Lenovo Group Ltd

HKEX:992

Earnings Call Transcript 2019-Q3

[Jenny Lai, executive]

Good morning, and good evening. Welcome to Lenovo's Quarter 3 Earnings Webcast. Thanks to everyone for joining us. This is Jenny Lai, Vice President of Investor Relations.

Before we start, let me introduce our management team join the call today. We have Lenovo's Chairman and CEO, Mr. Yuanqing Yang; Corporate President and COO, Mr. Gianfranco Lanci; Group CFO, Mr. Wong Wai Min; President of Data Center Group, Mr. Kirk Skaugen; and President of Motorola, Mr. Sergio Buniac.

We will begin with the presentation shortly, and after that, we'll open the call for questions. Without further ado, let me turn the call to Yuanqing. Yuanqing, please.

[Yang Yuanqing, executive]

Hello, everyone. Hope you had a good start in year 2019. Thank you for joining us today.

For several quarters, I have talked about our accelerating performance, driven by the strong execution of our Intelligent Transformation strategy. Today, I am pleased to say, despite the tough environment, we delivered exceptional results across all our businesses. Our strong performance starts at the top line. Group revenue grew year-on-year for the sixth consecutive quarter reaching USD 14 billion, the highest in 4 years. Our pretax income reached a all-time record of USD 350 million, up more than 130% year-on-year. As the profitability improved in all our businesses, our net income significantly improved from the loss of USD 289 million last year to USD 233 million profit this year.

Since its formation last May, our Intelligent Device Group has improved both revenue and profitability every quarter. Our PC business delivered a record-high revenue and profit. Our revenue grew by 16%, outperformed the market by more than 17 points. Operating profit also improved by 1 point. We remained the undisputed #1 in both PC and the PCD with yet another record market share of 24.6% and a share of 17%.

We focused on high-growth and the premium segments. Our Workstation, Thin and Light and Visuals revenue outgrew the market by over 30 points, gaming by 16 points and Chromebook by over 220 points.

While we maintained our revenue and profitability in China, we grew much faster and improved profitability outside of China.

In our Intelligent Device Group, we will continue to invest in high-growth segments focused on customer-centricity and drive the convergence of computing, communication and intelligent technologies. We are confident this business will continue to outperform the market.

The more exciting story is that our mobile business become profitable worldwide for the first time thanks to the Motorola acquisition. This result comes from strong execution of our strategy to reduce expense, simplify product portfolio and focus on key markets.

Our Motorola brand is on track to keep expenses below USD 1 billion for the year. In Latin America, we maintained profitability and a #2 market position despite the currency volatility and the supply constraints. In North America, we had a breakthrough quarter with improved product portfolio. Volume outgrew the market by more than 40 points. Profit improved USD 90 million year-on-year and returned to profitability after 6 quarters. In China, we quadrupled our revenue year-on-year last quarter.

Lenovo never stops innovating. Our moto z3 and 5G mod were announced as Verizon's first 5G mobile solution. We will continue to innovate and execute our strategy to resume profitable growth in our mobile business, particularly in our focus markets.

Our Data Center business continues to grow. Revenue maintained a strong double-digit year-on-year hypergrowth, and profitability improved for the fifth consecutive quarter. This is the result of continued hypergrowth in Hyperscale and software defined.

Our Hyperscale business grew triple digit year-on-year, driven by majority of new projects being designed and manufactured in-house now. And the software defined grew almost 70% year-on-year. We remained the #1 worldwide in the supercomputer rankings.

We will continues to invest in technology leadership and building end-to-end product portfolio in our Data Center business. Our new joint venture with NetApp in China will further strengthen our portfolio and expand our business. We will also further develop our capabilities in software defined with the aim of becoming the segment leader.

To become the leader and the enabler of Intelligent Transformation, we will continue to drive growth through smart IoT, smart infrastructure and smart vertical solutions. We demonstrated our execution of smart IoT strategy at the recent Consumer Electronics Show. We are making devices like PCs and the tablets smarter by adding voice and image engines to provide a more personalized service. For example, the smart tab we created with Amazon and Baidu.

