Earnings Call: Q1 2013

Aug 16, 2012

Good morning. 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. I hope you all enjoyed the exciting Olympics over the past two weeks. For Lenovo, our last quarter was also exciting. We are on our way to winning the gold medal. Our momentum continues to get stronger and more balanced. This quarter, our PC sales volume grew 24% year-on-year. Even as the overall market dropped, our global market share reached another historical high, 15%. Just a year ago, we were behind the number one by almost 6 points. But now, we have narrowed the gap to just 0.7 points. We achieved rapid growth in all customer and product segments. No matter whether in commercial or consumer, desktop or notebook, all had a record high market share. Especially, I want to mention the initial success of our PC Plus strategy. Our smartphone sales in China reached almost 5 million this quarter. Total phone sales volume reached almost 7 million, to surpass our China PC volume for the first time. In June, our smartphone market share in China reached 13%. Now we have surpassed Nokia and Huawei to become the number two smartphone and all-phone player for the first time in China. Our four geos all had a stellar performance. Our PC sales volume gained market share in all 13 regions. Even as the market dropped, our China PC business maintained a growth of almost 10% year-on-year, and our market share continued to reach new heights. In both EMEA and Asia Pacific Latin America, we grew at more than 50 points premier to the market. We gained share year-on-year in key markets such as Russia, which jumped 4 points to reach 11%, and India, which increased by 6.5 points to achieve a historic high of 17%. In North America, we reached an all-time high of 8% market share in the United States and rejoined the top four, just behind the three strong domestic brands. Just a year ago, we had only 12 countries and regions with double-digit market share. This quarter, we had almost tripled that number to 35 countries and regions. While we continued our rapid growth, we also improved profitability. Our pre-tax income increased 50% year-on-year to reach $185 million. Our net income increased by 30% year-on-year to reach $141 million. Gross margin improved by more than 1 point quarter to quarter. You may still remember that during the global financial crisis in year 2008, we faced a similar situation. Back then, the China PC market grew slower than the global market. Enterprise business shrank significantly. At that time, Lenovo performed poorly. Revenue dropped significantly, and losses mounted. But now, our performance is totally different. We not only maintain the strong growth but also significantly improve the profitability. Similar market environment, but with very different results. How did we do that? I still like to summarize it into the four points that I have always been saying. The right strategy, the efficient business model, innovative products, and a diversified team and culture. Today, I especially want to talk about having the right strategy and strong execution. Before 2009, we had only two core businesses, China and the global commercial business. In emerging markets and consumer business, our foundation was very weak. Although there was huge room for these areas, we had not established any business scale or capability. So during the financial crisis, this caused us to be at a big disadvantage versus our competitors. We had the lowest growth rate and the largest loss. Over the last three years, we locked in on our clear protect and attack strategy. On one hand, we protected our core businesses, allowing us to maintain the overall profitability of the company, and have enough resources to invest in expansion in high growth areas. On the other hand, we attack the growth businesses, gaining scale rapidly in emerging markets, in global consumer business, and in mobile internet and the digital home area. In this way, we incubate new core businesses and profit pools. Over the last three years, we executed this strategy very well to build the scale rapidly in these three new areas and drive hyper-growth. Compared to year 2008, last fiscal year, we doubled our PC revenue in emerging markets outside of China from $2.4 billion to almost $5 billion. Our consumer PC business in mature markets grew more than four times since our mobile internet and the digital home business was established in 2011. In just one year, we doubled our revenue to over $1 billion last fiscal year. Last quarter, revenue from the mobile internet business surged to almost $600 million, which accounted for 16% of our China overall revenue and 7% of our global revenue. We are still growing rapidly even today. Last quarter, in emerging markets outside of China, our PC volume grew by 39% year-on-year. That is a 36 point premium to the market. Our global consumer business volume increased 43% year-on-year, outgrowing the market by 42 points. Our smartphone business in China grew 44 times year-on-year. Three years ago, these three new businesses combined for 32% of our overall revenue. But now they account for 45% of our overall business. Together, they have become balanced pillars to support our overall performance, allowing us to maintain strong growth even as China and global commercial slow down. For 13 straight quarters, we have grown faster than the market. In comparison to our major competitors, we have grown the fastest for 11 straight quarters. Even with a weak macro economy environment and the PC market seeing negative growth, these new areas still shine, especially smartphones and emerging markets. According to IDC's forecast, from year 2012 to 