Ladies and gentlemen, thank you for standing by, and welcome to Xiaomi 2020 Interim Results Announcement Conference Call. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I'd like to hand the conference over to your host today, Mr. Steve Lin.
Thank you. Please go ahead, sir.
Thank you. Good evening, ladies and gentlemen. Welcome to the investor conference call hosted by Xiaomi Corporation regarding the company's 2020 interim results. I'm Steve Lin, Director of Finance and Company's Secretary. Before we start the call, we would like to remind you that this call may include forward looking statements, which are underlined by a number of risks and uncertainties and may not be realized in the future for bad reasons.
Information about general market conditions is coming from a variety of sources outside of Xiaoming. This presentation also contains some unaudited non IFRS financial measures that should be considered in addition to, but not as a substitute for the company's financial prepared in accordance with IFRS. Our President, Mr. Wang Zhang, will be presenting in the call. To start with, Mr.
Wang will share strategic initiatives for the company, and then we'll discuss the business segment and financial performance. We will then move on to Q and A after Mr. Wang's presentation. I will turn the call over to Mr. Wang.
Hi. Good evening, everyone. Thank you for joining our Q2 2020 earnings call. In the first half of twenty twenty, despite the impact of COVID-nineteen pandemic and the macro economic uncertainties. Our business continued to expand, demonstrating the strength and resilience of our business model.
In the first half, our total revenue was RMB 100 and 3,200,000,000, up 8% year over year. Adjusted net profit for the period achieved RMB5.7 billion. In the second quarter, our total revenue was RMB53.5 billion, up 3%. IFR's net income was $4,500,000,000 and adjusted net profit for the period was $3,400,000,000 up 47% quarter over quarter. Before I go over business performance of each segment, I'd like to share some of key business updates.
The first point I would like to talk about is the impact of COVID-nineteen on our business. In the second quarter, the COVID-nineteen pandemic affected our operations in different overseas markets to varying degrees. In April May, several of our key markets implemented strict lockdown measures, and our sales were greatly impacted. As business restrictions gradually lifted, our sales volume has recovered tentatively. In July, the average daily number of smartphone activations in overseas markets surpassed the pre pandemic level in January 2020.
In India, for example, the strict lockdown measures were imposed since late March and our sales were significantly impacted during the lockdown period. As India gradually lifting the restrictions during the Q2, consumer demand started to rebound. However, as production capacity has not yet resumed to the normal level, our sales were still limited by the production constraints. In July, the average number of smartphone activations in India returned to 72% of the pre pandemic level in January. In July, excluding India, the average daily number of overseas smartphone activations has reached to 120% of the average pre pandemic level in January.
Despite the pandemic, we have performed well in overseas market. One market to highlight is Europe. We continue to gain share and we ranked top 3 for the first time with the market share of 17%. Our smartphone shipping in European market grew by 65% year over year, which was the highest growth among major players. The second point I'd like to talk about is our relentlessly effort on pursuing advanced technologies.
On August 11, we launched our Mi 10 Ultra. Dealing numerous revolutionary features, including 120x AI superzoom, 120 hertz refresh rate with 10 bit color depth as well as 120 watts and 50 watts wireless fast charger. Ming Tian, our Ultra achieved DXOMark score of 130 for overall camera performance, once again, the 1st place globally. Our innovation has been globally acknowledged. In August, we made our 2nd entry on the Fortune 500 list ranked 420 2nd, up 46 places from last year.
As a global leading innovator, we ranked 24th on BCG's 50 Most Innovative Companies of 2020 and have made Durbin Top 100 Global Innovators 2020, list as one of the only 3 companies for Mainland China on the list. Now I'd like to discuss the performance of our smartphone business. So our smartphone revenue reached RMB31.6 billion, up 1.2%, but up 4 percent quarter over quarter against the overall smartphone market downtrend, with the smartphone shipments totaling 28,300,000 units. In the Q2, our premium smartphone were well received by the market. In Mainland China during JD's 6/18 shopping festival, our Mi 10, was the best seller in the price range of RMB 3,500 to 4,500.
