Xiaomi Corp

HKEX:1810

Earnings Call Transcript 2022-Q1

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to Xiaomi 2022 First Quarter Result Announcement Conference Call. Today's conference is being recorded. If you have any objections, you may now disconnect at this time. [Operator Instructions]

I'd now like to hand the conference over to your host today, [ Ms. Anita Chan ], Head of Investor Relations and Corporate Finance. Please go ahead, madam.

[Unknown Executive]

Good evening, ladies and gentlemen. Welcome to the Investor Conference Call update by Xiaomi Corporation regarding the company's 2022 First Quarter Results.

Before we start the call, we would like to remind you that the call may include forward-looking statements which are underlined by a number of risks and uncertainties that we not 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 the company's financials prepared in accordance with IFRS.

Joining us on the call today are Mr. Wang Xiang, Partner and President of Xiaomi Corporation, and Mr. Alain Lam, Vice President and CFO of Xiaomi Corporation and also the CEO of Airstar Digital Technology. To start, Mr. Wang will share recent strategic updates of the company; thereafter, Mr. Lam will review the business and financial performance for the first quarter of 2022. Following that, we will move on to the Q&A session.

I will now turn the call over to Mr. Wang.

[Xiang Wang, executive]

Thank you. Thank you, [ Anita ]. Hello, everyone. Thank you for joining our 2022 first quarter earnings call. In the first quarter of 2022, our industry faced significant challenges from the continued supply shortage of the key components and the research supply -- resonance of COVID-19 and the global macroeconomic headwinds exacerbated by Russian-Ukraine situation. These challenges have also impacted our business and affected our financial performances and operating results.

However, we are taking steps to optimize cost structure and improve operating efficiency. More importantly, we are developing the next growth engine through continued investments in new initiatives. We have great confidence in our team and in our product and services, difficult times to remind us of our funding vision, and we will never cease to fulfill our mission of building amazing products and honest prices and to let everyone in the world to enjoy a better life through innovative technology.

With that in mind, we continue to advance our business strategies and strengthen our foundation. Our first quarter total revenue reached RMB 73.4 billion, and our IoT lifestyle products business and the Internet Service business, maintaining solid growth momentum. Meanwhile, we have been actively developing our smart EV and other new initiatives.

Our adjusted net profit reached RMB 2.9 billion in the first quarter, which included RMB 425 million of expenses related to our smart EV and other new initiatives. Under this challenging environment, we remain resilient due to our global scale. In the first quarter, we maintained our #3 position in global smartphone shipments, and we continue to perform well in major regions globally. Our smartphone market share ranked Top 3 in 49 markets and among the Top 5 in 68 markets.

Our scale and strategy allow us to benefit from higher growth in overseas markets while mitigating [ vitality ] risk in any single market. We continue to invest in R&D to create something new, creative and a better for our users. In the first quarter of 2022, our R&D expenses reached RMB 3.5 billion, an increase of 16% year-over-year.

As a testament to our R&D capability, we continue to deliver industry leading camera and charging technologies, including our focused imaging and ultra-light video algorithm, which were recently awarded 2 CVPR entire world championships, as well as, an incredibly fast 120 volt single-cell battery design and our Xiaomi Surge P1 charging IC.

Our relentless pursuit of cutting-edge technology has strengthened our position in the premium smartphone market. In this quarter, global shipments of our premium smartphones reached nearly 4 million units, and our smartphone ASP grew 14% year-over-year to RMB 1,189. We were #1 among Android vendors for smartphone price between RMB 4,000 and RMB 6,000 in Mainland China.

And as a solid proof that our new retail strategy is taking place, our off-line channel accounted for over 30% of our premium smartphone shipments in Mainland China in this quarter. We have continued to attract new users, both globally, as well as, in Mainland China. Our global MIUI MAU reached 529 million in March 2022, a net increase of over 100 million MAU from a year ago. And our Mainland China MIUI MAU increased for 6 consecutive quarters, reaching RMB 136 million.

With our growing global user base and our diversified revenue streams, our Internet service business maintained a solid growth in the first quarter of 2022. Furthermore, our overseas Internet services revenue increased by over 70%, contributing nearly 22% of our total Internet service revenue in this quarter, a record high. Since last year, we have been focused in building synergies between our businesses while reducing costs. For example, we merged the software department, an IoT wearable team into the smartphone department, and we merged the Youpin E-commerce department into the China region.

