Lenovo Group Ltd

HKEX:992

Earnings Call Transcript 2021-Q4

[Jenny Lai, executive]

Good morning, good afternoon and good evening. Welcome, everyone, to Lenovo's earnings media 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 during 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; and Mr. Sergio Buniac, President of Latin America and 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 Yang Yuanqing. Yuanqing, please.

[Yang Yuanqing, executive]

Hello, everyone. Thank you for joining us.

A year ago, as we faced a great uncertainty. I told you we would continue to be resilient and strive for new heights. Today, I'm pleased to say that we have indeed seen phenomenal growth in every part of our business and have achieved both a record fourth quarter and a new milestone for our fiscal year.

Starting with our historical fourth quarter results. Group revenue reached USD 15.6 billion, growing 48% year-on-year, fastest growth in almost a decade. Pretax income soared to USD 380 million. Net income reached USD 260 million, both around 5 to 6x as much as last year. All our core businesses achieved high double-digit growth in revenue at the same time for the first time in 6 years, demonstrating our progress in diversification of our businesses.

For Intelligent Devices Group, PC and Smart devices had its best fourth quarter ever with USD 12.4 billion, up 46% year-on-year. Even more, profitability hit an all-time high at 6.7%. All of our geographies realized the high double-digit growth in revenue. Particularly in China, we grew 80% year-on-year. Our PC volume outgrew the market to further strengthen our leading position. Tablet volume also had breakthrough growth of 157% year-on-year, around 3x as faster as the market. Our consistent strategy to focus on and invest in high growth and the premier segment keeps delivering strong results as gaming PC, thin/light, Chromebook and visuals volume each grew at more than double-digit rates and outgrow the market.

Our mobile group continued its momentum of profitable growth with terrific results. Revenue achieved a hyper growth, up 86% year-on-year. Pretax income reached USD 21 million, record high since the Motorola acquisition. With the expanded carrier relationships and a strong product portfolio, particularly 5G products, our volume grew at a triple-digit rate in North America, Europe and Asia Pacific. Latin America remains a strong hold with market share reaching a new record of nearly 21%.

Our Data Center Group had a tremendous quarter. Revenue grew at a strong 32% year-on-year, the fifth straight quarter of premium to market growth. Profitability improved 4.4 points year-on-year, the biggest increase in over 2 years. Both our Cloud Service Provider segment and Enterprise SMB segment achieved year-on-year growth. In particular, the CSP business grew 73% year-on-year. Our storage, software-defined infrastructure and the software business all had a record fourth quarter revenue. Particularly, storage revenue achieved a high growth of 73% year-on-year.

Our Service-led Transformation accelerated fueled by ongoing strong growth in Software and Services, with revenue up 44% year-on-year. Managed Service revenue, including DaaS and TruScale, nearly doubled. And Solutions revenue grew 65% year-on-year.

This historical quarter ensured we reached a significant fiscal year milestone. For the first time, group revenue surged to over USD 60 billion, adding more than USD 10 billion in just over a year. Profit grew even faster to reach new records, with pretax income of almost USD 1.8 billion, and the net income was almost USD 1.2 billion. Both were up more than 70% year-on-year.

Our Intelligent Device Group and the Data Center Group achieved a revenue growth of 20% and 15%, respectively, as both reached historical highs. Our Software and Service revenue grew twice as fast as the overall group revenue at almost 40% year-on-year to a record USD 4.9 billion, which now make up 8% of our overall company revenue. This demonstrates our solid progress in Service-led Transformation.

These results come from excellent performance across all our businesses, delivering to the new needs in the new normal, leveraging our clear strategy, innovative products, operational excellence and our global-local model.

While we completed our true historic and record year, we are not stopping here. Looking forward, we will further drive our Service-led Transformation to capture growth opportunities created by both the new normal and the new technologies.

We see 3 important industry trends now and post the pandemic. The first trend is consumption upgrade as people spend more time on their devices, leading them to buy more devices and upgrade more often as we work, live in the [ attempt ] from home. At the same time, the adoption of commercial and 5G is driving the shift from computer to computing, making more traditional devices [ inflated ].