Our Redmi K30 Pro was the best selling 5 gs smartphones. In overseas market, our premium smartphones have also been popular among consumers, including our high end smartphones, Mi 10 Pro, Mi Note 10 and Mi 10 Lite. The overseas shipments of premium smartphones with retail price at €300 and above went up by 99% year over year in Q2 2020, Driven by higher proportion of sales from premium smartphones, the ASP of our smartphone increased by 12%. The exact number is 11.8% year over year and 7.5% quarter over quarter. In the first half of 2020, we launched a series of products across different price ranges.
Firstly, we have strengthened our position in premium smartphone market following the success of our Mi 10 and Mi 10 Pro. We introduced our Mi 10 Ultra in August. Secondly, we continue to broaden our smartphone offerings to bring 5 gs technology to the mass market. Following by launch of Revu K30 earlier this year, we introduced our revenue 10x series in May, which brought the 5 gs smartphone to an affordable RMB1.5000 price range. Thirdly, to fulfill the need of global customers amid the macroeconomic uncertainties, we also introduced highly competitive entry level smartphones, including Rami 9A Series, with pricing starting from RMB499, which set a new standard for entry level smartphone worldwide.
Now let's move on to IoT and the lifestyle products. IoT revenue. Our IoT and Lifestyle Products revenue was RMB15.3 billion in the Q2 of 2020, up about 2% year over year, up 18% quarter over quarter. At Xiaomi, we are powered by our smartphone Now we call smartphone times AIoT core strategy, which is upgraded from smartphone plus AIoT. It means smartphone is the cornerstone of our business, while our IoT platform will revolve around smartphones to build up a smart leading ecosystem.
Smartphone and AIoT will create multiplier effect to strengthen economic modes for our business. In the Q2, Xiaomi continued to expand our global A IoT user base. Solidifying our leading consumer AIoT platform position. The number of connected IoT devices further grew to 271,000,000 units as of June 30, 2020, up 38% year over year. Moreover, the number of users who have 5 or more devices connected to our IoT platform reached 5,100,000, up 64% year over year.
In June 2020, our AI assistant had 78,400,000 MAU, up 57%. In June 2020, our Mi Home app had 40,800,000 MAU, representing an increase of 34%. Moreover, our analysis showcase is a clear synergistic effort between smartphones and AIoT. Our smartphone users with connected IoT devices showed higher smartphone retention rate than users' results. Our AIoT platform also demonstrated user stickiness for our IoT users.
As of June 30, 2019, the average number of connected devices increased by over 25% in the subsequent 12 months. To enhance the connectivity and the interaction among devices, we launched a few new functions for our AIoT platform. First, if you are using Xiaomi smartphone with our updated MIUI 12 operating system, you can easily control the smart devices at your home. Secondly, supported by our MiWiFi router, new IoT products can be connected to WiFi easily with one single click. Thirdly, we enabled our IoT platform with Xiaomi Share to strengthen the Internet interaction among smart devices, including smartphone, laptop, smart TV, smartwatch and AI speaker.
For example, Xiaomi Share supports always our access to music, video, voice calls when switching across multiple devices. We not only maintain the number one position by shipments in Mainland China, but also strive to innovate. In the Q2, we introduced 2 flagship products under the new Mi TV Master Series, Further expanded our footprint into premium market, we launched Xiaomi Mi TV Lux 65 inches OLED and our groundbreaking Mi TV Lux OLED transparent edition. The world's 1st mass produced transparent TV with an edge transparent cell luminous display transmitting images that seem to be suspended in the air, the TV brings unprecedented visual experience. In the Q2 of 2020, despite the global TV shipment fall off, our global TV shipment has not amounted to 2,800,000 units, maintaining a year over year growth.
In Mainland China, we ranked number 1 by shipments for 6 consecutive quarters. Overseas market is also a key growth driver for our IoT business. We debuted our market TVs in several new markets, including Italy, Poland and France. To meet increasing needs from global consumer on our IoT products, we have the 1st global Xiaomi ecosystem product launch in July. In the launch event, we introduced a series of products, including Mi Smart Band 5, Mi True Wireless, Earphone 2 Basic and Mi Electric Scooter Pro 2, which collaborated with the Mercedes F1 team.
