Xiaomi Corp
HKEX:1810
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Xiaomi Corp
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Ladies and gentlemen, thank you for standing by, and welcome to Xiaomi 2021 Interim Results Announcement Conference Call. Today's conference is being recorded. And if you have any objection, you may disconnect at this time. [Operator Instructions] I'd now like to hand over the conference call to our host today, Ms. [ Anita ] Chan, Head of Investor Relations. Please go ahead, Ms. Chan.
Good evening, ladies and gentlemen. Welcome to investor conference call hosted by Xiaomi Corporation regarding the company's 2021 interim 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 and may not be 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, Chief Financial Officer and Vice President of Xiaomi Corporation. To start, Mr. Wang will share his strategic initiatives for the company. Thereafter, Mr. Lam will review the business and financial performance for the first half of 2021. Following that, we will move on to the Q&A session.
I will now turn the call over to Mr. Wang.
Yes. Thank you. Thank you, [ Anita ]. Hello, everyone. Thank you for joining our 2021 second quarter earnings call. Firstly, I'm very, very excited to share with you our remarkable results we achieved this quarter. Building on our strong growth momentum, both quarterly revenue and adjusted net profit reached record highs. Our total revenue reached RMB 87.8 billion, and our adjusted net profit reached RMB 6.3 billion, up 64% and 87.4% year-over-year, respectively. We have been included on the Fortune Global 500 list for the third consecutive year, ranking 338 in 2021, up 84 slots from last year.
Our smartphone business achieved significant milestones this quarter. We became the world #2 smartphone company in terms of global shipments as we increased market share across all key regions. Notably, we ranked #1 in Europe for the first time and increased our market share in the region to 28.5%.
Our premium smartphones continue to gain popularity and attract new Xiaomi users. In the first half of 2021 alone, our premium smartphone shipments exceeded 12 million units globally compared with around 10 million units in all of 2020. To further advance our Smartphone x AIoT strategy, we recently launched multiple exciting new products. This includes Xiaomi MIX 4, our new premium smartphone featuring a sterling full-screen display with camera under panel; Xiaomi Pad 5 series, our first tablet since 2018; Xiaomi Sound, our first premium smart speaker; and also CyberDog, first bio-inspired robotic campaign. All of these products reflect our relentless pursuit of technological breakthrough in our premium products.
Our ability to offer innovative technologies comes from our people. To recognize employees who have made outstanding contributions in July, we announced 2 equity award grants totaling about 190 million shares to about 4,000 participants. We believe this is an important step for us to attract and retain the best talent and allow us to maintain our long-term technology leadership.
We owe our success to our users, and user experience has always been our priority. To celebrate the 10-year anniversary of Mi 1, our first smartphone, we decided to give back to our first group of Mi 1 customers the RMB 1,999 they paid to demonstrate our deep gratitude for their support. Going forward, we'll continue to be friends with our users and offer the coolest products and services to them.
Now I'd like to invite Alain to discuss our second quarter earnings and business update in greater details. Alain?
Thank you, Xiang Wang. Good evening, everyone. Thank you for joining us today for our second quarter 2021 earnings call. As Xiang Wang mentioned, building on our momentum recently, we delivered another set of record-breaking results in the second quarter. Our revenue and net profit, our global market share, user base and our IoT platform all achieved remarkable growth in this quarter, which I'll discuss in more details in this presentation.
We achieved record quarterly revenue and adjusted net profit this quarter. In the second quarter, our total revenue grew 64% year-over-year to RMB 87.8 billion; our GAAP net profit grew 83.9% to RMB 8.3 billion; and our adjusted net profit grew 87.4% year-over-year to RMB 6.3 billion.
We have built our Xiaomi into one of the most recognizable brands worldwide. Xiaomi has been included on the Fortune Global 500 list for the third consecutive year. This year, we ranked 338, up 84 slots from last year. We were also selected among BrandZ's total Top 100 Most Valuable Global Brands again for the third consecutive year, and we ranked 70 this year, up 11 slots from last year.
