Good morning and good evening. Welcome to Lenovo's earnings webcast. Thanks to everyone for joining us. This is Jenny Rae, 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. John Franco Lentzey Group CFO, Mr. Wong Wai Min President of Data Center Group, Mr. Kurt Skowjian and President of Motorola, Mr.
Sergio Buniak. We will begin with a presentation shortly. And after that, we will open the call for questions. Without further ado, let me turn the call over to Yan Qing. Yan Qing, please.
Hello, everyone. Thank you for joining us. I'm pleased to talk about our record setting second quarter performance and our vision for further growth in today's faster changing world. Despite a challenging environment, last quarter, we delivered a record quarter performance in both revenue and profit. Revenue reached a new high of billion dollars growing over 7% year on year, as all of our core businesses delivered a year on year growth for the first time in six quarters.
Profit showed even stronger growth with the pretax income and the net income both up over 50% year on year. Pretax income reached $417,000,000, and the net income reached USD $310,000,000. In addition, the top three credit rating agencies created Lenovo's strong investment grade rating, further strengthening our ability to finance our growth. In our Intelligent Device Group, PC and Smart Devices delivered another historic quarter, revenue up 8%, while pretax income improved 18% year on year, both set a new record. Although market is shifting to consumer segments, we still maintained our industry leading and record profitability of 6.3% through excellent and high efficient operations.
And we returned to number one in DC with almost 24% market share. Our focus in high growth and the premium segments continued to drive strong growth. Despite the currency volatility in Latin America, our mobile business revenue grew 39% quarter to quarter and returned to year on year growth as we continued our strong recovery from the impact of COVID-nineteen. Besides the further solidifying presence in our strong hold markets like Latin America and North America, we have accelerated our development in Europe and Asia Pacific and saw clear results. In addition to our strong product portfolio, we launched the Razer five gs football smartphone and Lenovo Legion Gaming phone, and both have been well received by market.
In data center, we again saw double digit revenue growth with improved profitability year on year. Our cloud service provider segment continued to grow over 30% year on year with strong growth across all geographies, particularly thanks to years of investment in in house design and manufacturing. We discussed the major ODMs to become the motherboard and the system design partner to our top of class cloud service provider. We have also expanded the capacity of our factory in Monterrey, Mexico to serve data center customers across The Americas. In Enterprise and the SMB segment, our revenue stayed close to flat year on year, but we did outperform the market.
Our focus continues to drive double digit growth year on year across software defined infrastructure, storage, software and the service segments. Even more, we recently announced an exciting partnership with SAP. Our true scale infrastructure as a service, combined with SAP's HANA enterprise cloud, enables customers to keep their sensitive data on premises and secure while enjoying the flexibility of a Pay As You Go consumption model. We already see strong customer response to this offering. Our service led intelligent transformation continued to make a solid program with smart IoT, smart infrastructure and smart verticals revenue, each growing by strong double digit year on year.
In terms of service, our attached service, managed service and the solutions service also continued faster growth. Particularly, DAA, Device as a Service, tripled its total contract value year on year. Overall, software and services revenue grew to a new record of over US1.2 billion dollars up 39% year on year and now accounts for 8.5% of our total global revenue even as total revenue increases. Our e commerce revenue also grew by over 40% year on year. I have talked about the long term growth of the total technology market in the new normal for two quarters.
PCs and tablets are now one device per person. The cloud infrastructure demand are growing rapidly because of the work, learn and play from home economy. We believe the total PC market will grow by around 25,000,000 units and reach very close to 300,000,000 units in just the current calendar year. And both device and the cloud infrastructure market growth will continue for the long term. To meet the increasing demand of our valued customers, we are committed to further improving our supply going forward.
As the pandemic changes customer behavior, Lenovo continues to innovate and lead in this period of revenue change. Last week, we demonstrated our results and the vision in innovation at our annual flagship event, Lenovo Tech World. At the climate device level, we are expanding the idea of a computer to a computing everywhere with new form factors. In edge, we offer both hardware and our own AI enabled edge computing platform. In cloud, we can design, install and maintain public and private cloud as well as provide multi cloud management solution.
