Lenovo Group Ltd

HKEX:992

Earnings Call Transcript 2021-Q3

[Jenny Lai, executive]

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 COO, Mr. Gianfranco Lanci; Group CFO, Mr. Wong Wai Ming; President of Data Center Group, Mr. Kirk Skaugen. We will begin with the 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.

[Yang Yuanqing, executive]

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 a hyper growth in both revenue and profit. Our group revenue grew over 22% year-on-year, reaching USD 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 pretax income and net income both up over 50% year-on-year, reaching new records.

Pretax income reached USD 591 million and the net income reached USD 395 million. 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 historical quarter.

Our innovative product portfolio adapted quickly to meet customers' new needs in work, learn and play from home and captured strong demand. Our revenue grew over 26% while pretax income improved 35% year-on-year. And industry-leading profitability further improved to 6.6%, all achieved new records.

We extended our #1 position in PCs, growing PC volume to historical market share of 25.3%. Our focus in high growth and the premier segments continued to drive double, even triple-digit 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've become #1 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's 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 1 device per person track 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 the profitability since the pandemic, but also achieved a 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-digit 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 USD 1.6 billion while improving profitability by almost 1 point year-on-year. Both our Cloud Service Provider and the Enterprise SMB segments delivered year-on-year growth at a [ premier ] to the market. Enterprise SMB reached USD 1 billion in revenue, the highest amount in over 3 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 #1 position in TOP500 supercomputers to 182 systems. Our TruScale 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 & Service revenue grew almost 36% to a new record of USD 1.4 billion, over 8% of total group revenue. Our Attached Services, Managed Services and Solutions 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 Service, particularly Device as a Service, and leverage our experience and capabilities to build a solution focusing on smart manufacturing, smart education, smart health care and more. Clearly, 2020 was a challenging year that brought remarkable changes to our world, thanks to our continued innovation, excellent operations and a 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 3 business groups could be fully responsible for the execution of each S in the 3S strategy.

IDG, Intelligent Device Group, will be led by Luca Rossi, Senior Vice President and the current President of PCSD in EMEA and Latin America, to focus on smarter IoT. ISG, Infrastructure Solutions Group, renamed from Data Center Group, will continue to be led by Kirk Skaugen, 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 Wong, 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 geo-model structure into 2 sales organizations: China Geo to be led by Liu Zheng, Executive Vice President and Current President of IVG in China; and the international sales organization to be led by Matt Zelinski, Senior Vice President and the current President of PCSD in North America, covering Asia Pacific, EMEA, North America and Latin American Geos.

The 2 sales organizations will assume the same sales function system and drive 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.

Here, 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 #1 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, driving intelligent transformation across industries and create sustainable growth for our company. 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 in 3Q fiscal year 2021.

Next chart, please. This quarter, the group again set several performing 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% 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 gross margin improved 10 basis points year-on-year and our E to R ratio was reduced by 0.5 percentage point to 12.1%, a result of our operational excellence and optimization in sales mix.

Software & Services and e-commerce business grew their revenue strongly by 36% and 45% 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 USD 0.0331, up 53% from the previous year.

Next chart, please. In Q3, our cash flow generated from operations improved by $1.425 billion year-on-year to $1.963 billion. Our net debt level was reduced by $735 million year-on-year. The supply dynamics remained a challenge for the sector. Our inventory days increased 4 days year-on-year as we continue to secure critical parts to fulfill strong future demand. Sequentially, inventory days lowered by 5 days quarter-on-quarter, thanks to strong demand. AR days also improved 8 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 1 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% year-on-year to USD 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 #2 player. We also became #1 in EMEA for the first time.

PCSD further scaled up its high-margin and high-growth segments to drive expansion of pretax margin by more than 40 basis points to a record high of 6.6%. The Thin & Light, Gaming PC, e-commerce and Software & Services business saw double-digit growth and market share gain. Pretax 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 ranging. 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 mix improvement helped the business to resume profitability. Its PTI dollar risk USD 10 million and could have improved further if it wasn't for the higher freight costs 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 CSP 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 3 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 operational result by $14 million year-on-year to a pretax loss of $33 million. The group's efforts in product diversification and development of alternative platforms, the availability of high-end system as well as storage solution 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.

