Welcome to Lenovo's Q1 result 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. Last quarter, Lenovo once again delivered very strong results. Although the global PC market continued to decline last quarter, it shrank 11% year-on-year, Lenovo still delivered strong results. Our market share was up almost two points year-on-year to reach a record share of 16.7%. Now, we are the clear number one PC company in the world for the first time. This is an important milestone, and our balanced business is the main driver to achieve this dream. Last quarter, China PC market declined by 14% year-on-year. Although Lenovo's business is still very healthy, and even improved profit margin by almost one point, the fact is that in the past, if China market lags behind the global market, it would negatively impact our overall growth significantly. But today, our Europe and Americas businesses have become another pillar to our company.
They outgrew the market significantly and ensured our PC business revenue growth is still positive, and our overall business is still strong. Here, we must thank the successful strategy and execution over the past few years. Our successful attack battle for emerging and consumer business has given us the momentum. We can see not only rapid growth in emerging markets like Eastern Europe, Middle East, Africa, Brazil, and Asia, but also our consumer businesses in North America and Western Europe have turned into growth engines for our overall business. Today, we not only have a more balanced business across geographies, but also achieved a greater balance between commercial and consumer segments. In fact, we used the four to five years to build our previously China-only consumer business into now the world's largest consumer business.
Of course, other than ensuring a healthy PC business and such a tough environment, we have long realized the industry would go through major changes. It is at a turning point right now. Fortunately, Lenovo has been preparing for this change for a couple of years, and now our efforts are starting to pay off. In smartphones, we grow our volume significantly. Last quarter, our worldwide volume grew by 130% year-on-year, and we are now number four player in worldwide smartphone share, according to the latest IDC report. In China, the world's largest smartphone market, we sold more than 11 million units and continue to strengthen our number two position. Because of that, our China business overall still grew by 6%, even with PC market in significant decline.
In markets outside of China, we also made good progress, like in our first wave of Indonesia, India, Russia, and Vietnam. Most recently, we expanded into even more markets like Brazil, Thailand, and Malaysia, and received good initial results as well. In tablets, our four gears all revved up their motors, and they drove our sales volume to more than triple year-on-year. Last quarter, our combined sales of smartphones and tablets surpassed PCs for the first time. Our revenue from mobile internet businesses now accounts for 14% of our overall business. Once again, we had a record share in global smart connected devices with over 7%, which includes smartphones, tablets, and PCs. Now we are transforming from a PC company to a PC Plus company in full speed. We are confident that we will achieve even greater success in the future.
Our confidence still comes from the same success factors that we always talk about: right strategy, efficient business model, innovative products, and a diverse team and a global culture. Today, I want to emphasize on innovation and the business model. The first is innovation. We will center on user experience by blending hardware, software, and applications for greater end-to-end experience. We will win more customers with products that are more stylish, more exciting, and more user-friendly. In fact, Lenovo will launch a series of cool products for this holiday season. We will unveil the next generation of our multi-mode products, including the new Yoga and the uniquely designed tablets. Our new wave of smartphones will be even thinner, lighter, with more and better features, particularly around the security, collaboration, and the cloud. Okay, I better stop here and come back to the rest of my earnings announcement.
The recent industry trends also give us confidence, as they clearly favor our business model. The industry is entering a phase of transformation. According to IDC Data, the premier smartphone and tablet markets have slowed, while the mainstream entry-level markets continue to see rapid growth. At the same time, the market growth is also shifting from mature markets to the emerging markets. Even within mature markets, customers are switching phones much more quickly than before. In fact, in the U.S., some carriers are starting to change their policy to allow customers to switch their phones every 12 months or even just six months, instead of 2 to 3 years. So this customer behavior change gives companies that can offer fashionable, affordable products and develop products quickly, more growth opportunity. Lenovo is this kind of company. We have a rich product portfolio that covers all price bands.
Thanks to our speedy product development cycle and frequent product upgrades. We have a very efficient end-to-end business model with disciplined operation. Our in-house manufacturing can quickly turn our innovations into high-quality, cost-efficient products for customers in both mature markets and emerging markets. At the same time, even though we are consistently improving our profitability, we set reasonable margin targets. This means we are able to provide customers, especially mainstream customers, truly affordable products. In 1996, a PC with a Pentium chip was a premier product in China. With our highly efficient business model, Lenovo launched a campaign to offer it at less than 10,000 RMB. That premier product overnight became affordable to mainstream customers. It was a time when the PC market in China transformed from premier to mainstream, and Lenovo grasped that critical opportunity and built a solid foundation for our success in PCs.