2014, China's smartphone market will have a compounded growth rate of 20%. For emerging markets outside of China, the compounded growth rate for PCs reaches close to 10%. So we are confident that through deeper implementation of our strategy, we will seize these growth opportunities and continue to grow faster than the market. To maintain growth in this challenging environment is difficult. To do that while also improving profitability is even harder. But at Lenovo, we did it. This was also because of our strong execution of the strategy. China and global commercial are our two core businesses. Even today, they are still the mainstays of our profit. Over the last three years, when the overall market grew nicely, we actually made our protect battle more aggressive. While protecting profitability, we also gained market share. Now in this challenging environment, we will prioritize maintaining healthy profitability. Last quarter, even with the slower growth in China, we were able to maintain a healthy segment operating margin of 6.5%. At the same time, our global commercial business also delivered very solid profitability. Through fully leveraging our commercial area advantages in brand, channels, and customer base, we proactively expanded into high-margin enterprise businesses. Most recently, on August 1, we formed a strategic partnership with EMC. This will further enhance our advantages in server and storage areas. At the same time, our new businesses all progressed in line with our strategy. When they reach scale and reach certain market share, like double-digit market share, they will all are able to enter a phase of profitable growth. Last quarter, our emerging market outside of China almost broke even. Our consumer business outside of China showed very good GP margin improvement. The end game of all those new businesses should be the same, to make our new businesses as profitable as our core business today. Although the environment we are in is full of challenges, we are confident that through leveraging our core strength and continuing to execute our protect-and-attack strategy, we can achieve sustainable growth and healthy returns to our shareholders. We will continue to maximize our strength in research and innovation. In the second half of the year, we will launch wave after wave of exciting products. We will continue to build our brand. We are now the official PC sponsor of the National Football League. This will significantly lift our brand image in North America. In addition, we will continue to leverage our efficient business model and diversified team and culture, which are also competitive advantages of us. Looking ahead, we remain optimistic about the future of PC Plus and are on a course to become the leader in this industry. We will deliver investors a solid long-term return. Thank you, everybody. I now turn to our CFO, Weimin. Weimin, please. Thank you, Yang Qing. I will take you through Lenovo's financial and operational performance in quarter one. Next chart, please. We continue our profitable growth momentum, and our PC shipment growth in quarter one was up 24%. More importantly, we have a balanced growth across the board with particular strong growth in consumer and emerging markets. PC sales were up 25% year-to-year to $7.1 billion. Our strong performance in mobile internet business helped contribute more to the group's strong sales growth. Revenue from the mobile internet business was up 1.7 times year-to-year to $587 million. Sales of other goods and services were $282 million. Group sales grew 35% year-to-year to approximately $8 billion. Gross profit was about $959 million, up 30% year on year. Gross profit margin declined slightly to 12% year-on-year, largely due to an increase in the mix of consumer products, including our mobile internet products. However, our gross margin improved quarter-to-quarter, largely due to better scaling and component price benefits. Operating expenses increased to $777 million, and E/R ratio was down to 9.7% year-on-year from 10.4% a year, but up quarter-on-quarter from 9.4%. The year-on-year improvement is due to better scaling benefits, while the quarter-on-quarter decline is due to investment in promotion, branding, and R&D. Operating profit in quarter one was $182 million, up 48% year-on-year. Pretax income was $185 million, up 50% year-on-year. The effective tax rate for quarter one was 22%, while our quarter one tax rate is in line with our F rate run rate, which is around 20%-25%. This is higher than that in quarter one last year. The low tax rate last year was due to a reversal of certain provision made in previous years. Profit attributable to equity holders is $141 million, up 30% year-on-year. Now, let's take a look at the balance sheet in the next chart. Our balance sheet in quarter one remains strong. Non-current assets were at about $4 billion, similar to the level at 31st March 2012. Changes in current assets and current liabilities were due largely to increased activities during the quarter. We had net current assets of around $306 million at the end of June. The non-current liabilities were around $1.8 billion. Let's go through the cash and working capital in the next chart. Our cash flow and cash conversion cycle continued to be healthy in quarter one. Our net cash reserve remains strong at $3.7 billion, slightly above $3.6 billion of the same period last year. The quarter-on-quarter drop is mainly due to changes in the cash conversion cycle. Inclusion of the NEC joint venture and Medion in the balance sheet drove the main changes in cash conversion cycle from year-on-year perspective. Inventory days in quarter one were 19 days, against 16 days