Xiaomi, which depends on smartphone sales to ramp up users for its suite of online services, is trying to couch itself as a high-growth internet company -- a narrative consistently touted by billionaire co-founder Lei Jun. The internet services business accounted for about 9 per cent of revenue in the quarter. That segment’s growth, however, is one reason it managed to price its IPO
at multiples far higher than celebrated tech names such as Tencent Holdings Ltd. and Facebook Inc.
Longer term, Xiaomi’s busy building stores and production sites that’ll serve as beach-heads for expansion into emerging markets from India to Russia. Its 206.9 million monthly active users as of June are a rich pool of buyers for high-margin services. That base should grow as Xiaomi pushes gadgets to users for what it calls ‘‘honest prices.”
“Xiaomi is rooted in an internet mindset,” CCB International analysts Ronnie Ho and Rocky Zhang wrote in a report ahead of the earnings release. “By leveraging its rapidly growing hardware ecosystem, Xiaomi can acquire users at a profit in contrast to global internet companies
experiencing rising traffic acquisition costs.”
In the short term, the company faces no shortage of challenges, particularly in the smartphone business that yields 70 per cent of its revenue.
Local rivals are directing precision attacks against the company overseas, a key area for growth given a saturated Chinese market. Oppo created the Realme brand for India, selling budget phones online to try and topple Xiaomi from its leading position. At the other end of the spectrum, Huawei Technologies Co. is shifting its focus back to Europe, a critical market for Xiaomi’s more expensive devices.
The real battle revolves around growing services income -- its main source of profit. Revenue from that segment rose 64 per cent to 4 billion yuan in the June quarter, thanks mostly to ad sales.
While Xiaomi’s made advances in China with its own video, music and finance apps, those businesses barely exist elsewhere. Its ecosystem partners -- the ones that make everything from air purifiers to toy robots - are mostly domestically oriented. Global smartphone demand itself is on the wane, threatening the device sales that Xiaomi depends on to grow and engage its user base.
Xiaomi’s stock closed up about 1.6 per cent on Wednesday, just above its HK$17 IPO