The second trend is the infrastructure upgrade. The ever-growing use of online applications has not only increased the demand but also raised the bar for ICT infrastructure. Infrastructure not only refers to traditional data center products like server, storage, network but also edge or cloud, total solutions for computing power, from design and the deployment to operation and the maintenance.

The third trend is the application upgrade from digitalization to intelligent transformation with AI at its core. Industry survey by a leading consulting company shows the digitalization and the intelligent transformation of enterprises have accelerated by 3 to 4 years to enable more productive and efficient processes and the remote working conditions. The massive amounts of data from business digitalization and various smart devices are stored, organized and analyzed with computing power from edge and the cloud. Then by combining the data and the computing power with the algorithms based on industry know-how, we build intelligent solutions to transform industries.

At our last earnings call in February, I shared that Lenovo was making changes to align our organizational structure to our 3S strategy. Under the new structure, Intelligent Device Group, or IDG; Infrastructure Solutions Group, or ISG; and the Solutions and Service group, or SSG, will each focus on the unique opportunities created by these 3 upgrade trends to achieve sustainable long-term growth.

In the year ahead, IDG will continue to drive leadership in PC and tablet through innovation and operational excellence and further penetrate in new areas such as embedded computing, smart office, smart edge and AR/VR. And mobile will continue profitable growth as we take advantage of increased market demand and the changing competitive landscape and maintain strong momentum in North America, Europe and Asia Pacific and keep our stronghold in Latin America.

ISG will continue premier to market growth. We will further expand our Cloud Service Provider customer base and grow our channel business through our newly integrated One Lenovo sales organization structure. We will drive storage, software-defined infrastructure, software and services to further improve profitability and ramp up TruScale Infrastructure as a Service.

Our new business group, SSG, will strengthen our attached services portfolio and increase attach rates, expand Managed Services and develop repeatable solutions in key vertical industries.

Meanwhile, we have reduced the greenhouse gas emissions by 92% over the past decade and set new science-based targets to continue making progress in sustainability. In fact, we have been recognized by the annual Corporate Knights' Index as one of the world's 100 most sustainable companies.

The past year certainly presented many challenges that reminded us of the importance of adaptability and resilience. But the past year also created opportunities for Lenovo to empower our customers and the society, to do more than just to survive in the new normal but to thrive and achieve even greater success. We will continue to turn challenges into opportunities and build an even smarter future in the year ahead.

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 financial and operational performance in Q4 and fiscal year 2021.

We had a strong finish to a record fiscal year. For quarter 4, we delivered $15.6 billion in revenue with a 48% year-on-year growth, which is the fastest growth in almost a decade, with net profit increasing by more than 5x. Not only did all our 3 business groups achieved high double-digit sales growth for the first time since Moto and 86 (sic) [ x86 ] acquisitions, the group high-margin Software and Services booking revenue also grew at its highest rate ever since our Service-led Transformation started. Our core competencies of operational excellence, time to market and innovation are setting us apart in the post-COVID world and accelerating our transformation towards end-to-end solutions.

Our E to R ratio was reduced by 1.9 percentage point year-on-year to 14.1% as a result of disciplined control and economies of scale. Profit attributable to equityholders was $260 million. And the basic earnings per share came in at USD 0.0219.

Q4 marked another exceptional quarter for our PCSD business, with sustaining its position as the largest global PC brand by market share. All regions saw year-on-year revenue increases in the range of 29% to 80%, leading to a blended 46% growth and record revenue of $12.4 billion for the group. PCSD delivered a record profit of $831 million in the fourth quarter with a 58% year-on-year growth. Its pretax margin expanded 50 basis points to an all-time high of 6.7%. In addition to the high-growth segments, which have been our strong catalysts in past quarters, e-commerce and services upselling emerged as a new growth engine to propel hyper revenue growth of 42% to 58% as well as higher profitability. Enterprise demand recovery was also encouraging, as evidenced by double-digit growth in shipments.

Our MBG business delivered a hyper sales growth of 86% year-on-year while improving its pretax profit by $80 million year-on-year to a record $21 million since acquisition. We achieved premium to market growth across our major geographies and outperforming the market. We have grown our MBG business by strengthening its product portfolio via a 5G-for-all strategy and broadening its carrier ranging across key focus markets.

