Earnings Call: Q1 2012

Aug 18, 2011

Morning and good afternoon, ladies and gentlemen. Welcome to the webcast of Lenovo's quarter one 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. Our COO, Mr. Rory Read, 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. Thank you for joining us. Lenovo had another record-setting quarter. I am very excited to share our good news with you. Let's get started. Next slide. This quarter, we achieved a record global market share of 12.2%, record shipments of over 10 million units, and record revenue of $5.9 billion. These two milestones brought us back to the top three in the global PC industry. For the seventh consecutive quarter, Lenovo is the fastest-growing major PC company in the world. We grew at 23%, more than eight times the market rate. We achieved this by outgrowing the market in almost every region, customer segment, and product segment. While gaining market share, we also continued to improve our profitability with a PTI of $123 million. That is a 64% increase year-on-year. As we have said before, we are continuing to invest in innovation and branding for our long-term competitiveness. These investments pushed our overall E/R ratio slightly higher, to 10.4%. They are necessary and important to our long-term development. Why do we continue to have one strong quarter after another? The reasons are clear. We have the right strategy and strong execution worldwide. Next slide. Our protect-and-attack strategy continues to guide our strong execution. On the protect side, we continue to strengthen our leadership position in China and in global commercial business. On the attack side, we continued to gain share in emerging markets and in global transactional business. We also introduced our family of tablet worldwide as we expand our business in the mobile internet space. Now let's look at our key areas more closely. Next slide. Based on the latest IDC data, China has overtaken the U.S. as the world's largest PC market for the first time. In China, while owning nearly one-third of the market share, we outgrew the market by over nine points. We also increased our segment operating profit by 48% year-on-year. Next slide. In the rest of emerging markets, we continue to outpace the market. We grew 47% year-on-year, more than three times the market rate. Overall, Lenovo gained 1.5 points of the market share year-on-year. When including China, we strengthened our number one position in global emerging markets and further distanced ourselves from other competitors. When you look deeper, the story is even better. We gained share in all emerging market regions, particularly in India, where we gained 3.6 points. We will continue to invest in capturing growth in emerging markets while focusing on improving profitability. Next slide. In mature markets, we continue to improve profitability while segment operating profit growing $56 million U.S. year-on-year. At the same time, we continue to outperform the market by growing more than 8%, despite the overall market dropped. Overall, we reached a record high market share of 6.6% in mature markets. Our growth was particularly strong in North America, where we grew almost two points year-on-year and reached a record share of 7%. In addition, we have successfully launched our joint venture with NEC in Japan and completed our acquisition of Medion in Western Europe. Both NEC and Medion will contribute to our business next quarter. More importantly, both will further enhance our competitiveness in these key markets. These are our highlights for different markets. Now let's look at mobile internet. Next slide. This business has made good progress. We sold over 80,000 tablets in China last quarter, and are still ramping up. Globally, we have launched our family of IdeaPad and ThinkPad tablets targeting different customer segments. Meanwhile, the phone sales outgrew the market at 172% year-on-year. Last week, we launched a new smartphone, the Lenovo A60, to address the under 1,000 CNY market in China. This is an excellent product at that price point. Next slide. In general, over the past two years, we have paid more attention to growth and have invested a lot. This year, as we reach double-digit market share in more and more countries, we will have a more balanced strategy. While continuing to grow, we will focus more on profitability. We will begin to implement a more country-specific strategy based on our market position. For countries still trying to reach double-digit share, we will continue to invest in growth. For countries that have reached double-digit share, we will pursue profitable growth. We will reinvest those profits to drive more growth. For countries that already have reached the leading position, we will focus more on leveraging that advantage to increase profit. With that being said, we will continue to make strategic investments in innovation, in branding, in transactional business and emerging markets, as well as mobile internet. Next slide. Looking ahead, we remain optimistic on our growth trend. Emerging markets, including China, continue to gain momentum and outgrow the rest of the world. The global corporate PC refreshment cycle also continues its momentum. We are in excellent position to capitalize on both opportunities. Our mobile internet business will continue to make progress in both China and the global markets. In summary, with the right strategy and strong execution, we will continue to achieve sustainable growth and long-term gains for shareholders. Thank you, everybody. I now turn to