If you look at our smartphone market share, in the second quarter, we achieved the #2 position in smartphone shipment with a market share of 16.4%. Our global smartphone shipment increased 82.9% year-over-year, which again was the highest growth rate among the top smartphone companies. Similarly, we continued our stellar growth in the Mainland China smartphone market. Despite a year-over-year decline in the overall market, our Mainland China smartphone shipment grew 35.1% year-over-year, again, the highest growth rate among the top smartphone vendors. As a result of this, we rose to the #3 position and improved our market share to 16.8% in the last quarter.
The robust performance of our smartphone business was supported by our increasingly competitive position in the premium smartphones market. Our premium smartphone shipment exceeded 12 million units globally in the first half of 2021 alone compared with around 10 million units in all of 2020. If you look at this chart, we've expanded our market share in Mainland China across multiple premium-priced categories, from RMB 3,000 and above.
Our ability to continuously innovate in the premium segment is due in large part to our investment in R&D. In the second quarter of 2021, our R&D expenses increased by 56.5% year-over-year to reach RMB 3.1 billion. The latest example of our technology innovation is well represented by our Xiaomi Mi MIX 4, our flagship premium smartphone that we launched on August 10. Equipped with the camera-under-panel technology, MIX 4 has a full-screen display that allows the front camera to be completely hidden under the screen. It is also the first domestic smartphone to support the UWB Point to Connect technology, enabling seamless connectivity with our AIoT products, such as our smart TV and our smart speakers.
We also launched CyberDog in August, which exemplifies our achievements in AI and robotics. CyberDog leverages Xiaomi smartphone imaging technology to perceive its surroundings, and its advanced AI is capable of countless tasks and personalized interactions. It is built upon open source algorithms, and we will formally establish a robotics laboratory along with an open source community for engineers to share their latest innovations.
On the smart manufacturing side, we've also achieved a major breakthrough. In July 2021, we officially broke ground on our Smart Factory Phase 2 in the Changping district of Beijing. Leveraging our Phase 1 R&D capability, the new Smart Factory will have an annual production capacity of 10 million premium smartphones and is expected to begin production by the end of 2023. We are confident that our smart factories will leverage our cutting-edge technologies to deliver transformative efficiency gains for China manufacturing industry.
As Xiang Wang mentioned, we recognize that our people are key to our technology leadership. And therefore, in July, we announced 2 separate share award grants to employees who share our mission and values and have made outstanding contributions to our business. On July 2, we awarded over 70 million shares to over 3,900 young engineers, fresh graduates and other core staff. On July 5, we awarded over 119 million shares to 122 technology specialists, our core management and the initial recipients of our new 10-year entrepreneur program. We believe these share awards will help us attract and retain the best talent and motivate them to create a long-term value for us.
An update on our smart EV business. Since our announcement, we have been focusing on building the best team for this important initiative. In the last couple of months, we have received over 20,000 applications for our smart EV business. In particular, we announced 500 new positions in July for our self-driving division to develop L4 autonomous driving technologies in-house. Today, as many of you may have noted, we also announced that we will acquire a company called Deepmotion, one of the leading providers of L4 autonomous driving technology. We are very confident that we'll continue to attract the best talent to this very new and important business.
With that overview, let's dive deeper into each of our segments, starting with smartphones. In the second quarter, our smartphone business continued to grow rapidly. Revenue grew 86.8% to RMB 59.1 billion, our highest ever. Our global smartphone shipment had a new record high of 52.9 million units, up 86.8% year-over-year. In Mainland China, we continued to expand our off-line channel. As of the end of 2021, the total number of our retail stores in Mainland China exceeded 7,600, an increase of 3,100 stores from March. Many of these new stores are set up in lower-tier cities, which have allowed us to penetrate new markets and expand our market share. As you can see, our off-line smartphone market share in Mainland China increased to 7.8% last quarter.
While we continue to expand our off-line presence, our online channel also set new records. During the 618 e-Commerce festival, our cumulative paid GMV exceeded RMB 19 billion, an increase of 90% year-over-year. The order volume of our smartphone ranked #1 among Android smartphones on JD.com, Tmall and Suning. Furthermore, our IoT product achieved a total of 158 #1 rankings across various platforms by order value or by order volume.
