Xiaomi Corp

HKEX:1810

Earnings Call Transcript 2023-Q2

[Operator]

Ladies and gentlemen, thank you, and welcome to Xiaomi's Interim Results Announcement Conference Call. This conference will be recorded. [Operator Instructions] I'd like to hand over to Ms. Anita Chan, Head of Investor Relations and Corporate Finance.

[Anita Chan, executive]

Good evening, ladies and gentlemen. Welcome to the investor conference call hosted by Xiaomi Corporation regarding 2023 interim results. Before we start, I would like to remind you that this call may include forward-looking statements, which are underlined by a number of risks and uncertainties. Information about general market conditions are coming from a variety of sources outside of Xiaomi. Our presentation will also contain 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.

We have with us today, Mr. Weibing Lu, Partner and President of Xiaomi Corporation; Mr. Wai Lam, VP and CFO of Xiaomi Corporation. To start, Mr. Lu will share recent strategic and business updates of the company, and Mr. Lam will review the financial performance of the first half. Following that, we will proceed to Q&A session. Over to you, Mr. Lu, please.

[Weibing Lu, executive]

Good evening. Thank you very much for joining us on our second quarter earnings conference call. As you can see from our Q2 financial statements, we delivered robust results across key operational metrics, including the improvement on GP margin, effective cost controls, effective inventory management and stronger profit trajectory. Some of you may wonder, how come Xiaomi achieved significant improvements on its business operations amid this challenging environment. Is this improvement sustainable? Let's address these questions on our call today.

First, let's look at global macro and smartphone market. Since the beginning of the year, the global economy has shown signs of gradual recovery. However, ongoing pressure of the macro environment continues to weigh on the industry. IMF released a report in July that predicted '23 global growth was further slowdown to 3%. While on the upside, global inflation pressures would ease faster than expected. Against this backdrop, the global smartphone market has yet to fully emerge from these depressed conditions. The first half, the global smartphone market declined by 12% year-on-year and was down 5% year-on-year in China.

Looking into the second half, data from the third party has shown that the global smartphone market decline will soften to low single digits and we believe the global consumer electronics market to recover in a gradual manner. Operational improvements came from internal adjustments rather than external factors. The right strategy at the perfect timing since implementing our corporate strategy of dual emphasis on scale and profitability, we are delighted to see that each one of our business segments is now operating more efficiently and expanding in a well-balanced way. Meanwhile, we're also strengthening our corporate structure demonstrating excellent execution and driving better overall results.

We have also been enhancing all-round capabilities. Over the past 3 years, we've materially transformed our capabilities across the board. And these qualitative changes are sustainable and will continuously drive us forward. As for Q2 overall performance, in the second quarter of 2023, we continue to successfully navigate the market cycles. All of our business segments were exceptionally resilient. Our total revenue amounted to RMB 67.4 billion. This represents a decrease of 4% year-on-year. We're able to temper the decline compared with the past few quarters.

Our efforts on improving operating efficiency marks another key driver for delivering better-than-expected profitability. In the second quarter, gross profit margin reached a record high of 21% despite our ongoing investment on the new initiatives. We still managed to reduce our core business operating expenses drastically on a year-on-year basis, down RMB 1.1 billion, representing a decrease of 10.8%. Our improved GP gross margin and also reduced expenses. Our adjusted net profit in second quarter was RMB 5.1 billion, surging by 147%.

Our profitability in the first half was on par with profit level for the full year last year. We also ensured efficient ongoing investment of a new initiative. In the second quarter, our expenses related to Smart EV business and new initiatives accounted for RMB 1.4 billion, less than we expected, excluding our expenses related to Smart EV business and new initiatives. Earnings from our core businesses RMB 6.6 billion.

Now let's discuss topics that investors care most about. First, about smartphone premiumization. Boosting on our solid position as the industry's third largest global smartphone maker with a market share of nearly 13%, we have evolved the blueprint of our smartphone premiumization strategy. In the second quarter, the market share of our smartphone sold in the RMB 4,000 to RMB 6,000 price range, in China increased from 6.5% to 12.7%. Our premium smartphones as a percentage of our overall smartphone units sold in China continued to ramp up reaching 20.1% this quarter, representing an increase of 3.3 percentage points.

