Good afternoon and good morning. Welcome to Lenovo's Q3 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 start with our management presentations. After that, we will take your questions. Now, let me turn it over to Yuanqing .
Hello, everyone. Happy New Year to all of you. Lenovo had another record-setting quarter. I cannot wait to share our fantastic results with you. Last quarter, we achieved record volume, record revenue, and record profit. Let's start with our traditional PC business. Our PC sales volume grew almost 16 points ahead of the overall market. Our global market share reached another historic high, 15.9%, with more than 14 million units shipped. Now, we have grown faster than the market for 15 straight quarters and have been the fastest-growing major PC company for 13 straight quarters. Our strong growth came with record profitability. Our pre-tax income ratio reached 2.6%. That is three-tenths points better year-on-year, and our earnings increased by more than 33% year-on-year to reach $205 million . Record profits with record market share. This demonstrates that we have a very healthy business driving balanced growth worldwide.
We did this by outgrowing the market in all customer and product segments, as well as geographies. In EMEA, we outgrew the market by 36 points, with strong performance across all parts of our business. We also steadily improved profitability in our consumer business while increasing its mix in overall revenue. In early 2009, we were number seven with less than 4% of the market share. But now we reached number two in PCs with a record market share of more than 11%. It is even more impressive considering the challenging economic environment in the region. In our Asia-Pacific, Latin American geo, we grew 13 points faster than the market, and we improved profitability year-on-year. North America outgrew the market by 18 points. In the U.S., we had a record share of 8.6% and continue to have a strong, profitable commercial business.
In consumer, not only did we continue our strong growth, but we also saw initial success in the premier space. Our Yoga and Twist now own almost 30% of $700 and above Windows 8 retail market. Even more impressively, we have 49% retail market share of Windows 8 device sales that were priced over $900 . In China, our PC business remains strong even in a slower market, and we protected our profit pool perfectly to fuel our growth in other areas. We once again increased our market share and further improved our already healthy profitability by another three-tenths points year-on-year. Clearly, our PC business is healthy and will continue to get stronger. More importantly, beyond the PC, we have built a strong foundation for our PC Plus businesses, which is growing even faster. Our PC Plus growth starts with our strong performance in phones.
Total phone sales grew more than 50% year-on-year to reach 9.4 million units, of which smartphone growth was even more impressive. In China, our smartphone business actually doubled year-on-year. Outside of China, we had a strong early response in Russia, India, Indonesia, and other new markets. Globally, we sold over 9 million smartphones last quarter. Best of all, for the first time, we were profitable in smartphone sales globally. This is another milestone. At the same time, our worldwide tablet business not only grew almost 80% year-on-year to reach almost 800,000 units, but also was profitable. Overall, our Mobile Internet Digital Home businesses now accounts for 11% of Lenovo's overall revenue. While we are still focusing on growing our MIDH business worldwide, we will now drive profitable growth in China.
Today, according to IDC, in overall smart connected devices, including PC, smartphone, and tablet, Lenovo ranks number three worldwide, behind only Apple and Samsung. But definitely, we are not satisfied, and we will continue our march to the top. Our strong growth, record profitability, and rapid expansion as a PC Plus company, all have been guided by our protect-and-attack strategy. There are four critical elements to our success in all these areas: the right strategy, efficient business model, innovative products, and a diverse team and global culture. Combined with our world-class execution, we have delivered excellent results in various market conditions. In fact, we reached an important milestone this quarter. Our attack business now accounts for 50% of our total revenue. Our strategy will continue to guide us as we reorganize to aim for even stronger future growth.
Given our record performance, you may ask why we are reorganizing now. When we established our current structure, we were much smaller and had only one business outside of China, which was our commercial PC business. Today, we are a much more diverse business. In addition to commercial PCs, we have a strong global consumer business and have a fast-growing MIDH business, as well as servers and storage. These businesses require different business models. The transactional business is more about speed and efficiency, while relationship focuses more on quality and customization. So we are creating two end-to-end business groups to enhance each business model: The Lenovo Group and the Think Business Group. The new structure will significantly improve our product development cycle, time to market, marketing campaign, as well as day-to-day operations. Also, we want to expand our presence in the premier space.