And we are expanding our infrastructure as a service to attach platform as a service and software as a service. In network, we now can find more than 1,005 gs essential patent applications and implement five gs networks and applications with network cloud convergence, virtualization and network slicing technology. Finally, with all these technologies combined with the intelligence like machine learning and artificial intelligence, we generate the insight and provide the solution to customers of various industries and drive intelligent transformation. I believe that technology has never been so essential to humanity as it is today. Customers have new requirements to meeting this new normal, and our success in meeting these needs is demonstrated not only by our strong results this quarter, but also by how our service led transformation propels our growth well into the future.
Thank you. Now let me turn it over to our CFO, Wei Min.
Wei Min, please.
Thank you, Yunqin. I will now take you through Lenovo's financial and operational performance in the second quarter fiscal year twenty twenty one. Next chart, please. The group continued its record performance in the second fiscal quarter. We set a number of performance records while still navigating the ongoing pandemic.
Our revenue increased 7% year on year to reach an all time high of billion, and all three business groups recorded positive year to year revenue growth. Resilient and strong growth was achieved as a result of structural changes in demand of computing device, which include e learning, work from home, play at home and cloud. This also resulted in our gain in market share during the quarter. The group's gross margin improved 0.2 points quarter on quarter, thanks to high growth and premium segments. The software and services and e commerce grew their revenue strongly by 3942%, respectively, year on year.
Their high margin rates continue to support our strong profit trajectory. The segment profitability has improved, including margin rate expansion in consumer, Chromebook, e commerce and gaming segments. However, a higher COVID-nineteen less logistic costs caused a moderate year on year decline on gross margin. Our e2i ratio was reduced by 1.2 percentage points to 11.6% in the quarter, a result of our disciplined expense control and operational efficiency. Next chart, please.
Our business group total pretax profit grew 15% year on year to reach a new record of $634,000,000. During the quarter, we recognized a fair value gain of CNY 104,000,000 on strategic investments netted by a 33,000,000 provision for intellectual property in our unallocated headquarter and corporate expenses. Our profit performance has reached a new milestone. Profit attributable to equity holders increased by 53% to all time high of million, a consistent improvement across all three of our business groups. The basic earnings per share came in at US2.59 dollars up 53% from the previous year.
The Board of Directors declared today an interim dividend of HKD6.6, representing an approximately 5% increase on the interim dividend paid in the last fiscal year. Next chart, please. We lowered our net debt by million, thanks to the strong cash flow generated from our operations and our finance cost reduced further by RMB 45,000,000 or 33% year on year. In October, we received strong inaugural investment grade ratings from three leading credit rating agencies and successfully completed the first 144A issuance of 1,000,000,000 ten year senior notes. We will use the proceeds to retire a portion of the perpetual securities and secured notes in an effort to improve the efficiency of group's liability management while further reducing our financing costs and extending our test tenure.
Inventory days improved sequentially by two days, thanks to strong demand. This year on year increase of eleven days was due to our strategic buy ahead actions to secure critical path. Next slide, please. PC FC revenue grew by 7.6% year on year to CNY11.5 billion in the quarter. Pretax margin expanded by 0.6 percentage points to a record of 6.3%.
Pretax profit increased by 18% year on year to million. These record breaking achievements in the second fiscal quarter are encouraging as peak of seasonality normally occurs in our third quarter. I would like to take this opportunity to discuss our pretax margin for PC and SC. The process of managing margins is dynamic. We have enjoyed strong scaling benefits, and we have the most competitive profile in each of the segments we are servicing.