Turning now to our significant achievement in the overseas markets. According to Canalys, in the second quarter, we increased our smartphone market share in all key regions where we offer it. In particular, our ranking in Europe climbed to the #1 position for the first time. Furthermore, our market share rankings in Asia Pacific, the Middle East and Africa grows to #1, #2 and #3, respectively. Our smartphone market share ranked #1 in 22 markets worldwide and was among the top 5 in 65 markets. It's also worth noting that we ranked #1 for the first time in 10 new markets this quarter.
I'd like to further highlight the excellent results we achieved in Europe. We ranked #1 for the first time in Europe with a market share of 28.5% as our smartphone shipment increased 17.1% year-over-year. In Spain, we ranked #1 for 6 consecutive quarters as our market share reached 41.2%. In Italy and France, our ranking surged to the #1 position with market shares of 35% and 29.7%, respectively, as our shipments grew over 80% year-over-year in both countries.
Now let's move on to the IoT business. Our IoT and lifestyle product revenue increased by 35.9% year-over-year to RMB 20.7 billion in the second quarter. Our global leading consumer AIoT platform continues to expand. The number of connected IoT devices on our IoT platform reached 374.5 million, up 34% year-over-year. Moreover, the number of users who have 5 or more devices on our AIoT platform reached 7.4 million, up 44.5% year-over-year. In June 2021, our AI Assistant MAUs surpassed 100 million for the first time and reached 102 million, an increase of 30.2% year-over-year.
As the #1 TV brand in Mainland China, we continue to launch new and innovative products, especially in the premium category. In August, we launched the premium Xiaomi TV Master 77-inch OLED, which featured for the first time the UWB technology. In the second quarter, our global shipments of smart TV reached 2.5 million units. According to AVC, our TV shipment ranked #1 in Mainland China for the 10th consecutive quarter and among the top 5 globally.
To further expand our multiscreen ecosystem, we launched the Xiaomi Pad 5 Series in August, our first tablet since 2018. The Xiaomi Pad 5 Pro features highly attractive hardware specifications, including the Qualcomm Snapdragon 870 processor, an 11-inch 2.5K display, 67 watts fast charging and customized keyboard and pen accessories. It is seamlessly integrated with our MIUI for Pad operating system, which offers optimized support for over 300 mainstream apps, further improving user experience.
We also recently launched our first premium smart speaker, which we call Smart Xiaomi Sound. The speaker offers high-resolution certified audio with dynamic tuning by Harman for an immersive and realistic sound experience. It also features the UWB technology, which enables them to connect with our smartphone seamlessly.
Our IoT and lifestyle product segment also continued its rapid growth trajectory in the overseas market. In the second quarter, overseas revenue from IoT increased by 95 -- 93.8% year-over-year. Our smart TVs entered new overseas markets and are now sold in more than 40 markets globally. Many of these IoT products have gained popularity overseas. For example, overseas revenue from our electric scooters, our smart wristbands, smartwatches and desktop monitors have grown over 100% year-over-year in the overseas market.
Now let's move on to our Internet services segment. Our global Internet user base continued to grow rapidly and drive our Internet services business. In June, our MIUI MAU increased by 32.1% year-over-year to 453.8 million while our Mainland China MAU rose to 124 million, increase of 5.3 million users from the end of March. Our global TV MAU also grew over 34% year-over-year. As our global user base continues to grow, revenue from our Internet services segment reached RMB 7 billion in the second quarter, up 19.1% year-over-year. Our quarterly advertising revenue hit another historical high and reached RMB 4.5 billion, which also contributed to the increase in our gross margin in the Internet services segment to record high of 74.1%.
Our overseas Internet services continued its strong growth momentum, and we see significant potential to further penetrate the overseas market. In the second quarter, overseas Internet service revenue increased 96.8% year-over-year and accounted for 15.6% of our total Internet services revenue. Our MIUI MAU in some of the key overseas regions continue to grow rapidly. For example, our Western Europe MIUI MAU grew more than 60% year-over-year and our Latin America MAU grew over 125% year-over-year, respectively. Going forward, we will further diversify our overseas Internet services offering and enhance our user experience.
Now let's move on to more detailed financials. As mentioned earlier, our total revenue reached CNY 87.8 billion in the second quarter, up 64% year-over-year and 14.2% quarter-over-quarter. All of our 3 key segments demonstrated strong growth on a year-over-year on a quarter-over-quarter basis. Revenue from our smartphone grew to RMB 59.1 billion, revenue from our IoT and lifestyle product reached RMB 20.7 billion and revenue from our Internet services segment reached RMB 7 billion. Overseas revenue increased 81.6% year-over-year to RMB 43.6 billion, accounting for 49.7% of our total revenue.
