Good morning and good evening. Welcome to Lenovo's earnings webcast. Thanks to everyone for joining us. This is Jenny Lai, Vice President of Investor Relations. Before we start, let me introduce our management team joining the call today. We have Lenovo's Chairman and CEO, Mr. Yang Yuanqing, Corporate President and COO, Mr. Gianfranco Lanci, Group CFO, Mr. Wong Wai Ming, President of Data Center Group, Mr. Kirk Skaugen, and President of Motorola, Mr. Sergio Buniac. We will begin with a presentation shortly, and after that, we'll open the call for questions. Without further ado, let me turn the call over to Yuanqing. Yuanqing, please.
Hello, everyone. Thank you for joining us today. Despite the COVID-19 pandemic and geopolitical uncertainty, Lenovo delivered the outstanding results in the first quarter of our fiscal year, 2020-2021. In this challenging environment, our group revenue and profit both delivered a strong growth. Revenue reached $13.3 billion, growing almost 7% year-on-year, achieved the double-digit growth without the currency exchange impact. Profit showed even stronger growth as pre-tax income was up 38% year-on-year, reaching $332 million, and the net income grew 31% year-on-year, reaching $213 million. In our intelligent device group, PC and smart devices delivered another fantastic quarter. Revenue grew by double digits year-on-year to $10.6 billion. pre-tax income reached $617 million, 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 device revenue in EMEA and China grew 30% and 18%, respectively. Our focus on high growth and the premier segments continues to drive results. We maintain the strong double-digit volume growth in Chromebook, ThinkVision, thin and light, 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-19 and 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 5G, and expand carrier range to resume profitable growth. Our data center business revenue resumed hypergrowth of almost 20%, and profitability also improved year-over-year. Our cloud service provider segment, what we have called hyperscale in the past, grew more than 30% year-over-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 non-hyperscale, delivered a year-over-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 add new customers and expand the share with the 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 premier to market growth of this business, we will continue to focus on expense and cost management to improve profitability. 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%.
The Smart Verticals 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 fast-growing Device as a Service, and the solutions all realized a strong year-on-year growth of 30% or more, driving our overall software and service revenue to over $1 billion, 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 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 the 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, Wai Ming. Wai Ming, please.
Thank you, Yuanqing. I will now take you through Lenovo's financial and operational performance in Q1 fiscal year 2021. 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 $213 million. Our group generated $13.3 billion 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. PCSD also reported a record-breaking pre-tax 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 4 times of the group's average and emerged to be a key driver of a higher PTI margin.
The group pretax profit grew by 38% year-on-year to $332 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 $0.018, up 31% versus the prior year. Next chart, please. In Q1, our cash flow generated from operations improved by $459 million year-on-year to $317 million. Our net debt level was reduced by $837 million year-on-year. The group successfully issued a five-year note worth US$1 billion in May 2020 to refinance our RMB 4 billion debt and repay short-term borrowings. Inventory days increased by 11 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 $1.4 billion year-on-year to $7 billion. 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 MBG, delivered yet another strong quarter with pre-tax profit increasing 17% year-on-year to reach $620 million. Its revenue up a healthy 5% to $11.7 billion, driven by the strength in PCSD. Next chart, please. In Q1, PCSD revenue grew by 10% year-on-year to $10.6 billion. Pre-tax margin expanded by 0.9 percentage points to an all-time high of 6.3%, while pre-tax profit increased by 28% year-on-year to $670 million. 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 the service capability and continued to build a strong pipeline for new contracts for DaaS, which is a short form for Device as a Service, 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 four times 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 deliver 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 $1.1 billion. The losses before taxation dropped $55 million year-on-year to $50 million. The company took swift actions to control expenses, which helped to narrow its losses before taxation by $10 million quarter-on-quarter. The business has identified a strategy in place to further improve profitability, including an active 5G model launch schedule through the development of a 5G for all market strategy. Following our recently launched motorola edge+, the fastest 5G phone in the market, we will continue our innovations and product launches, including the Moto G 5G 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 $1.6 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 7 million year-on-year, narrowed by $17 million quarter-on-quarter to $58 million. The annual comparison was negatively impacted by the lingering impact of COVID-19 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 5G. 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 5G 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 will 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 5G 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.
Now we can take your questions.
Now we are open the line for questions, and this session will be in English only. Please be reminded to limit yourself for 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.