Even the consumer and Chromebook sales, which traditionally carry lower margins, will focus on higher margin projects to optimize and improve their segment profitability. For high margin products such as software, services, e commerce and high growth segments, including Thin and Light and Gaming, we have doubled down on our investment to boost the contribution of these segments and hence gain market share. We are confident in maintaining the PPI margin above 6% on a sustainable basis. Next chart, please. Thanks to rebounding market demand, the team's continued efforts in expanding portfolio and carrier ranging, FDG average selling prices improved, and the business group delivered strong revenue recovery, resulting in a 39% sequential growth, returning to a revenue scale of $500,000,000 up 1% year on year.
The sales recovery helped to narrow MBG losses before taxation by $28,000,000 quarter on quarter to $22,000,000 and the business was now cash flow positive. The business was impacted by higher freight costs, which showed a decline in profitability by $30,000,000 year on year. We expect the business will continue to grow and resume its profit growth going forward. The business will continue to execute its portfolio expansion to increase global market share. Its five gs for all market strategy is starting to bear fruit.
With our flagship Razer five gs film launches, our five gs products now span across all price segments, which helps to drive ASP expansion. The revenue contribution from five gs models more than doubled quarter on quarter. The business will continue to execute its strategy while preparing for more aggressive carrier penetration. Next chart, please. Our DCG continued to capitalize on cloud demand and achieved premium to market growth during the second quarter.
With strong momentum and continued client diversification, cloud service provider, or CSP, revenue growth accelerated to 34% year on year. The prospect for CSV has been promising, thanks to its richer mix of solutions and design wins supported by our in house design and manufacturing. Enterprise and SMB, or ESMB, segment continued to outperform the market. Our revenue posted a small year on year decline of 1.7%, a solid performance compared to the sluggish sector. We achieved this superior performance based on the double digit growth in software defined infrastructure, storage and software and services.
ECG business continued to improve its operational results by $11,000,000 quarter on quarter and $4,000,000 year on year to a pretax loss of $47,000,000 The group efforts in product diversification and development of alternative platforms, the availability of high end system as well as storage solutions has started to pay off. With our continued works in more margin wins for profitable projects and advanced configurations, ECG is on track to drive long term growth and profitability over time. Next slide, please. The invoice revenue of software and services surpassed CNY 1,200,000,000.0 in the second quarter with a 39% year on year growth, whereas deferred revenue grew 26% to nearly CNY 2,000,000,000. Since our break of the pandemic, there is a surge of interest in our service capability as clearly reflected in the strong new contract pipeline we have built across attached services, managed services and complex solutions.
Overall, DaaS and Infrastructure as a Service are gaining significant momentum. The recent DCG partnership with SAP was an important landmark deal highlighting the potential for Infrastructure as a Service. Next chart, please. Looking forward, the dynamic shift in PC demand will continue to create tailwinds for e learning, work from home, play from home, cloud infrastructure and five gs. We are optimistic that these long term structural trends could enlarge the addressable market for PCSD and cloud infrastructure as well as accelerate the development of five gs services.
Our PCSD business will continue to drive premium to market revenue growth through investment in the high growth and premium segments. We are confident to increase supply to meet the strong demand. We'll continue to build capabilities to drive sales growth in the Software and Services business and expand e commerce based on this well established infrastructure. For the MBG business, the group will invest in product innovation, including offering new and differentiated five gs smartphones. MBG will seek to strengthen its competitiveness in target markets to grow as a premium to the market and improve long term profitability.
For the DCG business, the group aims to deliver premium to market growth and improve profitability. For its cloud service provider business, the group's new design wins will expand its wallet share with existing accounts by leveraging its unique strength in the global supply chain and worldwide reach while expanding its portfolio with new product solutions and platforms. Lastly, in the enterprise and SMB segment, the group will grow its high margin service attach rate, upsell premium services and expand its hybrid cloud solutions to drive profit improvements. Thank you. And now we can take your questions.
Thank you, Y Lin. Now we are open the line for questions and this question will be English only. Please be reminded to limit yourself to two questions at a time. Please also state your name and company before asking questions. Operator, I'll now turn it over to you.
Please give us your instructions.
