Good morning, good afternoon, and good evening. Welcome, everyone, to Lenovo's earnings webcast. This is Jenny Rai, Vice President of Investor Relations at Lenovo. By now, you should have received a copy of our earnings release and earnings presentation. Before we start, let me introduce our management joining the call today.
Mr. Yang Yuanqing, Lenovo's Chairman and CEO Mr. Gianfranco Ranchi, Corporate President and CEO Mr. Wang Wai Ming, Group CFO Mr. Chris Gaojun, President of Infrastructure Solutions Group Mr.
Ken Wang, President of Solutions and Services Group and Mr. Sergio Bunyak, President of Latin America and Mobile Business Group and President of Motorola. We will begin with earnings presentation. And shortly after that, we will open the call for questions. Now let me hand it over to Yanxin Yuanxin, please.
Hello, everyone, and thank you for joining us. We are pleased to report record fiscal 1st quarter results in our new organizational structure. While we mean we'll go into detail about our performance, I want to focus on the greater opportunities we see and how we will deliver growth and sustainable profitability increases well into the future. The new normal has changed how people live and work. It has accelerated digital and intelligent transformation and upgrades in smart devices, ICT infrastructure and applications.
With our clear 3S strategy and strong execution, Lenovo is confident to capture these significant opportunities to further grow and improve profitability. In fact, last quarter, despite the challenging environment, Lenovo delivered a record quarter with a significant year on year profitability improvement. Group net income more than doubled. Net income margin reached the highest in many years. Group revenue continued hyper growth of almost 27% year on year.
But I want to say, this is just the beginning. In the coming years, we will continue to focus on high margin businesses, including solutions and services, particularly as a service business, infrastructure upgrade, premier PC and adjusting the Now PC devices. We will further increase investment in innovation and consistently improve our gross margin and overall profitability. Now I want to go into the details of each business group. Let's start with our new Solutions and Services Group or SSG.
Today, the ICT infrastructure is transforming to a new architecture of client, edge, cloud, network intelligence. This new IT will accelerate digital and intelligent transformation and bring each individual and enterprise higher efficiency and productivity, but also more complexity. This means customers now need more sophisticated IT services. This shift created a huge market opportunities for solution services as well as managed services, including the subscription based all inclusive business model, which we call as a service. This is not only a reshaping of IT services, but also a massive transformation of the entire industry.
IDC estimates the new IT service market to be over US1 $1,000,000,000,000 through 2025. While there is a potential to grow in traditional support services, even larger growth opportunities lie within Managed Services, Other Service and the vertical solutions. The margins of each service businesses are much higher than devices alone. So SSG's high growth will definitely drive higher profitability for the globe. SSG addresses these opportunities with 3 service segments, and we already see strong initial results Last quarter, SSG revenue achieved significant growth year on year with a strong operating margin of 22%, which is much higher than our traditional hardware businesses.
Support Services profitability was up by almost 3 points year on year. Managed Service, Other Service and Vertical Solutions all achieved double and triple digit growth year on year. We will own many more high profile smart city and smart retail deals and implemented hybrid cloud solutions with our own IP. Going forward, we will drive further growth and margin enhancement. Our support services business will improve penetration rates and leverage the increasing device install base, especially as commercial rebounds to grow.
For other service, we will aggressively invest in capability, platform and tools and drive scale through building more repeatable vertical solutions with our own IP and through strategic partnership. Now let's talk about our Infrastructure Solution Group or ICT. ICT infrastructure is the foundation to digital and intelligent transformation. IDC predicts the ICT infrastructure to be a near $250,000,000,000 market through 2025. We have been investing in ISD for years, having started with only our global server business from IBM X86 acquisition.
ISG has built storage software service, software defined infrastructure capabilities and become a full stack data center infrastructure provider. We have also expanded from providing enterprise IT infrastructure to public cloud and full hybrid cloud solutions to our customers. Now years of investments are paying off. This business is close to achieving profitable growth and generating returns. Last quarter, ISG delivered record revenue and has outperformed the market for 6 straight quarters, while achieving the best results in 5 years.
