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 will 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. Before we start, I want to share my heartfelt sympathy to those affected by the novel coronavirus. I also would like to express my deepest appreciation to all medical professionals for their dedication in fighting the diseases. Lenovo also responded immediately to the outbreak. We have donated and installed all IT equipment necessary to construct the two new hospitals in Wuhan. Donation from Lenovo employees and the Lenovo Foundation has arrived at places in need. We have also given away 100 activation keys of our remote office and online meeting solutions to hospitals and small and intermediate-sized businesses, which are heavily impacted by the epidemic. Although the outbreak happened around the Chinese New Year, Lenovo reacted right away and worked day and night throughout the holiday to implement a series of measures to protect the safety and the well-being of our employees.
Thanks to our global manufacturing footprint, while our factories in China are some of the first ones to resume production in the industry, our factories outside of China continued to operate. While the demand in China is impacted temporarily, the demand from the rest of the world remains strong, which will help accelerate the recovery of our capacity in China. We have also been working closely with our supply chain partners to ensure normal operation. Let me turn to our quarterly earnings. Last quarter, despite the geopolitical uncertainties and the industry-wide supply shortages, we demonstrated our world-class operation and the strategy execution capability in delivering a record-setting performance. Both global revenue and pre-tax income reached all-time highs. Our global revenue was $14.1 billion. Pre-tax income grew by double digits year-on-year and reached $390 million. Net income also improved by double digits year-on-year to $258 million.
These results would not be possible without our operational excellence, which allowed us to overcome the severe industry-wide CPU shortage. We have quickly adjusted our product portfolio, converted every available supply to a product that meets our customer's requirement, and greatly reduced our finished goods inventory. These efforts enabled our PC and smart device business to deliver all-time records in revenue, in pre-tax income, and in profit margin. In PC, we not only extended our clear number one position with record-high shipments, but also outperformed the market year-over-year. Our strategy to focus on high growth and premier segments continues to deliver results. The volume in gaming, thin and light, Visuals, workstations, and Chromebooks continued to grow at a higher double digits and significantly outgrew the market year-over-year. Innovation provides us another important growth driver.
At a recent Consumer Electronics Show, we demonstrated our leading technology in 5G and foldable with innovative products such as the world's first 5G PC. The Lenovo ThinkPad X1 Fold, which was named one of TIME's 2019 Best Inventions. The ThinkBook Plus notebook PC with E Ink display on top also received very positive feedback. Looking forward, while micro challenges may continue, with proven operational excellence and breakthrough innovation, we are confident that we will continue to drive premier to market growth in our PC business and industry-leading profitability. Our mobile business delivered its fifth consecutive profitable quarter. In our stronghold, Latin America, our volume outgrew the market by 19 points while improving profitability. Going forward, our mobile business will continue to strengthen profitability while driving growth in new markets. Our new Motorola Razr foldable has received great responses from investors, media, and tech opinion leaders.
We will build on this excitement to re-enter the premier segment. In data center, our server volume grew by 18% year-on-year. Data center revenue remained flat year-on-year as a sharp component price reduction resulted in erosion of average sales price. Profitability continued to improve year-on-year. Our non- hyperscale business had its highest revenue in four years, and grew nearly 16%, especially in China. It was up almost 46% year-on-year. We continue to see strong over 40% year-on-year revenue growth in software-defined infrastructure and storage. Looking forward, we will resume revenue growth in DCG. In our hyperscale business, we will expand our business with existing customers and continue to acquire new customers. In our non- hyperscale business, we will continue to drive a premier to market growth in servers, software-defined infrastructure, high-performance computing, storage, software and services with increasing customer diversity and broader indirect channels.
Our intelligent transformation continued to show strong momentum. In smart IoT, revenue almost quadrupled year-on-year, driven by strong growth in AR/VR, smart home and smart office. Smart infrastructure also grew more than 50% year-on-year, driven by software-defined and network functional virtualization. Smart vertical revenue doubled, thanks to triple-digit revenue growth in data intelligent business growth, smart healthcare and smart education solutions. We have noticed accelerated demand in China for our remote office, online education, online healthcare, and other online services solution due to impact of the ongoing epidemic. Last but not least, as we mentioned last quarter, our software and services revenue continued its hypergrowth and reached $1 billion in a quarter for the first time, up 41% year-on-year.
