Earnings Call: Q1 2011

Aug 19, 2010

Afternoon, ladies and gentlemen. Welcome to Lenovo Group's fiscal year 2009 to 2010 annual results presentation. I would also like to welcome our participants on the live webcast. Before we begin, let me introduce our senior management on stage. First of all, is Lenovo's Chairman, Mr. Liu Chuanzhi. Next to him is our Chief Executive Officer, Mr. Yang Yuanqing. On your left-hand side is our Chief Operating Officer, Mr. Rory Read. On your right-hand side is our Chief Financial Officer, Mr. Wong Wai Ming. I would like to turn the time over to Wai Ming. He is going to give us a review of Lenovo's performance in the past fiscal year. Wai Ming, please. Good afternoon, ladies and gentlemen. Thank you for joining us. Today, I will take you through Lenovo business and financial performance for the fiscal fourth quarter, and our results for the full year ending 31st March 2010. Our CEO, Mr. Yang Yuanqing, will give you a business review and discuss what we will be focusing on this year. Our Chairman, Mr. Liu Chuanzhi, will conclude with some remarks, after which we will take your questions. Let me start by giving you an overview of our quarter 4 performance. We had another strong quarter 4, despite our final quarter is typically a low season of the group. In this quarter, Lenovo grew 59% year-to-year in unit shipments, and our worldwide market share increased by 1.7 points to 8.7%. Yuanqing will give you more details later. You could refer to the financial summary table. Our quarter 4 sales revenue was approximately $4.3 billion, which was up 56% year-to-year or down 10% quarter-to-quarter. You may recall that we completed the acquisition of Lenovo Mobile at the end of January as part of our mobile internet strategy. Accordingly, we have consolidated approximately two months of Lenovo Mobile sales revenue, which was approximately $91 million. Excluding this, the PC sales revenue was up 53% year-to-year and down 12% quarter-to-quarter, better than the normal seasonality. The strong performance was driven by growth in all geographies, our transaction business, and our consumer products. Gross profit was $449 million, up 50% year-to-year, but down 15% quarter-to-quarter. Gross profit margin dipped slightly from 10.8% last year to 10.4% in this quarter. This is largely due to the high component prices, such as memory chips, panels, and strengthening of the U.S. dollars against other major currencies such as the euro, especially towards the end of the quarter. These factors will continue to be a challenge for us to improve our margin performance. Operating expenses increased $27 million or 7% compared to last year to $402 million, as we continue to invest in growing our business in emerging markets. The year-to-year increase in operating expenses related principally to our increase in our sales activities. You may note that our sales revenue increased by 56% year-to-year by $1.5 billion during the same period, and it demonstrate that we are scaling our investment very well. However, expenses were down $29 million quarter-to-quarter. Operating profit in quarter 4 was $47 million, which is in line with our normal seasonal pattern. That compares to a loss of $76 million last year. This is the third consecutive quarter where we have reported profit. We recorded a non-operating expense of $7 million that relates to net financing cost. Accordingly, our E/R ratio in quarter four was lower to 9.3% from 13.5% in last year. However, this increased marginally compared to 9% in quarter three due to seasonal revenue skew. We incurred a one-off cost of $20 million in quarter four, which is the redundancy cost incurred primarily in mature markets as we continue to drive operating efficiency and reduce cost. Our pre-tax income on a run-rate basis is $40 million. Taking the redundancy cost into consideration, pre-tax income for quarter four is $20 million. For the full year, sales revenue reached $16.6 billion, up 11.4% year-to-year, and gross profit declined 2.4% to approximately $1.8 billion, largely due to the drop in sales and the decline in gross profit in the first half of the year. Our action in expense reduction are well on track. We have saved a net cost of $224 million in the past four quarters, and we reinvested part of the savings, especially in the emerging markets and consumer business, to drive future growth. Operating profit was $204 million. We recorded a total of $68 million in one-off cost last year, largely the warranty provision of certain components and the parts not reimbursable from suppliers as recorded in our quarter three and the redundancy cost that I just mentioned. We also recorded a total of $83 million in one-off gain from disposal of shares in quarter two and three. Total pre-tax income last year was $176 million. The E/R ratio for the full year was down to 9.6% from 12.2% last year. We expect the E/R ratio will continue to improve as we grow our business and scale our expense investment. Profit attributable to equity holders for quarter four and for the year is $13 million and $129 million respectively. EPS is $0.14 in quarter four and $1.42 USD for the full year. The board decided today, in today's meeting, to declare a final dividend of HKD 4.5 cents per share. Next chart, please. Our balance sheet as of 31st March remains very strong. Non-current assets were slightly above $200 billion. The increase in intangible assets was largely due to the completion of the acquisition of Lenovo Mobile, and we have included a goodwill of $177 million in the intangible assets. Current assets were approximately $6.2 billion, and the increase compared to last year was due to higher bank deposits and improved cash flow and an increased account receivable, which