Categories Earnings Call Transcripts, Technology

Lenovo Group Ltd (00992) Q1 2021 Earnings Call Transcript

992 Earnings Call - Final Transcript

Lenovo Group Ltd  (HKG:00992) Q1 2021 earnings call dated Aug. 11, 2021.

Corporate Participants:

Jenny Lai — Vice President, Investor Relations

Yang Yuanqing — Chairman and Chief Executive Officer

Wong Wai Ming — Executive Vice President and Chief Financial Officer

Ken Wong — Senior Vice President and President, Lenovo Solutions & Services Group

Gianfranco Lanci — Corporate President and Chief Operating Officer

Luca Rossi — Senior Vice President and President of the Intelligent Devices Group

Kirk Skaugen — Executive Vice President and President, Infrastructure Solutions Group

Sergio Buniac — Senior Vice President, President of Latin America and Mobile Business Group, President of Motorola

Analysts:

 

Albert Hung — JP Morgan — Analyst

Huey Chun Yen — Huatai Securities — Analyst

Donnie Teng — Nomura — Analyst

Jerry Su — Credit Suisse — Analyst

Presentation:

Good morning, good afternoon and good evening. Welcome everyone to the Lenovo’s Earnings Webcast. This is Jenny Lai, Vice President of Investor Relations at Lenovo. By now you should have received a copy of our earnings release and earnings presentation.

Before we start, let me introduce our management joining the call today. Mr. Yang Yuanqing, Lenovo’s Chairman and CEO; Mr. Gianfranco Lanci, Corporate President and COO; Mr. Wong Wai Ming, Group CFO; Mr. Kirk Skaugen, President of Infrastructure Solutions Group; Mr. Ken Wong, President of Solutions & Services Group; and Mr. Sergio Buniac, President of Latin America and Mobile Business Group and President of Motorola. We will begin with earnings presentation and shortly after that, we will open the call for questions.

Now let me turn it over Yuanqing. Yuanqing please.

Yang YuanqingChairman and Chief Executive Officer

Hello, everyone. And thank you for joining us. We are pleased to report record fiscal first quarter results in our new organizational structure. Wong Wai Ming will go into detail about our performance, I want to focus on the greater opportunities we see and how we will deliver growth and sustainable profitability increases, we’re into the future. The new normal has changed how people live and work. It has accelerated the Digital and the Intelligent transformation and upgrades in smart devices, ICT infrastructure and applications. With our clear 3S strategy and a strong execution, Lenovo is confident to capture this significant opportunities to further grow and improve profitability. In fact, last quarter, despite the challenging environment, Lenovo delivered a record quarter with significant year-on-year profitability improvement. Group net income more than doubled. Net income margin reached the highest in many years. Group revenue continued the hypergrowth of almost 27% year-on-year. But I want to say, this is just the beginning.

In the coming years, we will continue to focus on high-margin businesses, including Solutions & Services, particularly as a Service business. Infrastructure upgrade, Premium PC and the adjacent non-PC devices. We will further increase investment in innovation and consistently improve our gross margin and the overall profitability.

Now I want to go into the details of each business group. Let us start with our new Solutions & Services Group or SSG. Today, the ICT infrastructure is transforming to a new architecture of Client-Edge-Cloud-Network-Intelligence. This new IT will accelerate Digital and the intelligence transformation and bring each individual and enterprise higher efficiency and productivity, but also more complexity. This means, customers now need more sophisticated IT services. This shift created a huge market opportunities for Solution & Services as well as the managed services, including the subscription based, all inclusive business model which we call as-a-Service. This is not only reshaping of IT services, but also a massive transformation of the entire industry. ITC estimates, the new IT service market to be over $1 trillion through 2025. While there is potential to grow in traditional support services even larger growth opportunities lie within managed services as-a-Service under the vertical solutions. The margins of each service businesses are much higher than devices alone. So SSGs high growth are definitely driving higher profitability for the Group.

SSG addresses these opportunities with the three service segments and we already see strong initial results. Last quarter SSG revenue achieved significant growth year-on-year with a strong operating margin of 22%, which is much higher than our traditional hardware businesses. Support services profitability was up by almost 3 points year-on-year. Managed service, as-a-Service and vertical solutions all achieved top and triple-digit growth year-on-year. We will own many more high-profile smart city and smart retail dealers and implemented hybrid cloud solutions with our own IP. Going forward, we will drive further growth and the margin enhancement. Our Support Services business, will improve penetration rates and the leverage the increasing device installed base, especially as a commercial rebounds to grow. For as-a-Service, we are aggressively investing in capability, platform and the tools and drive scale through building more repeatable vertical solutions with our own IP and through strategic partnership.

