Xiaomi: When Will It Rise Again From the Bottom?

Xiaomi Group (1810.HK) released its Q4 2022 earnings report (ending in December 2022) after the Hong Kong stock market closed on the evening of March 24, 2023. The key points are as follows:

1. Overall performance: The lackluster hardware pulled down the company's performance. Xiaomi Group-W.HK achieved a total revenue of RMB 66 billion this quarter, a year-on-year decrease of 22.8%, which is in line with market expectations (RMB 65.3 billion). The company's income has decreased this quarter, mainly due to the drag from its smartphone and IoT hardware business. Xiaomi Group's gross profit margin this quarter is 17.2%, a year-on-year increase of 0.1pct, in line with market expectations (17.1%), mainly due to the decline in the proportion of the low gross margin smartphone business, which led to a structural improvement of gross profit margin.

2. Smartphones: A large drop in shipments is the main reason for the decline. Xiaomi's smartphone business achieved revenue of RMB 36.7 billion this quarter, a year-on-year decrease of 27.3%, slightly lower than market expectations (RMB 38.2 billion). Xiaomi's global smartphone shipments decreased by about 12 million units year-on-year, and it is estimated that the Chinese market's year-on-year decrease was about 4.7 million and India's year-on-year decrease was about 3.4 million. The average selling price of Xiaomi phones this quarter was RMB 1,121, a year-on-year decrease of 2%, mainly due to promotions to reduce inventory.

3. IoT: Strong growth of large home appliances cannot compensate for the weakness of IoT. Xiaomi's IoT business achieved revenue of RMB 21.4 billion this quarter, a year-on-year decline of 14.4%, slightly exceeding market expectations (RMB 20.6 billion). The business, which used to achieve double-digit growth, is now experiencing double-digit declines. The air conditioning, refrigerator and tablet businesses all showed growth of 40%. However, this is not enough to counter the sharp decline in demand for other IoT hardware.

4. Internet services: The software entrance is still stable. Xiaomi's internet service business achieved revenue of RMB 7.2 billion this quarter, a year-on-year decrease of 1.4%, basically in line with market expectations (RMB 7.1 billion). The main reason why the performance can still support the company is due to the continuous growth of the user base, and it cannot avoid the impact of the overall environment on per capita monetization. Dolphin Jun calculated Xiaomi’s ARPU value for domestic users in the fourth quarter was RMB 36.68 (a year-on-year decrease of 16.5%), while the ARPU value for overseas users was RMB 4.33 (a year-on-year increase of 2.7%).

5. Expense and performance: Controlling expenses still cannot suppress R&D expenses. Xiaomi has begun to lay off employees this quarter, but its expenses have continued to increase. Xiaomi reduced 2,600 employees this quarter, but quarterly operating expenses still increased by RMB 1.6 billion QoQ. The increase in expenses mainly comes from sales expenses and R&D expenses. Sales expenses are mainly used for promotions and sales activities in the inventory. While R&D expenses are mainly invested in the automobile business, which will remain a rigid expenditure. Overall, Xiaomi has met market expectations. As those who have been tracking the company for a long time may know, Xiaomi rarely fails to deliver reports that meet expectations. However, this time, the company's core operating profit was negative, indicating that it has entered a dark period. Dolphin defines core operating profit as gross profit minus R&D expenses, sales expenses, and management expenses, and this quarter Xiaomi reported a negative answer for the first time since going public. The market had also anticipated the company's poor performance this quarter.

So why did Xiaomi's operating profit "lose money" this quarter? Xiaomi's business is mainly divided into hardware and software, and while the software side is still stable, there has been an overall decline in the hardware side this quarter. Firstly, in terms of smartphone business, the entire market has slumped and Xiaomi's global shipments and market share in China, India, and other regions have all declined significantly this quarter. Secondly, for its IoT business, even though large appliances held up, they couldn't withstand the sharp decline of other IoT businesses, with overseas IoT falling by more than 26%. As hardware accounts for about 90% of the company’s total revenue, it had a direct impact on the company's revenue this quarter.