Weiming. Thank you, Yuanqing. I will take you through Lenovo's financial and operational performance in quarter one. Next chart, please. Yuanqing has just shared with you our strong quarter one performance. Growth has, across the board, together with continued improvement in margins, even after our investment in innovation, branding, emerging markets and mobile internet business. In quarter one, Lenovo grew 15% year-to-year in revenue to approximately $5.9 billion. This is the highest quarterly revenue we have ever achieved. PC sales were up 15% year-to-year to $5.7 billion. Revenue from the mobile internet business was $250 million, up 18% year-to-year. Gross profit was about $739 million, up 41% year-to-year, and gross profit margin expanded to 12.5%. The strong margin improvement is largely due to better scaling, component price benefits, and increased ThinkPad product mix, which allow us to continue our investment in innovation, branding, emerging markets and MIDH to drive future growth. Operating expenses increased to $660 million, which include $98 million in advertising and promotion during the quarter. The E/R ratio was up 10.4%. We expect the ratio to trend down in next few quarters, as we enjoy better scaling benefit from unit shipments increases. The continuing investment in branding will help us to improve our brand awareness around the world, which will enable us to further improve our margin. Operating profits in quarter one was $123 million, up 51% year-to-year. Pretax income was $123 million, up 64% year-to-year. The effective tax rate for quarter one was 12%. The lower tax rate was mainly due to better pretax income margin and the reversal of a $9 million provisions previously made. Profit attributable to equity holders is $108 million, up 98% year-to-year. Now, let's look at the balance sheet in the next chart. Our strong operating performance has also helped our balance sheet and cash flow. Our balance sheet in quarter one remained strong. Non-current assets were about $2.8 billion, similar to the level at 31st March 2011. Changes in the current assets and current liabilities were due largely to increased activities during the quarter. We had net current assets of around $38 million at the end of June. The non-current liability were at around $875 million. Let's go through the cash and working capital in the next chart. Our cash flow continued to be very healthy, and our cash conversion cycle further improved in quarter one. The net cash reserve continued to improve to slightly above $3.6 billion against $2.2 billion of last year, largely due to increase in sales revenue. We continued to do well in managing our working capital. Inventory days improved to 16 days in quarter one, while days receivable increased by one day to 29 days, driven by our growth in emerging markets outside China. Days payable improved by two days to 72 days, largely due to increase in our outsourcing to ODMs. As a result, the cash conversion cycle in quarter one improved to negative 27 days, against a negative 23 days last year. Next chart, please. In the past years, we have been using IBM's IT system in markets outside China, and such IT expenses have been allocated only to mature and emerging markets. We have now migrated to our own integrated IT system for the entire group operations. Accordingly, starting with the current fiscal year, the IT expenses are allocated to each market segment on a flat rate basis with reference to their respective revenue contributions. We consider this basis more appropriate in the measurement of market segment results. The above change in allocation has no impact on the group's operating profit performance. We have, however, restated the historic figures for the like-for-like comparison. Details are set out in the appendix. China. We continue to perform well in China and further expanded our market share. PC sales increased 13% year-to-year to approximately $2.6 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 to 6.4% 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, LePhone, business is progressing well, but we are still making investment in product development, marketing, and new products promotion to drive future growth. Even with these investments, our overall operating margin in China expanded to 5.6% in quarter one. Emerging markets, excluding China. Our expansion in emerging markets continued to show good momentum in quarter one. Sales were up 26% year-to-year to slightly above $1 billion, and operating loss remained relatively stable at $22 million. Mature markets. We continue to record good growth in the mature markets helped by the strong commercial business. Sales were up 13% to slightly above $2 billion. Operating profit improved to $76 million and operating margin also improved to 3.7% for the quarter. Next chart, please. From the product perspective, both notebook and desktop outperformed the market. Unit shipments and sales in our desktop business were up 23% and 18% year-to-year, respectively. Our market share in the worldwide desktop market increased by 2.4 points to 12.3%. Our all-in-one products and SMB-targeted desktops, as well as our sales in China, continued to see good growth momentum. Notebook unit shipments and sales were up 23% and 14% year-to-year, respectively. The commercial business was especially strong. Our worldwide market share increased 1.7 points to 12.1%, and we maintained a leading position in the worldwide commercial notebook markets. Finally, sale for mobile internet products were up 18% year-to-year. Total mobile