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, 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. I'm pleased to discuss yet another record-breaking quarter. Our innovative product portfolio and operational excellence drove growth across all businesses, and our transformation investments are paying off. For the second straight quarter, we achieved hyper-growth in both revenue and profit. Our group revenue grew over 22% year-on-year, reaching $17.2 billion. This new record is $2.7 billion higher than the previous one we achieved just last quarter. In fact, profit achieved even stronger growth, with pre-tax income and net income both up over 50% year-on-year, reaching new records. Pre-tax income reached 591 million US dollars, and the net income reached 395 million US dollars. All of our core businesses delivered both top-line and bottom-line year-on-year growth. Our record performance starts in our intelligent device group, where PC and smart devices business delivered another historic quarter. Our innovative product portfolio adapted quickly to meet customers' new needs in work, learn and play from home, and captured a strong demand. Our revenue grew over 26%, while pre-tax income improved 35% year-on-year. and industry leading profitability further improved to 6.6%, all achieved new records. We extended our number one position in PCs, growing PC volume to historical market share of 25.3%. Our focus in high growth and premier segments continued to drive double, even triple digital growth in both revenue and volume. We saw strong performance across all geographies. In North America, we achieved almost 60% volume growth year-on-year. In EMEA, we became number one in PC for the first time. In Asia Pacific, profitability reached a new record. In China, we also achieved over 30% year-on-year shipment growth. For several quarters, I have predicted that the total PC shipment will likely reach 300 million units in 2021. Many people thought it was too optimistic. But the latest IDC data has confirmed that the total PC market last year has indeed surpassed 300 million units, driven by strong Q4. Obviously, this proves our view that work-study-play-from-home has become a new lifestyle. So the information consumption upgrade will drive one device per person trend and expand from just smartphones to also include PCs, tablets. And it will continue to drive the demand of PCs, tablets, and smart devices for the long term. So looking forward, we will continue to fulfill customers' new needs with innovative products and leverage our operational excellence to capture the strong demand. Meanwhile, our mobile business delivered double-digit revenue growth year-on-year. and not only resumed profitability since the pandemic, but also achieved record profit since the Motorola acquisition. In Latin America and North America, our stronghold remains solid. Across our expansion markets in Europe and Asia, we had a strong double and triple digital growth. Thanks to expanded carrier relationships and a stronger product mix. Looking forward, we will continue to drive growth with our strong 5G product portfolio. Our data center group achieved record revenue of over 1.6 billion US dollars while improving profitability by almost a point year-on-year. Both our cloud service provider and enterprise SMB segments delivered year-on-year growth at a premiere to the market. Enterprise SMB reached $1 billion in revenue, the highest amount in over three years. In storage, we had record revenue and outgrew the market by 11 points. We also had record revenue in software-defined infrastructure and services. And we extended our number one position in top 500 supercomputers to 182 systems. Our true-scale private cloud infrastructure as a service, combined with SAP's HANA Enterprise Cloud, has been well received and is generating a strong pipeline of demand. Lenovo is a unique player, providing a full range of IT infrastructure, from on-premise data center, private cloud, private cloud infrastructure as a service, to public