We are now number 3 in XSS6 server and the number 2 in mainstream storage worldwide. Our higher margin businesses, storage, software, continued strong growth year on year, particularly hybrid cloud solutions grew high double digit year on year. Looking forward, we will continue to invest in ISG's competitiveness and move toward profitability. We will increase investments in edge computing, hybrid cloud solutions and 5 gs cloud network convergence. We will also continue to strengthen our in house design and manufacturing capabilities, improve efficiency and expand the strategic partnership to enable more solutions.
Our vision is to become the largest ICT infrastructure solution provider. For Intelligent Device Group or IDG, I want to reemphasize that the pandemic has changed how people live and work, and the PCs has returned to the center of our digital life. People now spend much more time on its PCs. PC refreshment cycle has shortened and the penetration rate has increased. IDC confirmed that the total PC demand will at least remain at the current levels until 2025, while commercial demand is rebounding quickly.
At the same time, the IoT market is expected to surge by 11% CAGR through 2025. ITG is fully leveraging our PC leadership position and synergy across businesses to expand in adjusting the now PC segments, such as the Smart Meeting Collaboration and the Embedded Computing. We have also been investing in innovation and the premier segments like workstation, gaming PC and the thing and light to drive sustainable profitability increases. Last quarter, IDG continued significant top line growth of almost 30% year on year, but the profit grew even stronger at over 40%. In one aspect, this is driven by strong performance in PCs, thanks to years of investment in premium and the high growth PC segments.
We continue to improve our both average selling price and profitability. In another aspect, this result is driven by strong performance of non PC segments, which already accounts for 18% of IDG's total revenue. Both tablet and smartphone businesses achieved over 50% growth year on year with record performance. We strengthened the number 2 position in Android tablet worldwide. Smartphone had a record operating margin of almost 5% and now has become a self sustainable healthy business.
We are confident to leverage the change in market landscape to continue hyper growth. Going forward, IDG will continue to invest in smart devices, core component technologies and the next generation computing platform. We will continue to focus on premier segments to improve average selling price and profitability. We will leverage our broader customer base to cross sell, adjust the non PC products and further increase non PC business mix. Last quarter, we increased our R and D by 40% year on year, and we will continue to invest in innovation and aim to double our R and D expense in 3 years.
We will further strengthen operational excellence and improve efficiency through more decisive and thorough digital and intelligent transformation internally. And we remain committed to ESG and Sustainable Green Development. All these efforts will not only help us deliver long term profitable growth, but also bring to life our vision of smarter technology for all. Lastly, I invite you to attend our annual flagship event, Tech World, next month, where we will discuss more about our vision and our future. Thank you.
Now, Wei Min will talk about our Q1 in more detail. Wiming, please.
Thank you, Yuanqing. I will now take you through Lenovo's financial and operational performance in Q1 fiscal year 2022. We achieved our best Q1 in history. We outperformed the market and attained RevPAR Q1 revenue of $16,900,000,000 posting growth of 27% year on year. Our net income margin reached a 13 year high of 2.8% and net profit more than doubled year on year.
All our 3 business groups set new milestone in revenue and performances. IDG, our intelligent device group, realized its all time high operating margin of 7.5% and profit growth of 43% year on year. While PC business is contributing to the growth, non PC products also registered growth of 57% in revenue year on year. Our new profit driver, the Solutions and Services Group, SSG, saw its operating profit growth 51% year on year, contributing to 20% of our group's profits. Its 22% operating margin was nearly 3x of business group average.
Our Infrastructure Solutions Group, ISG, achieved its record revenue since the 886 acquisition and made its largest profit improvement since 2Q fiscal year 2018 2019 by €49,000,000 year on year. While maintaining our E to R ratio year to year, our research and development investment grew 40% year on year. We believe our commitment to R and D would drive innovation and differentiation that will continue to support higher profitability. We plan to double our R and D spending in 3 years. Furthermore, considering the improved profit mix structure, we are confident that we can continue to expand our net income margin.
Profit attributable to equity holders was 466,000,000 and the basic earnings per share came in at 4.02 dollars representing 123% growth year to year. Our operating cash improved by $131,000,000 to $448,000,000 driven by strong profitability. In this fiscal quarter, the ongoing component supply shortage remained a key challenge and our order backing further extended to fiscal Q3 across PC, smartphone and server. To support our growth, we continue to execute our component buy ahead program to meet strong demand. To optimize our capital structure, we further reduced our net debt by $541,000,000 to $739,000,000 and lower our finance costs correspondingly.