Let's move on to the Internet Service segment. In the Q2, our Internet services revenue reached RMB5.9 billion, representing an increase of 29% year over year. Revenue from advertising, online gaming and other Internet value added services grew by 23%, 55% and 27%, respectively. Our user base also grew strongly in the 2nd quarter. In July, our global MiUI MAU increased by 23% to $243,500,000 while Mainland China MAUI was 109.7000000.
The MAU of smart TV and TV box, meanwhile, increased by 42% to $32,000,000 Our advertising business achieved solid growth despite the challenging environment in the Q2 of 2020. Our advertising revenue reached RMB 3,100,000,000, up 23% year over year and 16% quarter over quarter. The growth was mainly driven by, firstly, rapid growth of overseas Internet advertising revenue second, the gradual recovery of advertising budget as business gradually recovered from the impact of the pandemic in Mainland China. Our Internet service services have been increasingly diversified. In the second quarter, 39% of our Internet service revenue came from Internet services outside of advertising gaming from Mainland China smartphones, including Fintech, European E Commerce, TV Internet and overseas Internet services, up by 39% year over year.
Among them, I'd like to highlight our TV Internet services. In the Q2, our TV Internet services grew strongly year over year, driven by the expansion of user base, increasing premium brand advertisers, diversified TV memberships and broadened TV Internet service offerings such as TVCarloKEY. We also upgraded our TV operating system, MiUI, for TV3.0. We improved our user interface and recommendation algorithm to further enhance our smart TV ecosystem. Next, let's move on to our overseas business.
In the Q2, despite the impact of the pandemic, the revenue from overseas market in the second quarter amounted to RMB24 1,000,000,000, representing an increase of 10% year over year, contributing to 45% of the total revenue. In the Q2, our smartphone shipment achieved solid growth in major countries and regions around the world. According to Canada's, our market share ranked top 5 in 50 countries and regions in terms of smartphone shippers, ranked the top 3 in 25 markets, a few markets to highlight. In Spain, our smartphone market share ranked number 1 for 2 quarters in a row. Moreover, we became number 1 smartphone in Poland, number 2 in France and number 4 in Netherlands for the first time.
In particular, Western Europe, our smartphone shipments were top 5 top 4 grew by 11 16% year over year in the 2nd quarter with a 12.4% market share. The growth in Western Europe was driven by strong performance in the key in key countries. During the quarter, our smartphone shipment ramped 1st in Spain with a market share of nearly 27%, a year over year growth of 151%. We also ranked number 2 in France and the number 4 in Germany and Italy with robust year over year growth. Lastly, during this quarter, India, we were in the Q2, we were the market leader with a market share of 13.7%, according to IDC.
Our smartphone shipment maintained the number one position for the 12th consecutive quarter. In the following, I'd like to go over the financials. We have witnessed the upward trend year over year in our overall gross margin from 14 percent in the Q2 of year 2019 to 14.4% in the Q2 of 2020. In the past quarter, our gross margin of our smartphone was 7.2%, which is slightly lower than the previous quarter because of the enhanced promotion efforts during the shopping festival in mainland China. The gross margin of our IoT and the lifestyle products was 11.4%, which maintains steady compared to same period of last year.
And the gross margin of our Internet services was 60.3%, which was lower year over year due to high credit allowance to our Fintech business. However, the gross margin of Internet services has been improved quarter over quarter. The OpEx, our operating expense ratio grew from 8.8% in the Q2 of 2019 to 11.2% in the Q2 of 2020, mainly due to: number 1, our continuous investment in the R and D and the brand building number 2, lower operating leverage during the pandemic. In the Q2, our R and D expenses increased 26% year over year. Our working capital also maintained healthy this quarter.
