Good morning and good afternoon. Welcome to Lenovo's Q2 result webcast. This is Gary Ng, VP in investor relations at Lenovo. We will first have remarks by our Chairman and CEO, Mr. Yang Yuanqing, and our CFO, Mr. Wong Wai Ming. After that, we will take your questions. Now, let me turn it over to Yuanqing.
Hello, everyone. Here in Beijing, we already had our first snow. So winter is coming. But I believe for Lenovo business, we are actually entering a great season. So I am glad to update you on our progress so far and share our confidence for the future. Last quarter, we faced the double challenges, integrating and digesting our two major acquisitions, and dealing with a tough market with a slower global economy, currency fluctuations in some key markets, and a declining PC and tablet demand. We made the decision last quarter to do the biggest restructuring in Lenovo history across all businesses to reduce costs and expenses and improve efficiency, and to align the key elements of the acquired businesses to build a simpler, more efficient organization.
I am sure you want to know how we executed that plan, and whether we are on track to continue to deliver our commitments, continue to execute our strategy, and continue to grow rapidly. Today, at least I can answer some of these questions, although not all of them yet. Our financial results are definitely the first proof. Last quarter, we delivered a solid performance. Our revenue grew 16% year-on-year to $12.2 billion. Excluding restructuring one-time and M&A accounting charges, our non-GAAP PTI was $166 million, down close to 50% year-on-year. But up 16% from last quarter. It is important to point out that this was achieved when the restructuring was not completed, and the cost savings were not realized yet. Our PC business, again, reached a record worldwide share with strong margins.
We also reached a record share in North America, Asia-Pacific and Latin America, each outperforming the market by around 20 points. Our worldwide consumer share reached around 20%. In tablets, while all other top four players' market share declined, we outgrew the market by almost 14 points to achieve record market share. In enterprise, we reached an important milestone as revenue increased year-on-year on a comparable basis for the first time since acquiring IBM System x. The revenue growth of 9% from last quarter indicates the business has stabilized and entered attack mode. Deals with hyperscale clients such as Alibaba, Tencent, and Baidu all indicate major breakthroughs in China. Our enterprise revenue was up 210% year-on-year. Even more, our enterprise business had its fourth straight quarter of operational profit as margins continued to improve.
In mobile, our volume grew 11% year-over-year, and the strategy to shift the growth focus to outside of China continued to pay off. In the first half of this fiscal year, rest of the world accounted for 70% of our volume, compared to only 19% a year ago. In key emerging markets of India, Indonesia, and Russia, we outgrew the market by an estimated 50, 12, and 180 points respectively. Our share grew to 9%, 6%, and 21%. In Brazil, we have 22% market share. Now, in these largest emerging markets, we all have great performance. Although exchange rate fluctuations in some key markets continued to impact our profits, MBG PTI margin improved by almost six points over last quarter. We took a number of strategic actions to solidify our foundation for long-term growth while keeping solid operation of the three growth pillars.
First, we have finished the integration of System x businesses and completed aligning the organization and the brands with Motorola Mobility. Now we are one organization, one team, ready to attack. Second, we executed the restructuring plan announced last quarter and are on track to achieve the restructuring savings. We will deliver more than $1.35 billion in annualized savings, including over $650 million in savings for the second half of this year. Most importantly, our cost structure is now among the most competitive of the industry in all our businesses. Third, in mobile business, we are on track, cleaning up aged inventory, streamlined product portfolio, and launched competitive new products. Our development cycle will now ensure our products will be competitive every season and every quarter. Fourth, we launched new products and received very positive market response.
We will continue to lead with innovative products such as newest Yoga family, Yoga Tablet 3 Pro, Yoga 4 Pro, and the Miix 700 Convertible. The new Moto X Force, which has the industry's first unbreakable screen, is getting great reviews, as are Moto 360 and the Vibe P1. Finally, in our enterprise business, after finishing the integration of System x, we now have a more complete product portfolio and a lower cost structure. In traditional IT, we are ready to attack our traditional competitors. In the faster-growing hyperscale market, what we have achieved in China market has laid a solid foundation for stronger competitiveness. In the emerging hyper-converged market or technology, the Dell EMC deal actually created an opportunity for us, as it pushed those new technology companies that represent the future to work more closely with Lenovo. The best example is our recent partnership agreement with Nutanix.