last year, as we continue to expand into more emerging markets and consumer business outside China. Days receivable increased by five days to 34 days, largely due to expansion into more emerging markets and consumer business outside China. They remained roughly flat quarter-to-quarter, increased by a day. Days payable was 66 days in quarter one. The decrease year-on-year was again due to the inclusion of NEC joint venture and Medion. Our expansion in the emerging markets, as well as the changes in payment terms with some suppliers. The decrease quarter-on-quarter was largely due to seasonality that quarter four is usually a low season. The change was in line with our normal trend. As a result, the cash conversion cycle in quarter one was a negative 13 days. Again, negative 27 days last year and negative 17 days last quarter. Next chart, please. The group has record high shipments and market share in quarter one. We have an even more balanced business by geography and products. Since quarter one this year, we have changed our organizational structure. We will accordingly report our geographic performance under the new four geographic classification. We have enclosed in the appendix the historic performance for your reference. China. We continue to perform well in China and further expanded our market share in PC and mobile internet business. Our PC sales increased around 13% year-on-year to about $2.97 billion, driven by our strong growth in emerging cities. Operating profit increased to $192 million, while margin remained stable at 6.5% year-on-year and up from last quarter. Our mobile internet business in China continued to show strong growth and began to play a part for our continued high growth in China. Sales increased to $549 million, which accounts for 16% of our China sales revenue in quarter one. This strong growth helped contribute to the group's strong 24% sales growth year-on-year to $3.5 billion in China, despite the slow PC market growth. We will continue to invest in the PC Plus area to drive future growth. APLA. Sales were up 72% year-on-year to $1.7 billion in APLA, and quarter one was profitable against an operating loss of $4 million recorded in the same quarter last year. We expect the new hub in Brazil will help accelerate our expansion in the country over time, and therefore contribute to the improvement of the region's profitability over time. EMEA. Sales grew 62% year-on-year to $1.6 billion, and we recorded profit in all regions. We are particularly pleased to see the EET region to show the first time profit in quarter one. We began to see the positive impact of our investment in the region, both operating profit and margin improvement year-on-year and quarter-on-quarter. North America. Sales grew around 7% year-on-year to $1.2 billion. Operating profit declined to $46 million this year from $52 million last year, but improved from $33 million last quarter. The year-on-year decline was due to our continued investment in consumer business, product mix change and competition, and the quarter-on-quarter improvement was due to better scaling benefit. Next chart. We have a more balanced product portfolio helped by expansion in the mobile internet business and other PC-related business. We had a record high market share in notebook at 15.4%. Notebook unit shipments and sales were up 27% and 23% year-to-year, respectively. Unit shipments and sales in our desktop business were up 21% and 26% year-to-year, respectively. Our market share in the worldwide desktop market increased to around 14.4%. Our MIDH business also saw strong performance, up 173% in sales led by the smartphone business. 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 want to give you some color on the market outlook. Despite uncertainties in the global economic conditions impacting the PC market growth in the short term, we will remain focused to outperform the worldwide PC market in a profitable way. We have continuously achieved that over the last few years and remain confident to continue such trend. We execute our protect and attack strategy well. Our core PC business is performing well, and our strategic investment in mobile internet have started contributing to the group growth in sales and improved profitability. New products in Ultrabook and the new Windows 8 operating system will help drive demand later this year. That will also benefit us. We will stay focused on balancing the cost initiatives and growth opportunities. We will continue to invest in core competence building, product innovation, and promotion, especially to ensure successful launch of new products related to Windows 8 and Ultrabooks, and also new MIDH products. We have a healthy balance sheet and will continue to be prudent in our cash management to create shareholders value. In addition, we will continue to look for M&A opportunities in areas that can help us to accelerate our growth. Finally, we remain on track to drive growth to transform ourselves to a leading PC Plus company. Thank you very much. We will take your question now. Thank you, Weimin. 