Compared to Q2 2019, our account receivable turnover days increased from 12 days to 14 days. Our account payable turnover days increased from 85 days to 11, 12 days, while our inventory turnover days increased from 63 days to 72 days. The increase of inventory turnover days was mostly caused by long inventory cycle for overseas smartphones and the impact of the pandemic. For example, because of the production disruption in India, we are importing smartphones from China to India, which led to a longer inventory cycle. As June 30, 2020, the cash resources were amounted to RMB64.4 billion.
In the Q2 of 2020, we have also witnessed a strong cash flow performance. The net cash generated from operating activities was RMB 4,300,000,000. If we exclude the impact from our FinTech business, the adjusted operating cash flow was RMB 6,700,000,000 Investment testing, important part of our business, In addition to investments in our ecosystem companies, we're also actively investing to our supply chain companies. This investment has strengthened the partnership with key component suppliers, enhance our sourcing and manufacturing abilities in advanced technology and facilitate the development of a key industry. In particular around 5 gs IoT AI and other area.
In the second half of twenty twenty, we have invested over 20 upstream supply chain companies and the book value of investment reached to RMB36.8 billion as of June 30, 2020. Before I end my presentation, I'd like to reiterate our 3 guiding principles. That Mr. Lei Jin, our Chairman and CEO, mentioned in Xiaomi's 10 year anniversary speech. Firstly, never cease to explore and innovate and bring everyone the most innovative technologies.
2nd, continue to offer product with the best price to performance ratio. 3rd, always make the coolest product. We firmly believe that no matter what, the pursuit of technological innovations will always be driving force for Xiaomi's competitiveness, offering amazing products at accessible and honest enterprises is an evergreen strategy throughout the economic cycles and making coolest product is inherent to our engineering culture. These three principles guarantee Xiaomi's high quality growth ahead, and they are our manifesto for the next decade. This and my prepared remarks.
Now we are open for Q and A. Thank you.
We will now proceed to the Q and A session. In order to allow questions from more investors, please limit your questions to a
Our first question comes from Peter Wu with UBS Hong Kong. Please go ahead. Thank you.
Okay. I think they're asking for me. Good evening, Wangzal, Steve. Thank you for taking my question. This is Thompson Wu from UBS.
First question, recent restrictions from the U. S. Has impacted some of the major smartphone players in China. Can you share with us how this may have changed your smartphone strategy,
if it
has? That's my first question. And then my second question is on India. I understand activations are now roughly about 70% of January and production has been slower to come back than expected. Can you talk a little bit about the app span, the recent tensions between the two countries and how are you thinking about the competitive environment in India going into the back half of the year?
Thank you.
Okay. Yes, thank you for the question. Actually, we will not change our strategy. We have been executing our strategy very, very effectively, which is we call it dual engine strategy. So we will continue to invest into the technology of 5 gs and AIoT, number 1.
Number 2, we'll continue to grow our business in China, in India and in many other markets like Europe and Latin America, Asia Pacific region, we are gaining a lot of attractions in the global market. You have seen our growth even during the pandemic, during the very difficult challenging time of Q2, we still maintain a healthy growth in most of the regions. We will continue to do that to execute the strategy. I think that strategy is the right strategy. We also established a very strong partnership, not only in China, but outside of China as well.
We'll continue to strengthen our partnership with the technology partners in U. S, Europe, in Asia Pacific. So we will continue to do that. So in summary, we don't see any change in our strategy. We'll continue to execute that strategy.
This is question number 1. Number 2 is regarding to the Indian market. Yes, we have we are facing a very, very serious challenge in the Q2 in the Indian market because of the pandemic. Right now, still the infection rate in India still very high. But after the lockdown, we see the recovery of the Indian market.
Right now, it's 72% compared to the normal level in January. In the second half, I think we will see the same challenge, which is the pandemic. We'll continue to work with our Indian team closely and also we will do our best to support our Indian partners and the community to fight against the pandemic. But also we see an opportunity in the second half because there is a big festival or selling season in India. We call it Diwali.
It's a big festival. We are working very hard to protect that opportunity. And also, we believe that the smartphone is a very, very important product for the consumer, especially in the very difficult challenging times. People, our Indian consumer or friends, they are using the smartphone have a better communication with their family and the community, I think we'll continue to offer a very, very cost effective and high performance and very accessible with honest prices product to the market. And as a company, actually, we have been promoting the mutual trust and the friendship between the people in India and China.