Ladies and gentlemen, if you wish to ask question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. 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, I'd like to ask about the server business. First of all, I want to understand the hyperscaler Data Center progress on the design win. I think the company talk about some potential wins with the U.S. side. How is that progressing so far? I wonder your potential market share again in China, particularly considering some of your competitors or peers in China are facing some sanction risk from the U.S. side. That's the first part of the questions. Second question I want to ask about the Device as a Service. I wonder how it's 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 the DaaS? Thank you.
Kirk , are you mute?
Are you okay?
Oh, yes. No, that's fine. Yes.
Great. Okay, well, let me answer the first question. 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. 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 have 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. 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.
The third is that we're moving more of both our design and our manufacturing in-house, which we've called ODM+. We're able to support these hyperscalers in 180 markets in the world. We're now doing our own design both for in China, for China, but also outside China for outside of China requirements. We have the ability now to manufacture worldwide, obviously both in China but also in Mexico, Hungary, and a number of our global factories. 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 a 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 DaaS , I'll.
Yes. Regarding China competition . In our understanding, other Chinese players are in the server and the data center space.
Are not impacted by this kind of China-U.S. tension. They still can buy chips from Intel, from AMD, and other vendors. The competition is a fair competition. We definitely are growing faster in China as well. We are significantly strengthening our resources in China because the market is growing faster. Regarding of the DaaS, I think probably Wai Ming should answer the question. If Gianfranco wants to add something, please.
Okay. Let me answer, I think the accounting issue. I think DaaS, in fact, exactly we offer our device together with a much higher service element, and then sell it to the customers. I think the AR, 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. Once we actually send the invoice, it will become an AR, and then we will do the factoring program, whatever we have, I think to actually get the cash. That is the technical, well, second question you asked about what's the implication to DaaS as to AR versus our cash. I don't know whether I answered your question or 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 a higher service element that is the entire contract value. That spreads through, say, two or three years. We bill them every year. The rest of the contract, in fact, actually go to in our balance sheet as deferred revenue. 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 when we sell DaaS, as Wai Ming said, it's always hardware, service, and software together. I think we also use some external financing institutions in order to secure the receivable, right? I don't think we see any impact in terms of either receivable or account receivable or effectively, because it's just back-to-back with the financing institution.
Okay. Thank you.
Next question.
Thank you. The next question comes from the line of Chris Yim from BOCOM International. Please go ahead.
All right. Thank you, and congratulations on the good results. My first question is on the PC side. I think previously you have stated that you're looking at the second quarter growing, and then perhaps a slowdown in December quarter 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 service revenue has been growing. For that, from your commercial side of the business on the PC front, whether you can roughly tell us how many of your customers are choosing DaaS over buying actual PCs? What's the portion now? 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 bit 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? Second part is on the cash flow. Any changes in how you position your cash and spend your cash, as now the operating cash flow seems to be continuously improving. Thank you.
Gianfranco, could you please answer the PC and the DaaS issue, then the rest of your questions will be answered by Wai Ming.
Well, on PC, I 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. We already see even the following quarters or the Q4 calendar year or Q3 same trend. I would expect that even Q1. Frankly speaking, I think that until the first half of next year, I don't really see the PC slowing down. This is due to that learning from home, working from home, playing from home. It's really, I think, a change in terms of rather than one or two PC per home, per house. It's one PC per person. It's also 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 working with the PC maybe one hour per day, two hours per day, not a number of hours per day. Even in talking with Microsoft, it's becoming much bigger, and they start to realize that the PC they have is not good enough. It's not only people buying new PC, but it's also people replacing PC. There are big education deals. Big education deal in U.S., big education deal in Japan, a 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 at least for the next three quarters.
On DaaS, what was the question?
DaaS. Which customer will choose DaaS? Which customer prefer to buy PC?
Well, no. Let's say, when we talk about DaaS, I think it's mainly Fortune 500 companies or big companies. We have been closing a very large deal last quarter with one of the largest IT company in the world, frankly. We also see, I don't know, the quarter before, it was with major airlines. We really see larger corporation, I would say mainly Fortune 500, 1,000, that are moving from CapEx to OpEx in terms of DaaS. As I said before, we offer not only the hardware, it's hardware plus service, plus software combined. The total value is usually in the range of 25%-30% bigger than just the hardware value. As I said, it doesn't have any implication in terms of receivable and in terms of inventory because we use external financing institution to cover it.
