Xiaomi Corp

HKEX:1810

Earnings Call Transcript 2022-Q2

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to Xiaomi 2022 Interim Result Announcement Conference Call. Today's conference is being recorded. [Operator Instructions]

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

[Anita Chan, executive]

Good evening, ladies and gentlemen. Welcome to the investor conference call hosted by Xiaomi Corporation regarding the company's 2022 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 that may not be realized in the future for various reasons. Information about the 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 Chief Financial Officer of Xiaomi Corporation, 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 half 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]

Yes. Thank you. Thank you, Anita. Nice meeting you here again. Thank you for joining our second quarter 2022 earnings call.

In this quarter, our industry faced many challenges, including rising global inflation, foreign exchange fluctuations, complex political environment, COVID-19 resurgence in Mainland China, so on and so forth. These challenges significantly impact overall market demand and our financial results for the period.

In the face of mounting pressure from both domestic and overseas markets, we remain focused on stabilizing our core business and leverage our global scale to mitigate risk in any single market, more so than any other time.

In times of difficulty, it is vital to strengthen our core capabilities and invest in R&D and technological innovation to enhance our long-term competitiveness. With this in mind, we continue to advance our business strategies and strengthen our foundation.

Our second quarter total revenue reached RMB 70.2 billion, with Smartphones revenue reaching RMB 42.3 billion. IoT and Lifestyle Products revenue of RMB 19.8 billion and Internet services revenue of RMB 7 billion.

Meanwhile, we have been actively developing our smart EV and other new initiatives. Our adjusted net profit reached RMB 2.1 billion in the second quarter of 2022, which included RMB 611 million of expenses related to our smart EV and other new initiatives.

In the complicated and ever changing international market, our core advantage is our ability to mitigate risks in any single market with our global scale and footprint. In the second quarter, we maintained our #3 position in global smartphone shipments and continue to advance our market position quarter-over-quarter.

In the second quarter, our smartphone market share grew quarter-over-quarter to 14% globally; 16% in Mainland China; and 22% in Europe. Meanwhile, our smartphone market share was among the top 3 in 55 markets and among the top 5 in 77 markets.

We continue to attract new users through our increasing popular new smartphones, both globally as well as in Mainland China. Our global MIUI MAU reached 547 million in June 2022 and our Mainland China MIUI MAU increased for 7 consecutive quarters, reaching 140 million.

It is worthwhile to note that our overseas Internet Services revenue increased by over 50% year-over-year, contributing nearly 24% of total Internet Services revenue in this quarter. This is a record high.

We continue to invest in R&D and strengthen our competitiveness with technology breakthroughs and to deliver ultimate user experience. In the second quarter, our R&D expenses reached RMB 3.8 billion, an increase of 23% year-over-year. Our R&D expenses are expected to reach RMB 17 billion this year and more than RMB 100 billion over the next 5 years.

Spanning from smartphones to wearable devices, from smart homes to smart manufacturing, from smart EV to bionic robots, Xiaomi has been constantly exploring innovations in various technology settings to better connect people in the world and building an ever evolving Xiaomi technology, EcoSphere. We made great progress on smart EV and other new initiatives.

Last week, we officially announced that we will adopt our self-developed autonomous driving technology. We plan to invest in R&D of RMB 3.3 billion in the Phase I. We have established an R&D team of more than 500 world-class professionals and plan to create a fleet of 140 test vehicles in Phase 1, aiming to become an industry leader in smart EV by 2024.

Meanwhile, we introduced our first self-developed humanoid robot, CyberOne. Robotics is considered the [indiscernible] of manufacturing. With humanoid robots being the ultimate goal for many across the industry, this new breakthrough represents a milestone in our exploration of new technology frontiers.

In August 2022, Xiaomi was named on the Fortune Global 500 for the fourth consecutive year and ranked 266, advancing 72 spots from last year. As a global company, we actively practice corporate social responsibility. In July 2022, Xiaomi was selected into Forbes China's 2022 Best Employers of the Year. Meanwhile, we established Beijing Municipal Natural Science Foundation, Xiaomi's joint innovation fund to support fundamental research in fields including AI, digital information, smart manufacturing.

Furthermore, we customized the Redmi Note 11E for the elderly to bring convenience to their lives, bringing a more elder friendly and accessible environment with our advanced technology. We believe it is necessary for us to [ spearhead ] social responsibility even against macroeconomic headwinds.

Faced with macroeconomic uncertainties and the challenges, what we can do is to firmly execute our core business fundamentals to strengthen our capabilities and to invest in technological innovation and self-improvement. We believe these will lay the foundation for our healthy and sustainable development over the long term. And together with all of you, our unwavering passion will help us discover opportunities and find the silver lining behind the cloud as we make the world a better place.