Looking forward, since there are still much uncertainty around the novel coronavirus, we will actively manage this evolving situation through our geographic balance, operational excellence, and solid strategy execution. We are confident in overcoming this challenge and quickly resume to the normal. 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 Q3 fiscal year 2020. Next chart, please. Let me share with you the financial highlights. We are pleased to announce another record quarter for the group. Our third quarter revenue was $14.1 billion, a new record, and up 0.5% year-on-year or nearly 2% in constant currency. Our business groups deliver exceptional execution against a backdrop of severe supply constraint. Gross profit increased 10% year-on-year, and gross profit margin expanded 1.5 percentage points to 16.1%. Thanks to favorable sales mix. Our team efforts in driving continuous sales mix improvement paid off. The improvement of data center business was again in a positive profit catalyst. Our transformation actions have led to accelerated growth in high-margin software and services business, and in turn improve overall profitability.
Operating expenses rose 10% to $ 1.8 billion, and the E2R ratio was 12.6%, up 1.1 percentage points year-on-year, driven by our continued investment in sales, marketing, research and development. The group PDI increased 11% year-on-year, and PDI dollar is at an all-time high. Among all business group, our PCSD business is the largest in the world, with the highest ever PDI margin, while MBG and DCG continue to improve their profitability. Our ability to set a new milestone in PDI demonstrated our ability to deliver strong margins and robust growth on earnings per share, despite the supply constraint. Net profit attributable to equity holders was $ 258 million, up 11% year-on-year. Basic earnings per share came in at $0.0216, up from $0.0196 last year. Next chart, please.
In Q3, our cash generated in operation was $ 538 million, compared to $ 1.2 billion cash generating in first half of the fiscal year. We made less cash from operations compared to the corresponding period last year, due to the two initiatives we took in the quarter. We have built some strategic position on critical paths, leading to a $ 206 million increase in total inventory year-on-year during the quarter, and our accounts receivable factoring volume dropped year-to-year. Next chart, please. Our Intelligent Device Business Group, consisting of PC and Smart Device Business Group and Mobile Business Group, achieved a record quarterly revenue, thanks to the strong growth in premium segments within PCSD and the strength in the software and services business.
With the all-time high pre-tax margin in PCSD and profit expansion in MBG, our IDG deliver a PDI of $687 million, up 17% year-on-year, and its PDI margin increased 0.8 percentage point year-on-year to 5.5%. Next chart, please. In Q3, despite being hit by key component shortage, the PCSD business group revenue grew 3% year-on-year to a record of $ 11.1 billion. Our team continued to execute its strategy to capitalize on the high growth and premium segments growth potential. The revenue from premium products across workstation, thin and light, Visuals, and gaming PC grew double digits year-on-year and now contribute more than half of PCSD's revenue. We are making important progress in our intelligent transformation by focusing on our software and services business. With its revenue up by a strong double digit year-on-year and carry the highest margin profile among all products.
Leveraging this strategic shift in sales mix, the PCSD business group set a record PDI margin of 6.2% in quarter three and reinforce its leadership position, not only in the PC shipments, but also profitability. Next chart, please. MBG also suffered from a supply constraint, resulting in a year-on-year revenue decline of 17%. Its focus strategy to invest and develop the business in regions where it has competitive advantages remain effective, helping MBG deliver positive PDI for the fifth consecutive quarter. Latin America remain a stronghold, and MBG's margin further expanded in this region. The MBG business is accelerating its innovation by launching attractive new products, including the recently announced foldable smartphone, the Razr. This product has earned positive customer reviews and will start contributing to the business revenue, as well as providing an opportunity to upsell and re-enter the premium segment. Next chart, please.
