Lenovo Group Ltd
HKEX:992
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
7.89
12.08
|
| Price Target |
|
We'll email you a reminder when the closing price reaches HKD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Lenovo Group Ltd
You don't have any saved screeners yet
Good morning, good afternoon and good evening. Welcome, everyone, to Lenovo's earnings webcast. This is Jenny Lai, Vice President of Investor Relations at Lenovo. By now you should have received a copy of our earnings release and earnings presentation.
Before we start, let me introduce our management joining the call today: Mr. Yang Yuanqing, Lenovo's Chairman and CEO; Mr. Gianfranco Lanci, Corporate President and COO; Mr. Wong Wai Ming, Group CFO; Mr. Kirk Skaugen, President of Infrastructure Solutions Group; Mr. Ken Wong, President of Solutions and Services Group; and Mr. Sergio Buniac, President of Latin America and Mobile Business Group and President of Motorola.
We will begin with earnings presentation. And shortly after that, we will open the call for questions.
Now let me turn it over Yuanqing. Yuanqing, please.
Hello, everyone, and thank you for joining us.
We are pleased to report a record fiscal first quarter results in our new organizational structure. While Wai Ming will go into detail about our performance, I want to focus on the greater opportunities we see and how we will deliver growth and sustainable profitability increases well into the future.
The new normal has changed how people live and work. It has accelerated the digital and the intelligent transformation and the upgrades in smart devices, ICT infrastructure and applications. With our clear 3S strategy and strong execution, Lenovo is confident to capture these significant opportunities to further grow and improve profitability.
In fact, last quarter, despite the challenging environment, Lenovo delivered a record quarter with a significant year-on-year profitability improvement. Group net income more than doubled. Net income margin reached the highest in many years. Group revenue continued the hyper-growth of almost 27% year-on-year.
But I want to say, this is just the beginning. In the coming years, we will continue to focus on high-margin businesses, including Solutions and Services, particularly as-a-Service business, infrastructure upgrade, premium PC and the adjacent non-PC devices. We will further increase investment in innovation and consistently improve our gross margin and overall profitability.
Now I want to go into the details of each business group. Let's start with our new Solutions and Services Group or SSG. Today, the ICT infrastructure is transforming to a new architecture of client, edge, cloud, network, intelligence. This new IT will accelerate digital and intelligent transformation and bring each individual and enterprise higher efficiency and productivity, but also more complexity. This means customers now need more sophisticated IT services.
This shift created the huge market opportunities for solution services as well as managed services, including the subscription-based, all-inclusive business model, which we call as-a-Service. This is not only a reshaping of IT services, but also a massive transformation of the entire industry. IDC estimates the new IT service market to be over USD 1 trillion through 2025.
While there is a potential to grow in traditional support services, even larger growth opportunities lie within managed services, other service and the vertical solutions. The margins of each service businesses are much higher than devices alone. So SSG's high growth will definitely drive higher profitability for the group.
SSG addresses these opportunities with the 3 service segments, and we already see strong initial results. Last quarter, SSG revenue achieved the significant growth year-on-year with a strong operating margin of 22%, which is much higher than our traditional hardware businesses.
Support Services profitability was up by almost 3 points year-on-year. Managed Service, as-a-Service and Vertical Solutions all achieved a double- and a triple-digit growth year-on-year. We will own many more high-profile smart city and smart retail deals on the implemented hybrid cloud solutions with our own IP.
Going forward, we will drive further growth and margin enhancement. Our Support Services business will improve penetration rates and leverage the increasing device install base, especially as commercial rebounds to grow. For as-a-Service, we will aggressively invest in capability, platform and tools and drive scale through building more repeatable Vertical Solutions with our own IP and through strategic partnerships.
Now let's talk about our Infrastructure Solutions Group or ISG. ICT infrastructure is the foundation to digital and the intelligent transformation. IDC predicts the ICT infrastructure to be a near $250 billion market through 2025. We have been investing in ISG for years, having started with only a global server business from IBM x86 acquisition.
ISG has built a storage, software, service, software-defined infrastructure capabilities and become a full-stack data center infrastructure provider. We have also expanded from providing enterprise IT infrastructure to public cloud and the full hybrid cloud solutions to our customers.
