Good afternoon, ladies and gentlemen. Welcome to Lenovo fiscal year 2010 and 2011 annual results presentation. I would also like to welcome our participants on the live webcast. Before we begin, let me introduce our senior management on stage. Sitting in the middle is Lenovo's Chairman, Mr. Liu Chuanzhi. Next to him, our Chief Executive Officer, Mr. Yang Yuanqing. Next to him is our Chief Operating Officer, Mr. Rory Read. And on the other side, we have our Chief Financial Officer, Mr. Wong Wai Ming. I'd like to turn the presentation over to Mr. Yuanqing now. He is going to give us his remarks on the group in the past fiscal year. Yuanqing, please.
Good evening, everybody. Thank you for joining us. This has been a fantastic year for Lenovo. Let's get started. We had a very strong fourth quarter to close outstanding fiscal year. Lenovo was the fastest-growing major PC company for the sixth straight quarter. We also had a strong improvement in our gross profit margin of almost two points year on year. For the year, Lenovo grew 4x the market rate, and our market share reached an all-time high of 10.2%. For the first time, we have surpassed $20 billion in revenue, reached $21 billion, and our PTI doubled to $358 million. We also achieved a historic low E/R ratio at just over 9%, even after substantial investments in branding and in innovation. If you look deeper, the story is even better. For the year, Lenovo was number one in global emerging markets, including China.
We are number two in global commercial notebooks and in the all-in-one desktop category. We have been number one in worldwide relationship notebook sales for two straight quarters. That's very fruitful results. Why did we have such a record-setting year? Two key reasons. We had the right strategy of protect and attack, and a strong execution worldwide. First, our strategy. In both China and a mature relationship, we want to protect our leadership position and our profit pool. In China, we achieved this by increasing profitability by more than 14%. We did this while growing faster than the market in all four quarters and reaching a record market share of almost 30%. In addition, our Lenovo mobile business unit volume grew more than twice as fast as the market. And we also launched new smartphone and tablet products in China.
So far, we have got very positive feedback. In mature markets, we increased segmented operating profit by $143 million year on year. Thanks mainly to our relationship business and also SMB sales. By protecting our profit pool, we also achieved our all-time high market share of 5.5% for the year, making our protect battle mode like attack. We outgrew the market every quarter in relationship and in SMB sales. Our transactional business actually grew 31 points more than the market for the year. In emerging markets, our strategy is to grow market share rapidly. In fact, in emerging markets, we are now number one in worldwide market share, including China. We grew nearly 3x faster than the market and increased our market share to more than 6% outside of China. In fact, we gained share across all emerging markets.
Like in India, we gained 2.2 points year-on-year, and in Russia, 3.5 points year-on-year. Our protect and attack strategy has guided us to strong growth and balanced performance across the world. This year, we will continue to execute our strategy, which is protecting China and mature relationships and attacking emerging markets and mature transactional. At the same time, we will also focus on some other key areas in our strategy. In China, we want to expand further into servers and workstations. In mature relationship, we will leverage the ongoing corporate replacement cycle and capitalize on synergies with NEC to drive more growth and profit. In emerging markets, we will improve profitability in countries where we have already reached double-digit market share. In mature transactional, we are committed to profitable growth. Our past investment in SMB are now paying off as we grow profitably.
We are also interested in the consumer space. This is certainly a fiercely competitive market, and it will be even more challenging for newcomers. We have to think in a different way to enter this space. In addition to our traditional PC business, we also will focus on the mobile internet space. We have formed the new growth Mobile Internet and Digital Home business unit to lead the effort. To attack this space, we will fully leverage our strengths. Therefore, China and the global commercial markets are our initial focus areas. In China, we have already launched the LePhone and LePad. This summer, we will launch both consumer and commercial tablet products in America and other selected countries. To continue our strong growth, we will make strategic investments in building our foundation and core competitiveness. First, we will continue to invest in innovation.
We will center on customer experience and go deeper in research on core component technology. We also will continue building our own device plus service end-to-end platform and ecosystem, particularly in China. Second, we will continue building a global brand. Our brand must become our strength, and we will improve our profitability over time. Third, we will continue to refine our business model. We will continue to develop our in-house good backend system . We will continue to develop our in-house service capabilities and enhance our strategic IT deployment. More importantly, we will further strengthen our transactional capability, which includes identifying opportunity, precise planning, and timely adjustment. This will help develop even higher efficiency from end to end. This investment will enhance our core competitiveness for future growth. Our strategy and execution worked very well last year, but we will not rest.
