Asustek Computer Inc

TWSE:2357

Earnings Call Transcript 2021-Q3

[Operator]

Ladies and gentlemen, welcome to ASUSTeK's 2021 Third Quarter Investor Conference. Today's conference will be co-hosted by our CFO and Co-CEOs. The first portion will be presented by our CFO, Nick Wu, on our third quarter financial results. Then our strategy and outlook will be presented by our Co-CEOs, S.Y. Hsu and Samson Hu. Finally, we will have a Q&A session. [Operator Instructions] Thank you.

Now I will hand it over to our CFO, Nick Wu.

[Nick Wu, executive]

Thank you. Please, investors and friends of the media, please turn to Page 5 of our slides. This is our 2021 third quarter brand profit and loss summary.

In the third quarter, our net revenue reached TWD 130 billion, with a quarter-on-quarter increase of 8% and year-on-year increase of 9%. In the third quarter, we were still constrained by component shortages and logistics. However, we still saw very healthy growth, and our revenue reached a record high for the quarter.

As for our margins, again, due to overall industry issues, such as video cards being driven up or actually returning to normal due to cryptocurrency prices as well as the share of PCs. Therefore, our margins in the third quarter stayed at a healthy level of 18% and 8%, respectively. So our operating profit reached TWD 10.8 billion with a year-on-year increase of 15%. Our net profit reached TWD 11.3 billion with a year-on-year increase of 8%. Our EPS in the third quarter reached TWD 15.3.

Next, please turn to Page 6. This is our brand non-OP items. In Q3, we see an investment income of TWD 522 million. This includes a loss of TWD 180 million from Askey. And from other investments, we received TWD 702 million. As for Askey, we implemented cost control measures and improved the supply chain issues. Therefore, in the third quarter, we saw a mitigation in its losses for a total of TWD 180 million. In addition, we can see in the third quarter an exchange gain of TWD 733 million as well as TWD 2.8 billion in dividend income for a total non-OP items of TWD 4.2 billion.

Please turn to Page 7. Here, we can see our brand balance sheet. The main changes are in inventories where we can see, compared to the TWD 129 billion, we have increased it to TWD 150.6 billion. So clearly, in the overall industry, we can see demand outstripping supply and lots of long-term and shortage -- short-term inventory issues. So in terms of ASUS' innovation and key components, we have engaged in strategic stockpiling as well as long-term planning. And we believe that in our inventories, we have a healthy level of quality and pricing. So as for Q4 seasonality, we expect that our inventory, cash and cash conversion cycles will return to normal levels. Other items such as accounts receivable and accounts payable has maintained a steady level. So this is our summary for the balance sheet.

Please turn to Page 8. This is our product mix for Q3. PCs account for 68%, up 6% from Q2's 62%. Phones account for 2%, and components account for 30%. In terms of year-over-year product mix, we can see that it has been steady and flattish. It is about the same as Q3 of 2020.

On Page 9, we can see the region mix. Europe accounts for 32%; Asia, 47%; the Americas, 21%.

On Page 10, we can see our forecast for Q4 due to logistics and constraints in the supply chain. ASUS will still maintain the Golden Triangle strategy and promote new products and new product cycles and continue to pursue new customers and new markets. We expect that in the fourth quarter, we will achieve positive growth quarter-on-quarter. So in the PC segment, we forecast 5% growth quarter-on-quarter and 20% to 30% growth year-on-year.

As for the components, we expect quarter-on-quarter will be roughly flattish. And we will see perhaps 5% increase year-over-year. So overall, we expect quarter 4 to have positive momentum and growth. This is the financial report. I'm going to hand it over to our Co-CEO, S.Y. Hsu, for our strategy and outlook presentation. Thank you.

[Shi Chang Hsu, executive]

Ladies and gentlemen, investors, friends of the media, hello. My name is S.Y. Hsu, and I will present, along with my Co-CEO, Samson, our strategy and outlook.

Our first slide is our key business objectives. So our first objective is managing market dynamics. In this quarter, we are still dealing with a lot of the impacts from COVID-19, including constraints on the supply chain, logistics, shipping fees. I'm sure that you all understand, you're all clear that with the power shortages in China, this also impacted our supply chain. With the hard work of all our suppliers, we have managed its impact on our operations.

