Welcome to
Xiaomi Corporation 2019 First Half Results Conference Call. I'm Steve Lin, the Director of Corporate Finance of 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 that 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 prepare 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. CFO, Mr. Shou Zixu or Senior Vice President, Mr.
Wang Xiang, who leads our international business. Now, I will turn the call over to our
our CFO, Mr. Shou Zhixin. 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 of this call, I will hand the time over to Mr. Wang Xiang, our SVP of our Global Business, who will share some of our global within Xiaomi. This growth, healthy growth is reflected in a few areas. 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. 2nd, 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 twenty nineteen results, our total revenue for the first half was RMB95.7 billion with year on year growth of 20%.
Our adjusted net profit was at RMB5.7 billion with a year on year growth of 50%. If you look solely in at Q2 2019, our total revenue was RMB 52,000,000,000 sorry, our total revenue was RMB 52,000,000,000 about 15%. Our adjusted net profit was at RMB 3,600,000,000 with year on year growth of 72%. We looked at the Bloomberg consensus numbers and to get a view of what research analysts have predicted for the Q2 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 List for the very first time, and our rank on this list was 4 68. 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 list today. Xiaomi also made the Brand Z twenty 19 Top 100 Most Valuable Global Brands ranking for the first time.
According to this ranking, we were ranked number 74 and our brand value was estimated to be about US19.8 billion dollars Xiaomi was also US dollars. Xiaomi was also
listed as one of the
2019 Forbes China's 50 Most Innovative Companies. We believe that these 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 twenty nineteen. In terms of our company's strategy, we launched the smartphone plus AIoT dual engine strategy in the first half of twenty nineteen.
In terms of the smartphones business, we executed the successful separation of Xiaomi and Redmi brand, including inviting Mr. Lu Wei Ping to join us as our Group Vice President and Head of our Redmi brand. We were ranked number 4 globally in terms of smartphone shipments in first half twenty nineteen. In particular, in Q2 2019, according to a particular third party research firm, we were very, very close to becoming the 3rd largest smartphone company in the world. This is something that's unimaginable 10 years ago.
We were number 1 in India for 8 consecutive quarters in terms of smartphone shipments and number 4 in Western Europe with a year on year growth of 53%. We also launched our first 5 gs phone in Europe this year, which is called the Mi Mix 5 gs model and our second 5 gs gs smartphone will be launched in Mainland China in the second half of twenty nineteen. In terms of our AIoT business, we have 100 and million connected IoT devices, excluding smartphones and laptops in the first half of twenty nineteen, of which we also have 49,900,000 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 number 1 in Mainland China in terms of shipments and number 5 globally in terms of shipments.
In terms of our large home appliances, we enjoyed 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 our In terms of our overall financials, as mentioned, our total revenue for the first half was RMB 95,700,000,000 with a year on year growth of 20%. Percent. Our adjusted net profit was at RMB 5,700,000,000 with a year on year growth of 50%. Our cash resources at the end of the first half was at RMB51.1 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 for the first half of twenty nineteen was at RMB 12,200,000,000. Next, I will go into a bit more detail for each of our key businesses. First, our smartphone business.
In the first half of twenty nineteen, our smartphone revenue reached RMB59 1,000,000,000, representing a year on year growth of 9.8%. In the first half of 2019, we sold approximately 60,000,000 smartphone units around the world. This quarter, we this first half of the year, we executed the successful separation of the Xiaomi and Redmi brands. Just as a recap, the Xiaomi brand focuses on pioneering advanced technology, establishing itself in the mid to high end and diversified user market. It is also brand that will help us build our new retail channels.
In the first half of this year, we launched the RMB 2,000 to 3,000 RMB price range flagship Xiaomi 9 Series. This series has achieved a widespread popularity among our users. Following which, we launched the RMB1000 to RMB3000 price range Xiaomi 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 20,000,000 units since launch. In the first half of twenty nineteen, we also the K20 series. In the 1st month of launch, we sold 1,000,000 units of the Redmi K20 series. This series also allows the Redmi brand to start pursuing more of the high end markets in the ultimate price performance ratio segment.