In the year ahead, we remain optimistic about the PC market as well as the mobile internet space. We are confident that we have the right strategy, and with strong execution, we will continue to achieve sustainable growth. Thank you. I now turn to Wai Ming, our CFO.
Good evening. Thank you, Yuanqing. I will take you through very briefly Lenovo financials and the operational performance for quarter four and our full fiscal year 2011. Next chart, please. Yuanqing had just shared with you that our fiscal year 2011 performance, which has been very fantastic for us. Quarter four is another solid quarter for us. We continue to outperform the worldwide PC market across the board by geography, by product, and customer segments. Our PC shipments growth in quarter four was up 16% against the worldwide PC market drop of 1.1% year-to-year. This helped drive our market share for quarter four up 1.5 points to 9.9%, and making our market share for the fiscal year increase 1.7 points to 10.2%.
China continued to regain its growth momentum, and we continued to extend our leadership in China to record high market share ever achieved in quarter four. With corporate refreshment cycle continuing its momentum, we continue to leverage this cycle to expand our growth in the mature market, and this helped to improve our margin as well. We grew at 7% in the mature market against the market decline of 12%. Indeed, we achieved an all-time high market share of 5.7% in the mature markets with improved margins. Meanwhile, our share growth strategy in emerging markets was also working well. We grew at over 2x the market growth, and we continued to gain share in the region to 5.7% with reduced losses. Our strong product portfolio and services help us to grow faster than the market in both the customer as well as product segments.
As a result, our share in commercial market grew by 1.6 points to 13.8%, and in the case of consumer market, we grew at 1.1 point to 6.7%. Next chart, please. In quarter four, we grew 13% year-to-year in revenue to approximately $4.9 billion. PC sales were up 11% year-to-year to $4.7 billion. Revenue from the mobile business at about $187 million, up 43% year-to-year. Gross profit was about $600 million, up 34% year-to-year, and gross profit margin expanded to 12.3%. The strong margin was due to effective margin management, increased Think product mix, and favorable key component prices. The strong margin improvement allow us to continue our investment in product innovation, branding, and marketing for new PC, as well as MIDH products to drive our future growth.
As a result, operating expenses, including our investments, increased to $531 million, and the E/R ratio was up 10.9%. While our quarter four is a typical slow season with less scaling benefit, this is also one of the reasons that our E/R ratio was up quarter-by-quarter. Nevertheless, we expect the ratio is going to trend down in the next few quarters, as we enjoy better scaling benefit from the increased volume in the next few quarters. Operating profit in quarter four was $69 million, up 46% year-to-year. We recorded a non-operating expense of $10 million that relates to net financing cost. Pre-tax income, $60 million, 3x against $20 million pre-tax income we recorded last year. We reported a one-off item and restructuring cost of $20 million quarter four last year, which related to redundancy costs incurred primarily in mature market.
Profit attributable to equity holders is $42 million, up 2.2x year-to-year. For the full year, we finished the year with strong sales revenue growth. Revenue was up 30% to $21.6 billion. Gross profit up 32% to approximately $2.4 billion, and GP margin expanded slightly to 10.9% from 10.8% last year. We expanded our profit and successfully managed our expenses, while we also invested to drive our long-term competitiveness. E/R ratio hit a recent record low level at 9.2%. Pre-tax income was $358 million, up 103% compared to last year. Please note that we recorded a $68 million one-off item and restructuring cost last year. That one-off item largely is the warranty provision of certain components and parts not reimbursable by suppliers. At the same time last year, we also recorded a one-off $83 million gain related to disposal of some listed investments.
Total pre-tax in fiscal year 2010 was $176 million. Profit attributable to equity holders for the full year is $273 million, up 111% year-to-year. Basic EPS is 0.43 US cents in quarter four, and 2.84 US cents for the full year. A final dividend of Hong Kong 5 cents per share is recommended by the board this morning. Together with the interim dividend paid of 2.6 Hong Kong cents per share, our dividends for the fiscal year will amount to a total of 7.6 Hong Kong cents per share. Next charts, please. Looking at the balance sheet, our strong operating performance has also helped our balance sheet and cash flow. Our balance sheet as of March 31st remains very strong. Non-current asset was about $2.8 billion, similar to that of last year.
