Good afternoon. Welcome to Lenovo's Q2 earnings webcast. This is Gary Ng, VP in Investor Relations at Lenovo. Before we start, let me introduce our management team with us today. We have our Chairman and CEO, Mr. Yang Yuanqing, and our CFO, Mr. Wong Wai Ming. We will first start with our management presentation. After that, we will take your questions. Now, let me turn it over to Yuanqing.
Hello, everyone, and thank you for joining us today. I am pleased to report that Lenovo once again delivered record results. Our formula for success starts with our clear strategy, driving our strong execution. Our protect and attack strategy now focuses on protecting our core PC business while aggressively attacking growth in PC+ , which includes tablets, smartphones, and servers. This clear strategy guided us to yet another record performance.
Not only was our nearly $10 billion revenue our all-time high, but more importantly, we achieved a record profit of $220 million, up 36% year-on-year. We promised to keep improving profitability, and we delivered that. For PCs, Lenovo grew market share by more than 2 points year-on-year and remained the world's number one PC company. Our market share reached a record of 17.7%. Our PC growth and strong profitability were driven by our balanced global business across all geos.
Now, Lenovo is number one in five of the top seven markets: China, Japan, Brazil, Germany, and Russia. We are number two in India. At the same time, we have reached double-digit market share in the U.S. for the first time. Brazil is a particular highlight. Through the acquisition and integration of CCE, we quickly built our foundation. It took us from number seven to number one in just three quarters with improved profitability. This exceeded our expectations. While we continue our success in PCs, our PC+ business also had a very strong quarter. In smartphones, we continued to see strong growth.
Last quarter, our worldwide volume grew by 78% year-on-year to reach 12.2 million units and continued to close the gap to the number three player worldwide. In China, we strengthened our number two position. At the same time, our expansion in our wave one markets gained real momentum. In just four quarters, we have reached double-digit shares in Indonesia, which has the fourth largest population in the world. We are also seeing strong progress in key markets such as Brazil, India, Russia, and Vietnam.
Over the next couple of quarters, in our second wave, we are expanding to at least 20 more countries. We saw even faster growth in tablets with sales volume up more than 400% year-on-year. This hyper-growth came from balanced sales worldwide. At the same time, our tablet business continues to be profitable. I will talk a bit more about tablets in just a moment. Our combined sales of smartphones and tablets surpassed PCs for the second straight quarter, and they now account for 15% of our overall business and continue to improve profitability.
In both PCs and PC+ , we delivered very strong performances. This definitely proves that our PC+ strategy is working very well and driving strong execution. We are confident that we can sustain this momentum quarter- after- quarter because in addition to our clear strategy, our investments in innovation and business model will continue to pay off. Lenovo continues to refine PCs with innovative products like we did with the multimode portfolio, Yoga, Horizon, Helix, which will bring more growth and opportunities.
At the same time, we will accelerate our growth in PC+ products. In smartphones, we launched our flagship Vibe smartphones. Not only do they have more competitive features and a stylish design, but they will become a platform for Lenovo to expand our premium smartphone business globally. Just last week, Lenovo launched the highly anticipated multimode, uniquely designed Yoga tablet. It can really solve some pain points of current tablet customers. We do hope it will be one of the best-selling tablets for the holiday season.
The Yoga tablet launch was also our latest brand-building effort, which will be our next focus area. Ashton Kutcher is a superstar actor, and he will definitely help us showcase our technology and innovation. In addition to hardware devices, we will continue to invest in our ecosystem. So far, there are over 400,000 apps in Lenovo Store and over 20 million downloads daily. These numbers are still growing. Actually, I hope you can try some of our most popular apps, such as AnyShare and Lenovo Safe. Meanwhile, we will continue improving our business model, which has led to lower cost and higher efficiency.
Our new factory in Itu, Brazil, was critical to our rapid rise to number one in the Brazilian PC market. Just next month, our mobile product factory in Wuhan, China, will officially start production, further strengthening our in-house manufacturing capability. Our business model is a competitive advantage, and we will keep investing in it. Looking to the next few quarters, we are confident not only because of our clear strategy, but also because we see the PC market improving and the growth in tablet shifting to our favor.