Smartphones and tablets are going through a similar transformation. With our core competence and the successful experience in PCs, we are confident that we can replicate that success in the PC Plus era. Thank you. 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 one. Next chart, please. We continue to grow in both sales and profit with margin expansion, even when the global PC market declined in quarter one. This is the 15 consecutive quarters that we achieved this year-on-year growth, despite the worldwide PC market show a negative growth for the last five quarters. Our performance has been driven by the solid execution of our protect and attack strategy that enable us to continue our growth in top line without giving us profitability. Over the last few quarters, which we witnessed a challenging PC market environment, strong growth in our mobile internet business has continued to help us drive sustainable growth for the group. Group sales grew 10% year-on-year to around $8.8 billion.
Sales in our mobile internet business were up 105% year-on-year to $1.2 billion. Strong performance in mobile internet business, especially smartphone, help drive the group's top-line growth. PC and related sales were up 2% year-on-year to around $7.3 billion. Sales of other goods and services were at $277 million. We reported in the last quarter that we have changed the way we organize our back-end operations by setting up two business group units, namely the Think business group and Lenovo business group. This helps enhance our end-to-end operating efficiency and innovation. This also resulted in some changes in cost classification. As a result, effective from this fiscal year, certain item used to be in the cost of goods sold, such as global supply chain and service overhead, have now been reclassified into operating expense.
There is no impact to operating profit, although both gross profit and expense will increase by around $65 million in quarter one. Gross profit was about $1.2 billion, up 14% year-on-year. Gross profit margin was 13.6%, improved by 0.5 point year-on-year on a like-for-like comparison. The year-on-year improvement is largely due to margin improvement PC from better average selling prices and profitability improvement from our mobile internet business. Operating expense increased by 14% to $989 million. The operating expense in quarter one has included expense incurred in the CCE and EMC joint venture that we have just started the integration in last quarter four. Meanwhile, as part of our protect and attack strategy, we have taken resource actions to further improve our profitability in our PC business and continue to deploy resource in our PC Plus strategy in order to drive further growth in revenue and profitability.
This resulted in a $17 million severance expenses incurred in quarter one. Our E/R ratio was up year-on-year to 11.3% against 10.8% last year. If we exclude the severance expenses, the E/R ratio would be lower. Operating profit in quarter one was $202 million, up 11% year-on-year. We recorded a net non-operating income of $13 million, mainly from incentives received for our investment in Wuhan Mobile Internet Manufacturing Hub. Pre-tax income was $250 million, up 16% year-on-year. I want to highlight that netting off both non-operating income and severance expenses, expansion in both our operating and PTI margin have been on track to close to 2.5%. The effective tax rate for quarter one was 21%, in line with our F rate fund rate around 20%-25%. Profit attributable to equity holders is $174 million, up 23% year-on-year. Net margin in quarter one was 2% against 1.8% last year.
Now, let's take a look at the balance sheet in the next chart. Our balance sheet in quarter one remained strong. Non-current assets were about $4.65 billion, slightly higher than the level at March 31st, 2013. Increase in inventory was largely due to increase in parts and components inventory needed for our increasing in-house manufacturing in China and Brazil. Consolidation of recent acquisitions like CCE, as well as finished goods, especially mobile internet device, to prepare for the summer sales season in quarter two. In summary, our inventory level is at a healthy level, taking into consideration of our business growth. Other changes in current assets and current liabilities were due largely to increased activities during the quarter. We had net current assets of around $331 million at the end of June. The non-current liabilities were at around $2.2 billion.
Let's go through the cash and working capital in the next chart. We have continued to leverage our strong cash resource to support our growth in driving strategic expansion in high growth areas such as consumer business, emerging markets, and mobile internet device business. As a result, the cash conversion cycle has come down to negative one day in Q1, against negative 13 days last year and negative seven days in last quarter four. Our bank deposit and cash level remained strong in Q1. It was lower compared to last year due to our capital expenditure and settlement to complete our recent acquisitions, as well as change in our cash conversion cycle. We drew down an outstanding bank facility in last Q2 before it lapsed. That resulted in a higher bank borrowing compared to last year, but it was similar to last quarter four.