Now let’s talk about our Infrastructure Solutions Group or ISG. ICT infrastructure is a foundation to digital under intelligence transformation. IDC predict the ICT infrastructure to be near $250 billion market through 2025. We have been investing in ISG for years. Having started with only our global server business from IBM x86 acquisition. ISG has a built a storage, software, service, software-defined infrastructure capabilities and become a full stack better than the infrastructure provider. We have also expanded from providing enterprise IT infrastructure to public cloud and full hybrid cloud solutions to our customers. Now years of investments are paying off. This business is a close to achieving profitable growth and generating returns. Last quarter, ISG delivered a record revenue and has outperformed the market for six straight quarters, while achieving the best results in five years. We are now number three in x86 server and the number two in mainstream storage worldwide. Our higher margin businesses storage, software, continued strong growth year-on-year. Particularly, hardware in the cloud solutions grew high double-digit year-on-year. Looking forward we are continuously investing ISGs competitiveness and move toward profitability. We will increase investments in edge computing, hybrid cloud solutions and the 5G cloud network convergence. We will also continue to strengthen our in-house design and manufacturing capabilities, improving efficiency and expand the strategic partnership to enable more solutions. Our vision is to become the largest ICT infrastructure solution provider.

For Intelligent Devices Group, or IDT, I want to a re-emphasize that the pandemic has changed how people live and work. And the PCs, has returned to the center of our digital life. People now spend much more time on PC. PC refreshment cycle has shortened and the penetration rate has increased. IDC confirmed that the total PC demand were at least re-met the current levels until 2025. While commercial demand is rebounding quickly, at the same time the IoT market is expected to surge by 11% CAGR through 2025. IDG is a fully leveraged in our PC leadership position and synergy across businesses to expanding adjacent non-PC segments such as the smart meeting collaboration and the embedded computing. We have also been investing in innovation and the premium segments like the Workstation, Gaming PC and thin & light to drive sustainable profitability increases.

Last quarter IDG continued significant topline growth of almost 30% year-on-year. But the profit grew even stronger at over 48%. In one aspect this is driven by strong performance in PCs. Thanks to years of investment in premium and the high growth PC segments. We continue to improve our average selling price and the profitability. In another aspect, this result is driven by strong performance of non-PC segments which already accounts for 18% of IDGs total revenue. Both tablet and the smartphone businesses achieved over 50% growth year-on-year, with a record performance. We strengthened the number two position in Android tablet worldwide. Smartphone had a record operating margin of almost 5% and now has become our self sustainable healthy business. We are confident to leverage the change in market landscape to continue hypergrowth.

Going forward IDG, we are continuously investing in smart devices, core component technologies and the next-generation computing platform. We will continue to focus on premium segments to improve average selling price and the profitability. We will leverage our broader customer base to cross-sell adjacent non-PC products and the further increase of non-PC business mix. Last quarter, we increased our R&D by 48% year-on-year and we will continue to invest in innovation and aim to double our R&D expense in three years. We will further strengthen operational excellence and improve efficiency through more decisive and thorough digital and intelligent transformation internally. And we remain committed to ESG and the sustainable green development. All these efforts, will not only help us to have a long-term profitable growth, but also bring to life our vision of smarter technology for all.

Lastly, I invite you to attend our Annual Flagship Event Tech World next month where we will discuss more about our vision and our future. Thank you. Now Wai Ming will talk about our first quarter in more detail. Wai Ming please?

Wong Wai MingExecutive Vice President and Chief Financial Officer

Thank you. Yuanqing. I will now take you through Lenovo’s financial and operational performance in Q1 fiscal year 2022. We achieve our best first quarter in history. We outperformed the markets and attained record Q1 revenue of $16.9 billion posting growth of 27% year-on-year. Our net income margin reached a 13-year high of 2.8% and net profit more than doubled year-on-year. All our three business groups set new milestones in revenue and performances. IDG our Intelligent Device Group realized its all-time high operating margin of 7.5% and profit growth of 43% year-on-year. While PC business is contributing to the growth, non-PC products also registered a growth of 57% in revenue year-on-year. Our new profit driver, the Solutions and Services Group, SSG also is operating profit growth 51% year-on-year, contributing to 20% of our gross profits. Its 22% operating margin was nearly 3 times of business group average. Our Infrastructure Solutions Group, ISG achieved its record revenue since the x86 acquisition and made its largest profit improvement since 2Q fiscal year ’18-’19 by $49 million year-on-year.

While maintaining our E/R ratio year-to-year, our research and development investment grew 40% year-on-year. We believe our commitment to R&D would drive innovation and differentiation that will continue to support higher profitability. The plan to double our R&D spending in three years. Furthermore, considering the improved product mix structure, we are confident that we can continue to expand our net income margin. Profit attributable to equity holders was $466 million and the basic earnings per share came in at $4.02 representing 123% growth year-to-year.

