Good evening and good afternoon, ladies and gentlemen. I am Wong Wai Ming , CFO of the group. Thank you for joining us. Today, I am joined by Mr. Liu Chuanzhi, Chairman, and Mr. Yang Yuanqing, CEO of Lenovo. I will first take you through Lenovo's financial highlights for the fiscal third quarter, as well as outlook for the year. Then Yuanqing will give you an update on key business and strategic issues that we have been focusing on for the rest of the year. Our Chairman, Mr. Liu, will conclude with some remarks, after which we will take your questions. Let me start by giving you an overview of our quarter 3 performance on the next chart. Lenovo had another strong quarter in quarter 3, with record high market share, the fastest growth among all key competitors, substantially improved profit, and historic low expense to revenue ratio.
Lenovo PC unit shipments grew 42% year-on-year in quarter 3 against a market growth rate of 17%, and we grew fastest among top five players. As a result, our worldwide PC market share increased by 1.6 points to approximately 9.0%. This is our record high market share and is the third consecutive quarter we outgrew the worldwide PC market since the economic crisis. This is achieved by our strong growth in China and emerging markets and transaction business that drove our consumer business to gain market share in all regions. We also gained market share in notebooks and desktops. We improved our profitability in Q3. This is our second straight profitable quarter, supported by our profitability improvement in all regions.
For expense control, this is the third consecutive quarter we have improvement in our E/R ratio and achieved an historic low E/R ratio at 9.0% through good expense management and scaling with increased volume. Yuanqing will elaborate more on how our strategy and strong execution helped deliver these results and how they will continue to help us deliver strong performance in the future as well. Let me turn you to details of our performance in quarter 3 in the next chart. Lenovo recorded $4.8 billion in sales in quarter 3, up 33% year to year. Gross profit was $531 million, up 45% year to year. Gross profit margin improved from 10.6% in quarter 2 to 11.1% in quarter 3. This is largely due to higher mix of notebook and high-end products and better pricing control help improve the sequential margin improvements.
However, key component costs remain high and will probably constrain margin improvements. Although we will continue to drive for volume growth for better scaling impact, please note that Q4 is typically a low season with low gross margin. Meanwhile, our actions in expense reduction are on track. We have saved a total of $247 million in the past three quarters. We further reduced our operating expenses from $457 million - $431 million year-on-year in quarter 3. The strong sales volume increase in quarter 3 helped achieve better scaling expenses, resulting our expense to revenue ratio further improved to a historic low of 9.0% in quarter 3 against 9.5% in quarter 2. Notwithstanding that, we have already achieved the majority of our target expense reduction in the last three quarters as planned. We will continue our efforts in expense control.
We will also invest part of the savings to drive future growth opportunities in consumer business, R&D, and in emerging markets. We expect the E/R ratio to remain low, although E/R ratio in quarter four is usually higher compared to quarter three due to the seasonality. We have a strong operating profit in quarter three. This is the second consecutive quarter we return to profit with improved margins. Operating profit was $99 million. We recorded a non-operating expense of $6 million, which relates to net financing costs. Pre-tax income was $93 million. We recorded some one-off items in Q3. They were provisions of non-reimbursable warranty costs for replacing components and parts and licensing fees that resulted in expense of $43 million. The group has recorded a net gain of $43 million from disposal of some of our investments during the quarter.
As a result, our pre-tax income for quarter three is $94 million. Profit attributable to equity holders for quarter three was $80 million. EPS is $0.86 US cent in this quarter. Next chart, please. Our balance sheet at the end of December remains strong. The non-current assets were approximately $2.5 billion. Current assets were around $6.9 billion, against $4.1 billion as at 31st March 2009. The increase in trade and notes receivable was roughly in line with our sales increase. The current liabilities were at $6.8 billion against $4.4 billion as of 31st March 2009. The increase was largely due to increase in our accounts payable, and again, this is in line with our growth in business. As a result, we had net current assets of $17 million as of 31st December, against $319 million net current liabilities recorded at the last fiscal year end date.
Let's go through the cash and working capital in the next charts. Cash reserves continue to improve to $3 billion against $2.4 billion last quarter, while our bank borrowings were $597 million, similar to last quarter. Our net cash reserve remained very healthy at $2.4 billion at the end of the quarter. We continue to do well in managing our working capital. Compared to last quarter, days receivable were 24 days, which shows an improvement of 11 day year-on-year. This was achieved through reduced overdue accounts receivable balances and early payment incentives. Days inventory also showed a reduction of two days year-on-year to 15 days, which was driven by strong sales performance. Days payable was slightly down by three days year-on-year. As a result, the cash conversion cycle in quarter three was at negative 32 days, decreased or better by 10 days year-on-year. Next chart, please. China.
