Lenovo Group Ltd Ord

Good morning and good evening. Welcome to Lenovo's earnings webcast. Thanks to everyone for joining us. This is Jenny Lai, Vice President of Investor Relations. Before we start, let me introduce our management team joining the call today. We have Lenovo's Chairman and CEO, Mr. Yang Yuanqing, Corporate President and CEO, Mr. Gianfranco Lenci, Group CFO, Mr. Wong Wai-Ming, President of Data Center Group, Mr. Kurt Skaugen, and President of Motorola, Mr. Sergio Buniak. We will begin with a presentation shortly, and after that, we will open the call for questions. Without further ado, let me turn the call over to Yuanqing. Yuanqing, please.

Hello, everyone. Thank you for joining us today. Despite the trade war, currency exchange shock, CPU shortage, and the pandemic, Lenovo still delivered a solid result this past fiscal year. Our full year revenue again exceeded 50 billion US dollars, almost the same as our record revenue the year before. Profitability showed a strong growth with pre-tax income reaching historical high of more than US$1 billion, up 19% year-on-year. Net income was US$665 million, up 12% year-on-year. In our intelligent device group, PC and smart devices again led the way through solid execution. Revenue grew to nearly US$40 billion. Profitability was even better. Pre-tax income reached US$2.3 billion, more than 18% year-on-year growth. And the profit margin was almost 6%, up 0.7 points year-on-year. Both set new records. We solidify the leadership in PCs, improving market share by over one point to 24.5%. This strong sustainable growth is driven by our consistent strategy to focus on and invest in the high growth segments. Workstation, Chromebook, visuals, thin and light, and gaming PC volume all outgrew the market by double digits. Our mobile business was on target for a breakthrough year until the impact in the fourth quarter. Overall, revenue was down to $5.2 billion, and the pre-tax loss was $43 million, greatly narrowed by 96 million US dollars. Our Moto G family reached 100 million lifetime units worldwide. And we launched the first clamshell foldable smartphone, Razr, to re-enter the premier segment. While overall data center revenue declined year on year due to softer hyperscale demand, and a sharp commodity price drop. Now, hyperscale revenue grows more than 5% year-on-year. This is driven by double digital growth in the key growth segments of software-defined infrastructure, storage, other software and services. Particularly, storage revenue grows more than 50% year-on-year. as well as over 14% growth in server volume and nearly 23% growth in China. We also extended number one ranking in high-performance computing with 173 designs worldwide. Our intelligent transformation showed solid progress Smart IoT revenue quadrupled year-on-year, driven by AR, VR, smart office, and smart home. Smart infrastructure grew 37% year-on-year as network function virtualization business started to contribute revenue of more than $70 million. And smart vertical revenue more than doubled thanks to strong growth in data intelligent business growth, smart healthcare, and smart education solutions. Software and services completed a breakthrough year, with revenue reaching 3.5 billion US dollars, up 43% year-on-year, and becoming the catalyst for our overall transformation. These solid results are driven by our core competencies of operational excellence and the global local philosophy. The same strengths also helped us overcome the challenges from the pandemic last quarter. While COVID-19 continues to impact the world, I'm very proud of the way Lenovo responded both as a business and a corporate citizen. While protecting our employees' safety and well-being, Lenovo also continued to provide resources and expertise to help our communities. This includes the donation of IT systems to hospitals, devices to students of low-income families to access e-learning and support to research into cure of the virus. The total donation of Lenovo to that is approaching 15 million US dollars in value. Create a challenge like this is a critical test to any company. At Lenovo, we fully leveraged our strong management and execution capability to mitigate the impact and deliver the results beyond the expectations. While limiting revenue decline year-on-year to less than 10%, we delivered a profit of US$7 million in pre-tax income and a net income of 43 million US dollars. Our PC and smart device business delivered a strong quarter. With our operational excellence, our PC manufacturing in China was one of the first to resume full production in the industry and achieved daily, weekly and monthly production records in March This helped us meet the strong PC demand driven by work from home and study at home due to the lockdown. As a result, we contended the revenue decline of PCSD and greatly improved the pre-tax income by 15% year-on-year and the profitability by a whole point to a record higher of 6.2%. Our PC volume outgrew the market by more than four points, further extending our leadership as the number one PC vendor. Our PC revenue outgrew the market in all geographies. In particular, our volume in North America grew almost 18% in a declining market And the market share improved 3.4 points year-on-year. Our share in EMEA also increased more than 2 points year-on-year. Our mobile business was severely impacted by the pandemic, as our primary smartphone factory in Wuhan remained closed for much of the quarter. However, we still produce 6 million units of smartphones, leveraging our global manufacturing footprint. In data center, our overall server volume continued double digital growth year-on-year. Hyperscale revenue remained a challenge due to commodity price drop, but the now hyperscale revenue continued to grow year-on-year. driven by the 4S software-defined infrastructure, storage, software, and services. And our intelligent transformation continued to show strength. Smart IoT revenue more than doubled, and the smart infrastructure, smart vertical, saw double digital growth in revenue year-on-year. Software and service revenue grow 38% year-on-year, contributing 8% of the group's total revenue. In the new fiscal year, Lenovo will prepare for uncertainty and strive for the best results. Even more, we will capture the opportunities brought by the market changes for long-term sustainable growth. the work from home, study at home, e-commerce, online gaming, and telehealth will become the new normal and expand the total PC and smart devices market size. We will continue to innovate to meet new demand and focus on the high growth segments to drive even stronger growth. Meanwhile, Our new premium and 5G smartphone products will help us capture the opportunity of much anticipated 5G mobile market. As digitalization and smartification accelerate, we will not only address the increasing demand for infrastructure, but also support the total solution needs with our broad product offerings and service capability. This is also highly aligned with our strategy to accelerate intelligent transformation through building services and solutions into our next core competence. Last year presented many challenges, but each time Lenovo leveraged our core competencies operational excellence, and global local philosophy to overcome them effectively. In the year ahead, we will continue to demonstrate resilience and strive to take our business to new heights. Thank you. Now, let me turn it over to our CFO, Wei Ming.

