Morning, and good evening. Welcome to Lenovo's Quarter 1 Result webcast. This is Hugh Wu, vice president in IR and treasury at Lenovo. Before we start, let me introduce our management team with us today. We have Chairman and CEO, Mr. Yang Yuanqing. President and COO, Mr. Gianfranco Lanci. Group CFO, Mr. Wai Ming. President of Data Center Group, Mr. Kirk Skaugen. President of Motorola, Mr. Sergio Buniac. We will first start with our presentation. After that, we will take your questions. Now, let me turn it over to Yuanqing. Yuanqing, please.
Hello, everyone. Thank you for joining us to discuss our financial results of the first quarter fiscal year 2018-19, and our progress in executing our Three-Wave Strategy. Four quarters ago, I shared with you that Lenovo has passed the turning point, and now we are in the phase of acceleration. Accelerating our transformation strategy execution, as well as the upward momentum in business performance. For the second straight quarter, we saw strong double-digit growth in revenue year-on-year. Global revenue reached almost $12 billion, up 19% year-on-year. Profits also followed the momentum. Our pre-tax income was $113 million. An improvement of more than $182 million year-on-year. The profitability improved across all our businesses. Since we combined the PC, mobile, and the smart devices into Intelligent Devices Group last quarter. The new group is energized by synergy from the shared platforms and resources.
IDG delivered a double-digit top-line growth and improved profitability year-on-year. We remain committed to driving the convergence of computing and communication technologies to enable smarter IoT and capture future opportunities through executing our Three-Wave Strategy. In the first wave, our PC plus tablet business continued to deliver strong double-digit growth for the second consecutive quarter, while we maintained the industry-leading profitability of 5%. In PC, we were the fastest-growing player among the top five, according to IDC. Our revenue grew almost 20%. 12 points premier to the market, driven by strong growth in commercial segments. Commercial mix reached a historical high of 63%. The integration of Fujitsu further solidified our position in the PC industry. We have returned to worldwide number one last quarter in PC by Gartner. We have been number one in overall PC plus tablet for four consecutive quarters by IDC.
We will continue to sharpen customer engagement through direct go-to-market, like e-commerce, relationship model for large accounts. Invest in high-growth segments like workstation, gaming, thin and light to drive growth. We will continue to strengthen our focus on Premier products to achieve higher average selling price for better top-line growth and profitability. With these efforts, we are confident in sustaining our premier-to-market growth while maintaining industry-leading profitability. Our second wave business, mobile, is definitely improving its health through executing the clear strategy. First, we reduced operating expenses by more than $100 million year-on-year. In fact, our goal for this fiscal year is to control the annual operating expense of Motorola business to below $1 billion. This means we will reduce the expense by $800 million since we acquired this business over three years ago.
Second, we refined our product portfolio and successfully launched the Moto G6 and the E5 products. Third, we focused on selected markets where we can compete and make a profit. In Latin America, we continued to outgrow the market in both revenue and volume for seven quarters in a row. In North America, our volume nearly doubled year-on-year. This is the fourth consecutive quarter of more than 50% year-on-year growth, driven by the right scaling strategy to expand it to all four major carriers. In key emerging markets, China and India, we are committed to further investing in the right brand strategy and product portfolio, and quickly return to healthy growth. We will continue to invest in innovation. This month, we announced the 5G upgradable phone, model Z3, in the U.S., with a 5G model scheduled to ship early next year.
We will be the first company to provide the 5G mobile experience to customers. Another second wave of business, Data Center Group, is on track to become a sustainable growth and a profit engine for our company. Revenue grew almost 68%, highest since IBM x86 acquisition, and profitability improved 11 points year-on-year. Accelerating double-digit growth for the third consecutive quarter, driven by software-defined infrastructure, high performance computing and AI, and hyperscale. Hyperscale revenue grew triple digit once again, while improving gross profit and diversifying our customer base. In addition, Lenovo surpassed HP to become number one supercomputer provider on the TOP500 supercomputing list, with 117 systems. Software defined accelerated further, driving triple digital growth year-on-year as well.
