Evening, everyone. Welcome to Xiaomi Corporation 2018 Annual Results Conference Call. In 2018, Xiaomi had very strong annual results. Our total annual revenue was RMB175 1,000,000,000 and our year on year growth was 52.6%. Our adjusted net profit was KRW 8.6 1,000,000,000 with a year on year growth of 59.5%.
According to IDC, Xiaomi achieved a 32.2% year on year growth in smartphone shipments while the global market declined by 4.1% over the same period. According to our own data, we sold 118,700,000 units of handsets in 2018. One of the main reasons why we could achieve such results was because of the investment in innovation that we have done over the many years. I'm going to give you two examples. 1st, on photography.
Our recently launched Xiaomi 9 achieved the number 4 rank according to DXO Mark and our Mix 3 achieved the number 6 rank globally. This is a very high global standard. According to the same ranking, Xiaomi 9 ranked number 1 for video. DXO, this is ranking from DXO Mark, which is the most authoritative camera racing company in the world. At the Mobile World Congress in Barcelona in February, we launched our first 5 gs phone, Mi Mix 3.
The reason why we could achieve such breakthrough was because we invested RMB5.8 billion in R and D expenses last year. If you compare this with our R and D expense in 2017, the growth was over 80%. Also, in terms of design, we also continue to win international global awards. We won 2 international top design awards last year. The first is Germany's IF Design Gold Award and the second is Germany's Red Dot Best of the Best Award.
We won 43 Major Design Awards in 2018. In terms of our quality improvement, we were widely recognized by the most authoritative quality organizations in China last year. And we won 3 of the most authoritative prices in this year. In terms of numbers, our Chinese smartphone fault feedback ratio has decreased by 44% in 2018 year on year. Because of such significant quality improvements, particularly over the last year, we were able to offer an 18 month long warranty program, which is 50% higher than the industry standard set by Samsung, Huawei and others.
In the last 3 months, Xiaomi smartphone business actually had very significant changes. The most significant of these changes is execution of our multi brand strategy where we separated Redmi into an independent brand. So we now have 2 major brands. 1 is called Xiaomi and the other is called Redmi. They actually serve very different customer segments.
For example, for Redmi, we will relentlessly pursue the highest price to performance ratio with the best quality in the market. Xiaomi will be used to penetrate the mid to high end market. Over the last 3 months, we have actually had 5 launch events and launched 5 new products. In January 2019, we launched Redmi Note 7, which is a RMB1000 to RMB1500 mid range smartphone. In February, we launched Mi 9 and Mi 9 SE, which is our flagship product for 2019.
Just yesterday, we launched our entry level Redmi 7, which is below RMB 1,000 in price and our mid range Redmi Note 7 Pro, which is 1500 to 2000 in price. All these phones have actually achieved outstanding results. Far. For example, Redmi Note 7 which was launched in January this year, Within just 1 month of launch, we managed to sell more than 1,000,000 of these units just in Mainland China alone. And this month included 2 weeks of Chinese New Year break.
We have been trying our best to ramp up production and it is We have been ramping up production very aggressively, but we couldn't fulfill all the demand until very recently. Xiaomi 9, which was launched in February, had very similar levels
of success.
It was launched on the 20th February. Even though we have actually supplied a lot of volume into the market, we are still significantly below the demand levels. This is one of the most critical points where our users are criticizing us today. We don't have enough supply to meet the massive demand. But we are doing our utmost to improve our supply.
The mismatch in the far outstanding demand has made some consumers believe wrongly that we are controlling our supply on purpose. Therefore, we want to make an official announcement today that our Xiaomi 9 Series supply will exceed is likely to exceed 1,500,000 units by the end of this month. We want to use this announcement to express to our loyal users that we are not purposely curtailing our supply. It's because demand has far outstripped our expectations. Yesterday we launched Redmi 7 and Redmi Note 7 Pro.
We have also achieved a lot of very, very strong initial feedback. The 5 products that we launched in 2019 were in 5 different price points. In a market where the global shipments of smartphones is declining, we believe that we are very optimistic about future as we have returned to very, very high levels of demand in the last few years. Some users anecdotally say that the Xiaomi that they are used to is back. I'm going to give an example of why Xiaomi 9 is performing so well in the market.
Xiaomi 9's camera is very outstanding. It is an AI triple camera with Sony 48 megapixel image sensor. The photographic quality has enjoyed very widespread praise. The 3 other phones that have a higher DXO mark score than this phone is only higher by a little bit. Those three phones that we mentioned just now are about 2 to 3 times more expensive than Xiaomi 9.
