Lenovo Group Ltd Ord

Good morning, good afternoon, and good evening. Welcome to Lenovo's Investor and its 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. Wong Wai-Ming, Group CFO. Mr. Ken Wong, President of Solutions and Services Group, Mr. Kurt Skaugen, President of Infrastructure Solutions Group, Mr. Luca Rossi, President of Intelligent Devices Group, Mr. Sergio Buniyak, President of Mobile Business Group, and President of Motorola. We will begin with Ernie's presentations, and shortly after that, we will open the call for questions. Now, let me turn it over to Yuanqing Yuanqing, please.

Hello everyone, and thank you for joining us.

Last quarter, the entire PC and mobile market experienced a severe downturn, as shown in the results of other players in our industry. Inevitably, Lenovo was largely impacted too. But with our diversified growth engines of infrastructure, solutions and services, Over 40% of our revenue now is driven by non-PC businesses. This also helped us to maintain solid profitability.

Even in PCs, we continue to keep our market leadership and the industry leading profitability. We believe the PC market might stabilize sooner than many expect.

and we continue to drive efficiency in our already lean operations, maintain healthy cash position, and invest in innovation and sustainability. Despite the slow IT market growth in the short term, total IT spending is expected to recover to a moderate growth rate in the mid to long term. Meanwhile, the megatrend of digital and intelligent transformation continues to accelerate. Last quarter, impacted mainly by a significant decline in device business, our group revenue was down by 24% year-on-year or 18% in constant currency.

Both solutions and services business

and the infrastructure business grow by high double digital year to historical records with positive operating profit contributed by all our main businesses for the fifth consecutive quarter we remain committed to doubling profitability in the meter last quarter we took proactive actions to reduce expenses and improve efficiency to ensure our cost competitiveness especially in areas where we see a softer market outlook our cash balance is still strong cash conversion cycle continues to improve and the channel inventory is reduced which allows us to continue investing in R&D centered around new IT technologies.

Now I will talk about each of our businesses. Let's start with SSG, Solutions and Services Group.

Although adjusted to slower growth this year, the trillion-dollar IT service market is expected to remain strong for the mid to long term. By 2025, managed services for cloud, on-prem, and edge is expected to increase at 7% CAGR, while hybrid infrastructure solution is becoming essential. Vertical solutions and services spending is also expected to remain at almost double digital growth in education, smart retail, smart city, and manufacturing from 2023 to 2025. Last quarter, our SSG's revenue grew by 23% year-on-year to 1.8 billion US dollars, setting a new record All segments, again, delivered a high profitability and a strong revenue growth. The revenue mix from non-hardware-tired solutions and services achieved a record high of 53%, with the managed service business almost doubled year-on-year. Then there was the Hefei Factory, has been added to World Economic Forum's global lighthouse network. for its smart manufacturing solution. SSG continued to invest in building scalable and repeatable horizontal and vertical solutions with Lenovo IAP. We also enriched our digital workplace solutions. strengthened our hybrid cloud portfolio and further expanded our sustainability offerings our ISG infrastructure solutions group continues to benefit from ICD infrastructure upgrade by 2025 the server market will reach 135 billion US dollars edge infrastructure 37 billion and storage 35 billion Last quarter, our ISG revenue increased by 48% year-on-year to a historical high of $2.9 billion, beating records for three consecutive quarters. Operating profit more than doubled year-on-year to a new record. Server revenue grew by 35% year-on-year, making Lenovo the third largest server provider in the world. storage more than tripled to become number five in the world and the software grew by 52% year-on-year all reaching an all-time high meanwhile we continue to enhance our comprehensive infrastructure portfolio and to invest in innovation particularly in air empowered edge computing and hybrid cloud We strengthen Lenovo's unique advantage to balance the scale and the profit. We remain focused on being one of the fastest growing and ultimately the largest end-to-end infrastructure solution provider in the world. Last quarter, our IDG, Intelligent Device Group, experienced a severe decline in device markets. However, the real demand reflected by the activation data was actually better than the shipment data seemed to indicate. While the PC market still needs some time to digest the inventory to a healthier level, we believe total shipments are likely to stabilize at a higher than the pandemic level.

as early as the second half of this year. In tough market conditions, IDG successfully maintained the number one position in PCs and industry leading profitability for the past quarter.