Now years of investments are paying off. This business is close to achieving profitable growth and generating returns. Last quarter, ISG delivered a record revenue and has outperformed the market for 6 straight quarters while achieving the best results in 5 years. We are now #3 in x86 server and the #2 in mainstream storage worldwide. Our higher-margin businesses, storage, software, continued strong growth year-on-year, particularly, hybrid cloud solutions grew high double-digit year-on-year.
Looking forward, we will continue to invest in ISG's competitiveness and move towards profitability. We will increase investments in edge computing, hybrid cloud solutions and the 5G cloud network convergence. We will also continue to strengthen our in-house design and manufacturing capabilities, improve efficiency and expand the strategic partnership to enable more solutions. Our vision is to become the largest ICT infrastructure solution provider.
For Intelligent Device Group, or IDG, I want to reemphasize that the pandemic has changed how people live and work. And PCs has returned to the center of our digital lives. People now spend much more time on these PCs. PC refreshment cycle has shortened, and the penetration rate has increased. IDC confirmed that the total PC demand will at least remain at the current levels until 2025, while commercial demand is rebounding quickly. At the same time, the IoT market is expected to surge by 11% CAGR through 2025.
IDG is fully leveraging our PC leadership proposition and synergy across businesses to expand in adjacent non-PC segments, such as the smart meeting collaboration and the embedded computing. We have also been investing in innovation in the premium segments like Workstation, Gaming PC and the Thin & Light to drive sustainable profitability increases.
Last quarter, IDG continued significant top line growth of almost 30% year-on-year, but the profit grew even stronger at over 40%. In one aspect, this is driven by strong performance in PCs, thanks to years of investment in premium and high-growth PC segments. We continue to improve our both average selling price and profitability. In another aspect, this result is driven by strong performance of non-PC segments, which already accounts for 18% of IDG's total revenue.
Both tablet and smartphone businesses achieved over 50% growth year-on-year with a record performance. We strengthened the #2 position in Android tablet worldwide. Smartphone had a record operating margin of almost 5% and then now has become a self-sustainable healthy business. We are confident to leverage the change in market landscape to continue hyper growth.
Going forward, IDG will continue to invest in smart devices, core component technologies and the next-generation computing platform. We will continue to focus on premium segments to improve average selling price and profitability. We will leverage our broad customer base to cross-sell adjacent non-PC products and further increase non-PC business mix.
Last quarter, we increased our R&D by 40% year-on-year. And we will continue to invest in innovation and aim to double our R&D expense in 3 years. We will further strengthen operational excellence and improve efficiency through more decisive and thorough digital and intelligent transformation internally. And we remain committed to ESG and the sustainable green development. All these efforts will not only help us deliver long-term profitable growth, but also bring to life our vision of smart technology for all.
Lastly, I invite you to attend our annual flagship event, Tech World, next month where we will discuss more about our vision and our future. Thank you.
Now Wai Ming will talk about our first quarter in more detail. Wai Ming, please.
Thank you, Yuanqing. I will now take you through Lenovo's financial and operational performance in Q1 fiscal year 2022.
We achieved our best first quarter in history. We outperformed the market and attained record Q1 revenue of $16.9 billion, posting growth of 27% year-on-year. Our net income margin reached a 13-year high of 2.8%, and net profit more than doubled year-on-year. All our 3 business groups set new milestone in revenue and performances.
IDG, our Intelligent Device Group, realized its all-time-high operating margin of 7.5% and profit growth of 43% year-on-year. While PC business is contributing to the growth, non-PC products also registered a growth of 57% in revenue year-on-year.
Our new product driver, the Solutions and Services Group, SSG, saw its operating profit grow 51% year-on-year, contributing to 20% of our group's profit. Its 22% operating margin was nearly 3x of business group average.
Our Infrastructure Solutions Group, ISG, achieved its record revenue since the x86 acquisition and made its largest profit improvement since 2Q fiscal year '18/'19 by $49 million year-on-year.
While maintaining our E/R ratio year-to-year, our research and development investment grew 40% year-on-year. We believe our commitment to R&D will drive innovation and differentiation that will continue to support higher profitability. We plan to double our R&D spending in 3 years.
Furthermore, considering the improved product mix structure, we are confident that we can continue to expand our net income margin. Profit attributable to equity holders was $466 million, and the basic earnings per share came in at USD 0.0402, representing 123% growth year-to-year.
Our operating cash improved by $131 million to $448 million, driven by strong profitability. In this fiscal quarter, the ongoing component supply shortage remained a key challenge, and our order backing further extended to fiscal Q2 across PC, smartphone and server. To support our growth, we continued to execute our component buy-ahead program to meet strong demand.
