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Edited Transcript of 1810.HK earnings conference call or presentation 20-Aug-19 12:00pm GMT

Half Year 2019 Xiaomi Corp Earnings Call

Aug 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Xiaomi Corp earnings conference call or presentation Tuesday, August 20, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chuan Wang

Xiaomi Corporation - Co-founder, Senior VP, Chief of Staff & President of China Region

* Jun Lei

Xiaomi Corporation - Founder, Chairman & CEO

* Shou Zi Chew

Xiaomi Corporation - Senior VP & CFO

* Steve Lin

Xiaomi Corporation - Joint Company Secretary

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Conference Call Participants

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* Fang He

HSBC, Research Division - Head of China Technology Hardware Research

* Gokul Hariharan

JP Morgan Chase & Co, Research Division - Head of Taiwan Equity Research and Senior Tech Analyst

* Kyna Wong

Crédit Suisse AG, Research Division - Associate

* Leping Huang

China International Capital Corporation Limited, Research Division - Analyst

* Piyush Mubayi

Goldman Sachs Group Inc., Research Division - MD

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Presentation

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Steve Lin, Xiaomi Corporation - Joint Company Secretary [1]

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Good evening, everyone. Welcome to Xiaomi Corporation 2019 First Half Result Conference Call. I'm Steve Lin, the Director of Corporate Finance at Xiaomi.

Before we start the call, we would like to remind you that it may include forward-looking statements, which are underlined by a number of risks and uncertainties and may not be realized in the future for various reasons.

Information about general market conditions is coming from a variety of sources outside of Xiaomi. This presentation also contains some unaudited non-IFRS financial measures that should be considered in addition to, but not as a substitute for, company's financial prepared in accordance with IFRS.

Now let me introduce the senior management on the call today. We have our Founder, Chairman and CEO, Mr. Lei Jun; our Senior Vice President and CFO, Mr. Shou Zi Chew; our Senior Vice President, Mr. Wang Chuan, who leads our international business.

Now I will turn the call over to our CFO, Mr. Shou Zi Chew.

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Shou Zi Chew, Xiaomi Corporation - Senior VP & CFO [2]

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Good evening, everybody. This is Shou here on the line. Thank you, as always, for your support of Xiaomi.

Today, I will go through a very quick recap of our first half and Q2 results. And the second half of this call, I will hand the time over to Mr. Wang Chuan, our SVP of our global business, who will share some of our global progress with you as well.

I think in summary, this first half of the year, we will categorize this as very healthy operations, very healthy growth within Xiaomi. This growth, healthy growth is reflected in a few areas: first of all, we have achieved very high-quality, healthy growth numbers in terms of our revenue; second, our profitability has increased significantly; and third, we believe that we are -- our ability to manage uncertainty has increased a lot as well.

In terms of our first half 2019 results, our total revenue for the first half was RMB 95.7 billion with year-on-year growth of 20%. Our adjusted net profit was at RMB 5.7 billion with a year-on-year growth of 50%.

If you look solely in -- for Q2 2019, our total growth was RMB 52 billion -- sorry, our total revenue was RMB 52 billion with year-on-year growth of about 15%. Our adjusted net profit was at RMB 3.6 billion with a year-on-year growth of 72%.

We look at the Bloomberg consensus numbers and -- to get a view of what research analyst have predicted for the second quarter of this year, and we believe that our Q2 revenue has met expectations, and our Q2 adjusted net income has greatly surpassed expectations by 29.4%.

Not long ago, we were very honored to be included in the Fortune 500 Global (sic) [Fortune Global 500] list for the very first time, and our rank on this list was 468. We were the 7th Internet company globally to join this very prestigious list. And from founding to today, it has only taken us 9 years to join this very prestigious list. We believe that we are the youngest company on the Global Fortune 500 (sic) Fortune Global 500 list today.

Xiaomi also made the BrandZ 2019 Top 100 Most Valuable Global Brands ranking for the first time. According to this rank -- ranking, we were ranked #74, and our brand value was estimated to be about USD 19.8 billion.

Xiaomi was also listed as one of the 2019 Forbes China's 50 Most Innovative Companies. We believe that this very prestigious award is a recognition of the hard work that all Xiaomi employees have put in over the course of the 9 years. This is also great encouragement for us as we work harder towards even bigger milestones in the future.

Now before we dive into details, let me give you guys a quick recap on first half 2019. In terms of our company strategy, we launched the Smartphone + AIoT dual-engine strategy in the first half of 2019. In terms of the smartphones business, we executed the successful separation of Xiaomi and Redmi brand, including inviting Mr. Lu Weibing to join us as our Group Vice President and Head of our Redmi brand.

We were ranked #4 globally in terms of smartphone shipments in first half 2019. In particular, in Q2 2019, according to a particular third-party research firm, we were very, very close to becoming the third-largest smartphone company in the world. This is something that's unimaginable 10 years ago.