We will continue executing our current strategy to improve our hyperscale business model by further expanding our in-house design and manufacturing capability, strengthen our leadership in high performance computing and AI, grow storage and networking, and continue to drive service attach and revenue growth. We will also move aggressively into growth markets like NFV and edge computing. In the third wave, we are also making good progress in smart IoT plus cloud, and infrastructure plus cloud. We are shipping Mirage Solo VR headset and camera, Smart Display in the United States, and received very positive feedback. Our consumer smart IoT-based services started to generate revenue in China, Japan, and Brazil. Similarly, our Smart Office also provided key wins at commercial customers like Microsoft and Michelin. The Device as a Service business has acquired large deals in Asia Pacific.
We are also providing vertical intelligent solutions and piloting commercial IoT-based industry solutions in selected vertical industries. Driven by these efforts, our services and software revenue reached almost $460 million U.S. With a firm belief in our direction and persistent execution, it is clear that Lenovo has turned the corner. I'm confident that as our execution of transformation strategy and the performance growth accelerate, with all cylinders fired up, sustainable returns will follow. Thank you very much. Now, let me turn it over to our CFO, Wai Ming. Wai Ming, please.
Thank you, Yuanqing. I will take you through Lenovo financial and operational performance in Q1 FY 2019. Next chart, please. Let me first share with you income statement highlights for the quarter one performance. Our transformation actions continue to show consistent and accelerated result improvement in Q1. Our revenue grew 19% year-on-year and achieved a record high first quarter with strong PTI improvement year-on-year, led by strong revenue performance from both PCSD and DCG. Gross profit increased by 20% year-on-year, while gross profit margin increased 0.01 percentage point year-on-year to 13.7%. The result was driven by better business performance in both PCSD and DCG. Operating expenses increased by 6% to around $1.5 billion, where the expenses to revenue ratio decreased 1.5 percentage points year-on-year to 12.2%, mainly due to the expenses saving from both the repositioning of strategy in MBG and the group revenue growth.
Group PTI was $113 million, which showed an improvement of more than $118 million from a loss of $69 million a year ago. All business group profitability have been significantly improved. Profit attributable to equity holders for Q1 was $77 million, also meaningfully improved from a $72 million loss from a year ago. Basic earnings per share for the quarter was $0.065, compared to a loss of $0.066 last year. Next chart, please. Cash generated from operations was at $336 million in Q1, improved from growth year-on-year and quarter-to-quarter, thanks to the operational and working capital improvement during the quarter. At the end of quarter one, we have net debt of $1.8 billion versus $1.3 billion of net debt in the previous year. The higher debt position was mainly due to the utilization of additional revolving facilities to finance business expansion.
In Q1, the cash conversion cycle was negative eight days, seven days worse year-on-year, due to longer inventory days that resulted from our component buy-ahead plan for PCSD and DCG businesses. We expect the buy ahead will subside in the upcoming quarters with inventory days improving. Next chart, please. In the first quarter after we combined PCSD and MBG into the Intelligent Devices Group, IDG has been able to drive synergy from shared platform and infrastructure, which help the group expand our ecosystem and achieve healthy revenue growth with profit improvement both year-on-year and quarter-to-quarter on a pro forma basis. The strong double-digit revenue growth was driven by our strong PC business. The PTI margin improved year-on-year for three consecutive quarters, driven by PCSD business, which was able to keep its industry-leading profitability of 5%, while MBG continued to improve its profitability as planned. Next chart, please.
Our PCSD business delivered another strong quarter with 19% year-to-year revenue growth, which is the second consecutive quarter to achieve the double-digit growth. Even without the contribution from the JV with Fujitsu, with our organic growth at 12%. The strong growth not only come from the continued healthy growth from our commercial businesses and workstation products, but also from the continued strength in the fast-growing niches, including gaming, thin and light, and visual products, which all achieved double-digit growth in quarter one. The group Three-Wave Strategy also shows solid growth in Q1 in ramping up its services and e-commerce business that we call the strong double-digit revenue growth, showing our strength in direct reach to users.