cloud infrastructure. Looking forward, with our strong in-house design and manufacturing capabilities, we will capture the growing hybrid cloud and infrastructure demand, and continue to outgrow the market while improving profitability. Our service-led intelligent transformation continued to make strong progress as total software and service revenue grew almost 36% to a new record of US$1.4 billion, over 8% of total group revenue. Our attached services, managed services and solution services achieved year-on-year growth of 26%, 73% and 49% respectively. Device-as-a-Service's total contract value achieved a high double-digit growth of 74% year-on-year. In addition, our e-commerce revenue grew 45% year-on-year and continued to set new records. Looking forward, we will further drive service-led intelligent transformation through further driving growth in managed services, particularly device-as-a-service. and leverage our experience and capabilities to build solutions focusing on smart manufacturing, smart education, smart healthcare, and more. Clearly, 2020 was a challenging year that brought remarkable changes to our world. Thanks to our continued innovation, excellent operations, and robust resilience, Lenovo quickly responded to the changing market and delivered excellent results. As we prepare for the new fiscal year ahead, we will further align our organization with our strategy and sharpen our execution. Effective April 1, 2021, we will establish a new business group, SSG Solutions and Services Group. by integrating all the existing services and solutions teams across the company into a dedicated organization. Thus, the three business groups could be fully responsible for the execution of each S in the 3S strategy. IDG will be led by Luca Rossi. Senior Vice President and current President of PCSD in EMEA and Latin America. To focus on smart IoT, ISG, Infrastructure Solutions Group, renamed from Data Center Group, will continue to be led by Kirk Scoggin, Executive Vice President and President of Data Center Group, and drive smart infrastructure. And the newly formed SSG Solutions and Service Group will be led by Ken Wang, Senior Vice President and current President of PCSD in Asia Pacific, will be responsible for growing our business in smart vertical and services. At the same time, In order to further improve synergies among business groups and build a unified customer-centric interface, we will integrate the existing Jio model structure into two sales organizations. China Jio, to be led by Liu Jun, Executive Vice President and current President of IDG in China. and the International Sales Organization to be led by Matt Zielinski, Senior Vice President and the current President of PCSD in North America, covering Asia Pacific, EMEA, North America, and the Latin American GEOs. The two sales organizations will assume the same sales function system and drive an integrated go-to-market strategy across all business groups in their respective locations. They will face our customers and partners unified as one Lenovo. As a result, I believe we will be able to respond more quickly to customer needs and market demands and further unlock the company's true value. I would also like to share another news. Mr. Gianfranco Lanci, President and Chief Operating Officer of Lenovo, will be retiring from the company in September 2021. Gianfranco has been instrumental in our success, growing Lenovo into the undisputed number one in global PC market in the past decade. His incredible legacy has led much of the foundation for our future growth. During the transition period to September, he will continue to fulfill his responsibilities while ensuring a smooth transition for the future. In 2021, with our planned issuing of Chinese depository receipts on Shanghai Stock Exchange, We will also further invest in technology and innovation, drive intelligent transformation across industries, and create sustainable growth for our company. Thank you. Now, let me turn it over to our CFO, Wei Ming. Wei Ming, please.