You can expect we will soon announce more partnership with other companies. We are also strengthening the relationship with IBM in storage, including in China. Definitely, we are now in our attack mode in enterprise business. I wanted to point out that we completed all these actions above while delivering better than previous quarters' results. This is as difficult as changing wheels while the train is running at full speed. But we did it. We executed it well. Although this is not the time to show you the final results, I do believe that for Lenovo, the worst is over. We are fully charged, ready to resume the momentum in the second half of the year and grow in the longer term. We are confident that our company will enter a new era of strong growth. Strategic transformation and integrating acquired businesses are not overnight efforts.
I appreciate the market's patience as we work through them with solid progress. After last quarter's earnings, some people concluded that our acquisition of Motorola had failed. I guess those people are perhaps disappointed now when they see our performance last quarter and our preparation for the future. The Lenovo team has fought extremely tough battles, and we will not only overcome these challenges, but also emerge out of them stronger than ever. Completing last quarter's restructuring actions so quickly, once again, proves our execution capability. Let me reaffirm that we will deliver our previous commitments. In PCs, achieve 30% market share with a strong profit. In enterprise, start from five billion annual business and attack aggressively. In mobile, turn the business around in one to two quarters and enter a new era of profitable growth. Now, let me turn it to our CFO, Wai Ming. Wai Ming, please.
Thank you, Yuanqing. I will take you through Lenovo's financial and operational performance in Q2 fiscal year 2016. Next chart, please. First, I will give you some highlights for the quarter two performance. As Yuanqing mentioned, despite a very challenging market environment, we achieved strong top-line growth with solid momentum across our businesses in Q2, and our run rate PTI improved quarter-on-quarter after executing our realignment plan announced in last quarter. Our group revenue increased 16% year-on-year to $12.2 billion. In quarter two, we booked a total of $923 million of restructuring and one-time charges, which resulted in a reported pre-tax loss of $842 million. Excluding the above charges and non-cash M&A accounting charges of $85 million, the group run rate PTI was $166 million, up 16% quarter-to-quarter, but down 50% year-on-year. Group loss attributable to equity holders was $714 million.
The smaller net loss was due to the net tax credit from the two recent acquisitions and restructuring. Next chart, please. Gross profit increased 8% year-on-year, while gross margin declined to 13%. Gross profit increase was the result of including the two acquired businesses for the entire quarter, and the decline in margin is driven by the additional spending to clear smartphone inventory. However, gross profit margin declined quarter-on-quarter, mainly due to the competitive environment in the EMEA and the AP regions. Operating expenses increased by 116% year-on-year to around $2.4 billion, mainly attributed to the restructuring and one-time charges. Excluding these charges, operating expenses were $1.6 billion, increased by 44% year-on-year, mainly driven by the two acquired businesses. We recorded other non-operating expenses of $58 million, which mainly included the interest expenses from the notes we issued and imputed interest expense for the Motorola deal-related promissory notes.
We recorded a tax credit of $125 million for the quarter. Tax credit in the second quarter significantly increased quarter-to-quarter as a result of the tax credit from restructuring and the one-time charges. Loss attributable to equity holders was $714 million. Basic loss per share was 6.43 U.S. cents. The board of directors in today's meeting declared an interim dividend of six Hong Kong cents, representing the same level of interim dividend paid last year. Next chart, please. In this chart, we'll also prepare an analysis on our run rate financial performance from an operational perspective for your reference by excluding the impact from restructuring and the one-time charges. These performance figures are provided to enable analysis of the like-for-like performance of the underlying business. As you can see from the chart, the run rate PTI and the margin improved quarter-to-quarter but declined year-to-year. Next chart, please.
