Good morning. Welcome to Lenovo's Q3 Results 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, our CFO, Mr. Wong Wai Ming. We will first start with our management presentation. After that, we will take your questions. Now let me turn it over to Yuanqing.
Hello, everyone. We had another record-setting quarter. Let's jump right into it. Our strong momentum just got even stronger. Lenovo has been the fastest-growing major PC company for nine quarters. This quarter, we grew 37% year-on-year as the overall market kept flat. That tremendous growth led to a record market share of 14%, record shipments of 13 million units, record revenue of $8.4 billion, and a record PTI of $192 million. We outgrew the market in almost every region, every customer segment, and every product segment. For the first time, we are number one worldwide in commercial PCs and in consumer desktop. We are closing the gap with number one to just 2 points from last year, almost 9 points. Meanwhile, even as we continue to invest in innovation and branding, our E2R ratio dropped almost 1 point quarter to quarter.
I especially want to highlight here, we achieved these fantastic results despite a major worldwide hard drive shortage. Our record performance shows Lenovo can turn a crisis into a competitive advantage, further demonstrating our world-class execution capability. Now let's look at our strategic areas more closely. In China, the world's largest PC market, we reached a record market share of over 35% for the first time, the highest ever in China market history. That is larger than the next four competitors combined. We significantly outgrew the market while increasing our segment profit by 57% year-on-year. While dominating the PC space, we are already looking ahead. Mobile internet, server, and service business are our future strategic priorities in China. Actually, we have already made good progress in these areas. In just a couple of minutes, I will talk more in details about our mobile internet business in China.
Now, let's look at the rest of the emerging markets. We increased our market share by more than 1 point year-on-year. We grew 23%, much faster than the market rate, and further strengthened our number one position in overall global emerging markets. We are 6 points ahead of the next competitor. More impressively, we gained share in almost every region, particularly in India, where we gained more than 3 points year-on-year. In Russia, we increased our market share by 1 point year-on-year. We also had another fantastic quarter in mature markets. We delivered a record segment profit of $109 million, as well as record shipments and revenue. While both integration with NEC and Medion are going smoothly, our organic growth was 40 points more than the market. This led to a record high market share, close to double digits.
In mature markets, we will continue to leverage our strength in commercial sales and to attack in the consumer space. Our exciting quarter goes beyond the traditional PCs. We also made great progress in the mobile internet space last quarter. In China, we now have a strong mobile internet business that keeps getting stronger very fast. Last quarter, we saw hyper-growth in our smartphone business, growing more than four times quarter to quarter. Lenovo sold more than 6.5 million phones in China last quarter, and almost half of them are smartphones. Our smartphone market share in China has jumped to 10% for the first time in December. In tablets, we also see strong momentum. Lenovo is now dominating the Android-based segment with over 50% shares in China. Overall, we are a strong number two tablet player with 16.5% of market share.
With more innovative products and a clear strategy, we expect our mobile internet businesses to keep winning in China. Over the next fiscal year, we expect to be expanding to more overseas markets. Like I said before, the foundation of our strong growth is our innovative products. Last month, at the Consumer Electronics Show, we unveiled our newest products across many categories. The response was clear. We own 23 awards. That is more than the next five competitors combined. Lenovo was absolutely the star of the show. These awards demonstrate not only our innovation capabilities, but also our strategy. Even as we have come very close to the leading position in PCs, we are already thinking ahead and preparing the next steps beyond the traditional PCs to the mobile internet space. We believe mobile internet will become our new growth engine to team up with our core PC business.
Clearly, our protect and attack strategy is working very well. Our world-class innovation capability, efficient business model, investments in branding, diverse leadership team, and a unified global culture are also major success factors. Looking ahead, I want to assure you that Lenovo is deeply committed to the PC industry and optimistic about the future of the PCs. We believe we will continue to outpace the market and are on course to become the leader in our industry. Thank you, everybody. I now turn to Wai Ming, our CFO.
Thank you, Yuanqing. I will take you through Lenovo's financial and operational performance for the fiscal quarter three. Next chart, please. Yuanqing just shared with you about our record quarter three. Group sales in quarter three were also at our historic high at $8.4 billion, up about 44% year to year. We have consolidated a full quarter of revenue from the NEC joint venture and Medion in the quarter three sales revenue. PC sales were up about 34% year to year to $7.3 billion. Revenue from the mobile internet business was $565 million, up 159% year to year. The flood in Thailand has resulted in HDD supply shortage and substantial cost increase in Q3 for the PC industry.
