Good morning and good evening. Welcome to Lenovo's earnings webcast. Thanks to everyone for joining us. This is Jenny Lai, Vice President of Investor Relations. Before we start, let me introduce our management team joining the call today.
We have Lenovo's Chairman and CEO, Mr. Yang Yuanqing Corporate President and COO, Mr. Gianfranco Lenci Group CFO, Mr. Wang Ymin President of Data Center Group, Mr. Chris Gaojun 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 Yanqing. Yanqing, please.
Hello, everyone. Thank you for joining us today. Despite the COVID-nineteen pandemic and geopolitical uncertainty, Lenovo delivered outstanding results in the first quarter of our fiscal year twenty twenty-twenty twenty one. In this challenging environment, our group revenue and profit both delivered strong growth. Revenue reached US13.3 billion dollars growing almost 7% year on year and achieved double digit growth without currency exchange impact.
Profit showed an even stronger growth as pretax income was up 38% year on year, reaching million dollars and net income grew 31% year on year, reaching US213 million dollars In our Intelligent Device group, PC and Smart Devices delivered another fantastic quarter. Revenue grew by double digits year on year to US10.6 billion dollars Pre tax income reached US670 million dollars also up almost 28% year on year. We improved the industry leading profitability by almost one point to a new record of 6.3%. As I predicted last quarter, the PC market grew by double digits due to increased demand driven by work from home and e learning, much more than the previous industry forecast of a market decline. Although supply shortage in Chromebook temporarily impacted our volume, we remained the leading company in PC and tablets.
Particularly in the Consumer PC segment, our revenue saw strong growth of over 45% year on year. Volume also grew almost 32% year on year. Likewise, quickly adapting to consumers' new purchasing habits in lockdown, our worldwide e commerce revenue also delivered a strong growth of over 50% year on year. Driven by these successes, our PC and Smart Devices revenue in EMEA and China grew 3018%, respectively. Our focus on High Growth and the Premier segments continues to drive results.
We maintained a strong double digit volume growth in Chromebook, Visual, Fan Lite and Gaming. Looking forward, we expect this strong PC, tablet and display demand will be a long term trend. We will develop the more innovative products to adapt to the new requirements of work from home and e learning and further strengthen our global supply chain to meet the fast growing demand. Meanwhile, we will continue to develop our e commerce platform and focus on high growth segments to drive premier to market growth with leading profitability. Although mobile business is still hit hard by COVID-nineteen and the foreign exchange rates, our revenue declined 27% year on year.
The momentum has greatly improved. The quarter to quarter revenue increased 33%. Volume outgrew the market year on year in key markets like Latin America, North America and Europe. Particularly, we achieved a historical high market share in Latin America and North America. Looking forward, in Mobile, we will continue to leverage our strong product portfolio, innovative technology, particularly in five gs and expand the carrier range to resume profitable growth.
Our data center business revenue resumed hyper growth of almost 20%, and profitability also improved year on year. Our cloud service provider segment, what we have called hyperscale in the past, grew more than 30% year on year, setting a new revenue record by capturing growing digital consumption due to the lockdown. Our customer base is also growing, thanks to our enhanced in house design and manufacturing capabilities. Our Enterprise and SMB segment, formerly called Now Hyperscale, delivered year on year revenue growth of more than 9%, led by double digit revenue growth in high growth segments such as software defined infrastructure, service as well as high performance computing. Looking forward, we will drive long term growth in our Cloud Service Provider segment as we added new customers and expanded share with existing customers by leveraging our unique strength in supply chain and global footprint.
For enterprise and SMB, we will grow high margin storage, service and software attach rates. We will also leverage our existing strength in public and private cloud to expand our edge computing business. While we further drive a premium to market growth of this business, we will continue to focus on expense and cost management to improve profitability. And our service led intelligent transformation continued to show strong progress, thanks to our determined execution of 3S strategy. Our Smart IoT revenue grew 39% year on year, Smart Infrastructure was up 16%, And Smart Vertical delivered a strong growth of 65% year on year, driven by Smart City Solutions in China and the Smart Healthcare Solution in North America.
