Earnings Call: Q2 2012

Nov 2, 2011

Good afternoon. Welcome to the webcast of Lenovo's Q2 in fiscal 2012 earnings announcement. This is Gary Ng, VP in Investor Relations at Lenovo. Before we start, let me introduce our management team with us today. First, Mr. Liu Chuanzhi, Chairman of Lenovo. Our CEO, Mr. Yang Yuanqing, and our CFO, Mr. Wong Wai Ming. We'll then first start with our management presentation. After that, we'll take your questions. Now let me turn it over to Yuanqing. Thank you for joining us. I'm very excited about another record-breaking quarter. Today is also important for another reason. On behalf of Lenovo, and on a personal level, I want to talk about Chairman Liu. Today, he announced that he will step down as Lenovo Chairman to focus on new opportunities and bold new goals at Legend Holdings. Clearly, he's the founder of our company and the architect of our business and our culture. I'm honored that with his support, I have been asked to lead Lenovo as both the Chairman and the CEO. This will ensure consistency in our strategy, our culture, and our execution. As I take on this new role, I will follow the footsteps of a great business visionary. I will continue to learn from him and build on what he has created. We will continue to have the same management principle, the same culture of ownership, and the same long-term aspiration for Lenovo. I know that Legend Holdings will now be his focus. But Lenovo will always be part of Chairman Liu, and Chairman Liu will always be part of Lenovo. I want to thank Chairman Liu for all he has done for our company. We look forward to making him even more proud of Lenovo for many years to come. Now onto our great second quarter. We have been the fastest-growing major PC company for eight quarters. This quarter, we grew by 36% year-on-year, seven times the market rate. Achieved a record market share of 13.5%, record shipments of 12.5 million units, and a record revenue of $7.8 billion. We outgrew the market in almost every region, every customer segment, and every product segment. In the last two quarters, we have made two unbelievable steps forward, surpassed both Acer and Dell, and reached another important milestone. From number four in PC market to number three, and now number two for the first time. While gaining market share, we continued to improve our profitability. Our net earnings increased by 88% year-on-year to reach more than $144 million. As we have said before, we are continuing to build our long-term competitiveness by investing in innovation and branding. Even so, our E2R ratio dropped almost half a point quarter to quarter. Now, let's look at each of our strategic areas more closely. In China, the world's largest PC market, we continue to extend our lead. We outgrew the market by more than 10 points, while increased our segmented profit by 35% year-on-year. As an already dominant player in China, this is truly an impressive performance. But we will not stop there, and we will continue to drive for more growth and better profitability in China. In the rest of the emerging markets, we once again reached a new record high market share of 8%. We grew 38% year-on-year, more than three times the market rate. With this, we further strengthened our number one position in global emerging markets. More impressively, we gained share in every region. Particularly in India, we gained 3.5 points year-on-year. In Russia, we grew more than 2 points to reach double-digit market share for the first time. Our focus in emerging markets is to continue investing in share growth. Meanwhile, for the countries that have reached the double-digit market share, we drive for profitable growth. I am especially proud of the performance of mature markets. We had a fantastic quarter. We delivered almost $100 million, more than doubled our segmented profit year-on-year, and were profitable in all regions. More impressively, for the first time, mature markets contributed more revenue than China did. While increased profit and revenue, we also gained share in all mature markets to reach a record high market share of over 9%, especially in North America, where we have returned to the top five PC companies in United States. In addition to strong organic growth, our acquisition activities have also contributed this excellent performance as well. Both of our integrations with NEC and Medion have been successful. Both of these additions are bold moves in line with our strategy. In most M&A cases, business will drop after the merge. However, our business not only did not slow down, but actually grew faster than the respective market rates, while making decent profit in the first quarter after closing. Now we are number one in Japan and number three in Germany. These excellent results demonstrate that M&A has become a core competence of Lenovo. We know what kind of companies to acquire, and we have the knowledge and the experience to integrate them. Outside of the traditional PC area, we also had very encouraging performance from our mobile internet business, which we view as the extended PC family. We continue to see strong LePad sales in China, more than doubled our sales volume quarter to quarter. We shipped 168,000 units last quarter. Now, we are the number two player in China market, with a significant lead over all other Android-based competitors. Outside of China, we launched both IdeaPad and ThinkPad tablets. Our enterprise-focused ThinkPad tablet has received very good feedback. Meanwhile, our smartphone business again outgrew the market and gained 1.6 points of the market share in just one month. This growth