Next, we want to expand the addressable market. We have invested a lot in the creator segment. A lot of the creator products have some features that are not all that different from our other products. So we have really strengthened these features to capture the creator segment.

The third objective is to focus on areas of growth. Obviously, gaming is very important to us. And due to COVID-19, the gaming segment has seen a lot of growth. We have invested a lot of resources in products and in marketing.

For ASUS, another area of growth is our commercial products. In the past, as you know, we focused more on consumer segment. So in comparison, our consumer products face a lower base. And with the investment of our resources, we have actually seen quite a good return, which Samson will elaborate on. Most of what I'm talking about is about our products. However, we have the capability, especially in the commercial area, in the gaming area, we have a lot of capability, but we haven't seen a lot of results yet, for example, in AIoT and AI solutions. As you all know, we have invested a lot of resources, and we foresee great areas of growth here in these segments. So we will continue to grow these areas and update on you as things progress.

Next. We obviously focus on our brand and therefore, our strategy of the Golden Triangle is key to this. We've used the Golden Triangle strategy to drive our brand position. This starts with our products and starts with design thinking to think about our consumers' pain points and how to provide them an optimal user experience. After the launch of our products, we use CRM and connected services to continue to boost our market position. And finally, we will use NPS, Net Promoter Score, as a metric to review whether we have really met our users' needs. So through this closed loop, we continue to evolve and improve ourselves.

Next. On this slide, you can see that in the third quarter, we have experienced very wonderful growth. In open platform products, we have experienced 12% year-over-year revenue growth; and system products, 9% year-on-year revenue growth. Samson will explain more about this later.

Next, this slide shows starting from the first quarter of 2020 to our current third quarter of 2021, we can see strong and consistent revenue growth, even a record high revenue growth of TWD 130 billion. So I would like to thank all our investors and our consumers for their support. As Nick, our CFO, reported, we believe that following up on this trend, we will continue to deliver a strong performance in Q4 and continue to address market issues such as component shortage in order to deliver a strong performance.

Next. As for motherboards and graphics cards, we have very good performance and growth. So whether talking about Intel or AMD motherboards, we have more than 40% share in the global market and a leading position in this area. Intel recently released the Alder Lake-S Z690 motherboard. And immediately, we launched products and captured 60% market share. As for next-gen technology, we are very focused on this and provide comprehensive support for PCIe Gen5, USB4, DDR5, WiFi 6E as well as Windows 11 OS.

In addition, we have always worked hard to differentiate our products and come up with new innovations, one of which is the AI overclocking technology. We all know that there are a lot of technological constraints here, and our R&D have worked very hard to innovate and support our gamers. And we have launched this AI overclocking technology.

In addition, we have also provided many user-friendly designs, such as the PCIe Slot Q-Release. Without Q-Release, when removing graphics cards, some users might encounter problems, it would not be so easy to remove. We believe that this is an issue that many gamers face. Therefore, we provided a wonderful solution for this issue.

Another innovation is the M.2 Q-Latch, which also was borne out of user expectations to provide a better user experience. The Matrix LED lighting was transferred from our ROG Zephyrus G14 notebook because following its launch, it was very well received by users. So we transferred this technology to our motherboard. In addition, we also have front panel USB-C port as well as fast-charging technology. All of this is to help our users have a better experience.

Next page, please. We mentioned that we invested resources in the AIoT ecosystem to focus on 3 key areas, namely smart manufacturing, smart health care and smart retail. In the past, we elaborated less on smart healthcare. So we will focus on this today.

This is our ASUS healthcare service architecture. Since starting this dedicated unit in smart healthcare, it's been about 3 years. Currently, we have achieved some of our short-term targets. In Taiwan, we have already -- we are already servicing 20 -- more than 20 hospitals, and we work with Olive AI in the United States to reach over 770 hospitals. And by the end of the year, we will service hospitals in Singapore.

So for the next 3 years, we hope to continue to serve hospitals and patients and address their pain points. First, we will upgrade the medical staff data model, which is this xHIS platform. In addition, we provide apps for patients so that they may manage their own health data. By collecting data through these 2 end points, we create real-world data, which combined with our AICS knowledge graph, we are able to integrate it with LUMOS so that medical reachers researchers can accelerate the time scale for generating and analyzing real-world evidence, which feeds back into enhancing medical treatment and services, so that researchers, medical staff and patients can all benefit from this positive feedback loop.