With that, I will hand it over to Alain to discuss our second quarter results in greater details.

[Sai Wai Lam, executive]

Yes. Thank you, Xiang. Good evening, everyone. I'd like to walk you through more details of our second quarter performance. As Xiang mentioned, this quarter, we faced multiple challenges in our business, including continued macroeconomic headwinds, which caused global inflation to rise significantly as well as extreme volatility in foreign exchange rates.

And in Mainland China, we have witnessed a resurgence in COVID-19, which caused significant disruptions to our offline business. Despite these challenges, we continue to focus on executing our core business strategies and strengthening our long-term competitiveness.

In the second quarter, our revenue reached RMB 70.2 billion and adjusted net profit reached RMB 2.1 billion, which included expenses of RMB 611 million for smart EV and other new initiatives. Our 3 major business segments remained resilient despite the continued challenging macro environment. We maintained our #3 position in terms of global smartphone shipments.

The number of connected devices on our AIoT platform increased more than 40% year-over-year. Our MIUI MAU reached 547 million globally and 140 million in Mainland China, both hitting record highs. Our brand continues to gain recognition worldwide. In August, we were named on the Fortune Global 500 list for the fourth consecutive year and ranked 266, up 72 spots from 2021.

In the second quarter of 2022, global smartphone industry shipments dropped nearly 8% quarter-over-quarter. Despite this, our smartphone shipments still achieved quarter-over-quarter growth and we have managed to increase our global market share for 2 consecutive quarters from 12.5% in Q4 2021 to 13.8% in Q2 2022. Our investment in premiumization strategy have resulted in increased market share in the premium smartphone market in Mainland China.

In this quarter, according to third-party data, our market share in the RMB 3,000 to RMB 4,000 price segment in Mainland China increased 3.5 percentage points year-over-year to 18.2%. And in the 4,000 to 5,000 price segment, our market share rose 2 percentage points year-over-year to 15.5%.

We delivered strong results during the 618 Shopping Festival. Our cumulative paid GMV from all sales channels exceeded RMB 18.7 billion during this festival, and we ranked #1 among Android smartphones in terms of both sales volume and sales value on jd.com, tmall.com, and other platforms. Our IoT and Lifestyle Products also achieved remarkable results. On jd.com and tmall.com, we took 148 #1 rankings across AIoT categories.

Our new retail strategy in Mainland China has been making good progress. As of June 30, we had over 10,600 off-line retail stores and our offline smartphone market share in Mainland China increased to 8% this quarter. Our off-line new retail strategy is highly complementary to our premiumization strategy. According to third body data, in Mainland China, the proportion of our premium smartphone shipments sold through the offline channels increased over 5 percentage points year-over-year in this quarter.

In addition, our off-line stores have helped us cross-sell more IoT products. In this quarter, the proportion of our off-line store GMV derived from IoT products increased over 11 percentage points year-over-year. Due to improved efficiency, our average single store GMV in June rose more than 20% compared to December 2021.

Next, I will discuss our latest technologies in greater detail, some of which we debuted in our launch event last week. Technology advancement is our foundation, and we continue to push the frontiers in technological innovation. This year, we expect R&D expenses to reach RMB 17 billion, which represents a 40% compound annual growth rate from 2017, and we expect to invest over RMB 100 billion in the next 5 years.

At the same time, we are building an ever-expanding technology ecosphere expanding smartphones, wearable devices, smart home, smart manufacturing, smart EVs and bionic robots to better connect people to the world around them and improve their lives.

In August, we launched our second-generation foldable smartphone, which we call Xiaomi MIX Fold 2 with a revolutionary ultra slim and lightweight design. Xiaomi MIX Fold 2 features our self-developed Micro Waterdrop Hinge and flexible ultrathin glass, achieving width of 5.4 millimeter unfolded and a weight of 262 grams. And it's one of the thinnest foldable smartphones in the market.

Xiaomi MIX Fold 2 is also equipped with the Eco2 OLED flexible light, which greatly increases light transmittance while reducing power consumption. Furthermore, it is also equipped with the Snapdragon 8+ Gen 1 processor, the Leica Summicron lenses and MIUI Fold 13, which is designed specifically for foldable smartphones.

We also launched our new premium wearable products alongside Xiaomi Mi -- MIX Fold 2 last week. Our new TWS earbuds, the Xiaomi Buds 4 Pro offer improvement in sound quality, noise cancellation and dimensional audio so that users can experience immersive life-like sound.

Our smartwatch, Xiaomi Watch S1 Pro provides a truly luxurious experience with its exquisite appearance, full range of fitness modes and multiple health functions. Both represent the highest priced TWS earbuds and smartphone we have launched today.

