LNVGF - Lenovo Group Limited (LNVGY) Q2 2024 Earnings Call Transcript

2023-11-16 06:07:03 ET

Lenovo Group Limited (LNVGY)

Q2 2024 Earnings Conference Call

November 16, 2023, 02:00 AM ET

Company Participants

Jenny Lai - Vice President of Investor Relations

Yang Yuanqing - Chairman and Chief Executive Officer

Wai Ming Wong - Executive Vice President and Chief Financial Officer

Ken Wong - Executive Vice President and President of Solutions and Services Group

Kirk Skaugen - Executive Vice President and President of Infrastructure Solutions Group

Luca Rossi - Executive Vice President and President of Intelligent Devices Group

Sergio Buniac - President of Mobile Business Group and President of Motorola

Conference Call Participants

Presentation

Operator

Good morning, good afternoon and good evening. Welcome to Lenovo's Investor Earnings Webcast. This is Jenny Lai, Vice President of Investor Relations at Lenovo. Thanks, everyone, for joining us. Before we start, let me introduce our management team joining the call today. Mr. Yang Yuanqing, Lenovo's Chairman and CEO; Mr. Wai Wong Ming, Group CFO; Mr. Ken Wong, President of Solutions and Services Group; Mr. Kirk Skaugen, President of Infrastructure Solutions Group; Mr. Luca Rossi, President of Intelligent Devices Group, Mr. Sergio Buniac, President of Mobile Business Group and President of Motorola. We will begin with earnings presentations. And shortly after that, we will open the call for questions.

Now let me turn it over to Yang Yuanqing, please.

Yang Yuanqing

Hello, everyone, and thank you for joining us today. Last quarter, despite the macro challenges, we saw clear signs of recovery across the technology sector. Our strong execution to our strategy, operational excellence and continuous investment in innovations enabled Lenovo to achieve quarter-to-quarter improvements in our performance. Once again, showcasing our business resilience, we are confident in our ability to resume year-on-year growth very soon.

Meanwhile, by leveraging - our continued investment and the growing portfolio of AI technologies over the years. We received a wide recognition for our AI for all vision and capabilities demonstrated at our Annual Tech World last month.

Furthermore, we strengthened our AI ecosystem and partner [Technical Difficulty] the exponential growth in the AI area. Last quarter global revenue achieved a quarter-to-quarter improvement for the second time in a row. [Technical Difficulty] SSG solutions and services growth.

Last quarter, SSG revenue and operating profit both reached historical highs. Again, we protected the support services and the software as our core profit engine and further expand the managed services and the project and solutions services. The revenue mix of which has grown 3 points year-on-year to account for 56% of SSG total business, leveraging the strong momentum of our hero offerings such as digital workplace solutions, hybrid cloud and sustainability.

We have been integrating these horizontal building blocks into smarter vertical solutions and services for different industries, winning breakthrough customer deals in multiple markets. Lenovo's new hybrid AI professional services practice is also enabling enterprises to use hybrid infrastructure and AI to transform their business.

Next, our Infrastructure Solutions Group or ISG. Last quarter, facing headwinds from global economy slowdown, platform migration as well as a supply shortage for key components, ISG's overall revenue and profitability were inevitably impacted, but we achieved a strong performance in storage, software, services, edge and the high-performance computing. In particular, storage achieved our all-time revenue record, which met us the third largest total storage provider in the world.

Looking ahead, we expect the development of hybrid AI to drive the future growth and diversification of the global ICT infrastructure market. It will gradually find a balance between public cloud, private cloud and the local data centers between cloud and edge as well as between AI computing and the traditional computing with AI being more balanced between training and influencing.

At Lenovo, we are well positioned to address this trend with our richest infrastructure products and solutions. We will continue to strengthen our portfolio and the competitiveness as well as operational excellence. We remain confident to resume growth and profitability as soon as possible.

For Intelligent Device Group or IDG, despite the tremendous market challenges last quarter, we maintained our global number one position in PC shipments and activations. Even though our overall revenue experienced a year-on-year decline, we maintained our profitability resilience with our industry-leading operating margin by taking concrete actions to further strengthen our operational excellence.