In terms of services, our attached service, managed service, including faster growing device as a service and solutions, all realized a strong year on
year growth of 30% or more, driving our overall Software and Services revenue to over US1 billion dollars growing 38% year on year, now
accounting for around 7.6% of our total group revenue. Our solid performance last quarter proves that Lenovo has quickly regained momentum from the impact of pandemic and captured the digitalization opportunities, accelerated by the new normal of remote working, e learning and more. In one aspect, this is thanks to our core competencies of operational excellence and the global sourcing local delivery approach. In another aspect, this is the result of our persistent execution of transformation strategy, guided by precise understanding of the technology and industry trend. Through driving the service led intelligent transformation, we will build a service and a solution into our next core competence and extend our growth well into the future.
Thank you. Now let me turn it over to our CFO, Wei Ming. Wei Ming, please.
Thank you, Yanqing. I will now take you through Lenovo's financial and operational performance in Q1 fiscal year twenty twenty one. Next chart, please. For fiscal quarter one, the group set a number of new performance records. Our profit attributable to equity holders increased by 31.2% to RMB213 million.
Our group generated $13,300,000,000 revenue, up 7% year on year and 10% in constant currency. As we navigated the ongoing pandemic, our PCSD and DCG were able to capture the benefits from demand tailwinds. Both PCSD and DCG reported double digit revenue growth. DCG's cloud service provider, or hyperscale business, delivered its highest revenue in history. PCSC also reported a record breaking pretax profit margin of 6.3%.
On top of its bread and butter device business, its high margin software and services business grew by more than 4x of the group's average and emerged to be a key driver of our higher PDI margin. The group pretax profit grew by 38% year on year to million due partly to disciplined expense control. Our E to R ratio was reduced by 1.6 points to 12% in the quarter. Our basic earnings per share came in at US0.1 dollars up 31% versus the prior year. Next chart, please.
In Q1, our cash flow generated from operations improved by US459 million dollars year on year to US370 million Our net debt level was reduced by million year on year. The group successfully issued a five year note worth US1 dollars in May 2020 to refinance our RMB4 billion debt and repay short term borrowings. Inventory days increased by eleven days year on year due to our strategic buy ahead actions to secure critical parts, including CPUs. However, the strong order momentum has started to drive the days of inventory lower by eight days quarter on quarter. We are comfortable with our inventory level in preparation for continued strength in our order pipeline.
Our account receivable was further reduced by $1,400,000,000 year on year to $7,000,000,000 The receivable improved by six days year on year, thanks to a better efficiency in our factoring program. Next chart, please. Our Intelligent Device business group consisting of PCSD and NBG delivered yet another strong quarter with pretax profit increasing 17% year on year to reach million, with revenue up a healthy 5% to US11.7 billion dollars driven by the strength in PCSD. Next chart, please. In Q1, PCSD revenue grew by 10% year on year to US10.6 dollars Pretax margin expanded by 0.9 percentage points to an all time high of 6.3%, while pretax profit increased by 28% year on year to US670 million dollars We saw better than expected demand and strong profitability throughout the quarter.
We attribute such increase to the group's strong execution and multiple structural growth trends. For example, work from home demand has been a clear catalyst for thin and light notebook PC sales, while consumers are buying more gaming PCs to meet their play from home requirements. E learning has emerged as a consistent driver for education sales across all regions. The e commerce evolution is accelerating, pushing a growing number of transactions through Lenovo's online franchise. The group was able to capture these growth opportunities to achieve record high market share in the consumer PC segment for the quarter.
Our team continued to execute its long term focus on optimizing segment profitability and expanding sales in premium products. Since the outbreak of the pandemic, the group has seen a surge in market interest in its service capability and continue to build a strong pipeline for new contracts for DAS, which is a soft form for Device as a Surface, particularly from global leaders in industry, including Financial Services, Food Delivery, Airline and Technology. The software and services business under the PCSD Group has grown its revenue 4x faster than the PCSD average and carries the highest margin among all products. Next chart, please. Thanks to new product launches and broader ranging with carriers, the MBG business groups delivered strong share gains and premium to market growth in both North America and Europe.
In Latin America, in spite of MBG's share gain of 1.8 points, this was not sufficient to completely mitigate the sharp decline of the region's smartphone market. As a consequence, MBG's revenue experienced a year on year drop of 27% to PHP1.1 billion. The losses before taxation dropped PHP55 million year on year to PHP50 million. However, the company took swift actions to control expenses, which helped to narrow its losses before taxation by $10,000,000 quarter on quarter. The business has identified a strategy in place to further improve profitability, including an active five gs model launch schedule through the development of a five gs for raw market strategy.
