Earnings Call: Q4 2014

May 21, 2014

Good afternoon, ladies and gentlemen. Welcome to the investor presentation of Lenovo today. Before we start, I want to share with you some of the highlights of Lenovo in the past fiscal year. Please enjoy. I got this feeling on the summer day when you were gone. I crashed my car into the bridge, I watched, I let it burn. I threw your stuff into a bag and pushed it down the stairs. I crashed my car into the bridge. I don't care, I love it. I don't care. I got this feeling on the summer day when you were gone. I crashed my car into the bridge, I watched, I let it burn. I threw your stuff into a bag and pushed it down the stairs. I crashed my car into the bridge. I don't care, I love it. I don't care. You're on a different road, I'm in the Milky Way. You want me down on Earth, but I am up in space. You're so damn hard to please, we gotta kill this switch. You're from the '70s, but I'm a '90s chick. I love it. I love it. You're on a different road, I'm in the Milky Way. You want me down on Earth, but I am up in space. You're so damn hard to please, we gotta kill this switch. The next question is why Lenovo? We're the number one PC company in the world. I love it. I love it. I got this feeling on the summer day when you were gone. I crashed my car into the bridge, I watched, I let it burn. I threw your stuff into a bag and pushed it down the stairs. I crashed my car into the bridge. I don't care, I love it. I don't care, I love it. I love it. I don't care, I love it. I don't care, I love it. I love it. I don't care, I love it. I don't care, I love it. I love it. I don't care. I love it. Now, may I invite our senior management to come up on stage? Our CEO, Mr. Yang Yuanqing. And our CFO, Mr. Wong Wai Ming. We will first have Yuanqing's presentation and followed by Wai Ming. Now, may I turn the stage to Yuanqing, please? Thank you. Good evening. Do you enjoy the video? Yeah, it's our last fiscal year. Thank you for joining us today. I'm very excited to share our historical performance and our future strategy with you. Last quarter, we delivered outstanding results, despite it being our seasonally low quarter. Revenue grew almost 20% year-on-year, while earnings increased almost 25% year-on-year, to $158 million. Although China PC market was slowing down, we saw strong growth across all other three geos. Actually, for the first time, our EMEA geo become our largest PC geo. We also become the number one consumer PC player in EMEA. But meanwhile, China still contributed most of our profit. Although revenue didn't grow in China, but we improved our PC PDI by one point to almost 7% there. Worldwide, not only did we strengthen our number one PC position, but we also gained about three points of the market share in tablets. And we were also the world's fastest growing major smartphone company, growing almost 6% year-on-year. For the fiscal year, our revenue reached an all-time high of nearly $39 billion U.S. dollars, up 14% year-on-year. More importantly, we had a record profit with a pre-tax income of more than $1 billion U.S. dollars for the first time in our company's history. Overall, we had record earnings of $870 million U.S. dollars, up almost 30% year-on-year. More impressively, we drove strong growth across all product lines. We shipped 55 million PCs to reach our all-time high share of 17.7% worldwide. And was the worldwide leader in every quarter of last fiscal year. We shipped 9.2 million tablets, quadruple our last year's volume. We also shipped over 50 million smartphones in 26 global markets. Now we are number four in both tablet and smartphone worldwide. We also had important success in our ecosystem business, with the Lenovo App Store delivering more than 25 million downloads per day. Our SHAREit app became our first to reach the 100 million users milestone. These results show the formula for success that I always talk about: clear strategy, innovative products, operational excellence, and a diverse global team and culture. This formula is clearly working. They prove our ability to make better money in matured businesses like PCs, and drive growth in those that are shifting to maturity like smartphone, tablet. This is our stronghold, because we are the best company in the world at balancing the innovation and the efficiency. Our next goal is becoming global number one in broader PC area. Broader PC means desktop plus laptop plus tablet. We want to become number one in this area, in two years. Now we are second place, four points behind the number one. We want to catch up this gap in two years, while building the new growth pillars in mobile and enterprise through successful integration of IBM x86 server and the Motorola Mobility. Both deals are progressing through approval process. To stabilize its current business, IBM announced a commitment to invest $15 million more over the next two quarters to further drive sales and invest in business partners. Feedback from customers, channel partners have been very positive. Once the IBM deal is closed, we believe we can build a $5 billion enterprise business with higher margins than PCs in one year. On the other hand, Motorola showed good growth last quarter. They just issued their last quarter's earnings. Their launches in key markets