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 Yuanxin. Yuanxin, please.

Hello, everyone. Thank you for joining us. I'm pleased to talk about our record-setting second quarter performance and our vision for further growth in today's fast-changing world. Despite a challenging environment, last quarter, we delivered a record quarter performance in both revenue and profit. Revenue reached a new height of $14.5 billion, growing over 7% year-on-year. As all of our core businesses delivered year-on-year growth for the first time in six quarters, Profit showed even stronger growth, with pre-tax income and net income both up over 50% year-on-year. Pre-tax income reached $470 million, and net income reached $310 million. In addition, the top three credit rating agencies granted Lenovo strong investment-grade rating, further strengthening our ability to finance our growth. In our intelligent device growth, PC and smart devices delivered another historic quarter, revenue up 8%, while pre-tax income improved 18% year-on-year. Both set new records, Although market is shifting to consumer segment, we still maintain our industry leading and record profitability of 6.3% through excellent and high efficient operations. And we return to number one in PC with almost 24% market share. Our focus in high growth and premium segments continued to drive strong growth. Despite the currency volatility in Latin America, our mobile business revenue rose 39% quarter to quarter and returned to year-on-year growth as we continued our strong recovery from the impact of COVID-19. Besides the further solidifying presence in our stronghold market like Latin America and North America. We have accelerated our development in Europe and the Asia-Pacific and saw clear results. In addition to our strong product portfolio, we launched Razer 5G football smartphone and Lenovo Legion gaming phone, and both have been well-received by markets. In data centers, we again saw double-digit revenue growth with improved profitability year-on-year. Our cloud service provider segment continued to grow over 30% year-on-year with strong growth across all geographies, particularly thanks to years of investment in in-house design and manufacturing. We discussed the major ODMs to become the motherboard and system design partners to our top cloud service provider. We have also expanded the capacity of our factory in Montreal, Mexico, to serve data center customers across the Americas. In enterprise and SMB segment, our revenue stayed close to flat year on year. But we did outperform the markets. Our focus continues to drive double-digit growth year-on-year across software-defined infrastructure, storage, software and service segments. Even more, we recently announced an exciting partnership with SAP. Our two-scale infrastructure-as-a-service combined with SAP's HANA Enterprise Cloud enables customers to keep their sensitive data on-premises and secure, while enjoying the flexibility of a pay-as-you-go consumption model. We already see strong customer response to this offering. Our service-led intelligent transformation continues to make solid progress with smart IoT, smart infrastructure, and smart verticals revenue, each growing by strong double-digit year-on-year. In terms of service, our attached service, managed service, and solution service also continued faster growth. Particularly, DAS, device as a service, tripled its total contract value year-on-year. Overall, software and services revenue grow to a new record of over 1.2 billion US dollars, up 39% year-on-year, and now accounts for 8.5% of our total growth revenue, even as total revenue increases. Our e-commerce revenue also grew by over 40% year-on-year. I have talked about the long-term growth of the total technology market in the new normal for two quarters. PCs and tablets are now one device per person, and the cloud infrastructure demand is growing rapidly because of the work, learn, and play from home economy. We believe the total PC market will grow by around 25 million units and reach very close to 300 million units in just the current calendar year. And both device and cloud infrastructure market growth will continue for the long term. To meet the increasing demand of our valued customers, we are committed to further improving our supply going forward. As the pandemic changes customer behavior, Lenovo continues to innovate and lead in this period of rapid change. Last week, we demonstrated our results and vision in innovation at our annual flagship event, Lenovo Tech World. At the climate device level, we are expanding the idea of a computer to a computing everywhere, with new In edge, we offer both hardware and our own AI-enabled edge computing platform. In cloud, we can design, install, and maintain public and private cloud, as well as provide multi-cloud management solutions. And we are extending our infrastructure as a service to attach platform as a service and software as a service. In network, we now have 5G essential patent applications and implement 5G networks and applications with network cloud convergence, virtualization, and network slicing technologies. Finally, With all these technologies combined with intelligence like machine learning and artificial intelligence, we generate insights and provide solutions to customers of various industries and drive intelligent transformation. I believe that technology has never been so essential to humanity as it is today. Customers have new requirements to meeting this new normal. And our success in meeting these needs is demonstrated not only by our strong results this quarter, but also by how our service-led transformation prepares our growth well into the future. Thank you. Now, let me turn it over to our CFO, women. Women, please.