In the smartphone category, we also vastly upgraded our products to bring healthier, smarter appliances to our users. Our large capacity Mijia Dual-Drum washer dryer integrate many functions such as separate and simultaneous washing and drying and bacteria and mite removal.

Our Mijia Purifying Range Hood uses advanced technology to capture smoke fumes and PM2.5 particles to protect air quality while cooking. All of these represent our application of innovative science and technology to home appliances.

Last week, we also provided an update on our latest autonomous driving technology. We plan to adopt a self-developed full stack approach, covering driving scenarios including highways, urban landscapes, parking lots and more. At present, our autonomous driving team has more than 500 employees, and we plan to invest RMB 3.3 billion in the first R&D phase with the goal of becoming a 1st Tier player by 2024.

We also launched our first full-size humanoid bionic robot CyberOne last week, demonstrating our exploration of new cutting-edge technology. CyberOne is capable of bipedal motion balancing using mechanical joint motors and full body control algorithms. Furthermore, it can detect human emotions and reconstruct 3D virtual environments of the real world using our self-developed audio and vision of algorithms.

Next, let us dive different to each segment, starting with smartphones. In this quarter, macroeconomic headwinds as well as COVID-19 resurgence impacted overall smartphone demand. And global smartphone industry shipments declined 8% quarter-over-quarter. Against this challenging backdrop, we successfully increased our smartphone shipments by 1.5% quarter-over-quarter to reach 39.1 million units. And smartphone revenue reached RMB 42.3 billion.

We announced our partnership with Leica in May. And in July, we launched the Xiaomi 12S series, our first smartphone series with an imaging system called Engineered with Leica. Xiaomi 12S Ultra is powered by the Snapdragon 8+ Gen 1 processor and 2 of our proprietary chips, the Surge G1 battery management chip; and Surge P1 charging chip, offering faster performances and lower power consumption.

Xiaomi 12S Ultra also delivers a truly exceptional imaging experience. It features Leica Summicron lenses and the extra-large Sony IMX989 1-inch image sensor, along with the Leica Authentic Look and the Leica Vibrant Look imaging profiles, pushing imaging technology to new heights. Its outstanding photography experience has won great reviews and all 3 models of our Xiaomi 12S Series have achieved over 98% positive ratings on jd.com.

We are committed to bringing cutting-edge technologies to the mass markets. In August, we launched Redmi K50 Ultra, which is equipped with the Snapdragon 8+ Gen 1 processor, a customized 1.5K display that balances image quality with battery life and a 5,000mAh battery with support for 120 watts fast charging.

Despite the challenging macro-economic environment, we continue to advance our overseas business and maintain leading positions in major global markets. In this quarter, our market share improved quarter-over-quarter in Europe, in Mainland China, in the Middle East, in Southeast Asia, Latin America and Africa. Furthermore, our ranking improved quarter-over-quarter in Europe, Mainland China and the Middle East.

As we mentioned before, our scale as well as our global operations help us mitigate volatility risk in any single market. According to Canalys, in the second quarter of 2022, we ranked top 3 in 55 markets and top 5 in 67 markets globally.

We continue to strengthen our operations in the overseas carrier channels. In this quarter, our carrier channel market share in Europe increased by 1 percentage point quarter-over-quarter to 18%. And our carrier channel market share in Latin America increased by 1.6 percentage points quarter-over-quarter to 19.3%. Furthermore, our smartphone market share for carrier channels ranked top 3 in 40 overseas markets.

Now let's look at the IoT business. Performance of our AIoT business was resilient, benefiting from solid growth in Mainland China. In the second quarter, our IoT and Lifestyle Products revenue reached RMB 19.8 billion, up 1.7% quarter-over-quarter. As of June 30, the number of connected devices on our AIoT platform reached 527 million, up over 40% year-over-year. The number of users with 5 or more connected AIoT devices exceeded 10 million for the first time, up 37% year-over-year. In June, MAU of our AI Assistant reached 115 million up nearly 13% year-over-year and MAU of our Mi Home app reached 70.8 million, up over 25% year-over-year.

Let's go into more details on the key IoT categories. In the second quarter, our global smart TV shipments achieved year-over-year growth to reach 2.6 million units against an overall industry decline, and we maintained our top 5 global rank. In Mainland China as well as India, we were able to maintain our #1 position.

Our Smart White Goods business is growing steadily and making good progress in the premium markets. In this quarter, revenue of our White Goods business grew by more than 25% year-over-year and achieved a record high. Shipments of air conditioners exceeded 1.2 million units in the second quarter, an increase of over 35% year-over-year.

