Good afternoon, ladies and gentlemen. Welcome to Lenovo Group fiscal year 2011-2012 annual results presentation. I would like also to welcome our participants on the live webcast. Before we begin, we would like to show you our latest video of Lenovo. Please enjoy. A very impressive video. Now, may I invite our senior management to come on stage? On my left-hand side, we have Mr. Yang Yuanqing, Chairman and Chief Executive Officer of Lenovo, and sitting next to him is Mr. Wong Wai Ming, our Chief Financial Officer. I would like to turn the presentation over to Mr. Yang now. He is going to give us his remarks on the progress of the group in the past fiscal year. Yuanqing, please.
Thank you for joining us. Lenovo closed a record-setting fiscal year with a strong fourth quarter. Now we have been the fastest-growing major PC company for the 10th straight quarter. I am very excited to share our accomplishment and future strategy with you. Let us jump right into it. For the year, Lenovo not only set an all-time high revenue of nearly $30 billion and an all-time high market share at almost 13%, but also reached an impressive net income of $473 million, up over 70% year-on-year. We not only strengthened our number one position in global emerging markets, but also reached an all-time high market share in mature markets. We also achieved balanced growth in all customer segments. We reached record high market shares in both the worldwide commercial and the consumer markets.
In Q4, we reached the double-digit market share in mature markets and the worldwide consumer markets for the first time. These are truly fantastic results. Now let us look at each area of our strategy more closely. In China, we once again outgrew the market and set another record high market share for the year at over 32%. That is about the same as the next four competitors combined. Our strong presence in emerging cities will continue to drive our future strong growth. More impressively, while gaining market share, we also increased the profitability by 27% year-on-year. We will stay hungry and drive for both more market share and profit in the coming year. In the rest of emerging markets, we continued our hyper-growth, growing 28 points premium to the market rate for the year.
Now in worldwide emerging markets, we are more than four points ahead of the next competitor. What is even better, we gained a share in every region in Q4. Like in India, we gained almost six points year-on-year, and became the number one in that market for the first time. In Russia, we reached double-digit shares and became number three there. Those are fantastic results from emerging markets. Now let us move to the mature markets. We not only set an all-time high segment operating profit of over $350 million, more than double the year before, but also set records for revenue, shipments, as well as market share. Organically, we grew at a 33-point premium to the market. When we count our successful integrations with NEC PC and Medion, we actually outgrew the market by 58 points.
More importantly, we saw both big profit improvements and big market share gains in the world's most competitive markets like U.S., Japan, and Western Europe. More profit, more market share, and more future growth. That is the theme across our PC business. Our good news does not stop there. We also made strong progress in the mobile internet space. Our mobile internet business delivered a strong improvement throughout the year. For the fiscal year in China, our smartphone shipments grew by 11x , and more than 6x faster than the overall market, and gained almost five points of the market share year-on-year. Last quarter, our smartphone share reached a record high market share of near 10%. We also had strong growth in our tablet sales. We are a solid number two in China tablet market with 17% of the market share.
The clear leader, so we are the clear leader in China Android-based tablet with almost a 50% market share. According to the latest IDC data, our worldwide tablet market share has leaped from number eight last year to number four last quarter. With more innovative products and enhanced brand image, I expect our growth in mobile internet and the digital home to be even stronger next year. This leads to our next topic, our strategy for the next year. Our protect and attack strategy has guided our company to record results over the last three years, and will continue to be the core of our PC business strategy. This year, our emphasis is attacking the consumer and the SMB space even more aggressively outside of China.
To win in this space, we will build a premier consumer SMB brand that is similar to ThinkPad in the enterprise space with compelling, world-class, top-quality products, more stylish, lighter, thinner, longer battery life, always on and instant on. While attacking consumer SMB aggressively, we will continue to protect our core commercial business. At the same time, we will maximize our advantages to expand our server workstation business. While executing protect and attack in the PC area, we have a clear strategy to expand into the new PC plus era. Obviously, multiple devices are emerging: smartphone, tablet, smart TV. We are entering a new era, the PC plus era. To win in the PC plus era, we will pursue a two-step strategy. First, we will win in China first, where we have a more mature business foundation.