We were #1 in India for 8 consecutive quarters in terms of smartphone shipments and #4 in Western Europe with a year-on-year growth of 53%. We also launched our first 5G phone in Europe this year, which is called the Mi Mix 5G model, and our second 5G smartphone will be launched in mainland China in the second half of 2019.

In terms of our AIoT business, we had 196 million connected IoT devices, excluding smartphones and laptops, in the first half of 2019, of which, we also had 49.9 million AI assistant MAUs, monthly active users. This is driven, in part, because of our strong TV and home appliances business.

In terms of our TV business, we were #1 in mainland China in terms of shipment and #5 globally in terms of shipment. In terms of our large home appliances, we enjoy very strong momentum, which I will deep dive into later in this presentation.

In terms of our Internet services, the first thing we have achieved is increased diversification of our Internet services revenue, reflecting a more robust and healthy business in the future, of which, our Youpin e-commerce GMV reached RMB 3.8 billion with a year-on-year growth of 114%.

In terms of our overall financials, as mentioned, our total revenue for the first half was RMB 95.7 billion with a year-on-year growth of 20%. Our adjusted net profit was at RMB 5.7 billion with a year-on-year growth of 50%.

Our cash resources at the end of the first half was at RMB 51.1 billion. This is a historic high for Xiaomi, including after comparing with the quarter after our IPO. So we have achieved a historic high in terms of our cash resources. Our operating cash flow on the first half of 2019 was at RMB 12.2 billion.

Next, I will go into a bit more detail for each of our key businesses. First, our smartphone business. In the first half of 2019, our smartphone revenue reached RMB 59 billion, representing a year-on-year growth of 9.8%. In the first half of 2019, we sold approximately 60 million smartphone units around the world.

This quarter, we -- this first half of the year, we executed the successful separation of the Xiaomi and Redmi brand. Just as a recap, the Xiaomi brand focuses on pioneering advanced technologies, establishing itself in the mid- to high-end and diversified user market. It is also the brand that will help us build our new retail channels.

In the first half of this year, we launched the RMB 2,000 to RMB 3,000 price range flagship Xiaomi 9 series. This series has achieved widespread popularity amongst our users. Following which, we launched a RMB 1,000 to RMB 3,000 price range Xiaomi CC9 series, which targets young and female users, of which, the Xiaomi CC9 Meitu model utilizes cutting-edge technology from Meitu with regards to photo quality. And we believe this brings our female users a very unique smartphone that is very good for selfies.

In terms of the Redmi brand, the Redmi brand focuses and pursues the ultimate price performance ratio and focuses on online channel. In the first half of this year, we launched the Redmi Note 7 series, which achieved incredible popularity across the world. We announced earlier this morning that our Redmi Note 7 series has sold 20 million units since launch.

In the first half of 2019, we also launched the K20 series. In the first month of launch, we sold 1 million units of the K -- the Redmi K20 series. This series also allows the Redmi brand to start pursuing more of the high-end market in the ultimate price performance ratio segment.

So by the end of the first half 2019, the Redmi and Xiaomi brand series both have a comprehensive portfolio of products that covers a suitably wide price range. We believe that this will allow the separation of the brand to be executed more successfully as we progress towards the second half of 2019.

As a result of a greater brand strategy and an optimized product portfolio, our average selling price of our smartphones has continued to grow. In the second quarter of 2019, our mainland China smartphone ASP grew by 13.3%, and our overseas smartphone ASP grew by 6.7%. Revenue from smartphone over RMB 2,000 has reached 32% of all our smartphone revenue in Q2 2019. Over the course of the past few months, this number is going up.

This year, in June, something very monumental happened in terms of the smartphone market in China. The Chinese government launched the first 5G license for commercial use, and we have officially entered the 5G commercial use era. We believe that the Chinese smartphone market will grow with the proliferation of 5G smartphones over the course of the next few years. We are very optimistic and very well-prepared to capture this growth in the future.

In terms of our preparation for 5G, we started devoting R&D resources into 5G as early as 2016. By 2018, we have successfully connected our first 5G device to a 5G network. By February 2019, we launched our first 5G phone in Europe. This same model, Xiaomi Mix 5G, was delivered to the 3 carriers in China in May 2019, and we will launch our first 5G phone in China in the second half of this year. Now details of the launch event will be disclosed at a later date, but we will keep everybody informed, of course.

Now as we enter this transitional era of 4G to 5G, over the first half of 2019, our emphasis is on prudent and healthy operations. I will share 2 numbers to show how we have executed this.

First, our gross margins of our smartphones grew from 3.3% in Q1 2019 to 8.1% in Q2 2019, growing by 5%. I think this shows the robustness of Xiaomi's operations as a whole.