In addition, the group also launched several new smart devices in consumer smart IoT, including Mirage Solo, Mirage Camera, and Daydream, Smart Display with Google, and in commercial IoT, including Smart Office or ThinkSmart Hub 500, Smart Enterprise Solutions with Lenovo Big Data and Lenovo Connect. These smart device launches demonstrated the group's innovation and leadership in technology. Revenue in Q1 was $8.3 billion. Pre-tax income was $418 million, up 43% year-on-year. PTI margin improved 0.08 percentage point to 5% level. Our PTI margin has shown quarter-to-quarter improvement since the previous financial year, driven by improved product mix, focusing on high-growth premium segments and with improved services attach rates. Next chart, please.
For our mobile business, our execution of turnaround strategy was on track to improve profitability during the quarter, thanks to the continuous strong momentum in Latin America and North America, and the inventory clearance along with our repositioning in emerging markets. Our expense reduction actions were also executed well, thus resulting in a more efficient cost structure and improved margins. Revenue improved 23% quarter-to-quarter, and pre-tax loss was narrowed by $44 million quarter-to-quarter and $75 million year-on-year, reflecting signs of business stabilization with our repositioning strategy. We will continue our strategy to streamline product portfolio to reduce the business complexity and continue our focus on increasing scale in the mainstream segments to further improve profitability over time. Reported PTI margin improved four percentage points year-on-year, thanks to the expense action, resulting in a more competitive and efficient cost structure. Next chart, please.
Our Data Center Group is on track to become a sustainable growth engine for Lenovo. Q1 revenue continued its double-digit growth of three consecutive quarters, and the growth of 68% in Q1 is the highest since the acquisition, while the PTI margin continued to improve for five consecutive quarters. All geos saw high double-digit revenue growth. In North America, we even achieve a triple-digit growth, which is already the fifth consecutive quarter of growth. In China, we also deliver our record revenue in Q1 with more than 50% growth year-on-year. Our product segment performance. Our hyperscale segment achieved triple-digit revenue growth while margin improved significantly. Our gross margin saw an increase of 13 percentage point year-on-year, thanks to our previous efforts, including our in-house design and manufacturing business model and diversifying our customer base.
Our high-performance computing business has become worldwide number one in the TOP500 list, and the software-defined segments also achieved triple-digit revenue growth during the quarter. Meanwhile, our traditional infrastructure business continue its positive growth trend with strong momentum in the flash-based storage solutions with more than 40% growth year-on-year. Revenue from data center business was up 68% year-on-year to $1.6 billion in Q1. Our PTI margin improved significantly by 11 percentage point, and pre-tax loss was narrowed to $63 million in the quarter. Next chart, please. Looking ahead, we'll continue to focus on driving profitable growth, building on the strong results of the last few quarters. As Yang Yuanqing mentioned, the formation of Intelligent Devices Group combining PCSD and MBG allow us to drive synergy from the shared platform that we have been building.
We'll continue to drive premium to market revenue growth and maintain our industry-leading profitability for our PCSD business. We'll continue to improve the user experience with our innovation products and to drive future growth. Our smart devices are in the go-to-market phase, starting to contribute to our revenue. For mobile business, we'll continue to execute a strategy of reducing complexity, streamlining portfolio, driving a more competitive cost structure, and continue to significantly reduce operation loss. Meanwhile, we'll focus on driving profitable growth from core markets, growing our strong position and profitability in both Latin America and North America, and strengthening our presence in mature market. We'll also continue our investment in innovation, just like our recent effort to launch the first 5G upgradable phone in the world. For Data Center business, we are confident to deliver sustainable profitable growth over time.
We established a solid foundation through our organization structure, product portfolio, and sales force to drive long-term growth. We will continue to outgrow the market in software-defined infrastructure. Meanwhile, we'll continue to strengthen our leadership position in high-performance computing and AI, invest further in services, storage, and networking, and continue to expect momentum in our hyperscale business, thanks to our unique in-house design and manufacturing business model. Our industry has now quickly moved into the smart IoT era. Hence, we will accelerate the convergence of the different technologies and devices, enabling us to address more market opportunities in the future and to drive our smart IoT plus cloud business to the next level. Coupled with our competitive cost structure and efficiency, we are confident that our profit improvement will continue, and we remain confident in our vision and strategy to deliver long-term profitable growth. Thank you.