Next. I would like to introduce the LUMOS system. Our AICS created the first real-world data platform in Taiwan. Currently, more than 5 medical centers have their data integrated onto this real-world data platform. In the past, it would take several months to integrate this data. Now in less than 5 minutes, you can integrate this data to receive analysis for treatment and further actions. We benefit researchers in their scientific exploration. We also work with pharma and biotech in drug development and discovery. And we are reaching out and we'll support regulatory agencies to help with drug monitoring and management, for example, working with the Ministry of Health and Welfare here in Taiwan.

Here, we can see how we provide care for patients. Ours is a patient-centered health care service that uses technology to give doctors time back to the patient. We already introduced the system to Chung Shan Medical University Hospital. We have worked with them for over 5 months and reached more than 19,000 patients achieving 35% penetration rate. Over 1/3 of CSMU patients use our app, and they use it because it's convenient. It allows them to make appointments and monitor their symptoms and make recommendations on which doctors or specialities they should choose. In addition, it is able to manage their medicine and prescriptions.

So our app has a lot of features. First of all, it recommends a doctor or speciality based on the patient's systems. So our app is able to provide this service. Also the app estimates the time that you are able to see the doctor and estimate the time needed for outpatient services. In Taiwan, a lot of patients report to the hospital first thing in the morning because they're afraid of missing their spot in the queue. This is actually a great waste of time for patients. So the app estimates when they will actually be able to see the doctor, which is a great convenience for patients.

This also provides services for blood tests, for other tests, for management of medicines, for long-term prescriptions and other services. All of these services address needs that patients actually have. And we hope that in the future, more clinics, hospitals can be integrated into our app to create an ASUS health care community. With the data generating through these apps, we can work with hospitals, insurance, health tech companies and pharma to better refine services in the future.

ASUS has always placed great emphasis on our design. And we have received worldwide recognition from highly recognized awards. This year, ASUS and ROG received -- among 6,000 entries, we received 15 awards from Good Design Award, way above any other company in Taiwan. This is great recognition from the international community.

In addition, ASUS and ROG received 5 awards from the Red Dot Brands and Communication Design Awards. We received accolades across multiple disciplines, including digital solutions, brand design and identity, film and animation, packaging design and interface and user experience. We aim to create design and creative performance, create great brand value as well as brand identity and differentiation.

Many companies in Taiwan have also been recognized. So here, I would like to particularly focus on the Red Dot Brands and Communication Design Awards. In the past, ASUS entered into these awards based on our innovation in our products. This year, it's a little bit different. So I'd like to spend some time on this. This year, ASUS received 5 awards. This is our best-ever performance, and we far surpassed any other company in Taiwan. These include brand design and identity, digital solutions, film and animation, packaging design and interface and user experience design.

I believe that this has a lot of meaning for us because this is not just in terms of our brand identity and differentiation. It also recognizes our innovation and our consideration of the user experience. I feel that ROG is not just gaming hardware. We have crossed over into many other areas. We sold -- in addition to ROG Phone, we also have the ROG Citadel, ROG brand book, which is our brand design book. As for digital solutions, we unveiled the ROG Citadel. These all show our pedigree in design.

I'd like to focus on our brand book for a moment. Through internally, our ADC, we designed a brand book to enter into Red Dot Award, and this brand book frames the history, design, technologies and innovations of our ASUS ROG sub-brand. The design of the brand book outlines our values, vision and product aesthetics.

As for ROG Citadel, some of you may have noticed that this year in January, during CES 2021, due to the COVID pandemic, we were not able to attend in person. We unveiled ROG Citadel, a new, innovative and joyful way to allow users to explore our offerings in a virtual reality. So we developed an ambitious virtual experience that in a game-like style, allowed our users and consumers to explore a gallery tour of the latest ROG devices and immerse themselves in an exciting interactive experience. In addition, we offered many games in the Citadel that allowed them to interact with each other. We feel that this is a very new and innovative way to launch our products, and we are very glad that it was recognized by Red Dot.

As for ROG Flow X 13, we received the film and animation award. We used a unique video display or presentation in order to show our universe of product innovation.