ASP for smartphone RMB 1,112, an increase of 2.8%. In August, we unveiled Xiaomi MIX Fold 3. Our Xiaomi MIX Fold 2 last year featured slim and light as the main technology breakthrough, setting a new bar for lightweight foldable smartphones.

This year, Fold 3 featuring slim and lightweight design while maintaining the flagship smartphone features. Both 3 features are our proprietary hinge and dragon scale fiber, it is slim and solid, the casing is a Quad camera system with like optical lenses and is supported by unrivaled battery life. We've achieved a new high in foldable device technology innovation and successfully lead the market. We invest in our technology amid the challenging environment and a greater internal pressure and operation. We still firmly invest in R&D. We upgraded our technology strategy and continue to advance our long-term philosophy.

And let's talk about AI, which is a foundational track representing the future of productivity and Mi's long-term investment. We have gradually established our AI capabilities, and we've recruited more than 3,000 top-tier AI professionals. In terms of self-developed large language models, we have focused on lightweight LLM and on device deployment. And so far, we have made meaningful progress. Our LLM within tens of billions of parameters has achieved top rankings from globally acknowledged organizations. Integration of larger language models on our smartphones has started to yield results. The best products will always be recognized by our market and our sales figures have been increasing fivefold, and there has been a shortage of products.

Last year, when the situation was particularly difficult, we invested consistently. We trust that such investments in R&D will bring fruitful results when things turn for the better in the market. On 14th of August, we have talked about our philosophy in terms of investment in technology. We are committed to long-term investment. Last time when we communicated with you about AI, well, you should know that we have a team of more than 3,000 experts. And we will continue to develop towards the lightweight model and also will focus on the domestic market first.

We have integration of LLM on our smartphones. And we also empowered our intelligent voice-based AI assistant with large language model and started institution-based testing for this model. AI-related investment opportunities has been another focus for us. Xiaomi and Kingsoft and [indiscernible] joint fund has already invested in 6 LLM related companies. We continue to explore new frontiers of cutting-edge technologies. We have unveiled CyberDog 2, our next-generation bio-inspired quadruped robot with an open source ecosystem equipped with our self-developed CyberGear Micro-actuator and powerful OT motor AI-backed fusion sensing and decision-making system. It's a slight small term natural and life like. As part of our aspiration to drive the solution of biorobotics, we opened the source code and drawings of the product to greatest extent possible.

Now I want to talk about global expansion. Despite the macroeconomic headwinds in the global market, we continue to expand our global footprint. We noticed some of our peers already exit from certain areas, but no matter how hard it is, we will reinforce our presence across regions and markets to unlock additional potential. In the second quarter, our smartphone shipment returned to #2 in Europe with market share of 21.2%. We see enormous potential in the Middle East, where our smartphone shipment ranking rose to #2 in the second quarter with a market share of 17.1%.

Solid growth in our smartphone business propelled our global MAU of MIUI to all-time-high. In June, global MAU of MIUI reached 600-odd million up 10.8%. We also expand our digital infrastructure development in more regions in the future, improving effectiveness, stability and controllability. Throughout July, we brought overseas managers together for a series of meetings at our headquarter, now that the pandemic has receded, these in-person gatherings were able to bring our global team even closer for tighter collaboration.

Our headquarters together and Global Core teams reviewed our past efforts and reaffirmed our strategic goals for future growth. During the pandemic, there was a shortage of face-to-face exchanges and the situation is now totally turned around.

A fourth topic is about domestic new retail business. The targets of our off-line business for this year are storefront integration and efficiency enhancements. In the second quarter, our offline stores' monthly average single-store GMV increased of 20%, locking our highest monthly average single-store GMV. This improvement shows initial success of our efficiency enhancement across our off-line stores. [indiscernible] our offline merchants improved steadily, which was around 30% in the first half. Going forward, we will deepen our partnerships with committed merchants.

In August, over 700 merchants gathered at our National Merchants Conference, and we all feel especially optimistic and upbeat about the offline partnership. Especially, I want to talk about ESG. In addition to the highlights of our business, I would like to share the significant progress in our ESG initiatives. As a market leader with long term vision, we are immensely committed to fulfill our corporate social responsibility. We pledged to achieve carbon neutrality in the operations of our existing businesses along with the use of 100% renewable energy utilization by 2040.