The rationalization of business units will strengthen our smartphone multi-price AIoT strategy, we improve operational efficiency and promote sustainable growth of our business. We also continue to actively promote ESG and a public welfare.

Last month, we published our 2021 ESG report and set multiple environmental targets, including our targets of energy, greenhouse gas emissions, order resources and waste management, we work hand-in-hand with our employees and the business partners to overcome difficulties and actively fulfill our social responsibilities.

Since the outbreak of COVID-19 in Shanghai in March 2022, we have proactively donated care packages to our employees in Shanghai. Since 2021, we have provided a total of RMB 120 million in subsidies -- subsidized to our off-line store partners in response to the impact of COVID-19.

I also want to take this chance to thank medical personnel on the front line. Thank our team and the business partners for their perseverance and courage and [ I sent ] all of our investors, analysts and friends who have supported us throughout this journey. These times remind us that we might continue to face challenges and uncertainties. But what is certain is that we shall never cease to strive for a better life for our users and the friends around the world through our innovative technologies.

With that, I will hand it over to our CFO, Alain to discuss our first quarter results in a greater detail.

[Alain Lam, executive]

Thank you, Xiang. Good evening, everyone. Thanks for joining us tonight. Let me go through the progress for this quarter in more detail. First of all, in the first quarter, as Xiang mentioned previously, we do face a lot of challenges, including the continued shortage of key semiconductor components, including COVID-19 resurgence in China, especially, as well as, macroeconomic headwinds, which were exacerbated by the Russian, Ukraine situation. Now despite this, we continue to focus on executing our business strategies, and we think we have made very good progress on our smart EV and other new initiatives.

In the first quarter, our revenue reached RMB 73.4 billion, and our adjusted net profit was RMB 2.9 billion. The RMB 2.9 billion included expenses of around RMB 425 million for smart EV and other new initiatives. Our 3 business segments remained healthy. Our smartphone market share is firmly in the Top 3 globally. The number of connected devices on our AIoT platform increased more than 36% year-over-year. And on MIUI MAU, with 529 million users globally and 136 million in Mainland China, again hit record high.

In the first quarter, as many of you are well aware global smartphone shipments fell by nearly 11% year-over-year due to many factors that we cited previously. Despite this challenging market backdrop, we managed to maintain our first position globally with a market share of 12.6%.

We continue to strengthen our position in the premium smartphone market. This quarter, we shipped nearly 4 million premium smartphones globally, driven by our premium strategy, our ASP continued to rise, reaching a quarterly high of RMB 1,189, up 14% year-over-year. Our premium smartphones have made breakthroughs in both Mainland China and overseas.

In Mainland China, we ranked first among annual vendors in the RMB 4,000 to RMB 6,000 price segment during the first quarter. Global commanded over 50% market share for smartphone equipped with the Snapdragon 8 Gen 1 processor in this quarter in Mainland China.

In the overseas markets, we ranked #3 in Europe in terms of premium smartphone brand this quarter. In March, we successfully launched the Xiaomi 12 series overseas, and we've held exclusive events at many places, including the Eiffel Tower in Paris to promote our premium brands.

We are constantly pushing the boundary on smartphone performance to provide the ultimate user experience. Our products have achieved very impressive results in the 2021 smartphone assessment published by the 3 main carriers in China, telecom, Unicom and mobile. Going forward, we'll continue to pursue technology innovation and focus on exceeding user expectations.

Our achievements are the result of our continuous investment in R&D. In this quarter, R&D expenses reached RMB 3.5 billion, up 16% year-over-year. We continue to enrich our talent pool and grow our IP portfolio. As of March 31, R&D personnel accounted for 44% of our total employees, and we have more than 26,000 branded [ patterns ] globally. We continue to innovate, and we believe these will further differentiate our products and further improve our user experience.

We continue to execute our new retail strategy. In this quarter, we retained our #1 position online -- in the Mainland China online market, with a market share of 32.3%. At the same time, we continue to expand our off-line coverage. As of March 31, we had over 10,500 retail stores in Mainland China, and this is becoming a very important part of our premiumization strategy.