Our ROG Phone 5 Ultimate, we received the interface and user experience design award. This is -- we used a very unique packaging that allowed the user, through their unboxing experience, to scan this code on the packaging in order to go to -- to experience the phone through an AR experience. And this really deepens the unboxing experience to help them get immersed in gaming from the get-go.

I would like to hand it over to Samson now. Thank you.

[Samson Hu, executive]

Thank you, S.Y. Ladies and gentlemen, investors, friends of the media, good day. I am Samson Hu, I will now present on our operational results of our Q1 to Q3 2021 as well as our outlook. During Q1 to Q3, we still use our dual strategies of Golden Triangle and product segmentation. Together, the whole ASUS team has worked to mitigate supply chain constraints and its impact on shipment. As a result, all of our product lines have outperformed the market average.

For example, here, you can see regular PCs outperformed the market and received 10% to 15% growth year-on-year in shipments. Gaming PC grew 25% to 30% year-on-year. And commercial and education PCs grew more than 50% year-on-year in terms of shipment.

Next. Here, we see additional information regarding our commercial PC business. Excluding Chromebooks, the year-on-year growth of ASUS commercial PC shipments in the first 3 quarters has exceeded 100%. In Europe and the Americas, we've seen multiple-fold growth. As for Asia Pacific and China, we also have more than 40% growth in commercial PC shipments. Over the past 2 years, we have increased our investment in the commercial segment. So we are very optimistic about the commercial segment and its growth momentum driving us next year and beyond. So I would like to provide this for your reference.

Next page. As we pursue growth in shipments, we also focus on value creation, and we'll continue to focus on growth of premium products. So comparing with pre-COVID levels and after COVID levels, we can see that PC shipments grew from about 260 million to -- grew 35% to 350 million units. As for ASUS' ZenBooks, consumer PC, gaming PCs, creator PCs and high-end Chromebooks, basically, our premium PCs, we experienced over 65% growth over pre-COVID levels. So this reflects our efforts in the premium market segment.

Next page. As we strive for growth in premium products, we have also improved our overall product portfolio. We have focused on OLED displays, including our ProArt studio books, ZenBooks and everyday Vivobooks. So we have comprehensively introduced OLED laptop solutions across the line in order to create value and maintain our leading position.

Next. Last year, we just launched our 2-in-1 Vivobook 13 Slate OLED laptop. This is the first 13.3-inch OLED Windows detachable laptop, it was very well received, and we expect that this month, we will proceed with shipments and launch to market.

Next. As for our gaming PC business, we have set high targets. We expect to grow faster than the market average. So in the first 3 quarters of this year, the market average is about 16% growth. As for ASUS, we reached about 30% growth. So looking at different regions, Europe is nearly 20% year-on-year growth; the Americas, 35%; Asia Pacific, 30%; China, 30%. These are all very strong performances.

Next. In terms of gaming notebook shipments, the premium gaming notebooks for the first 3 quarters, the market average is about 24%, whereas ASUS ROG, our in-house share grew from 31% to 35%. So compared to 2020, we continue to grow our premium gaming and ROG share.

Next. In addition to gaming notebooks, we have continued to enrich our entire gaming product line. The revenue of the gaming products compared to our in-house share has continued to grow and continues to grow to more than 40% and is estimated to nearly 45%. Through our overall operating strategy, we will continue to promote the aggressive growth of our gaming product portfolio.

Next. In our gaming brands, we have established an overall ecosystem to enhance our brand, to foster our community and to enrich our products. This is our very important strategy.

Next. As for our products, we have a very comprehensive gaming portfolio and optimal user experience to satisfy all the needs of gaming users.

Next. As for fostering the evolution of the gaming system and -- gaming ecosystem and community, in addition to fostering relationships with power users, we have also worked closely and cooperated with gaming vendors. We have also observed that gamers are not just the hard core users as in the past. We see a lot of crossover with entertainment and lifestyle segments. As a leader in the gaming industry, we continue to maintain engagement with the youth through social platforms and to foster and cultivate the growth of gaming subcultures, including music, fashion, animation, sports, entertainment, et cetera.

Next. This can be shown through our crossover collaborations and campaigns through our ROG sub-brand. So here, you can see some notable examples of our crossover campaigns. We believe that our crossover collaborations will continue to expand our ROG impact and brand growth momentum.