In this chart, we have provided a bridge to reconcile the different financial figures to give you an overview of how these figures are calculated. Next chart, please. The main driver of the change in our balance sheet is seasonality and the restructuring charges. The non-current assets were about $11.9 billion, and the current assets were about $15.4 billion as of September 30, 2015. We had net current liabilities of around $2.7 billion at the end of the quarter, which was higher than that in the June end mainly from the higher payable due to seasonality and restructuring reserve made during the quarter. The non-current liabilities were around $6.2 billion. Next chart, please.
Our cash flow from operations improved significantly to $909 million in quarter two against an inflow of $280 million last year and cash outflow of $310 million last quarter. The better cash position against quarter one was largely attributed to improvement in working capital by having both new businesses adopting our own working capital discipline. Net cash reserve was lower than last year as payment for the two acquisitions were made in quarter three last year. The quarter-on-quarter improvement was due to the better cash generated from operating activities despite we repay bank loans in quarter two. The cash conversion cycle for quarter two was negative one day, better than positive five days from Q1, thanks to better inventory turnover, but against negative five days last year.
We will continue to bring the credit policy of two new acquired businesses close to our legacy business in order to achieve a better working capital performance. Next chart, please. Our strong top-line growth in quarter two was driven by solid performance across the business groups and geography. PC business group. Even though the market continued to show a decline, we continued to outperform the markets. We remain number one player in the worldwide market for 10 consecutive quarters. Our PC revenue decreased by 7% year-on-year to $8.1 billion. Excluding the currency impact, we actually grew 1%. Pre-tax profit increased by 10% quarter-on-quarter, but registered a decline of 17% year-on-year. Pre-tax margin declined quarter-on-quarter by 0.1% and 0.6% year-on-year to 5% driven by the challenges from the EMEA markets. Enterprise business group. Our enterprise business continued to strengthen with revenue growth and continued operational profitability improvement.
Revenue of the enterprise business group increased by five times year-on-year to $1.2 billion, helped by the inclusion of System x business. On a pro forma basis, it shows for the first time year-on-year increase of 2%. We continue our strong growth in China and obtain major projects win from hyperscale market. We have now completed the integration with System x worldwide and together with partnership with industry leaders, we are ready to attack the enterprise business and stay very committed in our target of building a profitable $5 billion enterprise business. We recorded operational profits before the non-cash M&A accounting charges in the combined enterprise business for the four straight quarters while the margin continued to improve. Mobility business group. Our mobility business continued to improve, driven by our strong growth in markets outside China, where our operating margin improved quarter-on-quarter.
We continue to expand aggressively in markets outside of China. Shipment grew two times for Lenovo phone, especially in emerging markets like India and Indonesia. In Russia, we obtained breakthrough market share gain hitting more than 20%, thereby improving our revenue growth momentum quarter-to-quarter. Our new products recently launched have been gaining good market response. Moto X Play and Moto 360 saw solid activation rates since their launches. Our recently launched Moto X Force, the ShatterShield features received very good market traction. For tablet, we remain the number three player worldwide. Despite the market decline, our shipments outperformed the market and remained flat year-on-year and increased market share. For MBG, revenue was up 27% quarter-on-quarter. We reported an operating loss $217 million and a negative 8.1% pre-tax margin.
We improved our margin by about six points quarter-on-quarter, mainly driven by the improved business outside of China and better expenses control. We remain confident in turning around the mobile business in the next one or two quarters. Next chart, please. Our solid performance were also seen across geographies. China, we maintain a strong number one position in China PC despite market challenges while holding up margin. Our EBG revenue grew more than 210%, and the group has won a few key hyperscale opportunities from Baidu, Alibaba, and Tencent. However, China's smartphone market remains challenging, and it continues to shift to open and online channel. The realignment initiatives will improve our smartphone cost structure, along with simplifying product portfolio and global supply chain.
We have broadened our routes to market and together with new products such as Moto X Force and the ShatterShield features and the others, we are attacking the market from broader price bands. Nevertheless, the margin was impacted as we cleared aged inventory and market competition. Our revenue from China was down 12% year-on-year to $3.3 billion, resulted a PTI at $136 million and operating margin was 4.1%, a decline of 1.7 percentage points year-on-year. Asia Pacific. An attacking strategy in PC worked effectively in Q2 in the region. We continued to grow PC units and achieve a record high market share in the region and in key countries such as India. Our smartphone business also achieved strong growth in this region, including India and Indonesia, driven by substantial growth of Lenovo brand phones and inorganic help from Motorola.
