Earnings Call: Q3 2016

Feb 3, 2016

Good morning. Good afternoon. Welcome to Lenovo's Q3 result webcast. This is Gary Ng, VP in investor relations at Lenovo. Before we start, let me introduce our management team with us today. We have our Chairman and CEO, Mr. Yuanqing, our CFO, Mr. Wong Wai Ming, our COO of our PC Group and Enterprise Business Group, Gerry Smith. We will first start with our management presentation. After that, we will take your questions. Now, let me turn over to Yuanqing. Hello, everyone, and happy New Year. For those of you celebrating Chinese New Year, I wish you a happy and a prosperous year of the monkey. A year I believe will be full of energy and harvest for Lenovo. Last quarter, although Lenovo, just like everyone else in our industry, was impacted by global macroeconomic slowdown, currency fluctuations, and the PC market decline, and our revenue declined year-on-year. But the decisive actions we quickly took in the second quarter enabled us to beat expectations on profit. We delivered record high pre-tax income of $397 million, up 14% year-on-year excluding M&A accounting charges. Our net income was $300 million, up 19% year-on-year. This was driven by solid performance by all three of our growth pillars. Definitely, the most exciting thing last quarter was that our mobile business reached operational breakeven. This means we delivered on our commitment to turn this business around within four to six quarters after our acquisition of Motorola. And we improved the pre-tax income margin by 7.2 points over the last quarter. This success was not only through our restructuring action, but also through our strategic shift to focus on emerging markets outside of China, which has continued to pay off significantly. In Middle East Africa, Asia-Pacific emerging markets and East Europe, we significantly outgrew the market. In key emerging market countries like India, Indonesia, and Russia, we outgrew the market year-on-year by our estimated 170, 310 and 22 points respectively. And our shares are around double digits in India and Indonesia, 14% in Russia, and 20% in Brazil. In PCs, we again reached record worldwide shares of 21.6%, up 1.5 points year-on-year. While maintaining stable margins, we saw strong share growth in North America, Asia Pacific, and particularly in China, where we reached a record market share of 40%. And our tablets business achieved operational profitability as well. In enterprise, after we acquired System x, we have consistently improved the top line every quarter. Last quarter, our revenue grew even faster at 12% over the previous quarter and 8% year-on-year. Our revenue growth in China was even stronger at 30% year-on-year. Operational profit increased every quarter. Pre-tax income reached 1.5% last quarter. All these results indicated we are now in full attack mode in this business. We are now seeing the benefits of our strategic actions and are on schedule to realize $1.35 billion in full-year run rate savings. Our cost structure is now competitive across all businesses. And based on that, we will continue to decisively and steadily execute our strategy. In PCs, we will continue to leverage the consolidation trend to expand our leadership advantage. As Windows 10 is getting accepted by more commercial customers, there will be a wave of replacement demand this year. Innovation in detachables and convertibles will also generate more excitement and purchasing decisions among users. We will fully leverage our innovation capability and efficiency to achieve our goal of 30% market share in PCs. In mobile, we will play different games in different markets. In emerging markets, we will leverage scale and efficiency to accelerate growth and gradually improve the profitability. In mature markets, we will break through with innovative products and premier brands and gather our fair share in more profitable markets. In China, we will expand in open market and retail with a stronger product portfolio. Our goal is to pursue long-term profitable growth worldwide in mobile business. In enterprise, we will strengthen our competitiveness through strategic partnerships with industry leaders such as Nutanix, SAP, and others to achieve profitable growth. Meanwhile, we will continue to drive our business model transformations. We will transform our organizations and the processes to become more customer-centric and to better address device plus cloud strategy. Finally, we will continue to bring more innovative products to the market. Our new ThinkPad X1 family, Yoga 900S notebook, Moto X Force smartphone, Moto 360 Sport watch, et cetera, have gained great customer feedback once they were launched. At CES, we announced the Project Tango with Google to develop the first mobile device with breakthrough augmented reality technology. That product will be launched in summer, and there will be more exciting products to be launched soon. Now, let me turn it to our CFO, Wai Ming. Wai Ming, please. Thank you, Yuanqing. I will take you through Lenovo's financial and operational performance in Q3 fiscal year 2016. Next chart, please. First, I will give you some highlights for the quarter three performance. Group revenue declined by 8% year-on-year to $12.9 billion. If we exclude the currency impact, group revenue was down by 2% year-on-year amidst