In this quarter, more than 50% of our premium smartphones were sold offline in Mainland China. This year, our focus is on improving our store efficiency. We deepened cooperation with carriers, integrate sales and services in more locations and enhance staff training, optimized product mix and cross-sell more IoT products.

Furthermore, to broaden our sales channels, we began collaboration with Meituan to offer on-demand delivery of our products in as short as 30 minutes. As of March 2022, there were more than 3,000 new homes across 276 cities participating in the surface [ to Meituan caps ].

Next, let's dive deeper into each segment, starting with smartphone. In this quarter, the smartphone industry was affected by many of the factors we mentioned previously. Global smartphone shipments fell 11% year-over-year. Despite that, we managed to ship 38.5 million smartphone units and maintained our #3 position globally. On the other hand, our smartphone ASP increased by 14% to RMB 1,189. As a result, we achieved smartphone revenue of RMB 45.8 billion this quarter.

We continue to expand our smartphone portfolio and our target user base. For our new flagship smartphones, including Xiaomi 12 Series, Redmi K50 and Redmi K50 Pro, over 50 of the users came from new users. Our Mainland China MAU as a result, increased by 17 million year-over-year to 136 million in March 2022.

Our CIVI series continues to appeal to fashion-conscious users. We launched our new CIVI 1S with a very thin and attractive design, powerful beauty mode photography features and smooth user experience. Since launch, over 50% of its users were new Xiaomi users.

We continue to advance our overseas business and maintained leading positions in major markets. As you can see from this chart, our market share this quarter improved from last quarter in Europe, in India, Southeast Asia as well as Latin America.

Our overall operations and our global scale help us mitigate volatility risk in any single market. According to Canalys, in the first quarter of 2022, we ranked top 3 in 49 markets globally and top 5 in 58 markets.

We continue to build up our overseas carrier channel. In the first quarter, we shipped over 5.7 million smartphones for overseas carrier channels, an increase of more than 10% year-over-year. In this quarter, our carrier channel market share in Europe increased to 17% from 15.8% in 2021. And in Latin America, our market share in Q1 increased to 17.7% from 12.3% during the same period. In this quarter, our market share through carrier channel ranked top 3 in 38 overseas market.

On the IoT side, despite the effect of macro headwinds, COVID-19 and continued shipping logistical challenges, our IoT business still achieved steady growth. In the first quarter, IoT revenue reached RMB 19.5 billion, an increase of 6.8% year-over-year. Notably, gross margin of our IoT business reached a record high of 15.6%.

As of the end of March, the number of connected devices on our AIoT platform reached 478 million, up over 36% year-over-year. The number of users with 5 or more connected IoT devices reached 9.5 million, up 39% year-over-year. MAU of our AI assistant reached 115 million in March, up 24% year-over-year and MAU of our Mi Home App reached 65.8 million, up 34% year-over-year.

Let's go into more details on some of the key IoT categories. Despite year-over-year decline in the overall TV market, both globally and in Mainland China, we again achieved year-over-year growth against industry trends in our smart TV business. In the first quarter, we shipped almost 3 million units of global -- smart TVs globally, up 15% year-over-year. We ranked #1 in Mainland China for 13 consecutive quarters and top 5 globally. The growth in our TV shipment also led to an increase in our TV Internet revenue, which I'll mention later.

Our Smart white goods business is also growing rapidly and also penetrating the premium markets. In the first quarter, revenue of smart white goods grew by more than 25% year-over-year. We continue to launch new premium products this year, such as the Smart AC with ventilation vertical and the 630-liter super refrigerator crystal edition, allowing us to tap the huge potential in the premium white goods market.

On the tablet side, our Xiaomi Pad 5 series continues to be a top seller globally. Since its launch in August 2021, global shipments of our Xiaomi Pad 5 series have exceeded 2 million units. Capital has become one of the top AIoT categories in terms of revenue, and our tablet shipments ranked top 3 in Mainland China in the first quarter.

We also continue to be a leader in the variable products category. In March, we launched our tension impact co-branded TWS ear buds, which has been very highly popular. In Q1, our TWS ear buds shipments ranked #3 globally and #2 in Mainland China.

