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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good evening, ladies and gentlemen. Welcome to the investor conference call hosted by Xiaomi Corporation regarding the company's 2020 first quarter results. I am Steve Lin, the Director of Corporate Finance and Joint Company Secretary. Before we start the call, we would like to remind you that this 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, company's financials prepared in accordance with IFRS.
Joining us on the call today are our President and acting CFO, Mr. Wang Xiang. To start with, Mr. Wang will review the 2020 first quarter business and financial performance. Following that, we'll move on to Q&A session. I'll turn the call over to Mr. Wang.
Good evening, everyone. Thank you for joining our 2020 Q1 earnings call.
Before we start, I'd like to say that as the world is fighting against the COVID-19 pandemic, our thoughts and prayers are with everyone, in particular the people who have been deeply affected. During this difficult time, we seek to provide support, including medical supplies and cash donations to China and other countries around the world.
In the first quarter of 2020, we delivered solid results despite the challenging environment, reflecting the strength and resilience of our business model.
In the first quarter of 2020, our total revenue was RMB 49.7 billion, up to 13.6% year-over-year.
Adjusted net profit for the period was CNY 2.3 billion, up 10.6%.
Our business achieved solid growth across all business segments. Our smartphone revenue was up 12.3% year-over-year. Our IoT and lifestyle product revenue was up 7.8% year-over-year. And our Internet service revenue achieved a remarkable 38.6% growth.
Before I go over business performance of each segment, I'd like to provide some key business updates of the group.
In Q1 2020, the total revenue was CNY 49.7 billion, up 13.6%. The first point I would like to talk about is the impact of COVID-19 on our business.
In the first quarter, our global smartphone shipment actually increased, while global smartphone market declined by 13%. We also achieved highest growth among major smartphone companies worldwide, according to Canalys.
Our mainland China business also demonstrated resilience during the pandemic. In March, our mainland China smartphone shipments had already rebounded to the pre-pandemic level, and our smart TV shipments had also rebounded strongly and largely recovered.
Looking ahead, let me summarize the short-term impact of COVID-19 in our different markets.
In mainland China, as previously mentioned, our smartphone business has gradually returned to its normal level in March 2020.
In India, for example, the strict lockdown measures imposed in late March significantly impacted sales. Since the start of May, India has begun to lift the restrictions on production and sales activities in phases. And what we are seeing is that in area where sales have resumed, consumer demand has rebounded in a similar fashion in mainland China.
In other overseas markets, lockdown measures are expected to affect our Q2 financials. Even so, we are seeing similar recovery patterns in markets with easing lockdown measures.
For example, if you look at the number of daily smartphone activations each week, as of the third week of May, the activations in Europe had returned to over 90% of the daily average in January.
We plotted the weekly activation trends across all key international markets. In the third week of May in Europe, as previously mentioned, smartphone activations had returned to over 90% of the pre-pandemic level.
In Southeast Asia and the Middle East, smartphone activations have actually surpassed the pre-pandemic level.
The market with lowest level was India, which had about around 60% of the pre-pandemic level.
The second key point I would like to talk about is our progress of premium smartphones. We launched our Mi 10 series on February 13 in mainland China. Upon its launch, Mi 10 Pro ranked #1 in DxOMark for overall camera photo, video and other performance. Mi 10 series has been well received by the market. Two months after the launch, shipments of Mi 10 series in mainland China had already exceeded 1 million units.
The third key point I'd like to talk about is our overseas business. In the first quarter, Xiaomi further strengthened our presence abroad. Our overseas revenue reached CNY 24.8 billion, up 47.8% year-on-year and contributing to half of the total revenue. This is a historical high. At this point, we have become a truly international company.
Now I would like to further discuss our smartphone business segment. Our smartphone revenue achieved RMB 30.3 billion, showing a robust growth of 12.3% year-on-year, with smartphone shipments totaling 29.2 million units.
In the first quarter, we introduced highly competitive 5G smartphone products across different key price points and continued to gain market share in the 5G smartphone market. Our flagship Mi 10 series 5G smartphone models ranked in the top 3 by sales volume in RMB 4,000 to RMB 6,000 premium segments, according to the third-party statistics.