Thank you very much. Ladies and gentlemen, if you would like to ask a question on the phone, please press star one and wait for a name to be announced. If you would like to cancel your request, please press the pound or hash key. Once again, to ask question, please press star 1. There will be a short silence while questions are being collected.
Thank you for your patience. We have the first question from the line of Howard Koh from Morgan Stanley. Please go ahead.
Hi. Congratulations on the quarter and thank you for taking my questions. So my first question is on PC. So YY, you mentioned in your prepared remarks that this year, you guys are expecting PC demand to be close to 300,000,000 units. But I think most investors are curious about your outlook for calendar year 2021.
If possible, could you comment about one is on the total market, whether you guys see the growth rate to continue in calendar year 2021? And also by subsegments, if you guys can comment about the outlook for PCs, for example, gaming, educational enterprise as well as traditional consumer? Thank you. And I have a follow-up.
Thank you, Paul. So I would suggest the John Wangji to answer this
question. John Franco?
Can
you hear me? Yes. Yes. No. Yes, YY.
Let's say, as we said, we see 2020 is probably going to be, as YY said, the $25,000,000 additional unit in terms of total available market, right? And it came from more or less minus $5,000,000 Q1 and then plus 10,000,000 for the following three quarters. And the balance will be probably between $295,000,000 and $300,000,000 If I look at 2021, in my way in our opinion, we see additional 15,000,000 to €20,000,000 TAM growth coming from, for sure, a big growth in Q1 because last year this year, Q1 was the starting of the pandemic in most of the world, right? And then I think it's going to sustain for Q2, Q3 until Q4. Assuming something in the range of €300,000,000 this year, I think 6% to 7% growth in 2021.
Coming from we will continue to see a very strong demand on education and not only, let's say, not only US, not only Japan, but in most of the countries. Gaming, I think, will continue to grow because it's consumer. Again, I think we will continue to see similar growth that we have seen in 2020, 2021 on this segment. The only, I think, the only segment that is probably going to show a very moderate growth is enterprise. At least I'm not particularly optimistic in beginning of the year, q one, q two, and then probably we will see enterprises starting to invest again in q three, q four next year.
So overall, probably a very small growth or maybe more or less no growth. But education, gaming and consumer, I think we will continue to see something similar to this year. And this is why in our opinion, the €50,000,000 €20,000,000 additional units in terms of TAM is what we predict on 2020 for 2021.
Thank you. Okay. Thank you. So my follow-up is on your remarks regarding the strong growth that you guys expect in the educational space. So there are a lot of PC brands, not only Lenovo, but basically everyone is expanding their Chromebook product portfolio.
Just in regards to competition, how do you guys see competition for Chromebooks going into 2021, whether that will drive some kind of ASP erosion on a year on year basis?
No. Frankly speaking, no. No. Yes. But frankly speaking, when when you look at that okay.
The number of player on Chromebook is more or less always the same. The the the I really don't see lot of new player cam. There are four to five players in the Chromebook space, and I don't see any additional player cam, not only. But if I look at the evolution of Chromebook during the last three quarters, it's the a ASP is going up, mainly for two reasons. Because there is a factor that is related to innovation, but there is also a very good growth, talking about Chromebook on consumer.
And, the average selling price of consumer is very different. But even on, on, innovation, we have seen 10 to $20 improvement in terms of, average selling price. On top, we will see probably mid of next year or later later next year five g Chrome Chromebook coming, and so with the good five g connectivity or four g connectivity because people, they need to be connected, always connected. So I'm not I'm not afraid of any deterioration of of the average selling price on Chromebook.
Let me know if I
Yeah. So so, so although so we our group book increase is significant last quarter, but we still shipped much less than our competition, so key competitors. So the so if you can see our if you see our AUR, so actually, it's much better than than our competitors. So we are less impacted by the phone book and low end product. So that's that's thing I I hope
you can you can mention.
You can you can you can pay attention to. So, actually, we are more focusing on the so we know the market is shifting from enterprise to consumer. But the normal, we are more focusing on the the high end product in the in the consumer, like a thin and light, like a gaming PC. So with a much higher AUR and definitely margin. That's the the first point I want to mention.