Talking about our gross margin. Our gross margin reached 17.3% in the second quarter. And our gross margin for our smartphones, IoT and Internet services segment was 11.8%, 13.2% and 74.1%, respectively. Gross margin from our smartphone and IoT segment increased on a sequential basis, mainly due to enhanced promotional efforts during the online shopping festival in the second quarter of 2021.
Our quarterly adjusted net profit again reached a new record high of RMB 6.3 billion, up 87.4% year-over-year and 4.2% quarter-over-quarter. Our adjusted net profit climbed to 7.2% in the second quarter from 6.3% in the same period of 2020. Due to our high operating efficiency, our operating expense ratio in the second quarter remained stable at 11.1%. We continue to generate strong operating cash flow. In the second quarter, our adjusted operating cash flow reached RMB 8.1 billion while our capital expenditure were around RMB 700 million. Our strong cash flow allowed us to optimize our capital structure, and we have returned some of the cash back to our shareholders in the form of stock repurchases. In 2021, year-to-date, we repurchased a total of 208 million shares, around HKD 5.4 billion.
Primarily due to our strong operating cash flow and our capital market financing activities, our total cash resources reached over RMB 111 billion as of the end of the second quarter. We continuously explore suitable investment opportunities across different industry verticals and our investments enable us to create long-term strategic value, while generating additional earnings growth for us. During this quarter, we generated an after-tax net gain of RMB 1.1 billion from disposal of some of our portfolio investments. As of the end of the second quarter, we have invested in more than 330 companies, and the total value of our investment reached RMB 74.5 billion, representing around HKD 3.57 per share.
Last but not least, as the world's second largest smartphone company, we are fully committed to leveraging our scale and efficiency and drive a more sustainable economy that supports our users, our employees, our company and our planet. I'd like to take this opportunity to give an update on our ESG strategy. We firmly believe in leading by example and are proud to integrate ESG factors into our products and services, into our corporate governance structure and in our overall brand.
Xiaomi joined the United Nations Global Compact in 2020 and supports the Sustainable Development Goals adopted by the United Nations. We benchmark ourselves against international best practices and have implemented ESG strategies in relation to our green operations, our circular economy, workplace diversity, employee development, public welfare, data protection and more. To boost our employees' sustainable sustainability awareness, we actively promote our ESG framework to all of our stakeholders, including upstream and downstream business partners. We have set up a Corporate Governance Committee, which coordinate ESG and green finance-related matters, prioritizing our sustainability targets according to the unique characteristics of our business and our industry.
In July 2021, we published our 2020 Sustainability Report and the Green Finance Framework, which are all available on our website. We also issued our inaugural 30-year green bond, which was the first green bond issuance by any Asia TMT company. As an important component of our ESG strategy, we have very straight privacy protection and data security. In June 2021, we held the Security and Privacy Awareness Month to raise our employees' awareness in data security and privacy protection. This company-wide event lasted for 30 days and had over 12,000 off-line [ visits ].
In the second quarter, we also released a set of security and privacy white papers for smartphones, for our MIUI system and for our AIoT products, along with our 2020 Transparency Report, which is for published the first time. In the future, we will continue to hold ourselves to the highest standard with regard to cybersecurity compliance and user privacy protection.
This concludes our prepared remarks. We would now like to open the call for questions from investors.
Thank you, Alain. We will now proceed to the Q&A session. [Operator Instructions] Operator?
[Operator Instructions] And our first question is coming from Kyna Wong with Crédit Suisse.
Congratulations for such strong results. So I have 2 questions. The first question is about the Internet business. So we would like to hear about the outlook for the second half Internet business as advertising business continues to benefit from like MAU or ARPU increase and also smartphone shipments increase, et cetera. Can we expect normalized effect on gaming business terms and also fintech with control in the second half so that the outlook for the second half Internet business will be very encouraging? And what do you think about the positive impact from the -- as the #1 brand in Europe smartphone market and also 22% market share in the Western Europe, I mean, to your Internet business? I think this is the third part.