We managed to secure the supply to largely meet our customer demand in Q3 and took immediate actions such as demand conditioning and strengthened cost controls to mitigate the HDD cost increase. Our solid execution has successfully turned the industry's HDD shortage crisis into our competitive advantage. Our strong shipment growth also helped provide better scaling benefits. As a result, our gross margin in Q3 was up to 11.4% from 11.2% last year, despite the HDD cost impact. It was down from 12.2% last quarter, driven by HDD cost increases, product and regional mix. Gross profit was at $954 million, up about 47% year-to-year. Operating expenses were $761 million, up 45% from last year. The expenses-to-revenue ratio was 9.1%, up 0.1% from last year, but was lower quarter-to-quarter, driven by the revenue scaling despite continued investments.
We continue to invest in product innovation, branding and MIDH business to drive future growth and margin improvement over time. Operating profit in Q3 was $193 million, up 55% year-to-year. Pre-tax income was $192 million, up 59% year-to-year. This is a record high for Lenovo. Taxation expense was $38 million, up from $21 million last year and $20 million last quarter. The year-to-year increase was due to our increased operating profit as well as the inclusion of full quarter performance of NEC and Medion, which has relatively higher tax rate compared to the group. The quarter-to-quarter increase was largely due to a lower tax charge in Q2 as a result of a write-back of provisions made in earlier quarters. Nevertheless, the effective tax rate for Q3 was around 19.8%, which is still in line with our target of around 20% level for the full year.
The effective tax rate in Q4 will be higher, as Q4 is our typical low season during the year. Basic EPS improved to $0.015 from $0.0103 last year. Next chart, please. Our balance sheet at the end of December remains strong. Non-current assets were about $4 billion. The increase from that of 31st March 2011 was due to consolidation of NEC joint venture and Medion into our balance sheet this quarter. Changes in current assets and current liabilities were due largely to increased activities during the quarter. We had current liabilities of around $11.4 billion at the end of December. The non-current liabilities were around $1.6 billion. Next chart, please. Our cash flow and cash conversion cycle continued to be very healthy in quarter three.
The net cash reserve continued to improve to $3.9 billion against $3.2 billion last year, largely due to increase in sales revenue. We continued to do well in managing our working capital. Inventory days in Q3 was one day higher than last year, while days receivable increased by four days to 34 days, largely due to consolidation of the NEC and Medion this quarter, and our growth in emerging markets outside China. Days payable decreased by 9 days to 68 days, largely due to shorter payment terms to shore up our HDD supply. As a result, the cash conversion cycle in Q3 was -17 days against a -31 days last year. Next chart, please. We have even more balanced businesses in terms of geography after we consolidated the NEC joint venture and Medion. China. We continued to perform well in China and further expanded our market share.
PC sales increased 22% year-to-year to about $3 billion. Strong growth in emerging cities and desktop PCs helped drive strong shipments in China. We reached our record high market share ever achieved in China. Indeed, the PC operating margin improved year-to-year to 5.9% due to better scaling and strengthened expense control. The mobile internet business in China is making progress, but we are still making investment in product development, marketing, and promotion to drive future growth. Our sales revenue and segmental operating profit in China were at record high levels in quarter three, benefited from our continuous strong PC performance. Emerging market excluding China. Our expansion in emerging markets continued to show good momentum in quarter three. Sales were up around 13% year-to-year to approximately $1.3 billion, and we record an operating loss of about $13 million.
We continue to invest to expand scale to reach an optimal operating scale in key markets, resulting in margin decline in the short term. We are pleased to see the increasing number of countries that recorded profits in quarter three. Mature markets. We continued to record strong growth in mature markets, helped by our strong commercial business and increasing momentum in the consumer business. Sales were up over 81% year-to-year to slightly above $3.6 billion. We have included a full quarter performance of our NEC joint venture and Medion in quarter three. Both have performed better than their respective markets, and they were earnings accretive to the group. Excluding the acquisition impact, the organic growth in mature markets is around 32% year-to-year. Our U.S. continued to record strong shipment growth at about 40% year-to-year.