China continued to deliver solid growth and gain share amidst keen competition. Robust growth of the China market was driven by consumer products, especially notebook. The China PC market posted 41% year-on-year growth during the quarter, benefiting from steady economic growth under the government's stimulus package, improved consumer sentiment, and increasing interest in consumer notebooks. We continue to expand our leadership in China by growing 54% in unit shipments and increase our market share by 2.8 points to approximately 33.5% based on the latest industry estimate. This is the largest quarterly increase in share in the last nine years. We have the highest market share in our history. The impact of the government rural subsidy program, as we mentioned in previous quarters, remains small in quarter three, but we believe the huge rural population will be a big potential market in the future.
Sales were up 45% year-on-year and up 14% quarter-for-quarter. Operating profit was $135 million, and operating margin improved from 4.8% in quarter 2 to 6% in quarter 3. The margin improvement was due to a high mix of notebook and high-end products and better pricing control, as well as high attachment rates of services, software, and peripherals. Emerging markets, excluding China. Our expansion in emerging markets continued to show good momentum in quarter 3. Lenovo grew 52% year-on-year by unit shipments against 19% market growth. We gained share in almost across the region. As a result, our market share was up 1.2 points to 5.5%. Sales were 53% year-on-year and up 39% quarter-to-quarter. Profitability in all markets in the regions improved year-on-year, except Latin America, and operating loss was reduced from $20 million to $6 million in this quarter. Operating margin was improved accordingly. Mature markets.
Mature markets are on track to turn around. Unit shipments grew modestly compared to emerging markets at 16% year-on-year against a market growth of 10%. We gained share in all markets except North America, as our consumer business was still relatively small in this market. Unit shipments in North America and Western Europe were up 17% and 7% year-on-year respectively. Western Europe, Australia, and New Zealand were profitable in quarter 3. North America was breakeven. Japan recorded a strong shipment unit growth at 46% year-on-year. Indeed, we have recorded the fastest growth for the two straight quarters in Japan, and the number one in consumer business growth in quarter 3. Japan was approaching breakeven level in quarter 3 as well. Operating loss reduced from $50 million last quarter to $7 million this quarter.
Indeed, if we look at the operating profit before headquarter and other expense allocation, the mature markets have already recorded small profit after six quarters of losses. These are the results of improved margin control and our expansion in the transactional business, which help to increase our business, resulting a better scaling impact. The U.S. dollar weakening against key currency also helped margins, especially in Europe and Canada. Next chart, please. On product performance, Lenovo posted share gain in both desktop and notebook computer markets in quarter 3. The launch of Windows 7 helped improve the PC market during the quarter. Notebook shipments in quarter 3 were up 68% year-on-year against 32% market growth, and we gained market share in notebook worldwide to 8.5%. Revenue was up 46% year-on-year, which was largely due to our expanded consumer product lineup.
Notebook continued to be the largest contributor to the company's total revenue, accounting for approximately 62%. Our IdeaPad netbook has contributed to the good notebook volume growth, but stabilizes approximately 15% of our net notebook business, similar to last quarter. During the quarter, we launched the industry's first multi-touch capacitive tablet netbook, S10-3t. Our desktop shipments were up 18% year-on-year in the quarter against -1% market growth, boosted by the strong consumer products. We gained market share in desktop worldwide to 9.9%. Revenue was up 17% year-on-year, accounting for 36% of our total revenue. Please turn to the next page for the outlook. While the worldwide PC market has shown signs of improvement, commercial spending still remains soft in quarter 3, though it is expected that the corporate replacement cycle may come in the second half of this year.
Our expansion in consumer and emerging markets delivered good momentum in quarter 3, and we will continue to invest in this area to drive growth. However, the ongoing shift of product mix towards consumer PCs and penetration into emerging markets may exert pressure on the ASP, but we think that ASP may remain relatively stable in quarter 4 compared to quarter 3. However, the supplies issue in certain key components that impacted us in quarter 3 will continue to constrain margin improvement, in particular in quarter 4, which is typically low season, and E/R ratio, therefore, were normally higher sequentially compared to quarter 3. In addition, we will continue to take expense out in order to achieve a more efficient operation. The volatility of major currency against USD will also have impact on our margins, especially in the mature markets, though we have a prudent hedging policy in place.
Despite this and sequential seasonality, we expect the year-on-year unit shipment growth in quarter 4 is similar to quarter 3. The progress in quarter 3 continued to demonstrate the strength of our strategic priorities and will continue the solid execution to drive consistent, strong performance. Y uanqing will give you more update on this later. Now, let me turn to Y uanqing.
Thank you, Wai Ming. Hello, everyone. Today, I will first give some comments on our performance last quarter, and then discuss our view and thinking on the future. Next slide, please. Overall, we continued our strong momentum in the third quarter. For the first time since our acquisition of IBM PC business 5 years ago, Lenovo became the fastest-growing PC company at 42% year-to-year, vastly outpacing the market growth rate of 17%. This rapid growth enabled Lenovo to achieve its highest ever global market share for the third straight quarter, reaching 9%. Our growth was driven by gains in almost all regions of the world, particularly in China and other emerging markets. The continued rollout of our global transactional business is another driver. Last quarter, Lenovo continued to expand its leadership position in China, gaining 2.8 points to reach an all-time high share of 33.5%.