Xiaomi 9 has a very strong price to performance ratio as well. Now that our Redmi brand is an independent brand, the focus will be on high product quality and an ultimate price performance ratio. In order to make sure that this brand is well run, we invited Mr. William Lu, who is a very well respected figure in the industry to join our company in 2019. He has 20 years of smartphone industry experience.
He is here on this call as well. So let's welcome him to say a few words. Hi, everybody. I am William Lu. I am the General Manager of the Redmi brand.
Let me please share with you the results of Redmi in the last 3 months. As Lei Jun mentioned just now, shipment in mainline China for Redmi Note 7 has exceeded 1,000,000 units in less than 1 month after its launch in January. We expect that global shipment for this phone will exceed 4,000,000 by the end of this month, March 2019. Because some of this shipment will come from our international sales, so you will see the proportion of international sales of this phone increase over the next few months. In 2019, our strategy for Redmi is the following.
The first is expansion into mid to high end smartphones to enrich our portfolio. In the past, Redmi was just a sub brand within the big Xiaomi umbrella. Now that it is an independent brand, we will expand the smartphone market for Redmi into mid and high end as well. In the past, Redmi also only represent the phones. In the future, we will diversify Redmi product categories as well.
For example, at the launch event yesterday, we also launched a Redmi earphones and Redmi washing machine. We will launch more products in the future. 3rd, we will accelerate our international market expansion for Redmi. A lot of you may know that we are we have a leading position in India and Indonesia. This year, we will expand more aggressively into Asia and Western Europe.
We have also entered Latin America and Africa this year. So this is the near term strategy for Redmi in 2019. Thank you, William. Our Co Founder and President, Bin Lin, is also with us on the call today. His time now is spent mainly on the smartphone division's R and D, Product Management and Strategy.
Hello, everybody. I'm also I'm going to take some time to share with you the results of our R and D in our smartphone business last year. Mainly three
things.
First of all, the number of engineers in our smartphone team, I think our hardware team, our smartphone R and D team had gone from 1,000 people at the beginning of last year to 3,000 people by this year. Many of these engineers are actually experts in their respective categories. For example, the rapid increase in our photographic experience is due to the hard work of many experts who have joined us. This is they are not only experts in just photography. These are experts in the components within the camera, the modules, the motor, the software team and the tuning team.
So these are experts in many categories. 2nd of all, I want to share with you the different innovation that we have in the last year. On top of just an increase in photographic experience for Xiaomi 9, there's also a lot of innovation that happens in the phone. Because there were so many cutting edge features, we couldn't finish all the content in one launch event and actually had to extend into a 1 week long social marketing campaign to be able to explain all the features in the home. We had to spend 8 to 10 different articles on social media every single day to be able to properly explain all the innovation that has gone into the product.
Not only in hardware innovation but also in software innovation, for example, in the game to web experience. There was a lot of innovation in CMS and in design as well.
Yes, materials, new materials.
3rd, Xiaomi 9 is our 1st flagship product. The 79 sheet series is the 1st flagship product that we have launched in our history that we could actually deliver and supply 1,500,000 units just 1 month after launch. This is because of all the investments we made in our supply chain management, in our automated testing and in all other related fields to our supply. For our smartphone division, we will continue to invest in experts, in talent, in R and D and in the other important components that make up the phone. Over the last 8 years, Xiaomi's main strategy always revolve around the phone.
Starting from this year, we officially launched the smartphone plus AIoT dual engine strategy. AIoT is as important to us as our smartphone business today. For smartphones, we see the massive 5 gs opportunity ahead of us. Almost all phones will be a 5 gs phone sometime in the future. I believe that our smartphone business will grow will have the opportunity to grow very rapidly in order to capture the 5 gs smartphone revolution in the future.
AIoT is also a very historic opportunity for us. We believe we are we can be pioneers in this very, very large field and we will continue to invest up to RMB 10,000,000,000 in this in the next few years. As of December 2018, we have 151 connected IoT devices, excluding smartphones and laptop computers. This is a 193 percent year on year growth in terms of connected devices. We have 2,300,000 users today with more than 5 Xiaomi IoT devices outside of phones and laptop computers, and this number grew by 109.5% over the last year.