We achieved a solid operating margin at 7.3%. Our strong product competitiveness was further reflected in leading activations and resulted in improved inventory level. Our smartphone business achieved the 11th consecutive quarter of profitability. Our premier product, Motorola Edge's activation grew by 74% year-on-year. We expanded the premier product mix for our tablet portfolio as well. meanwhile our smart spaces solutions demonstrated growth potential with key wins in the short term we will take proactive actions to reduce expense and improve efficiency to ensure business healthiness while in the long term we will keep investing in innovation focusing on premier pc and the adjacent areas and drive the evolution from smart devices to smart spaces. Last month at CES, our Yoga Book 9i was the first full-sized OLED dual-screen laptop in the world, on a historic high of 50 awards. And our enhanced digital workplace solutions are improving user experience in a hybrid workspace looking ahead while the industry cycle still needs some time to run its full course strong execution can make a big difference our diversified growth engines are firing up our operational resilience is supporting the results Our healthy liquidity is ensuring the soundness of the company. And our investment in new IT is building the next wave of our competitive advantages.

Because of this, we are confident to deliver sustainable growth and improve profitability. Thank you. Now, let me turn it over to our CFO, Huang Weiming.

Wei Ming, please. Thank you, Yuanqing. I will now take you through Lenovo's financial and operational performance for Q3 in the 2023 fiscal year. The persistent macro volatility created a challenging environment for us in Q3, with group revenue declined 24% year-on-year in nominal terms to $15.3 billion, or down 18% in real terms, while group net income dropped 32% year-on-year. Notwithstanding challenging market conditions, our gross margin and operating margin improved by 44 and 28 basis points year-on-year respectively for the third fiscal quarter. The group's stable probability is a testament to its operational excellence and success in its long-term growth strategy for non-PC investment by supercharging growth in SSG and ISG. Revenue from non-PC pillars made up 41% of group revenue, up nine points from last year. SSG and ISG set new milestones in sales and profits. Together, their profit grew by 19% year on year and partially mitigated the pressure of a smaller scale operation and rising finance costs. Going forward, the group will continue to prioritize its medium-term target of doubling its net margin We continue to optimize the group operations for greater business agility and to support long-term growth. Our cash and cash equivalent balance exceeded $5 billion at the end of the quarter, up 34% year on year. We increased our net cash by $500 million from the same period last year to a balance of $581 million. We improve our cash conversion cycle by 13 days year on year and three days quarter on quarter to negative six days going to extension in accounts payable days. In the meantime, we will continue to drive inventory optimization. Last quarter end, we managed to reduce our inventory by over 900 million both annually and quarterly. ssg reported a 23 year-on-year growth with revenue reaching 1.8 billion thanks to robust growth across all service segments revenue of managed services nearly double year-on-year going to the ongoing as a surface trend the economic downturn appears to have accelerated the popularity of as a service solutions as our deal pipeline remains steady despite macro uncertainties prolonging the conversion cycle. Our project and solution services segment, which provides a broad base of solutions leveraging Lenovo IP, also saw revenue increasing by 7% from the same period last year. During the quarter, the combined revenue of managed services and project and solution services was 53%, 4 percentage points more than last year. attached and support services revenue also increased 12 percent year-on-year with a record pc service penetration rate despite declining sales for new devices ssg operating margin of 20 percent dropped two percentage point year-on-year was due to a mixed shift but overall it remains significantly higher than the group average expanding lenovo long-term profit margins SSG reported an all-time high operating profit of $370 million, up 12% year-on-year. Deferred revenue grew by 8% year-on-year to $3 billion. This echoed the success of the Group's transformation journey to enlarge and sustain its recurring revenue base. ISG continued to deliver exceptional results, as revenue and operating profit both set new records. Its Q3 revenue grew by 48% year-on-year to $2.9 billion, while operating profit increased by 156% year-on-year to $43 million. ISG was able to build a comprehensive product portfolio to achieve significant premium-to-market growth. This product strategy, along with an increase in customer base and design-in projects, was effective in driving all-time high revenue of server, storage, software, and AI edge. The latest quarterly third-party statistics indicated that ISG market share by revenue in the global storage market nearly doubled year on year. By customer segment, ISG exposure to CSP and ESMB segments gave the group a unique advantage in balancing scale and profits. Both segments saw double-digit revenue growth to record levels. IDG was impacted by sector-wide headwinds, including lower demand and excessive inventory. Despite revenue and operating profit each declining by 34% and 37% year-on-year, operating