Next chart, please. Our teams are executing well on the Software & Services-led transformation, accelerating our pace further to transitioning into a service model and expanding our Service scope. The Software & 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 3 key business elements: Managed Service, including Device-as-a-Service, commonly called DaaS, enjoys 73% growth because of strong progress in contract wins globally. Complex Solutions also remains strong and posted 49% growth from all verticals. Attached Service continued to grow steadily, up 26%.

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 the accelerated 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 & Services business and extend 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 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 service 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.

[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, please now I will turn it over to you. Please give us your instructions.

[Operator]

[Operator Instructions] Your first question comes from Sebastian Hou from CLSA.

[Sebastian Hou, analyst]

I have 2. First one is on the PCSD business. So congratulations on the continued improvement 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 half this year, considering there's a lot of the components are -- have a price hike due to supply shortage and DRAM pricing is to further increase in the first half of this year? And how would the margin be affected?

And my second question will be on Data Center business, that the margin also improved nicely. If I simply compare the margin you have compared to the -- for example, 2 quarters ago or 4 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?

[Yang Yuanqing, executive]

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 2 more earnings cycles as our COO and ensure smooth transition. So Gianfranco, could you answer this first question, then Kirk will answer the second question.

[Gianfranco Lanci, executive]

No. Yes, we're right. Thanks. Talking about the margin contribution, for sure, there has been growth. I think there are 2 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 better AUR in the sense that despite the growth of Chromebook, despite -- and 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 and a very strong growth on Thin & Light. We are back to grow on Workstation because we got a very good premium to market in all this growing segment.

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 better average selling price.

Coming to components, I think it's true there are some components going up with DRAM. But on the other side, the SSD, which is a big portion of our product cost, is still going down, right? So I really don't see for the next 6 to 9 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 -- our last quarter result 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 you look at the results, but we can say that it could be even better without any limitation on the supply. Thank you.

[Yang Yuanqing, executive]

So Kirk, could you please answer the second question?

[Kirk Skaugen, executive]

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, and 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. And we've also talked about significantly expanding our own in-house manufacturing with new factories coming online in Monterrey and Hungary to support our customer base. So that's making the CSP, or the Cloud Service Provider, business more profitable.

On the Enterprise SMB, we said we just had our highest quarter in 3 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, I do see just published our latest storage numbers. We were at 11-point premium to market. We became #2 now in entry storage, up from #5. So we crossed the #3 and #4 player. And we're just 3 points away from being #1 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 TruScale 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 cooling. 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.

[Yang Yuanqing, executive]

Thank you, Kirk.

[Operator]

Your next question is from Albert Hung from JPMorgan.

[Albert Hung, analyst]

Congrats on the fantastic results. My first question is regarding PC. Given the very high supply-demand dynamics, would you consider raising the retail price to reflect undersupply? And could we expect further 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 further investment in the Service segment using the proceeds from PTI. Could you give us a great example of how are you going to use that? And any milestone of Service segment? For example, when would you expect the Service revenue to reach like 15% of total group revenue?

[Yang Yuanqing, executive]

So Gianfranco, the first question is for you.

[Gianfranco Lanci, executive]

It is for me, yes. All right. No, coming to -- let's say, I answer first on the channel inventory because this is probably a very interesting question. I think when I look at around the world, frankly speaking, I don't think -- from U.S. 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 2 to 3 weeks.

Usually running -- a normal channel inventory is running around 6 weeks, right, between -- so we were really down to the very, very low level, and it's still more or less at that level. So the channel inventory, unfortunately, is still 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.

Are we going to -- as I said, demand is still very, very good. I would say we are not seeing any decline in demand, but it's probably even building up even stronger considering that Q1 is always much lower 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 of 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 RD, better SSG, 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 it's -- we will continue to see a very good growth in terms of CA and revenue and with a stable or slightly better margin. Thank you.

[Yang Yuanqing, executive]

So I want to echo to Gianfranco. The PC, 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, Internet from home have become the new normal. It drives information consumption upgrade from 1 [ phone ] per unit to 1 PC or -- and tablet per person. So definitely, it will drive the strong demand for PC and tablet.

Also today, the people spend more time on their PC and their tablet. So probably that will drive the faster replacement cycle in the future so that we believe that the demand for PC and the tablet could be stable. So actually, I have predicted the PC TAM would reach 300 million this year.

