Earnings Call: Q2 2013

Nov 8, 2012

Good morning and good afternoon. Welcome to Lenovo's Q2 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. Yang Yuanqing, and our CFO, Mr. Wong Wai Ming. We will first start with our management presentations. After that, we will take your questions. Now let me turn it over to Yuanqing. Hello, everyone. This quarter, despite a challenging environment, Lenovo continued its strong momentum and achieved many key milestones, demonstrating that our strategy is working very effectively. Last quarter, our PC sales volume grew by 10% year-on-year, 18 points ahead of the overall market. Our global market share reached another historic high, 15.6%. IDC has us as a narrow number 2. According to Gartner, we have already jumped to number 1 in global desktop and notebook sales. Now, we have grown faster than the market for 14 straight quarters, and have been the fastest-growing major PC company for 12 straight quarters. We again outgrew the market in all customer and product segments. Four years ago, we were number 7 in the worldwide consumer space with less than 4% share. That was mainly the contribution from China. Then you basically could not find any Lenovo consumer products outside of China. After we made our attack strategy clear, within only four years, our consumer business has grown significantly. Now, it doesn't matter if you are in emerging markets or mature markets, you can see our products everywhere. Last quarter, with 13% of the global consumer market share, Lenovo has become number 1 in this segment for the first time. Even better, our stellar performance is balanced across all four geos, which each outgrew the market significantly. In EMEA, we outgrew the market by 34 points, particularly in the consumer segment. We are now in the top 3 and reached the double-digit market share for the first time. For the first time, we were number 1 in Russia. In APLA geo, we grew 15 points faster than the market. We also had a strong quarter in India, gaining 4.2 points share year-on-year. In Japan, we strengthened our position as number 1 and had a record market share. North America outgrew the market by over 20 points. In the U.S., we also reached a record market share of 8.3%, and have a very stable business with strong profits, even in a weak macroeconomy. In China, the macroeconomy has clearly slowed down and the PC market declined. In this challenging environment, our combined businesses still grow by 20% year-on-year. We grew almost 9 points faster than the markets in PCs. Total phone sales reached more than 8.5 million. Our smartphone growth was even more encouraging. We sold 7 million units this quarter. That's 18 times greater than last year. Our smartphone share is now over 14% in China, just 1 point from the market leader. Let me remind everyone that we started this business only two and a half years ago. I am confident that we will continue our hypergrowth with multiple new products that are even more innovative and stylish. We also began expanding our PC Plus strategy outside of China, adding smartphone sales in India, Indonesia, Vietnam, and the Philippines, with more to come. Let me be clear. We not only grow rapidly, but our profitability also has reached record heights. Our pre-tax income ratio reached 2.4%. That is 0.3 points better than last year. That led to record pre-tax income of $204 million. And our net income increased by more than 10% year-on-year to reach $162 million. We are gaining share and improving profitability at the same time. This is our long-term formula for success. Our success is not an accident. Rather, it is a result of our formula for success. Which includes our clear strategy, innovative products, efficient business model, and the diverse team and the global culture. Of these, having the right strategy is the foundation. We implemented our protect and attack strategy three years ago, when the China PC market grew slower than the global market, enterprise business shrank, and Lenovo performed poorly. Under similar market conditions, the difference in our results is like night and day. As I discussed before, our strategy is clearly working, and we are now a much more balanced company. In emerging markets outside of China, we have 27 countries and regions reaching double-digit share. In mature markets, our transactional business has more than doubled from three years ago. And our Mobile Internet and Digital Home business continues to deliver hyper-growth. Last quarter, revenue from our mobile internet business grew to more than $700 million. This growth now accounts for about 18% of our China revenue and 8% of our global revenue. In the first quarter of this fiscal year, our business from emerging markets outside of China, mature transactional, and Mobile Internet, Digital Home, reached 45% of our company's overall revenue. Last quarter, this ratio increased by another point, further demonstrates our balanced business. But our goal is much more than just growing share and revenue. Our strategy has always been to achieve a critical share first and then drive profitable growth. Now, emerging markets outside of China and mature transactional have entered the profitable growth stage. I believe that in just a couple of quarters, our smartphone business in China will also reach that stage. To continue improving our profitability consistently, we must further build our core strength, our innovation, business model, diverse team, and global culture. To further