Data Center Group concluded the quarter with a 32% year-on-year growth to $1.6 billion in sales, thanks to the robust hyperscale demand and new customer acquisitions. Revenue of Enterprise SMB business reached 3-year high despite continued soft demand from Enterprise. Their high margin boded well to the sales mix. Along with more profitable Cloud Service Provider projects, DCG pretax improved by $45 million year-on-year, the largest expansion in the last 10 quarters.

It has been 3 years since we started our Software and Services-led transformation. The high-margin Software and Services business continued to see accelerated growth in invoice revenue to its highest ever rate of 44%, contributing 7.9% of group sales. Deferred revenue increased 32% year-on-year, which further secure our future growth by building a sticky business model. Managed Services enjoyed 91% growth in invoice revenue supported by upselling opportunities, leveraging the growing popularity of our as-a-service solution.

Our group generated an additional $10 billion revenue for the full year, capping off a record year with the highest rate in almost a decade. Our revenue grew 20% to $60.7 billion. Profit attributable to equityholders increased 77% to $1.2 billion, and basic earnings per share came in at USD 0.0954. PCSD, DCG, as Software as a Services businesses, each scored all-time annual revenue or record profit. Challenges from the pandemic impacted MBG's first half performance, but its swift recovery in second half led to its higher half year profit since acquisition. Our E to R ratio was reduced by 110 basis points year-on-year to 12.5% on disciplined expense control. Pretax income was $1.8 billion, up 74% year-on-year, while pretax margin reached 2.9%, its highest level in the last 13 years.

All of our business reported margin expansion. We have repositioned Lenovo to take advantage of the higher demand for computing power, data and end-to-end solutions. The consistent and strong earnings trajectory across our business units have underscore our company achievement after the Intelligent Transformation.

Today, the Board declared a final dividend of HKD 0.24 per share. Taking into consideration of the interim dividend of HKD 0.066 per share, total dividend will be HKD 0.0306 per share, a 10% increase compared to dividend paid in FY '19-'20.

For the fiscal year, our operating cash flow improved by $1.4 billion to $3.7 billion, thanks to strong earnings and working capital management. To optimize our capital structure, we reduced our net debt and repurchased perpetual securities amounting to a total of $1.4 billion. In the fiscal year, we obtained our first investment-grade credit rating with the subsequent upgrade. All of these actions together saved us 13% in financing costs and perpetual securities dividend. We expect more cost saving in the next fiscal year.

PCSD business achieved many performance records as industry demand continued to exceed expectations throughout the year. Its revenue grew 22% to an all-time high of $48.5 billion, while pretax profit advanced 34% to $3.1 billion. Since the outbreak of the pandemic, there have been many unexpected lifestyle changes, including the one PC per person trend, rising usage, intensity and e-commerce revolution. The group has leveraged our operational excellence, product innovation and quick time-to-market capability to address these new demand tailwinds.

We maintain a solid worldwide #1 position for the third consecutive year and became #1 in EMEA in the second half of the year for the first time in our history. We made the strategic decision to drive high-growth segments and expect segment profitability. We also deploy our capital and resources under PCSD to grow the high value-added Services business. As a result, the business further extended its industry-leading profitability to set a new milestone at 6.5%.

In the earlier part of the fiscal year, MBG operation was negatively impacted on both supply and demand side by the pandemic. Nevertheless, our commitment to strategic action has helped us stage a swift recovery in second half of the year. Thanks to the strong momentum across key markets, the business delivered a 39% revenue growth in the second half and then a 9% for full year.

Similarly, the pretax performance reversed from a loss in first half to a record pretax profit to $31 million in the second half, up $87 million year-on-year. We achieved a record market share in Latin America and North America and nearly doubled our revenue base in Europe.

Our strategy remains clear: driving product portfolio enhancement to include more premium model; a 5G for all strategy to make 5G connectivity more accessible; and broaden our carrier ranging to drive regional expansion. Looking forward, MBG will target to groom NA to be a significant contributor and embark its Europe business at a faster pace while maintaining LA as a stronghold market.

Data Center Group delivered a record-high annual revenue at $6.3 billion, up 15% year-on-year. CSP is the largest growth contributor with a strong double-digit increase. Positive catalysts for CSP included public cloud demand and customer and product expansion. We are winning projects not only utilizing our in-house design and manufacturing but also high-end design storage and HPC to expand the number of growth engines.