Benefiting from corporate refresh and the China market improvement, the sharpest declines in PC sales are now over. Just like I mentioned earlier, we are helping the PC market to recover with more and more innovative products. Also, according to most industry analysts, customers no longer see tablets as a replacement for PCs. The vast majority of tablet buyers say tablets only prevent them from buying a PC. Actually, tablet is shifting to mainstream and entry price bands and replacing netbook to become the important part of PC, particularly in emerging markets.
If you combine PC and tablet, you still can see very decent growth over the past couple of quarters. So with the PC market improving and growth in tablets shifting, the key industry trends are moving to Lenovo's favor. In fact, if you combine PC and tablet together, Lenovo is already number two worldwide in this measure. We want to first become number one in this category and then challenge the top in all smart connected devices. Looking ahead, we are confident that Lenovo will continue to deliver outstanding performance in both PC and PC+ , as we have proven that we deliver on our commitments time after time for now 18 straight quarters. Thank you very much. Now let me turn to our CFO, Wai Ming.
Thank you, Yuanqing. I will take you through Lenovo's financial and operational performance in quarter two. Next chart, please. We continued to grow in both sales and pre-tax income with margin expansion, even as the global PC market declined in quarter two. Lenovo recorded growth in all its key businesses, PC, smartphone, and tablets. Strong growth in our smartphone and tablet business has added an an important new source of sustainable growth for the group, and this is now accounted for 15% of the group's turnover, compared to 8% in quarter two last year. Group sales grew 13% year-on-year to around $9.8 billion.
This is a record high level for Lenovo. Despite the market drop 10% year-to-year, revenue derived from our PC business has recorded a 4% year-on-year gain to about $8 billion, driven by both shipments growth and increase in our ASP. Sales in our mobile internet business were up 106% year-on-year to $1.5 billion. Gross profit was about $1.3 billion, up 11% year-on-year. Gross profit margin dipped slightly to 12.9% from 13.1% last year and 13.6% in quarter one. The decline is largely due to the increased mix of our consumer and mobile internet businesses.
Operating expenses increased 5% year-on-year to $982 million to support our growth. The operating expense in quarter two has included expenses incurred in the CCE and EMC joint venture, in which we started the integration in quarter four last year. We have continued our efficiency improvement program started last quarter, which involved in taking resources reduction in our PC business and deploying some of those in our high-growth PC+ businesses. This result in a $50 million severance expense incurred in quarter two.
The E/R ratio was down to 10% from 10.8% last year and 11.3% last quarter due to better scaling benefits and strengthened expense control. Operating profits was $283 million, up 38% year-on-year. Increase in other non-operating expense was largely due to additional financing and hedging costs. Pre-tax income was $265 million, up 30% year-on-year, and this is a record high level for the group. PTI margin continued to improve year-on-year and quarter-on-quarter, and we are on track to deliver a 1% PTI margin improvement over a three-year period as disclosed in quarter two last year.
Effective tax rate for Q2 was around 20%, which is in line with our average run rate around 20%-25%. Profit attributable to equity holders is $220 million, up 36% year-on-year. Again, this is also a record high level for the group. Basic EPS improved to $0.0212 from $0.0158 last year. The Board of Directors in today's meeting declared an interim dividend of HKD 0.06 Per share, representing an increase of around 33% compared to last year. Next chart, please. Our balance sheet in Q2 remains healthy.
Non-current assets were about $4.7 billion, similar to last quarter. Current assets were also similar to last quarter, with a decline in cash and bank deposits offset by increase in receivables, which is in line with our business growth. Inventory was relatively stable under tight control, even as we continue to increase our in-house manufacturing in China and Brazil, consolidation of our recent acquisition like CCE, as well as finished goods, especially for mobile internet device to prepare for sales season in quarter three. Net current liabilities were around $144 million at the end of September.