We are also developing smart consumer devices for homes like Smart Clock, Smart Display and more. Our DCG will drive smarter infrastructure by capturing the opportunities in cloud and edge computing. Our big data and smart vertical solutions revenue showed great progress, growing almost 70% year-on-year. Our software and services revenue continued double-digit growth, reaching USD 638 million last quarter.

In closing, I want to share an analogy with you. I'd like to think of Lenovo as a mountain climber. Once we reach one peak, we immediately take aim at an even higher goal. Getting from one summit to another one sometimes means we have to go down first before we go up. It means we need to develop new tools, new skills and discover a new path to reach new heights. But once we set a goal, we never give up.

Today, I'm happy that the new strategy we've put in place 4 years ago is showing strong results. New foundation of our company has been built. and Lenovo has returned to Fortune's list of most-admired companies. With our strong execution, I'm confident that we will continue to climb and reach even greater heights.

Now, let me turn it over to our CFO, Wai Ming. Wai Ming, please.

[Wai Ming Wong, executive]

Thank you, Yuanqing. I will take you through Lenovo's financial and operational performance in Q3 fiscal year 2019. Next chart, please.

Let me first share with you the financial highlights of our Q3 performance. Lenovo deliver a strong quarter with many parts of our business setting new records through our robust execution of the Intelligent Transformation. Our group revenue was EUR 14 billion, up 8% and 13% year-on-year if currency impact is excluded. The revenue in constant currency at EUR 14.6 billion was a record high to Lenovo, led by strong performance from both PCSD and DCG.

Gross profit increased by 17% year-on-year, while gross profit margin expanded 1.1 percentage point to 14.6%, the highest in 10 quarters. The result was driven by solid margin expansion in PCSD and better profitability in MBG.

We continue to drive operating efficiency, and our expense-to-revenue ratio was reduced by 0.4 percentage points to 11.5%. Group PTI was a record high at $350 million, up $200 million from a year ago. We saw PTI improvement across all business groups.

Profit attributable to equity holders for Q3 was $233 million, significantly improved from a loss of $289 million a year ago. Basic earnings per share was USD 0.0196 compared to loss per share of USD 0.0253 same period last year. Next chart, please.

Our operational cash flow continue to improve and show strong improvement both year-on-year and quarter-to-quarter thanks to solid performance across all our businesses and strong execution in reducing our inventory in both finished goods and parts inventory. We expect this operating cash flow improvement to be sustainable, and we'll continue to use our cash reserves to invest in business growth. Next chart, please.

Intelligent Device Group. Our intelligent business group, which includes PCSD and MBG, continued to demonstrate healthy revenue growth with profit improvement both year-on-year and quarter-to-quarter. Revenue growth remained solid at 6% year-on-year driven by our strong PC business. IDG's PTI improved by 2.1 points to 4.7% year-on-year and it's been the fifth consecutive quarter of improvement. PCSD improved its PDI margin to 5.4%. MBG reported its first pretax profit since the Motorola acquisition. Next chart, please.

Our PCSD business has record-high revenue with 12% year-on-year growth. This is the fourth consecutive quarter that we achieved double-digit growth. Our PC revenue grew 16%, outperforming the market by more than 17 points. Strong growth was recorded across the board in commercial business and the segments including Workstation, Thin and Light, Visual and Gaming products. All of them continue this double-digit revenue growth in Q3.

We have showcased several new smart devices and smart home products recently at the CES. These are parts of our Intelligent Transformation strategy.

PCSD revenue in Q3 was $10.7 billion, setting a new record and driven by market share gain. Its pretax income was a also a record high at $584 million. We continue to drive market share in commercial and premium segments resulting in better sales mix. PCSD PTI margin improved 0.9 percentage point to 5.4%. Next chart, please.

For the Mobile business, we achieved a pretax profit in Q3 for the first time since the Motorola acquisition. We executed well with our core market strategy and saw strong momentum in North America and solid business performance in Latin America. Coupled with our efforts in streamlining product portfolios and expense reduction, all this contributed to the profitability improvement. Reported PTI margin, thus, improved 6.1 percentage points year-on-year and 3.2 percentage points quarter-on-quarter.

Our revenue is starting to show signs of stabilization, in contrast to revenue decline in the past several quarters due to our strategy to focus on core markets. We believe the transition is largely completed. A solid foundation has been built, and we are now ready to drive sustainable future growth. Next chart, please.