margin was well sustained at 7.3%. This industry-leading profitability reflected the group's efforts in stepping up operational efficiency and in expense control to mitigate market challenges. We work with our distribution partners to increase their cell activity and noted the decline in cell-outs is less than the cell-in, which leads to a lower channel inventory. IDG continued to invest in innovation for non-PC and adjacent areas to drive long-term growth. The smartphone segment was profitable for 11 consecutive quarters. In the tablet segment, nearly one-third of sales was from premium segment and in smart collaboration solutions, growth remained robust with key wins across geographical and global accounts. We continue R&D investment to drive innovation. The group's R&D spending increased by 5% year-on-year to view various growth engines, business transformations and ESG initiatives. The group continuing investment in R&D and together with rebalancing our operating expenses can mitigate the adverse impact from demand volatility in the near term while addressing long-term customer demands beyond technology hardware to drive sustainable growth. The group is now well recognized by its accelerated ESG investment and has received many accolades. MSCI upgraded our ESG rating to the highest level of AAA. The group also ranked 24th in the Boston Consulting Group's most innovative company list of over 1,500 global companies. Additionally, Lenovo was highlighted in the Bloomberg Gender Equality Index for the fourth consecutive year and featured as a leader in climate change and water security by CBP. Last month, the group's commitment to reach net zero by 2050 was validated and approved by the Science-Based Target Initiative, or SBTI, a partnership between the UN Global Compact, CDP, World Resources Institute, and Worldwide Fund for Nature. making it the first PC and smartphone maker and one of only 139 companies in the world with a net zero target validated by SBTI. External challenges prevailed in the global market and could extend well into future periods. The confluence of global economic challenges and dynamic shift in market demand could present new long-term opportunities. the Group continues to further strengthen its cost competitiveness to achieve its medium-term goal of doubling net margin. We will do this by investing in high-margin growth engines and taking proactive steps to reduce run-rate operational expenses by approximately $850 million. This includes overall reduction in operational spending as well as workforce adjustment where necessary and appropriate. We will take a comprehensive view to maximize operational efficiency, maintain momentum in our diversified businesses, and continue to invest in new IT technologies to drive sustainable profitable growth for the group. The group will foster the development of new IT architecture with the client edge cloud network intelligence framework. These investments, coupled with the growth plan to taking out operating expenses to maintain our operational excellence and global footprint, are the key to mitigating external challenges and supporting a surface-led transformation, enabling the achievement of our medium-term goal of doubling net margin. Looking forward, SSG should benefit from unleashed of demand for Premier through scale as a service. sustainability and vertical solutions although macro headwinds could delay the due conversion cycle in the near term the need to extend asset usability could supercharge long-term demand for maintenance services ssg will further broaden its service offerings including asset recovery services while strengthening channel tools and cooperation with business partners to expand its attached and support services managed services is well positioned to capture the long-term structural growth in as a surface isg builds industry leading end-to-end infrastructure solutions and expanded to full stack offerings including server storage and software the esmb segment will capitalize on growth opportunity in ai power edge hybrid cloud high performance computing and solutions for the telco communication sectors For the CSP segment, ISG has a unit ODM plus business model to address the growing demand for vertically integrated supply chains. The business will continue to diversify its customer base and capture new accounts through design wins across technology platforms. The approach will achieve the optimal balance between general purpose and customized offerings while ensuring the appropriate scale and an efficient cost structure to enable revenue and profitability growth. For IDG, we're striving to reinforce our number one position in the PC sector while maintaining leading profitability. IDG will continue to lead the race in device innovation by enhancing features for hybrid working, gaming, entertainment and ESG designs. IDG will further invest to score wins in non-PC areas, including fast-growing accessories, smart collaboration and smart home devices. In the short term, the total addressable market for PC could return to its pre-COVID level, but we anticipate it should be structurally higher in the long term as PC becomes the center of digital life. In terms of our smartphone business, we will focus on portfolio expansion and differentiation to take advantage of the accelerated 5G adoption. Our strong financial position provides a solid foundation for us to proactively pursue growth opportunities ahead. Finally, as always, we remain committed to driving sustainable growth and profitability for our shareholders. Thank you. We will now take your questions.