Operating profits improved to record high level at $109 million, and operating margin also improved to 3% for the quarter. Next chart, please. From the product perspective, in quarter three, we became the largest worldwide commercial PC company for the first time. Both notebook and desktop business continued to outperform their respective markets and achieved record high market shares. Notebook unit shipments and sales were up 41% and 30% year-to-year, respectively. Both our consumer and commercial notebook business show strong growth. Our worldwide notebook market share increased to around 13% and sustain our position as the largest worldwide commercial notebook player. Unit shipments and sales in our desktop business were up 31% and 39% year-to-year, respectively. Our market share in the worldwide desktop market increased to around 15%. Our all-in-one product, as well as our sales in China, continued to see good growth momentum.
We also became the world largest consumer desktop company for the first time. Finally, sales of mobile internet products were up about 159% year-to-year, boosted by strong performance across all our mobile internet products, namely smartphone, feature phones, and tablet, as Yang Yuanqing said earlier. Our smartphones A60 and P70 received very good market response, while our tablets continued to show good momentum, and we are the number 2 China tablet vendor. We will continue to adopt a full product portfolio strategy, that is to launch new products targeting at different prices and specific niches to drive future growth. Before I end my presentation, I want to give you some color on the market outlook. Despite uncertainties in the global macroeconomic environment, we remain confident in continuing our trend of outperforming the worldwide PC markets.
We believe the balanced nature of our growth, that is China, emerging markets, and mature markets, will enable Lenovo to continue to outperform the global PC market. Nevertheless, the HDD shortage will continue to affect the global PC supply in quarter four, and the gap between demand and supply will last through Q4, even the HDD supply is expected to gradually improve in late quarter four.
As a result, HDD costs will continue to stay high in the short term. We have demonstrated our success in turning this industry shortage into our competitive advantage through effective and flexible tactics to mitigate the shortage impact. We will continue to prioritize our customers, but also to monitor closely the cost efficiency. We will stay focused on the cost initiatives and growth opportunities. We will continue to make opportunistic investments, i.e., to use additional profits above our internal targets to fund the investment in core competence building, product innovation, branding, emerging markets, and especially the new MIDH group to drive our future growth. These investment, however, will cause the E2R ratio to increase in quarter four, which is a typical low season when the ratio will be higher sequentially compared to quarter three. We have a healthy balance sheet.
We will continue to be prudent in our cash management and to create shareholders value and look for M&A opportunities to accelerate our growth. Thank you.
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 say your name and name your company before your question. All the Q&A will be in English only. Operator, would you please give us your instructions?
If you wish to ask a question, please press star followed by one on your telephone and wait for your name to be announced. That is star one if you do wish to ask a question. The first question comes from the line of Jiong Shao of Macquarie Securities. Please ask your question.
Thank you very much, and good morning. First let me say a big congrats for a set of amazing results. I have two questions. Sticking to the program, with Yuanqing, I would like to step back to ask a longer-term question. First, I want to ask, let's say, in three years' time, I was wondering, what's your goal? What do you want Lenovo to look like from a business mix perspective, from the margin perspective, and from your value proposition positioning perspective?
Thank you for the question. I think for Lenovo, we will continue to implement our current strategy. Firstly, we will continue to focus on the traditional PC. We want to win in this market until we become the leader. I believe the traditional PC will continue to be our core business. Not only we will win the commercial PC area, but also we will win the consumer segment. Not only we will win in China, but also we want to win more in emerging markets as well as in mature markets. Meanwhile, we will try to attack the new opportunity in mobile internet and the digital home area, as well as probably in China, we will try the server and the cloud service. But, in short-term, I don't think that will account for a big portion of our entire business.
Probably mobile internet, smartphone, and tablet will reach 10% to 20% in three years. We haven't had the exact numbers. But that's our expectation.
Okay. Any color, Yuanqing, on the margin goal in three years? This is a part of my first question, by the way.
Wai Ming will answer.
We obviously would not. Sorry. I think rather than giving you a very specific numbers in three years' time, I think it may not be appropriate. I would actually say that we will continue to see improvement in operating margin, I think year in, year out. I think that primarily comes from, I think firstly, improving our gross margin line. If you have followed us for a period of time, I think over the last couple of quarters, we actually continue to invest heavily in building up our brand, making investment in coming up with innovative products. Which you obviously can see, I think from the results that we achieved in that. At the same time, with the increase in our business volume, that obviously you can begin to see the scaling impact. As a result, you can see that.
In fact, those two areas that are already reflected in our P&L over the last couple of quarters, meaning that we see margin holding or improving on the growth side as well as our E2R coming down. So I would say that it is our target or it is our plan to improve the operating margin over time. It may not be appropriate for me to give you a definitive number, what is the PTI margin in three years' time.