In Data Center Group, the business momentum is improving. Our server shipments grew 18% year-on-year, although revenue growth was again constrained by low average selling prices, a lingering problem caused by the significant correction in commodity prices. Our DCG revenue was $ 1.6 billion, largely flat year-on-year. Our non-hyperscale business reported its highest quarterly revenue in four years, representing double-digit year-on-year growth. We delivered strong growth in data center infrastructure, software-defined infrastructure, storage, and software and services. Our DCG operation in China seized the opportunity to broaden its sales coverage and product portfolio. The storage revenue grew at a strong double-digit rate, thanks to the NetApp joint venture and new product growth in entry and mid-range flash arrays. Our software-defined infrastructure product performance helped win market share and achieve strong double-digit revenue growth.
For hyperscale business, the annual revenue comparison was most difficult for the period under review, therefore, its revenue was still down year-on-year. However, the price erosion will come to an anniversary after this quarter, implying easier base of comparison going forward. Our DCG strategy is to balance between future investment and profitability. In Q3, the business further narrow its losses by $8 million year-on-year to $47 million. Next chart, please. Looking forward, macro risk factors, especially novel coronavirus outbreak, could bring short-term volatility. The unfortunate health crisis could lead to meaningful disruption in China's demand and supply chain. For us, the delay in employees returning to work has had the biggest impact on our business. The majority of our factories in China have reopened and are now operational, albeit on a limited basis due to transportation and travel limitations.
Our suppliers and logistics service across the country also affected. Given the situation remains extremely dynamic, it is difficult to provide an accurate estimation of the full financial impact. Nevertheless, we believe this is a one-off event, and our priority is to work with our supply chain to regain 100% capacity as soon as possible. We have contingency plan in place and will leverage our global manufacturing capabilities and strategic supplier partnership. We expect a rebound of demand in China after stabilization of the health crisis. With the demand from the rest of the world remaining strong, will help accelerate the recovery of our business in China. Our demand drivers could also emerge to bode well for our businesses. For example, our PCSD and DCG businesses are well-poised to benefit from the trend of remote education, remote work, home entertainment, and remote health consulting.
We are confident of driving long-term profitable growth when we aim to deliver a premium to market growth on the group top line. For PCSD, our goal is to continuously deliver industry-leading profitability and increase the sales in high growth and premium segments, as well as accelerating our software and services expansion to sustain premium to market revenue growth. For mobile, we'll continue to deliver innovative new products. Together with the launch of our 5G services, we look for potential growth opportunities by building more profitable core markets. For data center business, our journey to improvement has just begun. The trend of data growth is expected to accelerate following the development of more products and applications featuring new technologies, including 5G. Lenovo will tap into this opportunity to drive growth in multiple segments, including enterprise server, software-defined infrastructure, storage, and software and services.
For hyperscale business, the Group will leverage its differentiated in-house design and their manufacturing capability to broaden its customer base. We are going to increase our pocket share within existing customers by expanding product coverage from service to storage. We expect an improvement of hyperscale business and better profitability when the new share wins are fully operational. Thank you. Now we can take your questions.
Thank you, Wai Ming. Now we are open line for questions, and this session will be in English only. Please be reminded to limit yourself to two questions at a time. Please also state your name and company before asking a question. Operator, I'll turn it over to you now. Please give us your instructions.
Ladies and gentlemen, if you wish to ask a 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. We have the first question comes from the line of Gokul Hariharan from JP Morgan. Please ask your question.
Yeah. Hi. Thanks for taking my questions, and congrats on the great results in the December quarter. First of all, just to get some more clarity on the near-term challenges. Could you talk a little bit more specific on both the demand outlook, given the virus outbreak, as well as the supply side? When do we expect to get back to a reasonable level of supply for various product groups, over the next couple of months? That's my first question. Second question is on the server side, on Data Center Group. It looks like hyperscale seems to be the only area which is not yet ramping up in terms of growth. Non-hyperscale growth seems to be ramping up both outside China as well as in China. Could we talk a little bit about what kind of growth are we expecting either for fiscal 2021 or calendar 2020?
When do we expect hyperscale to come back to strong double-digit growth after being relatively weak in the last several quarters? Thank you.