We have a lot of local employees there. They are also working very hard. And also we support each other. We are we feel very good about the performance in India.
Thank you so much for your answer.
Thank you. Our next question comes from Luo Bin Huang with CICC. Please go ahead. Thank you.
Okay. Thank you for taking my questions. So the first question is about your smartphone business. You delivered very strong performance in last few quarters. So can you share more colors what you have done in the past to achieve this result?
And where are you in terms of the products or the channel in Europe? So do you have enough channel and product offering in Europe? Thank you. This is the first question. And the second question is about your Internet business.
I think you changed your strategy from the smartphone plus the AIoT to smartphone multiply with the AIoT. So I think AIoT is a key strategy for you for, I think, more than 1 year. Do you see any financial benefit in terms of either the Internet service or which is driven by Internet AIoT investment?
Yes. Okay. Yes. Thank you. Thank you for the question.
Regarding to the European market, actually, we have been in European market for, I think, almost 3 years, 3.5 or more than 3.5 2.5 years, almost 3 years. Actually, in European market, actually, we go all channels. We started from the open market. We established through the years, established a very strong partnership with the traditional offline channels, including the big players like the media market and others. We opened Xiaomi authorized stores across the major European countries, major cities.
And also, we have we are operating me.com in many of the European markets, including France, Spain, Germany, and also we partner with the online players, local online players like Amazon, like CDs coming in France, Amazon in almost every market. So that's the traditional existing channel in Europe, which are the major channel. The European market is very, very different from the Asian market or from the China market. They also have 50% of the smartphone are sold through carrier channels. Through the years, actually starting from year 2019 late 2018 2019, we have established strong partnership with the major European operators, including almost everyone, Vodafone, California, Orange, everyone.
Now we see the strong growth from that segment as well. So thirdly, I think our brand has been gradually accepted or become well known in many of Western European markets, including especially in Spain, now in France, Italy and Germany, not only in smartphones, but also we are offering many, many, we call it ecosystem products, including the scooters, the air purifier, the withstand, many, many others, even rice cookers. So we make a lot of friends or make a lot of people using our products. So that help us to generate a lot of attraction and also brand recognition. That's the I think the major reason for the growth.
Now if you look at the market share number, we grew from in Q1, I still remember, the market share our market share in Western European market was about 10%. Now become the 12.4%. Within 1 quarter, actually, we grew 2%. The overall European market, including Eastern Europe and Western Europe, now our market share is close to 17%. So you see the potential.
We are still I still see a lot of potential to grow in the second half and also next few years. So we are very, very excited about the future opportunity. That's the European market. Now let's talk about the strategy. Our strategy is 5 gs smartphone.
Smartphone plus AIoT, this strategy was developed or defined in the last year, year 2019. Now we do a little bit upgrade. We call it smartphone times AIoT. I think it means we emphasize the connection between those two technology and product. So we emphasize the multiplier effect of that.
We have never to show that our users our smartphone users, if they are also our IoT product users. So the retention rate is higher. So people would like to enjoy the user experience, the experience using our smartphone app, ART together. So that's very important to us. We'll continue to build how to say, to improve the user experience, invest into that AI technology.
That's why we just launched a new feature in our VUI OS we call Mi Share. So with Mi Share, you can easily access to different devices around you, around your family, around your house with your smartphones, with your AI speakers, use different size of screens, TVs, laptops, so make your life even easier. We'll continue to do that. I don't know if Steve and others have other
comments. No, I have not heard of that. Okay.
Thank you.
Thank you. Our next question comes from Proust Murali with Goldman Sachs in Hong Kong. Please go ahead. Thank you.
Could we just return to the China market and assess 2 things. First, your Internet MAU and the progression of that number through 2Q and how you think that could accelerate into 3Q and into 2021? And the second question, again, about China smartphones is could you assess the strengths and weaknesses of your distribution network in the country and contrast that with the other markets that you may have done. You may have gained market share that's probably better than what changes could be made in place ahead of potentially major structural change in the smartphone market share? Thank you.
