Ladies and gentlemen, thank you for standing by, and welcome to Xiaomi's 2019 4th Quarter and Annual Results Announcement Conference Call. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to hand the conference over to your host today, Mr. C.
Lin. Thank you. Please go ahead, sir.
Good evening, ladies and gentlemen. Welcome to the investor conference call hosted by Xiaomi Corporation regarding the company's 2019 annual results. I'm Steve Lin, the Director of Corporate Finance and Joint Company 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 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 financials prepared in accordance with IFRS. Joining us on call today are our President, Mr. Wang Sheng Senior Vice President, President of International and CFO, Mr. Shou Zixu and our Vice President of Finance, Mr. Richmond Li.
To start with, Mr. Wang will share strategic initiatives for our company in 2019 and Richmond will discuss the business segment and financial performance. Once the management completes their prepared remarks, we'll move on to the Q and A session. I will now turn the call over to Mr. Wang.
Good evening, everyone.
Thank you for joining our year 2019 annual results earnings call. I'm Wang Xiang, President of the Xiaomi Corporation. A little bit myself, I joined the company year 2015. Before my current role, I was in charge of the Xiaomi International Business, the IP Strategy and Legal Affairs. So we are going to I'm going to be your new friend.
In the future, we'll spend more time together. So this is my first time presenting our result together with Sho and Richmond. So I look forward to partnership with you. Actually, year 2019 was a very important year for us, just simply because in a few days, Xiaomi is going to celebrate our 10 years anniversary. So probably it's a good time for me to do a little summary about what we have done since we were founded in year 2010.
So actually, the company was founded in year 2010. 2 years later, we achieved or surpassed RMB10 1,000,000,000 as a revenue. And in year 2017, we surpassed RMB100 1,000,000,000. Last year 2019, the company revenue surpassed RMB200 1,000,000,000. Not only that, actually this is the first time Xiaomi was listed Fortune Global 500 in August ranked number 468.
Also, we are also listed by branding organization called Brand Z as the most available consumer brand in the world. It's a very, very important milestone for us as a 10 years old company. Let's talk about
the year 2019.
The total revenue was RMB205 800,000,000 up 17.7% year on year. Adjusted net profit was RMB11.5 billion, up 34.8% year on year. And also I want to mention the major business, for example, the Internet Service Business, grow 24.4% year on year and IoT business grow even 41.7%. Our smartphone business increased 7.3% in the entire year. Let's talk about the Q4 number.
The total revenue in Q4 was RMB 56,500,000,000 up 27.1 percent. Adjusted net profit was RMB2.3 billion up RMB26.5 billion year on year. So also we have significant increase in our Internet service in Q4 last year, which was 41.1%. IoT Business increased by 30.5% in Q4, smartphone business 22.8% growth. So let me highlight some strategic things we were doing in year 2019.
First thing is, we continued to increase our investment in R and D. So from year 2016 to year 2020, our R and D expenses expected to surpass RMB28.6 billion. And in the year 2019, our R and D expenses was RMB 7,500,000,000. Based on our plan, year 2020, this year, we're going to spend more than RMB10 1,000,000,000 in RMB. So another very important thing is we are successfully get or entered into premium tier smartphone sales business.
We launched Mi 10 series in February. So Mi 10 Pro was the 1st premium tier smartphone sold at over RMB5000. This is the first time we sell premium priced product. And also with the long term R and D investment, actually we achieved several technology make several technology achievements, for example, DxOMark. Remi 10 Pro is the first time we were in the top of the DSO Mark on the camera, video and audio scores.
And also in the entire year 2019, the company executed prudent operation strategy because 2019 is the technology migration time period from 4 gs to 5 gs In order to promote 5 gs in the future, actually, we are very carefully manage our inventory and our cash flow. So we have a 0 4 gs inventory so that we can be very, very ready to aggressively promote our 5 gs product in year 2020. Another very important thing is in December year 2019, we launched a very important 5 gs product we called Redmi K30 5 gs. It was the first 5 gs product selling at RMB below RMB2000. So that product actually got very, very good market response from consumers.