Our expansion into emerging markets outside of China continued to yield strong results, growing at 52% year-to-year, greatly outpacing the market rate of 19%. With this strong growth, Lenovo gained 1.2 points of the market share year-to-year. We grew volume rapidly year-to-year in key markets such as India at 54%, Southeast Asia at 66%, East Europe at 63%, and Russia at 374%. We also saw our growth in most regions of the mature market. Overall, we gained 0.2 points of the share year-to-year. But in particular, Japan gained 1.5 points, Australia and New Zealand gained 1.7 points, and Western Europe gained 0.3 points. Meanwhile, the expansion of our transactional model is becoming an important driver in the company's market share growth. In this space, we gained 1.6 points of the market share worldwide year-to-year.
This includes gaining 1.6 points in emerging markets outside of China, and 0.5 points of share in mature markets. This strong performance proves that our attack portion of our strategy, which was clarified last year, is delivering good results. Next slide, please. We have sustained the momentum that returned Lenovo to profitability last quarter and grew our PTI to $94 million in the third quarter. We improved our profitability in every part of the world, and our strong performance in China played an especially important role. Our China business contributed $135 million to our profitability, up 42% quarter-to-quarter. We achieved this by not only increasing sales volume, but also focusing on improving average sales price and gross margins. In other emerging markets, our profitability improved $40 million quarter-to-quarter.
In mature markets, our profitability is improved by $8 million quarter-to-quarter, bringing our mature markets group close to breakeven. Next slide, please. The improvement in profitability was also a result of our effective expense management. After achieving our lowest E/R ratio since the acquisition in fiscal Q2, last quarter, we reduced the expenses by $26 million year-to-year, while we grew our revenues by 33%. Our efforts led to another historically low E/R ratio of 9%. Meanwhile, we continued to focus on managing costs. We lowered our cost per box by 4.5% quarter-to-quarter. Next slide. These strong results once again demonstrate that we have set an effective strategy with strong execution. Early last year, we set a new business strategy based on the market conditions at the time and the company's situation. We called this strategy Protect and Attack.
Protect our core businesses in China and in global commercial segment, and attack emerging markets and the global transactional segment. This strategy is simple and clear, and enables every team to focus on their key areas. Based on this strategy, we realigned our organizational structure. Mature and emerging market groups at the front end, and Think and Idea product groups at the back end. This structure is more efficient and effective, allowing better end-to-end integration and a greater focus on the customer's needs. Catering to different customer needs, we launched different lines of innovative products in the commercial and consumer segments. This enhanced our product lines, making them more complete and more competitive than ever before. Meanwhile, our culture of delivering on commitments is taking hold across our teams and delivering strong results. Next slide.
Here, I would like to share more of our thoughts on this industry and Lenovo's business philosophy. As this industry moves toward low price points, more and more manufacturers think that there is no room or need for innovation. These PC players create commodity products in order to achieve higher efficiency. At Lenovo, we have a different perspective. While we believe that efficiency is important in the industry, without it, you cannot survive. But innovation is equally important. Room for innovation is everywhere. We need to be a company that best balances between innovation and efficiency, and uses the most efficient innovation to lead the developments in the industry. Guided by this philosophy, we were able to fully demonstrate our innovation capability and achieve great results at this January's Consumer Electronics Show. In only three days, we introduced more than 20 new products that enhance our strong portfolio.
This not only further expanded our product lines, but also opened new areas that can ensure Lenovo's sustainable growth. These products got a great response as Lenovo won 8 industry awards, and most of any PC manufacturers. We also generated positive media coverage in more than 3,500 articles worldwide. Our success at the CES demonstrates our innovation leadership. Even more, it further proves that Lenovo has the strategic vision to identify growth opportunities and the capability to grasp these opportunities. Next slide. One of the growth opportunities that we see in the mobile internet. As 3G networks become more mature, cloud computing technologies become more prevalent, content and usage models of the internet become more diverse. Traditional PCs, such as desktop or notebook, no longer fully satisfy the people's need to connect online at any time and any place.
Consumers are eager to get smaller and better wireless devices that integrate with internet content and services, and easily connect to 3G or Wi-Fi networks. Such a need is especially evident for an emerging market like China. Targeting this growth opportunity, we have defined Lenovo's mobile internet strategy. To dedicate our efforts in the development of a more advanced and complete line of mobile internet devices. These devices can integrate with and will be best suited for the most popular internet applications. Therefore, they will provide the users with the optimal internet experience. Based on this strategy, we have been carefully preparing our technology and product portfolio for the past few years. At CES, we introduced the first wave of our products in three categories for the mobile internet.
Our first smartphone, LePhone, and the industry's first ARM-based smartbook, Skylight, and the IdeaPad U1, a traditional notebook, and a tablet hybrid PC. These products became instant stars after they were announced. Many people cannot wait to buy and start using them. We will first launch this new business in China because there we have a strong brand and channel network. With these advantages, we can more easily integrate with service providers and carriers. In addition, with the shareholders' approval of our recent acquisition of Lenovo Mobile, it further strengthens our end-to-end operational expertise in phone and small form factor devices. We believe that Lenovo's mobile internet products will have high potential. Next slide. We are seeing good momentum in our performance and making progress with our new business. While we will make our best efforts in maintaining this momentum, challenges clearly remain.