Following our recently launched Motorola Edge Plus, the fastest five gs phone in the market, we will continue our innovations and product launches, including the Moto G five gs Plus model for the Motorola G franchise, which will soon be available in the markets targeting the mainstream segment. Next chart, please. In Q1, the DCG business was able to ride on strong cloud demand and grew its revenue by 19% year on year to RMB1.6 billion. Our DCG successfully capitalized on the surge of cloud demand and continued its segment expansion to set a new sales record in our cloud service providers business, which provide hyperscale products to public cloud service providers. Not only are we building on our continued investment to grow in house design and manufacturing capability, but we are also expanding DCG designs to include new platforms and higher end solutions.
We are excited about the growth outlook for this business segment. The enterprise and SMB segment under DCG also experienced robust growth across multiple product categories, including software and services, hybrid cloud and high performance computing. Revenue of the Enterprise and SMB segment increased by 9% year on year. Losses from DCG business extended by CAD7 million year on year, but narrowed by $17,000,000 quarter on quarter to $58,000,000 The annual comparison was negatively impacted by the lingering impact of COVID-nineteen and investment to further improve the group's long term growth prospects in regional markets, including China. Next chart, please.
Looking forward, the dynamic shift in consumer behavior has created demand tailwind 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. The group will continue to exercise prudent control on expenses to optimize its liquidity and financial health. Our PCSD business will continue to drive its premium to market revenue growth through investment in the high growth and premium segments. We'll continue to build capabilities to drive sales growth in the software and service business and expand e commerce based on its well established infrastructure.
For MBG business, the group will invest in product innovation, including offering new and differentiated five gs smartphones. It will seek to strengthen its competitiveness in target markets to grow at a premium to the market and improve long term profitability. In DCG business, the group aims to deliver premium to market growth and improve profitability. For its cloud service provider business, the group will attract new customer and expand its wallet share with existing accounts by leveraging its unique strengths 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 service and expand its hybrid cloud solutions.
Thank you. And now we can take your questions.
Now we will open the line for questions, and this session will be in English only. Operator, I'll now turn it over to you. Please give us your instructions.
The first question comes from the line of Sebastian Hou from CLSA. Please ask the question.
Thank you. Thank you gentlemen for taking my questions. I have two. First one is, I'd like to ask about the server business. So first of all, I want to understand the hyperscaler data center progress on the design win.
I think the company talked about some potential wins with The U. S. Side. So how is that progressing so far? And also, I wonder your potential market share gain in China, particularly considering some of your competitors or peers in China facing some sanction risk from The U.
S. Side? So that's the first part of the question. Second part second question I want to ask about the Device as a Service. So I wonder how is the implication here to the company's account receivable and the factoring policy going forward?
Will this change the AR working capital structurally if more business models change to DAS? Thank you.
Are
you mute? Are we okay? Yes, no that's fine. Yes, yes. Okay.
Well, let me answer the first question. So relative to hyperscale demand, we're seeing growth worldwide. And that's both in the top 10 hyperscalers as well as in the next wave of hyperscalers. So let me cover both. Today, we're shipping to about seven of the top 10 hyperscalers.
And our demand is increasing across the board there. There's a few reasons why. First, we've gone into production on not just Intel based solutions, but also AMD based solutions, which has expanded our total available market opportunity. The second is we had design wins in the four socket and eight socket space to, for example, run more enterprise workloads that have moved to the public cloud, for example, SAP HANA. And we've had a strong design win momentum and are now in production, which is helping the gross profit levels and profitability of that as well.
And then the third is that we're moving more of our both our design and our manufacturing in house, which we've called ODM Plus. So we're able to support these hyperscalers in 180 markets in the world, But we're now doing our own design both for in China for China, but also outside China for outside of China requirements. And we have the ability now to manufacture worldwide, obviously both in China, but also in Mexico, Hungary and a number of our global factories. So for all those reasons, we think that this 31% growth was significant and we're expecting strong double digit revenue growth on a yearly basis going forward with improving profitability, both in The U. S.
And to answer your question with China as well. Lastly, I would say we did add new sales force to cover the Next Wave, more than 200 other Next Wave Hyperscale customers and that is also growing significantly for us as we do semi custom design for them as well. Thank you for the question. For Daz, I'll
Yes. Let you So
go
regarding of China competition, in my in our understanding, other Chinese players in the server and the data center space are not impacted by this kind of China U. S. Tension. So they still can buy chips from Intel, from AMD and the other vendors. So the competition is a failed competition.
