Lenovo Group Ltd

HKEX:992

Earnings Call Transcript 2023-Q1

[Jenny Lai, executive]

Good morning, good afternoon and good evening. Welcome to Lenovo's Investor Earnings Webcast. This is Jenny Lai, Vice President of Investor Relations at Lenovo. Thanks to everyone for joining us.

Before we start, let me introduce our management team joining the call today, Mr. Yang Yuanqing, Lenovo's Chairman and CEO; Mr. Wong Wai Ming, Group CFO; Mr. Ken Wong, President of Solutions and Services Group; Mr. Kirk Skaugen, President of Infrastructure Solutions Group; Mr. Luca Rossi, President of Intelligent Devices Group; Mr. Sergio Buniac, President of Mobile Business Group and President of Motorola.

We will begin with earnings presentations. And shortly after that, we will open the call for questions. Now let me turn it over to Yuanqing, please.

[Yang Yuanqing, executive]

Hello, everyone, and thank you for joining us today. Last quarter, despite the increasing challenges such as the ongoing pandemic, pricing inflation, currency volatility, geopolitical tension and the supply shortages, we successfully grow our business and improve the profitability for the ninth consecutive quarter. Meanwhile, our years of persistent investment and efforts paid off as our revenue mix from non-PC businesses reached the highest level of over 37% in our history.

Two factors were crucial for our strong results last quarter: First, the strategic foresight and the strong execution; second, our operational resilience through our unique global local operating model.

Today, the digitalization trend continues to accelerate. The hybrid work model is here to stay, creating strong and sustainable demand for smart devices, IoT, smart infrastructure and the intelligent applications and services. Thanks to our strong execution of digital and intelligent transformation strategy with years of investments in diversified growth engines, our net income grew almost 11% year-on-year and 35% is non-Hong Kong FRS basis, still on track to meet our commitment of doubling profitability in the midterm.

Revenue grew to USD 17 billion and was up 5% year in constant currency. We saw strong performance in our new growth engines, solutions and services, infrastructure, and mobile businesses also double-digit revenue growth year-on-year. We also made strong progress toward doubling R&D investment commitment by growing R&D spending by 10% and head count by 29% year-on-year. Meanwhile, we further strengthened our One Lenovo platform and realized our ESG goals.

Now I will talk about each of our businesses. Let's start with SSG, Solutions and Services Group. The trillion-dollar IT services market continues to see strong growth. By 2026, 75% of workers will adopt a hybrid working model. Driver demand for premium and customer fulfillment services. Digital workplace expansion has increased demand for other services, for devices, infrastructure and workplace management. Vertical solutions, including smart cities, smart manufacturing, smart education and smart retail, is expected to grow double-digit CAGR through 2025.

Last quarter, SSG again delivered high growth and high profitability. Revenue grew 23% year-on-year. Operating margin was further improved to almost 23% as well. With double-digit growth in revenue across all segments, revenue from now hardware-tied management service and the project and solution services now accounts for almost half of SSG business. At the same time, SSG continued to invest in software tools, platforms and repeatable vertical solutions. That includes continued expansion of TruScale as a service portfolio to the broader digital workplace.

We also launched hybrid/multi-cloud solutions and continued to develop our sustainability offerings. With a new strategic partnership with PCCW, we will expand our footprint in Asia Pacific.

Our Infrastructure Solutions Group, or ISG, continues to benefit from strong infrastructure market growth. The server market is expected to grow at a double-digit CAGR through 2025. The Edge infrastructure market will exceed USD 41 billion. And the storage will reach USD 36 billion by 2025. Last quarter, ISG revenue exceeded USD 2 billion for the first half, up almost 14% year-on-year, the third consecutive quarter with positive operating profit.

Cloud Service Provider segment as well as the server and storage revenue all reached the all-time records and outgrow the market. Edge computing revenue almost doubled year-on-year. In high-performance computing, we maintained our leadership in the Top 5 country list by adding more units with our Neptune Liquid Cooling technology.

We will continue to invest in our comprehensive portfolio and in innovation, particularly in edge and services. We will continue to balance the scale and profitability as we remain focused on being one of the fastest-growing end-to-end infrastructure providers.

For our Intelligent Devices Group, or IDG, the PC market currently is experiencing a short-term challenge. But as the people recognize the necessity of PC as a key productivity tool, the PC TAM is expected to be much higher than pre-pandemic levels in the long term. Meanwhile, the scenario-based solutions market grow faster. Smart collaboration is one of them and expected to surpass USD 80 billion by 2025.