First, fiscal Q4 is typically the slowest season of the year. Seasonality will continue to be a factor. Second, although the global economy has shown signs of improvement, the corporate replacement cycle is still expected to be delayed until the second half of this year. In addition, although we have strong plans and processes in place to manage and minimize supply issue, component costs are increasing, especially memory, and remain a challenge. More importantly, I would like to emphasize that we will continue to invest heavily in emerging markets, in consumer business, and in the mobile internet to achieve sustainable growth. We believe the long-term benefits of this investment strategy are clear. Next slide. In any case, I have complete confidence in Lenovo's future and vision. Good results depend on a sound strategy and a solid execution, one step at a time.
To do this, we must continue to focus on executing our strategy priorities, maintain our China leadership and improve its profitability. Improve profitability in mature markets. Continue to invest in and seize growth opportunities in emerging markets and the global transactional segment. Execute our mobile internet strategy, first in China, then worldwide. Drive our lean cost structure. Differentiate through innovation and a leading product portfolio. Thank you, everyone. Now I will turn the meeting over to Chairman Liu.
Next is the translation of the remark of Chairman Liu. The board is especially satisfied with the performance of Lenovo for this quarter. This is not only because our performance exceeded our expectations, but also that we had big success with our new products launched last month in CES in Las Vegas. Several of our products snatched major awards. These new products are going to be launched in China very soon, and then will be launched in other markets in the rest of the world. When we announced our earnings performance last quarter, some investors and journalists asked the management how it would address the issue of declining gross profit margin. Our CEO and COO said clearly that the company would not only do the apparent of lowering cost, but will also, more importantly, seek to raise profitability through innovation.
The new products we launched at CES marked the beginning of our innovative efforts. The new Lenovo management is forward-looking and strong in strategic planning. Although Lenovo, like many business corporations, has been hit in the economic downturn last year and is still in its recovery, it has already started to deploy a development strategy that integrates innovation into business model, technology, and management. Mobile internet is a growing demand worldwide. In China, the government is currently driving the convergence of the three networks, telecom, TV, and the internet, by formulating new standards. This gives the computer industry, especially Lenovo, significant opportunities for development and growth. At the last earnings announcement, I encouraged you to look at what we have said and whether we are able to deliver on our words. This is a basic principle in relationship-building between the Chairman and management team of a company and investors.
At this time, my conclusions are, first, although Lenovo managed notable improvements, it still has rooms for improvement in management and operation. Secondly, some of our innovative initiatives may not hit the target the first time. Hence, might need adjustments. In addition, we will enlarge our investments in R&D and product marketing. So we hope that investors won't set expectations in profits too high for us. Thirdly, I'm happy to say that Lenovo has the best of time, circumstance, and people now, which means it will be able to keep growing in the short term, the next one to two years, and its long-term prospects look bright. Sometime this year, we will invite investors and analysts to visit our operations in mainland China to allow them to see firsthand and in depth about how we run our business. Thank you.
Thank you. This is Gary. Congratulations on Lenovo.
CFO Wai Ming, as well as our COO, Rory Read with us. 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 of company before your questions. Operator, will you please give us your instructions?
Certainly. We will now begin the question and answer session. If you would like to ask a question, please press star 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. Your first questions comes from the line of Pranav Sama from Daiwa Capital Markets. Please ask your question.
Hi. Thank you for taking my questions, and congratulations on the good set of results. My first question is, could you give some color, due to component shortage, how many percentage of margin was impacted on the last quarter? And what you have done to secure enough component for first half of 2010? And I have a follow-up question.
Well, this is Rory Read. First of all, the component shortages really affected us in the LCD and the memory spaces, but we did a fine job of managing through those shortages. I do not think we experienced any significant pressure based on that. I think we saw consistent pressure across the memory and LCD segments, and I think we did a very good job of managing through those for the quarter.
Okay. Any, if thought about the margin impact because of that, because your CFO has made a comment like there was margin was impacted because of component shortage.
It would be relatively small. We actually saw improvements in business activity across the planet. While there is pressure there, I think it is relatively small.
Yeah. We cannot give the of the component now.
Okay, got it. My second question is on your mobile internet strategy. I guess to expand, you need to tie up with the operators globally, and also you need to develop a lot of applications. Could you give us some color outside China, how you are going to develop this business, and how much money you will be putting to develop this business in 2010?
In terms of the applications, we will rely on the third party. Because we have a very strong brand, we have very good relationships with those service provider, content providers. I do not think it is very difficult for Lenovo to integrate those kind of applications and the content in China. Also, I believe we could have the good relationships with the carriers. We have wonderful design devices that we could cooperate with the carriers and the service and the content providers, so we could provide a better customer experience to our end users. We are very confident that we could be a strong player in China in this area. In terms of the concrete investment, we could not give the exact number.