ESMB revenue was at its highest in last 3 years, outperforming the overall enterprise market even though market demand was sluggish. Storage, SDI software and HPC performed well, posting strong double-digit growth and record revenue.

Our DCG is now ranked global #2 in entry-level storage, advanced from #5 last year and extended its #1 lead in HPC segment.

On pretax, DCG saw improved profitability for the fourth consecutive year by $57 million year-on-year, and narrowed pretax loss to $169 million, driven by broad-based improvement across CSP and ESMB.

Since this group started its Service-led Transformation, the Software and Services business had made tremendous progress. Its invoice revenue grew, accelerated and reached 39% for the year to $4.9 billion, which is nearly twice as high as the group revenue growth rate, now contributing 8% of the group sales. The business has broadened its scope and scale and has won many landmark deals. Managed Services enjoyed 78% growth, thanks to mega as-a-service deals signed around the world with leading technology, retail and financial institution as well as global spot events. Complex Solutions posted a strong 58% growth from all verticals. Attached services continue to grow at a fast pace of 48%.

Deferred revenue increased 32% year-on-year to $2.2 billion, pointing to a fast-growing recurring revenue base as we make further inroads to build a sticky business model. With regional economy on pace to expect and signs of a rebound in enterprise IT spending, the group will continue to ride on recovery-led opportunities and deliver sustainable growth.

With our new organizational structure, we plan to supercharge the growth opportunity arising from our Service-led Transformation efforts and capitalize on long-term upgrade cycles. With the investment-grade rating, we will further improve our debt capital structure by leveraging current low interest environment.

Our planned CDR listing will also further our market-leading position in China and provide capital for us to invest in technology, hence, further support our long-term growth.

By business group, our PCSD business will continue to address opportunities emerging from new smart devices and expand its leading position in both market share and profitability. It will leverage its innovation, solution capabilities and further improve its world-class supply chain to meet strong segment demand partly driven by commercial recovery.

For mobile business, the group will focus on sustaining its strong momentum in North America and Europe while maintaining its leadership in Latin America. MBG will further push product innovation and accelerated 5G smartphone launches to score wins in more markets and stay on the profitable growth journey.

Our Infrastructure Solutions Group or DCG business will aim to grow the channel business with the One Lenovo platform while delivering premium to market growth and profitability. In the ESMB segment, the group will grow high-margin services tax rates, expand high-growth segments and position its hybrid cloud solution to drive a paradigm shift in computing with edge to cloud solutions.

For the CSP business, the group will continue to expand customer base and gain wallet share among existing accounts. To achieve that, the business will leverage its unique strength, including in-house custom design,and worldwide manufacturing capability and expand its product portfolio with advanced configuration and storage platform.

The newly established SSG will bring our Service-led Transformation to a new level. We will continuously focus on expanding our capabilities in 3 key priority segments with clear multiyear growth targets: we will raise the attach rate for attached services; drive higher growth in Managed Services and as-a-service by enhancing delivery differentiation and platform; and develop end-to-end solutions and our Lenovo IP to support our growth in solutions.

Thank you. And now we can take your questions.

[Jenny Lai, executive]

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

[Operator]

[Operator Instructions] First question comes from the line of Leping Huang from Huatai.

[Leping Huang, analyst]

Okay. Congrats for the very good results, Yuanqing and Wai Ming. So I have 2 questions. One question is about the impact of the chip shortage, and we see it recorded very good results last quarter. But looking forward, do you see any impact from shortage business? This is number one.

And the second one is that we see reopening of the major countries. And so in the major countries, do you see the PC demand become -- remain still strong? Or do you see some markets, especially do you see the consumer market has any change?

[Yang Yuanqing, executive]

So can I invite Gianfranco to answer the question?

[Gianfranco Lanci, executive]

Can you hear me? Thank you, Yuanqing.

[Yang Yuanqing, executive]

Yes. Yes.