Driven by our operational excellence, IDG, overcome challenges while capturing opportunities. We maintained the industry-leading profitability with operating profit of over USD 1 billion. We outgrew the market to strengthen our #1 position in PCs driven by strong growth in Premier segments such as gaming and workstations. At the same time, our smartphone revenue increased by more than 20%. The more impressive part is that such growth not just come from our traditional strength of the market of Latin America and North America, but also expansion markets of Europe and Asia Pacific.

Our expansion beyond the PCs continues and now nearly 22% of IDG revenue comes from non-PC smart devices, embedded computing, IoT and the scenario-based solutions such as smart home and smart collaboration. We continue to focus on innovation from smarter devices to smarter collaboration and then to smarter spaces. In smart devices, we focus on innovative form factor, extreme performance, adaptive intelligence, security, et cetera. For the digital workspace, we are working on seamless connection and the integration, allowing for the best possible mix of physical and virtual collaboration.

In summary, although external challenges may persist in the short term, we continue to see long-term opportunities. We see clear trend from smart devices to smart spaces, from computer to computing, from traditional IT to digitalization across all industries and the new IT architecture, and from serving customers to protecting the planet. We will definitely innovate and capture these opportunities. You will see our vision and the progress in these directions at the Tech World, our annual flagship event in October.

With a solid performance, Lenovo has proven that we have the right strategy, strong execution, the agility and the resilience to transcend the cycle. We are confident in our ability to overcome challenges, continue to transform, diversify our businesses and deliver sustainable growth and profitability improvements. Thank you.

Now let me turn it over to our CFO, Wai Ming. Wai Ming, please.

[Wai Ming Wong, executive]

Thank you, Yuanqing. I will now take you through Lenovo's financial and operational performance for Q1 in the 2023 fiscal year. We faced a variety of macroeconomic challenges in the quarter, including the ongoing COVID-led disruption, foreign exchange rate volatility, geopolitical uncertainties and surging global inflation. Despite this, our reported revenue remained steady year-on-year with a 5% growth in constant currency. Thanks to growth of IT spending arising from digital transformation and our operational excellence in cost control and supply chain management.

While China saw demand impacted by the lockdown, all other geographical markets had positive growth. Even though our PC business continued to grow at a premium to market, the group's non-PC revenue has shown significant growth and now contributed over 1/3 of our group revenue.

Our group net income reached a record high for the first fiscal quarter at USD 516 million. Net margin reached 3% up 29 basis points from last year, a record for quarter 1 and the ninth consecutive quarter with year-on-year profit expansion, and we are on track to achieve our medium-term target of doubling our net margin. Basic earnings per share came in at USD 0.439.

To facilitate a more meaningful evaluation of Lenovo's current operating performance and comparisons to other peers, we have also reported our adjusted profit repair outside of the Hong Kong Financial Reporting Standards as an additional financial measure. Excluding fair value gain or losses from the group's strategic investments, amortization charges of intangible assets, resulting from mergers and acquisitions and M&A-related costs, our non-HKFRS operating profit and net income jumped 21% and 35%, respectively. You may refer to the appendix of our presentation for more information on the supplemental non-HKFRS measures.

In Q1, we maintained a net cash position of USD 394 million after a USD 1.1 billion reduction in net debt in the past year. However, the supply disruption caused by the Shanghai lockdown resulted in sales concentrated towards the last month of the quarter, which have driven a higher quarter end balances in accounts receivable and also impacted inventory. Two-third of our account receivables are less than 30 days. We expect the disruption to be temporary and free cash flow to improve.

Contemplating further uncertainty in the capital markets, the group successfully completed in July its USD 1.25 billion dual-trance bond offering, which include our inaugural green bond offering. In addition, a USD 2 billion refinancing syndicated loan facility was completed in the same month with improvement in margin compared to our existing facility. The two financing transactions together extended the group's total average debt maturity by 2 years to nearly 5 years.

SSG is a key beneficiary of the growth in new IT, marking another outstanding quarter for the group. Revenue rose 23% to $1.5 billion, and operating profit reached $329 million with a year-on-year growth of 25%. SSG further improved its operating margin by 36 basis points from the previous year to 22.6%. Deferred revenue, an indicator for recurring business grew 20% year-on-year. The operating margin expansion was a strong driver for the group's continued growth.

