HONG KONG (Reuters Breakingviews) - Xiaomi's phones are eating the world – but not its software. A 50 percent surge in third-quarter sales from a year earlier confirms the success of the Chinese group's smartphones in India and beyond. Xiaomi is mainly about hardware. Boss Lei Jun's bets in video-streaming, fintech and other internet services may prove to be costly distractions.

Smartphones powered another quarter of heady growth for the Beijing-based company. Revenue from Xiaomi’s smartphone unit alone, which accounts for over two-thirds of the company’s top line, topped 35 billion yuan, roughly $5 billion, up 36 percent from a year earlier. The company also said that at the end of October it had already met its goal of selling 100 million phones this year. That's thanks to strong demand for Xiaomi's flagship Mi 8 and other models in markets outside China, which made up an impressive 44 percent of total sales.

Other parts of Xiaomi's hardware business look promising too. Shipments of so-called smart TVs, for example, nearly tripled in the quarter. The company is now the top smart-TV brand in fast-growing markets like India and has plans to branch out into other appliances like air conditioners.

Lei has other ambitions though. The founder touts his company, worth about $44 billion at Monday’s close in Hong Kong before its earnings report, as a "new species" that integrates hardware and software services. The latter category, primarily advertising and online games, may be more lucrative than hardware – but for now it brings in less than a tenth of total sales.

Losses on Lei's investments in outfits including the $15 billion iQiyi, China's answer to Netflix, also nearly tripled in the quarter. This matters: ballooning research and development costs and foreign currency moves are squeezing already razor-thin hardware margins. Xiaomi’s operating profit for the third quarter fell 38 percent year-on-year to 2.2 billion yuan.

Shares of Xiaomi are down by nearly a fifth since its early July listing, and more than a third from its peak later in the same month. The company's strength in selling handsets might be the simplest positive message for Lei to give investors.

CONTEXT NEWS

- Chinese smartphone maker Xiaomi on Nov. 19 reported revenue in the three months to September of 50.8 billion yuan ($7.3 billion), an increase of 49 percent from the same quarter last year. That compares to an average analysts' forecast of 48.7 billion yuan, according to I/B/E/S data from Refinitiv.

- Adjusted earnings, excluding share-based compensation and other one-off gains, increased 17 percent year-on-year to 2.9 billion yuan.

- The company also announced that it has signed an agreement with Meitu, which makes smartphones and beauty apps. As part of the cooperation, Xiaomi will own the exclusive global licence of Meitu's brand as well as certain image-related technologies.

- Global smartphone shipments fell 6 percent year on year to 355 million units in the third quarter this year, according to industry tracker IDC. Xiaomi, with a 9.7 percent market share, ranks fourth worldwide after Samsung, Huawei and Apple.

- Shares of Xiaomi closed up 5.1 percent at HK$13.60 on Nov. 19 ahead of its earnings announcement.

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

(Editing by Richard Beales and Karen Kwok) ((robyn.mak@thomsonreuters.com; Reuters Messaging: robyn.mak.thomsonreuters.com@reuters.net))