Xiaomi reports profit in maiden quarterly earnings result post IPO
Xiaomi, the world’s fourth largest smartphone supplier, reported a surprise profit for the quarter ended June 30, assuaging recent concerns about its ability to grow and join the league of China’s biggest internet companies.
“Xiaomi’s performance was in line with our internal expectations, but beyond external expectations,” chief financial officer Chew Shou Zi said in a conference call with analysts on Wednesday after the market closed.
The Beijing-based company posted a profit of 14.6 billion yuan (US$2.1 billion) in the second quarter, rebounding from an 11.9 billion yuan loss a year ago.
Xiaomi booked a gain of 22.5 billion yuan by revaluing convertible redeemable preferred stock in the wake of its debut. The company had an operating loss of 7.59 billion for the quarter.
Sales grew 68.3 per cent to 45.23 billion yuan, up from 26.9 billion yuan a year earlier, beating the market’s 38 billion yuan consensus estimate.
Xiaomi, which sells mostly budget-priced handsets, said its smartphone business recorded revenue of 30.5 billion yuan in the second quarter, up 58.7 per cent from the same period last year, on total shipments of 32 million units.
Shares of Xiaomi, which raised US$5.4 billion from its initial public offering (IPO) in Hong Kong last month, were up 1.61 per cent to close at HK$17.68 on Wednesday. That was around 19 per cent down from its high of HK$21.55 on July 18.
With the strong second-quarter performance, Xiaomi could bolster investor confidence for its business model, which company founder and chief executive Lei Jun described in June as a “triathlon” of hardware, e-commerce and internet services.
Not everyone had agreed with Lei’s internet-business narrative ahead of Xiaomi’s public listing last month. The Chinese securities regulator asked Xiaomi whether the firm considered itself a hardware or internet company, while international institutional investors questioned the valuation which they thought was high for a hardware company.
“Eight years ago, I came up with a crazy idea, which was to build a smartphone business based on the business model of an internet company, transforming the global image of ‘Made in China’ products and benefiting everyone across the globe with amazing products at honest pricing,” Lei said in a statement on Wednesday. “The interim results that Xiaomi announced today prove that this idea has become reality.”
Xiaomi was the first company to be listed in Hong Kong with a dual-class shareholding structure.
Analysts see Xiaomi building up its market position in the so-called of Internet of Things (IoT) market.
“Over the past few years, Xiaomi has built a unique integrated internet-hardware ecosystem that acquires users by selling high-quality products and monetising user traffic, a virtuous circle that underpins long-term growth,” CCB International analyst Ronnie Ho and Rocky Zhang wrote in a recent report.
Xiaomi reported that revenue from its IoT products, including smart television sets and laptop computers, increased 104.3 per cent in the second quarter to 10.4 billion yuan. Revenue from internet services, which include online advertising, rose 63.6 per cent to 4 billion yuan.
The company was still in the early stage of development for its own finance business, according to Chew.
Amid a saturated market in China, Xiaomi has been sharpening its focus on India, the world’s second largest smartphone market, and across Europe.
Xiaomi introduced on Wednesday a separate mobile phone brand, Poco, to take on industry leaders Samsung Electronics and Huawei Technologies in the premium segment of the global Android handset market.
The push towards the higher end of the smartphone market comes at a time when the major Chinese brands have squeezed international brands in the mass market segment.
China’s top four smartphone brands – Huawei, Xiaomi, Oppo and Vivo – had a combined global market share of 39 per cent in the second quarter, according to Counterpoint Research.
Samsung led the industry during that quarter with a 20 per cent share, while Apple slipped behind second-ranked Huawei with an 11 per cent share. Xiaomi, Oppo and Vivo ranked behind the iPhone maker.
Following its IPO in Hong Kong, Xiaomi set a goal to further expand worldwide. It wants to have overseas markets account for more than half of its annual revenue.
While Xiaomi remains committed to a business model that puts a 5 per cent limit on the profit margin of every piece of hardware – from smartphones to suitcases and ballpoint pens – that it sells, certain expenses ballooned in the second quarter.
It reported a 4,469 per cent jump in administrative expenses to 10.6 billion yuan last quarter, which was mainly attributed to the one-off share-based compensation of 9.9 billion yuan awarded to Lei before the company’s IPO.
Without that windfall, its operating loss came to 7.6 billion yuan -- reflecting the company’s philosophy of selling phones at near-cost so it can drive the sale of services from music to video, a la Apple Inc.