like India, Brazil, and the U.K. have been very successful. The new Moto products, including Moto E and Moto G LTE, have been very positive. We just got news from them. After they launched the Moto G- E. Moto E. Moto E in India. Actually in two hours, they sold out all the products. We believe with Lenovo's scale and operational excellence, we are confident to turn this business around in four to six quarters after the deal close. This is still our expectation or plan. Once we close this deal, we aim to sell 100 million mobile devices, including smartphone and tablets in the coming year. Lenovo has a proven track record, that we turned the IBM PC business from losing hundreds of million dollars a year, to today Lenovo's a cash cow and a global leader. We have successfully integrated NEC in Japan, Medion in Germany, CCE in Brazil. We created a global team, global culture, and a global winner. Now we will drive even stronger future growth in our mobile and enterprise business. We understand that investing in these two new businesses or two acquisitions will impact our short-term performance. But we are very firm that we should do this to secure our sustainable growth. Balancing short-term and long-term performance is a true test of management commitment. In the year ahead, our strategy will focus on protecting PCs and attacking in mobile enterprise and ecosystem cloud services. Protect and attack is still our strategy. Our Triple Plus strategy roadmap starts with PC plus mobile to form our smarter connected devices portfolio. This product will leverage our innovation, our strong channels, and operational excellence across all devices. When you add the servers and the storage, you get our total device portfolio. Lenovo is one of a few companies that can offer a full range of products. Then we add cloud products and services to create a unique Lenovo experience to drive even more value to our customers. That is our strategy going forward. This last year was the most successful year in Lenovo's history. Yet, we are prepared to again unlock substantial growth in acquisitions. Through the combination of our existing and new businesses, Lenovo offers tremendous value to our shareholders today, and our value will be even greater in the future. Thank you, everyone. Now, let me turn this stage to Wai Ming, our CFO. Wai Ming, please. Thank you, Yang. Good evening, everybody. I will take you through the Lenovo financial and operational performance for our quarter 4 as well as the full fiscal year 2014. Next slide, please. Fiscal year 2014 was a year of success for Lenovo, and Q4 was another quarter as we continue to grow in both sales and profit with margin expansion. Even more, I think cash flow from our operations has also improved significantly compared to that of last year. We recorded growth in all our key businesses and, at the same time, further improved our profitability. We finished the fiscal year with record-high revenue. Group revenue was up 14% to around $39 billion. PC sales up 7% year-to-year to around $31.8 billion, driven by the shipment growth as well as increase in ASP. Sales in our mobile device business are up 86% year-on-year to about $5.7 billion. Gross profit for the fiscal year was about $5 billion, up 14%. Gross margin stayed flat year-to-year at 13.1%. Operating expenses increased 11% year-to-year to about $4 billion. This included a $79 million severance payment for the year as part of our efficiency improvement program. Even with that, our E2R was down year-on-year to 10.4% compared with 10.7% last year. Operating profit and pre-tax income surpassed the $1 billion mark and up 32% and 27% respectively. It was the first time in our history that we have passed our PTI over the $1 billion. PTI margin was 2.6% versus last year at 2.4%. Profit for the year was $870 million against $631 million, again up 29%. Profit attributable to equity holders was $870 million, up 29% year-to-year. We continue to be on track in our margin expansion program, announced about seven quarters ago to improve PDI margin by one percentage point in three years' time. For quarter four, revenue was up 19% year-to-year to around $9.4 billion. Gross profit was up 18% year-to-year to $1.2 billion. Operating profit increased by 37% year-to-year to $231 million. Other non-operating expenses was $90 million, mainly attributed to increased financing costs, including factoring as well as local borrowing costs as we further expand our business. Pre-tax income was $212 million, up 28% year-to-year. Profit attributable to equity holders was $158 million, up 25% year-to-year. After netting off a $10 million non-controlling interest from the profit recorded in the Compal JV in the quarter. Basic earnings per share is 1.53 US cents in quarter four and 7.88 US cents for the full year. The board decided this morning to declare a final dividend of 18 Hong Kong cents per share. Next slide, please. Our balance sheet remains strong. Non-current assets as of March 31, 2014 was about $5 billion. The increase from the previous year was largely due to an increase of our in-house manufacturing and related facilities in China. Current assets were around $13.4 billion. Increase in inventory were largely due to the increase in our in-house manufacturing. Increased