Good evening, ladies and gentlemen. Welcome to the Investor Conference Call hosted by Xiaomi Corporation regarding the company's 2019 annual 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, Mr. Wang Xiang, Senior Vice President, President of International and CFO, Mr.

Shou Zi Chew; and our Vice 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 the prepared remarks, we will 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 myself. I joined the company year 2015.

Before my current role, I was in charge of the Xiaomi International business, the IT strategy and 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 results 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 a good time for me to do a little summary about what we have done since we found it in year 2010.

So actually the company was founded in year 2010. Two years later, we achieved or surpassed.

RMB10 billion as a revenue. And in year 2017 we surpassed RMB100 billion.

Last year, year 2019, the company revenue surpassed RMB200 billion. Not only that, actually there's a first time Xiaomi was listed a Fortune Global 500 in August, ranked number 468, also, we are also listed by 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-year old company. Let's talk about year 2019.

The total revenue was RMB205.8 billion, up 17.7% year-on-year. Adjusted net profit was RMB11.5 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 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 RMB56.5 billion, up 27.1%, while adjusted net profit was RMB2.3 billion, up 26.5% year-on-year. So also we have significant increase in our Internet service in Q4 last year, which was a 41.1%.

In turn IoT business increased by 13.5% in Q4. Smartphone business has 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 expected to surpass RMB28.6 billion. And in the year 2019, our RMB expenses was RMB7.5 billion.

Based on our plan, year 2020 this year, we’re going to spend more than RMB10 billion in R&D. So another very important thing is, we are successfully got or entered into premium tier smartphone sales business.

We launch Mi 10 series. In February, so Mi 10 Pro was the first premium tier smartphone sell at over RMB5,000.

This is the first time we sell premium priced product. And also with the long-term RMB, the investment actually we achieved several technology -- make us several technology achievement, for example, DxOMark.

That mean 10 Pro 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 operations strategy because as 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 0:40 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 got Redmi K30 5G.

It was the first 5G product selling at below RMB2,000. So that's -- that product has 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 the impact from the virus.

Actually, let me do some summary about what we see the virus and what is the impact for our near-term and mid-term business. From the supply side, actually we were suffering during the February timeframe -- early February, for the production.

Actually it's a -- it was a very challenging time to find labors to resume the factory. But after a month -- more than a month effort actually today -- as of today, I'm happy to share with you our production capacity capability resume to 80% to 90% of the normal level as 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 locked down, the shopping malls closed, so the demand was affected very, 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 that's up around 80% to 90% of the January consumption.

It's a very good signal. And also it tells us smartphone maybe we call the rigid demand.

So people actually need smartphone to communicate, even during the virus timeframe when they stay more -- spend more time with families at home. And overseas market right now it's in the outbreak period.

We see a lot of serious situation that’s 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 a loss based on the experience in China, smartphone demand is resilient and it will 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 value added service revenue grew strongly. Although the tightening budget from certain clients, 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.

Hello, everyone. I’m Richmond Li.

VP of Finance at Xiaomi. I will now walk you through our business segment supplements as well as key financial indicators.

First, our Smartphone segment delivered solid performance in 2019 as revenue reached RMB122.1 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 RMB13.8 billion, an increase of 23% year-on-year.

We also want to highlight that in the fourth quarter of 2019, we achieved the highest year-on-year growth of smartphone shipments among the top five smartphone companies, according to Canalys. In 2019, our smartphone dual-brand strategy achieved very remarkable results.

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.

The Mi 10 series offers ultimate performance experience across all functions by deploying industry leading processor, display, camera, and faster charging technologies. As Wang Xiang just mentioned, the Mi 10 series is well received by consumers.

On the other hand, Redmi brand offers product with ultimate price-performance ratio through the mass market. In 2019, Redmi also launched its first 5G smartphone, the 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 [indiscernible]. Let's move on to the IoT segment.

This year we’ve seen strong growth of our IoT and lifestyle products segment as we continue to grow our IoT product portfolio and enhance the connectivity across our product. The IoT and lifestyle products revenue was RMB62 billion from RMB1 billion in 2019, an increase of 41% year-on-year.