Okay. Thanks for the answer to my first question. My second question is on a mature market. Even when excluding the acquisitions, you still grew your mature market business by 32% year-over-year. That's a fairly impressive growth rate. Would you be able to elaborate on some of your sort of the secret weapons or secret strategies that has put you where you are today, way outgrew the market over the last year, particularly in a mature market where the competition is pretty intense? Thank you.
Firstly, our secret is still our strategy. I think we have well implemented our strategy. Firstly, we focus on the commercial segment to strengthen our leadership position. To make more money from that area, so that we can form our attack in the consumer area, in the SMB area. We have implemented this strategy very well. That's why not only we have reached the number one in the commercial area, but also we are growing fast pace in the SMB area. Definitely, while we can be successful in mature market, another reason is we really have very competitive, very strong product portfolio. Our ThinkPad has become a very popular, high quality, innovative products in the commercial area. That help us to win the number one position to make more money.
Thank you very much.
Our next question comes the line is Shannon Cross of Cross Research. Please ask your question.
Thank you very much for taking my question. My first is on what is going on within the HDD industry. I was curious about how you are thinking about availability. I know you said it would be tight in fourth quarter, and price would remain high, but I am trying to figure out how much of this is sort of locked in on a longer term basis. If you could give us some idea on the impact on your third quarter gross margin, if we had not had the HDD shortage, because clearly I am sure there was some impact there. Then I had a follow-up.
Yeah. We believe this quarter, the calendar first quarter, the HDD supplier were being pulled gradually in latter of this quarter. We expect the gap between the demand and the supply to last through this quarter as all the PC makers try to fill up their demand. We believe the HDD costs will continue to stay high in this quarter. We try our best to offset the gap with the other components. That is this quarter's HDD situation. Regarding of last quarter's GP margin, it is definitely impacted by the HDD cost rise. If you compare our last quarter's GP margin with the Q2, we dropped a little bit. I think the key reason is HDD.
Yeah.
Maybe you add something here.
Yeah, I think if you really compare the GP margin of quarter two versus quarter three, I think is around 0.8 of a percent. I actually would not contribute all of those of the increasing cost of the hard drive. Our margin obviously also varies because of the change of the mix of our business versus consumer and commercial. I think for the benefit of you to do any sort of modeling, I think I would say that increasing cost of HDD is around between $5 to $10 a box. Obviously some of those we will be able to pass on to customers, some of them we may not be, because there are also finished goods inventory that we hold inventory on some of the hard disk. So it is nearly impossible to actually say how much of that change is the result of the hard drive.
Generally the industry, you see that the cost increase between 5-10% is as a result of the unfortunate flood in Thailand. We continue to see that in quarter four and probably will ease out, I think towards the end of the quarter. Having said that, obviously HDD is only one component within the entire box. There are obviously some benefits or cost benefit coming out from other commodities. That's the reason why I think this is impossible to quantify exactly what's the dollar amount as well as the margin. I think that has an impact on our P&L for quarter three.
Okay, great. That was very helpful. Thank you. My second question is on Ultrabooks. We actually went to your booth and your trailer at CES and saw all of your lineup. I'm curious as to how you think about Ultrabooks when Intel is saying 40% of the market is going to shift to Ultrabooks in a couple of years. How does Lenovo think about the opportunity and think about trading off a higher ASP, and trying to get customers to effectively pay up for a notebook relative to prior price points? Just any color you can give us on your thoughts on Ultrabooks would be very appreciated.
Yeah. I think Ultrabook is not just a smaller form factor. Ultrabook has learned a lot from the phone and the tablet. We believe consumer customers, they need not just a smaller form factor, but also always on feature. Long battery life, et cetera. The Ultrabook will meet customers these kind of requirements. This will become the trend for the traditional clamshell notebooks. Sooner or later, the Ultrabook will account for the majority of the traditional PC market. But definitely the customers want to see the price is competitive. If they compare with the traditional PC. We think at Lenovo, we have positioned ourselves in this area. We will become the leading company in the technology, in the product. This is our assessment, probably in next 18 months.
Ultrabook will account for around 30% to 40% of the total notebook market.
Okay, and just to be clear, do you think you can get to a $600 to $650 price point with a solid-state drive? Or will you need to use a hybrid solution?
How much you said?
$600.
$650 to $700. Definitely that's our goal. But I don't know when we can hit that pricing point.
Okay. Thank you very much for taking my question.
Thank you.
