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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to Xiaomi Corporation's 2018 Third Quarter Results Conference Call. I am Steve Lin, the Director of Corporate Financial of Xiaomi. Before we start the presentation, we would like to remind you that this includes 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 the general market condition is coming from a variety of sources outside Xiaomi. This presentation also contains some unaudited non-GAAP financial measures that should be considered in addition to, but not as a substitute for, measures of the company's financial performance prepared in accordance with IFRS. Let me introduce the management team on the call tonight. We have our Founder, Chairman and CEO, Mr. Lei Jun; our Co-Founder and Senior Vice President, Mr. Wang Chuan; and our CFO, Mr. Shou Zi Chew. Lei will provide an overview on our third quarter results, and then we will have a Q&A session. Now I will turn the call over to Mr. Lei Jun.
[Foreign Language] Good evening, everybody. Okay. [Foreign Language] Our revenue last quarter in Q3 2018 was RMB 50.8 billion with a year-on-year growth of 49.1%. [Foreign Language] Our adjusted net profit was RMB 2.9 billion. [Foreign Language] On the 26th of October this year, our 2018 smartphone shipment exceeded 100 million units. [Foreign Language] Our revenue growth was both in China and international. Our Mainland China revenue grew by 20.9% year-on-year. Our international revenue grew by 112.7% year-on-year. [Foreign Language] Xiaomi was ranked Top 5 in 30 smartphone markets. [Foreign Language] We want to introduce our Western European smartphone business growth. So we are ranked #4 according to the IDC -- according to Canalys in Western Europe today, with 386% year-on-year growth rate in Q3 2018. [Foreign Language] We have been #1 in India for 4 consecutive quarters as of the end of Q3. [Foreign Language] We are #2 in the Indonesian smartphone market today. [Foreign Language] In terms of innovations, the first example we want to share is Mi Mix 3 that we launched in October this year. This is the world's first full screen magnetic slider phone. [Foreign Language] It has one of the top 3 photographic experiences globally. According to DxOMark, it is ranked in the top 3 for photography. [Foreign Language] This time around, we have proven our continued leadership in color ceramics with this phone. [Foreign Language] We established our camera group some time ago. And with continued optimization in image processing algorithms, our DxOMark score for Mi Mix 3 is already at 103, which is ranked top 3 globally. [Foreign Language] As a comparison, iPhone X is at 97 points; Huawei P20 is at 102 points. [Foreign Language] We also have pioneering products besides new technology. In September this year, we successfully connected to top 6 gigahertz. And in October this year, our mmWave, millimeter wave, was successfully connected. We expect that we will launch a 5G smartphone in Europe in Quarter 1, 2019. [Foreign Language] Second, in terms of AI and IoT, our connected devices outside of smartphones and laptops is already at 132 million devices, which is a quarter-on-quarter growth of 13.8%. [Foreign Language] We already have 2 million users with 5 or more Xiaomi IoT devices outside of smartphones and laptops. This is a quarter-on-quarter growth of 16.5%. [Foreign Language] Our Xiaomi AI assistant monthly active user has exceeded 34 million. [Foreign Language] Our AI technology was awarded 4 important awards in the last quarter. [Foreign Language] For example, at the World Internet Conference in Wuzhen last month, Xiaomi's AI Open Platform for Smart Homes was awarded -- an award called the World Leading Internet Scientific and Technological Achievement. [Foreign Language] Third, our -- Xiaomi maintained an efficient operating expense ratio of 8.5% last quarter. This is in spite of our further expansion of our offline channels in the same quarter. [Foreign Language] Next in terms of our smartphone strategy, we experimented with a multibrand strategy this year. For example, we released a phone called POCO phone in India in August 2018. And this phone is now available in most of our international market. It delivers technology that truly matters to tech enthusiasts. So it's a brand that's targeted towards the tech enthusiasts market. [Foreign Language] Right now, the basic model is at RMB 2,100. [Foreign Language] Another example of our multibrand strategy is our invest P (sic) [ investee ] company produced a smartphone brand called Black Shark, which targets the gaming audience and the performance so far has been very good. [Foreign Language] Today, we also announced a strategic cooperation between us and Meitu. Under this deal, we have a 30-year license for smartphones and other smart products. [Foreign Language] At the same time, we have -- Meitu will be investing certain image-related algorithms and technologies in our cooperation in smartphones. [Foreign Language] Most importantly, this deal allows us to more effectively target the female demographic. [Foreign Language] Because our user base is mainly males and Meitu's female base is predominantly females, so this deal allows us to further expand and diversify our user base by dealing on Meitu's popularity amongst female users. [Foreign Language] In September this year, we also did a significant global organization restructure. [Foreign Language] First, to strengthen the management functions of our headquarters, we created the Organization Department and the Strategic Advisory Department. [Foreign Language] We also appointed 2 of our co-founders and senior vice presidents to be in charge of each department. [Foreign Language] At the same time, we streamlined our business and -- from 4 business units, we created 10 new business units to streamline the business, improve efficiency and to promote the next generation of leaders. Okay. [Foreign Language ] Our TV business performed very well last quarter, so let us introduce our SVP of TV, Wang Chuan, to share a little bit more about the business.