Thank you, Waimin. Now we'll open the line for questions, and this session will be in English only. Please be reminded to limit yourself to two questions at a time. Operator, I'll now turn it over to you. Please give us your instructions.

To submit a question, please type your question in the Q&A box on the right and click Submit.

Thank you, Operator. We have several questions coming in. And our first question is coming from Hannah O'Mara from Jefferies. There are three parts of the question. First one is several cloud CapEx companies in the U.S. have tempered their budgets this year. Have you seen the same with your client base? And if not, why not? This is the first part of the question. And the second part is regarding to cash conversion cycle. Our cash conversion cycle improves 13 days this quarter, how much of that is sustainable and how much, just because PC downturn requires less working capital needs. And the last part of the question, what gives you the confidence to predict PC cells will stabilize in second half of 2023 and at pre-COVID levels?

Yes, so probably a couple of questions, so we need different people to answer that. Regarding of the cloud company, so Kirk, so probably you can answer the question.

Yes, hello, this is Kirk speaking. So I would say in general, yes, in a broad sense, the overall total available spend is probably down. largely Lenovo is immune to that trend. And I'll give you some color on why. Obviously, we just announced a record in our cloud business. And for many quarters, I've been talking about our new ODM Plus model, where we're delivering custom designs for the largest hyperscalers in the world. Those designs have been ramping for many quarters. not just in the server space but we're also expanding very aggressively into the storage space as well so despite the fact that the total market of spend might be down lenovo is definitely known for many years and the last several quarters that we've gotten the designs for those motherboards those systems and those racks because we've we've been designing those in for the last you know year plus at least. Secondly, we're expanding our opportunity because we've expanded beyond just Intel to include AMD and also Ampere as an ARM provider to the cloud. So we're expanding the amount of designs we can get, not just by going from server to storage, not just by doing the design, but also expanding our CPU providers. Next, we also expanded to our next wave and created an entire new sales force about a year ago to address the next wave of hyperscalers, which has grown significantly. Again, brand new design lens for Lenovo. And then last but not least, We have new factory capacity and new factories in Mexico and Budapest that are significantly improving our logistics costs. And that's definitely driving us to be more agile and getting more designs. So while there may be some softness in the overall market, we're dramatically increasing our presence for those reasons I stated. Thank you.

Thank you. Regarding of the PC demand, so... In my view, if you want to understand the future, so probably you need to understand the past three years. So if we... Probably most of people only see the shipment data. given by IDC. But I don't think the shipment data can precisely reflect the real market demand. But the real demand can be reflected by the device activation data. So if you use 2019 as the base, 100%, so actually 2020, the activation increased by probably 15%. The real demand, I would say the real demand probably increased by 15%. But the shipment only increased 7, 8%. So that generated a lot of supply shortage. Since then, in year 2021, definitely, China started to push inventory. So you can see, in year 2021, the shipment increased by 15%. But the actual device activation was actually flat to 2020. So that definitely accumulated a lot of image. Then you can see in year 2022, China started to digest the image. the shipment declined significantly. But the real device activation did not decline as much as the shipment last year, probably only 6% year-on-year. So by the end of last year, So let me say November, December. So the real activation number probably is, or the real shipment number probably is consistent with the activation number. So in my view, next year, the real demand reflected by the activation could be flat to this year. So which is still 5% to 8% higher than 2019. But probably we still need one or two quarters to digest the human trade in the channel. Then from the second half of the year, you can see PC market resume the growth. That will drive the entire 2023 shipment drop, still drop by 5%, but it is still higher than 2019. Then since 2024, I think the market will resume the growth, so that will ensure the overall demand will be 5% to 10% higher than 2019. And both shipment activation will be consistent in that year, hopefully. So that's why we are rather confident for the second half of the year. So I don't know, Luca, our IDG leader, have something to add.