mix of our consumer business, which is in line with our business growth. Other changes in the current assets and current liabilities were due largely to our increased level of activities. Overall, our balance sheet remains healthy despite quarter four typically being a low season for us. We have net current liabilities around $62 million as of March 31, 2014. The non-current liabilities were around $1.9 billion. Next slide, please. Our cash position remained very healthy. As of March 31, 2014, we have net cash of around $3.5 billion. We continue to do well in managing our working capital. For the full year, inventory days were 28 days, up seven days against last year due to our expansion into consumer business as well as in emerging markets and the ramp-up of our new in-house manufacturing capabilities. Receivable days was around 35 days, flat year-on-year. Payable days were 65 days, up one day against last year. As a result, our cash conversion cycle for the fiscal year was negative two days compared with negative eight days the year before. For quarter four, our cash conversion cycle changed from negative seven days to negative four days, very similar to our full-year trend. Our operating cash flow has improved significantly during the quarter. We have recorded net cash generated from operations around $1.4 billion for the full year versus $20 million outflow for the last year. And $469 million in quarter four this year, again a cash outflow of $679 million the same quarter last year. To further improve our financial position, we have issued a US $1.5 billion five-year notes with a coupon rate of 4.7% in early May. The notes were well received by the market. In fact, the issue is the largest ever unrated bond issuance by a non-Japanese Asian company. Our cash position remained very strong, even taking into consideration paying about $2.8 billion for the two acquisitions at the closing. Next chart, please. Our balanced geographic exposure continued to help contribute to our top-line growth. Strong performance in EMEA and APJ up 27% and 31% respectively, despite sales decline in China. Markets outside China now account for around 62% of the group sales, compared with 57% last year. In fact, our PC revenue in EMEA in Q4 has surpassed our PC business in China for the first time in our history. We continue to record share gain across geography, products, and customer segments under our strategy. For China, we continue to outperform in the China PC market despite its decline, and further strengthen our number one position with a strong market share. Our strategy continued to work well as both our smartphone and tablet business continued to post strong growth. Total revenue from China was up 1% year-on-year. Our overall margin in China up 0.9 percentage points year-on-year to 5.4%. This reflected the successful execution of our strategy to protect our China PC business, profitable business, through tighter control over pricing as well as expense control. While continuously, we attack into the mobile device market, which shows significant growth in top line as well as improved profitability. For Asia Pacific, revenue up 12% year-to-year to about $6.2 billion in Asia Pacific. Operating profit recorded reached record high of $109 million. Strong performance in Japan, especially in the commercial PC segment, supported our overall improvement in the region. Our drive in smartphone and tablet in this region has also been encouraging, and our smartphone shipments surpassed 3 million units in the region for the fiscal year. Our operating margin up significantly by 0.7 percentage points to 1.8% for the year due to the scaling benefit as well as expense control. For EMEA, we continue to have very encouraging results in the region with record high market share. Revenue grew 27% year-on-year to about $9.6 billion. Strong growth in emerging markets and consumer business contributed to the strong growth in the region. We became the largest consumer PC player in the region for the first time in Q4. Our mobile business, including smartphone and tablet in the region, has also recorded strong growth momentum. The overall operating margin for the region was up 0.5 percentage points to 2%, again due to scaling benefit as well as good expense control. For Americas, we continue to achieve strong growth in the American region. Revenue up 31% year-on-year. We benefit from the strong growth in both commercial as well as the commercial business in North America, resulting our market share gain of 1.7 points to a record high to 10.5%. In Q4, we became the number three player in the U.S. market, the first time for the group. We also continued to deliver strong growth in Brazil. Operating margin of the American region was down 0.5 percentage points year-to-year to 0.08%, which was mainly due to the increased consumer business exposure. As well as there is an impact on the mechanical part supply interruption affecting our North American business starting in Q3. However, the issue largely been fixed in Q4, and we actually see operating margin of our North American business has recovered. Meanwhile, we continue our investment in the fast-growing Brazil and Latin America business to build our foundation. Next chart, please. We have a more balanced