Thank you, Yuanqing. I will now take you through Lenovo's financial and operational performance in the second quarter, fiscal year 2021. Next chart, please. The group continued its record performance in the second fiscal quarter. We set a number of performance records while still navigating the ongoing pandemic. Our revenue increased 7% year-on-year to reach an all-time high of $14.5 billion. And all three business groups recorded positive year-to-year revenue growth. Resilient and strong growth was achieved as a result of structural changes in demand of computing devices, which include e-learning, work from home, played at home, and cloud. This also resulted in a gain in market share during the quarter. The group's gross margin improved 0.2 points quarter-on-quarter thanks to high growth and premium segments. The software and services and e-commerce business grew their revenue strongly by 39%, and 42% respectively year-on-year. Their high margin rates continue to support our strong profit trajectory. The segment profitability has improved, including margin rate expansion in consumer, Chromebook, e-commerce, and gaming segments. However, a higher COVID-19-led logistic cost caused a moderate year-on-year decline on gross margin. Our E2R ratio was reduced by 1.2 percentage points to 11.6%. in the quarter, a result of our disciplined expense control and operational efficiency. Next slide, please. Our business group total pre-tax profit grew 15% year-on-year to reach a new record of $654 million. During the quarter, we recognized a fair value gain of $104 million on strategic investment netted by a $53 million provision for intellectual properties in our unallocated headquarter and corporate expenses. Our profit performance has reached a new milestone. Profit actionable to equity holders increased by 53% to all-time height of $310 million, with consistent improvement across all three of our business groups. The basic earnings per share came in at 2.59 US cents, up 53% from the previous year. The Board of Directors declared today an interim dividend of 6.6 Hong Kong cents, representing an approximately 5% increase on the interim dividend paid in the last fiscal year. Next slide, please. We lowered our net debt by 390 million, thanks to the strong cash flow generated from our operations, and our finance costs reduced further by 45 million, or 33% year-on-year. In October, we received strong inaugural investment-grade ratings, from three leading credit rating agencies and successfully completed the first 144A issuance of 1 billion 10-year senior notes. We will use the proceeds to retire a portion of the perpetual securities and secure notes in an effort to improve the efficiency of the group's liability management while further reducing our financing costs and extending our test tenure. Infancy days improved sequentially by two days thanks to strong demand. Its year-on-year increase of 11 days was due to our strategic buy-ahead actions to secure critical parts. Next slide, please. PCUSD revenue grew by 7.6% year-on-year to $11.5 billion in the quarter. Pre-tax margin expanded by 0.6 percentage points to a record of 6.3%. Pre-tax profit increased by 18% year-on-year to $723 million. These record-breaking achievements in the second fiscal quarter are encouraging as peak of seasonality normally occurs in our third quarter. I would like to take this opportunity to discuss our pre-tax margin for PCUSD. The process of managing margins is dynamic. We have enjoyed strong scaling benefits and we have the most competitive profile in each of the segments we are servicing. Even the consumer and Chromebook sales, which traditionally carry lower margins, will focus on higher-margin projects to optimize and improve their segment profitability. For high-margin products such as software, services, e-commerce, and high-growth segments including thin and light and gaming, we have doubled down on our investment to boost the contribution of these segments and hence gain market share. We are confident in maintaining the PDI margin of about 6%, on a sustainable basis. Next chart, please. Thanks for rebounding market demand. The team's continued efforts in expanding portfolio and carrier ranging, MBG average selling prices improved, and the business group delivered strong revenue recovery, resulting in 39% sequential growth, returning to a revenue scale of $1.5 billion, up 1% year-on-year. The sales recovery helped to narrow MBG losses before taxation by $28.25 million to $22 million, and the business was now cash flow positive. The business was impacted by higher freight costs, which showed a decline in profitability by $30 million year-on-year. We expect the business will continue to grow and resume its profit growth track going forward. The business will continue to execute its portfolio expansion to increase global market share, Its 5G for All market strategy is starting to bear fruit. With our flagship Razer 5G phone launches, our 5G products now span across all price segments, which helps to drive ASP expansion. The revenue contribution from 5G models more than doubled quarter-on-quarter. The business will continue to execute its strategy while preparing for more aggressive carrier penetration. Our DCG continues to capitalize on cloud demand, and achieved premium-to-market growth during the second quarter. With strong momentum and continued client diversification, cloud service provider, or CSP, revenue growth accelerated to 34% year-on-year. The prospect for CSP has been promising, thanks to its rich mix of solutions and design wins, supported by our in-house design and manufacturing. Enterprise and SMB, or eSMB, Segment continued to outperform the market. Our revenue posted a small year-on-year decline of 1.7%, a solid performance compared to the sluggish sector. We achieved this superior performance based on the double-digit growth in software-defined infrastructure, storage, and software and services. ECG business continued to improve its operational result by 11 million quarter-on-quarter and 4 million year-on-year to a pre-tax loss of 47 million. The group efforts in product diversification and development of alternative platforms, the availability of high-end systems, as well as storage solutions have started to pay off. With our continual works in more margin wins for profitable projects and advanced configurations, DCG is on track to drive long-term growth and profitability over time. Next slide, please. The invoice revenue of software and services surpassed $1.2 billion in the second quarter with a 39% year-on-year growth, whereas deferred revenue grew 26% to nearly $2 billion. Since our break-off the pandemic, there is a surge of interest in our service capability as clearly reflected in the strong new contract pipeline we have built across attached services, many services and complex solutions. Among all, gas and infrastructure as a service are gaining significant momentum. The recent DCG partnership with SAP was an important landmark deal, highlighting the potential for infrastructure as a service. Next slide, please. Looking forward, the dynamic shift in PC demand will continue to create tailwinds for e-learning, work-from-home, play-from-home, cloud infrastructure, and 5G. We are optimistic that these long-term structural trends could enlarge the addressable market for PCSD and cloud infrastructure, as well as accelerate the development of 5G services. Our PCSD business will continue to drive premium to market revenue growth through investment in the high growth and premium segments. We are confident to increase supply to meet the strong demand. We will continue to build capabilities to drive sales growth in the software and services business and expand e-commerce based on this well-established infrastructure. For the MBG business, the Group will invest in product innovation including offering new and differentiated 5G smartphones. MBG will seek to strengthen its competitiveness in target markets to grow at a premium to the market and improve long-term profitability. For the DCG business, the Group aims to deliver premium to market growth and improve profitability. For its cloud service provider business, the Group's new design wins will expand its wallet share with existing accounts by leveraging its unique strength in the global supply chain and worldwide reach while expanding its portfolio with new product solutions and platforms. Lastly, in the enterprise and SMB segment, the group will grow its high-margin service attach rate, upsell premium services, and expand its hybrid cloud solutions to drive profit improvements. Thank you, and now we can take your questions.