Our high-end-priced model Redmi K30 5G, Redmi K30 Pro series and the Mi 10 Lite 5G series also expanded our 5G portfolio. In the first quarter, our 5G smartphone market share reached 14% in mainland China, according to the third-party statistics.
Because of our high 5G penetration rate, premium smartphone rollouts and growth in developed markets, our smartphone ASP has increased by a great extent. In the first quarter of 2020, our smartphone ASP increased by 7.2% year-on-year, with a 13.7% year-on-year growth in the overseas markets and 18.7% year-on-year growth in mainland China.
On top of product rollouts, we launched our latest version of MIUI. We call it MIUI 12, with many technological breakthroughs. The highlights include our remarkable and proprietary animation technology, which brings our users ultimate visual experience and our enhanced privacy protection capability, which has won multiple highly renowned privacy protection certificates.
Now let's move on the IoT segment. Our IoT lifestyle products revenue was RMB 13 billion in the first quarter of 2020, up 7.8% year-over-year. The lower-than-previous growth rate was mainly due to impact of the pandemic, especially for certain product categories, such as large home appliances.
In the first quarter of 2020, Xiaomi continued to expand our global-leading consumer IoT platform. According to iResearch, Xiaomi was largest consumer IoT platform in the world in terms of number of connected IoT devices as of December 31, 2019. December further grew to 252 million units as of March 23, 2020 (sic) [ March 31, 2020 ], up 42.6% year-over-year. Moreover, the number of users who have 5 or more devices connected to the company's IoT platform reached 4.6 million, an increase of 67.9%. In March 2020, our AI assistant [Foreign Language], had 70.2 million (sic) [ 70.5 million ] MAU, an increase of 54.9% year-over-year.
In March 2020, our Mi Home app had 40 million MAU, an increase of 53.4%.
Let's talk about TV. Our smart TV business continued to maintain its leading position in both mainland China and the overseas market. In the first quarter, global smart TV shipments reached 2.7 million units, up 3% despite the decline in global TV market according to AVC. In the first quarter of 2020, we ranked the #1 in mainland China for 5 consecutive quarters.
As the leader in the smart TV market, Xiaomi continued to explore future of smart TVs. In March 2020, we launched the Redmi Smart TV Max 98" priced just RMB 19,999. It brings ultra-large high-end TVs to the mass market price segment.
Although certain product categories that require installations, such as large home appliances, were affected during the pandemic, many of our key IoT products maintained strong growth during this challenging time. In Q1, sales of our WiFi router increased by 124%. Sales of our TWS Earphones, wristband, Mi Electric Scooter and Robot Vacuum Cleaner increased by 619.6%, 56%, 40.7% and 40%, respectively. According to Canalys, we ranked #1 in terms of wearable band, electric scooter shipments and the third in terms of TWS shipments globally in 2019.
Moving on to Internet services segment. In the first quarter, Internet service revenue reached CNY 4.9 billion (sic) [ CNY 5.9 billion ], up 38.6% year-over-year. Revenue from advertising, online gaming and other Internet value-added service grew by 16.6%, 80.5% and 52.1%, respectively.
Our user base continued to increase in Q1 2020. In March, global MIUI MAU increased by 26.7% to 330.7 million, while MIUI MAU of mainland China reached to 111.5 million, an increase versus previous quarter.
Our smart TV MAU, meanwhile, grew by 46.8% to 30.4 million and our paid users grew by 53.7% year-on-year to 4.3 million.
Advertising. Our advertising business remains solid in this difficult environment. While advertising budget will decrease, our advertising revenue reached RMB 2.7 billion, a year-on-year growth of 16.6%. The growth was mainly driven by: number one, diversified monetization methods, including search, pre-installation and news feeds; number two, diversification of advertising customers; number three, optimization of our recommendation algorithm; number four, rapid growth of overseas Internet advertising revenue. Those are the 4 major drivers for the advertising business growth.
Gaming. In the first quarter, our online gaming revenue increased by 80.5% to RMB 1.5 billion, mainly due to: number one, fast-growing online gaming market in mainland China; higher online gaming -- number two, higher online gaming average revenue per user from premium smartphone users.
Diversification is a key growth driver for our Internet service revenue. In the first quarter of 2020, our Internet service revenue coming from outside of advertising and gaming, including fintech, Youpin e-commerce, TV Internet and overseas Internet services continued its strong growth momentum with 7.1% -- 71.5% year-over-year and representing 38.1% of our total Internet service revenue.