product portfolio help our expansion in consumer PC and mobile device business with growth and share gain in each of those key devices. The revenue contribution for the mobile device business increased to 13% this year compared with 9% last year with improving profitability. I want to take this opportunity to report the status of our two recent corporate transactions. Both transactions are still pending approval from the relative authorities, and we expect both transactions to close in quarter 3. We have started our post-merger management work so as to ensure a smooth transaction after the closings, which will enable us to secure the planned synergy resulting from a seamless integration from day one after close. Looking ahead, we believe our existing business will continue to outperform the market across our key products under the solid execution of our strategy and will continue our margin improvements. For our PC business, we will continue to invest in branding and innovation in order to enable us to continue to outperform the market. However, performance may vary in different geographies or regions depending on their respective general economic environment. Smartphone and enterprise business are key to enable our continuing growth, and we will invest to build our enterprise business and accelerate our smartphone worldwide expansion and to prepare for LTE 4G products in China. In the meantime, we will begin to invest in the ecosystem and cloud services to support the further growth of our device business. We will stay focused on our efficiency improvement initiative and growth opportunities of our existing business. We are very confident the trend in the growth of our existing business that we have shown in the past several years will continue to deliver the improvement in profitability. Addition to the two businesses after the final approvals will definitely further strengthen the company's competitiveness in driving a sustainable growth in the next several years. Thank you very much. Let me now take your questions. Thank you, Boyang. Now we will come to the Q&A section, and it will be conducted in English. If you wish to ask questions, please raise your hand and we will pass you the microphone. To make sure all of us, including our participants on the webcast, can hear your questions, please wait for the microphone before you speak. We would like to accommodate questions from as many participants as possible. Please avoid multi-part questions and limit to only two questions at one time. Kindly state your name and the name of your company before asking questions. Thank you. Now may I invite the first question, please? Hi, good evening. This is Arthur from UBS. Congratulations on the good results. I have two questions. First is with regard to this MIDH performance. I think previously the management indicated that you are in product transition, but actually, if you really look into the details, it seems that the numbers actually are quite encouraging. Could you let us know how is the mix between China and overseas? Then within China, what is the carrier channel sales as opposed to the open channel sales? There is a lot of concern about this potential cut from the subsidies and the coming impact to this overall market demand. That is my first question. Okay. Thank you. Regarding our smartphone business, last year we shipped 50 million units. Among that, around 45 million were sold in China and 5.5 million outside of China, mainly in emerging markets. Actually, we are very satisfied with the progress in other emerging markets. In some countries, we have already reached the double-digit shares and make very good profit, like in Indonesia. That is the mix of the sales last year. Overall, we grow by 6% year-on-year. China is lower, but the rest of the world is much higher. Probably 200% year-on-year growth. Regarding the China smartphone, carrier is still our majority channel, probably 70%. Yeah. Probably 70%, then the open market. Recently, we also opened a new route to sell to the end users, which is online channels. Also in the other route, we do both through the third-party channels like Jingdong, like Tmall. Also, we are building our official sales channel, through our sales official channel to sell. We believe in the next year, we can sell more through the internet channel. Now we have three routes to sell to the market. Carrier, open market retailers— Internet and the internet channel. We have three models. Okay. Does that imply the new sales channels is going to mitigate this potential weakness for this carrier channel related demand? Say it again. Yeah, I think generally there is concern about the- Oh, the subsidy. That is right, the subsidy cut. Yes. That is why I said we are strengthening our open market channels. We are addressing both the retail channels and the internet channels. We believe that mix will be increased over years. Okay, thanks. Second question is with regard to this PC demand. As you can see, the China region is the only region that you show the year-on-year decline. How is the current status? Is it already stabilized, or is it still kind of staying in a relatively weak situation? You mean in China only? Yeah. China PC overall demand. Thank you. Yeah. It is true. Last year, China PC market