But we definitely are growing faster in China as well. Are significantly strengthening
our
resources in China, because the market is growing fast. Regarding of the DAF, so I think probably we need to answer the question. So I then if Gianfranco want to add
some space. Okay. So let me answer the, I think, accounting issue. I think that, in fact, exactly we offer our device together with a much higher service element and then sell it to the customers. Now I think the AR will we will not actually book the revenue on the entire contract value.
I think we will only actually send the invoice for monthly or quarterly payment. And once we actually send the invoice, it will become an AR and then we will do the factoring program wherever we have, I think, to actually get the cash. So that is the technical well, part of the question you asked about what's the implication to that as to AR versus AR cash. I don't know whether I answered your question or not. It's not what I really want to say is it's not the entire contract value we will book as revenue.
I think the entire contract value represents the device together plus higher service element that is the entire contract value. That's spread through, say, two or three years. And then we bill them every year. And the rest of the contract, in fact, actually go to in our balance sheet as deferred revenue. And the AR only represents, I think, the services that we deliver during the year or during the quarter or whatever.
Gianfranco, you want to add something?
No, I think no. In the sense that we sell DAS, as Guaimin said, it's always hardware soft service and software together. Then I think we also use some external financing institution in order to secure the receivable, right? So I don't think we see any impact in terms of either receivable or the accounts receivable or effectively, because it's just back to back with the financing institution.
Okay. Thank you. Next question.
Thank you. Your next question comes from the line of Chris Yim from Bokong International. Please go ahead.
Thank you and congrats on the good results. My first question is on the PC side. I think previously you have stated that you're looking at the December growing and then perhaps a slowdown in December as demand was pulled in. I was wondering what's the view now on the PC market over the next six months? That's the first part.
The second part is about your service revenue. I was wondering if you can roughly tell us what the service profit contribution is for you now since the Surface revenue has been growing. And for DAS, from your commercial side of the business on the PC front, whether you can roughly tell us how many of your customers are choosing DAS for buying actual PCs? What's the portion now? And my second question is on the financial side.
I was wondering the OpEx reduction cost savings this quarter. I'm wondering if you can give us a little more color on where it came from? And also whether that is sustainable as your revenue scale perhaps continue to grow, whether we can maintain an EBITDA rate of about 12%. What's the outlook there? And then second part is on the cash flow.
Any changes in how you position your cash, expand your cash as now the operating cash flow seems to be continue to improve? Thank you.
So, Gianfranco, could you please answer the PC and the dock issue, then rest of your questions will be answered by Wei Mi.
On PC, think looking at this quarter, even next quarter, let's say, looking at the rest of our financial year, I think we don't see any slowdown in the sense that, frankly speaking, this quarter in terms of demand is even better than the last quarter. And we already see even the following quarters, let's say, Q4 calendar year or Q3, same trend. And I would expect that even Q1. Frankly speaking, I think that until the first half of next year, I don't really see pieces going down. And this is due to that learning from home, working from home, trying from home.
And it's really, I think, a change in terms of rather than one or two pieces per home per house, it's one piece per person. And becoming so it's also the TAM the overall TAM growing worldwide, which means that also the replacement will continue to grow. Not only we also see a lot of people that they have a PC, it is maybe three, four years old. They were used to work with the PC maybe one hour per day, two hours per day, not the number of hours per day, even talking with Microsoft is becoming much bigger. And they start to realize that the PC they have is not good enough.
So it's not only people buying new PC, but it's also people replacing PC. And then there are big education deals, big education deal in U. S, big education deal in Japan, big education deal in Europe that we didn't supply yet. This is why. When I look at the trend, I think we should continue to see between single to double digit growth for the next at least for the next three quarters.
On Das, what was the question?
So which customer will choose Das? Which customer prefer to buy PC? I think that's
So Let's say, when we talk about that, I think it's mainly Fortune 500 companies or big companies. We have been closing very large deal last quarter with one of the largest IT company in the world, frankly. Also did I don't know, we have the quarter before it was with major airlines. So we really see larger corporation, I would say mainly Fortune 500, 1,000, that are moving from CapEx to OpEx in terms of that. And then as I said before, we offer not only the hardware, it's hardware plus service plus software combined.