Okay. Thanks, Kyna. On the Internet business, we obviously -- and our advertising business obviously benefiting from a couple of trends. Number one, our increased installed base; and number two, our premium smartphone market penetration. So if you look at our installed base, as you can see, our MAU reached 124 million at the end of last quarter and as well as our premium smartphone shipped over 12 million units in the first half of this year. So we'll continue to benefit from the increased install base as far as the increased percentage in our premium smartphone. I mean obviously, there will be some challenges because there's a lot of regulatory restrictions in the Mainland China market, right, including, which impact some of -- some key sectors that invest a lot in advertising. And also with the new data privacy logos and, obviously, we would be assessing the impact that it has on our business. But overall, we are very positive on the advertising business, and we believe that it will continue to grow.
On the gaming side, we've seen improvement in our gaming business. As you look at our third quarter results so far, we've seen a pickup in terms of growth in terms of our gaming business. We also benefited from some of our products. For example, we launched the K40 gaming series in the second quarter, and we've seen pretty significant gaming revenue on those products versus a more general smartphone. So we continue to be very hopeful that second quarter -- second half of the year, we'll see improved growth in the gaming segment.
On the fintech side, we've seen continued improvement in our gross margin in our fintech business as we move from a more balance sheet-heavy model to a more balance sheet-light model, we've seen improvement. And obviously, the improvement in the credit market in China obviously benefited in that initiative as well. So seen we've very healthy margin for our fintech business in the first half, and we'll continue to see healthy margin in the second half.
In terms of the overseas Internet, I think as we show in the chart, the overseas Internet market has shown very strong growth in the first half and a strong -- representing a very strong percentage of our overall Internet business. We are still not quite monetizing the users at this point. I think at this point, it's more about market share at this point. So we'll continue to watch the monetization opportunity, especially in the Western European market. We want to make sure that the user experience are good before we start to monetize our users over there. So I hope that answers your question.
Yes. So I have another question more about the outlook for the second half on shipment because we consider the chip tightness continued demand because in China, or at least so far, I mean, still like high single digit. Also, the waiting competition was on there, what should we expect? I mean because we see the company has already set this target as the #1 smartphone brand in 3 years. So what should we expect going forward on the strategy to both the -- I mean the market share and also the presence in China as well?
Yes. So let me take the -- your second question, it's regarding to the second half forecast. Actually, we continue to see the business opportunity, the growth opportunity for smartphone shipment globally. But real challenge for everybody actually, not only for us, is the supply shortage. So we are working very hard to get more supply to support the different requirements from different regions and markets. And also, I think we have to manage the growth in more than, I think, over about 100 different markets. So it's -- we want to be -- we need to be working very hard for the supply. So that's one potential challenge for us. And also in China market specifically, we need to continue to execute our off-line strategy so that we can have more coverage.
So right now, we have over 7,000 retail stores in Mainland China. We continue to grow that number, so that's a long-term thing. So once we build the store, we need to train the sales and help the store grow the business. It's also -- that also takes time for a new store to become a real profitable or high-growth, high-output stores. So this is another challenge. I think we are confident that if we continue to execute the strategy to grow the number of stores and also to help the stores grow with our -- the software, the tools, we are confident that we will continue to grow our business in China as well.
Overall, let me summarize, number one is we need to deal with the shortage issue. Secondly, we need to continue to execute our strategy for the off-line, especially in China. In overseas market, I think we have over 100 different markets. We need to maximize the -- our usage of the supply. So I think I hope this answer your question. Thank you.
And our next question is coming from Leping Huang with Huatai Securities.
So my first question is also related to smartphone. I think like you mentioned that Xiaomi has to become a global #1 smartphone company by volume in 3 years. So if I understand correctly, the current #1 player, Samsung, is roughly 300 million units per year shipment, and you are roughly 200 million units. So in order to achieve this global #1, so where you think you can get this, most of the additional volume in next few years? Or which market and which segment?
Yes. So I think we see -- still, we see a lot of new opportunities for us, yes. Although we are #1 in Europe for the first time, we'll continue to see a lot of space to grow even in Europe. Outside of Europe, actually, if you look at the growth rate, you can see we have a very big potential in Latin America, Africa as well. So we'll continue to supply the right product for those regions. So that's for the market opportunity side.