was slowing down, so definitely. Although Lenovo continued to outperform the market. I think now the market has become more stable. Probably it has already hit the bottom. Probably in one to two quarters, there will be still a little bit of negative growth, negative growth. We are still confident. Probably in the second half of the year, the market will turn to the positive. Also, we believe the cannibalization of the tablet has been very limited. Probably more cannibalization come from the smartphone. Many people use smartphone as their first internet device. That will have a little bit of cannibalization. We are still confident on the total China PC market. Actually, today, China's PC market is still smaller than the U.S. market. That is not the right thing. I think at least it should be the same scale or a little bit bigger. Okay. Thank you. Next questions, please. Hi, I'm Steve Zhang from Macquarie. My first question is about margins for your overseas market. In AP and EMEA, it seems like your operating margins for the quarter were actually quite strong. Can you talk about the trend that you see over the next few quarters? In Americas, you did see a margin decline it seems. Can you talk about maybe what you're doing in Brazil and how you're improving the margins in that country? In PC area, definitely, we are committed to further improve the margin and the PDI. As Wai Ming just said, we are on track to deliver our commitment to improve the existing business PDI by 1 point in three years. Starting from seven quarters ago. Over the past seven quarters, I think we have delivered our commitment, definitely. Five more quarters to go. We are still committed to this improvement, particularly in the PC space, with our current scale, with our current competitiveness. We are very confident we can further improve our PC margin. Actually, you have seen China is a good role model. Actually, last quarter, even market was very slow, but we still improved our PDI by 1 point in China to reach almost 7% PDI. Actually, EMEA is improving PDI significantly. Last quarter, they delivered $75 million PDI. Right. That is pretty impressive. Even Asia Pacific, Japan, we are improving the profit margin. We are confident that we can further deliver the improvement. But definitely, after we close the two deals, probably we need to give you a different way to track the improvement. But more focusing on the PC will be the right thing. This is always Lenovo management's commitment. While we will focus on the short-term performance, we also need to build the foundation for the sustainable growth for the future. We will invest, not just squeeze every penny into the bottom line. Maybe let me add a little bit, give a little bit more color on the, I think, the margin in AP and North America. I think there are two reasons for primarily the significant improvement of the operating margin in Asia Pacific. I think one country which actually been doing fantastic, very, very well, fantastically well, is actually Japan. I think, as I mentioned in my presentation, I think we continue to improve efficiency by taking out headcount and redeploying to the growth area. I think a lot of those actually happened in the beginning of the year, and we definitely see Japan, I think the markets have significant year-to-year growth in Q3 and Q4, and partly due to, I think, the window, I think, or Microsoft not supporting the XP ecosystem. As well as, I think the change in the tax for consumer in Japan that accelerate, I think the business or I think Q4. You can actually see this business in a way is very simple. If you will be able to control your expense, when you actually have your top-line growth, immediately it flow into the bottom line. That is really generally, I think, how and why we are so confident that we continue to see opportunities to see further improvement in margin, in areas like AP, EMEA, as well as North America. Now, commenting on the AG, on a year-to-year basis, obviously it is declined, I think partly because of our, again, what Yuanqing said, protect and attack. We have been extremely aggressive, I think been attacking, I think the growth areas in Latin America and in Brazil. North America, I think if you recall Q3, we actually had some problem, partly because we have some supplier issue in some of the hinges in some of the factory, and that actually sort of had an impact on our North America business. But Q4, by and large, I think the issue resolved. I think they recover. You see that Q2 to Q, I think the AG margin actually improved. But compare with the year before, this year we obviously, I think put a lot of effort in attacking and growing the business. I think you may recall that, I think Brazil will actually reach, I think it is probably number one. I do not have the IDC number for Q4, but you can actually see how the overall Lenovo strategy work, protect and attack. I think we actually get a lot more profit in the protect area, and then we attack and have the super growth. As a result, I think we deliver more balance on a growth basis as well as on the geo basis. Okay. My second question is related to commercial PCs. Can you talk a little more about what your outlook is for that segment, especially given that media reports today have said