The net cash reserve declined to around $3.1 billion compared to last year, but flat against last quarter four. Inventory days were 27 days, up eight days against last year due to our expansion into consumer business and emerging markets, ramp up for our new in-house manufacturing and integration of our recent acquisitions. They were up one day quarter-on-quarter due to increase in mobile internet device business and ramp up for our in-house manufacturing. Receivable days were 36, up two days compared to last year. Also driven by our expansion in consumer business as well as integration of our recent acquisitions. It was down quarter-on-quarter due to improvement in collection as well as quarter four is typically our low season. Payable days were 64 days, down two days compared to last year and nine days compared to last quarter four.
The year-on-year change was in line with our normal trend, and the quarter-on-quarter change was due to seasonality. We remain at a very strong cash position for working capital needs to drive future growth. Next chart, please. We continued to do well in all geographies in quarter 1 for both our PC and mobile internet device business under our PC Plus strategy, resulting in margin improvement year-on-year in most regions. Our balanced geographic exposure, especially markets outside China, including Americas and EMEA, continued to help contribute to our top-line growth. We continued to record share gain across product and customer segments. We have combined Latin America with North America to form the new American region, beginning from quarter 1 to further facilitate our operating efficiency. We have reported our performance this time under the new four geographic classification. We have enclosed in appendix the historic performance for your reference.
China. The revenue from China was up 6% year-on-year, driven by strong growth in our mobile internet device, which grew 76% year-on-year. Our smartphone business in China continued to be profitable in quarter 1 for the third consecutive quarter. Profitability of the overall mobile internet device business has also improved. Revenue from PC business was down 7% year-on-year, however, owing to the decline in the PC market. We continue to strengthen our leadership and further improve PC operating margin. It was up year-on-year and quarter-to-quarter to 6.8% as we focus on upholding margin in a declining market. As a result, our overall margin in China was up 0.6 points year-on-year and 0.5 points quarter-to-quarter to 5.2%. Remain confident that our PC Plus strategy is fully operational in China and can continue to drive growth in sales and profit. Asia Pacific.
Revenue was down 9% year-on-year to about $1.3 billion in Asia Pacific, which is a result of our decision to focus on profitability. We have given up some non-profitable government-related transactions in the region, which resulted in the decline of our market share. Nevertheless, we continue to perform well in Japan and solidify our leadership position with share gain. We also recorded record high market share in ASEAN. Our operating margin was up 0.1 point to 0.9% year-on-year. EMEA. We had a very encouraging quarter in EMEA with record high market share. Revenue grew 18% year-on-year to about $1.9 billion. Strong growth in emerging markets and consumer business contributed to the strong growth in the region. We are number one for the first time in Eastern Europe, and we achieved number one position in 10 countries, including Germany, from two countries last year.
Our operating margin was up 0.4 points to 1.5% year-on-year. Americas, we continue to achieve a strong growth premium against the market decline in the region with record high market share at 9.7%. We continue to record strong growth in North America, up 17% for the first time to reach double-digit market share, driven by strong growth in the U.S. commercial business. We also performed well in Brazil, which saw a record high market at 9.5%. Operating margin, however, was down year-on-year as we are still investing in Brazil and consumer business in the region and integrating CCE operations in the short term. Next chart, please. We have a more balanced product portfolio helped by our expansion in consumer PC and mobile internet device business.
Notebook unit shipments were down around 2% with a 10% premium to the market, but sales were up 5% year-to-year respectively as the average selling price was up. Unit shipments and sales in our desktop business were flat with a 10-point premium, but sales were down 3% year-on-year. Our mobile internet business continued to show strong performance, up 105% year-on-year in sales, led by smartphone and tablet business, which fueled the growth of the group. The mix of mobile internet device further increased to 14% from 7%, while becoming number one in the PCs for the first time ever. We actually sold more smartphones and tablets than PC during this quarter for the first time ever. Before I end my presentation, I want to give you some color on the market outlook.
Our PC Plus strategy has been working well to drive the group's growth in sales and profit with margin expansion in the past several quarters. Strong growth momentum in our mobile internet device business, especially our smartphone business in China, has helped fuel the group's solid growth with improving profitability. We expect this trend to continue. We'll continue to roll out our smartphone business in emerging markets and our tablet business in mature markets. Our core PC business is performing well despite uncertainties in the global economy impacting the PC market growth in the short term. There are still enormous opportunities for growth in the traditional PCs. We remain confident that we can continue to outperform the global PC market and to improve our operating margin.