Our legendary ThinkPad brand already has a strong position in commercial, and we believe we can extend that into consumer as well. Through the new end-to-end organization, we want to further leverage our innovation excellence to lead in both commercial and consumer premier space. Our innovative products have long been a critical part of our success. Innovation enabled us to break through in the premier market in North America, a market we were never able to enter in the past. With our best-selling Yoga and Twist, we did not reach this point by accident. We have dedicated years of hard work to innovation. At CES in 2010, we broke new ground with the IdeaPad U1, the early idea of our convertible PC. Last year, with the successful launch of Yoga, we formally showcased our fully developed concept of convertibles.
Our best-selling products now are the outcome of continuous enhancement through the years. In the last couple of years, we built our own smartphone and tablet businesses from scratch. In fact, the groundwork of our mobile internet research and technology began six to seven years ago. We have not reached here by following others' footsteps. At this year's Consumer Electronics Show, our award-winning Horizon Table PC is the latest convincing example. We created new product categories, and even more, it helped build the image of Lenovo as a global innovation leader. Also at CES, with our other newest products like K900 smartphone and Helix Convertible PC, we won a record 15 major awards. By far the biggest winner at CES. It is more evident than ever that Lenovo's innovative image is more and more recognized globally.
Innovation is in our DNA and will continue to drive our growth in PCs and PC Plus products. Looking ahead, we are committed to the PC industry and definitely are in a stronger position than other competitors. While we are on course to become the worldwide PC leader, we will continue to focus on improving profitability. Last quarter, I committed that our goal is to improve our PDR margin by one point over three years, and now I still stand firm to that commitment. At the same time, we will continue to focus and grow faster in all smart connected devices. We believe this will yield healthy returns for our investors in the long term. Thank you, everybody. I now turn to our CFO, Wai Ming. Wai Ming, please.
Thank you, Yang Yuanqing. Hello, everyone. This is Wai Ming. I will take you through Lenovo's financial and operational performance in Q3 . Next chart, please. We continue to grow in both sales and profit with margin expansion, even when the global PC market declined in Q3 . We have delivered 13 consecutive quarters of year-on-year growth. Our balanced performance has been driven by our successful execution of our protect-and-attack strategy. I think the strong performance of our mobile internet business is a significant strength that we believe will help us drive sustainable growth even in challenging market conditions. Our PC shipments in Q3 were up 8%, and PC sales were up 7% year-on-year to $8 billion. Our strong performance in mobile internet business, especially smartphone, help continue more to the group's strong revenue growth. Sales in our mobile internet business were up 77% year-on-year to $998 million.
Sales of other goods and services were $393 million. Group sales grew 12% year-on-year to approximately $9.4 billion. Gross profit was about $1.1 billion, up 15% year-on-year. Gross profit margin improved by 0.04 points to 11.8% year-on-year, primarily due to scaling benefits, but dipped slightly from 12.1% in Q2 , mostly due to increased mix of the consumer business. Operating expenses, including our continued investment in R&D and branding, increased 13% year-on-year to $858 million to support our growth. Our E to R ratio was relatively stable year-on-year at 9.2%, but down from 9.7% in last quarter due to our continuing efforts in efficiency improvement. Operating profit was $243 million, up 26% year-on-year. Pre-tax income was $246 million, up 28% year-on-year. This is a record high level for the group. PTI margin was 2.6% up year-on-year and quarter-on-quarter.
Effective tax rate for Q3 was slightly below 20% as a result of better margin. Profit attributable to equity holders is $205 million, up 34% year-on-year. Net margin was 2.2%, an improvement of over 15% quarter-on-quarter and 20% year-on-year. Basic EPS improved to $0.0199 , representing a 33% increase from $0.015 cents last year. Next chart, please. Our balance sheet in Q3 remains strong. Non-current assets were about $4.3 billion, slightly higher compared to the level at 3 0th September, 2012. Changes in current assets and current liabilities were largely due to increased activities during the quarter. Increase in the inventory level is due to the preparation for the Chinese New Year holiday sales, expansion into emerging markets, as well as increase in component inventory due to pricing benefit and more in-house inventory. We had net current assets of around $349 million at the end of December.