the challenging markets. Group PTI achieved a record high of $397 million if we exclude the non-cash M&A-related accounting charges of $77 million, represent an increase of 14% year-on-year. Reported PTI was $320 million, up 17% year-on-year. Group net income was $300 million, increased by 19% year-on-year. The improvement in our profitability in Q3 was a good demonstration of the solid execution of our strategy to protect our leadership and profit in PC and attack the mobile and enterprise businesses. Contemplating the market environment will remain challenging in the near future, we have taken prompt and decisive actions to align our businesses and plan to achieve an annualized savings of $1.35 billion as announced in last quarter. These restructuring actions are nearly completed, and the effects have started to pay off, and some of them were reflected in Q3. We have realized the cost saving as planned in Q3, and we remain on track to achieve our savings target in the second half of this year and on a full-year run rate basis. The restructuring actions, when completed, will help us to enhance our competitiveness with a faster, stronger, and more efficient organization together with our industry-leading cost structure to drive future revenue and profit growth even in the current market environment. I will elaborate in more detail on our financial performance in the following charts. Next chart, please. As I mentioned, the market environment remained challenging in Q3 and currency fluctuations also affected our group's revenue. Excluding currency impact, our Q3 group revenue would have been down by 2% year-on-year. Gross profit decreased by 10% year-on-year to around $1.9 billion, and our gross margin recorded a slight decline year-on-year to 14.6%. Gross margin improved quarter-on-quarter as we continue to improve our product mix and drive scaling benefits. Operating expenses decreased by $266 million and were down 15% year-on-year. Expense to revenue ratio was 11.7%, also down significantly by 0.9 point year-on-year. The improved efficiency was the result of our restructuring actions that have already started to show effect, bringing us a more efficient organization and leading cost structure across all our business groups. Other non-operating expenses were $59 million, which were mainly financing costs. This included interest expenses from the notes we issued and included interest expense for the Motorola deal-related promissory notes. Group reported PTI was $320 million, up 17% year-on-year. The effective tax rate for the quarter was 8.2%, slightly higher than that of last year due to improved profitability of the two acquired businesses. Profit attributable to equity holders was $300 million, up 90% year-on-year. Basic earnings per share were 2.71 US cents. Next chart, please. There were no material changes in our balance sheet items, and the drive of the movement in our balance sheet is mainly due to seasonality. The non-current assets were about $11.6 billion, and current assets were about $15.2 billion as of December 31, 2015. During the quarter, we have repaid some of the short-term loans, which resulted in lower bank loan balance. We had net current liabilities of around $2.5 billion. The non-current liabilities were around $6.2 billion. Next chart, please. Cash flow from operations performance remained solid in Q3 at $393 million, against $738 million same quarter last year and $909 million in Q2. Q3 operation cash flow was lower as some of our restructuring expenses we accrued in Q2 were paid in Q3 as the realignment plan continued to progress, and we have been moving the manufacturing of Moto products to our Wuhan factory. As I mentioned above, we repaid some of the short-term loans in Q3, which resulted in lower cash position and borrowings quarter-on-quarter. We have a net debt of $49 million in Q3. We continue to improve our working capital by driving both new businesses to adopt group working capital discipline. Our cash conversion cycle for Q3 was negative two days, similar to that of last year and improved slightly compared to last quarter. Thus, our Q3 net cash position was also better against Q2. Next chart, please. Our business remains solid across the board in Q3. For PC business growth, even though the market continued to show a decline, we continued to grow our market share in the consolidating market. We remained the number one player in the worldwide market for the 11th consecutive quarter. We continued to outperform the market. Nevertheless, our PC revenue inevitably was affected by the slower-than-expected market and currency impact, which resulted in a decline of 12% year-on-year to $8 billion. Excluding the currency impact, revenue declined 6% year-on-year, which is in line with our shipment performance. Despite a tougher-than-expected PC market, we are still able to hold our PC margin at 5% level in Q3, driven by a leading industry position and cost efficiency. We expect our industry-leading cost structure has improved our competitiveness and well-positioned us to drive growth in the PC business over time without a material impact on our margin, even if the tough PC market environment continues. For enterprise business growth, as Yang Yuanqing mentioned, our enterprise business has been trending strong, and we have been