Thank you, Yang Jing. I will now take you through Lenovo financial and operational performance in Q4 and fiscal year 2020. Next chart, please. Thank you, Yang Qing. I will now take you through Lenovo financial and operational performance in Q4 and fiscal year 2020. Next chart, please. The group set a historic record year in Lenovo history with 1 billion PDI, up 19% year-on-year. thanks to strength in PCSD and profit improvement of MBG and DCG. For the full year, we generated $50.7 billion in revenue, largely stable year-on-year despite challenges affecting sector demand and supply. Our PCSD business gained 1.2% of worldwide share and maintained its number one position in the sector while setting all-time records on shipment, revenue, and pre-tax profits. Both DCG and MBG improved their annual profitability for the third consecutive year, although their revenue declined due to COVID-19 impact and change of sector dynamics. Our transformation actions led to accelerated growth in high-margin software and services business. After consistent double-digit growth throughout the year, software and services business grew to become a 7% revenue contributor. The group gross margin expanded 2.1 percentage points to a new record of 16.5% for the year, primarily due to profitability of PCSD and further boosted by high-margin software and service business. Operating expenses increased by 12% to $6.9 billion, and the year-to-hour ratio rose 1.5 percentage points to 13.6%, as we continue to invest in sales, marketing, research, and provide incentive to reward performance. Profit attributable to equity holders was $665 million, and the basic earnings per share came in at 5.58 U.S. cents. Today, the Board declared a final dividend of 21.5 Hong Kong cents per share. Taking into consideration of the interim dividend of 6.3 Hong Kong cents per share, total dividend will be the same as last fiscal year. Next chart, please. In Q4, our cash flow generated from operations was $432 million, a year-on-year improvement of $910 million. For the fiscal year, we generated a total of $2.2 billion in operating cash flow, representing a year-on-year increase of $737 million and net debt was reduced by $404 million year-on-year. The strong profit improvement and better working capital management are positive catalysts. Our infantry days increased by 15 days year on year as we started to buy ahead of strategic paths in Q3 and accumulated more paths towards the end of Q4 in preparation for future orders. We recently issued a five-year U.S. dollar bond amounting to $1 billion, partly to repay a $4 billion RMB bond and partly to boost our cash pool as it is prudent to strengthen liquidity in light of the uncertain economic outlook. Let's move to segment performance for the last fiscal year. Next chart, please. Our intelligent device business group, consisting of PCSD and MBG, delivered an outstanding year in the midst of several macro events. Its PDI improved 25% year-on-year to set an all-time record of $2.3 billion. Both PCSD and MBG contributed to the profit improvement. IDG's revenue was up 0.5% year-on-year or up 3.1% in constant currency. The most significant macro event in the year was the pandemic. As one of our MBG factories is in Wuhan, China, the extended closure of the factory caused a severe shortage in its supply and resulting in a 10% year-on-year revenue decline for IDG in Q4. Next slide, please. This is another record-setting year for our PCSD business. We achieved record-breaking revenue, shipments, and PPI. By leveraging its operational excellence, portfolio optimization, and sales execution, PCSD remained as the fastest-growing PCOEM among the global top five players for two consecutive years with record-high market share. The business revenue reached an all-time high at $39.9 billion, up 4% from the prior year. The high growth and premium segments including workstation, thin and light, visual, and gaming PC all report year-on-year units growth of 28% to 38%, helping the business to deliver premium-to-market growth and to reinforce its global number one position in the PC market. PCSE reported a record PTI of 2.3 billion, up 18% year-on-year, and its PDI margin expanded 73 basis points to 5.9%, boosted by strategic investment to drive sustainable return in high-growth and premium segment sales and double-digit growth in its software and service business. Next slide, please. MBG's strategy has proven to be a success in driving a balance between profitability and regional growth to turn the business profitable in the first three quarters until COVID-19 in quarter four. MBG protect loss improved by 96 million year-on-year, thanks to its solid strategy execution and focus on profitable core markets, product portfolio enhancement, and expense reduction. Its revenue declined 90% year-on-year due to its focused market strategy. In return, its two core markets, Latin and North America, deliver healthy profitability and year-on-year profit expansion. Next slide, please. Group concluded the fiscal year with a 9% year-on-year revenue decline and the third consecutive year in PPI improvements. Softness in hyperscale revenue was driven by customer inventory digestion and commodity price erosion, partially offset by strength in non-hyperscale business. However, starting Q4, DCG hyperscale shipment growth recovered to double-digit year-on-year. The growth trajectory of non-hyperscale revenue started to improve in Q2. For the last three quarters of the fiscal year, DCG non-hyperscale shipments grew by consistent double-digit year-on-year, owing to strong momentum in storage, software-defined infrastructure, and software and services, as