AI speakers will be one of the most important entry points into a smart home in the future. We have over 9,000,000 accumulated AI speaker shipment today. And our AI assistant has over 38,800,000 monthly youth activities today. The reason why we can achieve such accomplishments in AIoT is because of the large investments we have made into AI in the last many years. For example, Nikkei.com released a report recently for the top 15 enterprises with the most AI patent applications.
Xiaomi was ranked 11th globally, ranking very ranking in the front of many, many important companies and is one of the most has one of the most patent applications for a Chinese company today. In order to make sure that we can execute the immense opportunity ahead of us, we think the most important thing is to continue to optimize our organizational structure. The first is increased focus on technology innovation through establishing the technology committee. This committee will be led by Doctor. Cui, who will be in charge of the technical development of our 10,000 engineers.
In order to strengthen the management functions of headquarters, we formed the organization department and the strategic advisory department to assist the CEO for top management functions. 3rd of all, we streamlined our business units and promoted a significant number of next generation leaders to important positions within the organization. We reorganized our business units into 16 more streamlined efficient new business units. In the process of executing our strategy, we have a system to recognize talent and promote them within our ranks. My name is Shou.
I'm the CFO and I'll continue with the rest of the presentation on more detailed financial numbers. So the first section I would like to share with everybody is our smartphone business in a bit more detail. Our smartphone revenue reached RMB114 1,000,000,000 in 18, representing a 41.3 percent growth. This is a year on year number. I see some friends are also very also asking us about our Q4 numbers.
Our Q4 revenue for smartphones reached RMB25 1,000,000,000 representing a 7% growth from a year ago. One of the most important engines behind the growth is the increase of our smartphone ASP. As an example, our Chinese smartphone ASP grew by 17% in 2018, whereas our international ASP grew by 10% due to our expansion into more developed markets like Western Europe. The reason for the ASP increase is because of our strategy in 2018 to strengthen our position in the mid to top tier smartphone market. To give you a sense of our success in this strategy, our smartphone revenue 32% of our smartphone revenue in Q4 2018 actually came from phones above RMB 2,000 in price.
So this reflects a successful entry into the mid to high end market, of which we want to emphasize Q4 2018. A lot of friends have also asked us recently about Q4 2018. Now just to give everybody a recap, we launched only 2 new smartphone models in Q4 2018. They were respectively the Mi Mix 3 that we launched in October 2018 and Mi Play, which we launched on the 24th December 2018. Because Mi Play was launched so close to the end of the year, In actual in reality, there was only one new model that was available in the market for Q4 2018 and that was the Mi Mix 3.
Now Mi Mix 3 is a very important product for us. It is our most premium smartphone. This phone actually enhances our presence quite greatly in the high end market. However, because it is the most premium phone, we do not actually expect a large shipment number from this product category. In Q4 2018, we had a period of adjustment to prepare for the launch of our Red Knee brand and our new products in Q1 2019.
And as our Chairman CEO, Lejoon, mentioned just now, starting from January 2019, with the separation of the Redmi and Xiaomi brand, we have launched 5 new phones in 2019 so far, and we are not even at the end of Q1 2019. Just as a quick recap, we launched Redmi Note 7 in January 2019. We sold 1,000,000 units of that phone within 1 month of launch and we expect to sell 4,000,000 units of the phone cumulative by the end of this month. We launched our flagship Xiaomi 9 in February 2019, and we expect to supply 1,500,000 units of Xiaomi 9 by the end of this month. We launched our Redmi Note 7 Pro and Redmi 7 yesterday.
And so far, the feedback has been very, very strong. So if you look at our product launch schedule over the last few months, it is more accurate to look at it from a Q4 and Q1 perspective. The second business line I want to give a bit more detail on is on IoT and Lifestyle Products. Our revenue for this business line reached RMB44 1,000,000,000 in 2018, representing a 87% year on year growth, of which we want to highlight the strong sales of our smart TVs. Our smart TV sales volume reached 8,400,000 units in 2018, achieving a 2 25 percent growth.
By the end of Q4 2018, we were the number one smart TV brand in China by shipments. Now with the success of this category, we had the playbook to further expand into the white goods category. We launched Xiaomi Air Conditioner in July 2018 and the Xiaomi Washing Machine in December 2018. So far, the demand for these two products are very strong. Now apart from these white goods, a number of key IoT products also drove significant growth for us in Q4 2018.