that the Chinese government is going to possibly block procurement of Windows 8 operating system for their PC. Yeah. We heard of the news, but we don't think it will impact our business, because we have multiple choices for our customers. We can give the Windows 8 to customers, we can give the Windows 7 to customers. We can even give the Linux, Android, or Chrome to our customers, based on their requirement. We have no problem to sell the planned PC, the volume to the market. Okay. Thank you. Well, I just add one thing. We are obviously, I think, optimistic in the overall personal computer industry as a whole. I think specifically on commercial, we definitely see in the mature market some very positive sign in the SMB area. I think we definitely, if you look at our result over the last couple of quarters, I think we can begin to see some relationship for large enterprise business picking up. But we definitely have a much more positive outlook on the SMB business. Okay. Thank you. Next questions, please. Thank you for taking my question. I am from Nomura. I am Lebin Huang. I have two questions. First question is about your server, the IBM server business. We see IDC say their server business, IDC, the market share for IBM server dropped quite sharply in Q1. Maybe it is IBM business, but can you elaborate why they lose market share significantly? Also, you still show the confidence you can have $5 billion revenue. This business will be bring back or can you elaborate more detail on this one? Yes. It is still not a Lenovo business. Yeah. Let me try to help you to analyze the reason. Actually, IBM is more focusing on the profitability. If you do not have the profit, probably they would not do the business. That is why, in the past, when they competed with HP, with Dell, they are not strong enough to win the deal, to win the customer, because that is not their strategy. Recently, it become even more tough because the competition is not just coming from the HP and the Dell, it is also coming from those so-called white box or ODM, OEMs, because they directly sell to those IDC company, data center company like Google, like Amazon, like Amazon with the customized models. Definitely, we understand the trend. That is why we want to do the deal, because we can handle better than them. We can handle better than them. We will do manufacturing by ourselves. We will have a more efficient platform. That not only we can compete with the HP and Dell with efficiency, but also we can compete with those white box with a better brand, with better technology. That is why we are still confident. We can build a $5 billion business with better than PC margin for PDI. Just add one point. I think one area which IBM has traditionally not strong, which is the channel business. We obviously, Lenovo has been very strong, I think, in the PC and channel. Obviously, with the IBM product portfolio, I think with our capability in the channel, we definitely feel that apart from what Yuanqing said, that we being more effective in competing in the more commoditized business. We definitely can do better as well as we actually have channel experience and capability, which is on top of what IBM strong in more direct and relationship business. The second question, I think, is also related to the acquisition. You give us quite confidence on this IBM's $5 billion sales with higher margin than PC. Do you have any confidence on the Moto brand smartphone business in terms of revenue scale or the margin higher than PC? Yeah. To be frank, when we announced the two deals, I had more confidence on IBM. You have seen the results that just announced. Actually last quarter, Moto was performing very well. Actually, they exceeded our expectation or the plan that they gave us when we negotiated. It is ahead of their plan to turn around the business, not just on the profitability. Profitability is better than what we expected. But also, in the volume, in the revenue growth. Way above our expectation. Their Moto G is selling very well, not just in North America and Latin America, but in some new markets like Europe, Asia Pacific as well. Recently, they just launched the Moto E and some Moto G new version. E. They will launch more models in September. The review has been very positive. For example, Moto E, they first launched in India. They just told us in just two hours- Two hours. They sold out all the Two hours. the first batch of the products. Both Moto G and the Moto E's margin are very good. That can help to further improve the profitability. Thank you. Thank you. Next questions, please. Thank you for taking my question. I am Jean Louis from SGJI. My first question is on the China PC business. I would like to know, the margins have been coming up very strongly. I would like to know how structural that is. In other words, if we continue to have a flat sales in China PC, can you maintain your segment operating profit at the high level that we are currently? You answer. Yes, we do. I think, again, if you really look at the entire, what I call the personal computing device business, which is primarily, I think, comprising desktop, notebook, and tablet. Obviously, if you really analyze the numbers, I think in terms of units, it is actually continued to grow. As a total market