The current underperformance of the company's business has concurrently resulted in an increase in expenses, directly causing profits to plummet. The development of the car-making business has led to a rigid increase in R&D expenses, and efforts to promote sales to clear inventory will also increase sales expenses. Although the company has started cost-cutting measures such as layoffs, it is difficult to reduce expenses in the short term.

So what can we expect from Xiaomi in light of this report? Firstly, in terms of performance, it will be difficult for the company to rebound in the short term as the downstream demand remains weak and the company's expenses remain high. Therefore, the company will continue to strive for "turning losses into gains" from an operational standpoint. Secondly, Xiaomi has already hit rock bottom, and there is limited room for further decline in its business. A few things to note from this report are that, first of all, while smartphone shipments have been poor, the average selling price and gross profit margin have shown signs of stabilizing this quarter. Although the gross profit margin is still quite low, it is unlikely to hit new lows. Secondly, for IoT business, with the recovery of economic activity, it is expected to rebound after being affected by macroeconomic factors last quarter and last year. Thirdly, MIUI's user base continues to grow, and its gross profit margin has already stabilized at above 70%. Even in the previous macroeconomic environment, the company's Internet services remained stable. Advertising and gaming businesses are likely to continue to improve with the overall macro environment. Lastly, the inventory situation at Xiaomi continues to improve, with the absolute value of inventory continuing to decline this quarter while inventory turnover days have also decreased. This indicates that the company’s previous efforts to clear inventory have achieved certain results.

Overall, Xiaomi's current financial report has shown losses in operations, and has also entered a "low period." Whether Xiaomi can make progress in performance depends mainly on whether its hardware businesses such as smartphones and IoT can hit bottom and rebound under high corporate costs. However, with the current effective inventory turnover, the erosion of gross profit margin by the devaluation and promotion of inventory in the future will be reduced.

Dolphin believes that Xiaomi's current performance has begun to bottom out and has already been reflected in the financial report as inventory is being cleared. The rebound in performance in the future mainly depends on the recovery of downstream demand.

The following is the specific analysis of Xiaomi's financial report by Dolphin:

I. Overall Performance: Disappointing Hardware Pulls Down Company's Performance

1.1 Revenue

Xiaomi Group's total revenue for the fourth quarter of 2022 was RMB 66 billion, a year-on-year decrease of 22.8%, slightly exceeding market expectations (RMB 65.3 billion). The company's revenue decline was mainly due to disruptions in demand for smartphones and electronic products in the market caused by multiple factors. The weak demand in the electronic product market caused both Xiaomi's smartphone business and IoT business to decline by double digits.

In this quarter, the revenue proportions of Xiaomi Group's major businesses including smartphones, IoT and internet services were 55.5%, 32.5%, and 10.9%, respectively. The smartphone business is still Xiaomi Group's largest source of revenue, but due to the declining performance of the smartphone business, its proportion of total revenue has accelerated its decline.

1.2 Gross Profit Margin

Xiaomi Group's gross profit margin for the fourth quarter of 2022 was 17.2%, a year-on-year decrease of 0.1 percentage points, which meets market expectations (17.1%).

As the revenue proportion of Xiaomi's hardware reaches nearly 90 percent, the company's gross profit margin is mainly affected by its hardware products. The improvement in the gross profit margin on a month-on-month basis is mainly due to the structural improvement brought about by the decline in the proportion of smartphones with a low gross profit margin. The gross profit margin of hardware is still lower than the overall gross profit margin, while the software gross profit margin can still be maintained above 70%.

II. Smartphone Business: The Major Reason for Decline is the Significant Drop in Shipments. In Q4 2022, Xiaomi's smartphone business achieved a revenue of CNY 36.7 billion, a YoY decrease of 27.3%. The decline in the company's smartphone business this quarter was mainly due to a significant decrease in shipments, which was affected by poor demand in both domestic and overseas markets.