was largely in line with our increase in sales. Current liabilities were at $6.4 billion, largely due to increase in account payable, which again, was in line with our increase of sale activities. As a result, we have net current liabilities of around $184 million as at 31st March 2010. The non-current liabilities were at around $931 million. Let's go through the cash and working capital in the next chart. We have a total cash reserve and bank deposit of $2.4 billion, compared to $1.9 billion last year. The year-to-year increase in our cash position result on the improved cash conversion cycle, as well as an increase in our sales activities. We settled the payment for the acquisition of Lenovo Mobile at the end of January, and also paid down $135 million bank loan for Q4 and $235 million respective for the year. The net cash reserve remains very healthy at $1.9 billion against $1.2 billion at the end of the previous fiscal year. We continue to do well with managing our working capital. Our cash conversion cycle in Q4 was at negative 28 days, a further improvement of two days compared to the same period last year. Inventory days increased one day year-to-year to 18 days in Q4, primarily due to an increase in channel sales in overseas markets. Days receivable improved by three days to 30 days due to strong sales volume growth, especially in China. We actually have very good control over the absolute receivable level. Days payable remain the same as 76 days. The cash conversion cycle for the full year was at negative 30 days, better than the negative 23 days last year. Inventory days was reduced by one day compared to last year. Days receivable improved by six days to 24 days, largely due to early repayment from customer, especially in China, who could borrow at relatively low interest costs from banks when the market liquidity was abundant and pay us early to enjoy our early payment incentive schemes. The environment also made it attractive for us to discount some of our outstanding notes receivable. Days payable were the same compared to last year at 69 days. Now let me turn to the geography performance for Q4. This chart summarize our PC geography segment reporting for Q4. We have excluded all the one-off items, such as capital gains on share disposal and redundancy costs from the operating profit and margin, so that you can compare our operating result on a run-rate basis. For China accounts for roughly 45% of our sales, lower than last quarter due to seasonality. It continued to deliver solid growth and gain share driven by consumer products and especially notebooks. The China PC market posted 40% year-to-year growth by unit shipments during this quarter. Please note that China is currently the number two largest market in the world, and it is the fastest-growing market among the top five biggest markets. The high growth was a result of a strong consumer sentiment. Accordingly, you would note that we had a significant increase in our consumer notebook business. We continue to expand our leadership in China by growing 57% in unit shipments and increase our market share by two points to approximately 28% based on the latest industry estimate. The robust growth was driven by strong commercial and consumer products. They were up 39% and 9% respectively year-to-year. Notebook also recorded a strong growth of up 80% year-to-year. Although China market remained competitive, our success has widened the gap between ourselves and the number two market player by three points to 60% in Q4 compared to last year. The average selling price decreased slightly by 2% quarter-to-quarter. We expect the ASP to trend lower over time as the mix of consumer products and lower priced brand products will continue to increase. Sales were up 67% year-to-year, but down 14% quarter-to-quarter. As I mentioned before, we completed the acquisition of Lenovo Mobile at the end of the January. We have consolidated Lenovo Mobile result for two months, excluding the sales revenue from Lenovo Mobile. Our business was up 59% year-to-year and down 18% quarter-to-quarter. Operating profit was $108 million, and operating margin improved from 4.9% to 5.5% in quarter four, a drop of 6% in quarter three due to seasonality. For emerging markets, excluding China, it accounts for 17% of our sales. Our expansion in emerging market continued to show good momentum in quarter four on the strong execution. Lenovo grew 95% year-to-year by unit shipments and gained 33% market growth according to the latest industry estimates. We gained share all across the region. Key markets in the region continued to show strong growth momentum. Expansion in our transaction business continued to drive our growth in the region. It was up 136% year-to-year, and our market share in emerging markets was up 1.6 points to 5%. Sales were up 91% year-to-year, but down 13% quarter-to-quarter. Operating loss narrowed from $57 million last year to $38 million, but widened quarter-to-quarter due to seasonality and our continued investments in channel build-out. Our efforts in integrating the emerging markets with China business model continue to see progress. As we told you before, we will continue to invest in the channel network to drive volume growth and market share gains. We expect profitability in the region will improve over time as we gain more market share with better scaling impact. Now for mature markets. Mature markets account for 38% of our sales. The region also recorded strong unit shipment growth during the quarter of 45% year-to-year against market growth at 19%. We recorded share gains across the region, and as a result, our market share increased by approximately one point. North America and Western Europe were up 34% and 45% respectively. Japan