Outside of China, we will first build our brand, channel, and ecosystem to prepare for driving success in PC plus. Towards that direction, our mobile internet and digital home business has seen initial success in China. But we are definitely not satisfied. For the coming year, our goal is to triple last year's smartphone volume and be a top three player in China. In tablet market, so we want to reach more than 20% market share in China, and establish Lenovo as a pioneer in smart TV area. Actually, earlier this month, we officially launched our first smart TV. It will change the whole concept of family entertainment, and it also means even more growth opportunity for Lenovo. To drive growth in both PC and PC plus, we will build on our core strengths.
First, our strategy is clearly understood and executed by our employees, as well as our business partners and suppliers globally. Second, innovation is in our DNA. For both PC and PC plus products, we will focus on better design, better user experience, and better ecosystem. Even more importantly, we will develop our own distinct characteristics and winning differentiation, and eventually, lead in new categories like smart TV, convertible PCs, and family entertainment devices. Our business model, which is a unique vertically integrated business model through strategic partners with key suppliers and channel partners. We will jointly define and develop the products that satisfy customers' requirements. Lastly, we have built a unified ownership culture that is embraced by our employees globally. We will maximize our core strength going forward. Looking ahead, we will push to continue growing faster than the market, and to further improve our profitability.
To support our growth, we have realigned our organization into four geos: China, North America, EMEIA, and Asia Pacific, Latin America. We will also report business results for each new geo from next quarter and forward. Overall, we remain optimistic about the PC market, as well as our ability to continue growing quickly in the PC plus market. We are confident that next year will be even better. Thank you. Now let me turn to our CFO, Wai Ming. Thank you.
Hi. Good afternoon. Thank you, Yuanqing. I will take you through the Lenovo financial and operation performance for quarter four as well as for the full year 2012. Next chart, please. Yuanqing has just shared with you our fiscal year 2012 performance, which is a year of records for Lenovo. I think Q4 is another record quarter for us. We continue to outperform the worldwide PC market across the board by geographies, by products, and by customer segments. Our PC shipment growth in quarter four was up 44% against the worldwide PC market growth of around 5% year-to-year. We have a record quarter four market share at 13.1%. We have consolidated a full quarter of performance from the NEC and Medion. But if you exclude them, our Lenovo brand growth is up 30% year-to-year.
Group sales grew 54% year-to-year to approximately $7.5 billion. PC sales were up 44% year-to-year at $6.8 billion. Revenue from our MIDH business was at $423 million, up 126% year-to-year. Sales of other goods and services were at around $300 million. Gross profit was about $806 million, up 34% year-to-year. The gross margin declined slightly to 10.8%. The year-to-year decline is due to the hard disk impact, though we managed to mitigate the impact, as well as an increase in the mix of the NEC and Medion consumer products, as well as our mobile internet products. The quarter-to-quarter decline is largely due to a typical low season in China. However, we expect the gross margin to improve in quarter one as the scaling benefits will improve given the higher volume of our business, and again, especially in China in quarter one.
Operating expenses, including our investment in R&D, branding, and others, increased to $704 million, but the E to R ratio was down 1.5 percentage points to 9.4% year-to-year under our very stringent cost control. Pretax income in quarter four was $102 million, up 69% year-to-year. PTI margin was up 0.2 percentage points year-to-year. We expect the pretax margin to continue to expand due to the scaling benefits from the continued strong shipment growth in the next several quarters. Effective rate for quarter four is 34%. The higher tax rate is due to a lower pretax margin in quarter four because of the seasonality and the inclusion of the NEC and the Medion businesses. Profit attributable to equity holders for quarter four is $67 million, up 59% year-to-year. For the full year, we finished the year with very strong sales revenue growth.