was fueled by our newest smartphone, the Lenovo A60, which has increased its weekly run rate by four times since launch. We expect our mobile internet business to continue its strong momentum in the upcoming holiday season. Clearly, our protect and attack strategy is working very well. In addition, diverse talents, global culture, business model, and innovation are also our success factors. I truly believe that Lenovo is one of the most diverse companies in the world. Our Lenovo executive committee, comprised of nine members, comes from six countries. Because of our success, more global talents are joining us. Recently, Mr. Gianfranco Lanci, the former CEO of Acer, joined us as a consultant. We also welcomed Idei-san, the former chairman of Sony, to join our board. Even with operations in over 160 countries, we are able to create a truly powerful and unified global culture, which is based on ownership spirit. Do what we say and own what we do. Our new business model, which caters toward the specific needs of relationship and transactional clients, just got even more support from our vertical integration move. Last quarter, we announced a joint venture with Compal for our notebook production. This move will greatly enhance our vertical integration effort. A good strategy and a talented team still need equally attractive products to make it work. At Lenovo, we are very proud of our innovation capability and achievements. Our results speak for themselves. More specifically, we have successfully passed HP to become the number one player in worldwide commercial notebook space, and passed Dell to become the number two in worldwide overall desktop segment, as well as number three in global consumer sales. We won't stop there as we march towards our aspiration. Looking ahead, we are deeply committed to continue building our core competitiveness and investing in branding and innovation. By doing so, we will further improve our GP margin and increase our PTI. Overall, we are very optimistic about the future of the PC industry and are fully committed to the whole PC industry for the long run. Not only we want to become the leader in traditional PC market, but also we are confident that we will accomplish much more in those extended PC categories, such as tablet and smartphone. Thank you, everybody. I now turn to Wai Ming. Thank you, Yuanqing. I will take you through Lenovo's financial and operational performance for the fiscal second quarter. Next chart, please. Yuanqing just shared with you that we have had another milestone quarter with balanced growth across geographies, customer, and product segments through the solid execution of our strategy. Group sales in quarter 2 were at $7.8 billion, up about 35% year-to-year. PC sales were up about 32% year-to-year to $7.3 billion. We have consolidated a full quarter of revenue from NEC JV and two months revenue of Medion in the quarter 2 PC sales revenue. Excluding NEC and Medion, we had over 25% year-to-year shipment increase. Revenue from the mobile internet business was $282 million, up 30% year-to-year. Gross profit was at $948 million, up about 60% year-to-year. Gross margin was 12.2% in quarter 2, up from 10.3% last year, but dipped slightly from 12.5% last quarter. The slight quarter-to-quarter dip is largely due to increase in consumer business after including NEC JV and Medion. The year-to-year margin improvement is largely due to better scaling and increased Think product and geography mix, which allowed us to continue our investment to drive future growth. Operating expenses increased to $782 million, which included $146 million in advertising and promotion during the quarter. We expect this investment in marketing will help us to improve our brand awareness around the world, which enable us to further improve our margin over time. The E2R ratio was 10%, up from 8.4% last year, but was lower quarter-to-quarter. We expect the ratio to trend down in the next few quarters as we enjoy better scaling benefit from revenue increase resulting from unit shipments growth. Operating profit in quarter 2 was $166 million, up 55% year-to-year. Pretax income was $165 million, up 62% year-to-year. The effective tax rate for quarter 2 was 12.3%. The lower tax rate was mainly due to better PTI margin and reversal of provision previously made. Profit attributable to equity holders was $144 million, up about 88% year-to-year. Basic EPS improved to USD 1.41 cents from USD 0.81 cent last year. The board of directors today meeting declared an interim dividend of Hong Kong 3.8 cents per share, representing an increase of approximately 46% compared to last year. Next chart, please. Our strong operating performance has also helped our balance sheet and cash flow. Our balance sheet in quarter 2 remains strong. Non-current assets were about $3.8 billion. The increase from that of 31st March 2011 was due to consolidation of NEC JV and Medion into our balance sheet this quarter. Changes in current assets and current liabilities were due largely to increased activities during the quarter. We had net current assets of around $134 million at the end of September. The non-current liabilities were at around $1.6 billion. Next chart, please. Our cash flow and cash conversion cycle continued to be very healthy in quarter 2. The net cash reserve continued to improve to about $4 billion against $2.3 billion last year, largely due to increase in sales revenue. We continue to do well in managing our working capital. Inventory days improved to one day in quarter 2, while days receivable increased by five days to 33 days, largely due to consolidation