So by the end of the first half twenty nineteen, 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 twenty nineteen. As a result of our upgraded brand strategy and our optimized product portfolio, our average selling price of our our smartphones has continued to grow. In the Q2 of 2019, our Mainland China smartphone ASP grew by 13.3 percent and our overseas smartphone ASP grew by 6.7%. Revenue from smartphones phones over RMB2000 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 5 gs license for commercial use and we have officially entered the 5 gs commercial use era. We believe that the Chinese smartphone market will grow with the proliferation of 5 gs 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 5 gs, we started devoting R and D resources into 5 gs as early as 2016. By 2018, we have successfully connected our first 5 gs device to a 5 gs network. By February 2019, we launched our first 5 gs phone in Europe. This same model, Xiaomi MiX 5 gs, was delivered to the 3 carriers in China in May 2019. And we will launch our first 5 gs 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 4 gs to 5 gs, over the first half of twenty nineteen, our emphasis is on prudent and healthy operations. I will share two 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.
2nd, in terms of our operating cash flow excluding our FinTech business, we went from negative 1,500,000,000 dollars in Q1 2019 to positive cash flow of $13,700,000,000 in Q2 2019. We believe that having these significant resources at hand will allow us to better capture the 5 gs 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 $27,000,000,000 in the first half of twenty nineteen, representing a blistering growth of 40 9.3%. 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. 1st, 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. 2nd 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. 3rd, 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. 4th, it allows us to have a diversified revenue and profit stream. In the first half of twenty nineteen, our AIoT business was driven by many factors, including our smart TV business, which reached 5,400,000 units of shipment with a year on year growth of 65% in the first half of twenty nineteen.
We were ranked number 1 by shipments in China and number 5 globally in the first half of twenty nineteen in terms of TV shipments. Our TV, we are the number one 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 1,000,000 units in the first of twenty nineteen. Now for those who are familiar with this space, this is a very important milestone to reach and very, very few companies can reach it as such with such a short history of operations in the space. In terms of our laptop business, according to IDC, Mainland Laptop China market share grew by grew from 5.5% in the second half of twenty eighteen 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 number 1 in terms of wearable devices shipments in the Q1 of 2019. 2nd quarter numbers are not out yet. Our Mi Smart Band 4 exceeded 1,000,000 units of shipments in just 8 days since its launch on the 14th June this month. 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 3,000,000 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 capabilities. Our AI speaker shipments exceeded 4,000,000 units in the first half of twenty nineteen. Today, we have 49 point close to 50,000,000 AI assistant monthly active users. Now what is 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 leap in terms of connected IoT devices, we believe that in the AIoT era, we have built a very significant competitive advantage for our company. 3rd, I want to share a little bit more about Internet services. In the first half of twenty nineteen, our Internet service revenue reached 8.8 $1,000,000,000 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 1st of all, by our strong MIUI monthly active user growth.
Our global MIUI MiWay monthly active users has grown from 207,000,000 in Q2 2018 to 270 $9,000,000 in Q2 2019, representing a year on year growth of 35%. We would also like to share our Mainland China MiUI monthly activity number. Today, our Mainland China MAU number is at 115,000,000. Over the course of the first half of twenty nineteen, our Chinese smartphone advertising business has achieved increasing diversification. Over the course of the last few 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 few numbers with everybody. First of all, we have built a very significant newsfeed business within our Internet services. Our news feed business has over 71,000,000 monthly active users on our phones today and this number has a year on year growth of 31%. Our New Speed products are ranked number 1 in terms of monthly active users on our smartphone.
We are also number 1 in terms of search queries on our smartphones. We have a few entry points for searches to take place on our smartphones, including our launcher search box, our browser and our NegativeONE screen and our AI assistant. We believe that our leading position in news feed and in search queries allows us to better diversify our 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 RMB213 to RMB 408,000,000 over the course of the last year. This represents a gross profit growth of 92%.
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 1. And point number 2, there is higher revenue growth from content providers, which give us a high gross profit margin. So underpinned by these two things, we believe that our gaming business is healthy today. I talked about Mainland China Advertising and Gaming Businesses now.