Lenovo will succeed in the PC Plus era because we are best positioned to capture the opportunity where the market is going from a premium to mainstream and entry-level and from mature market to emerging markets. This is our strength, where we have proven with our success in PC, and we will replicate this success in the PC Plus era as well. We'll stay focused on our efficiency improvement initiatives and growth opportunities. We will continue to invest in core competence building and product innovation and redeploy resources to invest in the high-growth area to drive the sustainable future growth. We have a healthy balance sheet, which provide us the flexibility for our M&A strategy to capture opportunities in high-growth area that can help to accelerate our growth. Thank you very much. Now we can take your questions.
Thank you, Wai Ming. Let's now proceed to questions. We want to accommodate questions from as many people as possible, so please avoid multi-part questions and limit yourself to 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, would you please give us your instructions?
Certainly. Ladies and gentlemen, if you would like to ask questions, please press star one and wait for your name to be announced. To cancel a request, please press the pound or hash key. First question comes from the line of Steven Zhang from Macquarie. Please ask your question.
Hi. Thanks for taking my question. My first question relates to your China business. As we have seen that there has been some channel inventory buildup
in China over the past month or so. Can you talk a little more about that and where you are seeing your distributors, especially in lower-tier cities in terms of inventory levels? Also, can you talk a little more about how the demand outlook for China is in terms of both consumer and commercial? Thank you.
Yeah. Okay, this is Wai Ming Wong. Let me deal with the China inventory issue. Obviously, I think the China market declined, but we actually have been keeping a very healthy channel inventory. I think we do not necessarily, definitely from a Lenovo perspective, I think we have a very tight control over our channel inventory. That obviously applies not only China but on a worldwide basis. I think today, our channel inventory remains very, very healthy. I think going forward, obviously China, I think we see some signs. I think the PC market obviously is a good reflection of the overall economy. We definitely see that. I think the recent government policy, I think does have some disabling element in the economy.
Although that may not have an immediate impact over the next one or two quarters, but definitely we are very optimistic about the further stabling of the economy. As a result, that will benefit, I think the PC and the PC Plus demand. In particular, I think the urbanization policy announced by the PRC government definitely will help, I think the better growth of the Chinese economy in the longer term.
Okay, thank you. A follow-up is in regards to your Brazil business. With the closing of the acquisition of CCE, when do you expect that business to start contributing in terms of profitability?
It's Wai Ming again. Brazil, I think we begin to fully integrate Brazil. As you can see that, I think Brazil, we actually take an investment not only in CCE, but also we've been investing in building our own factory. I think based on the latest IDC number, in fact, Brazil, we actually jumped to a market share. I think we grow about 130%, and now we actually have a 9.6% market share, which is number two, I think in PC as well as number two in tablet. Obviously, we still need to ramp up because of the investment that we made in Brazil. As I said, this is not only CCE, but also, I think we are investing in the factory.
I think we are actually making good progress, but integration, I think we are going to have a fully integrated Lenovo operation comprising of obviously the Lenovo brand as well as CCE brand, I think to hit different segments of the market. We would expect that as and when we grow the business, I think we will reach, I think definitely reduce the operating loss, which we recorded in the previous quarter. We definitely see progress in quarter one, and we will continue to see progress in quarter two, and eventually we'll become profitable.
Okay, thank you.
Thank you for your question. Next questions comes from the line of Arthur Hsieh from UBS. Please ask your question.
Hi. Congratulations to the outstanding results. My first question is on the smartphone. I am just wondering, was there any change in the sales exposure to the wireless carriers and the retail channels that helped the improvement in the profitability? Also related to smartphone, with Samsung getting more aggressive in pricing, Apple is likely to introduce a low-cost iPhone. Plus, the recent pre-order of the Hongmi seems to receive a lot of attention. So it seems that the competitive pressure in the smartphone area is getting more intense. Do you foresee that the profitability in the smartphone business to sustain, or actually we could see more pressure to cause some downturn?