Our operating cash improved by $131 million to $448 million, driven by strong profitability. In this fiscal quarter the ongoing component supply shortage remained a key challenge and our order backing further extended to fiscal Q2 across PC, smartphone and server. To support our growth, we continue to execute our component buy ahead program to meet strong demand. To optimize our capital structure, we further reduced our net debt by $541 million to $739 million and lowered our finance cost correspondingly. In addition, Fitch upgraded our credit rating to BBB in March 2021. Recently S&P and Moody’s revised our outlook from stable to positive reflecting our sustainable growth outlook.

Targeting the fast growing new IT services segments within the $1 trillion IT services market, SSG deliver a successful first quarter with strong revenue growth and high profitability. This financial result SSG has demonstrated the group’s strategic focus for the past few years on surface led transformation and started to bear fruits. SSG revenue increased by 38% year-on-year to $1.2 billion, with strong double-digit revenue growth across three segments and all regions.

Operating profit surged by 51% year-on-year to $264 million, driven by strong top line momentum and solid expansion in operating margin which stand at 22%, topping all business groups. SSG will continue to contribute to Lenovo long-term profitability through its higher profitability and fastest revenue growth among all our business groups.

Revenue of Support Service grew 24% year-on-year. We continue to drive its penetration rate by strengthening premium surface attach and new solutions, such as asset recovery services. The remarkable growth of managed service reached 64% year-on-year, demonstrating our ability to serve customers demand as they switch to as-a-Service model. Total contract value of as-a-Service more than doubled during the quarter. The growth momentum continues as we secure several landmark deals and strategic partnerships. Project and solutions also reported strong revenue growth of 56% year-on-year, paving the way for scalable growth. These achievement as a whole contributed to a 41% year-on-year growth in bookings. While deferred revenues amounted to $2.4 billion, up 34% year-on-year.

ISG continues faster than market growth momentum for six consecutive quarters. Sales grew 40% year-on-year to $1.8 billion. Profitability improved $49 million was the strongest in the past two years, driven by more profitable cloud service provider projects and favorable mix within this enterprise and SMB. ISG will continue to increase its profitability. CSP sales reached an all-time high and it continued to expand client base, adding 12 new CSP next wave clients with more project wins. Its global design in projects now extended from one socket to eight sockets, servers to storage, liquid cooling, more advanced system designs and multiple platforms from single platform.

ESMB, delivered the highest 1Q revenue in the last five years, supported by record sales in high margins storage, high performance computing and hybrid cloud solutions. In the mainstream storage market, the Group was one of the fastest growing vendors and maintained its position as the second largest global player. Q1 marked another record quarter for our IDG with a 43% improvement in operating profits and a 28% revenue expansion. There were multiple drivers contributing to IDGs performance, including strong commercial demand and encouraging share gain in premium segments resulting in higher ASP, and profit margin. The use of PC has returned to the center of people’s digital life, leading to increase demand for premium products, including gaming, thin & ligh and yoga series. Digital transformation has taken a different turn to drive commercial recovery as economies reopen. IDGs commercial PC sales and its premium product sales, such as Yoga and Gaming PC grew significantly year-on-year, translating into high ASP and stronger profitability for IDG PC mix. We further improved our ASP by 6%. Q1 marked the 14th consecutive quarters of profit margin expansion for IDG.

The non-PC product was another bright spot, representing 80% of IDG revenue in Q1. Tablet revenue grew 58% year-on-year and smartphone sales went up by 64%. Smartphone profit expanded $85 million year-on-year, while operating margin reached new high of 4.9% driven by consistent market share gains across all geographical markets. The successful execution of our smartphone strategy in product optimization and broader carrier ranging have proven to be earnings accretive. We will continue to increase ASP through investing in innovation and driving favorable premium mix. This will contribute to a healthy growth of our smartphone business continued revenue growth while maintaining profitability.

ESG continued to be a very important focus area for Lenovo. In the environment aspect, we are very proud. We exceeded our 2020 Climate Change Commitment. Furthermore, we launched our new 2030 climate change goals. Our new 2030 Science Based Targets address both Scope 1 and 2 direct emissions as well as Scope 3 emissions intensity in our value chain. In the social aspect, we formally announce our product diversity office in 2020, supporting our commitment to develop technology for diverse uses and minimize bias inherent in the technology or product itself. In regard to governance, we establish a new ESG executive oversight committee. The committee is comprised of executive from different business areas and geographies to ensure Lenovo ESG programs and investment effectively and appropriately address risks and opportunities. We are very pleased to note that our strong ESG performance has earned the recognition from a number of notable organizations. We will continue to honor our responsibility as an industry leader and corporate citizen.