enhance our business model and allow our supply chain to be faster and more flexible, we are building a global local company step by step. This means that while we will operate globally, we will also fully leverage local advantages and local talents in every key market. We have already implemented this plan worldwide. We want to build our home base in key markets. Not only just the sales and marketing team, but also use local innovation to develop products for local demand. At the same time, we will build our manufacturing bases in key markets to respond quickly to local market demand. Over the last few years, through M&A and self-expansion, we have strengthened our foundation in key mature markets like the U.S., Japan, and Germany, as well as in key emerging markets like Brazil and India, and of course, China. Last quarter, we acquired CCE in Brazil. This is another solid step forward towards our goal. Operating globally while emphasizing local development, this also will strengthen our diverse team and global culture. Our innovation leadership will continue to be our key competitive advantage. Especially now with the launch of Windows 8, there will be more demand for PCs. Our family of convertible PCs combines the best experience for both laptop and tablet. We believe the emotional purchase trend for tablet is fading, and that our convertibles will meet the customers' needs for more computing power in tablet devices. Already, our large retail partners have told us that Yoga and Twist are their top Windows 8 devices in pre-sales. We will have even more exciting products to unveil at CES next year. In addition to client devices, we also will focus on the back-end opportunity in servers, storage, and services. Our joint venture with EMC and the acquisition of Stoneware both enhance and expand our offerings to customers worldwide. In fact, we created our enterprise product group to focus on making us a serious competitor in this space. Through strong execution of our strategy and the continuous enhancement of our core strengths, we are confident that we will continue to improve our profitability. In three years, we want our global pre-tax income ratio to increase by at least one point to reach 3%-4%. Looking ahead, although the macroeconomy shows some softness, we see many growth opportunities, especially from Windows 8, from emerging market, and from China, where growth from smaller developing cities is still very strong. Lenovo is on course to become the worldwide PC leader. While becoming number one will be a major milestone, it is not the end of our journey. Now, our focus is to become a leader in PC Plus as well. We firmly believe that we will continue to deliver solid long-term return to our investors and shareholders. I also believe that Lenovo's brightest days are still to come. Thank you, everybody. I now turn to our CFO, Weimin, please. Thank you, Yan Xing. I will take you through Lenovo financial and operational performance in quarter 2. Next chart, please. We continue to grow in both sales and pre-tax income with margin expansion, even when the global PC market declined in quarter 2. We have delivered such performance track record for 12 consecutive quarters of year-on-year growth. Our balanced performance, driven by our successful execution of protect and attack strategy, is a significant strength that we believe will help us drive sustainable growth even in challenging market conditions. Our PC shipments in quarter 2 were up 10%, and PC sales were up 5% year-on-year to $7.7 billion. Our strong performance in mobile internet business, especially smartphone, help contribute more to the group's strong revenue growth. Revenue from the mobile internet business were up 1.5 times year-on-year to $718 million. Sales of other goods and services were $263 million. Group sales grew 11% year-on-year to approximately $8.7 billion. Gross profit was about $1.1 billion, up 11% year-on-year. Gross profit margin remained relatively stable at 12.1% year-on-year and quarter-on-quarter. Operating expenses increased 8% year-on-year to $844 million to support our growth. E/R ratio was down to 9.7% from 10% last year due to better scaling benefits and flat quarter-to-quarter, even after our investment in R&D and promotion to support the Windows 8 related new product launches. Operating profit was $206 million, up 24% year-on-year. Pre-tax income was $204 million, up 24% year-on-year. This is a record high level for the group. PTI margin continued to improve year-on-year and quarter-to-quarter due to scaling benefits and strengthened expense control. Effective tax rate for quarter 2 was 20%, while our quarter 2 tax rate is in line with our average run rate around 20%-25%. This is higher than that in quarter 2 last year. The low tax rate last year was due to a reversal of certain provision made in previous years. Profit attributable to equity holders is $162 million, up 13% year-on-year. Basic EPS improved to 1.58 US cents from 1.41 US cents last year. The board of directors in today's meeting declared an interim dividend of 4.5 Hong Kong cents per share, representing an increase of around 19% compared to last year. Next chart, please. Our balance sheet in quarter 2 remains strong. Non-current assets were about $4.2 billion, similar to the level at 30th of June, 2012. Changes in current assets and current liabilities were largely due to increased activities during the quarter. We had net current assets of around $481 million at the