To optimize our capital structure, we further reduced our net debt by 4 -- $541 million to $739 million and lowered our finance costs correspondingly. In addition, Fitch upgraded our credit rating to BBB in March 2021. Recently, S&P and Moody's revised our outlook from stable to positive, reflecting our sustainable growth outlook.
Targeting the fast-growing new IT services segments within the trillion-dollar IT services market, SSG delivered a successful first quarter with strong revenue growth and high profitability. This financial result, SSG, have demonstrated the group's strategic focus for the past 2 years on service-led transformation and started to bear fruits.
SSG revenue increased by 38% year-on-year to $1.2 billion, with strong double-digit revenue growth across 3 segments and all regions. Operating profit surged by 51% year-on-year to $264 million. Driven by strong top line momentum and solid expansion in operating margin, we stand at 22%, topping all business groups. SSG will continue to contribute to Lenovo long-term profitability through its higher profitability and fastest revenue growth among all our business groups.
Revenue of Support Service grew 24% year-on-year. We continue to drive its penetration rate by strengthening premium service attached and new solutions such as asset recovery services.
The remarkable growth of Managed Service reached 64% year-on-year, demonstrating our ability to serve customers' demand as they switch to as-a-Service model. Total contract value of as-a-Service more than doubled during the quarter. The growth momentum continues as we secure several landmark deals and strategic partnerships.
Project & Solutions also reported strong revenue growth of 56% year-on-year, paving the way for scalable growth. This achievement as a whole contributed to a 41% year-on-year growth in booking, while deferred revenues amounted to $2.4 billion, up 34% year-on-year.
ISG continued its faster-than-market growth momentum for 6 consecutive quarters. Sales grew 14% year-on-year to $1.8 billion. Profitability improvement of $49 million was the strongest in the past 2 years, driven by more profitable cloud service provider projects and favorable mix within enterprise and SMB. ISG will continue to increase its profitability.
CSP sales reached an all-time high, and they continue to expand client base, adding 12 new CSP next-wave clients with more project wins. Its global design-in projects now expanded from 1 socket to 8 sockets, server to storage, liquid cooling, more advanced system designs and multiple platforms from a single platform.
ESMB delivered the highest 1Q revenue in the last 5 years, supported by record sales and high margins, storage, high-performance computing and hybrid cloud solutions. In the mainstream storage market, the group was one of the fastest-growing vendors and maintained its position as the second largest global player.
Q1 marked another record quarter for our IDG with a 43% improvement in operating profit and a 28% revenue expansion. There were multiple drivers contributing to IDG's performance, including strong commercial demand and encouraged share gain in premium segments, resulting in higher ASP and profit margin.
The use of PC has returned to the center of people's digital life, leading to increased demand for premium products, including Gaming, Thin & Light and Yoga series. Digital transformation had taken a different turn to drive commercial recovery as economies reopen.
IDG's commercial PC sales and its premium product sales, such as Yoga and Gaming PC, grew significantly year-on-year, translating into high ASP and stronger profitability for IDG PC mix. We further improved our ASP by 6%. Q1 marked the 14th consecutive quarters of profit margin expansion for IDG.
The non-PC product was another bright spot, representing 80% of IDG revenue in Q1. Tablet revenue grew 58% year-on-year, and smartphone sales went up by 64%. Our smartphone profit expanded $85 million year-on-year, while operating margin reached new high of 4.9%, driven by consistent market share gains across all geographical markets.
The successful execution of our smartphone strategy in product optimization and broader carrier ranging have proven to be earnings accretive. We will continue to increase ASP through investing in innovation and driving favorable premium mix. This will contribute to a healthy growth of our smartphone business, continue revenue growth while maintaining profitability.
ESG continue to be a very important focus area for Lenovo. In the environment aspect, we are very proud we exceeded our 2020 climate change commitment. Furthermore, we launched our new 2030 climate change goals. Our new 2030 Science Based Targets address both Scope 1 and 2 direct emissions as well as Scope 3 emissions intensity in our value chain.
In the social aspect, we formally announced our Product Diversity Office in 2020, supporting our commitment to develop technology for diverse users and minimize bias inherent in the technology or product itself.
In regard to governance, we established a new ESG Executive Oversight Committee. The committee is comprised of executives from different business areas and geographies to ensure Lenovo ESG programs and investment effectively and appropriately address risk and opportunities. We are very pleased to note that our strong ESG performance has earned the recognition from a number of notable organizations. We will continue to honor our responsibility as an industry leader and corporate citizen.