So we'll continue to promote the Remedy brand with the extreme performance price ratio and bring the latest technology widely available to the mass consumer. I think at this point of time, the people concerned about the virus, The COVID-nineteen outbreak has the impact from the virus. Actually, let me do some summary about where we see the barriers and what is the impact to our near term and mid term business. From the supply side, actually, we were suffering during the February timeframe, early February for the production. Actually, it was a very challenging time to find labors to resume the factory.
But after a month, more than a month's effort actually today as of today, I'm happy to share with you our production capacity, our capability, we seem to 80% to 90% of the normal level as end of March 2020. And let me talk about a little bit about the Mainland China market. During early February, actually, because of the whole many cities are locked down, the shopping malls closed. So the demand was affected very, very heavily. But starting from late February, we see a very strong rebound of the market.
So up to now, the China smartphone market recovered about, I think that's around 80% to 90% of the January consumption. It's a very good signal and also it tells us smartphone maybe we call the rigid demand. So people actually need smartphone to communicate even during the various timeframe when they stay more spend more time with families and at home. And overseas market, right now is the outbreak period. We see a lot of serious situation happening in Europe, in India and other part of the world.
I think the market will be impacted in Q2 year 2020. I think May the April May mostly and the demand likely be deferred rather than lost. Based on the experience in China, smartphone demand is resilient and will be rebound quickly. With a strong global foothold and continuous expansion into new markets, the long term growth prospect is in that. We remain confident for the rest of the year.
So regarding to the Internet service, we see both time spent and the value added service revenue grew strongly, although advertising budget from certain client vertical were impacted, but the general Internet service was not impacted heavily. So I think this is the overall picture of year 2019. So I would like to invite Richmond to give you details in the different business units for the business.
Thank you, Xiaoming. Hello, everyone. I'm Richmond Li, VP of Finance at Xiaomi. I will now walk you through our business segment performance as well as key financial indicators. First, our smartphone segment delivered solid performance in 2019.
IP revenue reached RMB122.1 billion, an increase of 7.3% year on year, with smartphone shipments totaling at 124,600,000 units. In the Q4 of 2019, smartphone revenue was RMB13.8 billion, an increase of 23% year on year. We also want to highlight that in the Q1 of 2019, we achieved the highest year on year growth of smartphone shipments among the top 5 smartphone companies according to Canalys. In 2019, our smartphone user strategy achieved very remarkable results. On one hand, Xiaomi brand focused on pioneering advanced technologies and successfully established itself in the high end smartphone market.
After unveiling the MiX R5 5 gs, a concept phone featuring surround display, we launched our flagship 5 gs smartphone models, the Mi 10 and Mi 10 Pro in February 2020. Mi 10 series offer ultimate performance experience across all functions by deploying industry leading processor, display, camera and the faster charging technology. As Shaojun just mentioned, mid-ten series is well received by our consumers. On the other hand, Redmi brand offers products with quality based price performance ratio to the mass market. In 2019, Renmin also launched its first 5 gs smartphone, Renmin K30 5 gs and followed by the Renmin K30 Pro 5 gs, which it was launched last week.
Remi has launched competitive products across different platforms from RMB 6,99 to RMB 4,000. Let's move on to the IoT segment. This year has seen strong growth of core IoT and Lifestyle Product segment as we continue to grow our IoT product portfolio and enhance the connectivity across our products. The IoT and Lifestyle Products revenue was RMB62.1 billion in 2019, an increase of 41% year on year, while the revenue in the Q4 was RMB19.5 billion, up 31% year on year. As one of the global leading consumer IoT platform, we continue to expand our IoT user base.
At the end of 2019, the number of connected devices on our IoT platform, excluding the smartphone and laptops, reached 235,000,000 units, an increase of 56% year on year. The number of users who have 5 or more devices connected to Xiaomi's LTE platform reached 4,100,000, an increase of 77 year on year. We have achieved leading positions in key IoT products that are critical to our IoT platform. Among lots of popular products we offer, Xiaomi TV is one of the star products. In 2019, our global TV shipments reached 12,800,000 units, an increase of 52% year on year.