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 to just two questions at one time. Please state your name and name of your company before your questions. All the questions today will be in English only. Operator, will you please give us your instructions? We will now begin the question and answer session. If you wish to ask a question, please press star followed by 1 on your telephone keypad and wait for it 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 Thompson Wu from Credit Suisse. Please ask your question. Thank you. Good morning, guys. Good quarter. Just had a quick question. I guess, how is Lenovo kind of seeing demand shape up in the second half of the year, globally and in particular with China? That's my first question. I have a quick follow-up as well. The question is how long? Demand of cost of the second quarter. Okay. In short term, there is some uncertainty in China overall macro economy because of the tighter real estate bubble control and weak exports because of the worldwide weak macro economy. But from long-term point of view, I am still optimistic on China economy because we still have 50% population are living in the rural area. The move from rural to the city will continue. And also our PC penetration rate is still much lower than the mature market like in Europe and the U.S. From Lenovo competitiveness and the strategy point of view, I am even more optimistic. If you look at last quarter's Lenovo's performance in China, although the PC market was negative growth, our PC revenue was still growing by 13% year-on-year. That is because we are very strong in the low tier cities in the rural areas. There our market share is even high. In those areas, we still can see double digital growth. If you look at our overall revenue growth in China, actually we grow by 24%. That was driven by our mobile internet strategy. Our smartphone grow by 44 times of last year than the same period of last year. That is because we have the strategy to attack the mobile internet and the digital home area. In summary, even though the macro economy and the PC industry in China are not that optimistic, we are still confident on Lenovo's performance in next quarter and in this fiscal year. Thank you. Okay. Great. Is there enough time for me to do one quick follow-up? Yes, please go ahead. Please, Thompson. Thank you, Gary. I think this is better suited for Weimin. I just noticed that in the quarter, inventories had ticked up quite a bit sequentially. Can you kind of go through the elements of why inventories were up quarter on quarter? Yeah, Thompson. Thanks. It's Weimin here. I think the increase in inventory, obviously, there is a SKU element. As you know that, I think if you really look at the SKU of Lenovo, we actually have the smallest in Q4, and then Q1, Q2, and we have the biggest in Q3. Therefore, inventory actually is a reflection, I think, of the quarter going forward rather than sort of, I think you should really not comparing, I think the sort of balance sheet number. For us, we actually look at the way that we control the inventory or manage the inventory as is really looking at weeks of sales, I think generally, and this is actually in a very healthy position. I think the increase in inventory under our management system is actually totally normal, is actually a reflection of our business going forward. Okay, thank you very much. Next question, please. Your next question comes from the line of John Shao from Macquarie. Please ask your question. Good morning. Hi. Thank you for taking my questions and congrats on a very strong set of results. Could you please elaborate a bit on your recent partnership with EMC to talk about the market share you have in the server market in China, and how this partnership with EMC in the storage side will help you to gain share in the server side, and when this partnership will start to contribute some meaningful revenues to you, and how much revenues we should be expecting? Thank you. Right. Well, this is Weimin. I think that maybe I answer the numbers first. I think that probably it will not have any material increase in the revenue and therefore profitability in the current fiscal year. I think what our cooperation or strategic relationship with EMC, I think comprises of three parts. I think the first one is, I think we actually have a cooperation in building our servers, in particular, the product design capability, where that we actually form a joint lab to develop products, part of which we actually sell it into EMC in their product as well as we will be able to sell it to third party. This is obviously a worldwide market. I think it is currently we have a Business in China, but we do not have a significant server business outside China. That actually gives us a lot of credibility of bringing in products to customers. That is number one. Number two is, we have a joint venture with them in the NAS, the storage business, which primarily, I think give us an exposure in the storage area. This joint venture probably will not be closed until two or three months, because we obviously need to get some regulatory clearance. The third element of that, we actually will be able to sell on a joint brand basis, I think the high-end storage EMC products, I think initially in China, and if successful, we will probably be able to extend in other countries. So exactly give Lenovo a full range. Obviously, outside our strong PC presence, I think to be able to get into the storage, as far as into, I think the server business. As I said, I think from a number perspective, it probably will have no material implication in our current fiscal year. I think partly because, I think in the server side, although we begin the cooperation in developing products, I think as soon as we can, but products will not come out the day after. So in the current fiscal year, that probably will not be significant. The storage joint venture, as I said, it will take probably two or three months, to clear the regulation, and if it happens, it probably will happen a couple of months in this fiscal year. As a result of that, it would not be significant. But the important thing is, I think is really a very strong strategic alliance for us to link up with a significant storage IT group around the world to give us the credibility, as well as the ability to develop into a server market, which obviously will have much better margin and will have a very strong client base in the PC, especially in the commercial area, that actually give us a very solid foundation, I think, to expand into that area. This is great. A quick follow-up, Weimin. What's the market share of servers inside China right now? It's about 15%. 