We are also building up, it's already running in a few countries, DaaS for SMB, I would say not really yet, but medium business. We start to realize that the demand is also coming from that. For the same reason with the COVID and with the virus, people they need either to expand their install base or to give a PC to their employees. I think it's a little bit like car. I mean, today, most of the people are not buying car anymore. They buy car with a rent fee, right? Between medium business and very large business, this is also what's happening on PC. The pipeline we have, we see today it's really big. Thank you, Yuanqing.
Thank you, Gianfranco. I want to echo Gianfranco's comment on PC market outlook. Definitely, we are more optimistic than before now. I think COVID-19 impact to PC industry is definitely positive. As Gianfranco said, that will drive the PC from one per family to one per person. One unit per person. That will significantly enlarge the PC TAM from today around the 270 million units to more than 300 million units . That's our strong belief. If you look at the recent situation, you can believe that. Actually, the growth is not driven by the emerging market in recent days. It's driven by mature markets. U.S., Europe, Japan.
Japan.
The growth is higher in those markets, even with 78% PC penetration rate. They still need more PCs. I think this is just the first wave. Definitely this trend will shift to emerging markets over time because-It will prove us, the PC is an essential product for those people who need to work from home, and for kids who need to study from home or take more e-learning program. That's our strong belief. Okay. Wai Ming, could you please answer the remaining question? Service profitability, OpEx reduction, cash flow.
Okay. Thanks, Yang Yuanqing . I think in terms of the service profit contribution to group, it's roughly around, the group profit account for about around 15%. I just want to make sure that you do not misunderstood that 15%, because this is really the service element account for around 15% of group profit. In terms of profit margin, it is about, I would say double. The growth profit margin on services is at least double or probably a little bit more than double than our hardware.
Oh, it's more than.
Sorry?
It's almost three times.
Sorry. More than. One is an absolute dollar, the other is the margin. In terms of operating expenses, I think clearly we've been actively 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 shrinking of the market, for example, in MBG, where our two main markets today in Q1 still at least subject to lockdown. Therefore, I think we actually, I think, optimize or reduce our advertising spending. Those expenses as and when business returns, obviously go up, but there is a high proportion of our expenses really taken out from our structure, and those will be sustainable. On our cash flow, I think where are 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 one source of the improvement in cash. I think the second one is a better utilization, I think of the factoring program. I think if you actively participate in our earnings call over the last few quarters, I think last year, in 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.
Actually we'll 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 better managing of our inventory, better managing of our account payable as well as receivable. Okay. I think back to Yuanqing.
Yeah. Next question, please.
Thank you. The next question comes from the line of Howard Kao from Morgan Stanley. Please go ahead.
Hi. Thank you for taking my questions and congratulations on the quarter. Two questions. My first question is still on the PC side. Regarding, YY, your statement about how the PC market will expand from 260 to 270 million units to upwards of 300+. How long will that take, do you think, across how many years or quarters? The additional PCs above the 260 to 270 million 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? 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? Thank you.
In my view, the PC count increase to 300 million should be very quick, so probably next year. Probably, so Gianfranco, so you can give your opinion as well.
Well, I think, as I said, if I look at the current quarter and also, let's say Q4 current year, Q1 next year, in my opinion, we can probably reach something in the range of 300 million units within the first half of next year. We really see the growth quarter by quarter. I think only last quarter, if I'm not wrong, market compared to the year before has been growing in the range of 6 million-7 million units . Right? Four quarter at $7 million, it's already 30 million. We see this quarter and next quarter is probably growing even faster. I think 30 million for sure within the first half of next year should be achievable.
Of the split, I would say probably 20%-35% is going to be Chrome, and the rest it's between traditional consumer, including gaming, so average good AUR, not only entry, and for B2B, and some commercial. I would say 70% is traditional PC, 30% can be Chromebook or Winbook. Really, solution for education. In the 70% traditional PC, I would say a big portion is consumer, including gaming. There is probably another 20%-30% portion of the 70% that is going to be SMB or combination.
Meanwhile, Gianfranco, actually, last quarter, AUR is better than previous years. Our revenue growth was higher than our volume growth. That's another point I wish analysts could.
pay attention. Yeah.
This is into gaming growth.
Yeah. Even with the higher growth in Chromebook, we still manage higher AUR than previous year.
It's coming from gaming and thin and light.
Yeah. Gaming and the thin and light. Other consumer products are growing faster as well. Education and the consumer PC, particular consumer PC in the high end. Regarding of the data center, so can Kirk give your outlook on the market?