delivering growth trend of revenue and profit in every quarter since we closed the System x deal last year. In Q3, enterprise business recorded year-on-year revenue growth for the second consecutive quarter as revenue increased 8% year-on-year to $1.3 billion. Our strong growth in China continued up 30% year-on-year, driven by our attack in the high-growth hyperscale market. For the fifth consecutive quarter, we recorded operational profit before the non-cash M&A accounting charges, and the margin continued to improve. With an improved cost structure after our restructuring actions, we are in attack mode in the faster-growing enterprise areas while promising partnership with industry leaders, including Nutanix, Red Hat, and SAP. Mobility business growth. As Yang Yuanqing mentioned, we achieved a key milestone for our mobile business growth in Q3 by operational break even, both the mobile and the Motorola businesses, as we committed when we closed the transaction a year ago. With the business realignment action taken in Q2, our mobile business began to regain momentum in Q3. Revenue was up 21% quarter-on-quarter to $3.2 billion in Q3, driven by our strong smartphone growth in markets outside China, especially in key emerging markets. New Motorola products launched, including the very innovative shatterproof Moto X Force smartphone, also add strength to our mobile business performance in Q3. For tablet, we continued to launch new innovative products, including the ThinkPad X1 Tablet. Our Q3 tablet shipments increased 4% quarter-on-quarter. Our mobile business has reached the break-even milestone, if excluding the non-cash M&A accounting charges. Our pretax margin was improved by about 7.2 points quarter-on-quarter from negative 8.1% to a negative 0.9%. We remain committed to our mobile business to drive its profitability over the next 12 months. Next chart, please. Our solid performance was also seen across geography. I want to highlight that as our business continues to get more diversified, the geo P&L will reflect a combination of our PC, enterprise, and mobility businesses. Its financial performance will be driven by the change in the mix and the seasonality of the different business in each of the geography. With China, we remain a very strong number one position in China PC market despite challenges while holding up the margin. Enterprise business revenue grew 30% year-on-year, driven by the capture of the hyperscale opportunities. For smartphone business, we now have a much healthier inventory position after our clearance efforts. Consolidation in smartphone has started, and we will leverage this by strengthening our open channel partnership while maintaining the telco relationship. At the same time, we will focus on product mix improvement and leverage on our dual-brand strategy. With a new leadership team and refreshed strategy, we will remain focused on driving profitable growth of China smartphones business over time. Revenue was down 14% year-on-year to $3.5 billion, resulting in our China PTI at $167 million, and operating margin was 4.7%, a decline of one percentage point year-on-year, an improvement on 0.6 points quarter-on-quarter. For Asia Pacific, our attacking strategy in PC worked effectively in Q3 in the region. We continued to grow PC shipments and achieve a strong premium growth with continuous share gain in the region, especially in key countries such as India. Our smartphone business also achieved strong growth, including India and Indonesia. For enterprise, we continued to record growth with improved profitability. Revenue grew 15% year-on-year, with PTI at $19 million and PTI margin at 1%. The year-on-year and quarter-to-quarter decline in margin was mainly due to significant market decline in Japan, macro challenges, and the currency impact. For EMEA, the PC market in the region were affected by challenging macro environment and currency fluctuations and remained our number two position in the market. Smartphone business achieved strong growth in this region, driven by substantial year-on-year growth of both Lenovo and Motorola brand phones. Revenue declined by 13% year-on-year, and profit before taxation was $57 million, and operating margin was 1.7%. The margin decline was mainly due to the tougher market environment and the foreign currency impact. Americas. Our PC unit in North America remains strong, leading to a 16-point premium growth and share gain of the overall American region. For the mobile side, we significantly improved our smartphone business across the region in the quarter, especially in North America, driven by new products Moto launch. We continue to stabilize our enterprise business in the region. American revenue was up 9% quarter-on-quarter and declined 7% year-on-year. We turned around the American business with $76 million pre-tax income and 1.9% PTI margin, thanks to the continuous profitability in Brazil and MBG cost structure improvement. Next chart, please. As Yuanqing mentioned, we have largely completed our business realignment and restructuring actions. In Q3, we realized $346 million of savings, and we are on track to delivering our saving targets, which was $650 million in the second half of this fiscal year and target full-year run rate saving of $1.35 billion. Looking forward, even the markets we are