According to ABC, we are the number one TV brand in China, in mainland China, with about 20% of market share achievements in 2019. And we achieved over 10,000,000 units in the mainland trend last year, setting a very good industry record. Our smart TV ranked number 5 globally and number 1 in India. In 2020, we will offer our smart TV in more countries and regions. Except the TV, Xiaomi also leads the market of wearable bands ranking number 1 globally.
According to Canolink, our variable band shipments reached 35,600,000 units, an increase of 55% year on year, with global market share of 21%. Also meanwhile our AI assistant Xiaizengxue had 50,400,000 MAU in December 2019, an increase of 56% year on year. AI assistant supports new functions including continuous conversation, integrated graphic and voice user interface, AI, smartphone assistant and the voice print recognition. The newly added functions received highly positive responses by our users. Moving over to the Internet service segment.
In 2019, Internet services revenue reached RMB19.8 billion, up 24% year on year. For the Q1, revenue was RMB5.7 billion, an increase of 41% year on year. After all that advertising revenue grew by 18%, online gaming grew by 44% and the other Internet value and services grew by 104%. Such solid growth is supported by our expansion of the user base. In December 2019, the global MAU increased by 28% year on year to RMB310 1,000,000.
While MAU of mainland China accounts for RMB109 1,000,000,000 Besides the smartphone, our smart TV MAU also grew by 49% year on year to RMB27.7 million. Last year, despite the challenging macro environment in China, our advertising business achieved consecutive quarter on quarter growth. This increase was mainly attributable to our consistent improvements in our mobile Internet apps, which put their MAUs. And this is further because of our efforts to increase the monetization because of the diversification of our advertising customer base and optimization of our recommendation algorithms. The diversification is a key growth driver of our Internet services revenue.
For the Q4 2019, our Internet services revenue outside of advertising on the gaming from mainland Chinese smartphones increased by 112% year on year. And this accounts for 43% of our total Internet service revenue. This business refers to our FinTech business as UPN e commerce platform, TV Internet Services and Overseas Internet Service. Next, moving on to our international business. The overseas market offers us tremendous growth room.
In terms of matching, we further expand our global footprint with overseas revenue account for 44% of our total revenue. The overseas revenue was RMB91.2 billion in 2019 and the increase of 30% year on year. Our smartphones were sold in over 90 markets and our smartphone ranked top 5 for 45 markets. In the Q4 of 2019, our overseas revenue increased by 41% on year to RMB26.4 billion, and this accounts for 47% of the total revenue. We witnessed the growth across all regions where we operate, but India is still our single largest overseas market achievement.
In the Q4 of 2019, we maintained the number one position for 10 consecutive quarters with market share of 29% according to IDC. We also gained the market share in Western Europe. According to candidates, in the Q4 of 2019, we ranked number 4 in Western Europe with smartphone shipments growing 115% year on year. In Spain, we were the number 1, the number 2 with 23% of market share and just 1% less than the number 1. We also ranked number 4 in France and Italy.
After reviewing the performance of business segments, I'd like to share some financial metrics with you. First is our gross profit margin. Compared to the year 2018, smartphone gross margin increased from 6.2% to 7.2%. The IoT and left from 10.3% to 11.2% and the gross margin for Internet services remains flat. In terms of the expenses, our operating expense ratio increased from 9.1% to 10.2%.
This is mainly attributable to our elevated investment in R and D activities, as well as the branding activities in overseas market. In 20 19, our R and D expense increased by 30% year over year. For the working capital, all metrics remains healthy compared to the Q4 of 2018. In the Q4 of 2019, our inventory turnover days decreased from 65 days to 54 days. And account receivable turnover days decreased from 14 days to 7 days.
Accounts payable turnover days decreased from 115 days to 101 days. The cash flow results were very strong in terms of net income as well. The adjusted operating cash flow was RMB27.1 billion for the full year 2019 and RMB11,300,000,000 for the Q1 of 2019. Accordingly, our cash position was further boosted Cash resources amounted to RMB66 1,000,000,000 by the end of 2019. And with our investment portfolio, and the book value is RMB30 1,000,000,000 and our office and other real estate, the book value is RMB11.3 billion and then deducting the financial debt of RMB17.6 billion.