I would only add, this is Rory Read. I think it is a very exciting time in the mobile internet space, and we see a lot of momentum in China and across the emerging market in the application development areas. Based on our success at the most recent CES, Consumer Electronics Show this past month that Yuanqing referenced in his comments earlier, we saw a very significant interest across those developers in the products and platforms we announced for the mobile internet. Products like the Skylight product and LePhone are very exciting to those, and we see a lot of interest and uptake in them.
Okay. Thank you.
Your next questions comes from the line of Charles Cartledge from Sloane Robinson. Please ask your question.
Thank you very much, and congratulations on the results. Wondering if, perhaps Rory, I do not know, could comment on your expectations for a corporate refresh, maybe in the States, for example, where you have strong market share. I mean, in the presentation it was alluded to that you expected something in the second half. I wonder if specifically you could take us through what you look forward to validate that expectation. Do people put in orders around March, April, May for delivery in Q3, calendar Q3, or what markers can we look for on the way to validate that expectation, please?
Yeah, no problem. That is actually a very interesting area for us to look at. In the most recent quarter, we actually were able to take share in the commercial segment across the planet. We also saw better business activity. While I would not say it is a full recovery yet in the commercial segment, we clearly saw better activity in the quarter. What is encouraging about the corporate refresh cycle is the interest in new products and new solutions from our customer set.
Those commercial customers have been bringing forward additional RFPs, requests for quotations, and requests for pricing. They have also been bringing in certain products to do testing using Win7. I think if we continue to see business activity improve over the coming quarters, which we expect they will, that corporate refresh cycle should begin in the second half of this calendar year. That is based on the early test activity.
It is also based on the increase in RFP, and we have done a lot of focus on acquisition, acquiring new customers during this down period. As that refresh begins to take hold, we have a stable of new customers to participate in that segment. I think those are the key areas. In terms of the segments, I do not think there is any doubt that we will see it in the global customers, those large enterprises that run on a global basis. We will also see activity across Asia and China and here in North America and Western Europe. To be quite frank, we see activity or interest increasing in all geographies. I would not call it a turn yet, but I definitely see increased activity.
To what extent is this a Win7-inspired refresh, and to what extent is it the sort of 4 and a half, 5-year cycle time? If the former, if it is Win7-inspired, would you expect a sort of double whammy effect in terms of volume of demand?
I think you highlight both of the actual key drivers. You can take a look at what comes out of the computer bags at the airport, at the security station. Some of those laptops in the corporate area are getting quite old, 4 and 5 years. That's at the outset of most normal corporate refresh cycles. I think that's a key driver. I also think that while Vista was not a significant uptake in the commercial segment, we see a lot better corporate interest in Win7. So I think you're spot on and you're identifying really the two key drivers. I think it is actually the longevity of this particular cycle, the length of time since the last one, and Win7 as opposed to Vista. Vista never got the interest at the corporate level in terms of refresh, and XP is now quite long in the tooth.
It's time, and I think as the economic environment improves, we'll have all three factors in place for that to increase. I don't expect it to be gangbusters initially. I think it will build over the course of a 24 to 30-month refresh cycle, and we'll begin to see some of that activity in the second half.
Thank you.
Thank you. Your next question comes from the line of Joseph Ho from Daiwa. Please ask your question.
Hi. Thank you for taking my question. First question is for Wai Ming. Can you give us more colors on the one-off items about the licensing fees? What is the nature of them, to whom you pay to?
Well, obviously, we would not be able to tell you whom we actually paid to. I think it is one of the license that we use. I think it is the settlement of some of the fees related to the previous shipment, and also we agree a very good rate going forward. So that is in relation to license fee. That account for around approximately $10 million.
Sorry, you mean going forward, is it recurring in nature or is that one-off?
Okay. License fee, that obviously is a going forward as well.
Okay. The second question is on the China margin, which we see improvement from Q1 to Q. Do you see there are increasing pricing pressure in China from your competitors getting, how to say, more deeply into the distribution channels? What is your expectation on your margins in China?
Yeah. Last quarter, we are very happy to see our gross margin in China has been improved. Actually, we think we strengthen our product competitiveness. We sell more high-end product. We sell more S and Ts. Our AUR, average unit revenue, went up. That helped us to increase our GP margin. This is our objective. No matter how fierce the competition will be, we want to improve our GP margin, improve our profitability, not only in China but also worldwide. We will further improve our product competitiveness. Meanwhile, we think to improve the profitability, we need to further innovate, not just on our existing business, but also we should find a new opportunity to enter into the new business like mobile internet business. I wish with that business, that could help Lenovo to further improve our profitability.
Joseph, I just want to add on to what Yuanqing said. I think while China, I think in this quarter, we actually improved margin. At the same time, you should also note that I think we have been actually growing 57% year-to-year while the market is only growing 27%. I think it is a very strong execution. Sorry, it is 41%. Sorry. I beg your pardon. It is 54% against 41%. I think it is a very strong execution as far as the product mix.