in will remain challenging under current macroeconomic situation. We continue to see profitable growth opportunities across our businesses, and Lenovo is poised to capture those opportunity to drive future growth with our clear strategy and solid execution. For PC, the traditional PC market will likely continue to be tough, impacted by the macro weakness in the short term. Nevertheless, our number one market position and our further enhanced cost structure could help us to accelerate share gains under the continuous industry consolidation trend. Even further, the evolution of the broader form factors such as detachable, convertible, and two-in-one will continue to bring growing opportunities to the expanded PC market. We have recently launched a number of new innovative products, including IdeaPad Miix 700, Yoga 900 Notebook, ThinkPad X1 Yoga, which well-position us to capture this opportunity. For mobile, we now have a more efficient cost structure and a clear business strategy to drive sustainable growth. With a solid foundation built in Q3, we will continue to execute our growth strategy in emerging markets outside China and build our capability in both the mature markets and China. We are confident that we can continue to improve our mobility business by both increasing our top line while maintaining our profitability in the next 12 months. For enterprise, with our strength in China and emerging markets, we will continue to attack and accelerate growth. On one hand, in the traditional IT market, with better technologies, great product portfolio, and the right cost structure, leveraging both System x and Lenovo's efficiency. On the other hand, we are also moving to faster-growing opportunities through strategic partnership established with the leaders in the areas to drive growth. We have finished our quarter successfully, achieving a record profit while executing a significant restructuring. Although the market environment remains volatile and challenging in the short term, we remain confident that the solid quarter 3 result has provided the foundation for us to drive a balance between growth and profitability over time. Thank you. Now, we will take your questions. Thank you, Wai Ming. Let's now proceed to questions. We want to accommodate questions from as many people as possible, so please avoid multi-part questions and limit to just two questions at one time. Please state your name and name of your company before your questions. All the Q&A will be in English only. Operator, will you please give us your instructions? Thank you. We will now begin the question and answer session. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. There may be a short silence while we await for questions to queue up. Thank you. Our first question comes from the line of Arthur Hsieh of UBS. Please go ahead. Hi. Thank you for taking my question. Can you hear me all right? Yes. Please go ahead. Thank you. Is it possible to provide a breakdown of this $346 million cost-saving among PCG, MBG, and EBG? Cost saving. Cost saving. Yes, I think Arthur, just give me one second. Without getting the exact numbers, I will check it out. I think possibly maybe 60%-70% derived from our MBG, and the remaining from PCG and EBG. Arthur? You said in this quarter? This quarter. So let me just check the numbers, but that is around the sort of high level, 60%-70% from MBG and remaining for PCG, EBG. Got it. If the cost saving for the second half of the fiscal year is still at about $650 million, does that mean the remaining for the March quarter could be about- For smartphone and the PC. We definitely cannot guarantee it over here. We still can break even. But we wish we could break even in the full year period. I think that is possible. Full year for the next fiscal year, do you mean? Yeah, for the full year. Because Q1. Currently in the Q1, it is always the lowest of the season. It is always the lowest sales and volume. Definitely, we cannot guarantee this quarter we can make money. But I believe if we can have enough volume, like last quarter, Q3, our fiscal quarter, we have a good chance to make money. Actually, after restructure, let me give you the number. After restructure, in fiscal Q3, our MBG EBITDA ratio reduced to just 14%. Second half last fiscal year was almost 20%. Q1 was 25%, Q2 was 18.6%. If we can have the similar revenue or volume, definitely, we can further improve our efficiency. That is what we can see. Arthur, just get back to the numbers. I think what I am getting is right. I think the MBG, our mobility business, accounts for around 60% of the savings. About 10% coming out from our enterprise, and about 30% coming out from our PC. I think in addition to what Yuanqing said, I think PC, we saw one of the biggest decline in normally one of the highest seasons or highest point of the business year, which is about 10%-11%. Therefore, unless the market is going to go even further down, otherwise, I think the action that we took actually give us sufficient headroom or definitely the best expenses-to-revenue ratio from a point of view, I think be able to compete, and then be able to win in the markets. I would want to also, I think, highlight the point that even in a very difficult market, with a market decline 11%, I think we still be holding our margin around 5% level, which