The non-current liabilities were at around $1.8 billion. Let's go through the cash and working capital in the next chart. We continue to leverage our strong cash position to support our strategic business expansion into high growth areas such as consumer business and mobile internet device business, as well as enhancing our capability through increasing in-house manufacturing mix. This strategy continued to be in progress in quarter two, as reflected in an increase in inventory to support the growth of both MIDH and consumer business, as well as ramping up our new plants in China and Brazil.
Adoption of this strategy also reflected on our cash conversion cycle trend. As a result, the cash conversion cycle has come down to negative three days in Q2 against negative nine days last year. We recorded our operating cash outflow of $189 million versus approximately an inflow of $114 million in Q1 this year and $143 million in Q2 last year. This yearly change is primarily due to a reduction of our cash conversion cycle of negative three days in Q2 versus negative nine days last year, as explained before.
The change when compared to Q1 is mainly due to the timing difference in relation to payment to certain suppliers. I want to emphasize here that the reduction of our cash position is a result of our strategic decision to leverage our balance sheet to invest in high growth areas that resulted in our strong shipment growth in Q2. We expect this investment will help to continue our growth, which eventually will be cash generating in the near future.
We expect the cash position to increase in Q3 and remain at a very strong cash position for working capital needs to drive future growth. Next chart, please. Despite the significant decline in the China market for the last few quarters, the group continues to maintain its overall growth in revenue contributed by other geos that have been successfully expanded their business and recorded share gains.
This resulted, the group now has a more balanced business derived from all our four geos. We continue to do well in all geographies in Q2 for both our PC and mobile internet device business under our PC+ strategy. Our balanced geographic exposure, especially markets outside China, including Americas, EMEA, and Asia-Pacific, continue to help contribute to our top-line growth. We continue to record share gains across geographies, products, and consumer segments.
Result of our initial expansion of our smartphone and tablet business in market outside China was encouraging. Total revenue from China was up 1% year-on-year, driven by strong growth in mobile internet devices, which grew 45% year-on-year. Our overall margin in China was up 1.3 point year-on-year and 0.1 point quarter-to-quarter to 5.3%. This reflected the successful execution of our protect and attack strategy to protect China PC profit through tighter control and pricing and expense control, which resulted in improved PC operating margin, while continuously attacking into mobile internet markets, which resulted in overall increase in revenue.
Our smartphone business in China continued to be profitable for the fourth consecutive quarter in Q2. As a result, we remain confident that our PC+ strategy is fully operational in China and can continue to drive growth in sales and profit in China. Asia-Pacific. Revenue was up slightly 1% year-on-year to about $1.5 billion in Asia-Pacific, while operating profit increased over 30% year-to-year to $25 million, which is the result of our solid PC+ execution. We continue to do well in Japan and maintain our leadership position, but depreciation of Japanese yen had negatively impacted sales in the region.
Our drive in smartphone in this region has been encouraging, and we have reached 10% market share in smartphone in Indonesia, according to preliminary industry estimate, with strong growth also in tablet shipment. Our operating margin was up 0.05 points to 1.7% year-on-year under the strong progress in the PC+ area. EMEA. We continue to have a very strong, encouraging quarter in EMEA with record high market share. Revenue grew 26% year-on-year to about $2.3 billion. Strong growth in emerging markets and consumer business contributed to the strong growth in the region.
We achieved number one position in 12 countries, including Germany and Russia, from just three countries last year. Our mobile internet business, especially tablet business in Europe, has also recorded encouraging feedback. But we are in the early phase of development and need further investment in the business, and as a result, our operating margin was down 0.01 points to 1.5% year-on-year. Americas. We continue to achieve strong growth in the region with record high double-digit share.
Unit shipments growth 39% against the market decline by above 4%. This represent a premium growth of over 40% in Americas, and we reached double-digit market share in the U.S. for the first time, driven by the strong growth in the U.S. commercial and consumer business. We also perform well in Brazil. Our integration of CCE has been on track, helping us achieve a record high market share in Brazil with improving profitability.