[Foreign Language] In Q3 2018, our smart TV sales volume grew by 199% year-on-year. [Foreign Language] In the first 9 months of 2018, our sales volume cumulative has already exceeded 5 million units. [Foreign Language] Our monthly sales volume exceeded 1 million units in October 2018. [Foreign Language] During the Singles’ Day Shopping Festival in November 2011 (sic) [ November 11 ], the sales volume and sales value of all platforms, including Tmall, JD and Suning.com, ranked our TV business as the #1 brand. [Foreign Language] We started selling our TVs in India this year as well -- in March this year. [Foreign Language] According to IDC, we are already the leading smart TV brand in India in a few short months. [Foreign Language] The reason why we can perform so well in our TV business is because we relentlessly pursue amazing products with honest prices. [Foreign Language] We relentlessly pursue innovation. [Foreign Language] Relentlessly pursue improvement in quality. [Foreign Language] In terms of quality, our metrics are ahead of our competitors. [Foreign Language] This is how we earn the trust of our consumers. [Foreign Language]
Okay. In the next section, I'll continue in English. This is Shou, the CFO of the company. In the next section, I will introduce our financials to everybody as well before we open up to Q&A. So as a recap, in Q3 2018, our total revenue was RMB 50.8 billion with a year-on-year growth of 49.1%. Our adjusted net profit was RMB 2.9 billion. If you look at it in each of the 3 categories -- let me explain our revenue, for the smartphone business, our smartphone revenue reached RMB 35 billion in Q3 2018, representing a year-on-year growth of 36.1%. Now at the back of this is 33.3 million units of smartphone shipment in Q3 2018. We continued to expand our market share based on the shipment numbers that I just talked about. Now according to IDC, we are the fourth largest smartphone company in the world today. And in a market where the entire smartphone market globally shrank by 6% quarter-on-quarter in Q3 2018, we were 1 of only 2 companies in the top 5 to grow. And our year-on-year growth, according to IDC in Q3 2018, was 21.2% in a market that shrank by 6%. More importantly, we continued as we left off in Q2 2018. We continued optimizing our product portfolio and the result of this is the ASP of our smartphone has increased year-on-year and quarter-on-quarter. In Q3 2018, our smartphone ASP grew 16% year-on-year in Mainland China; 4% quarter-on-quarter in Mainland China. We also grew 18% year-on-year overseas. And one of the reasons for this is our continued penetration in the Western European markets where consumers are demanding higher-end units. At the back of this, our Xiaomi 8 series, which we launched in -- which is the flagship series that we have, which we launched in May, exceeded 6 million units of shipment as of October 9, 2018. Another example is that during the November 11 Singles' Day Sale, our Xiaomi 8 was ranked #1 in the CNY 2,000 to CNY 3,000 price range on Tmall and JD.com and #1 in the CNY 2,000 to CNY 2,500 price range on Suning.com, which shows that we have improved our leadership in high-end segment phones. Now what numbers that we will be disclosing this quarter is that if we look at our flagship phones, which are phones above RMB 2,000 in price range, which includes our Mi Mix series, our Mi 8 and our POCO phone, the revenue contribution of these flagship phones as a percentage of total smartphone revenues is at 31%. This is as of Q3 2018. So we see improvements in the revenue contribution of our flagship models as well. This is in line with our overall strategy of not blindly pursuing smartphone shipments, particularly in China, but to make sure we go after the quality smartphone users, which are the high-end users, which reflect the Chinese consumer -- consumption upgrade cycle in China today. In terms of IoT and lifestyle products. Now IoT and lifestyle products revenue reached RMB 10.8 billion in Q3 2018. This represents a growth of 89.8% year-on-year. As our Co-Founder and SVP Wang Chuan had mentioned just now, our smart TVs sales volume, just as an example of one of our IoT products, grew by 199% in Q3 2018. This is a very significant growth. Our sales volume in the first 9 months of 2018, cumulative, has exceeded 5 million units. And our monthly sales volume in the month of October 2018 exceeded 1 million units for the first time for our business. During the Singles' Day Shopping Festival in 2018, the sales volume and sales value were both ranked #1 for our TV business on Tmall, JD and Suning.com. And according to IDC, we are now the leading smart TV brand in India. With our success in the TV business now, we have small companies, we continue expanding our IoT product portfolio, particularly in the single white goods segment. At the back of this, we launched our Mi Air Conditioner on July 23, 2018. And it has been very well received by our users so far. Very positive reviews.
