Chinese phone giant Xiaomi delivers growth in first results

Beijing

XIAOMI Corp delivered a 68 per cent revenue jump and quarterly profit in its maiden earnings report, as the Chinese smartphone giant made strides overseas while fending off a challenge from local rivals such as Oppo.

The results - its first since raising US$5.4 billion in an initial public offering - could help Xiaomi get past an anti-climactic July trading debut. Net income came to 14.7 billion yuan (S$2.93 billion) in the three months ended June, versus a 12 billion yuan loss a year earlier. Revenue climbed to 45.2 billion yuan, but its pace decelerated from the first quarter.

The dramatic reversal in the bottom line came about because Xiaomi booked a one-time gain of 22.5 billion yuan by revaluing a swath of preferred stock in the aftermath of its debut. Without that windfall, its operating loss came to 7.6 billion yuan - reflecting the company's philosophy of selling phones at near-cost so it can drive the sale of services from music to video, a la Apple Inc.

Xiaomi 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 remains small, accounting for just 9 per cent of revenue in the quarter. But that segment's potential is one reason Xiaomi managed to price its IPO at multiples far higher than celebrated tech names such as Tencent Holdings Ltd and Facebook Inc. Revenue from that division rose 64 per cent to 4 billion yuan in the June quarter, thanks mostly to ad sales.

"Xiaomi posted somewhat encouraging results today," said Brock Silvers, managing director of Kaiyuan Capital. But it "may not have done much to assuage concerns about its business model. Xiaomi has billed itself as an internet company deserving a tech growth multiple, and the market continues to expect evidence of a transformation". The stock closed up about 1.6 per cent on Wednesday, just above its HK$17 IPO price.

In the short run, Xiaomi faces no shortage of challenges, particularly in the smartphone business that yields two-thirds of its revenue. Global demand is on the wane, threatening the device sales it depends on to grow its user base.

Local rivals are attacking the company overseas, a key area for growth given a shrinking Chinese market. At home, Xiaomi grew its market share at a slower pace than all three of its larger rivals, according to research firm IDC. And while Xiaomi's made advances in China with its own video, music and finance apps, those businesses barely exist elsewhere.

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." In the second quarter, its overseas revenue more than doubled to 16.4 billion yuan - accounting for more than a third of overall sales.

"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." BLOOMBERG