Looking ahead, we believe the accelerating global trend in digitalization and service-led transformation and the recovery of global IT spending post COVID-19 will continue to benefit Lenovo. Our commitment to R&D investment will further elevate Lenovo leadership in innovation, while our branding efforts will raise customer recognition of such differentiation. Both are the key drivers for us to further expand our gross margin.
Our service-led transformation, commercial recovery, favorable mix, product innovations such as full-stack offerings from ISG and our strong operational efficiency are all supporting factors to help achieve Lenovo medium-term financial target of doubling our net margin.
SSG will play an important role as the group's high-margin, high-growth engine, targeting the fast-growing new IT service segment. In addition, our extensive exposure to commercial PC and ESMB infrastructure offer vast solution and service potentials, leveraging on strong as-a-Service demand. We will continue to enrich our solution portfolios with in-house IP to drive scalable growth and build competitive edge for the next-stage expansion.
In ISG, we will continue our profitability improvement, supported by consistent premium-to-market growth in both ESMB and CSP markets. We will continue to deliver industry-leading end-to-end infrastructure solutions and expansion from server to full-stack offerings.
In ESMB, we will expand the product portfolio through servers into storage, software-defined infrastructure, software, services and new segment coverage in edge through AI and communication solutions while raising profitability. In CSP, we will fully integrate our unique ODM+ model to expand profitable opportunities and drive quarter-to-quarter profit improvements.
In IDG, we will sustain our profit expansion while investing in R&D to drive higher value-added premium products and smarter devices. We will further enhance our operational excellence and global supply chain management. The digital transformation took a new turn as the economy reopened, thus creating a strong demand and order backlog in commercial PCs.
The premiumization trend could also accelerate as remote learning and working models have raised the bar for video and audio designs. Riding on the 2 trends, we believe the ASP and margin expansion in PC will continue to support our profit improvement.
Our smartphone business will form an important driver for non-PC growth, while it's focused on sustaining strong growth momentum in North America and Europe, while maintaining market leadership in Latin America. It will further push product innovation and accelerate 5G smartphone launches to score wins in more market and stay on track for profitable growth.
Our strong financial position and cash flow have provided a solid foundation on which Lenovo can proactively pursue growth opportunity ahead, particularly in the fast-growing service area. Lastly, we reiterate to our shareholders Lenovo commitment to sustainable profitability increase.
Thank you. And now we can take your questions.
[Operator Instructions] Operator, I will now turn it over to you. Please give us your instructions.
[Operator Instructions] The first question comes from the line of [ Huey Chun Yen ] from Huatai Securities.
I'm [ Huey Chun Yen ] from Huatai, and I have 2 questions. And the first question is about your new segment that is SSG. I noticed it's the first time Lenovo has officially re-segmented revenue. So can you please tell us more on your -- the segment of SSG? I mean what's your -- what's the relationship between now the SSG and the former segments? And what's your strategy on SSG's further development? That's my first question.
And the second question is about chips. Can you give us more color on the chips right now with respect to the laptop?
Okay. So now we have a new leader of SSG, Ken Wong, in the call. So probably I would invite Ken to answer your first question. So regarding the chip shortages, so probably the Chief Operating Officer, Gianfranco, can answer the question.
Thank you, Yuanqing. So this is Ken. Thanks for the question. I think this is a really great question. I think we're very happy to see, in fact, the increasing demand for more sophisticated services requirements coming out from new IP, I think as Yuanqing mentioned. Now with the new IP, I think, obviously, the benefit is going to be able to help enterprises to increase efficiency, productivity and competitiveness. I think the biggest challenge for a lot of people is that there's a lot of complexity and complication.
So I think Lenovo and especially SSG's role is to help our customer to navigate and overcome all these challenges in order to get the benefit. Now that's why if you look at our business, right, we have basically 3 tower of services and all entangle to work to provide the end-to-end solution to our customer regarding new IT. Now the tower 1 is mainly around our attached services, right? These are the basic warranty and also warranty upgrade to improve the ownership experience of our hardware products.
Now tower 2 is about managed service and also as-a-Service. Now this is the part where we add a lot of value. And also because a lot of data point that we got, right, this is the market where it's growing very, very fast, right? Some of the data point is suggesting that this is the part of the bucket that is rolling at 30% plus on a year-to-year basis. And we have been focusing a lot in this area in terms of building our capabilities, building our system and tools so that we can provide the best-of-the-breed managed services.