Thank you, Yaneen. Now we will open the 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 will now turn it over to you. Please give us your instructions.

Thank you very much. Ladies and gentlemen, if you would like to ask a question on the phone, please press star 1 and wait for a name to be announced. If you'd like to cancel your request, please press the pound or hash key. Once again, to ask question, please press star one. There'll be a short silence while questions are being collected. Thank you for your patience. We have the first question from the line of Howard Kao from Morgan Stanley. Please go ahead.

Hi, congratulations on the quarter and thank you for taking my questions. So my first question is on PC. So YY, you mentioned in your prepared remarks that this year you guys are expecting PC demand to be close to 300 million units. But I think, you know, most investors are curious about your outlook for calendar year 2021. If possible, could you comment about, you know, one is on the total market, whether you guys see the growth rate to continue in calendar year 2021. And also by sub-segments, if you guys can comment about the outlook for PCs, for example, gaming, educational enterprise, as well as traditional consumer. Thank you. And I have a follow-up.

Thank you, Howard. So I would suggest John Franco to answer this question. John Franco?

Hello?

Yes. Can you hear me? Yes. No, yes. As we said, we see 2020 is probably going to be, as YY said, 25 million additional units in terms of total available market, right? And it's coming from more or less minus 5 million Q1. and then plus 10 for the following three quarters. And the market will be probably between 295 and 300 million. If I look at 2021, in our opinion, we see additional 15 to 20 million. 10 growth. Coming from, for sure, a big growth in Q1. because this year Q1 was the starting of the pandemic in most of the world, right? And then I think it's going to sustain for Q2, Q3, until Q4. Assuming something in the range of 300 million this year, I think 6% to 7% growth in 2021. Coming from, we will continue to see a very strong demand on education. And not only, let's say, not only US, not only Japan, but in most of the countries. Gaming, I think, will continue to grow because it's consumer. Again, I think we will continue to see similar growth that we have seen in 2020, 2021 on this segment. I think the only segment that is probably going to show a very moderate growth is enterprise. At least I'm not particularly optimistic at the beginning of the year. If you want, you do. And then probably we will see enterprise starting to invest again in Q3, Q4 next year. So overall, probably a very small growth, or maybe more or less no growth. But education, gaming, and consumer, I think we will continue to see something similar to this year. And this is why, in our opinion, 50, 20 million additional units in terms of TAM is what we predict for 2021.