So the total value is usually in the range of 25%, 30% bigger than just the hardware value. And as I said, it doesn't have any implication in terms of receivable and in terms of inventory because we use our financing institution to cover it. We are also building up it's already running in few countries. Thus for SMB, I would say not really S, but medium business, because we start to realize that the demand is also coming from that. But for the same reason, with COVID and with the virus, people they need to either to expand the installed base or to give PC to their employees.
And I think it's a little bit like car. I think today, most of the people are not buying car anymore. They buy car with a rent fee. Between the medium business and very large business, this is also what's happening on PC. The pipeline, as I said, the pipeline we we see today is really, really big.
Thank you, Yanjun.
Thank you, Gianfranco. So I want to echo Gianfranco's comment on PC market outlook. So definitely, we are more optimistic than before now. So I think COVID-nineteen impact to PC industry is definitely positive. So as Jianfeng Goh said, so that will drive the PC from one family to one per person.
One unit per person. So that we are significantly enlarge the PC tech from today around RMB270 million to more than million. So that's our strong belief. So if you look at the recent situation, can believe that. So actually the growth is not driven by the emerging market in recent, it's driven by mature markets.
So, S, Europe, Japan, so the growth is higher in those markets, even with 70%, 80% PC penetration rate. So, still need more PCs. So I think this is just the first way. So definitely this trend will shift to emerging market over time, because it will prove the PC is essential product for those people who needed to work from home and for kids who need study from home or take more e learning program. So that's our strong belief.
Okay. So, Wenning, could you please answer the remaining question, service profitability, OpEx reduction, cash flow?
Okay. So, thanks, YY. So, I think in terms of the service profit contribution to group, I think it's roughly around I think the group profit of account for about around 15%. I just want to make sure that I think you do not misunderstood that 15% because this is really the service element account for around 50% of group profit. But in terms of profit margin, it is about, I would say, double.
I think the gross profit margin on services is at least double or probably a little bit more than double than our half Sorry, more than. Sorry, So more than, because it's so that so it's one is an absolute dollar, the other is the margin. In terms of operating expenses, I think, clearly, we've been actually taking actions. I think some of those are structural. For example, reducing headcount or moving headcount from high cost jurisdiction to lower cost jurisdiction, I think definitely those are sustainable.
Some of those expenses are actually reduced as a result of, I think, the strengthening of the market. For example, in MBG, where our two main markets today in Q1 still at least subject to lockdown. And therefore, I think we actually, I think, or reduce our advertising spending. Those expenses as in when business return obviously go up, but there is a high proportion of our expenses really taken out from our structure, and those will be sustainable. On the cash flow, I think where the improvement?
I think the improvement, I think, coming out from, I think, two or three areas. I think the fundamental one is really the operational profit of the group actually improved significantly, I think, over the last year. That actually account for, I think, source of the improvement in cash. I think the second one is the better utilization, I think, of the factoring program. I think if you actually participated in our earnings call over the last few quarters, I think last year at the beginning of last year, I think we actually changed the service provider.
I think in the first quarter last year, I think there is some sort of transition. And I think over the last few quarters, we continue to see improvement. And therefore, you actually see a steady improvement, I think, of our cash position and hence, I actually see well, I actually will see that there will be more opportunities for us, I think, to
further improve our cash flow position. I think
that really come out from managing better managing of our inventory, better managing of our account payable as well as receivables. Okay. I think back to you, Yanjing.
Yes. So next question, please.
Thank you. The next question comes from the line of Howard Koh from Morgan Stanley. Please go ahead.
Hi. Thank you for taking my questions and congratulations on the quarter. So two questions. My first question is still on the PC side. Regarding YY, your statement about how the PC market will expand from two sixty million to two seventy million units to upwards of 300 plus.
How long will that take, do you think, across how many years or quarters? And the additional PCs above the two sixty million to two seventy million units today, do you have a rough sense of what you think will be from e learning or from work from home or from what that breakdown might look like? So that's my first question. Second question is on the data center side. Just for a more near term outlook going into the second half, any view or color on trajectory into Q3 and Q4, particularly the breakdown between cloud and enterprise?
So in my view, the PC TAM increased to RMB300 million, should be very quick, so probably next year. So probably Jianfeng, so you can give your opinion as well.
Well, I think as I said, if I look at the current quarter and also the Q4 calendar year, Q1 next year. In my opinion, we can probably reach something in the range of $300,000,000 within the first half of next year, because we really see the growth quarter by quarter. Think only last quarter, if I'm not wrong, market compared to the year before has been growing in the range of million to $7,000,000 right? So fourth quarter at $7,000,000 it's already $30,000,000 And we see this quarter and next quarter is probably growing even faster. Think €30,000,000 for sure within the first half of next year should be achievable.
