Xiaomi – Broken engagement.

Reply to this post

Flat revenue is the least of Xiaomi’s problems.

• Xiaomi has finally admitted that it ran out of growth in 2015, but unsurprisingly was very tight lipped about the much larger problems it faces in 2016.
• Revenues in 2015 increased 5% to RMB78bn ($12.5bn) which, with 70.7m units shipped, gives an ASP of around $176 per phone shipped.
• I think that the best case for Xiaomi was that it earned 20% gross margins and 3% EBIT margins on those revenues, giving EBIT and cash flow of $375m or RMB2.3bn.
• This in isolation is not a problem because as long as the company generates some cash it will never come close to going out of business.
• However there are two other big problems.
  • First. 2016 is shaping up to be a much tougher year and, for the last two quarters, it has lost market share.
  • This is in the face of a resurgent Huawei and Oppo both of whom look better equipped financially to fight for market share.
  • Consequently, I think that there is real risk that in Xiaomi’s 2016 units decline YoY on the back of a much softer market and much tougher competition.
  • The edge that Xiaomi carved out for itself did not last long and I see it having to cut prices in order to minimise market share losses.
  • Hence, it is not difficult to see revenues declining by 10% or more in 2016.
  • In this instance, Xiaomi will have to act quickly and trim its operations back in order to avoid a loss both at the EBIT level and in terms of cash flow.
  • Second. RFM research is indicating that there has been a huge decline in the engagement of users with the Xiaomi ecosystem.
  • Tough times at Xunlei (see here) were one indication that engagement had weakened considerably but now also the rankings of its core services.
  • Xiaomi’s main offerings in Digital Life are Media Consumption, Instant Messaging and an app store.
  • There was a time when Xiaomi devices registered more usage than iPhones on the back of the Media Consumption service but in terms of popularity it is now nowhere to be seen.
  • Baidu and Alibaba dominate this segment of the Chinese Digital Life pie and Xiaomi’s app store now rates second behind Baidu’s and just ahead of Huawei.
  • Consequently, it appears that users don’t really care about the Xiaomi ecosystem and even when they have Xiaomi devices they prefer to use the Digital Life services of Baidu, Tencent and Alibaba.
• The prospect of declining revenues, combined with very little engagement, means that Xiaomi’s strategy to become an ecosystem is failing and failing badly.
• To pour salt into the wound, Xiaomi does not even have the resources to compete with its rivals as I think that it has around $1bn in the bank and no cash flow.
• This is but a fraction of what its rivals generate every quarter meaning that it will be outbid for every asset and out invested for every service.
• The end result is that while Xiaomi was first to really understand the importance of the ecosystem, it appears to have very little chance making a good return from it.
• This is why I am valuing Xiaomi at around $5bn some 89% below the level at which it last raised money.
• I think that an alliance with one of the big three ecosystems is the best outcome for Xiaomi.
• Baidu looks to me like to the most appealing as all of the others are already working on their own versions of Android, while Baidu has closed its down.
• I very much doubt that Baidu will pay anything like $45bn for control of Xiaomi, meaning that even with this outcome there is huge downside for Xiaomi’s current owners.
• I think the current investors should be looking to exit at almost any price.