And we saw our all-time high market share position based on that growth rate of 54%. We topped out at 33.5% market share in the region. I think that combined with the improving margins, showed very strong execution, as Yuanqing mentioned.
Yes, thank you.
Your next question comes from the line of Jenny Lai from CLSA. Please ask your question.
Congratulations on the results. I just have a follow-up question. Exactly how do you guys gain market share across the board? Because if you look at your ASP, basically, the ASP went up in China and the other regions, probably maintained as well, and then you improved your gross margin. So without price cut, how do you gain market share?
Without what?
Price cut.
Well, the key driver, Jenny, is I believe that we've really enhanced the competitiveness of our products, particularly in the transaction space. We saw very rapid growth across the transaction space, and we outgrew the market substantially on a volume basis. Our business model and our relationship with our business partners are working very well. Our business partners are giving us the feedback that they believe in Lenovo, they believe in our product set, and the value they create for the customer. I think we're seeing a very strong interest in our transaction model, the competitiveness of our products, and that's driving our 42% growth versus the market of 17. We saw that in all regions, and we saw that particularly strong in the emerging markets and driven by the transaction business model.
Because we are focusing on attacking market share from emerging markets as well as the global transactional business. I think this strategy has worked. We grow faster in most of the emerging markets, outgrow most of our competitors. We actually leverage our talents from China, leverage our business model in China, leverage our broad and more competitive product portfolio from China, Idea products to attack emerging markets as well as global transactional business. That helped us a lot. We harvest from these segments.
We've additionally expanded now to over 86 countries worldwide where we're selling our Idea and Think products. 86 countries, that's increased quarter-to-quarter and significantly year-to-year. That's helping us reach more customers, giving them more choice, and driving more growth.
Yeah. Just to give you some, Jenny, give you some sort of background sort of numbers. I think year-to-year, we increased our revenue by over $1 billion, more than 90% of such increases derived from the transaction business.
Okay. Understood. Just another follow-up question is, when you speak about the more than 86 countries now selling the Idea products, could you give us some reference point regarding to the number of countries selling Idea products in the previous quarter or a year ago?
Yeah.
Well, actually, we increased by 10 countries.
Yeah, in the quarter to quarter, about 10 countries. With 18 months ago, we really moved from a single digit to a handful of countries. We've been expanding rapidly over the past four to five quarters. In the most recent quarter, as Gary mentioned, we increased by additional 10 countries. But also equally important, we're increasing our product portfolio in all of the existing countries. So we're selling additional breadth and additional scope, which gives us a more robust portfolio to react to customer needs.
Yuanqing, actually, you could give the numbers, the growth in last quarter. So how much it comes from budget market? What percentage comes from the emerging market? What percentage comes from the Idea product? What percentage comes from the transactional business? That's very compelling number.
Yeah. Maybe I give you three sets of numbers that actually would demonstrate, I think, the result of our execution of our strategy. I think let's look at the sort of emerging market, mature market. I think year to year, we increased $1.2 billion turnover. 82% come out from emerging markets. I think the rest come out from mature markets. If you look at, if you really break down between Idea and Think, year to year, the increase of $1.2 billion, nearly 70% come out from Idea. About 30% come out from Think. I just said that transactional and relationship business, more than 90%, come out from transaction. The rest come out relationship. Now looking at quarter to quarter, I think we increased turnover by about $690 or $685 million. About 56% come out from emerging markets.
If you look at Think versus Idea, I think account for about 40%, and you can actually see more Think. Transaction business also cover Think as well. Don't just take Think as a commercial relationship business. If you look at the business model transaction versus relationship, 75% quarter to quarter come out from transaction, and the balance from relationship. Then you can see that I think our success closely tied with the successful increase in the transactional business and in emerging markets.
This is great. Thanks a lot.
Your next question comes from the line of Arthur Hsieh from UBS. Please ask your question. Mr. Arthur Hsieh, your line is open.
Hi, can you hear me?
Yes, we can.
Yeah. Good to see the great results. It is Arthur here. Just want to follow up on China. I think Wai Ming mentioned about increasing exposure to the notebook segment. In addition to what you gentlemen just mentioned about this increasing exposure to the SMB market, could you also share with us in terms of the mix shift between desktop and notebook there?
Yes. Wai Ming could give you the number. I need to find out, Arthur. If you have the same question, I think go proceed first. I will need to find out because we have the overall growth notebook, but I need to find out what China notebook shift.
Sure. Going forward, say in this March quarter, do you foresee the penetration in this SMB market could further increase? My impression is that actually, in terms of the margin for SMB, it is actually quite similar to regular consumer models. Could you please share with us a bit more details on the difference between these two different segments?
Yeah. Absolutely. We should and we could further improve our SMB segment business in China. Particularly in those matured cities. In those matured cities, we need to further improve our business model. We should use more call center. We should use more web sales to help us to improve the business in this area. Meanwhile, we have a lot of opportunity in small city and small towns. Because there are many SMB business in those cities. Now we separate the cities, matured cities and emerging cities in China to adopt a different strategy to attack the SMB and the consumer business. We believe these kind of actions will pay off soon. We believe we could get more market share from the SMB business in China.