But actually -- so last year, we have already reached 300 million. So we believe this year, so 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 second question, could Wai Ming answer the second question regarding of the CDR.

[Wai Ming Wong, executive]

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

[Yang Yuanqing, executive]

So the question is about how we invest, right?

[Wai Ming Wong, executive]

Oh, the investment stuff. I forgot that. Yes, I think the investment, we are actually working primarily investing in technology-related 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 in this new technology, I think particularly in China, the new IT infrastructure that offer us a lot growth opportunity.

We will have that disclosed much more detail in the prospectus in the -- while we are actually in the process of preparing the document and waiting to review the document by the regulators. I think it will 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.

[Yang Yuanqing, executive]

Thank you, Wai Ming.

[Operator]

Your next question is from Howard Kao from Morgan Stanley.

[Howard Kao, analyst]

Congratulations on a record quarter. So I have 2 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 good 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 good inventory. I was just wondering what -- why was the finished good inventory up during the December quarter.

[Yang Yuanqing, executive]

So Gianfranco, could you please...

[Gianfranco Lanci, executive]

Yes, yes, yes. Coming to logistics costs, 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 on such a big impact. For sure, we are seeing 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 cost going up in Q2, going up in Q3, stabilizing in Q4 because we have not seen an increase compared to the previous 2 quarters. And we expect that, slowly, they will go down as soon as we are back to normal in terms of pandemic and with -- 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 -- when you ship 20 million, 21 million, 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 both, A, the charter, sea shipment, train shipment and so on. But we are talking about a very low number in terms of decimal.

Inventory -- the channel inventory is extremely low in terms of 3 to 4 weeks today. We have been building on the other side. In this situation, when there is any opportunity to buy ahead, we buy ahead. We buy ahead any kind of things, but it's Display, IC because we wanted 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 component, 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 shortage, you don't have a problem 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 what is in shortage, we can produce and ship.

Finished goods, there is also -- the other consideration is that we have -- when we look at our finished goods inventory, a lot of this is in transit, is on the boat -- is in the boat, reaching our customer for Q1 -- for this quarter demand.

And we are -- we also built up some -- or we have some additional finished goods because mainly for retail in U.S. and in some cases also in Europe, you need to deliver within January and February. And in February, we should not forget there is the Chinese New Year. So production will be a little bit impacted, not too much, maybe 2, 3, 4 days.

But with this kind of situation in terms of demand and supply, even 2 or 3 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.

[Yang Yuanqing, executive]

Thank you, Gianfranco.

[Operator]

[Operator Instructions] Your next question is from [ Li Ping Go ] from Fullerton.

[Unknown Analyst]

Questions on the restructuring of the 3 groups. How should we...

[Yang Yuanqing, executive]

Your voice is broken.

[Gianfranco Lanci, executive]

Sorry, your line is broken.

[Yang Yuanqing, executive]

Could you please repeat your question?

[Unknown Analyst]

Okay. Is it better?

[Gianfranco Lanci, executive]

Yes.

[Unknown Analyst]

Right. Okay. I just have a question on the restructuring to the 3 new groups. How different should we think about these 3 versus the current structure in terms of the performance indicators? Would it still be focusing on PTI margins? And does -- how different should we look at it here versus current structure?

[Yang Yuanqing, executive]

Okay. So we will do this restructure. The first reason is Gianfranco will retire in September, so we need to make some change on our organization and leadership. The second reason is definitely we want to drive our organization to be aligned with our strategy. So we have a Service-led 3S strategy part. 3S means smarter, IoT smart infrastructure and smart vertical part. So with the new organization, so our IDG, Intelligent Device Growth, will address the smart IoT direction.

Then our new named infrastructure solution group plus it's a DCG will drive the smart infrastructure. And definitely, so the new established smart -- new published solution and the service group, SSG, will drive the solution and service direction. So that's a very crucial part for our intelligent transformation. So this has been growth.

We integrated other service-oriented teams in our growth to drive Attached Service, Managed Service, Device-as-a-Service, solutions and the 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 in the past couple of quarters, we have seen very good progress in our Service-led transformation. So last quarter, our Software & Services business grew 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 much better margin than the average in our company. So that's why we think this is crucial for Lenovo's transformation for our future strategy -- our strategy execution.

[Operator]

[Operator Instructions] Our next question is from Chris Yim from BOCOM International.