Next, let's move on to our overseas business. In the first quarter, we continued to expand our global footprint. Revenue from overseas market in the first quarter of 2020 amounted to RMB 24.8 billion, an increase of 47.8% year-over-year and for the first time, accounting for half of our total revenue. That's a very important milestone.
Following our continuous internationalization demos, our overseas smartphone shipments achieved remarkable growth in the first quarter of 2020. Let's give a few examples.
In Latin America, Europe and Africa, our smartphone shipments grew by 236.1%, 58.3% and 284.9% year-on-year, respectively, according to Canalys.
In particular, Western Europe, in an overall declining smartphone market of 19%, we achieved year-on-year growth of 79% by shipments, becoming the only company with positive year-on-year growth rate among the top 4 vendors, according to Canalys.
Also for the first time, we have become #1 smartphone brand in Spain, with 28 market share -- 28% market share and a year-over-year growth of 46% by shipments, according to Canalys.
In India, we continue to expand our market share, and we were the #1 smartphone brand in terms of shipments for the 11th consecutive quarter. We have also leveraged our strength in India to expand to adjacent markets. For example, in Q1, we ranked #1, in the top, for the first time in terms of shipments, with a market share of 30.9%.
Now I'd like to go over the financials. We achieved financial performance in the first quarter of 2020. Our revenue increased by 13.6% year-on-year. Our gross profit increased 44.9% year-on-year. If you subtract our gross profit by operating expenses, the figure grow 109.6%. Our adjusted net profit was CNY 2.3 billion, which grew by 10.6%.
Note that our profit was impacted by foreign exchange loss of RMB 503 million this quarter.
We have witnessed an upward trend in our overall gross margin from 11.9% in the first quarter 2019 to 15.2% in the first quarter of 2020.
In the past quarter, the gross margin of our smartphones, IoT and the lifestyle products and the Internet service reached 8.1%, 13.4% and 57.1%, respectively.
During the pandemic outbreak, we also effectively controlled our operating expenses from CNY 6.9 billion in the last quarter of 2019 to CNY 5.3 billion in the first quarter of 2020, which implies a decrease in our OpEx ratio from 12.1% in Q4 2019 to 10.6% in Q1 2020.
Our working capital also remained healthy and efficient in Q1.
Compared to Q1 2019, our account receivable turnover days remained stable at 13 days. Our account payable turnover days increased from 96 to 121 days, while our inventory turnover days increased from 65 to 71 days.
Let me elaborate on the reason for the increase of inventory days, which was impacted by the pandemic. If you look at the absolute inventory level, our inventory, excluding the provision of impairment, was CNY 34.8 billion, only slightly more than CNY 33.5 billion in the first quarter of 2020. The increase was mainly from raw materials inventory, which increased from CNY 15.4 billion to CNY 22.2 billion because of the production disruption in Q1 2020. The finished goods inventory, on the other hand, declined from RMB 18 billion to RMB 12.6 billion. So while overall inventory days increased, from the operational perspective, we were actually short of supply.
Last but not least, I would like to briefly talk about our investment performance. As of March 21, 2020 -- sorry, March 31, 2020, we have invested in more than 300 companies with an aggregate book value of approximately RMB 32.3 billion, representing year-on-year growth of 11.4%.
In May 2020, one of our investee companies, Kingsoft Cloud, successfully listed on Nasdaq with a market capitalization of USD 4.8 billion on the day of its IPO, with Xiaomi owning 30.8% of its share.
In conclusion, Xiaomi is still in the rapid growth stage. And unfortunately, like many other businesses, we are facing certain challenges this year due to the epidemic. Nevertheless, the demand of our smartphone and IoT products have proved to be resilient. We have also, comparatively, less impacted because of our advantages in online channels, our value proposition in offering users superior price to performance and diversified businesses.
Looking forward, the pandemic is expected to impact our business performance in Q2 2020. However, with gradual lifting of the lockdown measures, we have witnessed a quick rebound in many of the markets where we operate.
This ends my prepared remarks. We shall now open the line for questions.
Thank you, Mr. Wang. [Operator Instructions]
[Operator Instructions] Our first question comes from Piyush Mubayi with Goldman Sachs.