In addition, Fitch upgraded our credit rating to BBB in March 2021. Recently, S&P and Moody's revised our outlook from stable to positive, reflecting our sustainable growth outlook. Targeting the fast growing new IT services segments within the $1,000,000,000,000 IT services market, SSG delivered a successful Q1 with strong revenue growth and high profitability. This financial result, SSG, have demonstrated the group's strategic focus for the past 2 years on surface led transformation and started to bear fruits. SSG revenue increased by 38% year on year to $1,200,000,000 with strong double digit revenue growth across 3 segments and all regions.
Operating profit surged by 51% year on year to $264,000,000 driven by strong top line momentum and solid expansion in operating margin. We stand at 22%, topping all business groups. SSG will continue to contribute to Land Rover long term profitability through its higher profitability and fastest revenue growth among all our business groups. Revenue of support service rose 24% year on year. We continue to drive its penetration rate by strengthening premium service attached and new solutions such as asset recovery services.
The remarkable growth of managed service reached 64% year on year, demonstrating our ability to serve customers' demand as they switch to asset service model. Total contract value of asset service more than doubled during the quarter. The growth momentum continues as we secure several landmark deals and strategic partnerships. Project and Solutions also reported strong revenue growth of 56% year on year, paving the way for scalable growth. This achievement as a whole contributed to a 41% year on year growth in booking, while deferred revenues amounted to JPY 2,400,000,000 up 34% year on year.
ISG continued its faster than market growth momentum for 6 consecutive quarters. Sales grew 40% year on year to $1,800,000,000 Profitability improved of $49,000,000 was the strongest in the past 2 years, driven by more profitable cloud service provider projects and favorable mix within Sys Enterprise and SMB. ISG will continue to increase its profitability. CSP sales reached an all time high and it continued to expand client base, adding 12 new CSP next wave clients with more project wins. Its global design in projects now extended from 1 socket to 8 sockets, surface to storage, liquid cooling, more advanced system designs and multiple platforms from single platform.
ESMB delivered the highest 1Q revenue in the last 5 years, supported by record sales in high margins, storage, high performance computing and hybrid cloud solutions. In the mainstream storage market, the group was one of the fastest growing vendors and maintained its position as the 2nd largest global player. Q1 marked another record quarter for our IDG with a 43% improvement in operating profits and a 28% revenue expansion. There were multiple drivers contributing to IDG's performance, including strong commercial demand and encouraged share gain in premium segments, resulting in higher ASP and profit margin. The use of PC has returned to the center of people's digital life, leading to increased demand for premium products, including gaming, thin and light and yoga series.
Digital transformation had taken a different turn to drive commercial recovery as economies reopen. IDG's commercial PC sales and its premium product sales such as yoga and gaming PC grew significantly year on year, translating into high ASP and stronger profitability for IDG PC mix. We further improved our ASP by 6%. Q1 marked the 14th consecutive quarters of profit margin expansion for IDG. The non PC product was another bright spot, representing 80% of IDG revenue in Q1.
Tablet revenue grew 58% year on year, and smartphone sales went up by 64%. Our smartphone profit expanded €85,000,000 year on year, while operating margin reached new high of 4.9%, driven by consistent market share gains across all geographical markets. The successful execution of our smartphone strategy in product optimization and broader carrier ranging have proven to be earnings accretive. We will continue to increase ASP through investing in innovation and driving favorable premium mix. This will contribute to a healthy growth of our smartphone business, continued revenue growth while maintaining profitability.
ESG continue to be a very important focus area for Lenovo. In the environment aspect, we are very proud. We exceeded our 2020 climate change commitment. Furthermore, we launched our new 2030 climate change goals. Our new 2030 science based targets address both Scope 1 and 2 direct emissions as well as Scope 3 emissions intensity in our value chain.
In the social aspect, we formally announced our Product Diversity Office in 2020, supporting our commitment to develop technology for diverse users and minimize bias inherent in the technology or product itself. In regard to governance, we established a new ESG Executive Oversight Committee. The committee is comprised of executives from different business areas and geographies to ensure Lenovo ESG programs and investment effectively and appropriately address risk and opportunities. We are very pleased to note that our strong ESG performance has earned the recognition from a number of notable organizations. We will continue to honor our responsibility as an industry leader and corporate citizen.