of NEC JV and Medion this quarter and our growth in emerging markets outside China. Days payable improved by two days to 71 days, largely due to increase in our outsourcing to ODMs. As a result, the cash conversion cycle in quarter 2 was at negative 20 days, again, negative 26 days last year. Next chart, please. We are even more balanced in terms of geography after we consolidated NEC joint venture and Medion. China, we continue to perform well in China and further expanded our market share. PC sales increased 21% year-to-year to approximately $2.9 billion. Strong growth in emerging cities and desktop PCs helped drive the strong shipments in China, but also resulted in lower average selling price. Indeed, the PC operating margin improved year-to-year to 5.6% due to better scaling and stringent expense control. We are confident that the PC margin will remain relatively stable going forward. The mobile internet business in China is making progress. Our 3G smartphone and tablet business is progressing well, but we are still making investment in product development, marketing, and new product promotion to drive future growth. Emerging markets excluding China. Our expansion in emerging markets continued to show strong momentum in quarter 2. Sales were up 21% year-to-year to $1.3 billion, and operating loss remained relatively stable at $23 million. We continued to invest in growth, which resulted in a decline of margin of 0.7 points to negative 1.8%. However, we began to see progress made in the emerging markets. As reported by Yuanqing earlier, certain major regions have already exceeded 10% market share. Mature market. We continue to record good growth in the mature markets helped by the strong commercial business. Sales were up 61% year-to-year to slightly above $3.3 billion. We have included a full quarter performance of NEC JV and two months performance of Medion in quarter two. Both have performed better than their forecast and contributed profit to the region. Operating profit improved to $95 million and operating margin also improved to 2.9% for the quarter. The quarter-to-quarter dip in margin is largely due to the increase in consumer business after including NEC JV and Medion. Next chart, please. From the product perspective, both notebook and desktop outperformed the market. Notebook unit shipments and sales were up 35% and 30% year-to-year respectively. The commercial business was especially strong. Our worldwide market share increased 2.8 points to 13.3% and became the largest worldwide commercial notebook player. Unit shipments and sale in our desktop business were up 36% and 38% year-to-year respectively. Our market share in worldwide desktop market increased by 3.5 points to 13.7%. Our all-in-one products and SMB-targeted desktops, as well as our sales in China, continue to see good growth momentum. We became the world's second-largest desktop player. Finally, sales of mobile internet products were up about 30% year-to-year. Our mobile phone business, including feature phones and 3G smartphone business, continued to do well. Our tablet products also show strong growth. As Yuanqing said earlier, we were number two in the China tablet market with around 8.4% market share. Before I end my presentation, I want to give you some color on the market outlook. Despite the current volatility in global financial markets, which may have an impact on the global economy, we remain confident in continuing our trend of outperforming the worldwide PC market. We believe the balanced nature of our growth that help our strong performance in the past several quarters, that is China, emerging market, and corporate refreshment demand, will continue to enable Lenovo to outperform and outpace our peers. Based on the initial assessment of our October performance, we continue our growth momentum in China, emerging markets, and mature markets. Nevertheless, the recent flood in Thailand impacting global supply of hard disk drives would likely affect the PC supply in the short term. We have already taken actions to try to mitigate the potential impact. The abrupt distortion in the supply will, however, inevitably result in cost increase in hard disk in short term, and we will continue to monitor the situation closely. We will prioritize our customers, but also monitor very closely the cost efficiency. We will stay focused on the cost initiatives and growth opportunities. We will continue to make opportunistic investment, i.e., to use additional profits above our internal targets to fund investment in core competence building, such as product innovation, branding, and emerging markets, especially in the new MIDH group, to drive our future growth. Notwithstanding this investment, we expect our E2R to improve in the next few quarters due to better scaling and benefits arising from the unit shipment increase. We have a healthy balance sheet. We will continue to be prudent in our cash management to create shareholders value and look for M&A opportunities to accelerate our growth. Now, let me turn to Chairman Liu. Next is the translation of Chairman Liu's remark. Ladies and gentlemen, Lenovo's performance in this quarter is outstanding. Despite significant investment for future growth, its PTI increased and overachieved targets. The management developed strategies in the right way and built a solid corporate culture, and the morale of the whole staff is very high. The board is very satisfied. When looking back on Lenovo's history, it was 1990 when the company started making computers bearing its own brand. Throughout the journey, we have experienced three critical