However, due to a change in product mix, especially from selling more entry-level mobile internet product in the rest of Latin America, coupled with the competition of PC business in the region, has resulted in lower operating margin year-on-year. Next chart, please. We also have a more balanced product portfolio helped by expansion in consumer PC and mobile internet business. We had a record high market share in notebook at around 19%.
Notebook unit shipments and sales were up about 3% and 8% year-on-year, respectively. Unit shipments in our desktop business were up 1% and sales down 3% year-on-year. Our market share in the worldwide desktop market increased to around 17%. Our MIDH business showed strong growth performance, up 1.06x year-on-year in sales, led by the smartphone and tablet business, which fueled the strong growth of the group.
We will continue to invest in innovation and broaden our product portfolio to enhance our competitiveness and service to our customers. Before I end my presentation, I would want to give you some color of the market outlook. Our PC+ strategy has been working well to drive the group growth in sales and profit with margin expansion in the past several quarters. Strong growth momentum in our Mobile Internet Device business has been the driver of the group's solid growth. Despite the PC markets has been volatile over the past several quarters, the combined PC and tablet markets has continued to see growth, and we are confident that this trend will continue.
We expect our core PC business will benefit from the improving worldwide PC market in the second half of the year from corporate refreshment and the gradual recovery in China PC market. There is still enormous opportunity for growth in the traditional PC areas. Given that our smartphone business has reached certain critical scale in China, we will focus in improving the margin while we are expanding our smartphone business aggressively to markets outside China. We will continue to invest in growth areas in consumer PC and smartphone and tablets to maintain a healthy top-line growth.
We will stay focused on our efficiency improvement initiatives and growth opportunities. We will continue to invest in core competence building and product innovations. We have taken resource action in our PC business and redeployed resources to invest in the high-growth areas to drive sustainable future growth. We have a healthy balance sheet and strong cash position, which provides the flexibility for our M&A strategy to capture opportunities in high-growth areas that can help to accelerate our growth and improvement in profitability. Thank you very much. Now we can 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 us to two questions at one time. Please say 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?
Certainly, sir. Ladies and gentlemen, 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. Your first question comes from the line of Kirk Yang from Barclays. Please ask your question.
Yes, thank you for taking my questions, and very strong results. I guess the only small concern I have is the gross margin trend. I think the CFO also mentions that a part of that could be due to product mix and also maybe mobile internet margins. Just wondering that can you give us some colors on the gross profit margin and also maybe the outlook for the gross profit margin, please.
Yes. Thanks to Kirk for the question. Our consumer business was growing much faster than our commercial PC business. The consumer PC margin is lower than commercial PC. But definitely, we are making effort to improve the pre-tax income as well. That means the consumer PC business model is actually different from commercial PC. If a commercial PC can run at 14%, 15% margin, 9%, 10% expense.
Then we have 4%, 5% PTI. Probably consumer PC should be around at 11%, 12% margin, but at 9% expense. But we still want to have 3% PTI. These are different business models. Given our consumer PC business is growing faster than the commercial PC business, this is a natural result. Our GP margin could be a little bit lower, but it will not impact our overall operation margin, operating margin. That's the answer to your question. Wai Ming, you—
Well, Kirk, it's Wai Ming here. I think Yuanqing basically gave out the total point, but one thing is very, very important that if I Although we don't announce or disclose separately, I think different business model, we obviously see that I think the margin is not declining. It's really the mix of the overall business that really drives. Therefore, one really should look at Lenovo by looking at how we actually be able to expand our business when the market expands. When you look at the PC device business, meaning the PC+ tablet, I think it's still growing.
But obviously the growth of the tablet is much faster, I think, than the PC business. Now you know that we have a very strong commercial business, which obviously trading at a much higher gross margin. But on the other hand, I think we are making money, I think, in the entry level, which obviously is expanding very, very quickly, I think the smartphone as well as the tablet business. As a result of that, I think it's really a mix. I think the key to verify what I think Yuanqing and I just said is right, is when you look at our operating margin, it's actually improved, I think quarter- by- quarter, as well as year- to- year.