Revenue is up 37% to $29.6 billion. Gross profit up 46% to $3.4 billion. Gross margin expanded to 11% from 10.9% the year before. The E to R ratio was at 9.7%, up half a point year-to-year, even with our continued investment to drive future growth. We have a record high pretax income at $582 million, up 63% compared to last year. Profit attributable to equity holders for the full year is $473 million, up 73% year-to-year. Basic earnings per share is $0.65 in quarter four, and $4.67 for the full year. The board decided in its meeting this morning to declare a final dividend of 10 Hong Kong cents per share. Next chart, please. Our balance sheet as at March 31st this year remains strong. Non-current assets were about $4 billion.
The increase from that of March 31st, 2011 was due to the consolidation of the NEC, as well as the Medion balance sheet into ours. The other factor that attributable change is our overall operational performance. We have a net current assets of around $11 million as of March 31st, 2012. The net current liabilities were around $1.6 billion. Next chart, please. Our cash flow and cash conversion cycle continued to be very healthy in quarter four. The net cash reserve continued to improve to $4.1 billion against $2.7 billion last year, largely due to an increase in sales revenue and operating profit. We continued to do well in managing our working capital. Inventory days in quarter four were flat, while days receivable increased by three days to 35 days, largely due to the consolidation of the NEC and the Medion business, and our growth in the emerging markets.
Days payable decreased to 17 days, largely due to a shorter payment terms to secure the hard disk supply. As a result, our cash conversion cycle in quarter four was a negative 17 days against a negative 33 days the year before. Next chart, please. The group has a record high quarter four in shipments, and market share grew almost 10x , driving market share to 13.1%. We have an even more balanced business in quarter four in terms of geography after we consolidated the NEC and the Medion business. In China, we continued to perform well in China and further expanded our market share. Sales increased 25% year-to-year to about $2.5 billion. Strong growth in emerging cities helped drive strong shipments in China. Our market share further expanded to 30%.
Our PC operating margin dipped slightly as we continued to invest in branding activities, and we expect that the margin will improve quarter- to- quarter in quarter one. The MIDH business in China is making progress, and we are still making investment in product development, marketing, and promotion to drive future sales. Emerging markets excluding China. Our expansion in emerging markets continued to show growth momentum in quarter four. Our shipment growth about 7x the market growth, and we see share gain in all regions. We are particularly pleased with our milestone achievement. We came number one in India and number three in Russia. Sales were up around 43% year-to-year to approximately $1.2 billion, and our operating loss was flat at $19 million. For mature markets, we continued to record strong growth in mature markets.
Indeed, this is the first time we hit the 10% market share in this region, which is a record high for us. Sales were up around 85% year-to-year to slightly above $3.4 billion. We have included a full quarter performance of NEC as well as Medion in quarter four. Both have performed better than their respective markets, and their earnings are accretive to the group. Excluding the acquisition impact, the Lenovo brand shipment grew in mature market around 28% year-to-year. Operating profit improved to $74 million, and operating margin also improved slightly to 2.2% for the quarter. Next chart, please. Looking at the performance by products. From a product perspective, our drive in the consumer business, especially in market outside China, began to show results. We have a record high worldwide consumer PC at 10.2% in quarter four.
Our commercial business continued to do well and outperformed the market in quarter four. We had a record high market share in notebook at 13.5%. Notebook unit shipment and sales were up 44% and 41% year-to-year, respectively. Unit shipments and sales in our desktop business were up 43% and 45% year-to-year, respectively. Our market share in the worldwide desktop market increased to around 12.7%. Our MIDH business also saw strong performance. Smartphone shipments grew 21x faster than the market year-to-year, and our market share grew 8.2 percentage year-to-year to 9.5%. Tablet business continued to show good momentum, and we are the number two China tablet vendor with about half of the Android-based tablet market and the number four in the world.
To ensure a strong growth momentum continue, we have already launched a series of new products in smartphone as well as tablets to drive future growth. Before I end my presentation, I want to give you some color on market outlook. Our continuing efforts in operational efficiency improvements and significant investment made over the years in R&D, and establishing a global brand will enable us to continue our trend in outperforming the worldwide PC market. The successful execution of our protect and attack strategy has resulted in having a very balanced business for us in emerging markets versus mature market, as well as in consumer versus the commercial segments. Such solid foundation reinforce our confidence that we can continue our trend to over-perform the market with improved profitability, despite the current uncertainties in the global economic environment.
