XIAOMI-W (01810.HK) announced record-breaking Q2 2025 results for both revenue and profit, but investors appear underwhelmed. Post-earnings, Xiaomi's stock opened down 2.29%, later recovering slightly to trade up 0.29% at HK$52.55, with a market capitalization of HK$1.37 trillion.

**Quarterly Revenue and Profit Hit New Highs**

Q2 revenue reached RMB 115.956 billion, a historical high with 30.45% year-over-year growth. The smartphones and AIoT segment generated RMB 94.693 billion, up 14.75% annually, while the smart electric vehicles and AI innovation segment achieved RMB 21.263 billion in revenue, surging 233.87% year-over-year. Both main business segments reached record highs. Xiaomi's Q2 adjusted net profit hit a record RMB 10.8 billion, up 75.4% year-over-year.

**Smartphone Business Decline Offset by IoT and Lifestyle Product Growth**

Despite double-digit growth in overall revenue and gross profit for the smartphones and AIoT segment, Xiaomi's smartphone business performance was less than ideal when examined individually.

Xiaomi's Q2 smartphone shipments increased marginally by 0.6% year-over-year to 42.4 million units, while the average selling price (ASP) declined 2.75% annually to RMB 1,073.2. The company attributed this to the April launch of the REDMI A5 series, which lowered overseas market ASP.

Smartphone gross margin decreased by 0.68 percentage points year-over-year to 11.47% in Q2, with quarterly gross profit down 7.60% annually to RMB 5.22 billion. The company explained this was mainly due to intensified overseas competition and increased revenue proportion from lower-margin products. Sequential gross margin declined 0.95 percentage points, with management citing rising memory prices, particularly unexpected DDR4 price increases, export controls on lithium from the Democratic Republic of Congo increasing battery material costs, and fewer new product launches in Q2.

However, management expects smartphone gross margins to recover in Q4 with concentrated new product launches, while increasing investments in chips, OS, and AI technology.

Regarding global smartphone market performance in the second half, management expects minimal or negligible growth. While brands were optimistic at the beginning of the year, inventory levels balanced by mid-year, making the second-half market more rational. Xiaomi adjusted its annual shipment target to around 175 million units, representing 5%-6% growth versus last year, outpacing overall market growth.

Strong growth in IoT and lifestyle products, along with internet services, offset the smartphone business decline. Q2 2025 IoT and lifestyle products revenue surged 44.66% year-over-year to RMB 38.712 billion, with segment gross profit up 65.07% annually to RMB 8.722 billion. Gross margin increased 2.79 percentage points year-over-year to 22.53%. Internet services segment quarterly revenue grew 10.07% annually to RMB 9.098 billion, with gross profit up 5.92% to RMB 6.856 billion, though gross margin declined 2.95 percentage points year-over-year to 75.36%.

Management explained that IoT and lifestyle products gross margin improvement was mainly due to higher-margin wearable products and certain lifestyle products in the domestic market, along with increased revenue proportion. Internet services gross margin decline was primarily attributed to advertising business margin compression.

For IoT business, both domestic and international markets achieved strong growth. The domestic market benefited from new retail construction, with offline stores significantly driving large appliance business development. Currently, large appliance business is mainly sold domestically, explaining why domestic growth exceeds overseas. International markets benefited from channel expansion, with Xiaomi revealing plans for scaled closed-loop new retail construction overseas this year, opening approximately 200 new stores in the first half with 400-500 planned for the full year, and over 1,000 additional stores planned for next year.

**Auto Business Gross Margin Significantly Improved, Scale Benefits Emerging**

Q2 2025 smart electric vehicles and AI innovation segment quarterly revenue reached RMB 21.263 billion, including RMB 20.6 billion from smart electric vehicles and RMB 600 million from other related businesses. The segment's quarterly gross margin was 26.43%, up 11.05 percentage points year-over-year, mainly due to declining core component costs, lower unit manufacturing costs, Xiaomi SU7 Ultra deliveries, and improved margins from other related businesses. Segment operating loss was RMB 300 million.