Now let's look at Internet services. Our global and Mainland China MAU brokerage record high as mentioned previously. In March, our global MAU reached 529 million, an increase of over 100 million year-over-year. And the Mainland China MAU reached 136 million, an increase of 17 million year-over-year.

Also worth mentioning is our TV MAU, which have exceeded 50 million for the first time in March. Despite an uncertain industry environment in Mainland China, we continue to expand our user base and grow our Internet services revenue through multiple monetization channels. In the first quarter, Internet revenue reached RMB 7.1 billion, up 8.2% year-over-year. Our advertising revenue reached RMB 4.5 billion, up 16.2% year-over-year, mainly due to the growth of search revenue, as well as, performance and brand advertising. We also continue to expand the number of gaming partners and improve our gaming monetization efficiency, which helped drive the growth of our gaming revenue.

As our global user base continues to expand, our overseas Internet business has maintained strong growth. In the first quarter of '22, overseas Internet services revenue reached RMB 1.6 billion, up 71.1% year-over-year and accounted for 21.9% of total Internet services revenue. In March, the MAU in Western Europe and Latin America increased by more than 50% and 70% year-over-year, respectively.

I want to talk about growth drivers of our advertising business. This quarter, both our performance and brand advertising revenue as well as our search revenue both grew year-over-year. Performance and brand advertising revenue continued to grow in Mainland China, driven by our expanding advertiser base and our higher monetization efficiency. At the same time, overseas performance and brand advertising revenue hit another quarterly high due to stronger operations of our content and services business.

This quarter, search revenue hit another record high. In Mainland China, hot topics such as the Winter Olympics drove the year-over-year increase. In the overseas market, improved monetization capability and our expanding MAU base drove search revenue to another record [ panel ]. Preinstallation revenue in Mainland China declined year-over-year due to lower smartphone shipments. Overseas for insulation revenue actually increased year-over-year as we expanded into more markets with our global products.

Let's now talk about our TV Internet business, which is gaining traction. In this quarter, China TV Internet revenue accounted for about 15% of China Internet services [ role ]. TV Internet revenue mainly comes from TV value added services and TV advertising. For TV value added services, which is mainly our subscription business. We have expanded our content to cover sports, kids and family programming, driving revenue to a quarterly cost. Meanwhile, driven by luxury goods and high-end automobile brand advertising, TV advertising revenue also grew significantly. As the #1 TV brand in Mainland China, we believe there's huge monetization potential for us within Internet services and TV.

Now let's move on to more detailed financials. First, let's take a look at the top line performance of each of the segments. In the first quarter of '22, total revenue was RMB 73.4 billion. Smartphone revenue was RMB 45.8 billion. IoT was RMB 19.5 million and Internet services revenue was RMB 7.1 billion. In the first quarter, overseas revenue accounted for 51.1% of our total revenue.

In the first quarter, overall gross margin reached 17.3%, a decline of 1.1 percentage points year-over-year. Smartphone gross margin declined to 9.9% this quarter, mainly due to promotional sales of certain smartphone models. Gross margin of our IoT business hit a record high of 15.6%, mainly due to lower prices of key components such as display panels. Internet services gross margin was 70.8%, and the decline was mainly due to higher revenue contribution from lower-margin advertising businesses.

We maintained high operating efficiency while continue to increase our R&D investments. In the first quarter of '22, overall operating expense ratio was 13.6%, which included expenses of RMB 425 million for smartphone -- for smart EV and other new initiatives. R&D expense ratio was 4.8%.

Going forward, we'll continue to implement prudent financial policies and optimize our cost structure to enhance our operating efficiency. Since last year, we have been focusing on building synergies between our businesses. As Wang Xiang mentioned previously, we have put our software department as well as our wearable business department into the smartphone department. We've also merged the Youpin E-commerce business into the China region business.

Furthermore, we combine our data services platform and our group IT department into group IT department. These organization adjustments, we believe will strengthen our smartphone times AIoT strategy, improve our operational efficiency and promote sustainable growth of our business in the long term. Our cash resources remained robust, reaching RMB 95 billion as of the end of March.