But in order to be #1, I think we also need to continue to invest into more R&D resources. Now this year, we want to -- we will -- our R&D investment is going to be at RMB 13 billion. The second quarter, actually, we have a very high-growth R&D investment in the second quarter. I think we'll continue to invest in the third quarter or the fourth quarter so that we can make sure we invest enough on the R&D side. So we will continue with the R&D resources to continue to innovate in many, many different technology areas. Actually, Alain just mentioned in the MIX 4, actually, we got new technologies. We got the camera under panel so -- and also UWB. We continue to bring more and more new technologies into the smartphone sector and also the ecosystem products. So yes, I think in the long term, I think we are confident that we can -- we see the opportunities. And we are confident that within 3 years, we can achieve the goal set by our Chairman and CEO to be #1 globally.
Okay. Great. It's very good ambitious time. So the second question is about your smart EV business. So we see a lot of news recently about your smart EV business, including today's announcement of the Deepmotion. So do you have a more clear plan to share with investors about for the product, what will be the scale of the staff? And what's the relation between your EV business for the R&D structure with your smartphone business? And what's Deepmotion's goal, the company you acquired today, in this EV plan?
Yes. Why don't I take that, Leping? So with respect to Deepmotion, we did file an announcement today, so a lot of the information are included in that announcement. But just to summarize, the total consideration that we are going to pay for the acquisition was -- is going to be USD 77.4 million, right? A lot of it will be in terms of stock. A lot of these payments will be deferred until certain milestones are hit. And so therefore, we want to make sure that we are retaining and motivating this team. So that's the first point.
Second point is we do believe that the company has -- is very attractive to us, right? The company is -- let me find the information. The company is an autonomous driving technology company, is focusing on providing the full-stack software solutions on the -- for the ADAS and automated driving applications. We believe that there's a lot of synergies with the technology with our initiative, with our EV initiative.
So I think it tells you a couple of points. Number one is grow our EV business. And as I said in our prepared remarks, we've been very focused on hiring the right team for the EV business at this point in time, formulated our strategy, formulated our product strategy, et cetera, et cetera. But at the same time, we're not afraid to acquire and integrate other teams if we find that those are -- those will help us accelerate our plans, right? And so I think that this will prove to you that we are very focusing on attracting and retaining these experts and talent. And we are making very, very good progress in that regard.
So what's the overall picture of the EV business you can share with us today or?
Look, we are still studying. We are still formulating the team. We think that we are ahead of our schedule. We believe that we have been ahead of our schedule. And so we're making very good progress. But I mean if there are more details we can share, we'll definitely share those.
I think what we can share is right now, we are focusing on 3 things. Number one, as Alain just mentioned, we hire the talent. We try to find the best talent that we can find. We need a world-class team to execute. This is very important. Certainly, we are doing a lot of evaluations, analysis for the location, right, where we're going to build the car, build our first car, vehicle, EV? And also, we are continuing to -- actually, we started to, I would say, to define what's going to be our first product, these customers who we're working to target. So right now, as Alain mentioned, we are on track. So we are confident that we can achieve what we will as planned.
And our next question is coming from Gokul Krishnan (sic) [ Gokul Hariharan ] with JPMorgan.
This is Gokul from JPMorgan. Maybe, first of all, can I ask a little bit more on the supply limitations and the chipset shortage. I think even today, we saw some headlines about Xiaomi having to pull some models in certain markets because of the shortage. Could you help us understand what is the extent? Like is it limiting your shipments by 5%? Is it limiting your shipments by 20% in terms -- when we look into the second half of the year? And what is your estimate at this point in time in terms of where we will be, where would this issue get resolved? Is it sometime end of this year? Or is it going to go into the next year as well? That's my first question.
Thank you. Thank you, Gokul, for your question. Actually, so the challenges for us, not only for us, actually, this is a challenge for the whole electronics, consumer electronics industry and even for the EV industry. This is a global shortage. The challenge for us is, right now, we are in it's about 100 different markets, right? But the requirements -- actually demand is very strong, and the requirement is very, very different. So the challenge is to manage the dynamic.