Thank you, Yuanqing. I will now take you through Lenovo's financial and operational performance in 3Q fiscal year 2021. Next chart, please. This quarter, the group again set several performance records. We delivered sales growth across geographies and businesses, robust margin, all-time high group revenue and profits, and strong cash flow generation. Our service-led transformation continued to accelerate, and we further enhanced our service portfolio to build new growth catalysts. Our group revenue increased 22 percent year-on-year to $17.2 billion. PCSD and DCG achieved record sales, while MBG grew its revenue at a double-digit rate. The group's growth margin improved 10 basis points year-on-year, and our e-to-hour ratio was reduced by 0.5 percentage points to 12.1 percent, a result of our operational excellence and optimization in sales mix. Software and services and e-commerce businesses grew their revenue strongly by 36 percent and 45 percent year-on-year, respectively. The high margin rates continue to support our profit trajectory. Our net income grew 53% to an all-time high of $395 million. Record-breaking PCSD profit and consistent profit improvement in MBG and DCG helped in setting this new milestone. The basic earnings per share was 3.31 US cents, up 53% from the previous year. In Q3, Our cash flow generated from operation improved by 1.425 billion year-on-year to 1.963 billion. Our net debt level was reduced by 755 million year-on-year. The supply dynamics remain a challenge for the sector. Our infantry days increased four days year-on-year as we continue to secure critical parts to fulfill strong future demand. Sequentially, infantry days lowered by five days quarter-on-quarter thanks to strong demand. AR days also improved eight days year-on-year thanks to improved efficiency in our factoring program. Next chart, please. PCSD achieved all-time high revenue and profit. The sector demand was strong and above expectation, as supported by lifestyle changes including one PC per person trend and rising usage intensity, leveraging our operational excellence, product innovation, and quick time-to-market capabilities to address new demand tailwinds. PCSD revenue grew by 27 percent year-on-year to US$14 billion in the quarter. Our unique hybrid manufacturing strategy allows us to have greater flexibility and more supply to fulfill strong sector demand. We boosted our share gain to capture 25.3% of global market share and expanded our market share lead to 4.2 points ahead of the number two player. We also became number one in EMEA for the first time. PCSD further scaled up its higher margin and high growth segments to drive expansion of pre-tax margin by more than 40 basis points to a record high of 6.6%. The thin and light gaming PC, e-commerce, and software and services business saw double-digit growth and market share gain. Pre-tax profit increased by 35% year-on-year to $925 million. Next chart, please. MBG revenue grew 10% year-on-year, thanks to the team's continued effort in expanding portfolio and carrier arranging. with launch of new 5G models and gaming phones. The group has improved its average selling price by 19% year-on-year, and such product makes improvement help the business to resume profitability. Its PTI dollar reached US$10 million and could have improved further if it wasn't for the high freight cost and industry-wide component shortages. The revenue contribution from 5G models now represent more than 10% of MBG revenue, significantly growing from the previous quarter. the business will continue to execute its 5G for All strategy to make 5G more accessible in all prices spectrum while continuing to make important carrier penetration to drive profitable growth. Next chart, please. In the third quarter, our DCG achieved record revenue, driven by solid growth across both CSP and ESMB segments. The CSB business continued to capitalize on cloud demand and achieved double-digit revenue growth across regions, except for China, where orders with better profitability were given higher regional priority. ESMB business delivered the highest revenue in three years, thanks to its record performance in software-defined infrastructure, storage, high-performance computing, and services. These high-margin products with higher revenue mix resulted a better profitability profile. The DCG business improved its operation result by 14 million year-on-year to a pre-tax loss of 33 million. The Group's efforts in product diversification and development of alternative platforms, the availability of higher-end systems, as well as storage solutions, have started to pay off. Given our recent design wins for profitable projects and advanced configuration, DCG is on track to drive long-term, top-line growth and profitability expansion. Our teams are executing well on the software and services-led transformation, accelerating our pace further to transitioning into a service model and expanding our service scope. The software and services business, which carries the highest margin profile among all products, reported invoice revenue and deferred revenue growth of 36% and 30% year-on-year, respectively, representing to around 8.1% of the group's revenue. Among the three key business elements, managed service, including devices service, commonly called DAS, enjoyed 73 percent growth because of strong progress in contract wins globally. Complex solution also remained strong and posted 49 percent growth from all verticals. Uptest service continued to grow steadily, up 26 percent. Next chart, please. Looking forward, the Group will continue to leverage its core competence in driving earning growth and business transformation by taking advantage of tailwind opportunities, including e-learning, work from home, play from home, cloud infrastructure, and 5G. We remain optimistic that these long-term structural trends can expand the addressable market for PCSD and cloud infrastructure, as well as accelerate development of 5G services. Our PCSD business will leverage our operational excellence and global franchise to increase supply to meet strong segment demand and drive consistent premium-to-market revenue growth through investment in the high growth and premium segments. We will continue to build capability to drive sales growth in software and services business and expand e-commerce based on our well-established infrastructure. For MBG business, the group will further push product innovation and accelerate 5G smartphone launches to strengthen its stronghold markets. MBG will strengthen its competitiveness in target market, grow at a premium to the sector, and improve long-term profitability. For DCG business, the group aims to deliver premium-to-market growth and enhance profitability. For our cloud service provider business, The group's recent design wins will attract new customers and expand its share with existing accounts by leveraging its unique strength in the global supply chain and worldwide reach and expanding its portfolio with advanced configuration and storage platforms. Lastly, in the enterprise and SMB segment, the group will grow its high-margin surface attach rate, upsell premium service, and expand its hybrid cloud solutions to drive profit improvement. On January 20, Lenovo announced a proposal to list on Shanghai Stock Exchange by way issuance of Chinese depository receipts. The company plans to use the proceeds for R&D in new technologies and products to address the high-growth new IT infrastructure opportunities in one of the fast-growing economies in the world in the future. Together with the new organization structure in the new fiscal year, which enable us to further focus on our strategy execution, and respond quicker to customer needs. We are confident in our ability to drive sustainable and higher growth in our business and expand profitability, and to deliver better return to our shareholders. Thank you. Now we can take your questions.