was up 17%. Expansion in the transaction business continued to yield good results, with unit shipments up 85% year-to-year. We continue to see positive scaling from the strong volume increase. Our consumer products also continue to show strong growth, up 98% year-to-year. Commercial product also rebounded, up 37% year-to-year. Both contributed to the growth momentum in the region. Operating loss reduced from $7 million in quarter three to $6 million in quarter four. The continued improvement in the region is a result of the increase in sales revenue and the efficiency improvement. Although currency volatility has caused some negative impact on both our sales as well as profit in the region, especially in Europe. Overall, we are on track to break even. Next slide, please. From a product perspective, Idea products show strong growth momentum in quarter four as we continue to roll out the transaction business model. We have launched several exciting new products in laptop, such as IdeaPad Y series, and desktop, such as the IdeaCentre A300 series. Idea product grows 86% year-to-year in unit shipment and 94% in sales. Idea now accounts for 34.8% of our group sales. Think products also show a 43% growth year-to-year and up 37% in sales. The newly launched new ThinkPad X100e for SMB have gained much market traction. Think accounts for 65.2% of our sales. Notebook continued to demonstrate strong growth momentum through its winning product portfolio. Notebook unit shipments and sales were up 76% and 60% year-to-year respectively. Our worldwide market share increased 1.7 points to 8.5%. Notebook accounts for 62% of the group sales. Netbook unit shipments grew 25% year-to-year and account for approximately 9% of our notebook shipments. Desktops performed well in quarter 4. Unit shipments and sales in our desktop were up 40% and 41% year-to-year respectively. Our market share in worldwide desktop market increased by 1.8 points to 8.9%. Desktop accounted for 34% of our sales. Our all-in-one products continue to see strong growth momentum. This category has grown substantially since its launch last year and accounts for 25% of our desktop product sales in quarter 4. Before I end my presentation, I want to give you some color on the market outlook. The worldwide PC market has shown signs of improvement in the last several quarters, although challenges remain. It is likely that the PC demand in China will remain strong, as it will be in most emerging markets. There are some promising signs of corporate refreshment, and commercial spending will likely improve gradually in this fiscal year. Consumer demand has been the key driver for the worldwide PC market growth for the past year, and its growth momentum is likely to remain. However, the recent economic issues such as the Forex, the volatility in Europe, may dampen the growth of the PC demand globally. Meanwhile, the ongoing shift of product mix towards the low price and within the consumer PC will remain challenging as it continue to exert downward pressure on our average selling price. In addition, as demand for PC continue to improve, supply constraint in certain key components such as memory, panels, will continue to impact production. Component price increase could constrain margins in the current fiscal year. Furthermore, volatility in global currency, like what we experienced in the last several quarters, could cause additional challenges for PC makers like ourselves. We will continue to monitor the market environment and actively manage our business to ensure continued improvement in our performance. We have a healthy balance sheet, and we will continue to be prudent in our cash management to create shareholders value. We will continue to look for M&A opportunities to complement our growth. We are very confident with our well-defined strategy and action plan in place. With our action plan in place, we will continue to improve our performance and profitability this year. Now let me turn to Yuanqing. Thank you, Wei Ming. Good afternoon, everyone. As you have just heard from Wei Ming, after reporting a solid performance in the previous two quarters, Lenovo continued its strong performance in Q4, providing an ideal ending for the fiscal year. These results completed the turnaround performance compared to the big loss in 2008-2009 fiscal year. Next slide. Last quarter, Lenovo was the fastest-growing major PC company for the second consecutive quarter. We grew at 59% year to year, twice as fast as the market growth rate of 27%. This rapid growth led to a Q4 market share of 8.7%, up 1.7 points year-over-year. In addition, the impact of seasonality, which usually makes our Q4 our lowest quarter. This year was the smallest in our history. This was also our third straight quarter of profitable growth. Although our gross margin was impacted by increases in component cost, our substantial revenue growth of 56% greatly improved our E/R ratio by 4.2 points year-over-year to 9.3% and ensured the health of our business. Last quarter's strong performance in revenue, profit, and the E/R ratio enabled Lenovo to achieve all of the financial targets we set in the beginning of the last year. Next slide. For the fiscal year, our worldwide market share grew 1.2 points to 8.8%, an all-time high. We had never reached above 8% market share. Full-year market share. This is the first time. Our revenue grew by 11% to $16.6 billion. Meanwhile, we completely turned around the massive losses of $188 million in fiscal year 2008-2009 and achieved a PTI of $176 million. With our effective expense management and improved operational efficiency, we reduced our E/R ratio to 9.6%, which improved 2.1 points year-over-year. You would ask, in one short year, what did we