Meanwhile, our smartphone business achieved a double-digit shipment growth year-on-year, even though the market was flat. We further enhanced the competitiveness of our products and optimized our portfolio with a higher mix of Cremer [ph] products. We will fully leverage generative AI to accelerate the launch of our next generation of AI devices, including AIPC as scheduled next year, and we remain committed to investing in technology innovations for growth and to build long-term competitiveness.

Before I close, I want to emphasize that Rome was not built in a day, while the leap in AI applications, driven by generative AI and large language models might seem recent. Lenovo has, in fact, been persistently executing our intelligent transformation strategy for many years. This has given us a distinctive head start in building a comprehensive AI product roadmap that includes a rich smart device portfolio, such as AI-enabled PC, smartphone and tablet, as well as AI-ready and AI optimized infrastructure solutions and services. This unique advantage also enables us to build the strongest partnership in the industry. Together, we are well positioned to capture the huge opportunities brought by this level of AI revolution.

Thank you. Now let me turn it over to our CFO, Wai Ming Wong. Wai Ming, please.

Wai Ming Wong

Thank you, Yang Yuanqing. I will now take you through Lenovo's financial and operational performance for Q2 in fiscal year 2024. Next chart, please.

In Q2, the group began to yield benefit from accelerating demand momentum and improved profitability. Despite last year peak performance, creating a high base and a 16% year-on-year revenue decline, group revenue grew 12% quarter-on-quarter to $14.4 billion. This marks the second consecutive quarter of sequential growth, confirming a recovery trend with a growth rate faster than our 10-year average of 9%.

Gross margin reached 17.5%, the highest for a second fiscal quarter, supported by the group's unwavering investment in innovation and the increasing contribution from our high-margin Surface business.

Group E/R ratio remained higher than our typical target range due to smaller top line. On non-HKFRS standard, group profit attributable to equity holders was $273 million, representing 40% quarter-on-quarter increase, although still down 54% compared to our nearing peak profit set a year ago.

Basic earnings per share came in at $2.49 [ph] Today, the Board of Directors declared an interim dividend of HKD 0.08 [ph] same as last fiscal year. SSG is the high priority growth engine that [indiscernible] has the group service-led transformation and margin expansion. Its revenue and operating profit both reached all-time highs. The share of non-PC sales improved to 40% of the combined sales of the group's three business groups.

Sales of IDG and ISG made sequential and robust improvement, signaling momentum in demand recovery after a few challenging quarters. The group will continue to focus on accelerating transformation, driving demand recovery and seizing new growth opportunities in order to expedite business recovery, we are committed to restoring target profitability with our priority being to double net margin in the medium term.

Next chart, please. The group efforts to optimize operational efficiency help to shorten the cash conversion cycle to negative four days base of accounts receivables and inventory together improved by nine days year-on-year, of which six day came from inventory days improvement alone, a reduction of $2.2 billion in inventory level was achieved through our active management in raw materials.

Q2 Finance cost was down $7 million quarter-to-quarter, thanks to prudently lower borrowings offsetting the higher base interest rates. Last but not the least, S&P Global rating upgraded the group's long-term credit ratings to BBB with a stable outlook, affirming our operational resilience and the effectiveness of our strategy in diversifying our growth engines.

Next chart, please. SSG has once again achieved record high performance with revenue growing 11% year-on-year to $1.9 billion and operating margin of 20%, which is a few times higher than our corporate leverage [ph] showcases our business strength. This was achieved despite a mix shift and a high base comparison that resulted in a slightly lower margin year-on-year.

Managed Services grew 31% year-on-year on strong demand for or as-a-service solutions and accelerated geographic expansion, which includes a TruScale breakthrough win in Japan this quartrer. Premier Support and Sustainability solutions, such as CO2 offset and reduce carbon transport continue to boost our penetration rate.

SSG is also leveraging AI to enrich its service portfolio to meet the evolving needs of our customers. A newly unveiled g Care of One platform service is the first of its kind AI-empowered advisory service that makes it possible for clients to reduce deep time and maximize optimization. Our AI professional services can help customers to deploy Gen AI securely and efficiently in the hybrid environment and Lenovo Intelligent Sustainability Solution Adviser is another AI-powered service that assists our clients in aligning their IT environment with their sustainability growth.