The non-current liability were around $2.1 billion. Now let's go through the cash and working capital in the next chart. Our cash flow continued to be healthy in Q3 . As a result, our bank deposit and cash level was higher compared to last year and last quarter. Our net cash reserve was strong at $4.2 billion compared to last year and last quarter. We continued to do well in managing our working capital. Inventory days were 20, up three days against last year and one day compared to last quarter. Receivable days were 36, up two days and three days compared to last year and last quarter as well. Both increases are driven by our expansion in consumer business. Payable days were 61 days in Q3 , flat quarter-on-quarter. The decline of seven days compared to last year was again due to our expansion in the consumer business.
We expect it to remain stable. As a result, the cash conversion cycle in Q3 was at - 5 days. Again, - 17 days last year and - 9 days last quarter. The change was driven by our strategic business decision into emerging markets and consumer business, including MIDH, together with our hybrid strategy of increasing our mix of in-house manufacturing to enhance end-to-end efficiency and product time to market. Nevertheless, the group cash position remains at a very strong level to drive future growth. Next chart, please. The group has record high shipments and market share in Q3 , even as the China PC market slowed down. We also see strong performance across the board relative to the markets. We continue to perform well in China in both PC and mobile internet business.
Despite the negative growth in China PC market, we recorded a 17% growth revenue year-on-year to about $4.1 billion in China. Our PC sales increased around 6% year-on-year to about $3.2 billion, driven by our strong growth in emerging cities undergoing urbanization. We achieved record high market share in Q3 , and our market share is even bigger than the total of the next four players. China PC operating profit increased to $200 million, also a record high level for us, while margin further improved to 6.3% year-on-year. Our mobile internet business in China continued to show strong growth and provided a strong support for our continuing high growth in China in Q3 . Sales increased by 83% to $895 million, which account for 22% of the China total sales revenue in Q3 .
MIDH profitability also saw continuous improvement in Q3 , particularly with the help of our strong China smartphone business, which turned profitable for the first time in this quarter. We will continue to invest in the PC Plus area to drive our future growth. APLA sales were down 1.6% year-on-year at about $1.7 billion in APLA, despite our shipment growth against the declining PC market in the region. Operating profit improved slightly against the loss recorded last year, but it dropped quarter-to-quarter. Latin America and Brazil were the markets accounting for the majority of the loss in this quarter. We expect our new manufacturing hub and the acquisition of CCE in Brazil, that we closed at the beginning of this January, will help accelerate our expansion in the country and therefore contribute to the further development of the region's profitability over time. EMEA.
We had a very encouraging quarter in EMEA as sales grew 17% year-on-year to about $2.3 billion. Strong growth in emerging markets in the region like Eastern and Southern Europe, Middle East and Africa, as well as consumer business, contributed to the strong growth in the region. In Q3 , we maintained number one positions in Russia and Germany. We achieved record high market share in Western Europe at 11.3% and became the number two PC player for the first time. Operating margin remained stable both year-on-year and quarter-on-quarter at 2%. Our attack in the consumer business in the region continued to gain traction that resulted in share gain. Our consumers in EMEA continued to be profitable with improved margin in Q3 from better scaling. We will continue to attack in the consumer business and expect it to provide additional support to our margin improvement over time. North America.
We continued to achieve strong growth premium against the market decline in the region with record share in the U.S. and North America. Sales grew at 8% year-on-year to about $1.3 billion. We had a successful drive in our consumer business, especially with the high-end Windows 8-based products like Yoga, leveraging the Christmas holiday season to build a solid foundation for future growth. This is the first time that our premium price consumer product has broken into the main retail chain in the U.S. The increased mix of our consumer business at the stills of scale led to a decline in the operating profit from $38 million last year to $34 million this year. Next chart, please. We have a more balanced product portfolio helped by our expansion in consumer PC and mobile internet business. Notebook unit shipments and sales were up 9% and 8% year-on-year, respectively.
Unit shipments and sales in our desktop business were up 6% and 1% year-on-year respectively. Our MIDH business continued to show strong performance, up 77% year-on-year in sales, led by the smartphone business, which fueled the strong growth of our group. Our smartphone business has become profitable, and we have also started to expand into certain countries in emerging markets. Our tablet business also saw strong growth in Q3 . We will continue to invest in innovation and broaden our product portfolio to enhance our competitiveness and service to our customers. Next chart, please. I want to take this opportunity to report the status of our recent corporate transactions. In this chart, we have included highlights of the deals and their progress for your reference, and how they fit into our existing strategy. The integration of all these transactions is well on track.