And to share a lot of -- a little bit more detail, I think this year, we're already able to provide tower 2 services, managed service and as-a-Service in over 100 markets that we have business in. And the target is do all the way towards 180 markets that Lenovo has business in, right? So this is obviously a huge growth opportunity for our business.
Last but not least, right, I think the tower 3 is about project solution and also vertical solution. This is where the part we can add even more value by understanding some industry-specific requirements, leveraging some of the Lenovo internal IP and provide a integrated solution, an end-to-end solution for our customers.
Now with all these, right, I think we are very confident that the SSG business will continue to grow. I think as Yuanqing mentioned in his opening that we'll continue to grow even at a speed that will be faster than the overall growth from a top line and also bottom line perspective. Thank you.
Yes. So I want to add a couple of points. So this business, our Solutions and Services business, is key to Lenovo strategy. So we call it service-led as we have a strategy path. So that means smart IoT, smart infrastructure and smart vertical part, all of those are related to Solutions and Services.
Second, so SSG will help us to achieve our goal to sustainably improve our profitability because this is a high-margin business. So actually, you see last quarter's same profit -- operating margin was above 20%, so it was 22% year-on-year, and it's still increasing. So that will help us to improve our profitability over time.
Okay. So the next question will be answered by Gianfranco regarding of the supply shortage.
Talking about the supply shortages, first of all, one clarification. When we talk about chip, I mean, mainly, it's really IC, integrated circuit. So small components, mainly that are key for motherboard display, the LAN card or some other things because sometimes, I think there is confusion between CPU or other GPU and so on. But the shortage, it's really on IC.
We are facing these shortages in -- so now it's already 3 -- almost 3 quarters, right? We don't see further deterioration in that, but yes, they are still short, and I think they will continue to be short at least for the next couple of -- maybe 2 or 3 quarters. We see some improvement in here and there. On the other hand, when you look at our growth, that is between 20% to 30% on PC in -- it's a potential limitation, but it's a potential limitation to grow more than 25%, 30%.
So we still see for the future quarters a good opportunity to continue to grow with this trend. And as I said, it will not improve seriously at least for the next 2 or 3 quarters because it's not only coming -- and it's not coming -- it's not only coming from PC demand. It's coming from automotive. It's coming from any kind of smart devices, including white goods, any kind of really smart devices where you need even small board. And now you'll see electronics, you see small board almost anywhere, right?
So PC demand, for sure, is one of the reason, but it's not the only reason of the shortage. We have seen, on the other side, good improvement on display. Display, I think, it's -- we don't see any issue on display. We don't see any issue on any other major components. It's just IC, and I said it is mainly impacting motherboard and display in the sense that you need the board managing the display. I hope I have answered your question.
Okay. Thank you, Gianfranco. So in summary, so the key shortage is on IC. So the component shortage will probably last until first half of next year. But we want to emphasize this shortage is [ influenced ] by stronger-than-expected demand, not shrinking demand, but demand for devices, data center infrastructure are all very strong. Actually, Lenovo's backlog is almost the same as the previous quarter.
Another point is Lenovo has a track record to drive better-than-competitor results regarding of the supply part. So mainly because of Lenovo's unique business model part, we are not like our competitors who outsource 100% of production to the third party. At Lenovo, we have the hybrid, 50% in-house, 50% outsourcing model part. So this model give us more flexibility and a better relationship with Tier 2, Tier 3 suppliers, upstream suppliers, so that we can manage our supply base part. So even with the supply constraints, we are optimistic and confident to continue to drive the premium-to-the-market growth. Thank you.
The next question comes from the line of Albert Hung from JPMorgan.
Congrats on the good result. My first question is still regarding the service. So could you provide some analysis? From quantitative analysis, what's the, say, long-term target of service segment? What's the KPI for this? And from, say, qualitative analysis, could you share more color on the difference in customer behavior between the service and traditional hardware segment? For example, how is the customer churn rate? And how is the customer cross-selling opportunities for service segment? I guess one also key question is whether the customer tend to adopt more than one partner in service model or they just use single source in service.
And my second question is the OP margin. Segment OP margin achieved new set of highs for PC, and mobile KPI also achieved record highs. [ Several ] also showed very meaningful loss reduction. But the group gross margin actually dropped on a sequential basis. Could you help me to understand a bit more about the disconnection between gross margin and OP margin?