Furthermore, cumulative shipments of air conditioners in the first 7 months of 2022 already exceeded the 2 million units we shipped in 2021. Meanwhile, our refrigerators and washing machines are also gaining market recognition. In this quarter, refrigerator shipments reached approximately 116,000 units, an increase of 30% year-over-year and washing machine shipment exceeded 240,000 units.

Last week, we launched our new tablet, Xiaomi Pad 5 Pro, featuring a 12.4-inch 2.5K display, Snapdragon 870 processor, 20-megapixel front camera on the [ long ] side and ultra-long battery life. It also comes equipped with MIUI Pad13, which offers customized system functions adapted for tablets, offering a compelling experience for both office use as well as entertainment.

We continue to be a leader in wearable products globally. Our TWS shipments ranked #3 globally and our ranking in Mainland China rose to the #1 position in the second quarter. Furthermore, our Xiaomi Smart Band 7 Pro has been well received with its brand-new design. It features a large rectangular display with a thin lightweight design as well as the built-in GPS, 117 fitness modes and all day health tracking. Since launch in July, it has shipped more than 400,000 units in Mainland China.

Now let's look at the Internet Services. In this quarter, our global and Mainland China MAU both achieved record highs. Our global MAU in June reached 547 million, an increase of 93 million year-over-year and our Mainland China MAU reached 140 million, an increase of 16 million year-over-year. In addition, our global TV MAU reached 53 million, showing very healthy growth momentum.

Our Internet Services revenue remained stable despite pressures in Mainland China. In this quarter, Internet Services revenue reached RMB 7 billion. Our Internet Services gross margin rose 2.2 percentage points quarter-over-quarter to 73% as a result of higher revenue contribution from the advertising business. Our global advertising revenue remained stable despite the decline in industry advertising budget in Mainland China.

Thanks to the expansion of our overseas user space, especially in the developed markets, our overseas Internet Services revenue achieved a quarterly high. In this quarter, overseas Internet Services revenue reached RMB 1.7 billion, up 52.1% year-over-year and accounted for a record high 23.9% of total Internet Services revenue.

Benefiting from multiple monetization engines, our advertising business enjoyed solid performance. In this quarter, performance and brand advertising revenue in Mainland China was down quarter-over-quarter due to the impact of COVID-19, which resulted in lower advertising budget. However, our overseas ad revenue hit another quarterly high, driven by strong operations of our content and services.

Our global search revenue has continued to achieve record high now for the 8 consecutive quarters. Besides the growth in Mainland China, improved monetization capability and our expanding MAU base in the overseas market, has also helped our overseas search revenue to achieve another quarterly high. Furthermore, as our pre-installed units increased and as we work with more global partners, our pre-installation revenue in both Mainland China and overseas markets increased quarter-over-quarter.

Our TV Internet Services revenue continued its robust growth momentum driven by enriched content and expanded user scenarios, our TV value-added services revenue increased by about 25% year-over-year.

Now let's move on to the more detailed financials. First, take a look at the top line performance of each segment. In the second quarter, total revenue was RMB 70.2 billion, and 48.4% came from overseas. Smartphone revenue was RMB 42.3 billion; IoT revenue was RMB 19.8 billion and Internet Services revenue was RMB 7 billion.

In the second quarter of 2022, our gross margin reached 16.8%. Smartphone gross margin decreased year-over-year to 8.7%, mainly due to enhanced promotional efforts to clear our inventory, especially during the 618 Shopping Festival in Mainland China as well as an increase in costs due to U.S. dollar appreciation.

IoT gross margin increased year-over-year to 14.3%, mainly due to decreased price of key components, such as display panels. Smartphone and AIoT gross margin decreased quarter-over-quarter due to enhanced promotional efforts during the 618 Shopping Festival.

Internet Services gross margin decreased slightly year-over-year to 73% as a result of lower translation revenue related to smartphone shipments and increased quarter-over-quarter driven by higher contribution from our advertising business.

In the second quarter, overall operating expense ratio was 14.8%, which included expenses related to smart EV and other new initiatives of RMB 611 million. We'll continue to invest in R&D and our R&D expense ratio reached 5.7% in this quarter. Our cash resources remain robust, reaching RMB 102.5 billion as of June 30.

Lastly, I would like to provide an update on our ESG initiatives. We actively practice corporate social responsibility and a few honors to have been recognized for our efforts. In July, Forbes placed Xiaomi on its 2022 Best Employers of the Year list, and we were named as China's Best Employer of the Year, China's Most Sustainable Employer of the Year, and China's Most Digitally Responsible Employer of the Year. Furthermore, we won the best ESG in the technology hardware sector in II's 2022 Asia Pacific Ex-Japan Executive Team awards.

