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Ladies and gentlemen, thank you for standing by, and welcome to Xiaomi's 2019 Fourth Quarter and Annual Results Announcement Conference Call. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to hand the conference over to your host today, Mr. Steve Lin. Thank you. Please go ahead, sir.
Good evening, ladies and gentlemen. Welcome to the investor conference call hosted by Xiaomi Corporation regarding the company's 2019 annual results. I'm 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, Mr. Wang Xiang; Senior Vice President, President of International and CFO, Mr. Shou Zi Chew; and Vice our President of Finance, Mr. Richmond Li. To start with, Mr. Wang will share strategic initiatives for the company in 2019, and Richmond will discuss the business segment and financial performance. Once the management completes their prepared remarks, we'll move on to the Q&A session. I will now turn the call over to Mr. Wang.
Yes. Good evening, everyone. Thank you for joining our year 2019 annual results earnings call. I'm Wang Xiang, President of Xiaomi Corporation. A little bit of myself. I joined the company year 2015. Before my current role, I was in charge of the Xiaomi International business, the IP strategy and the legal affairs. So we're going to -- I'm going to be your new friend. In the future, we'll spend more time together. So this is my first time presenting our result together with Shou and Richmond. So I look forward to partnership with you. Actually, year 2019 was a very important year for us just simply because in a few days, Xiaomi is going to celebrate our 10 years anniversary. So probably, it's good time for me to do a little summary about what we have done in -- since we were founded in 2010. So actually, the company was founded year 2010. 2 years later, we achieved or surpassed RMB 10 billion as a revenue. And in year 2017, we surpassed RMB 100 billion. Last year, year 2019, the company revenue surpassed RMB 200 billion. Not only that, actually, this is the first time Xiaomi was listed a Fortune Global 500 in August, ranked #468. Also, we are also listed by a branding organization called BrandZ as the most valuable consumer brand in the world. It's a very, very important milestone for us as a 10-years-old company. Let's talk about year 2019. The total revenue was RMB 205.8 billion, up 17.7% year-on-year. Adjusted net profit was RMB 11.5 billion, up 34.8% year-on-year. And also, I want to mention the major business. For example, the Internet service business grow 24.4% year-on-year and IoT business grow even 41.7%. Our smartphone business increased 7.3% in the entire year. Let's talk about the Q4 number. The total revenue in Q4 was RMB 56.5 billion, up 27.1%. Adjusted net profit was RMB 2.3 billion, up 26.5% year-on-year. So also, we have significant increase in our Internet service in Q4 last year, which was 41.1%. IoT business increased by 13.5% in Q4. Smartphone business, 22.8% growth. So let me highlight some strategic things we were doing in year 2019. First thing is, we continued to increase our investment in the R&D. So from year 2016 to year 2020, our R&D expenses started to surpass CNY 28.6 billion. And in the year 2019, our R&D expenses was 7 -- 70 -- CNY 7.5 billion. Based on our plan year 2020, this year, we are going to spend more than RMB 10 billion in R&D. So another very important thing is, we are successfully got or entered into premium-tier smartphone sales business. We launched Mi 10 series in February. So Mi 10 Pro was the first premium-tier smartphone sells at over RMB 5,000. This is the first time we sell a premium-priced product. And also, with the long-term R&D investment, actually, we achieved several technology -- make several technology achievement, for example, DxOMark. Redmi 10 Pro, this is the first time we were in the top of the DxOMark on the camera, video and audio scores. And also, in the entire year 2019, the company executed proven operation strategy because it's -- year 2019 is the technology migration time period from 4G to 5G. In order to promote 5G in the future, actually, we are very carefully manage our inventory and our cash flow. So we have a 0 4G inventory so that we can be very, very ready to aggressively promote our 5G products in year 2020. Another very important thing is, in December year 2019, we launched a very important 5G product we called Redmi K30 5G. It was the first 5G product selling at below RMB 2,000. So that's -- that product actually got very, very good market response from consumers. So we'll continue to promote the Redmi brand with the extreme performance-price ratio and bring the latest technology widely available to the mass consumer. I think at this