Okay, thank you. So my follow-up is on your remarks regarding the strong growth that you guys expect in the educational space. So there are a lot of PC brands, not only Lenovo, but basically everyone is expanding their Chromebook product portfolio. Just in regards to competition, how do you guys see competition for Chromebooks going into 2021, whether that will drive some kind of ASP erosion on a year-on-year basis?

No, no, yes, but frankly speaking, when you look at... Okay, the number of players on Chromebook is more or less always the same. I really don't see a lot of new players coming. There are four to five players in the Chromebook space, and I don't see additional players coming. Not only, but if I look at the evolution of Chromebook during the last three quarters... the ASP is going up mainly for two reasons because there is a part that is related to education but there is also very good growth talking about Chromebook on consumer and the average selling price of consumer is very different but even on education we have seen 10 to 20 dollars improvement in terms of average selling price On top, we will see probably mid of next year or later, later next year, 5G Chromebook coming, so with the good 5G connectivity or 4G connectivity, because people, they need to be connected, always connected. So I'm not afraid of any deterioration of... of the average selling price on Chromebook. And we don't have .

Yeah, so , although, so we, our Chromebook increase is significant last quarter, but we still shift much less than our competition. So, key competitor, so, So if you can see our, if you see our AUR, so actually it's much better than our competitors. So we are less impacted by the Chromebook and low-end product. So that's one thing I hope you can mention, or you can pay attention to. So actually we are more focusing on the, so we know the market is shifting from enterprise to consumer, but Lenovo, we are more focusing on the higher end product in the consumer, like thing and light, like gaming PC. with a much higher AUR and definitely margin. So that's the first point I want to mention. And the second point is when market is shifting to the consumer, to Lenovo, we are more focusing on improving our expensive revenues So we know to sell consumer product is different from to sell enterprise product. So if you don't have the efficient expense to revenue, so you will not have the good margin in the consumer. But if you can see, our E to R ratio, we improved significantly last quarter. So that even in the low end product, Chromebook, tablets, we still can deliver very decent profit. So probably you can only imagine. So our tablet profit, let's say pre-tax income, It's even higher than our PC segment, in-kind PC segment. So that's just $100, $200 product . So we still can make very decent margin. The third point is, in the past, we sell only hardware. But now, we are, we emphasize the service, we sell more hardware with attached service. You know the service definitely, so the market and the profit is much higher than in hardware. So with these three focus or shift, so we are driving the the better margin and the PDR so particular PDR so if you look at the last quarter so we our PDR in the PCSD was historical high so 6.3% so we believe so at least we can maintain this PDR ratio right yes

Got it. Very clear. Thank you.

Thank you for the questions. Our next question comes from the line of Jerry Hsu of Credit Suisse.

Please go ahead. Yeah. Hi. Thank you for taking my question. I want to follow up on the comments about the gross margin. I think in your prepared remarks, you have mentioned that the past quarter's gross margin was impacted by a higher mix coming from consumer and Chromebooks. Could you give some color about what is the mix coming from these two segments in the last quarter, and how do you view how the mix is going to change into the third quarter this year, and how will that impact your overall growth margin?

You mean the positive or negative?

Well, I think on a group level, I think whether it's going to be positive or negative.