They include our wristband, which is now according to IDC, the number 2 wearable product by shipment in Q4 2018, including our scooters, which are extremely popular in especially in Western Europe and our robotic vacuum cleaner, which was the number 2 robotic vacuum cleaner by shipment in China in 2018. Now our IoT platform is no longer only constrained to our own devices. Starting from quite some time ago, we extended our IoT platform to other players in the market as well. For example, we Xiaomi and IKEA established a global strategic presence global strategic partnership in IoT in 2018. Today, all IKEA Smart Lighting products in China can be connected to the Xiaomi IoT platform.
Now we are also very pleased to say, not only are we expanding into different brands on the devices platform, our Xiaomi app, IoT app called the Mi Home app is also increasingly become an app that crosses beyond the Xiaomi smartphone devices. Today, the Mi Home app has 20,300,000 monthly active users and over 50% of our Mi Home app users are non Xiaomi phone users, which is to say that this device has successfully crossed over to many other phones outside of the Xiaomi smartphone devices as well. Now the next section is something I'm very pleased to report on, which is our Internet services revenue. Our Internet services revenue reached RMB16 1,000,000,000 in 2018, representing a year on year growth of 61%. Now this is underpinned, of course, by strong MiUI user growth.
Our MiUI user growth globally grew from 170,000,000 in 2017 to 242,000,000 in 2018, representing a 42% growth. But what is also very important to us is that this revenue stream is becoming increasingly diversified. Let me share 4 sets of numbers with you. Internet services revenue from our IoT devices, particularly from television, is now 8.2% of all our Internet services revenue. And the year on year growth of this revenue stream is at 119%.
In terms of our international Internet Services revenue, by the end of 2018, international Internet Services represented 6.3% of all our Internet Services revenue with a year on year growth of 12.96%. Our 2 cross Xiaomi device apps, Yopin and Xiaomi Finance also achieved very strong growth. Yopin now has 4.1% it now accounts for 4.1% of all our Internet services revenue and it has a year on year growth of 427%. Xiaomi Finance represents 11.9% of our Internet Services revenue and had a year on year growth of 81%. So today, in aggregate, over 30% of our Internet services revenue comes from outside of advertising and gaming from China smartphones.
We believe this diversification makes our Internet services more robust and less prone to cyclical changes in the market. In terms of international revenue, our international revenue reached RMB70 1,000,000,000 in 2018, representing a year on year growth of 118% 40% of our total revenue. As many of you may notice, we are very, very strong in India and we have been in terms of smartphone shipments, number 1 in India for 6 consecutive shipments sorry, 6 consecutive quarters. According to Catalyst, last year in India, we were the amongst the top 4, we were not only number 1, but the fastest growing in terms of our shipment growth. In Indonesia, we are now the 2nd largest smartphone maker in Indonesia with year on year growth of 299.6%.
Western Europe was also a very important market for us last year. In 2018, we were ranked number 4 in Western Europe with a 4 15% year on year growth. Now in terms of our margins, our hardware margins in Q4 2018 was 7.7% compared to 6.3% in Q4 2017. Our Internet services gross margin remained relatively stable at 63% in Q4 2018. In terms of operating expenses, our operating expenses in 2018 was still below 10%.
We are immensely proud of this And the biggest driver of our operating expenses growth in 2018 was actually our increase in R and D expenditure. Now despite having industry leading one of the lowest operating expense levels in the industry, we managed to expand our efficient new retail network in 2018. We opened our number of Mi Homes grew from 281 shops to 586 shops in Mainland China in 2018. Our number of franchised stores grew 22x from 62 to 1378 stores in Mainland China in 2018. Now all this where we flow it down to the bottom line, we just want to have a recap that at the end right before IPO, we made an announcement after unanimous consensus within our senior management and with our Board's blessing that our hardware business will not have an overall net profit margin of more than 5% per year.
We believe that this is a very important we believe that this is a very important promise, not only for this generation of Xiaomi management, but for the next generation and the generation beyond that. The reason why this promise is significant to us from a company's perspective is because we believe this is the only way we can achieve our company's mission, which is to relentlessly pursue honest the best product and honest prices in order to let everybody in the world enjoy technology. Now we are very pleased to say that after review by our auditors, our overall hardware business is profitable with hardware profit net margin of less than 1%. Now, this is only our hardware net profit. Our group net profit in 2018 was RMB13.5 billion, of which our adjusted net profit was slightly beyond above expectations from Bloomberg consensus at RMB8.6 billion, achieving a year on year growth of 59.5%.