Sure. 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. We think 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. 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.
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. 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 some large supercomputing deals around the world as people look for vaccine research in COVID and this kind of thing. I would say the 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.
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, 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, in your prepared remarks, and also the 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 constraints, and how is this impacting the past quarter and also 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 consumers are still quite eager to buy these PC during the COVID-19 outbreak? Thank you.
Gianfranco.
Okay. Let me start from the shortage. I think when we look at shortage mainly coming from, I would say, two components. One is the display, I would say any kind of display. The other one is IC. In the sense that we've been able to manage relatively well. Some CPU shortages, some other things. I think main shortage is LCD and IC. IC for LCD, IC for some motherboards. Any measuring 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. Not really a big impact in terms of shipment or in terms of overloading. 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. Probably it is going to take a little bit longer because they need to change production from TV and so on to notebook display or even to monitor display. Channel inventory, frankly speaking, it's even lower than what we need. Simply because since the overload is so strong. The lead time, in certain cases, is getting a little bit longer. As I said, we normally close the quarter with $1 million, $1.5 million of all the load . Last quarter, we were in the range of $4 million-$5 million, and we will continue to have $4 million, despite the very good growth. Channel inventory, today it's a problem in the sense that it's not enough. 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 anywhere in the world. I speak from our side, but also frankly speaking, also from competition, because competition is more or less in the same situation in terms of shipment.
Yeah. We have a very strong demand, all the load. A big portion of that we cannot ship last quarter. We think the current quarter is a similar situation. We are trying to drive more supply, particularly on the display, on the IC. We don't have a big channel inventory issue. That's the answer.
No, it's the other way around.
Yeah. It is another way around. Yeah, sure. Okay, next question.
Thank you. The next questions comes from the line of Albert Hung from JP Morgan. 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. If you look at the bottom line, actually, it did not improve. Could you share or color some why the earnings improvement is quite limited last quarter? When could we see the inflection point of the server profit? 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, nine million above, could we anticipate a turnaround in this business in second half? Thank you.
Okay. yeah. Kirk, go ahead.
Sure. I think, a few things. Number one, we're continuing to invest for a premium growth to market. 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. 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. 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 Wai Ming said, from high-cost geography to low-cost geography, as well as some reduction in force in other parts of the world. Those major expense actions were not seen this quarter and will start taking effect dramatically next quarter, which will again help improve the profitability. 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. Now we're ramping not just commodity 2-socket systems, but actually 4-socket and 8-socket class systems across a number of players as well. As growing our next wave business, not just the tier one business, which tends to be a bit more profitable.
Those expense actions will kick in beginning this next quarter or the quarter we're in right now, rather. Thank you for the question.
The market is quickly shifting from traditional enterprise and SMB market to cloud service provider markets. We have to adapt to this change quickly. Definitely, one important fact to address this change is we need to strengthen our in-house design and manufacturing capabilities. Only with that capability we can better address cloud service provider market with better profitability. Now, we have invested significantly in this space. If we can address this market better than our competition, better than before, we think we can also have the better profitability in traditional enterprise and SMB market as well. That will be Lenovo's strategy. From where I stand, I think Lenovo has been a very unique company in the data center market. As you can see, we have very balanced business in both enterprise SMB and cloud service provider.
Meanwhile, we are trying to build the different core competence in each of these two markets to compete.
Thank you, Yang Yuanqing .
No. Jenny, we need Buniac to answer the second question. Mobile.
Yes.
We cannot avoid that.
Yeah. We are seeing a good recovery in the market. If you compare already April to June, our activation grew almost by 100%. 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 are sell out. It's 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. 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. Also, there are more 5G launches coming.
The mix is 5% lower, but in the next two to three months as 5G starts deploying, we also see an improvement in the mix, especially for last quarter of calendar year.
I want to echo to Buniac's point. Although last quarter our MBG business declined, but we see the momentum is getting stronger. In our key market, Latin America and North America, we both outgrow the market and set the record market share. Delivered the record market share.
Record.
Even in Europe, we see the very strong year-on-year growth and compared to the market. Also based on our smartphone activation rate, we see the obvious recovery of the market. In Latin America and North America, almost back to the normal. If you consider year-on-year, we are confident. We will quickly recover this business in current quarter and the future. We want to drive the profitable growth in this business.
Thank you, Yang Yuanqing .
Okay.
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.
Take care. Bye bye.