Next chart, please. The infrastructure market is currently transitioning to support the growth opportunities in AI. This has resulted in short-term challenges, including supply shortage of key GPU components, [indiscernible] shifts away from traditional general purpose computing and a slower-than-expected transition to DDR5 based platforms.

ISG recorded a 5% quarter-to-quarter revenue increase and a $7 million improvement in operating profit, suggesting stabilizing sector demand. Year-to-year revenue declined 23% with operating loss. Despite the headwinds, ISG delivered multiple performance records, including all-time high revenues in storage.

According to third-party statistics, Lenovo is now the third largest storage supplier by global revenue market share, a significant advancement of 5 positions from just a year ago. Within the storage market price bands of 25k and below, Lenovo has helped number one position for four consecutive quarters. Moreover, we also achieved double-digit revenue growth in high-performance computing with five consecutive quarters of year-to-year growth. Our edge and software revenue both achieved an all-time quarterly record with 10 and four consecutive quarters of year-to-year growth, respectively.

ISG is investing in the development of differentiated technology solutions in general purpose service, hybrid cloud, HPC, data management, AI and edge computing. As part of these efforts, Lenovo has recently unveiled a new edge server with differentiated technology featuring 32% less power consumption.

Next slide, please. IDG solidified its global PC market leadership ranking number one in four out of five geos with expanded market share. This revenue was up 12% sequentially. Our performance is seasonal average of last 6 years despite a decline of 16% year-on-year on high comparison base.

With the confirmed recovery trend, IDG revenue growth is expected to turn positive in the near future. IDG achieved an operating margin of 7.4%, returned to the high end of its historic range, thanks to continued R&D investment in innovations, operational excellence and exciting new product launches.

The segment also made great progress in seizing growth opportunities beyond PC products, driving non-PC sales up 2.4 percentage points year-on-year to 20% of IDG's revenue. Our smartphone business continued to accelerate market share gain in its growth and strong home markets with double-digit premium to market growth in shipments.

Our innovations such as AIPC, which features AI computing and private foundation models as smart devices are expected to be a powerful driver for the PC replacement cycle from the second half of 2024. AIPC also bodes well to the growth strategic positioning in AI from pocket [ph] to cloud, allowing for provision of end-to-end solutions that effectively harness the power of AI.

Next chart, please. The group has consistently received numerous recognitions for its ESG performance such as its recent inclusion in the 2023 Hang Seng Corporate Sustainability Index with the highest score in the IT industry for its environmental and social achievements. The group was also granted the champion status in 2023 Canalys Sustainable Ecosystems Leadership Matrix and was dragged as the best place to work for disability inclusion by the Disability Equity Index for the third consecutive year.

Among our various ESG initiatives, Lenovo has taken a significant step towards advancing the United Nations sustainable development goals by joining the UNGC forward faster initiative, which sits to expedite private sector actions in realizing the SDGs outlined in the 2030 agenda.

Next chart please. The group continued investment in innovation has diversified our growth engines and unlock new opportunities in intelligent transformation, especially in AI. Our investment goes beyond hardware devices, software, services and ecosystem to address the challenges in privacy protection and data security management. All in all, the group will seek to harness the full potential of AI from pocket to cloud.

Looking ahead, SSG will launch new AI embedded services to accommodate enterprise customers' growing demand for AI technology, while safeguarding its core business with high value-added support services across both PC and infrastructure sectors, strengthening partnerships and channel tools are also key growth initiatives for SSG to undertake to enhance its contribution to the group's success.

ISG has extended its industry-leading full stack offerings to include hybrid cloud, HPC, data management, AI and edge computing. AI present new opportunity for ISG, which is supported by its ODM business model and the new AI innovations program designed to meet the demand for vertical solutions. The business segment will further diversify its customer base and acquire new accounts while balancing between general purpose systems and customized cloud offerings. This will ensure scalability, cost efficiency and the optimization of revenue growth and profitability.

The stabilizing global PC market is poised for year-on-year recovery in late 2023. IDG will leverage the commercial upgrade cycle, the premiumization trend and the AI PC to drive premium to market growth and maintain its PC market leadership.