Second, in terms of our operating cash flow, excluding our Fintech business, we went from negative CNY 1.5 billion in Q1 2019 to positive cash flow of CNY 13.7 billion in Q2 2019. We believe that having these significant resources at hand will allow us to better capture the 5G opportunities when they arrive very, very soon.

Next, I would like to share a bit more detail on the AIoT business. Our IoT and lifestyle product revenue reached CNY 27 billion in the first half 2019, representing a blistering growth of 49.3%.

Here, I would like to share our thoughts on why our IoT business is unique and highly strategic. It fulfills 4 key strategic functions for us. First, our IoT offering allows us to empower more ecosystem companies to fulfill our mission to build amazing products at honest prices so that everybody in the world can enjoy a better life through innovative technology. Second of all, this very complete product offering that we have attracts customers to our retail channels in a very efficient manner. This is one of the key reasons why we have been able to keep our operating efficiency at such a high level compared with every single company in our space. Third, the highly popular products are connected to form a very unique consumer IoT platform, which is one of the largest, if not the largest in the world today. Fourth, it allows us to have a diversified revenue and profit streams.

In the first half of 2019, our AIoT business was driven by many factors, including our smart TVs business, which reached 5.4 million units of shipment with a year-on-year growth of 65% in the first half of 2019. We were ranked #1 by shipments in China and #5 globally in the first half of 2019 in terms of TV shipments. Our TV -- we are the #1 smart TV brand in India for 5 consecutive quarters as well.

We also have very strong momentum in large home appliances, of which, our Mi Air Conditioner shipments reached 1 million units in the first half of 2019. Now for those who are familiar of this space, this is a very important milestone to reach, and very, very few companies can reach it at such a -- with such a short history of operations in the space.

In terms of our laptop business, according to IDC, our mainland laptop China market share grew by -- grew from 5.5% in the second half of 2018 to 8.7% in Q2 2019, representing a growth of more than 3% market share in just 1 year.

In terms of wearables, we remain the #1 in terms of wearable devices shipments in the first quarter of 2019. Second quarter numbers are not out yet.

Our Mi Smart Band 4 exceeded 1 million units of shipment in just 8 days since its launch on the 14th of June this year. What all -- what these -- the strength of these products have done is that it has allowed us to build the leading global consumer IoT platform. Today, we have 196 million connected devices outside of smartphones and laptops, and this number has grown by 70% over the last year. We have 3 million users who use 5 or more IoT devices on Xiaomi's IoT platform, and this number has grown 79% over the course of the last year.

Behind our IoT platform is our AI capability. Our AI speaker shipments exceeded 4 million units in the first half of 2019. Today, we have 49.9 million, close to 50 million AI assistant monthly active users. Now what is a -- what has a -- one number that we want to share is that in June 2019, 45% of our AI speaker users used voice to control their IoT devices. Now because we have built such a big lead in terms of connected IoT devices, we believe that in the AIoT era, we have built a very significant competitive advantage for our company.

Third, I want to share a little bit more about Internet services. In the first half of 2019, our Internet service revenue reached CNY 8.8 billion, representing a growth of 23%. Now, this is despite challenging macro -- a challenging macro environment for the Internet business as many, many of you are aware.

Now, this growth is underpinned, first of all, by our strong MIUI monthly active user growth. Our global MIUI monthly active users has grown from 207 million in Q2 2018 to 279 million in Q2 2019, representing a year-on-year growth of 35%. We would also like to share our mainland China MIUI monthly active user number. Today, our mainland China MAU number is at 115 million.

Over the course of the first half of 2019, our Chinese smartphone advertising business has achieved increasing diversification. Over the course of the last few quarters, our advertisers have extended from other Internet companies to new verticals such as small to medium business enterprises and large finance organizations such as the big banks.

Apart from just diversifying our advertisers, we have also increasingly built new Internet services within our platform. I would like to share a few numbers with everybody.

First of all, we have built a very significant news feed business within our Internet services. Our news feed business has over 71 million monthly active users on our phones today, and this number has a year-on-year growth of 31%. Our news feed products are ranked #1 in terms of monthly active users on our smartphones.

We are also #1 in terms of search queries on our smartphones. We have a few entry points for searches to take place on our smartphone, including our launcher search box, our browser and our negative one screen and our AI assistant. We believe that our leading position in news feed and in search -- the search queries allows us to better diversify our advertiser base in the future. This will allow us to build a more robust Internet advertising business in mainland China, and this will allow us to capture even more growth when market conditions recover.

In terms of our gaming revenue and gross profit, I would like to emphasize that our gaming gross profit grew from 212 -- RMB 213 million to 409 -- RMB 408 million over the course of the last year. This represents a gross profit growth of 92%. The reason this -- the reason for this is because we have put in a lot of effort over the last year to optimize our gaming distribution efficiency, this is point number one; and point number two, there's higher revenue growth from content providers, which give us a high gross profit margin. So underpinned by these 2 things, we believe that our gaming business is healthy today.