Looking ahead, we believe the accelerating global trend in digitalization and service led transformation and the recovery of global IT spending post COVID-19 will continue to benefit Lenovo. Our commitment to R&D investment will further elevate Lenovo leadership in innovation, while our branding efforts will raise customer recognition of such differentiation. Both are the key drivers for us to further expand our gross margin. Our service led transformation, commercial recovery, favorable mix, product innovation, such as full stack offerings from ISG and our strong operational efficiency are all supporting factors to help achieve Lenovo medium-term financial target of doubling our net margin.

SSG will play an important role as the group’s high margin, high growth engine, targeting the fast growing new IT service segments. In addition, our extensive exposure to commercial PC and ESMB infrastructure offer fast solution and service potentials, leveraging on strong as-a-Service demand. We will continue to enrich our solution portfolios with in-house IP to drive scalable growth and build competitive edge for the next stage expansion.

In ISG we will continue our profitability improvement, supported by consistent premium to market growth in both ESMB and CSP markets. We will continue to deliver industry-leading end-to-end infrastructure solutions and expansion from server to full stack offerings. In the ESMB, we will expand the product portfolio through servers into storage, software defined infrastructure, software services and new segment coverage in edge, AI and communication solutions while rising profitability.

In CSP we will fully integrate our unique ODM plus model to expand profitable opportunities and drive quarter-to-quarter profit improvements. In IDG, we will sustain our profit expansion while investing in R&D to drive higher value at the premium products and smart devices. We will further enhance our operational excellence and global supply chain management. The digital transformation took a new turn as economy reopened, thus creating a strong demand and order backlog in commercial PCs. The premiumization trend could also accelerate as remote learning and working models have raised the bar for video and audio designs riding on the two tracks. We believe the ASP and margin expansion in PC will continue to support our profit improvement. Our smartphone business will form an important driver for non-PC growth, whereas focus on sustaining strong growth momentum in North America and Europe, while maintaining market leadership in Latin America. It will further push product innovation and accelerate 5G smartphone launches to score wins in more market and stay on track for profitable growth.

Our strong financial position and cash flow have provided a solid foundation on which Lenovo can proactively pursue its growth opportunity ahead, particularly in the fast growing service area. Lastly, we will reiterate to our shareholders, Lenovo commitment to sustainable profitability increase. Thank you.

And now we can take your questions.

Jenny LaiVice President, Investor Relations

Please be reminded to limit yourself to two questions at a time. Operator. I will now turn it over to you, please give us your instructions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Huey Chun Yen [Phonetic] from Huatai Securities. Please go ahead.

Huey Chun YenHuatai Securities — Analyst

Thanks. Huey Chun from Huatai. And I have two questions. And the first question, is about your new segments that is SSG. I noticed is the first time Lenovo has officially segment revenue. So can you please tell us more on your — the segment of SSG. I mean what’s your — what’s the relationship between now the SSG and the former segments? And what’s your strategy on SSGs further development. That’s my first question. And the second question is about chips. Can you give us more color on the chips right now — we expect it to the last half? Thank you.

Yang YuanqingChairman and Chief Executive Officer

Okay. Now we have the new leader of SSG, Ken Wong in the call. So, probably I would invite Ken to answer your first question. So regarding of chip, the shortages, so probably Chief Operating Officer, Gianfranco can answer the question.

Ken WongSenior Vice President and President, Lenovo Solutions & Services Group

Thank you. Yang Yuanqing. So, this is Ken. Thanks for the question. I think this is a really great question. I think we’re very happy to see, in fact there are increasing demand for more sophisticated services requirement coming out from new IT. I think as Yuanqing mentioned. Now with the new IP I think obviously the benefit is going to be able to help enterprises to increase efficiency, productivity and competitiveness. I think the biggest challenge, to a lot of people is that there’s a lot of complexity and complications. So I think Lenovo and actually SSGs role is to help our customer to navigate and overcome all these challenges in order to get the benefit. Now that’s why if you look at our business, where we have basically three tower of services and all entangled to work to provide the end-to-end solution to our customer regarding new IP.

Now the tower one is mainly around attached services. These are the basic warranty and warranty upgrade to improve the ownership experience of our hardware products. Now tower two is about managed service and also as-a-Service. This is the part where we had a lot of value and also because a lot of data point that we got. This is the market, where it’s growing very, very fast right, some of the data point is suggesting that this is the part of the market that is growing at 30% plus on a year-to-year basis. And we have been focusing a lot in this area in terms of building our capabilities, building our system, and tools so that we can provide the best of the breed managed services. And to share a lot of — a little bit more detail, I think this year, we’re already able to provide tower two services, managed service, and as-a-service in over 100 markets that we are — that we have business in and the target is to — all the way toward 180 markets than Lenovo [Indecipherable] right. So this is obviously a huge growth opportunity for our business.