On the Street, I would say probably 20%, 25% is going to be Chrome and the rest is between consumer, I mean, traditional consumer including gaming, so average good AUR, not only entry and more B2B and some commercial. But I would say 70% is traditional PC, 30% can be Chromebook or Winbook. So really solution for education. In the 70% of traditional PC, I would say a big portion is consumer, including gaming. And there is probably another 30 of the 70% that is going to be SMB or commercial.
Yes, but meanwhile, so the example actually so our last quarter AUR is better than previous year. So our revenue growth was higher than our volume growth. So that's another point I wish analysts could This
pay attention
is due to gaming growth.
Yes. Even with the higher growth in Chromebook, so we still manage higher AUR than previous year. Yes, gaming and the scene and the light. So, so other consumer products are growing faster as well. Education and consumer PC, particularly consumer PC in the high end.
So regarding of the data centers, can Kirk give your outlook on the market?
Sure. So again, I think we set a new revenue record this quarter with a 31% growth. I think interesting to note, this is the first quarter in Lenovo and probably IBM prior to that history where our hyperscaler cloud service provider business is larger than our enterprise and SMB business. I think that'll continue. You know it's a very kind of cyclical but lumpy market.
So we think it'll maintain we'll maintain strong double digit revenue growth for the year, but it probably will reset to a more sustainable level in the second half. That's our prediction. But our goal is to continue to grow at a premium to market. If we look at enterprise and SMB per IDC, we've now had three consecutive quarters of premium to market and I expect that to happen this quarter as well, which would make it our fourth consecutive quarter. So regardless of what the market does, we believe we're well positioned because we're attaching more premium services and more professional services With our joint venture with NetApp, we're attaching more storage.
We have a number of new enterprise software contracts with some of the largest software companies in the world. We're improving our software attach and our HPC business continues to grow. As you saw, we expanded our number one position in global supercomputers as well and are continuing to win large supercomputing deals around the world as people look for vaccine, research in COVID and this kind of thing. So I would say that cloud service provider business will grow faster than enterprise SMB. We're probably less susceptible than our competitors to a softening SMB market just based on the history of our account base.
And our goal is to continue to grow at a significant premium to market in both cloud service provider and the enterprise SMB segment while improving profitability.
Thank you. Thank you. Thank you, Kirk. Next question, please.
Thank you. The next question comes from the line of Jerry Su from Credit Suisse. Please go ahead.
Hi, thank you for taking my question. My first question is regarding, I think in your prepared remarks and also supply chain we're seeing the PC industry is still facing some component shortage. I would like to know from Lenovo's perspective, which area are you facing more constraint? And how is this impacting the past quarter and also the remaining the next few quarters of your PC shipments? The second question is on the channel inventory side.
Can you give us some color about the channel inventory on the PC? Are we seeing more restocking demand? Or is the channel inventory still lean and then customers are still quite eager to buy these PC during the COVID-nineteen outbreak? Thank you.
So, Jean Francois?
Let me start from the shortage. I think when we look at shortage and mainly coming from, I would say two components. One is the display, I would say any kind of display and the other one is IC in the sense that we've been able to manage quite relatively well some CPU shortages, some other things. But I think main shortage is LCD and IC. IC for LCD, IC for some motherboard.
Any major impact on our shipment, I would say not really in the sense that it is slowing down a little bit the lead time of the product, but not really a big impact terms of shipment or in terms of order loading. I think we will see some good improvement on the IC in the next couple of quarters. Display, I think we also are going to see some improvement, but it probably is going to take a little bit longer because they need to move production. They need to change production from TV to notebook display or even to monitor display. China inventory, frankly speaking, it probably is even lower than what we need, simply because since the overload is a soft longer.
Since the lead time in certain cases is getting a little bit longer, As I said, we normally close the quarter with $1,000,000 $1,500,000 of order not fit. Last quarter, we were in the range of $4,000,000 to $5,000,000 and we will continue to have $4,000,000 a very good growth. So channel inventory, if there is a problem in the sense that it's not enough. And if you talk with the channel, they are even complaining a little bit because it's not enough. We really don't see any channel inventory issue in anywhere in the world, especially from our side, but also frankly speaking also from competition, because competition is more or less in the same situation in terms of shipment.