Our Data Center Group deliver another strong quarter with solid revenue growth and profitability improvements. Q3 revenue continued its double-digit growth for the fifth consecutive quarter, while its PTI margin continued to improve year-on-year.

Let me provide more detail on this segment performance. Hyperscale had another great quarter and maintained its strong triple-digit revenue growth with margin improvement driven by incremental contribution from in-house design and manufacturing and customer diversification to more profitable orders. Software Defined Infrastructure continued its hypergrowth for the seventh consecutive quarter thanks to fast-growing hyperconverge systems. Our Flash Arrays growth also grew at a triple-digit rate, which is more than double the market rate. Revenue from DCG was up 31% year-on-year to $1.6 billion in Q3. PTI margin improved significantly by 3.6 percentage points year-on-year.

Moreover, it is worthwhile to highlight the progress we made in our Intelligent Transformation. The Device as a Service business continued rapid growth with its booking revenue more than double quarter-on-quarter, up 111% quarter-to-quarter. Our big data and AI-powered smart vertical solutions revenue also grew 68% year-on-year during the quarter. Next chart, please.

Looking ahead, we will continue to build our strength as a global company with worldwide manufacturing capabilities, leading supply chain efficiency with our extensive experience in managing the ongoing volatility in the macro environment. We aim to drive premium to market revenue growth and deliver industry-leading profitability for PCSD business. We will continue to improve our user experience, expand our innovative products lineup and drive future growth. Our investment in capability building in the smart devices and smart IoT are gaining traction to become a future growth driver.

For Mobile business, we will continue to execute our strategy to resume revenue growth, especially in focus markets, while maintaining profitability. We will continue our strategy in streamlining our product portfolio and driving a more competitive cost structure. We will also continue our investment in innovation, such as our 5G upgradable phone which soon be available in the U.S. markets.

For the Data Center business, we are confident that we will deliver premium to market and sustainable healthy growth continuously. We have established solid capability in business model, product leadership and sales and marketing to drive long-term growth. We aim to continue to outgrow the market in every segment where we participate, from IoT, to Software Defined Infrastructure. Meanwhile, we will continue strengthen our leadership position in high-performance computing and AI, and we expect growth momentum in our Hyperscale business to continue thanks to our competitive advantages in design, manufacturing and global fulfillment.

In storage and networking, the NetApp strategic partnership and joint venture will capture more business opportunity for us to drive incremental growth. We will accelerate our Intelligent Transformation in across all businesses. We will focus on converging different technologies and devices to address more market opportunities and drive our smart IoT business to the next level. Coupled with the competitive cost structure and strong execution, we remain confident in delivering long-term profitable growth.

Thank you. I'll now turn it back to Jenny so we can take your questions.

[Jenny Lai, executive]

Thank you, Wai Ming. Now we will open the line for questions, and this session will be in English only. [Operator Instructions]

Operator, I will turn it over to you. Please give us your instructions.

[Operator]

[Operator Instructions] We have the first questions from the line of Gokul Hariharan from JPMorgan.

[Gokul Hariharan, analyst]

First question I had was in PC market. I think margins have now come back above 5%. Could you talk a little bit about some of the dynamics in the PC market? First of all, enterprise PC has been pretty strong last year. How much longer do we expect the upward-cycle-related strength to continue given some of the macro [ for PCs ]? Secondly, could you also address what has been the impact that you've seen in the December quarter from CPU shortage? And is that a tailwind from a supply perspective as we go into the next 1 or 2 quarters as that situation alleviates? That's my first question.

[Yang Yuanqing, executive]

So our COO, Gianfranco, will answer your question.

[Gianfranco Lanci, executive]

Okay. What is the -- PC market? What we have seen is still relatively strong on enterprise and, I would say, weak on the consumer, but this has been the entire 2018, the entire year. It's not that -- we didn't see any big change. I think, in consumer, we see Thin and Light and Gaming growing very, very fast. In commercial, I think it's mainly transition to Windows 10, right. And when we look at Windows 10 in enterprise, I think, for the entire 2019, situation will not change in the sense that big corporation, they already move. But when I look at medium-sized businesses, some still large enterprise and also a lot of government, they didn't move yet, and they need to move in 2019. So I think transition to Windows 10 is not finish. We will see a similar future about the entire -- this year. On CPU shortage, for sure, we have seen, a certain impact in the market. I think we have been very, very good to manage the shortage and even taking advantage probably due to our scale and our supply chain compared to some other competitors. It's still going on, I think, until Q2 calendar year. We will see probably better situation starting from July, August, mainly impacting, I would say, low- and mid-end CPU. On the high-end CPU, we didn't see any serious shortage, I would say. But the situation will continue this quarter and will continue also next quarter. Capacity, based on what we know, they will start to have a better capacity on the 14-nanometer only starting from July, August. And for sure, that's being impacted in both PC.