15? It's about 15%. We are behind the top three players. We are the largest domestic player. Domestic player. Domestic player. Over 3 to 5 years, this deal can give us a couple of billion business. Yes. A couple of billion business. Yes. So. I think Yeah. Yeah, from a number perspective. On a number basis, probably next year we'll begin to show numbers, definitely initially on the storage side. I think on a joint brand, I think selling into the Chinese enterprises of the high-end storage as well as the NAS storage product. On the server side, we probably begin in this, I would say maybe in the second half of next fiscal year, because as I said, I think the joint lab will actually have the engineers coming from EMC, working together with our engineers in China, to develop a very strong portfolio, so that we can actually sell into EMC for their products as well be able to sell into the third parties. Okay, a couple of billion. That sounds great. Thank you very much, guys. Not one year. Not in one year. That's right. Don't make a mistake. Next question, please. Next question comes from the line of Gokul Hariharan from J.P. Morgan. Please ask the question. Yeah, hi. Thanks for taking my question, and congrats on a good quarter. Just a couple of questions. First of all, on the smartphone side, can you give us some roadmap in terms of how you think this business is going to evolve? The market share gains seems to be pretty strong. When do we expect the losses, which is running at about $20 million per quarter to start to narrow? Is that something that we could expect in the medium term, or you're not going to focus on that in the near term? Second is, also, if we look at the different geographies on the PC side, is it only Latin America, which is now a drag on the profitability? Or asking it a different way, is it only Latin America which is losing money right now, or are there any other geographies which are losing money after Eastern Europe and Turkey turn profitable? Thanks. Yeah. Regarding the smartphone, I think we are building the core competence in this area in China. Now we provide a much richer portfolio than our core competitors, those multinational competitors. Also, we have a much broader channel network and the relationship with the telco companies. Also, our development speed is very fast. We emphasize on the time to market and the time to volume, so that we can launch the advanced Devices than any of our competitors. That's why we have been so successful in this area. Another reason is not only we use the in-house development, but also in-house manufacturing. That gave us the cost advantage, the price advantage, so we can compete with any of our competitors. Also, we are building the 3C storefronts across China. That would help us to expand this business. Definitely in short term, we're not focusing on the profitability, but with the current scale, we definitely believe we have a good opportunity to make money even in the smartphone area. In the past, we sell more units through the telco companies. But now, our open market mix is growing. In those markets, our GP margin is much better than the sales through the telco companies. We are very confident. In a couple of quarters, we can turn around this business to start making money. This is about the smartphone. Regarding the PC outside of China, actually, in all rest of emerging markets, excluding China, we made money last quarter. In most of the regions, we made money. Probably, only one or two regions. Definitely Brazil is one of them. We are still losing money. That's the situation in emerging market. In mature markets, North America, Western Europe, and Japan. Or even Australia and New Zealand, we are making very decent money. Particularly in North America, because we sell more commercial PCs in that market. So we can have very decent GP margin and net profit in the commercial segment. That's, I don't know whether that answered your question. I think Yang Yuanqing is Let me maybe give a little bit more color, I think by way of numbers. I think Yang Yuanqing mentioned about the change of mix. I'm talking about the smartphone business in China. I think that, as Yang Yuanqing said, I think the two data points I want to give is the margin that we sell through the open channel versus the margin that we sell through operators, the difference can be nearly 3 to 4 times. That's really number one. And number two is, I think the change in mix. We continue to see that, I think the mix, I think selling through open channel increased. I think it's a very rough numbers. I think the mix that we see that, I think sort of improving probably by 5, 10%, I think over the quarter. The more important thing, I think you mentioned about the sort of operating loss that you saw. I would say that because we actually have a strategy of investment for growth, I think provided, I think that the overall growth actually maintain an improvement on profitability. The investment that we actually put in, I think in terms of really helping us to improve our mix in the open market is you can actually measure it by weight of storefronts. We actually increased nearly about 25%, now reaching over 10,000 storefronts in China. We will continue to invest of that, and that actually, I think from