well as leadership in high-performance computing. By regional market, DCG China outperformed and its shipment in non-hyperscale segment increased significantly. high double-digit in the year after investment were put in place to drive channel and product expansion while taking advantage of DCG joint venture with NetApp to expand the addressable market in storage products. Now let's shift to Q4 performance. Next chart, please. We deliver a solid Q4 despite the incredibly challenging supply disruption from the pandemic. Our operational excellence and global footprint enable a strong quarter-end supply expansion for PCSD. Riding on the unexpected demand dynamics favouring work from home, our rapid supply recovery helped PCSD to deliver premium-to-market growth in all regions and maintain its global number one position. Other bright spots included the non-hyperscale business of DCG and our software and service business. These strong performances were offset by severe supply constraint of MBG and lingering component price erosion of our hyperscale business, thus resulting in a 9.7% year-on-year revenue decline to $10.6 billion for the quarter. Gross margin expanded 1.4 percentage points to an all-time high of 17.6%, thanks to PCSD's consistent focus to prioritize growth on premium segments. The continuing strength on this high-margin software and service business and improved segment profitability. PDI was 77 million, down from 118 million in the same period last year. The healthy profit expansion by PCSD was partly offset by pre-tax losses from MBG and DCG as COVID-19 kept the supply of MBG and DCG profitability due to the rising freight and shipping cost. Next slide, please. In Q4, the pandemic resulted in a sector-wide factory shutdown in China. Nevertheless, PCSD business was able to leverage its operational excellence and global footprint to snap back the supply faster than its competition and ride on work-from-home demand tailwind to capture market share. Its premium-to-market growth reached 4 percentage points in the quarter. However, the supply disruption in the first part of the quarter weighted on the Q4 revenue, resulting in a 4 percent decline year on year. PCSD business reported a 15% PDI growth, and its PDI margin remains stable at a record level of 6.2%, thanks to premium segment sales, rising software and services contribution, and improved segment profitability due to new growth opportunities such as work-from-home demand. Next chart, please. MBG performance in fiscal Q4 was impacted by a factory shutdown in Wuhan, China, for the most part of the quarter because of COVID-19. MBG was able to leverage the support of our global footprint to deliver 6 million smartphone shipments, but the zero loading of Wuhan factory for most of the quarter resulted in a year-on-year revenue decline of 47%. MBG was able to contain its pre-tax loss at 60 million after expense action partly mitigated the negative impact from revenue shortfall. Next slide, please. In Q4, DCG's server shipments grew double digits year-on-year. Although its revenue growth again was constrained by lingering commodity price erosion in hyperscale business, DCG revenue declined 3% year-on-year to $1.2 billion. The non-hyperscale business continued its momentum thanks to double-digit year-on-year revenue growth in storage and its software and services business. We were ranked global number three in the entry storage market, and started to see storage profitability in expansion. Losses expanded 23 million year-on-year in the quarter due to higher shipping and freight costs amidst COVID-19 city lockdown. Next chart, please. Operating in this complex global environment, our company will leverage its extensive experience in managing a multitude of macro risk, operational excellence, and global footprints to deliver consistent performance. will continue to innovate and promptly add on industry growth opportunities, including the search of work from home and study at home tailwinds. These long-term structured trends could enlarge the addressable market for PCSD and cloud infrastructure demand, as well as accelerate development of 5G services. The group will also exercise disciplined expense control to optimize its liquidity and financial health. Our PCSD business targets to continue its premium-to-market growth and industry-leading profitability. Its consistent focus on high growth and premium segments, investing in software and services business, and expanding e-commerce will all help to drive new growth opportunities. For mobile business, the group will continue to protect its position in its stronghold market and strengthen its competitiveness in target markets to grow at premium-to-market, improve long-term profitability, and reenter flagship segment through product innovation. Now the supply is normalized. On the back of lean channel inventory and pent-up demand, the group is well-positioned for future improvements where uncertainty is off. In DCG business, the group aims to deliver premium-to-market growth while improving profitability. In the hyperscale segment, the group is offering the broadest custom hyperscale server and storage solution in its history. BCG will strengthen in-house design and manufacturing capabilities, bring superior solutions to global and Tier 2 hyperscalers, and build a profitable business model. In the non-hyperscale segment, the group will continue to drive growth in the enterprise servers, SDIs, storage, and the software and services business. The group will also further enhance its capabilities in professional services and solution-based expertise. Thank you. And now we can take your questions.