Meanwhile, IDG will prioritize efficiency, cash generation and non-PC investment. In the smartphone business, we will focus on portfolio and regional expansion and differentiation given rapid 5G adoption. Finally, as always, we remain committed to driving sustainable growth and profitability improvements for our shareholders.

Thank you. We will now take your questions.

Jenny Lai

Thank you, Wai Ming. Now we will open the line for questions. [Operator Instructions] Operator, please give us your instructions.

Question-and-Answer Session

Operator

[Operator Instructions] Thank you. And our first question is coming from Mr. Robert Chan with COA [ph]

Unidentified Analyst

His first question is on PC market. What is your expectation on PC market and the [indiscernible] target goes in the market. And his second question is on AI. When do you expect AI to tackle could you - could you discuss AI [indiscernible] how is it going to be?

Yang Yuanqing

Yes. So probably this is a question for our IDG leader Luca. Luca, please.

Luca Rossi

Yes. So thank you, Yang Yuanqing, and thanks for the question, and good morning, afternoon to everyone. So the first half was the bottom of the PC demand, and we are looking cautiously optimistic in the second half and where we see some early signs of stabilization with Lenovo performing better than the market, driven by our record activation share and our balanced market position with the leadership in BC in 4 out of 5 geographies globally.

And we believe in 2024, the growth of the market will solidly, driven by a large installed base to be refreshed post-COVID, we do [indiscernible] repayment cycle and new exciting product launches, such as AIBC. We are modeling 2024 with a low single-digit growth from the total available market from 2023.

Moving to AIBC, we believe that AIBC will be an inflection point for the PC industry, starting from 2024 and accelerating in 2025 and 2026. When we start, I would say, AI PC is not something new for Lenovo because in the last 2 years, we already invested in AI techniques to make our PC smarter and adapted to the user need. So we believe we have enhanced to on the AI technology there.

There will be the beginning in '24 accelerate in the second half of '24. I think there was a question on the AUR. Definitely, the configurations will become richer and the demand for those devices will require more memory, more storage and also more CPU computing power. And we are still modeling how much will be the AUR growth. But definitely, there will be a good upside there.

What percentage? So regarding the percentage of AIPC, I believe it's a little bit early to give us a final number. We are thinking that 2023 – 2024 will be before, it will be a 1-digit percentage of the market and the acceleration for AIPC is going to be in 2025 with many more and new designs to be launched. Thank you.

Operator

Thank you, Luca. And the next question is coming from [indiscernible]

Unidentified Analyst

Followed the new U.S. regulations in that segment and the company's AI strategy?

Yang Yuanqing

Yes. So we are still tightly communicating with the U.S. government to assess the relevant impact to our customers and to our business operation. But anyway, Lenovo will continue to comply with all applicable laws and regulations. So in every market we do business Meanwhile, I want to say Lenovo is global and diversified the business. So we have a strong global and resilient supply chain and manufacturing footprint. And I believe we can navigate this and continue to support our customers needs in all the markets we do business.

Operator

Thank you, Yuanqing. And the last open is coming [indiscernible]

Unidentified Analyst

How quickly can server [indiscernible] And are there are any update on China server business, even at edge...

Yang Yuanqing

Yes. So probably Kirk is the best person to answer this question.

Kirk Skaugen

Yes. Thank you. So I think as we look at the future, we believe that as we go into the next calendar year and next fiscal year, we'll have a more balanced market between what today is largely driven by large language models and becoming more balanced between storage, compute, large language models and AI inferencing. So that's number one.

I think our profit growth drivers are continuing to be strong with records in storage and then records in services and growing quarterly software numbers. The other thing that will help our profit is as the DDR5 transition continues to happen, those motherboards move in-house for both Intel and AMD at Lenovo. So that improves our cost, delivers higher utilization in our factories and ultimately will improve our profit.

And then lastly, we'll continue to manage our costs and expenses so that we can get profitable as quickly as possible. So I think a more balanced market and recovery. We saw quarter-on-quarter improvement going into this quarter, and we expect quarter-to-quarter improvement going into the current quarter as well.

Relative to the China AI market, we're continuing to evaluate new chips that are coming to market from our suppliers, and we'll have updates in the future. But as Wai said, we'll comply with all export regulations as new chips come out for all the markets we do business in. Thank you.