Dolphin translates Xiaomi's smartphone business into volume and price. Let's take a look at the main drivers of the smartphone business this quarter:

Volume: In Q4 2022, Xiaomi's smartphone shipments were 32.7 million units, a YoY decrease of 25.9%. The quarterly shipment volume fell to a new low in two years, dropping below 35 million units.

This quarter, Xiaomi's smartphone shipments continued to decline significantly, mainly due to the overall depression in the smartphone market, with global smartphone shipments falling by 17.1%. Xiaomi's decline was even greater than the market average, mainly due to the impact of unstable factors, which affected Xiaomi smartphones in both the domestic and international markets.

Of the 12 million smartphones that Xiaomi declined YoY this quarter, approximately 5 million came from the domestic market, and approximately 7 million came from overseas markets. In terms of the submarkets of Q4, Xiaomi's demand in both domestic and overseas markets was not optimistic, and its market share also declined to varying degrees.

Price: In Q4 2022, the average selling price of Xiaomi's smartphones was CNY 1,121, a YoY decrease of 2%, mainly due to increased inventory clearance efforts in overseas markets. The main reason for the slight rebound in mobile phone prices this quarter was that the proportion of domestic mobile phone shipments increased slightly, and relatively speaking, the average selling price of domestic mobile phones was higher, bringing about structural improvement.

Xiaomi's strategy of high-end development still has some effect on the company's smartphone ASP. The average selling price of the company's smartphones has stabilized at around CNY 1,100 from the previous CNY 1,000. However, in the case of weak market demand, the company carried out some promotions to digest high inventory of mobile phones.

In Q4 2022, Xiaomi's smartphone business achieved a gross profit of CNY 3 billion, a YoY decrease of 41.4%, accounting for 26.4% of the company's gross profit. The significant decline in Xiaomi's mobile phone business gross profit this quarter was due to both revenue and gross profit declines.

This quarter's gross profit margin for Xiaomi's smartphone business was 8.2%, a YoY decrease of 1.9pct. Due to the seasonal decline in gross profit margin caused by traditional promotions in Q4. Compared with the same period last year, the gross profit margin of mobile phones in this quarter has dropped sharply, mainly due to sluggish demand in the mobile phone market this year and high inventory of the company's mobile phones. In the past few quarters, the company has increased its promotional efforts, which has eroded gross profit margin. At the same time, inventory impairment has also had a certain impact on gross profit margin.

3. IoT business: The sluggishness of IoT cannot be lifted even by high-growth major appliances

In the fourth quarter of 2022, Xiaomi's IoT business achieved revenue of 21.4 billion yuan, down 14.4% year on year. This was mainly due to the impact of the global macro economy, with reduced demand for smart TVs and some consumer goods.

Xiaomi's main IoT products mainly include televisions and notebooks. In the fourth quarter of 2022, the revenue of its main IoT products was 6.5 billion yuan, down 25.3% year on year, mainly due to the decrease in shipments and average price of smart TVs.

In the fourth quarter of 2022, Xiaomi's revenue from other IoT products was 14.9 billion yuan, down 8.7% year on year. The main reason for the year-on-year decline is that demand for some IoT products has weakened significantly, while the growth of the smart major appliances business has partly offset the overall decline.

The highlight of this quarter's growth is still the 40% year-on-year growth of the smart major appliances (air conditioning, refrigerators, washing machines), mainly due to the increase in shipments of smart air conditioners and refrigerators. In addition, there was also a 39% year-on-year growth in the tablet segment, mainly due to the increase in shipments in mainland China.

Despite the high growth of smart major appliances and tablets, other IoT products still showed a decline, indicating that the performance of other products is quite sluggish.

In the fourth quarter of 2022, Xiaomi's gross profit from IoT business was 3.06 billion yuan, down 6.5% year on year. The decline in gross profit was mainly due to the decline in revenue.