Thank you, Waimin. Now we are open line for questions and this session will be in English only. Please be reminded to limit yourself to two questions at a time. Please also state your name and company before asking questions. Operator, I'll now turn it over to you. Please give us your instructions.

The question and answer session will now begin. If anyone wishes to ask questions, please press star one on your telephone keypad. Press star followed by one. Thank you. The first question comes from from JP Morgan.

Thanks, and thanks for taking my questions. I hope you're all fine. I will just focus on my first question on the PC side. Could you talk a little bit about how is the demand trends coming through from work from home, study at home, et cetera? Do we see a meaningful pickup in terms of PC demand coming through in the current quarter? And I also wanted to have some view from Lenovo management on how the demand is going to shape up through the rest of the year. We feel that this is a little bit of a short-term uptick, and we see a fall-off in the second half of the calendar year, especially since IT spending, Windows 10 refresh cycle, all starts to hit a peak. Second question I have on is on gross margins. I think gross margin continues to edge up ever since your software and service business mix has been growing. So could we talk a little bit about how sensitive is gross margin to the mix of software and services? And should we assume that over a longer, medium to long term period, we are likely to continue to see gross margins keep expanding as software and services grows at a faster pace than the hardware part of the business? Thank you.

So you want to answer the question first.

Yes, thanks. Good morning or good afternoon. I don't know where you are located. Coming to demand, I think what we see clearly, and this is already in Q4, or at least at the end of Q4, but due to factory and due to production in China, we couldn't leverage Q4 demand too much. But what we see from... working from home, learning from home. It's really a pickup of demand. And we continue to see strong demand this quarter on notebook, both traditional notebook and Chromebook Winbook. Chromebook Winbook for learning from home, traditional notebook for working from home. And the clear trend we see is that usually at home you have one or two PCs. So it's one to two PCs per family, at least in mature markets. It's clearly becoming one PC per person. And I think it's a huge... And this is going to last. I don't think it's going to just... to last for the coronavirus impact, but it's going to last forever. And it's going to last forever because clearly, at least working from home is something that is going to last forever. People will continue to work from home even after the crisis. Maybe not at the same level, not 100%, but for sure a good percentage of people will continue to work from home. because it's proven that it's more efficient from a company point of view, and it's also better perceived from an employee point of view. So I think the real deal, what is happening, is I think it can expand when we look at PC. It's really a lot of time, and then it's up to us to deliver a good experience on PC, because there are other people that have to use PC.

And if we can continue to deliver a good experience on PC, then we can deliver a good experience.

And it's also a matter of usage model. I think usage model is also changing. So talking about demand, we see a very strong Q1. I think this will continue in Q2. We don't see any slowdown for Q2. Talking about second DALT, it will be probably a little bit more critical Q3. Probably we will see a slowdown on demand on Q3. And coming back in Q4, also because the base of Q4 is relatively small this year. So I think I'm quite confident on the PC demand this year. As I said, Q1 very strong, Q2 also quite good. Probably a slowdown in Q3 and demand coming back in Q4. When we talk about gross margin, for sure the increase of gross margin is coming from two things in my opinion. One is the component