Chinese phone giant Xiaomi delivers growth with first results

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BEIJING (Aug 22): Xiaomi Corp delivered a 68% revenue jump and quarterly profit in its maiden financial results, as the Chinese smartphone giant made strides overseas while fending off a challenge from local rivals such as Oppo.

The results — its first since raising US$5.4 billion in an initial public offering — could help Xiaomi get past an anti-climactic July debut. Net income came to 14.7 billion yuan (US$2.1 billion) in the three months ended June, versus a 12 billion yuan loss a year earlier. Revenue climbed to 45.2 billion yuan, it reported, but at a pace that decelerated from the first quarter’s 86%.

The dramatic reversal in the bottom line came about when Xiaomi booked a one-time gain of 22.5 billion yuan, after revaluing a swath of preferred stock in the aftermath of its Hong Kong IPO. Without that, its operating loss came to 7.6 billion yuan.

Xiaomi, which depends on smartphone sales to ramp up users for its suite of online services, is trying to couch itself as a high-growth internet company — a narrative consistently touted by billionaire co-founder Lei Jun. The internet services business accounted for about 9% of revenue in the quarter. That segment’s growth however is one reason it managed to price its IPO at multiples far higher than celebrated tech names such as Tencent Holdings Ltd and Facebook Inc.

Longer term, Xiaomi’s busy building stores and production sites that’ll serve as beach-heads for expansion into emerging markets from India to Russia. Its 206.9 million monthly active users as of June are a rich pool of buyers for high-margin services. That base should grow as Xiaomi pushes gadgets to users for what it calls “honest prices.”

“Xiaomi is rooted in an internet mindset,” CCB International analysts Ronnie Ho and Rocky Zhang wrote in a report ahead of the earnings release. “By leveraging its rapidly growing hardware ecosystem, Xiaomi can acquire users at a profit in contrast to global internet companies experiencing rising traffic acquisition costs.”

In the short term, the company faces no shortage of challenges, particularly in the smartphone business that yields 70% of its revenue.

Local rivals are directing precision attacks against the company overseas, a key area for growth given a saturated Chinese market. Oppo created the Realme brand for India, selling budget phones online to try and topple Xiaomi from its leading position. At the other end of the spectrum, Huawei Technologies Co is shifting its focus back to Europe, a critical market for Xiaomi’s more expensive devices.

The real battle revolves around growing services income — its main source of profit. Revenue from that segment rose 64% to 4 billion yuan in the June quarter, thanks mostly to ad sales.

While Xiaomi’s made advances in China with its own video, music and finance apps, those businesses barely exist elsewhere. Its ecosystem partners — the ones that make everything from air purifiers to toy robots — are mostly domestically oriented. Global smartphone demand itself is on the wane, threatening the device sales that Xiaomi depends on to grow and engage its user base.

Xiaomi’s stock closed up about 1.6% on Wednesday, just above its HK$17 IPO price.