Last but not least right, I think the tower three is about product, solution and also political solution. This is where the pipe, we can add even more value by understanding some industry specific requirements leveraging some of the Lenovo internal IP and provide a integrated solution, end-to-end solution for our customers. Now with all of these right, I think we are very confident that the SSG business will continue to grow. I think as Yuanqing mentioned in his opening, that we’ll continue to grow even at a speed that will be faster than the overall growth from the top line and also bottom line perspective. Thank you.

Gianfranco LanciCorporate President and Chief Operating Officer

Yes, so I want to add a couple of points. So this business, Solution & Service business is key to Lenovo’s strategy. So, we call it as-a- Service we had strategy, so that means some of the IoT smart infrastructure and smart vertical part, all of those are related to Solution & Services. So SSG will help us to achieve our goal to sustainably improve our profit. So because this is a high margin business. So actually you see the last quarter’s same profit — operating margin was above 20%, so it was 22% year-on-year is still increasing, so that will help us to improve our profitability further.

Yang YuanqingChairman and Chief Executive Officer

Okay. So the next question will be answered by Gianfranco regarding of the supply shortage.

Gianfranco LanciCorporate President and Chief Operating Officer

Hello, can you hear me?

Yang YuanqingChairman and Chief Executive Officer

Yes.

Gianfranco LanciCorporate President and Chief Operating Officer

Talking about the supply shortages. First of all, the one clarification. When we talk about the chip I think it’s yearly IC, integrated chip that deserves more components mainly that are key for motherboard, display, the [Indecipherable] some other things and sometimes I think there is confusion between the CPU or other GPU and so on. But the shortage, it’s really on IC. We are facing this shortages since now it’s already three — almost three quarters, right. We don’t see further deterioration in the event that there are few shorter, I think they will continue to be short at least for the next couple of — maybe two or three quarters. We see some improvement in here and there.

On the other side, when you look at our growth that is between 20% to 30% on PC, it’s the potential limitation, but it’s a potential limitation to grow more than 25%, 30%. So if you see for the future quarters a good opportunity to continue to grow with this trend and as I said, it will not improve seriously at least for the next two or three quarters, because its not only coming — and it is not coming — it is not only coming from the PC demand. It is coming from automotive, coming from any kind of smart devices and including white goods, any kind of really smart devices where you need even more board. And now we will see [Indecipherable] to use these more board almost anywhere, right. So PC demand for sure is one of the reason but it is not the only reason of the shortage.

We have seen on the other side, good improvement on display. Display I think is, I mean, we don’t see any issue on display. We don’t see any issue on any other major components. It’s just IC and as I said it is mainly impacting motherboard and display in the sense that you need board managing the display. Well, I don’t know if I answered your question.

Yang YuanqingChairman and Chief Executive Officer

Yes. Thank you, Gianfranco. So in summary, the key shortages is on IC. So the component shortage will probably last until the first half of next year, but we want to emphasize shortage is by stronger than expected demand, another shrinking demand for devices that is in the infrastructure, all very strong. Actually, Lenovo’s backlog is almost the same as the previous quarter. Another point is Lenovo has set record to drive better than competitors’ result regarding of the supply. So mainly because of Lenovo’s unique ability to modify, we are not like our competitors who outsourced 100% of the production to the third-party. At Lenovo, we have the hybrid, 50% in-house 50% outsourcing model. So this model give us more flexibility and better relationship with the Tier 2, Tier 3 suppliers, upstream suppliers so that we can manage our supply base. So even with the supply constraint we are optimistic and confident to continue to drive the premium to the market growth.

Thank you. Next question.

Operator

Thank you. The next question comes from the line of Albert Hung from JP Morgan. Please ask the question.

Albert HungJP Morgan — Analyst

Thanks for taking my question. Congrats on the good result. My first question is still regarding the service. So could you provide some analysis? From quantitative analysis, what’s the, say, long-term target of service segment? What’s the KPI for this? And from, say, qualitative analysis, could you share more color on the difference in customer behavior between the service and traditional hardware segment? For example, how is the customer churn rate? And how is the customer cross-selling opportunities for service segment? I guess one also key question is whether the customer tend to adopt more than one partner in service model or they just use single source in service.

And my second question is the OP margin. Segment OP margin achieved new set of highs for PC, and mobile KPI also achieved record highs. [Indecipherable] also showed very meaningful loss reduction. But the group gross margin actually dropped on a sequential basis. Could you help me to understand a bit more about the disconnection between gross margin and OP margin? Thank you.

Yang YuanqingChairman and Chief Executive Officer

So Ken, could you please answer the first question.