cost and managing the component cost very carefully and our capability and our supply chain execution. And the other, as you said, is coming from a better mix between software and service and then the hardware. So we continue to be confident that we can keep this level of gross margin. Even though we start to see some, it's very difficult at least to predict the component trends during the last couple of months. But I think gross margin is solid and it's solid As you rightly pointed out, because the mix of software and service and the hardware is increasing, and we continue to see software and service growing double digit and on the high side of the double digit. And again, with the need of one computer per person, the need of growing the time, what we also see is devices and services really starting to pick up. Thank you.

Thank you, Gianfranco. Adding a couple of points. First, to the gross margin issue. Besides, we are focusing on the premium product segment like workstation, thin and light gaming. Besides the high mix of software and service, Besides, we leverage the component cost advantage. I think another two points that we should mention. The first is our global manufacturing footprint actually make Lenovo more efficient. So that's the first point. The second way is because of this coronavirus, actually, Our e-commerce business is growing significantly. And direct e-commerce also help to improve our profitability. And also this trend will continue. So that's two point that I want to add on the margin. Regarding of the outlook of the PC, I completely agree with Gianfranco. So this PC demand booming driven by work from home and the study at home is not just a short-term trend. It could be a long-term trend. So we have heard many of our customers, big enterprise customers talk, so they will allow their employees to work from home forever if their role allows them to do that. And also, we see many companies, Gianfranco just talked about the feminists will buy more PCs for their for their parents and their kids. Meanwhile, many commercial customers are buying laptops for their employees as well to prepare for their work from home. So we see this trend is not sheltered. So it could be a long term. It will drive the total PC time to increase. I think it's very possible. So the total PC time will be increased by 25 to 30% in two to three years. So that's very possible. Thank you.

Thank you, gentlemen. Operator, we are ready for the next question, please.

The next question comes from Hui Chen Yan of CICC. Please go ahead.

Oh, thanks for having my question. And I'm just wondering, because recently there are ups and downs in expectation for 5G. I'm wondering what's your expectation for 5G smartphones for this year? Thanks.

Okay, Bunyako, would you like to answer the question first?

Yeah, so, I mean, we have positive expectations. We just announced our re-entry in the flagship with two 5G phones two weeks ago. We are starting to ship this week, like in the market. We see 5G growing fast, especially in the second half of the year. Between now and the end of November, we will launch other three products. So we are growing from non-products to five products. And in markets where 5G deployment is a little more accelerated, we expect at least 25% of our sales coming from 5G phones in the second half. So that's a strong growth and a we will help the recovery of the market fresh in the second half of the fiscal year. Okay. Thanks.

We are also, so... Yeah, we think the 5G development will speed up. So in China and in US, we have seen this trend. So definitely we will meet the market requirement as soon as possible. So not just in the smartphone area, so we will launch premium and mainstream smartphone in our key markets, particularly North America and Latin America and Europe. But also, so we will address the 5G demand in PC and even in the infrastructure. So we are driving the network function of virtualization. opportunity. So that's what we are doing to address the 5G booming demand. Thank you. Okay, thank you.

