Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from the line of Catherine Leung with Citigroup.
Catherine Leung - Citigroup
I have two questions. The first one is can you please update us on your margin outlook for the second half of ’09 and whether you plan to increase your cost base in terms of call center product development and marketing spend more materially as the market demand has been coming back?
And the second question is on Home Inns, as you mentioned, you had included your proportionate share of the third quarter ’08 through first quarter ’09 earnings as equity income rather than of their second quarter ’09 earnings. Can you please elaborate more on this accounting? Thank you.
Jane Jie Sun
Sure. Let me address the first question first. First of all, our company controls the costs very tightly. Normally we would not allow expense to grow faster than the revenue so gross margin at the current level is very stabilized. For the second half of the year, we expect the gross margin to be somewhere around 76% to 78%, within that range. Operating margin should also be stabilized at around 38% to 40% excluding share-based compensation charges.
And then on your second question on Home Inns, let me address the accounting treatment in five steps. First of all, before Q2 2009, we used cost accounting method because our shareholding was below 10%. Secondly, starting Q2, we increased our share holding in Home Inns and therefore we have to use the equity method to pick up the income from Home Inns’ results. And thirdly, because Home Inns’ financial statements may not be available before we release our earnings, we elect to use one quarter lag method to pick up their net income as permitted by APBAT.
And fourthly, for the current quarter, we therefore pick up the prior period earnings, which amounts to $7 million from the third quarter of 2008, which is the first time we got Home Inns shares and we picked up all the earnings up until last quarter, which was Q1 2009.
And lastly, going forward, we will continuously and consistently use one quarter lag method to pick up Home Inns’ equity income, so we will pick up the Q2 results in our Q3 financials. I hope that helps.
Catherine Leung - Citigroup
Yeah, that’s very clear. Thank you.
Operator
Your next question comes from Aaron Kessler with Kaufmann.
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