Thank you, Wai Min. 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. Operator, please, now I will turn...

Ladies and gentlemen, we now begin the question and answer session. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request today, please press the pound or hash key. Please note there will be a short pause while we collate the questions. Once again, to ask a question today, please press star 1 on your telephone. Your first question comes from Sebastian Ho from CLSA. Your line is now open.

Good afternoon. Thanks for taking my questions. I have two. The first one is on the PCSD business. So congratulations on the continued improve on the PTI margin in PCSD business. And I wonder how much of it was due to the rising service contribution. And also, how do we see the margin trend going to first-hand this year, considering there's a lot of the components have a price hike due to supply shortage, and DRM pricing is to further increase in the first-hand this year. And how would the margin be affected? And the second question will be on data-centered business, that the margin also improved nicely. If I simply compare the margin you had compared to, for example, two quarters ago or four quarters ago, that you have a similar revenue scale, the margin has improved. So can we view it as a structural improvement on the overall data center business? And how would you project the margin improvement direction going forward? Thank you.

Thank you, Sebastian. So for the first question, I would like to ask my great partner and friend, Gianfranco, to answer this question. Although I want to congratulate him on his retirement this coming September, unfortunately, he cannot start his retirement life yet. He will still be with us for two more earnings cycles as our CEO and ensure smooth transition. So, Gianfranco, could you answer this first question? Then Kirker will answer the second question.

No, yes, thanks. Talking about the margin contribution, for sure the service growth. I think there are two elements when I look at the margin improvement. And one is for sure coming from the service growth. The other one, if you look at our numbers, is also coming from a better AUR. In the sense that despite the growth of Chromebook, despite we have seen AUR going up in consumer and also in SMB and a little bit in e-commerce. Due to, I would say, a different profile of the demand from customers. Because we have seen a very strong growth on gaming, a very strong growth on thin and light games, We are back to grow on water station because we have got a very good premium to market in all these growing segments. So I think it's... Service, we have been growing service 30% to 40% during the last, I don't remember how many quarters, but many quarters. And, of course, there is a good contribution for service, but I would say the major contribution is really coming from... a different profile of the business and a better average selling price. Coming to components, I think that it is true there are some components going up, DRAM, but on the other side, SSD, which is a big portion of our product cost, is still going down, right? So I really don't see for the next six to nine months any major impact coming from components going up. In my opinion, when I look at the PC industry today, the only limitation, but it's not really a margin limitation, it's a growth limitation, can only come or is coming only from supply shortage between IC and display. That's Our last quarter results without this limitation could be, and I'm not dreaming, could be even better. So we have been able to manage the supply issue very, very well if we look at the results. But we can say that it could be even better without any limitation on the supply. Thank you.

So, Kirk, could you please answer the second question?