In summary, for the first half, we focused on balancing our operating goals across each of our business segments. We focus on technology, product quality, innovation and service level while simultaneously maintaining a competitive edge among our peers. We reinforced management upgrades and refined operations, achieving more efficient resource allocation and higher efficiency. What we've achieved over the first half did not just happen by chance. It was bound to materialize as a result of our enhanced capabilities. Our relentless effort to do the right thing over the years has paid off.

Looking forward, I am very confident in our performance of continuous improvement. We will remain committed to deep cultivation of technology from the application layer to underlying technology, continuous brand premiumization, replicating our China success across our operations worldwide, consistent management of rates to reach it's cost, enhance efficiency and sharpen the edge of our powerful operating system. We reap the benefits of our hardware for the past 2, 3 years. Tomorrow, we will harvest the fruitful results of the seeds that we sow today.

We have indeed undergone a profound transformation. So we have gone through a lot of changes, and I'm very delighted because of such transformation. And I feel very proud, and I'm very thankful for your concern. I will hand over to our CFO, Lam, for financial review.

[Alain Lam, executive]

Thank you, Mr. Lu. Good evening, everyone. Despite lingering macroeconomic headwinds and sector-wide challenges, we are delighted to deliver a nice performance for the second quarter with multiple operating metrics surpassing our expectations. While we keep investing in cutting-edge technologies, we also managed to reduce costs and expenses, optimize inventory management, increase our cash flow, improve overall efficiency and profitability. I would like to further elaborate on our second quarter operational and financial performances on areas that I mentioned before.

In the second quarter of 2023, our total revenue amounted to RMB 67.4 billion. Segment wise, in the second quarter, our smartphone revenue was RMB 36.6 billion. While the overall smartphone market remained weak for the second quarter, our global smartphone shipments were 32.9 million units, up 8.3% with our market share increased by 1.6 percentage points to 12.9%. Solidifying our top 3 ranking globally in 12 consecutive quarters. Meanwhile, as we steadily executed our premiumization strategy during this quarter, the contribution from our premium smartphones as a percentage of total smartphone units sold in China reached 20.1%.

Additionally, ASP of our smartphones in Mainland China also increased by more than 20% year-on-year. Revenue from our IoT and lifestyle products reached RMB 22.3 billion, up 12.3%, putting us back on a double-digit growth track. We delivered stellar results in our IoT portfolio. In the second quarter, the revenue of our smart large home appliances business surged by more than 70% year-on-year. Shipments of air conditioners and refrigerators both reached all-time highest in Mainland China, where air conditioners shipments increased by over a 90% year-on-year, in the first half, TV shipments ranked #1 in Mainland China. In the second quarter, our tablet shipments in Mainland China increased by more than 50%, elevating our tablet shipment ranking to #3.

Our user base continued to expand. In June, the global MAU of MIUI set another record level of 606 million, an increase of 10.8% year-on-year. While MAU of MIUI in Mainland China reached 149.3 million, 6.5% year-on-year. In the second quarter, our Internet services revenue was RMB 7.4 billion in Q2, up 6.8% year-on-year, hitting a record quarter high.

Our advertising business reaped the benefit of our strong domestic and overseas performance-based and brand advertising with revenue reaching a record of $5.1 billion, increase of 13% year-on-year. Gaming revenue increased 7.5% to RMB 1 billion, boosting year-on-year revenue growth for 8 consecutive quarters. As Mr. Lu mentioned earlier, over the first half of the year, by balancing our operating goals across all business segments, we effectively strengthened our financial position, successfully controlled costs and expenses and further reinforced our inventory management.

In the second quarter, we delivered solid financial results and recorded strong profitability across the group. We set new highs in our group's GP margin -- GP margin of smartphone business as well as GP margin of our IoT and lifestyle products. In the second quarter, our total gross profit margin was 21%, up 4.3 percentage points year-on-year. As for the breakdown by segment, GP margin of smartphone business reached 13.3%, a record high, mainly attributable to factors including the expanding contribution of our premium smartphones and inventory management. GP margin of IoT and lifestyle products rose to 17.6%. GP margin of our Internet services also remarkable, reaching 74.1% in the second quarter, mainly owing to the growth of our advertising business.