Then as a result, our net cash as assets were about RMB89.7 billion by the end of 2019, increased by RMB25 1,000,000,000 from 2018. The strong balance sheet should enable us to well position in front of any unexpected market change. Last, I want to walk you talk about our investment performance. As of December 30, 2019, we have invested more than 290 companies with an aggregate book value of about RMB30 1,000,000,000 An increasing number of our invested companies have gone public. February 2020, the Robo Rock, Shilou Kezi, one of our invested companies, was successfully listed on the submarket in China, become the 1st ecosystem partner company of us to lead on the Asia market.
We believe that this is a recognition to our ecosystem business model by the HR Capital Markets. As our business continues to grow, we believe that more invested companies will go public in the future. And that's why we want to reiterate our pride. Our mission is to build amazing products with only products to let everyone in the world to enjoy the better life. In 2018, as approved by our Board, we pledged to our existing and potential users that starting from 2018, Xiaomi's hardware business, including smartphone IoT products, would have overall net profit margin will now exceed 5%.
And for this year 2019, our hardware business was profitable and with our overall net profit margin, which is less than 1%. So this is fully our plan. This ends my prepared remarks. Thank you very much. Thank you, Richmond.
We'll now proceed to the Q and A session.
In order to allow
more people to ask questions, please limit your question to a maximum of
Your first question comes from Le Pin Huang from CICC. Please ask your question.
Thank you for taking my question. I have two questions. So one is about the impact of the various operating in India and Europe. The second question is about your strong performance of your Inlet business in the 4th quarter. So I just read Leitong's letter to the investor saying that in Mandarin keep high efficiency is the ultimate solution to overcome the crisis.
So I want to know what is the latest situation of your business in India and the major European cities like countries like Spain and Italy? And what's your plan to overcome this challenging situation due to the virus? And the second question is, I see you are doing very well in your Internet business. I see the growth rate of your Internet business actually reaccelerates to 40% in 4th quarter from 12% in 3rd quarter. I want to know what's the reason behind and considering if I understand correctly, it's mainly in China.
So what's will this driver remain strong in the Q1 2020 considering the various situation in China? Thank you.
Yes. Maybe I'll answer the question and then Shao and Richmond can add. So the first question is related to the impact, like the COVID-nineteen impact, our business in India and in Europe. So right now in India, I think Indian government can take a very, very big step to prevent the whole country into to try to help the people to prevent the more infection. I think it's a right decision.
So the whole country right now is shutting down. So we see definitely will impact our business. But based on the but still, although everything is shutting down, we still see a lot of customers, our fans still buying our smartphones from different channels. That's a good indication that the consumers need smartphone even in the very difficult situation. So based on the experience we have in China, we see a strong bounce back of the market.
We believe after the recovery from the virus, actually will see a strong recovery. So in China, Chinese peers told us right now in March actually, the run rate of smartphone sales is about 90% of the January consumption. It's a very good signal and it tells us the smartphone demand is a resilient demand. In Europe, the same thing. Right now, many countries, including Spain, Italy and France, their focus is fight against the virus, right?
So we see a demand drop, but gradually after a week gradually stabilize. So maybe later I would like a show to give you detail.
Yes, show.
Okay. So this is Shao here. I would just sort of reiterate a few things that Xiangxiang mentioned just now. The first is based on our experience in China, smartphone demand rebounds quickly. And our own assessment of this based on going through a full cycle here in China is that smartphones is on the spec closer to the spectrum of essentials than on the spectrum of sort of luxuries in this time.
So the good thing about our Chinese demand was there was deferred consumption in the month of February, in particular, when a lot of cities were shut. Of course, e commerce did a little bit to mitigate this. And as all of you know, our e commerce presence in China is significant compared to a lot of our peers. So this is the experience we had in China. Now the situation outside of China is very dynamic.