Thank you, Gokul. I will answer your first question. Probably Gianfranco can help to add something. Kirk will answer your second question. Definitely, coronavirus outbreak impacts our demand in China and our production capacity in China as well. Mainly because of three reasons. First, it has delayed our factory reopen time. Second, less workers come back to the factory as well.
Suppliers also impacted, particularly the components that are produced by the smaller suppliers. They also face the issue to reopen the factories. For Lenovo, we are more optimistic on our supply, although it will be impacted in this quarter as well. Regarding the factories reopen, by now, most of our factories in China have already been reopened again, except for Wuhan and Chengdu factories. We still wait for government guidance in those two cities. Regarding our workers, we are providing the support and incentive to encourage more workers to come back to work. Two factories are more important for our PC supply. One in Shenzhen, another is Hefei. Our current estimation is by the end of this month, we can resume 100% capacity in Shenzhen by the end of this month.
We can resume 70% capacity in Hefei by the end of this month. Definitely for Wuhan factory, it's mainly for smartphone, we are waiting for government guidance to reopen again. Chengdu is mainly for desktops. Lenovo has a very diversified manufacturing footprint. We actually have the global footprint, that will help us as well. We have a smartphone manufacturing factory in Brazil and India. That will help our smartphone business, particularly in Latin America and in North America. We have a factory in Japan, in Mexico, in U.S. for PC and server as well. That will help our PC and server business in the rest of the world. From a demand point of view, definitely China current quarter will be impacted.
The good news is the rest of world, our demand for all our products, including PC, smartphone, and data center, are still very strong. That not only we can leverage our rest of world manufacturing facility to fulfill this demand, but also that can help our China manufacturing factories to ramp up. That's regarding your first question. I don't know whether Gianfranco, you want to add something to that. Oh, by the way, regarding the supply, I talked about the third bottleneck is the supply. Right after the outbreak of the virus, we realized the issue. We immediately pull in some supply to our warehouse. I think for a shorter period, we have enough components to resume the operation, resume the factory production.
Also, we are helping those suppliers, our smaller suppliers to resume work, to resume the operation so that from a longer term point of view, so we still can have enough component supply. That's my answer. Gianfranco, you want to add something here?
I think a couple of things. One, because you asked when we will be back to full capacity. I think that within Q1, by the end of March, we should be able, at least in SA and some other factories, to be back at 100% capacity. The other thing is that we see for sure the slowdown in China. We still see very strong demand on PC in the rest of the world. U.S., EMEA, Japan, Asia Pacific. I think in terms of demand in the rest of the world, we still see a very good demand. The only problem is really China. Even the transition to Windows 10. They were saying in Japan that the forecast or that the projection from major market analysts was very negative. We see a very good demand.
Yeah. By the way, this quarter is not the normal peak quarter. Our peak quarter was actually last quarter, Q2-
Yes.
in our fiscal year. When I talk about the capacity, it's definitely about the peak capacity. That means the impact to our shipment in this quarter will be less than last quarter, if we face the same situation. That's what I want you to understand. Okay. Kirk, would you please answer the second question?
Yeah. This is Kirk speaking. With regards to the hyperscale business, I think we have very strong confidence as we go into our next fiscal year that demand is definitely recovering. At the existing accounts we have, we've been holding or growing share relatively consistently. A few of those customers were still working through excess capacity, but there's a few things that I think should give us confidence. Number one, we're winning business now in storage, not just in the server space. We're winning business in the hundreds of millions of dollar range in storage, which is a first for us. The second is we have confidence because in the past, we have been a system integrator and perhaps not the motherboard supplier to some of these large accounts.
With our ODM + strategy, we know 18 months in advance that we have gotten design wins for motherboards, and that will improve our profitability as well as our ability to manage our supply chain more effectively than if we were acquiring boards from an ODM. The third thing is we're seeing components like SSD and memory that had seen the largest drops in a decade, now beginning to grow again, which will improve the revenue outlook year-on-year. I would say, as we said before, we're in six of the top 10 hyperscalers in the world, and we expect in the next fiscal year to be growing significantly across almost all of those.