And the second part is when market is shifting to the consumer, so Lenovo, we are more focusing on improving our expense to revenue. So we know to sell consumer product is different from to sell enterprise product. So if you don't have the efficient expense to revenue, so you will not have the good margin in the consumer. But if you can see our e to r ratio, we improved significantly last quarter. So that even in the low end product combo tablet, we still can deliver very decent profit.
So probably you cannot imagine. So our tablet profit, let's say, pretax income ratio is even higher than our PCB PC segment, our entire PC segment. So that's just $100, $200 product. So we still can make very, very decent margin. The third point is in the past, we sell only hardware, but now we are we we more emphasize the service.
We we we we sell more hardware with attached service. You know the service, definitely. So the margin and the profit is much higher than in the Huddl in Huddl. So with these three focus or shift, so we are driving the the the the better margin and the and the PDF. So yeah.
So particular PDF. So if you look at the last last quarter, right, so we our PDR in the PCSD was the historical high, so 6.3%. So we believe so Japan, at least the first, we can maintain this PDR ratio. Right? Yes.
Got it. Very clear. Thank you.
Thank you for the questions. Our next question comes from the line of Jerry Su of Credit Suisse. Please go ahead.
Hi. Thank you for taking my question. I want to follow-up on the comments about the gross margin. I think in the prepared remarks, you have mentioned that the past quarter's gross margin was impacted by higher mix coming from consumer and Chromebook. Could you give some color about what is the mix coming from these two segments in the last quarter?
And how do view that how the mix is going to change into the third quarter of this year? And how will that impact your overall gross margin?
You
mean impact the positive or negative?
Well, I think on a group level, I think whether it's going to be positive or negative.
But I think we have been very, very clear that we don't see any deterioration of the margin coming from the different mix for, for two reasons. One, as YY already said, when you look at Chromebook, our mix of Chromebook compared to the rest of the market is relatively small. I can give you a very simple example. We because it's part you you can find it from market researches. I'm not disclosing anything.
I think we we shipped 1,700,000 last quarter, Chromebook. One of our larger comp largest our largest competitor, they ship 3.7 or something like that. So you can you can and we ship more than 19,000,000. So the weight of Chromebook, 1,700,000 out of 90,000,000, it's less than 10%. Right?
And we've been able to improve to improve ASP because we look at deal by deal by deal, and we pay attention on what is the the the marginality of the different deal. So the mix coming from the impact that's coming from Chromebook, it's almost irrelevant. And probably compared to the past, we have seen a good improvement on both margin and AUR on Chromebook. Consumer, same story. Now we are running consumer at profitability that is very close to the average profitability of PCSD, very close to the 6.3%.
Why? Because again, our mix of consumer, we are not focused on low end at all, It's mainly coming from gaming, teen and light or what we call, let's say, prosumer. The the big part of consumer because it's mainly coming from consumer in terms of addressing this new segment, is the segment of people working from home. So in terms of margin, I think we have been able to and I think when I look at this year's demand in margin compared to last quarter, compared to last year, there is no deterioration at all. And when I look at this quarter, so Q4 calendar year or Q3 financial year, the trend is exactly the same as Q2 last quarter.
The only small impact, but we've been able to absorb the impact coming from a better margin on the product is logistics. Logistics continue to be more expensive than before. Magiste is already from, let's say, Q1, after the the February, March. And we need the and we we we need we need to move things sometimes by by air due to the supply shortage. So logistics is still more expensive than one year before.
But when you look, we have been able to compensate with better margin on the product because you don't see deterioration of the margin coming from logistics.
Thank you.
Okay. And then a follow-up question is, I think you also mentioned about the DCG expanding factory in Mexico. Can you provide a little bit color about what's the capacity capacity in this area as a percentage of the overall the group's capacity and also what kind of service you know, that is expected, you know, to be in in that facility.
Sir, Kurt? Yeah. Hi. Can you hear me okay?