[Gianfranco Lanci, executive]

Okay. Good. No, okay, impact of the -- first of all, let me say, we are facing this shortage since Q4 last year, so it's not new. We have seen some deterioration from this beginning Q1 in terms of shortage and now is getting relatively stable. And I would say moving forward, I don't expect further deterioration. But for sure, we will continue to face the shortage for the next 12 or 18 months. It's mainly coming not only from PC demand but also from other products, automotive and so on. We have been able, as you see the result, to manage the shortage quite well in Q4 and last year in Q1. And we will continue to manage as we did in the past also in the future.

There is another important thing that probably because when we talk about shortage people, they just think about IC. And they think that all they see are the same or similar, right? Part of the shortage came from by the demand from car, the car industry, but usually, the IC that they utilize is based on a very, very old fab technology, 28 or even higher in terms of technology. While we use still chipsets that are coming and IC that are coming from a little bit more recent technology. So the 2 things are not really overlapping too much. And while it's very difficult to invest on very old technology, it is different from our side. Now let's say, in terms of impact looking forward, as I said, we will be probably in a similar situation like Q1 or Q4 but not a deterioration.

Talking about PC demand, I think it's a very good question because it is true that a lot of countries in the world that are finally opening up, and it looks like we are slowly getting out of the tunnel. But when I see the demand in terms of PC, this quarter, even for the next following quarters, is still very, very strong. And I think the real difference is not because people -- because people working from home, learning from home, playing from home, everything from home. But I think the major difference is people, they start to realize, one, they need 1 PC per person and not 1 or 2 PC per outlet. Second, and there is a direct -- there are a few very interesting survey in terms of what the people think about PC after pandemic, let's say.

Second, the experience on PC, a very different experience than what experience on certain applications. So PC is becoming much more key for a lot of people not only because everything from home but also for gaming or entertainment or other things, people, they realize they can do and they can get a much better experience than what they get on a phone or a tablet.

The last thing is that when you look at the installed base, we have a very old installed base, 4, 5 or 6 years, and it's a huge number. And all these people, they are -- or they will be in the position to refresh their own PC, so we will see an acceleration of the refresh of the entire installed base. But again, because if you want to get good experience, if you go to enjoy certain experience, you need a brand-new PC, not a 4, 5 years old PC. So I'm quite optimistic. We are quite optimistic that what we see in terms of growth but also if you look at the market research data and so on, it will continue for several quarters this year for sure and next year also.

[Yang Yuanqing, executive]

Thank you, Gianfranco. So given this is a very important question, so I just want to echo what Gianfranco just said. So PC and the tablet demand are still very strong. So not only we see a big volume of the backlog in our order pool, but also, we are -- so you can see that the number, particularly China number, China has already reopened for a couple of quarters. But their demand is still very strong, or even stronger than other geographical parts. So that can prove what Gianfranco just said. So this pandemic just pushed people's behavior on a change. So they try to own PC [ after first half ]. And also people are spending more time on their devices, and they are buying more devices and upgrading more often. So their work, learn and platform home. So we believe that the demand will continue to be strong for a longer time, not just because of the pandemic.

And also regarding of the shortage, so I think this shortage is mainly driven by the stronger demand than expected. But for sure, not just the PC and the tablet but also electronic cut as well. So it's caused by additional growth. So that means the market will continue to grow, and then Lenovo will also grow. It's just how much growth would -- depending on how much supply we can get. But in that aspect, so we are confident that Lenovo can perform better than the market and our key competitors.

First, we have a very strong global supply chain, which was just awarded the Gartner's top 25 supply chain. Also, Lenovo has a very unique business model. Most of our competitors don't do manufacture by themselves. They're just outsource to the third party. But Lenovo has a hybrid model. We do 50% outsourcing and 50% in-house manufacturing. So this unique business model gives us advantage to approach upstream vendors and build a better relationship with them. So in shortage like this, we can leverage this relationship to get better supply situation. So I'm confident that we will continue to outperform the market, and the key competitors enjoy sustainable growth. Thank you.

[Operator]

Next question will come from the line of Jerry Su of Credit Suisse.

[Jerry Su, analyst]

Congratulations on the good result. For my first question is still regarding PC front. I think education or compute demand has been quite strong over the past couple of quarters. Can you give us some idea what do you think about the education penetration rate or also the growth outlook into the later half of the year? I think there are some concerns that this could slow down due to a stumble in some area is reaching some higher penetration. So I would like to get your thoughts on that.