I talked about mainland China advertising and gaming businesses just now. Now in terms of other Internet services, including Youpin, including our Fintech business, including our overseas Internet business and including our AIoT Internet services business, we have achieved increasing diversification and growth from these revenue streams. Combined, they account for 36% of all Internet service revenue for Xiaomi today. And these 4 revenue streams combined has a year-on-year growth of 109% in the second quarter of 2019.

Youpin, for example, achieved a 3.8 billion GMV in the first half of this year with a year-on-year growth of 114%. What is also very interesting is that 65% of GMV in June 2019 for Youpin was from smartphone users who are not using Xiaomi handsets, which means that Youpin has successfully transitioned into an Internet app for all users.

In terms of our Fintech business, our Fintech business, underpinned by our consumer loan and supply chain financing business, achieved revenue of CNY 1.4 billion in the first half of 2019. This is a year-on-year growth of 79%.

In terms of our IoT services business, I'm going to use TV as an example here. We have 22.6 million monthly active users for our TVs today, of which, we have 3 million paid subscribers. They pay for multiple membership, including video, sports, children and education. Some of these memberships we have designed ourselves, including buying content ourselves. And some of these memberships have successfully expanded to non-Xiaomi TVs, so we are building an Internet service business that -- IoT Internet service business that not only services our devices.

In terms of our overseas Internet services, we are continuing to build and strengthen our service offerings. Just to give everybody an example, our Xiaomi browser is now ranked #1 on Xiaomi phones in India in terms of monthly active user. Our overseas ARPU has continued to grow rapidly with a year-on-year growth of 133% in Q2 2019.

Next, in terms of our entire overseas business, our entire overseas business revenue continue to grow strongly with a year-on-year growth of 34% in the first half of 2019. This revenue stream now accounts for 40% of our total revenue.

Mr. Wang Chuan will go into more detail for this business very shortly, so I'll just go through the key highlights. For example, in India, we have been ranked for 8 consecutive quarters the #1 smartphone brand in terms of shipments, and our market share in Q2 2019 was already at 31%. In Western Europe, we are ranked #4 by smartphone shipments in Q2 2019, achieving a very high growth rate of 53%. In Spain, in particular, we are now ranked #2 in the -- in open market in Spain and growing rapidly.

In terms of our overall financial performance, our hardware gross margin, due to our prudent and healthy operational strategy, has grown from 7.4% in Q2 2018 to 9.1% in Q2 2019. Our Internet service gross margin has also increased slightly from 63% in Q2 2018 to 66% in Q2 2019.

Our operating expense remains very, very efficient and very stable. Our entire operating expense ratio in Q2 2019 was still below 9% at 8.8%. This is in spite of our R&D expenses increasingly -- increasing by 30% year-on-year in first half 2019, outpacing our revenue growth quite significantly.

In terms of our balance sheet, our inventory turnover days has decreased to 53 days in Q2 2019. The strength of our operating -- of our balance sheet is reflected -- and our cash flow is reflected in this number. Our net cash generated from operating activities in Q2 2019 was at RMB 13.7 billion, excluding our Fintech business.

We have also done the following math: our cash resources today is -- at the end of first half 2019 was at RMB 51 billion. The book value of our investment portfolio is at RMB 29 billion. And the book value of our campus, our offices and our other real estate is at RMB 9.6 billion. If you take away our RMB 13.8 billion of financial debt, our total, I guess, asset value as defined by what I just said is at RMB 75.6 billion. We have enough resources to prepare us for the growth opportunities that will come when the 5G -- when 5G becomes widely used.

Speaking of investments, one very important thing that we have done in terms of investment is that we have expanded our investments into the Chinese supply chain. We have invested in 12 local supply chain companies, of which, very fortunately, 3 of them are already listed on the new STAR Market. The reason why we have done this is because we want to form key relationships with our key component suppliers in order to build a supply chain ecosystem with the kind of strength that we have built in our consumer business. We believe that the work that we have put in over the last 2 years has already put us on the right path, and we will continue to invest to strengthen our ability to form meaningful R&D relationships with very important suppliers in the future.

With that, I will end my portion of the presentation and hand over the time to Mr. Wang Chuan. Mr. Wang Chuan is our Senior Vice President of our global business, who joined the company 1 month before I did 4 years ago. He used to be the Global Senior Vice President of Qualcomm and is a veteran in the space. So I will hand the time over to Mr. Wang.

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Chuan Wang, Xiaomi Corporation - Co-founder, Senior VP, Chief of Staff & President of China Region [3]

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Thank you. Thank you, Shou. I'm very happy to share this latest datas for the Xiaomi international business. Actually, let me start with the total addressable market for the global smartphone.