Revenue in the fourth quarter was RMB19.5 billion, up 31% year-on-year. As one of the global leading consumer IoT platform, we continue 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 five 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 number one TV brand in China -- in mainland China with about 20% of market share achievements in 2019 and we shipped over 10 million units in the mainland China last year, setting a very good industry record.

Our smart TV ranked number 5 globally and number 1 in India. In 2020, we will also -- we will offer our smart TV in more countries and regions.

Besides TV, Xiaomi also lead the market of wearable brands, ranking number 1 globally. According to Canalys, our wearable brands shipments reached 35.6 million units, an increase of 55% year-on-year with global market share of 21%.

Also -- meanwhile our AI assistant Xiao Ai, have 60.4 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 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 RMB19.8 billion, up 24% year-on-year. For the fourth quarter, revenue was RMB5.7 billion, an increase of 41.1% year-on-year.

Of that, advertising revenue grew by 18%, online gaming 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. Revenue -- MAU of mainland China account for 109 billion.

Besides the smartphone, our Smart TV MAU also grew by 49% [ph] year-on-year to 27.7 million. Last year, despite the challenge in macro environment 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, reach with their MAUs. And this is further because of our efforts to increase the monetization, because of the diversification of our advertising customer base and optimization of our recommendation algorithms.

The diversification is a key growth driver of our Internet services revenue. For the fourth quarter of 2019, our Internet services revenue outside of advertising and the gaming from mainland China smartphones increased by 112% year-on-year and this accounts for 43% of our total Internet services value.

This business refers to our Fintech business and built in e-commerce platform, TV internet services and overseas internet service. Next, moving on to our international business.

The overseas market offers tremendous growth room. In 2019, we further expand our global footprint with overseas revenue account for 44% of our total revenue.

Overseas revenue was RMB91.2 billion in technology and increase of 30% year-on-year. Our smartphones were sold in over 90 [ph] 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 RMB26.4 billion. And this accounts for 47% of the total revenue.

We witnessed the growth of -- across all regions where we operate. India is still our single largest overseas market at shipment.

In the fourth quarter of 2019, we maintain the number 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 candidates in the fourth quarter of 2019, ranked number 4 in Western Europe with smartphone shipments growing by 115% year-on-year. In Spain, we were the number one.

Number two with 23% of market share and just 1% less than the number 1. We also ranked number 4 in France and Italy.

After reviewing the performance of business segments. I would like to share some financial metrics with you.

First is our gross profit margin. Compared to the year 2018, the smartphone gross margin increased from 6.2% to 7.2%.

The IoT and lifestyle products gross margin increased from 10.3% to 11.2% and gross margin for internet services remains flat [ph]. In terms of the expenses, our operating expenses ratio increased from 9.1% [ph] to 10.2%.

This is mainly attributable to our advertising investment in R&D activities as well as the planting activities in overseas market. In terms of '19, our R&D expense increased by 30% year-on-year.

For the working capital, all metrics remained healthy compared to the fourth quarter of 2018 -- in the first quarter of 2019. Our inventory turnover date decreased from 65 days to 54 days.

An account with people turnover that decreased from 14 days to 7 days. Accounts payable to number of day decreased from 115 days to 101 day.

The cash flow results were very strong in terms of [indiscernible]. The adjusted operating cash flow was RMB27.1 billion for the full-year 2019 and RMB11.3 billion for the first quarter of 2019.

Accordingly, our cash position was further boosted and cash resources amounted to RMB66 billion by the end of 2019. And with our investment portfolio and the book value is RMB30 billion and our office [ph] and other real estate the book value is 11.3% and then deducting the financial debt of RMB17.6 billion.

Then as a result, our net cash of assets were about RMB89.7 billion by the end of 2019, increased by RMB25 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. At December 30, 2019 we have to invest more than 290 companies with our aggregate value of about RMB30 billion.

An increasing number of our invested companies have gone public, in February 2020, Roborock, [indiscernible] one of our investee companies, was successfully listed on the STAR market in China. It become the first ecosystem partner company of ours to list on the STAR Market.

We believe that this is a recognition to our ecosystem business model by the STAR capital markets. As our business continues to grow, we believe that more investee companies will go public in the future.