As of we are operational in 90 countries. And as of now, almost every single country has imposed some sort of restrictions within the country internally. Now there are only a handful that have imposed the highest form of restrictions, which is even the logistics and fulfillment doesn't work. Only a handful of countries are in this category. The large majority of countries are in the category where there is social distancing policies.
Some offline retail shops are shut. But in general, the country is not at a complete standstill. So what we are seeing based on our numbers, 1st of all, we understand the gravity of the situation. We see a fall, but we see it sort of stabilizing. In particular, in some countries, we actually see a slight recovery.
It's across 90 countries around the world. So different countries are in different stages of this. The second is what we have seen is in China is the consumption gets deferred. So at least in China in the second half of March, what we are seeing is a relatively robust recovery. So this is something that we take to heart.
Now the third thing that we see and we have to be very factual here is that almost every country, maybe except for Australia, where we don't really have too much business, is imposing sort of different types of social distancing and lockdown until the middle of April. Most countries are in this category. Now whether or not this gets extended, I think really is an assumption at this point in time. So based on all these assumptions, we our current assessment and we do this on an almost daily basis now. Our current assumption is that undoubtedly there will be impact in demand.
Undoubtedly there will be impact, particularly for our overseas business in the Q2 of 2020. But we but right now, we are our we think the whole situation is currently manageable. And overall for the year 2020, we expect to grow as a business. The Internet,
you want to take the Internet?
For Internet, yes.
So I'll talk about the Internet service growth. So in the Q4 of 2019, our Internet growth 41%. If you look at it, all the secular growth, where advertising grew 18%, our gaming grew 44% and our other value added service grew over was a drag in the past few quarters. Starting from Q4, if you was a drag in the past few quarters. Starting from Q4, if you compare to 2018 Q4, because the weakness in China smartphone advertising market started in 2018 Q4.
So the year on year price drop on advertising was less than the year starting from Q4 of 2019. So that is one of the reasons. And another reason is a lot of our fast growing advertising business has become larger. So we talk about the diversification of our Internet service revenue, which for new e commerce or overseas Internet service or TV Internet service and our Fintech business, together right now already accounting for 43% of our Internet service revenue in Q4 of 2019 and was growing at over 100%. So this fast growing business has become even larger and contributed to an even larger growth.
So those are the reasons for the growth in fiscal 2019.
I will just add one more thing here. You may have noticed that our advertising revenue has grown quarter on quarter for 4 consecutive quarters in 2019. I think many of you know that 2019 for China advertising was not the best year. It's a relatively challenging macro outlook for the year 2019 for advertising. Now the reason why we achieved quarter on quarter growth is really down to the few things we have been talking about consistently over the last many quarters, which is 1, diversifying our advertising base, transiting from only sort of majority Internet company advertisers a couple of years back to more verticals like small to medium business verticals and direct e commerce players, so on and so forth.
The second is you may have noticed in our announcement that our new suite service, for example, now has 76,000,000 monthly active users. Now this is very prime advertising space, particularly for location based services. So and for small to medium businesses. So these are the things that we've put in effort in the past. And the third, as we have said several quarters now is our investment in optimizing our advertising recommendation systems.
And the combined impact of this is advertisers just get a better return. And as a result, it allows us to grow our advertising business. So I think we are doing we have been doing all the work that we have been saying for quite some time. And I think Q4, you see a little bit of the results of this.
Thank you very much.
Next question please.
Your next question comes from Cherry Ma from Macquarie. Please ask your question.
Hi. Thank you for taking my first question is, is it possible to give us some color on the overseas Internet service revenue? What is the rough percentage breakdown within the segment in 4Q? And any rough idea on how much overseas ARPU is?
Shih, do you want to take?
Jerry, so we don't want to go beyond what we have disclosed in our announcement. We have disclosed that the 4 revenue streams, YOKI plus, Fintech plus TV advertising, particularly from membership, plus overseas revenue, combined is 43% of our total Internet revenue in Q4 2019. And combined revenue growth is at 112%. So that's what we disclosed in our announcement. But qualitatively, I can tell you that.
I can tell you that, again, this is very consistent with what we have been talking about for many quarters now. Step 1, cell phones, IoT devices get users. I think this is proving well, this is something that we have been growing every single quarter. So that's the first thing. The second is provide more Internet services.