do to achieve this turnaround and strong performance? First, we had the right strategy and combined it with strong execution. Next slide. Around this time last year, I told you, I communicated with you about our new strategy. We call it protect and attack. We want to protect our core business in China and in global commercial business. Meanwhile, we want to attack in emerging markets and the global transactional space, which include consumer and SMB. Let's first look at the improvement from the protect side of our strategy. We continued to expand our leadership position in China, outperforming the market in all four quarters and reaching a fiscal year market share of 30%, a gain of 1.2 points year-over-year. Meanwhile, our profitability was further improved with PTI increased by $66 million year-over-year. Our business in China was a key contributor to the company's overall market share and profitability improvement. For our global commercial business, we achieved its primary objective of returning to profitability. PTI reached $64 million, an improvement of $62 million year-over-year. Next slide. On the attack side of our strategy, we also executed effectively and achieved substantial improvements. We had strong results in emerging markets outside of China, growing at 34% for the year, well ahead of the market growth of 7%. This led to a market share of 4.8%, a gain of one point for the full year. We delivered rapid volume growth in key markets such as Southeast Asia at 39%, Eastern Europe at 30%, and Russia at a triple digit growth of 207%. The expansion of our global transactional business continued to gain momentum and help drive the company's market share growth. We grew 47% in volume, and worldwide market share reached 7.2%, a gain of 1.5 points for the fiscal year. This includes gaining 1.2 in emerging market and three-tenths in mature markets. Next slide. In addition to effective execution of our strategy, we also further improved our overall competitiveness. These improvements were also important drivers for our rapid growth. First, we created a fast and effective decision-making system. We formed the Lenovo Executive Committee and effective working process. The LEC makes quick and effective decisions on the company's strategy and execution. This has greatly enhanced Lenovo's speed. Second, we took steps to strengthen our business model. We established the key building blocks for our global transactional business. Also, we started to simplify our relationship business and shift some customers from relationship model to transactional model. Third, we fully leveraged our advantage in innovation. Lenovo's commitment to innovation differentiates us from other commodity players. This not only improved our overall product portfolio competitiveness, it also enabled us to lead in new product categories, such as mobile internet devices. Last but not least, our culture of delivery on commitments is taking hold, providing a competitive advantage. These improvements were important factors for our turnaround performance last year. Meanwhile, I believe they are the foundation for Lenovo to achieve further growth in the future. Next slide. Our performance and achievements in the past year clearly demonstrated that our strategy was correct and our execution was effective. This year, we will continue our protect and attack approach. Next slide. We will continue to protect our core China business. In the PC space, we creatively segmented the China market into mature and emerging areas. The big cities like Beijing, Shanghai, actually, are very mature markets. The penetration rates have been very, very high. But Chinese government is trying to build more and more small cities and towns. For those cities, they are the emerging market for Lenovo. Based on the special characteristics of each of these areas, we will utilize different approaches to further expand our market and to strengthen our leadership position. While extending our leadership in PCs, we will move aggressively to expand our business to the new fast-growing mobile internet space. We will fully grab this opportunity, which may become the same size as the PC market in the next few years. In partnership with China Unicom, we just launched our new smartphone, LePhone, a couple of weeks ago. With our advantages in brand, in product, and in channel, Lenovo has an opportunity to win this market. We believe we will become the leader in this space and deliver a new wave of growth for the company. Meanwhile, we will also pay close attention and prepare for the growing opportunity in digital home server storage in China. For our attacks in emerging markets, we will. It's next slide. For our attacks in emerging markets, we will be even more determined and decisive. Our objective remains the same, to gain share and achieve substantial market positions in key countries. We have identified countries such as India, Russia, Turkey, Poland, et cetera, as key markets with a goal of double-digit shares within 1-2 years. We will continue to focus on the transactional segment and invest in gaining share now, and then improve profitability once we are well-established in these markets. Next slide. For mature markets, while we will further improve profitability, we will place more emphasis on growth as well. We will focus on driving a healthier and steadier profit from the relationship business, large enterprise customer business. With this profit, we will then invest more into the transactional business to drive additional growth. Last year, we built the foundation blocks in our transactional business in mature markets. This year, we will fully integrate them to further improve our competitiveness and to harvest in this space. Next slide. To ensure