point of time, the people concerned about the virus, the COVID-19 outbreak has a -- the impact from the virus. Actually, let me do some summary about what we see the virus and what is the impact to our near-term and midterm business. From the supply side, actually, we were suffering during the February time frame, early February, for the production. Actually, it's -- it was a very challenging time to find labors to resume the factory. But after a month -- more than a month's effort, actually, today -- as of today, I'm happy to share with you our production capacity or capability resumed to 80% to 90% of the normal level at end of March 2020. And let me talk about -- a little bit about the Mainland China market. During early February, actually, because of the whole -- many cities are locked up, the shopping malls closed, so the demand was affected very heavily. But starting from late February, we see a very strong rebound of the market. So up to now, the China smartphone market recovered about -- I think it's around 80% to 90% of the January consumption. It's a very good signal. And also it tells us smartphone may be -- we call the rigid demand. So people actually need smartphone to communicate even during the virus time frame when they stay more -- spend more time with families and -- at home. And the overseas market right now is in the outbreak period. We see a lot of serious situation happening in Europe, in India and other part of the world. I think the market will be -- impact -- the impact will be expected in Q2 year 2020. I think May -- April and May mostly. And the demand likely be deferred rather than lost. Based on the experience in China, smartphone demand is resilient and will be -- rebound quickly. With a strong global foothold and continuous expansion into new markets, the long-term growth prospect is intact. We remain confident for the rest of the year. So regarding to the Internet service, we see both time spend and the value-added service revenue grew strongly, although out of a tightening budget from certain client vertical were -- client vertical was impacted, but the general Internet service was not impacted heavily. So I think this is the overall picture of year 2019. So I would like to invite Richmond to give you details in the different business unit for the business.
Thank you, Xiang Wang. Hello, everyone. I'm Richmond Li , VP of Finance at Xiaomi. I will now walk you through our business segment performance as well as key financial indicators. First, our smartphone segment delivered solid performance in 2019 as revenue reached CNY 122.1 billion, an increase of 7.3% year-on-year with smartphone shipments totaling at 124.6 million units. In the fourth quarter of 2019, smartphone revenue was CNY 13.8 billion, an increase of 23% year-on-year. We also want to highlight that in the first quarter of 2019, we achieved the highest year-on-year growth of smartphone shipments among the top 5 smartphone companies according to Canalys. In 2019, our smartphone dual-brand strategy achieved very remarkable results. While on one hand, Xiaomi brand focused on pioneering advanced technologies and successfully established itself in the high-end smartphone market. After building the Mix Alpha 5G, a concept phone featuring surround display, we launched our flagship 5G smartphone models, the Mi 10 and Mi 10 Pro, in February 2020. Mi 10 series offer ultimate performance experience across all functions by deploying industry-leading processor, display camera and the faster charging technology. As Xiang Wang just mentioned, Mi 10 series is well received by our consumers. On the other hand, Redmi brand offers product with ultimate price-performance ratio to the mass market. In 2019, Redmi also launched its first 5G smartphone, Redmi K30 5G and followed by the Redmi K30 Pro 5G, which was launched last week. Redmi has launched competitive products across different price points from CNY 1,699 to CNY 2,000. Let's move on to the IoT segment. This year has seen strong growth of IoT and lifestyle product segment as we continue to grow our IoT product portfolio and enhance the connectivity across our products. The IoT and lifestyle products revenue was CNY 62.1 billion in 2019, an increase of 41% year-on-year. While the revenue in the fourth quarter was CNY 19.5 billion, up 31% year-on-year. As one of the global-leading consumer IoT platform, we continued to expand our IoT user base. At the end of 2019, the number of connected devices on our IoT platform, excluding the smartphone and laptops, reached 235 million units, an increase of 56% year-on-year. The number of users who have 5-or-more devices connected to Xiaomi's IoT platform reached 4.1 million, an increase of 77% year-on-year. We