Yes. Thank you. Thank you for the question. The first question is related to the future of Internet service revenue, right? So I think we see some there are several reasons for the Q2 revenue.
I think we see a strong growth in the advertising revenue, gaming and also the Internet revenue generated from the TV and the content business segment. So we actually we were facing a little challenge on the Internet Financial Fintech Business because of the pandemic. That's the challenge that's one of the biggest challenge we are dealing with. I think in the long run, after the recovery from the pandemic we see, we will see a better opportunity in the future, number 1. Number 2, actually, if you look at the number, actually, the we I would say, we diversified our Internet revenue.
Now our Internet revenue generated from outside of the smartphone related Internet revenue from China, actually, we see a new growth area. For example, in the TV content area, we see a growth. And also overseas interest service revenue also grew significantly because of the our installation base. Our smartphone market share increased globally. That's also a good signal for us for the future.
So I don't know if Steve, you have anything to add. Yes. So on the user base, I think if you look at the global and new UI MAUs on the smartphone, it grew 23% year over year. So it's growing robustly. And outside of smartphone, if you look at our TV MAU, 42% year over year.
All these growing users actually bring us more monetization, which contributes to a lot of the growth that Simon mentioned about. China MAU has been stable over the past quarter. And I think the MAU is a big function of the market share of the China market. So I think as we talk about how we want to progress and continue to gain share with the strategies including to or successful entry in the high end market, including using our efficiency to make 5 gs technology more accessible. So I think as a company, we are confident as the 5 gs continues to proliferate, we'll be able to have a better opportunity to take more share in China, which will drive towards which will then drive the growth in MAU.
And second question is related to the China distribution channel. Actually, we are working very hard to build or establish or further establish our offline channel. We are now building our Xiaomi stores and also Xiaomi authorized stores. And also, we are building our partnership with our carrier partners as well. At the same time, because we are coming from online company, right, we'll continue to strengthen our business performance in the me.com and also the 3rd party online channels like jd.com and Tmall market.
So still working in progress in the offline channels. So we see a pretty good signal. So different than the other market in Europe because the offline market has been strong for many, many years. Their offline market is very, very mature. The market structure actually is very different than the Chinese domestic market.
So we will use a different strategy. We are keep exploring which is the most efficient way of distributing our product and service in China domestic market. Thank you.
Thank you. Our next question comes from Gokul Hariharan with JPMorgan in Hong Kong. Thank you.
Yeah. Thanks for taking my question. My first question is on the Internet finance side. Could you talk a little bit about what you have done to kind of control some of the exposure given some of the challenges that we have faced in the Exchange Finance business? You also talk about changing the nature of that business towards more supply chain finance, etcetera.
So can you talk a little bit about what you're doing in that front as well as maybe add a little bit on any impact from some of the regulations and the consolidation that we are seeing in the consumer finance side? My second question is on the VUI user base, especially on the AIoT front. I think you did mention that the retention rate is really rising for users who are smartphone users who are also using Xiaomi AIoT devices. Are there any early examples of monetization or some kind of cross marketing that you're able to offer and increase your Internet service revenues from this AIoT user base? I know that we had doing a fair bit of TV monetization with the rising installed base.
But beyond the TV side, are we seeing could you give some examples of some of the early efforts on that front? Thank you.
Yes. I'd like to let Steve answer the question for you.
Okay. Thanks a lot for the question. So I'll first start with the first question is which is in relation to the Internet finance. So at first, I just want to clarify, we're sort of not shifting focus from consumer to the industry finance. I think for when we look at our semi finance business, we always see a long term potential and that's centered around 2 parts.
One part is providing service to our user. So this is on the retail side. The second part is leveraging or value chains to develop supply chain financing solutions. So these have always been the 2 key parts that we are concurrently developing. I think one part on the retail side that people are very focusing on is because we mentioned in the announcement that our Internet service gross margin was impacted by the increasing provision of consumer loan.