Yes, Huishan, do you have another question?

No, no. Perfect, thank you.

Thank you. Operator, we are ready for the next question, please.

The next question is from Sebastian Ho from CLSA. Please go ahead.

All right. Thank you, gentlemen, for taking my questions. My first one, just follow up on the PC side. I understand that the work on home is a solid demand in order to drive the notebook demand. but how do you think about the desktop and then into the second half this year when the enterprise market spend will be potentially impacted? And how do you know there are the two factors, half the market and the ESQ, but another half of the market desktop may potentially be seen as a weakness? What do you see the net impact on the total PC market this year? Thank you. So, John, back off?

Yes. Yes. Why? No, as I said, we see very strong demand on notebook. Good demand on only one because it's still a suitable solution for working from home or learning from home. We are experiencing some slowdown on desktop, but when we compare the increase on notebook and the slowdown on desktop, it's relatively small. So for sure there is a slowdown on that because, as we said, people are buying notebooks either as a personal device or companies are buying notebooks to provide to their employees. And so there is some slowdown on the desktop demand, no doubt. Our desktop portion, when I look at our portion between desktop and notebook, is smaller than our competitors. And the question is, combining desktop and notebook, what do you see in terms of demand for PC? I think we started to be quite confident to see demand on PC for this year. I would say relatively flat. For our financial year, let's talk about our financial year, relatively flat. I think during the crisis and during the virus in Q4, we may be a little bit less optimistic. But if I look at, as I said, Q1, Q2, slowdown in Q3 and Q4 coming back, I think demand is probably going to be flat. Not with... any surprise in terms of demand decreasing compared to last year. It might be slightly better than last year. A big question is also, because the other thing is that we start to see government and public administration investing on learning commons. There are a few cases around the world, but they start to become more than a few cases. So it also depends on this investment and how they would deploy the investment between this year and next year. Thanks.

Got it. Got it. Thank you. Second question is on the server businesses you have. I understand that the strength in hyperscaler, but how about the enterprise type of businesses? How do you see that growing? being impacted by COVID and a global economy downturn, particularly when we go into second half this year. Yes, that's my question. Thank you.

Okay. Cook, could you please answer your question?

Yeah, sure. So I think we're looking at our strengths first from a unit perspective. If you look at our fiscal Q2, we drew 39% year-on-year. Fiscal Q3, 34% year-on-year. And then this quarter, we grew 14% in units with both double-digit growth in hyperscale and non-hyperscale. The reason our hyperscale business has been down is some of our customers had paused buying as they were consuming inventory. We see that dramatically changing rapidly starting this quarter in units, but even more dramatically next quarter. And revenue was impacted in hyperscale primarily because of sharp commodity declines in FSD and memory. Those are over, so we should see now a tailwind in revenue as well from increased demand and increased commodity pricing. In non-hyperscale enterprise, we saw a lot of enterprises not prepared for work from home. And while they may be decreasing real estate in the coming years because they don't need as much real estate for people when they're working from home, they're dramatically increasing their infrastructure for virtual desktop infrastructure. And they're typically doing that on Lenovo Gear with our partners, whether it's Nutanix, VMware, or Microsoft, putting in software-defined infrastructure to support that VDI demand. So I think we're very unique relative to some of our competitors because when a customer comes and asks us for that, we can supply them both the notebook computer and also the back-end infrastructure. So I think you're going to see, obviously, a strong double-digit units this quarter that we're reporting now, but even stronger growth and premium to market as well as revenue growth as we go into next year. We're very confident in the current quarter in the dramatic change in both our progress in non-hyperscale and hyperscale as a result of this work from home and study from home.

So I I want to expand so what the cooker said this this quarter is actually in our laughter fiscal quarter Don't misunderstand that so I I think I Had to present agree with the cookers View are so So data center will be really new infrastructure. So particularly during this work from home and study at home period. So without the support from the infrastructure. It doesn't matter if it's a public cloud or it's a private cloud. So it's not possible for companies and employees to work from home. So we will see the growing demand in both cloud computing and in the enterprise private computing or on-prem infrastructure building.

Got it. Thank you. Last question for me?