an accounting perspective, you may actually see a mismatch because we actually keep investing heavily our storefront, and the benefit will come in with a higher mix in the open market that actually attract, as I said, three times the gross margin. Therefore, I think as Yuanqing said, while we've been actually growing very fast, I think the two prongs, the hybrid approach, on one hand, we actually leverage on the capability of the telecom operators to distribute our product in volume. At the same time, we actually increase the number through open channel at a much higher margin. With a result of that, we obviously are very confident that we will be able to achieve, I think, a breakeven and will become, as Yuanqing already said, that the smartphone or the MIDH business today begin to show as a growth driver, I think of the overall growth Lenovo business. Yeah. The trend will be very clear. The open market will dominate the smartphone and the total phone market. In the past one or two years, operators have been very aggressive to purchase smartphone by themselves. That have a significant negative impact on their profitability. Probably in the future, they will not be that aggressive. That means the open market will become bigger and bigger. In the open market, it is definitely Lenovo's stronghold. We have a much stronger brand awareness and reputation in the open market, in the public. We have much wider channel networks. Also, we are building the new 3C storefront now across China. Also, our product strategy is different from our key competitors. They only use one model to cover all the segments. We don't think that this strategy is right for China, particularly for the low-tier cities and the rural areas. We are providing much richer product portfolio. This year, we will launch more than 40 models over a year. We believe this is the right strategy for China. Okay. That's very helpful. Thank you. Thanks, Gokul. Next question, please. The next question comes from the line of Arthur Hsu from UBS. Please ask your question. Hi, this is Arthur from UBS. Thanks for doing the call in the late evening. Two questions. First question is about China again. I think earlier, Yuanqing mentioned that the slowdown is more temporary. But I just want to bring your attention that actually for the September quarter, it is going to be an even tougher comparison, because last year, you did even better. And this year, in terms of this Windows 8 transition, we all know it will not really happen until late October. I am just trying to see if you could share with us, if the China market, this slowdown is going to lengthen. What could you change your strategy to handle a situation that could extend this kind of weakness? That is my first question. The second question is about Surface. I think some of your competitors showed worrisome about a potential threat. But obviously, you seem to be more confident. And yesterday, there was some news about maybe the product could be priced at only $199. Could you take this opportunity to share with us your view about a potential impact that this product could bring to the market, and how are you going to face the competition? Thank you. As I said, there is some uncertainty in short term in China. But the long term, we are optimistic. But even in short term, I do not think this quarter will be worse than the last quarter. This is about the market. We are even more confident on Lenovo's competitiveness, and our strategy. Not only we will leverage our mobile internet strategy to grow our smartphone and other mobile internet business. Even in the PC area, we think we still can outgrow the market. Definitely. We also protect our profitability in this core business area. Regarding of the Surface. To be frank, we are not that worried about that. Firstly, Microsoft is still our strategy partner. We are very optimistic on the new Windows 8 launch. We will fully leverage that to launch our new product, to take the market opportunity. Although we do not like Microsoft provide the hardware. But even their started its hardware business. We think that for us, that just add one more competitor. It is just one of our many competitors. We are still confident in ourselves. We are providing much better hardware than our competitors, including Microsoft. They are strong in the software, but I do not believe they can provide the best hardware in the world. Lenovo can. Yeah. Arthur, just so I think maybe I, again, sort of elevate numbers to substantiate what Yuanqing said. I think in particular on the sort of, I think what arguably people think that China is going to slow down. I think Lenovo, I think disregard about the market environment, you can actually sort of take it, I think that we over the last few years, when China did have high growth as well as low growth. In fact, the China slow growth is not only in quarter 1, but also in our quarter 4 last year. I think, look at the numbers. I think China was slow. The China growth probably negative in quarter 1, and we are growing 13%. In fact, we actually have, because of our capabilities in China in terms of product as well as distribution capability, that actually give us even more strength to compete more effectively, I think, than our competitors as a result of that. Not only we'll be able to increase our business, I think on a year-to-year basis, it's 13% versus the market of negative 2.8%. So that itself is not a problem for us. Obviously, I think that is because of our strong execution and the right strategy on holding our stronghold in, I think, the world largest PC market. The one other point that, again, is, I think one should not forget is, I think Lenovo today is