In the second quarter, total operating expenses, RMB 10.2 billion, excluding those related to EV and new initiatives, core business expenses would be RMB 8.7 billion, down almost RMB 1.1 billion. In the second quarter, we reduced our selling and marketing expenses by 16% to RMB 4.5 billion. Admin expenses, RMB 1.1 billion, down 13.1%. We remained committed to investing in our future and continue to step up our R&D spending. In the second quarter, R&D expenses were RMB 4.6 billion, up 21% year-on-year.

Moving to the bottom line. In the second quarter, our adjusted net profit was RMB 5.1 billion, surging by 147% year-on-year, with an adjusted net profit margin of 7.6%, excluding RMB 1.4 billion of expenses related to our smart EV business and other initiatives. Earnings from our core businesses were RMB 6.6 billion, up 144.2% year-on-year with a core business profit margin of around 9.8%. We have been starting to optimize inventory management since early last year. In the second quarter, our total inventory was RMB 38.5 billion, down 33.5% year-on-year, hitting lowest level in the past 10 quarters.

Both our raw materials inventory and finished goods inventory decreased by more than 30%. During the quarter, our free cash flow was RMB 16.8 billion, far exceeding the level in the same period last year. At the end of June, we maintained a strong cash position of RMB 113.2 billion in cash reserves, providing sufficient resources for us to advance all of our business segments.

Moving to corporate social responsibility. We pledged to achieve carbon neutrality in the operations of our existing businesses, along with the use of 100% renewable energy utilization by 2040. Besides, I will talk about our relentless efforts towards public welfare. Beijing and Hebei provinces were recently hit by intense rainfall. Beijing Xiaomi Foundation donated RMB 25 million to emergency relief efforts in safeguarding the security of those affected, providing emergency supplies and post disaster recovery.

Beyond our swift action to catastrophic events, we've also attached great importance to talent development. Recently, we launched our 2023 Xiaomi scholarships program and Xiaomi Young Scholars program. So far, Beijing Xiaomi Foundation has partnered with multiple universities to encourage talent in the science and technology sectors and to support universities in advancing cutting-edge research and cost development.

Looking back on the first half, we are delighted with our healthy operational cycle, strong financial metrics and outstanding team execution across the group. Moving forward, while we continuously keep our users at the heart of our daily work, we will pursue quality improvement and technology innovation and firmly advance our premiumization path. The market dynamics brings opportunities, building upon our solid profitability, we are in a strong financial position with a huge leeway to choreograph greater expansion across new business segments. We will continue to improve our operating efficiency, optimize allocation of resources and accomplish sustainable development over the long term.

Thank you very much. That concludes our prepared remarks for the quarter. We are now ready for questions.

[Operator]

[Operator Instructions] First question, Andy from Morgan Stanley.

[Andy Meng, analyst]

Congratulations on very good performance in Q2. I want to ask about smartphone. Global sales was weakened, but Xiaomi was outperforming the overall market. What about Q3 domestic and overseas sales projections. Recently, Xuezhong has made some announcements. Any impacts on your sales volume in Q3 in China? And what about the overall competitive landscape for the longer term for Q3 projection for sales.

[Weibing Lu, executive]

For Q2, we enhanced our capabilities. So we've come up with this very good report card. Q3 compared to Q2, we believe there will be further enhancements and we can already see some of the August figures coming in, so we are feeling very confident about Q3 overall performance. Today, we've heard about Xuezhong's announcements. This is what I think. The Chinese market is the one to go for. In previous years, we have been setting up our foundation, we just want to focus on capability, building, improving our products, our services and enhancement of our strategic direction. So there are no changes here. Our product launch momentum and cycles will not be affected.

[Operator]

Next question [indiscernible] from Citi.