We continuously strive to improve accessibility options and strengthen our data security. For accessibility, Xiaomi built "My Own Voice" project, which creates a unique and customized voice for users with speech disorders using our self-developed text-to-speech technology. Meanwhile, we collaborated with the Xinyang government to customize the Redmi Note 11E for the elderly and bring convenience to their lives.

With respect to data security, we launched Xiaomi Electric Scooter 4 Pro, which is the world's first scooter with Gold Level certification in Underwriter Laboratories IoT security rating. All of these demonstrate our commitment to using technology for good and our mission of letting everyone in the world enjoy a better life through innovative technology.

Finally, we have always been committed to public welfare initiatives. After the flood disaster in Henan province in July last year, Beijing Xiaomi Foundation reconstructed 79 village schools and modernized their teaching equipment. In August, we donated RMB 1 million to Hainan Red Cross Society to support the pandemic prevent and control there and the procurement of related supplies.

We also try to give back to our community through talent development. Recently, Beijing Xiaomi Foundation has committed to donate RMB 500 million to Beijing Municipal Natural Science Foundation Committee to support research and education. In addition, since February of this year, Xiaomi Young Scholar Program has been rolled out to over 10 universities in Mainland China, including Peking University and Tsinghua University.

This concluded our prepared remarks. Now let's open the call to questions from investors.

[Anita Chan, executive]

Thank you, Alain. We will now proceed to the Q&A session. [Operator Instructions] Meanwhile, we read your questions in Mandarin followed by English recap next. Operator?

[Operator]

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

[Andy Meng, analyst]

[Foreign Language] I will do some English translation. My question is related to the smartphone volume and gross margin. In the second quarter, the smartphone shipment has seen slight increased versus first quarter but the gross margin has been quarter-over-quarter declined. The management has mentioned June 18 promotion and FX issues.

Looking into the third quarter, we have seen the continuous launch of high-end smartphone models, including Xiaomi curved S series, Mix Fold 2. Will those high-end products [ into ] this positive impact on the gross margins? Given there's no June 18 promotion festival in the third quarter, how should we think about the smartphone volume and gross margin trends in the coming quarters?

[Sai Wai Lam, executive]

Thanks, Andy. Let me try to answer your question in English. As I mentioned in my prepared remarks, obviously, there are a few factors that drove the decline in gross margin in Q2. 618, I think, is one. Obviously, that's a big festival in China. The FX, the U.S. dollar appreciation, obviously increased our cost versus last year. And so that has also impacted our gross margin somewhat.

In addition to that, last year, I mean, I think it's worth mentioning that in Q2 of last year. So obviously, we have a number of high-end products launching in that quarter. This year, due to the fact that we're waiting for the new Qualcomm chipset to be shipped the new 8 Gen Plus, we delayed our launch -- the launch of our premium products, the Ultra, the 12S series, et cetera, to the third quarter of this year. And as a result, I think there are more old products that we're trying to sell and clear in second quarter, which has caused the margin to decline.

Looking forward to the second half, so obviously, we were trying to make sure that the gross margin will stay at a healthy level with the new products that we're launching. With some of these new products that we'll be launching in the overseas market, et cetera, we will hopefully be able to maintain our gross margin at a healthier level.

But in terms of the shipment forecast, obviously, we are trying to -- with the -- it depends on a lot of factors in the market. But obviously, we are hoping that the second quarter will be better than the first quarter as usual.

[Xiang Wang, executive]

Second half.

[Sai Wai Lam, executive]

Second half will better than the first half as usual, normal, with the fact that there are a lot of overseas events, including Diwali, including the Double-11 event, including the Black Friday, Christmas, et cetera, et cetera. So in a normal market cycle, the second half for smartphone shipment, it tends to be better than the first half.

[Operator]

Our next question comes from Kyna Wong with Crédit Suisse.

[Kyna Wong, analyst]

So I have a follow-up question on the smartphone business as well that the -- we see the inventory -- we find two things. One is the provision of inventory impairment increased in the first half and what kind of the inventory the company has applied the provision to write off?

The second thing is we see the inventory finished goods actually up 35% year-over-year as well, in which that -- how should we expect in the second half, along with the new product launch and also the sales promotion in the second half as well, how to -- how that will impact to the gross margin, which I [indiscernible] second half to be staying at healthy level? But what should we understand that implication from the inventory perspective?

[Foreign Language]

[Sai Wai Lam, executive]

Thanks, Kyna. Thanks for your question. In terms of our provision for inventory -- provision for impairment for inventory, we strictly follow the IFRS accounting standards. And for the long-dated inventory, we will be taking provisions on those long-tailed products. So obviously, once we sold those products and depending on how much we provisioned, we'll be able to -- well, if we are [ selling ] more than we provisioned and we'll be able to reclaim it back right, et cetera.