Current asset approximately $8 billion, and the increase compared to last year was due to higher bank deposits and the improved cash flow. Increase in trade, notes, and other receivable was in line with our increase in business. Current liabilities was at around $8 billion, largely due to increase in account payable, again, which is in line with our increase of our business. Overall, the balance sheet remains very strong, despite quarter four typically is our slow season. We had net current liabilities of around $96 million as of March 31st 2011. The non-current liabilities were around $838 million. Next charts, please. Working capital. Our cash flow continued to be very healthy, and cash conversion cycle further improved in quarter four. Our net cash reserve increased to $2.7 billion against $1.9 billion last year, largely due to increase in sales revenue.
While our business model operates on a negative cash conversion cycle, this mean in this quarter four, we need to settle the account payable in quarter three, which is much relatively higher, and then we receive the revenue in quarter four, which is smaller. That's the reason why we are showing Q to Q drop in cash. We continue to do well in managing our working capital. Our cash conversion cycle in quarter four continued to improve to negative 33 days, a further improvement of five days compared to the same period last year. Inventory days remained the same at 18 days in quarter four. While days receivable increased by two days, 32 days, despite increase in channel sales in overseas market, especially emerging market, and increase in ocean shipment. Days payable improved by seven days to 83 days, largely due to increase in our outsourcing to ODMs.
The cash conversion cycle for the full year was - 28 days compared to the - 30 days last year. Reason for the changes is inventory days, accounts receivable and payables are similar to that as I explained in quarter four. Let me turn to quarter four geographic performance. This chart summarizes the performance by geography for quarter four. We have excluded restructuring charges and one-off items from the operating profit and margins so that you can better evaluate our performance. China. China market has regained its momentum in quarter four, driven primarily by growth in the emerging cities in the country. We continue to perform well in China, with unit shipment growth as approximately 16% year-to-year, more than 2x the market growth. This resulted in our further increase of our share in the market.
According to the preliminary industry estimate, our share for the fiscal year hit a record high of 29.5%. PC sales increased 7% year-to-year to approximately $2 billion. Strong growth in emerging cities and desktop PC are the main driver for the strong growth in China, but it also resulted a lower ASP, which is average selling price. Nevertheless, our gross margin remains stable. The PC operating margins stay at about 5%, drop slightly year-to-year due to increased R&D expenses as well as selling expenses. We are very confident that the PC margin will remain relatively stable. The mobile business in China continued to be on track. Unit shipment growth was strong at 27.3% year-to-year, and I will cover this in more details a little later. Our 3G smartphone, which is the LePhone business, is progressing well.
We are still making investment in product development, marketing, and new product promotion to drive future growth. We will also make investment in the launch of our first tablet product, LePad, in March this year. As a result, our overall operating margin in China dropped to 4% and we expect our investments in the mobile internet business will help to drive growth in China over time. Looking at emerging markets. Our expansion in emerging markets continue to show good momentum in quarter four across all geographies, products, and customer segments. Unit shipments were up 31.5% year-to-year. Market share further expanded to 5.7% and up 0.8 point year-to-year. Sales were up 14.2% year-to-year to $850 million, and operating loss narrowed to $10 million, both quarter-to-quarter and year-to-year. And we further improved our operating efficiency.
We are particularly pleased to see that share gains in countries like India up 2.8 points to 10%, Russia, which is primary Russia, up 3.5%- 8.9%, ASEAN up 1.3 points to 6.9%, were either profitable or break even, with the objective to achieving a stronger and more prominent market position with sustainable profitability. We continue to invest in branding to drive our volume growth and extend our market share to reach 10% in more key countries. Looking at the mature market, we continue to record good growth in the mature markets. Unit shipments up 7% year-to-year against the market drop of 12%, boosted by the strong momentum in the commercial business as corporate continue to refresh their machines. Market share, as a result, was up one point to 5.7%, and this is the record high market share we ever achieved.
In addition, we also maintain our position as the number two commercial notebook manufacturer and have become the number one relationship notebook player in the world. North America remained a key market in the region. Unit shipments were up 25.4% and also achieved a record high market share of 5.8%. We are profitable in all countries in the mature region except for Western Europe. Performance in Western Europe was, however, affected by the weakened consumer sentiment and a relatively small presence in some distribution channels. We will endeavor to take actions to improve our consumer business with an objective to improve the overall performance and profitability in Western Europe. Sales were up 13.3% to approximately $1.8 billion. Operating profit improved to $36 million from a loss of $6 million a year ago, and operating margin also improved to 1.9% for the quarter.