Next. In addition to gaming, another segment that we care very much about is the creator segment, as S.Y. mentioned earlier. Starting in 2011, we began to introduce ProArt display monitors for professional creators. And starting in 2019, we began to expand our investment in creating a more comprehensive creator portfolio, including notebook, workstation, display, projectors, motherboards and other components. So through this overall effort, we have sought to satisfy creator needs.

Next. As always, as we continue to deepen and expand our creator solutions and business, we believe that we can leverage our advantages and our capabilities to create an entire ecosystem for creators. So working together and creating strategic collaborations with different elements within the creator ecosystem, we want to enhance our products, our solutions and services to create optimum user experience and enhance our brand.

Next. Here is an example. In September, we held a creator product launch, where we announced our ASUS Dial, this directly resolved the pain points of a lot of creators and allowed them to enhance their efficiency in creative works. So with a built-in ASUS Dial in our creator notebooks and related products, we are able to enhance this whole ecosystem. We also worked with Adobe in a strategic partnership. I'm sure we are all very, very familiar with Adobe. So we work closely with them to enable ASUS Dial to support Adobe's various creative applications and to support the entire creative flow.

Next. Following 2 years of intense efforts in creator solutions, we can see that ASUS creator solutions has become one of the driving factors of ASUS' growth momentum. In Q1 to Q3 of 2021 compared to the same period last year, we experienced threefold growth. Looking to 2022, as I mentioned last time, we are very optimistic about various impacts brought about by COVID-19, including the acceleration of digital lifestyle, digital learning and hybrid working modes. We believe that this is an irreversible new normal. And under these new normal situations, we feel that the PC will become the main device among all digital devices because it is the most productive and it constitutes rigid demand.

Additionally, as we all know, Microsoft just launched the Windows 11 operating system with many new features and experiences. This is -- probably will require more than a lot of old equipments can handle. So we anticipate a cycle of replacement for old equipment. So based on these above factors, the new normal rigid demand for PCs and the Windows 11 launch, we believe that in terms of quantity, this will sustain us in terms of shipments throughout 2022 and beyond. We expect that looking towards next year and beyond, we can foresee probably about the same level of demand as this year, which is about 350 million units.

So this is a forecast for 2022 and for following years. Compared to pre-COVID levels, so in 2019, shipments were 250 million to 260 million units. This constitutes an increase of 100 million units. So we believe that this is a great opportunity in the future. ASUS will continue to engage in our dual strategies of Golden Triangle and product segmentation, whether we are talking about gaming, creator or commercial products to seize these opportunities and pursue above market level growth. In addition, we will continue to create value and work hard in this area.

This concludes my presentation. Thank you.

[Operator]

Thank you, co-CEOs and CFO for your presentation. [Operator Instructions] All right. We see a few questions from Credit Suisse and CLSA about the component shortage.

Which components are currently in shortage for the PC market? Will the shortage and the price increase of semiconductor components impact the gross profit? Are you able to reflect the cost increase on the product's selling price?

[Samson Hu, executive]

Samson here, I'll handle this one. I believe that the component shortage continues to be a serious issue. In the fourth quarter as well as the first quarter of 2022, we see demand momentum for our PCs is still very positive. Overall, the industry still faces demand outstripping supply. At ASUS, we have continued to work very closely with our supply chain. Currently, compared to previous situation, as for the types of components that are in shortage and with the efforts from our vendors, the gap between demand and supply of IC and motherboard and graphics cards has started to decrease. Previously, the gap was at 20% to 30%, now it has decreased to roughly under 20%. This is the current situation.

However, I must report that, as we all know, PC and notebooks, these type of system products cannot operate with even 1 component that is lacking. Without any single one of these components, we can't create a PC system. So looking from now and into the future, as for which variables will impact the component shortage, we identified, for example, 1 IDM/ICM supplier in the U.S., they supply automotive, electronics, IoT and PC products.

In PC products, there are quite a lot of IC parts for whom they are a major supplier, including in our notebooks, our USB interface power control as well as our notebook sound smart amplifiers, as well as our notebook's battery chargers. So this IDM supplier plays a very big part in the -- in all of these components.