Yes. Okay. Yeah. Thank you, Yuanqing, and thank you, Wai Ming. That's very clear. As a follow-up, can I please ask you about your smartphone strategy? Obviously you are now number four globally, number two in China. Can you maybe give us some color on the strategy, between high-end smartphone versus low-end smartphone and between China and the non-China strategy, please?
Yeah. So, definitely. So in China, so definitely we want to strengthen our number two position in short term. From long term point of view, so definitely we will make effort to become the leader of the market. But definitely we understand that if we want to become the leader in the market, so we must strengthen our high-end smartphone. So that's why we launched K900 earlier this year. Just last month we launched two new models, the Vibe X and the Vibe Z. Actually, we created these new sub-brand, so to just focus on the high end. So that's our strategy.
So that definitely with the high-end product, it's not just for China, it's for other emerging markets as well. Outside of China, so we launched our smartphone in, first wave emerging countries, like Russia, India, Indonesia, Philippines, Vietnam. We have seen very positive results in those markets. Our market share in those markets have kept growing. In Indonesia, we have already reached 13% market share. The profitability in the market is pretty good.
It is even better than in China. We are very encouraged by these kind of results. We definitely will double down on these markets. The second wave, we have started launching the second wave of the emerging countries. Hopefully over next couple of quarters, we will expand to 20 more countries. That is our current plan. Then probably, finally, we are launching in the mature markets. That is our strategy for the smartphone.
Okay. Yuanqing, thank you very much. It is very clear.
Thank you, Kirk.
Thank you, Kirk. Next question, please.
Thank you for your question. Your next question comes from the line of Thompson Wu from Credit Suisse. Please ask your question.
Thank you for taking my question. Good afternoon. In preparation for your Wuhan facility coming online this December quarter, was there any headwinds in terms of manufacturing cost or R&D in the September quarter?
The production cost and the licenses.
Thompson, can you repeat the question? Not very clear, your question. Can you repeat that, please? Maybe a little slower.
Sure.
Yeah. Thank you.
Sure. In preparation for your Wuhan facility, which I believe you said it was coming online in the December quarter, I was just curious to see if there was any costs flowing through the P&L in the September quarter that may have brought down margins, the gross margins quarter-on-quarter, or perhaps may have elevated your OpEx level above a normalized run rate.
Yeah. Thompson, no. I think the answer is not in a significant way. I think the probably more visible impact is on the cash flow, because we obviously need to, I think, build up the inventory, so on and so forth, without seeing the sort of revenue coming in, which is in Q3. So generally, I would say that, no, it does not have any significant impact on our Q2 results, because of the impending, I think, starting operation of the Wuhan plants.
Okay. Thank you very much. That was very clear. Just a quick follow-up, if I may. Just on the tablet business, very strong growth year-on-year. I believe yet in the presentation, about 80% of your tablets are being sold outside of China. Can you just elaborate maybe which markets are you guys doing particularly well in? And maybe just what's driving the strength. Is it product portfolio? What specific designs and features that are allowing you to deliver this type of growth?
We are growing very fast across the geographies, across the planet. India, Asia- Pacific, and Americas. All are growing very fast. I think that now we have very attractive product, particularly after we launch the Yoga tablet. We think we have a pretty strong product portfolio compared to our competition. We are very confident. We will keep the hypergrowth over the second half of the year. We are right on track to deliver 10 million tablets in this fiscal year. This is the priority we give to our geographies, so that should protect our PC profit pool.
But meanwhile, they should be more aggressive to attack the tablet market. Actually, in my view now, tablet has been part of the PC. It is shifting from the premier price band to the mainstream and the low end. It is actually replacing the previous netbook market. But definitely because the user experience and the applications are much better than the previous netbook. More and more consumers and users would like to accept this kind of product. It will keep growing. But it is part of the PC. From a development point of view, from the channel point of view, we definitely can share a lot of common knowledge or channel networks. We are very confident we can be most successful in the tablet market across the planet.