With the continuing improvement of our commercial business in the region, we expect that profitability in this region will continue to improve. Next chart, please. Looking at by product. From the product perspective, the desktop business continued to perform well. Unit shipments and sales in our desktop were up 17% and 13% year-to-year respectively. Our market share in worldwide desktop market increased 1.8 points to 10.2%. Our all-in-one product and SMB-targeted desktop continued to see good growth momentum and we were number two all-in-one producer worldwide in the fiscal year. The all-in-one category has doubled in shipments and it accounted for approximately 39% of our worldwide consumer desktop product sales in quarter four. Notebook continued to demonstrate good growth momentum through our winning product portfolio. Unit shipments and sales were up 15% and 12% year-to-year respectively.
Strong performance in the commercial business helped offset the pressure on the consumer business, and the increased Think- branded product mix resulted in the higher increase in sales. Our worldwide market share increased 1.2 points to 9.7 points, and we have become the number one relationship notebook player in the world. During quarter four, we introduced a new wave of ThinkPad Edge products for SMB and the next generation of ultraportable business laptops, further enhancing our notebook portfolio. Finally, Mobile products also showed very strong growth in quarter four. Unit shipments were up 27% year-to-year. Our feature phone business continued to show strong shipment growth at 24% year-to-year, and we remained the largest domestic mobile handset brand in China, with market share up by around 1.5 points year-to-year. Our 3G smartphone, which is LePhone unit shipment, was below 100,000 units in quarter four, largely due to a slower seasonality.
We continue to work closely with the telco operators in China to broaden our distribution coverage in China and enrich our app store platform, which is called LeStore, to enhance user experience. Yuanqing just shared with you our newly formed organization, MIDH Group, which will coordinate the overall mobile internet initiative to drive future growth. Before I end my presentation, I want to give you some color on the market outlook. Looking ahead, we are optimistic of the PC market and the mobile internet space. China PC market growth will likely to continue to regain momentum in the coming quarters on improving market sentiment. The corporate PC refresh cycle will continue its momentum, and we will continue to leverage this cycle to grow profitably and gain share for the group. Similarly, the strong growth momentum in emerging markets that we saw last year, will likely to continue.
We will continue our solid execution of our protect and attack strategy, which will give us a balanced performance to further consistently expand the business scale and improving our margins. We will stay focused on the cost initiative and growth opportunity. We will continue to invest in our core competence building, product innovation, and branding, especially the new MIDH Group, to drive our future growth. The new MIDH Group will coordinate our initiative to drive growth in the mobile internet business, and we will continue to launch new products in smartphones and tablets. Even with this investment, we expect our E/R ratio to improve in the next few quarters due to better scaling benefit arising from our increase in volume. We have a very healthy balance sheet, and we will continue to be prudent in managing our cash to create shareholders value.
As well as we will also look for M&A opportunities to accelerate our growth. In the meantime, we will focus on the smooth integration of our joint venture with NEC after we close the transaction at the end of June. We are very confident that with our well-defined strategy and action plan in place, Lenovo will continue to improve its performance and profitability in the next few quarters. Now let me turn to Chairman Liu.
Dear friends, good evening. By this quarter, it has been more than two years since the company adjusted the top leadership. During the first year following the change, we turned around the business. In the second year, our profit grew substantially against the previous year. Now we are enjoying a very strong momentum. For six consecutive quarters, Lenovo has been the fastest-growing one among all of the major PC makers of the world. Our North America and European markets have become very profitable, and our emerging markets have grown market share substantially while staying profitable. Our business is very balanced in all geographies, all business units, and all product lines. What is most encouraging is that our Think- brand product line has become the key driver of our profit, and this result exactly fulfills our original intention of acquiring IBM's PC business.