Looking ahead, we believe the accelerating global trend in digitalization and service led transformation and the recovery of global IT spending post COVID-nineteen will continue to benefit Lenovo. Our commitment to R and D investment will further elevate Lenovo leadership in innovation, while our branding efforts will raise customer recognition of such differentiation. Both are the key driver for us to further expand our gross margin. Our service led transformation, commercial recovery, favorable mix, product innovations such as full stack offerings from ISG and our strong operation efficiency are all supporting factors to help achieve Lenovo medium term financial target of doubling our net margin. SSG will play an important role as the group's high margin, high growth engine, targeting the fast growing new IT service segments.
In addition, our extensive exposure to commercial PC and ESMB infrastructure over vast solution and service potentials, leveraging on strong as a service demand. We will continue to enrich our solution portfolios with in house IP to drive scalable growth and build competitive edge for next stage expansion. In ISG, we will continue our profitability improvement supported by consistent premium to market growth in both ESMB and CSP markets. We will continue to deliver industry leading end to end infrastructure solutions and expansion from server to full stack offerings. In ESMB, we will expand the product portfolio through service into storage, software defined infrastructure, software, services and new segment coverage in edge, AI and communication solutions while rising profitability.
In CSP, we will fully integrate our unique ODM plus model to expand profitable opportunities and drive quarter to quarter profit improvements. In IDG, we will sustain our profit expansion while investing in R and D to drive higher value at the premium products and smarter devices. We will further enhance our operational excellence and global supply chain management. The digital transformation took a new turn as economy reopened, thus creating a strong demand and order backlog in commercial PCs. The premiumization trend could also accelerate as remote learning and working models have raised the bar for video and audio designs, riding on the two trends.
We believe the ASP and margin expansion in PC will continue to support our profit improvement. Our smartphone business will form an important driver for non PC growth. While it's focused on sustaining strong growth momentum in North America and Europe, while maintaining market leadership in Latin America, It will further push product innovation and accelerate 5 gs smartphone launches to score wins in more market and stay on track for profitable growth. Our strong financial position and cash flow have provided a solid foundation on which Lenovo can proactively pursue growth opportunity ahead, particularly in the fast growing service area. Lastly, we will reiterate to our shareholders Lenovo commitment to sustainable profitability increase.
Thank you. And now we can take your questions.
Operator, I will now turn it over to you. Please give us your instructions. The first question comes from the line of Huizhen Yan from Huatai Securities. Please go ahead.
Thanks. I'm Huizhen Yan from Huatai and I have two questions. And the first question is about your new segment that is SSG. I noticed it's the first time Renault has officially re segmented revenue. So can you please tell us more on your the segment of SSD?
I mean, what's your what's the relationship between now the SSD and the former segments? And what's your strategy on SSG's further development? That's my first question. And the second question is about chips. Can you give us more color on the chips right now with respect to the laptop?
Thank you.
Okay. So now we have the new leader of SSG, Ken Wang in the call. So probably I would invite Ken to answer your first question. So regarding of the chip shortages, so probably Chief Operating Officer, John Franco, can answer the question.
Thank you, Yanqing. So, this is Ken. And thanks for the question. I think this is a really great question. I think we're very happy to see, in fact, increasing demand for more sophisticated services requirement coming out from new IT, I think as Yanqing mentioned.
Now, with new IT, I think, obviously, the benefit has got to be able to help enterprises to increase efficiency, productivity and competitiveness. I think the biggest challenge for a lot of people is that there is a lot of complexity and complication. So, I think the normal and especially SSG's role is to help our customers to navigate and overcome all these challenges in order to get the benefit. Now that's why if you look at our business, we have basically 3 tower of services and all entangled to work to provide the end to end solution to our customer regarding new IT. Now the tower 1 is mainly around our attached services, right.
These are the basic warranty and auto warranty upgrade to improve the ownership experience of our hardware products. Now, TAU2 is about managed service and also access service. Now, this is the part where we add a lot of value and also because a lot of data point that we got, right, this is the market where it's growing very, very fast, right. Some of the data points suggesting that this is the part of the market that is growing at 30% -plus on
a year to year basis.