SSG achieved this by enriching its service offerings across all three of its segments for better profitability and scalability. Revenue of the Managed Services segment increased 70% year-on-year. Inflation and delivery uncertainties stemming out from macro conditions are triggering a shift in CIO's preference from ownership to services, driving the popularity of as-a-service. The TruScale as-a-service solution extended from server and storage to high-performance computing.

Revenue from Support Services and Products & Solutions Services segments rose double digit year-on-year thanks to the enhanced portfolio, utilizing our intellectual property to address the growing IT workload. ISG continued to report strong quarterly performance. Revenue grew 14% year-on-year to above $2 billion for the first time in its history, making the group one of the fastest-growing infrastructure solution providers globally, leveraging its expanding solution portfolio, broaden customer coverage and a unique fully integrated ODM+ business model. ISG successfully improved its operating profit by $22 million year-on-year to $11 million, marking the eighth consecutive quarter with year-on-year profitability improvement.

Cloud service provider revenue reached an all-time high, supporting by a growing customer base, product portfolio and design wins. We increased capacity in our plants in Mexico and Hungary to capture future growth opportunities. Despite supply challenges, the ESMB segment sales also continue to grow with a focus on improving profitability and an expanded footprint in server, storage, edge computing, services and multi-cloud solutions.

ISG product sales broke Q1 records in server, storage and AI and edge. IDG revenue declined 3% year-on-year, primarily from the weak consumer PC demand and the COVID-led supply constraint. However, non-PC sales grew 12% year-on-year, thanks to several pockets of growth, accounting for 22% of the business group revenue. Its profitability remained robust at 7.5%, thanks to the enriched product mix.

In the PC business, the structural shift to the Commercial and Premium segments is supported by the digital transformation cycle and IDG investment in innovation to leverage the hybrid work model and lifestyle change. Commercial sales in China were impacted by the COVID lockdown and the one for the rest of the world continue to grow. Premium segment sales also grew 8% year-on-year, including a 28% growth on workstations and a 14% growth in gaming.

In the non-PC business, Smartphone revenue grew over 20% year-on-year, supported by a robust growth trajectory across all geographical regions and an accelerated product transition towards 5G. Scenario-based solutions are a new driver for IDG and our smart collaboration solutions maintain hypergrowth rates of key wins in the global markets.

Now let's talk about Research and Development. It is the main driver for innovative growth pillars to meet customer demand despite various challenges. Although our total expense remained flat year-on-year, as a result of disciplined control, R&D investments still increased 10% year-to-year to drive various growth engines and business transformation to support the group's services, commercial sales, premium mix and ESG initiatives. These strategic priorities sustain the group operating margin at a record high level for Q1 at 4.6% and it will enable us to better navigate through the macroeconomic challenges and demand uncertainties.

Now let's look at the result of our ESG efforts. Lenovo expanded its use of closed-loop post-consumer recycled content of 103 to 248 products in 2022 fiscal year. Our KPI required 100% of our PC products to contain PCR content materials and 90% of electricity used in our global operations to be renewable by the 2026 fiscal year.

Last month, the issuance of the group's first green bond and the establishment of its first ever green finance framework like an important milestone in our ESG journey. These initiatives support our vision to achieve net zero by 2050 reaffirming our commitment to a more sustainable future. To further accelerate global ESG progress, in November 2021, the company kicked off the first phase of the Lenovo 360 Circle Partnership, we will promote corporate citizenship and facilitate the group transition to adopting a more sustainable value chain within its business model. While the external business environment continues to be volatile, the strategic opportunities in digital and service-led transformations are substantial and conducive to the growth of our high value-added products and services.

The group will maintain its agility and resilience in tackling external uncertainties and challenges while implementing a growth strategy. Like every business today, we are actively and prudently managing our cost structure across all elements to ensure Lenovo's long-term growth and sustainability.

Looking forward, SSG will drive scalable growth with high profitability. Digitalization and post-pandemic changes in the workplace will increase demand for premium, TruScale as-a-service, sustainability and vertical solutions. SSG will continue to broaden service offerings with the goal to sustain its double-digit growth and trajectory while actively seeking business opportunity to broaden and deepen the geographical and vertical coverage of our services, especially for managed services and project and solution services.

We aim to grow both organically and inorganically through various means including our strategic partnership with PCCW. ISG has built industry-leading end-to-end infrastructure solutions and expanded from server to full stack offerings that include storage, SDI, software and services. ISG will expand its ESMB portfolio for higher profitability and capitalize on growth opportunities in AI PowerEdge, hybrid cloud, high-performance computing and solutions for the telco communication sectors.