I think we have been very, very clear that we don't see any deterioration of the margin coming from the different mix for a few reasons. One, as Wai Wai already said, when you look at Chromebook, our mix of Chromebook compared to the rest of the market is relatively small. I can give you a very simple example because it's part, you can find it from market researchers. I'm not disclosing anything. I think we ship 1.7 million last quarter, Chromebook. One of our largest competitors, they ship 3.7 or something like that. So you can imagine, and we ship more than 19 million. So the weight of Chromebook, 1.7 million, out of 19 million, it's less than 10%, right? And we've been able to improve ASP because we look at deal by deal and we pay attention on what is the marginality of the different deal. So the mix coming from, the impact coming from Chromebook It's almost irrelevant, and probably compared to the past, we have seen a good improvement on both margin and AUR on Chromebook. Consumer, same story. Now we are running consumer at profitability that is very close to the average profitability of PCSD, very close to the 6.3%. Why? Because, again, our mix of consumer, we are not focused on low-end at all. is mainly coming from gaming, in and light, or what we call, let's say, prosumer. That is still part of consumer because it's mainly coming from consumer in terms of addressing this new segment that is the segment of people working from home. So in terms of margin, I think we have been able to, and I think when I look at ECSD margin, compared to last quarter, compared to last year, there is no deterioration at all. And when I look at this quarter, so Q4 calendar year or Q3 financial year, the trend is exactly the same as Q2, last quarter. The only small impact, but we have been able to absorb the impact, coming from a better margin on the product is logistics. Logistics continue to be more expensive than before. But this is already from, say, Q1, just after February, March. And we need to move things sometimes by air due to the supply shortage. So logistics is still more expensive than one year before. But when you look, we have been able to compensate with better margin on the product because you don't see deterioration of the margin coming from logistics.

Thank you. Okay, thank you. And then a follow-up question. I think you also mentioned about the DCG expanding factory in Mexico. can you provide a little bit of color about what's the capacity or capacity in this area as percentage of the overall group's capacity and also what kind of service that is expected to be in that facility?

Yeah, hi, can you hear me okay? Yes. Great. Yeah, so thank you for the question. You know, I think we're excited about the growing customer design wins we have in North America, as well as in the cloud service provider space. And while some of our competitors had significant issues applying through this COVID pandemic in the North America space, We just had our tech world, and you heard customers like DreamWorks, who we just signed a five-year relationship with, say that they were able to deploy a supercomputer flawlessly through the pandemic. And so the Monterey, Mexico facility expansion is going to be a dedicated expansion of our factory. We're moving into a second building. It's up and operational. We've started shipping our first into some of the tier one cloud service providers. So I think this is a good sign, I think, for the market that we're confident in the growth, both in North America for Enterprise SMB, as well as in the cloud service providers. And they've asked us to increase the capacity based on future orders that we've had. Over time, we will not just do the system development, but also do motherboard development in multiple geographies. So, again, I think with North America being the largest data center market, it's also our strongest growing market right now. So we're excited that that plan is now fully operational. So it's a significant, you know, that capacity expansion. Thank you.

Okay. Thank you.

Thank you for the questions. Next question comes from the wife of Sebastian Ho from CL Securities. Please go ahead.

Hey. Thanks for taking my questions. So I think the first questions I have is on the desk. Total contract rate value grew triple digits, which is a pretty impressive result. So I'm curious about what's your current expectation for the increase in revenue, still tracking about $1 billion for this fiscal year. And also, if we look from the group company perspective, what's the adoption rate over such a restriction period? is this model now for both the PC and PCST and DCG business? And what's the reasonable target, say, in three years from now? Thank you.

So, Gianfranco, would you like to answer first?

Yes, why? So, that's, I think, what is the reason? I would say a couple of, one is for sure. We are probably one of the few companies today able to offer a worldwide coverage in terms of gas. So for large enterprises, I would say Fortune 500, but not only Fortune 500, with operations all around the world, there are very few people today able to offer a gas solution that is able to cover the entire world. And, of course, the other big reason is that people, they start to realize, like in other businesses, if you take a car or other things, it's very similar, that the opportunity to change after two to three years, your store base, just paying a monthly fee and without any asset cost, it's a very good solution because you... You have a new install base every three years. You have the service covering for the three years, whatever you need. And the last thing is that we started to address DAS also for small-medium business, mainly through the channel. So today we have a solution on DAS that is going from very large enterprise down to, let's say, medium business. In terms of perspective, in my opinion, we have seen that it's growing 40, 50, 60% the entire service revenue, right? Our service revenue is growing more or less in the range of 40%, now very consistent during the last probably four to five or six quarters, more than one year, almost two years. And we reach 1.2 billion customers as a company this quarter. And I think that very soon it will represent 10% of our total revenue. And in my opinion, between three to five years, it can represent probably 20% of the total revenue.

Thank you. Thank you, Gianfranco. So, Kosovo, would you like to add something on our two-scale project? particularly the deal with SAP?