achieved unit shipments growth of 34% year-to-year. Our feature phone business continued to do well, and our 3G smartphone, LePhone, also showed strong growth, as Yang Yuanqing said earlier. Before I end my presentation, I want to give you some color on the market outlook. Despite the current volatility in the global financial markets, which may have an impact on the global economy, we remain confident on continuing our trend of outperforming the worldwide PC market. We are executing our protect and attack strategy well. As a result, our core business are performing well, and our strategic investment are laying the foundation for future growth. We will continue to benefit from growth in China and emerging markets, as well as the continued corporate refreshment cycle in the mature markets. We will stay focused on the cost initiatives and growth opportunities. We will continue to invest in core competence building, product innovation, branding, emerging markets, especially the new MIDH group, to drive our future growth. Even with this investment, we expect E/R ratio to improve in the next few quarters due to better scaling benefit arising from the unit shipments 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. Our strategy is to drive shipment growth and at the same time to improve profitability over time. We are confident that with our well-defined strategy and action plan in place, we continue to outperform the worldwide PC market, and our investment in branding, as well as our stringent expense control, will continue to improve our margin. Now, let me turn to Chairman Liu. The board is very satisfied with Lenovo's first quarter results. The highlight is the performance of our mature markets. In this quarter, the mature markets contributed $77 million US of pre-tax income, becoming a major contributor to the company's profit, while in the same period of last year, mature markets had a loss of $9 million US. This is a major improvement in just one year. Lenovo's pre-tax income for this quarter is $123 million US, a 64% year-on-year increase, and this was achieved despite our ever-increasing investments in R&D and brand building. Mature markets has made significant contribution to this result. For seven consecutive quarters, Lenovo has been the fastest-growing one among the world's top five PC vendors. In this quarter, its growth rate is eight times of that of the worldwide market. During the past seven quarters, the global economic environment and the PC industry have undergone significant changes. The world's economy experienced drastic ups and downs, and China's PC market also fluctuated, even though it has generally maintained an upward trend. The competition within this industry has been fierce. Profit margin has been getting thinner, and suppliers have not been stable. Any of these factors could be used as an excuse for failures or misses in our business performance, but we have not had any misses or failures. Since early February 2009, when we adjusted our leadership team, our business has turned around. In the initial three quarters right after the change, we made adjustments and fixed some historical issues. Since then, we have not experienced any sharp ups and downs. We have made consistent progress in shipment volume, revenue, market share, and pre-tax income. Our business is climbing up, and everything has been executed well according to original plans. Lenovo has an outstanding top leadership team, a correct approach of developing strategies, and strong execution capabilities. This quarter again proves this. It also proves that Lenovo's acquisition of IBM's PC business has become a success. In future quarters, you will see clearly that we will apply our learning from this acquisition into our joint venture with NEC in Japan and our acquisition of Medion in Germany. In this quarter, there is one thing which investors have not paid enough attention to, while I deem it very important. In June, CEO Yang Yuanqing, representing the management team, purchased 800 million shares of the company from Legend Holdings through personal financing. This made him the second-largest shareholder of Lenovo. It represents not only Yuanqing's confidence in Lenovo, but it is a great example of one of our most important management concepts. We always advocate that top leaders, those who are ambitious and capable, should be the company's true owners, and we are very determined to put some financial arrangements in place to ensure that they will have that mentality. Under Lenovo's parent, Legend Holdings, in addition to Lenovo, there are other subsidiaries. Digital China, focusing on software service and IT product input, Legend Capital, focusing on venture capital investment, Hony Capital, a PE investment firm, and Raycom Real Estate. Today, all of them are the leading players in their respective industries in China. I think that one important reason for our repeated successes is that we select the right leader of a company and build a platform for him with the foundation of true financial ownership. Yang Yuanqing is an enterprising leader with outstanding capability and bold aspirations. He took the risk of having to pay back loans to buy large amounts of Lenovo shares to become its second-largest shareholder. This has fundamental implications and meaning for Lenovo's development. There are two types of management teams. First, there are those who act only as hired hands. They make short-term decisions and are not personally invested in the long-term future of a company. Companies led by this sort