We just added a sales force to cover the next wave of hyperscalers globally, and we have acquired now dozens of new customers that will be coming online in the next fiscal year. We are waiting week by week to look at where we do rely on ODMs for motherboards, how their factories are coming back. For the stuff we have internally, we have plants in Hungary, plants in Monterrey, and plants in Shenzhen that are all up and operationally supplying the demand this quarter.
Thank you.
Thank you.
Thank you. We are ready. Operator, we are ready for last question, please.
Next question comes from the line of [Abely] from Bank of America. Please ask the question.
Hi, Jenny and management team. Congratulate for good result. Actually, I would like to have an update on all the U.S. sector, like for PC. I think the memory price hike is positive for Data Center . Do you worry about the memory price hike will impact on your PC margin? Also on smartphone. I can understand, like in near term, demand could be kept due to a novel coronavirus in China. How do you feel like the 4G smartphone inventory in China? I feel like the 4G smartphone inventory is pretty high. Lastly, about Data Center. Can I have more update about like what would be the driver? Is it hyperscaler enterprise in China or non-China? Thank you.
Gianfranco, could you please answer the memory price issue? Probably, Buniac can help on the 4G inventory.
Yeah. I can, yes.
Go ahead.
Yes. You're right. No. On memory, we see some, I would say very small increase. It is mainly SSD rather than DRAM. We need to see with the novel coronavirus and in the current environment, what is going to happen in the next couple of quarters, because we have seen already during the last couple of weeks that rather than increase, they start to decrease again. We start to see memory going down again. I think in terms of impact on the margin, I don't see any major issue in terms of impact on the margin. For a couple of reasons. We have built up a very good inventory in terms of memory, so we have enough-
Component for at least this quarter and also next quarter. On the other side, the prices are now slowing down again. We will manage also in terms of configuration and pricing in order to avoid any impact on the margin. Frankly speaking, I don't see any major issue on memory.
Okay. Thank you, Gianfranco. Buniac, could you please answer the 4G inventory issue?
Yeah. We see the opposite. I think our inventory levels are slightly below target as we ended Q3 all over the globe, including China. Our activations in Q3 were much higher than our selling by almost half a million globally. What's not normal for this period, and in this current quarter, we are still seeing very strong activations, even with some measures we take to contain the expenses. We expect inventory by the end of this quarter, as we are not seeing any drop in activations, to be extremely healthy. Both in 4G and of course, we are just launching 5G phones in the next few weeks. I see actually the opposite right now. We have a very healthy inventory position, much, much better than a year ago and much better than one quarter ago. What's not normal for this time of the year.
Yeah. I agree with Buniac. Actually, in the rest of world, last quarter, our volume and revenue dropped as many because the supply shortage. Actually, we sold out more in the retail than we are selling to the distributor and the retailers. We don't have the inventory issue in the rest of world. I think probably the majority inventory you talked about is in China. But fortunately, in China, our business is not rather big. Actually, we don't have any inventory issue there. That will probably give us more opportunity to grow our business with new products. Okay, regarding of the DCG , Kirk, could you please answer the last question?
I think the simplest answer is we're seeing a strong premium to market across all geographies and in all segments. Hyperscale demand is recovering and strong. It should get stronger each quarter as we go through the next fiscal year. Again, as I mentioned earlier, not just in servers, but also in storage, and with improved profitability as higher-end workloads like SAP HANA move to the cloud. We're supplying not just 2-socket, but 4-socket and even 8-socket capabilities to some of the large cloud providers to meet that demand, and obviously, those margins are better than some of the entry products. Our non-hyperscale revenue, as you heard, was the highest in four years, and we're seeing premium to market growth, and it should continue to see that across software-defined infrastructure.
We're seeing strong growth across our hyper-converged infrastructure from Microsoft, from Nutanix, from VMware, as well as from smaller players like Pivot3. On storage, especially in all-flash arrays and hybrid flash arrays, we've seen more than 40% growth across our aggregate storage business, both with the NetApp joint venture in China, also with the expanded entry and mid-range portfolio we have in the rest of the world. On services, we're making very good progress. Our attach rate on services penetration is up another 7% year-over-year. We have our highest-ever deferred revenue on the balance sheet now, which should continue, again, consistently improving every quarter. In supercomputing, we've continued to use our Neptune warm water cooling to deliver on the TOP 500 list.