challenges or three watershed moments. The first challenge was in the early 1990s when China opened its PC market by lowering import tariffs and canceling the quota system. Foreign PC giants started to occupy the China market. Domestic players were not able to compete and fight back. Lenovo was a very small company, dwarfed by multinationals like IBM and Compaq in terms of technology, capital, management capability, and talent. In 1994, Lenovo reviewed itself and identified its own weaknesses and then implemented major reforms on organizational structure and business models. We selected the then 29-year-old Yang Yuanqing as the general manager of the newly founded PC business unit. Since then, the results have been truly miraculous. Lenovo started with no more than 2% market share in China and then managed to increase it to be 27% in six years and has been firmly holding the number one position in China and even Asia Pacific. Only people who were involved in this process know that the capabilities and wisdom Lenovo earned through this process were earned through sweat, tears, and even blood. What Lenovo got at this point was not only just market share and profits, but also the capability of learning and understanding the insights and know-how of the industry. We also developed the ability to continuously build the foundation of the company. At the same time, it got a motivated, capable team, as well as leaders of divisions and business units headed by Yang Yuanqing. The second challenge was in the mid-1990s when Dell started to enter and develop in China, and Lenovo's shares started to drop. With its innovative business model, Dell countered the U.S. and European markets. In the China market, Lenovo battled head-to-head against Dell for three hard years. I remember that the industry insiders and media all thought that Lenovo faced a killer enemy at this time. After two rounds of failures, in the third year, that was 2004, Lenovo won the battle with its bold deployment of dual business models and excellent execution. This battle and its win has very fundamental implication for Lenovo because it provided confidence for Lenovo's expansion into the global market, build a foundation for the dual business model, and developed a group of capable leaders. Yang Yuanqing, at this point, became an experienced leader and CEO who knew how to learn from past experiences. The third challenge was the acquisition of IBM's PC business in May 2005. When we decided to go for it, observers and the media thought it was a typical case of a snake swallowing an elephant, and our possibility for success was very slight. Prior to the acquisition, Lenovo China's board and management did thorough analysis and evaluation. Why would IBM sell this business? Why has IBM lost money in this business unit and we could turn it around? What did we want to get? The brand, technology, and global resources. What are the major risks? The risk that customers will not buy in the ThinkPad brand under a new owner, the risk of losing employees, and the risk of cultural collision. We had plans in place for all of this. In retrospect, it is very important to think things over and have a clear idea. Yang Yuanqing was already an outstanding CEO, but to manage an international company is different than managing a Chinese one. So in the beginning, we insisted on hiring an international executive to be our CEO, and Yuanqing was the chairman. With the attitude of respecting and compromising, Yang Yuanqing observed and learned how to be a good CEO of an international company. However, cultural integration and adaptation, which means how people from different backgrounds, companies, and countries get along with each other and work together, was crucial to our early development. This is a live issue in the real world rather than something theoretical. In the integration and adaptation, collisions were inevitable, and a nice person may not necessarily end up working happily with another person. In this special international company, we had to decide how the chairman work with the CEO and how the board handles the conflicts between the two. These are all of the issues in cultural integration and adaptation, and a tough challenge we used to face. The worldwide financial crisis in 2008 was the trigger factor of Lenovo's financial losses. We adjusted the board and the top management team and embarked on a new journey. I'm sincerely thankful for the previous two CEOs who passed valuable experience in international business management to Yuanqing and developed a large group of international managers. I'm very grateful for our board members who are fair, candid, loyal, and committed. On one hand, they stick to principles. On the other hand, they will take advices to make relevant changes. Given this foundation, we got a new united board which prioritized the company first. Yang Yuanqing built a solid, outstanding top leadership team, and we finally succeeded in handling the cultural integration and adaptation. In this year, our partnership with NEC PC and Germany's Medion have been very smooth, and the success was because of this foundation. In summary, Lenovo had undergone extreme hardships and risks, but we successfully survived and passed the three milestone type of tests. As you have heard by now, I am announcing my retirement from the position of Chairman of the Board of Lenovo. The board has accepted my proposal and has appointed Mr. Yang Yuanqing as the Chairman, and at the same time, he will continue his CEO role. I would like to highlight several points of this announcement. First, during the past seven years