Now we can take your questions.
Thank you, Wai Ming. We want to accommodate questions from as many people as possible, so please avoid multi-part questions, and limit to just two questions at one time. Please state your name and the name of your company before your question. All the Q&A will be English only. Operator, would you please give us your instructions?
Sure, sir. Ladies and gentlemen, we will now begin the question-and-answer session. 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 the hash key. We have our first question from the line of Gokul Hariharan from JP Morgan. Please ask your question.
Hi. Morning, and thanks for taking my question. First of all, congratulations on a good set of results. First question on the mobile side. Can you talk a little bit about the strategy in mobile? Is there any strategy to come back into markets like China and India once you strengthen the portfolio a little bit? The second part of the question is there any profitability target that you have in mind now, given the losses have started to narrow quite a bit? That's my first question. The second question is, you are starting to break out your services and software revenues in the last several quarters. I think last year it hit about a billion-dollar-plus of revenues, last fiscal. This quarter, I think it's about $450 million.
Could we have some detail in terms of what exactly are the parts that are included in the service and software revenues? What is the underlying profitability in this segment compared to the hardware business? Obviously, it's likely to be higher, but could you give us some indication about what the profitability looks like in the segment?
Okay. I will invite our MBG leader, Sergio Buniac, to answer your first question.
Yeah. We are still playing in emerging markets, including India. What we did, we took a more conservative approach as our target this year is to reduce the loss. Keeping having the losses quarter-over-quarter, year-over-year. The deal is still the same. We want to align our expense toward profitability, invest in core strengths. That includes playing the emerging market with a more conservative approach, reduce complexity, keep investing in innovation, and foster the consumer. Nothing has changed. In terms of profitability, our commitment is still to narrow the losses on a continuous basis quarter-over-quarter and year-over-year. Not more than quarter-over-quarter because of the magnitude.
Gokul, why we could improve our MBG business. I think the key reason is that we have the clear intent for this business. We want to turn around this business as soon as possible. We have the initiatives to be focusing to achieve this goal. First, we reduce the expense significantly. Last quarter, we reduced more than $100 million year-over-year. Actually, we are very confident that this year we can run our Motorola business. Motorola is the majority of our MBG business. We can run our Motorola business at below $1 billion expense. That represents almost a 50% year-on-year
reduction if you compare to three or four years ago, or right after we acquired the business from Google. Second is we are focusing on the mainstream product that we have successfully launched both G6 and E5. That's another reason. The third reason, we are focusing on the selective markets. Definitely, EMEA is still our stronghold. Also, we think we have more better opportunities in mature markets, particularly North America. Actually last quarter, we almost doubled our volume in North America. These strategic directions definitely give us a good return. Regarding the emerging markets, we will only be focusing on China and India. Three markets. Definitely, the purpose is to drive the profit of those two largest markets in the world over time. Definitely in China and India.
Not only we sell the Motorola, but also we sell Lenovo as well. That's related to the mobile business. Yes. We are more focusing on our service business. Because we believe service business is one of the three pillars of Lenovo of customer-centric transformation. The other two are customer experience. We must ensure the product experience, delivery, quality. These kind of things are to customers. The second is customer engagement. We must ensure we have a direct window with our customers. That means we must strengthen our e-commerce, our large account direct relationship with our business models. Also we need to strengthen our consumer fan club, this kind of thing. Those are the first two pillars. The third pillar will be the service business.
Definitely, we believe if we can strengthen our service business, that will strengthen our customer-centric transformation as well. We have made a lot of progress in the past couple of quarters. We are more focusing on the upsell service, extension warranty service, Premier service. Those are related to the devices. Meanwhile, we are strengthening our IoT-based cloud service as well in both the consumer side and commercial side. Last quarter, I shared with you how we want to build a UDS platform, user device and services. We have seen the first step results in China and in Japan and in Brazil. We are quickly building the team to start this business. Also, we are focusing on providing the intelligent solution for some vertical industries, leveraging the commercial model IoT in some selective vertical industries.