is obviously, I think the best in class. Okay. Thank you, Arthur. Next question, please. Thank you. Our next question comes from the line of Andrew Zhang of Deutsche Bank. Please go ahead. Hello. This is Andrew Zhang from Deutsche Bank. I think that my question is about the currency, because of the currency movement currently, for example, in Russia, Brazil, or even the renminbi, remain very volatile. So can you give us some idea about how you manage the potential margin or even the revenue risk? Thank you. Yeah. I think for two parts. I think the revenue impact obviously is big. I think from a functional currency point of view, we are probably, if it is, say, the current currency on a conversion perspective, I think it is about 6% or 10% negative delta. Asking about the operation, we have all along a hedging policy to hedge the cost of our materials on a rolling forward perspective. Therefore, I think for the short-term fluctuation, obviously our margin is well-protected. Then, longer term, if the currency remain low, we obviously need to reprice our product, so that we be able to maintain our overall margin. Inevitably, I think when we actually raise price, because when the currency depreciate, the cost of material going up, I think there may be some impact on the demand, which as a result, we can see that the decline in overall margin. Just also give you a sense of how the currency impact on our profit. Because generally, on the top 10 market, I think that some of those obviously have double digits, for example, Latin America, like Argentina, I think year-to-year is actually dropped by nearly about 15%. Russia, I think emerging markets, another 30%. Even in the mature market, you are really talking about a decrease base of EUR, about 12%. I think just thinking about the top 10 market, just on the translation, assuming that we make the same local currency profit, it will have about over 40 million PTI impact on our result. I think that means that we actually have to earn much harder in order to maintain the level of profitability. So I think that is really the achievement that we did. I also would want to add the point that in quarter 3, we actually undergo a major restructuring and realignment. That itself is actually a complicated exercise. With that, we will also be able to achieve, especially in the PC, a 5%, and we are very, very proud of the result. We believe that after the restructuring, we have the best cost structure to go forward and be able to win or continue to win in the market. Yeah. But do you need to adjust your selling price to reduce some of the currency impact? Well, longer term, yes. I think from a hedging, the currency exactly, I think if the goods are priced or we have to buy the materials in U.S. dollars, if the currency remain low, meaning your cost of material is going up, in order to maintain the margin, longer term, you have to reprice. Okay. And another very Weimin just said, even without considering the repricing, if we make the same amount of the local currency, then if you translate it into U.S. dollar, that will be more than $410 million impact our last quarter performance. That means if we put consistent currency, we can make $40 million more in business. Yeah. At the least. Okay. Thank you, Andrew. Next question, please. Thank you. Our next question comes from the line of Thompson Wu from Credit Suisse. Please go ahead. Hi, Yuanqing, Weiming, Gary. Happy Chinese New Year to you. This is again Thompson Wu from Credit Suisse. Just a question on your China EBG business. Can you talk a little bit more about the market dynamics there, both from a customer and product perspective? Can you also provide a little feedback on your newly launched converged HX appliance? Yeah. Fortunately, we have our EBG and the PCG leader, Gerry Smith here, so he will address your question. Yeah, Thompson. First, from a China perspective, we have been very successful in the Chinese market. We grew at 30% on a year-over-year basis, and we had significant wins in the hyperscale space with $5 billion and $0.10. What I am excited about, if you look at from some of Weiming and Wai Ming's charts, is we are growing quarter over quarter every quarter and dramatically increasing revenue. We have a very aggressive cost structure as well. We are extremely well-positioned to win, and we are number one in the market share position in China as well. Obviously, over a period of time, if you look at IDC forecast, it is the fastest-growing market in the world and will continue to be from infrastructure perspective going forward. On the Nutanix piece, which I was personally very heavily engaged with, we are really excited by the opportunities. We announced the appliances in December. We actually officially launched them last week, and we are excited with a number of go-to-market opportunities we have working with Nutanix on prospective customers, as well as we are getting tremendous amount of media as well as digital marketing type of hits. Actually, it is Nutanix's best ever webinar they have ever done, the announcement we did with them last week. We are very bullish on hyperconverged, and we are very bullish on our partnership with Nutanix. Okay. Thank you. Yeah. Thank you. Next question, please. Thank you. Our next question comes from the lines of Jenny Lai