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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
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 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 2 new hospitals in Wuhan. Donation from Lenovo employees and the Lenovo Foundation has arrived at places they need. We have also given away 100 activation keys of our remote office and the online meeting solutions to hospitals and small- and the medium-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 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.
Now 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 the pretax income reached all-time highs. Our Group revenue was USD 14.1 billion. Pretax income grew by double digits year-on-year and reached USD 390 million. Net income also improved by double digits year-on-year to USD 258 million. These results will 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 our product that meets our customers' requirement. And greatly reduced our finished goods inventory. So these efforts enabled our PC and Smart Devices business to deliver all-time records in revenue, in pretax income and in profit margin.
In PC, we not only extended our clear #1 position with record high shipments, but also outperformed the market year-on-year. Our strategy to focus on a high-growth under premium segments continues to deliver results. The volume in Gaming, Thin & Light, Visuals, Workstations and Chromebooks continued to grow at higher double digits and significantly outgrew the market year-on-year.
Innovation provides us another important growth driver. At the recent consumer electronics show, we demonstrated our leading technology in 5G and foldable with innovative products such as world's first 5G PC. Under 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 a very positive feedback.
Looking forward, while micro challenges may continue with a proven operational excellence and breakthrough innovation, we are confident that we will continue to drive premium-to-market growth in our PC business and the 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 greater responses from investors, media and tech opinion leaders. We will build on this excitement to re-enter the premium segment. In Data Center, our server volume grow by 18% year-on-year, though 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 4 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 the existing customers and continue to acquire new customers.
In our non-hyperscale business, we will continue to drive premium-to-market growth in servers, Software Defined Infrastructure, High Performance Computing, storage, software and services with the increasing customer diversity and a 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 Function Virtualization. Smart Vertical revenue doubled, thanks to triple-digital revenue growth in Data Intelligence Business Group, Smart health care and Smart education solutions.
We have noticed accelerated demand in China for our remote office, online education, online health care and other online services solution due to impact of the ongoing epidemic.
Last but not least, as we mentioned in the last quarter, our software and services revenue continued its hypergrowth and reached USD 1 billion in a quarter for the first time, up 41% year-on-year.
Looking forward, things there are still much uncertainty around the novel coronavirus. We will actively manage this evolving situation through our geographical balance, operational excellence and a solid strategic 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, 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 delivered exceptional execution against a backdrop of the 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 continued sales mix improvement paid off.
The improvement of Data Center Business was again in a positive profit [ catalyst ]. Our transformation actions had led to accelerated growth in high-margin software and services business, and in turn, improved overall profitability.
Operating expenses rose 10% to $1.8 billion, and the E/R 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 PTI increased 11% year-on-year. And PTI dollar is at an all-time high. Among all business group, our PCSD business is the largest in the world, with the highest ever PTI margin, while MBG and DCG continue to improve their profitability. Our ability to set a new milestone in PTI 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 USD 0.0216 from USD 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 the first half of the fiscal year. We made less cash from operations compared to the corresponding period last year due to the 2 initiatives we took in the quarter. We have built some strategic position on critical parts, 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 pretax margin in PCSD and proper expansion in MBG, our IDG delivered a PTI of $687 million, up 17% year-on-year and its PTI 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 a strategy to capitalize on the high-growth and premium segments growth potential. The revenue from premium products across Workstation, Thin & Light, Visual 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 & Services business, with its revenue up by a strong double-digit year-on-year and carried the highest margin profile among all products.
Leveraging this strategic shift in the sales mix, the PCSD business group set a record PTI margin of 6.2% in quarter 3 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 focused strategy to invest and develop the business in regions where it has competitive advantages remain effective, helping MBG deliver positive PTI for the fifth consecutive quarter.
Latin America remains 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 4 years, representing double-digit year-on-year growth. We delivered strong growth in Data Center Infrastructure, Software Defined Infrastructure, Storage and Software & Services.
Our DCG operation in China sees the opportunity to broaden its sales operation product portfolio.
The storage revenue grew at a strong double-digit rate, thanks to the NetApp joint venture, a new product growth in entry and mid-range flash arrays. Our software defined infrastructure product performance have win market share and achieved strong double-digit revenue growth.
For Hyperscale business, the annual revenue comparison was most difficult for the period under review. And 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 narrowed its losses by USD 8 million year-on-year to USD 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 Chinese 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 logistic 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 continuous decline in place, and we'll leverage our global manufacturing capabilities and strategic supply partnership.
We expect a rebound of demand in China after stabilization of the health crisis, where the demand from the rest of the world remains strong, will help accelerate the recovery of our business in China.