end of September. The non-current liabilities were at around $2.2 billion. Let's go through the cash and working capital in the next chart. Our cash flow and cash conversion cycle continued to be healthy in quarter 2. Bank deposits and cash level was lower compared to last year due to capital expenditure, share repurchase, and changes in our cash conversion cycle. Bank borrowing was high in quarter 2 compared to last year and last quarter, as we draw down an outstanding facility before it lapsed at the end of the quarter. Our net cash reserve dipped slightly but remains strong at $3.6 billion. We continue to do well in managing our working capital. Inventory days and receivable days remained relatively stable in quarter 2 compared to last year and last quarter. Payable days were 61 days in quarter 2. The decline compared to last year and last quarter was again due to our expansion into consumer business, including MIDH and Medion, and increasing mix of in-house manufacturing. The change was in line with our normal trend. As a result, the cash conversion cycle in quarter 2 were at negative nine days. Again, negative 20 days last year and negative 13 days last quarter. The change was a reflection of our strategic business expansion into emerging markets and consumer business, including MIDH. Together with our hybrid strategy of increasing mix of in-house manufacturing to enhance end-to-end efficiency and product time to market. Nevertheless, the group's cash position remains at a very strong level to drive future growth. Next chart, please. The group has record high shipments and market shares in Q2, even as the China PC market slowed down. We see across the board strong performance and year-on-year profit improvement in each of the four geographies. Since Q1 this year, we have changed our organizational structure. We will accordingly report our geographic performance under the new four geographic classifications. China. We continue to perform well in China and further expanded our market share in both PC and mobile internet business. Despite the negative growth in China PC markets, we recorded a 20% growth in revenue year-on-year to about $3.9 billion in China. Our PC sales increased around 8% year-on-year to about $3.1 billion, driven by our strong growth in emerging cities undergoing urbanization. We continue to be the clear leader in the market, and our market share is even bigger than the total of the next four players. China PC operating profit increased to $185 million, while margin further improved slightly to 5.9% year-on-year. The slight dip in margin quarter-on-quarter was due to seasonality, as we normally have more promotion during the summer sales period in Q2. Our mobile internet business in China continued to show strong growth and provided increasing support for our continuing high growth in China in Q2. Sales increased by 1.7 times to $676 million, which accounts for 18% of the China total sales revenue in Q2. MIDH profitability also saw continuous improvement in Q2. We will continue to invest in the PC Plus area to drive future growth. APLA. Sales were up 6% quarter-on-quarter, but down 2% year-on-year to about $1.8 billion in APLA. Operating margin doubled to 0.8% compared to last year, as we focus on the balance between growth and profitability. We expect the new manufacturing hub and the acquisition of CCE in Brazil will help accelerate our expansion in the country and therefore contribute to the further improvement of the region's profitability over time. EMEA. We had a very encouraging quarter in EMEA. Sales grew 12% year-on-year to above $1.8 billion. Strong growth in the emerging markets in the region like Eastern Europe, Middle East and Africa, and Russia, as well as consumer business, contributed to the strong growth in the region. In Q2, we achieved number one positions in two of the largest three countries in the region. Operating margin also continued to improve both year-on-year and quarter-on-quarter to 2%. Our attack in consumer business in the region continued to gain traction that resulted in share gain. Our consumer business in EMEA became profitable in Q2, benefited from better scaling. We still continue to attack in the consumer business and expect to provide additional support to margin improvement over time. North America. We continued to record good performance despite market decline in the region. Sales grew at 7% year-on-year to about $1.2 billion. Operating profit increased to $45 million this year from $39 million last year, but it declined from $46 million last quarter. The year-on-year operating margin improvement was due to better scaling benefits, while the increased mix of SMB and consumer business led to quarter-on-quarter margin decline. Next chart, please. We also have a more balanced product portfolio helped by the expansion in consumer PC and mobile internet business. We have a record high market share in notebook at about 16%. Notebook unit shipments and sales were up 11% and 3% year-on-year respectively. Unit shipments and sales in our desktop business were up 9% and 5% year-on-year respectively. Our market share in the worldwide desktop market increased to around 15%. Our MIDH business also shows strong performance, up 1.5 times year-on-year in sales led by the smartphone business, which fueled the strong growth of the group. We will continue to invest in innovation and broaden our product portfolio to enhance our competitiveness and service to our customers. Before