I would also say just one more thing that during this softness that we saw in hyperscale revenue, we were gaining share in almost all of our hyperscale accounts. So, again, we were winning storage business, not just servers, and expanding the number of design wins we had in those hyperscale accounts. So we have a lot of confidence, whether you're going to cloud for your video conferencing, or whether you're putting in on-prem infrastructure, you're gonna see strong demand and strong growth premium to market from Lenovo.

Thank you, Kurt. And thank you, gentlemen. Let's move on to the next question, please, operator.

The next question comes from Howard from Morgan Stanley, Asia. Please go ahead.

Hi. Congratulations on the quarter, and thank you for taking my questions. So I have two questions. The first is in follow-up on PCs, in terms of seasonality, based on what your comments earlier, basically, are you seeing a change in terms of seasonality this year where in calendar year Q3 or the September quarter, we expect to see the highest PC revenue versus previous years where maybe we see that in the December quarter. And then the second question is on DCG. You mentioned growth in hyperscale in this upcoming fiscal year. Is that mostly driven by your existing hyperscale customers, or is that mostly driven by new customer and new project wins? And a second part to the hyperscale question is, post-COVID, are we seeing an acceleration from our customers to, from our enterprise customers to drive digital transformation? So are we seeing, you know, hyperscale growth Are we expecting that to accelerate in the coming quarters versus enterprise?

So, Kirk, could you please answer the second question continuously? So then Gianfranco will answer the first question.

Yeah, yeah. I can be really quick.

So I think in hyperscale, there's a number of things that are going to drive both our revenue growth as well as our profit growth. First, we're launching Intel and AMD and ARM-based servers. So we've expanded our portfolio beyond just Intel for some of the hyperscalers. Second is we've won significant design wins now in storage for the hyperscalers, not just server, and those tend to be a bit more profitable. Third is we're going to build motherboards in-house at our own factories. leveraging the tens of millions of units of capacity we have on notebooks and building server motherboard capacity to support them so we don't have to pay an ODM along with that. And then lastly, we have expanded aggressively our sales force to cover approximately 250 of the next wave of hyperscalers. These traditionally had not been covered by Lenovo, and we're already seeing dozens of new design wins from this next wave tier of hyperscalers worldwide that will grow dramatically. But I think, as I said, as we enter the new fiscal year and the quarter we're in, we see increased demand from every single one of our customers in both server and storage. With the commodity price declines that caused some of our revenue shortfalls in this past year, those are behind us, and we just see smooth sailing ahead. Ke, have you finished? Yes, sorry.

Okay, so definitely, so we see the strong demand for the digitalization and the smartification post the COVID. So in many areas, so smart manufacturing, smart retail, and smarter healthcare. So those can help to meet this social distancing requirement. So that's why Lenovo is driving this service-led transformation. So we will provide more solutions, intelligent solutions to our customers in many smart vertical areas. Actually, I can give you an example. In China, we developed a new retail business model, we call it OMO, or Merged Offline Model, which allows our online team to collaborate with offline partners and the retail stores to provide an even more efficient road to market. So this has worked very well. Actually, without this model, we would not have the good results. during this coronavirus outbreak. So we will try to replicate it to the rest of the world. Meanwhile, it could become a product for Lenovo to introduce to other customers. Definitely, in the smart manufacturing area, we want to build Lenovo as a role model as well. So to digitalize ourselves, to modify ourselves, then we can introduce this model to our customers as well. And also, we are working on the smart healthcare and other smart vertical area. to drive this complex solution for our customers. Regarding the first question, Gianfranco, could you please talk about the PC seasonality issue?

No, yes, we will. For sure, there is a slight change, but I would say, again, looking at our financial year, so not calendar year, but financial year, what we can say is probably we see a better balance between first half and second half. But I would not say it's a big seasonality change. It's a small seasonality change. It will end up probably with a better balance between first half and second half.

Thank you. Thank you. Thank you, Gianfranco. Okay. Thank you. Next, please.

Yes, YY, I'm sorry, but we will now have to conclude our call because of limited time. We thank you very much for everyone for joining today's call. If you have any further questions, please feel free to contact us directly. 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. Thank you. Bye.

Thank you. Bye-bye.

Thank you. Thank you. Bye-bye. Thank you.

Ladies and gentlemen, let's conclude our conference call today. Thank you for your participation today. You may now disconnect. Thank you.