Xiaomi posted $56M profit in 2013 but razor-thin margins, filing shows

Xiaomi posted $56.1 million (347.5 million yuan) in net profit last year, according to a regulatory filing. The filing provides a glimpse inside the finances of privately owned Chinese smartphone vendor Xiaomi, which has rocketed up the rankings to become one of the world's top smartphone brands in the past few quarters.

The filing, spotted by Reuters, showed that Xiaomi is also dealing with miniscule profit margins. Xiaomi had a financing round in August 2013 that valued the company at $10 billion. However, a report last month from Bloomberg, which cited unnamed sources, said that the company was holding talks on a funding round that would value the company at around $40 billion to $50 billion.

Despite the rosy valuation, the filing revealed that in 2013 Xiaomi recorded revenue of $4.3 billion but an operating margin of just 1.8 percent. A Xiaomi spokeswoman confirmed the accuracy of the filing to Reuters, but said it did not cover all of Xiaomi's business. The financial results were included in a filing made on Monday to the Shenzhen Stock Exchange by electrical appliance maker Midea Group, which Xiaomi owns a 1.3 percent stake in.

Xiaomi, which only started selling its smartphones in 2011, sells its phones in batches online, and the devices often sell out in minutes. The company has been pushing inexpensive phones with features that rival those of other mid-level and even high-end phones from Samsung Electronics and Apple (NASDAQ: AAPL), but it has long been speculated that Xiaomi is seeing only razor-thin margins, something the filing bears out.

"They're growing so fast and so lean, I wouldn't be surprised even if they were losing money," Forrester Research analyst Bryan Wang told Reuters. "The current market is so competitive that I don't think it's sustainable without consolidation."

Xiaomi started in China but has expanded to India, Indonesia, Singapore and other Asian countries, and is looking at Brazil, Mexico and other markets where its low-cost business model can thrive. However, that expansion strategy took a hit last week after an Indian court ordered Xiaomi to halt smartphone sales in the country due to a parent-infringement claim made against the company by network giant Ericsson (NASDAQ: ERIC), which alleged that Xiaomi was illegally violating its wireless patents.

Citing unnamed sources close to Xiaomi, Reuters reported that its leadership has privately acknowledged for years its vulnerability to patent disputes, which even played a role in its expansion strategy. Xiaomi said in a statement that "it isn't easy" to build up a patent portfolio as a startup company, but it aims to file 8,000 patent applications by 2016.

Meanwhile, research firm Gartner said Xiaomi was the No. 4 player in the global smartphone market in the third quarter, behind Samsung, Apple and Huawei and ahead of Lenovo. Gartner said Xiaomi had 15.77 million smartphone sales to end customers in the quarter, good for a 5.2 percent market share. That would represent a huge surge from the year-ago quarter, when Gartner said Xiaomi sold only 3.61 million smartphones and had a 1.5 percent market share.

"Xiaomi made its debut among the top-five smartphone vendors," Gartner noted. "It experienced the highest growth of the quarter, with an increase of 336 percent driven by strong performance in China where it became market leader."

For more:
- see these two separate Reuters articles
- see this Gartner post
- see this TechCrunch article

Related Articles:
Xiaomi, OnePlus and other Chinese manufacturers face hurdles in international smartphone expansion
Why Samsung and Apple should be worried about Xiaomi and Lenovo
Report: China's Xiaomi valued at $40-$50B as it vaults up smartphone ranks
Samsung's mobile profit plunges 74% in Q3 as competition intensifies
Xiaomi becomes world's No. 3 smartphone vendor by market share
Gartner, CCS Insight: Smartphone growth in 2014 will be fueled by low-cost models

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