All of these results I have mentioned are not enough to prove that our acquisition of IBM's PCD is a success. The most effective proof point is the top leadership team, who are very united and are working with very good rapport. The team is very determined about goals and works as a good example for the whole staff. In addition, across the company, a positive culture has been built. For Chinese employees, as well as employees across the world, their confidence and aspirational spirit are getting stronger and stronger. Given this foundation, the strategies developed by the management will certainly be executed well and with determination. In virtually every board meeting, the directors were delighted by the fact that the management overachieved or sometimes well surpassed what they committed. It has been six years since Lenovo's acquisition of IBM PCD.
We have undergone various hardships, testing, and quite a long period of adaptation and integration. Now we can say proudly and surely that this large-scale M&A has been a success. Currently, Lenovo is facing new significant challenges. That is the new demands by customers for products and services with the emergence of the mobile internet. Facing such challenges, the board and management of Lenovo are calm, realistic, and focused in addressing them. On the other hand, we are taking the challenge as an opportunity with an enterprising and upbeat spirit. Over the years since its establishment, especially through the M&A of IBM PCD, Lenovo has accumulated certain R&D capabilities and capital. The board has approved the management's initiative of allocating quite a large proportion of profits of each quarter and each year to invest significantly in brand building and R&D.
Given this foundation, the management will analyze the industry landscape and trends. They would start from a conceptual and a macro perspective, then move to micro and detailed level. Their analysis and exploration enable them to craft a strategy with phases to achieve technology innovation and business model innovation. We just established the MIDH business unit, led by an executive with proven track record. Starting from this year, we will take China as an arena to make breakthroughs by rolling out a whole new series of products, including smartphones, tablets, Smart TV, and et cetera. In this new field, we will learn and adjust continuously. Our strong historical track record and consistent style of doing what we say will give our shareholders, customers confidence in us. Over time, we will prove to them that we can deliver.
Lenovo's vision is to be an enduring, trusted technology business that is well respected across the world. We are marching towards our preset goals step by step with perseverance and determination. I firmly believe that Lenovo's future would be very bright. Thank you.
Thank you, Mr. Liu, for your remarks, and Yuanqing and Wai Ming for their presentations. We will take questions from the floor now. 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 your questions. Now, may I have the first questions, please.
Hi. It's a bit loud. This is Arthur Hsieh from UBS. Congratulations on the great results. Two questions. First is that in this previous quarter, the March quarter, Western Europe seemed to have a little bit loss. I wonder how much of that was because of your competitors stopped the channels and caused your abnormal performance, or is that really a market demand slowdown? What's your assessment of the market demand right now? That's the first question.
Well, from a standpoint of our business, our strengths are well-aligned to where the markets are strong. We've been winning in the commercial segment as well as in China across our key segments. In Western Europe, what we saw is some macroeconomic issues around the Eurozone. Our business performed very well in that space and in front of that, and actually took share. But because of competition's long position in inventory, this put pressure in the marketplace. There was a disproportional amount of inventory in the PC segment across Western Europe. We believe this market will continue to slowly improve as its macroeconomic environment improves. But our business has continued to perform reasonably well in the front of those kinds of pressure. Actually, as we've seen, our commercial business is now number one in large enterprise and public sector, and we've seen very strong performance across that.
That's why we're investing today to expand a global campaign around "For Those Who Do," a marketing campaign to lift our brand presence, to create a deeper awareness and consideration for all our product segments in Western Europe and across the emerging markets. In Western Europe, I think that the inventory position from our competition was a factor as well as the macroeconomic environment. But again, we took share, we outpaced the market. If you reflect on Yuanqing's comment about mature markets, in mature markets, we hit our all-time high for market share and had some of our best profit driven by our Think business. Our Think business in both SMB, small and medium business, as well as commercial. This Think business is where our business is strong, and we're seeing strong market performance.
Thank you. Next question is about this mobile internet-related investment. If my calculation is correct, I think in the past two quarters, you spent around $19 million, like $22 million each quarter for this related investment. Should we look at this number as a normalized run rate into the future, or will you also start to spend this kind of a marketing related dollar and R&D in the other regions as you roll out your mobile internet products into other regions?
Well, just as our strengths are aligned to where the market is strong, our investments are clearly in the areas where the market is growing. You may have noticed that we've seen a step-by-step, quarter-by-quarter improvement in our operating margins and our execution across the planet. I didn't mention it earlier, but we saw almost a 500,000 units improvement in our inventory position over the last quarter, where many of our competitors have seen their inventory position erode. We're well-positioned for velocity and momentum going forward. I think that's a key factor in terms of the business. Did you want to make any additional comments?