today, I think that the business is $200 billion. I think today we are probably, although we are number one or probably number two, if you have tablet and PC, there is a long way for us to grow our market share. The way we look at it is, I think maintaining or even improving profitability. Again, if you really look at the profile of the business coming out from different geography, we obviously have excellent execution ability in China, and that was demonstrated even the market is not growing. We have been able to, through, I think, controlling our pricing and improving our efficiency by expenses, we have been able to improve the margin. Set that aside, if you really look at, I think the region like EMEA, like American region or AP, the key for us is obviously to improve the overall operating efficiency. If you actually be able to control your cost, and any additional or incremental revenue coming out from gaining share from your competitors, which we have been doing it for the last three, four years, that actually will continue to improve the margin. Again, if you really look at the EMEA margin today, American region margin, AP margin, I think there is a long way for them to go before even close to how the China margin. We are definitely, I think first, very confident about the overall personal computing business as a whole. Secondly, we continue to believe that I think the capability or the strength of Lenovo is really focused on execution. On execution, we will continue be able to drop to able to control costs or expenses, at the same time, be able to increase share. On that basis, I think if you compare with the margin differential between our, I think, best-in-class of China versus the others, there is a lot of room for us, I think, to go from here. Thank you very much. My second question is on the smartphone business. Looking at the smartphone, do you have a target for FY 2015 to give us some sort of year-over-year growth you are expecting in units? Just by that measure, at what point do we see uplift in profitability depending on the scale that you expect to achieve? Yeah. So you mean 2014, 2015, right? Yeah. Next 12 months. Yeah. The current fiscal year. Smartphone and tablet are managed by our new mobile growth. Their target is selling 100 million units in the fiscal year. Definitely. It could include some Motorola volume, but not full year. We hope we can close the deal on time. That will be our target. But this 100 million includes both smartphone and tablet, Android-based devices, let me say in this way, because our Windows-based device is in PC growth. It's a little bit different, because as Wai Ming said, today, if we view PC, we actually, I think all three categories are PC. Desktop, laptop, and tablet are PC. But when we develop the products, we must group based on the operating system. Android is Android, Windows is Windows. That would be our target, definitely. In short term, making money is not the key priority. We still want to build the scale. Today, we have only 4 point something market share in both smartphone and tablet, Android tablet. That's not the scale. You can make money. At least you must have the double-digit shares, so you can make the very good money. That would be our target, to build the scale for us. But we will not lose too much money. Actually, today in China, our smartphone business is a break-even business. Outside of China, smartphone business, in emerging market, is making money business, is making very, very good margin. Particularly in the market like Indonesia. Right. Thank you. I just add one more point. I think the way how we actually manage the business, again, I sort of come back to the strategy that we have, protect and attack. We actually look at the business as a whole. Clearly, I think our personal computing device business, which is our protect business, will continue to drive profit. I just explained that we remain very confident that I think there is a lot more profit to be made. At the same time, the high growth is really, I think, the smartphone business, I think partly because, I think other than China, we are number two. I think many other parts of the world, we begin to go into that. Therefore, for us, I think the top priority is really to build up the volume, as Yuanqing said. I think we believe that unless you actually have a reasonable market share where you can actually leverage the synergy and then turn it into a profit. At this point in time, our smartphone business in China, although we are number two, we still have a gap with the number one. I think we still focus on, I think with the competition, continue to, I think, grow our top line. At the same time, I think our China business at the moment is not loss-making, but we begin to get into emerging market, and hopefully, I think by the time we close Motorola, we will have a much bigger business and leverage on a global basis. I think the profitability will eventually, I think, become a major contributor. But definitely for the next 12 months, I do not see that. Regarding the profitability, I think probably China is the most tough market. The competition is more fierce there. Not just all the multinational players are there, but we have a lot of local players. So the competition is very hard to make