And the last one, we want to reiterate our pledge. Our mission is to build amazing products with honest prices 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, the Xiaomi Hardware Business, including smartphones and IoT products would have an overall net profit margin that would not exceed 5%.For this year, 2019, hardware business was profitable and with an overall net profit margin which is less than 1%. So this is to fulfill our pledge.

This ends my prepared remarks. Thank you very much.

Thank you, Richmond. We will now proceed to the Q&A session.

In order to allow more people that have questions, please limit your question to a maximum of 2.

Thank you for taking my question, I have two questions. So why it's about the impact of the virus outbreak in India and Europe?

The second question is about your strong performance of the Internet business in the fourth quarter. So I just read Lei Jun's letter to the investor saying that [indiscernible] keep high efficiency is the ultimate solution to overcome the crisis.

So I want to know what is the latest situation of your business or business in India, and the major European cities like countries like Spain and Italy. And what's your plan to overcome this challenging situation due to the virus?

And the second question is, I see you're doing well in your Internet business. I see the growth rate of your internet business actually reaccelerates to about 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 -- where this drive remain strong in the first quarter of 2020, considering the virus situation in China. Thank you.

Yes, maybe I answer the question and then Shou and Richmond can add. So the first question is related to the impact, right, the COVID-19.

Yes, yes. Yes.

Our business in India and Europe. So right now in India, I think an Indian government take a very, very big step to prevent the whole country into -- try to help the people to prevent the more infection.

I think this is a right decision. So the whole country right now is just shutting down.

So we see that it really will impact all our business. But based on the first deal, although everything is shutting down, we just do see a lot of customers are still buying our smartphones from different channels.

That's a good indication that the consumers need smartphone even in the very difficult situation. So based on the experience we have in China, we see strong bounce back of the market.

So we believe after the -- 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.

It's a very good signal and it tells us the smartphone demand is a resilient demand. In Europe, the same thing.

Right now many countries, including Spain, Italy and France, their focus is fight against the virus, right? So we a demand drop, but gradually after a week, gradually stabilized.

So maybe later I would like Shou to give you a detail. Yes, Shou.

Okay. I will go.

So this is Shou here. I will just reiterate a few things that Chuan Wang mentioned just now.

The first is based on our experience in China, based on our experience in China, smartphone demand rebounds quickly. And our own assessment of this based on going through a full cycle here in China is that, smartphones is 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 the country internally. Now there are only a handful that have imposed the highest form of restrictions, which is even the logistics and procurement doesn’t work.

Only a handful of countries are in this category. The large majority of countries are in the category where there's social distancing policy, some offline 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, 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’ve is, in China, the consumption gets deferred.

So at least in China and in certain -- in the second half of March, what we are seeing is relatively robust recovery. So this is something that we take to heart.

Now, the third thing that we see and we have to be very factual here is that almost every country, maybe except Australia, where we don't really have too much business, is imposing sort of different types of social distancing and not down until the middle of April. Most countries are in this category.

Now, whether or not this gets extended, I think really it's an assumption at this point in time. So based on all these assumptions, we -- our current assessment and we do this on almost daily basis now, our current assumption is that undoubtedly there will be impact in demand, undoubtedly, there'll be impact, particularly on 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.

Internet. [Indiscernible] take internet.

He is asking …

For Internet -- yes. Yes.

So I will talk about the Internet service growth. So in the fourth quarter of 2019 our Internet growth 41%.

If you look at it, all the secured growth, our advertising grew 18%, our gaming grew 44% and our other value added service grew over 100%. So if you look at it,.

I think one difference from the past few quarter is advertising. Advertising in China, in smartphone particular, was a [indiscernible] in the past few quarters.

Starting from fourth quarter, if you compare to 2018 fourth quarter, because the weakness in China's mobile advertising market started in 2018 fourth quarter. So the year-on-year price drop on advertising was less severe starting from the fourth quarter of 2019.

So that is one of the reason. And another reason is a lot of fast growing advertising business has become larger.

So we talk about the diversification of our Internet service revenue, which for European e-commerce or oversea Internet service or TV Internet service and our Fintech business together right now already accounted for 43% of our Internet service revenue in Q4 2019. That was growing at over 100%.

So this fast growing business is becoming even larger and contributed to a even larger growth. So those are the reason for the growth in the 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 four consecutive quarters in 2019.