The gross profit margin of IoT business in the fourth quarter was 14.3%, up 1.3 percentage points year on year. IoT business has begun to stabilize and rebound, mainly due to the increase in gross profit margin of smart major appliances, smart TVs and tablets. Based on the analysis, it is believed that the increase in gross profit margin of major appliances and tablets is mainly due to the growth of business scale, while the increase in gross profit margin of smart TVs is mainly due to the optimization of component costs. IV. Internet Services: Hardware Entry is Still Stable

In Q4 2022, Xiaomi's internet services achieved revenue of RMB 7.2 billion, a decrease of 1.4% YoY, accounting for 10.9% of the company's total revenue. The stabilization of internet service revenue is in line with market expectations (around RMB 7.1 billion). Due to the overall macro environment, the market had anticipated a decline in internet services, mainly due to a decline in the company's fintech and advertising businesses.

Specifically, the breakdown of internet services is as follows:

① Advertising services: the largest component of the company's internet services. In Q4, Xiaomi's advertising services achieved revenue of RMB 4.7 billion, a 4.1% YoY decrease, mainly affected by Mainland China.

In this quarter, revenue from pre-installed ads in Mainland China was impacted by a YoY decline in phone shipments, with Xiaomi's shipments down by 26.2% YoY;

② Game revenue: remained stable. In Q4, Xiaomi's game revenue was RMB 1 billion, an 8.7% YoY increase. Xiaomi achieved YoY growth for six consecutive quarters, despite a 14.4% YoY decline in China's mobile game market in 2022, thanks to the company's growth in active users and stickiness, as well as an increasing penetration rate of paying users. As the hardware entry point, the overall risk resistance of the company's products is relatively strong;

③ Other value-added services: In Q4, Xiaomi's other value-added services revenue was RMB 1.4 billion, with continued contraction in fintech businesses.

From the performance of Xiaomi and Apple's value-added businesses, companies that occupy the software entry point have relatively strong risk resistance. Despite an overall decline of double digits in the advertising market, the internet services of both companies still demonstrate better resilience.

Dolphin Jun breaks down Xiaomi's internet services by volume and price:

① MIUI users: as of December 2022, the number of MIUI monthly active users reached 582 million, a 14.4% YoY increase, with growth in user numbers continuing at a double-digit rate despite a decline in internet services in this quarter.

② ARPU value: by combining the number of MIUI users, the ARPU value for a single quarter can be calculated. In Q4, Xiaomi's internet services ARPU value was RMB 12.3, a 14% YoY decrease. The reason for the decline in ARPU value in this quarter was due to a decrease in ARPU value of domestic users (due to the decline in domestic advertising and pre-installed businesses) and structural impact brought by the increasing proportion of lower ARPU overseas users.

In Q4 2022, Xiaomi's gross profit from its internet services business was RMB 5.13 billion, a YoY decrease of 7.2%. The gross profit margin of Xiaomi's internet services business decreased by 4.6 percentage points YoY, mainly due to a decrease in revenue from pre-loaded advertising related to smartphone shipments.

Xiaomi's own increase in gross profit margin for its internet services business was mainly driven by the increase in the proportion of high-margin advertising business. However, the decrease in smartphone shipments and the impact of the macroeconomic environment affected the growth of the company's advertising business, thereby affecting the gross profit margin of its internet services business.

Compared to other companies in the advertising industry, Xiaomi, which has software as its entrance, still maintains a gross profit margin of over 70% in its internet services business. In this era of intensified competition for traffic, the competitive landscape for internet entrance traffic is better, and Xiaomi has unique advantages.

In Q4 2022, Xiaomi's overseas revenue was RMB 30.7 billion, a YoY decrease of 26.1%, and its revenue proportion declined to 46.5%.