Now the third revenue line that we have is Internet services. Internet services revenue reached RMB 4.7 billion in Q3 2018. It represented growth of 85.5%. Now just to put this number in context, RMB 4.7 billion in 1 single quarter already makes up one of the top Internet companies by revenues in the world today. With reported EBITDA, our advertising revenue grew by 109.8% year-on-year in Q3 2018. Our online gaming revenue grew by 12% in light of the current gaming climate in China. Our other Internet value-added services grew by 98.6% year-on-year. This is primarily driven by our growth in the fintech business and in Youpin, our curated e-commerce website. At the back of this revenue growth is really underpinned by the same growth in our MIUI monthly active users and the general ARPU growth. Our MIUI MAU grew from 157 million users in Q3 2017 to 224 million users in Q3 2018, representing a 43.4% growth. Our quarterly ARPU grew from RMB 16.3 in Q3 2017 to RMB 21.1 in Q3 2018. A lot of you may be concerned -- may be very concerned about Internet monetization outside of smartphones in China. We are happy to report that Internet monetization outside the Mainland China smartphone is early, but showing good progress. For example, within the IoT category, TV's Internet services revenue already accounted for 5.4% of total Internet services revenue in Q3 2018. This is driven by the fact that the monthly active users of Mi TV and Mi Box reached 15.9 million as of September 2018. Outside of China, our overseas Internet services revenue now accounts for 4.4% of total Internet services revenue in Q3 2018. This is early, but we see very, very positive signs of future growth. Moving on the data. Our international revenue as a whole grew very rapidly at 112.7% in Q3 2018 year-on-year. This now represents 43.9% of our total revenue. Xiaomi was ranked top 5 in 30 smartphone markets around the world. As our Chairman mentioned, for example, we have been #1 in India for 4 consecutive quarters as of Q3 2018. Now in Q3 2018, according to Canalys, the difference between us and the second-placed competitor widened significantly. In Indonesia, our shipment -- we are now the #2 smartphone maker in Indonesia with shipment growth year-on-year at 337%. Our market share went from single digit in Q3 2017 to more than 20% in Q3 2018 according to Canalys. In Western Europe, we are now #4, with shipment year-on-year growth of 386% in Q3 2018. Some of you may know, those were the markets where we have only launched very recently in Western Europe. Now on this topic, we also like to share that due to the economic climate around the world today, RMB and the Indian rupee, which is 2 important currency for revenue for us, have depreciated quite a bit against U.S. dollar this year. RMB has depreciated 6.9% and the Indian rupee depreciated 14.2% against the USD starting from January through the 9th of November according to IMF. Now this clearly is a pressure on our costs. So in Q3 2018, our hardware gross margin went down from 7.4% the quarter before to 7.1% in Q3 2018. This is hardware gross margin. Conversely, our Internet services gross margin went from 62.8% in Q2 2018 to 68.4% in Q3 2018. The reason for this increase is because advertising revenue has higher gross margin and advertising revenue has grown more significantly than gaming revenue in the last quarter. Now despite the pressure that we have on currency, we have managed to -- we have still managed our expected...