We expect these transactions will help provide a steady contribution to the company alongside our organic engines. Before I end my presentation, I want to give you some color on the market outlook. Despite uncertainties in the global economy impacting the PC market growth in short term, we remain confident that we can continue to outperform the worldwide PC market and to improve our operating margin. While our core PC business is performing well, our mobile internet business, especially our smartphone business in China, has also started contributing to the group growth in sales and improving profitability. We have also begun to invest our smartphone business in certain countries in emerging markets. This balanced performance is a significant strength that will help us drive sustainable growth even in challenging market conditions. We will stay focused in our efficiency improvement initiatives and growth opportunities.
We will continue to invest in core competence building and product innovation to drive sustainable future growth.
These investments, however, may cause the expense-to-revenue ratio to increase in the short term, especially during Q4 , which is a typical low season for us, and the ratio will be higher sequentially compared to Q3 . We have a healthy balance sheet, and we will continue to look for M&A opportunities in areas that can help us to accelerate our growth. Thank you very much. We will take your question now.
Thank you, Wai Ming. Let's now proceed to questions. We want to accommodate questions from as many people as possible, so please avoid multiple part questions and limit to just questions at one time. Please state your name of your company before your questions. All the Q and A will be in English only. Operator, will you please give out your instructions?
Ladies and gentlemen, if you do wish to ask a question, please press star followed by one on your telephone keypad and wait for your name to be announced. If you do wish to withdraw your question request, you can do so by pressing the pound or hash key. Your first question comes to the line of Kirk Yang from Barclays. Please go ahead.
Hi, this is Kirk Yang from Barclays. Thank you for taking my questions. My question is mostly on page number 16 of presentation on your MIDH business. I think right now it shows that it accounts for almost 11% of sales. Just like to know from the management that what is your outlook, say, for the next year? What percentage do you expect to grow to? More importantly, I think right now you already shows profit. Do you expect the profitability to continue in the next several quarters?
Definitely as our MIDH business has performed very well, including our smartphone business and tablet business both. We shipped totally 9.4 million phones. Among that, 9 million are smartphones. We doubled our volume in China. Our launching other emerging markets like Russia, India, Indonesia, Philippines, and Vietnam. We have seen the first step of success. We have seen very positive response to our smartphone. Regarding of the tablet, last quarter, we grow by almost 80% year-over-year. We shipped almost 800,000 units of the tablet. We are definitely confident. We will continue to have the hypergrowth in both smartphone and in tablet. We believe we have very strong product portfolio. Not just in China, but also for rest of the world. Definitely.
Our MIDH business mix in our total revenue will continue to grow. Any addition from-
I think Kirk, it is Wai Ming here. I think it is very difficult to give a specific line of the sort of mix. I think MIDH is a mix of our PC business because I think we are very sure that we will, I think, have a wonderful growth in our smartphone business. As a mix, I think you have to form a view as to how the PC growth is going to be. So I can tell you that MIDH is, I think if you are really looking at, I think our Q3 , I think we have an overall growth of revenue of about 12%, of which I think a lot of growth coming up from MIDH. Going forward, we will continue to see, I think MIDH on a standalone, a very, very high rate of growth.
As a mix of our business, it all depends on how quickly, I think the PC recovery and in there. So there are too many variables, but I can assure you, I think from our perspective, that we are very, very positive, I think of us getting into the PC Plus, expanding our revenue, and obviously the MIDH, not only smartphone, but also tablet, will continue to be a driver, I think for a very reasonable growth in our top line as well as in our bottom line.
Sure. As a follow. Sorry.
Go ahead.
Sure. Sorry. Yeah. As a follow-up, can I double-check that I think MIDH division is already at least break even and showing some profit. Do you expect to see the profitability to continue, or would you see some volatility in the profitability?
Overall, our MIDH business still lost a little bit of money. But we made money from smartphone. We made money from tablets. We lost money in the Smart TV. Over time, we are very confident that we will have the profitable growth in China smartphone market. But definitely, we will continue to invest in the rest of the world smartphone business. So tablet, I hope we can have a profitable growth. But it depends on the competition. It depends on how we will be aggressive to gain the share. So I cannot give you the performance on tablet now. Yeah.
Sure. That's very helpful. Okay. Thank you, Chairman Yang, and thank you, Wai Ming.