So at this moment, I cannot tell, I cannot share the quantified, the impact. But overall, I think it's on track. We are working very, very hard trying to get more supply and try to allocate the supply we have got, allocate them to the right markets. That's the challenge we are dealing with. So yes, this is what we can -- I can answer.
I mean Gokul, I think one clarification. I'm not sure where this cutting orders is coming from. So yes, so I don't think -- and I think we're still on track.
Got it. Understood. Second question on the Internet services. I think some of the more broad-based companies in China have warned about a little bit of slowdown in advertising given some of the regulatory pressures and some other industries which are heavy advertisers starting to see some regulatory impact. I think you guys have been growing very rapidly, especially in Q2 for advertising. How do you think about advertising revenue in particular in second half of the year and the tailwinds and the headwinds that you're seeing there, especially as you are also increasing the ARPU of your own smartphones in China?
Second, maybe second part of that is the mix seems to be very heavy advertising at this point in time. Is that something that we should continue to expect over the next maybe 2 to 3 quarters? Or do we see a more balanced mix of other value-added services and gaming also kind of coming through?
Yes. Gokul, as we -- as I said before, I think it is more a balance between having a bigger, larger user base shipping more products year-over-year in each quarter and then getting more product shipped in the premium segment, right? I mean obviously, I think all of those factors will lead to a higher advertising revenue, right, balanced by some of the difficult phase in some of the sectors or the vessel spending in some of the sectors due to regulatory purchase right? And so I think that, that's a balance between those 2 factors.
But overall, I think we still expect to see continued growth in our advertising revenue due to our larger installed base. I mean that's point number one.
In terms of your second question, I mean I think we've said this in the last 2 quarters as well, which is we obviously love to see a more balanced Internet services portfolio, both advertising, gaming as well as other businesses. And so we think that -- we are hopeful that it will be the case. But that's something that we are still working towards. I mean obviously, in the near term, with the higher smartphone growth, I think it will lead to naturally to a higher advertising revenue base.
[Operator Instructions] And our next question is coming from Yingbo Xu with CITIC.
I have 2 questions. The first one is about our competitors and new models. We have seen Xiaomi market share increase in the second quarter and also the MIUI user, the number of MIUI user in Mainland China keep increasing. However, we still see that the competitors like Honor brand has played very strong in the market. So my first question is how we plan for the competition in next half of this year, especially like our new models launch plan?
So I think we are focused more -- focusing more on the product and the off-line channels build up in the China mainland market. So as I mentioned earlier, so we have over 7,000 stores, but we need more than 7,000 stores. We continue to build our off-line coverage. So it takes time for us to build those more stores. I think that's -- so one challenge. We are working very hard on that. Certainly, we're focusing on the right product. And so we want to offer the right product to the consumers. And also, we -- also, it takes time for us to not only grow the store base, but also help the stores to gain market share or to grow their smartphone shipment from every store.
It takes time for a new store to become a mature store. So also, it takes time for us to train the store managers and also the salespeople in the -- working in the store. So also it takes a lot of time. So we are confident in the long term with the right coverage and also the right product, I think we can compete. We -- I think our focus is on our side. The competition, I think we -- in China market, there's never a lack of competitors. We were born from a competition environment. So we will continue to focus on our product and also off-line channels. I think this is what we are doing now. In the global market actually, we are -- I think we are -- we see so many new opportunities, growth areas. So we'll continue to execute the strategy.
Got it. Yes. My second question comes from the stores, you mentioned that to keep opening the stores. And the other data we noticed that it's about the efficiency of the single-day stores. It seems that those stores opened before last year performed relatively good when we see -- calculate the performance of the newly opened stores, especially when we consider all the stores as a total. It seems that the sales efficiency seems to drop a little bit. I know that we need the time to improve, but how we see the improving in next -- in the second half for the sales efficiency of single stores?
Yes. Thank you. Thank you for the question. Actually, I mentioned actually, so one of the challenges is to train the new store to become more mature store, right, including the training for the employee, the store managers and also the sales guys working in the new store. And also takes time for the consumers to be familiar with the new store, right? I think that's number one. Number two, we will continue to, I would say, to upgrade the software, the tools we are offering to the stores so that we can use the data and use the tool to improve the efficiency of the operation. I think that those the 2 major areas we are working very hard.