[Technical Difficulty] I apologize. Okay. Despite the depreciation in currency and the pressure on our gross margin, we have taken measures to make sure that we improve on our operational efficiency. As most of you will know, one of the key things that we go after is to make sure that we remain the most -- one of the most efficient companies in our industry. And I believe at this point in time, we still are. Our operating expenses went down from 8.8% in Q2 2018 to 8.5% in Q3 2018, some of which is also driven by seasonality, including the World Cup advertisings that we invested in the quarter before. The reduction of this was shown also in Q3 2018. So the result of this is IFRS profit -- net profit of RMB 2.48 billion in Q3 2018 and RMB 2.9 billion non-IFRS adjusted net income in Q3 2018, representing a net income margin of 5.7%. Just a few quick words on working capital. Our trade receivable turnover days remains low at 14 days. Our inventory turnover days remains low at 49 days and our trade payables turnover days increased slightly to 99 days, which means our cash conversion cycle still remains negative 36 days. So our main business is still very -- is still cash flow positive. Our net cash generated from operating activities, adjusted for our finance business, is positive RMB 1 billion. And this reflects the healthy nature of our cash flow profile. One other quick note on finance. Because of the impact -- because of the reduction -- because we're now a public company and because a few quarters have passed, the impact on this convertible redeemable preferred share on our P&L and our -- on our balance sheet has been adjusted. So our total equity today moved from negative RMB 110 billion to positive RMB 67 billion.
This concludes the quick overview we have on Q3 2018. I think to quickly summarize, one, our revenue grew by RMB 50.8 billion -- sorry, our revenue was RMB 50.8 billion, growing at 49% year-on-year. Adjusted net profit of RMB 2.9 billion. This is in line with our internal expectations, and I believe plenty of us -- room for consensus for revenue and quite significantly robust room for consensus for net income. So that's the quick update. We will now open the floor to questions and answers.
[Operator Instructions] [Foreign Language] Our first question comes from Morgan Stanley, and it's Grace Chen.
I'm interesting to know about the key running drivers for the better Internet services revenue. As you mentioned, there were no goods overseas, and then TV started to contribute more substantially to the Internet services. So could you elaborate a bit more about the -- any differences in the margin profile for the Internet services on TV versus smartphone overseas and China? And how should we project the margin trend in the future?
Grace, thank you for the question. This is Shou here. So for Internet services, just as a very quick recap, we grew at -- our Internet services revenue was at RMB 4.7 billion in Q3 2018, growing at 85.5%. Now if we break this down, this CNY 4.7 billion down, CNY 3.2 billion was from advertising, CNY 0.7 billion from online games and CNY 0.8 billion from other Internet value-added services. The increase in our advertising revenue is down to a few things. One, it is the continued optimization of our -- so that's back-end advertising engine. The second is increased engagements in our user base. And the third is -- overall to the -- increase in the price of premium products. So that's the key drivers behind the advertising revenue stream. For online games, we were at CNY 0.6 billion in Q3 2017 and CNY 0.7 billion Q3 2018. I think the current climate for gaming in China is very well understood by most of you on the call due to tightening government regulations. We believe that this is in line with our expectations on where we should be in terms of our growth versus the market. So it's 12% year-on-year growth. Just to give you a sense, advertising, just in general, has higher gross margin than gaming. So if advertising grows faster than gaming, you should expect gross margins to go up. For other Internet value-added services, it's primarily driven by 2 parts today. One is our fintech business and the second is Youpin, which is our curated marketplace. Both businesses have performed well, which explains the growth here. So I think the -- that explains the breakdown. Now for your question on how you should think about the margin structure. In terms of gross margins, it's advertising, number one; other Internet value-added services, number two; online games, number three. So the ranking order is like this. So it depends on which one grows faster. For overseas, today, we are primarily making our -- Internet services revenue from 3 ways. One is your more traditional advertising revenue, working in conjunction with place like Google. The second is search revenue split from Google. And the third is our pre-install business, still very early but showing very good promise. For the TV business, it's really advertising. And it's more -- it's very weighted towards brand advertising because of the media -- because of the large screen format. So the margin structure is almost in line with advertising. So that's the beauty of that, too.
Next question comes from Cherry Ma, CLSA.
I have two question. My first question is related to the Meitu strategy. Within the Meitu, are we able to leverage our MIUI software platform to monetize this new brand? And the second question related to Meitu is that are we able to leverage the existing Xiaomi sales channel for future smartphone launches? And overall, my second question will be the pricing for smartphone. Since 3Q margin is really impacted by the rupees headwind, are we going to readjust the pricing in rupees in 4Q so our margin will be more well balanced?