of HSBC. Please go ahead. Hi. Thanks for taking my question. My first question is regarding your MBG. Thanks for providing the market share numbers. It is becoming obvious Lenovo is becoming a major player across a few countries with over 10% market share. If I remember correctly, previous strategy was to ensure profitability once the market share gets to a level. Could you share your margin performance perhaps by region, by market, so we could get a better idea? Yes. Weimin. Yeah. Jenny, I think this has always been our strategy that once we build up a regional size, then we will grow our top line based on the sort of break-even position. The market where we actually have, I think, doing great, I think this is really primarily coming out from rest of the world emerging markets. I think we have been growing at a significant premium, I think in country like India, with over 130 percentage point premium, Indonesia, Russia. I think we will continue to execute that, and those businesses are profitable. Not hugely profitable, but that is the base where we are going to. Since Q3, we already reached on a natural basis. I think if it were to take out the accounting charges, I think the entire MBG is actually recording a small profit. So on that basis, I think we will continue to grow our market share in those countries, mostly in the rest of the emerging market. On the other side, we will continue to build up our capability, primarily in terms of product as well as distribution channel, I think in mature markets as well as slightly building up our business again in China. Yeah. Jenny, I think why we can break even last quarter, it's not just because of our cost-cutting action. It's also because our strategic shift from China to rest of emerging markets. Actually, we grow significantly in rest of emerging markets, including Middle East, Africa, Asia Pacific, emerging markets, Eastern Europe. We really have reached a very different market share in India, Indonesia, Russia, Brazil, et cetera. Actually, that gives us a lot of benefits. Generally speaking, we have much better profit in those markets than in China. In China, we still lose money. But in these emerging markets, we can make money. Also we make money in North America. Overall, that help us to break even. Actually, over time, we still separate the smartphone business between emerging market and the mature market. Because in those two markets, they have different games. In emerging markets, if you want to make money, you must have two elements. The first, you must have enough scale. That means that you must get enough market share and sell enough volume. The second important element is you must be efficient. Even with enough scale, if you are not efficient, it's hard for you to make money. That's why for those premier brands, it's not easy for them to win in the emerging market. But this is definitely Lenovo's favorite game. In PC area, we have learned a lot. How to make money, how to win in that space. But in mature markets, it's different again. First, there is a much larger profit pool in mature markets than in emerging markets. But if you want to share that profit pool, you must have another two things. The first is you must have very innovative products. The second is you must build a very strong premier brand. With these two elements, you can have an opportunity to share the profit. Definitely now we have a good presence in North America. This year, we are preparing to break through in North America, another mature market as well, with both innovative products like our Project Tango with Google. Definitely, we have more exciting products coming. The second thing is we are preparing to invest more on the branding, on the marketing, so to build the premier brand in mature market as well. That will help us to win in the entire smartphone market. Definitely. It doesn't mean we will give up our China market. China market actually is a mixed market. From one aspect, it is definitely emerging market. We still need to win through the emerging market approach. Meanwhile, the premium product is big market as well. Definitely, we will not ignore that. I think with stronger positioning outside of China, that will help us to win in China as well over time. We just announced the stronger leadership team in China. Our MBG leader, Chen Xudong, will be the acting leader for our China smartphone business. Meanwhile, we have already launched more competitive products. Definitely in our pipeline, we have even stronger product portfolio. We are ready to turn around our China business as well. That is our overall mobile or smartphone business strategy. Thank you, Wai Ming. Thank you, Jenny. Next question, please. Thank you. Our next question comes from the line of Grace Chen from Morgan Stanley. Please go ahead. Hello, thank you. I have a question about the cost savings. Can you add a bit more color about the cost savings, about $346 million in the December quarter? Should we assume that the benefits from the cost savings will directly flow through the bottom line? How do we reconcile these cost savings of $346 million with the reported PTI of $320 million? Thank you. I think, Grace, there was $350 million. I think part of those obviously may reflect on the cost because I think we are taking expenses out throughout the entire