That is why we can have the better service revenue last quarter. We have seen that the booking revenue for our service is increasing. Actually last quarter, the booking revenue increased by more than 20%. That is a good signal to us. Over time, we still can have the better service revenue or even better service revenue. Gianfranco, you want to add something to the service?
No. Service, I think, we are on top of Premier, we are also running Device as a Service. We start to see some very good results. The pipeline is huge, but we also start to see some conversion from pipeline to contract. I think as Yuanqing said there, we have seen the service growing more than 20% year on year. Talking about the margin, it is probably four times the margin we do, between three to four times the margin we make on the devices, just to give you an idea. It is a combination of Premier service and Device as a Service.
Next question.
Our next question is coming from the line of Chris Yim from BOCOM International. Please ask your question.
Hi. Thanks for taking my question and congrats on the good results. I was wondering if the management can comment on the near-term PC and DCG demand outlook, with relations to the current commercial upgrade in PC, maybe back-to-school sales, and then on the DCG front, maybe on the comments on the continued hyperscale demand outlook. Thank you. That's my first question.
Okay. Gianfranco will answer on the PC, Kirk will answer the DCG.
Well, on PC, I think, as you see from both Gartner and IDC, we are back to growth, not only on revenue, but also on units. I think on units it's the first quarter after, I don't know, I even don't remember how many years that it was negative. It is coming, frankly speaking, from for sure the upgrade to Windows 10 from Enterprise, but we also see a very good growth on SMB. This is coming from, I would say, overall economic environment. It's not really only coming from Windows 10 transition. Consumer is still slightly behind, I would say, mainly some emerging market. But if I look over the next, for this year, I think we will continue to see good revenue growth and also some different CA growth in terms of market. The only question mark is probably exchange rate.
That is partially compensated by component cost that finally start to go down. But on the other side, we see the exchange rate going up. But I think overall, I am quite positive, we are quite positive on PC in terms of PC demand and growth. We will continue to see the same growth, at least for the next two or three quarters.
Yeah. That was it.
That was it.
Okay. Kirk.
Yes. On Data Center Group, this is Kirk. I think for hyperscale, as we mentioned last quarter, we have design wins now with six of the TOP10 global hyperscalers. Our profitability is improving, and we still continue to see strong demand. As we bring these design wins to production, which will happen over the next months and next several quarters. Some of these new design wins will be coming to the marketplace next quarter as well as the following quarter. We have diversified the customer base outside of China. We have also diversified the customer base beyond the TOP10 to the next 50 or so, because about 40%, I think, of the volume in hyperscale is beyond, say, the super seven.
I think the business model we are using, we are using our own factories now, both at a motherboard level as well as a system level, and now doing over 30 custom products customized to the unique needs of the super seven is playing out quite well for us. I think we have more procurement power than a typical OEM. We have a supply chain that sells into 160 countries, and I think our quality has been world-class. I think we are quite bullish on hyperscale. Having said that, it is lumpier than a traditional business. I think we just have to be aware of that. On the on-prem, I think we do see a resurgence on the on-prem as well. We see our results in software-defined infrastructure, our triple-digit growth. Again, I think it is a testament to a few things.
We do not have a legacy network or storage business to protect, so we are very aggressively moving to the next generation of hyperconverged infrastructure. We have been the fastest or close to the fastest-growing OEM on the planet in software-defined infrastructure now for several quarters. We are basically seeing in the move from a traditional infrastructure to a software-defined, we are seeing us grow our share either 2X or 3X in that move. The ThinkAgile brand, I think from that perspective, is quite strong. We do see a resurgence as things like some of these hyperconverged infrastructures are providing a better cost structure to people that want on-prem solutions. As you saw this quarter, we announced a new composable cloud solution around ThinkAgile CP in an exclusive partnership, with Cloudistics as well.