I think from a long term perspective, we continue to feel like Xiaomi has a platform with data, with user and with the strength in balance sheet, we feel like business finance is a good and long term business for us. Unfortunately, I think in the short term, what we're facing is the whole industry is facing headwinds. And on top of that, there is a pandemic impacting. So for the past few quarters, we have been proactively strengthening our risk control, meaning we are raising the bar and trying to only serve the more high quality users. So despite that you're seeing like in the Q1 and the Q2, I think we have increased the credit allowance for the provision.
But I think overall, the trend as we've been controlling the risk for a couple of quarters already, I think that from a trend perspective, it's positive. And then on the other side, we continue to very actively develop new supply chain solutions. So I think the idea is to be able to leverage a large supply chain, both for ourselves and also a lot of ecosystem companies. And we developed supply chain finance solutions. So these solutions will empower all these supply chain companies, not only our suppliers, but our supplier to supplier to enable everyone to be able to get finance and credit more easily.
So it's not entirely a balance sheet business. It's probably balance sheet, but a lot of it is actually technology solution, which we are developing right now. So that was the first question regarding Internet Finance. Second question was sort of on the user base of IoT, right? So IoT, I think as Jiang talked about or emphasis on smartphone type AIoT because we see a very clear synergistic effect between the products.
So I think one example we talk about is retention, right? So people or smartphone users who have also connected IoT devices on their smartphone from a data we're seeing, their retention is much higher. And then we're also seeing that people who buy IoT devices, they're buying more and more, right? So if we look at last year's users and look at the average number of IoT devices, over 12 months, that number actually increased by over 25%. So I think these are very positive and synergetic effects.
But if we look at the real like smart home experience, I think we're still at the very early stage. I think we talked about that more time. And I think it's easy to understand majority of people in this call, right? I don't think we have a smartphone experience yet. So the clear focus for us is really executing smartphone times AI strategy and to continue to strengthen our leadership in IoT that this AI is based, meaning having more and more people buy IoT device, connected them to the smartphones and start to use a smartphone to connect to devices.
We believe long term, this should have a very good monetization potential. I think one number we show, right, is for AI system actually reached I mean, you actually reached 78,000,000 and grew at a rate of 57%, right? So I think the idea is once we connect everything, a lot of different entry points, including smartphone, including AI, including TV, with the time spent, with the user engagement, it should bring a monetization opportunity. But the focus at the moment is really to have everybody to start having a smart reading experience.
Understood. Thank you.
Thank you. Our next question comes from Lin Jun Tai with Morgan Stanley. Please go ahead. Thank you.
Hi. Thank you for taking my question. So my question is really regarding the expenses, the OpEx. So just wonder, is there a priority where you want to spend those resources? I'm also more interested in knowing whether there is a direction more towards the domestic or to the overseas because it sounds like throughout the call you are planning to do more of the offline channel in the China market as well.
And also because if we look at simply on the Q2, it looks like in the overseas market there is ongoing spending as well. So how should we think about this? And could you also let us know how should we think about the trend going forward too? Thank you.
We will continue to focus on the technology areas. For example, the 5 gs technology and also the AI technology and also camera, fast charging kind of technology lot. This year, actually, our spending on R and D probably will be more than RMB10 1,000,000,000, so over 25% growth actually in Q2. Our R and D expenses in Q2 was 25% growth year over year. So we continue to spend more R and D dollars on those key technology areas.
This is number 1. And also, China market, no doubt China market is a very important market, is the most important market for us. We'll continue to invest into that Chinese domestic market. But at the same time, actually, we will continue to expand our business or footprint to the major market, for example, Europe, Asia Pacific and also the Turkey and other markets. Also, actually from 'nineteen year to 'nineteen, we entered new markets like Africa and Latin America.
Right now, they are doing well. So we'll continue to grow the Internet because the Internet market actually, the potential is very, very big. It's a 1,500,000,000, 1,600,000,000 smartphones shipment every year. So that's a big market for us. We had that strategy a couple of years ago, 3 or maybe 4 years ago.
So we'll execute that strategy firmly. So this is what I see the trend is.