[Seeching Yim, analyst]

Congrats again on the strong results. I have a question on PC, 2 questions total, but first question is on PC. I would like to know what is the Enterprise segment? How is the Enterprise segment looking this year versus Consumer? Historically, we see Enterprise margin on the PC side higher than Consumer, and now it seems like it may be changing. So my question -- my first question is to Enterprise demand and also like Enterprise versus Consumer PC margin.

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 IDG profit margin?

[Yang Yuanqing, executive]

Okay. So still Gianfranco, you have to answer the first question.

[Gianfranco Lanci, executive]

Yes. So 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 when -- but a big increase on consumer and partially SMB. So it's not only consumer with this very strong demand, it's also -- 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 6 months. And when I look at this quarter, I think demand is really back on Enterprise Notebook and that of Workstation, I mean, 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 demand. So Enterprise, I think, we see a rebound during the last, let me say, 3 to 4 months between November, December and also now January and February. And backorder is really building up nicely.

Margin -- when we look at our margin, I think -- and when you look at our 3 segments, margin on Enterprise and also margin on SMB, they continue to be very, very strong. The real difference is that -- also marginal 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 still, we still run Enterprise with better margin than Consumer, more or less at the same level as SMB.

[Yang Yuanqing, executive]

So I want to emphasize what Gianfranco just said. So for the first time, we see the Enterprise or Commercial demand increase so -- last quarter. So actually, the Commercial PC increased by 26% -- 20-something in the market. So definitely, Lenovo have around 6 points premium to the market. So that's a very good symptom that the economy -- the global economy is recovering. So that has less impact than previous quarters. Meanwhile, the consumer demand is still strong. So that's the [ splitter ] landscape for you to consider. Next question?

[Jenny Lai, executive]

We also have...

[Yang Yuanqing, executive]

Oh, CDR. CDR, yes. So Wai Ming, could you please answer the CDR question?

[Wai Ming Wong, executive]

Okay. Yes. I think on the CDR, well, I've said in the earlier question, I won't be able to tell you exactly which project we have been starting. But generally, I think we are raising I think the proceeds, investing in technology. It would obviously either -- I think when completed will either improve our operating efficiency or will form part of our services 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 & Services normally command a much higher gross margin, I think, than our existing devices business. So net-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.

[Operator]

Your next question comes from [ Kwai Jin from Orion Securities ].

[Unknown Analyst]

I have 2 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 R&D function and marketing function, et cetera? That's my first question.

[Yang Yuanqing, executive]

Yes. So even I myself don't have that number so far. So we -- yes, so we will integrate all the service-oriented teams together. So -- but yes, so by the April 1, so it will become more clear. But the content or the scope of the business is very clear.

So that will drive Attached 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 tickets.

So I definitely believe -- so in all these areas, we can drive the hypergrowth. So for the Attached Service, so although it's close to the box service, but now Lenovo's attach rate is still much lower than the industry average. So we still have a lot of room to improve in that area. Definitely, Managed Service, that will be the trend.

So in the past quarter, this business grew by more than 70% year-on-year. So that will be our strong growth focused area. So that's definitely -- as I said, smart vertical will be the third area we will drive the growth.

[Unknown Analyst]

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

[Yang Yuanqing, executive]

So Gianfranco, would you like to answer the question?

[Gianfranco Lanci, executive]

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 2, 3 quarters due to the pandemic and due to the demand coming from the impact -- with the impact coming from COVID-19.

But if you look at the last 6 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 good profitability because the business is back to growth.

It's back to growth in U.S. It's back to growth, very -- almost 80%, 85% in Europe, where we see really very, very good opportunity to further develop Europe with good connection and 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 mark also on Mobile, it's again supply with the same -- more or less the same profile that we see on PC, IC and Display.

What was the other question? One it was -- yes, 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 -- we have 85% revenue growth, and we continue to see a big opportunity.

In Latin America, we continue to be #2. And I would say, compared to 1, 2, 3, 4, 5 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 other less aggressive than before, but I would say the overall landscape is the same. There are also some other brands that are -- they just announced to lead 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.

[Yang Yuanqing, executive]

Thank you.

[Jenny Lai, executive]

Thank you, Gianfranco, and thank you, Yuanqing. We are running out of time to 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 Lenovo 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.

[Yang Yuanqing, executive]

Yes. Bye-bye.

[Operator]

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