have achieved leading positions in key IoT products that are critical to our AIoT platform. Among the popular products we offered, Xiaomi TV is now the star product. In 2019, our global TV shipments reached 12.8 million units, an increase of 52% year-on-year. According to AVC, we are the #1 TV brand in China, in Mainland China, with about 20% of market share shipments in 2019. And we shipped over 10 million units in the Mainland China last year, setting a very good industry record. Our smart TV ranks #5 globally and #1 in India. In 2020, we will also -- we will offer our smart TV in more countries and regions. Except for TV, Xiaomi also leads the market of wearable brands, ranking #1 globally. According to Canalys, our wearable brand shipments reached 35.6 million units, an increase of 55% year-on-year with global market share of 21%. Also, meanwhile, our AI assistant, [Foreign Language], have 50.4 million MAU in December 2019, an increase of 56% year-on-year. AI assistant supports new functions, including continuous conversation, intuitive graphical and voice user interface, AI smartphone assistant and the voiceprint recognition. The newly added functions received highly positive responses by our users. Moving over to the Internet service segment. In 2019, Internet services revenue reached CNY 19.8 billion, up 24% year-on-year. For the first quarter, revenue was CNY 5.7 billion, an increase of 41% year-on-year. Of the -- of that, advertising revenue grew by 18%, online game grew by 44% and the other Internet value-add services grew by 104%. Such solid growth is supported by our expansion of the user base. In December 2019, the global MAU increased by 28% year-on-year to 310 million while MAU of Mainland China account for 109 million. Besides the smartphone, our smart TV MAU also grew by 49% year-on-year to 27.7 million. Last year, despite the challenging macroenvironment in China, our advertising business achieved consecutive quarter-on-quarter growth. This increase was mainly attributed to our consistent improvements in our mobile Internet apps, which boost their MAUs. And this is for the -- because our efforts to increase the monetization because of the diversification of our advertising customer base and optimization of our recommendation algorithms. Diversification is a key growth driver of our Internet services revenue. For the fourth quarter 2019, our Internet services revenue outside of the advertising and the gaming from Mainland China smartphones increased by 112% year-on-year. And this accounts for 43% of our total Internet services revenue. This business refers to our fintech business and Youpin e-commerce platform, TV Internet services and overseas Internet service. Next, moving on to our international business. The overseas market offers us tremendous growth room. In 2019, we further expand our global footprint with overseas revenue account for 44% of our total revenue. The overseas revenue was CNY 91.2 billion in 2019, an increase of 30% year-on-year. Our smartphones were sold in over 90 markets and our smartphone ranked top 5 for 45 markets. In the fourth quarter of 2019, our overseas revenue increased by 41% year-on-year to CNY 26.4 billion, and this accounts for 47% of the total revenue. We witnessed the growth of -- across all regions where we operate. But India is still our single largest overseas market on shipment. In the fourth quarter of 2019, we maintained the #1 position for 10 consecutive quarters with market share of 29% according to AVC. We also gained the market share in Western Europe. According to Canalys, in the fourth quarter of 2019, we ranked #4 in Western Europe with smartphone shipment growing 115% year-on-year. In Spain, we were the #1 -- the #2 with 23% of market share and just 1% less than that #1. We also ranked #4 in France and Italy. After reviewing the performance and -- of business segments, I'd like to share some financial metrics with you. First is our gross profit margin. Compared to the year 2018, smartphone gross margin increased from 6.2% to 7.2%. The loT and lifestyle products gross margin increased from 10.3% to 11.2%, and the gross margin for Internet services remains fine. In terms of expenses, our operating expense ratio increased from 9.1% to 10.2%. This is mainly attributed to our advertising investment in R&D activities as well as the branding activities in overseas market. In 2019, our R&D expense increased by 30% year-over-year. For the working capital, all metrics remain healthy compared to the fourth quarter of 2018. In the fourth quarter of 2019, our inventory turnover days decreased from 65 days to 54 days, and accounts receivable turnover days decreased from 14 days to 7 days. Accounts payable turnover days