Thank you for the question. Firstly, our smartphone business now is profitable. Particularly in China, our business is profitable, and also we have very decent margin. Actually, our smartphone business margin in China is higher than our PC business. But in short term, we think it is still in the investment period. We still needed to invest on the branding. We still needed to invest on the channel network building. We don't expect our smartphone business will contribute significantly to our overall profit, particularly outside China. We will focus on our emerging market to develop. We still need to invest in that area. That is about the margin and the profit. Regarding the competition, we have never been scared with competition. Actually, we think the reason the market changed favor Lenovo
Our old business model. We have seen this trend. The market is shifting from the premium to the mainstream. It is shifting from the mature market to emerging markets. Actually, last quarter, emerging markets accounts for more than 64% of the total smartphone market. Even in mature markets, we see the refreshment cycle is becoming faster and faster. Some carriers allow their customers to replace their phones in one year or even just six months, like AT&T and T-Mobile. We think this trend definitely is more appropriate for the Lenovo business model. As you know, we have very rich product portfolio that covers all price points. We have very fast product development cycle. We emphasize on time to market and the time to volume. That is our long-term stronghold since our PC stage.
We have a very efficient end-to-end business model with disciplined operations. Our in-house manufacturing can quickly turn our innovation into high quality, cost-effective products. Meanwhile, although we are trying to improve our profitability, we always set a reasonable margin target. This means that we are able to provide the customers, especially mainstream customers, truly affordable products, compared to our current leaders in the smartphone and the tablet area. That is one reason we are confident on the competition. Definitely, the second reason is we are also a very innovative company. We are innovating not just in the traditional PC area, we are innovating in the smartphone and the tablet area as well. In the second half of the year, you will see more exciting products from both PC and the PC Plus.
We will launch our second generation of multi-mode products, including Yoga second generation, including the first generation of the multi-mode tablets. I just give you a consensus. In the smartphone, we will launch multiple modes, models of the thinner and the lighter smartphones with features focusing on security, focusing on the collaboration across devices, focusing on the cloud service applications. I am very confident on our competition with our key competitors in the market. Thank you.
Thank you for your question. Next question comes from the line of Thompson Wu from Credit Suisse. Please ask your question.
Thank you, and good morning. My first question is, I guess in your slides from your last earnings report, slide 10, you talked about being a global player in server and storage in three years. I noticed that point was noticeably absent in this quarter's presentation. Any changes to the thought process strategy there?
That strategy hasn't changed. Server and enterprise business is still part of our PC Plus strategy. We think we can fully leverage our current strength in the enterprise or in the commercial segments. Regarding of the strong brand, regarding of the channels, regarding of the products. We will develop a full range of the x86 servers to address our partners and our enterprise customers requirements, as well as we believe our joint venture with EMC will be a successful model. Wong?
Yeah, I just want to add one more point, and Thompson, as Yuanqing said, I think the server is obviously our strategic development area within the enterprise. I think that has not changed. I guess that the unwritten question is I think about our M&A. I think we actually have a very disciplined M&A approach. We always look at a business, I think either growing organically as well as taking the opportunity inorganically. We will take, as I said, a very disciplined approach. I think in looking at inorganic opportunities, I think the basic criteria will be, I think the acquisition will have to be accretive to our overall business. And we continue to do that, and we continue to look at the opportunities. As Yuanqing said, we will not grow this business just based on the inorganic approach.
I think in particular, the EMC and everything is actually on track, and we are still pursuing the strategy that we laid out for our commercials business.
Okay, great. Just to be clear, I just want to make sure that, I guess the message is Lenovo is quite happy with its organic capabilities on the server and storage side, in addition to the JV as with EMC, but won't ignore opportune and accretive opportunities in the market.
Correct. We will continue to grow the business both organically as well as inorganically. I think the point I just made is, I think in the inorganic approach, I think we take a very disciplined approach looking at the opportunities, which exactly add value to Lenovo, rather than doing the acquisition for the sake of acquisition.
Okay, great. That was very helpful. Thank you very much. My second question is about, I guess, the restatements in your profitability by region. I think it suggests that the MIDH business in China has actually been profitable in the past three quarters now based on your presentation. Should we take that to mean that the MIDH business is scaling up a little bit faster, and will scale up faster than before, or this is purely a product of accounting changes? Thank you.
It's definitely not an accounting changes. I think the MIDH business, a large part of it, obviously driven by our smartphone business. As you know, our smartphone business starting profitable, I think in quarter three last year, and we continue to maintain that profitability. But as Yuanqing said, that we obviously balance the growth and profitability on one hand. I think we will maintain the profitability. At the same time, we will also maintain the growth of the business.
Okay, great. Thank you.
Thank you for your question. Next question comes from the line of Kirk Yang from Barclays. Please ask your question.