Now in terms of other Internet services, including Yopin, including our FinTech business, including our overseas Internet business and including our AIoT Internet Services business, we have achieved increasing diversification and growth these revenue streams. Combined, they account for 36% of all Internet service revenue for Xiaomi today. And this four revenue streams combined has a year on year growth of 109% in the Q2 of 2019. YOKIN, for example, achieved a 3,800,000,000 GMV in the first half of this year with a year on year growth of 114%. What is also very interesting is that 65 percent of GMV in June 2019 for Yopine was from smartphone users who are not using Xiaomi handsets, which means that Youping 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 RMB1.4 billion in the first half of 19. This is a year on year growth of 7% to 9%. In terms of our IoT services business, I'm going to use TV as an example here. We have 22,600,000 monthly active users for our TVs today, of which we have 3,000,000 paid subscribers. They pay for IoT Internet service business that not only services our devices.
In terms of our overseas Internet services, our Xiaomi browser is now ranked number 1 on Xiaomi phones in India in terms of monthly active users. Our overseas ARPU has continued to grow rapidly with a year on year growth of 100 and 3% in Q2 2019. Next, in terms of our entire overseas business. Our entire overseas business revenue continued to grow strongly with a year on year growth of 34% in the first half of twenty nineteen. This revenue stream now accounts for 40 percent of our total revenue.
Mr. Wang Xiang 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 number one smartphone brand in terms of shipments and our market share in Q2 2019 was already at 31%. In Western Europe, we are ranked number 4 smartphone shipments in Q2 2019, achieving a very high growth rate of 53%. In Spain, in particular, we are now ranked number 2 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 0.1% 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 and D expenses increasing by 30% year on year in first half twenty nineteen outpacing our revenue growth quite significantly.
In terms of our balance sheet, our inventory turnover days has decreased to 53 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 13,700,000,000 excluding our FinTech business. We have also done the following math. Our cash resources today is at the end of first half twenty nineteen was at RMB51 1,000,000,000.
The book value of our investment portfolio is at RMB29 1,000,000,000 and the book value of our campus, our offices and our other real estate is at RMB9.6 RMB9.6 billion. If you take away our RMB13.8 billion of financial debt, our total, I guess, asset value as defined by what I just said is at RMB 75,600,000,000. We have enough resources to prepare us for the growth opportunities that will come when the 5 gs where 5 gs becomes widely used. Speaking of investment, one very important thing that we have done in terms of investments is that we have 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 and 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 Zhang. Mr. Wang Xiang 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'll hand the time to Mr. Wang.
Thank you. Thank you, Shao. We're very happy to share the latest status of Xiaomi International Business. Actually, let me with the total addressable market for the global smartphone. So based on the catalyst number, there will be 1,300,000,000 smartphone market for year 2019.
The Xiaomi International Business will focus on the about the total addressable market is about 1,000,000,000 units of a smartphone. 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 smartphones sold in Western Europe is from carrier channels.
This is a new space for us. After a couple of years effort, actually, we are right now in 80 plus countries in the region. First half of year twenty nineteen, the total shipment from the international business is around 60,000,000 units. And also, we are in top 5 smartphone brand in over 44 different markets, including just Shou mentioned India, we are number 1 in 8 consecutive quarters. And also, we are number 1 in several other markets in Asian countries.
And also we have many number twos and the number threes. 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 markets, which the GDP per capital exceed US10 $1,000 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 twenty nineteen, we saw a 10 times growth year on year in the shipment volumes and the activation number grew 700%. The example is, despite launching for just 4 months, the shipment volume for Mi 9 exceeded the entire life cycle of Mi8. It's a very good signal for us in the flagship device level. And also secondly, a very important thing is we create we call it a hero model. This year, in the first half of year twenty nineteen actually, Remi Note 7 is a hero model, not only in China, but also in almost every country we entered.
So Remi Note 7 is one of the best selling Remi Note 5, the shipment volume for Remi Note 7 increased by 179%. The activation number increased by 175 percent. RemNote 7 is just an example. Our mid range device is experienced 37% year on year growth in terms of shipment volumes and a 50% year on year growth in activation numbers. Let's talk about the ecosystem product.