So Ken, could you please answer your first question, service?
Yes, Yuanqing. Thank you, Albert. So let me take the first question. Now regarding the target, I think, first of all, we're very happy to see the Q1 performance, right, the 38% year-to-year growth and 20 -- 22% of operating margin. Now as I answered the previous question, I think we continue to see a very strong demand for all kinds of services, right, from attached services all the way to managed services and everything as-a-Service. So our target in the midterm is to maintain the SSG growth, which is faster than the overall Lenovo Group growth, right, for both top line and bottom line.
So your second -- could you please repeat your second question? Is the cost impact on our margin or profit? Is that the question?
Sorry, my second question is your OP margin actually achieved greater highs, but actual gross margin declined quarter-on-quarter. So could you help me understand the disconnection between these 2 composition?
But it's only within...
Okay.
Only one thing. But it has been growing 1 point -- almost 1.5 points year-to-year. So it depends on the comparison, quarter-to-quarter or year-to-year.
So Wai Ming, you want to add something here?
Yes, YY. I think there are, I think, a couple of reasons, Albert. I think one already -- Gianfranco mentioned about the competition issue. I think the other one is obviously scale. I think quarter 4, I think we will not play -- I think quarter 4 numbers, I think we obviously get some maybe -- because of scale, because of some one-off costs that actually drive, but in fact, it's actually not significant. I think for us, I think there may well be also some changes, I think, in terms of the mix of the product, I think, resulting that -- again, I think -- probably I need to give -- I think provide more detail, for example, in different geography or in different countries, I think the profit margin or the gross margin profit is a little bit higher than the others, for example, like Japan, generally.
I think when the market size changes quarter-to-quarter, that actually have a small impact, I think, on our overall gross margin. But generally, I think as Gianfranco said, we've actually been looking, I think, more comparable. I think it's really year-to-year and we've actually been, I think, improving gross margin, and that is our target. And we also feel very comfortable that we can continue to maintain the margin improvement. I think resulting what Yuanqing said earlier that it is our medium financial goal, I think, is to [ show ] improvement in gross margin, obviously, as well as operating efficiency, be able to bring our net margin, I think, to double, I think, from last year, 2% to 4%, I think medium-term target, and we are obviously on track on that.
The next question comes from the line of Donnie Teng from Nomura.
My first question is regarding to your PC business. So I think in the past 2 months, the confirmed COVID-19 confirmed cases in U.S. surged a lot again from a very low base in May and June. So previously, I think the -- my impression is like Lenovo believes that the commercial PC demand is increasing due to people will be back to office rather than work from home after the easing of the COVID. But now the situation looks like to be getting worse again in Western countries. So just wondering if you could give us an idea about our PC business outlook in terms of like commercial or consumer or educational segment. And that's the first question.
And the second question is for inventory. So in the past few quarters, I'm seeing that your raw material and working process inventory surged more meaningfully compared with the finished good. So I'm just curious, what kind of component, materials or ICs are accumulated in the past few quarters? And whether if -- I mean if there is any demand deteriorating, if there would be any kind of risk on inventory write-off in the future.
So the first, PC-related question, could I invite our new IDG leader, Luca, to answer the question? So probably Gianfranco can answer the inventory question or Wai Ming as a company. Luca, please.
So thank you for the question. So I think, Donnie, you are asking whether the new COVID profile is -- how it's affecting our PC segment. So obviously...
PC demand.
Yes, yes, the PC demand in each segment. So obviously, we are seeing a very robust consumer segment demand still. We observed that in some of the country with the lower COVID rate or with the better COVID situation, the demand slow down a little bit, but still maintains far superior to the previous pre-COVID levels, so to say, demonstrating our theory that the PC is truly back at the center of people digital life. So that is for the consumer part.
The commercial side, the demand profile and the outlook we estimate is very bright because we have noticed during the initial COVID 1 year ago, many enterprises have lowered down investments. But now due to the necessary, the must digitalization of their businesses, there is a very significant demand increase. We have noticed this initially more in the large and very large enterprises, namely our global accounts, but now it's expanding also to the large enterprises and the SMB.
So I would say we are very positive on the demand of the commercial PC business. For both segments, there is also an upgrade into the product demand, which means there is a higher demand of audio, video, microphone conferencing experience. So that drives the premium PC higher, which consequently drive AUR and our margin opportunity higher as well.