Your next question comes the line of Don C at Standard Chartered Bank. Please ask your question.
Hi, good morning Yuanqing, Wai Ming, and Gary. Congratulations on a very good set of results. I've got two questions. First on TV and second on smartphone. First on TV, could you share with us a little bit more on what's your TV strategy? When can we see the first product launch to the market? If you can add a bit more color on how this TV business will look like in one and three years from now. Second, this is on smartphone and on strategy and the outlook. If you can add a lot more color, given that the momentum has been particularly strong in the last quarter, can we expect to see this sort of strength going forward from here? Thanks.
Thank you for the question. TV, we plan to launch our first smart TV in April, in China first. We don't have too high expectation for the first year because this is the first year we started the business. Probably a couple of hundred thousand units. We will be satisfied with that test. But definitely we will have a higher expectation on our next generation. That's the answer to the first question. Regarding the smartphone, last quarter, as you have seen, we really had a breakthrough results. We shipped 6.5 million phones total. Among that, almost half are the smartphones. For the coming year, definitely we want to keep the current momentum. At least 1 million a month. That will be our expectation, yeah.
We want to gain more market share in this area.
Okay, thanks Yuanqing. Can I just clarify, you are looking at 3 million units per month, and that is for smartphones only?
Is your target 3 million units per month for smartphone?
1 million.
I said 1 million.
Oh, 1 million.
Actually, last quarter was 1 million per month. I think that's a minimum number. We should keep this pace.
Okay.
If we have 1 million per month, 12 months, we will have 12 million.
Okay, got you. Thank you very much. I'll rejoin the queue.
Your next question comes on the line from Charles Yonts of CIMA. Please ask your question.
Hi, morning. Just wanted to have a follow-up on the question on HDD. Can you give us an idea, in terms of the HDD prices moving into the March quarter compared to the December quarter, will it be sort of flat or will we in fact start to see some marginal decline? Because I think the drive makers themselves are sort of guiding us marginal slight in the ASP coming to the March quarter. From Lenovo's perspective, what will the prices look like?
We believe the price of the hard drive will keep at the current high level, but it will not become worse. That's our projection.
Okay. Has the company sort of gone into long-term agreement, like what Wai Ming mentioned, for multi-year or for the full year kind of a price level?
What do you mean?
Well, we obviously will not be able to disclose to you what sort of supply agreement we have with the supplier. We obviously look into. But one thing I can assure you is, again, I think probably you should really look at our balance sheet. We have a very strong cash position. We can actually do whatever that really for us to grow the business and grow the business with a reasonable margin.
Okay.
But as to detail as to whether we have long-term or have not long-term or the terms, it will be inappropriate for us to discuss here.
Sure. My next question is, the admin expenses was actually fairly flat in the December quarter relative to the September quarter, but the revenues grew quite nicely. Will this be the level we should be looking at moving forward?
So-
I think-
Admin expenses.
Admin.
Admin.
Are you asking admin expenses? It doesn't come out quite clearly.
Yeah, the admin expenses of about $169 million per quarter.
I would say that probably that is the sort of back office. I think without looking at the detailed breakdown, I wouldn't say that it would significantly increase. Obviously, it varies. As you know, I think we've been actually trying very hard to control our cost. I explained earlier that one way for us to see that margin improvement is to have the scaling benefit of our expenses. Back office expense, admin expense, that obviously is one of the items.
Okay. Thank you.
Your next question comes on the line of Roxy Wong of Mirae Asset Securities. Please ask your question.
Hi. Regarding your MIDH business, is it possible to give us some color on, say, the operating margin or GP margin side on that business?
Well, the GP margin at the moment is obviously, I think, lower than the PC business, because obviously, I think our PC business is significantly larger than the MIDH business. Our MIDH business today, by and large, a lot of those is actually in China, while our PC business is global. Without giving you the exact number, I will actually say that the gross margin probably is about I think will be very difficult because, again, the MIDH business comprises of our smartphone as well as our tablet. While tablet, we are in the beginning stage, it may not be appropriate, I think, to disclose that number. I understand that you really want to see how that business is going on.
I can tell you. Our mainstream smartphone models have very decent gross margin. The model we sell to the China Unicom. I think we have very decent gross margin. Last quarter, we cleaned the older inventory.
Yes, the tablet department.
The tablet, particularly in the tablet area. Overall, GP margin probably were impacted by that inventory cleaning.
In that case, at what kind of scale do you think the MIDH business would be having a margin which is similar to your-
Similar to PC. I think, or probably in the future, it could be even better.