actually moving from a PC to a PC Plus. In that we actually have another strong segment coming to implement the growth. Again, look at the smartphone business. I think the China smartphone business is growing over 100% year to year. We actually see, I think the initial success that we had over the investment for the last few quarters, and that all obviously together as a whole, I think we've been growing over 20 something percent year to year. You can actually see that, I think the slowdown in the PC market in itself does not necessarily have any significant impact on us. On top of that, from a Lenovo Group perspective, you see that even the entire worldwide PC market is slowing down. You can actually see our overall increase in volume, in revenue, as well as improving profitability. So, although that one obviously would like to have a market with a high growth rate, but it doesn't necessarily have any impact on our overall capability to demonstrate that we will continue to improve our profitability as well as increase our business. Well, thanks for the clarification. Congrats again on the good result. Thank you, Arthur. Thanks, Arthur. Next question, please. The next question comes from the line of Kirk from Barclays Capital. Please ask your question. Yeah. Hi, this is Kirk from Barclays. Hello, Yuanqing, Weimin, and Gary. I actually have a question on the profitability, and I apologize that I know the same question has been asked earlier, but because the China PC business actually account for over 80% of your profitability, the China PC market is actually still quite important. I do understand that you're executing well and you're getting market share, et cetera. But I think the fact is that in the second quarter, in the June quarter, the China PC shipment was actually down year-on-year. I'm just wondering that for the September quarter, do you expect to see the China PC shipments, I don't think it should be better than June quarter, but do you see that at least going back to positive growth year-on-year for September quarter, or do you still see some weakness in the near term? I just said, although we're not that optimistic on September quarter for the China PC market, but we think it will not be worse than last quarter. That's my assessment. Also, we believe Lenovo, we can protect our profit. We are very confident on that. Weimin, actually, second quarter- We definitely have the capability. seasonality should be, from seasonality point of view, should be higher than the last quarter. That's right. Quarter 2 is a better quarter than quarter 1. Yeah. So we definitely can ship more volume in China next quarter. And also, as I said before, we will prioritize profitability first in those stronghold area, core business area. So we definitely would protect our profit in China and in global enterprise segment. Okay. Yeah. Again, I apologize. I know the same question being asked because it's very important. Just a quick follow-up. I noticed on your financial statements on the headquarter allocation, for the June quarter, you have $68.8 million of headquarter allocation. But the same time one year ago, I guess the question for Weimin, is $93.5. So I see a big decline of headquarter allocation. Can I please ask you the reason for the decline, please? I think you probably, I get Gary to find out exactly where you find that. I think you probably refer to the unallocated headquarter expense. Is that right? Exactly. Page nine. Yeah. I think that we probably have more expenses be able to allocate to the geography. I think the other reason is probably the, I think the general principle, as I said, I think in the past, we actually have a lot of marketing activities, because there's really benefit to the group. We don't actually allocate, I think, to the geography. Now, I think moving forward, because we actually now have four geography organization. I think the geography actually have a much more better sort of work together, have a better say on how the money is spent. We actually have more of in the past, I think put it in the headquarter, now is actually in the geography. Okay. That makes sense. Okay. Thank you again. Thank you very much. I'm marrying sort of marketing. Okay. Thank you again. Appreciate it. In view of time constraint, we probably will take the final questions. The last question comes from the line of Jenny Lai from HSBC. Please ask the question. Thanks. I am the lucky one. Congratulations on the strong results. My question is actually on the. We have been seeing the market share going up to number 2 position, and most likely, hopefully, you will become number 1 very soon. With that, how do you see the long-term operating margin target? Because, for key competitors like especially U.S. competitors, their operating margin is still significantly higher than the company. We are actually interested to know, how should we look at your long-term margin trend? As I said in my presentation, now actually we have five businesses, key businesses. China, global commercial enterprise business, then the rest of emerging market, mature transactional consumer, then MIDH. Among these five businesses, our China business is very healthy. Last quarter, actually, we delivered 6. In China PC business, we delivered 6.5% operating margin. In the global enterprise business, although it is not as high as our China business, but it is still very decent profitability business. For other three business, they are developing business. Before, we have very low market share in rest of emerging market, in global transactional and particularly in the consumer segment. MIDH is the same story. During the developing period, definitely, you cannot