And then secondly, on the data side, on DCG, I think in last quarter, it seems like that the loss is at about USD 30 million, which -- please correct if I'm wrong, that this probably means that it's already at the breakeven level excluding the depreciation and also the amortization. So how should we think about the future profitability of DCG?

[Yang Yuanqing, executive]

Okay. So Gianfranco, could you continue to answer the first question regarding of the education market?

[Gianfranco Lanci, executive]

Education and corporate, right? But I think we need to make a distinction between corporate and education in the sense that when we look at education, we have seen, due to the pandemia, a huge demand on education, mainly Chromebook, mainly Chromebook. And we continue to see a strong demand on education in the past quarter, this quarter and also moving forward [indiscernible] mainly coming from Chromebook. And if you look at the...

[Yang Yuanqing, executive]

Gianfranco?

[Gianfranco Lanci, executive]

Yes, hello?

[Yang Yuanqing, executive]

Yes, so we --now, it's fine, which I couldn't...

[Gianfranco Lanci, executive]

No, as I said, we continue to see strong demand from education. But also moving forward and not only in last quarter or Q4, there are some seasonal effect because this is -- education is a kind of a seasonal business. But as I said, also if you look, it's mainly Chromebook but not only Chromebook. And when you look at the projection in terms of Chromebook growth, we are still talking about a big double-digit number in the sense that it's starting with 3 or 4 so for this year and I think also for the following years.

Corporate, I think, is a very different picture in the sense that we have seen a slowdown during pandemia with, of course, corporate reducing investment and trying to control cost. Starting from Q4, we have seen a rebound. Last quarter was already quite strong. And we expect that as soon as the people, they come back to work -- work in the office, I mean, not from home, this demand will accelerate because what we see in corporate, it's a big transition from -- I'm talking about corporate, not government. Big transition from desktop to notebook simply because the people, they want to be ready on the quick for any issue can happen in the future. So they are really -- we see a replacement of the desktop installed base with notebook.

The other important thing when you look at Europe but also U.S. or some other countries, there are huge programs on digitalization, right? In Europe is 1 of the 4 or 5 key element of the [ founder ] I think from the European community for the different countries. They need to invest on the one clear guideline. They need to invest on digitalization. That means that, again, this means that you need to upgrade or to update or to look at the new installed base in terms of not only PC, in terms of PC for sure, but also in terms of infrastructure, cyber and storage, the entire infrastructure. And this is when you look at the number in terms of amount of dollars, it's really, really huge. So corporate, in my opinion, we see a speed-up of the growth during the next 3, 4, 5 quarters without any help.

[Yang Yuanqing, executive]

Okay. Thank you, Gianfranco. So Kirk, would you like to answer the second question?

[Kirk Skaugen, executive]

Yes, thank you for the question. Our strategy within the Infrastructure Solutions Group is to deliver hyper growth and continued profitability improvements both year-on-year and quarter-on-quarter. I think the nice thing about the Data Center business is the design wins to get good long-term visibility into the key profit drivers that will continue to improve DCG's profitability, ISG profitability in the future. And that is that we're improving not just in server but in storage. Our in-house design and manufacturing is giving us design wins at the motherboard level. And we're expanding our Services business and the attach of our premium services at a double-digit increase to our servers and storage versus last year.

And lastly, we see the enterprise and small business market and the on-prem as a service through our true scale now growing significantly with our as-a-Service business growing triple digits year-on-year. So all these things are sticky and long-term profitability trends that we see. In-house manufacturing and design with motherboards, expanding our storage, you saw us grow 73%, which is a huge premium to market. And our commitment remains to continue this profitability growth each and every quarter. Thank you.

[Operator]

Next question comes from the line of Albert Hung of JPMorgan.

[Albert Hung, analyst]

Congrats on the results . My first question is could you share more color on the channel inventory level? What's our pricing strategy for PC under tight supply/demand?

And my second question is the mobile profit was [indiscernible] what will be the future profitability trend if the supply-demand become more [indiscernible]?

[Yang Yuanqing, executive]

Okay. So Gianfranco, could you please answer the first question regarding the channel inventory and pricing?