decreased from 115 days to 101 days. The cash flow results were very strong in terms of [ the market ]. The adjusted operating cash flow was CNY 27.1 billion for the full year 2019 and CNY 11.3 billion for the first quarter of 2019. Accordingly, our cash position was further boosted and cash resources amounted to CNY 66 billion by the end of 2019. And with our investment portfolio and the book value is CNY 30 billion. And our office and other real estate, the book value is CNY 11.3 billion and that's deducting finance debt of CNY 17.6 billion. Then as a result, our net cash of assets were about CNY 89.7 billion by the end of 2019, increased by CNY 25 billion from 2018. The strong balance sheet should enable us to well position in front of any unexpected market change. Last, I want to walk you -- talk about our investment performance. As of December 30, 2019, we have invested in more than 290 companies with an aggregate book value of about CNY 30 billion. An increasing number of our invested companies have gone public. In February 2020, the Roborock, [Foreign Language], one of our invested companies, was successfully listed on the STAR Market in China, become the first ecosystem partner company of us to lead on the Asia market. We believe that this is a recognition to our ecosystem business model by the Asia capital markets. As our business continues to grow, we believe that more invested companies will go public in the future. The last one, we want to reiterate our pledge. Our mission is to build amazing products with honest price to let everyone in the world enjoy a better life. In 2018, as approved by our Board, we pledged to our existing and potential users that starting from 2018, Xiaomi's hardware business, including smartphone and IoT products, would have an overall net profit margin do not exceed 5%. And for this year 2019, our hardware business was profitable and with an overall net profit margin which is less than 1%. So this is for you our pledge. This ends my prepared remarks. Thank you very much.
Thank you, Richmond. We'll now proceed to the Q&A session. [Operator Instructions]
[Operator Instructions] Your first question comes from Leping Huang from CICC.
So I have two questions. So one is about the impact of the virus outbreak in India and Europe. The second question is about the -- your strong performance of your Internet business in the fourth quarter. So I just read Lei Jun's letter to the investors. They're saying that it's easy to say in -- in Mandarin, it's [Foreign Language] to acquire [Foreign Language] to keep your high efficiency is the ultimate solution to overcome the crisis. So I want to know what is the latest situation of your business or the business in India and the major European cities like countries like Spain and Italy? And what's your plan to overcome this challenging situation of -- due to the virus? And the second question is, I see you are doing very well in your Internet business. I see the growth rate of your Internet business actually reaccelerates to 40% in fourth quarter from 12% in third quarter. I want to know what's the reason behind and considering, if I understand correctly, mainly -- it's mainly in China. So what's -- will this driver remain strong in the first quarter 2020 considering the virus situation in China?
Yes. Maybe I'll answer the question and then Shou and Richmond can add. So the first question is related to the impact, right, the COVID-19 impact in our business in India and Europe. So right now in India, I think the Indian government take a very, very big step to prevent the whole country into -- to try to help the people to prevent the more infection. I think it's the right decision. So the whole country right now is shutting down. So we see definitely it will impact our business. But based on the -- but still, although everything is shutting down, we still see a lot of our customers or fans still buying our smartphones from different channels. That's a good indication that the consumer -- consumers need smartphone even in the very difficult situation. So based on the experience we have in China, we see a strong bounceback of the market. We believe after the -- we recover from the virus, actually, we will see a strong recovery. So in China, China's experience told us, right now, in March actually, the run rate of smartphone sales is about 90% of the January consumption. And so a very good signal. And it tells us the smartphone demand is a resilient demand. In Europe, the same thing. Many countries, including Spain, Italy and France, they -- their focus is fight against the virus, right? So we see a demand drop, but gradually -- after a week, gradually stabilize. So maybe later, I would like Shou to give you a detail.