But that's something that, as many people highlighted and as Xiang Wang also highlighted, we spent our Q2 clearing some of our old inventory but there's still something that we need to clear out over time.

So obviously, we also said that during the 618 festival, we have been successful in clearing a lot of those inventories, especially in China. So in China, our inventory has come down to a pretty healthy level at this point in time, right?

In terms of -- you mentioned the finished goods being much higher in our inventory this quarter. A lot of it is due to the overseas markets. The overseas market, the inventory has stayed relatively high. And as we mentioned, this is due to some of the lower consumption power in the overseas market due to inflation, due to FX, et cetera, et cetera, which we won't go into.

We'll obviously spend second half trying to dissolve some of these finished products using a number of means, including promotions, including adjustment to our production schedules, et cetera, et cetera, to remain -- to take that back down to a more normal level. It's also fair to say that if we look at the inventory for now, although it is high, we don't think that -- we think that a lot of these are not really big problem for us. A lot of these, I think, can be cleared with sufficient measures. So I hope that answers your question.

[Operator]

And our next question comes from Timothy Zhao from Goldman Sachs.

[Timothy Zhao, analyst]

[Foreign Language] My question is about the Internet Services revenue. Could management provide some guidance or outlook, how we should look at the MAU and advertising revenue growth into the second half of this year, especially as China's macro becomes more stabilized in the second half, how should we look at the revenue in the second half in China?

And also related to this, because premium phone is quite important for the Internet Services revenue growth. Could the management share some color on the proportion of premium phone shipments as a percentage of total shipment in the second quarter and whether we have any target to achieve for this year?

[Sai Wai Lam, executive]

Thanks, Timothy. Let me address your questions and see if Xiang Wang has more to add, right? In terms of Internet Services, in terms of MAU, so obviously, as you can see that our MAU has continued to grow pretty healthily. We added close to 90 million MAUs globally. We added 40 million MAUs in China over the last year. And if you look at the past 2 quarters, in China alone, we added close to 10 million -- over 10 million MAUs. So that shows that a lot of new users are coming to Xiaomi and willing to try out our phones, especially the premium smartphones that we offered. And that will set a very strong foundation for our Internet Services revenue going forward, both in China as well as in the overseas market.

So obviously, in the near term, we are in China, especially, the overall ad budget has not been healthy, as you know, given COVID, given some of the regulatory constraints and whatnot has impacted the overall ad budget, right? I think that's something that we've noted many times in the past. This quarter, the certain lockdown of certain cities in China has caused the brand ad budget to drop as well. So what we've seen is -- and I see that coming from several of our peers, as we're mentioning that the brand advertising budget has come down in the second quarter of this year.

So that has curved the overall size of the growth, but at the same time, as we mentioned that we've seen quite healthy growth coming from the overseas market with the help of the MAU growth that we've seen. I think in the second quarter -- in the second half, I think we have to see how the market develops. Obviously, the overall ad budget for this year, I don't think people are having a pretty robust forecast, and obviously, that will filter down to us. But at the same time, I think the overseas market has been quite healthy for us, especially if we continue to add MAUs to our user base. So I hope that answers your first question. right?

In terms of the second question, with respect to the premium smartphones. The one focus that we have this year is to improve the quality of our premium smartphone. And that's a very important focus for this year. And I think that, as you can see from the recent launches of the 12S as well as our Fold product, I think those have received pretty good review from our users. And I think that's something that we prioritize this year, making sure that these premium smartphones are of high quality. And I think that's something that will set us up with our brand image as well as set us up for much improved premium smartphone shipments in the coming quarters.

The other thing is, obviously, we did not compare year-over-year also because there was some delay in our schedule this year because of the launch of Qualcomm. So that's something that we don't think is quite comparable with what we disclosed in the first half of last year.

[Xiang Wang, executive]

Yes, actually, the improved the market share of high-end smartphones is a long effort. So we will continue to make improvement in the overall quality of the high-end smartphones. So we see a good sign from the market that we get a very, very positive feedback from the market about our 12 Ultra, 12S and also Fold. I think that will give us the confidence that we will continue to invest into those improvements.

And also the high-end smartphones can also help us to drive the Interest Services revenue. So we will continue to improve the user experience so that in the longer term, we can grow the Internet Services revenue. The good signal is that we'll continue to increase the MAU in China and outside of China. And as Alain just mentioned, so we keep growing the overseas Interest Services revenue. That's also very, very good for us.

[Operator]

And our next question comes from Hanjing Wen with CICC.

[Hanjing Wen, analyst]

[Foreign Language] For the Internet business, could management share the driver for the strong growth of Internet business in overseas market this quarter and our long-term strategy for the overseas Internet business? And we are very interested about our robot, CyberOne. Could management share some color about our long-term strategy in this area?