count on the profitability. But now, our rest of emerging market, as we said before, has already been breaking even last quarter. Broken even last quarter. In the global consumer segment, last quarter, we significantly improved our GP margin. Over time, we are very confident we will turn around this business again. MIDH, we have already discussed our plan to improve the operating margin, given we have more opportunity to sell in the open market. We are very confident as we will improve our operating margin in that area as well. Our end game for this developing business, for this new business, definitely, is similar to our core business. We expect we would deliver the very similar operating margin over time. Even in short term, we have seen the improvement in those areas. We believe we will give our shareholders the better return for the year-over-year. Sure. That is my expectation, that is my assessment. We need- Now, Jenny Lai, I think maybe I give you again a little bit more color. Obviously, we know that I think the PC industry, I think you have certain benchmark, especially when you are in the pole position. The operating margin, given we have more opportunity to sell in the open market. We are very confident as we will improve our operation margin in the other area as well. Our end game for this developing business, for this new business, definitely is similar to our core business. We expect we would deliver the very similar operation margin over time. But even in short term, we have seen the improvement in those areas. We believe we will give our shareholders the better return for the year we issue. Yeah. That is my expectation, that is my assessment. We need, yeah. Now, Jimmy, I think maybe I give you again a little bit more color. Obviously, we know that I think the PC industry, I think you have certain benchmark, especially when you are in the pole position. We definitely, as Jianqing said, that I think really looking at just on the PC alone, I think that we obviously have geography, which obviously much higher than, I think the PC benchmark, but at the same time, we are growing very fast in areas where we do not necessarily being number one, but a lot of those are already in more than 10%. As we actually been explaining to you as well as to the market, that when we reach the 10%, we have to scale, and we obviously will then focus on profitable growth. I think on the PC, we obviously have plan or action plan to actually move ourself, I think towards the benchmark for 5% operating margin. But at the same time, we actually would not do it overnight. We actually will improve, as Jianqing said, quarter to quarter. I think taking into consideration the amount of investment we need to invest into another high growth area, moving Lenovo to a PC Plus, I think namely the MIDH, the smartphone business. At the same time, you also see that our effort really building up another high margin business supplementing to our stronghold in PC commercial, which is the service, which probably will come in one or two years time, become more significant. So you would expect that we will continue on one hand in growing our business, at the same time, improving profitability. We definitely will not reduce our profitability for growth. I think that is for sure. We will continue grow the company as well as improve our profitability over time. Take a balanced view as to, I think our protect and attack, you probably hear a number of times that we will protect our profit pool, as well as enhance our profit in those areas. At the same time, we are definitely being very, very diligent in investing into the high growth area so that I think the company will be in a very healthy, sustainable growth position. Yeah. So I don't think that it's fair to say so we sacrifice the profit to- To grow to grow. That's not fair. Yeah. Even for current leading company, when they have developed the new market, like China market a couple of years ago, I don't think they could make money. Yeah. This is a developing period. Yeah. But definitely, we should thank our shareholders, our investors. You are tolerant for us to, in short term, we don't make too much money. So that we can have the resource to be more aggressive to attack the new business, to attack the new market. But definitely, from long term point of view, we must return our shareholders. Yeah. From now on, actually we are very confident to quarter-on-quarter, year-on-year, we can give shareholders the better return. Yes, sure. Jianqing, in fact, I should actually add that probably we have been doing it for the last three years. I think starting a couple of years ago, when the situation is exactly like that today, when China growth is actually lower than the rest of the world, when consumer has a much higher growth than commercial, I think Lenovo recorded the first time in its history about losses. We obviously regrouped ourselves, got the right strategy, execution, and from then onwards, year to year, I mean, obviously we have quarterly SKU. But year to year, we have been doing for the last three years, that we will continue to grow our business. Definitely in specific area like PC, we will continue outgrow the market. At the same time, we actually improve our profitability. We never, I think definitely for the last three years, we have sort of sacrificed profitability for growth. And definitely we will continue to do that. Yes. If you look at our past three years profit performance. Yeah almost every quarter. Every year, because we are quarter SKU. Quarter 4 is lower than quarter 4. year to year comparison. Yeah. We improve the profitability. Yeah. Okay. Okay. Thank you. Thanks. Thank you. Okay.