I just really want to add one point. Basically summarizing that while everybody will agree that we actually have a very, I think, strong capability in the sort of traditional PC business. As Yuanqing said that the tablet is really, I think, considered part of the portfolio under the PC and PC device. Therefore, you can be sure that the scaling benefit of that is going to be enormous, because we are obviously now being number one in the world. With the new form factor of PC device coming out, we obviously will benefit a lot coming out of that.
Okay, great. Thank you very much.
Thank you for your question. Your next question comes from the line of Grace Chen from Morgan Stanley. Please ask question.
Hi. Thank you. Thank you for taking my questions, and thank you for the impressive results. My first question is about the smartphone business. I understand that you just mentioned that you have achieved a critical mass in the smartphone business in China, and you will be focusing on margin improvements. I am wondering whether you can give us a margin target for the smartphone business. Operating margin target, I mean. Also, I remember that you mentioned there are ways to improve margins for your smartphone business in China, including the channel mix and also the product mix, low-end and mid-to high-end. Can you give an update about your channel mix right now and also product mix low-end versus mid-to high-end? Thank you.
Go ahead, Wai Ming.
Grace, it is Wai Ming here. I think, as you know that we do not actually want to disclose openly about our sort of margin target for, I think one of the, probably the most attractive markets in the world. But we definitely can tell you that from a directional point of view, that China now we do have the critical mass. I think there are two directions. I think overall we derive better profitability. I think one thing that we definitely will go aggressive is really developing our capability, moving our portfolio, I think from an entry, as you know, from an entry more to a sort of a high-end or main market. So that is definitely one way of improving the sort of gross margin.
The other, as you mentioned, is really the mix that we sell through open market versus selling through the telecom operators. I don't have the numbers, I think, in front of me compare with quarter-to-quarter, year-to-year. Very, very high level obviously. I think the open, on a year-to-year basis obviously is more because we started the business off by, I think focusing initially, I think the operator to build the volume. I don't have the exact numbers, but I can get my IR colleagues to come back to you, give you some sort of, I think the mix change, I think over the period.
For the smartphone business, over the past a couple of quarters, we are profitable.
Yeah.
Not just in China, even outside China, we are profitable even though for many markets, many countries, it's just the first stage. Our profitability is very encouraging.
Maybe I give you a little bit more color. I think the sort of terminology we use is wave one, wave two, wave three. Wave one is really China. We do have the critical mass, and now we obviously will put sort of focus on, I think really improving further our profitability. Although, we've been already sort of, I think making money probably three quarters ago. I think we will continue to drive that. The way to do it is, as you said, improving the mix of our portfolio, as well as our channel mix. What Yuanqing said is, I think the wave two result of our success in China, I think we're going to move in the emerging market.
That obviously is a very, very encouraging result, as Yuanqing just said. I think some markets, which obviously is much faster in turning into profitability, in the process of us, I think growing the market share. So far, I think in some of the high-growth markets, we actually achieve a reasonable or a very, I think, respectable market share within a very short period of time.
Grace, I will get back to you on the data point later today then.
Sure. Thank you very much. Just a second question from me is about the commercial PC business. We have been hearing that the corporate refresh is helping PC demand a little bit, and we understand that you have high exposure to the commercial PCs as well. Are you expecting that the commercial PCs growth will be accelerating in the second half of the year?
Yes. So we see these symptoms also, particularly in United States or North America. Also we see China PC business is gradually recovering. So we are a little bit more optimistic on the PC market. So probably, yeah, for the next fiscal year, so we can see the positive growth in the PC industry.
And—
Definitely Lenovo. The position is stronger than our competition, so we could further benefit from our number one position in this area. Also, we will further innovate so to ensure we can provide the most exciting products to our customers.
Thank you. Let me clarify. For the corporate PC refresh, you are seeing the strength is mainly coming from the U.S., I mean, the North America regions. For the China recovery, are you seeing the recovery mainly from the consumer segment or you are seeing corporate commercial PC demand coming back?
From above. Commercial and the consumer in China. I believe this quarter will be better than last quarter. Probably next year, so we can recover, we can see the positive year-on-year growth again in China.