We are continuing to expand the portfolio beyond what we have been doing with VMware and Nutanix and Microsoft, Pivot3, and others. Thank you for the question.
Thank you.
Regarding the PC, our growth is mainly driven by the commercial. We grow at a hyper rate. For example, with the digital business, our enterprise public revenue grew close to 40%. Our SMB grew by 27%. Actually, last quarter, our commercial mix reached 63%.
The historical high. I think that also helps our profitability because we can make a better profit in the commercial side. That is what I want to share with you as well.
Thank you. Next question, please.
Our next question is coming from the line of Arthur Lai from Citi. Please ask your question.
Hi. Thanks for management to take my question. My question will be focused on the DCG. On page 10, you highlight that the revenue up over 60% and also profitability improved significantly. Can Kirk tell us what drives the bigger change and also what we can expect in the next two years? This is my first question. My second question is, some investors, they trust me to ask. Recently, they have been observed the server DRAM spot price start to decline, and they wanted to know, is a positive impact to your profitability or actually is a sign of the global server demand could be softening? This is my second question. That is it. Thank you.
Yes. I think if you look at the year-on-year revenue growth, it has been driven by things like triple digit growth in software-defined infrastructure, triple digit growth in hyperscale computing, and then as we have expanded our portfolio storage solutions, particularly in flash arrays, more than 40% growth. On top of that, we have grown our professional services business over 30%, and it is a profitable and growing entity, and we are increasing our Premier services as well associated with that at quite good margins. All of those are growth drivers. I think in the future, you should expect us to continue to increase our network attach, our storage attach, and our services attach to continue to make inroads on profitability. I think overall, SSD pricing obviously has been okay and things like that. So that is the-
But it is not the demand declining.
Yeah.
It's more capacity.
Correct.
Those are moving to 3D.
Correct.
Gianfranco want to add something to the-
No. Yeah. It's the SSD and DRAM, they start to go down, but it's not because the demand is slowing down. It is because most of the manufacturer, they move to 3D, and now capacity is much bigger than it six or 12 months ago. It's not really because demand is going down. It is because there is much more capacity available.
The last thing I would say about the DCG profitability is we've enhanced our training and our selling capability. Over the last year, we've trained over 11,000 certified experts, so they have the ability to sell higher end, more profitable solutions versus just doing box pushing. It's a more profitable sale for us based on a more technically trained channel and sales force.
Yeah. Thank you. Next question, please.
Our next question is coming from the line of Wei Chen from Goldman Sachs. Please ask your question.
Yeah. Thank you. Good morning. Your comments on the PC growth outlook for the next few quarter is pretty positive and your mix of 63% in commercial PC is also pretty good. But in this reporting season, we've been kind of picking up some data points around a major CPU platform shortage risk in the second half of 2018. Can you comment about how this could impact your business? Any risks, any mitigation plans to move to a different CPU platform? That's my first question. Thank you.
Yes. I think they try well most, but there is a shortage on CPU, so it is difficult to neglect it. There is a shortage. It is mainly on the new technology, while if you run on the traditional CPU, like you is more or less okay. The real issue that we have been working during the last quarter to go back to the old platform. On the other side, we are also running or working on alternatives to Intel CPU. I think we have today a very good offer on the AMD CPU too, but we will probably need to increase even more, with the current situation. There is an impact. Frankly speaking, I would say we can manage the impact, we can manage the negative impact within something very, very small.
At the end, when we said that we will continue to see double-digit growth and on the high side of the double digit, we also take in consideration that the CPU. Without the CPU, probably can be even better. But I do not think that is going to impact. Frankly speaking, most of the industry is moving back to older technology or is moving to alternative platforms.
Yeah. Okay. Thank you.
Even in the Chromebook, right?
Even Chromebook, in consumer.
Yeah.
Frankly speaking, even on enterprise, we start to see alternatives to Intel growing nicely.
Mm-hmm. Yeah, so, is that-
Intel, we start to work already more than one year ago, so we have the platform ready.
Oh, okay.
This is something from our side. Most of the platform are ready.
Okay.
Thank you.
I understand.