For the CSP segment, the group has a unique ODM+ business model to address growing customer demand, increasing our customer base and procuring new accounts through design wins. IDG will lead the global race in device innovation by enhancing features that support hybrid working, gaming, entertainment, green materials and ESG design.

Within the PC business, we will solidify our #1 position with leading profitability. The smartphone business will focus on portfolio expansion and differentiation to take advantage of the accelerated 5G adoption and changing competitive landscape. IDG will accelerate investment to score wins in new growth engines, including fast-growing accessories and scenario-based solutions. Our strong financial position provides a solid foundation for us to proactively pursue growth opportunities ahead. Finally, as always, we remain committed to driving sustainable growth and profitability for our shareholders.

Thank you, and we will now take your questions.

[Jenny Lai, executive]

Thank you, Wai Ming. Now we will open the line for questions, and this session will be in English only. [Operator Instructions]. Operator, I'll now turn it over to you. Please give us your instructions.

[Operator]

[Operator Instructions]

[Jenny Lai, executive]

And we have our first question from Howard Kao from Morgan Stanley. Congrats for the quarter, and we have seen Intel and AMD tie down the PC market this year to more than 10% down year-to-year for CY 2022. Could you please share with us your view on PC 10 this year and next year? Additionally, this question two, your finished good. Inventory was up 13% quarter over quarter. Any color on what that is going and your strategy to own finish good inventory in the coming quarters?

[Yang Yuanqing, executive]

So I would invite our IDG President, Luca to introduce -- to answer the first question, then our CFO, Wai Ming will answer your second question.

[Luca Rossi, executive]

Okay. Hi, everyone. Good morning, afternoon and evening. So thanks for the question, Howard, and maybe allow me to give you some context before giving a number. So I think the situation can be viewed from two perspectives, reflecting different time horizons. So we feel good about the long term of the PC industry as the digital transformation, hybrid work and also the digital life for consumers in our opinion unstoppable trend. And that we see is right at the center of that. And we also see additional opportunity which include a huge 400 million-plus old PC that has to be replaced and refreshed. And then also many new innovation will drive PC replacement in the midterm.

We also feel good about the quality of this demand, which has shifted towards higher-end devices, premium devices, better features, higher attach of accessories, new services designed for the new hybrid. But meanwhile, we certainly recognize short-term headwinds, obviously driven by unfavorable macro inflation, exchange rate and consumer confidence. So at this moment, we see consumer weakness not in gaming, where we continue to grow like we did in Q1, 14%, SMB, a little bit of softness, while enterprise and public sector are still showing robust demand. And we have good order and pipeline visibility for the rest of the year.

And then this includes also premium services, high margin accessory attached. And just as a data point, we grew 28% in workstation in last quarter, achieving almost $1 billion revenue and also our accessories business and visual business is growing at double-digit revenue.

Now to end up with a number, we also see a softer PC market than we anticipated. And we are looking at a number between $300 million and $310 million, which implies 10% to 12% year-over-year decline. Within this market, we still continue to plan to grow at premium to market like we did in Q1. So even in this condition, we plan to expand our market share and particularly expand our commercial mix.

As the next year and the year after, we believe the market in the longer term will maintain around $330 million, which is aligned with the IDC and many analysts are search from you at this moment.

[Wai Ming Wong, executive]

Howard, this is Wai Ming. I think your question about the total inventory exactly comprises of parts as far as finished goods. Our finished goods, I think, mostly PC is over 80% or nearly 90% of those is less than 60 days. So I think the rise, I think you mentioned, I think you asked, is mostly, I think, due to the lockdown and the logistics issue that actually I think seeing the increase. But from our perspective, I think all those inventory are clean and fresh. I think we are very comfortable that I think once the structure, I think, get to go away, I think we cannot see the inventory coming back.

[Jenny Lai, executive]

And now let's move to question #2, Albert Hung from JPMorgan. Albert's first question is, again on PC market. In the near term, should we expect a weaker than seasonal second half given increasing demand weakness? And he also wanted to know if we will be able to share some comment on channel inventory level and pricing dynamics, specifically in consumer PC. And in the longer term, [indiscernible] the PC market volume should be higher than pre-pandemic level due to higher installed base. But do we expect an air pocket in 2023 before we return to a higher level?

And second question is on [ RDCG ] ISG revenue, which is record high in our fiscal quarter 1. And there are more and more negative data points in the server space, however, and Intel already slowed down and DRAM vendors also mentioning cloud weakness. Are we seeing similar demand weakness? So those are two questions.