of manager do not do well in the long term. Then there are those who are owners and have a personal stake and a long-term mentality about company strategy. This is the type of manager we have at Lenovo. They are owners and entrepreneurs. I can tell you that it is very easy to see immediately which kind of manager is running a company simply by looking at how they approach business and what attitude they have in their decision-making. This is why I think Yuanqing's personal investment is so important to Lenovo now and for the future. Legend Holdings, the Lenovo board, and the Lenovo management team represented by Yuanqing are grateful to each other for creating an environment where ownership and commitment are so supported and valued. This feeling will extend to be among our management and the staff over time as well. In China, people emphasize that a success is based on a combination of the right timing, right location, and right people. It is hard to control the timing and location factors. For the people factor, Lenovo has got all of the advantages it deserves and should have against its competitions. Thank you. Thank you. Let's now proceed to questions. In this Q&A session, we have our CEO, Yuanqing, our CFO, Weiming, as well as our COO, Rory Read, with us. Chairman Liu, however, cannot join us in this Q&A session. We want to accommodate questions from as many people as possible, so please avoid multi-part questions and limit it just to questions at one time. Please state your name and name of your company before your question. All the Q&A will be in English only. Operator, will you please give us your instructions? Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. Your first question comes from the line of Abhey Lamba, ISI Group. Please ask your question. Yeah, thank you. We've heard from a lot of technology vendors about slowdown in U.S. federal government spending, July slowing down, weak consumer in developed markets. Can you talk a little bit about what you're seeing in different parts of the world and different customer types? What are the different pockets of strength and pockets of weaknesses that you're seeing? And then I have one follow-up, please. Yeah. This is Yuanqing Yang, CEO of Lenovo. We have seen the strong growth in emerging market continue. We believe that will continue in the future quarters. In mature markets, corporate refreshment cycle will continue again. But certainly, the consumer segment is slowing down because of the customer's sentiment. That's our view. Perhaps, Rory, you can add something. Yes. I would add that what we are seeing with 12.2% market share is a reflection of the strong demand we are seeing across the balanced performance in all regions. We have added two points of market share this quarter, and I think what is really impressive is the balance that we have seen across this 10 million units. We have seen strong growth in every region: China, emerging market, and the mature markets. Our market growth rates have outpaced the market in every region, and those regions have added significant shares, two points worldwide. I think that reflects that our customers are reacting very positively to the kinds of products and solutions that we are bringing to market. We have the right strategy, and we have the right execution, and we are making investments where the market is growing, and we are strong where the market is strong. I think what we are seeing is real momentum across the board, and that is whether the market improves or moderates, it is not really important. What is important that quarter in and quarter out, we outpace the market, we gain share, and we grow faster than our competitors. That is our strategy, and that is what we have been executing. Thank you. Got it. Weimeng, I know you do not give specific guidance, but can you qualitatively talk about gross margin next year? You have given E/R commentary, but on gross margin side, is 12.5% sustainable? What are the puts and takes for the next quarter? That is it for me. Thank you. Well, obviously we want to I think the good result that we achieved, which is the 12.5%, obviously that is an objective that we want to achieve. Again, I think if you get my comments on our E/R, I think this quarter will obviously a little bit higher, I think primarily due to the additional investment that we made in marketing, primarily in branding. That obviously will help us to maintain, if not improve the margin going forward. I think in E/R, we obviously will try to bring it down to a lower percentage, I think lower than 10%. I think primarily because of the effort that we made in controlling the overall expenses. But at the same time, the E/R is also affected by the R, which is revenue. I think taking Rory's comment and Yuanqing's comment earlier, we will continue to grow our top line. We obviously will continue to invest in branding, but the overall objective is try to bring the E/R to below 10%. It is Rory Read. To add a little bit more on that, 12.2% worldwide market share, the fastest-growing major PC company for seven quarters in a row, and we have seen our profit, our gross margin expand for five quarters in a row. I think that is because of a clear strategy, good execution, and I think we have a favorable component cost environment. More importantly, we continue to add scale, and this business is about continuing to grow and expand on that base. Five quarters of expanding gross margin levels is very important in terms of the benefits that it yields. I think we are in solid position. Thank you. Thank