I think many of you know that 2019 for China advertising was not the best year. It's 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, transiting from only sort of majority Internet company advertisers, a couple of years back. The 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 have 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've put in 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 effect impact of this is advertisers just get a better return.

And as a result, it allows us to grow our advertising business. So I think, we are doing -- we’ve been all the work that we’ve been saying for quite some time.

And I think the fourth quarter, you see a little bit of the results of this.

Thank you very much.

Next question, please.

Hi. Thank you for taking [technical difficulty].

And 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?

Should 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 four revenue streams, Youpin plus, Fintech plus, TV advertising, particularly for membership, plus overseas revenue combined is 43% of our total Internet revenue in Q4 of 2019.

And combined revenue growth is at 112%. So that's what we disclosed in our announcement.

But qualitatively, I can tell you that -- I can tell you that, again, this is very consistent with what we have been talking about for many quarters now. One, cell phones, 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 on our announcement, in particular in India, you see the introduction of new video, new music, and news feed, even our App Store and all this is -- if 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 -- so -- that our energy is on step 1 and step 2.

Step 3 is something that we are sort of we are doing by building is growing very quickly. But the management focus here is step 1 and step 2, which makes sense for the future.

Okay. My second question, it's on the AirStar Virtual Bank.

I notice there's a stock opening today. Congratulations.

How much does Xiaomi own in this virtual bank and how should analyst model this business going forward? Any guidance would be helpful.

Thank you.

We own 90% of AirStar. It is still immaterial.

But 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 the 100% owned by Xiaomi today.

While the idea is to bring great financial services to our users in Hong Kong, at this point in time, it is very early. I think it's too early to talk about the modeling at this stage.

But yes, we do have a soft launch.

All right. Thank you so much.

But those in Hong Kong. You are free to sign up with them.

For the first 20,000 Hong Kong deposit, we will give you a 3.6 interest rate. Unbeatable.

Sounds good. Thanks.

Okay. Next question.

Please.

Hi, Management. Thanks for taking my question.

It's a great result in the fourth quarter. I wanted 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. So just wanted to know the trend going forward because this year, 2020, that we see, obviously is a 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 revelations in this year? So this is the first question.

The second one is about the recent launch of the Mi 10 and also the Huawei Pro, the P40 actually pricing in a similar range in the premium segment. Do you worry about the sales expectation in the business because I guess you have to have competition in this segment after Huawei launches P40 with the same price, I mean, at a lower segment?

Thank you.

Yes. Thank you for the question.

Let me answer the question number one, regarding the ASP and gross margin, right? So I think it's a seasonal thing, Q4 year 2019 actually, so it's a very important selling season.

We do a lot of promotions. We drive huge volume in China and outside of China.

We ship a lot of devices to India, to Latin America, to Europe, to everywhere. So we drive a significant volume.

This is a promotion and a branding. So that's why you see the ASP is a little dropped.

The gross margin is a little declining. I think it's a seasonal thing.

So in the future we will continue actually to drive two 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 Europe basically for the premium tier. So you will see we launch Mi 10 and Mi 10 Pro in December -- sorry, in February.

And also we will 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 a very good response. The shipment actually exceed our original expectation.

I think the selling is not as good, although we see other companies is shifting or launching a similar product. You just mentioned P40 and the P40 Pro.

But we still very happy with our shipment because we really drive the performance to a new level. So I believe our customer, our fans love to use our product.

So 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, the three variants of it, P40, P40 Pro and P40 Pro+. If you want to compare prices, you need to compare P40, because they haven’t been launched in China.

You need to compare P40 with Mi 10 which we launched in Europe last Friday. And if you take these two products and put them side-by-side, yes, the two prices are the same, but P40 is much inferior.

So I just want to point it out.

Okay. Okay.

Thanks.

Yes. Thank you.

Thank you. Next question, please?

Thanks and good evening. Hope everyone is relatively safe tonight.

Wang Xiang welcome to the call. I’ve just two quick questions.

The first one I think goes back to Kyna's point about smartphone ASPs and Wang Xiang's comment 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 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 price bands and smartphones, what kind of impact can we expect with your IoT Internet services business?

Thompson, do you mind repeating the second question. I apologize.