[Yang Yuanqing, executive]

Okay. Luca, first question is still your answer. The second will be Kirk's question.

[Luca Rossi, executive]

Yes. Thank you, Yuanqing. So let me start with the first part. On the second item, now we know that the seasonality in the last 2 or 3 years was abnormal, right, due to the heightened demand during the COVID time. So I probably will answer looking at the year-over-year, which we believe that the second half from a year-over-year perspective should be better than the first half. We should remember that Q1 was double-digit down, it was also because of the lockdown in China, while Q2 should be a little bit better than Q1 as year-over-year. And from what we see, we believe that the H2 will be better than H1, still negative, but better than H1.

[Yang Yuanqing, executive]

Negative report year-on-year but better for the second half.

[Luca Rossi, executive]

So the decline will be milder year-over-year than in H1. That is what we are seeing now. On the channel inventory, so our business is very diversified. And you probably know that a significant portion of our business is by design without channel inventory. So that includes the relationship, include public sector and include our global account customers.

Now for the business model that require channel inventory, namely consumer and SMB, the level of the channel inventories generally returned to pre-COVID level in most of the geographies. And the in-transit inventory, which is a bit higher than the pre-COVID, and then is explained by the fact that the logistics time end-to-end is significantly higher than pre-COVID due to the logistic network congestion globally.

So I think in the short term, the churn inventory is poised to be at pre-COVID levels or slightly above, but we're also seeing that after the holiday season, we'll have a path to return to, let's say, pre-COVID levels or slightly lower. That at least is our plan. I think there was another piece of your ask, do we expect what happened in 2023? I think what we are thinking is now flat or slightly growth but in the range of 1%, 2%, 3%, not the big growth.

[Kirk Skaugen, executive]

Yes. Albert, this is Kirk. So from an Infrastructure Solutions Group, relative to demand, I would say, we're in a unique position because we are almost perfectly balanced between public cloud and our on-premise ESMB business, and that's a unique position for us in the industry. If we look at cloud, we're probably less exposed in China than some of our competitors. We see records backlog in cloud. If you look beyond China, the kind of next wave of the next 500 or so hyperscalers, we're seeing well over 100% growth year-on-year.

And remember, our profitability is growing in that space because we're now building our own motherboards to our ODM+ model that Wai Ming mentioned. We're also expanding from servers into storage, which is higher profit. We're expanding in the next wave accounts, and we're expanding our portfolio from Intel to including more and more AMD and ARM. So all of those are improving our profitability. So I think we still see record demand and growing market share within that demand.

At ESMB, in April, we created a new ThinkEdge business unit. That business is now growing nearly 100% year-on-year for us with eight consecutive quarters of growth year-on-year. So this edge to cloud phenomenon is also driving a lot of ThinkSystem and ThinkEdge products at the edge in our server business.

And then lastly, in storage, we're seeing tremendous growth in our storage business. which is now growing 35% year-on-year, which I think from any analyst's momentum, there's multiples of growth above the market. So and that's got a cloud in an on-prem ESMB statement for hyperconverged, traditional storage, software-defined storage and cloud-based storage. So all parts of our business, I think, are strong with record backlog, and we're starting to see supply ease up, which is also going to help our responsiveness to our customers.

[Jenny Lai, executive]

Yuanqing, would you like to add any more color?

[Yang Yuanqing, executive]

Yes. So definitely. So although we see PC market softness in short term, so we are still optimistic on the longer term. And also Lenovo will continue to drive the premier to the market. And also, we will be more focusing on the premier product. So we are confident we can drive the better average selling price so that our revenue growth will be better than the unit shipment. So that's another additional comment. But beyond the PC, so you see our last quarter's performance. So we believe our three other growth engines will continue to show the strong growth.

So Kirk just talked about the ISG, so actually, our SSG business, Solution and Service business not only grow strongly, but also with much stronger -- much better profitability. Also, our mobile business grow at more than 20% level. So we think this momentum -- all this momentum can continue. So probably -- so -- Buniac, you can comment on our mobile business. So how we solidify our stronghold in North America and Latin America and expanding to Western Europe and Asia Pacific.