So for this past year, supply has been very, very tight. And based on our current information, by the fourth quarter of next year, as they have -- as they complete their new capacity expansion. So before then, they will have very long lead times and very unclear visibility. This is something that we need to address, and we will continue to follow closely.

As for other IC suppliers, we can see that they have started to bridge the gap. It is simply that the semiconductor chain, including foundry, packaging, testing, it's a very long chain, which means that many things can happen in this process. So before we can completely resolve supply chain issues, at ASUS, we will continue to use our in-house R&D team to provide flexibility and work closely with suppliers to develop second source or even third source to mitigate the impact from component shortages.

As for cost, as everyone knows, there is a semiconductor shortage. So starting from foundries, all of our outflows, the cost has gone up. And our IC vendors have also reflected this. So as for reflecting the cost to our consumers, first, as of the second and third quarter, because there is such a semiconductor shortage, there are so much constraint on the PC supply. So we have communicated with our own consumers. And of course, they understand that there is a semiconductor shortage. So as we're discussing deals for the fourth quarter or in the future, for example, in the first quarter of 2022, we will encounter a new product cycle, new CPUs. As well as with the launch of Microsoft's Windows 11, we will see an upgrade in products and specifications. Therefore, the cost will also be suitably reflected in these upgrades and passed on to our consumers. Thank you.

[Operator]

Our next question comes from DigiTimes.

Does China's limitation on mobile gaming time make any impact on ASUS' gaming phone business? Will the phone business maintain its profitability target and turnaround plan?

[Shi Chang Hsu, executive]

S.Y. here. I'll handle this one. As for Chinese limitation on mobile gaming time, of course, we are very concerned. We have reached out to China's largest gaming distributor to discuss this issue. But prior to addressing this issue, we need to first view ASUS' share of the -- of China's gaming market. So obviously, in China, there's a lot of manufacturers of gaming phones and lots of market segments. In gaming phones, ASUS has the high-end position. So in terms of ROG, in terms of the functionality of our gaming phones, we are the leader. We are the high-end premium segment. Therefore, that means that our consumers have this certain financial ability to afford our products.

So China's limitation on mobile gaming time mostly aims to curb teenagers' use or time in gaming. They might feel that teenagers or youth spend too much time in gaming and it may impact their development. So working with these gaming distributors or developers, they've shared some data with us. So in terms of mobile gaming business, they analyze their target audience, so teenagers is not their main intended audience. So you can see that China's policy mainly affects teenagers. And therefore, since our target audience is not the teenager segment, therefore, our target users are not really affected by this policy.

We believe that this does not have a big impact on our gaming phones. However, we do not know if China will shift its policy. So we will continue to observe developments closely and make changes accordingly.

Another issue of concern is our gaming phone margin and profitability. In our last conference call, we delivered a very strong performance for that quarter, and we aim to continue to deliver strong performance. And overall, for this year, we will continue to work hard towards this target. I want to elaborate on this point, in ASUS, our investment is not just our gaming phone business unit. We have additional teams that work in communication, patent and R&D. This team has already existed for a long time since we were using 3G technology in our phones. And so therefore, we have accumulated a number of patents. Therefore, there have been in-house discussions about how to turn our technological advantage into profit and contribute to ASUS' business.

We have some ideas and -- for breakthrough in this technology, and we will be sure to share them with you in the near future at an appropriate time. I personally feel that if we combine the above -- two segments are our gaming phone business unit and our communication patents team, there is a lot of opportunity for profit. Our phone business is not very big. We have not reached an economy of scale. So even though we have very good positioning with our phones, it doesn't really convert to profitability yet because we haven't reached that scale. In the future, if we can separate the data for this business unit, it might be helpful for analysis, and we will continue to have in-house discussions and developments. Thank you.

[Operator]

The next question comes from Credit Suisse and UBS.

Can you explain ASUS' growth strategy next year for each PC segment: Education, consumer and commercial? Especially in the commercial PC business, would you elaborate about ASUS' strategy to expand in the commercial PC market? How would ASUS differentiate from the current established commercial PC leaders? And what's your expectation and plan for the profitability of commercial PC business.