In Q2, Xiaomi's electric vehicle deliveries reached 81,300 units, up 197.73% year-over-year, with an average price of RMB 253,700, up 10.94% annually. In June 2025, the company launched its first SUV product, the YU7 series, positioned as a luxury high-performance SUV with a starting price of RMB 253,500. Combined with SU7 Ultra deliveries, this likely drove the unit price increase. Continued delivery record highs allowed platform standardization and supply chain centralization to generate scale benefits.

Compared to "new forces," Q2 XPeng Motors-W (09868.HK) delivered 103,200 units, up 241.58% year-over-year; NIO (09866.HK) delivered 72,100 units quarterly, up 25.6% annually; Li Auto (02015.HK) delivered 111,100 units quarterly, up 2.30% year-over-year. Xiaomi's deliveries have surpassed NIO but still lag behind Li Auto and XPeng. XPeng's outstanding Q2 performance with strong growth led to significant post-earnings stock gains.

Looking ahead, Xiaomi management expects future long-term gross margin sustainability will depend on order volume. The second-half target is achieving quarterly or monthly profitability, but given cumulative investments of over RMB 30 billion from 2022 to H1 2025, complete turnaround may require considerable time.

Management emphasized in the earnings call that the auto business will not participate in price wars or internal competition, focusing on order delivery and new model development, pursuing platformization, standardization, and hit products to improve gross margins. European expansion is planned for 2027, currently in research and preparation phase.

**Capital Expenditure and Shareholder Returns**

Q2 2025 net cash inflow from operating activities was RMB 23.545 billion, compared to RMB 4.51 billion in the previous quarter. During the period, Xiaomi's capital expenditure was RMB 4.869 billion, up 78.40% from the previous quarter, with 65.70% allocated to smart electric vehicles and AI innovation businesses, and the remainder to smartphones and AIoT.

Management revealed Xiaomi's three-tier AI strategy including AI large model layer, transformation layer, and application layer, with widespread application devices including smartphone OS, automotive cockpits, and AI glasses. In June 2025, Xiaomi officially launched its first AI glasses, supporting first-person perspective camera shooting, third-party application video calls and live streaming functions, while also serving as open earphones. Currently, edge AI has limited effectiveness, with user experience prioritizing edge or cloud usage, but as model efficiency and edge computing power improve, edge AI will be a major trend with more AI-enabled devices.

Management also expressed optimism about robotics development opportunities, having invested for four to five years and favoring industrial humanoid robots. The goal is to first achieve business closed-loop in proprietary factories, then improve efficiency, though commercial closed-loop implementation remains challenging.

As usual, Xiaomi pays no dividends, but in the first half ending June 30, 2025, the company repurchased 6.8298 million B shares on the Stock Exchange for a total consideration of HK$225 million.

**Conclusion**

Despite delivering "perfect" results with record revenue and profit, Xiaomi's stock response was lukewarm, reflecting investor skepticism about the performance and prospects.

Markets see not only current glory but future concerns. The core contradiction lies in the "cash cow" business supporting the company's current scale and profit foundation – smartphones showing fatigue (stagnant shipments, declining ASP and gross margins) – while the "new engine" carrying future growth expectations – smart vehicles – shows remarkable growth and margin improvement but remains in heavy investment phase without full profitability.

This may prompt market revaluation of Xiaomi's worth. Investors may worry whether Xiaomi's smartphone profitability can withstand fierce competition and cost pressures amid global smartphone market "zero growth." Although auto business momentum is strong, the path to recovering massive capital investments remains long with formidable competitors ahead. This "gear shifting" transition period, with the "old engine" slowing while the "new engine" hasn't fully taken over, may trigger market caution about Xiaomi's ability to maintain high growth and profitability.