Thank you. Well, now we are going to take the last question because of limited time. Please raise your last question for the interest of time.
Our last question is coming from the line of Thompson Wu from Credit Suisse. Please ask your question.
Thank you. Good morning. Thanks for getting me in the queue. The first question is on the PC business. I would have thought with the higher mix of corporate in the quarter, we could have seen even better performance on operating margin or pre-tax margin. A very good job at 5%, but I thought we could have seen better scale. How should we think about Fujitsu? Was that a headwind for margins? If so, how can we think about cost and scaling over the next 12 months? That is my first question. The second question has to do with the repurchase of the stake in a manufacturing plant for notebooks. How should we think about that plant's utilization over the next few years? Is that intended to build more notebooks, or is the idea to transition that to build more data center, some components like server motherboards?
How should we think about that manufacturing within your overall production plans for your businesses?
Gianfranco will answer your first question, and our CFO will answer your second question.
On the first question, you said that, you told that we could be even higher on commercial.
Correct. Very good performance already. I felt like with the higher record mix of corporate, perhaps pre-tax margin could have seen more growth. Just was thinking maybe Fujitsu had dragged that down in the quarter, and there might be opportunity to
No, no, no.
You know.
If you No, I think that, as I said, we are at 63% of commercial against the consumer. I don't think you find any other company with the same mix today. Even though the other companies, they said they are very focused on commercial, but at the end what they push is consumer or Chromebook. Our percentage of Chromebook within the 63% is much smaller than other people. It is. The other thing, when you look at year-to-year improvement in terms of profitability, I think it's almost one point, right? 0.8. So we are from 4.2% to 5%. So it's a very good improvement, and it's mainly coming from, of course, commercial business. Commercial means both enterprise and SMB, but not for consumer. The last thing, if I look at PC alone, only PC, our profitability is 5.5%.
Then when we include the smart device, tablet, it's going down to 5%. And I don't think we can expect much better than 5.5%. I think we will do our best to keep this for the rest of the years. But if you compare with competition, we are running already at probably two points better than-
Competition.
than competition. So, on x86, I think, [inaudible], and then I think Wai Ming can be much more deep than me. But we are already running, we are already producing something between 20 million to 25 million notebook per year in x86. So it's a big portion of our notebook, both consumer and commercial. And we also start starting, we also produce both for third party, and we are also starting to produce both for DCG.
For DCG.
For hyperscale.
For server.
For server. We are being certified by Intel, so we are in a very good position in LCFC today, not only on PC, but also in terms of motherboard for server business.
Yeah.
But we will continue to maintain the 20 million to 25 million, and if we continue to see this growth, it is probably going to be 25 million to 30 million, because it is growing together with our business.
.
Yeah. Fujitsu business actually went-
Oh, no. The other question? No.
Yeah.
Sorry, I forgot Fujitsu. When you look at Fujitsu, I think that with the synergy, but we still need to work on certain things because it is only the first two months. But with the synergy, Fujitsu will not drag our margin down. It is not going to improve, but I think we are going to run Fujitsu with the same margin we are running the rest of PC worldwide.
Yeah. Actually, Fujitsu has a higher mix in the commercial.
It's even bigger on commercial.
Even bigger in the commercial, rather than consumer.
And a very good
That will help us on the commercial mix, and we believe the commercial mix will not be just the growth driver, but also the profitability driver as well. That is our view.
Normally, I think you probably get it not 100% correct. I think the 49% shareholding in LCFC that was owned by Compal would have been sold to an independent third party. It is not repurchased by Lenovo. Our shareholding remained at 51%, and Gian franco and Yang Yuanqing just now already mentioned about, I think our continuing use of the factory to do, I think not only PC, but also our server business. But I just want to clarify that we did not increase, I think, take the 49% that was actually sold by Compal, I think to a third party.
It is fine.
Thank you, Daniel.
Thank you.
Thank you everyone for your participation in today's call. If you have further questions, please feel free to contact me or our IR representative directly. This webcast replay and the conference call replay will be available in the next couple of hours. Thank you again for joining us today. Thank you.
Bye-bye.
Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.