The overseas internet revenue of Xiaomi still achieved a growth of 19.4% this quarter. The double-digit decline in the company's overseas revenue this quarter primarily came from its hardware business. In this quarter where the global macroeconomic environment is unstable, it directly affected Xiaomi's smartphone and IoT product exports. According to Dolphin's estimation, Xiaomi's overseas smartphone shipments in Q4 decreased by 22.2% YoY (excluding China), which is similar to the decline in overseas revenue. It can be further inferred that the decline in overseas IoT business in Q4 will also be greater than 26%.

Part of Xiaomi's success comes from globalization, and currently nearly half of Xiaomi's revenue comes from overseas markets. Although the "globalization strategy" can to some extent diversify Xiaomi's risks, instability in multiple regions directly affects the development of Xiaomi's business. Xiaomi's global shipments in Q4 decreased by about 12 million units YoY. Among them: (1) Mainland China market: Xiaomi's smartphone shipments in Q4 decreased by approximately 4.7 million units YoY, mainly due to the impact of public health and safety incidents on domestic smartphones; (2) Indian market: Xiaomi's smartphone shipments in Q4 decreased by approximately 3.4 million units YoY, mainly due to weakened demand due to high inflation, and other brands have also eroded some of Xiaomi's market share; (3) Other markets: Combined with the Chinese and Indian markets, in Q4, Xiaomi's sales in other overseas markets decreased by approximately 4 million units. Overall, Xiaomi experienced a comprehensive decline in the global market during this quarter.

Due to Xiaomi's business philosophy of "hardware + software", the overseas smartphone sales have fallen by double digits while the number of overseas software users has continued to grow (with the new purchase volume exceeding the replacement volume). According to the distribution of MIUI users, Xiaomi has already had 580 million MIUI users by the end of this quarter, with more than 400 million from overseas markets. In other words, although Xiaomi is from mainland China, overseas users now account for three-quarters of the company.

As overseas users have a much lower ARPU value per capita than domestic users, the higher proportion of overseas users structurally drags down the company's ARPU value level. This quarter, Xiaomi's Internet service ARPU value was 12.3 yuan, down 14% year on year. The reasons are mainly the growth of overseas users and the decline of domestic ARPU value.

According to DolphinJun's calculation, Xiaomi's ARPU value for domestic users in the fourth quarter is 36.68 yuan, down 16.5% year on year, mainly due to the macroeconomic environment impact, lower budgets for domestic advertisers, and a decline in domestic pre-installation business. Meanwhile, the ARPU value of overseas users in the fourth quarter was 4.33 yuan, up 2.7% year on year and back on an upward trend. This also shows that the company's overseas Internet business has a smaller impact from the overall macro environment and advertising industry while expanding its user base.

As the economic growth slows down, the overall advertising and other Internet services begin to tighten budgets, which is unavoidable for many domestic and overseas companies. However, Xiaomi, with the attribute of "hardware entrance," continues to benefit from user growth, which has to some extent avoided the "collapse" of its Internet business.

VI. Expenses and performance: can't curb R&D expenses even with cost control

In the fourth quarter of 2022, Xiaomi's three expenses totaled 11.85 billion yuan, up 3.7% year on year. The operating expense ratio increased by 4.5 percentage points, mainly due to the significant increase in research and development expenses. Xiaomi's total number of employees this quarter decreased by 2,642 compared to the previous quarter, indicating that Xiaomi has begun to control costs. Even the research and development department, which continues to increase its costs, lost 740 positions this quarter. In DolphinJun's evaluation of the financial report in the previous quarter, "Xiaomi has even set up a new salary committee this quarter, and it is afraid that it will continue to control costs and reduce expenses in the future." Xiaomi's Q4 report maintains its target to start production in the first half of 2024, which means R&D costs will still have certain rigidness. The adjustment of personnel in the R&D department this quarter mainly targets the original mobile phone/IoT department.

Currently, Xiaomi's R&D team has 2,300 people, accounting for about 7-8% of the total employees. Xiaodolphin believes that Xiaomi will continue to invest in R&D for automobiles, and R&D costs will still be difficult to reduce in the short term.