And will be—
Grace, the way we look at it is, again, I think I might want to point out to you some of the results that we achieved in quarter two. I think if you relook at North America, the market declined at 4%, we grow year-to-year about 38%, 39%. No doubt, I think our stronghold in commercial make a big contribution of that. So we're definitely seeing evidences that there are growing demand in, I would say mature market, in particular North America.
In China, again, I think set aside the PC business, if you really look at the economy, I think the economy probably is a lot more optimistic than, say, a quarter or two ago. Again, based on the industry projection, although China is still in the negative territory, probably so in our Q3, but the rate of decline is actually slowing down. We definitely are confident that, with the government meetings later in the month, setting out a new direction gives clarity about how the economy is going to grow. That definitely is a very good news for the overall Chinese economy. Therefore, we definitely will be the one that benefit most, I think from a demand for PC and PC device.
Got it. Thank you very much.
Thank you for your question. Your next question comes from the line of Gokul Hariharan from JP Morgan Securities. Please ask your question.
Yeah. Hi. Thanks for taking my question. Just wanted to ask about your server momentum as well as the progress in the LenovoEMC joint venture. Looks like the server volume growth has slowed a little bit in China. How do you expect that to go over the next, say, couple of quarters? As well as, what is the progress on the LenovoEMC joint venture so far? Thanks.
Our cooperation with EMC includes three parts. The first is we resale EMC storage. The second one is we sell to and we sell through EMC for our servers. That would definitely help us to strengthen our server portfolio. The third part is we have a joint venture called Iomega to focus on the SMB and the consumer customers. The first part, I think the progress has been very good. We are building our capability to sell the storage product, particularly high-end storage to the larger enterprise customers. The second one is in the process.
Before we started to ship to EMC and ship through EMC, we need to strengthen our product portfolio. This year, we have invested a lot on strengthening our server product portfolios. I hope since next year we can see the positive results. Regarding the joint venture of the Iomega. This company was focusing on the consumer customers before. Now we are trying to shift the focus to the SMB customers. I think we are in the right direction in the process. The right process, yeah.
Just to add one thing that I think on the EMC Iomega, I think to give it a bit color. I think that we obviously, as Yuanqing said, repositioned the portfolio, I think to satisfy the SMB demand or satisfy the SMB customers. I think we definitely see quarter in, quarter out improvement in profitability. But still today is not a significant business. But we believe that with the transition of the portfolio, I think leveraging on the Lenovo sales infrastructure, I think that it is going to be, in the near term, going to bring us a much better result than what we saw in the first few quarters after we closed the transaction.
Okay. Thank you very much. The second question I had was on the profitability in Americas, which was a bit weak. Was Brazil, the CCE acquisition, a factor in that? Was that profitability lower than the overall Americas profitability?
Yeah. So definitely. So our Brazilian businesses are getting better and better. So leveraging our acquisition of CCE. Not only on the growth side, but also on the profitability side. Regarding of the growth, actually, right after we acquired CCE, our combined market share probably was just 7%, 8%. We were still ranked at number three. But this fiscal year, the first two quarters, we have made a lot of progress. Last quarter, we gained 18% shares in the Brazilian market in the PC area. That's very encouraging results.
Beyond the PC, we are making a lot of progress on our PC+ strategy. We sold many smartphones, tablets, and TVs in the Brazilian market. That's very encouraging as well. But definitely, the even more important thing is that we significantly improved our profit level in Brazil. That's a very important contribution to our improvement in the American growth.
Gokul, it's Wai Ming . Let me maybe give you a little color. I definitely do not share the view that the America profitability is not exciting. I think the way we look at it is, as I explained earlier, I think the profitability is driven by pretty much the mix of your business. As you can see that when we grow the business, the market is actually declining. If you really look at North America, the market declined - 4% or AG, Americas Group. The market dropped - 4%, we actually grew 39%.