[Unknown Analyst]

I have 2 questions. Smartphone channel, what is the inventory level? I see obvious drop, is it normalized at the moment? Or so far, what is happening to overseas situation. The demand has weakened and also in terms of your channels in Europe and Middle East, what is the inventory level? Is it well under control? What about the cost for smartphone? We can see GP margin in the quarter has reached a record high. So concerning overall control of your products that is very good news. So what will happen in the second half when others increase prices, how will that affect your smartphone segment? Do you think you can really achieve the original GP margin target?

[Unknown Executive]

You asked 2 questions, inventory and also trends of our cost. Q2 inventory, our overall inventory as well on the adjustment. I can tell you today. So our own inventory and also inventory in our channels. They are all at very healthy levels. In various countries, we are selling very well. So we faced some pressure in terms of shipment actually. If you look at the 4 new products, on tablet, smartphones, there is a shortage everywhere. So overseas market, the shortage is rather serious. So Xiaomi is at a very healthy level at the moment. Some people may say our GP margin is enhancing. So you're improving your cost structure. In the past, I think we enjoyed great advantages in terms of controlling our cost because of our economies of scale. We enjoyed good scale. So we will continuously move forward and we have good cost control capabilities.

Actually, in recent years our capabilities have been advancing. I can give you one simple example. For the foldable screens, we are the major player. We are the front runner. If you're able to do such products. If you look at the camera modules, our screen and motor technologies as examples, they are all good examples in showing you that we have good cost control capability. In terms of the price or cost for screen, we are not looking at major rising trends. So far, what's driving up the cost upstream suppliers, they have reduced their output because of market trends. But if you look at other elements, we are not looking at any major increases causing major impacts to us, because we have done a lot of strategic stocking in the past. We are quite well protected by any market fluctuations.

In Q3, cost factors will not affect much our overall performance. Things will continue to look very bright. I want to add a few points. It's not just about a drop in inventory level. Channel inventory, you can see that for this quarter, is dropped from RMB 3.7 billion to RMB 3.3 billion. So it is very helpful to our GP margin by 0.6 percentage points. Last year, it was about 0.9 percentage points. So last year's exchange rates, the impact on GP margin was quite substantial about 1 percentage point. But this year, USD exchange rate stabilized. So no serious impact. I've said a lot about GP margin. Last year, there were certain factors. They are no longer there. So there is no impact on our GP margin.

[Operator]

Next question [indiscernible].

[Unknown Analyst]

2 questions. First on smartphone. We can see very good progress and ASP has been greatly enhanced. You talked about a drop in raw material costs. Does that mean the whole sector will have to readjust the price level? Will there be more promotional activities, causing certain pressure on our business, IoT. We see that many players in China are doing very well, but what about overseas players. What is the inventory level in their channels?

[Unknown Executive]

Well, raw material cost decline basically has bottomed out. We can only say, there may be a small rebound. So we are going to consider some major raw materials. There is a slight rebound. I think the price decline has reached its bottom more or less. This year, we are looking at a different direction at the moment. So basically, you are spending the same level of money, but you are purchasing a smartphone with much better functions and performance.

Secondly, you asked about IoT. I think performance was very outstanding for refrigerators, air conditioners and washing machines. But let's not forget our tablets. In 2021, we returned to the market, top 3 level. Especially, the 14-inch tablet product, it is very welcomed -- very much welcomed by the market, and we also have good performance for our wearable products. I think for some inventory-related pressure for the overseas market. I think we have completed the adjustment exercise. So IoT inventory has gone through such readjustments. So IoT overseas market will begin to perform very well.

If you look at the overall situation and the rebound around the world, it is quite slow, it is not fully optimistic. But for 2024, we are still rather optimistic. I want to say a few words about the figures. In the past 2 quarters, we have seen overseas IoT expansion for domestic IoT because of major growth in tablets and large home appliances. Recent months, domestically speaking, IoT proportion is higher than normal compared to overseas figure because of inventory level and also the macro situation. So recent quarters, domestic IoT proportion will expand with further inventory clearance and recovery and rebound in the market, it will continue to rise in terms of it's overall contribution.

[Operator]

Next question [indiscernible].

[Unknown Analyst]

I have 2 small questions. First, due to Internet business on record high, shipping margin recoveries very strong. So looking forward, what is Internet guidance? Advertising business, very strong. So what will be the future trend for development?