My first question is concerning the premium handsets and the way that it's changing or seemingly changing the Internet revenue lines. Could you give us a sense of what percentage of these sales that you were able to book in the first quarter came in from the premium smartphone category? And also a feel for the premium ARPU that you've been able to post on the Internet revenue lines now on the back of that.
And my second question is related to the pattern of normalization that you talked about through the month of April -- through the months of April and May. And when you look forward towards the quarter, what is the level of impact that you could foresee in Q2 following a very strong Q1?
The first question is related to the premium-tier smartphones and its ARPU, right? So actually, yes, we are very happy to see the first result of our Mi 10 series. We launched our product in mid of February, during the China -- just post the China pandemic, the outbreak actually but the market response was very, very good. So actually, after 2 months of launch, we shipped over 1 million already. This is the first time in Xiaomi's history, our selling price reached to RMB 5,000 and above price segment. We are very happy with the results. We'll continue to offer more and more premium flagship devices with the Mi 10. That also give us confidence on the dual-brand strategy.
Regarding to the ARPU, we don't disclose the specific ARPU number by models. But I can share with you, for example, the gaming revenue, actually the ARPU from the premium-tier smartphone actually has a higher ARPU. It's very, very easy to understand because of the performance of the device with the flagship processor, with optimized graphic processor and a software capability that works better for the complicated games. I think that's understandable. That's -- the second question.
Okay. Regarding to the second question, regarding to the second quarter. Yes, the second quarter will get a hit, because if you look at the history, China upgrade happens in late January and early February, right? At that time, actually, most of the Chinese cities were locked up. But in Europe and India, the outbreak in Europe happened in, I think, early March. So gradually, the -- many of the European cities were locked down. So that gives some impact on the business.
India, even more serious. In the late March, everything was shutting down because of the government policy, we believe that's the right strategy for Indian people. But I can -- what I can share is the smartphone product and also some of the ecosystem products actually are kind of resilient, so they are -- the people need smartphone much better than the other device. So the first product or market rebound will be smartphone-related. So we are very confident with the recovery of the European situation. We are confident that in June time frame and beyond, we'll see a good recovery.
Right now, the number is -- based on the current number, the activation, our smartphone activation in Europe is 90%, above the normal situation. That's a good signal for us. But the Q2 still, the message in Q2 still, a challenging quarter for us. India is kind of -- we are still managing very closely. India, also situation improved a lot in the last maybe 10 days. Right now also, we see probably 50% to 60% of the recovery, activation recovery. So we'll continue to monitor the progress.
May I also clarify? When you talk about normalization, when you look at gaming revenue that was so strong in the first quarter, can I just make sure that there was no -- nothing abnormally strong, it was booked because of COVID and people staying at home, such that, that pattern will not recur in Q2?
Yes. For some reason, to be very honest, people spend more time on smartphones, right? They will play more games with a smartphone. But we will -- actually, we want to -- number one, we will maintain those customers, of course. We gain those customers and we will maintain them, number one. Number two, for other segment, Internet service segment will also grow. For example, the advertising and other Internet services also grow. I think it's -- for us, it's opportunity to grow, to keep those customers in our service.
Our next question comes from Yunchen Tsai with Morgan Stanley.
And also, first of all, just congrats on the results for first quarter. My first question is actually regarding the overseas market. So you mentioned that -- especially Europe market has recovered to like 90% of the pre-COVID-19 level. Could you share with us, do you think it's a function of the overall the industry recover? Or do you think there is a certain extent of your share gain in this area of the market?
And then as for India, you also just mentioned in the past 10 days, they have rebounded quite quickly. So when will you probably expect it could recover to the pre-pandemic level?
Okay. I think the Q1 performance, the performance is due to several reasons. Number one, I think our business model -- in our business model, we are very, very focused on the online channels, right, both in China and in many of the countries. Although there were a lot of lockdowns in many places, but online channel was still open. So we still -- our customers still buy our products through online channel. That's our strength, number one.
Number two, I think we always pursue a very, very big performance and price ratio. People will -- yes, people who know us will buy our product first. This is, I think, also help us make us less impacted compared to our peers and other industry.
So regarding to India, we are very closely monitoring the development there. Now it's at 60%. So it highly depends on the situation, the pandemic situation in India and other markets as well.