[Sergio Buniac, executive]

Yes. So no, I think despite the market was negative 9 points, we grew at 20% in revenue. We have our best Q1 in Latin America ever. But enjoy growth in all regions in the globe. We grew 24% in Europe, 66% in Asia, so we are seeing growth across all the regions. Our AUR is also increasing by $20 year-over-year, showing a better mix. Our AG franchise, the new franchise just launched that's on more on the premium segment is growing from a small base, but growing 700% year-over-year. We expect that trajectory to continue to grow as we have important launches coming between now and September 8. So -- also the Moto G is growing plus 30% year-over-year. So we are seeing growth segments and gross order dues, sustainable growth at ex factory premium to market in the -- over the quarter in the near future.

[Jenny Lai, executive]

And the next question is coming from Conor O'Mara from Jefferies. Have you seen any order delays or cancellation in servers? Many are worrying about and expecting cuts from hyperscale clients in particular.

[Kirk Skaugen, executive]

This is Kirk. The simple answer is no, we are not seeing that. I think we're gaining share relative to our competitors and the accounts that we are the strongest and seem to be winning in the market. So we're not seeing order cancellations and, in fact, we have record backlog and have confidence several quarters out on a rapidly growing cloud business.

[Yang Yuanqing, executive]

Yes. So we definitely believe this quarter, probably the second half of the year. So our IT business will continue to grow and very strong growth. And also, so if you read those hyperscale company's performance, you see they're still growing faster. So no matter whether it is Microsoft, Amazon or Google, so their cloud business are still growing strongly.

[Jenny Lai, executive]

And the next question is coming from Mr. [indiscernible]. Does the management expects a strong level of gaming devices to continue in the next 12 months?

[Luca Rossi, executive]

Yes. So look, for sure, the gaming segment is a growing one and certainly doing better than the overall consumer segment. Now to make a forecast over the next 12 months for the general market is not easy, but I believe that it will continue to do better than the consumer market. While probably if the entire consumer market is down because of the reasons that we mentioned, the macro, et cetera, et cetera. I think it's reasonable to believe that also the gaming will slow down a little bit, but still remain positive and growing.

So to give you some data point, we grew, I think I mentioned before, [ 40% ] year-over-year in revenue. And the other thing I'm confident, given our position in the overall gaming sector globally is that we will continue to be able to grow at premium to market no matter what will be the market, so continue to gain share also in the gaming segment, given our portfolio that is really strong, and we have a lot of new products and innovation coming in the gaming in the next 12 months.

[Jenny Lai, executive]

And the next question is coming from Albert Hung from JPMorgan. Regarding to the China lockdown, the China lockdown result in order backlog as seen in the June quarter. Shall we expect a strong rebound in second half for the China market?

[Yang Yuanqing, executive]

So definitely, the last quarter, China was impacted by the longer term, particularly in April and May. But since June, so we have seen the positive signal. So definitely not just the consumer segment. Performance is better than we expected, particularly for the June jd.com sales. But also we see the better result in the Commercial segment as well. I still believe second half should be better than the first half in the China market. Luca, you want to?

[Luca Rossi, executive]

No, no. I think I'm aligned with you. We also believe the second half should be better than the first half. The consumer is showing from the June promotion is showing signs of recovery. I think there was also a question on the backlog, I don't know if this was referred to the China business or the overall business. But if it was referred to the overall business, we continue to have significant backlog at the end of every quarter. Now obviously, if you compare it to 1 year ago, the backlog is gradually reducing to more normal levels. But in general, I can tell you that the backlog is still significantly higher than what was the average backlog of quarter end pre-COVID is still the case.

[Jenny Lai, executive]

And next question is coming from [indiscernible]. Congratulation on the results. I would like to check the extent of the impact of foreign exchange to the business?

[Wai Ming Wong, executive]

It's Wai Ming. I think if it is say about constant currency, I think we will record about 5% up. And in terms of margin, I think the company adopted very prudent hedging policy. I think our margin is a sort of protected by having the right financial instrument.

[Yang Yuanqing, executive]

Yes. But generally speaking, so a stronger U.S. dollar will have more impact on our performance because 80% of our supplies is in U.S. dollars. But 70% of our market is not U.S. dollars market.

[Wai Ming Wong, executive]

But Yuanqing, I think maybe I should actually add one other point. I think Lenovo being a global company, I think our business actually spread around the four geographies. I think U.S. account for probably 30% and therefore, while the U.S. -- strong U.S. dollar may be a little bit more challenged. But on the other hand, Lenovo has been less impacted by, I think, company [indiscernible] declined in any one geography because we I think, have a very well balanced global business. So that is also one of the things that while we continue to see that [indiscernible] will be able to maintain the growth and profitability.