So based on the Canalys number, there will be 1.3 billion smartphone market for year 2019. The Xiaomi international business will focus on the -- about the -- the total addressable market is about 1 billion, 1 billion units of smartphones. The market is huge.

In addition to that, actually, we are getting into a new space, which is a carrier-driven market. They are in Europe. Over 50% of the total smartphone sold in Western Europe is from carrier channels. It's a new space for us. After couple years effort, actually, we are right now in 80-plus countries in the region.

I'll give you one example. In Europe, we shipped over 9.4 million smartphones. The -- in the entire first half of year 2019, the total shipment from the international business is around 60 million units.

And also, we are in top 5 smartphone brand in over 44 different markets, including, just Shou mentioned, India, we are #1 in 8 consecutive quarters. And also, we are #1 in several other markets in Asian countries. And also, we have many #2s and #3s. We'll continue to add the new markets to the list.

And also, another positive news or good news is we're not only in the developing market, now we are enter over 44 developed market, which the GDP per capital (sic) [capita] exceed USD 10,000. So the growth from that market is huge. So based on the first half, actually, we -- our growth is 64% year-on-year growth in those developed markets.

And also, another trend is our high-end device, our flagship device volume increased significantly. Actually, the first half of year 2019, we saw 10x growth year-on-year in the shipment volumes, and activation number grow 700%. The example is despite launching for just 4 months, the shipment volume for Mi 9 exceeded the entire life cycle of Mi 8. It's a very good signal for us in the flagship device level.

And also, secondly, a very important thing is we create a -- we caught a hero model. This year, year -- in the first half of year 2019, actually, Redmi Note 7 is a hero model not only in China but also in almost every country we entered.

So Redmi Note 7 is one of the best-selling products. I'll give you one example. In comparison with the best-selling year 2018 device, Redmi Note 5, the shipment model for Redmi Note 7 increased by 179%. The activation number increased by 175%. Redmi Note 7 is just an example. Our mid-range devices experienced 37% year-on-year growth in terms of shipment volumes and 50% year-on-year growth in activation numbers.

Let's talk about the ecosystem product. Actually, we experienced the same. The -- so the Band, the Mi Band actually also one of the best-selling ecosystem product internationally. As of July of year 2019, number of activations is close to the number of activations for the year 2018. The growth is significant.

And also, in year 2019, actually we focus a lot, we caught on the -- we caught a retail channel buildup. Actually, we focus on 3 areas: the online channels; the offline retail channels; we add a new channel, which is the operator retail channels. We put a lot of efforts into those 3 channels.

So -- and also let me talk about the mi.com first. mi.com is the main pillar of our e-commerce strategy. Currently it covers over 29 markets, 9 of them are B2C sites, which -- where users can directly purchase Xiaomi products from those 9 sites. Includes Hong Kong, Taiwan, India, Spain, Indonesia, Russia, France, Italy and the U.K.

And also, we have a steady growth for Spain mi.com since April Mi Fans Festival, experienced over 60% of year-on-year growth. France mi.com experienced continuous growth in daily active users. Actually, the active users growth, over 300% year-on-year.

Let's talk about the offline retail. Actually, offline retail strategy has achieved notable results. We entered over 66 -- 56 markets with 520 offline retail locations. We established over 50 key accounts. We caught a key retailers. For example, in Europe, they are media market and those kind of big retailers. We build a very strong strategic partnership with them. Point-of-sales increased by 31%. Mi counters tripled in numbers. Mi Zones increased sevenfold.

Let's talk about the carrier channel. Actually, in the first (sic) [first half] of year 2019, we built a strategic partnership with almost every European carriers. Includes Vodafone, Orange and 3G (sic) [Three], TIM and Telefonica. We expected to have greater sales volume through these carrier partnerships in the second half of year 2019.

So let's move into marketing. Actually, we used a lot of our social media to do our marketing. We operate 5 platforms, including all the popular global social media platforms, including Facebook, Instagram, VK in Russia and others. And also we run over 161 accounts in 63 markets. Now we have close to 40 million followers in those social media platforms and over 27% year-on-year growth.

So in the future, we have a plan to -- for the future, for the second half, even more. The first thing is we continue to offer amazing product with honest prices to global consumers. And secondly, we will focus on Western Europe market in the second half year 2019. And also, we will continue to build our presence, our channels in other market like Latin America and Africa. We are building our offices and channels in those market as well.

And also, we definitely will build stronger partnership with more operators globally. We will increase the volume of flagship devices, leverage to increase our brand image. This is the plan for the second half and even beyond. This is a short summary of the international business.