Your next question comes to the line of Arthur from UBS. Please go ahead.
Hi, it is Arthur Hsieh from UBS. Thanks for taking my question. Congratulations to the results, especially it is very encouraging in these challenging times. My first question is also on MIDH. I am just wondering, for the company to set targets to improve the PTI margin by 1% in three years, does that imply that MIDH could also improve by the same level or actually even higher level? Actually, the question is coming from an angle that, how much do you think the operating margin of MIDH could really become? Could it reach the corporate average or could it even reach the China margin? What is the more reasonable target? Thank you.
Yeah. While I am very confident, over three years, we can improve our PTI margin or net profit margin. Firstly, we will improve our margin in the PC. That is even most important part because the PC still accounts for almost 90% of our total business. With the scale we have built, with the market share we have built in emerging market as well as in consumer business. We are very confident. We are very confident that we can further improve not just the gross margin but also the net profit through the PC. Definitely for MIDH business, we wish we could have at least a similar GP margin as we have in the PC area. Not just in China, but also rest of the world.
Arthur, maybe I actually add that I think if you follow Lenovo way of managing the business and being responsible to shareholders, I think we will always have this protect-and-attack. Obviously, I think the smartphone, you should look at it. I think the China smartphone and smartphone outside China, I think we obviously overall balance. I think the continuing investment in the high growth area where we actually be able to increase our top line. But at the same time, we are very mindful that I think the existing profit generator, I think in this case, maybe PC, maybe the China smartphone, a profitable growth. So we actually take a balanced view. On one hand, assuming we will manage to grow so that we will continuing improve the overall group profitability by 1%.
But in terms of specific area, we obviously will have different consideration as to which area we should go aggressive. Nevertheless, the end of it, I think we will have improved the group net margin by 1% over the period.
So, at one point, I think we will benefit from another two points, another two areas, to improve the margin. The first thing is brand. We will further invest on the branding part, so that we can leverage our brand awareness and brand reputation to improve the margin worldwide. Our current strong momentum, our position in the PC industry, we are definitely help to further promote the brand. That's one point. Another point is we will further invest on the innovation on the product. That will definitely give us advantage to improve margin. We are very encouraged by our recent sales in North America, particularly in U.S. retail market, with the Yoga and the Twist. Now we have 38% market share in the 700 and above Windows 8 based system.
We have 49% market share in the 900 and above retail market, Windows 8 based. That has never happened before. In the past, we could only sell about 299, 399 products in Best Buy and other retailers. But now, in those high-end product categories, not only we can have the presence, but also we can have the high shares. That's very promising. Definitely, those categories margins are much better than the low end.
Thank you. My next question is about China. I think my impression was usually in the past you grow 5%-10% faster than the market. But in the December quarter, I think China market probably only flat or up slightly, but you grew 17%. Should we review how the way we model the growth for you in China? Because this is almost impossible. You already have a dominant share, but still, your growth was amazing there. What's your view about the demand and growth in market overall and yourself?
Yeah. We have 35%. Actually, last quarter, 36.7%, almost a 37% market share in China. With that high market share, you cannot always expect that we outgrow the market significantly. A little bit or grow with the market is actually our target for our China team. Otherwise, we will use more resources, or we have to sacrifice more profit to get more market share. That's not a good return. That would be not a good return. But you still can expect on the overall China market growth. Actually, we separate China by China mature market and China emerging markets. In the lower tier cities, we think the penetration rates are still very low. We still have a lot of opportunity to grow in those areas. But definitely the mature market is a mature market. It's just like the U.S., the Western Europe.
That's regarding of the PC. For Lenovo China, our strategy is different from the rest of the world. Not only we want them to protect the PC leadership position, we also want them to be more aggressive to attack the PC Plus opportunity. We are aggressively in smartphone, in the tablet, in the server area. If you look at our overall growth rate last quarter in China, it's not slower. Actually, our combined growth rate was 17%?
17%, yeah.
Was a 17%. If you combine the PC and the MIDH and the server business. We still have a 17% year-on-year growth rate. It's not slow.