Okay. And my second question is regarding the gross margin on the Internet service. Because it looks like because gaming is so strong, so that should have, together with the advertising, that should have some -- the positive impact to the gross margin. But instead, gross margin looks like a decline. So could you just give us what's the revenue mix here, especially for the others? And just within this category, which is -- is there any gross margin decline, which is the part that we see the more impact from?
Yes. Maybe I can answer. And also, I'd like Steve to add more. I think, yes, the gross margin -- the growth rate of the gross margin percentage-wise is not -- it's below the expectation. The real reason is actually, during the pandemic, our fintech business actually, it was in the challenging time. We want to minimize our risk, so we raised the bar. And also, we see a lot of challenges there. So that's one of the reasons the gross margin was not as high as we expected. That's the -- I think that's the major reason. Maybe Steve can add more.
Yes. So I think the gross margin was 57.1% this quarter, which is lower compared to last quarter and also from a year perspective. So I think the main reason, as what Xiansheng mentioned, is the decline in gross margin of our fintech business. Because of the pandemic, to be conservative, we have increased the loan loss provision to cope with the situation. So I think that is the biggest reason.
I think there's also a reason on the product mix. So if you observed, I think this quarter, the growth of gaming and the growth of other value-added services outgrow advertising. So among our 3 segments, advertising has the highest gross margin. So from a product mix perspective, if the percentage of advertising decrease, that will also cause a decrease in gross margin.
Our next question comes from Leping Huang with CICC.
First question is about the -- after this pandemic in China. So what's your latest view on the 5G adoption rate in China this year for the market and for yourself?
Actually, the company strategy will continue to be drive the 5G adoption in China and the market where it has a 5G. So that's a market. That's why we launched in the January last, the first model Redmi K30 5G, is the first model, as I mentioned, below RMB to dollar. We'll continue to drive that. I think the carrier, if you want to drive a new market in the wireless industry, based on the past experience, there are 2 challenges.
Number one is the technology adoption, the coverage, right? I believe all the 3 Chinese carriers will accelerate the network buildup, they will build more base stations across the country. So that will improve the signal coverage significantly in the rest of the year. That will help drive the 5G adoption. That's number one.
Number two is the handset, the terminal price. The terminal cost is critical for the new technology adoption because you have to reach to the mass market. You have to drive more people to use it, to buy it. Then you can drive more applications, better ecosystem.
So we are determined to invest into the 5G market to grow the 5G subscriber base together with our partners, specifically the operators. And also among all the Chinese vendors, we are -- we have a 14%, right? The total 5G smart...
The total for that actually, 26%.
Yes. 26% of our smartphones sold were the 5G device. And in the 5G adoption actually were up 14%.
5G smartphone market share.
Yes. Actually, smartphone share were up 14%.
Okay. So the second question is the -- you mentioned that you see the demand is recovering in both the Europe and in India. So how about the supply side? Because I think I remember you have -- most of the smartphone in India are made in India. So does your production in India recover? And how the -- I remember in the end of March, there were some logistic issues between China and Europe. How this works now?
Yes. The China supply ecosystem, I think, is 100% recovered already. In India, just -- I think that is still at a very early stage. The Indian government just lift the restriction gradually actually. So we're working right now very hard with our manufacturing partners to get the workers back to the factory and help to ramp up the production. That's what we are doing now. It takes some time, but we are working very hard on that.
So we'll face a similar, I could say, sort of inventory issue, sort of inventory issue when the market recover, I believe, you have enough product to sell.
Yes. Unfortunately, yes. And we've been working very hard. We have some -- we prepare the -- everything. But yes, the production just restarted, so the factory just reopened. So yes, we are working very hard on that and at the same time, monitor the pandemic situation in that market.
Pretty -- actually, very -- this is an encouraging message because our India market recovered almost 60%. It's a good signal, but we need to work very hard on the supply side.
Our next question comes from Robert Cheng with Bank of America Merrill Lynch.
Yes. My first question is about smartphone. I just want to get a sense, like, because of how we have expanded our market shutdown and reopened. And can we say in the second quarter the smartphone shipments partly vis-Ã -vis compare to first quarter? Can we say it has some quarter-by-quarter growth? And then also can you help give us a sense on the growth situation in China market and overseas? Because in first quarter, if we see the ASP and gross margin on smartphone, both of them have increased. Can we still have to see this kind of uptrend in the second quarter or third quarter?