And we disclosed an announcement in particular in India. You see the introduction of Mi Video, Mi Music, our news feed, even our App store. And all these is it's the services that eventually gets you the inventory to monetize. And then the 3rd step is to monetize. So we are not in the phase where we are fully sort of that our energy is on step 1 and step 2.
Step 3 is something that we are sort of we're doing, we're building, it's growing very quickly. But the management focus here is on step 1 and step 2, which makes sense for the future.
Okay. My second question, it's on the Airstar Virtual Bank. I noticed there's a stock opening today. Congratulations. How much does Xiaomi own in this virtual bank?
And how should analysts model this business going forward? Any guidance would be helpful. Thank you.
We own 90% of SR. It's still immaterial in terms of our P and L and our balance sheet at this stage. It's operated by the Xiaomi Finance entities, which Xiaomi Finance is 100% owned by Xiaomi today. The well, the idea is to bring great financial services to our users in Hong Kong at this point in time. It's very early.
I think
it's too
early to talk about sort of modeling at this stage. But yes, we do have a problem. For those in Hong Kong, you are 3, 2, 3, 2, sign up. For first $200,000 deposit will give you a 3.6 interest rate.
Sounds good. Thanks.
Okay. Next question please.
Your next question comes from Tina Wong from Credit Suisse. Please ask your question.
Hi, management. Thanks for taking my question. It's a great result in 4th quarter. And I want to check is about the ASP and also gross margin in the 4th quarter that we see for the smartphone side, there's a decline because of the mix from the overseas. And also the gross margin is also slightly below from the Q3 as well in terms of smartphone business.
So just wanted to know the trend going forward because this year, 2020, that we see, obviously, the contribution will continue to increase. And what's the mix that will help in terms of ASP? And what is your expectation now that the gross margin, if it could maintain in that level or we should expect there will be more variations in this year? So that's the first question. The second one is about the recent launch of the Mi 10 and also that Huawei border, the P40 actually pricing in a similar range in the premium segment.
Do you worry about the sales expectation in the V Series because there's a had to have competitions in the segment after Huawei launches P40 with the same price at the lower segment? Thank you.
Yes. Thank you for the question. Let me answer the question number 1 regarding the ASP and gross margin. So I think it's a seasonal thing. Q4 year 2019 actually is a very important selling season.
We do a lot of promotions. We drive huge volume in China and outside of China. We ship a lot of devices to India, to Latin America, to Europe, to everywhere. So we drive the significant volume with the promotion and the branding. So that's why you see the ASP is a little drop.
The gross margins is a little declining. I think it's a single thing. So in the future, we'll continue actually to drive two things. Number 1, we want to drive we want to develop premium tier smartphones in China and in the rest of the world market, in China and in Europe, basically for the premium tier. So you see we launched Mi 10 Pro in December sorry, in February and also we continue to do that.
Also we launched that similar product, the same product in Europe last week. Actually both Europe and China, we all received a very good response. The shipment actually is exceed our original expectation. I think the selling result is good, although we see other companies shifting or launching similar product. You just mentioned the P40 and the P40 Pro, but we're still very happy with our shipment because we really drive the performance to new level.
So I believe our customer, our fans love to use our product. It's a very good signal. So you are yes, maybe Shou can add.
Yes, I just want to add one more thing. You mentioned some other products in the market. Let's talk about the P40. There are 3 variants of it, P40, P40 Pro and P40 Pro Plus. If you want to compare prices, you need to compare P40 because they haven't launched in China.
You need to compare P40 with Mi 10 in which we launched in Europe last Friday. And if you take these two products and put them side by side, yes, the two prices are the same, but P40 is much inferior. So I just want to point that out.
Okay, Okay. Thanks.
Yes. Thank you. Thank you. Next question please.
Your next question comes from Thompson Wu from UBS. Please ask your question.
Thanks and good evening. Hope everyone is relatively safe tonight. Wang Zhong, welcome to the call. I have just two quick questions. The first one, I think, goes back to Kiena's points about smartphone ASPs and Wang Zhang's comments about expanding overseas and investing in new product categories.