Also, Arthur, is very interesting is if you look at some of the product innovation with the new ThinkPad Edge product that we have announced in the most recent quarter. We see very strong interest in the SMB segment around this product, initially in the 13-inch form factor, and then we will be introducing a 14 and 15-inch product very shortly. We see a lot of demand in SMB, both in China and across the globe, in that segment. And given that product innovation, that really nice design, that should help on the margin side and help us continue to improve. Wai Ming, did you have some data?
Yeah. I think that Arthur, very roughly, I think the current quarter our desktop and notebook ratio in China is approximately 50/50. A year before is probably 55/45.
Could you say it again? Connection wasn't very good.
Yeah. It's 50/50. This is talking about Q3. I think if you compare with Q3 last year, it's about 55/45.
Oh, so notebook is already 30/30? Is it 30/30?
50/50.
Oh, 50/50.
In quarter three this year is half off.
Got it.
Last year is 55/45.
Thank you.
Notebook continues to grow dramatically faster.
Yeah.
Yeah.
Yeah. Good.
Yeah. Okay.
Another question is about this component shortage into this quarter. It is kind of hard to believe that given this is actually a weak quarter, right? Isn't the supply supposed to ease given the demand is slowing down?
Well, actually, the demand was so strong in Q2 on a global basis. I think it drained most of the inventory on the parts. We have seen pressure here in the early parts of the quarter, but we do not expect that to last throughout the quarter. More of the demand component issues have been really around very specific and unique SKUs or very specific and unique actions. We are managing that very appropriately, and we do not see that as having any significant impact moving forward at this point.
Thank you. My final question is about the inventory situation. I think apparently you guys did a really good job reducing the inventory days to only 15 days. Any idea about the inventories among these retailer distributors in different regions? What the status now, say, comparing with normal level?
We manage this on a day-to-day and a weekly basis. All of our data across all regions are all within our normal management SKUs. We were trending very consistent to where we expect to be and within our normal inventory levels, even with the significant increase in volume activity. Nothing unusual around the inventory levels. We are seeing strong sell-in and strong sell-through, and business activity seems very consistent with the inventory levels we would expect.
Thank you, Rory.
Thank you. Your next question comes from the line of Patrick Yau from Macquarie. Please ask your question.
Hi. Thank you. I actually have two questions. The first question is in regards to the expected level of seasonality in the current quarter. Is the experience in the past 20 years a good guide where you will be expecting something closer to a 20% figure, or will we be guided by a higher number given that there has actually been a strong drawdown on inventories worldwide as we move into this current quarter? The second question is probably more housekeeping, which is, of the $50 million, which is the kind of a one-time charge, and I think Wai Ming explained that $10 million was a licensing fee. Could we get some explanation on the other $40 million that made up the $50 million charge?
What was the first question?
Oh, the first question.
Seasonality.
Seasonality. Yeah. Seasonality. We couldn't give a forecast on seasonality, but we don't see anything that significantly changes the historical seasonality and trends that we've seen in the past. But I can't go any further than that. Yeah.
Yeah. The reason why that question is coming around is because you are exhibiting a fairly strong momentum as far as share gains are concerned. If you look at the past couple of years, basically you were on the other side of the fence where the market share figure was basically quite stagnant. So one would think that your seasonality experience this time around should be somewhat better than what has been the recent past years.
I would actually just add one thing, that I think obviously we've been actually enjoying a very respectable growth in quarter three. From a growth perspective, I think the trend that we have, I think it would not be too raw, I think, if we do not actually grow at a similar growth rate in terms of volume compared the quarter three and quarter four.
You mean year-to-year?
Going to your one-off item, the other item is really in relation to the additional warranty cost that we, I think, provide for certain components in some of the products that we sold. Obviously, I think the way that we make provision for the warranty cost is really based on history. When we actually observe that certain product, which obviously had a rate higher than what we project, then we obviously do a catch-up, and this is, I think, the provision in relation to the catch-up.
These are for products that were so kind of like your seasonality experience this time around should be somewhat better than what has been the recent past years.
I would actually just add one thing, that I think obviously we've been actually enjoying a very respectable growth in quarter 3. From a growth perspective, I think the trend that we have, I think it would not be too raw, I think, if we do not actually grow at a similar growth rate in terms of volume compared the quarter 3 and quarter 4.
You mean year-to-year?
Going to your one-off item, the other item is really in relation to the additional warranty cost that we, I think, provide for certain components in some of the products that we sold.
Obviously, I think the way that we make provision for the warranty cost is really based on history. When we actually observe that certain product, which obviously had a rate higher than what we project, then we obviously do a catch-up, and this is, I think the provision in relation to the catch-up.
These are for products that were sold kind of a year or two ago, and then you had a higher than usual kind of warranty claim, and this is the charge for that?