Mr. Lu talked about AI, planning. Mr. Lu, can you tell us more AI products, what are the plans, and AI smartphones, will they be launched in the near future?

[Weibing Lu, executive]

Internet services. It is closely related to terminal MAU, global MAU continuously rise. China MAU has been rising at the same time. So for higher-end devices, they have a bigger and bigger contribution. The ARPU is already beyond the average figure. So we are particularly concerned about these factors. So these are 2 important indicators. And we care about product structure and market structure. For the details, Lam, would you like to answer them?

[Alain Lam, executive]

For AI, in terms of application, we first need to launch continuously new products, enhance performance. For example, in Mi Home, we have many offerings. We have to do allocation arrangements for our products. Internally, we have a lot of AI applications. We have to consider through AI and our new product launch, there will be new plans. Going back to your first question about the Internet services. There are several factors. Advertising. As we all know, Mainland advertising recovering slowly still. The big pie is still growing. Higher end consumers contribution continues to grow. So that helps with our advertising ARPU.

Thirdly, overseas advertising, MAU growth and we have new advertising input on our platform. At the beginning, overseas, we will serve certain APP such as TikTok and [indiscernible], but with more and more high-level operational capability, we are attracting new APPs to make the investments. So you can do the math. Overseas ARPU has shown clear growth. So MAU growth is the key point for overseas.

For gaming, thanks to new games being launched in our operation, including premium smartphones. We have shown certain figures. Gaming ARPU compared to lower and medium and ARPU may be higher by 30%. So we have more and more high-end customers, and it is good news for our revenue for gaming. And tablet for gaming is also performing rather well.

[Operator]

Next question from Huatai [indiscernible].

[Unknown Analyst]

I have 2 questions. First, recently, your market share has dropped in India because of geopolitical factors. So what is the focus of your future planning for overseas market? Are you going to move into Africa, for example? And then also about AI. Mi phone 5G, there's a lack of selling point. What do you think about this? What are your considerations? How are you going to promote smartphones? What type of smartphones are you going to focus on?

[Unknown Executive]

First about globalization. I think today, I've already mentioned other than the U.S. market, around the world, we have entered every single market following our original time payable. In every single market, I think the focal point of development may be slightly different. But recently, you can see in Europe, I think if you look at the market layout, we are already doing very well. We are after Samsung and then Xiaomi is following very closely. So we just need to focus on high-end products and do well in this segment. And then potential markets, Middle East is one of them. 17% is current market share. We can enhance that to 25%. We have such opportunity.

And then Latin America is a huge market. Our market share is only about 15%. So I think to Xiaomi, 20% for every single market is our overall goal. We have plenty of opportunities. You've also talked about Africa. We divided into 3 segments: North Africa, including Arabic countries such as Morocco, et cetera. We have been #2 in these places. And then Southern Africa, it is along the southern part. And then in the middle, we are talking about a population of nearly 1 billion. Recently in both countries, we have been working very hard. For example, in Kenya, we have launched a number of new initiatives, so I think there's plenty of space for development.

I think our Vietnam team also provided some new figures to us. We are now #2 in Vietnam. So we're doing very well. So around the world, there's plenty of potential for us to grow further. In Q2, we faced a lot of pressure, but we can enjoy a very strong rebound for sure. I'm very confident.

You talked about AI technology application, it is a technology, it should focus on functions and experience. I trust that [indiscernible] is the future direction. There's plenty of space for future development and also Xiaomi combined with AI application, there will be plenty of great news. During future launches, you will understand more details.

[Operator]

Next question. Timothy from Goldman Sachs.

[Timothy Zhao, analyst]

Very good Q2 results. I have 2 questions. If you look at second half. How do you follow scale and profitability for core business, almost 10% net profit. Are you going to consider more investment in the second half to drive for even greater growth?

Secondly, your expenses have dropped by 2 digits. So what about the second half when it comes to operating or sales expenses, what will happen there?

[Unknown Executive]

Concerning balancing act, Xiaomi has spent a lot of time to have the right feel of it, so to speak. Last year, our team has been asking when things are rough, what do we choose? We want both, of course. But if we have to choose, so management has to resolve such conflicts. That is the art of running a business, I think. I think we have performed very well and the entire management team have gradually found the right feel so that you are able to see that we have set up a new management committee, which focuses on major direction for the company. I think they have been very effective. So with such foundations, we can enhance our capability. So for the second half, I trust that both scale and profitability will grow. I'm very, very confident. Just wait and see.