You also asked about the education. I think the education, namely Chromebook, is also in function of the learn-from-home status. Now there is a little bit of slowdown, particularly in U.S. We have noticed the Chromebook has slowed down a little bit. But that's also related to the seasonality and to the government funding incentive, which we have reason to believe that will pick up. So it's probably that this education segment is probably the lowest among the consumer and commercial. But we still believe it's very early to say that the demand is trending down. It's just a pause. But in -- and in any case, for us, Chromebook is a very small fraction of our PC revenue. I think it's less than 5%.
Yes. So I want to echo Luca's point. So firstly, from what we can see, PC demand is still very strong in both consumer and the commercial segment. Our backlog order last quarter was similar to the previous quarter. So very big volume, we still cannot ship. We still cannot deliver because of the component shortage.
From a long-term point of view, so we are equally optimistic because we think this pandemic has changed the people's behavior. So the hybrid working approach will last for a long term, just to stay. So that will drive the PC demand, at least to keep at the current level of, let me say, [ 368 million ] units per year level, which is much higher than the pre-pandemic, which is just 206 million.
Now our people spend more time every day on their PC, so that they will drive the faster replacement cycle. And also, it will definitely drive the more penetration rate. So that will help PC total market keep stable. So that's our view. And also, the commercial -- because commercial customers or market is getting recovered, so that we believe the averaging selling price will go up and also that will help us to improve the profitability. So given Lenovo commercial PC products are stronger in the industry, particularly in the premium Thinkpad sort of area part, so I think that will help us to improve the profitability.
Regarding of the component that you mentioned, I don't think that's the issue part. So actually, it's driven by the supply shortage. We have to buy ahead for some components. So perhaps, Gianfranco, you want to add something here?
No, yes, yes, very well. And -- but there is another important there, there is another element in my view also that is going to drive demand on PC in the next 3 to 6 months, which is the Windows 11 that we -- because it's going to be available very soon, and this will also help to drive demand first in consumer, second in commercial later.
On the inventory, I think we did it on purpose to build up some inventory in terms of components because with the shortage today, if you are in a good position in terms of inventory, then you can speed up the manufacturing and ship as quick as possible. Because like YY said, we still see back order very, very high. It's almost 1 quarter of back order. So we really don't see any deterioration on demand.
And to have even more inventory, it will be good. Because with the shortage, and you need to play between different components, you need to see what is available, what isn't, to make sure that in terms of square set, you are okay. And we really don't see any possibility of the deterioration or write-off of the inventory. Unfortunately, it's not enough. It should be more. But should be more, it depends on the shortage. So inventory is really not the issue.
I think that clean the back order and shipping to the customer on time is the real issue we have today. And we will not see any good solution for sure until the end of the year and probably even next year as demand is so strong; on consumer, still stronger; getting very strong on commercial, but it's already a couple of quarters, almost 3 quarters.
And the impact of COVID-19 with the new -- the delta and what we are seeing. First of all, in the Western world, it's very clear that with the vaccine, people, they may get infected. But if they are vaccinated, they don't go to the hospital. They -- it becomes like a flu, but it's not getting very serious.
Second, I think most of the enterprise customer, all the larger enterprise customer, it's really not because people that they start to invest again, not because people are coming back to the office, but because they want to -- they really want to speed up the digitalization of the company in order to be ready for any future surprise or future issue. So I think it's got nothing to do, in my opinion, with people going back to the office or not when we look at commercial investment.
I would say the only thing where you see a little bit of slowdown is education, mainly in units, Chromebook. We are not one of the largest player on Chromebook. Chromebook is for us today something in the range of 5% of our revenue. We've never been very focused on Chromebook also because talking about inventory, we prefer to use the parts and the components to build better machine in terms of the average selling price rather than building a Chromebook. We lead to our competitor to do it. But I think it's the only area also due to some seasonality because now it's valuation. It's the only area where we see a little bit of a slowdown. Consumer and commercial, we really not see any slowdown.
The last question comes from the line of Jerry Su from Credit Suisse.
So my first question is regarding the channel inventory situation. I know that Gianfranco and other executives had talked about the strong demand and also the backlog you have. But I think the market has some concern about the rising inventory level in some developed markets. So can you give us a little bit of comment on that? And then the second question is regarding the Asia listing. Is there any new update you can share with the investors?
Okay. So Gianfranco, continue to answer the channel inventory.