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Shou Zi Chew, Xiaomi Corporation - Senior VP & CFO [4]

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Thank you, Chuan Wang. So I think now we'll open the floor for questions. We'll be taking the first question.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes Leping Huang with CICC in Hong Kong.

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Leping Huang, China International Capital Corporation Limited, Research Division - Analyst [2]

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I think 2 questions about smartphones. The first thing is that you have a -- you delivered a flattish volume in this quarter year-over-year. And if you look at the IDC number, your China volume actually declined by 19%. So what is the shift of the market dynamics these days of your market position in China and offline China?

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Jun Lei, Xiaomi Corporation - Founder, Chairman & CEO [3]

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[Interpreted] Thank you, everybody, for attending our analyst call today. Today, the market overall is very challenging. First, there is a lot of uncertainty that's arisen from the trade talks between China and the U.S. Second, this is the early days of the transition to 5G. We expect 5G to be -- to have explosive growth starting from Q2 2020. The global smartphone shipment market is shrinking right now. Our global shipment in Q2 2019 was flat from last year. While in a market that's falling, it means that we are actually growing. Our smartphone revenue grew by 9.8%. So I believe that in Q2 2019, we have achieved very, very robust results in a challenging environment.

In Q2 2019, our adjusted net profit was at RMB 3.6 billion. This has exceeded some estimates by almost RMB 1 billion. Our operating cash flow in the second quarter exceeded RMB 13 billion. We put in a huge amount of effort to increase our operating efficiency, and our entire health of our business has improved very significantly. He is personally satisfied, very satisfied with the performance of our Q2 numbers.

After 9 years of very explosive growth, Xiaomi needs a period of time of adjustment in order to elevate our core competence to a higher level. For example, we are increasing our R&D spending by a very significant amount.

Last year, we spent RMB 5.8 billion in R&D. In the first half of 2019, our R&D expense has continued to grow at 30%. In a difficult macro environment, our most important thing to make sure our operations are healthy, increase our operational efficiency and increase our core competence in the key areas that matter.

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Leping Huang, China International Capital Corporation Limited, Research Division - Analyst [4]

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(foreign language) So translate English, so I asked -- my question is that whether the 5G smartphone is the opportunity or the challenge for Xiaomi because we see that its -- on the positive side, we see that market will recover driven by this 5G cycle. But on the negative side, because Xiaomis mainly rely on the third-party chipset, the company don't rely on their own chipset. Maybe you have a -- lagging behind your competitors in terms of R&D of those product cycles?

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Jun Lei, Xiaomi Corporation - Founder, Chairman & CEO [5]

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Okay. [Interpreted] For -- the 5G opportunity is an opportunity and a challenge for every single smartphone maker in the world today. He thinks that the opportunity for Xiaomi greatly outweighs the challenges. We started investing in 5G R&D starting from 2016. We launched our first 5G phone in Europe in February this year. All the carriers have a -- are using our device in Europe. In September this year, we will launch our second 5G phone and the first 5G phone for the Chinese market. We are very confident in our ability to compete in the 5G era. 5G will bring about a whole new replacement cycle in China. He's very optimistic about it.

Well, what is difficult to gauge accurately is exactly when will 5G be greatly proliferated. Every time there is a change, such a major change in technology, some device makers will fall behind. This is the challenge that we face. Our management is very aware of this challenge. We talk about this at almost every single of our senior meetings. At this point in time, we are very optimistic and confident.

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Operator [6]

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Our next question comes from Piyush Mubayi with Goldman Sachs in Hong Kong.

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Piyush Mubayi, Goldman Sachs Group Inc., Research Division - MD [7]

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I've got 2 questions. First, on the MAU that you announced for China of 115 million, could you just explain to us where you were a quarter ago? And second, related to that, how do you think this will grow through the rest of the year in a market where smartphone growth rates within China have been under some sort of pressure? The second question and related to smartphone business itself is, while I understand 5G launch takes place potentially with earnest in the second quarter of 2020. Between now and then, what is your expectation for market share gains? I understand, we understand the market's under pressure, et cetera. But what is the expectation for market share progression from here till first quarter in '20 or second quarter '20? And related to that, when I look at smartphone numbers across the world where you've done quite well, could you just describe to us how you've made progress with Internet revenues in other parts of the world?

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Shou Zi Chew, Xiaomi Corporation - Senior VP & CFO [8]

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Piyush, this is Shou here. I will respond to the Internet questions first, and Lei Jun will respond to the smartphone market share question shortly after.

Our MAU in China, this is the first time we're disclosing this number. It's 115 million at the end of Q2 2019. In response to your question, this has remained stable over the last quarter. This has remained stable over the last quarter.

In response to your third question, in terms of our Internet services business outside of China, first of all, this business, this revenue stream continues to grow very well. Our ARPU for our overseas user base has grown by 133% over the course of the last year.