Yes. Great. Yeah. So thank you for the question. You know, I think we're excited about the growing customer design wins we have in North America as well as in the cloud service provider space.
And, while some of our competitors, had significant issues flying through the through this COVID pandemic into North America, We just had our tech world, and you heard customers like DreamWorks, who we just signed a five year relationship with, say that, they were able to, deploy a supercomputer flawlessly through the pandemic. And so the Monterrey, Mexico facility expansion is gonna be a dedicated expansion of our factory. We're moving into a second building. It's up and operational. We've started shipping our first racks into some of the tier one cloud service providers.
So I think this is a a good sign, I think, for the market that we're confident in the growth both in North America for enterprise SMB as well as in as in the cloud service providers. And they've asked us to increase the capacity based on future orders that we've had. Over time, we will not just do the system development, but also do motherboard development, in multiple geographies. So, again again, I think, with North America being the largest data center market, it's also our strongest growing market right now. So so we're excited that that plan is now fully, up and operational.
So it's a significant capacity expansion.
Thank you for the questions. Next question comes from the line of Sebastian Hou
from CNL Securities. Please go ahead.
Hey, thanks for taking my questions. So I think the first questions I have is on the desk. Total contract value grew triple digits, which is a pretty impressive result. So I'm curious about what's your current expectation for the in force revenue still tracking about USD 1,000,000,000 for this fiscal year? And also, if we look from the group company perspective, what's the adoption rate of such subscription business model now for both the PC and PCSD and the PCG business?
And what's the reasonable target, say, in three years from now?
John Pendle, would you like to answer the question?
Yeah. Yes. We're right. No. That that's I think, what is the reason, I would say, a couple of one is for sure.
We we are probably one of the few company today able to offer a worldwide coverage in terms of in terms of task. So for large enterprise, I would say, Fortune 500, but not only not only Fortune 500, with the operation all around the world, there are very few people, today, able to offer a faster solution that is able to cover in the entire covering the entire world. And, of course, and then the the the the other the other big reason is that if people, they start to realize, like in other businesses, if you take car or other things, it's it's very similar. That the opportunity to to change after two to three years your installed base, just paying a monthly fee and without any asset cost, it's a it's a very good solution because you you you have a new installed base every three years, so you have the service covering for the three years, whatever you need. And the last thing is that we we started to address the task also for the small medium business, partially to the channel mainly to the channel.
But for today, we have a solution on DAS that is going from very large enterprise down to, let's say, medium business. In terms of perspective, in my opinion, we have seen that it's growing forty, fifty, 60%, the entire the the the the entire service revenue. Right? Our revenue service revenue is growing more or less in the range of 40%. Not very consistent during the last, probably, to five or six quarters.
More than one year, almost two years. And we reached 1,200,000,000.0 as a company this quarter. And I think that very soon, it will represent 10% of the our total revenue. And in my opinion, between three to five years can represent probably 20% of the total revenue.
You. Thank you, Fernando. So, would you like to add something on our true scale, particularly the deal with SAP?
Sure, YY. So we're extremely excited as we announced just recently at Tech World with the CEO of SAP that their new HANA Enterprise Cloud customer edition will be available now using Lenovo CrewScale. So CrewScale is our as a service brand that does on demand pay as you consume metering and enables you to get cloud like economics, but be able to, have that hardware located on your premise either for security or for your own your own data requirements. So this was a significant commitment by SAP to both truScale and as a service where they'll be enabling that to their customers to support the new on premise enterprise cloud. Previously, we had won many of the tier one cloud providers as SAP moved to the public cloud.
So we're seeing TruScale as a great example there, and SAP is just another example of the momentum we have there. Thank you. Yeah.
So we I think the staff and the on prem data center infrastructure as a service. So we'll be the number of the focus there for for a long time. So that will will help us to drive this service led transformation. So because SaaS or data center is a service part, so will not help us to to to shift the customer from the transactional customers to subscription customers. But also, that it give us an opportunity to attach more services and the parts and stuff.