I end my presentation, I want to give you some color on the market outlook. Despite uncertainties in the global economic condition impacting the PC market growth in the short term, we remain confident that we can outperform the worldwide PC market and continue to improve our operating margin. We have a strong record of consistent year-on-year growth in both revenue and operating profit for more than two years, and we remain confident to continue this performance trend. We have executed our protect and attack strategy well. Our expansion in emerging market and consumer business outside China have already reached a tipping level that the scaling benefits will continue to enhance our group margin as planned. While our core PC business is performing well, our mobile internet business, especially smartphone operation in China, has also started contributing to the group growth in sales with improving profitability. This balanced performance, driven by the successful execution of our protect and attack strategy, is a significant strength that will help us drive sustainable growth even in challenging market conditions. We will stay focused on our efficiency improvement initiatives and growth opportunities. We will continue to invest in core competence building, product innovation to drive sustainable future growth. Progress of our recent corporate transactions, like our partnership with EMC, the acquisition of CCE and Stoneware, have been on track. We have a healthy balance sheet, and we will continue to look for M&A opportunities in areas that can help to accelerate our growth. We continue to be prudent in our cash management to create shareholders value. Thank you very much, and we will take your question now. Thank you, Wong Wai Ming. Let's now proceed with 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 a time. Please state your name and name of your company before your questions. All the Q&As 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 followed by one 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. The first question comes from the line of Wei Chen from Citigroup. Please go ahead. Hi. Congratulations on your results in a very challenging market. My first question is on your smartphone strategy. Can you talk about, obviously, this is a very good opportunity for Lenovo to continue to grow for next couple years. But given that ASP is eroding very fast and with new competition from the white box makers, can you talk about what is Lenovo's strategy to compete in that very thin margin market? ASP is growing fast. Yeah. You said the average sales price Well, the average selling price is dropping very significantly. We have seen a big migration from feature phone to smartphone. And obviously, that is a very big opportunity for Lenovo. However, that also introduces new competitors like the white box makers. Yeah. How does Lenovo compete in that market? Can you talk about your strategy to become profitable? I don't think basically Lenovo's trend. Actually, last quarter, we sold more smartphone than feature phone. So our average sales price actually went up, not went down. So that is very clear. But probably, you are talking about the market sector, right? I am talking about the smartphone market only, not the feature phone. The smartphone. Yeah. Probably that is a market trend, but this is not Lenovo's trend. Our average sales price in the total phone area was increased last quarter because we sold more smartphones than feature phones last quarter. Actually, last quarter, we sold totally 8.5 million phones. Among that, 7 million was smartphones. Yes. Actually, even in the smartphone area, now we are not just focusing in the low-end. We also launched the mainstream smartphone with around the 2,000 RMB price range. Definitely, in the future, we will launch even more mainstream or high-end products to get market share in those price bands. I see. Yeah. This is in China. Definitely, for our smartphone business, now we have the strategy to expand into other emerging markets. We have launched our smartphone in India, Indonesia, Vietnam, and the Philippines last quarter. More will come. That is our strategy. Well, maybe I can add a little bit sort of financials on the comment on the market trend. I think obviously you look at the entire China, but obviously the China market grow very fast. I think especially the entry level, I think been growing much faster than the high-end, and therefore, hence comes the comments on the smartphone ASP coming down very, very quickly. I just want to add, I think give a little bit more color to Yang Yuanqing's comment. I think our smartphone business actually done through operators as well as open market. I think in both channels, our ASP actually went up. I think the comment is because the change in the market was so fast that I think probably a year ago, primary dominated by the premium end. But now the market grow, a lot of those exactly on the entry product and hence, I think your comment. I see. It looks like MIDH is running at about 22 million losses in the September quarter. Basically, the same comparing to the June quarter. You mentioned that MIDH profitability has improved quarter-over-quarter. Can you kind of just explain that? June quarter. June quarter. You said the previous quarter? January. January quarter. I think our smartphone business margin was improved quarter-to-quarter. Because we sold more units in the open market last quarter. So actually last quarter, our