I'll just supplement quickly on point. I think what you see this quarter is the operating expense ratio has increased quite a lot. I think what happened is because of the pandemic or revenue slowdown. But if you look at the investment we're making, the R and D investment we're making, the sales and marketing investment we're making, branding investment we're making, we did not slow down. I think we continue to see great market opportunities.
So we're continuing to maintain our pace as original for future growth.
Okay. So just a bit follow-up on this. So despite of the recent changes in the macro environment, is it fair to say you haven't really switched like the resources that you are willing to put I mean the allocation of resources you are willing to put into the overseas versus the domestic mobile market?
Yes. Despite the environment, actually, we execute our strategy even in a very difficult time period like Q1 and Q2. Actually, we see a slowing down of the smartphone market or but we still keep our spending, our investment in R and D and also in sales and marketing channel. That's a proof for our, how to say, determination to grow further. So the overseas market, the same thing.
We will continue to grow that market. Actually, because of the we are we have a very diversified market opportunities that helped us actually a lot during the pandemic environment. So for example, Q1, China was hit, right, by the pandemic. But we the overseas market helped us. In Q2, actually, we had a bigger challenge in the overseas market.
So we have a it diversifies the market as an alternative, which is good for the long term growth.
Due to the time constraint, we will now take the last question.
Thank you. And our last question comes from Tina Wong with Credit Suisse in Hong Kong. Thank you.
Thanks for taking my questions. So I have two questions. The first one is about the IoT business because the second quarter seems like the growth is actually showing much due to the pandemic impact. But we'd like to know is about the domestic market as well. If the recovery is in progress and what's the outlook in the second half that could we see the momentum to come back?
Or like do we need to like generate more promotion and or like advertisement to push the IoT in domestic and market? And also the overseas recovery, this is the first question. And the second one is about the gross margin in smartphone business. So because we also expect like company could gradually spend share in China market with the dual engine and also the modified synergy strategy going forward, strengthen the China market presence. But this will this may also affect the gross margin going forward because the competition in the market are still very severe.
So what should we like expect that going forward? How the company can manage the gross profit margin in smartphone business? Thanks.
Yes. Thank you. The first question is related to the IoT business. In Q2, actually, the IoT business grew slightly, right? It's slower than our original plan.
This is, I think, it's mainly due to the pandemic. The market was gradually recovering, but still we had many challenges in the Q2. For example, the TV business, right? The market the total market was in the very, very in the downtrend actually in Q2. The TV installation was an issue for many families or consumers in Q2 still.
And also both these markets, the same thing. So that's the major challenge we have been facing. In the future, actually, you see there still are uncertainties because of the pandemic, right? The India market, the India market, European market and the Latin market, still those areas or countries, there is still uncertainty on the pandemic. We still see that's a potential risk for us.
But we will we're working very hard. We are monitoring the progress very, very closely for the second half. But we also be very cautious about the pandemic impact from the pandemic. The gross margin in smartphone actually the in my opinion, in our business model, we should maintain we can maintain a high single digit, right, the gross margin. In the Q actually Q1 or Q2, we want to push smartphone 5 gs smartphone very aggressively.
So we invest a lot in the marketing industry. We want to drive the cost down so that we can add as many people as possible to use 5 gs devices. So that could impact our gross margin in Q1 and Q2. In the second half, actually, you will see we will have more 5 gs models, but also we have a very strong entry level devices. For example, in the presentation I mentioned, there's a very strong product.
We call the Redmi 9A. It's an entry level device. I think that can be should be the best entry level device ever. So I think we'll ship a lot, not only to China domestic market, but globally global market as well. The AIC of that phone is only RMB 4.99.
With that modem, actually, you will see the big volume, but also the gross will impact the gross margin, right? Do you agree? Yes. So thank you.
Thank you.
Okay. So thank you all for joining today. We will now conclude the call. Thanks, Ted, for joining the call. Good luck.
Yes. Thank you. Thank you very much for taking.
Thank you. This concludes the conference call today. Thanks again for joining us. You may now disconnect. Goodbye.