money. But the emerging market, as I said, probably is easier to make money. So if you can enter the mature market, you can make even better money. But the problem is whether you can enter the mature market, because the key barrier is IP. Is IPR. For those Chinese players, if they do not have any IP, so probably they need to prepare 25% to pay the royalty to the. No competitiveness at all. But with the Motorola deal, we think we will have the better position on the IPR. So we will be competitive in the market. Okay. Thank you. Due to time constraint, let's have the last questions from the floor. Hi, thank you. This is Nam Kim from Arete Research. The follow-up question on Motorola side, you just mentioned IPR. I think you did this due diligence before you acquired Motorola. In terms of IPR rate, especially U.S. and Euro market, how much royalty saving can you have after Motorola acquisition? You can give us any ballpark or wide range of the number. You said you can turn Motorola business around next four to six quarters after acquisition. You can turn Motorola business around in four to six quarters. But if you look at Motorola, their last year they made a profit was 2006 before iPhone launch, and then they lost $5 billion non-GAAP loss since 2007, plus $3 billion restructuring cost. Today you don't make much money with the smartphone business, but I believe there is substantial cost saving from this deal. Can you walk through a little bit more detail? Where is the best synergy you have in terms of saving after this acquisition, so you can quickly turn this business around? Regarding of the IPR, as I said, if today Lenovo enters U.S. market, probably we need to pay 25% of our total sales. But with the Motorola deal, at least 15% we can save. It's a save, right? To save. Well, I can comment. I think the way to look at it is, I think if you really assuming that you do not own any IPR, if you were to go to the mature market, just looking at the IPR owners, roughly you are talking about 25%, I think of your ASP. Motorola, obviously today, I think they have very strong cross-licensing agreement. They probably paying around 10% or even lower than that. It is not a saving per se, it is really if you do not have the IPR, you have to pay 25%, I think, rather than cost saving. Let me turn to the question on why we are so confident, as Yuanqing said, that we, I think between 4 to 6 quarters, we can turn around. I think that you probably need a little bit more work in looking at the composition of P&L. I think Motorola, I think if you really go into detail, Motorola last year, in fact, they actually relaunched their product. I think Motorola, under the Google ownership, rather than continue to run as a device business, they actually concentrate in developing, I think, the best-in-class Android operating system under Motorola. As I said, rather than run on a worldwide basis, I think they cut their workforce, used to be around 40,000 to about 3,000, 4,000. So last June, I believe, I think they believe that they actually has the best product they can actually launch in the market only initially in North America. And then this on the Moto X, which is the high-end of the market, and then you have the main market product, Moto G, only in Latin America. But bear in mind that Motorola, in fact, is actually a global brand. It used to actually sell everywhere and can easily have, I think, over 10% market share. Now, if you really look at the P&L, I think let us take their margin, I think is actually sort of positive area. But since they are only sort of doing one country, North America, for 6 months, compare this as a global business, as well as the mainline product, I think Moto G, only in 3 months in Latin America. Now, obviously, this is not an expense issue. This is a scaling issue. As Yuanqing just said, I think when we look at their roadmap, they obviously been growing significantly above the normal market rate. I think the way to look at it is because the comparison last year, as I said, I think if you really assuming that they actually do exactly the same, I think in North America, it is already double. But let alone the fact that they actually relaunched Motorola in Europe, which has been very successful. They actually relaunch in India, which was very successful. So we are very confident that their top line continue to grow significantly above, I think, the market. And in fact, as Yuanqing just said, I think looking at their quarter 1 result, I think their volume is already well above, I think, their roadmap. And let take that momentum continue, and in fact, it was well demonstrated by the successful launch of Moto G about a week ago. I think we are very confident that this business can be turned around. So the Motorola, I just think that it is not simply an expense issue. I think this is a scaling issue, and we believe that the Motorola brand is a strong brand, is a global brand, and the revenue. Or put it simply, the revenue that we quoted last year resulting a significant operating loss, does not represent the business that Motorola can do, I think, on a run rate basis. Okay. Thank you. This is the end of our today's presentation. Once again, thank you for joining us. We have prepared some refreshment outside. Please enjoy.