As a result, our revenue in AP grew 27% year-on-year, while the overall AP margin recorded a decline of 1.1%, mainly due to the Japan macro challenges and from Motorola. For EMEA, our PC business in the region continues its share gain amidst challenging macro environment and currency fluctuation. Thus, our margin was also impacted. Our smartphone business achieved strong growth in this region, driven by substantial quarter-on-quarter growth of Lenovo brand phones and stabilizing Motorola business. Our EMEA revenue was up by 6% year-on-year and 20% quarter-on-quarter to $3.2 billion. Profit before taxation was $23 million and operating margin was 0.07%. The margin decline was mainly due to currency impact in our PC business. For Americas, our PC unit shipments in North America remained strong with record high market share, driven by strong growth in consumer business.
However, this strong performance was offset by slow performance in the challenging Brazilian market. This weak macro environment in Brazil has also impacted our smartphone business, particularly the Motorola business, as Brazil accounts for a substantial part of its business. Nevertheless, Motorola performance has seen improvements quarter-on-quarter, driven by the launch of its newest generation of products. With the business alignment actions taken set to improve our cost structure and our efforts in clearing aged inventory in the market that brought us healthier inventory position, we are confident in driving the growth of our PC and mobile business in Brazil and in turn improve our profitability in the near future. Americas revenue was up 70% year-on-year and 12% quarter-on-quarter to about $3.7 billion, helped by the addition of the System x and Motorola business.
We narrowed the operating loss to $73 million in the region quarter-to-quarter, thanks to a strong shipment growth from Motorola in North America region. Next chart, please. As Yuanqing mentioned, we are on track to realize the planned annualized savings of $1.35 billion, and we expect approximately $650 million of such savings to be realized in the second half of the year. In quarter two, we also booked $599 million restructuring cost, which comprised of mainly severance cost and write-off and disposal of assets. We also booked $324 million one-time charges for clearing smartphone inventory, mainly in China. Together with restructuring cost, we booked a total of $923 million charges in quarter two. We believe the action will help us to become an even faster, stronger global company to drive revenue and profit growth.
It will help us maintain a more efficient cost structure and enable us to attack the market with a new product portfolio across all business groups. Our Q2 result fully demonstrated our solid performance in a challenging market environment. The quarter-on-quarter business stabilization led us with the optimism and confidence that our business realignment actions will begin to show results in the second half of this fiscal year. For PC, we believe the market will further consolidate, and we will leverage such trend to further gain market share and drive top-line growth. The lower cost structure will help us compete and hold our current profitability. For our mobility business, the successful completion of combining Motorola and Lenovo and the realignment actions has given us a solid foundation to commence profitable growth of the business.
We have recently launched new products such as Moto X Force and Vibe P1, which have been well-received by the market and received industry endorsement. For EBG, we have completed our System x integration, which has given us an effective cost structure to compete in the market. Together with our recent strategic partnership with industry leaders, we are on attack mode to drive growth. Although the market environment remains volatile and challenging in the short term, we are confident to deliver the targets we shared with you before and bring the company back to the profitable growth track. Thank you. Now we take your questions.
Thank you, Wai Ming. We now proceed to questions. We want to accommodate questions from as many people as possible, so please avoid multi-part questions and limit to just two questions at one time. Please state your name and name of your company before your questions. All the Q&A will be in English only. Operator, will you please give us your instructions?
Thank you. We will now begin the question and answer session. If you wish 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. Thank you. Our first question comes from the line of Arthur Hsieh from UBS. Please go ahead.
Thank you for taking my question. Can you hear me all right?
Yes. Yes. Hello .
Well-
Yes.
Thank you for delivering the mission impossible. My first question is that you made great improvement in the enterprise and mobile business groups, but profitability for the PC business dipped a little bit. But when we look at the geographic performance, it seems only the Americas group made improvement. China, AP, and EMEA all deteriorated. Could you elaborate the deterioration in those three regions? Was that mainly because of the pressure in the PC business? I remember when Wai Ming made a comment earlier, there is some competition in EMEA and the APAC. So how do you see the situation now, and how do you address that? Thank you. That's the first question.