after acquiring and integrating IBM's PC business, Yang Yuanqing has grown through various challenges and tests and is now fully qualified for the role of Chairman of the global company. In addition, he is an outstanding CEO in our industry. Under his leadership, Lenovo will climb and reach higher and higher summits. Secondly, several months ago, Yang Yuanqing purchased 8% of Lenovo's shares from its parent company, Legend Holdings, through personal financing. This shows that he is fully confident and motivated about the prospect of the company. He is one of the true owners of this company. As Lenovo's founder and representative of its major shareholder, I would not retire from this position without full confidence, certainty, and thoughtful arrangements. Thirdly, in the future, Lenovo will face challenges in the mobile internet area. However, Yang Yuanqing is heading a united, extremely capable global leadership team. He masters the right approach of developing strategies and executing them well and enjoys a strong corporate culture as the foundation. Given this culture, employees love this company. Based on the above-mentioned three points, I believe Lenovo will take challenges with calm and confidence and leverage all of the strengths it has accumulated over the years. It will divide its goal into different phases, tackle different regions in different priorities, and finally will be among the leading players in this industry. Again, based on the above-mentioned three points, Lenovo will not be complacent in front of short-term success, nor will it be defeated by failures. Even though we are far from our goal, we will march forward with determination. Lenovo will become a great company and an enduring one with limitless future. As the founder and honorary Chairman, I will love this company in the same way I cherish my own life. As the Chairman and President of its parent company, we will be willing and ready to provide all necessary support to Lenovo at any time. I know Lenovo will continue to soar to new heights and achieve all of its dreams and aspirations. Thank you. Thank you, Chairman Liu. Let's now proceed to questions. In this Q&A session, we have Chairman Liu, our CEO, Yuanqing, and our CFO, Wai Ming, with us. We want to accommodate questions from as many people as possible, so please avoid multi-part questions and limit to just two questions at one time. Please state your name and name of your company before your questions. All the Q&A will be in English only. Operator, will you please give us the instruction? Certainly. We will now begin the question and answer session. If you wish to ask a question, please press star followed by one on your telephone and wait for your name to be announced. If you wish to cancel your request, press the pound or hash key. Your first question comes from Charles of Charles Schwab. The question. Good evening. Can you hear me okay? Yes. Yes. Okay. Hi. First off, congratulations to both Chairman Liu and Yuanqing for your new venture, and also congratulations on a very strong set of results. Sticking to the rule, I have a couple questions. First, on the potential HDD supply disruption, I was wondering, would you be able to provide a bit more color in terms of how much inventory you have on hand? What are some of the sort of backup plans you may have if you experience some supply shortage? Any color you can provide will be great. That's my first question. Thank you for the question. We do have some inventory of hard drive. In short term, it will not impact our shipment. We do have, I think, some constraints on the supply of the hard drive, and also the hard drive material costs have been increased significantly. I believe because we have a strong growth momentum, and also for a long time, we have built a very strong relationship with those hard drive partners. I should say we will try our best to get more supply of the hard drive. Actually, we have fine-tuned our strategy. We will pursue to maximum our profit rather than to pursue the volume growth because of this supply constraint. Also, we have some policy to give to those suppliers to ensure we can get the best benefit from those hard drive suppliers. Okay. Thanks for the comments. My second question is on your mobile internet products. It is very encouraging to see the momentum seems to be picking up for your tablet and also for your phones, LePad and LePhone. I was wondering, could you talk about your product pipeline in both of your tablet and LePhone category for the next 12 months, and also sort of your expectations in terms of the revenue contribution from your mobile internet products in the next couple of years to your overall revenue? Thank you. Thank you very much. Actually, as you said, we do have seen some positive results in our mobile internet area, including smartphone and the tablet. In the tablet area, we shipped almost double the volume the previous quarter in China. Now we have 80% of the market share, and we are ahead of the other Android-based players. We are a leading company in the Android-based system player. In the smartphone area, we have changed our strategy. In the past, we only used one model to compete with Apple's one model. It is very hard to beat them with this strategy. We changed our strategy. We have developed multiple models to cover not just the high-end, but also mainstream and the low-end. We believe in the mainstream and the low-end, there are even bigger markets, particularly in China, particularly in the small cities in China. After we changed this strategy, we have strengthened our relationships with those