you. Your next question comes from the line of John Shao of Macquarie. Please ask your question. Thank you very much. Good morning, for taking my questions, and congratulations for the strong results. Yuanqing, hat off to you for buying into the stock to have the same incentive as shareholders. I have a couple questions. One is on the global economy. As you know, there have been a lot of things happening in recent weeks. Could you talk about what you can see in terms of your enterprise customer demand in the U.S., in Europe and in the rest of the world? My second question is about your mobile products. Could you talk about some of the product roadmap currently, the products recently launched on the LePad, LePhone, and what is your future roadmap for products in this category? Thank you. Last quarter, we still had a very strong enterprise business. Our relationship model business still grew by almost 30%, 29%. Actually the market was strong as well. According to IDC, the total relationship model in mature market? Worldwide. 11%. Worldwide. So grow by 11%. Market growth was 11%. We grow by 29%, almost 30%. We believe the enterprise refreshment cycle is continuing, and we believe this trend will continue for at least a couple of quarters. You have seen most of the large enterprises, they reported a very strong performance. There's no reason they will reduce their IT expense. That's our forecast. That's the answer to your first question. Regarding our mobile internet product, Rory Read, our COO, will give you the answer. First I'll give a little bit more detail on the corporate refresh. As Yuanqing suggests, we've enjoyed a very strong performance across the corporate refresh in all key regions. That's helped drive our mature business to its all-time share position, adding over one point of share worldwide. That commercial demand continues to look strong. We think we're about halfway through this corporate refresh, and it could go on over the next four to eight quarters, is our expectation. Now it may elongate because of some of the activities, but this corporate refresh is solid, and we're participating in it in a significant way. I think it's very important from a standpoint to also know that our notebook in the commercial space is now number two across the planet in all commercial, and number one in the relationship segment. Those are very good data points to show you the progress that we've been making, and in terms of relationship, we've not had a higher share of position in commercial large enterprise in the past several years. We've continued to gain and acquire new customers. MIDH, what was the question that you wanted me to hit on? Roadmap. Oh, the roadmap for product? Yeah. Okay. From a standpoint of MIDH, I think we've made some very good progress in both our LePhone and LePad launches in China. We've seen very interesting uptake in terms of both of those and good feedback. I also think it's very important to keep current and to continue to drive with new product that give us fresh, current product that is very competitive and meets the market's need. With that, we just announced three new pads in July, where we saw both a consumer, a commercial tablet, and then later in the year, a Windows-based tablet. Those are interesting solutions that'll expand our footprint in the tablet space past LePad, and introduce opportunity for further growth. Our early order there are quite good. In LePhone, we've seen very strong year-to-year growth, well over triple digits, and we're outgrowing the market. What's really interesting is that we're working on a steady drumbeat through our investments in innovation to introduce new phones and to do them faster and quicker and reach additional price points in the crucial China market. We believe that will position us for increased and improved revenue growth and market share gains. Thank you. So we Could I ask you a quick follow-up on this? Do you have any comments regarding the Motorola Google tie-up and how that's going to impact your mobility strategy, if anything? We don't generally comment on acquisition activities in the marketplace. I think what we're really excited about today is the fact that we've been the fastest-growing major PC company on the planet for seven quarters in a row. We've seen our net income improve almost 100% and 98%. We've reached 12.2% market share, and we've been able to do that with over 10 million units. We have many partners, and we'll continue to partner with those key partners in the mobile and the mobile internet space to expand on that. We're excited to work with those partners to help us win. Intel is our strategic partner as well. As you know, we use Android in our tablet products. I believe this acquisition can help us to strengthen our IP position. That will be a positive result. Great. Thank you very much for the answers. Thank you. Your next question comes from the line of Gokul Hariharan from JP Morgan. Please ask your question. Yeah. Hi. Congrats on a very good set of results. I had just one question. On the emerging market business, given that the progress towards 10% share is going pretty well, do you have any kind of guidance in terms of when we could see that business starting to break even? Do we still stick to early next year kind of target, or is it going to be happening a bit quicker? Thanks. Yeah. So actually, in most of emerging markets, not only we can see the hyper-growth, but also the improvement on the profit. So right now, actually, almost half of our emerging region have already been positive