Ken WongSenior Vice President and President, Lenovo Solutions & Services Group

Yeah Jenny. Thank you Albert. So let me take the first question. Now regarding the target. I think first of all, we’re very happy to see the Q1 performance rate of 38% due to year growth and 22% of operating margin. Now as I — as I answered the previous question, I think we continue to see a very strong demand for all kind of services right from attached services all the way to managed services and everything as a service. So our target in mid-term is to maintain the SSC growth, which is faster than the overall Lenovo group growth for both topline and bottom line.

Yang YuanqingChairman and Chief Executive Officer

So your second — could you please repeat your second — second question. If cost impacted our marginal profit, is that the question?

Albert HungJP Morgan — Analyst

Sorry, my second question is your OP margin actually achieved greater highs, but actual gross margin declined quarter-on-quarter. So could you help me understand the disconnection between these two composition?

Wong Wai MingExecutive Vice President and Chief Financial Officer

[Speech Overlap] Only one thing, but it has been growing almost 1.5 points year-to-year. So it depends on the comparison quarter-to-quarter or year-to-year.

Yang YuanqingChairman and Chief Executive Officer

So, you want to add something here?

Ken WongSenior Vice President and President, Lenovo Solutions & Services Group

Yes, all right. I think there are — I think couple of reasons. I think one already Gianfranco mentioned about the competition issue. I think the other one is obviously scale. I think in quarter four, I think we’ve been actually — I think quarter four numbers, I think we obviously get some maybe because of scale, because of some one-off costs that actually drive cost is in fact is actually not significant. I think for us, I think there may well be also some changes, I think in terms of the mix of the product. I think resulting that again I think probably I need to give — I think provide more detail for example in different geographies or in different countries. I think the profit margin or the gross margin in profit is a little bit higher than the others, for example, like Japan generally. I think when the market size changes quarter-to-quarter, that actually have a small impact I think on our overall gross margin, but generally I think as to — we have played in looking I think more comparable. I think is really year-to-year and that’s, we actually been I think improving gross margin and that is our target and we also prefer comfortable that we can continue to maintain the margin improvement. I think resulting what Wong said earlier, that it is our medium financial goal I think is to truly improvement in gross margin obviously as well as operating efficiency to be able to bring our net margin. I think to double. I think from last year to 24% I think medium term target and we’re obviously on track on that.

Yang YuanqingChairman and Chief Executive Officer

Okay, next question.

Operator

Thank you. The next question comes from the line of Donnie Teng from Nomura. Please ask the question.

Donnie TengNomura — Analyst

Thank you management for taking my question. My first question is regarding to your PC business. So I think in the past two months the confirmed — COVID-19 confirmed cases in US surged a lot again from the very low base in May and June. So, previously, I think my impression is like Lenovo believes that a commercial PC demand is increasing due to people will be back to office red and work from home after the easing of the COVID, but now the situation looks like it will be getting worse again in Western countries. So just wondering if you could give us an idea about our PC business outlook in terms of like commercial or consumer or educational segment? And that’s the first question.

And the second question is for inventory. So in the past few quarters, I’m seeing that your raw materials and working process inventory surged more meaningful compared with the finished good. So I’m just curious what kind of component materials or ICs accumulated in the past few quarters and whether — I mean if there is any demand deteriorating if there would be any kind of risk on inventory write-off in the future? Thank you.

Yang YuanqingChairman and Chief Executive Officer

So the first PC we have your questions. So could I invite our new IDG leader Luca to answer the question. So probably Gianfranco can answer the inventory question or [Indecipherable] Luca please.

Luca RossiSenior Vice President and President of the Intelligent Devices Group

Hello, can you hear me?

Donnie TengNomura — Analyst

Yes.

Luca RossiSenior Vice President and President of the Intelligent Devices Group

Very good. So thank you for the question. So I think, Donnie, you are asking whether the new COVID profile is — how it is affecting our PC segments. So obviously — yeah the PC demand in each segment. So obviously we are seeing a very robust consumer segment. Consumer segment demand still. We observed that in some of the country with the — with the lower COVID rate or with the better COVID situation the demand slowed down a little bit, but still maintains far superior to the previous pre COVID levels so to say, demonstrating our theory that the PC is truly back at the center of people digital life. So that is for the consumer part. The commercial side, the demand profile and the outlook we estimate is very bright because we have noticed during the initial COVID one year ago many enterprises have lowered down investments, but now due to the necessary the must digitalization of their businesses. There is very significant demand increase. We have noticed this initially more in the large and very large enterprises, namely our global accounts, but now it is extending also to the — the large enterprises and the SMB. So I would say we are very positive on the demand of the commercial PC business. For both segments, there is also an upgrade into the product demand, which means there is a higher demand of audio, video, microphone, conferencing experience. So that drives the premium PC higher, which consequently drives AUR and our margin opportunity higher as well. You also ask it about the education. I think the education and namely Chromebook is also in function of the learn from home status. Now there is a little bit of slowdown, particularly in US, we have noticed the Chromebook as slowed down a little bit, but that’s also related to the seasonality and to the government funding incentive, which we have reason to believe that will pick up, so it’s probably that this education segment is probably the lowest among the consumer and commercial, but we still believe it’s very early to say that the demand is trending down, it is just pause. But in any case for us Chromebook is a very small fraction of our PC revenue. I think it’s less than 5%.