Shall I start first, and then Arthur, thanks for the question. Let me just answer the numbers, how you should read it, and then I'll let Gianfranco to give you the comments on the EMEA and APAC. I think the region P&L or the geo P&L is actually a combination of our PC, enterprise, and mobility business. Hence you actually see that there's an impact there. I think the overall PC business, obviously from a PC group perspective, I think on an absolute profit point of view, I think it comes down a little bit. But on the other hand, I think we actually outgrow the market, and be able to do it in a very efficient way, maintaining approximately similar margin. So I will let Gianfranco to answer, I think your question on PC condition in EMEA and AP.
No. Yes. No. On PC, if you look at PTI overall, I think it's 5% against 5.1% last quarter. So quarter on quarter, it's almost flat.
Yeah.
The real difference in talking about the regions, in EMEA, the market was down 23%. So almost one-fourth of the market disappeared in the last quarter. End of quarter, in that situation, we have been spending the entire quarter in terms of cleaning inventory and making sure that we ended the quarter with a good level of inventory. On top, there are regions in EMEA that they are still struggling much more than the others. If you take East, it's almost close to 30% decline, and even Middle East and Africa. In AP, and on top, there is a deterioration of the currency that euro continue to weak to depreciate against the U.S. dollar, and it's not finished yet because I think now it's already close to 1.07. All the expectation is that it can be very close to one to one.
China is doing well because China is doing well both in terms of market share and profitability. When I look at PC, despite market is also not great. In Asia Pacific, we are growing share very well, except Japan, where we are stable in market share, but the market again, it is very similar to India in terms of market decline. On the other side, we have seen strong growth in India, Southeast Asia, almost everywhere in terms of share. But Japan, that was the best contributor last year, and the market is extremely weak.
Okay.
Okay. My second question is on the partnership with Nutanix. I think Wai Wai mentioned earlier there could be some further announcement later, but before you get into that, could you elaborate how you benefit from the partnership, and is there any need for more M&As, especially in light of the potential merger between Dell and EMC?
Actually, in the enterprise segment, there are three parts. The first is traditional IT. Actually, in that area, with a combination of the System x and the Lenovo ThinkServer business, we are definitely more competitive because now we have the strong technology and portfolio. Also, we can leverage the traditional Lenovo's efficiency. Definitely, that can ensure we can compete with our traditional competitors, which are HP and Dell. That is for sure. We are now in attack mode because our competitors are either on the splitting mode or on the integrating mode. We definitely should be on the attack mode in that area. The second area is hyperscale, which are the so-called IDC market. That is in the market, big data centers in the market. Google, Facebook, Baidu, Alibaba, Tencent.
In that area, we are strengthening our capability. Over the past couple of quarters, we have won all three BAT companies. That has given our China business a boost. And so grow at more than 200% year-on-year. We definitely should leverage the foundation to further expand to the rest of the world. Particularly, we should put the opportunity to enter into the U.S. market. In this area, actually, our key competitors are not HP and Dell. Those are Taiwanese ODMs. Actually, in the third area, I think that represents the future technology. It is what we call hyper-converged technology, hyper-converged market. In that area, definitely, Nutanix is a leading technology company. Actually, we think the Dell EMC deal helped us in that area. Because that deal pushes this company to us.
Because before, Nutanix, 50% of their business is with Dell. But now they definitely feel threatened by this deal. They are very eager to cooperate with us. Actually, more companies are similar to Nutanix attitude. That is why we are confident that probably more partnerships will come. But it does not mean we need an M&A. Partnership, cooperation is a good way as well. That is how we drive the enterprise business in the future. Also, by the way, we are strengthening our relationship with IBM on the storage as well, particularly in China. Instead of our partnership with EMC before. Gianfranco, you want to add something?
