What did XIAOMI-W management say after an ordinary financial report? (Conference call summary)" was published.

On March 22, 2022, financial report review "XIAOMI-W: Mediocre financial report, tasteless but a pity to abandon" was published.

On November 30, 2021, conference call summary "How will Ideal Auto compete with XIAOMI-W, which released pure electric vehicle models before and after? (Meeting summary)" was published.

On November 23, 2021, conference call "How does XIAOMI-W management explain the decline in mobile phone sales caused by shortages? (XIAOMI-W conference call)" was held.

On November 23, 2021, financial report review "Where is XIAOMI-W heading with ups and downs?" was published.

On August 26, 2021, conference call "What did XIAOMI-W management talk about after the beautiful report card?" was held.

On August 25, 2021, financial report review "[Don't doubt it anymore, XIAOMI-W is on the "godly" throne again](https://longbridgeapp.com/topics/1079597? invite-code=032064)》

2021年5月26日财报点评《 Impressive Performance, Will XIAOMI-W be Listed on Nasdaq?》

2021年3月25日电话会《 Shortage of Chips, Slow Development of Internet of Things and Vehicle Manufacturing? XIAOMI-W Has the Answer!》

2021年3月24日财报点评《 Why Did XIAOMI-W's Performance Fall Short of Expectations?》

In-depth Analysis

2022年12月1日《 XIAOMI-W: The "Three Arrows" of Reversing the Dilemma》

2022年6月17日《 Consumer Electronics "Mature", Apple Stands Firm, XIAOMI-W Struggles》

2021年12月1日《 Honour's Siege, XIAOMI-W Faces Another "Life and Death Crisis"》

2021年11月24日《 What Went Wrong Behind XIAOMI-W's Sharp Decline?》

2021年6月11日《 2021, XIAOMI-W "Transforms" | Dolphin Analyst》

2021年3月16日《 Dolphin Analyst | Turning the Tide, Will XIAOMI-W Finally Get Rid of Bad Luck?》

Live Broadcast

2022年8月19日《 XIAOMI-W-W(01810.HK) Q2 2022 Earnings Conference Call》