Operator

Thank you. And the net question comes [indiscernible]

Unidentified Analyst

What's the future for [indiscernible] in 2024? And what is your strategy to take off the India smartphone market?

Yang Yuanqing

Yes. So Buniac, please answer your question.

Sergio Buniac

Yes. So very clear. I think, first, our strategy is to become double the business in the next 3 years. We are now on track to achieve that goal. I mean, at the mid of the first year, that means in India, we need to become a top 3 player in the next 3 years. Last quarter, we grew in Asia, close to 50%. And in the October month, that's probably the biggest month in some festivals in India, but we are seeing triple digit grow year-over-year.

We, in partners online, we have already achieved double-digit market share in October, what shows very good progress. We are expanding offline, and we are seeing also our premium franchises growing much faster than the mainstream. So that franchise the Razor [ph] So high expectations on India. We are on track on the plan and not different in the rest of the globe, very similar strategy, growing faster in premium and especially in Foldable. Foldable is the first form factor in a long time attracting consumers from iOS, many percent of our Razor consumers are coming from iOS and we expect that growth to continue to expect to sell in the current generation 5x what we sold in the previous generation of the results.

Operator

Thank you. And the next question is coming from Mr. Jerry Huang from VMP [ph]

Q – Unidentified Analyst

And the question is AI workload versus AIPC. What kind of AI workload could be transferred to a data center to AIPC at its launching 2024, such that it creates [indiscernible] In other words, in most workload - well, they will be down at data center and how well AIPC?

Yang Yuanqing

Yes. No, I think in for me. So we are confident that AIPC value-added will be significant and transformative foreign users that will be both in commercial and consumer segment with significant productivity gain for the user. We are investing in R&D to deliver unique and exclusive features to further differentiate and expand our leadership and more specifically, a natural language interaction, processing speed for the AI workloads and the edge, security, privacy, low latency and low power consumption will be all the characteristic of the AIPC, which we believe will deliver such value.

As a last point, obviously, this will not be only at the edge, but will be an hybrid blend of client edge and cloud. So this also further give us an opportunity given our exclusive pocket to the cloud offering to further differentiate in the market. Thank you.

Wai Ming Wong

Yes. So I want to add a couple of fun here. So definitely, as AIPC will help to protect the customers' personal data probably so that's the most important fact that in the future people would need AIPC. But additional to that, so today, AI workload is mainly for the training. So that's the advantage of the comp.

But over time, the workload will shift to the inferencing - so if all the inferencing still happens in the cloud, so definitely, it will impact the efficiency and the cost. So we think with the workload shift, so probably between client devices, edge and cloud, you will see more balanced some of these three areas. So that's our view. So that's also why we need to AIPC to do some inferencing work - with the more efficiency and the lower cost.

Operator

Great. The next question is coming from Anthony with Jeffrey Morgan [ph]

Q – Unidentified Analyst

And what is your PC market are looking the calendar quarter 4 and next calendar year, how sustainable is your PC margin? Is there any one-off items this quarter? And what is Lenovo’s view on ATC. Is it accounts for state spec upgrade? Or is it the unique driver? And what's the expectation on AIPC penetration in the last few years?

Yang Yuanqing

Yes. So this is also for me. So PC market outlook calendar Q4, we are now modeling flat year-over-year. And in 2024, we are modeling low single-digit growth. No, there are no one-off income only for this quarter. Obviously, how sustainable is the margin. I think you definitely have a very competitive market as usual, but we think we can still drive the profitability for this business in the high range of becoming – and even beyond that with the following durations I'm trying to summarize higher average [indiscernible] with a market shifting to premium, our only normal share gain in the premium and commercial segment, reach configuration, as I mentioned for AIPC [indiscernible] configuration, we believe this trend will be visible in '24, but accelerate further in ‘25.

Our focus on efficiencies and services and software - and I will conclude with our strong competence in what we call design to cost, given our leadership in R&D and innovation. And then on the last item, the expected AIPC penetration, as I said before, for '24, we are modeling a single-digit share of the AIPC in the total market, growing 25%. And according to many analysts, it could be 50%, 60% in the market in 2026. Thank you.