Further, 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 slide.
For PCSD, our goal is to continuously deliver industry-leading profitability and increase of 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 & Services.
For Hyperscale business, the group will leverage its differentiated in-house design and in 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. And now we can take your questions.
Thank you, Wai Ming. Now we will open the line for questions and this section will be in English only. [Operator Instructions] Operator, I'll turn it over to you now. Please give us your instructions.
[Operator Instructions] We have the first question comes from the line of Gokul Hariharan from JPMorgan.
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 in 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, 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 '21 or calendar '20? And when do we expect Hyperscale to come back to strong double-digit growth after being relatively weak in the last several quarters?
Thank you, Gokul. I will answer your first question. So probably Gianfranco can help to add something. Then Kirk Skaugen will answer your second question. So definitely coronavirus outbreak impacted our demand in China and our production capacity in China as well. Mainly because of 3 reasons.
First, so -- we have delayed our factory reopen time. Second, so let workers come back to the factory. So supply is also impacted, particularly the cost components that are produced by the smaller suppliers. So they are also facing the issue to reopen the factory. But for Lenovo, we are more optimistic on our supply, although it will be impacted in this quarter as well. So regarding of the factory, we open, so now -- by now, most of our factories in China have already been reopened again, except for Wuhan and Chengdu factories. So we see a multiple problem in this cost guided by those 2 cities.
Regarding of workers. So we are providing the support and incentives to encourage more workers to come back to work. So 2 factories are more important for our PC supply. Volume at Shenzhen another issue reported. So our current estimation is by the end of this month, we can resume 100% production to start in Shenzhen by the end of this month. And we can resume 7 as I said, [indiscernible] by the end of this month. So definitely, for Wuhan factory, so it's mainly for smartphone. So we are waiting for government guidance, to be [indiscernible] on the Chengdu is mainly for sales comp. And also -- Lenovo has a very diversified manufacturing footprint. So we actually have the global footprint. So that will help us -- help ourselves as well.
So we have smartphone manufacturing factory in Brazil, in India. So that will have our Smartphone business, particularly in Latin America and then in North America. And also we have a factory in Japan, in Mexico, in U.S. for our PC and the server as well. So that will help our PC and server business in the rest of the world. From demand point of view, so definitely China current quarter will be impacted. So the good news is cycle of work, our demand for all our products, including PC, smartphone and data center are still very strong. So as I said, no wonder we can leverage our rest of work manufacturing facility to fulfill this demand, but also that can help our China manufacturing -- factory to ramp up. So that's regarding your first question.
So I don't know whether Gianfranco, you want to add something to that. By the way, so regarding of the supply. So I talked about the third important message is supply. So right after the outbreak of the virus, so we realize the issue. So we immediately are pulling some supply to our warehouse. So yes, so I think for a shorter period, we have enough of component to resume the operation, resume the factory production. And also we are helping most of the suppliers, smaller suppliers to resume work, to resume the operations so that from longer point of view. So we still can have enough component in supply. So that's my answer. So Gianfranco, you want to add something here?
Yes, I think a couple of things. One, we will be ready to ask, when will be back to full capacity, I think, that within Q1 by the end of March, we should be able, at least in Israel and some other factories it'll be back at 100% capacity. The other thing is that we see production does go down in China. On the other side, we still see very strong demand on PC in the rest of the world, U.S., EMEA, and Japan, Asia Pacific. So I think in terms of demand in the rest of the world, we could see a very good demand. The only problem is really in China. That's even though transition to -- the China transition to [ Windows 10 ] clearly, it's not over yet, because even in Japan that the forecast or the projection from major market analyst, it was very negative. We could see a very good demand.
Yes. So by the way, this quarter, it's not Lenovo's peak quarter. So our peak quarter requested last quarter, Q2 I think [indiscernible]. So when I talk about the capacity, it's definitely about the peak capacity. So that means the impact to our shipments in this quarter will be less than last quarter, even refer to the same situation. So that's what I want to -- want you to understand. Okay. So Kirk, I mean -- would you, please answer your second question?
Yes, this is Kirk speaking. So 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. And we're winning business in the hundreds of millions of dollar range in storage, which is the 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, but 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 OEM.
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. So I would say, as we've said before, we're in 6 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.
In addition, 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. But for the stuff we had internally, we have plants in Hungary, plants in Monterrey and plants in Whitsett that are all up and operationally supplying the demand this quarter.
Next question comes from the line of Abel Lee from Bank of America.