Yang YuanqingChairman and Chief Executive Officer

Yeah, so I want to echo Luca’s point. So firstly from what we can see PC demand feel very strong in both consumer and commercial segments. Our backlog orders last quarter was similar to the previous quarter, so very big volume. We still cannot — we still cannot believe it because of the complementary shortage. From long-term point of view, so we are equally optimistic because we think this pandemic has changed peoples behavior. So the hybrid working approach will last for long-term, just to say. So that will drive the PC demand, but it is the people at the current level. And it is a 300 million units per year level, which is much higher than the pre-pandemic, which is just [Indecipherable]. Now our people spend more time, every day on their PC so that they will drive faster replacement cycle. And also we definitely drive the more penetration rate. So that will help PC total market keep it stable. So that’s the — that’s our view. And also the commercial — because the commercial customers while market is getting recovered, so that we believe everything selling price. We have to work [Indecipherable] to improve the profitability. So even Lenovo’s commercial PC product are strong in industry, particularly in the premium ThinkPad area. So I think that will help us to improve the profitability. Regarding the component that you mentioned, I don’t think that the issue part. Actually it is driven by the supply shortage. We have to buy ahead for some components. So perhaps Gianfranco, you want to add something of the here.

Gianfranco LanciCorporate President and Chief Operating Officer

Yes, there is another important that there is another element in my view also that is going to drive demand on PC in the next three months to six months, which is the Windows 11. Then it’s going to be available very soon and this will also help to drive demand first in consumers, second in commercial later. On the inventory, I think what is important to build up some inventory in terms of components because with the shortage today if you are in a good position in terms of inventory, then you can speed up manufacturing and ship as quickly as possible, because as [Indecipherable] we still see back order very, very high. It’s almost one quarter of back order so we really don’t see any deterioration of demand. And to have even more inventory it would be good, because with the shortage you need to play between different components, you need to see what is available, what is in it to make sure that in terms of [Indecipherable] you are okay. And we really don’t see any possibility of the deterioration or write-off of the inventory. Unfortunately it is not enough, should be more but, but should be more, it depends on the shortage. And so inventory is really another issue.

I think that the clean the back order and shipping to the customer on time is the real issue we have today and we will not see any good the solution for sure until the end of the year and probably even next year. As demand is so strong on consumer, still strong, getting very stronger on commercial, but it’s already a couple of quarters, almost three quarters. And the impact of COVID-19 with the new — the Delta and what we have seen. First of all in the Western world, it is very clear that with the vaccine, people they may get infected, but if they are vaccinated they don’t go to the hospital. They — it becomes like flu, but it is not getting very serious. Second, I think most of the enterprise customer, all the larger enterprise customer it is really not because people that they start to invest again, not because people are coming back to the office, but because they want to — they really want to speed up the digitalization of the company in order to be ready for any future the surprises or future issue. And so I think nothing to do, in my opinion with people going back to the office or not when we — when we look at commercial investment.

I would say, the only thing where you see a little bit of slowdown is education mainly in units Chromebook. We are not one of the largest players in Chromebook. Chromebook for us today something in the range of 5% of our revenue. We never have been very focused on Chromebook also because talking about inventory we prefer to use parts and the components to build better machine in terms of average selling price rather than building Chromebook will lead to our competitor to do it, but I think it is the only area also due to some seasonality because now it’s into Malaysia. It is the only area where we see a little bit of a slowdown, consumer and commercial really did not see any slowdown.

Yang YuanqingChairman and Chief Executive Officer

Okay, next question.

Operator

Thank you. The last question comes from the line of Jerry Su from Credit Suisse. Please go ahead.

Jerry SuCredit Suisse — Analyst

Thank you. Thanks for taking my question. So my first question is regarding the channel inventory situation. I know that Gianfranco and other executives have talked about the strong demo also the backlog you have, but I think the market has some concern about the rising inventory level in some developed market. So can you give us a little bit comment on that? And then the second question is regarding the Asia listing, is there any new update you can share with investors? Thank you.

Jenny LaiVice President, Investor Relations

Okay. Gianfranco, you can continue to answer the channel inventory.

