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Xiaomi calls on home AI devices for post-smartphone growth

As earnings top estimates, CEO says company 'can be pioneer' in segment

Xiaomi is looking to smart devices like its Mi AI speaker as a new growth driver. (Photo courtesy of Xiaomi)

HONG KONG -- Xiaomi, the world's fourth-largest smartphone company, has positioned home devices powered by artificial intelligence as its second engine of growth to navigate a slowing global phone market.

Xiaomi beat market expectations on Tuesday when it reported a net profit of 1.9 billion yuan ($283 million) for the fourth quarter of 2018. Analysts surveyed by Reuters had forecast 1.7 billion yuan.

The Hong Kong-listed company's quarterly revenue grew to 44.4 billion yuan from the year-earlier 35.1 billion yuan.

While attributing improved profitability to headway into the high-end phone segment, Xiaomi made it clear that the company no longer stakes its future on smartphones alone.

"Over the last eight years, our focus was always around smartphones," Xiaomi founder and CEO Lei Jun told analysts on a call Tuesday after the earnings release. "But this year we have started our smartphones and AIoT as a dual engine," referring to "artificial intelligence of things," an emerging field of devices that use AI to help humans with tasks.

"AIoT is a historic opportunity for us," Lei said. "We can be a pioneer in this very big market segment."

The global smart home market was worth $28 billion last year, according to market intelligence company IHS Markit. Sales of Xiaomi's smart TVs, smart speakers and other connected devices contributed 14.9 billion yuan, or roughly 34% of its total revenue in the fourth quarter of 2018. By contrast, such sales contributed less than 25% in the fourth quarter of 2017.

Xiaomi's decision to diversify its business comes as global smartphone sales lose steam. Smartphone vendors worldwide shipped a total of 375.4 million units during the fourth quarter of 2018, down 4.9% on the year, marking the fifth consecutive quarter of decline, data from market research company IDC shows.

The company sold about 25 million smartphones in the fourth quarter of 2018, down from 28.5 million shipments a year earlier, according to the company's results. Xiaomi blamed a brand overhaul for the sales decline, but some analysts pointed to increasing selectivity among Chinese consumers.

"Xiaomi has been suffering continuous [market] share loss in the context of consumption upgrades in its home market," said Ethan Qi, an analyst at global consultancy Counterpoint Research.

With China's growing middle classes demanding higher-quality smartphones, "[Xiaomi's] cost-based competitive advantage is a double-edged sword," Qi said, adding that "the majority of consumers in China regard Xiaomi as a low-end brand with less innovation compared to Huawei, Oppo and Vivo."

During the fourth quarter, Chinese smartphone maker Oppo overtook Xiaomi as the world's fourth-largest smartphone vendor, IDC data shows, although Xiaomi held on to fourth place in total sales for all of 2018.

Xiaomi has tried to move upmarket. The company, which made a name for itself with phones priced as low as $150, has launched premium products in recent months. In the fourth quarter, revenue generated by phones sold for 2,000 yuan ($300) or more accounted for 31.8% of total revenue for the smartphone segment, according to the company's results. Lei said achieving a bigger presence in Western Europe is one of Xiaomi's primary goals for 2019.

"We want to prove to our investors that our products are also very popular in developed countries," Lei said.

Xiaomi's shares, which have plunged by more than one-quarter since an initial public offering in July, were up 2.5% to HK$12.20 in the aftermarket trading on Tuesday following the earnings report.

The company logged net profit and revenue of 8.6 billion yuan and 174.9 billion yuan, respectively, in 2018.

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