[Sai Wai Lam, executive]

Let me first address that and then Xiang Wang can talk about the robot. On the overseas Internet revenue, we mentioned a few factors that has driven the growth in the overseas Internet revenue. Number one is pre-installation. As the shipments -- as our smartphone shipments continue to increase in the overseas market, the ARPU, right, which we are able to achieve on a per-installed smartphone has also increased, right? So that has helped the pre-installation revenue to increase.

Second is search revenue as our MAU continues to grow, right, the search revenue, the search volume will grow. And as a result, our search revenue continues to improve. I think this is quite straightforward. Also, I think to note that in the search revenue, revenue coming from a user in the more developed market is higher than a user coming from a developing market, right? So as we have more users in the developed market using our search engines or using other people's search engines, we're able to receive a share of that revenue, of the search revenue.

As we look forward, we do think that there are still a lot of room to grow the overseas Internet revenue. And because we are continuing to penetrate our market share, continue to increase our market share. We got to Europe -- we got to #2 in Europe this quarter. So we think that there's still a lot of room to improve our monetization in those areas.

At the same time, we are also exploring other ways of monetization, not just advertising, do we have scope to improve our monetization, for example, in gaming, in literature, et cetera. Those are stuff that we've been exploring. Xiang, you want to answer the question on...

[Xiang Wang, executive]

Yes. And also, as we continue to increase our market share in Europe, especially in Western European market that will also help us to increase our Internet Services revenue.

So regarding to the robotics. So I think this is the -- CyberOne is also -- although it's a second generation of our -- not the category, but still in a very, very early stage. So actually, the initial idea is to create an open platform so that like more engineers get involved, get interest into those areas that can help us in the longer term. And also, we can also -- like a lot of the engineers outside of Xiaomi also participate those innovations.

So that's also -- the current CyberOne is also very -- in a very early stage. The cost is still very high. So we will continue to invest and to explore for the future.

[Operator]

And our next question comes from Yingbo Xu with Citic.

[Yingbo Xu, analyst]

[Foreign Language] Could you please give us more colors about the IoT market and overseas market?

[Sai Wai Lam, executive]

On the IoT market side, this quarter, the upshot is that we enjoyed pretty healthy growth in the China market Q-over-Q, I think driven by some of the new products that we launched, which are super competitive, including Smart White Goods including our Pad product, which continues to be quite competitive and our wearable products. The low light is the overseas IoT market.

As we said it last year, I believe, some of our overseas businesses, IoT business was hit by very high logistical costs, which continues to stay high as the fuel costs continue to increase. So that's one that has hurt our shipments to those markets as well as our pricing in those markets.

Second is the -- some of the macro factors that we talked about, including high inflation, high interest rate, et cetera, has really hit the consumption for a lot of our users in the overseas market. So they cut down on some of the discretionary electronic spend, such as our robot cleaners, our scooters, et cetera. So I think that's something that we've seen what happened this quarter.

Obviously, as we said previously, we all think that IoT in the overseas market is a huge market. So we continue to be optimistic that the market will rebound in the future. But obviously, in the short term I think they have to be [ grappled ] with some of the factors we mentioned about high inflation, even high U.S. dollars, which obviously caused the consumption power to drop as well as some of these geopolitical uncertainties. that has limited the outflow of U.S. dollars in some of the more developing countries.

So I think that, hopefully, these macro factors will come and go. And then we'll be able to see the growth pick up again in the overseas market.

[Operator]

And our next question comes from Thompson Wu with UBS.

[Thompson Wu, analyst]

Just very quick one. In the overseas smartphone businesses, especially in LatAm, India and Africa, can you give us a quick update on the demand in the overall environment. [Foreign Language]

[Xiang Wang, executive]

Yes. So Yes, we will continue to be very, very positive on the growth potential in many, many international markets, for example, the Latin American market and other nation markets, Latin America, India and Africa, yes. So Africa and Latin America, right now, we're doing very good. So I think we'll continue to grow our business in Latin America and Africa.

India also -- so we -- once we solve the supply issues in India, I think we will take Diwali to ship a lot of products into the Indian market. In the first half, actually, we had some issues on the entry-level supply. So I think now, we have the improvement, and we will continue to work with our partners online, off-line in the second half, especially on the Diwali. So yes. I think -- yes, that's the question. Alain, do you have anything?

[Sai Wai Lam, executive]

Well, look, I mean, I think Thompson, I think the questions that you have is the -- I don't know if the overall demand or you're seeing our demand, right?

So I think the overall smartphone market, I think, in many of these areas that you talked about this year in Q2 has seen year-over-year drop just by the global market. I think that for us, obviously, we talk about some of the areas that we've been focusing on, such as Latin America.