Actually, we experienced the same. The band, the Mi Band actually also one of the best selling ecosystem product internationally. As of July of year 20 19, 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 focused a lot on the retail channel build up.
Actually, we focused on 3 areas, the on 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 me.com first. Me.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 spendmi.com since April Mi Science Festival experienced over 60% on year growth. Fronsme.com experienced continuous growth in daily active active users actually, the active users grows over 300% year Actually, offline retail strategy has achieved notable results. We entered over 60 66 markets with 520 offline retail locations.
We established over 50 key accounts, we call the key retailers. For example, in Europe, they are medium market and those kind of big retailers. We build a very strong strategic partnership with them. Point of sales increased by 31%. Mi Contours tripled in numbers.
Mi Zhu's increased sevenfold. Let's talk about the carrier channel. Actually in the 1st of year 2019, we built a strategic partnership with almost every European carriers, includes Vodafone, Orange, S3 gs, TIM and Telefonica. We expect to have greater volume through these carrier partnerships in the second half of year twenty nineteen. So let's move into marketing.
Actually, we use a lot of social media to do our marketing. We operate 5 platforms, including all the popular global social media platforms, including Facebook, Instagram, Viki in Russia and others. And also we run over 161 accounts in 63 markets. Now we have close to 40,000,000 followers in those social media platforms and over to for the future for the second half and 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 twenty nineteen. And also, we will continue to build our or channels in other markets like Latin America and Africa. We are building our offices and the channels in those markets as well. And also, we definitely will build stronger partnership with more operators globally. We will for the second half and even beyond.
This is a short summary of the international business.
Thank you, Xiaozhong. So I think now we'll open the floor for questions. We'll be taking the first question.
Thank you. Our first
my questions. I think two questions about smartphone.
The first thing is that you have you delivered
a flattish volume in this quarter year over year. And but if you look the as you see numbers, 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 outside China? Thank you.
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. Explosive growth starting from Q2222020. The global smartphone shipment market is shrinking right now.
Our Our global shipment in Q2 2019 was flat from last year. Well, in a market that's falling, it means that we are actually growing. Our smartphone 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 3,600,000,000. This has exceeded some estimates by almost RMB 1,000,000,000.
Working capital free cash in FY 2020, Our operating cash flow in the 2nd quarter exceeded RMB 13,000,000,000. We put in a huge amount of effort to increase our operating efficiency and our 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 and D spending by a very significant amount. Last year, we spent RMB 5,800,000,000 in R and In the first half of twenty nineteen, our R and D expense has continued to grow at 30%.
In a difficult macro environment, our most important things are to make sure our operations are healthy, increase our operational efficiency and increase our core competence in the key areas that matter.
Ask my question is that whether the 5 gs smartphone is the opportunity or the challenge for Xiaomi because we see that this on the positive side, we see negative side because Xiaomi is mainly rely on the 3rd party chipset, the competitor rely on their own chipset. Maybe you have a lagging behind your competitor in terms of R and D of this product cycle? Thank you. Okay.
He thinks that the opportunity for Xiaomi greatly outweighs the challenges. We started investing in 5 gs R and D starting from 2016. We launched our first 5 gs phone in Europe in February this year. All the carriers have are using our device in Europe. In We are very confident in our ability to compete in the 5 gs era.
5 gs will bring about a whole new replacement cycle in China. He's very optimistic about What is difficult to gauge accurately is exactly when will 5 gigabytes greatly proliferate. 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.
Thank you. Xu Xi.
Thank you. Our next question comes from Chris Mooiabi with Goldman Sachs in Hong Kong.
I've got two questions. First on the MAU that you announced for China of 115. 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 related to smartphone business itself is, while I understand 5 gs launch takes place potentially with earnest in the Q2 of 2020, between now and then, what is your expectation for market share gains?
I understand we understand the market's under pressure, etcetera. But what is the expectation for market share progression from here till the first quarter 2020 or Q2 2020? 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? Thank you.
Piyush, this is Shao here. I will respond to the Internet questions first and Lejuan will respond to the smartphone market share question shortly after. Our MAU in China, this is the first time we're disclosing this number, is at KRW 115,000,000 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.