One in three of the TOP 500 computers in the world run Lenovo, and we have coverage now in 50% of the countries that are even on the list. That's 14 countries in the world where we're number one in total core, number one in aggregate performance with a 35% share. The simplest answer to your question is we're seeing strong premium to market growth and want to continue that on the top line, and this is our tenth consecutive quarter of PTI improvement. We want to continue that while still driving premium to market revenue growth. Thank you.
Thank you, Kirk. Operator, we are ready for the next question.
Next question comes from the line of Verena Jeng from Goldman Sachs. Please ask your question.
Yes. Hi, this is Verena from Goldman. My first question is on data centers. I would like to know, you mentioned that your software-defined infrastructure continue to win the market share. Could you elaborate more, like what are edges, advantages here, and who we are winning over the market share, and what's our target market? Is it China or outside of China? My second question is on smartphones. I would like to know how much of the production is coming from the Wuhan factory, and can our other factories cover the supply? Will this affect our mobile business profitability? Thank you.
Yeah.
This is Kirk. I can answer the first question maybe, on software design.
Yeah, please. Go ahead, Kirk.
I think what we are seeing is, in whether you're talking about the larger players like Nutanix, Microsoft, and VMware, in many cases, what we're hearing from our partners is that we may not be their largest partner, but we're definitely their fastest-growing partner. We're seeing a good balance and good consistent growth across Nutanix, VMware, and Microsoft on Azure HCI, and others. There's also some smaller players like Scale Computing, Pivot3, where we're doing some really good work around smart city, in terms of protecting citizens, like we've said publicly before for cities like Bogotá and others. Certainly in China, we're also seeing strong growth there, but it's been a consistent, strong premium to market quarter after quarter for many quarters now, and we think that will continue.
Our differentiation is we've built our ThinkAgile brand, to make it the most simple, highest performance, highest reliable solution in the market. Thank you.
Okay. Buniac, could you please answer second question? How much volume, which is produced-
Yeah.
by smartphone in Wuhan?
Let me check. First, half of our volume is produced, manufactured in China and around 60% to 70% of that in Wuhan. The factory's reopening tomorrow, and, I think, we expect some short-term volatility, and we'll manage through that. Now, that said, the Brazil factory, the India factory, we can increase capacity as if we need in the near future. We are managing carefully. Let's see how it goes, around half in China from what, 70% in Wuhan.
We actually, not just produce smartphone by ourselves, we also leverage the ODM to produce for us. In this conjunction, definitely we try to shift some production from Wuhan factory to third party as well. If they can resume the operations earlier than in Wuhan, definitely that will help.
Yeah. Actually, we are already doing that. In many parts of China on the ODMs, our production has resumed last week.
I think, given Lenovo is a global footprint, although, we will still see the impact, but we are trying to mitigate the impact to the minimum. Hopefully, the maximum volume to impact our smartphone is just 1 million or 2 million. That's the maximum. We definitely have the plan to mitigate that.
Thank you. Operator, next question, please.
The next question comes from the line of Howard Kao from Morgan Stanley. Please ask the question.
Hi. Good evening. Congrats on the quarter, thank you for taking my question. I have two questions. The first one is, in the very beginning, you guys talked about how there are some components from smaller suppliers that could be in constraint. Could you just give us a little bit more details on what kind of components these are, and whether how much inventory we have right now, and how we are thinking about that if there are any kind of logistics constraints where we could see some component shortages. My second question is, throughout this novel coronavirus outbreak situation, we're hearing across the supply chain that there are increased labor costs, logistics costs, and just all kinds of different costs. How will that impact our profitability this quarter, and perhaps the next quarter? Maybe are we able to pass it on to our end customers?
Thank you.