No, I mean, the only thing that we can add is that, when you look at data center, we are moving from traditional architecture to new architecture. Traditional architecture, it was traditional server storage and networking working together. Now it is hardware from one side and software managing all the hardware together. It is still small because I think this year is going to be something in the range of $800 million worldwide. But it is expected to be something between $4 billion to $5 billion in five years from now. Growing very, very fast, also because in terms of cost and in terms of overall TCO, it is totally different than traditional infrastructure. We are investing in that direction because we think that it is going to be the future of the data center infrastructure.
We are working also on other things, of course, because it is software-defined, let us say anything. It will become big in the next two or three years. I think that when we look at the agreement with Nutanix, we provide the hardware from one side, they provide the software. We will have a common approach for the go-to-market together.
That is a perfect combination.
It's the perfect combination.
Right. Gianfranco, thanks. Thanks. Next question, please.
Thank you. Our next question comes from the line of Jenny Lai from HSBC. Please go ahead.
Yes. Congratulations on the results. My first question is, in terms of the currency impact. Yuanqing mentioned in the presentation that the currency impact to your PC business. Could you give us more details regarding to if we exclude the currency impact, what would the revenue growth and the profit, the PTM margin looks like in the quarter?
Yeah. Jenny Lai, I think first of all, the currency impact is about 8%. I think if we have to state a constant currency, it will run 8%. That's really the impact of currency on us. Now, as to the foreign currency on the margin of our business, we have always been having a consistent and proven hedging policy, I think, which by and large is about three months rolling forward, in order to protect the short-term fluctuation. When the currency continuing to depreciate, obviously, we need to do pricing, I think repricing, as well as improve your efficiency in order to maintain the overall profitability.
In other words, was there any aggressive repricing activity being down in the quarter? Could you give us some, in terms of your ASP impact, expenses going up?
Well, ASP-
ASP is not going up. I never saw ASP going up. It is up, and I'm not so young, unfortunately. But the good thing is only that the deterioration of ASP has been very small, which is almost a very good signal in terms of a healthy business. I think we are in the range of 2%-3% deterioration only in terms of ASP, which is good. Repricing, of course, we do some repricing because it depends geography by geography, country by country. We have countries where we are seeing a deterioration of the currency in the range of 15% to 20% in two, three months. Of course, you do repricing. Then in PC, rather very often, it's not really repricing.
Very often, it is you change your configuration, and the customer, for the same amount of money, they can buy something that is less powerful, with less memory, and less hard disk. It is more or less changing the lineup and the offer to the customer. We do some repricing with the enterprise, of course, because then it is a different business model.
Okay, understood. Thanks a lot. My next question is regarding your restructuring savings. Understood that we are looking for $650 million cost saving for the next two quarters. Could you give us some idea about how we should expect, if you are able to give us the quarterly split, as well as in terms of the more details, where the savings are going to come from for next quarter and for the coming one year?
Jenny, I think the $650 million obviously spread over the second half. I think on a very high level, I actually would say that maybe, I think $350 million to $400 million, I think in Q3 and probably $200 million or thereabout, I think the balance in Q4. The most areas in terms of cost saving coming out from headcount reduction as well as, I think the space reduction. I think take for example, we obviously take out a lot of spaces, I think in our MBG business. I think from the Motorola, I think we reduce, or we plan to reduce the number of floors in Merchandise Mart, Chicago. We actually closed down a few sites, I think in the U.S. So those are really the two primary sources of cost reduction.
I think the best way for you to able to examine how effective our, I think, reduction is really looking at the year-to-year expenses. Definitely on the half-year basis, we are very confident that we can deliver, hopefully be able to exceed targets. But at the moment, our estimate is, I think at least $650 million, I think be able to achieve in the second half of the year.
Yeah. Also, I wish you should focus not just on the absolute dollars of saving. Actually, this restructuring action will happen to improve our overall competitiveness in all three businesses. We believe we will have the best in cost, so cost structure. For PC, even with the current market situation, we think we still can live better than last year expected revenue ratio. With this restructuring action, definitely, it's the same in the mobile and the enterprise business as well.
Okay. Thank you, Jenny. Next question, please.
Thank you. Our next question comes from the line of Grace Chen from Morgan Stanley. Please go ahead.