No. What are the numbers you mentioned? It's $19 million.
The investment about MIDH?
Yeah.
Well, yeah, he was talking about $19 million investment.
Why did you move from the previous quarter?
From a standpoint of investment, as our margins improve quarter-on-quarter, as they've gotten better and better, as Yuanqing and Chairman Liu commented in the presentation, we are taking investments around that global market campaign to build our global brand, as well as to invest in those key business areas where the market is growing. The mobile internet is a key segment. We must lead and gain market share to a leadership position in China. We've leveraged the ecosystem we've begun to build with the LePhone launch last year, and now with LePad in March, we've continued to expand on that. You'll see us continue to funnel off a portion of the investment each quarter to fuel that growth in this key segment.
We will continue to invest in the mobile internet area in China, not just in marketing, but also in R&D. In terms of marketing investment, why we need to invest so much money? Because although Lenovo has a very strong brand in China, our brand is in PC side. We need to build a stronger brand in the phone area, in the mobile internet area. We should build the leadership position in this area, in terms of the brand. That's why certainly we need to invest more on R&D area. Now, I think we have the constraint on the R&D as a product development, because we don't have enough resources to develop multiple product lines. We will further invest in this area to ensure we will have more attractive, more competitive products in the market.
Actually, as you see our revenues continue to grow and our market share position expand, I would expect our investment to continue to expand. On a percentage basis, it will go down, but in total dollars, it will increase.
Thank you.
I just want to add one point. I think the way that you try to read the numbers, probably the difference between the segment profit between China and China PC, that is definitely not the right logic of this is the investment we invest in our MIDH business. I think it's more substantial. This is part of our key growth in the future. We actually invested a lot more than that. The way that you look at the numbers, I think the logic is not correct because in the non-PC business, there are mobile handset businesses, which is very profitable.
Thank you. Next questions, please.
Good evening. I'm [Sha Xin]. I'm from Macquarie. Two questions. First of all, I would like to ask you, previously there was this earthquake in Japan. How does that affect the supply situation of components? From now on, in the coming months, what would be the impact on the price of components? That's the first question.
From Rory Read on the operational side. The March 11th earthquake was a tragic event in Japan. Fortunately, in the quarter that we just completed, all of the parts were already in the supply chain structure, so no impact in terms of supply chain activities. Over the last two or three weeks of March, we saw some impacts in terms of, not the core main component, but in the second-tier components like disk controllers, smaller chip controller components. We saw some potential gap within the next quarter supply.
Our product teams and our supply chain have worked very hard in the current quarter. They've closed the supply chain, the supply plan to support our objectives for the quarter. We do not see any significant impact in terms of the supply chain and our supply plan to support our objectives for the quarter, in Japan or anywhere around the world. In terms of pricing, what we did see was some tightness of product components in the first six weeks with the quarter. We saw that, and now those component pricing had some small increases, but this is marginal and not impacting our overall growth and objectives. We've seen a very healthy business in our Japan business. It's performed well, and our global supply chain is well-positioned and not feeling any material impact from the earthquake from March 11th.
Okay. Thank you. My second question is about the macro Chinese economic situation. Lately, we're all talking about the economy slowing down. Are you worried about any hard landing? PMI hasn't been very positive. Can you talk about that? What do you see from your perspective? Is it going to slow down? Any significant signs?
From our perspective, I think things are looking very positive, and we're very confident about the Chinese economy, especially for the PC sector. Why is that? Right now, many commodities in China, well, they're already looking at the biggest market, but for PC or computers, we are only the second largest. The U.S. is still the biggest market. We believe in the coming two years, we are going to grow into the biggest market.
Concerning PC infiltration rate compared to the United States, there is still a big gap, especially since China is part of the mature market, also part of the emerging market. For the mature market part, it is already saturated. For medium to small-sized cities, there is still great potential for growth. We will pay close attention to this area. Concerning the macroeconomic situation, we're very confident. We believe there will be high-speed development and growth. Although there are some control measures on the property sector, the impact will be very mild. Chairman Liu? In the shorter term, I think there will be some policies affecting every sector. For the longer term, there is plenty of room to sustain high-speed development of the Chinese economy. For example, the Chinese government has announced clearly that consumption has to be the pulling factor for economic growth.