In particular, we have products in Ultrabook and in new chipset, which will help us to drive demand this year that will also benefit us. We launched our first consumer Ultrabook, the IdeaPad U300s, last year and launched our first commercial Ultrabook ThinkPad X1 Hybrid at the CES in January this year. Both products are among our prize-winning products that we launched in CES this year. We believe we have excellent offerings. The market response has been very positive, and we have more exciting Ultrabooks on the way. While we are one of the first, and with our current offering, we have shown that we are also one of the best. Our drives in PC plus that Yuanqing has just shared with you will further provide additional growth to us over time.
We have a very strong MIDH product portfolio lined up for this year, and our goal is to triple last year's smartphone volume and will continue to win in the China Android tablet market. We will stay focused on our cost initiative and growth opportunities, and we will continue to make investment in our core competence building, which is product innovation, branding in emerging market, and especially the MIDH group, which will ensure us to have strong growth momentum to continue. Nevertheless, we expect our margin, both gross and at operating level, will improve in quarter one, benefiting from the improved scaling of our sequential growth momentum. We have a very healthy balance sheet, and we will continue to be prudent in our cash management to create shareholders value.
We will continue to look for M&A opportunities that will enable us to accelerate our growth in high-growth markets as well as in profitability segments. With that, thank you very much, and now we can have any questions.
Thank you, Wong Wai Ming. We will now take questions from the floor. If you wish to ask questions, please raise your hand and we will pass you a microphone. To make sure all of us, including our participants on the webcast, can hear your question, 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 your questions. Now, may I invite the first questions, please?
Thank you very much. Jiong Shao from Macquarie. Two questions. First, could you talk about the current PC demand around the world? Because, as you know, Dell talked about their weak sales in Europe in particular last night. The second question is, could you talk about the channel inventory currently for you and for the industry? Thank you.
Thank you. We do see some weakness in U.S. and Western Europe enterprise business. But this partially is impacted by the macroeconomy, like the European debt. But partially because of the enterprise are waiting for Windows 8 and the better product in the second half of the year. And also the first quarter, we still had some hard disk impact issue. But we still see very strong demand in emerging markets, including China. Particularly in China. So although those big cities, the penetration rate have been very high. But in many emerging cities, thousands emerging cities, the demand is still very strong. So we still can see 10% year-on-year growth in those markets. The other emerging markets are similar to China. Like Russia. We are seeing the strong demand from Russian market. Our channel inventory is very healthy. Second question. Our channel inventory is very healthy.
We monitor that on a weekly and daily basis. We haven't seen the significant increase in this area. But I just don't know what's our competitor situation now. We really see the competition here is becoming fierce, tough. But I think we will insist on ourselves growing fast, so keep the inventory healthy. Thank you.
Yeah. Maybe I add a little bit more sort of numbers, I think in case you don't have it. I think for China, I think the growth for 2012 is 9%, but of which the emerging cities, which is pretty similar to our definition, is 12%, and mature city is 5%. And going forward, I think emerging city is really growing 17%, 18%, I think in the next two years. So China, you actually see a different picture.
The overall growth, I think is 9%, according to the IDC forecast, is 9% for 2012, 14% in 2013, and 13% in 2014. And the emerging cities in China is obviously much higher than this number.
Okay. Thank you. Next questions, please.
Firstly, gentlemen, congratulations on your strong result. I wanted to ask you about a secular trend that we're all seeing, the move from the notebook and desktop to the tablet and the smartphone. Right now your strategy is very focused on smartphone and tablet for the Chinese market, but your PC-centric business is a global business. We're seeing a very big move between PC and these mobile devices. First question, do you plan to roll out your tablet and smartphone business to be global so that as consumers and enterprises switch from PC-centric to ARM-centric, that you're going to be able to get that business? Second of all, when we look at your notebook and tablet business, right now it's more popularly priced as opposed to premium priced. Will you have a full-
Say that again.
That-
Under priced than premium priced.
You are not the most expensive, you are the average priced device for tablet and smartphone in the Chinese market. But when you approach the global market, which segment, low, medium, high, or all three will you be looking at?