effective execution of the strategy, we must continue our commitment to enhance our overall competitiveness. We will further enhance the end-to-end integration of our dual business models and fully unleash the unique advantage of our business model. We will continue our commitment to innovation. This is the key weapon to differentiate ourselves from our competitors. This year, our innovation will continue to drive momentum in our core PC business. Meanwhile, we will also grasp new opportunities, such as mobile internet, digital home, and cloud computing. We will also continue to deepen our company's culture of delivering on commitment and acting like owners. This will further enhance our execution capability. Next slide. Today, the overall global economy is improving. But the challenges remain. We will closely monitor the economic environment and the industry trend changes. On one hand, we will fully leverage the positive market trends to further grow our core PC business. On the other hand, we will grasp the opportunities in mobile internet area and build up our new businesses. Lenovo is a company that emphasizes strategy, execution, and delivers on its commitments. Last year, with the right strategy and the effective execution, we successfully turned around our business. In this new fiscal year and into the future, as we continue to execute our strategy, we are confident that we will drive further and deliver more sustainable growth for our business. Thank you, everyone. I will now turn the meeting over to Chairman Liu. Ladies and gentlemen, the 2009-2010 fiscal year was a critical year for Lenovo, not only because of our outstanding performance. More importantly, this year also marked a turning point since Lenovo's acquisition of IBM's PC division. Prior to this year, we had experienced various difficulties and obstacles, and we had even faced extreme danger, like standing on the edge of a cliff. But since this year, Lenovo has embarked on a fast-lane path, one that will lead to our goals for ultimate success. Lenovo's improvements in business results over the last year were partially due to external macro environment reasons, such as the revived Chinese and international economies and the PC industry. What is more important are internal people-related factors, and these factors, of course, are subjective in nature. Among these factors, the most important one is the fact that CEO Yang Yuanqing has built a core leadership team, blending people and practices from both East and West. These team members work closely with good rapport, and each one has the freedom and space to contribute his or her opinions and inputs. As a result, the team is able to formulate a very suitable and optimal strategy of protect and attack. This team brings deep experience and expertise in industry accumulated from diverse operations in different geographies. Their wide range of perspectives explains why they could develop the effective protect and attack strategy and why they executed it with determination and executed it well. In addition, during the past one year, this management team invested great deal of effort in building the company's culture. As a result, "Do what we say and own what we do" has become a creed of the staff. Throughout the whole company, the morale has been boosted. All these signs demonstrate that this year is indeed a turning point, and we have embarked on a new chapter for Lenovo Group. The board is very pleased with the performance of management, and we will continue our strong support of it in the future. The IT industry is still in the process of hyper-growth and development, but we have to pay special attention to the future directions of the industry. The application of the mobile internet has started to take off. As the cloud computing will become mature and also the convergence of the three networks in China, all this will change the landscape of IT industry's manufacturing and service offerings. The management of Lenovo Group has already started to look at this new trend and has organized dedicated members to conduct research and analysis to explore and identify our future path. The recent launch of LePhone in China is a demonstration of the management's forward-looking perspectives and their preparedness for the future. I believe in terms of the forecasting of the future development of the industry, as well as the identification of path of future development, we're not going to lose to any competitors. However, the micro-level economic development of the world is beyond our control. What we can do is to try our best to adjust and respond to ensure our leadership position in the industry. For your remarks, and thank you, Yuanqing and Wei Ming, for your presentation. We will take questions from the floor now. If you wish to ask question, please raise your hand and we'll pass you a microphone. To make sure all of us, including our participants on the webcast, can hear your question, please wait for the microphone before you speak. We would also like to accommodate questions from as many participants as possible, so please avoid multi-part questions and limit to only two questions in one time. Kindly state your name and the name of your company before asking question. Now, yes, may I take the first question? Thank you. Hi, this is Arthur Shea from UBS. Thanks for taking my questions. My first question is about the China market. Apparently, there has been a lot of noise about the demand. Since we are already at the end of May, which is more than half of the June quarter. Could you give us a little bit idea in terms of how is the market demand tracking? In terms of this share gain potential, and margin outlook, could you please give us some idea in terms of the current status? Thank