Now 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 1 133% 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 pre install other browser. So for our own browser to be number 1 in terms of MAU in India, it's a great accomplishment and recognition of the service that we have provided to our users. And the browser comes with the search bar, it comes with the possibility of going to News Feed, which again are the 2 services I talked about, 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.
Lejun will now talk about market share. Okay. We haven't disclosed to the externally on our market share expectation for the future. But he is very confident now that our market share will be increased from our position today. In order to make sure that we are well equipped to business.
He personally is battle. Today, he spends 2 thirds of his time in the China region. You can feel that the spirit of the Chinese team is increasing rapidly. On the 29th August this year, we'll be launching Redmi Note 8, which is the sequel to the very successful Redmi Note 7. 7.
The launch of this device will display our improved capabilities to the external world. Question, please.
Thank you. Our next question comes from Tan Wong with Credit Suisse in Hong Kong. Please go ahead. Thank you for taking my questions. Ladies and gentlemen, please stay on the line as our management's line has been disconnected.
We will resume as the speaker's line is back online.
Thank you. Drop the line. Please continue on the question.
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 Q2. Given the severe competition, how much is contributed by product mix, regional mix and also supply chain management? That is the for the first question.
Thank
you. Give me a moment to translate. Hold on, please. He believes that 8.1% gross margins for smartphones is a normal number. This is something that doesn't mean that's normal.
In Q1, we were adjusting our product mix and optimizing our channels. Because the market conditions are tough, we are making sure that increasing operational
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.
My second question is actually, I want to ask how to deal with the peers' aggressive move in the IoT along with the strategy of like 1 plus 8 per N and also leverage their chipset and also OS platform? Thank
you.
Today. We have a few very key milestones we want to share. First of all, our AI assistant is at 49 point 9,000,000 MAUs. This is a very big leap across our industry. We have spent a lot of R and D resources on our AI capability, none of which we are monetizing today.
2nd, one of the most important IoT devices, televisions. We are number 1 in terms of shipment in China and number 5 in terms of shipment globally. Our laptop market share is also at more than 8 percent 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 plus AIoT dual engine strategy as our key strategy over the next few years. We are also going to devote more than RMB 10,000,000,000 of investment to support this strategy. 2nd, we established the AIoT Committee within our company in order to push ahead with the AIoT strategy. 3rd, we established the IoT platform technical team and have 300 engineers working on it today. Although we don't make own chipset today, but we were the 1st 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 costs RMB 9. With just RMB 9, you can buy a module 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 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 strategy, we believe we are very resolute and we are leading in terms of our strategy execution.
Thank you. Thank you. Our next question comes from Frank He with HSBC in China.
So my first question is about the gross margin on the online game in the Internet Service segment. We see almost 30 percentage point increase on a year over year basis. So just wondering if there were any one off impact from certain games, titles or any other reasons behind that?
Frank, let me explain this. There are two reasons why our gaming gross margin has improved year on year, and this is work that we've done over the last few quarters. 1, 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 revenue the net take rate from them and not the gross take rate. There are only 1 or 2 partners. 1 of them is Tencent and their Q2 growth was significant.
Okay, got it.
Makes sense? Yes,
So my second question is about the FinTech business. So we see very strong growth in this FinTech
Fintech
also whether there were any synergies between our existing IoT and the smartphone platform?
Okay. Frank, there are a few things here. 1, 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. 2nd, 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 1, being compliant with regulations and number 2, 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.
Okay. Now to the time question, we'll take the last question. Operator, please.
Thank you. Our last question comes from Gokul Hariharan with JPMorgan in Hong Kong. Please go ahead.
Yes. Thanks for taking my questions. First of all, could you talk a little bit more in detail about what you're planning to do in Western 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.
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. Actually, we can offer very, very highly sophisticated devices with affordable price.
That will help the carrier to lower their cost and 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.
Okay. Just one follow-up question on Internet Finance, Fintech Businesses Show. Could you give us a little bit more detail, given now it's almost high teens percentage of federal and 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?
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 complying 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, score, 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 that they 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 We'll be closing the call now. Thank you.
Thank you.