[Gokul Hariharan, analyst]

Okay. My second question is on the Data Center side. I think we've seen pretty strong year-on-year growth. But from an absolute run-rate basis we've been running at about $1.6 billion revenues for the last 3 quarters. I'm just curious, what do you expect the next leg of growth to be largely driven by, especially where there has been a fair bit of industry commentary about slowdown in data center spending from chip vendors as well as other players in the data center industry?

[Kirk Skaugen, executive]

Yes, this is...

[Yang Yuanqing, executive]

Kirk, our DCG President, will answer your question.

[Kirk Skaugen, executive]

I think Lenovo is in a unique position because we've been working on our transformation now for about 2 years, and some of those product offerings we brought into the market are now going through the qualification and design win cycle. So if you look at our overall data center share, it's still high single digit, which means even in our market that's constraining, with our momentum, we can continue to gain share. So as you've seen and heard from Wai Ming and Y.Y., in the opening comments, we're consistently driving triple-digit growth in Hyperscale. We've said that we're in 6 of the top 10 hyperscalers, and some of those design wins have not yet reached production. And we're getting more profitable in that and that we're bringing it in-house with our own design, our own motherboard development and our own manufacturing, whereas a year ago we were using outside sources for all that. So much more customized.

We'll talk about NetApp in a little bit, but I think, as we said, we are in triple-digit growth in Flash Array. And with collaboration with NetApp, I think you'll still continue to see us significantly grow there. And then in software defined, I think something like 7 consecutive quarters now, we've been growing twice the market. So we are not encumbered by some of the legacy that our competitors have, so we're aggressively embracing Software Defined Infrastructure whether that's on Nutanix or vSAN or Microsoft or other solutions in the marketplace. So I would say software defined, Hyperscale and flash storage are where we see the strongest growth in our business.

[Gokul Hariharan, analyst]

And just an add-on...

[Kirk Skaugen, executive]

It wasn't meant to be -- to take share even in a constrained market or in a market that might be softening.

[Gokul Hariharan, analyst]

And just in adding on, given the very strong growth in hyperconverged -- sorry, Hyperscale, do we expect that, that will negatively impact margin? Or there is enough of margin improvement within Hyperscale itself to lift the overall profitability?

[Kirk Skaugen, executive]

Well, I think, certainly, it'll help on gross profit dollars, right. Obviously, the margin in Hyperscale is not where it's at in other parts of the market. However, we've been diversifying our Hyperscale customer base. I would say, 2 years ago, we were predominantly only in China. Now a growing and large portion of that is in the rest of world outside of China, and now we're moving aggressively with a new sales force into the second and third tier hyperscalers as well, which have traditionally been more profitable for the industry.

[Yang Yuanqing, executive]

So our Data Center business strategy is very clear. We will drive the scale, so our Hyperscale business. So definitely, we will ensure we can make money out from that business as well. So that we will drive the in-house design and the in-house manufacturing. So that will definitely give us the better margin and profitability. So for all the new projects, we have [indiscernible] so most of them are in-house design and in-house manufacturing. Second, we will become the technology leader, particularly in software defined and in water cooling technology. Third, so we will continue to drive the growth in the traditional Data Center business. So leveraging Lenovo's strength -- in the reliability -- in the high performance. So that's where -- last but not least, so we will drive the high service [ attachment ] so that we can make more money from this business.

[Operator]

Next question comes from the line of Laura Chen from BNP.

[Laura Chen, analyst]

I have 2 questions. First of all, about Mobile business, that's really very exciting to see the turnaround. I'm looking for -- I'm just wondering what's the growth strategy. Do we see the overall smartphone industry as now doing well? And just wondering, your growth strategy, we already see a good execution on cost reduction, but what about the next step and [ your thought down the scale ]? That's my first question.