operators, including China Mobile, China Telecom, and China Unicom. Particularly the cooperation with China Unicom has made a lot of progress. With our A60 model, we believe we have a very good opportunity to ship more than half a million a month this quarter. We do have seen some positive progress. Actually, in the tablet area, we use the similar strategy. We have developed multiple models, not just the 10-inch tablet, but also a 7-inch, 5-inch tablet. We believe we have a unique competitiveness in those areas. That drives the growth in China market. That is the answer to you. Yeah, I just add one more comment to Yuanqing. While we definitely see a lot of momentum in our mobile internet products, I think it's growing at a very, very high rate. Nevertheless, I think mobile internet, I think if you really look at our quarter 2 numbers, it account for about 3, 4% of our revenue. I think while on one hand that the growth rate is very, very significant, very, very fast, it probably will not be very, very significant over the one or two years compared with our overall growth business. Because if you recall, I think the PC business, I think in this quarter we have $7.5 billion turnover. So this is really providing the engine of our growth, I think in the future. Yeah. Our smartphone, so last quarter, recorded 335% year-on-year growth. Gained 1.6 points of the market share in just one month. Although it's still tiny in our overall portfolio, but we are very confident. So we should gradually increase the mix of the mobile internet business. Okay, next question please. Thank you. Your next question comes from Don Sy, Standard Chartered. Please ask your question. Hi, good evening gentlemen, and a big congratulations to a good set of results. I have two questions. First question is directed for Wai Ming. Of the $100 million in synergies from NEC consolidation, how much of it has been reflected in the quarter? How much more can we expect going forward from here? My second question is again, on the hard disk drives. This is a follow-up. Can we try to quantify the impact of the shortage? For example, in terms of margin pressure, how much impact may be taken by your margin for the next 1-2 quarters? Thank you. Let me just comment on the NEC. Obviously, the $100 million is on an annual basis. I think that is our initial assessment of the total synergies that we can derive from the NEC acquisition, the NEC joint venture. I think we are actually on track, so on that basis, you can actually work out on a pro rata basis the amount of synergy that is incorporated or that is reflected in the quarterly results that we have. We will continue to drive more synergy. I think apart from the global supply chain, the materials, the component side, we obviously will consolidate further. I think how to improve the efficiency, there are obviously more synergy that can come out. That, I think answer your first question. The second question on hard disk drive, whether I can quantify by way of reduction of margin. I think at this point in time, it is actually very, very difficult. As Yuanqing just mentioned, we obviously have a number of action in place. I think first of all, to secure the supply. But no doubt that there will be an increase in cost or pressure increase in cost. So we obviously would want to balance. I think as Yuanqing also said that we obviously take profitability in mind. We will make sure that, I think on one hand that maybe hard disk actually have an increasing cost. We obviously will drive very hard to have a cost improvement in other areas. As a whole, our objective remain that we want to maintain the overall margin of the operation. Yeah. I want to repeat Wai Ming's answer. Definitely the hard drive cost will be increased, but we will drive other component costs down to balance the overall material cost. Meanwhile, in the front end, for our sales and marketing, we have given them the clear direction. Don't drive the volume growth too much. We are confident we will keep the market share. So, no problem on that. But try your best to maximize the profitability. We are still committed to deliver the decent profit to our shareholders. Yeah. One thing I just really want to give by way of background information, as everybody would know that I think component prices or different component prices did go up and down, I think, in different periods of time. This time around, I think we obviously see the very unfortunate natural disaster in Thailand that may actually push up the hard disk drive. Just sort of think about, I think in the past, we actually may have memory, may have LCD, would obviously also go up as well. I think we obviously believe our execution excellency will be able to do quick actions to mitigate that very briefly. I think hard disk, generally, because it all depends on different configurations, is really between 6% to 7% of the total, I think cost of the machine. So I think it is caught up. But as Yang Yuanqing said, that we actually take action to make cost down of other components, and this is not the first time that we see that happen in the PC industry. Yeah. Particularly in China, so in the past, we have managed this supply shortage many times and managed very well. So actually, we leverage this as an opportunity, not only to gain market share, but also to maximize the profit. Great. Thank you very much, gentlemen. Good luck. Thank you. Next person, please. Thank you. The next question comes from Grace Chen from Morgan Stanley. Please ask the question. Thank you. Thank you for taking my question. First, congratulations on the strong performance. I have