No, I'm a little bit -- so thank you for the question. I'm mostly a little bit surprised about that because we don't see any buildup of inventory in the channel, exactly the opposite. In most of the geo, the level of the channel inventory has never been so low. We are talking in some cases of less than 4 weeks, 3 to 4 weeks. And we know with the 3 to 4 weeks, usually, you lose the sales because the profile of inventory never [ comes ].
And I don't know where the information is coming from in terms of building up channel inventory. But for sure, it's not the case for us. As I said, the back order we have is so -- it's almost 1 quarter. And in most of the countries, with people, distributors and dealers and so on, I think, desperate to get the goods.
So both commercial and consumer, as I said, again, probably there is -- we may see some in education inventory building up, Chromebook mainly in one geo, which is U.S. This may be the case if we talk about overall inventory, as I said, that I don't see issue on consumer. I don't see issue on commercial. We might see something on education. But again, in our case, in fact, we are growing #3 in terms of -- even #4 in terms of Chromebook supplier. So it's not going to be a major concern even with some slowdown on the sales.
Okay. Thank you. Thank you, Gianfranco. So regarding of the Asia, so Wai Ming, you want to answer the question?
Yes, YY. I think in terms of the CDR -- application of CDR listing in Shanghai, we are definitely making progress. I think in accordance with the requirements laid out by, I think, the relevant regulatory -- regulators, I think we achieved certain milestones. I can give you a little bit sort of color, including, for example, I think management and director doing the education and taking exam. I think getting all the adviser, I think verifying our documents, I think we are making very, very good progress. And we obviously will follow the procedure as laid out by the regulators. And if there is anything that I think that we want to go to public, we will obviously, I think, publish an announcement informing the market. But in short, I think we are making progress and achieved, I think, a number of milestones as laid out by the regulators. Thank you.
Okay. So before we end the call, can I invite Kirk and Buniac to give a 1-minute update on their business, so regarding of the ISG and MBG. Kirk, please.
Sure, YY. So I think we feel very confident in our continued growth, for year-on-year growth, quarter-on-quarter revenue growth and improving profitability. We've now shared with you 6 quarters premium to market with our all-time record revenue. But we also had records across our server business, storage business, cloud business, high-performance computing business and communication service provider and service. So in the areas of storage, we're seeing more than 50% year-to-year growth and 14 quarters of premium-to-market growth, which has catapulted us to #2 in the mainstream storage market of 25,000 and under storage.
So it's a good momentum story for us, and we continue to grow, we believe, at a premium to market. Despite, again, certain supply shortages, we don't think that will limit our continued record revenue growth and improving profitability.
Yes. So thank you. Thank you, Kirk. So definitely, we think the ISG has a big opportunity to further grow. So there, we'll transform from server only to the full stack of data center, product, storage, software-defined software and the services. And also, there were -- so we have successfully shifted from enterprises -- SMB only to cloud service provider. So we will be focusing on the hybrid cloud as well in the future. So the opportunity is huge. We will ensure the investment to guarantee the growth in that business.
Okay. So Buniac, 1 minute.
Yes. Hello, everyone. So similarly, we are seeing very strong demand coming from all geographies. We saw a record Q1 like from -- the best Q1 since 2015, 64% year-over-year growth. We see that sustaining across the future quarters. Many, many ones like record [ right of way ] since 2018, record North America Q1 ever, 5 consecutive quarters of premium to market. We are seeing the range growing significantly in all regions across the globe. And we also just deployed a very strong enterprise portfolio by launching features. So not only by geo, but only -- we are growing in different segments. The final comment is that our 5G [ unit ] has grown from 10% to 14%. And we believe you are probably double between now and the end of the year as part of the portfolio.
Thanks. Thank you. Thank you, Buniac. So we are definitely impressed by these 2 businesses, particularly on the profitability environment. So I think our ISG is seeing the last mile to deliver profit growth, and our MBG delivered 5% operating margin last quarter. So this has been very healthy business, the highest level. And also, so we will reinvest this money in the mobile market to drive the growth.
Okay. Thank you. Thank you, everyone, for participating in the call.
Yes. Thank you, YY. Thank you, my executives. And we thank you very much for joining today's call. If you have any questions, feel free to contact our IR department. And the replay of this webcast will be available in the next couple of hours on our Investor Relations website. Thank you again for joining us. Bye-bye now.
This concludes this conference call. Thank you for participating. You may now disconnect.