[Yang Yuanqing, executive]

Okay. So Buniac, our MBG leader, will answer your question.

[Sergio Buniac, executive]

Laura, I think we're going to keep the [ key things ] on our strategy. If you look to like market like North America, in spite of a large contraction last quarter, we grew premium to market. So we're going to keep like -- just focus on our expenses under control. We have been doing that for the last 4 quarters. We want to resume a profitable growth in the next 2 or 3 quarters. So we want to start growing premium to market year-over-year. And we are going to keep like the way we are playing right now. So I would say, for the size we are, the market dynamics is not affecting. I mean, we have a very focused strategy, and I think, also, we're benefiting from the volatility, right. So I see more slightly grows, and I think we're going to keep -- we're on track to hit like 4 quarters of profitability. That's what we committed last quarter.

[Laura Chen, analyst]

So can I...

[Sergio Buniac, executive]

[indiscernible] For our Mobile business...

[Laura Chen, analyst]

[indiscernible] Sorry.

[Sergio Buniac, executive]

[indiscernible] Q3 results our volumes were very impacted by some supply constraints, so we feel -- -- so now our inventory position from the beginning of the year to now has been reduced by almost 4 million units, the inventory in the field. So our sell-out has been significantly higher than our sell-in. So we should be consolidating that now in more sales as we move forward.

[Yang Yuanqing, executive]

Yes. So our mobile business strategy so is very clear for the past couple of quarters and for the [indiscernible] in the future. So we -- first, we need a lighter expense cost structure. So we have significantly reduced the expense so in the past couple of quarters. So we are on track to run our Motorola business below USD 1 billion in this fiscal year. With that, cost structure, expense structure, so I think we can pursue the profitable growth in the future. Second, we've streamlined our product line or simplified our product. We only focused on Moto G and Moto E and Moto Z. So that's the second part. The third is we are only focus on selective markets, so namely, Latin America, North America, China, India, so that we can put all our resources...

[Sergio Buniac, executive]

Western Europe.

[Yang Yuanqing, executive]

Oh, and Western Europe, so that we can put all our energy and resources in this market. So we have seen the positive results. Definite, for the next step, so we will resume the growth. I think we will resume the growth from this quarter so -- particularly in those selective markets. So like In North Americas, so we will keep our current growth momentum. So last quarter we had, for the premium to the market, although market shrinked 10%, we grew by [ 13% ]. So I think in U.S. -- in North America and Western Europe, so the competition is not at fierce markets as in emerging markets. So we definitely can leverage our strength in that area to grow.

[Laura Chen, analyst]

And actually, that's my following question. I mean, for our the market in the West Europe or Latin America and North America, it's probably even more driven by telco operators. But in emerging markets like India or even like in China, open market is so, so quite big. So what is your different approach or strategy, in particularly, for the emerging market?

[Sergio Buniac, executive]

So the approach is going to be the same. We have very strong carrier partnerships in those markets. Our range in Europe is growing in each country with the new generation we just launched with the carriers. In North America that's a carrier-driven market, we are now playing with all carriers, and that's different than a year ago when we're like -- we'll be out of 30% of the carriers. And in markets like Latin America that are retail-oriented, they want to keep a strong foothold in retail while it's sustainable. So because we have this focus in strategy in the markets we play, we are playing it in equally well balanced between carriers and retail markets. So we don't see a major difference. The other fact is that we are just now first to 5G in North America. We announced the first 5G-ready phone, and in 2 weeks, you will see in the market the first mobile devices with Verizon. So we also see some growth coming from 5G as the year ago. Too early, but market should capitalize on that.

[Yang Yuanqing, executive]

Yes, Definitely. So the mature market and the emerging markets are different again. So in mature market, you must have the strong brands. You must be more focusing on the premium product. So innovation. So you must have the enough IP protection. So that's how you can win in the 2 markets. Emerging markets, efficiency here will be even more important. We definitely have a lot of experience in both markets. So like in Latin America, we're not the emerging market, so we have already had the success. So in U.S., North America, so we -- in the past couple of quarters, we have had hypergrowth. So we think that we can play both games in different markets.

[Operator]

Next question is from the line of Abel Lee from Bank of America Merrill Lynch.