So we don't give any specific guidance on the shipment for Q2, but we are actually, the -- as I mentioned, the April -- and April was very, very challenging because of the pandemic, because of the lockdown, but we see a very fast recovery in Europe. We see a pretty good recovery in India right now. So we are working very hard on the market recovery. I think the key is in late -- second half of May and also the June -- yes, June. So yes, we remain confident and also monitor the environment very, very carefully. This is what we can do.
And how do we see the ASP and margin for the smartphone in the second quarter and third quarter?
I'd like Steve to answer the question regarding to the margin.
So I think the ASP increased 7.2% this quarter year-on-year, and the driver was clear. I think one is the 5G smartphone. I think in the beginning of the year, we always talked about 5G smartphones because of the higher band cost, the ASP will be higher. So I think that is a very clear driver in China that will continue to sustain from a year-on-year perspective.
I think the second one is also the premium smartphone. So the higher percent of premium smartphone also helped orders increase both in China and overseas market. So that's -- I think from a year-on-year perspective, a lot of those drivers are still true. But of course, if you look from it, you also have to consider product mix, right? So for example, I think Xiang earlier mentioned about what we're trying to do is use our efficiency to continue to bring the 5G smartphone price to a lower price point to enable more people to enjoy the 5G technology. Look, also need to consider in that factor when you think about ASP.
Overseas, what we're seeing, the driver has always been the mix between the developed markets and the emerging markets. So market like Europe would actually have a higher ASP versus a market like India. So if the growth rate in the developed markets like in Europe is faster than regions like India, then naturally, the overseas ASP will increase. So that's on the ASP side.
So the gross margin for smartphone this quarter was 8.1%. So it increased both from a quarter-to-quarter perspective and also from a year-on-year perspective. So there's not a lot of difference in sort of in the gross margin driver that we talked about. I think Q4 was typically lower because of seasonality. So relatively, I think the first quarter, our gross margin for smartphone was quite normal.
Okay. Then I have another follow-up on your Internet. Because of the -- I mean, you mentioned about advertisement. Advertisement, some had very high growth in first quarter even had the virus situation. And because of it, sounds like a lot of Internet companies, they are spending on advertisement, and this year actually has some decreasing. But how come you as a potential business continue to see growth? And how do you -- were, I guess with the video or the forecast for this year? And also the same thing because you mentioned about slowdown -- I mean, also growth from fintech. I just want to know about like the expectation on the business.
Okay. Let me -- I will answer the -- your first half. So you talked about the question related to the advertising revenue growth, right? Other Internet companies, they decreased their forecasting from the advertisement. So actually, we did several things in Q1 and continue -- we'll continue to do that.
Number one, we diversified or we increased our customer base for the advertisement. Instead of serving the major -- the big Internet companies, we developed many, many vertical markets, new vertical market for us, so that we'll work with those vertical market players very, very closely, number one. So that's an increase, number one.
Number two, actually, we -- after years of effort, we continue to optimize our recommendation algorithm so that we can offer more efficient recommendations to every customer so that we can get a better return for both our customers and ourselves. Lastly, 2, I think has 2 major reason for us to grow our advertisement -- advertising revenue. So the second half is related to fintech.
Yes. Fintech, I think Steve already explained the fintech. Yes, continue.
So on the advertising, I just want to supplement that. I think another factor is we're just more diversified. So in addition to China, I think a lot of peers are compared to other China companies. So while the China advertising market is challenging, our overseas advertising is actually growing very fast. So I think having the fast-growing overseas also helped to achieve that growth in the first quarter.
Thank you. Very important.
As for the sort of the fintech outlook, right? So I think we didn't sort of disclose the fintech number. I think the only number we shared is Youpin, fintech, TV internet and overseas, right? These 4, which are less related to the China smartphone, we have the rate of 71.5%. So you see the Internet service continue to diversify, and these segments continue to grow very fast. So that also included fintech.