Okay. Firstly, I disagree. PC market will be shrinking. It is still very decent market. We are optimistic on that market. But definitely PC need to evolve. We need to redefine the PC, particularly notebook and the desktop. You will see Lenovo will launch more and more evolved notebook and the desktop to meet the customer's requirements. For notebook, not just thinner, lighter, longer battery life, as well as always on, instant on. This kind of feature, but also you could use both keyboard and touch. In the future, I believe with Lenovo, we are lead the revolution in that area. In the desktop area, you will see the similar situation. Lenovo will lead the revolution. That will drive the decent growth in the traditional PC area.
But definitely, tablet and smartphone will be two more important market as well. We think that is Lenovo's future. We have paid a lot of attention to growing these two business. But as I said at my speech, we will focus on China first. Outside China, we do not think that now we are ready to be more aggressive, because we are not ready in the branding, in the channel, retail channel, and the telco channel. We are not ready in the ecosystem. We want to build our consumer PC business first. Leveraging that, we prepare the brand, prepare the channel, prepare the ecosystem. Definitely. Even in China, our tablet and the smartphone are not just focusing on the low-end. Actually, we have much richer, much broader product portfolio than our key competitors. They only have one models.
They have only one model, but we have multiple model to cover from premier to the low-end. Certainly outside of China, we will have the similar strategy. By the way, actually we have already started our tablet business outside China. Certainly, smartphone now is just focusing on China. Thank you.
Thank you. Next questions please.
Hi, it's. A few weeks ago you guys announced that you guys plan to make some sizable investments in your Mobile Internet Digital Home business in, I believe, Wuhan, China. Can you share with us kind of strategically how that fits into the overall MIDH strategy, how that might impact the cost structure for Lenovo in that bit?
Do you like to talk about it?
Yeah. The Wuhan project is actually, we firmly believe that the eventual success of our MIDH business, which is primary consumer, is you have to have a very efficient end-to-end process from product development all the way to assembling the product. Hence, rather than relying ODM and then you stick your brand there and then sell, I think you have to have your distinguished features that is relevant to the market as well as the capability of developing that, have the product design closely sort of geared to us or closely associated to work with the assembly process. That's the overall view of us in why we actually been investing in improving our product design capability, I think a while ago in Hefei together with Compal and now with Wuhan. I think that is really the overall sort of strategy.
Thank you. Next questions, please.
Hi, this is Mark Kong from DBS Vickers. Two questions. One, what is your target level for operating and gross margin in quarter one and going forward? Second, why do you think they are achievable? Thank you.
Well, I think unlike the many U.S. companies, we normally do not give guidance per se. I think what I can say is we definitely are very confident that in the current quarter, you are talking about quarter one, which is the current quarter, we will see improvement of both our gross margin as well as our net operating margin. In fact, I think this is the overall strategy of the group that over a period of time, we will improve our overall net operating margin. The way that we do it is obviously depending on the product mix. Again, you probably would know that I think the mix between the commercial business and the consumer business have a different margin and a different expense or different business model resulting in different E to R.
Therefore, I think the primary focus for us to improve the net operating margin. So far as quarter one is concerned, compared with quarter four, which historically is our lowest quarter within the financial year, we are very confident that we will improve the gross margin as well as the net margin. Why are we confident? I think we obviously have a very balanced business. I think Yuanqing just now showed that there may be some weakness in certain parts of the world, but we have a very balanced business. I think we have been investing in research and technology, and we actually have a series of products that roll out. Again, from an operational efficiency point of view, you can actually see the trend that we will continue to improve our operational efficiency.
I think a combination of those factors are going to be one factor that we rely upon to drive our improvement in efficiency.
Thank you.
Last quarter, there were three reasons to drag our GP margin down. The first is hard drive cost, because of the shortage. The hard drive cost went up. The second is we had the higher consumer business mix. As you know, outside of China, our consumer business is still in the stage of developing the business. The margin with those key retailers, like Best Buy, are still very low. That dragged our GP margin low. The third is because we absorbed the two companies, NEC and Medion. Their margin is lower than Lenovo's traditional average. But over time, as Wai Ming just said, we are very confident. We can keep improving our GP margin because the first is we have invested a lot on the branding, on the marketing, as well as on the R&D.