PTI. Yes, sure. nine regions. Among that, five regions reported the positive PTI. We have set a right and a clear strategy for each of our regions and the countries. For those regions and the countries that have below 10% market share, they should put the growth as a priority. We will continue to invest in those regions. For those countries and the regions that have above 10% market share, we want them to be profitable growth. While we will keep the positive PTI, we will reinvest the profit, the MEC, to drive the further growth. Only for those countries and the regions that have the leading position, so at least the top three position in the market. We want them to focus on the profitability, to put profit as a priority. We have already had a clear strategy on the regions and the countries. Now we have seen more and more regions and the countries moving from the lower growth to the higher growth. That's why we are very confident that that will help us improve our GP margin as well as the PTI. Okay. Thank you. Thank you. Your next question comes from the line of Grace Chen of Morgan Stanley. Please ask the question. Thank you. First, congratulations on a good result. My first question is regarding the China market. Can you share some of your observations regarding the back-to-school demand in China so far, and how does that compare with the traditional, the seasonal back-to-school demand in the past couple of years? That's my first question. Yeah. Our China business is still very strong. As you can see, although we have already had one third of the market share, last quarter, we still had 9 points premium over the market. So we gained 2.3 points of the share in the market. That demonstrate our strength in this country. Why we have such a strong momentum in China? Because we have the right strategy. Actually, we separate China into mature territory and emerging territory. Now we are focusing on the small cities and the towns to drive the growth. The demand there is still very strong. The growth is very high. We believe the policy Chinese government is driving to increase the domestic consumption will So we will continue to benefit from this policy. We believe China will continue to grow. Yeah. We've definitely seen some strength in terms of the China marketplace over the past three quarters at the market level. The China growth rates in the PC have improved from 4% to 8% to 14%. At the same time, we've been able to maintain a significant premium to those growth rates. As Yuanqing mentioned, we added 2.3 points of market share in the most recent quarter, growing at 23% versus a market of 14. It's really that strategy, the clarity of that strategy around really looking at the tier 1 through 3 cities as a mature space. We compete very strongly there. In the tier 4 through 6 cities and villages, those areas are the areas where we are seeing very strong growth and where Lenovo has the reach, the distribution capability, and the brand that is allowing us to gain significant momentum using this dual protect and attack, emerging mature strategy. It is working, and that is why we are seeing a 31.7% market share for China this quarter. Great. Just one more comment. This is Wai Ming. I think you really should know also, China became the largest market, I think, in this quarter. This is the number one in the world, overpassing the U.S. As you may know, as Rory said, China is growing 14% year-to-year, while the U.S. is actually at negative 4%. So we will continue to see the strong growth in China, that China will maintain bigger and bigger and remain the number one spot position, and knowing that we are, I think, having the largest market share, as well as increasing market share with the right strategy. I have a follow-up question. In the China market in general, if we divide it into tier 1 to tier 3 and tier 4 to tier 6 and the villages, two sections, for Lenovo, how much of your revenue in China is derived from the lower tier city, tier 4 to tier 6, and villages? We do not generally break that out in this kind of call, but what I would share is that we are seeing very strong growth in that tier 4 through 6. Four through 6. and villages. Think about it is really because of the strength of our distribution structure, our channel partnerships, and just the sheer number of distribution points, as well as our strong brand, that allows us to open up those emerging cities and villages that gives us that lift and faster growth rate, significantly faster growth rate than the market. Again, total market, 23 versus a market of 14, adding 2.3 points of market share year-over-year. 31.7% market share for the quarter. Is there any margin differences between tier 1, tier 3, and low tier cities in terms of gross margin or operating margins? Well, I think the tier 4 to tier 6 cities, obviously there is a larger proportion of desktop, and the AUR is lower, and the gross margin may well be a bit lower than our sort of commercial products. Operating margin, obviously we will look at it. I think overall, I do not think there will be any significant change in the overall margin of our China business. As Yang Yuanqing said earlier, I think we have a very clear strategy of having different tactics in different country with different market share, and China being one of the core markets, obviously profitability is an issue, and we will aim to maintain the level of our overall operating profitability while we are growing our business. Great. Thank you very much. Thank you. Your next question comes from the line of John Lewis