This is underpinned by a few things. It really is underpinned by how many services we're providing to our users. Now I shared the example just now of our browser in India. You may be aware that outside of China, we preinstall other browsers. So in -- so for our own browser to be #1 in terms of MAU in India, it is a great accomplishment and recognition of the service that we have provided our users. And the browser comes with the search bar. It comes with the possibility of going to news feed, now -- which again are the 2 services I talked about just now. It allows us to capture Internet services revenue in a way that we cannot capture today. So we are very optimistic about our ability to do this all around the world. So that's my response to the Internet question. Lei Jun will now talk about market share.

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Jun Lei, Xiaomi Corporation - Founder, Chairman & CEO [9]

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Okay. [Interpreted] We haven't disclosed to the -- externally on our market share expectation for the future. But he's very confident that our market share will be increased from our position today. In order to make sure that we are well-equipped to handle the 5G war, 3 months ago, he personally became the President of our Chinese business. He personally is now reorganizing our talent pool, including recruiting top talent to join in preparation for the 5G battle. Today, he spends 2/3 of his time in the China region. He can feel that the spirit of the Chinese team is increasing rapidly. On the 29th of August this year, we will be launching Redmi Note 8, which is the sequel to the very successful Redmi Note 7. This -- the launch of this device will display our improved capabilities to the external world.

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Operator [10]

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Our next question comes from Kyna Wong with Crédit Suisse in Hong Kong.

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Kyna Wong, Crédit Suisse AG, Research Division - Associate [11]

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(foreign language)

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Operator [12]

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(Operator Instructions)

(technical difficulty)

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Steve Lin, Xiaomi Corporation - Joint Company Secretary [13]

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We dropped the line. Please continue on the question.

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Kyna Wong, Crédit Suisse AG, Research Division - Associate [14]

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Yes. Okay. I wanted to ask in English again, okay? So we wanted to track the breakdown for the gross margin improvement in the smartphone business in the second quarter. Given there's a fierce competitions, how much is contributed by border mix, regional mix and also supply chain management? This is the -- for the first question.

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Steve Lin, Xiaomi Corporation - Joint Company Secretary [15]

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Give me a moment to translate. Hold on, please.

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Jun Lei, Xiaomi Corporation - Founder, Chairman & CEO [16]

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[Interpreted] He believes that 8.1% gross margins for smartphones is a normal number. This is something that -- this is something that's normal. In Q1, we were adjusting our product mix and optimizing our channels. Because the market is -- market conditions are tough, we are making sure that increasing operational efficiency is our key priority. He expects that our gross margin will stay at this level for some time. We need to make sure our pricing remains extremely competitive in the market.

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Kyna Wong, Crédit Suisse AG, Research Division - Associate [17]

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Okay. (foreign language) My second question is, actually, I wanted to ask how to deal with the -- another peer's aggressive move in the IoT, along with the strategy of like OnePlus 8 and also leverage their chipset and also OS platform.

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Jun Lei, Xiaomi Corporation - Founder, Chairman & CEO [18]

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[Interpreted] For AIoT, we started building this business 6 years ago, and we have built such a big lead that we think this is the basis of our competitive advantage today. We have a few really key milestones we want to share. First of all, our AI assistant is at 49.9 million MAUs. This is a very big lead across our industry. We have spent a lot of R&D resources on our AI capabilities, a lot of which we are monetizing today. Second, one of the most important IoT devices, televisions, we are #1 in terms of shipment in China and #5 in terms of shipment globally. Our laptop market share is also at more than 8% today.

So in terms of this strategy, we started early, and our execution has been very resolute. In order to compete with our peers, we did 3 things last year.

First thing is we elevated Smartphone + AIoT dual-engine strategy as our key strategy over the next 2 years. We are also going to devote more than RMB 10 billion of investment to support this strategy.

Second, we established the AIoT committee within our company in order to push ahead with the AIoT strategy.

Third, we established the IoT platform technical team and have 300 engineers working on it today. Although we don't make our own chipset today, but we were the first company to create our own module many years ago. Our module includes a chipset inside, and we can work with any chipset manufacturer in the world to push ahead for AIoT strategy.

5 to 6 years ago, the modules you buy in the market will cost you RMB 65. After we entered this industry, it now only cost RMB 9. With just RMB 9, you can buy a module that can connect your air conditioning unit, your TV, your light, your -- any device that you want onto our IoT platform.

Although we didn't create our own chipset 4 years ago, what we did was we created our own module, our own operating system, our own control system and our own cloud services in order to push forward our IoT strategy. So in terms of the IoT -- AIoT strategy, we believe we are very resolute, and we are leading in terms of our strategy execution.

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Operator [19]

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Our next question comes from Fang He with HSBC in China.