[Jenny Lai, executive]

So the next question is coming from Desmond Lim from Eastspring. Your IDG business has been holding up very well. Despite the industry transition is down 15% year-to-year in second quarter, calendar quarter with the third-party data. How did Lenovo's shipments do? And non-PC shipments seem to be -- seem to have helped, does that expected to hold up as well?

[Luca Rossi, executive]

Yes. So let me start with the end. So we certainly expect to hold it up and do even better. That's our plan. So as you have noted, our calendar Q2, we did well, we grew at premium to market, gaining share. We extended our lead and solidified our #1 position in the PC, and we certainly plan to continue that.

Now obviously, we are aware of the weather conditions are not full stand. There is maybe a little bit of rain in the short term. And then we are certainly taking proactive actions in several fronts to be able to prudently navigate the situation. We want to continue to deliver industry-leading profitability while gaining share. And at the same time, we will continue to invest in foundational technology, product innovation so that we protect our long-term competitiveness.

And as you rightfully noticed, our non-PC business continued to grow. Last quarter was at 22%. And obviously, within this 22%, we are happy and proud that our smartphone business, like Sergio was mentioning after many years of work is now in a situation where we are strong in Latin America, strong in North America. And now we have a profitable growth strategy to attack EMEA, Asia Pacific.

Then we have a strong accessory business growing double digits, strong visual business growing double digit. We are expanding -- extending our service penetration rate in the commercial business. And then our smart collaboration business is also growing very fast. So not only we want to maintain the PC growth, but we also want to accelerate the other growth engines to deliver what we have committed to the market.

[Yang Yuanqing, executive]

Yes. Now just as Luca said, so in IDG, so we will drive the non-PC business growth, including our mobile business growth. So I'm very confident. So our other two growth engines, ISG and SSG will continue to grow at double-digit -- at least a double-digit level. So that can offset the PC software mix. So but definitely Luca has much more confidence. So we will drive the PC Premier to the market, and we will drive the Premier PC to offset the unit shipment [indiscernible] as well.

[Jenny Lai, executive]

And the next question is coming from Robert Cheng from Merrill Lynch. His first question is on consumer PC demand has shown weakness that companies see any weakness or order pushback from corporate PC market now.

And question #2, what is the regional sales breakdown of Lenovo's corporate server market? And any weakness from corporate server market? And which market is showing the strongest [indiscernible] and which market is showing weakness?

[Luca Rossi, executive]

So I think the PC question, I will answer. So yes, the consumer PC market has shown weakness, certainly, as we mentioned. While any weakness on corporate PC market or all the pushback, I think we still see a reasonably robust demand, and we have a good pipeline visibility with the corporate and the enterprise customer for the rest of the year that I can say.

[Kirk Skaugen, executive]

Sure. I think the question was around the regional breakdown of our corporate server market. So the Americas, which would be North America and Latin America is our largest geography and is also our fastest growing geography if you take out the cloud service provider business. We had double-digit growth in North America, Latin America, Asia Pacific and our global accounts, which are the largest corporate accounts we covered globally, all had double-digit growth.

Europe was probably the softest just because of the conflict that we had. But as you saw, we had a record in server, we had record in storage. We had records in Edge. We had records in comm service providers, and we think we're growing at a significant premium to market. ESMB, again, even though some of the analysts have taken the number down is just still at a growth market year-on-year, and we're growing at a premium to that, we believe, as we look forward.

[Yang Yuanqing, executive]

EMEA also grow at 29%. So this is the overall [indiscernible].

[Kirk Skaugen, executive]

Yes, I think the question was regarding corporate.

[Yang Yuanqing, executive]

Other also impacted by the currency because euro actually dropped year-to-year 10%, while North America, we don't actually have any currency impact.

[Kirk Skaugen, executive]

Yes, of course. But just even without the cloud customers in China, we did grow in the corporate business in China.

[Jenny Lai, executive]

All right. Because of time constraint, we will take the last question for this conference call. The last question is coming from [indiscernible]. What is the operating margin outlook for the rest of the year? Which segment will see relatively stronger growth and with margin expansion? On the mobile segment [indiscernible], what are the key drivers, given overall market sell-through is quite weak? Those are the questions.

[Wai Ming Wong, executive]

The operating margin for the second half of the year, and so that's the question. I think on the mobile segment, what were the key drivers, I think given the overall weakness.

