Xiaomi announced its third-quarter results recently. Xiaomi is having a mixed 2019 with only moderate  growth (2% YoY) in its smartphone business that still contributes around 60% of its overall revenue. But it is performing better in other segments of its business.

The three most important takeaways from its recent third-quarter earnings call are:

• Quarterly revenue hit an all-time record, but smartphone growth slowed: Xiaomi posted record revenue of RMB 53.7 billion with a YoY growth of 5.5%. Its gross profit during the quarter hit RMB 8.2 billion with a YoY growth of 25.2%. Its adjusted net profit increased by 20.3% YoY to reach RMB 3.5 billion. However, the smartphone segment that accounts for 60% of its total revenue, declined 7.8% YoY to reach RMB 32.2 billion. The decline was driven by its performance in China, where it had a sharp decline (-38%) during the quarter thanks to the onslaught from Honor on one side, and Oppo A-series and Vivo Y-series on the other. The decline would have been steeper if it weren’t for the strong performance in India (+8%) and Western European markets (+68%).
• China turnaround dependent on 5G smartphones: For Xiaomi to gain in the global smartphone market, its performance in its home market China will be crucial. Having a strong portfolio of 5G smartphones can help Xiaomi to capture growth. During the quarter, Xiaomi launched its first-ever 5G smartphone in China, Mi9 Pro, which started well. Xiaomi also announced that it will launch at least 10 5G models in 2020 to capture first-time 5G smartphone users. It is also launching its first 5G smartphone under its Redmi brand (K30) in the coming month. 5G smartphones can also help Xiaomi to improve its ASP which grew a modest 4.6% in China and declined 4.1% outside China; its competitors like Oppo, vivo, and Huawei improved their ASPs in many markets. Additionally, before 5G kicks-in, Xiaomi needs to resolve its inventory situation. There were positive signs during the quarter with inventory turnover days falling from 65 days in Q1 2019 to 52 days in Q3 2019, but more can be done.
• IoT and Lifestyle category drove revenue. Monetization of userbase outside China key to drive service revenue: During the third quarter, Xiaomi’s smartphone revenue decline was offset by its IoT and lifestyle segment, which grew 44.4% YoY to reach RMB 15.6 billion and contributing 29% of the total revenue. TV and wearable segments performed well, contributing the majority of the revenue growth. Xiaomi now has a monthly active MIUI user base of 291.6 million, while the number of connected IoT devices (excluding smartphones and laptops) reached 213.2 million. Out of 291.6 million MIUI users, 112.8 million are from China These are impressive user metrics for any brand, but the key challenge for Xiaomi is to monetize this user base thus driving its internet services revenue which contributes to just 10% of the overall revenue, reaching RMB 5.3 billion during the quarter.As of now Smart TV and Mi Box drove its services revenue with 3.2 million paid subscribers. During the quarter, 37.2% of Xiaomi’s Internet service revenue was from internet services outside of advertising and gaming from mainland China smartphones. However, a lot needs to be done to drive service growth from outside China, especially in markets like India where it has a significant installed base. We believe that within China, advertising, gaming and TV subscriptions can drive service revenue, but in overseas market it will be services revenue from its IoT products that will be key. The absence of a strong service strategy around its IoT devices means that the overall mix and user engagement with its ecosystem products remains low. To drive the attach rate and engagement, Xiaomi should carefully bundle services on top of its popular IoT products like wearables, smart home devices, TV and others. 

To conclude, we believe Xiaomi is at an interesting crossroads. At one point it has to arrest the decline in the smartphone segment within China by accelerating its efforts in 5G devices, while at the same time it finding ways to monetize its massive ~292 million userbase to drive its service strategy. In such a scenario having sufficient working capital is critical. As of now Xiaomi has enough cash in hand with total cash resources at RMB 56.6 billion at the end of Q3 2019. Continuing investing in R&D (its R&D expenses from 2016 to Q3 2019 reached RMB 16.3 billion) will be key to unlocking new revenue potential via in house development as well as investing in meaningful partnerships in content and services. We believe that Xiaomi is aware of its upcoming battles on multiple fronts and 2020 will prove to be a crucial year for Xiaomi.