Relevant measures have already been implemented. They have been chanting the slogan for quite some time, and we now feel that actual measures have been implemented. China is going to become the fastest developing market. Chinese and international enterprises will enjoy great opportunities to enter the Chinese market. If we do this well, the exchange rate of renminbi can be resolved, so that the amount of export will not greatly exceed the amount of import. Many problems can be resolved from this angle. Why is there great room for development? We have more than 200 million population in the villages. Through urbanization, they will have great demand. In the past, the land in villages could not be transferred, and now there are new policies that land can be transferred, and that means a lot of labor will be released. They will have great purchasing power.
I know the government has some concepts in mind. Last year, they were making preparation for the 12th Five-Year Plan, and some new leaders were coming on board. For medium to maybe in two years' time, I think the situation will be very positive. For the shorter term, it's hard to say because there will be different fluctuations and factors.
Also comment concerning the PC market space in China. Quarter to quarter, we saw the growth rate significantly improve and increase, significantly faster than the rest of the world. The PC market, as Yuanqing mentioned, is quite strong. Our performance came in at almost 16% versus a market of less than 8%, 2x faster. For the full year, we improved our market share to 29.5%, pointing all to a relatively strong PC market in China.
Thank you. Next questions, please.
Hi. I'm [Jean-Louis] from Société Générale . I just want to ask you a couple of questions. First one is about your M&A strategy. Some of your competitors are out there buying software companies, cloud computing companies, that type of thing. Now that you've tied up with NEC, could you talk a little bit about your future strategy for M&A?
The future strategy around M&A?
You want to go?
Please.
Well, I think we obviously look at the M&A opportunities, I think, not only in the PC area, but also the adjacent area that we obviously can offer a portfolio of services. I think this also includes any technology or other adjacent areas. I think the key for us looking at M&A is not really just M&A alone. I think we really have to look at what value do we want to bring in or to acquire in order to add to our existing capabilities so that we can have a bigger win in the market. I think if you look at our balance sheet, which is relatively strong, and carries very little debt, I think we have a capability of doing many things. But we don't necessarily just zoom on one area. I think when there is an opportunity.
I think the other thing, the key thing is we obviously, if you look at our core business, which is growing very handsomely over the last couple of quarters, and we continue to see that trend going. What I really want to say is we do not necessarily rely on M&A to fund our growth. As and when there are good opportunities which actually can add value, I think in different aspects of our existing portfolio of businesses, I think we will consider. Our balance sheet can afford us to do that, and we will know that we will do that.
Two key areas that we look at are around increasing scale, share, increasing our scale of our business, because as we have driven to 10.2% market share, one of the reasons that we are getting a favorable cost environment is because of relevance to the suppliers. That is really driving that. W e look at it around the protect and attack strategy to really add scale. The second part of the acquisition areas that we target are around the ideas of the mobile internet and expanding into those key strategic areas.
Those that give us the balance and allow us to expand in that space. Remember, one of the key things to the success of the IBM transition is the fact that we have implemented a very consistent culture, what we call the Lenovo way. A culture around ownership, where each of us act as owners, putting the company first, and around commitment.
We do what we say, and we own what we do. This culture binds us, all 27,000 Lenovo employees across the planet. This we see in terms of the joint venture with NEC, where we see a strong culture around innovation and time to market. Our ability to leverage the Lenovo way to integrate companies and acquisitions and joint ventures is very powerful. It gives us a competitive advantage to continue to scan the landscape for those opportunities that present themselves, either strategically or around scale. Both of those. The Lenovo way, and that culture, has been a key differentiator in the acquisition, I think a competitive advantage for Lenovo.
Thank you.
I think t o add one point. Absolutely. As Rory said, we will focus on two areas to have the acquisition, scale and the strategy. Even for scale, we would not just buy volume. We will buy the capability. We need to understand where is our strengths area, where is our weakness area. If we buy some company that could help us to strengthen our weakness area, to lift us to the next stage.
Thank you. Do you just have?
I think he had one more question.
Sorry. I will be very quick. In terms of your tablets in China, can you give us some sort of color of how sales have been so far? Also, perhaps targets for this year?
In terms of China.
Yeah, we are still very optimistic on China PC market and on our target. I believe at least for this year, we can keep the double-digit growth in that market.
PCs.
In PC area. Certainly, mobile internet area, we have even more ambitious targets. Probably we want to double our smartphone sales. We want to gain 20% of the tablet market.