But I think in reality, I think we also mentioned in the last quarter's call is we do realize, although we see the very good long-term prospect for the fintech business for Xiaomi, I think in the short term, we realize that there's a pandemic situation and the overall credit environment in China is also more challenging. So I think starting from fourth quarter last year, we started to control the fintech business. We have lowered the approval rate of new customers and controlled the credit quality. So -- but from a year-on-year perspective, there's growth. But from a Q-on-Q perspective, I think for fintech, we will -- for this year, at least for the short term, we'll try to control the pace.
Our next question comes from Gokul Hariharan with JPMorgan.
My first question is on the Internet side. When I look at your MIUI reported number of subscribers of MAU, almost 2/3 of it is now outside of China. And Steve, you just mentioned some of the advertising businesses starting to grow quite fast in overseas market. Could you give a little bit more color on how that is progressing? Maybe especially in the 2 big overseas markets that you're in: Europe, probably a higher ARPU market but a newer market for you; as well as India, probably a lower ARPU market but a much more established market, where you have been #2 -- #1 for 2 years plus.
Okay. Thanks a lot.
Steve will answer that question.
Thanks a lot for that question. So for -- we just talked about overseas advertising actually drive the growth for us in first quarter. We didn't disclose the detailed number, but our overseas Internet service is still growing very fast, driven by both the growth in user and also the growth in ARPU. So the progress, I think, we are still -- we're very happy as a company. We're very happy with the progress of our overseas Internet service. Right now, we talked about -- I think in the past, we talked about the different stages of developing overseas into this business.
The first stage is obviously developing a large enough user base, which right now in India we have. But in a lot of overseas markets, I think still -- the focus is still more on the user rather than monetization. And the second phase is to give a service. So I think on that front, we continue to do, and we see the progress each quarter. I think in this quarter, I think we shared a number that we're quite happy with. If you look at globally within the Xiaomi smartphone or processor actually become #1 processor among global smartphone. So with the more service penetration on that, we'll be able to start to monetize a bit more. But of course, in a lot of key markets we have like India, I think the overall online advertising market is still quite small.
I think another thing we are also actively doing is to continue to increase our overseas advertising customer base. So in addition to leveraging big advertising platforms for them to fill our inventory, we are also making very good progress on building the relationship with advertisers. On that, we'll also be able to further drive up the ARPU we have. So that's what we can share.
Okay. My second question is on China market share. I think there seems to be a little bit of encouraging sign initially on 5G. But could you think about it? I mean the market is so consolidated now with 4 players, basically 4 local players dominating the market. What are the strategies apart from just the product side, I think which you've talked about quite a few times? Could you talk a little bit about the -- could you talk a little bit about what you're trying to do from addressing the channel gaps or any of the... [Audio Gap]
I think in China, we continue to build our online -- strengthen our online and off-line channels. For example, off-line, we are -- we have around 2,000 stores to continue to strengthen those coverage by improving the efficiency, deliver our product to the store with the most efficient way. That's a very important part of our business model. We always want to deliver or offer very high-performance devices at affordable prices. So efficiency will be the key. We'll continue to do that. And also, I think we will do our partnership with the carriers, for example, for the 5G adoption this year. This is also what we are going to do in 2020 in China. Overseas market, I think in Europe, for example, we have been [Audio Gap]
in 2020. Actually, we started building a partnership with our carrier partners in Europe since early 2019. We continue to grow or strengthen our partnership in year 2020. And you will see more and more partnership with global carriers in Europe and in many other markets as well. That's a very important channel strategy for us in the international market.
The question comes from Thompson Wu with UBS.
I hope you are both doing very well in the current environment. I just have one last question. I think you've covered a lot of ground this evening. I think the one area I wanted to focus on is on Latin America. There's a little bit more language in your results, talking about the progress you're making in that region. I think now you're a top 5 vendor, specifically in Latin America. Could you just talk a little bit about the channel strategy, both on carrier's distribution but also on production and supply chain? I know that's generally been a pretty challenging market to break into, given some of the tax, import tax issues. So just on Latin America, can you walk through your strategy there?
Okay. So it's a good question. Actually, we started investing in Latin America market in the -- I think in the early '19, 2019. So our headquarter, we built our first office in Mexico. So the Latin America market is very fragmented. As you mentioned, there's many, many different countries. But except Brazil, they are all Español, Spanish-spoken, the territory. So because we can -- yes, that's good for us because we have many, many friends in Spain. We can share a lot of content with Español. So that's good.