Wai Ming Wong

Yes. So simply good. We are very confident to not just a kid or you may improve the profitability in our PC business, you should know the past year probably was the toughest period, so in our PCs. So we still keep the very good GP margin and the operation profit, so with our competitive products and operation excellence. So we definitely believe with further investment in the AI and the innovation sharpening our operation excellence. So we will further improve the GP margin as well as the operation profit. Thank you.

Operator

Last question coming from [indiscernible]

Q – Unidentified Analyst

So NVIDIA is to trying to integrate is their own superior engines [ph] in order to widen its dominant position in AI supermarkets, not just for training, but also for infrencing. So what is going to be the impact to server ecosystem? Could you do it?

Yang Yuanqing

Yes. So probably Kirk, you can talk first.

Kirk Skaugen

Sure. As I mentioned, I think as we look at AI, we've established a strong position with the initial $1.2 billion we invested and now an additional $1 billion we've committed to invest over the next 3 years as Lenovo. Our AI strategy drives a very broad portfolio from edge to cloud with our unique ODM plus development model, where we're building our own motherboards and putting them in our own factories.

The second thing we're doing on AI is delivering simplified solutions through our AI innovators program. So that regardless of what your business size is, you can easily deploy AI technology. And then the third is the services we announced.

So relative to NVIDIA, I think you saw the strong support from all our partners at Lenovo's Tech World. We had Jensen on stage, Lisa, Pat Gelsinger and Cristiano from Qualcomm, and we plan to support all of those accelerators going forward.

In addition, we will be the reference design partner for several of those partners as we look at next-generation form factors that start optimizing the system around the GPU. So I think we believe in customer choice will be customer-driven. And relative to both the CPU and the GPU from NVIDIA we will be supporting. Thank you.

Operator

Thank you, Kirk.

Q – Unidentified Analyst

And then from the managed business research has a question our services business with some workers now returning to the offices. Have you seen a shift in organization, consumption of PP service like that and/or traditional life cycle services?

Kirk Skaugen

Yes. So Cam, so our SSD leader will answer the question.

A – Unidentified Company Representative

Thank you, Ben, for the question. So through our interaction with our customer, I think we continue to see a couple of support needed and also trend in the market. Number one is hybrid work is the longer one-off phenomenon or more - becoming a new normal, where especially when we talk about the whole workplace technologies, right.

The second one is we continue to see a strong demand in terms of asset service, right, because this is the agility and also the facility - the flexibility that the customers are looking for. And hence, we continue to see strong double-digit demand growth in the as-a-service segment of the IT services. And also some of the data points that we are seeing is suggesting that 1 in 5 commercial PCs in the coming 3 to 5 years where we consume as a service manner.

Last but not least, this is another phenomenon that we see in terms of our customer demand change is they're looking for a new technology that could transform user experience right. And that is why, for example, we just announced our care of one platform, which is a highly automated hyper-personalized technology to help to deliver the next level of employee experiences to our digital workplace solution. Thank you.

Operator

And [indiscernible]

Q – Unidentified Analyst

Is raising question regarding to AI. Can you please tell us that for your business in China? Would it be possible to share your geographical exposure for your AI ever business?

Yang Yuanqing

Yes. I think scale [indiscernible] so probably could the answer first.

A – Unidentified Company Representative

Yes, we don't disclose the split by geography, but I think we're seeing good demand globally for AI technology and a lot of the AI as it balances out between large language models and inferencing, we're seeing a lot of demand even at the CPU level, not just the GPU level as the world starts to drive inferencing more from the early demand in large language models. So I think that's our situation. Thank you.

Yang Yuanqing

And also why we committed to comply to the regulation. We also - we meet the customer demand. So definitely, for - even for China market for China users, we will have the different portfolio to meet the requirements.

Operator

Thank you. And the next question is coming from [indiscernible]

Q – Unidentified Analyst

What are the key reasons for the decline in terms of cash from March 2023 level? And what's the other receivables in the market?

Yang Yuanqing

Yes. So probably our CFO answer the questions...

Wai Ming Wong

Thank you. Thank you for the question. The decline in cash item is primarily the way how we manage working capital. As most of you know that I think interest rate remains pretty high, and we have actually been trying to optimize our cash level by managing our three components of working capital and then mainly our receivable inventory as far as our payables.