So So that's why I think for this kind of business, is a very bright pitch. So that can help us to drive not just the growth, but also profitability improvement.
Thank you. I have a follow-up. Is that with the Fusco offering on the enterprise IT solutions and also more in house model board design to win more CSP business, also lower cost, these all seems to pretty margin accretive strategies. So how do you quantify the profitability enhancement target? Let's say, within what time frame can the DCG business at the pretax level achieve breakeven?
Thank you.
So Yeah.
Yeah. So I think that right now, we feel very, positive that we're especially when you look at Intel's results and if we talk to some of our other suppliers that we're growing at a significant premium to market and and likely a double digit or higher premium to market. And I think the confidence we have in our our top line growth is driven by a few things. Number one is we're very well balanced now between our geographies. If you look at China versus rest of Asia versus Europe, and the Americans, you know, we have a pretty decent split of almost a quarter of our business in each.
Secondly, we're expanding pretty rapidly into the storage market after we had our announcement in our joint venture with NetApp. So significant premium relative to what I think you're hearing from the analysts reporting the overall storage market, and we're growing, you know, at the numbers that we've been talking about of 15% in storage and 22% in hyperconverged. So so that's feeling quite good. But we're really trying to balance, you know, this double digit growth and the premium to market versus just continuing to improve our pretax each and every quarter. So that's really our what we're trying to drive is is the the commitment to the market and how do we grow double digit premium to market, and how do we continue to improve pretax each and every quarter.
So the reason we're exposing you to the four s's SDI, software storage, and services is that's where we're really getting decent attach on profit. And and as you said, as we now win some of these motherboard designs for, you know, designs all the way out there now that are gonna be in 2022 with, you know, and beyond with next generation Intel and AMD silicon, that's also helping us improve our margin because we're we're we started out as a system integrator putting together other people's systems in the racks. Then we did what they call copy exact motherboards where we would take the motherboard from someone else and manufacture it. And now we're actually becoming a design partner where other people will be paying us a royalty on the boards to become a second or third source to the tier ones. So this is something that, you know, hopefully, you've been tracking over the last several years.
It's been a consistent, improvement, both where we're gaining share, we're gaining the number of customers, and we're gaining their confidence to do more and more of their products. And lastly, I think in cloud service provider, you know, we've said this consistently, over the last several quarters, but we're we're doing Intel now and AMD. We're doing server now and adding storage. We're not just doing motherboards and systems, but now we're doing motherboard design, and systems. And then our services attached across the board is increasing double digits, from a penetration rate for all our premium services as well.
So I'm confident we can continue improving PTI relative to exactly when. I think we're just going to continue to drive double digit premium to market and improve PTI, know, ideally every quarter as we go forward.
So to add something here, so for our PCG business, we are focusing not just in short term, but also the long term. So in short term, I think the most important thing for us is building the foundation, building the competitiveness. Definitely. So we understand the market is shifting from enterprise SMB to the to the car. So if we cannot access the the CSP, we cannot make money from the c CSP segment.
So we we we will not be competitive in that market. So that's why we are building the in house design and manual factory capability from motherboard all the way to the the system integration. So I I believe we are in the better position than our traditional competitors. So like HP and Z, they just focus on the enterprise and the the and SMB. I I said a couple of clients.
So this mix is similar to the consumer PC and the commercial PC mix. Consumer PC has less margin, but if you don't play in that segment, you will not have the scale. If you don't have scale, you you will not have the the the cost of competitiveness or efficiency. So consumers give you the the the scale, commercial give you the profitability. So signal in the in in the data center business.
If you don't have the CFP, so you will not have the scale now. If you but definitely, we can make a better margin from the from the enterprise with stronger in house design and the and the manufacturing capability. So that's why I I think we are in the better position than than our traditional competitors. Second and secondly, so the service, particular on prem, they're the service. So you could say it's on prem, a private car or on demand private car.