It seems like selling and marketing exiting 4th quarter was growing at a fairly healthy clip. How should we think about selling marketing in this year? Should we expect to see some scale by second half twenty twenty? That's my first question. My second question is, as you start moving into some of the more premium price bands in smartphones, what kind of impact can we expect with your IoT and Internet Services business?
Dongsa, do you mind repeating the second question? I apologize. The second question.
Sure. No problem, Shao. It's just as you move into some of the more premium priced categories, I know this has been a focus for your company for a number of quarters. As you move into 3,000 or above price bands within China, what kind of benefits or impacts do you expect in your IoT and Internet service business?
Yes, I will yes, let me answer your first question first. So you're talking about the marketing. Actually in Q4, yes, because we are as a company strategy, we want to bring more premium tier product to China and also to Europe. So we started building our brand in Q4 last year. That's why you see the marketing expenses increase a little bit.
But in the long run, we'll continue to offer the best performance product to the consumer with a very, very efficient way of marketing. So we highly focus on efficiency in the long run. But at the same time, we'll do brand promotion and to promote our brand in Europe and in the rest of the world. I think in the future, we will see that.
On your second question, if I understood it correctly, first of all, going into a higher end segment allows us to capture a set of users that we didn't have before. So that is clearly beneficial because it's just new users. The other metric that you could be looking for is that there is a correlation that the higher ASP users do have a higher ARPU across Internet services. So this is a there is a positive correlation to this.
Perfect. Very clear. Thanks guys.
Next question please.
Your next question comes from Yingbo Xi from Citiks. Please ask your question.
Thank you for having my questions. This is Yingbo from Citix. I have two questions. The first one is that we noticed that the margin of the smartphone of the Q4 dropped a little bit. So we're curious about how we see the trend of the margin of the smartphone next several quarters?
This is my first question. And the second question is that we still expect a fast increase in IoT area. Could you please give us some colors on next year's IoT area? What kind of big products can we expect in IoT area? Thank you.
Okay. I'll do the first one. So gross margins, as Chang Liu said, it's Q4 is seasonal. There are a lot of events happening in Q4, November 11 sales, Diwali, Black Friday, it all happens in Christmas, it's all in Q4. So it's natural that gross margins go down a little bit due to some promotional activities.
Now we said in the last quarter that what we achieved in Q3, Q2 is a very reasonable gross margin to expect in a normal quarter. So that's I think there is no changes to that statement. So that's the first question.
Yes. The same question is related to the IoT growth. Yes, we will continue to grow our IoT business globally. I think I can talk about the TVs, for example. We are launching TV product, not only in China, but in India, Russia, Indonesia, but also in Europe, we'll continue to bring more and more TVs, smart TVs to Europe.
That's an example. And also in China, will talk about the white goods, the air conditioners, washing machine, refrigerator, these kind of appliances is an area. Of course, we'll continue to focus the connected IP devices and where is our traditional strength. So for example, the smartwatches and others. So I see the great potential, not only in China market, but overseas market, the same thing, especially in Europe and Latin America.
Our IoT product is well received by the consumers in those areas, those markets. Thank you.
Next question please.
Your next question comes from Frank He from HSBC. Please ask your question.
Thank you for taking my question. I have 2. The first is about the supply chain security. Given that the COVID-nineteen is spreading across the entire world, I guess some of your suppliers are located in the U. S.
And the European countries. So I just wonder, do we see any disruptions or any shortages of key component so far? And what's our inventory at this moment for the finished good and also the raw materials?
Okay. Thank you for the question. Actually, yes, we have suppliers. We have many, many suppliers around the world, not only in Europe, but also in many different areas, Latin sorry, the Asia Pacific region, Japan, Korea, yes, some of them are in Europe and the U. S.
So far at the moment actually, we haven't seen a significant impact from the Dovirus at the moment. But we realize that we have some peer, how to say, indirect suppliers, the material suppliers. Some of them are located in Asia Pacific, for example, Philippines, Malaysia, they may have some national policies to anti the virus. So potentially will be there could be a risk, but so far we haven't seen it. But we have a team to monitor the development every day.