you. Overall, we are still very optimistic on China macroeconomy and China PC market. But certainly, there is some negative impact on the PC demand, because the government control the house price. Also the stock market is dropping significantly. This really have some negative impact on the consumer's confidence. But, as I just said, I am still optimistic on the China market. Maybe it is not that easy to see 30%, 40%, 50% growth, but to keep at least a double-digit growth in that market is a very reasonable expectation, 10%-20% growth in China market. Sorry, could you clarify? Does that imply that 45%, 50% kind of growth is probably not going to recur in this current quarter? Well, we cannot comment on forward-looking, but we clearly believe that we have the right strategy around protect and attack. Our focus in China around the mature cities is really producing strong results that you have seen. We have also got the right product set, and our coverage is very strong. We have added share in each of the past four quarters, all year long. As we look into the year, the next year, our strategy is right, our products are right. We believe that the opportunity and the optimism is there. But of course, there is macro challenges because of some of the economic adjustments that are occurring, for example, as Yuanqing mentioned, in the stock market or the real estate space. But again, the right strategy, the right products, we see the good trends in the market for the PC space, and we are optimistic about our fortunes in China. Thank you. My second question is about the mobile internet strategy. I personally think this LePhone is a great product, and you have a great alliance with all these leaders in the industry. We did some channel checks recently. It is very interesting that, first of all, China Unicom has a very limited number of stores. Secondly, when we went to the stores, the sales representatives tend to try to promote the competing models instead of the Lenovo models. I am wondering, I think with such a great product, what is the next strategy in terms of how to enhance your distribution and how to capitalize this new opportunity? Thank you. Thank you. You like our product. I am wondering, so in which channel you visit? It is China Unicom's channel or- That is right, yeah. Huh? Channel. Unicom's, this specific sales stores. Oh, okay. This time, we actually not just use China Unicom's channel to sell LePhone. We also use Lenovo's PC channel to sell LePhone. We use dual model as well. For China Unicom's channel, they sell their package. But with a certain expense with China Unicom, they could get a free LePhone or could get subsidies on buying a LePhone. This is one model. Another model is in Lenovo exclusive stores. You could buy a LePhone with RMB 2,499 price, but meanwhile you could buy a discounted China Unicom's package. That different models. Maybe you should go to Lenovo's store. I believe they would not introduce our competitor's product. Remember, Arthur, it's just been a couple. Oh, well, last question. Please. Point. In fact, I had also done something to understand the situation at China Unicom stores. Actually, they have run out of stock. In Beijing, Shenzhen, Shanghai, at China Unicom stores, there is still some stock, but at other stores, they are running out of stock. It is not true to say that their salespeople did not promote our products. Sure, on the manufacturing and the shipment. I hope that we could fix this issue quickly. Is there any indication in terms of what is the potential bottom-line contribution for this new business, say, in this year? For the sake of modeling, is it reasonable to assume that probably it will be insignificant? For the first year, I do not expect that we could make money from this business. The key objective for the first year is getting the shares, selling the volume. I think it is much more important to build the leadership position in this new area. Thank you. Next question, please. Hi, thank you for taking my question. I am Grace Chen from Morgan Stanley. My first question is about your success in China PC market. Even though you say you protect your China market, I think you still managed to gain share, even in China. I think the key success factor is definitely your unique channel strategy. Can you elaborate a little bit on your channel strategy in China? How many selling points or exclusive stores that you have in China overall, and how many you have in tier 4 to tier 6 cities? Do you have any plan to further expand your channel coverage in the coming fiscal year? Also, would you also comment about your competition in tier 4 to tier 6 cities, where I believe the Lenovo parents have high market share? Do you feel any competition that is coming there, or basically the Lenovo still dominate the market in China's tier 4 to tier 6 cities? That is my first question. Thank you. You want to answer that question first? Sure. From a standpoint of China market share, we have added over 1.2% market share, almost 30%, basically 30% for the year. That is a good point, and you are correct in saying that it is much more protect is continuing to grow. Our channel is one of the deepest and most loyal here in China that we see anywhere on the planet. We have thousands of distribution points across mature and tier 4 through 6 cities. These distribution points are a combination of business partners, Lenovo exclusive stores, and large format distribution type centers. We have a robust distribution model that covers the entire market and all segments across the region. In tier 4 and 6 cities, we have a strong reach because of our very strong brand position and this deep channel. We see competitors across China come in, and we see them aggressively