Yeah. I think, Arthur, just to make sure you understand the numbers correctly. I think from a PC perspective, I think we are growing 6% revenue. The 17% is really from the tremendous amount of growth from MIDH, who have been growing about 83% year to year. I think that is really the key driver of a slow-growth PC environment. I think while we are pursuing the PC Plus strategy, that will still give us a very handsome, I think, high teens sort of year-on-year growth. The one thing that I think I just really want to focus back on the sort of overall profitability of the group. I think China, the PC, we definitely will take all the opportunities available to us, I think to do more business in a profitable way.
But again, while you understand our protect-and-attack strategy, our PC business in China is in the protect area. We definitely will not, I think, give away profit just for increasing market share in the PC in China. Therefore, what I want to summarize two points is, one, I think with our PC Plus strategy successfully executed in China, I think while the PC area may be a slow growth, but we still have, I think, a very decent double-digit growth in revenue. The second point is on profitability. We definitely, on the PC side, we will not, I think, give away profit just for the sake of getting increasing market share. We will maintain a very efficient and profitable PC business going forward.
Thanks very much.
Your next question comes from the line of Gokul Hariharan from JP Morgan. Please go ahead. As it appears, our participant line has disconnected. We will move to the next question. The next question comes to the line of Grace Chen from Morgan Stanley. Please go ahead.
Thank you for taking my question. I am Grace from Morgan Stanley. Congratulations on the good results. My first question is about the smartphone business. You just talked about you ship around 9 million units of smartphones in the December quarter. I am just wondering how many of that were from China and how many of that were from overseas. What is your target for 2013, shipment target? Thank you.
Yeah. I think most of those, we actually shipped more than 9.3 million. I think about 9 million is really in China, and the rest is in the rest of the world. I think it is a relatively small part. Obviously, our strategy is, I think, to have the initial successes in China, which we obviously do over the last few quarters, and last quarter or Q3, right? Last quarter, we have over 9.3 million, I think, of which 9 million is in China.
Okay. I understand that you want to expand your smartphone business overseas, so do you have any shipment target for next year, and also your smartphone shipment target for China?
Definitely, we have the target, but it is not convenient to disclose here.
Okay, got it. My second question is about your production strategy. Can you update us about your current in-house percentage for PC and smartphones, and what is your ideal target for your in-house percentage in the future? Thank you.
The production strategy.
Yeah. We will continue our current strategy to leverage both in-house manufacturing and the outsourcing strategy. We want to have the balance of manufacturing. But definitely, we will not give up the in-house manufacturing, because not only that will give us more efficiency, but also it will help us to strengthen our innovation capability. It will help us to keep the connection with the upstream suppliers, component suppliers, so that we can find the opportunity to innovate. This is Lenovo's vertical integrated innovation model. That's the fundamental purpose we keep the in-house manufacturing. Actually, today, most of our desktop business are in-house manufactured. Most of our smartphone are in-house manufactured. In the Notebook and the tablet, probably we have less than 50% in-house manufactured. More than 50% are outsourced to the third party. We want to keep both balanced.
Yeah, Grace, just to give you one example, I think to demonstrate what Yuanqing just said. I think our in-house manufacturing, obviously, the key to that is to improve our overall product innovation. I think one of our price-winning product, Yoga, is actually done in-house. You can actually see, I think we take a balanced approach rather than just a W1 approach. I think different business model will have different benefits going to the customers, and we will continue to adapt that approach.
Got it. So may I take that, may I summarize that for Notebook and tablet PC, because the current in-house percentage is a bit lower? Ideally, you will increase that over the time.
Sorry, Grace, can you repeat? The line is breaking up a little bit.
Okay, sure. For Notebook and tablet PC, your current in-house production percentage is a bit low, relatively lower versus other products. May I expect that you will increase your in-house productions for Notebook and tablet PC in the future?
We will not say that direction. It depends on the product mix. Some models, we will use the in-house. Some models, we will use the outsourcing. I wish we could keep both balanced. We will not go to any-
One direction.
Just one direction or extreme direction.
Got it. Thank you very much.
Grace, put it in simple, I think the rumor saying that we are going to do 100% in-house, I think that is untrue statement. That is a rumor, pure rumor.
Okay, got it. Very clear. Thank you so much.
Yeah. It's very clear. In the future, the most innovative products will be manufactured in-house. We want to keep it confidential. Also, we will do the innovation and the product development by ourselves.
Thank you. Congrats on the good results. Thank you.
Thanks, Grace.
Your next question comes from the line of Gokul Hariharan from JP Morgan. Please go ahead.