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Fang He, HSBC, Research Division - Head of China Technology Hardware Research [20]

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(foreign language) So my first question is about the gross margin on the online gaming Internet service segment. We see almost 30 percentage point increase on a year-on-year basis. So just wondering if there were any one-off impact from certain games' titles or any other reasons behind that?

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Shou Zi Chew, Xiaomi Corporation - Senior VP & CFO [21]

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Fang, let me explain this. There are 2 reasons why the -- our gaming gross margin has improved year-on-year, and this is work that we've done over the last few quarters. One, we have just -- we have reduced our reliance on sort of low-efficient distribution partners. We just stopped using those. We just, overall, just made sure that the operating efficiency of our gaming business went up. But the second important reason is that there are 1 or 2 gaming partners who -- in terms of revenue recognition, we recognize the net, the net revenue, the net take rate from them and not the growth take rate. They're only 1 or 2 partners. One of them is Tencent, and their Q2 growth was significant.

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Fang He, HSBC, Research Division - Head of China Technology Hardware Research [22]

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Okay. Got it.

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Shou Zi Chew, Xiaomi Corporation - Senior VP & CFO [23]

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Makes sense?

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Fang He, HSBC, Research Division - Head of China Technology Hardware Research [24]

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Yes. Very clear. (foreign language) So my second question is about the Fintech business. So we see very strong growth in this Fintech revenue, and I just wonder what kind of commitments or plans we have to keep driving the growth? And also whether there were any synergies between our existing IoT in the smartphone platforms.

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Shou Zi Chew, Xiaomi Corporation - Senior VP & CFO [25]

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Okay. Fang, there are a few things here. One, our Fintech business mainly revolves around supporting our core business. For example, our consumer financial business services Xiaomi users. Once -- this is the first thing. Second, our supply chain financing business services supply chain partners of Xiaomi. This is a highly regulated industry. We are highly compliant with all the rules and regulations of the industry. And we believe that number one, being compliant of regulations; and number two, servicing Xiaomi and Xiaomi's ecosystem is enough to grow the business to a significant scale. And you are seeing sort of the early to mid-stages of this expansion.

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Operator [26]

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Our last question comes from Gokul Hariharan with JPMorgan in Hong Kong.

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Gokul Hariharan, JP Morgan Chase & Co, Research Division - Head of Taiwan Equity Research and Senior Tech Analyst [27]

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First of all, could you talk a little bit more in detail about what you're planning to invest in Europe? What is the engagement levels that you're getting from the telecom carriers, especially given one of your competitors has faced a tough time in the European market in the last several months? Also, if we engage more closely with telecom carriers, what does that do from a margin profile perspective? Is it similar margins compared to the open channel kind of markets that we have? And I had one follow-up question on the Internet services as well.

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Shou Zi Chew, Xiaomi Corporation - Senior VP & CFO [28]

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Yes. Thank you for the question. Actually, we are -- start building a partnership with the major, major European carriers. I think that's the strategy. They -- actually, we can offer very, very highly sophisticated devices with affordable price. That will help the carrier to lower their cost and serve more consumers. That's why the global carriers also like us. In terms of the margin, actually, we are working with the carrier to optimize the cost, the channel cost, so that we can have a better offering for the carrier retail channel as well. I think this is what we do right now. We see significant traction from the -- all the carrier channels in Europe.

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Gokul Hariharan, JP Morgan Chase & Co, Research Division - Head of Taiwan Equity Research and Senior Tech Analyst [29]

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Okay. Just one follow-up question on Internet finance Fintech businesses, Shou. Can you give a little bit more detail given now it's almost high teens percentage of Internet service revenues? How is the breakdown of the loan balances between consumer and supply chain? Is there any payments business in there? Or is there any international business in there right now?

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Shou Zi Chew, Xiaomi Corporation - Senior VP & CFO [30]

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Gokul, so the majority of the Fintech business right now in terms of loan portfolio is the consumer loan business. The way this business is conducted is that, obviously, compliant with all the privacy rules that we need to comply with, the user allows us to run a credit score for him or her. And based on this credit score, the -- a certain risk profile is allocated and a certain amount of loan with a certain interest rate is given to the user, all these are compliant with rules and regulation.

Supply chain financing today revolves mainly around our accounts payable, so the amount of money that we need to pay to our partners. We give them a credit score based on the financials they can provide, based on the historical data and the historical transactions that we do together. And then we can give them -- we can pay them slightly in advance, and there is a cost associated with them. These are the 2 components of our Fintech business today with consumer loan being the majority.

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Steve Lin, Xiaomi Corporation - Joint Company Secretary [31]

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So thank you all for your time tonight. We'll be closing the call now. Thank you.

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Shou Zi Chew, Xiaomi Corporation - Senior VP & CFO [32]

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Thank you.

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Jun Lei, Xiaomi Corporation - Founder, Chairman & CEO [33]

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Thank you. Thank you.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]