from GI Asia. Please ask your question. Hi, this is John Lewis. I have a couple of questions. My first question is on the Medion acquisition. What I would like to know, please, is specifically how do you intend to distribute Lenovo's products versus Medion's products? By that, I mean, are you using their sales channels? Are you replacing their products with yours, or how is that going to work? Thank you. Well, I think we obviously have a clear strategy of employing Medion to help us to improve or increase our consumer business. Medion has a very specific channel of distribution, primarily distributing their products through a very large retailer by the name of Aldi. Apart from that, there are also some specialized distribution channel, like the like of MediaMarkt. We obviously would leverage on their ability to do the consumer business, and then we will have Medion on one hand. I think the products just continue to distribute in the Aldi distribution, with obviously the synergy that derives from our overall volume, that will help them to improve further, I think, their business. At the same time, they will help in distributing the Lenovo product, I think in the specialized channels. Okay, that is very clear. Basically, the Medion and Lenovo products to be sold alongside one another. Okay, that is clear. I think I have to be very clear. I think in the existing Medion business, that will remain with the Medion product. At the same time, they will help us to bring the Lenovo product into. Thank you. My second question, please, is regarding tablets in China. You sold about 80,000 so far. You are hoping, as I understand it, to get 20% of the market by the year-end, which would mean, by my calculations, something like a 75,000 tablet run rate per month. Is that something that you think is achievable? Yes. This is our target. By the end of the year, we want to get at least a 20% market share. We are ramping up. Currently, certainly, iPad is dominating the market. But I believe we have our unique strengths. We will provide a full Chinese environment. That will help us to gain market share. You will see the good results in the coming quarters. Okay. Thank you. What's really strong about the LePad and the tablet solutions that we've introduced to the market, in the China space, the tailoring that we've done to make it specific to the customer set, to really leverage the application base, and the navigation that's familiar with the China customer, is definitely getting positive feedback. When you look about the worldwide launches, like the ThinkPad tablet in the commercial space, again, very specifically tailored to the customer feedback that we've been receiving around manageability, controllability, upgradeability. These things are very relevant to the enterprise customer. I think that's the way we're looking at the innovation and the kind of tablet solutions that we're putting in place. Matching up to the specific customer with the application functionality that differentiates the solution, not just at the physical performance level, but in terms of usage patterns and the experience the customer has. That's what we believe will differentiate and create the long-term benefit, opening up the opportunity for us to hit that 20% market share goal for the end of the year. By end of the year, do you mean fiscal year or do you mean calendar year? Of course, fiscal year. Okay. Thank you. Only three months away. Thank you. Your next question comes from the line of Arthur Hsieh of UBS. Please ask the question. Hi, good evening over there. Congratulations for the great results. I have a question about the emerging market. Because if you look at the sales in the past quarter, you had a very strong growth of 26%. Yet in terms of this operating margin, it remains stable. I was just wondering, was there any volatility in the market that hinders this operating leverage that did not really come through? I think Yuanqing just mentioned that five out of nine regions reported positive PTI. Would you help us to get a better idea, what are the other markets that is still running at negative PTI? Thank you. Yeah, we would not break out the specifics at the regional level. What I think is important is that we know that China grew at 23% on a market of 14, and the rest of the emerging markets grew at 46.5% on a market of 13. That is an outstanding market premium. At the same time, we have hit our all-time market share for the emerging markets outside of China, both in China and in the rest of the emerging market. We have also seen, for example, in a key market like India, significant improvements where we have gone double digit in market share and our profitability has continued to increase, and margin levels have improved. A key reason is because of the strategy that Yuanqing has put in place around protect and attack. It is a balanced strategy. We are winning in the commercial space, in the SMB space, and the consumer space. When we get that portfolio of product and we get the scale, we are able to produce that. That is why it is so key that we are seeing that 46.5% growth rate for emerging markets versus the 13. But we would not break out the specifics at a region level. All right. The separate question is about some new products that Intel mentioned recently, Ultrabook. I think different OEMs seem to have different view on the potential and the timing. Would you give us a bit of your thought on this product? Is it going to help to create new demand? There's no doubt that there's going to continue to be a movement in the