Sure, YY. So we're extremely excited as we announced just recently at Tech World with the CEO of SAP that their new HANA Enterprise Cloud Customer Edition will be available now using Lenovo TruScale. So TruScale is our as-a-service brand that does on-demand pay-as-you-consume applications and enables you to get cloud-like economics, but be able to have that hardware located on your premise, either for security or for your own data requirements. So this was a significant commitment by SAP to both TrueScale and as a service, where they'll be enabling that to their customers to support the new on-premise HANA Enterprise Cloud. Previously, we had won many of the Tier 1 cloud providers as SAP moved to the public cloud. So we're seeing TruScale as a great example there, and SAP is just another example of the momentum we have there. Thank you.

Yeah, so we... I think the top and the on-prem... data center or infrastructure as a service. So we'll be, Lenovo's focused area for a long time. So that will help us to drive this service-led transformation. So because the data center as a service, would not help us to shift the customer from the transactional customer to a subscription customer, but also give us the opportunity to attach more services and parts and stuff. So that's why I think for this kind of business, there is a very bright future. So that can help us to drive not just growth, but also profitability improvement.

Thank you. I have a follow-up. Is that with the ThruScale offering on the enterprise IT solutions and also more in-house motherboard design to win more CSP business, also lower costs, these all seem to pretty margin-accurative strategies. So how do you quantify the probability enhancement target? Let's say, within what timeframe can the DCG business at the pre-tax level achieve break-even? Thank you. Yeah.

Yeah, so I think that right now we feel very... positive that we're, especially when you look at Intel's results, as we talked to some of our other suppliers, that we're growing at a significant premium to market and likely a double digit or higher premium to market. And I think the confidence we have in our top line growth is driven by a few things. Number one is we're very well balanced now between our geographies. If you look at China versus rest of Asia versus Europe, And the Americas, you know, we have a pretty decent split of almost a quarter of our business in each. Secondly, we're expanding pretty rapidly into the storage market after we had our announcement and our joint venture with NetApp. So significant premium relative to what I think you're hearing from the analysts reporting the overall storage market when we're growing significantly. You know, at the numbers that we've been talking about of 15% in storage and 22% in hyper-converged. So that's feeling quite good. But we're really trying to balance, you know, this double-digit growth as a premium to market versus just continuing to improve our pre-tax each and every quarter. So that's really what we're trying to drive is the commitment to the market. How do we grow double-digit premium to market And how do we continue to improve pre-tax each and every quarter? So the reason we're exposing you to the four S's, SDI, software storage and services, is that's where we're really getting decent attach on profit. And as you said, we now win some of these motherboard designs for, you know, designs all the way out there now that are going to be in 2022, you know, and beyond with next generation Intel and AMD silicon. That's also helping us improve our margin because we're, or we started out as a system integrator putting together other people's systems into racks. Then we did what they call copy exact motherboards where we would take the motherboard from someone else and manufacture it and now we're actually becoming the design partner where other people will be paying us a royalty on the boards to become a second or third source to the tier ones. So this is something that hopefully you've been tracking over the last several years. It's been a consistent both where we're gaining share, we're getting the number of customers, and we're gaining their confidence to do more and more of their products. And lastly, I think in cloud service provider, we've said this consistently over the last several quarters, but we're doing Intel now and AMD. We're doing server now and adding storage. We're not just doing motherboards and systems, but now we're doing motherboard design and systems And then our services attached across the board is increasing double digits from a penetration rate for all our premium services as well. So I'm confident we can continue improving PTI relative to exactly when. I think we're just gonna continue to drive double digit premium in the market and improve PTI ideally every quarter as we go forward.

So to add to something here, For our DCG business, we are focusing not just in short-term, but also long-term. In short-term, I think the most important thing for us is building the foundation, building the competitiveness. Definitely, so we understand that the market is shifting from enterprise SMB to the cloud. So if we cannot address the CSP, we cannot make money from the CSP segment. So we will not be competitive in that market. So that's why we are building the in-house design and manufacturing capability from motherboard all the way to the system integration. So I believe we are in a better position than our traditional competitors, like HP and Dell. They just focus on the enterprise and the SMB. So I said a couple of times, so this mix is similar to the consumer PC and the commercial PC mix. Consumer PC has less market, but if you don't play in that segment, you will not have the scale. If you don't have scale, you will not have the cost competitiveness or efficiency. So, consumers give you the scale, commercial give you the profitability. So, similar in the data center business. If you don't have the CFD, so you will not have the scale now. But definitely, we can make a better model from the enterprise with stronger in-house design manufacturing capability. So that's why I think we are in a better position than our traditional competitors in that space. Secondary, so data center of the service, so particularly on-prem data center of the service. So you could say it's on-prem target cost. or on-demand private cloud. So if you believe the public cloud would have the bright future, you should think this on-prem, on-demand private cloud should have the bright future as well. Should make money better margins in the future as well. Because most enterprise customers, they would not shift all their infrastructure to the public cloud because of the data security and application security issues. So the hybrid cloud will be the... dominant business model over time. But definitely enterprise customers also want to enjoy this kind of pair-as-you-go business model. And also, we believe if more customers start to use this model, we can make more money from this kind of business. Thank you. Okay. Thank you. Thank you for the question.