[Gianfranco Lanci, executive]

Thank you for the question. It's a very good question because I think the channel inventory has probably never been so low in the history. We are running today in certain country with 2 or 3 weeks of channel inventory, which is really too low. In the sense we were used to run with something between 6 to 8, and now we have 50% of what we need. And frankly speaking, we will be in this situation at least for the next 2 or 3 quarters because when I look at our back order, as Yuanqing said, we are not able to reduce our backlog quarter-by-quarter. It's still there with the same amount, more or less with the same amount of units. So channel inventory is worrying and not -- but because it's too low. And this is, I would say, everywhere, really everywhere, from Europe to China. China is even probably one of the worst places in terms of channel inventory. In terms of being too low, Europe, U.S. and Latin America, it's really everywhere. Then we need to deal with this situation.

So pricing, with this stronger demand on one side, some components but mainly when I look at components, it's really very cheap components. I mean you talk about IC. You are talking about sense or not -- but pricing are slowly going up. And in order to maintain the profitability we need and also in -- to make sure that we continue to watch pricing, we still -- we want to be competitive, of course. But pricing are slowly going up. And I think we'll continue to go up for the next 3 or 4 quarters because the component cost trend.

On the other side, it's not affecting demand because demand is so strong. That is really not -- we didn't see -- we started already the exercise in last quarter, even in Q4 partially. But we didn't see any impact on the demand at all.

[Yang Yuanqing, executive]

Thank you. Thank you, Gianfranco. So Buniac, would you like to answer the MBG topic?

[Sergio Buniac, executive]

Yes. From the mobile side, I think, number one, despite the high growth, the demand was even stronger. We are seeing demand growing in many different regions across the globe and even in different channels, including like enterprise where we are just starting. So I believe in the future, we will sustain the profitability. We don't see any deterioration. And we expect to still growing premium to market for the full year in the next few quarters. And we expect demand to hold now. As much as there is more competition from some players, as you mentioned, there are other entity that are benefiting demand, so our expectation is to continue grow premium to market. And we are seeing demand stocking channel at very healthy low levels and demand across multiple regions, especially North America, Latin America and Europe but also market tracking growing in a good pace. And we'll continue to focus on our strategy, that is focused on our core strength and grow profitably like we have been doing now over the last 2 to 3 years.

[Yang Yuanqing, executive]

So thank you, Buniac. So we definitely have a higher expectation in our Mobile business to drive the profitable growth. Actually, we think we have the better position than other competitors in some markets, particularly mature markets. In North America, so we will leverage some competitors exit to further grow our share. Definitely, a similar situation will happen in Europe and some Asia-Pacific market as well. So we will keep the strong growth, profitable growth in those markets, right? So actually, for the Mobile businesses, we could grow even stronger, but we are limited by the supply as well. So we will try our best to get more supply to support our profitable growth. Thank you.

[Jenny Lai, executive]

Thank you, [ Wawai ]. We are now ready to take the last question due to limited time. And please raise your last question. Operator, please.

[Operator]

Your last question comes from Grace Chen of UBS.

[H. Chen, analyst]

I have 2 questions. Number one is just a follow-up on the component shortage topic. When do you -- I'm wondering whether you are able to quantify the size of component shortage and when do you expect the component shortage will ease.

And then second question about servers. I understand that your servers have been growing quite well. I'm wondering whether you're also seeing some component shortage in servers. And also, what do you believe as your key competitive edge to win server -- cloud server orders from the ODMs.

[Yang Yuanqing, executive]

So Gianfranco, would you like to repeat your answer?

[Gianfranco Lanci, executive]

Again? No, but it's also a very interesting question. It's a good question because to quantify, it's always not easy. But I would say, if I look at our back order, and we can probably say that in terms of quantifying the shortage, we can probably say that it's around 20 -- in the range of 20%. So without shortage, we could probably ship 20 -- easily 20% more. So still a brilliant result in Q1; without shortage, could be much, much better, let's put it in this way. But it's not easy to quantify because, unfortunately, we are not talking about 1 component or 2 components. We are talking about a big number of different small components. Then in some cases, you can -- if you are flexible and good enough, and this is why also it's important to run your own factory, you can easily switch, and you can be flexible enough to enjoy maybe some other components that are available rather than what is not available.