Now we have been asked several times whether because our hardware business has thin margins, what is our return on equity? Now we did the math and in 2018, our return on equity was at 16.2%, which we think is a leading number in the industry. If you take away all the net cash proceeds that was raised during the IPO, our return on equity in 2018 was at 32.6%. The last section of this is on cash flow. In Q4 2018, we maintained a negative cash conversion cycle of negative 36 days.
So we're going to some of you may have noticed that in Q4 2018, our inventory turnover days, excluding our Real Estate business, was at 65 days. Now the reason for this is because of decline in sales in order to prepare for Q1 shipment of new products in 2019. Now we want to give you a sense that by January 2019, our inventories have declined by 12% according to management accounts and our inventory turnover days by the end of January was at 55 days, which is the same as the full year 2018 inventory days. So we believe it is at a healthy level today. Our net cash generated from operating activities was positive RMB3.4 billion in 2018.
In Q4, this number was negative RMB 4,600,000,000 and the reasons for this are twofold. 1, Q4 2017 was also a negative operating cash flow quarter due to seasonality. And the second is because we were because of the adjustment in product launch schedules that we talked about just now, resulting in an increase in inventory. So this is the reason why Q4 had this number. As of the end of 2018, our cash resources, which includes cash and cash equivalent, restricted cash and short term bank deposits and investments, was at RMB 39,700,000,000.
Now beyond this, as many of you recall, we have invested in over 260 companies as of December 2018. In 2018, 9 of these companies successfully completed the IPOs. Today, the investment book value of all these investee companies is at RMB27.3 billion, which represents a 32.6% year on year growth from the year before. We believe that in 2019, we could see the strong portfolio of our investment companies that have gone public could see us start to reap more significant investment returns from these investments. With that, I would like to conclude the management presentation part of this call.
We thank you again for your support of Xiaomi, and we will now open the floor to questions.
Thank you for taking my question. I have two questions. The first question is about the Internet services. It would be great if the management can share the drivers for MAU and ARPU growth in 2019 given that the softening smartphone demand in China and worldwide? And also we noticed that Xiaomi Finance and Yopi E Commerce have very strong growth last year.
Can we share a bit about the details or growth driver there? For example, the GMV size, key product categories of e Commerce business and the growth outlook, similarly for Xiaomi Finance? Any detail there will be very appreciated. Thank you.
Thank you, Grace. This is Shou here. I will answer your first question on the key drivers of our Internet Services business. The underpinning everything is, of course, the growth in our monthly active users. As we disclosed in our announcement and just now, our global MAUs have increased from 170,000,000 to 240,000,000 over the period of 2017 to 2018.
As you know, we don't break this down by geography, but I can share with you that as of today, our year on year growth of our Chinese MAU has also increased from a year ago as of today. In terms of ARPU, we believe that the increase in ARPU is down to a few things. 1, of course, is the continuous upgrade of our advertising algorithm in order to provide a better advertising experience for advertisers, therefore, increasing organically just increasing advertising our poop. The second is, just to clarify here, because this was us last quarter, our ad load for our advertising business is actually very similar to relevant comparable ad loads of comparable products in China. So there is nothing that strikes us as being sort of different here.
Now the second is, of course, we talked about the diversification of our Internet services revenue. We believe that by providing a whole suite of different Internet services, we can better service our customers. And the result has been, as you can see, very strong growth in Internet services revenue outside of advertising and gaming from Chinese smartphones. And we expect that the diversification will continue over the next few quarters and over the next few years. I will hand over to our CEO to talk about YOKIN is an e commerce platform that we incubated 2 years ago.
The key here is to have an e commerce pure platform that is very close to the Xiaomi philosophy of product selection and price to value and sell lifestyle products. The idea is to sell products from our ecosystem companies or other partners, the lifestyle products on their portfolio using a relatively good price to performance ratio to provide our consumers with a whole slew of different lifestyle products. Last year, the GMV for Yopine exceeded RMB5 1,000,000,000. And the growth for Yopin is actually very fast. There is already a very significant number of users on Yopine that are not Xiaomi users.
It also proves that the Xiaomi philosophy is actually very easily expanded across industries. He's encouraging everybody to download the Yopin app because I personally recommend it too. So far, only Chinese users. It actually has a whole portfolio of very outstanding products. This is a very interesting business for us.