Actually, we have a daily meeting to monitor everything we need on global basis. So we are yes, we monitor very, very closely.
Okay, got it. And then second question is about your smartphone users' behaviors during this crisis period. Given the experience you have observed in China, can you share some colors regarding the overseas users, how they are using their phones and how that should impact our Internet service revenue in Q1 and Q2? Thank you.
Yes. In China, actually, it's very interesting. We see the DAU and user time becomes longer when people stay at home. So people have much more time playing with smartphones. So our revenue generated from the game, from the message, from browsers increased significantly.
But overseas market, we because right now, it's still in the outbreak period. We will monitor the progress. We don't have the data yet. So we see probably the same thing, I don't know if Shaul agrees, but First of
all, there's GDPR in Europe. I'm just joking. It's too early to tell. But anecdotally and this is anecdotal and qualitatively, people spend a lot more time on their devices, not smartphones, but some other IoT devices, like televisions, in order to connect with others.
TV every day, every hour.
Yes. I mean, you must have heard that some Internet companies had to lower their streaming quality so that it's not to congest Internet traffic globally. So I think it's quite clear that this is I'm not sure if any of you have been quarantined, I have. You spend a lot more time on night.
Okay. That's helpful. Thank you.
Thanks. Due to time constraints, we'll now take the last question.
We'll now invite the last question, which will come from Roku Hariharan from JPMorgan. Please ask your question.
Thanks for asking my question. First, I have a question on 5 gs. Could you talk
a little bit
about how do you see the progress of the 2 products you've launched? Maybe quantify a little bit if you've got Britney SER-five gs as well as Mi 10 5 gs, how things have been going? And could we also talk a little bit about how much like we are roughly like 8% or 9% market share right now in China in the 4 gs era? What is your target combined Xiaomi SME and Redmi in terms of 5 gs market share as in Sager, how China moves to a much more 5 gs centric market? That is my first question.
2nd question on the FinTech and Internet Finance business. There has been some concerns about some of the more lower tier companies starting to face higher delinquency. Could you talk a little bit about what is what do we think about the health of the business right now, the quality of the loan book, as well as how should we think about growth for this business given that it's been the fastest or one of the fastest growing, not the fastest growing part of the Internet revenues last year?
Thanks. Gokul, thank you. It's Shao here. So how is 5 gs going? It's in China.
In China, it's actually going very well. What we are observing is is it's a real selling point for devices in China at this point in time. We have K30 5 gs, which was launched in November at RMB 1999, so that cracked the RMB2000 price point. And we have Mi 10, which is flagship. And both devices so far have exceeded our expectations.
The way I will phrase it is, we are glad we don't have 4 gs sort of a lot of 4 gs inventory at this point in time in China. So it's on track, it's meeting our expectation. It's actually slightly meeting our expectations. But it's we have described this at length over the last few quarters. This is what we are prepared for.
So we are executing this at this point in time. Now we don't give guidance. So I unfortunately cannot say where we think our market share will end up at this year, but clearly higher than last year. So that's the question. Your question on FinTech, I think a few points here.
1, we are strengthening our FinTech capital advantage cost of capital advantage over time. In January, we got a consumer finance license. It's one of the bigger licenses in China. It allows you to get access to lower cost of capital for our consumer finance business. So we're building it in a very robust way, playing up the three strengths that we have.
1, strength of acquisition of traffic because we have a significant UI base. 2nd is the strength of our data in China where data allows for more robust risk models. And the third is that we're building up the cost of capital sort of advantage by getting a lot of difficult to get licenses. Think in general, our motivation for doing finance is to help our consumers and our supply chain get better access to capital. We are prudent in our operations.
This is not something that we believe in sort of charging ahead without sort of a huge respect for the risks involved. So our balance on the whole is to air on being conservative. So right now, our coverage ratio for any bad debt is higher than all the numbers that we need to hit. So that's the way we think about that business.
Thank you all for joining us tonight. We'll now conclude the call.
Thank you. Yes. Thank you. Thank you very much.