[Samson Hu, executive]

Samson here, I will handle this. Education, commercial and consumer PCs are all growing, and we have different strategies for each. For commercial PC, we have seen great growth in the past 2 years, great momentum, mostly driven by Chromebook. And Chromebook, coming into 2022, faces some challenges. In the past 2 years, Chromebooks has seen great growth, mainly because of U.S. accounts for 70% of the market, and Chromebook plays a great role in education, in distance learning. So a lot of this demand has already been fulfilled. K-12 students and teachers, that comes to about 56 million units, most of that has already been fulfilled.

So looking at next year, whether we can continue to grow the U.S. market depends on 2 factors. One is the replacement of Chromebooks for education, or this replacement momentum. Optimistically speaking, school children, because they're more active, they may not take as good care of their Chromebooks, meaning that product life might be less than with other users. Therefore, they may need to be replaced at a faster pace. So that is a positive factor.

The other factor is the U.S. government budget or subsidies for education. These are 2 main metrics when looking at the education segment, because it is so dominated by Chromebooks and also dominated by the U.S. market because it takes up 70%. So that is it for education.

For ASUS, we are also affected by factors from the larger environment. Therefore, our target is about the same as market levels to maintain probably more flat or single-digit growth. That is the education segment.

For the commercial segment, we expect that enterprises will go back to working in offices. Therefore, they will have more expenses to replace equipment. So therefore, there will be a stronger momentum in the commercial segment compared to the consumer segment. From ASUS' perspective, as I presented on earlier, we have invested a lot in the commercial segment. Therefore, we have excellent growth momentum. Therefore, we forecast a very great momentum next year, and we hope to have better than market levels of growth, about 10% to 20% in the commercial segment.

As for the consumer segment, we have worked hard in various areas, including creating value for our products and enhancing our competitiveness. This includes what I said before, which is that we have integrated OLED displays across the product line. Therefore, in consumer PCs, we have already shipped out a great number of units in the fourth quarter. Therefore, looking to 2022, we are very confident that we can continue this momentum. So in the consumer segment, ASUS is very optimistic and confident that we can outperform the market by 10%. That's the overall situation.

I'd like to elaborate a little bit more about our strategy. In the past few years, we have developed the market a little bit more slowly, especially in the consumer segment. Therefore, we have adopted 2 strategies. One is focus, the other is flexibility. Focus means that we are focusing on regions, countries, markets where the ASUS consumer brand is among the top 3 brands. This will allow us to drive commercial business in these specific regions and markets, to focus on specific regions and markets.

The second focus is to focus on commercial consumers, which include government, educational institutions, small and medium businesses and enterprises. For now, we are going to focus on education and SMB.

As for enterprise, we are probably not going to develop this area in the short term. So the second focus is to focus on particular consumer channels, which is education and SMB.

As for flexibility, looking to our services, whether we are talking about hardware or software applications for education, we also have some customization services. For example, OC match or computational services. We will continue to work flexibly with other vendors and to support our consumers. Therefore, our 2 strategies, focus and flexibility, will see us through. Did I cover everything? Thank you.

[Operator]

Our next question is from DigiTimes and Giant Network. ASUS has a strong position in graphics card markets and also has made some development in the AR and VR products in the past. Does ASUS have a long-term view and road map for the metaverse topic? And what's your long-term strategy for the graphics card business?

[Shi Chang Hsu, executive]

S.Y. here. I'll handle this question. I think the hottest topic or keyword right now is metaverse. Of course, to realize the vision of the metaverse requires a lot of building blocks. And I think that when we think of the metaverse, the movie, Ready Player One, probably comes to mind, or even other sci-fi movies. However, to fully realize that kind of world, we need a lot of computing and graphics chips power.

So one of the leaders in realizing the metaverse will be NVIDIA. They are a leader in computing and in graphics chips. ASUS has a long-term collaboration or partnership relationship with NVIDIA, and we will work closely with them to enable and support the concept of the metaverse.

Personally, I would like to share some of my own views. I feel like to actually really develop the metaverse, we -- there are many requirements. In order to fully realize the vision of Ready Player One, the first thing we need is strong computing power and graphics. Second, to attract users to this platform, you need to have content, which will make the users willing to spend time on this platform. Since ASUS is not a content provider, I feel like we can only play a supporting role.

So for example, Facebook plans to play a very important role in this aspect in providing content. And therefore, they rebranded themselves as Meta.