Hi, this is Kirk Yang. Thank you for taking my questions. My first question, please, is on the outlook of the mobile industry. We all know that PC demand has been pretty weak for several quarters, but starting in Q4, we are going to have several new products such as Intel's Haswell and Bay Trail, also Windows 8.1. Just curious from your view, do you think those might be a catalyst for better PC outlook in Q4 this year?
Probably in one or two quarters for the PC market, including desktop and notebook, will continue to decline. But we have seen some positive signal here. First is in the commercial segment. Actually, now enterprise customers need to refresh their old Windows XP-based system to either Windows 7 or Windows 8. So we have seen this cycle, particularly in U.S. That is one thing. The second thing is, China economy is the key reason to attract the PC market now. But we believe China economy will become stable because the government has sent the message to the market that will ensure the GDP growth of the economy health. I believe that will help the China market. Also, I believe the innovation on the PC, like Lenovo. We launched the multimode products, including Yoga, Helix, and ThinkPad Tablet, these kind of things.
That will help to drive the healthy growth in the PC market.
In the industry as well. I believe in the second half of the year, not just Lenovo, but also other players in the industry will launch more convertible multi-mode products in the market to help drive the industry sales. I believe PC is still a more powerful and a full function computing device. People still need this product. It is still a $200 billion industry and market. We are rather confident. In the future, I do not believe the market will drop by double digits half years later. That is my view on the PC market.
Okay. Thank you, Chairman. That is very helpful. My second question, please. I think earlier you mentioned that your strategy is to sell tablet in the mature market, smartphone in the emerging market, at least from your focus. For emerging market, we discussed about Hongmi earlier. We have seen some local vendors coming out with a very low ASP type of product. Just curious that, do you think those low ASP product, would they put pressure on ASP or even profitability for Lenovo? As you know, Lenovo is making money for three quarters in a row on smartphone. Again, just curious that would those product put any pressure on ASP or profitability, please?
I think now we have full range of the products, focusing from high-end to the low-end. Definitely we are not scared the competition. We grew up through the competition. As long as other companies also need to make money, also need healthy business. I do not think we are scared with that kind of competition.
Okay. That's very helpful. Thank you, Chairman. Appreciate it.
Thank you.
Thank you for your question. Next question comes from the line of Stephen Yang from Sun Hung Kai Research. Please ask your question.
Hi. Great quarter, guys. Just wanted to ask you about your U.S. and Europe success in the past quarter on the PC side. Can you give us a little bit more color on what you guys are doing there to sort of achieve that success and things that will continue in the next few quarters?
Yes. Definitely. Our North American business grew very well last quarter. Actually, we have a 2% year-on-year growth in American growth. The rest is North America. Actually, in North America, for the first time, we reached the double-digit market share. We have more than 20 points premium to the market. That's very positive results. As I said it before, actually, we are stronger in the commercial side now. We fully leverage the current refreshment cycle of the commercial customers to drive the growth, including large enterprise customers and the SMB customers. Meanwhile, we are more aggressive in the consumer space as well. We're entering to more Best Buy and other retail stores to drive the growth. In both commercial and consumer segments, we have seen the more aggressive actions and the most strong growth rate.
When you say aggressive, is it spending on marketing and promotions or is it more on sort of the pricing versus HP and Dell?
I think we have very healthy profitability in North America. We don't sacrifice the margin and the profitability to compete.
Yeah.
I think while the commercial customers more trust Lenovo. That's because of our reliable-
Yes
product. Our ThinkPad is definitely the first choice of most enterprise customers. Most enterprise. It is reliable, it is durable.
Yes.
That is a key reason.
Maybe I add one more point. I think on our successes in Americas, obviously, it begins to show the effect of our overall executional strategy. What I mean is, I think we not only have the innovative products, I think on the commercial side, I think we hold our margin. But over the last couple of quarters, we actually been also improving our overall services, I think, to customers. I think if you follow the industry trend, I think there is a well-known independent research firm called TBR. I think that actually ranked Lenovo number one, I think, in the services to the customers. You can actually see with our overall quality of our product, quality of our services in terms of supply chain services to customers. We obviously been very focused.
And one thing that I believe that we are well above our competitors, I think in mature market in particular, the U.S. is our focus in delivering the product to our customers. While our competitors may have multi objective in delivering different businesses. And as a result of that, I think the end customer recognize our value and begin to actually move the business to our side. And therefore, even in a very weak market, we have been actually doing well, but not as a result of sacrificing profitability.