Hi, guys. Sorry, I got bumped out earlier. Just a couple of questions. First of all, on the PC demand side, enterprise was quite weak through most of last year. How are you guys looking at the enterprise demand overall, talking to your customers? Especially given that XP is coming off support in early 2014, do we have any possibility of a refresh activity going into second half 2013? Second question is for Wai Ming. We had other income of about $20 million from derecognition of contingent consideration. Is this something that is a one-off, or given that there are further commitments to NEC, EMC, and Stoneware in the future, do you see this coming in pretty much every quarter over the next couple of years? Thanks.
Yes. Over the past couple of quarters, impacted by the global economy, the enterprise demand on IT product has been really weak. That's the kind of situation. But I think with the macro economy recovery, enterprise customers still needed to buy PC to replace their PC. Also the new technology, like Windows 8, like Ultrabook or convertible PCs will drive the replacement, will drive the new demand. This is my view. I believe 2013 will be better than 2012.
Yeah. As to the same question, I think that $20 million really relates to the release of the, I think, provision that we have in the accounts. I think that relates to the acquisition of the Medion, I think about a year ago. I think the original deal was, we are going to set certain, I think financial targets in relation to the business plan and subject to achieving that, we will actually I think each buy the remaining shareholding of Medion by Gerd Brachmann . But since, I think with the arrival of Joe Lanci, our EMEA leader, I think there is a modification of our overall strategy in hitting EMEA. There is an acceleration of, I think acquiring the Medion share. As a result of that actually give us a saving of, I think what we actually provide in the accounts of around $20 million.
We actually aware of that very early on, I think in the early October. I think what we do is, I think bearing in mind that, I think with the one time accounting benefit, we actually been aggressively, I think reinvesting that amount of money, I think in particularly brand, as Yuanqing said earlier, I think we have a great success in one of the most, I think, market loving products, Yoga. We actually spent, I think, more, I think to really take advantage of that. Yes it is one-off, and I do not necessarily see those sort of similar or one-time items similar, I think, in the near future.
All right. Thank you.
Your next question comes to the line of Jenny Lai from HSBC. Please go ahead.
Thanks. Congratulations on the results. I have a question on your smartphone business outside of China. Obviously, your China smartphone business is doing very well. But outside of China, should we expect similar pattern? Meaning, from the time you started to invest in smartphone to now, it is probably two years. Should we expect another two years before the smartphone becoming more meaningful contributor to your bottom line?
I can honestly say, we have very high expectation on the rest of emerging markets regarding the smartphone business. We will be more aggressive. We will invest to drive the hypergrowth. I do not know whether we have the similar growth rate as we have in China. I hope we can see that, but I cannot guarantee.
All right. Could I ask another question then?
Please.
In terms of Latin America, it sounds like you are loss-making in Latin America, and management's counting on CCE acquisition to accelerate the progress in the country. Could you give us more colored highlights in terms of what's the progress and what kind of expectation we should set in terms of your operation in the country?
Yeah, I think the acquisition of CCE actually became effective on 2nd of January . We obviously have a plan, I think, to fully integrate the CCE to help us to improve the overall business in Brazil. I think it would be too early for us, I think, to actually say what exactly are the financial targets. But we are very, very confident, I think, with the brand there, I think with the sort of PC Plus business, not only they actually have PC, they also have smartphone, and also a little bit of TV. And Brazil is, I think, on the verge of having some significant global events like the football as well as the Olympics. I think the solid foundation that we buy because it's actually a well-run company, has a relatively long track record proven to be successful.
We are very, very confident that we will, I think, gradually be improving the overall performance. Definitely, I think applying the Lenovo formula, we definitely believe that we can outgrow, I think the market, at the same time, we improve the overall profitability. But trying to name a date, a specific date or a period with specific financial target, I think we probably need a little bit more time, I think, to go through to fully integrate. We begin to integrate, but we are only just about a month away after the official acquisition of the company. We probably will share with you more information maybe in the next quarter or maybe the quarter after. But we are very, very confident that we actually have the right company, have the right infrastructure.
I think we need to, again, repeat the experience of successful integrating companies so that we can actually sort of build a very solid foundation to take advantage of the recovery of the market.
All right.
Okay.
Thanks.
Okay. In view of the time, we would like to close the session right now. Thank you again for joining us this today.