India, I think that there's obviously more competition coming through. And so some people ask whether -- why our market share dropped in India, but that's also due to some of the supply in the low-end market, which we don't have. And so we don't think that the losing market share is a lot at all detrimental to our business.

In Latin America, obviously, you've seen that our shipment despite the overall market difficulty has continued to increase over -- quarter-over-quarter and we've been able to pick up market share in those areas. Does that make sense?

[Xiang Wang, executive]

Yes. For example, in Latin America, our market share grew by 3%. Yes. I see the shipment increased 24%. So we think it's very, very healthy. In Colombia, we'll keep #1 position. And also Chile, we maintained our #2 position. So I think we see a lot of potential in Mexico, Brazil and other countries in Latin America.

[Operator]

And our next question is come from Leping Huang with Huatai.

[Leping Huang, analyst]

[Foreign Language] The Xiaomi op maintained very high operating efficiency in the last few years, including the gross margin of 17.7% and the 7.9% for the operating margin last year. Because I see that the revenue was -- due to the revenue decline, we see operating efficiency was declining in the last few quarters. I fully understand that you need to balance the future investment, especially on electric vehicle, but I want to know how you keep the balance between the investment and operating efficiency in this difficult time?

[Sai Wai Lam, executive]

So actually, we are -- yes, we are -- we continue to invest into the R&D. So if you look at the R&D investment, volume actually has increased significantly. So I think the challenge for us is because of the demand issue, our revenue dropped, right? So that will impact the efficiency. So that's the issue. But we continue to -- we are very, very confident long term, so we will continue to invest into the R&D, including the mid- and high-tier products and the new initiatives. So we believe that will help us in the longer term.

And at the same time, of course, we will do everything possible to increase our shipment, our market share in China and also in many other strategic regions like I just mentioned Latin America and Europe and China.

[Leping Huang, analyst]

Do you have any minimum requirement on this operating margin where you operate the company? Sorry, sorry, Alain.

[Sai Wai Lam, executive]

But I think, Leping, I mean, obviously, like a lot of our peers, we're also trying to control our costs as well. If you look at the disclosure on our headcount, you'll see that we reduced our headcount Q2 versus Q1. Not a lot, but obviously, the effect will take some time to come through to the bottom line.

Obviously, at the same time, while we are reducing our headcount, we've also been increasing our headcount in some of these new areas like electric vehicles, right? So but it will take time for these effects to come through. So we are doing like what a lot of our peers in the industry are doing, trying to extract more efficiency into our business, right?

Number one, while balancing the increase in expenses related to the new initiatives. So I think that's one. Two is obviously -- we're also trying to improve the core profitability of our business, the profitability of our core business at the same time, right? We think that there's still a lot of room to grow our operating profit. And so that's something that we are looking to do in the future. And then third thing is in terms of the target we have in mind, I mean, obviously, if you look at historically, our operating margins have been kind of around 10% to 12% area, right. The operating expense ratio was about a 10% to 12% area. And so this is something that if we see the environment improve, we'd like to get back to that level.

[Operator]

We will now invite the last questions. And the question is come from Gokul Hariharan with JPMorgan.

[Gokul Hariharan, analyst]

My question is regarding EV. So it looks like Xiaomi is following a bit more of a full-stack strategy on the EV development, including in-force manufacturing, developing the full autonomous driving stack, et cetera. Could we talk a little bit about what are -- how Xiaomi decides what to do in-house versus what to go out with other vendors, given that in the smartphone side and other IoT devices, we have taken a very asset-light and more partner-centric kind of approach to address that market?

And also on the autonomous drive, would you consider Xiaomi, given that you showcased your solution recently. Should we think of Xiaomi as a competitor to Baidu, Apollo or Huawei or you're going to be more like a partner to those software-centric companies?

[Sai Wai Lam, executive]

Well, I think on the -- topic on the EV side, we look at all possibilities, right? I think as you can see from the past, we've done some of these, we've done self-development. We've also acquired companies like Deepmotion. We've also invested in a lot of these related technology companies through our investments team. So I think we're taking a fairly flexible approach in terms of -- open approach, I should say, I should say open in terms of whether we do it in-house, whether we partner, whether we use investments as a vehicle, et cetera, et cetera. I think that's something that we look at all possibilities, and we find the best thing for us to do to put it this way. So that's how we approach this, number one.

Number two, in terms of autonomous driving technology. At this point in time, I think we are just looking to use all these technology in-house for our own car. We haven't thought about licensing it out to other people or enabling other technologies. This is also a similar approach that we take in our smartphone business. So I hope that answers your questions.

[Operator]

Thank you. This concludes today's conference call. Thanks, again, for joining us. You may now disconnect.