[Foreign Language] So we have experimented with a multibrand strategy for quite some time. And we have had some initial success with 2 top brands. The first is POCO, which is targeted towards tech enthusiasts. We go after very extreme hardware performance. And the second is Black Shark, which goes after the gaming user base. And this strategy has proven to be quite a success for us. So the strategic cooperation with Meitu is primarily to continue this multibrand strategy. And this one is going to be focused in the female demographic, which is a demographic that we feel like we can improve. So that's the overall sort of thinking behind the Meitu deal. [Foreign Language] Meitu is very well-known amongst female -- the female demographic, particularly in China. So very strong brand equity there. And the second is the camera chain for photography is actually quite strong. [Foreign Language] Our cooperation is going to greatly boost Xiaomi's efforts in further penetrating the female market. [Foreign Language] Second -- the second question on currency, currency has presented a significant challenge for us this year. [Foreign Language] The currency is -- as mentioned, currency has presented a big challenge. Our gross margin from last year to this year for hardware has actually gone down from roughly 11% to 7.1%. A significant challenge. But through improving our overall operating efficiency, we have managed to achieve our net income numbers despite of it -- despite this. [Foreign Language] We really cannot very easily make the decision to increase our prices in order to mitigate this. [Foreign Language] What is more important is probably how do we continue to improve our efficiency. [Foreign Language] So we are very satisfied with our -- the numbers in Q3 this year.
And our next question comes from Leping Huang from CICC.
So my question is about the IoT and the lifestyle products. I see the revenue grow very strong and also we see a margin expansion. So can you elaborate -- so what's the strong -- we know the TV is growing very well, but I was assuming that TV -- it's a lower margin product, but why the margin is going strong as well? And how we should model that -- how we should see this business margin trend ahead? [Foreign Language]
[Foreign Language]
[Foreign Language]
[Foreign Language]
Okay. Let me translate it for the benefit of everybody. The question revolved around 2 things. The first one, why is the IoT and lifestyle products gross margin not as effective -- why did it not decline as much as the handsets? That's the first question. And the second is, is the TV gross margin structure lower than handsets? Okay. So in terms of the first question, the short answer is that the IoT and lifestyle products revenue stream is a combination of many products. So it's not just a single product like the smartphone's revenue stream. So the -- a lot -- a part of the gross margin -- gross profit is sort of affected by this product combination. The second is a lot of these products don't actually rely on U.S. dollar sourcing, which means that the impact of the appreciation in the U.S. dollar doesn't impact a lot of these products costs as much. So it's a combination of these 2 that resulted in an increase in our gross margin for IoT versus smartphone. Now the second question is because of the recent depreciation of some currencies around the world, our smartphone gross margin is under a lot of pressure. Under normalized circumstances, the gross margin for smartphones should be higher than television. But right now, it is about 2% lower.
And our next question comes from Gokul from JPMorgan.
I have a couple of questions. First of all, could you talk a little bit about what is your outlook for China smartphone market? And how will you go about eventually engineering some consolidation in the market, given that some of the market players above you are starting to see year-on-year unit decline? That's my first question. Second question is could you talk a little bit about the details of your monetization into e-commerce services outside of China? When are we seeing more of the monetization opportunities? Is it in the bigger install base market like India, Indonesia? Or is it from some of the more consolidated and fast growing and potentially higher dollar -- higher positive dollar countries like Europe? And going forward as we grow this business, where do you see the growth coming from it? Is it going to be more from the Europe? Or is it going to be more from India or Indonesia or other OEMs?
Thank you, Gokul. Let me translate quickly. Gokul, let me answer your second question first. So on details of Internet services outside of China, I mentioned, just now, it really -- it comes from 3 sources today. One is working together with the ad network of Facebook and Google, second is search revenue from Google and the third is pre-install. We had -- we could have the capability to sell our own ads in the future, but this will require a bit of time. Today, our Internet services -- our Internet services is really always a function of where we have the biggest MAU base. So you can expect India and Indonesia to be significant contributors today. But in the future, I think you can expect Western Europe to be a higher ARPU market in general. So I think for the next few years, India, Indonesia, Western Europe, of course, rest of the world where we can monetize the stable result. But this will be likely going to be the 3 key markets. Now on the first question of that, our Chairman will reply.