And we have been focusing a lot in this area in terms of building our capabilities, building our system and tools so that we can provide the best of the breed managed services. And to share a lot of a little bit more detail, I think this year we're already able to provide child services, managed service and as a service in over 100 markets that we have business in and the target is to all the way to 180 markets that Lenovo has business in, right. So this is obviously a huge growth opportunity for our business. Last but not least, right, I think the cloud rate is about project solution and also critical solution. This is where the path we can add even more value by understanding some industry specific requirement, leveraging some of the Lenovo internal IP and provide an integrated solution, an end to end solution for our customers.
Now with all these, right, I think we are very confident that the SSG business will continue to grow. I think as Yanxin mentioned in his opening that we'll continue to grow even at a speed that will be faster than the overall growth from a top line and also bottom line perspective. Thank you.
Yes. So I want to add a couple of points. So this business, solution and service business, is key to Lenovo's strategy. So we call it service led 3S strategy part. 3S means smart IoT, smart infrastructure and the smart verticals.
All of those are related to solution and services. 2nd, so SFG will help us to achieve our growth path to sustainably improve our profitability because this is a high margin business. So actually, you see the last quarter's numbers, so their profit operating margin was above 20%. So it was 22% year on year. It's still increasing.
So that will help us to improve our profitability over time. Okay. So next question will be answered by Jianwen Ku regarding the supply shortage.
Look, can you hear
me? Yes.
So talking about the supply shortages. First of all, one clarification. When we talk about cheap, I think it's really high seat, integrated seats. So small components, mainly that are key for motherboard, the display, the RAM card or some other things. Because sometimes I think there is confusion between CPU or other GPU and so on.
But the shortage, it's really on IC. We are facing this shortage since now it's already 3 almost 3 quarters, right? We don't see further deterioration in the fact that they are still short. I think they will continue to be short at least for the next couple of maybe 2 or 3 quarters. We see some improvement here and there.
On the other side, when you look at our growth, that is between 20% to 30% on PC. It's a potential limitation, but it's a potential limitation to grow more than 25%, 30%. So we still see for the future quarters a good opportunity to continue to grow with this trend. And as I said, it will not improve seriously, at least for the next 2 or 3 quarters because it's not only coming and it's not only coming from PC demand. It's coming from automotive.
It's coming from any kind of smart devices, including white goods, any kind of really smart devices where you need even a small board. And now you see electronics, you see small board almost anywhere, right? So PC demand, for sure, is one of the reasons, but it's not the only reason of the shortage. We have seen, on the other side, good improvement on display. Display, I think, is we don't see any issue on display.
We don't see any issue on any other major components. It's just I see and I said it's mainly impacting motherboard and display in the sense that you need a board managing the display.
Thank you, Jack.
Thank you. So in summary, so the key shortages on IC, so the component shortage will probably last until first half of next year. But we want to emphasize this shortage of consumers by stronger than expected demand, not the shrinking demand, but demand for devices that is in the infrastructure, all very strong. Actually, Lenovo's backlog is almost the same as the previous quarter. Another point is Lenovo has track record to drive better than competitors' results regarding of the supply.
So mainly because Lenovo is a unique business model. We are not like our competitors who outsource 100 percent of the production to the 3rd party. Lenovo, we have the hybrid 5, 5th type in house, 5th type of house building model. So this model give us more flexibility and the better relationship with Tier 2, Tier 3 supplier, upstream supplier, so that we can manage our supply better. So even with the supply constraints, we are optimistic and confident to continue to drive the premier to the market growth.
Thank you. Next question?
Thank you. The next question comes from the line of Albert Hung from JPMorgan. Please ask your question.
Yes. Hi, Ming Jingting. Thanks My first question is still regarding the service. So could you provide some analysis from competitive analysis, what's the long term target of service segment, what's the KPI for this? And from, say, qualitative analysis, could you share more color on the difference in customer behavior between that service and traditional hardware segment?
For example, how is the customer churn rate and how is the customer cross selling opportunity for service segment. I guess one of the key question is whether the customer tend to adopt more than 1 partner in service model or let's just use single service in service. And my second question is the OT margin segment OT margin achieved new record high for PC and mobile PPI also achieved record high, several also show very meaningful loss reduction. But the group gross margin actually dropped on a sequential basis. Could you help me to understand a bit more about the disconnection between gross margin and OP margin?
Thank you.
So, Ken, could you please answer your first question, please?