Yes. Sure. Okay. I'll go. So this is Shou here. I would just sort of reiterate a few things that Xiang Wang mentioned just now. The first is, based on our experience in China, the smartphone demand rebounds quickly. And our own assessment of this based on going through a full cycle here in China is that smartphones is on the -- closer to the spectrum of essentials than on the spectrum of sort of luxuries in this time. So the good thing about our Chinese demand was -- there was deferred consumption in the month of February, in particular, when a lot of cities were shut. Of course, e-commerce did a little bit to mitigate this. And as all of you know, our e-commerce presence in China is significant compared to a lot of our peers. So this is the experience we had in China. Now the situation outside of China is very dynamic. As of -- we are operational in 90 countries. And as of now, almost every single country has imposed some sort of restrictions within their countries internally. Now there are only a handful that have imposed the highest form of restrictions, which is even the logistics and fulfillment doesn't work. Only a handful of countries are in this category. The large majority of countries are in the category where there is a social distancing policy. Some off-line retail shops are shut. But in general, the country is not at a complete, complete standstill. So what we are seeing based on our numbers, the -- first of all, we understand the gravity of the situation. We see a fall, but we see it sort of stabilizing. In particular, in some countries, we actually see a slight recovery. It's across 90 countries around the world. So different countries are in different stages of this. The second is, what we have seen is -- in China is the consumption gets deferred. So at least in China, in certain -- in the second half of March, what we are seeing is a relatively robust recovery. So this is something that we take to heart. Now the third thing that we see and we will be very factual here is that almost every country, maybe except for Australia where we don't really have too much business, is imposing sort of different types of social distancing and lockdown until the middle of April. More countries are in this category. Now whether or not this gets extended I think really is an assumption at this point in time. So based on all these assumptions, we -- our current assessment -- and we do this on an almost daily basis now, our current assumption is that undoubtedly there will be impact in demand. Undoubtedly, there will be impact particularly for our overseas business in the second quarter of 2020. But we -- but right now, we are -- our -- we think the whole situation is currently manageable. And overall, for the year 2020, we expect to grow as a business.
The Internet, Chew Shou? He's asking...
For Internet -- for -- yes. Yes. So I'll talk about the Internet service growth. So in the fourth quarter of 2019, our Internet growth, 41%. If you look at it on a secular growth, our advertising grew 18%, our gaming grew 44% and our other value-added services grew at over 100%. So if you look at this, I think one difference from the past few quarters is advertising. Our advertising in China in smartphone, in particular, was a drop in the past few quarters. Starting from fourth quarter, if you compare to 2018 fourth quarter because the weakness in China smartphone advertising market started in 2018 fourth quarter. So the year-on-year price drop on advertising was less severe starting from fourth quarter of 2019. So that is one of the reasons. And another reason is a lot of our fast-growing advertising business has become larger. So we talk about the diversification of our Internet service revenue, which for Youpin e-commerce or overseas Internet service or TV Internet service and our fintech business, together, right now already accounted for 43% of Internet services revenue in Q4 of 2019 and was growing at over 100%. So this fast-growing business has become even larger and contributed to even larger growth. So those are the reasons for the growth in fourth quarter 2019.
I will just add one more thing here. You may have noticed that our advertising revenue has grown quarter-on-quarter for 4 consecutive quarters in 2019. I think many of you know that 2019 for China advertising was not the best year. It's a relatively challenging macro outlook for the year 2019 for advertising. Now the reason why we achieved quarter-on-quarter growth is really down to the few things we have been talking about consistently over the last many quarters, which is, one, diversifying our advertising base, transitioning from only sort of majority Internet company advertisers a couple of years back to more verticals like small- to medium-business verticals and direct e-commerce players so on and so forth. The second is you may have noticed in our announcement that our news feed service, for example, now has 76 million monthly active users. Now this is very prime advertising space, particularly for location-based services. So -- and for small to medium businesses. So these are the things that we're putting effort in the past. And the third, as we have said several quarters now, is our investment in optimizing our advertising recommendation systems. And the combined impact of this is advertisers get a better return and as a result allows us to grow our advertising business. So I think we are doing -- we have been doing all the work that we have been saying for quite some time. And I think fourth quarter, you see a little bit of a -- the results of this.
Your next question comes from Cherry Ma from Macquarie.
My first question is, is it possible to give us some color on the overseas Internet service revenue? What is the rough percentage breakdown within the segment in 4Q? And any rough idea on how much overseas ARPU is?
Shou, do you want to take?