Sure. Thanks, Sebastian. Yes, I think you're correct. We're seeing sustained improved margins in the business, and I think it's driven by a number of factors consistent with our strategy that remain strong. The first is in the cloud service provider market. We're diversifying from servers into storage and winning multiple multi-hundred million dollar deals in storage. We're expanding beyond Intel architecture into AMD solutions. We're now bringing our motherboard development on these new designs in-house, so we're getting the profit not just on the system integration, but also on the motherboard design and manufacturing. We've also talked about significantly expanding our own in-house manufacturing with new factories coming online in Monterey and Hungary to support our customer base. That's making the CSP, the cloud service provider business, more profitable. On the enterprise SMB, we said we just had our highest quarter in three years, despite being in the middle of COVID. That's really being driven by not just the efficiencies across the company, but by our 4S strategy, where we talked about higher profitability. So in storage, IDC just... published their latest storage numbers. We were at 11 point premium to market. We became number two now in entry storage up from number five. So we crossed the number three and number four player. And we're just three points away from being number one in entry storage worldwide. In software, we have higher attach rates. In software defined, IDC just showed in hybrid cloud, we grew 58% year on year, which was a 45% premium to market. And then lastly, on services, we're tracking a double-digit growth year-on-year in our point-of-sale attach rates. We're expanding our true-scale as-a-service offerings, and we're delivering more professional services. For example, almost every HPC install where we had a record, we do data center design around our Neptune warm water pooling. And we also do data center design for some of the largest cloud players in the world, not just providing them servers and storage, but actually designing the whole data center for them. So those are, I think, just some of the examples. Hopefully, they give you confidence that this is a sustained growth driven by in-house design and manufacturing, as well as 4S focus that's improving our profitability. And I don't see that changing in the future. I think these trends, we feel confident for the future. Thank you.

Thank you, Kirk. Next question, please.

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

Your next question is from Albert Hong from JP Morgan. Please go ahead.

Hi, management team. Thanks for taking my question and congrats on the fantastic results. My first question is regarding PC. Given the supply demand dynamics, would you consider raising the retail price to reflect the under supply? And could we expect for PCSD margin improvement in the coming quarters? And could you also give some updates on the channel inventory level? My second question would be, you mentioned some solar investment in the service segment using the proceeds from CDR. Could you give us some great example of how are you going to use that? And any milestone of service segment, for example, when would you expect the service and the revenue to reach like 15% of total group revenue? Thank you.

So, Gianfranco, the first question is for you.

I see for me, yes. No, coming to... I answer first on the channel inventory, because this is probably a very interesting question. I think when I look around the world, frankly speaking, I don't think from US to Europe to China to Asia Pacific, I think our channel inventory has never been so low. And in some cases... During the last quarter, we were down to two to three weeks. Usually, a normal channel inventory is running around six weeks, right? So we were really down to a very, very low level. And it's still more or less at that level. So channel inventory, unfortunately, is too low. As I said, with no limitation on supply, the result of last quarter could be even better than what you see in terms of reporting. As I said, demand is still very, very good. I would say we have not seen any decline in demand. It's probably even building up even stronger, considering that Q1 is always much lower than Q2. than Q4. It's even stronger than in Q4. And we are doing some adjustment on the price, but I think it's really not rising price because shortage or because tight supply. It's mainly because, as I said before, we see in terms of demand a very different profile than in the past. With gaming, graphic card, better memory, better SSD, bigger SSD. And in terms of margin trend, I see very stable margin trend for this quarter and also for the next couple of quarters. So I think we will continue to see a very good growth. in terms of CA and revenue, and with the stable or slightly better margin. Thank you.

So I want to echo to Gianfranco. The PEC tablet demand will be still strong for this coming year. As I always said to you, so this pandemic is driving the people's behavior change. Now work from home, study from home, internment from home have become the new normal. It drives the information consumption upgrade from one phone per unit to one PC. or tablet per person. So definitely it will drive the strong demand for PC and the tablet. Also today the people spend more time on their PC and the tablet. So probably that will drive the faster replacement cycle in the future. So that we believe the demand for PC and tablet could be stable. So actually I have predicted the PC time would reach 300 million this year, but actually last year we have already reached 300 million. So we believe this year the demand will continue to grow by 5% to 10%. So that's our focus. So actually today's supply shortage is driven by the strong demand. So don't misunderstand. So supply shortage will not stop us to further grow. So a second question, could we answer the second question regarding of the CDR?

I'm on mute. I think the CDR, yeah, sorry. I think we obviously, I think, announced the CDR proposal. I think next time, next thing will happen is tomorrow we'll have a shareholders meeting, I think, approving the application. And from then onwards, I think we will get our prospectus I think, ready and then going through the necessary process, the application process, and hopefully that it will, I think, happen within, I think, the next few months.