Howard, thank you for your question. To produce a product, even you are lack of a small piece of component, you cannot finish that. I have heard some of our competitors, just because they are lack of the package, so they cannot resume their operation. Fortunately for Lenovo, because we realized the issue earlier, so we prepared earlier. As I just talked to you, so even before the Chinese New Year, we realized the issue. We started to pull in all the components as early as possible, as many as possible. By now, I think we have enough components to ensure a couple weeks of production. I would not say I think we have enough inventory to ensure a couple of months, but a couple of weeks. We are okay. That's it for us.
For sure, if you want to ensure we will not have any issue here, we need to ensure all the smaller suppliers can resume the work, can resume the operation as early as possible. We are trying to help them, to get the approval from the government as early as possible. Regarding of the labor cost, actually, the direct labor cost accounts for small portion of our total expense. I'm not that worried about the significant impact. It will impact our individual, but not significant. Gianfranco.
I agree with Yuanqing. If you think that MVA, you own a notebook, it's between $ 5-$ 6.
That's it. Yeah. Our MVA. That means our cost to manufacture one unit of the PC is just $6 total.
Yeah.
That will not impact significantly.
There is almost no impact.
Yeah.
It's so small that it's not relevant at all.
Yeah.
Thank you. Operator, we are open for the last question, please.
The last questions comes from the line of [Hoi Chenyan] from CICC. Please ask the question.
Hi. Congratulations. This is [Hoi Chenyan] from CICC. Thanks for taking my question. I have two questions. The first is also regarding to the part shortage. I was wondering about the PCSD and the MBG if we don't consider the virus. You are talking about the shortage, and can I understand this as a pressure of the gross margin to the next quarter? The shortage will continue. The second thing is about the Can I have two numbers? The first is the percentage of revenue of your MBG in both SA and America. The second is the percentage of hyperscale servers in your DCG sector. Thanks.
Gianfranco, could you please answer the margin impact please? If the shortage will continue, I suppose.
Hello? No, I think.
Yeah.
Yeah. Because when you talk about the shortage, I think there are two different kind of shortage. One is for sure the impact coming from the novel coronavirus, and the other is that.
We still see some shortage on the CPU. The situation is improving, but it's not yet normalized. Frankly speaking, on both, as you see from Q3 result, I don't see any negative impact on the margin. Maybe we can get some positive impact from the margin simply because the entire market will be short of product. There is no reason to lower down price or to take action, or to clean inventory. All these things are gone. In terms of margin, we have been able to, if I look at Q3, and if you look at result, we have been able even to improve margin in a difficult situation in terms of supply or in terms of component supply. I really don't see any negative margin impact. I may see an impact in terms of some positive margin impact due to the shortage.
Simply because, as I said, demand worldwide on PC is still very good. Probably in Q1, the entire market, the entire industry will not have enough supply.
Yeah. I want to echo Gianfranco's points. Actually, operational excellence is Lenovo's core competence. Not only we know how to manage the margins during the supply shortage. As Gianfranco said, actually, supply shortage probably will help us to improve the gross profit. Also, even in the supply shortage situation, we still can manage our business well. The last quarter was actually a very good example. Actually, we planned to sell more Intel-based chips at the beginning of the quarter. We were informed, we couldn't get the supply they committed at the beginning of the quarter, in the middle of the quarter, like November. We quickly shift our product portfolio and the supply to other CPU vendors, AMD and the MediaTek supply. That will help us to deliver the historically high shipment and the revenue.
Also the fantastic performance in our PCSD. Actually, PCSD delivered a historically high shipment, historically high revenue and GP profit.
Margins.
Yeah. That's because of our excellent operation capability. We had a very short period to adjust, but we did that. Actually, last quarter, we sold almost competitively AMD-based PC. Also we sold more MediaTek-based Chromebooks as well. That's kind of our capability. We didn't waste even one unit of the supply at the end of the quarter. We converted those supply into the finished good and to meet the customer requirements. That's for sure Lenovo's unique core competence. We believe that will help us in current quarter as well.
Thank you, Yuanqing. Due to limited time, we are going to end our webcast now. We thank you very much for joining today's call. If you have any further questions, please feel free to contact me directly. 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.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.