Jenny and the management team. I'm grateful for results. Firstly, I would like to have an update on all the U.S. sector like, your PC, I think the memory price hike is possibly for data centers, but we worry about the memory price hike, will impact our your PC margin. Also on smartphone -- yes, I can understand like a near-term demand could be kept due to the coronavirus in China. But how do you feel like the 4G smartphone inventory in China? I feel like the 4G smartphone inventory is pretty high. And lastly, about data center. Can I have more update about like qualitative driver. Is a hyperscaler enterprise in the China or non-China?
So Gianfranco, could you please answer the memory pricing, probably Buniac can help on the 4G inventory.
Yes, yes.
Go ahead.
No. On memory, we see some, I would say, there is more increase, with memory rather than DRAM. We need to see with the coronavirus and with -- 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 started to decrease again, as we start to see memory going down again.
But 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 for this quarter and also next quarter. And on the other side, the price are now slowing down again. And we will manage also in terms of configuration and pricing in order to avoid any impact on the margin. So frankly speaking, I don't see any major issue on memory.
Okay. Thank you, Gianfranco. So Buniac, could you please answer your 4G inventory issue?
Yes. So I mean we see the opposite. I think our inventory levels are slightly below target as we ended Q3 over the globe, including China. Our activations in Q3 were much higher than our selling by almost 0.5 million globally, what's not normal for this period. And in this current quarter, we are still seeing very strong activations, even if some measures we take to contain the expenses. So we're expecting the inventory by the end of this quarter, as we are not seeing any drop in activations to be extremely health both in 4G and, of course, we are just launching 5G phones in the next few weeks. So we -- I feel actually the opposite right now. We have a very health inventory position, much, much better than a year ago and much better than 1 quarter ago, what's not normal for this at the time of the year.
Yes. So I agree with Buniac. So actually rest of the world. So last quarter, we -- our volume and volume readiness are dropped, as mainly because the supply issue -- supply shortage. So actually, we sold more product than we -- we sold out more products in the retail part, than we sale into the future business and the retailers. So we don't have the inventory issue in the rest of the world. So I think, probably the majority inventory, you talked about is in China. Fortunately, in China, we -- our business is another one, the big part. So actually, we don't have right now inventory issue and [indiscernible]. So probably, it will give us more opportunity to grow our business with new products. Okay. So regarding of the PC, Kirk, could you please answer the last question.
Yes. I think the simplest answer is we're seeing strong premium-to-market across all geographies and in all segments. So hyperscale demand is recovering and strong. It should get stronger each quarter as we go through the next fiscal year. Again, because 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 4 years, and we're seeing premium-to-market growth, and we 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 the 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, but 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-on-year. So we have our highest-ever deferred revenue on the balance sheet now, which should continue, again, consistently improving every quarter. And then in supercomputing, we've continued to use our Neptune warm-water cooling to deliver on the top 500 list. Now 1 and 3 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. So that's 14 countries in the world, where we're #1 in total core, #1 in aggregate performance with 35% share. So 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 10th consecutive quarter of PTI improvement. We want to continue that, while still driving premium-to-market revenue growth.
Next question comes from the line of Verena Jeng from Goldman Sachs.
This is Verena from Goldman. My first question is on Data Center. So I would like to know, you mentioned that your software defined infrastructure continue to win the market share. So could you elaborate more or like what's our 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?
And my second question is on smartphones. So I would like to know like how much of the production is coming from the Wuhan factory? And can our other factories cover the supply? And will this affects our mobile business profitability?
Yes. So...
So this is Kirk. I can answer the first question maybe on software defined?
Yes, please. Go ahead, Kirk.
Yes. So 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. So we're seeing a good balance and good consistent growth across Nutanix, VMware and Microsoft on Azure HCI and others. There is 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 Bogota and others. So 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. So Buniac, could you please answer the second question. So how much of volume was produced of smartphone in Wuhan?
Yes. So let me say, so first half of our volume is produced -- manufactured in China and around 60% to 70% of that's in Wuhan. So the factories we're opening tomorrow, and I think we expect some short-term volatility, and you manage through that. Now that said, the Brazil factory, the India factory, they can -- we can increase capacity, if we need in the near future. So we are managing carefully. Let's see how it goes around half in China from what, 70% in Wuhan.
Yes. So we actually -- so not just produce smartphone by ourselves, but we also leveraged ODM to produce for us. So in this conjunction, so definitely, we try to shift some production from Wuhan factory to third-party as well. So if they can resume the operations earlier in the Wuhan, so definitely that will help.