Cherry, so we don't want to go beyond what we have disclosed in our announcement. We have disclosed that the 4 revenue streams, Youpin plus, fintech plus, TV advertising, particularly from memberships plus overseas revenue combined, is 43% of our total Internet revenue in Q4 2019. And combined, the revenue growth is at 112%. So that's what we disclosed in our announcement. But qualitatively, I can tell you that again this is very consistent with what we have been talking about for many quarters now. Step 1, cellphones, LTE devices get users. I think this is proving -- well, this is something that we have been growing every single quarter. So that's the first thing. The second is provide more Internet services. And we disclosed in an announcement, in particular, in India, you see that the introduction of the Mi Video Mi Music, our news feed, even our App Store. And all this is the services that eventually gets you the inventory to monetize. And then the third step is to monetize. So we are not in the phase where we are fully sort of -- our energy is on step 1 and step 2. Step 3 is something that we are sort of -- we are doing, we're building, it's growing very quickly. But the management focus here is on step 1 and step 2, which makes sense for the future.
Okay. My second question is on the Airstar virtual bank. I noticed there's a soft opening today. Congratulations. How much does Xiaomi own in this virtual bank? And how should analysts model this business going forward? Any guidance would be helpful.
We own 90% of Airstar. It's still -- it's immaterial in terms of our P&L and our balance sheet at this stage. It's operated by the Xiaomi Finance entities, which Xiaomi Finance is 100% owned by Xiaomi today. The -- well, the idea is to bring great financial services to our users in Hong Kong at this point in time. It's very early. I think it's too early to talk about sort of modeling at this stage. But yes, we do have a soft opening. But those in Hong Kong, you are free to sign up for them. For the first HKD 20,000 that you deposit there, you get 3.6% interest rate. Unbeatable.
Your next question comes from Kyna Wong from Crédit Suisse.
Management, it's a great result in fourth quarter. And I want to check is about the ASP and also gross margin in the fourth quarter that we see for the smartphone side, there's a decline because of the mix from the overseas. And also the gross margin is also slightly below from the third quarter as well in the smartphone business. So just wanted to know the trend going forward because this year, 2020, that we see obviously contribution will continue to increase. And what's the mix that will help in terms of ASP? And what is your expectation now that the gross margin, if it could maintain I mean in that level? Or we should expect there will be more variations in this year? So this is the first question. The second one is about the recent launch of the Mi 10 and also that the Huawei Pro there, the P40, actually pricing in a similar range in the premium segment. Do you worry about the sales expectation in the Mi series because as I -- you have to have competition in the segment after Huawei launches P40 with the same price I mean at the lower segment?
Yes. Thank you for the question. Let me answer the question #1 regarding the ASP and the gross margin, okay? So I think it's a seasonal thing. Q4 year 2019 actually is a very important selling season. We do a lot of our promotions. We drive huge volume in China and outside of China. We shipped a lot of devices to India, to Latin America, to Europe, to everywhere. So we drive a significant volume with the promotion and the branding. So that's why you see the ASP is a little drop. The gross margin is a little declining. I think it's a seasonal thing. So in the future, we'll continue actually to drive 2 things. Number one, we want to drive -- we want to develop premium-tier smartphones in China and in the rest of world market, in China and in Europe basically for the premium tier. So you see, we launched Mi 10 and Mi 10 Pro in December -- sorry, in February. And also, we'll continue to do that. Also, we launched a similar product, the same product in Europe last week. Actually, both Europe and China, we all received very good response. The shipment actually is -- exceed our original expectation. I think the selling result is good, although we see other companies shifting or launching similar product. You just mentioned the P40 and the P40 Pro, but we're still very happy with our shipment because we really drive the performance to a new level. So I believe our customer or fans love to use our product. It's a very good signal. So your -- yes, maybe Shou can add.
Yes. I just want to add one more thing. You mentioned some other products in the market. Let's talk about the P40. There are 3 variants of it, P40, P40 Pro and P40 Pro Plus. If you want to compare prices, you need to compare P40 because they haven't launched in China. You need to compete P40 with Mi 10 in -- which we launched in Europe last Friday. And if you take these 2 products and put them side-by-side, the -- yes, the 2 prices are the same, but P40 is much inferior. So I just want to point it out.