We believe that can help us to drive the GP margin up. The second one is our consumer business as well as our mobile internet business. We are reaching a certain scale. With that scale, I believe that can help us to improve the margin. The similar situation will happen in the emerging markets. As you know, we still lose money in emerging markets, but with improved market share. Particularly for those countries which have reached a double-digit market share. We believe that they will shift their focus to profitability. That's our confidence. Over time, we will improve our GP margin.
Okay. Thank you. Next questions, please.
This is Alberto Moel from Sanford Bernstein. A couple of questions. On your China smartphone shipments and your China tablet shipments, do you have some specific unit numbers for the quarter, if you could give that? Second, a more difficult question is, what is your timeline for profitability for the emerging markets in the MIDH business? Or at least breakeven.
Should I give them numbers?
Yeah.
Okay. Well, I think for the smartphone, I think for the quarter four is around 2.4 million units.
Smartphone?
Smartphone.
All the phones.
Smartphones, yeah. And well, as you know, we actually have both the feature phone and smartphone, but obviously smartphone growing much faster. I think if you ask, the smartphone is about 2.4, on a total mobile phone is about 4.5. On a tablet on a worldwide basis, I think although we sell a lot of those in China, we sell a little bit outside China, is around 480,000 units.
Yeah.
That drove our market share up.
Our smartphone market share in China to close 10%. This is historically high for Lenovo. Now we are the number four smartphone player in China. We are the number four tablet player in the worldwide as well, compare with the number eight one year ago. It's a big improvement. Regarding your question about when we can make money in emerging markets, as well as MIDH. This is our belief. If you want to make money, you must have enough scale. For emerging markets, our belief is, when we reach the double-digit market share, 10% market share, that's time for us to make money. Now we have seven point something overall. But for the individual market, like India, Russia, we have already reached the double-digit shares. You can see the result. We can make money from those markets.
India, we have become the number one in the total market. We make money. In Russia, we have a rough 10% market share, so we can make money. This quarter, we believe those big emerging markets can contribute more to Lenovo's performance. MIDH is a similar situation. If we cannot have enough scale, it is hard to make money. We believe, in smartphone area, we are close to the break-even point.
Okay. Thank you.
I may actually draw your attention if you really look at page five, I think, of numbers. If you really look at the REM, I think to answer your question, I think indirectly, you can actually see that we actually hold more or less flat our operating loss. But on the other hand, we actually have been increasing nearly 40% year-to-year revenue. We can actually see that, I think what it means by scaling, because obviously, I think not all the markets that we have been set, I think we are selling our product as a negative gross margin. I think we obviously, in markets where we are very small, we begin to invest and expand. I think pricing is obviously one tool for us to grow market share.
But again, as I said, if you really look at the year-to-year increase and the operating loss basically stayed flat year-t o- year. But business really literally grew by 50%. I just add one more sort of financial, I think so that in case you are interested in putting your model, our smartphone is actually at a gross profit. I think obviously at the moment we are still investing, but the pricing of the product is actually as a positive gross margin.
Okay. Thank you. Due to time constraint, we now have one more question. Last question, please.
What percentage of your units do you expect to be Ultrabooks by the second half of this year? Secondly is, what impact will that have on your notebook ASP?
Notebook ASP?
ASP.
Currently, Ultrabook only covers the premium price band. It is very hard to gain high shares of the notebook. I believe in the second half, you will see more mainstream Ultrabook. That will drive to higher mix of the total notebook market. We believe 30% shares will be reasonable when we exit this year. What is next?
Average selling price.
Yes. Ultrabooks, so that could help improving a little bit on the ASP, but not significantly.
Okay. Thank you. This is the end of our Q&A section. Before the end of today's presentation, we would like to share with you a highlight video featuring Lenovo's recent marketing campaign. Please enjoy. We are Lenovo, for those who do. Once again, thank you for joining us today. We have prepared some refreshments at the back. Please help yourself. Hope to see you soon. Thank you.