Yes. Actually, we are already doing that. So in many parts of China on the ODMs, our production has resonated last week. So we'll make it from -- because I think most of this...
I think we -- given Lenovo's global footprint. So although, you will still see the impact to the minimum. So hopefully, so the maximum volume to impact our smartphone is just 1 or 2 million. So that's the maximum, but we definitely have the plan to mitigate that.
The next question comes from the line of Howard Kao from Morgan Stanley.
Congrats on the quarter. So I have 2 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?
And my second question is, throughout this 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? Or maybe are we able to pass it on to our end customers?
So Howard, thank you for your question. So to produce a product, even lack of a small piece of component, you cannot finish that. So I have heard some of our competitors, just because they are lack of the package, so they cannot resume the operations. But fortunately, for Lenovo because we realized the issue earlier, so we prepared earlier. So as I just said -- talk to you -- so even before the Chinese New Year, we realized the issue. We've started deploying all the components as early as possible as many as possible. So by now, I think we have enough components to ensure a couple of weeks production. I would note that we think, we have not inventory to issue a couple of months, but a couple of weeks. So we are okay. So like we said for our parts.
But for sure -- if you want to reinsure, so we will not have any issue here. So we need to -- issue of the smaller suppliers can resume the work -- can resume the operations as early as possible. So we are trying to help them to get the approval from the government as early as possible. So that -- regarding of the labor costs. So actually, the labor cost accounts for small portion of our total CapEx. So I'm not rather worried about the significant impact. So it will impact a little bit, but not a significant. So Gianfranco...
No, I agree with Wai. If you think that[ NBA ] you own an order book is between $5 to $6.
Yes, yes, yes. So that's -- yes, that's -- our [indiscernible] part. So that is our effort to manufacture unit of the CC. It's just $6 a product. That would not impact significantly.
There is no impact. So small, but it's not relevant at all.
Last question comes from the line of [ Hao Chen Yong ] from CICC.
Congratulations. This is [ Hao Chen Yong ] from CICC. I have 2 questions. The first is also regarded to the shortage -- the part shortage. I was wondering about the PCSD and MBG, if we don't consider the wireless, because you are talking about the shortage and can I understand this as a pressure to the -- of the gross margin for the next third quarter which is -- the shortage will continue.
And the second thing is about the -- can I have 2 numbers. First is the percentage of revenue of your MBG imports sourced America? The second is the percentage of hyperscale server in your DCG structure?
So if you can, Gianfranco. Could you please answer the margin impact? If the shortage will continue, I...
Hello? I think there are two different, I would say, when you look about the shortage, I think there are 2 different kind of shortage. One is, for sure, the impact coming from the coronavirus. And the other is that we did see some shortage on the CPU. The situation is improving, but it's not yet mobilized. And much frankly speaking on both, as you see from Q3 results, 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 rather down -- lower down price or to take action or to clean inventory. So all these things are our job. And in terms of margin, we have been able to -- if I look at Q3 and if you look at the results, I mean we have been able even to improve margin in a difficult situation in terms of supply -- in terms of component supply. So I really don't see any margin impact on -- negative margin impact. I may see an impact in terms of some positive margin impact due to the shortage, but simply because -- as I said, demand worldwide on PC is still very, very good. And probably in Q1, the entire market, the entire industry will not have enough supply.
Yes. So I want to echo Gianfranco's point. So actually, operational excellence is Lenovo's core competence. So not only we know how to manage the margins during the supply shortage. So as Gianfranco said, there is actually the supply shortage probably will help us to improve the gross profit. But also -- so even in the supply shortage situation, we still can manage our business well. So last quarter it was actually a very good example. So actually, we planned to sell more Intel-based chips to the beginning of the quarter. But we were informed, so we couldn't cater the supply that are committed at the beginning of the quarter -- in the middle of the quarter, so like November. But we quickly shifted our product portfolio and the supply to other CPU lender, SMB and media -- with Media Tech.
So it doesn't help us to deliver this historical high shipment and the revenue. And also the fantastic performance in our PCSD. So actually the PCSD delivered historical high shipment, historical high revenue and the profits, that's because of our excellent operational capability. So we had a very short period to adjust, but we did that. So actually, last quarter, we sold almost [indiscernible] PCs. And also we sold more media chat with that the Chromebook as well -- so in Lenovo's history. So that's the kind of our capability. We did in the west that even 1 unit of the supply. So at the end of the quarter, so we converted those supply into the finished goods and into the -- and to meet the customer requirements. So that's for sure, Lenovo's unique core competence. We believe that we'll have it in current quarter as well.
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