I just want to see whether there is any estimate or, say, what kind of scale, say, when it reach 1 billion sales or 2 billion sales or whatever, that it will be matching a PC margin right now. Would there be any sort of revenue size that you would like to share? Well,
One billion a quarter, definitely. One billion a quarter, definitely will improve the GP margin.
Now we have 500. Yeah, we have about half a billion today. I think we have half a billion today, and then we have, I think, again, if you really compare that to our PC business, I think our PC business is really around $8 billion or $7.8 billion. So we actually would need to see that business to grow, as Yuanqing said, at least double before we actually see a reasonable margin coming in.
Again, I think the MIDH business, as Yuanqing just now said, I think we have more products to come out, so it will be very difficult to actually. I think the phone business we obviously can, as Yuanqing said, that we definitely have a little more visibility on that. There are more new products coming in, especially in different stage of the launch, that actually may not be able to give you a definitive sort of margin as well as this, how much revenue or how much scale in order to get that turned into a decent margin.
The last thing is that I noticed that the emerging market sales as well as the loss seems to be getting worse in the December quarter. Was it because of the HDD shortage that you try to optimize your revenue and profit by shipping less to low profit margin, lower ASP market?
Not exactly that is the case. I think, again, if you really look at the emerging market, I think we obviously would not be able to give you a breakdown of all the regions in the emerging market. I think we probably will have one or two regions at the moment are still not profitable because not really reaching the scale that we want. Partly the reason is obviously the cost is high, but partly because there are, I think we take some efforts in cleaning some of the channel inventories in certain regions, and that caused the losses.
All I can tell you is, I think of the top three markets in the rest of emerging market portfolio in Lenovo, I think those top three markets are doing very well in terms of increasing market share as well as profitable.
Thank you. In view of time, we probably take the last question.
Your last question comes from the line of Wanli Wang of RBS. Please ask your question.
Hi, good morning. My first question is that after success for this A60 smartphone, when are we going to see next new model available in the market? How many new models is Lenovo planning to launch in 2012?
We will have a very rich smartphone portfolio in the coming year. We will not only have the model for China Unicom, but also China Telecom, as well as China Mobile. Also, we will provide multi models for the open market. I believe very soon, you will see the replacement model of A60 with the China Unicom. Why we have seen the breakthrough in the smartphone area, mainly because we changed our product strategy. We will not use just one model to compete with Apple. We will use multi-model, cooperating with multi telecom companies. We will adopt this kind of strategy to compete in the market.
If with the multi model and also multi-channel, can we assume that this monthly shipment should be better than this 1 million units per month? Because, last year, only one model.
I said this is the minimum. I definitely have the high expectation, but I just want to be reasonable.
Okay.
Not set too high expectation.
Yeah. How about overseas market? Is Lenovo going to sell this smartphone to us?
We still haven't sold the smartphone outside of China. But I believe in the next fiscal year, we will expand it to some emerging markets. We really have the tablet sales outside of China. So, totally last quarter, we sold around 400,000 tablets. Most of them are sold in China.
Okay. By the end of this year, what do you expect is a contribution from this MIDH business? Is it like 10% or 15%?
Are you talking sales or are you talking about-
Sales.
Oh, sales.
I mean, top line.
So currently accounts for how much, 5%?
Less than 5%.
5%.
5%, yeah. 6%.
The last quarter was the 5%. We want to lift the number to 10% in the next fiscal year. For this fiscal year, our Mobile Internet and Digital Home business are still the investment business. That means we still lose money in that area. I think to nurture a new business, it definitely needed to invest.
Okay. My second question is related to the JV with Compal, because we all know that in terms of the manufacturing capacity, right now it's in the oversupply stage. I wonder why Lenovo needs to have a JV with Compal, and also your strategy in terms of this manufacturing side. Thank you.
This will be our strategic decision. We believe with this, as Jiong mentioned, that will help us to improve the efficiency as well as it will help us to strengthen our innovation capability. We believe we need this manufacturing capability and capacity.
Okay. Thank you. That's my questions.
Thanks, Wanli. Thank you everybody for your participation in today's call. If you have any further questions, please feel free to contact me or the IR rep directly. This webcast will play, and the press call will be available in the next couple of hours. Thank you again for joining us today. Thank you.
Ladies and gentlemen, there will be a replay available of this call with the code 662009. That does conclude our conference for today. Thank you for participating in our call.