The third and I think the most important factor is to create economic activity. Without economic activity, you won't attract any users. Therefore, in the metaverse, you need meta currency or cryptocurrency. I feel that this will play an important role in the metaverse, such as other things like the very popular NFTs of late. When I was looking at NFTs, I couldn't even wrap my head around it. But with the introduction of the metaverse, I had an aha moment. Of course, in the metaverse, you need cryptocurrency to buy something and own something that is absolutely unique.

So for example, in the metaverse, if you buy a one-of-a-kind Nike sneaker NFT, therefore, you are the only person in the metaverse that can wear this unique pair of Nike sneakers. Therefore, the NFT has value.

So combining all these factors, some of them will definitely involve ASUS' business to create this platform. For example, ASUS has our own cloud service, we also have this server management service. Therefore, we have a lot of overlap with the services needed for the metaverse. Also, as I've mentioned earlier, blockchain will play an important role. We have worked with a company that is reportedly Taiwan's largest blockchain technology company. So ASUS has some advantage in its positioning and can play a leading role in Taiwan's metaverse. And I feel that we have this advantage. I believe that starting now, to fully realizing the metaverse, we need a lot of time and advancements.

But from my above comments, I'm sure you understand that although we are not directly linked to the metaverse, we are very involved in many of the building blocks that could be important in realizing the metaverse. Of course, in the future, as it continues to develop, we will continue to update you and strengthen our advantages in the future. Thank you.

[Operator]

Our next question is regarding channel inventory level. Morgan Stanley, KGI have all asked this question. According to other PC companies, the channel inventory level has returned to normal now. Does ASUS also see a similar trend? And looking into the fourth quarter of 2021, what percentage of orders is not able to be fulfilled or in supply constraints?

[Samson Hu, executive]

Samson here, I'll handle this question. Currently, channel inventory levels, as I reported on in my presentation, this shortage is gradually being mitigated. And so we are resolving supply chain issues in order to meet demand. Currently, looking at inventory levels and comparing with pre-COVID levels, we previously saw inventories at only 50%, and now they have returned to about 70% of pre-COVID levels. So it is improving, it is getting better, but we probably still see a 30% gap compared to the 50% gap of earlier of unfulfilled orders.

However, that is a worldwide or global average. However, the U.S. market is very particular. Previously, it had higher inventory. However, as you all know, the U.S. faces port blockages as well as supply chain issues for overland transport. There is a shortage in truck drivers. Therefore, inventory in the U.S. has actually gone worse and faced more constraints.

Therefore, I'd like to mention that for example, in our October earnings, we were actually impacted a little bit by this -- by the U.S. inventory issues because our shipments were not able to be delivered to our customers. So overall, globally speaking, inventory -- channel inventory levels has gone from a 50% gap to about a 30% gap. However, the U.S. is different, because of port blockages, U.S. inventory has actually gotten worse. As for unfulfilled orders, this is actually very closely linked to inventory issues. So unfulfilled orders is about 20% to 30%, and this will continue into the fourth quarter and continue into Q1 of 2022. Thank you.

[Operator]

Due to time constraints, this is the end of our Q&A session. I'd like to invite our co-CEOs to share closing comments.

[Shi Chang Hsu, executive]

Hi. S.Y. here. I'd like to thank our investors, friends of the media and consumers. Thank you for your support, and we were able to deliver good performance in Q3. We're a very high-quality company. Although there are strong tailwinds from the overall industry, we have also spent a lot of time addressing market changes. We have dedicated our efforts to meeting demands and improve our products, our creator, gaming and commercial products, to enhance our business.

Looking to our potential business, we foresee that AIoT and smart healthcare, we will continue to dedicate our efforts in these areas and deliver good performances for our consumers and shareholders. Although we are still in the middle of the pandemic and Taiwan has not completely returned to normal, I still wish everyone good health and prosperity. Thank you.

[Samson Hu, executive]

Hello, Samson here. Thank you, investors and friends of the media. Thank you for your long-term support and feedback. I think that ASUS will continue to work on improving our daily operations to meet demands and fix supply chain issues. In terms of the strategic aspect, our aggressive target is to transform to a growth company and to continue to grow our earnings and our value, particularly value. So in the past 2 years, we have worked towards this goal, and we'll continue to work towards this goal.

During the meantime, I'd like to thank everyone for your support, and I wish you all good health. Thank you. Thank you.