But you need to be very flexible. You need to do qualification very quickly. You need to do a lot of things, that if you run, let's say, your own destiny is much more easy than depending from an ODM supplier.

When, as I said, I would not expect that in the next 12 to 18 months the situation will improve. It will not deteriorate, probably it will stay at the same level, but I would not expect that for the next 12 to 18 months. So we'd see still the same situation also next year. Because to build that capacity when you talk about the fab, silicon foundry, it takes some time. There are big investments going on in different areas of the world in terms of new fab. But they will not be ready before 12 to 18 months.

[Yang Yuanqing, executive]

Thank you. Thank you, Gianfranco. Kirk, would you like to add something on DCG or IDG?

[Kirk Skaugen, executive]

Sure. So 2 questions: first is servers being impacted by component issues; and second is how do we differentiate in the cloud service provider market versus the ODMs. So I think, certainly, there's no one in technology, I think, that's not affected in some way by the chip shortages. However, I think we've done an outstanding job multi-sourcing across our portfolio. We just had, for example, record AMD shipments in our server technology with all of the latest Milan announcements we just made with AMD. We've announced 18 new platforms this quarter in think system and think agile. And we're multi-sourced across just about everything. So we don't see that being a major impact to having a significant double-digit premium to market and growth as we move forward here.

As our supply chain is a little bit more nimble, I mean we are bringing in inventory for the cloud service providers based on future orders. So I think we're excited that we're not just winning the server business, but we're also winning significant storage orders, gateway orders, high-performance computing and the cloud orders. It's improving our profitability, and so we're able to pre-stage that and build that equipment because we're not just doing the system integration or just the rack integration, we're also doing the motherboard design. So we get to get a start on that much earlier.

And candidly, we don't need to worry about ODMs because we're now designing our own motherboards in-house, manufacturing them in our own motherboard factories and integrating them in our own system factories around the world. In fact, we've recently talked about significant new motherboard factories in Mexico, expanding in China as well as expanding in Europe, in Hungary to increase our capacity based on the demand we see. So I don't think the chip shortage changes that.

Our strategy for the cloud, for the public cloud is what we call ODM plus. So we have $40 billion a year of procurement power, so we have much larger procurement power especially in a shortage than most ODMs. Unlike the multinational traditional OEMs, we can build our own motherboards. We're not outsourcing those to someone, so that improves our profitability and our agility. And we're in 180 markets. So as we take China cloud providers global or we take U.S.-based cloud manufacturers global, in either sense, we have the ability to get to every corner of the globe from India to Brazil, to South Africa, to anywhere in the world. So this is our supply chain, which was just ranked #16 by Gartner of all companies in the world and #5 in tech, is proving to be a significant advantage for us both in procurement and in supply chain. So I think 73% growth, this is just the beginning because we know the design wins in cloud are coming, and we know that those design wins are even going to have a better mix with improved profit.

[Yang Yuanqing, executive]

In the transformation, so now we have made our strategy very clearly. So we will drive the 3S strategy, some other smart IoT and smart devices, smarter infrastructure and smarter verticals. So definitely, our Solution and Service business will be key to realize this transformation. So we will drive a high attach rate of the attached service. We will drive hyper growth for the Managed Service, by including Device as a Service and TruScale or Data Center as a Service business. And meanwhile, we will drive a multiple smart verticals in manufacturing, education, retail, et cetera, et cetera.

So you know Lenovo has very strong execution capability. Once we have the clear strategy, we will drive the results for us. So actually, a couple of years ago, you were worried so whether we could turn around our Mobile business and the Data Center business. So we couldn't give you answer immediately. But over the past couple of quarters performance, you could see clear progress in these 2 businesses. So that can demonstrate Lenovo's execution capability. And also it could demonstrate our further success of diversification of our business. Definitely, for the next step, driving the Intelligent Transformation will be our strategy. And I hope with Lenovo's proven record, you can believe we can deliver. Thank you.

[Jenny Lai, executive]

Thank you, Yuanqing. And we thank you very much for joining today's call. If you or any of the investors or analysts has any further questions, please feel free to contact me or the IR team directly. 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. Bye.

[Operator]

Ladies and gentlemen, that concludes the conference for today. You may now disconnect your line.