So the question is about how we invest, right? Oh, the investment, sorry.

I forgot that. Yeah, I think the investment, we are actually working primarily investing in technology-related, I think, projects and investments. I think at the moment we are actually working out the details and we will actually put in more details of where we invest, I think, in this new technology. I think that, particularly in China, I think the new IT infrastructure that offers a lot of growth opportunity, we will have that disclosed, I think, in much more detail, I think, in the prospectus. I think while we are actually in the process of preparing the document and waiting to review the document by the regulators. I think it would be better just to give you a high-level description of where we invest, but we will actually have those in more detail as and when we publish the prospectus.

Thank you. Thank you, William. Next question.

Yes. Operator, we are ready for the next question, please.

Your next question is from Howard Kao from Morgan Stanley. Please go ahead.

Hi, guys. Congratulations on a record quarter. So I have two questions. The first question is a follow-on on the PCSD operating profit margin. I understand you guys during the quarter saw higher logistics costs. I was just wondering how much did that impact your margins And when can we expect these higher logistics costs to normalize? And the second question is on inventory. I noticed you guys had higher finished goods inventory both sequentially as well as year-on-year in the December quarter. I guess my understanding or I thought because of the strong end demand, you guys would actually have lower finished goods inventory. I was just wondering what, you know, why was it finished good inventory up during the December quarter?

Gianfranco, could you please?

Oh, yes.

Yeah, yeah. No, coming to logistic cost, when we see the impact, it's probably in the range of In terms of impact, this is decimal. It's not a big impact, maybe 0.1%, 0.2%, because it's not such a big... But for sure, we have seen the logistics costs going up. But this is not in Q4. This is already after, I would say, Q1 last year. So we have seen logistics costs going up in Q2, going up in Q3. stabilizing in Q4 because we have not seen an increase compared to the previous two quarters. And we expect that slowly they will go down as soon as we are back to normal in terms of pandemic and back to normal in terms of travel and so on. But when I look at the impact, I think because we have also been able to manage very, very well the increase In terms of charter, in terms of, you know, when you ship 20, 21, 23 million units per quarter, despite the cost increase, you can still manage to get a good discount, I would say. It's really how you manage logistics in terms of... either charter, sea shipment, train shipment, and so on. But we are talking about a very low number in terms of decimal. Inventory, China inventory is extremely low in terms of three to four weeks today. We have been building on the other side. In this situation, when there is any opportunity to buy a head, we buy ahead. We buy ahead any kind of things, but it's display, IC, because we want to make sure that, one, we can satisfy demand, and second, we can keep the factory up and running. So when I look at the inventory, I think it's mainly coming from parts components, not only, but with this kind of situation, When some components, it's very difficult to forecast in terms of delivery, so you usually try to build up the other components in order to make sure that as soon as you get the parts that are used on your short search, you don't have problems on the normal supply. So we have been building up more inventory just to make sure that we have enough components in the factory or in our ODM supplier that as soon as we get bodies in shortage, we can produce and ship. Finish good, there is also the other consideration is that we have, when we look at our finish good inventory, a lot of this is in transit. It's on the boat. is in the boat reaching our customer for Q1, for this quarter demand. And we also build up some, we have some additional finished goods because mainly for retail in US and in some cases also in Europe. you need to deliver within January and February. And in February, we should not forget there is Chinese New Year. So production will be a little bit impacted. Not too much, maybe two, three, four days, but with this kind of situation in terms of demand and supply, even two or three days of factory shutdown for Chinese New Year can be a problem. So this is also the other reason you see some finished goods. Probably today there is nothing left already in terms of finished goods because they are either on the boat or on the plane reaching our customers. Thanks.

Thank you. So next question please.

Once again if you wish to ask a question please press star 1 on your telephone and wait for your name to be announced. Your next question is from Lei Peng Goh from Fullerton. Please go ahead.

Hi, Government Management. Thanks for the presentation. Questions on the research How should... Your voice is broken.

Could you please repeat your question?