[Luca Rossi, executive]

I think we just need to clarify which business because this is a general question or maybe we can talk about PC and then server and then mobile. So on the PC, I think clearly, as said, right, we will drive -- and this is because this is the segment that gives more opportunity. We will drive more than proportional efforts to grow our commercial business, which comes with better service attach, better accessory attach, et cetera, et cetera.

So the SMB enterprise public, this will be the segment that offer more opportunity. While we will continue to do our regular consumer business, but this is not probably this year the segment that will offer the best opportunities for growth or margin expansion.

Talking about margin expansion, probably I should mention that in commercial, we have several drivers that can help to expand the margin, which are namely service penetration rate, visual accessories, more premium devices. We have several new product launches in the course of the year that we believe will help us to raise the AUR and also help us to drive margin expansion. That is for the PC.

[Kirk Skaugen, executive]

Yes. In the data center space relative to operating margin, I think the way we think about it is improving our margins in the public cloud space. And then separately, can we improve our margins in the ESMB space. I think in both cases, we have confidence we can do that. In the cloud space, our ODM+ model, we're bringing in more of our motherboard design and development in-house. We're expanding into storage at an aggressive rate with new customers and deeper market share in the customers we have, which is higher margin. We're expanding with more AMD and ARM products, which will also expand our margin. So for all those reasons, I think we believe our cloud margins will improve.

On the ESMB side, again, we're growing storage at 35% overall in terms of our total storage market and our ESMB market is in the mid-double digits as well. So with that and the services and software that get attached to that, I think we're also confident.

And then lastly, our CPU suppliers are going to be doing announcements throughout our -- the remainder of our fiscal year, and that's an opportunity for us to refresh our pricing with fresh products in the market, and we will have our largest portfolios ever launching time to market with those transitions. So the only issue is what will be the mix of the public cloud business versus ESMB because obviously, there's a blended margin between the two, but that's something we can't necessarily predict right now.

[Sergio Buniac, executive]

So on our side of the mobile, the margin has been consistently stable across many quarters. I think the growth -- I mean, we cannot define one single item. I think it's -- given the solid execution, we are growing, as we said, in [indiscernible], with record in regions that we are a solid market share like Latin America, but also growing significantly to market in Asia and Europe. And I think also on the segments, if you look on the Edge, that's the new franchisees just launched, we saw 700% growth. We expect that to continue delivering a significant market share gain in that segment.

Also, we are seeing across our Moto G family, significant gains on net promoter score that's increasing the retention of existing customers and bringing new customers. So I would say our growth is across geography, across product. And even we are seeing now some traction on the B2B commercial side of the market, [indiscernible] Lenovo on a sales footprint. So many areas of growth, very consistent growth much [indiscernible].

[Yang Yuanqing, executive]

And yes, don't forget our last driver of the profitability improvement, which is our SSG. So Ken Wong, you want to?

[Kin Hang Wong, executive]

Yes. I was about to chime in. So SSG, Solutions and Services Group, I think we are very happy about the momentum that we have built into the business. Indeed, I think this is the fifth consecutive quarter that we see a very strong result, double-digit year-to-year growth in terms of revenue and also a relatively high operating margins. As we share with the analysts and media friends today, we continue to see a very strong IT services demand from the market, mainly driven by the digital transformation. And this is what SSG, right? The Solution and Services Group in Lenovo is tasked to drive for the group.

Now in terms of outlook, we will continue to see the strong demand in specific in two practices. One is the device as-a-service, and also Infrastructure as-a-Service. In Lenovo, we all call it the TruScale as-a-service, right? This is a very strong growth of area, driving from hybrid cloud and also the modern replace solution, right? So this is our target to continue to drive growth and profitability contribution to the group overall. So back to you, Yuanqing.

[Yang Yuanqing, executive]

Thank you, Ken, and analysts and investors. So you have heard from four of our business leaders to talk about their confidence to improve the profitability in their respective business. So definitely the number as a whole. So we are very confident to hold down our -- not just the GP margin, but also operation margin as well as net income ratio. So it's still our commitment to drive the double net income ratio. So from a fiscal year network base. So we are very confident. So we are still on track to drive that. So meanwhile, it's still our commitment to further invest in innovation in the R&D. So we will double our expense in R&D in the midterm as well. So we believe, we will still deliver our commitment.

[Jenny Lai, executive]

Thank you, Yuanqing. Thank you, everyone, and we thank you very much for joining today's call. If you still have further questions, please feel free to contact me or the IR team 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. Bye-bye now.

[Yang Yuanqing, executive]

Thank you.