Then growing at such a premium, it will go without saying that it is a lot of, well, some of those, or if not a lot of those, coming out from consumer, which obviously has a lower margin, I think at least on a gross margin basis, compared to our sort of pure commercial. But if you really see this significant amount of growth in North America, why would we actually be holding the margin from a quarter-on-quarter basis? Because Q2 last year and Q2 this year, I think there is significant change or significant improvement in the business.
In fact, Q2 this year, I think is the first time we actually hit double market share in North America. I actually would say that America is one of the key contributors I think for Lenovo to have a much more balanced business. I think comparing the past that we obviously have been a leader in China, and when China actually slowed down, it had a much bigger impact. But today, I think we actually be able to deal with that problem because I think the two biggest contributors, one of which is Americas, actually been doing very well.
So in some sense, I disagree with the observation that our Americas is not good. It's actually very exciting because holding margin as well as I think growing 40% premium to the market, as well as the first time to hit, I think, double digit in terms of market share. It's very exciting. On top of that, although from an absolute point of view that Brazil is still compared with North America is small, but we definitely see significant improvement, I think, in profitability as well as, I think, subject to the final IDC number, I think we are probably reaching the pole position in Brazil.
Okay. Thanks very much, Wai Ming. Just one follow-up on that. Could you talk about what is your consumer market share in the U.S.? Just wanted to understand whether there has been a lot of spending on the operating expenses and you're just catching up in terms of the consumer scale.
I think generally, I think there is a lot of opportunities. I think we build up, I think from the product innovation, the Yoga been doing very well. And we believe that the Yoga tablet we just launched, again, will do equally well. I think this is a result of our continuing effort in spending in the innovative product, in product development.
So in real time, we probably have to go take the last question.
Thank you for your question. The last question comes from the line of Jenny Lai from HSBC. Please ask your question.
Thanks. Congratulations on the results. I have two questions here. The first question is on PC market. It is actually quite encouraging to hear that you are expecting PC market to recover next year. But one thing is that, most probably, we have been noting quite a few product launch backs in the very low-end price segment. Could you also comment about the pricing environment for next year as well?
Pricing. Jenny, you are talking about the pricing environment of the smartphone or PC?
The PC.
Pricing.
Jenny, could you please repeat your question again? What pricing—
Yes. The question is that, we are seeing some of your competitors launching pretty competitive models. Competitive meaning, in terms of the price, for example, ASUS has this T100 that is launching to the $350 range. We are just wondering, what is the pricing environment next year? In terms of the PC hybrid device, in terms of the pricing pressure, are we going to see accelerated label next year?
Jenny, actually, I think PC industry has become a very matured industry. Some competitors will launch some new products with a more aggressive pricing. We go up from the competition. We definitely are not scared of the competition. Also, I believe we have the best product, not just for the commercial customer, but also for the consumer customers. Like Yoga, Helix, these kind of products. Not just the innovation.
Actually, I believe Lenovo is the most efficient PC company in the world. We have the best balance between innovation and efficiency. I believe we will not just keep our number one position, but also we will further grow our market share and improve our profitability in the PC space. PC is definitely our home base. Our stronghold. We will make this business as our profit pool to fund our growth in those new areas, smartphone and tablets, enterprise business.
Yeah. Jenny, maybe I add one final point is, again, I think from the results, I think over the last 16 or 18 quarters, we have been growing faster than the market. That actually demonstrates we have the ability, and we demonstrated our ability to be able to win in market, not in one segment, but also in a premium segment as well as in an entry price segment. As Yuanqing said, we cannot stop our competitors, I think, really coming out with low price. I think our business model, as I explained earlier, I think the consumer and the commercial or the high-end or the main market.
I think they are slightly different business model in the sense that if we can actually have a product selling at a higher margin, then we obviously would spend more money in marketing, I think in getting the business. But at the same time, if it is on an entry product where the price is low, I think our efficiency actually comes into play. At the end of the day, I think we actually been accretive to our PTI. I think the last 16 quarters has already demonstrated that we have the ability to do so, and there is no reason why we worry that, I think certain player coming out to cover one product, I think will give us significant problem.
Okay. Thank you, Wai Ming, and 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. Thank you again for joining us today.