Thank you. Thank you for taking my question. Can you update us with the status of CCE? The Brazilian company that were acquired before, we understand that you plan to sell CCE back to the owner. Has this transaction been completed so Lenovo did not need to consolidate a loss on CCE starting from the second quarter? Thank you.
Great Grace. Thanks for the question. I think to be absolute precise, we did not actually sell the CCE business back to the owners. We only sell the manufacturing facility in Manaus, I think back to the owners, because obviously they have a more sort of knowledgeable locally, be able to manage, I think the businesses. So it is only the factory that we actually sell back to them. I think we continue to sell. We honestly, I think also rationalize our Brazilian operation by really focusing on one brand, but we continue to sell, I think, PC to their distributors. So the whole business, I think, we are not selling back the entire business to them.
We are just selling back the manufacturing facilities to them. And the financial impact is already included in the restructuring because that is part of our overall restructuring or streamlining our overall Brazilian operation.
Okay. I remember the cost per quarter from that entity is actually quite sizable. After the transaction, how would that help in the second quarter in terms of the bottom line?
Right. I think the bottom line is, again, we do not, I think, break down the American group. I think as you can see from the chart, we only disclose AG. And one of the sort of big improvement, I think quarter-to-quarter obviously is our improvement in the Brazilian operation. Now on a very high level, I think we still target to hit at least a cash flow breakeven operation, I think for our Brazil in Q3. I think we are definitely aiming to achieve that. But bear in mind that the Brazilian market is very, very volatile. I think it obviously have a lot of challenges, but this is against our overall objective, I think to hit that operational objective.
Okay. Thank you Grace. Next question, please.
Our next question comes from the line of Thompson Wu from Credit Suisse. Please go ahead.
Yes. Hi, everyone, thank you for taking my question. Just a point of clarification on CCE. Will that impact your ability to achieve some of the tax saving incentives by having local operations in the country? I think that was described in the previous presentation when you made an acquisition a few years back.
No, Thompson. I think we actually have two. I think prior to this sale back, we actually have two factories, one in Itu, the other is in Manaus. We are just selling. I need Gianfranco to give you a little more details of what we have sold back.
We have the two factories in Brazil. One is mainly manufacturing the motherboards, and this is the-
[inaudible]
Yeah. This is the factory that we sell back to CCE. Then we have another factory where we do PC assembly. This will continue to run as before under Lenovo. So in terms of tax credit or VAT credit or any other credit, nothing is going to change. It is exactly as before, because we still 100% manufacture in Brazil.
Okay, great. Thank you, Gianfranco. Very clear. If I can switch questions, just follow up on the Enterprise Business Group, with respect to your wins at Alibaba, Baidu and Tencent. Is it possible for you to share if these wins are specific to one data center, or are these data centers only within China? Does it potentially include data centers outside of China? If possible, can you also share with us the vendors that you see yourself displacing?
I think their mainly operation are in China. Yeah, but all three deals are big deals, not just a couple of hundred servers. A thousand or 10,000. A couple of 10,000 servers. So that's definitely the big deal.
Okay. Thompson, thanks. Next question, please.
Thank you. Our next question comes from the line of Arthur Lai from Citigroup. Please go ahead.
Hi, Yuanqing. Thanks for taking our question. So during our overseas marketing event, we sense a very strong investor interest on the enterprise segment. So our question was, investor trust us to They want to understand the pricing environment on the enterprise segment, because you are migrating to a hyperscale and cloud, and also going to face the China big clients like BAT. Do you feel the pricing environment is facing a stronger pricing pressure? This is question one. And question two is, do you sense the demand for the server has slowed down because the data center There is some concern that data center is over capacity. These are two questions from investor. Thank you.
Pricing pressure.
Pricing pressure on hyperscale is a very competitive market. As Yuanqing said before, most of the competition is not coming from traditional competitors HPE in there, but it is coming from Taiwanese ODMs. I think what we did very clearly is that we set up our cost structure in order to be competitive with this level of competition. We are able to run this deal still making some money. Of course, the profitability is different than when you run hyper-converged or traditional IT. But we are competitive, and we can play, and we can win. Frankly speaking, we do not see any signal that data center demand is going down. Probably will continue to go up.