Yeah. So even in the consumer segment, because we have the Yoga, we have more exciting desktop, all-in-one, and laptop, multi-model laptop products. So now we get more shelf of the retail. So that help us not just gain share, but also improve the profitability.
Excellent. Thank you very much.
Thank you for your question. Next question comes from Jenny Lai from HSBC. Please ask your question now.
Yes. Thanks for taking my question. Well, actually, a follow-up question to your smartphone and tablet business. So earlier, there was a couple of press reports regarding to your targets in terms of the shipments for this year, in terms of smartphone being at 50 million units and then tablet, 10 million units. Could you comment on the progress in terms of achieving those targets?
This target is definitely a very aggressive target. But now we have become more and more confident to achieve this target. From the results of the last quarter, you can see we have had a very successful first step. Last quarter, we shipped almost 12 million smartphone, 1.5 million tablets. With that number, definitely you can believe. 15 million smartphone is in our reach. Also for the tablet, all our four geos now are gearing up. I believe this quarter, you will see even higher achievement. To ensure we can deliver the 10 million. We fully leverage our current PC channel and the reputation to develop the tablet business across world. That has been very successful. But definitely our product is also very attractive to the customers. That is another reason.
As I said before, the industry trend is definitely favor Lenovo's business model. The market is shifting from premium to the mainstream. Shifting from mature market to emerging market. More frequent or faster refreshment cycle. These kind of things definitely favor Lenovo's business model. Because we are strongly in emerging market, we are strongly in mainstream. Our product development cycle is shorter than our competition. We are focusing on the time to market, time to volume. We are focusing on building end-to-end integrated efficient business model with disciplined operation. These kind of things will give us a very strong competitiveness. Not only are we confident to deliver this 10 million target, but also we will become a stronger player in both the smartphone and the tablet area.
Okay, I think in view of time constraint, we will take the last question now.
Thank you. The last question comes from the line of Gokul Hariharan from JP Morgan. Please ask your question.
Yeah, thanks for taking my question and congrats on the good results. Just wanted to ask a couple of questions on the China business. First of all, MIDH still seems to be losing about $20 million in the last quarter. Could you explain where that is coming from, given that smartphone is already profitable? Second is on China PC margins. I think 6.8% China PC margin is probably the highest that we have seen for quite some time. Could you talk about what you are doing in the declining PC market, which is enabling this kind of margin? Should we expect that to continue, given that we get into the traditional promotion season in the next quarter? Thanks.
So let me talk about the China PC first. Because the market was declining, we actually asked our team to focus more on selling the high-end or premium products, and keep the healthy margins and profitability. Definitely this strategy has worked very well. You can see, although our overall PC unit shipments dropped a little bit, but definitely we are better than the market. Our overall PC revenue increased a little bit. That means our average selling price was higher year on year. This is unusual. Typically, the PC ASP drops year over year. Because of our guidance to the team, our premium product mix in our total PC shipment increased. That gave us the better margin. That is the first point. The second point is definitely we have more innovative products like ThinkPad X1 Carbon, ThinkPad Tablet 2, Helix, Yoga.
These kinds of innovative products help us to drive the high margin. The third point is we have more disciplined operations to manage the cost, to manage the expense. Actually, last quarter, our China team significantly reduced the expense. That helped us to improve the profit. These couple of things, the combination helped us to improve the margin, not just in China, actually worldwide. That is the answer to your second question. Regarding the profitability of MIDH business, probably your message is wrong. Wai, you can-
Yeah. Wai, I actually referred to the chart that we prepared, which is on page 8, I think under the headline called Performance by Geography. If you really look at the segment operating profit, we break down into China, we have an operating profit of 194, and PC 188. I think you probably may be misreading the next column, which was Q1 last year. I think that recorded an operating loss of probably $20 million. But as you can see, we also show the quarter four number, which is an operating loss of negative 3, and quarter 1 this year, an operating profit. I think by using that deduction, it is about $6 million. We can actually see the increasing profitability of our MIDH business in China. All right. Gokul, thanks for your questions. Thank you again, everybody, for your participation in today's call.
If you have any further questions, please feel free to contact the IR team directly. The broadcast replay and conference calls replay will be available in the next couple of hours. Thank you again for joining us today. Bye-bye.
Thank you, ladies and gentlemen. That does conclude the conference call today. The replay of this conference will also be available two hours from now. Thank you for participating. You may now disconnect.