Lastly, I will provide an update on our ESG initiatives. We continue to incorporate ESG into our operations and management. In April of this year, we published our fourth annual year ESG report and disclosed multiple KPIs. Notably, our 2021 greenhouse gas emission data has been verified by the British Standards Institution.

We have set multiple environmental goals this year. We aim to reduce per capita energy consumption by 5% in 2026 compared to 2020. And we aim to reduce per capita greenhouse gas emissions by 4.5% over the same period.

In terms of water resources, our goal is to not exceed the 2020 per capita water consumption loans. With regards to waste management, we aim to categorize nonhazardous raised and safely dispose 100% of hazardous raised through qualified organizations.

We have also been actively promoting public welfare. In January, Xiaomi Foundation Limited in Hong Kong announced an expected donation of RMB 10 million over the next 5 years to setup the Xiaomi Sports Scholarship to support teenage athletes. In April, Beijing, Xiaomi Foundation and Peking University jointly launched the Peking University Xiaomi Innovation Fund to support cutting-edge research. To help them people who are in need, Beijing Xiaomi Foundation offers assistance to multiple regions affected by COVID-19 in Mainland China, including a RMB 1 million donation to Beijing in May. Going forward, we'll continue to get back to society.

Lastly, we are committed to using technology to help the public prepare against natural disasters globally. In March, we officially launched the earthquake early warning smartphone function in Indonesia to help provide users with precious time to take protective measures in the event of [ earth ].

This concludes our prepared remarks. We'd like to open the call up for questions from investors.

[Unknown Executive]

Thank you, Alain. We will now proceed to the Q&A session. Please ask no more than 1 questions at a time so that we could allow more investors to ask their question. Meanwhile please read your questions in Mandarin followed by English recap. Thank you.

[Operator]

[Operator Instructions] Our first question is come from Andy Meng with Morgan Stanley.

[Andy Meng, analyst]

For smartphone business, there's growth headwinds in the first quarter. What's the management's take on the demand outlook in the following quarters? Do we expect continuous weakness or there's a chance of recovery. Regarding the smartphone margin, we have also observed year-over-year decline this quarter. How should we think about the margin outlook in the coming quarter?

[Xiang Wang, executive]

So I think because of the uncertainty in the global environment and also COVID. So we are still closely monitor the development and carefully making our forecast. So I think in Q1, what happened was the -- first of all, the shortage of the entry-level SoCs. So that -- he does because we have a lot of volume in India, in Europe and in many, many regions. So that's the problem. But in Q2, actually, we see the improvement of the supply. But we also see the uncertainty with the macroeconomic environment and the political -- and also geopolitical environment. So we are still watching closely.

[Alain Lam, executive]

So I think regarding the gross margin -- I think let me supplement some of Wang Xiang answers. I think for Q2, obviously, there's still a lot of macro uncertainty with respect to the market, but that will continue to monitor both, of course, in China as well as, in the overseas market. Obviously, we expect the supply to be better in Q2. And also there are major events such as 618, the shopping event in China, which will help the stocking shipments in the second quarter. So we do see some of these promotional events as our key catalysts to drive our home shipments in Q2. That's number one.

In terms of fixed gross margin, if you look at the gross margin in Q1, it declined slightly from the Q4 level, which was 10.1% to 9.9% this quarter. We think that there were some promotions that we've done -- we did in Q1 to clear up our inventory to better position ourselves for the rest of the year when supplies become more trend. And obviously last year in Q1, I think I also mentioned to a lot of the investors that last year, we were benefiting in a way our gross margin benefited from a lack of supply. So fear lack of supply in the market as the fact that there were not a lot of promotional activities that happen in the market. So I hope that answers your question, Andy.

[Operator]

And our next question is come from Kyna Wong with Credit Suisse.

[Kyna Wong, analyst]

I want to ask about the gross margin in the IT business that improved to 15.6%. Is this a sustainable level in the coming quarters? And what's the reason more like data breakdown, we could get -- will be appreciated. And when you see this overseas sales to recover post lockdown easing that may help the logistic -- improve the logistic challenges.