Yes, Tianjin. Thank you, Albert. So, let me take the first question. Now, regarding the target, I think first of all, we're very happy to see the Q1 performance rate, a 38% year to year growth and 22% of operating margin. Now, as I answered the previous question, I think we continue to see a very strong demand for all kind of services, right, from attached services all the way to managed services and everything is a service.
So, our target in mid term is to maintain the SSD growth, which is faster than the overall growth growth, right, for both our top line and bottom line.
So your second question could you please repeat your second question? Is the cost impact on our margin or profit. Is that a question?
Sorry, my second question is your OB margin actually achieved greater high, but actually gross margin declined quarter on quarter. So, could you help me understand the disconnection between these two composition?
Only one thing, but it has been growing 1 point, almost 1.5 points year to year. So it depends on the comparison quarter to quarter or year to year.
So, Wimi, do you want to add something here?
Yes, Wai Wai. I think there are, I think, couple of reasons. Albert, I think one already Jo Franco mentioned about the competition issue. I think the other one is obviously scale. I think quarter 4, I think we've been actually I think quarter 4 numbers, I think we obviously get some maybe because of scale, because of some one off costs that actually drive, but in fact it's actually not significant.
I think for us, I think there may well be also some changes, I think, in terms of the mix of the product, I think, resulting that again, I think probably I need to give I think provide more detail, for example, in different geography or in different countries, I think the profit margin or the gross margin of profit is a little bit higher than the others, for example, like Japan, generally. I think when the market size changes quarter to quarter, that actually have a small impact, I think, on our overall gross margin. But generally, I think, as Zhou Hao said, we actually been looking, I think, more comparable, I think, is really year to year. And that we actually been, I think, improving gross margin. And that is our target.
And we also feel very comfortable that we can continue to maintain the margin improvement. I think resulting in what Yanjing said earlier, that it is our medium financial goal, I think, is to through improvement in gross margin, obviously, as well as operating efficiency, be able to bring our net margin, I think, to double, I think, from last year, 2% to 4%, I think, medium term target, and we are obviously on track on that.
Okay. Next question.
Thank you. The next question comes from the line of Donnie Peng from Nomura. Please ask your question.
Thank you, management for taking my question. My first question is regarding to your PC business. So, I think in the past 2 months, the confirmed COVID-nineteen confirmed cases in U. S. Surged a lot again from the very low base in May June.
So previously, I think my impression is like Lenovo believes that the commercial PC demand is increasing due to people will be back to office rather than work from home after the easing of the COVID. Another situation looks like to be getting worse again in Western countries. So just wondering if you could give us an idea about our PC business outlook in terms of like commercial or consumer or educational segment? And that's the first question. And the second question is for inventory.
So in the past few quarters, I'm seeing that your raw materials and work in process inventory surged more meaningfully compared with finished goods. So I'm just curious what kind of component materials or ICs are accumulated in the past few quarters? And whether if I mean, if there is any demand deteriorating, if there would be any kind of risk on inventory write off in the future? Thank you.
So, the first PC, we had your question. So, could I invite our new IDG leader, Luca, to answer the question? So, probably, Gianfranco can answer the inventory question or Wei Bin can add something.
Luca, please. Hello. Can you hear me? Yes. Good.
Very good. So thank you for the question. So I think, Donnie, you are asking whether the new COVID profile is how it's affecting our PC segments. So obviously, the PC demand in each segment. So obviously, we are seeing a very robust consumer segment demand still.
We observed that in some of the country with lower COVID rate or with a better COVID situation, the demand slows down a little bit, but still maintains far superior to the previous pre COVID levels, so to say, demonstrating our theory that the PC is truly back at the center of people's digital life. So that is for the consumer part. The commercial side, the demand profile and the outlook we estimated is very bright because we have noticed during the initial COVID 1 year ago, many enterprises have slowed down investments. But now due to the necessary the must digitalization of their businesses, there is a very significant demand increase. We have noticed this initially more in the large and very large enterprises, namely our global accounts, but now is expanding also to the large enterprises and SMB.
So I would say we are very positive on the demand of the commercial PC business. For both segments, there is also an upgrade into the product demand, which means there is a higher demand of audio, video, microphone conferencing experience. So that drives the premium PC higher, which consequently drives AUR and our margin opportunity higher as well. You also asked about the education. I think the education, namely Chromebook, is also in function of the learn from home status.