mobility space for thinner and lighter. It's key. The ability for longer battery life and the ability for people to move and access data and information in a mobile environment with a lighter and thinner device just makes sense. Think about our flagship launch of our X1 ThinkPad. Some people have called it one of the best-engineered PCs they've seen. I think that's a reflection, and that kind of hits the criteria of what an Ultrabook is. It's a very thin solution with a long battery life. It has the portability and the mobility that makes a difference to the customer. We believe that by moving in that direction, thinner and lighter, which has always been our heritage, Lenovo will invest in innovation to be a leader in that space, and we believe that will continue to drive demand, no doubt. Well, but if I remember correctly, I think the target pricing for Intel's Ultrabook is like $1,000. I think without a doubt, X1 is a premium product that's well respected, and I think it's well received. But I think it's selling more than $3,000. Just wondering, is there any plan that you wrote out something at a much lower price point before the year-end? I don't know if it would be by the year-end, but it's clearly our intention is to go thinner and lighter and continue to drive that direction quarter in and quarter out. You'll see us introduce, over the coming quarters, the ability to reach the mainstream price points with solutions that were only 18 months ago in premium segments. That's just a natural evolution of the space. So I would expect that you'll see those thin and ultra light solutions in the mainstream space in the coming quarters. I wouldn't say by the end of the year necessarily, but I think depending on the way you define Ultrabook, that's definitely going to happen. We think thinner and lighter will continue to increase demand. Thank you. Yes, sir. Thank you. Due to the time constraint, we probably will take the last question. Thank you. Our last question comes from the line of Don Tsao of Standard Chartered. Please ask the question. Hi. Thank you very much for taking my questions. Management, congratulations on a good set of results. I have two questions. First up, it is for Wai Ming. I want to know what is in the other expenses, and why is it negative this quarter around? In terms of the SG&A, I want to drill down a little bit further. Can you comment on the last quarter marketing and promotional expenses? Is there any one-off expenses, and what would be the normalized level for the rest of this year? In terms of R&D, first quarter level has been stable over last year. What should we expect for this year? The next one is for Yuanqing and Rory Read. On the corporate refresh visibility, given the jitters on the macro front, would you not expect PC demand to be affected? What sort of leading indicators would you depend on? Thanks. Right. Okay, let me just comment on the first one. I think the net other operating expenses, I think there are some miscellaneous items, net of some payment of IP expenses, settlement of IP expenses. I think that is really more of a one-off item, I think, appear in the current quarter. As far as marketing or branding expenses that we incur this year, we really look at, I think, two aspects. One obviously is we would want to make sure that, I think, the overall E/R is actually in line, I think, with our target of below 10%. I think it would be better for me to comment on, I think, the marketing and branding investment is around $100 million this quarter. I think as compared with the year-to-year, we actually increased by nearly $35 million, and quarter-to-quarter about an increase of $30 million. R&D, we actually spent about $18 million this quarter. So I think these are really the more hard numbers, and then we will look at making the investment in marketing, obviously, I think depending on the overall E/R as well as our overall profitability. I think obviously, one aspect of this quarter is because we are improving our gross margin and therefore allow us the ability to invest more, I think, in branding, which obviously will give us a much better foundation to improve or to hold the gross margin going forward. Okay. From a corporate refresh perspective, as we talked about earlier on the call, we've seen an expanding share position for five quarters in a row now in the commercial relationship segment. We have, at the same time, seen our margins improve. We believe that there's been significant uptake in the corporate demand in terms of refreshing their PC fleet, and we continue to see interesting bid activity and our ability to acquire new customers. We look at the data on a longer-term range to look at the pipeline, those opportunities where customers are going to RFP, those customers that are asking for information about corporate refresh activities, and we are seeing continued demand in that space. We do believe we're about halfway through that corporate refresh, and we believe it will continue. Could it moderate slightly over the coming quarters? That's possible. We look at it in terms of demand acquisition rates and the pipeline, and all those suggest that we're about halfway through this corporate refresh, and we expect it to continue through the balance of the year at a minimum. Okay. I have no more follow-up questions. Thank you very much. Thank you, everybody, for your participation in today's call. If you have any further questions, please feel free to contact me or the IR team directly. Thank you again for joining us today. Thank you. Bye-bye. Bye-bye.