Okay. [Foreign Language] According to GFK and IDC this year, the Chinese smartphone market is declining this year. [Foreign Language] Second and third-tier smartphone brands are facing very immense challenges. [Foreign Language] The first point is that he thinks that the next growth driver for Chinese smartphone market will be 5G. 5G will actually boost the replacement cycle here in China. [Foreign Language] Second is, we have spent a lot of efforts over the past few quarters optimizing our product portfolio. And I think you're beginning to see the results of this product portfolio optimization. Today, our high-end phones, defined as RMB 2,500 and above, is already at 31% of our total smartphone revenue. So you're seeing the results today. [Foreign Language] Overall, the [ region ] remains optimistic about the Chinese smartphone market.
Okay. Do you expect market share to move up over the next year or so? Because it's been -- things have been stagnant while we have engineered this portfolio reengineering? And how should we think about -- how aggressive Xiaomi is going to be going into the next year, given 5Gs too, they'd be more like a 2020 story for China? So it looks like the market is soon likely to grow next year.
[Foreign Language] We will launch our first 5G-enabled phone in Europe in Q1 2019. For China, 5G should be a 2020 story like you said. [Foreign Language] Second, we will continue to optimize our product portfolio and our multibrand strategy, and our goal is to improve our market share in general. [Foreign Language] We believe that our overall capabilities have improved a lot from last year. [Foreign Language] For example, for our cameras, you can see that we are -- we have already improved a lot, achieving very, very high DxOMark score already. [Foreign Language] As our products get better, we believe that our market share will get higher.
Next question comes from Thompson Wu from Credit Suisse.
First one is just on the overseas monetization for Internet services. I think Shou, you mentioned that, that piece of the business is now 4.4% of Internet service revenue. Can you just give us some background as to kind of areas where you're generating this monetization? And how you plan on monetizing in these areas over the next few quarters, specifically the overseas, Internet services piece? That's my first question.
Okay. Thompson, I'll answer the first question first. It comes from 3 sources today. The first is working with Google and Facebook's ad network. This is the very basic way when you have a lot of users who just connect to the network and a very quick way to monetize. The second is our search revenue agreement with Google where they pay for search traffic. And the third is pre-install. In the future, we want to build the local advertising capabilities in some key countries. These 3 revenue streams that I talked about are very early precursors to our advertising business there and including our gaming distribution business in the future. So I think we have taken the first step. We are building the capabilities for the second step.
Okay. Sure. And just on that point for search -- for both the search and advertising for display, is that through the Mi browser? I guess I'm just curious, I know that in China, that's a large part of your strength is having your users use the Mi browser. Do you still have -- is that advertising revenue generated to your browser? Or is that applicable to other third-party-browsers that the user may download?
It's -- for overseas, the Google search bar is on our launcher -- on our [ 4 million. ] It's on the main screen. And so it's a different rule, okay? And we also have advertising revenue share. So it's not just others.
Okay. Great. And then my other question is just on the pricing for overseas smartphones. I understand that the India rupee depreciation is putting some cost pressure in that part of the business. I guess I was under the impression that the company runs a cost-plus model, so you'd be able to more quickly pass through these changes on to the end user through pricing increase. But I think I might have heard that differently earlier on the call. Can you just give me an update on kind of how you're thinking about I guess you're pricing relative to some of the currency fluctuations, particularly in India?
[Foreign Language] Okay. So for the benefit of everybody, we think that the most effective way to counter against any increase in cost driven by currency depreciation is actually to make sure that we design with a better cost -- we design for a better cost. And then we will design on our entire operating efficiency so that we can have more room to import these increase in costs. Now for some models in India, we have increased in -- some very limited models we have done a small price increase. And that's the way we have effectively sort of handled the challenge of the depreciation of the rupee. Our Indian business remains profitable.
And just one quick follow-up on IoT. I think we've talked about the growth in the smart TV business, can you just give us a sense about how big just the TV business is as a percentage of the total IoT and home lifestyle product category?
Okay. Thompson, I'm just checking what we have disclosed just to make sure I don't say anything I shouldn't. We have disclosed our TV and PC revenue combined, and it's about 40% of our IoT revenue, TV plus PC.
