Xiaomi's Revenue Surges on India Smartphone Demand but Growth Doubts Stay

Chinese smartphone maker Xiaomi's quarterly revenue soared due to strong demand in India and other emerging markets but doubts remained on whether it can sustain the fast pace of growth and its shares reversed early gains to end lower.

Xiaomi, which toppled Samsung Electronics as the top smartphone seller in the price-conscious Indian market earlier this year, said on Wednesday in its first results as a listed firm that revenue from overseas markets for the quarter ended June 30 more than doubled from the year-ago period.

The company started trading in July after a closely watched but disappointing initial public offering that valued it at almost half the $100 billion (roughly Rs. 7 lakh crores) that industry analysts had initially estimated.

"The overseas market opportunity is massive, which provides huge growth potential for Xiaomi on both hardware and software," Fubon Research analyst Dany Wu said in a broker note. "Despite the margin decline, we think this is a compromise for rapid expansion in its overall product lines."

The company's gross margins dropped 2 percentage points to 12.5 percent as steady profits at its Internet services business failed to offset declines in its hardware businesses, that includes smartphones and Internet-connected devices such as smart TVs.

Xiaomi, which has gained sizeable market share in India by taking on Samsung and Apple, is scheduled to start selling a new phone in the South Asian nation called Poco F1 at the end of this month. The company will sell the device only in India at first, underscoring the market's importance to Xiaomi.

The phone packs a punch for the price, according to reviews in technology websites. The cheapest version is expected to be sold at around $300 in India, more than double that of its popular Redmi 5 model.

Xiaomi doesn't break out India sales. International revenue in the second quarter was CNY 16.4 billion, accounting for more than a third of total revenue.

Not just smartphones
While Xiaomi still generates the bulk of its revenue from smartphones, it is also trying to turn itself into an internet services powerhouse. The company hopes that smartphone sales will drive traffic to its apps, boosting its software-driven business and advertising sales.

But doubts remain that Xiaomi will be able to leverage its user base.

"It will be challenging for Xiaomi to monetize its smartphone user base ... as Baidu, Alibaba and Tencent are already well positioned in China," said CK Lu, a research director at Gartner.

And though the company shipped 32 million smartphones in the quarter, up 44 percent compared to the year-ago period, the growth rate slowed sharply from the 117 percent recorded in the first quarter.

The slowdown echoes a broader one in the global smartphone market even as Xiaomi's Asian rivals including Huawei, Vivo and Oppo step on the gas.

Bearish investors have limited gains in Xiaomi's stock since it priced its IPO at HK$17 ($2.17). On Thursday, shares rose as much as 7.2 percent, taking the company's value to about $60 billion, before erasing the gains and closing down 1.4 percent.

Xiaomi's shares trade at 37 times forward 12-month earnings, well above Apple's 18 times and Samsung's six.

"We believe that the 2Q18 results did little to justify a valuation that already factors in generous premiums to global leaders," said Arun George, who publishes commentary on independent research platform Smartkarma.

Xiaomi's revenue for the quarter rose to CNY 45.24 billion ($6.58 billion) from CNY 26.88 billion. It posted a net profit of CNY 14.63 billion for the period compared to a net loss of CNY 11.97 billion in the year-ago period.

© Thomson Reuters 2018