[Xiang Wang, executive]

I think a couple of answers to your question, Kyna. One is, on the IoT gross margin. In the second quarter, our IoT gross margin benefited because of lower -- some of the lower costs due to -- in some of our components, for example, display panels. So our TV business benefiting from -- benefited from the lower cost so that drives our gross margin to be higher. Also some of our new categories like pet, white goods, obviously, I think those are relatively -- those carry relatively higher margins -- gross margin. So that is helpful to our accretive to our gross margin overall.

Looking forward, I think it will depend on some of these input prices obviously will drive our gross margin, which they've done historically as well. I think that's number one. Number two is our overseas IoT business does suffer from the continued logistical challenges overseas. So that has slowed down the growth of our overseas IoT business. That's number one. But also another factor that impact our overseas IoT growth was the certain macroeconomic headwinds, especially impacting Europe.

So I think that, obviously, we expect that the logistical challenges to improve over time. But one thing that we are a bit uncertain about is whether the economy is going to recover as fast because, obviously, the world is still ongoing. It has impacted a lot of factors like foreign exchange, as well as, the inflation in those areas, especially in Europe. But that's something that we'll continue to monitor very, very closely.

[Operator]

And our next question is come from Timothy Zhao with Goldman Sachs.

[Timothy Zhao, analyst]

My question is also related to the IoT. We see in the first quarter some detailed numbers such as the number of connected devices or the users with over 5 devices. All those members actually had a very significant growth. But in terms of the revenue -- the IoT revenue was relatively soft. Could management help understanding the difference between these 2 data series? And also, can management help to provide some outlook for the IoT revenue for this year, given the uncertainty of the macro economy from the product perspective, what kind of the strategy that we can have to drive the IoT revenue growth?

[Xiang Wang, executive]

I think the one of the major challenges for the IoT growth is the, I think, 2 major reasons. Number one is the higher transportation cost, that will hurt the growth and even the profit. I think secondly, is the uncertainty in the Europe, right now, the leading classed has increased into the Ukraine -- Russia-Ukraine war. So the demand is subsided. So that's another uncertainty. But we still have a lot of very good hot-selling products in China and the rest of the world. In China, for example, we have a very good growth and the shipment in the TVs, right? And also the washing machines and other products. So in Europe, actually, our major key seller will be the vacuum cleaner and also the [ scooters ]. So -- and also, we are trying to sell more and more TWS ear buds and try to get the smartwatch market as well. So I think that's the outlook for the opportunities for the Q2 and Q3, Q4 the rest of the year. So Alain, maybe you.

[Alain Lam, executive]

I think, Tim, one is obviously, as I mentioned in the previous question, the overseas IoT opportunity remains quite big in our -- from our point of view. We need to get more SKUs over there. Some of them have shown slowdown due to the -- what's going on in Europe. Some of them has slowed down because of what's happening with the economy overall. But if these things normalize, hopefully it will help our IoT growth to pick up again. I think that's number one.

We continue to introduce new categories -- new growth categories in China like our tablet by our white goods. And then also, I might have mentioned that on the other call as well that one of the key initiatives for IoT is to get those into our off-line retail network as well, right? I think we've been trying to get more IoT categories, SKUs into our off-line network. And I think that numbers will show that the IoT is becoming more important in terms of the sales through our offline distribution network. So we're still quite optimistic. I mean, obviously, there some challenges overall, but we're still optimistic that the IoT business will continue to be a very important business for us.

[Operator]

And our next question is come from Wen, Hanjing with CICC.

[Hanjing Wen, analyst]

Could management share your opinion about our competitive strength in Africa and the Latin American markets and our expansion strategy in these 2 markets this year?

[Xiang Wang, executive]

So overall, we are -- I think we are doing good in the Q1 and the many, many markets, Latin America is one of them. So in the total market, actually -- right now our market share in Latin America is, I think, around 15%. So that market is very big. So as a carrier-driven market, we have established a good partnership with the major carriers in that market. So we are -- I think we are #1 in Colombia. And also Mexico, we also have a very big growth. So I think the potential there is huge. Right now, the major player in Latin America right now is Samsung, Motorola and Apple.