Now there is a little bit of slowdown, particularly in U. S. We have noticed the Chromebook has lowered down a little bit. But that's also related to the seasonality and to the government funding incentive, which we have reason to believe that will pick up. So it's probably that this education segment is probably the lowest among the consumer and commercial, but we still believe it's very early to say that the demand is trending down.
It's just a pause. But in any case, for us, Chromoog is a very small fraction of our PCE revenue. I think it's less than 5%.
Yes. So I want to echo Luca's point. So firstly, from what we can see, PC demand is still very strong in both consumer and commercial segments. Our backlog orders last quarter was similar to the previous quarter, so very big volume. We still cannot deliver because of the component shortage.
From long term on the view, so we are equally optimistic because we think this pandemic has changed people's behavior. So the hybrid working approach last for a long term, I just said. So that will drive the PC demand at least at the current level, let me say, 350,000,000 units per year level, which is much higher than the pre pandemic, which is just
260,000,000.
Now our people spend more time every day on their PC, so that they will drive faster replacement cycle. And also, it will definitely drive the more penetration rate. So that will help PCE total market keep it stable. So that's our view. And also the commercial because commercial customers or market is getting recovered.
So we believe the average selling price will go up and also that will help us to improve the profitability. So given that normal commercial PC products are stronger in the industry, particularly in the premium SIM pack area. So I think that will help us to improve the profitability. Regarding of the component inventory, I don't think that the issue part actually it's driven by the supply shortage. We have to buy ahead for some components.
So perhaps, Jack Van Gogh, you want to add something here?
No, yes. But there is another important that there is another element in my view also that is going to drive demand on PC in the next 3 to 6 months, which is Windows 11, because it's going to be available very soon. And this will also help to drive demand, first in consumer, second in commercial later. On the inventory, I think we did it on purpose to build up some inventory in terms of components because with the shortage today, if you are in a good position in terms of inventory, then you can speed up the manufacturing and ship as quick as possible. Because as the boy was said, we still see back order very, very high.
It's almost 1 quarter of back order. So, we really don't see any deterioration on demand. And to have even more inventory, it will be good. Because with the shortage and you need to play between different components, you need to see what is available, what is to make sure that in terms of square set, you are okay. And we really don't see any possibility of the deterioration or write off of the inventory.
Unfortunately, it's not enough. It should be more. But it should be more, it depends on the shortage. So inventory is really not an issue. I think that clean the pack order and shipping to the customer on time is the real issue we have today.
And we will not see any good solution for sure until the end of the year and probably even next year. As demand is so strong on consumer, it's still strong. Getting very strong on commercial, but it's already a couple of quarters, almost 3 quarters. And the impact of COVID-nineteen with the new the delta and what we have seen. First of all, in the Western world, it's very clear that with the vaccine, people they may get infected, but if they are vaccinated, they don't go to the hospital.
It becomes like a fluke, but it's not getting very serious. 2nd, I think most of the enterprise customer, all the larger enterprise customer, it's really not because people they start to invest again, not because people are coming back to the office, but because they want to they really want to speed up the digitalization of the company in order to be ready for any future surprise or future issue. So I think that's nothing to do, in my opinion, with people going back to the office or not when we look at commercial investment. I would say the only thing where you see a little bit of slowdown is education, mainly in units, Chromebook. We are not one of the largest player on Chromebook.
Chromebook is for us today something in the range of 5% of our revenue. We never been very focused on Chromebook also because talking about inventory, we prefer to use the parts and the components to build better machine in terms of average selling price rather than building a Chromebook will lead to our competitors to do it. But I think it's the only area also due to some seasonality because now it's variation. It's the only area where we see a little bit of a slowdown. Consumer and commercial, we really not see any slowdown.
Okay. Next question. Thank you.
Thank you. The last question comes from the line of Jerry Hsu from Credit Suisse. Please go ahead.
Thank you. Thanks for taking my question. So my first question is regarding the channel inventory situation. I know that Trafango and other executives have talked about the strong demand and also the backlog you have. But I think the market has some concern about the rising inventory level in some developed markets.
So can you give us a little bit comment on that? And then the second question is regarding the Asia listing. Is there any new update you can share with the investors? Thank you.