I would say that this is within our, I think the product that is sold within the warranty period. I think that is normally about a three-year period. Yes.
Okay. This shouldn't be expected to kind of reoccur on a more constant basis?
We do not expect that.
Okay. Thank you.
Actually, our quality trends continue to look very strong. Our focus on innovation and quality remains very consistent. Our repair actions and all warranty trends continue to be some of the very best in the industry. This is just one small subset of products that had some warranty action that we needed to take care of. Our overall trend is really quite good.
Okay. Thank you.
Thank you. The next questions comes from Eve Jung from Citi. Please ask your question.
Thank you for taking my question, and congratulations for the great result. My first question is that you deliver 18% desktop shipment growth for December quarter. On which area or segment you see particularly strong desktop shipments? Also, all-in-one PC, what the sales mix in your desktop shipments right now, and will it continue to trend up? That is my first question.
Yeah. I'll take the second question first. The all-in-one area is one good example of innovation that's helped drive growth for us. The Idea product group implemented the all-in-one. Now Think has come at it as well. Our products are quite innovative. They're quite stylish. We've seen a very rapid uptake in that part of the desktop market. In several segments, we've taken a significant share position in the all-in-one segment. That's been very encouraging, and we'll look to continue to expand that all-in-one percentage across the desktop segment. In terms of desktop, we continue to see desktop activity. I think that a number of our competitors have neglected the desktop space. We continue to innovate and create new products to meet customer demand. While that market is not growing as rapidly as notebook, we've been able to gather and gain a share.
We've seen that in most emerging markets, and we've seen that across most key segments.
Okay. Thank you. Also, regarding E/R ratio, can you provide us your E/R ratio in China operation? What's the likely breakeven schedule for emerging market and the U.S. market?
Well, we normally do not actually sort of break down, but I can assure you that China probably has the lowest E/R ratio within the group. I think it would be very
Not just the
Not appropriate.
Not just the
Probably the industry. We believe that we are the lowest within the industry.
Yeah. We're very encouraged by the E/R activity. We've had an intense focus on managing expense. We'll continue that focus even as we're growing revenue. We want to make sure that we're getting more and more cost-effective, being more efficient and more productive. That will not change. We will continue to drive hard on the expense side and continue to make our business model more and more competitive. China is clearly a leader in that segment, but this is a trend that we're seeing across our business in all key segments.
Yes. Not only we had a very good E/R ratio in China now. So our E/R ratio in emerging markets is competitive as well. So I think that we are well executing our strategy to replicate our business model, to replicate our cost structure from China to other emerging markets. So we are executing this strategy very well.
Thanks, Eve. Due to a time constraint, we welcome the last questions.
The last questions comes from the line of Donald Lu from Goldman Sachs. Please ask your question.
Oh, yeah. So great. I got to ask the last question. Congratulations on good results.
Thanks, Donald.
Yeah. I think there are two. One investor concern is about China, and you clearly delivered good results this quarter, but maybe you can give us some more detailed competitive analysis, let's say in the first, second tier cities versus countryside, who is competing more aggressively there, and also in the SMB and also in the corporate markets as well.
Yeah. I think in China, we are pretty strong in large enterprise and the public segment. We dominate this segment. Also, I think we are very strong in consumer area. Now, maybe the weakest area is SMB, as I just mentioned. We have the plan in place to strengthen this area. We want to sell more products to SMB through call center, through web sale, online sales in mature cities. Meanwhile, for the small city or small towns, we will fully leverage our business partners to build a more strong storefront to cover more SMB business as well as the consumer business. I believe with this kind of strategy, we could further strengthen our leadership position in China.
Okay. Have you, in this SMB market, who is the major competitors there?
The major competitors in SMB market are the normal competitors, the usual suspects you would see across the planet.
Okay.
But yeah.
Yeah, I see. Another question is on this smartphone, the new product. I know the launch of the product is in the mid-year or this Q3. Have you, let's say, signed a contract with China Mobile or major carriers in China? What is their reaction so far for smartphone, smartbook, et cetera?
We have already had a lot of discussion with those carriers in China. We cannot have detailed information to share with you now.
I see. Yeah, last question is on the ASP trend in the current quarter. Will that stabilize given the component price is pretty high right now on a sequential basis?
We were actually, in the most recent in the quarter we are reporting, we actually saw ASP trend up slightly, which is a first time in five quarters.
Wow.
We know that is driven by mix and improving economic environment. We have also seen the expansion in the netbook space as now kind of stabilizing out, and we are reaching kind of a normal level there. I expect that there will be ASP pressure as we move forward. That is an industry phenomena, but I think it is clearly moderating, and I think you will see a period of more consistent or stable ASP trending. It will not be anything significant out of the historical norms.
Okay. Thank you, Donald.
Thanks.
Thank you, everybody again for your participation in today's call. If you have any further questions, please feel free to contact me or the IR team. The webcast replay and conference call replay will be available in the next couple of hours. Thank you again for joining us today. Thanks.
Thank you. Bye-bye.
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