Concerning efficiency enhancement, I think we have gone a long way. We have saved more than RMB 1.1 billion. I think we have a lot of management premium. We have gone through a very rapid development and management was lagging behind. So that led to lack of efficiency somewhere and some wastage. But we have started to see some management premium and there is still some potential there that is not yet fully tapped into, so I'm very confident looking forward.

In the first half, there's a drop of $2.4 billion in terms of core expenses because we do feel that in terms of new business or new initiatives, we have a lot of investment, so we need to continuously enhance our profit level and cash flow, so that we can cover more new business. In terms of operations, we will look at every single piece of expense, including different departments, sales, on the expenses after sales, everything. We will open all of them up, and then we will see if there is any room for optimization. Do we have very good systems. Do we have further flexibility. So we have to start somewhere and work our way through. As long as we're able to enhance efficiency level for the whole year, that is good news.

[Operator]

Next question, Thompson from Credit Suisse.

[Unknown Analyst]

All right. Thank you very much for the presentation. I have a question about inventory. The drop in raw materials and also components, what are the expectations there? And what about shipment level in the second half?

Second question. Let me look at the PPT, I think it's towards the end about AI. Page 12, you setup this AI dedicated fund. What is the latest investment, can you explain further.

[Unknown Executive]

Concerning inventory, I think I have already gone through that. At the moment, it's at a rather optimal level. For the channels, we have raw materials and finished products. I think we have seen rather positive trends. At the moment, because recent sales increased and very good sell-through rate. And we also have strategic preparation for our inventory. And you asked about Xiaomi AI. After our announcement was made on the 14th of August, many people applied for testing. So the feedback is very strong. After we talked about our focus being placed on LLM, we've got very strong response in the market. But this is only just the first step, it's just the beginning. So in the future, you will see more and more outstanding results.

For example, if we have a vehicle project, I want to be guided to go home. If I ask how long is it going to take for me to reach home, the vehicle is not able to respond. So we have to improve the overall experience. You asked about something towards the end actually together with some broader companies, including [indiscernible], we setup a fund going into AI is about USD 150 million. In terms of AI, we have invested in 6 entities already.

So we have already looked into different possibilities. They can also bring greater capability to AI development. We have some self-developed initiatives, which can be opened to other players so that we can come up with greater models, because we want to go lightweight over 100 million data models. I can hand over to third parties after we have reached the scale. So we can look at our investment layout and then enhance our AI inventory.

[Operator]

Due to time constraints. We are going to take the final question, Mr. [indiscernible].

[Unknown Analyst]

I would like to ask about LLM. Lam talked about the plan to focus on lightweight and domestic. So does that mean -- when it comes to training, we need great algorithm related capability and great computing power. So that means more people have to go into the team, more than 3,000. Are you going to hand over this part to a third party for the greater computing power. And there are many bottlenecks, especially domestically speaking, so what is the current situation?

[Unknown Executive]

First of all, 3,000-odd people that is the result of our AI investment, not just for LLM. They come from different segments, cameras, et cetera. So it's not just 3,000 doing only LLM. We setup LLM Team at the beginning of this year to support the relevant developments. So that is a clarification.

Secondly, in terms of computing power, we are okay at the moment. We have broader entities, so when it comes to computing power, we are doing very okay. I think those were your 2 questions.

[Unknown Analyst]

Then I want to ask, in the PPT, you mentioned robotics. There are some open sourced strategic thinking. So can you explain further what is the strategy? How do you operate it?

[Unknown Executive]

Robotics are still at its early stage. So we are going to focus on biorobotics as part of our 2-pronged approach. We will look into commercialization for the longer run, but at the moment, we will look at personalized options. We should combine all the efforts of all the players in the market. Our open sourced scope, we would like to have bigger coverage. So in terms of our collaboration, we have gone to some public website. So that is the basic strategy at the moment.

[Operator]

Thank you. That's the end of today's telephone conference. Thank you for your time. We hope that you will continue to support.