And great, I'll spend a second on Internet Finance as well. Our Internet Finance business is underpinned by 2 key businesses. 1 is consumer finance and the other is supply chain finance. The consumer finance finance was started earlier, a few years ago. And the logic underpinning consumer finance is users who want to borrow gives us permission to run through the privacy compliant immense amounts of data that we have in order to give them a credit score.
And then based on this credit score, we give them appropriate load. This business has been running for 3 to 4 years and has been growing at a very significant clip. The other business that we launched roughly 1.5 years ago is our supply chain financing. Because we are engaged in the manufacturing business as part of our business, we actually have a lot of, in particular, suppliers who have payables with us, which allows us to do factoring and different kinds of supply chain financing. This has also grown very quickly for us.
Thanks. Let's take next question please.
Thank you. Our next question comes from Han Joon Kim with Deutsche Bank in Hong Kong. Thank you.
Great. Thanks for the chance to ask a question. I've noticed that your overseas Internet revenues have gained a little bit further traction this quarter from last quarter. So if you can just kind of provide with us an update on the progress there and how you look at 2019 structure, that would be fantastic. Thank you.
Our international business is growing very quickly and this has allowed our MiuIs outside of China to our DAU to exceed 100,000,000. We will gradually replicate all the successful Internet services models that we have in China to all the international relevant international markets. We believe that our 2019 Internet services revenue outside of China should exceed 100% growth. Okay. Let's take the next question, please.
Thanks for taking my questions. I have two questions. The first is about your product launch plan in the rest of the year. Given you have launched 5 new models in the Q1 to boost the shipment. So just wonder what's the new product plan for the Q2 and Q3?
And how should we look at your overall shipment growth for this year? If possible, could you break down by China and overseas? So this is number 1. And number 2 is about your output trend. Given we noted that in the Q4 there were some Q on Q declines in the advertising revenue and also the ARPU.
So I just wonder what's the reason behind that? Is that because of the seasonalities about the macro slowdown or even about the pickup from the overseas customer base given generally they have a lower ARPU? Thank you.
Okay. Thank you. Give me a second to translate, please. In Q1, so far, we have launched 5 smartphone products covering RMB600 to RMB4000 price points. But this is because but if you split it into Redmi and Xiaomi, you will see that both brands don't have a full product portfolio for every price point yet.
So over in Q2, we could launch up to 4 new devices to Looking at our Q1, 2000 numbers so far, we are very optimistic about 2019 shipments. Even though today we are at the dawn of 5 gs, or more accurately, we are before the dawn of 5 gs, So the entire smartphone market is still under a bit of pressure before the 5 gs era. But we believe that Xiaomi's growth momentum is still strong. Our overseas business is also growing very rapidly. We expect it to grow this year, in particular in Western Europe, Latin America and Africa.
We believe that with this new multi brand strategy, we can still grow in the Chinese buffer market. Okay. I will explain the ARPU trend. I think as you pointed out, one of the biggest factors for ARPU is, of course, the denominator, which is MAU. And because if our international Internet services revenue is still significantly lower than China and the international business is growing at a faster clip, then you can expect that this ARPU number is slightly distorted from that perspective.
What we also want to point out in Q4 compared to the last few quarters is we are seeing we are closely monitoring the advertising market in China. We believe we are cautiously optimistic, although we believe there could be some adjustments in the market compared to a year ago. And the gaming market is still at its dawn in terms of licensing. So you can see that in Q4 2018, our gaming revenue is not as strong as a year ago. But again, we are seeing the dawn of this with the release of licenses.
As a platform, we are affected by the entire gaming market. So with the release of more licenses, we believe that this will bring about a new wave of growth in the gaming sector. So overall, I think that's the trend that we see for ARPU. Next question please.
So
the first question is the I remember in your IPO that you mentioned you have TianXuan, the TRYSTONE strategy. Now you are talking about the AOIT strategy. So what will the new strategy change the company, I mean, let's say, 2 to 3 year? Or what will be the major? I think you mentioned you increased R and D a lot and what we should expect the new revenue to come out.
In the last 8 years, our strategy was to was that the smartphone device is the most important IoT device and we will connect all IoT to the smartphone. Our IoT strategy in the past was complementary to the smartphone strategy. Last year, our biggest strategic change is that we have promoted IoT's A IoT's importance to the same importance as our smartphones. We established the AIoT Strategy Committee to coordinate all IoT efforts internally. We established a specific AIoT sales and marketing sales strategy division in order to optimize our AIoT sales.