open market versus telco market mix was almost one third to two-thirds. So that significantly helped us to improve the margin. As I told to you before, we are not just focusing on the low-end smartphone. We also have the mainstream products to cover 2,000 RMB range price band. That helped us to improve the GP margin as well. Okay, thanks. We are confident. We will further improve our GP margin and profitability in the smartphone area. Probably in two to three quarters, you can see, we start to make money in China smartphone area. I think you may be looking at different set of numbers, but I will draw your attention to, I think our result deck, I think the page where we set up underperformance by geography. If you really look at China and China PC, I think the difference is really the smartphone. We actually see the smartphone rapidly improving, not significantly. Obviously, we expand significantly on the top line, I think Q1, well, quarter-to-quarter and year-to-year. I think that is really it. Again, to give you more color, I think in terms of gross margin, although we do not actually disclose separately, I think what is the gross margin of the individual product. But I can tell you that I think we actually see quarter-to-quarter improvement margin between 2%-4%, I think in different channels of the products that we are selling in China. Yeah. Just one last question. For the smartphone business in China to be- Yeah. For the benefit of others, probably we prefer to the next two questions. Okay, sure. Thanks. We can do that. Yeah. Thank you. Your next question comes from the line of Gokul Hariharan from JP Morgan. Please go ahead. Yeah. Hi. Congrats on the results, and thanks for taking my question. My first question is on China PC market. Are you guys seeing any sign of any improvement heading into fourth quarter? Should we expect a return to growth in 2013? Secondly, on the tablet comments that Yuanqing made about consumer purchase decisions fading, the emotional purchase decision fading away. What is your strategy on tablets, given that, at least in the emerging market side, tablet has not really taken off in a very big manner? Thanks. China PC market is still very soft. We haven't seen the significant improvement in this quarter. But we are confident that we will continue to outperform the market, particularly leveraging our strong Windows-based products that we just launched. Yoga Twist is that. We believe that's the innovation for traditional PCs. We are very confident that we will continue to outgrow the market. The second question is, definitely for China market, this is just a short-term problem. From long-term point of view, we are more optimistic because in China now, PC penetration rate is still much lower than in mature markets. That's the difference. Compared with more than 90% in mature markets, China is developing many small cities and towns to shift the population from the rural area to the cities. That will be our opportunity. After the party meeting, I believe the market will start to recover. That's my view. What's the other question? Tablet strategy. Tablet strategy. Yeah. Tablet is definitely a new market. It can address the e-reader market, the media consumption market. But my view is it will not replace the traditional PC, particularly after the PC evolves itself. With the new product, like our Yoga, you can have both tablet experience and the traditional PC's power and the features and the function. That will be even better products. I just read the report on the iPad. Actually now, market accepts the 7-inch better than 10-inch. That's a very strong signal. The pad will not replace the traditional PC. Probably, tablet in the future, would compete with larger screen smartphone rather than the PC. People will still need the PC with the keyboard, with hard performance, more powerful, full functional PCs. But definitely, if the PC can have the touchscreen, it will be even better. This is our view. With that assumption, not only at Lenovo with the developer, the better tablet products to address the market demand. We also will further innovate on the traditional PC to ensure we will be the leader in that area. But our ultimate target is to become the PC Plus leaders in the world. Yeah. I just add some financials, I think to substantiate what Yuanqing just said. I think obviously with the sort of convergence of the PC Plus company, although Yuanqing comments that PC probably remains soft, I think you actually see our PC Plus or our revenue in China actually growing 20% year-to-year. I think that is actually a very significant increase of a relatively large market. Secondly, even commenting on the softness of the PC market, maybe going forward, I think you look at our operating margin is actually improved from a PC perspective, I think marginally year-to-year. So I just really want to, I think bring some financials, so that you can understand, I think the development of the economy has an impact on Lenovo. Recently, a lot of economists based on this PMI index, saying China is already sort of bottom out or probably on its way up. I think that we obviously are operating in the market. I think if the market does turn, economy does recover, I believe very strongly that Lenovo will obviously be the company that will benefit most. Right. Thank you. Go ahead. Thank you. Your next question comes from the line of Jenny Lai from HSBC. Please go ahead. Thanks for taking my questions. Again, congratulations on the good