The early feedback on the LePad launch interest has been quite strong. I think one of the differentiating capabilities that we've introduced is the tailored ecosystem for China. That experience that's created on the Lenovo LePad is unique to the Chinese consumer, to the customer here. Many of the other products that are being introduced in China have fundamental weaknesses in their capability to fulfill the interest and experience for the China consumer.
I think what we have done with the launch of LePhone last year was to build that initial ecosystem. Now, with LePad, we begin to build the convergence around smartphone, tablet, and then ultimately PCs. It gives us a competitive advantage that sets that objective to go after 20% market share, which is, in our opinion, quite reasonable given that we have 29.5% market share in the PC segment.
As a user of LePad, I can say that it is a great product, especially for Chinese people, because it is all in Chinese. I learned to play this war game on LePad, which is very popular in China. But if I want to do the same on iPad, it is very difficult because many commands are in English, and it is hard for me to understand. If it is all in Chinese, it is very convenient. I play until 1:00 A.M. every night. LePad situation right now is very positive. I wanted to buy 1,000 for my friends, but I could never get them. I am sure they are selling very well. We need to step up production capability. There are some small defects. For example, the charger is too big. In the new version, I am sure it is going to look wonderful.
Thank you. We can only have one more question. May I have the last question, please?
That is good. Hi, this is Roxy Wong from Mirae Asset Securities. Since you are including the NEC operation in your financials in the upcoming quarter, can you give us some idea on how we should be looking at your operating expense, say in the June quarter and the September quarter? How should we be looking at the margin? How would that affect your margin?
Well, I think the NEC joint venture will start on July 1st. Obviously, they are number one market share. I think in the initial stage, I think as a guidance, I think that you really should look at, I think we would probably be hitting a level which is commensurate with our current overall cost structure. Obviously, that is the bottom line. We expect that we will generate significant value out of that. But as you know, any business combinations, I think will take time, and we are very sure that we will improve from there. But I think as a guideline, that will be commensurate with our existing operating cost structure.
In terms of margin. We are very happy. Last quarter, we improved our GP margin by 2 points year-on-year. This is our management's long-term commitment to our shareholders. We will keep improving our GP margin. Actually, I think we can improve GP margin. The following couple of areas. The first is good implementation of our strategy. Now you know we have the protect and attack strategy. Protect certainly means we will protect our profit pool. But attack means we need to attack the market share to focus on growth first.
That means probably we will invest something in those markets. We have to sacrifice the margin in those areas. But we have given the clear guidance to our team. Once certain markets, they can reach the double-digit market share. They should shift their focus from growth to profitability.
We want to have the profitable growth in those markets. I think with the better implementation of the strategy, step by step, we can improve our GP margin. The second point is we should further invest in the innovation. We strongly believe the better product, the better technology, the better innovation can help us to improve the GP margin. Actually, over the past couple of quarters, we improved our GP margin. Partially it's because our investment on R&D in the past. Like recently, we just launched our ThinkPad X1. I think it's a perfect product. Many multinational media give us a very high, how to say, appreciation.
Assessment.
Assessment. Review. Yeah. Very positive review. We will continue to do innovation in our product and the technology. Certainly, we also will refine our business model, to improve the end-to-end efficiency. I believe that would help us to improve our margin as well. We have a plan to improve our warranty service, cost.
E/R.
E/R ratio. I believe that could help us to improve the margin. We will consider how to improve the manufacturing logistics efficiency. I believe those actions will help us to improve margin as well.
What we've seen, if you go look back, and we've talked about it several times over the last six quarters, we said we'd step by step move that margin forward on a step-by-step basis, moving it up. One other area where we'll continue to invest, in addition to innovation, is in marketing, building our brand on a worldwide basis. As we drive for double-digit share in each country, we must continue to expand our brand awareness and product consideration. This will lift margin. As we've seen our results continuously improve quarter on quarter, we're using those dollars, some of those dollars, to make investments in the product areas that you see the great products out there, but also in building the brand.
We've launched a global campaign we've called For Those Who Do, and it's the idea that we create the technology and the solutions for the doers on the planet, the people who make things happen, the people who are going to create the next rocket ship to space or the next great literary novel. We're creating that technology. That'll increase awareness and lift margin as we move step by step, quarter on quarter, over a sustained period of time. Thank you.