try to win in the market space. They are good competitors. But we continue to execute our strategy strongly with a deep relationship with the channel and the right products, the right promotions at the right time that allows us to continue to build in this market and win. In terms of Lenovo PC stores, I think now we have more than 6,000. Correct stores. Also, as I just introduced, forward we split our geographies into mature and emerging. This year, we creatively split the China market into mature and emerging as well. Because for different kind of market, we should have different channel, we should have different strategy. For example, in large cities, in mature market in China, we should fully leverage those large format retailers to sell to the consumer. Also, we should fully leverage teleweb sales to cover the small and medium businesses. The traditional distributors in these big cities will become the only fulfillment partners. But for the emerging cities, small cities, small towns, those are emerging market for Lenovo. We will continue to build Lenovo exclusive stores in those small cities or even small towns. We will use different model. For those multinational companies, they cannot do that. Wherever they go, they will try to find where the logistics are, where the larger format retailers are. No, there's no in the small cities, small towns. We use bicycle to ship our goods. We use Lenovo exclusive stores to sell to customers. There is no traditional published advertisement. We print our advertisement on the wall of the village houses. That's our approach. Can I ask some more questions? Within the 6,000 stores, how many of them are in what you define as emerging cities in China? What's your plan to further expand this number of stores? From a specific standpoint, why don't we take that offline? We'll give you the specific numbers just after the session. We're going to expand, and we're going to continue to grow, but we'll give you the exact numbers right after. Fair? Okay. Good. All right. Thank you. My second question is about margin. I noticed gross margin dipped a bit on a quarter-over-quarter basis. I believe key component price increase definitely key with. What is your view for the key component price rate in the coming fiscal year? Do you expect gross margin to rebound in the next quarter? Thank you. Gross margins at a worldwide basis came under pressure, slight pressure, as we saw component price increases, as Yuanqing mentioned, primarily in memory, LCD glass. We see also some seasonality in terms of volume across the business. But again, the strategy we have and the products that we have are really leveraging what is the key to the customer sets in each of the markets, particularly emerging, where we are seeing 95% growth year-over-year in the most recent quarter. That shows a strong interest in our product set and strong demand. That increases our scale and allows us to buy component prices at even more at better pricing in the future. We believe that there will continue to be pressure in the component areas because there is demand in the PC market on a worldwide base. But we believe that our strategies around efficiency, our strategies around growing our scale and size will be advantageous to us in terms of those pricing over the coming quarters. Of course. Thank you. Yes. Next question, please. Hello. It's Joseph Ho from Daiwa Capital Markets. First question is product related. iPad selling momentum is picking up, and the MacBook was a lesson to learn about time to market. Management, can you talk a little about your tablet strategy in terms of your flagship product launch roadmap? Yeah. We have already had a very complete mobile internet strategy. LePhone is our first product. You will see our next product soon. Actually, you have seen we launched our LePhone, our Skylight, our U1 product at the CES. Certainly at that time, some of this kind of product were just prototype products. Now we are working to develop the product that could be launched in the market. Yeah. Okay. Second question is about the corporate PC recovery, the demand. In terms of your IT and also system integrated partnerships, I think that's quite crucial in order to gain market share when the demand recovers. Can you talk a little bit about your efforts in that area, which will try to help you to capture the growth? Sure. That's the first. Second is about your server's product strategy. Before we go on to server, Joseph, what was the question? I got to corporate buying, but I didn't understand the subtlety. You asked our relationship with who? I think for corporate. Their IT requirement probably will go for some system integrators. Oh, sure. IT consulting. Sure. Say in the States and also in Europe. Can you talk a little bit about your efforts in that area Sure that would help you to better position compared to HP, which they already acquired IT services company. Sure. Also with the products they have. Sure. From a corporate demand perspective on a worldwide basis, we've seen continued signs of improving corporate buying. Our corporate segment has increased in volume year-over-year, and for three quarters in a row, we've seen improving buying activity across the board. The interest in Windows 7 and corporate refresh is strong, and they view Lenovo as a very strong player and opportunity. What's key for us around system integrators is we're focused on our relationships with those system integrators and our business partners. Our focus is the partnership. We're not tied to one System integrator, some of our competitors have chosen to really move in a service-only direction. This allows us to work more smoothly with many of our system integrators. We have a strategy, and we are working directly