results. I just have a follow-up question on the smartphone business. In terms of the overseas opportunities, could you highlight more details in terms of how you are going to compete with your stronger smartphone peers such as Samsung in the overseas market? Could you also tell us how much of your smartphone in 2Q is coming from overseas market? In 2Q, our smartphone volume outside of China was very small, was very limited. We just launched the products in those four markets. I believe to expand the smartphone to other markets, first step in the emerging market is definitely our strategy. We will fully leverage our good products, our good sophisticated channel, and the brand to develop this business, starting from the emerging market. We are confident that will work. All right. Thanks. Can I have a follow-up question? Go ahead. Another question is regarding your touch notebook strategy or your convertible PC strategy. We have been hearing the supply chain talking about in first quarter, the touch panel availability is quite limited. How much of your total PC, or your notebook PC shipments are you looking for to achieve in terms of the touch notebook or convertible devices in first quarter, and what is the outlook for next year? Yes. Definitely, with the launch of the Windows 8, touch would become a very popular feature on the traditional PC. We notified this change earlier. We have tried our best to build a good relationship with those suppliers. We cannot guarantee that we will get 100% what we want to get. We are definitely trying our best to get enough supply here. The second point is, we believe the convertible PC is even better for the clamshell PC with the touch feature. If you want to touch with the traditional PC, it is not that smooth, it is not that user-friendly. Good user experience. Yeah, good user experience. But, if you use our Yoga, so you flip it 360 degrees, it will become a tablet-like PC. So that will be easier for you to touch. So we believe this will be the trend. This could redefine the traditional PC. Thanks. Great. Thank you. Okay. Your next question comes from the line of Thompson Wu from Credit Suisse. Please go ahead. Thank you, gentlemen, and thank you for taking my question this afternoon. Switching gears a little bit, maybe we can talk a little bit on the PC business, specifically, in the APLA region, Asia-Pac, Latin America. It seems like profitability there improved quite meaningfully, both year-on-year and quarter-on-quarter. Can you speak to if this is more on the Asia-Pac side or the LatAm side? Specifically, in Brazil, if I remember correctly, that's a country where I think end of last quarter was still in operating loss. That's my first question. Yeah. Brazil, we still lost money last quarter. We haven't built the in-house manufacturing there. We haven't built a very sophisticated, solid business model and foundation there. We still have some trouble or we are still struggling there. But as you know, last quarter, we announced the CCE deal. That's the important step for Lenovo to improve our operation in that market. Actually, this will be Lenovo's long-term strategy. We want to build Lenovo as a global local company. We believe if we want to win an important market, we must leverage the local talent, to build end-to-end integrated functions in the local area. We should have the local products, we should have the local manufacturing, we should have local supply chain, and the service to support a big market. With the acquisition of the CCE, we believe we have a good opportunity to improve in this area. CCE is definitely a good consumer-oriented company. Not only it can help us to improve our PC business, but also other PC Plus products, including smartphone and the TV. They have already sold those products for many years. That's what we are addressing our Brazilian problem. Yeah. Again, this is Ren giving some financial, I think, color on what Yuanqing said. APLA actually comprises of, I think, countries with both mature as well as emerging. As you can see that we are number 1 in Japan. I think that is obviously mature. And in India, we are also number 1. You may well recall that Yuanqing has been talking about 1, we are actually over 10%, and we become focused on profitable growth. And that exactly is the execution of our strategy, trying to grow the volume up to a market share, so that when we further grow, we have the scaling benefit, and that will actually have a more significant impact on our bottom line. And that exactly reflected in, I think, the results in APLA. As Yuanqing said, I think that we have one big market we need to address within that area, which is Brazil. We believe that, I think CCE will be a very good platform together with other strategic investment decisions like building a factory there, will help us to address that. I think the growth as well as the profitability of the market. I think we have been very successful in integrating NEC in Japan, which everybody think that Japan has always been a difficult country for foreign investors to do business, to integrate, and yet we have been extremely successful in that. We have been also successful integrating Medion, and we are very confident that we will carry that capability and experience to able to integrate CCE so that we can address that market in the near future. Yeah. I will give you another information. Among our top seven PC countries. Now, in five countries, we have been the number one. Also we can