Xiaomi’s margins improve as it focuses on more expensive phones

Xiaomi Corp. reported better-than-expected profit after cost-cutting efforts and a focus on more expensive mobile devices helped buoy margins and offset a moribund smartphone market.

Net income more than doubled to 3.67 billion yuan ($503 million) in the three months ended June, versus the average estimate of 3.16 billion yuan. Revenue slid a less-than-projected 4% to 67.4 billion yuan, narrowing declines from previous quarters when the smartphone market slump was at its worst.

Beijing-based Xiaomi has been steadily working through a glut of smartphone supply, while spending cuts helped stabilize the bottom line during China’s faltering economic recovery. The domestic mobile market — the world’s largest — is now showing signs of bottoming out. Xiaomi also sold more premium smartphones, cushioning margins: Its average selling price in China climbed more than 24%.

Executives acknowledged uncertainties facing the global economy but asked for patience, reaffirming Xiaomi’s intention to expand in regions such as Latin America and Europe and into new arenas such as services and electric vehicles. It’s also awaiting a bottom in India, where it’s grappling with a regulatory probe into alleged forex violations.

“As a consumer electronics player, Xiaomi has to scale up in global markets,” President Lu Weibing told reporters after the results were released. “Xiaomi will firmly proceed the legal actions in India. We’ve actually seen a pretty big improvement in Indian business, I believe you will see some indexes showing the change soon.”

As the smartphone market gyrates, billionaire Xiaomi co-founder Lei Jun has turned his attention to a $10 billion electric car venture, which recently won approval from China’s powerful state planning agency, Reuters reported last week. With the first vehicle planned for next year — pending a full set of regulatory licenses — the EV business could contribute as much as 5% of Xiaomi’s 2024 revenue, Bloomberg Intelligence estimates. Xiaomi would then go up against a crowded field spanning brands from Xpeng Inc. and Nio Inc. to Tesla Inc.

While expenses slid in the quarter, Xiaomi boosted its research spending by 21% to 4.6 billion yuan, of which more than a third went toward its EV project. It also hired some 3,000 people to propel AI development, joining a nationwide investment spree that accelerated this year with the advent of ChatGPT.

“Shipment remains soft given inventory digestion but likely reaching a healthier level,” Citigroup analysts including Kyna Wong and Andre Lin wrote ahead of the earnings release. Xiaomi’s internet of things and services businesses showed “signs of silver linings,” they added. Bloomberg