three questions. The first question is about sales. Apparently, your September sales came in better than expected. Can you share with us which regions that were performing better, that lead to the upside? Also, can you comment on the corporate refresh cycle? Thank you. We actually gained share in all regions last quarter. In China, although we have already had the one-third of the market share, we still keep the 25% year-on-year growth, with 10 points of the premium over the market. In entire emerging markets, we were three times of the market average growth. We grow at 37% year-on-year. In mature markets, if you consider the acquisition of the NEC and Medion, we actually grow at more than 50%. But if you use the pro forma number, we still grow by 25% over almost a flat market growth. Particularly in mature markets, not only we outgrew the market, but also we made money in each of the regions. They made very decent money. I want to highlight Japan. You know, we just closed the deal with NEC. That was the first quarter we combined NEC PC business into Lenovo's performance. In most M&As, the first quarter, the revenue and the profit would drop down. This is not Lenovo NEC joint venture's case. If combine the business, we still grow at around the 15%, 16% level compared to the 2% to 3%? The market growth is about 5%. 5%, compared with the 5% market growth. We have more than 10% premium. This is very unusual. Also, in the past, NEC PC lost money. But in the first quarter, because we quickly realized the finish, we successfully turned around the business. We recorded a very decent profit in Japan market. Now we are the solid number one. We are the solid number one position in Japan as well. Our Japan team's morale is very high. They try to catch up China's market share. We changed our incentive plan for our Japanese team as well. In the past, in Japan, there was almost no bonus. Yeah. Very few bonus, but we changed the incentive plan. Because they deliver the strong performance, they can get a good return as well. We are very confident. We will continue to deliver the strong performance, not just in Japan, but also in mature markets. Great. I just really want to clarify, I think Yang Yuanqing's point on bonus. I think he is referring to the NEC before coming together with Lenovo. Lenovo has a culture of, I think, performance-driven culture. Obviously, our Japanese team has been growing, and obviously, rewarded accordingly. But with the Lenovo culture, with the results that they have achieved in the first quarter, that obviously reinforced the combined, I think, workforce that we have in Japan, meaning both Lenovo as well as the NEC JV. By the way, I want to give this information to you. In the first quarter, our entire mature markets revenue surpassed China to become the largest geographic in Lenovo's total portfolio. Okay, next question, please. Thank you. The next question comes from Wei Chen from Citigroup. Please ask your question. Hi, gentlemen. Congratulations. Actually, I have a question following up the smartphone segment. Obviously, that's going to be an area of very exciting future growth. Can you also share with us on the margin profile of these lower and mainstream smartphone, both in the short term and also in the long term? Yeah. Our model A60, which is the model we cooperate with China Unicom, has very good margin, GP margin. But certainly, some other models, we don't have a good margin now. But I believe with strong volume growth, we can get the better material cost. That will help us to improve the margin. Actually, last quarter's margin was not that good in our mobile internet business. Partially it's because we had to write off some old image, particularly in the tablet area. But I believe with the launch of the new models, we will improve our GP margin. Maybe you want to Yeah, I think as Yuanqing said that obviously we continue to see the improvements in gross margin of our smartphone business. But one thing I just really want to flag out is, while that we see extremely encouraging progress, I think in the mobile internet area, I think initially now in the smartphone, as well as we obviously also offer different products in different segments in the tablet market. But nevertheless, I think the mobile internet today still accounts for 3, 4% of our revenue. We will continue to see very significant growth. I think this is obviously, we believe firmly this is a growth engine, but it will take a number of years before it becomes a significant part of our business. Yeah. Overall, in mobile internet area, it is still the stage of investment. I believe now it is not time to talk about how much money we can make from this area. It is still investment area. We should invest more to drive more market share, to drive this business to a mature business. That is our current strategy. Also have a follow-up back to the PC market. As you mentioned, a lot of growth in China is actually coming from the low-tier cities. Can you talk to us about your strategy there and your market share, and also what is the growth trend going forward for the next maybe two quarters? Yes. This is exactly our strategy in China. We actually spread the China market by mature markets and emerging markets as well. Tier 1 to tier 3 are the mature markets, and the tier 4 to tier 6 are the emerging cities. We actually have the higher market share in the emerging cities because we have been always the pioneer to develop the lower-tier cities. We benefit from that. Do you have the exact number? Yeah, I have. I think that we were obviously in the emerging, China emerging is about 