with many of them to build relationships where we can reach them with our products, and they know that we are going to do it in a partnership method together and not try and take services away from their relationship. I think that is a unique position for us and one that will bode well in this refresh cycle over the next 24-30 months. And with regard to the server products. Sure. Our focus in servers, obviously we have a good server business here in China. We have done a lot of work to integrate our international server activity with our business here in China. We have now simplified our product set, and over the next coming quarters, you will see us introduce common products that will be able to serve both China and the rest of the world. This will allow us to deliver more scale in the server space, reach better price points, and better solutions for our customers at lower complexities and lower costs. This should allow us to expand that business over the coming year or two. But this is a relatively small business on a worldwide scale compared to the rest of our business. Okay? Thank you. Thanks, Joseph. Due to time constraint, we take the last question. Thank you. This is Patrick here from Macquarie. I want to ask a question on operating leverage. If you look at the segment of emerging markets excluding China, there has actually been a regression, you were saying, which is you have got fairly good seasonality in terms of revenues, but the operating margins has actually gone back to a minus 5% level. If you look at your relative market share, you have got similar market share, 5% in both emerging market versus mature markets, but yet your operating leverage is significantly worse off, and that is actually deteriorated in the fourth quarter. Could you explain why that is the case? Sure. We have kind of highlighted a couple of the drivers around the component pricing and obviously, some of the seasonality. But most important, we feel if we look at the total piece of work, the growth that we are seeing across the segment, very strong share gains. We are on a strategy and a game plan to win in the emerging market segments. Our operating margins, as component prices moderate, and as we continue to increase our scale. We have added over more than one point of market share in this segment over the past quarter. That is very important to give us the scale to get better pricing. Also, our focus on the channels in emerging markets is also paying dividends. Our relationships with our channel partners is improving and growing more deep each and every month. This allows us to have a better brand position and better support from our channel partners in the emerging markets. Our focus will be to continue to protect and attack and win share, at the same time, improving our margins over the coming quarter step by step. Yeah, I wish I could help you to better understand our strategy. We said that we have a protect and attack strategy. On the protect side, our China business, our global commercial business, our core business, we must protect not just the market share leadership position here, but also the profitability. Meanwhile, we must attack. In attack side, to win the market share, to gain the market share is even more important. Certainly, we should mitigate the loss. We should mitigate it, but to win market share is even more important. In most emerging market and in transactional space, currently, Lenovo's market share is very small. It's not relevant to the market. It's just 2%, 3%. We must be relevant to the market. We must get double-digit shares, country by country. Until you have the double-digit share, you have opportunity to make money. That's Lenovo's strategy. For this year, we have identified some key countries like India, Russia. Poland Poland. Turkey. You will see double-digit shares in those markets. Then we will shift to focusing on the profitability. Can I put it this way, which is in the emerging market ex-China space, unless you get to double-digit market share, we are not going to see significant improvement at the operating margin level? Yeah. We would not pay that much attention to the profitability in emerging markets. We will pay more attention to gaining share in those markets. And remember, as we move forward, Patrick, every share point that we add in the emerging market increases our scale, significantly improving our ability to acquire components at lower pricing. Each and every share point that we add, each quarter, each month, improves our efficiency and cost structure. That should translate in over each of the coming quarters, some improvement. But as you know, the key is to increase that share position to get the scale. I can understand that completely, but if you look at where the numbers stack up, you are basically saying that, look, you are trying to increase scale in your smallest revenue segment. So what I want to understand is that at what point in terms of relative market share where you basically see some level of positive operating margin? Sure. From a standpoint, remember, it's key from where on a longer midterm strategic view, those emerging markets are going to be key. Russia, India, Eastern Europe, Brazil, Latin America, those are spaces. As we moved last year from 2%, 3% market share to 5% and then to 7% and then ultimately 10%, that gives us the scale. Each point, Patrick, each step function will improve our position because it gives us scale. Don't underestimate the power of every share percent in that space, and it positions us strongly for years two and three out from here in the future. Okay? Thank you. Do you want to take? Yeah. Thank you. Thank you for all your questions, and this ends our Q&A sessions as well as today's press conference.