Operator, we are now ready to type the last question due to consideration of time.

Certainly. Our last question comes from the line of Nam Hyung Kim of RIT Research. Please go ahead.

Hi. Thanks for taking my question. This is Nam from RIT Research. I have one question for server and one question for mobile server. This year, local players in China, such as Inspire and others, seems taking enterprise server share from US OEM, such as HP and Dell. So, Lenovo is a Chinese company with a global footprint. I think you have a good opportunity in China market. So, can you update your China business situation and plan? And also, When do you expect the global enterprise server demand to recover? And then second question for smartphone. I feel like Lenovo tried to refocus on scale, not only profitability in mobile business. In the past, you focused more on profitability than market share, like focusing on more mid-range and low-end segment and targeted market. And are you changing your strategy to move more premium segment and additional region like Europe? So any updates on your mobile business and strategy would be great. Thank you.

So probably, Bunyak, you can answer the second question first. So, Kirk, you can prepare for the first one.

Yeah. So, I mean, to be very clear, our main focus is fuel profitability. And so, now that said, we are entering in the premium phase. We launched the Razor, and now with 5G also coming, we are seeing an improvement in our AURs. We grew 5% year-over-year, 10% quarter-over-quarter. We expect this fiscal year the EOR to keep growing. We are also, you know, expanding a range of our products across many carriers. What is driving growth in additional markets like Europe, Asia, and even India. I think as we get more competitive, we are proving to be able to play globally. what is also going to help what we call our main core markets like Latin America and North America. So main focus was stability. We are improving our NIF, not significantly, around 10%, 15%. That means we are a little more into the premium side of the market without deviating from our strategy. And we are seeing growth from other regions, including Europe, but not also to include like Asia and all other markets. Giving a better execution, increased ranging, and growth of 5G. Our 5G doubled quarter over quarter on our needs and expect over the next six months to double again from where we are today.

Yeah, so our mobile business strategy is very, very clear. As a first step, we need to turn around this business to make it a healthy business. So we achieved that actually a couple of quarters ago. But unfortunately, because of the pandemic, our business was impacted significantly. So we lost a little bit of money. But fortunately, last quarter, we significantly reduced the loss. and we are very optimistic, so we will try to go back to normal. But after we achieved the first step, for the second step, we will drive the profitable growth. To drive the profitable growth, While we will continue to maintain our position in Latin America and North America, we will pursue the growth opportunity in Europe and the Asia Pacific market. So that's about our mobile business strategy. And also, we will drive the product portfolio from the near end to the high end. with the Razor and the gaming phone launch. So we are more confident on that. So, Kurt, please.

Yes, I think, well, first of all, if you look at the overall TAM over the next several years, we think it'll be roughly 6% or greater TAM as we go into the next fiscal year out through the middle of the 2020s. So I think that The demand, as we all know, for data is out there, and the movement to the edge and where data goes computed will drive a nice 6% or higher data center TAM growth. In China specifically, we saw high single-digit growth, and so I think we're definitely growing. We're taking smart share. I think some of the deals in the Tier 1s are just really negative profit, and we're not necessarily – engaging in those today. We're taking SmartShare. We can improve profitability while growing with the market, or greater than market. And then in storage, with our NetApp JV, we're growing at a significant premium to market as well. So I guess it's the balance of both server and storage growth as you look at China and the balance of SmartShare growth, but growth with profitability, not just for growth to for top line revenue sake.

Okay, thank you.

Thank you. Thank you. Thank you, Kurt. We thank you very much for joining today's call, and that is our last question. If you have any further questions, please feel free to contact us directly. The replay of this webcast will be available in a couple of hours on our investor relations website. Thank you again for joining us.