So if you if you believe the the public cloud would have the the the bright future, you should think this offset on demand private cloud should have the a bright future as well. It should make better margin in the future as well. Because most most enterprise customers, they will not shift all their infrastructure to the public to the public cloud because of the data security and application security issue. So the hybrid cloud will be the the the the tech as you go. And also, we believe, for more customers that we use this model, we can make more money from this kind of business.
You. Okay. Thank you. You the Operator,
we are now ready to take the last question due to configuration of time.
So Tommy, our last question comes from the line of Nam Hyun Kim of RAT Research. This
is Nam from RAT Research. I have a one question for server. I have one question for mobile. This year, a local players in China, such as Inspur and others, seems taking enterprise server share from U. S.
OEM such as SD and Dell. But Lenovo is a Chinese company with a global footprint. I think you have a good opportunity in China market. So can you update your China business situation and plan? And also, when do you expect the global enterprise server demand to recover?
And then second question for smartphone. Now I feel like Lenovo tried to refocus on scale, you know, not only profitability in mobile business. You know, in the past, you focused more on profitability than market share, like focusing on more mid range and low end, you know, segment and targeted market. And are you changing your strategy to move a more premium segment and additional region like your Europe? So so any update on your mobile business and strategy would be great.
Thank you.
So probably, Bunya, you can answer the second question first. Kirk, you can prepare for the first one. Yeah. So, I mean, to
be very clear, our main focus is fuel profitability. And so now that said, we are seeing we are we are entering in the premium space. We launched the Razer, and now with five gs also coming, we are seeing an improvement in our AURs. We grew 5% year over year, 10% quarter over quarter. We expect this fiscal year, the UR keep growing.
We are also expanding a range of our products across many carriers. What is driving, growth in more in additional markets like Europe, Asia, and and even India. I think as we get, more competitive, we are proving to be able to play globally. What is also gonna help what we we call our main core markets like Latin America, Latin America. So main focus was stability.
We are improving our mix, not only in
this company, around 10%,
15%. That means we are a little more into the premium side of the market without the VAT from our strategy. And we have seen growth from other regions, including Europe, but not also to include like Asia and other markets, giving a better execution, improved ranging and growth of five Our five gs double quarter over quarter on our leads and expect over the next six months to double again from where we are today.
So our mobile business strategy is very, very clear. So as a first step, we need to turn around the
business to
make it a healthy business. So we achieved that actually a couple of quarters ago. But unfortunately, because of the pandemic, so our business was impacted significantly. So lost a little bit of money. But fortunately, last quarter, we significantly reduced the loss.
And we are very optimistic in the current quarter. So will try to do back to normal. But after we achieve the first step, so for the second step, we will drive the profitable growth So while we will continue to maintain our position in Latin America and North America, we will pursue the growth opportunity in Europe and the Asia Pacific Asia Pacific markets. So that's about our mobile business plan. And also, so we will drive product portfolio from near end to the to the high end.
So with the the and the gaming phone launch, so we are more confident on that. So Kurt, please.
Yes. I think, well, first of all, if you look at the overall TAM over the next several years, we think it'll be roughly 6% or greater TAM as we go into the next fiscal year out through the middle of the 2020s. So I think that the demand that we all know for data is out there and the movement to the edge and where data build competed will drive a nice 6% or higher, data center TAM growth. In China, specifically, we saw high single digit growth. And so I think we're we're definitely growing.
We're taking smart share.
I think some some of the
deals in the tier ones are just really negative profit, and we're not necessarily engaging in those today. We're taking smart share. We can improve profitability while growing with the market and then or at at greater than market. And then in storage, with our NetApp JV, we're growing at a significant premium to market as well. So I guess it's the balance of both server and storage growth, if you look at China and and the balance of SmartShare growth, but growth with profitability, not just for for growth, for the top line revenue sake.
Okay. Thank you.
Thank you. Thank you. Thank you, Chris. We thank you very much for joining today's call, and that is our last question. But meanwhile, if you have any further questions, please feel free to contact us directly.
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