35%, China mature is 65%, roughly. Just to remind, this is not talking about China market as a whole because it is really talking about the consumer business in China, which is, I think for us is 35/65. Again, if you really look at the IDC number, the emerging city obviously has a much higher rate. If I may quote the IDC number, I think in 2012, I think the IDC number is growing 20%. The mature city is growing about 14%, and really going forward is about 30%, 26%, 25%, three, four years out. Our unique market share position or leading position in the emerging cities, which in our own terms called China emerging markets, is actually giving us a very solid engine for our growth. Bear in mind that I think this is really one of the drivers that China, in the first quarter of this calendar year, bypassed U.S. being the largest market, and at the moment is still showing a high growth. One of the main driver of the high growth, apart from the general growth in the economy, is really the PC penetration that primarily come out from the China emerging markets. Adding to your question, which obviously this, I think that there is a sort of trade-off is, on one hand, while we have a tremendous high growth in the emerging market, I think they tend to have a little bit more desktop rather than notebook, and the GP margin will be a little bit lower, but at the same time, our E2R serving those markets will also be a little bit lower as well. All in all, I think that China provides the engine for growth, as well as provide a very solid stream of income, I think, to the group. Okay. Thank you so much. I have no more questions. Okay. Due to the time constraint, we might take the last questions now. Thank you. Your last question comes from Gokul Hariharan from JP Morgan. Please ask the question. Yeah. Hi, this is Gokul from JP Morgan. Thanks for taking my question. My question's on the emerging market side. We see that some of the markets like Russia and India have already moved up to around 10% market share or even higher. Do we have any kind of timelines in terms of when the emerging market business could approach breakeven levels, given that you're also approaching your target of 10% market share for the entire group of emerging market countries? Thanks. Our overall emerging market strategy in the current stage is still to invest. We want to drive more market share. We want to drive more countries to reach the double-digit market shares. We actually have grouped all emerging countries into three categories. The first category grade is below 10% market share. We will continue to invest to drive the growth. We can say the investment growth model. For the second category, they have already reached double-digit market share for those countries. We will drive the profitable growth. For example, India is a good example. They have reached double digits of market share, so now they have recorded very good profit as well. For the third category, if we have the leading position in the market, top 2, top 3, we call those countries as our profit engine. We have very clear strategy for each of the emerging markets. With this strategy, I believe step by step, we will improve our profitability. The first, we will continue to invest to drive the growth. We can say the investment growth model. For the second category, they have already reached double-digit market share for those countries. We will drive the profitable growth. We will drive the profitable. For example, India is a good example. They have reached double digits market share, so now they have recorded very good profit as well. For the third category, if we have the leading position in the market, top 2, top 3, we call those countries as our profit engine. We have a very clear strategy for each of the emerging markets. With this strategy, I believe step by step, we will improve our profitability. Actually, last quarter, we have seen very strong year-on-year growth in all emerging markets, particularly in India and Russia. We gained almost a 3.5 point of the shares. India recorded a very positive profit. Also, emerging markets as a whole, we also improved the profit significantly. Yeah, the margin. Yeah. We believe we will continue to make progress regarding the profitability. Okay, thanks. Maybe I add one more comment. We are now number three consumer worldwide, and that is consistent with Yang Yuanqing's comment that once we achieve 10%, we will try to drive profitable growth. You should really look at, I think the emerging market breaking up into China as well as non-China. China is a driver of our profit. Within the emerging market, there are countries where we have already reached 10%, we will continue to drive profitable growth. There are other big countries, like Brazil, that we have not reached the 10%. We will continue to invest to basically execute our protect and attack strategy. I think from an analyst point of view, one really should not just look at general, we are number three worldwide consumer and 10%, because within that 10%, we have market where we do very well, like China, like Japan. We are over 20% or nearly 30% market share. There are emerging countries or countries in emerging markets where we actually exceed 10%, we will drive profitable growth. There are also a lot of high-growth countries in the emerging market. We will continue to invest to drive the super growth for the group. Thank you, Wai Ming. All right, with that, thank you very much again for your participation in today's call. If you have any further questions, please feel free to contact me or the IR team there. Thank you again for joining us.