This allowed the entire company to promote the importance of AIoT internally to the highest strategic level. The fundamental problem that we are trying to solve here is we want all devices in the world to be able to seamlessly connect with each other. What he cares about the most is the user experience when interacting with all these devices. What could happen here if we provide a seamlessly integrated user experience is that a Xiaomi user could buy 1 device and then 5 and then 10. And before you know it, his entire house is a proper Xiaomi home.
So how do we monetize them AIoT? First of all, some devices are inherently allows us to make Internet services often. For example, televisions. Our Internet services revenue from televisions is actually increasing significantly. For example, our AI speakers is also an entry point to the Internet.
The AI speakers have actually started to monetize Internet services revenue as well. In the last few months, especially at the end of last quarter, our TV shipment is already number 1 in China. We need more of our IoT devices to be ranked top 3 in the markets that we are in. So the first direction of the RMB10 1,000,000,000 investment that we talked about is to it will be invested in increasing the user experience of our IoT devices. We will set up a very high end testing lab in order to facilitate this.
We will continue to expand our R and D team in order to enhance our IoT experience. We will also invest in more ecosystem companies and IoT products, so that there will be more products that can better service our customers. We will not rule out some large M and A in order to achieve this, including using investments to achieve strategic deep strategic partnership. For example, we through investing in TCL a couple of months ago, we established a very deep partnership with them on the AIoT direction. It has already created very strong working synergies.
The second question I think is mainly for sure. The smartphone that you changed, you adjust your accounting treatment for the Q4 for the warranty. So can you help us to understand the cost, it's quite complicated, so you increase the provision and it reduced. So what's the financial impact to the 4th quarter profit? Thank you.
Okay. Yes. Thank you for this question. So in over the period of 2018, first of all, it is through the investment that we have made in our product quality, all the work that we have done, including through the work that's done by the group level quality committee that we established last quarter, we have actually seen very significant improvements in our product quality. The number that we we won a lot of awards, but a number that is very significant here is that our full feedback ratio for our Mainland Chinese loans, for example, actually went down by 44% year on year in 2018.
So what we have noticed over the course of 2018 is that the warranty provision is actually significantly higher than the actual repair cost that is being incurred. So in Q4 2018, we adjusted that level to a more reasonable level, which we think is adequate to cover all the warranty expenses. Now in terms of the total warranty provision pool that we have, it is JPY 1,700,000,000 at the end of 2018, which is the same number as RMB 1,700,000,000 in 2017. And because product improvements has increased so much, we could continue to we could give out longer warranty programs and still be more than enough to cover for all the actual warranty expenses. So this impact is actually a positive impact on our gross margins.
Now because we knew that we were going to do this, the philosophy of the company, as you know, is to return the savings to our customers. So through a series of adjustments, for example, increasing our warranty for future our warranty period for future products and through pricing promotions on some of our existing portfolio, we have actually returned a part of this to our users as well. And the right result of this, as you reduce prices for your existing portfolio, is that you have to increase the inventory provision. So that is a negative impact on gross profit. So these two impact, 1 was a positive impact and 1 was a negative impact.
The overall impact on our hardware business is that our gross margin was at 7.7% in Q4 2018 versus about 6.3% in Q4 2017. Okay. Due to the time constraint, we'll take the last question.
Just a point on clarification for gross margins. It does seem like in 2018 smartphone gross margins took a little bit of a dip. I know probably because of currency midway through the year, it seems like there's an impact from warranty reserve in Q4. How should we think about reserves as it relates also to your growth in ASPs in 2019? 19, do we expect margins essentially get back to maybe 2017 levels or should we continue to look at it as closer to the levels we saw in 2018?
That's my first question.
Give me a second to translate this.
Sure.
Because we promised that we will make no more than 5% net income margins on our hardware before we went public, Our goal internally is actually to make 2% to 3% in the future. So the number that we focus on is hardware. So it's net income margin. He cares about 3 things the most. 1 is the net promoter score of our products, which is a reflection of the overall satisfaction of our customers on all our products.
The last over the last 3 months, the new products that we launched have actually achieved very widespread acclaim from our users. The second is smartphone shipments, in particular in China and in Western Europe. We need to prove that we are also very, very popular in developed countries. 3rd, we need to deepen our Internet services offering to ensure that our Internet service revenue continues to expand rapidly. These are the 3 main focuses for him at this point in time.
Okay. We will now conclude the call tonight. Thank you everyone for participating. Thank you.