Yeah.
For two reasons. One is because with the increase of mobile, of smartphone, you need to manage more data, and so you need more data center. The other thing is, we also expect to see some growth in Europe based on European Union decision last month, when they said that data of European people need to be stored in Europe and cannot be stored outside Europe. So we will see growth demand in Europe, because Europe was not a place where usually you have a data center. But now, for people, they will start to build data center in Europe to store the data of the European people in Europe. Same thing we are seeing in Russia. Data of people in Russia needs to be stored in Russia. It does not matter from East or from the West, it does not matter who is the owner of the data.
We really do not see any signal that data center demand or capacity or the recovery capacity today.
Right. Thanks, Arthur. Next question, please.
Thank you. Our next question comes from the line of Nicolas Baratte from CLSA. Please go ahead.
Hello, everybody. Following Jenny's question, was it Jenny, on the restructuring plan and cost saving. You know, whether it's $200 million, $300 million per quarter, never mind. I'm not asking a question about the precise amount, but do you expect most of it to be in the form of lower operating expenses or somewhere else?
Yes, correct. I think we are really talking about taking out expenses. I think your assessment is right. It will be, I think nearly more than exactly in operating expenses.
Before the two acquisition or mergers, you were at, let's say, a billion dollars per quarter of OPEX, and afterwards, after the two M&A at $1.6 billion, let's say? That is the right base to think about this, Wai Ming?
Well, I think when we do it, we obviously have an assessment of the market. The market remains challenging, and we definitely feel that, as Yuanqing just said, I think taking off on an annualized basis, this is really 1.35, and hopefully that we can overachieve that cost-saving target. I think with that, based on our current assessment of the market, I think we definitely feel that we probably have the best in class, I think, E2R for us to be able to grow the business profitably and to attack the business, I think, in a very aggressive way.
Okay. Thank you. Due to time constraint, we are taking the last questions.
Thank you. Our last question comes from the line of Andrew Chang of Deutsche Bank. Please go ahead.
Hi, YY, Gianfranco, and Wai Ming. Thank you for taking my question. I think that today we focus a lot of discussion for the enterprise business. Can you just give more color, more pictures about the smartphone strategy, how to improve the margins quickly? Since currently, even some China vendors, they will be more aggressive to leverage their ecosystem or telecom equipment products to support a smartphone aggressively. How Lenovo win, I can say, the games going forward? Thank you.
Thank you. This is my favorite question. Actually, I think our smartphone strategy has been very simple and clear. Actually, probably a couple of quarters ago, we decided to shift our focus from China to rest of the emerging market. This will be our first strategy, first priority. We will grow our business in rest of the emerging market. Actually, you can see the results in the last quarter as we grow our India smartphone by more than 700%. Russia, more than 165%. Middle East, Africa, more than 200%. Asia-Pacific emerging market, 36%. Eastern Europe, 115%. Combining with our 22% market share in Brazil, also okay. We almost performed
Finally, in all the rest of emergent markets. That's definitely still our first priority we will pursue in the future. Grow the emerging market. The second point is, we want to break through in mature market, including U.S. next year with our latest product and I would say more exciting product. That's our next step. Meanwhile, the third point is we will turn around our China business. We will not focus on that. That doesn't mean we will give up the business. We will still turn around the business. How to turn around the business? We will not focus on the fiercely competitive online channel, online market. We will focus on the traditional local market, which are operators market and the retail or open market. That's Lenovo's traditional strength area.
I wish you could know, although now in China, there are many so-called internet online companies, like Xiaomi, LeTV, Meizu, and Qiku. Actually, online market only account for 20% of the total smartphone volume. 78% are still in the traditional channel, retail and carrier market. Definitely, we will fully leverage our strength in those areas to recover and to turn around our China business. That will be our very clear strategy. Growing emerging market, breakthrough in mature market, and turn around the China.
Right. Okay. Thank you, Yuanqing and Jinzhu. Thank you everybody for your participation in today's call. If you have any further questions, please feel free to contact the IR team directly. This webcast replay and conference calls replay will be available in the next couple hours. Thank you again for joining us today.
Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.