[Abel Lee, analyst]

One question actually is what's the current status of the NetApp JV in China. And my second question will be your Hyperscale or server business, the revenues [ course ] is very strong, and we see the economies of scale for the better margin. Forward-looking, can we expect a continuous margin upside because you might have more design wins, and maybe for the board design, you can have like more [ definition ] for the component procurement. So that's my question.

[Kirk Skaugen, executive]

Yes, this is Kirk again. So Transform 2.0, we launched Lenovo's largest storage portfolio in history where we announced 10 new platforms to the market in conjunction with our global partnership with NetApp. A year earlier than that, we launched our largest server portfolio in history with 14 new platforms in Transform 1.0. Relative to NetApp, we now can cover 92% of the global total available market for storage. Prior to the NetApp relationship, we could only cover 15%, and yet, we're the fastest-growing entry storage company in the world prior to NetApp. And you heard earlier that we're now growing twice the market in Flash Arrays. Relative to the joint venture, I'm happy to report that as of February 18, our China joint venture is fully operational. We've taken our first storage orders from some of the largest banks in China. And now, the financials of that JV are flowing through the Lenovo Data Center Group. So we expect this to be excellent for our margin profile as well as helping pull along the servers alongside our storage. I would also say that we announced in the last couple of weeks Intel -- Lenovo's True Scale services on Intel-based platforms. And what that is, is a truly metered dynamic solution where we can deliver as-a-service offerings in an OpEx model that's going to cover both our storage and our server platforms. So I think we are aggressively ramping the NetApp portfolio worldwide now in over 160 countries. And the JV is fully operational. On Hyperscale, I think, simply put, as Y.Y. said, more and more of our business is being designed in-house by Lenovo. We've put in significant motherboard capacity into our internal factories that are doing tens of millions of PC boards a year. So we have excellent cost structures there. And so we're getting the margins associated with the design, the board manufacturing and the system integration in addition to diversifying our portfolio not just in China but outside China in the Tier 2s and Tier 3s. So I do expect our margin profile to continue to increase over time in Hyperscale as these business models continue to evolve.

[Operator]

Next question is from the line of Thompson Wu will from Credit Suisse.

[Thompson Wu, analyst]

So just the first question is back to the point, I think, Kirk made about data centers. I understand that you guys are gaining market share pretty much in all the categories. But you had mentioned that maybe the market is softening, and I just kind of want to drill into that point. Again, it seems like, across the supply chain, it seems like Hyperscale CapEx seems to be coming off in 2019 and certainly in first half '19. Are you seeing that across your customer base when you think about new orders for the next 12, 16 months? Is there a slowdown in Hyperscale? And then maybe if you can also talk about the linearity of the deployment. Is this pushing out from first half? Is it really second half deployment? And maybe just within there, are you seeing a higher mix of AI-accelerated ASIC -- FPGA-based servers.

[Kirk Skaugen, executive]

Yes, so -- yes, we are seeing a increase in the diversity, I think, across the hyperscalers with the kinds of solutions they want, including GPU-based designs, non-x86 designs where we've partnered with Ampere Computing. FPGA, GPU, as you mentioned, as well as more enterprise workloads like SAP HANA moving to the cloud. We're also starting to see demand for 4-socket and 8-socket machines as well where some of the more mission-critical workloads are moving from on-prem to the public cloud. Relative to the softening, I think yes. I think it's pretty widely known in the industry that the hyperscale is softening, at least for the first half of the year. Having said that, we've been saying in this call now for several quarters that we've been getting new design wins that we've been piloting and then driving into production. So again, we'll probably benefit from new designs that we've never had entering and taking share from competitors or, indeed, using some of these nontraditional standard systems to get into the market for the first time. So from that perspective, we'll buck, I think, some of that trend and grow faster than market.

[Thompson Wu, analyst]

Great. Understood. The second question I have is just maybe kind of broader China consumer. It seems like some of the data points is [ over there ] are softening. It could be a function of trade. But also, we're seeing some specific issue across PCs, tablets and smartphones and some sharp slow down even exiting December of last year. Could you guys just give a quick update as to what you're seeing from end demand across your products and businesses, and particularly, the China market through Q1 this year -- sorry, calendar first quarter?