Okay. So, John Van Gogh will continue to answer the channel inventory.
I'm a little bit thank you for the question. I'm also a little bit surprised about the growth because we don't see any buildup of inventory in the channel, exactly the opposite. In most of the geo, the level of the channel inventory has never been so low. We are talking in some cases of less than 4 weeks, 3 to 4 weeks. And we know with the 3 to 4 weeks, usually you lose the sales because the profile of inventory never come.
I don't know where the information is coming from in terms of building up channel inventory. But for sure, it's not the case for us. As I said, the back order we have, we saw it's almost 1 quarter. And in most of the country, the people, the distributors, dealers and so on are still desperate to get the goods. So both commercial and consumer, as a for again, probably there is or we may see some education inventory building up Chromebook, mainly in 1 Geo, which is U.
S. This may be the case if we talk about overall inventory reset. I don't see issue on consumer. I don't see issue on commercial. We may see something on education.
But again, in our case, that we are probably number 3 in terms of maybe you're number 4 in terms of Chromebook supplier. So it's not going to be a major concern even with some slowdown on the sales.
Okay. Thank you. Thank you, Jean Francois. So regarding the Asia, so we mean you want to answer the question?
Yes, bye bye. I think in terms of the CDR application of CDR listing in Shanghai, we are definitely making progress, I think in accordance with the requirement laid out by, I think, the relevant regulators. I think we achieved certain milestones. I think give you a little bit sort of color, including, for example, I think management and director doing the education and taking exam, I think getting all the adviser, I think verifying our documents, I think we are making very, very good progress. And we obviously will follow the procedure as laid out by the regulators.
And if there is anything that I think that we want to go to public, we will obviously, I think, publish and announce and informing the market. But in short, I think we are making progress and achieve, I think, a number of milestones as laid out by the regulators.
Thank you.
Okay. So before we end the call, so can I invite Kirk and Punya to give 1 minute update on their business regarding our ISG and NPG? Chris, Xu?
Sure, YY. So I think we feel very confident in our continued growth or year on year growth, quarter on quarter revenue growth and improving profitability. We've now shared with you 6 quarters premium to market with our all time record revenue, but we also had records across our server business, storage business, cloud business, high performance computing business and communication service provider and service. So, in the areas of storage, we're seeing more than 50% year to year growth and 14 quarters of premium market growth, which has catapulted us to number 2 in the mainstream storage market of 25 ks and under storage. So, it's a good momentum story for us and we continue to grow we believe at a premium to market despite again certain supply shortages.
We don't think that will limit our continued record revenue growth and improving profitability.
Yes. So, thank you. Thank you, sir. So definitely, we think the ISG has a big opportunity to further grow. So that we are transformed from server only to the full stack of data center products, storage, software defined, software and services and also parts.
So we have successfully shifted from enterprise SMB only to cloud service provider. So we will be focusing on the hybrid cloud as well in the future. So the opportunity is huge. So we will ensure the investment to guarantee the growth in that business. Okay.
So, Punjak, one minute.
Yes. Hello, everyone. So similarly, we are seeing very strong demand coming from all geographies. We saw a record Q1 like for the best Q1 since 2015, 64% year over year growth. We see that sustaining across the future quarters.
Many, many
ones like record like LA since 2018, record North America Q1 ever, 5 consecutive quarters of premium to market. We are seeing the range growing significantly in all regions across the globe. And we also just deploy a very strong enterprise portfolio by launching Fintune. So not only by geo, but only we're growing in different segments. The final comment is that our 5 gs WIC has grown from 10% to 14%, and we believe you are probably double between now and the end of the year as part of the portfolio.
Thank you. Thank you, Bunyan. So we are definitely impressed by these two business, particularly on the profitability improvement. So I think our ISG is in the last mile to deliver profit. And our NPG delivered 5% operating margin last quarter.
So this has been very healthy business at the highest level. And also, we will reinvest this money in the mobile market to drive the growth. Okay. Thank you. Thank you, everyone, for participating in the call.
Yes. Thank you, YY. Thank you, my executives. And we thank you very much for joining today's call. If you have any questions, feel free to contact our IR department.
And the replay of this webcast will be available in the next couple of hours on our Investor Relations website. Thank you again for joining us. Bye bye now. This concludes today's conference call. Thank you for participating.
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