Is it better? Yes. Right, okay. I just have a question on the restructuring to the three new groups. How different should we think about these three versus the current structure in terms of the performance indicators or... Would it still be focusing on PPI margin? And just how different should we look at it, yeah, versus the current structure?

Thanks. Okay. So we will do this . The first reason is Gianfranco will retire in September, so we need to make some changes on our organization and leadership. The second reason is definitely we want to drive our organization to be aligned with our strategy. You know, we have a service-led 3S strategy. 3S means smart IoT, smart infrastructure, and smart vertical. So with the new organization, our IDG, Intelligent Device Goal, will address the smart IoT direction. Our new named infrastructure solution group is the DCG. We are driving the smart infrastructure. Definitely, the new established solution and service group, SSG, will drive the solution and the service direction. That's very crucial for our intelligent transformation. So this has been the goal. We are integrating all the service-oriented teams in our group to drive attached service, managed service, device-as-a-service, solutions, and smart vertical. et cetera, et cetera. So definitely smart vertical, we will be focusing on smart manufacturing, smart retail, smart city, smart education, et cetera, et cetera. So you know, in the past couple of quarters, we have seen very good progress in our service led transformation. So last quarter, our software and service led business grow by 36% year-on-year. So with the new organization, so we definitely believe we will keep the strong growth in the service area. So definitely our service business has a much better margin than the average in our company. So that's why we We think this is a caution for Lenovo's transformation for our future strategy or strategy execution.

Okay, thank you very much.

Thank you. Once again, if you wish to ask a question, please press star 1 on your telephone and wait for a name to be announced. The next question is from Chris Yim from BOCOM International. Please go ahead.

Hi, thanks for picking my questions and congrats again on the strong results. I have a question on PC, two questions total, but first question is on PC. I would like to know what is the enterprise statement? How is the enterprise statement looking this year versus consumer? Historically, we see enterprise margins on the PC side higher than consumer. And now it seems like it may be changing. So my first question is through enterprise demand and also enterprise versus consumer PC margins. My second question is on your CDR and more on the longer-term outlook. As we invest more in new technologies and innovation, how would that impact our operating expense? And how would that impact our ITG? profit margin. Thank you.

Okay, so still Gianfranco, you have the first question.

Yes. Enterprise segment, when we look at the trend, for sure during pandemic, with the pandemic, when I look at talking about calendar year, Q2 and Q3 We have seen a slowdown, right? Really a slowdown on demand, but a big increase on consumer and partially SMB. So it's not only consumer with this very strong demand. It was also SMB when I look at Q2 and Q3 calendar year. Q4, we start to see some signal of demand coming back, much better than the previous six months. And when I look at this quarter, I think demand is really back on enterprise, notebook, desktop, workstation, and I would say all the key segment or product segment in the enterprise. And again, I think even in enterprise during the last quarter and this quarter, the major concern in terms of is supply. and it's really how we can satisfy a demand. So enterprise, I think, we see a rebound during the last, let me say, three to four months, between November, December, and also now January and February. And back order is really building up nicely. Margin, when we talk about margin, I think, and when you look at our three segments, margin on enterprise and also margin on SMB, they continue to be very, very strong. The real difference is that also margin on consumer is becoming very good, but it's still not at the same level as SMB and commercial. But before, there was a big gap, and I would say the marginal consumer is reducing the gap against SMB and enterprise. But we still run enterprise with a better margin than consumer, more or less at the same level as SMB. Thanks.

So I want to emphasize what Gianfermo just said. So for the first time, we see the enterprise or commercial demand increase, so last quarter. So actually, the commercial PEC increased by 26%, 20-something. in the market. So definitely now we have around six points premium to the market. So that's a very good symptom. The economy, the global economy is recovering. So that has less impact than previous quarters. Meanwhile, the consumer demand is is still strong. So that's the split landscape for you to consider.

Next question. We also have. Oh, CDR, CDR, yes. Could you please answer the CDR question? Okay.