And our next question comes from [ Hung Tao ] from [ Quangfa ].
[Foreign Language]
[Foreign Language]
Let me translate for everybody. So there were two questions. The first is regarding a new product that we launched last quarter for IoT and lifestyle products. And Lei Jun shared that in the last quarter, we launched our Mi Air Conditioner, which was launched on the 23rd of July this year. And the review of our users so far has been overwhelmingly positive actually. And next year, we have actually a whole suite of products, but this is probably not the right forum to talk about our product pipeline for next year. The second question is regarding the opening of our Mi Homes and our authorized -- and our authorizing stores. So you may have noticed in our report that we already have 500 Mi Homes. These Mi Homes are in certain second-tier cities. And we think that 500 Mi Homes at this stage is a good number to achieve and that -- and really, the priority right now is to make sure that we improve the operating efficiency of these Mi Homes, which is something that we are very, very acutely aware of is the key competitive advantage of this offline new retail. The -- in -- for authorized stores, we have already opened 1,100 of them. These are mainly in the third-, fourth-, fifth-tier cities in China. This is the more effective way of reaching these cities. So there's been quite a record growth from 360 stores to 1,100 stores in the last quarter. And we have done all these while achieving our 8.5% operating efficiency. So that's the answer to the question.
And our next question comes from Frank He from HSBC.
I have two question. The first is regarding a follow-up on the gross margin on the smartphone. Just want to know that comparing to the high-end model, which is the ASP over CNY 2,000 versus lower-end like revenue models, the recent margin improvement versus the cheap-product category, given that we are optimizing our product mix to a high end. So this question, excluding the foreign exchange effect, just the value of apple-to-apple comparison on the company's cheap-product categories.
[Foreign Language] So the first question is, if we normalize for currency, will gross margins be higher for high-end phones versus the entry-level phones? And the answer is yes. So for high-end phones, the gross margin is still higher. And the reason is because there's more R&D expense and it's generally more expense -- more other cost items involved below the gross margin line in creating higher-end ASP phones. And the emphasis here is to make sure that no matter what kind of phones we're selling, the emphasis here is we need to make sure we improve our overall operating efficiency just so that we can return as much cost savings as possible to our users.
Okay. Got it. And the second question is about the ARPU trend, given that Lei Jun just mentioned the contribution of the modernization, the maintainability dipped at an early stage for relative market. So I guess the ARPU for the users in China market coverage will be much higher than the average number of CNY 21, is that correct?
[Foreign Language] Okay. Yes. Yes, you're correct. So of the 224 million MAU, clearly, not all of them are in China. As we mentioned in our last call, north of 100 million -- above 110 million is from China. So you can do the math quickly. But I think if you compare our ARPU versus the appropriate relevant metrics for other leading Internet companies, so if you look at their real MAU numbers and divide it by their real MAU numbers, you know there's still a lot of room for improvement.
Due to the time constraint, we'll take the last question.
And our last question comes from Goldman Sachs, Piyush.
On the Internet revenue side, may I just ask where you are with ad loads? That's the first question. And where you could take that up to? Second is could you give us a sense of how much time spent has been on your platforms both in China as well as outside China, India, Indonesia as well as initial numbers coming through for Europe? That would be appreciated. And also, if I can ask about app distribution. You talked about games distribution, but could you also spend about a few minutes on app distribution?
Okay. [Foreign Language] So Piyush, on your question -- on the question of -- so our MAU has grown to 224 million globally today, representing a 43% growth year-on-year. The time spent was still at over about 4.5 hours. This is a global number. So the -- we don't see any significant difference between time spent on our phones in India and in China. This is number one. Number two, due to, as you are probably very aware, the regulatory environment in China today, during this transition of I think the gaming industry is not growing as well as a lot of people would hope. So that's the pressure that we see and that's the reason why our gaming revenue is also growing in the team. The -- in terms of our app store, in terms of other numbers, it's very normal. We don't see anything abnormal in terms of the growth here. Now for Internet revenue ad loads, because we have so many -- so much inventory across so many different products, this is not a number that we have right now in terms of your -- direct answer to your question. So we need to go back and double check.
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Thank you very much. Have a good night.
Thank you, and that concludes today's call. Thank you for joining and goodbye.
Okay. Thank you.