So I think with the partnership with the retail channel and the carrier channels, I think we have a lot of room to grow. So from 2020, we only had -- around 5%. But 2021, we were over 12%. But now we are even got more in Latin America. I think it's going to be one of the major growth area for Xiaomi in this year and next couple of years. I think Africa, we are trying to bring more and more 4G devices into Africa, because the Africa right now, some of the countries, they have a 5G network, a majority of the carriers, they are still in the 3G, so we are trying our best to optimize the cost structure so that we can provide our 4G devices to serve consumers in the Africa. The market there is huge.

[Operator]

And our next question is come from Xu, Yingbo with Citic.

[Yingbo Xu, analyst]

My question is related to auto industry. And we saw that there have been like RMB 425 million expense on auto and related new initiatives. So what's the whole will -- for the whole year's expense in this area? And could you please give us more color on the auto sector?

[Alain Lam, executive]

I think most of the RMB 425 million is in R&D. Most of it, now there is some G&A expenses as well. There's some G&A personnel involved, right? But there's not -- there's no sales and marketing at this point. So the above majority of the RMB 425 million is included in R&D expenses. So you can think about -- literally, the whole thing is in that category. And that answers your questions.

We'll continue to spend on EV this year. The expenses will probably ramp up as we continue to ramp up our business. Right now, we have around 1,200 people at this point in time. and that will continue to ramp up as the year progresses. We have not disclosed any plans for the entire 2022, but you expect that number to ramp up progressively.

[Xiang Wang, executive]

So the Q1, actually, you may have the question that in Q1, we spent RMB 420 million. Actually, we will continue to invest into the R&D of the EVs. So you can expect our investment into the EV business is going higher in the rest of the year. The rate will be higher in the rest of the year. I think the majority, as Alain mentioned, the majority will be the R&D cost.

[Operator]

Our next question is come from Yu, Jintong with Guotai Securities.

[Yu Jintong, analyst]

So my question is, what's the COVID-19 the quarantine and the control issuance? What impact on your smartphone, IoT and the Internet business on the first quarter and on the second quarter?

[Xiang Wang, executive]

Definitely, the Shanghai -- the COVID-19 Shanghai gave some impact to our business because we have a lot of stores in Shanghai, right? So we have to -- the store -- we closed -- also closed now will hit our business and also the Shanghai not only consumer market for us, actually, there are some components manufacturing capabilities also give us some impact, not only in Shanghai, but even in Hong Kong and Guangdong area in Q1, actually, they all have hit by the COVID.

So that the challenge for us is the first is will be the -- was the ground transportation by Hong Kong is a very important hard for us to -- for our smartphone transportation through the air freight transportation. So that gave us some problems in January, February, March. So I think the problem is gradually improved because of the COVID situation in the Hong Kong and Shenzhen have been improved a lot. So we almost softer that problem. But Shanghai still -- we still have some problems in Shanghai. We're working very hard with our suppliers, including the manufacturers and also even the transportation companies to improve the logistics support in that area. So we hope that in Q2, we can stop that problem.

[Operator]

And our next question is come from Gokul Hariharan with JPMorgan.

[Gokul Hariharan, analyst]

First, can you talk a little bit about China smartphone market share. I think we've dropped down to #5. Although even though it was a launch quarter for 12. Could you talk a little bit about what are the market share dynamics you're seeing competition in China smartphones and what is our kind of path back to kind of going back to like top 3 than we enjoyed for some this time earlier last year?

[Alain Lam, executive]

I think a couple of things to note is, number one, is obviously the overall market in China in terms of shipment in the first quarter was -- I mean, obviously underperformed the broader market. Broader market decreased by 11%. I think China's market decreased by 18%, right? So overall, the Chinese market has deteriorated more dramatically than the overall margin as a result.

Number two is, is Xiang, I think earlier mentioned, we do have continued to suffer from the lack of chipset, especially on the lower-end segment. So on the lower end segment we do see continued shortage of the chipset.

Number three is, we continue to grow our premium segment. So the premium segment, obviously, we still have a decent market share as we put into our slide between 4,000 and 6,000 among the Android players, we're actually #1, and our high-end Gen 8 product was sold extremely well. So I think we do suffered a bit on -- obviously, more competition is obviously more intense towards the mid to lower end, and we're also suffering a little bit on the [indiscernible]. Does that make sense?

[Gokul Hariharan, analyst]

Maybe one small question on the TV monetization, you talked a little bit more about the details in terms of like how does ARPU compare with China smartphone ARPUs? And is that something that is going to be a meaningful driver for your Internet services business going forward?