I think we are actually in a very comfortable position. Our cap remained pretty strong. You will know that lately, I think Standard & Poor and for actually upgraded our investment brand rating. So is - again, this is primarily driven from the external environment because of the continuously high interest rate environment and therefore, we try to optimize between a very healthy balance sheet, a healthy cash flow against the expenses we pay for the interest. Thank you.

Operator

Thank you, Wai Ming. [indiscernible] is asking regarding to what is Motorola strategy to [indiscernible] smartphone and by which here with overall plans to make it like a portfolio of 100% last...

Wai Ming Wong

Yes. So Buniac.

Sergio Buniac

Yes. So I think, number one, our 5G mix is growing slightly faster than the market. Of course, the different maturity levels, some markets like North America growing faster just because the carrier deployments are coming faster. We are seeing our price ranges going down by almost 30%, 40% in the last 2 years, also in line with the market. What is democratizing 5G over the place.

And probably normally the 3G to 4G 3 to 5 years, at least 90% of the portfolio should be 5G between the next 24 to 36 months. But we'll go in line with the market. So that also depends on the deployment from the carriers in each market. So some markets probably - you'll see that next year like North America, more 3 months and the others, 18 months.

Operator

Thank you. And our next question comes from [indiscernible]

Q – Unidentified Analyst

Can you please talk about the benefit of AI on both PC and software [ph]. This could be a statement driver if it captures consumer imagination. When we talk about the license, et cetera, what is the use case we have in...

Yang Yuanqing

So thinking this way, IPC will be - now you are talking about consumer will be your personal tween - so key with the IFC will know everything about you, we'll be able to process the data value in your other line. So without the need to loaded into the cloud because I'm sure nobody wants to put on the cloud certain private data. So that is a very powerful use case where you will have the AI workload capability at very high speed, you need to think about several trillions of operations per segment will be the capability of this new generation of PC to elaborate AI workloads.

But doing it on your device without moving your data to the cloud. I think that will guarantee privacy, security, low latency, certain things are also requiring low latency. So this is the one of the used cases we have in mind in consumer, so personal win. Then you can imagine in commercial, you were on the productivity used case, where the PC will be able to do things that were just imaginable today with this new computing power that they will have.

Wai Ming Wong

So basically, you can enjoy the advantage of today's larger language model to write pre-appointed - picture, et cetera, et cetera. But the new one, you don't need to share all your personal data with the public cloud. So that's the advantage of - so we have a survey to our customers, and most of them like the ID. So that's for sure.

But so as Luca said, so gradual will be in become your personal partisan or we call it a personal trim. So what does personal trim it means only you can use this device. Meanwhile, only this device or your personal team can understand you better. So if you ask that - ask it to do people they will always give you the best other large line.

Operator

We will move to the next question coming from [indiscernible]

Q – Unidentified Analyst

What are the key cost drivers for an IA PC renewable add the entire cost structure of the new generation of machine...

Yang Yuanqing

So I think - I believe that you can just take the configurations will be richer, so more premium then also the selling price, the market will shift towards more premium. There is no issue on managing the costs. I would tell you instead that given our R&D efforts in the last 2 or 3 years, we are very confident that we have and we will have the best design to cost. So that is why we want to deliver superior margin in the PC industry.\

Operator

Thank you. And the next questions is coming from [indiscernible]

Q – Unidentified Analyst

What's your view and the edge [ph] and equivalent, which is the equivalent new and [indiscernible]. Are you going to ship service edge in plus [ph] in China in 2 or...

Yang Yuanqing

Yeah, Kirk.

Kirk Skaugen

Yes. So I think right now, we're evaluating the technology. We plan to be compliant, as we said, with all export control regulations in all the countries we do business with, including China. Our understanding right now is there are new NVIDIA chips that are not on the restricted list. And so for those kind of chips, we will certainly want to be time to market with our key partners, whether it's in video or others. So it's still early days, but certainly, there's chips that are going to be targeted at that market, and we'll continue to use our flexible supply chain to meet customer needs.

Operator

Thank you. And the last question is coming from [indiscernible]

Q – Unidentified Analyst

[indiscernible] IT services looking in 2024 and what will be the blended ASP and margin offset for AIG versus normal thing. So there are actually 2 different questions.