The second question.

Sure. It's just as you move into some of the more premium price band categories and I know this has been a focus for your company for a number of quarters.

As you move into to, 3,000 or above price bands within China, what kind of benefits or impact you expect in your IoT Internet service 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, you 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 increased 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 marketing.

So we highly focus on efficiency in the long run. But at the same time we'll do brand promotion.

To promote our brand in the -- in Europe and in the rest of the world. I think in the future we will see that.

Thompson, 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 -- 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 very positive correlation to this.

Perfect, very clear. Thanks, guys.

Next question, please.

Thank you for having my questions. This is Yingbo Xu from CITIC.

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're curious about how we see the trend of the margin of the smartphone next year -- next several quarters? This is my first question.

And the second question that would you expect fast increase in IoT area. Could you give -- please give us some colors on next year's IoT area?

What kind of big products can we expect in IoT area? So thank you.

Yes. Okay.

I'll do the first one. So gross margins, as Chuan 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 …

Christmas.

… 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 very reasonable gross margin to expect in a normal quarter. So that’s -- 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 will continue to bring more and more TVs -- Smart TVs to Europe. That's an example.

And also in China we will talk about the white goods, the air conditioners, washing machine, refrigerators, these kind of appliances is the area. Of course, we will continue to focus the connect -- connected IoT devices, whereas our traditional strengths.

So, for example, the smart watches 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.

So our IoT product is well received by the consumers in those areas, those markets. Thank you.

Next question, please.

Thank you for taking my question. 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 European countries.

So I just wonder, do we see any disruptions or any shortages of key component 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 our suppliers. We have many, many suppliers around the world, not only in Europe, but also in many different areas.

Latin -- sorry, in 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 tier -- 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 untie the virus.

So potentially we will be -- there could be a risk, but so far we haven't seen it. 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 -- we monitor very closely.

Okay. Got it.

And then second question is about your smartphone users behaviors during this crisis period, given the experience you have exactly in China, can you share us 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? Thank you.

In China, actually, it's very interesting. We see the DAU and user time becomes longer when people stay -- staying at home.

So people have much more time playing with their smartphones. So our revenue generally from the game, 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 agree, but …

First of all, there is GDPR in Europe. No, I was just joking.

It's too early to tell, but anecdotally and this is anecdotal and qualitatively. People spend a lot more time on their devices, not just phones, but some other IoT devices like televisions in order to connect with …

TV every day. Every hour.

Yes. I mean, you might have heard that some Internet companies had lowered their streaming quality so that not to congest Internet traffic globally.

So I think, it's quite clear that this is if you -- I'm not sure if any one of you had been quarantine, I have. You spend a lot more time on that.

Okay. That's helpful.

Thank you.

Thanks. Due to time constraint we will now take the last question.

Thanks for taking my question. First, I have a question on 5G.

Could you talk a little bit about how do you see the progress of the two 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 roughly like 8% or 9% market share right now in China in the 4G era, where does your target combined Xiaomi Mi [ph] and Redmi in terms of 5G market share? In second half, china moves to a much more crisis in tech 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 there has been the fastest -- one of the fastest growing -- if not the fastest growing part of the Internet revenues last year. Thanks.

Gokul, thank you. It's Shou here.

So how is 5G going it's -- in China? In China, it's actually going very well.

What we are observing is it's real -- 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 RMB1,999.

So they’re correct the RMB2,000 price point. And we have Mi 10, which is flagship.

And mobile 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 expectation. 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 our guidance.

So I unfortunately cannot say, where we think our market share will end up at end of 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 a lower cost of capital for our consumer finance business. So we're building it in a very robust way, playing up the three strengths that we have.

One, strength of acquisition of traffic because we have a significant UI user base. Second is the strength of our data in China, where data allows for more robust risk models.

And the third is that we are bidding up the cost of capital sort of advantage by getting a lot of -- difficult to get licenses. 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 air on being conservative. So right now, our coverage -- our loan -- our coverage ratio for any bad debt is higher than -- it's higher than other numbers that we need to hit.

So that's the way we think about our business.

Thank you.

Thank you all for you joining us tonight. We'll now conclude the call.

Thank you.

Yes. Thank you.

Thank you very much.