Your next question comes from Thompson Wu from UBS.
I have just two quick questions. The first I think one goes back to Kyna's points about smartphone ASPs and Wang Chuan's comments about expanding overseas and investing in new product categories. It seems like selling and marketing exiting fourth quarter was growing at a fairly healthy clip. How should we think about selling and marketing in this year? Should we expect to see some scale by second half 2020? That's my first question. My second question is, as you start moving into some of the more premium-priced bands in smartphones, what kind of impact can we expect with your IoT and Internet services business?
Thompson, do you mind repeating your second question? I apologize. The second question.
Sure. No problem, Shou. It's just as you move into some of the more premium-priced band categories, I know this has been a focus for your company for a number of quarters. As you move into CNY 3,000 or above price bands within China, what kind of benefits or impact do you expect in your IoT and Internet services business?
Yes. I will -- yes. Let me answer your first question first. So you're talking about the marketing. Actually, in Q4, yes, because we are -- as a company strategy, we want to bring more premium-tier product to China and also to Europe. So we started building our brand in Q4 last year that's why you see the marketing expenses increase a little bit. But in the long run, we'll continue to offer the best-performance product to the consumer with a very, very efficient way of doing -- of marketing. So we highly focus on efficiency in the long run. But at the same time, we'll do brand promotion and plan to promote our brand in the -- in Europe and in the rest of the world. I think in the future, you will see that.
Also, on your second question, if I understood it correctly, first of all, going into a higher-end segment allows us to capture a set of users that we didn't have before. So that is clearly beneficial because it's just new users. The other metric that you could be looking for is that there is a correlation that the higher ASP users do have a higher ARPU across Internet services. So this is a -- there is a positive correlation to this.
Your next question comes from [ Ying Fo Shi ] from Citi.
This is [ Ying Fo ] from Citi. I have two questions. The first one is that we noticed that the margin of the smartphone of the fourth quarter dropped a little bit. So we are curious about how we see the trend of the margin of the smartphone next year or next several quarters. This is my first question. And the second question is that which do you expect a fast increase in IoT area. Could you please give us some colors on next year's IoT area? What kind of big products can we expect in IoT area?
Yes. Okay. I'll do the first one. So gross margins, as Xiang Wang said, it's -- Q4 is seasonal. There are a lot of events happening in Q4, November 11 sales, Diwali, Black Friday, it all happens, it's Christmas, it's all in Q4. So it's natural that gross margins go down a little bit due to some promotional activities. Now we said in the last quarter that what we achieved in Q3 -- Q2 is a very reasonable gross margin to expect in the normal quarter. So that -- I think there is no changes to that statement. So that's the first question.
Yes. The second question is related to the IoT growth. Yes. We will continue to grow our IoT business globally. I think I can talk about the TVs, for example. We are launching TV product not only in China, but in India, Russia, Indonesia. But also in Europe, we continue to bring more and more TVs, smart TVs to Europe. That's an example. And also in China, we'll talk about the white goods, the air conditioners, washing machine, refrigerators, these kind of appliances area. Of course, we'll continue to focus the connect -- connected IoT devices whereas our traditional strengths. So for example, the smartwatches and others. So I see a great potential not only in China market, but overseas market, the same thing, especially in Europe and Latin America. Our IoT product is well received by the consumers in those area, those markets.
Your next question comes from Frank He from HSBC.
I have two. The first is about the supply chain security. Given that the COVID-19 is spreading across the entire world, I guess some of your suppliers are located in the U.S. and the European countries. So I just wonder, do we see any disruptions or any shortages of key components so far? And what's our inventory at this moment for the finished good and also the raw materials?
Okay. Thank you for the question. Actually, yes, we have suppliers. We have many, many suppliers around the world not only in Europe, but also in many different areas, Latin -- sorry, the Asia Pacific region, Japan, Korea, yes, some of them are in Europe and the U.S. So far, at the moment, actually, we haven't seen a significant impact from the virus at the moment. But we realize that we have some peer, how to say, indirect suppliers. The material suppliers, some of them are located in Asia Pacific, for example, Philippines, Malaysia. They may have some national policies to anti the virus. So potentially, we'll be -- there could be a risk. But so far, we haven't seen that. But we have a team to monitor the development every day. Actually, we have a daily meeting to monitor everything we need on global basis. So we are -- yes, we monitor very, very closely.