organization, including some of those may be I think running that may have an impact on margins. As you can see, the market actually declined by 10%. If you really just, I think, taking the expenses and change, I think no organization will be able to maintain profits. Therefore, I think the profit or the expenses that take out obviously contribute to one of the reasons why we will be able to maintain our overall profitability, which is at 5%. Secondly, I think that taking our expenses also enable us to grow our business better than the market. We obviously record a decline, but if you really compare to the market, we are still looking at doing better, around 6%-7% premium to the market. So I think we are operating in the market, which is obviously a decline on a simple PC form factor. If you were to take in other form factor, obviously, I think the decline is much smaller. For us, to taking our expenses, that is one of the ways for us to maintain our overall profitability in the decline market. At the same time, we also have been, I think, spending money in our R&D, I think to come up with innovative product, especially in the sort of, I think two-in-one, which obviously we see it in the segment, which is growing. We definitely will take advantage of that going forward. Okay. Thank you for the color. Yeah. Thanks, Grace. Next question, please. Thank you. Our next question comes from the line of Gokul Hariharan from J.P. Morgan. Please go ahead. Hi. Thanks for taking the market from overall market as well as Lenovo's own inventory situation. Is there any further inventory correction that we should see in the market over the next quarter or so? That's my first question. Thanks. I think Gokul, when you look at the numbers, you obviously see decline in the EMEA market, but we haven't actually lost market share. I think that's really number one. I think EMEA, for the last few quarters, the market actually have relatively high general inventory, which is a general market statement. We obviously, I think, bearing in mind how to build a healthy business, we actually take very aggressive action clearing general inventory. I think for us, I think we feel very comfortable about the level of general inventory as of today. Exactly bring down, exactly come down quite a bit I think in Q3. We are very comfortable going forward that when the market stabilize, they go up, they become stabilized, and trying to regain momentum, we are definitely the first one to get that advantage. Gokul, are you still there? Hey, Gokul, are you there? I think he might have lost his line. Yeah. Hi. Where is your second question? You only have two questions now. Yeah. Sorry. Second question is on mobile. Could you talk a little bit about the FY 2017? I think you mentioned we could be at breakeven for FY 2017. Could you talk a little bit about where the improvement is coming? What is happening in China? Since you mentioned that in the prepared remarks that there is some consolidation already happening in the market. Okay. Gokul, before we answer the question, let me make sure that we understand exactly your question. You said that why are we comfortable that the business can be profitable going forward for the next 12 months. Is that the first part of your question? I think. Mobile business. Yeah, that's right. I think what are the Underlying in China, right? Underlying that confidence. Okay. Jiangxi, if you want to answer your question, let me just repeat your question. Why are we comfortable? What are the assumptions that we feel that we are comfortable? And then general comment on China's smartphone market. Yes. We took action to reduce the expense and the cost. That definitely has put us in a competitive position in the industry. As I just introduced, our EBITDA ratio is just around 14%-15%. That's almost a 5% drop compared to the same period last year. Also, we are confident. We will resume the growth. That will ensure we have enough scale, we have enough room to be profitable. That's the reason why we think we can operational EBITDA in our mobile business. Definitely, it's relying on our strategy as well. As I just explained, we plan to grow in rest of emerging markets. You can see the results last quarter. We grow faster in Middle East, Africa, in Asia, specifically emerging market, in Eastern Europe. I think even in Latin America, we will resume the growth as well. We will become very decent player in those markets. That means at least we will hold more than 10% market share. This is still the growth market in the smartphone area. That's the first part. The second is, we will try to do breakthrough in mature market. That means we want to share the profit pool in the mature market as well with more attractive products and with more strong brand. That's our strategy. Also, I think our China business has already hit at the bottom. From now, you will see the growth quarter-over-quarter. That's the confidence. That's the confidence as to why we can be profitable. Right. Thank you, Dudu. Thank you everyone for your participation in today's call. If you have any further questions, please feel free to contact the IR team directly. This webcast replay and the conference call replay will be available in the next couple of hours. Thank you again for attending today. Thank you. Thank you. Thank you.