And our next question is coming from Piyush with Goldman Sachs.
If I look at the off-line presence and the market share you talked about, could you just give us a feel for what percentage of your overall volumes is through that? And if you look at that market share and the number of stores you've laid out, what is the number of markets -- number of stores you would need to roll out in the country to get to the #1 position 3 years out from now? I suspect you would have to match the market leader in the off-line space to be able to get to that number. And that's the reason for the ask.
The second question I have is centered around your gaming revenue, where you talked about a decrease due to the revised commercial terms. Is this the new revision -- is this a new revision? Or is this a revision that we've seen at work for a couple of quarters already, and it should now stabilize as you can start to see that move forward?
Yes. So the first question is regarding to the off-line coverage. And right now, we have over 7,000 stores. So we -- I think we need much more than 7,000 stores. So right now, our off-line market share based on the Q2 numbers is around 7.3% -- 7.8%. So I think you see that we have a great space to grow. So in China market specifically, there are about probably 70%, around 70% of the smartphone shipped are sold coming from the off-line stores and the 30% is from the online channels. So we -- right now, we only have 7% of the off-line stores. You see the potential. So our competitors, they have much more stores than we have. So we will continue to grow the number of stores, number one. Number two, we will dig out a way. I think we are in the right track to improve, continue to improve the store efficiency so that we can sell more smartphones from the off-line stores. I think this is what we are doing now.
Yes. Right. Piyush, I think with respect to the off-line network, I'm not quite sure we need the same number of stores as the #1 guy. We get to number one. I think our model has proven that it is working and it is very efficient compared to our competitors and our peers. And so therefore, we are hopeful that we don't need that many stores to achieve the same results. I think that's to answer your first question.
To answer your second question, I think on the gaming revenue side, I think, yes, the commercial terms was the one that we talked about last year. And so therefore, I mean as I mentioned earlier, we are beginning to see growth picking up again on the gaming sector as we are comparing apples-to-apples.
Yes. I wonder if you could share with us the rate -- revenue share-adjusted growth rates in gaming on a year-on-year basis for Q2? I realize it's hard to [indiscernible] but nonetheless.
Let me get back to you on that. I don't think we have that number.
We will now emerge to the last question, and the question is coming from [ Tien-Tsin Huang ] with CICC.
Congratulations on the very strong results. I've got 2 quick questions. The first one is about our -- the MIX smartphone position. We think the pricing of our new MIX model smartphone is higher than the previous ones. Should we share more details on the positioning of the MIX series? And I wonder when we expand more series of our Mi brand. This is my first question.
Okay. So actually, we position MIX as the pioneer of the latest technology. So if you remember that a couple of years ago, we will launch our first MIX product, which are full display with the world's first full-display form, even ahead of everyone. So that phone actually was collected by several art museums in Europe, including Pompidou Museum and a museum from Germany and also Denmark. So we'll continue that brand.
I think last year or earlier this year, we launched our MIX. It's a foldable product, which is also very difficult and latest technology we were using in that form. So this time, also, we add, we got the top camera-under-panel technology. It's also a difficult technology, which can be used in the smartphone for the -- especially for the front camera. And also, we bring UWB to that smartphone to the MIX. And also, they can improve the features not only on the smartphone, but also the connectivity between smartphone and IoT, AIoT products. So that's the MIX.
So the Mi series, Mi series is a traditional high-end product for Xiaomi. So we always bring the best user experience to that series. For example, the previous launch, Mi 11 Ultra -- actually in that phone, there were the world's #1 quality camera in that phone. So it's #1 in the DxOMark benchmark. But we're continuing to maintain MIX series and Mi series to bring different kind of user experience to the consumers. I think that can answer your question. Thank you.
My second question is about our China's off-line channels. I think we've seen that we expand really fast in our domestic off-line channel. So I wonder, will we keep this [ fast speed ] likely next year and how we control our, shall we say, planned pace of our off-line expansion?
I think we will continue to improve in the store efficiency, number one; number two, improve the coverage. That means we need to build more stores to cover more territories in China domestic market. Also, continue to improve from the tools we are providing to those stores. So those are the 3 important things we are -- we will be working on even for the next year.
This concludes the conference call today. Thanks again for joining us, and you may now disconnect.
Thank you.