Yes. So we have a very strong demand. All the load, we a big portion of that we cannot ship last quarter. So think the current quarter is a similar situation. So we are trying to drive more supply, particularly on the display on the IC.
So that we don't have a big channel inventory issue. So that's the
answer. Nothing. It's the other way around.
Yes. Yes, it's another way around. Yes, sure. Okay. So next question.
Thank you. The next question comes from the line of Albert Ho from JPMorgan. Please go ahead.
Hi, management team. Thank you for taking my question. My first question is on server. The revenue actually grew 20% year on year last quarter. But if you look at the bottom line, actually, it did not improve.
So could you share some color on why the earnings improvement is quite limited last quarter? And when could we see the inflection point of the server profit? And my second question is on mobile. When would you expect a meaningful recovery in demand? Let's say, if the volume is back to, say, 9,000,000 above, could we anticipate a turnaround in this business in second half?
Thank you.
Okay. Yes, go ahead.
Sure. So, think a few things. Number one, we're continuing to invest as a for a premium growth to market. So we did make some significant investments, particularly in China. As we look to grow our professional services business, We announced, for example, a major smart city initiative with Meishan this quarter, but we are making investments that we believe will result in long term growth at a premium to market in a very critical market for us, China.
The profit comparison year on year, I think partly is due to a mix shift between SMB moving to some hyperscale business, particularly in this COVID situation. So that mix shift, I think, did impact margins somewhat. Having said that, we've been driving a number of expense initiatives and recently announced, for example, some moves as Huayoming said, high cost geography to low cost geography, as well as some reduction in force in other parts of the world. So those major expense actions will really we're not seeing this quarter and will start taking into effect dramatically next quarter, which will again help improve the profitability. So our goal to be very clear is in hyperscale, we think our profitability will continue to improve if you just look at that segment because we're shipping storage, not just server, we're shipping AMD, not just Intel And now we're ramping not just commodity two socket systems, but actually four socket and eight socket class systems across a number of players as well as growing our NexWave business, not just the Tier one business, which tends to be a bit more profitable.
And then those expense actions will kick in beginning this next quarter the quarter we're in right now rather.
Thank you for the question. Yes. So the market is quickly shifting from traditional enterprise and SMB market to cloud service provider market. So we have to adapt to this change quickly.
So
definitely, one important fact to address this change is we need to strengthen our in house design and manufacturing capability. So only with that capability, we can better address the cloud service provider market, so with better profitability. Now, we have invested significantly in this space. So if we can address this market better than our competition, better than before, so we think we can have we can also have the better profitability in traditional enterprise and SMB market as well. So that will be Lenovo's strategy.
From what I said, we're I think Lenovo has been a very unique company in the data center market. So, as you can see, so we have very balanced business in both enterprise SMB and cloud service provider. But meanwhile, we are trying to build the different core competence in each of these two markets to compete.
Thank you, Wang Yuan. Due to limited time, we are now No, no, no.
Jerry, we need Bunya to answer the second question, mobile. Yes. We have another question. Yes.
So we are seeing a good recovery in the market. If you compare already April to June, our operations grew almost by 100%. So through the quarter, we saw recovery. We expect the recovery to continue this quarter and extending into the next second half of our fiscal year. In July and August, quarter to date, our activations sell out is almost flat, like it's 0.5% year over year.
What shows the market is recovering and I believe we are recovering a little faster than the market. So I believe the market is going to see a good recovery and we expect to still recover premium to market in the next two, three quarters at least. And also, there are more five gs launches coming. The mix is like 5% lower, but in the next two to three months as five start deploying, we also see an improvement in the mix, especially for last quarter of calendar year.
So, yes, so I want to echo Bunya's point. So although last quarter, our MBG business declined, but we see the momentum is getting stronger. So in our key market, Latin America and North America, we both outgrew the market and set the record market share delivered record market share. So even in Europe, so we see the very, very, very strong year on year growth and the primary to the market. So and also based on our activation, smartphone activation rate, so we see the obvious recovery of the market.
So in Latin America and North America, almost back the normal. So if you consider year on year, so we are confident. So we will quickly recover this business in current quarter and the future. So we want to drive the profitable growth in this business.
Thank you, Wang Yai. Okay. And thank you, Sergio. Due to limited time, we would like to conclude the call now. And there are still quite a lot of questions in the pipeline.
Please feel free to contact me 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. Thank you. Bye bye now.
Thank you. Bye bye.