Okay. Got it. And then second question is about the -- your smartphone users' behaviors during this crisis period. Given the experience you have observed in China, can you share some colors regarding the overseas users how they are using their phones and how that should impact our Internet service revenue in Q1 and Q2?
Yes. In China, actually, it's very interesting. We see the DAU and the user time becomes longer when people are staying at home. So people have much more time playing with their smartphones. So our revenue generated from the gain, from the message, from browsers increased significantly. But overseas market, we -- because right now, it's still in the outbreak period. We will monitor the progress. We don't have the data yet. So we see probably the same thing. I don't know if Shou agrees, but...
First of all, there's GDPR in Europe. So I cannot -- No. I'm just joking. It's too early to tell. But anecdotically and this is anecdotal and qualitatively, people spend a lot more time on their devices, not phones, but some other IoT devices like televisions in order to connect with their...
TV every day, every hour.
Yes. I mean you must have heard that some Internet companies have to lower their streaming quality so that -- so as not to congest the Internet traffic globally. So I think it's quite clear that this is -- if you -- I'm not sure if any one of you have been quarantined. I have. You spend a lot more time online.
We will now invite the last question which will come from Gokul Hariharan from JPMorgan.
First, I have a question on 5G. Could you talk a little bit about how do you see the progress of the 2 more -- 2 products you've launched? Maybe quantify a little bit, if you could, Redmi K30 5G as well as Mi 10 5G, how things have been going? And could we also talk a little bit about how much -- like we are at roughly like 8% or 9% market share right now in China in the 4G era. What is your target combined Xiaomi Mi and Redmi in terms of 5G market share as in the second half China moves to a much more 5G-centric market? That is my first question. Second question. On the fintech and Internet finance business, there has been some concerns about some of the more lower-tier companies starting to face higher delinquency. Could you talk a little bit about what is -- what do we think about the health of the business right now, the quality of the loan book as well as how should we think about growth for this business given that it's been the fastest or one of the fastest growing, if not the fastest-growing, part of the Internet revenues last year?
Gokul, thank you. It's Shou here. So how is 5G going? It's -- in China, it's actually going very well that what we are observing is it's a real selling point for devices in China at this point in time. We have K30 5G, which was launched in November at CNY 1,999, so that's correct, the RMB 2,000 price point; and we have Mi 10, which is a flagship. And both devices so far have exceeded our expectations. The way I will phrase it is, we are glad we don't have 4G -- sort of a lot of 4G inventory at this point in time in China. So it's on track. It's meeting our expectations. It's actually slightly beating our expectations. But it's -- we have described this at length over the last few quarters. This is what we're prepared for. So we are executing this at this point in time. Now we don't give guidance. So unfortunately, I can't say where we think our market share will end up at this year, but clearly, higher than last year. So that's the question. Your question on fintech, I think a few points here. One, we are strengthening our fintech capital advantage -- cost of capital advantage over time. In January, we got a consumer finance license. It's one of the bigger licenses in China. It allows you to get access to lower cost of capital for our consumer finance business. So we're building it in a very robust way, playing up the 3 strengths that we have: one, strength of acquisition of traffic because we have a significant UI base; second is the strength of our data in China where data allows for more robust risk models; and the third is we're building up the cost of capital sort of advantage by getting a lot of difficult-to-get licenses. In -- I think in general, our motivation for doing finance is to help our consumers and our supply chain get better access to capital. We are prudent in our operations. This is not something that we believe in sort of charging ahead without sort of a huge respect for the risks involved. So our balance on the whole is to err on being conservative. So right now, our coverage ratio for any bad debt is higher than all the numbers that we need to hit. So that's the way we think about that.
Thank you all for joining us tonight. We will now conclude the call. Thank you.
Yes. Thank you. Thank you very much.
This concludes the conference call today. Thanks again for joining us. You may now disconnect.