Gianfranco LanciCorporate President and Chief Operating Officer

I’m little bit — thank you for question. Mostly, I’m little bit surprised about that because we don’t see any buildup of inventory in the channel exactly the opposite. In most of the geo, the level of the channel inventory has never been so low. We are building in some cases of less than four weeks, three weeks to four weeks. And we know with the three weeks to four weeks that usually, you lose the sales, because the profile of inventory never [Indecipherable] I don’t know where the information is coming from in terms of building up channel inventory, but for sure it’s not the case for us. As I said the back order we have it is almost one quarter and in most of the country with people distributors and dealers and so on. I think desperate to get the goods. So both commercial and consumer again, probably there is or we may see some education inventory building up Chromebook mainly in one geo in — which is US, this may be the case if we talk about overall inventory I don’t see issue on consumer, I don’t see issue on commercial, we might see something on education, but again in our case as I do we are the number three in terms of — even number four in terms of Chromebook suppliers. So, it’s not going to be a major — a major concern even with some slowdown on the sales.

Yang YuanqingChairman and Chief Executive Officer

Okay, thank you. Thank you Gianfranco. Regarding on the Asia, so Wai Ming, you want to answer the question?

Wong Wai MingExecutive Vice President and Chief Financial Officer

Yes, alright. I think in terms of the CDR — application of CDR listing in Shanghai, we are definitely making progress. I think in accordance with the requirements laid out by I think the relevant regulatory — regulators. I think we have achieved several milestones. I can give you a little bit sort of color, including for example I think management and directors doing the education and taking exam. I think getting all the adviser, I think verifying our documents. I think we are making very, very good progress and we obviously will follow the procedure as laid out by the regulators. And if there is anything that I think that we want to go to public we will obviously I think publish an announcement informing the market. But in short, I think we are making progress and achieved, I think a number of milestone as laid out by the regulator.

Jerry SuCredit Suisse — Analyst

Thank you.

Yang YuanqingChairman and Chief Executive Officer

Okay. So before we end the call, can I invite Kirk and Buniac to give one minute update on their business regarding of the ISG and MBG. Kirk?

Kirk SkaugenExecutive Vice President and President, Infrastructure Solutions Group

Sure Yang. So I think we feel very confident in our continued growth or year-on-year growth, quarter-on-quarter revenue growth and improving profitability. We’ve now shared with you six quarters premium to market with our all-time record revenue, but we also had records across our server business, storage business, cloud business, high performance computing business and communication service provider and service. So in the areas of storage, we’re seeing more than 50% year-to-year growth and 14 quarters of premium-to-market growth, which as catapulted us to number two in the mainstream storage market of 25K and under storage. So, it is a good momentum story for us and we continue to grow. We believe at a premium to market despite again certain supply shortages we don’t think that will limit our continued record revenue growth and improving profitability.

Yang YuanqingChairman and Chief Executive Officer

Thank you. Thank you, Kirk. So, definitely, we think the ISG has big opportunity to do further grow. So that we transform from server only to the full stack of data center product storage software defined, software and the services and also there were — I think we have successfully shifted from enterprise from SMB only to cloud service provider side. So we will be — are focusing on the hybrid cloud as we are in the future. So the opportunity is huge. We will ensure that investment to guarantee the growth in that business. Okay. So Bunaic, one minute.

Sergio BuniacSenior Vice President, President of Latin America and Mobile Business Group, President of Motorola

Yeah, hello everyone. So similar, we are seeing very strong demand coming from all geographies. We saw a record Q1 like from the best Q1 since 2015, 64% year-over-year growth. We see that sustaining growth in future quarters. Many, many ones like [Indecipherable] since 2018 record North America Q1 ever, price complex in quarter of bringing to market. We have seen ranging growth significantly in all regions across the globe. And we also just deployed a very strong enterprise portfolio by launching features. So not only by geo, but only — we are growing in different segments. The final comment is that our 5G has grown from 10% to 14% and we believe you are probably double between now and the end of the year as part of the portfolio.

Yang YuanqingChairman and Chief Executive Officer

Thank you. Thank you Bunaic. So we are definitely impressed by these two businesses, particularly on the profitability environment. So I think ISG is seeing the last mile to deliver profitable growth and our MBG delivered 5% operating margin. Last quarter, so basically has been very healthy business. The height of the level and also positive. We will reinvest this money in the mobile market to drive the growth.

Okay, thank you. Thank you everyone for participating in the call.

Jenny LaiVice President, Investor Relations

Yes, thank you. Thank you YY, thank you executives. And we thank you very much for joining today’s call. If you have any questions feel free to contact our IR department and the replay of this webcast will be available in the next couple of hours on our Investor Relations website. Thank you again for joining us. Bye-bye now.

Operator

[Operator Closing Remarks]

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