① R&D costs: RMB 4.7 billion this quarter, a year-on-year increase of 22%, accounting for 7.1% of revenue. The continuous increase in R&D costs mainly comes from the increase in R&D expenses related to innovative businesses such as smart cars. Although the number of R&D personnel in Xiaomi decreased by 740 this quarter, it is difficult for costs to decrease according to Xiaomi's plan for automobiles.

② Sales Costs: RMB 5.85 billion this quarter, a year-on-year decrease of 6.4%, accounting for 8.9% of revenue. The year-on-year decrease in the sales cost rate this quarter is mainly due to the macro environment's influence, which is closely related to the changes in sales cost items and product sales. While the increase in the sales cost on a quarter-on-quarter basis is mainly due to the traditional promotional season in Q4, and the company also has some inventory reduction needs.

③ Management Costs: RMB 1.3 billion this quarter, a year-on-year decrease of 2.1%, accounting for 2% of revenue. Administrative expenses have decreased, mainly due to the decrease in administrative staff salaries under cost control.

Xiaomi's overall gross profit margin in Q4 2022 was 17.2%, a year-on-year increase of 0.1 percentage point, which remained basically stable.

The increase in the gross profit margin of the mobile phone business on a quarter-on-quarter basis is mainly due to the decrease in the proportion of the mobile phone business with relatively low gross profit margin. Nowadays, Internet services have become the company's largest source of gross profit.

However, under the macro environment's influence in 2022, the gross profit margin of advertising and financial technology businesses decreased, which caused the decline in the gross profit margin of the Internet business. And the decline in the gross profit margin of the two items that are the largest source of gross profit for the company has lowered the overall gross profit margin level of the company in 2022.

The adjusted net profit in Q4 2022 was RMB 1.5 billion, slightly exceeding the market expectation of RMB 1.3 billion. From the perspective of the company's operating performance (excluding investment fair value changes), although Xiaomi clearly entered a low point in business this quarter, it still basically met the market's expectations.

Dolphin Xiaomi Group's historical articles review:

Earnings Season

Nov 23, 2022 Telephone Meeting: "Inventory begins to digest, supply and demand approach balance (Xiaomi 22Q3 Telephone Meeting)"

Nov 23, 2022 Earnings Review: "[Xiaomi has been lying down for too long, and finally it's about to see the "light"] (https://longbridgeapp.com/en/topics/3680818)"

Aug 19, 2022 Telephone Meeting: "After the comprehensive decline in earnings, how did the management explain it (Xiaomi 22Q2 Telephone Meeting)"

Aug 19, 2022 Earnings Review: "Layoffs cannot save Xiaomi's heavy predicament"

May 19, 2022 Telephone Meeting: "How does Xiaomi's management respond when facing internal and external difficulties? (Xiaomi 22Q1 Telephone Meeting)"

May 19, 2022 Earnings Review: "With internal and external troubles, Xiaomi is not the best choice"

Mar 22, 2022 Telephone Meeting: "After the mediocre earnings report of Xiaomi Group, what does the management say? (Minutes of the Telephone Meeting)"

Mar 22, 2022 Earnings Review: "Xiaomi: mediocre report, tasteless, but a pity to waste"

Nov 30, 2021 Telephone Meeting: "After releasing pure electric car models closely after Xiaomi, what does Ideal Auto rely on to compete? (Meeting Summary)"

Nov 23, 2021 Telephone Meeting: "Is the shortage causing the phone to decline? Listen to how Xiaomi's management explains (Xiaomi Telephone Meeting)"

Nov 23, 2021 Earnings Review: "Where is Xiaomi going after a roller coaster ride?"

On August 25, 2021, Financial Report Review: "Stop Doubting, Xiaomi Once Again Climbs to the Top"."

On May 26, 2021, Financial Report Review: "Impressive Performance, Is Xiaomi about to Double Click Davis?""

On March 25, 2021, a telephone conference "Lacking Chips, Slow Internet of Things(IoT), Building Cars? This is How Xiaomi Responds!" was held.