Yeah, I think on the CDR, while I said in the earlier, I think, question, I won't be able to, I think, tell you exactly, I think, which project or we are investing. But generally, I think we are raising, I think, the proceeds investing in technology, which obviously either, I think, when completed, will either improve our operating efficiency or will form part of our service's or solutions that we offer to our customers. As you know, I think if you look at the profile of our business, I think solutions and services normally command a much higher gross margin, I think, than our existing devices business. So in that net, I think after we actually raise the capital to invest, I think in areas we are very, very confident that not only will help us to expand further our top line of business, but at the same time, we'll be able to improve, I think, the margin profile of our business.

Next question, please.

Your next question comes from Kwai Tien from Orient Securities. Please go ahead.

Hi, management. Thanks for taking my question. I have two questions regarding SSG group. May we know how do you see the growth driver, the biggest growth driver for the SSG group in the next few years? And also, can you give us maybe the employee number and the breakdown of these employees by functions? of this group, such as how many employees are from the IND function and the marketing function, et cetera? Thank you, that's my first question.

Yeah, so even I myself don't have the number so far, so we, yeah, so we will, integrate all the service-oriented teams together. By April 1st, it will become more clear. But the content or the scope of the business is very clear. So they will try to attach the service managed service, including device as a service, and solution service. For the solution service, so we are particularly focusing on smarter vertical solutions, like smarter manufacturing, smarter education, smarter retail, smarter cities. So, I definitely believe in all these areas we can drive the hyper growth. So for the attached survey, although it's close to the box survey, but now Lenovo's attached rate is still much lower than the industry average. So we still have a lot of room to improve in that area. Definitely, manager service, DART, will be the trend. So, in the past quarter, this business has grown by more than 70% year-on-year. So, that will be our strong growth strategy. So that's definitely, as I said, smart vertical. So it will be the third area we will drive the growth.

Okay, thanks. Thank you. My second question is regarding the mobile business. We can see this business turn profit in the quarter, and I want to know how do we see the profitability in the next few quarter and With more Chinese brands are going overseas How do we see the competition in the overseas market like in the Latin America or? Europe and other markets.

Thank you So John Hanford, would you like to do it to answer the question?

No, yes But first of all, mobile business, I think, is back to profitability already since a few quarters, right? I think we have seen some impact on the profitability just during the last two or three quarters due to the pandemic and due to the demand with the impact coming from COVID-19. But if you look at the last six quarters, I would say, we were already back to profitability before pandemic. And then, of course, we have seen some impact during the pandemic. Now we are back to profit. And I think that even if I look at the next few quarters, I think we will continue to deliver a good profitability. Because the business is back to growth. It's back to growth in the U.S., It's back to growth, almost 80%, 85% in Europe, where we see really very, very good opportunity to further develop Europe with good connection, good relationship with most of the operators in Europe. But it's also back to growth in Asia-Pacific, talking about India or other countries in Asia-Pacific. So I think we will see growth in terms of revenue, but also we will continue to deliver good profitability like this quarter. The only question, Marco, also on mobile, it's again supply, with more or less the same profile that we see on PC, IC and display. What was the other question? One, it was... The Chinese competition, but frankly speaking, we have seen Chinese brand competition in Europe, but despite the Chinese brand competition in Europe, as I said, we continue to see 85% revenue growth and we continue to see a big opportunity. In Latin America, we continue to be number two and I would say, compared to one, two, three, four, five quarters ago, in terms of competition landscape, we really don't see a major, major difference or a big difference. Some of the Chinese brands coming, some others less aggressive than before, but I would say the overall landscape is the same. There are also some other brands that they just announced to leave the market. And it's going to be another very good opportunity in both U.S. and Europe in terms of growing potential. Thank you.

Thank you.

Thank you, Gianfranco. And thank you, Yanqing. We are running out of time. Take more questions. Thank you very much for joining today's call. If you have further questions, feel free to contact the IR team or they know 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, everyone. Bye-bye now.

Bye-bye. Ladies and gentlemen, this does conclude today's conference call. Thank you for participating. You may now disconnect.