Yang Yuanqing

Okay. Thank you, Susanne. So regarding the IP services outlook, number one, I think even though there are a lot of dynamics happening in the market, but throughout our conversation and interaction with our customer, I think our customer is more relying on leveraging technology to create competitive edge for their business. And that's why if you look at the overall IT services market, you continue to see resilient demand from the IT services market, right? That's number one.

Number two, among all the IT services market segment, we definitely see a pocket of faster growing segment. The first one is definitely the as-a-service demand but across devices as a service and also Infrastructure as-a-service. And that is also reflected in our strength in our True Scale as a Service business, which has been consistently growing at double-digit year-to-year basis for a couple of quarters, right?

The other part is AI, a lot of our customer, on one hand, they are trying to understand the - how to leverage AI to build competitive cash for their businesses. On the other hand, they're looking for a partner, for example, like us to help them to understand the technology to help them to deploy the technology in a efficient and most importantly, in a secure manner. And this is why I think just in our tech world, which is an anal flagship event of Lenovo. We announced the AI professional services in partnership with India [ph] which is to help our customers to accelerate their journey and also time to market for their AI solutions. Thank you.

Wai Ming Wong

So in regards of the second part of the question, the branded ASP and margin upside, as I said before, we are still modeling how much will be the upside in AUR or ASP, definitely win with reconfigurations, there will be a meaningful upside. And in regards of the margin upside, I can only reiterate, we are confident we will deliver margin or profitability on the high side of the pre-COVID and even beyond. Thank you.

Operator

Thank you. And the last question is coming from [indiscernible]

Q – Unidentified Analyst

Well, NPU a very cultural path in AI PC as the [indiscernible] CPU or is a separate shape?

Yang Yuanqing

Okay. So there will be different classes of AIPC with and without MPU. AI workloads can be processed also by the combination of CPU or CPU plant GPU. But clearly, there will be a new clients of the lines that will host an NPU, new processing unit within the review. And that will help to drive AI workloads with more efficiency, speed and energy saving. So I think there will be the 2 cases we then and we out. Thank you.

Operator

All right. The last question, which is also our last porting is [indiscernible]

Q – Unidentified Analyst

Could you share your definition of AICP and how would they over average the impact of U.S. government expanded restriction on AI over those times of...

Yang Yuanqing

Yes. So on the definition of AIPC, I think the industry is still maturing on this front. Probably, if you ask to several silicon vendor, they will have a different definition of [indiscernible] I believe this will mature over time. From a usage perspective, this AIPC will have the natural interaction with the end user. We have this kind of personal tween personal system approach or both, we'll be able to execute those AI workloads in a hybrid way, so partially on the mice and actually on the cloud. When is on the mines, you will have your personal foundation model and the knowledge base that contains the on the device and then you will be able to go to the cloud on demand and the user will be able to reach when he wants to also share the cloud data and when we only want to process under the lines.

And in general, as I mentioned in the previous there will be a combination of CPU and NBU - and well, I believe this is just the beginning. So we will see more clarity over time in 2024. And in 2025, where the year in that we believe will be a very big acceleration of those AIPC shipments. Thank you.

Wai Ming Wong

Yes. So probably clearly, you can answer the second part of the question - Can you repeat the second part, please?

Operator

Can you repeat the second part, please? How would renewable as the impact on U.S. development from expanding restrictions on AI server...

Yang Yuanqing

Address the impact from U.S. governments, expanded the restriction on AI silver GPUs.

Wai Ming Wong

Yes. Yes. So I think as we said earlier, we're still evaluating the impact - it's too early. It's a multi-hundred page document, and we're still working with our suppliers and with the U.S. government. Having said that, we're continuing to buy and integrate products in the United States, which is not requiring export. So we'll give you more updates as we get further along. But right now, we're still evaluating.

Operator

Thank you. And thank you, everyone. This is our last question due to time constraints. We thank you very much for joining today's call. If you have any further context, please feel free to contour Investor Relations team. The replay of this webcast will be available in the next couple of hours on our Investor Relations website. Thank you again for joining us. Thank you. Bye-bye now.

A - Yang Yuanqing

Thank you. Bye-bye.

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Lenovo Group Limited (LNVGY) Q2 2024 Earnings Call Transcript