And also in Mexico, specifically, it's a carrier-driven market. There is the biggest -- their wireless operator called América Móvil in Mexico is called Telcel. They represent, I think, maybe 90% -- I think around 90% of the Mexico market. We are building a partnership with them. We have a Xiaomi store. We have a shop-in-shop in their store. We have Xiaomi stores. We build our off-line channels on our own. And also, we build a partnership with the América Móvil. That's one example. We'll continue to do that.
In many other countries, we build our Xiaomi stores and also work with the carriers. Because in Latin America, the 70%, maybe 60% to 70% of the smartphone market are through carrier channels. We will work with that carrier very, very closely. Brazil is an exception. Brazil is a Portuguese language-spoken country, so it's different. But we have not -- we don't have -- they have regulations on the local manufacturing. We have that do local manufacturing yet. We have a Xiaomi store there to demonstrate our product, just demonstrate and sell product there. We are -- we focus more on the Spanish-spoken countries at the moment.
Okay. And I guess just to follow up on that for the time being, most of the strategy is really focused on carrier relationships on smartphone. It will require a little bit more time to roll out the IoT portfolio. Is that correct?
Actually, this is very, very important. Actually, every -- almost every carrier, they all are very, very interested in building a partnership with us on the ecosystem products. But challenging for both of us is several things. Number one is the local certification takes a lot of time because every country, every market, they have a different certification requirement. We have to do it one by one. It takes time and engineering effort. That's number one. Number two, a lot of carrier partners, they want us to do some kind of customization for them in the -- even for the ecosystem IoT products. It also takes time. We are working with them. We'll solve the problem one by one. I think it will happen, but takes a little time.
Actually, we'll take one more question. Yes, so please link up the next question.
And the last question comes from Kyna Wong with Crédit Suisse.
But can I like just try to 2 small questions? First is about -- because like there's some fears of like China retaliation in regard to the Huawei restriction stand. So may also worry about any risk in like banking or like any restrictions on Qualcomm that affect your smartphone business? I think this is the first one.
The second is actually about the cash flow in the first quarter that we see are large also. I would like to have more detailed explanation from the company.
So yes, okay. Thank you for the question. Actually, in Xiaomi's spirit of the vision, we want to be a friend to everyone. We are a very, very important technology partner for Qualcomm, for Google and also a good partner for many, many European technology companies. So we are working with them very, very closely. We don't see any reason that we don't strengthen -- continue to strengthen the partnership. This is number one.
And also, our vision is to, how to say, to change or improve people's life through our innovation. The innovation is combined by our own technology innovation together with our partners. So in that sense, I think -- well, I don't see any reason that we don't continue to do the -- strengthen the partnership. So everything so far is going well. So that's -- we are very confident we will go to -- now we are in 90 different markets. I think we'll add more market in the future.
And I'll add just about the cash flow question. So I think there's a larger operating cash flow outflow in the first quarter this year. So I think a couple of points. I think first, first quarter is typically the low season of the cash flow. So if you look at the company history, our operating cash flow generation, very strong. As a lot of you guys saw, we have a negative cash conversion cycle, meaning when we grew revenue, actually, it should be operating cash inflow, assuming all the working capital base resume cost there. And so despite from a full year perspective, it has been a very strong cash flow generation. First quarter is typically a low season. And the reason is because a lot of purchase was made in Q4 that we need to pay the supplier in the first quarter. So that's a typical case.
I think for this quarter, I think there's a few specific other situation consideration. I think one is in preparation of 5G, which has higher build material, the payable we have was higher. That's coupled with lower receivables, the lower cash received this quarter because of the pandemic. So because of the pandemic, we get less money from the customer typically this quarter. So that's one. And the second is the inventory also increased quarter-by-quarter. But inventory increase was really not a big issue. It was mainly, I think Xiang, Xiansheng mentioned it earlier during the presentation, the increase in inventory is really in the raw material. So because of the production disruption, so we have a lot of raw material not produced into finished good in the first quarter. So that caused the absolute amount of inventory increase, which, again, is a cash outflow.
Okay. Yes. So this will conclude the call tonight. Thanks, everyone, for joining.
Thank you. Thank you for joining.
Thank you for your participation. This concludes the conference.