make money in those five largest markets: China, Japan, Russia, India, and Germany. Yeah. Actually, although we are number four in U.S., but we still make very solid, very stable money from that market. Brazil is the only market that we haven't built a solid foundation. But with the CCE deal, with other efforts, we are building a new factory in São Paulo by ourselves. This is not part of the CCE. With this kind of actions, we believe we will significantly improve our operation in Brazil. Okay, great. That was very helpful and best of luck on integrating CCE. If I may ask one quick follow-up question pertaining to the, I guess, the emerging enterprise business. I know you guys have been quite busy there as well with the new business unit hiring some external talent. I guess, specifically on the EMC side, have you guys begun to start selling storage systems in China? Through on behalf of EMC. I guess, where are we with the Iomega IP there? Are we starting to develop more IP and technology on the enterprise storage side in-house? Well, I think, first of all, maybe let me just clarify or just give you the latest status of all the M&A corporate transactions that we did over the last quarter or last half year. I think that the EMC deal, as well as Stoneware, which is another software company to build up our cloud capability. Those are still subject to the regulatory approval, although we will expect that we will be able to close in this quarter. Likewise, CCE again is also subject to, I think, the regulatory approval. I think that we obviously want to build a more solid foundation to build the adjacent business, I think, to our core enterprises customers. I think you are absolutely right that we will continue. We will work with EMC, and also build up, I think, through the cooperation, we obviously will develop more IP, and that will be the foundation for our future growth to service our customers in the mature market. Again, go without saying, because we have not closed the deal, we are not integrating or consolidating the Iomega business as of now. But we would expect that we will do it within this quarter. Yeah. But we have already started to sell EMC. Agent, yeah. Yeah, EMC branded storage in China, so as an agent. Another information I can give you is, last quarter, we gained historical higher server market share in China, with 15%. That is another information. With more than 15% year-on-year growth in China. That is China. Again, it complement is, we obviously have a very solid organic growth of our own business. At the same time, we will take advantage of our M&A, leveraging on the business on our partners so that we will grow even much faster. Great. Thank you. Thank you, gentlemen. Your message is very clear. Have a good day. Thank you. Thank you. If we have time, we probably will take the last questions. Great. Thank you. Your last question comes from the line of Steve Chung from Macquarie. Please go ahead. Hi, thanks for taking my question. My first question is related to your MIDH business. You had mentioned that margin improvement was partially due to the shift from carriers to open channel. I am wondering if the product mix from low-end handsets to mid-end handsets above 2,000 RMB had any incremental impact on your margins on that business, and whether the break-even point for these mid-end handsets are lower than the low-end handsets, and maybe quantify a little bit. That is my first question. Yeah. Definitely. The open market gross profit is better than the carriers market. Also the mid-end product is better than the low-end. But even in the low-end area, we are making effort to improve the GP margin so that we are very, like I always say, I am very confident. We can further improve our profitability in the MIDH with our current scales, current volume, and market position. There is no reason we cannot make money in very short period. Actually, for the past couple of quarters, although we still lost money. But actually, we invested more on the marketing, on the channel building, these kind of things. With the enough volume, I believe in couple of quarters, we can start to make money. So actually, as I said in the opening remark, now we have three attack businesses. So emerging markets, mature market, transactional business, and MIDH business. Among these three businesses, two of them have already started to make money, which are emerging markets as a whole and mature transactional business. If we can turn around this MIDH business, that would significantly help our profitability, help our GP margin improvement. That is why I am very confident. Over next three years, this is my target. This is my target to improve our PTI ratio by at least 1 point to reach 3%-4%. That is our goal. I give some financials again to illustrate Yuanqing's point. I think the overall gross margin improvement, coming out from a change in the mix, meaning that we sell more in the open market rather than the telco market. As a matter of fact, in both respective channel, we actually see margin improvement, I think quarter-to-quarter. It is really the individual channel, we actually see improvement in margin as well as we see that the change in mix also help us to move more to the open market, giving us the benefit of overall margin improvement. With that, thank you, Steve, and everybody, 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 transcript will be available in the next couple hours. Thank you again for joining us today. Thank you.