[Alain Lam, executive]

Well, I think the -- I think a few things. One is, as I mentioned in my prepared remarks, there are 2 parts of this revenue. One is the subscription revenue, which comes from new buying programs, buying IT packages or increasingly Tencent video packages or TV packages, et cetera, or [ mango ] packages. That one we like because it's obviously a recurring revenue base for us. And given our large installed base in China, it has -- the fact that it's growing nicely is very encouraging. I think that's something that -- it's something that we would like to see that is growing. Even though the [ opposite business ] may not be as significant as smartphone ARPU per se, but is very much a recurring revenue for us. I think that's number one. But that obviously, we need to split revenue with IT and other content providers. So that's the first thing.

The second part is the advertising -- brand advertising revenue. And that's something that we are working with fairly different advertising base compared to our smartphone business, right? And our smartphone business, a lot of these are ROI driven performance-driven, maybe e-commerce, maybe gaming company, et cetera. On the TV side, as you know, we've been focusing much more on large screen TVs, selling more to the more kind of the mid to high-end demographics in China. And it also attracted -- allow us to attract brand advertisers, right, whether it's luxury goods, whether it is the major brands, consumer brands, et cetera.

So that's something that we've seen that is actually growing quite well, especially in the last quarter, right, especially in Chinese here, a lot of people stay at home, watch TV and whatnot. That is something that we need to watch a bit more closely going forward, because of the lockdown of some of these things, it may actually have some impact on that brand advertising business. So that's something we need to continue to watch. That's not recurring revenue per se. So that's how we look at the TV business overall. But we're optimistic given that we have a large installed base, mostly large screen TV users and then something -- that's something that we -- and then also more recurring revenue for us.

[Operator]

Our next question is come from John Choi with Daiwa.

[John Choi, analyst]

My question is on advertising. We noticed that you guys did very well this quarter, both on performance-based and search. Could you elaborate the reason why is it more, because of your MAU of your new users have increased. You did say both for performance, you had a stable y-o-y growth on diversified customer base and higher monetization. I want to have more details there. And then also on the search on the Olympics, would that also see like a sequential decline in the coming quarters, both for performance and search given that the macro situation in China is also challenging.

[Alain Lam, executive]

We do see -- I mean you will hear from the other folks as well, right? Apple just overall is under pressure in China. I think there's no question about that. I think given what's happened to the macro economy, what happened in the -- in some of the -- more regulations and what not. We do see more pressure coming on the ad budget side overall in China. I mean that's number one observation. Number two is, I think we do benefit from a higher number of user base, right? And that obviously help us attract more advertisers to our platform. So I think that's one of the major drivers for both the performance app as well as the search app.

Right, in terms of hot topics, we do -- we do see a significant pickup in traffic due to some of these topics that are quite permanent with the Olympics being one of them in Q1. Whether that will continue in Q2, obviously, there's no [ Winter Olympics ] we hope there are other topics that will pick up -- that will help -- that will help user interest. But that's something that is obviously more -- it depends on something that is all about control.

But something that is in our control is obviously a number of users that would continue to -- continues to be new users to Xiaomi, number one. Number two is the increased percentage of premium smartphone users in that user space. I think that will also help drive higher ARPU overall for that advertising business. Obviously, the other thing that we have seen quite healthy growth is the overseas business, as we mentioned, both because we've added 1 million -- 100 million users to our platform, and that obviously helped some of the advertising revenue over there, too. So that -- those are the few things that, I hope that answer your question.

[Xiang Wang, executive]

Yes. One thing I want to add is, actually, we are -- keep adding the MAUs for the MIUI App in China and outside of China. So that means we got more new users through our mid and high-tier smartphones through offline channels. We keep getting the new users from those channels. That's a very, very good signal for us, good news for the monetization on the Internet service side. The overseas market is the same, and we'll continue to grow our user base in Europe in other territories so that we can have -- we can generate more in term revenue to manage from the search or other channels.

[Operator]

This concludes the conference call today. Thanks again for joining us. You may now disconnect.

[Xiang Wang, executive]

Thank you, everyone. Thank you.