[Gianfranco Lanci, executive]

I think that, yes, we are seeing some slowness. At least, we do in the last couple of quarters seeing. The market in China has been negative for the entire 2018. Negative on [ CA ], roughly stable on revenue. What we have seen this quarter is more like the same trend as the previous 2 quarters. I would not expect that it's going to recover soon, so we will continue to see this trend in terms of softness for the next maybe 2 or 3 quarters. Then it depends on a lot of things. On data side, when I look at our performance in China, we are able -- we have been able to maintain market share both on [ CA ] and in revenue. We are even growing a little bit market share. So I think it's -- in a market that, for sure, is not brilliant, I think we have been able to manage very, very well, considering that we have almost something between 37% to 40% market share. So to keep the market share both on [ CA ] and revenue and, even more important, to keep a very good profitability.

[Yang Yuanqing, executive]

Yes, we also want to drive the premier to the market, focusing on the premier products. So we are driving Gaming, we are driving Thin and Light, we are driving Workstation, vision in China so that we can have the premier to the market. So generally speaking, so China PC market, from a revenue point of view, is pretty stable. So we will drive the premier to the market. And also, so I think our rest of the world revenue is growing much faster, and our profitability has been improved significantly in rest of world. So that can offset the slowdown in China. So that's the situation.

[Audio Gap]

but from a mid-term to long-term point of view, so I am still a little bit optimistic even on China market, so even on the consumer segment part, because now you now have -- China has so many population. So almost in every vertical industry, so we have the largest market in the world. So we are

[Audio Gap]

from a mid-term to long-term point of view, so there is no reason we

[Audio Gap]

we cannot further grow in the PC space. Particularly, government want to

[Audio Gap]

the consumption. So I think this IT consumption, PC consumption, definitely should be the area we can stimulate the growth, stimulate the consumption. So I think we can try to upgrade consumer consumption from just a smartphone to PC. So that's why I'm a little bit more optimistic on China market from a mid-term to long-term point of view. So definitely in the enterprise space, so we have the chance as well to upgrade from Windows 7 to Windows 10. So that's the my assessment.

[Jenny Lai, executive]

We are now ready to take the last question due to limited time. Operator, please take our last question.

[Operator]

The last question comes from Arthur Lai from Citigroup.

[Arthur Lai, analyst]

This is Arthur Lai from Citi. I have a quick question on the cash flow. Maybe, please, Wai Ming, give us some insight. So looking at your presentation, actually, the net cash from the operating level reached a $1.6 billion level, and this is really a surprise to me. Can you share with us, is the strong cash flow sustainable? And how do you achieve that? We've just learned from Gianfranco that the sell-out, actually, bigger than sell-in. And then inventory down 4 million. And besides that, any operating metrics we can monitor in the future?

[Wai Ming Wong, executive]

I think the improvement in cash flow obviously come from 2 things. One obviously is our underlying profitability. I think if you actually see the year-to-year improvement in the profit, that actually is a driver. And the biggest driver is -- also come out from, I think, our diligent management of our working capital. I think, as Gianfranco said, I think from an inventory perspective, I think we actually have been able to consume more finished goods than what we planned for in order to meet the demand. Because the supply was obviously been influenced by shortage of supply of the chipset. And secondly, more important is, I think, we really focused on looking, I think, at the other 2 aspects of, I think, the working capital, namely the account receivable or account payable. I think we actually have done a lot of work, I think, in getting -- improving our accountable or supply, I think, in terms of payment and if you really look at the cash conversion cycle, I think we probably see significant improvement by a couple of days, I think, in account payable terms. So we definitely will continue that operating efficiency going forward, but as you know, I think, in terms of operating cash flow, that actually will closely -- correlated, I think, to the top line growth. So we definitely believe that, I think, the cash conversion cycle pattern will continue, and we will see that with the improvement of profitability going forward. We definitely are very confident that we will continue to improve, I think, the financial health and, in particular, the cash side of the operations.

[Jenny Lai, executive]

We thank you very much for joining today's call. If you have any further questions, please feel free to contact me directly. And the replay of this webcast will be available in the next couple of hours on our Investor Relations website. Thank you, again, for joining us. Thank you.

[Yang Yuanqing, executive]

Thank you.

[Operator]

Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation. You may now disconnect your lines.