Yeah. So, Yanqing, I think you have already presented the data view for which, obviously, I am totally aligned. And I think maybe I can just add that we feel confident about the long-term trajectory simply because digital transformation, hybrid work, digital life, all these are secular trends. PC is definitely at the center of all these trends. And additionally, there is out in the market an opportunity for more than 400 million PC that are more than four years old to be replaced. So I think all these factors are giving us certain optimism that after the digestion of the channel inventory, which, as Yanqing mentioned, will be completed in the coming months. The second half of this calendar year will start to resume growth. And additionally, looking at the activation, you should know that our activation share, market share, is at record levels in the last six, eight months. So we are gaining share as a sign of the appreciation of the customer for our products and our innovation. So even in a weaker market, we want to perform better than the market. We will continue to perform better than the market.

Thank you. So over the past three years, our activation numbers have always been higher than the market. But our shipment number is actually more conservative than the market. So that means that we actually have generated less inventory than our competition. And probably we are leading to digest the inventory as well. So that's why we are pretty confident for Lenovo's future. in the PC area. And also, I want to echo Luca. So actually, COVID actually has changed the PC landscape. So from one PC per household to one PC per person. and also because people spend more time on their pc probably double the time so that will drive the the faster replacement cycle so that's a that's a our view on the pc demand

Regarding the cash conversion cycle, we have negative six days and 13 days improvement. Clearly, this is sustainable. I think rather than call it sustainable, I actually would say that there are further room for improvement. I think clearly when the economy getting, I would say, more normal, logistic and everything getting better. I think the inventory level will continue to come down. We definitely see that there are room for improvement. As you may see, I think the industry average, I mean, obviously different company will have different business model. It's about 20, negative 20 days. So I definitely think that we will, I think the next six days is sustainable or more than sustainable that we will see through our operational efficiency. We're going to see further improvement, I think, in the negative cash proportion cycle.

Thank you.

Thank you, Wai-Ming. Now we'll move to the next question from Mr. Howard Gao at Morgan Stanley. It seems like desktop and notebook ASP decline 5% to 10% quarter to quarter in the December quarter. How does management view ASP as we move throughout calendar year 2023? That's his first question, number one.

Yeah, Luca will answer the question.

Yeah, so look, in general, we are. I will not talk for the market, but I'll talk for Lenovo. I think we are not declining our ASP in that shape. I would say that our our ASP has declined slightly in the sequential quarter on quarter. But year over year, we continue to record uh growth of our asp for the last eight quarters and probably you can only say that the last one or two quarter it has increased less than the previous quarters but we we are not modeling for 2023 a significant decline year over year of the asp now you can think in this way from a how the ASP is built from the commodity perspective, there is probably a little bit of downward pressure because obviously the demand is not so great. So the commodity costs are going a little bit down, but that does not necessarily reflect on the ASP. And we are working hard to increase our premium mix so that we will control and hopefully improve the ASP. Obviously, the other element will be the exchange rate, which obviously is volatile, and that will maybe determine certain up or down of the ESP. So I would not anticipate a significant decline of the ESP. At least we are not modeling it for 2023. Thank you.

Thank you, Luca. And we also have two follow-up questions from Howard as well. The first follow-up question is the server business in December quarter is stronger than expected. Any color, what's driving this trend? Could you also discuss hyperscale versus ESMB and server versus storage? And the next follow-up question is ISG as well. What is the target operating margin? for ISG segment in the long term.

Yeah, thanks, Howard. This is Kirk. Well, I would say we are seeing record high fresh order load. So our success was not driven by backlog reduction. We've already largely passed that. So we are seeing strong fresh load. I think we are one of the few companies in the market that's very balanced between the cloud and ESMB, and I can say we had records in the cloud and records in ESMB. We had records in server and in storage. And then even within storage, we had records for hyper-converged, traditional entry and mid-range, and cloud storage. So it was very broad-based. In addition, as you know, we created a new division back in April around ThinkEdge. And we grew that edge and the artificial intelligence associated with the edge with many, many end user retail wins and grew that business triple digits. So definitely edge and the AI at the edge is a strong growth factor for us. Outside of China, we had a record and North America and Europe were particularly strong within that. So I would just say it's broad based across the board where we saw the new fresh load and we see that continuing again in the quarter we're in right now. Relative to the operating margin target, I think we want to continue to drive hyper growth. So hopefully, you know, with almost 50% growth quarter on, you know, year on year rather, our goal is to drive hyper growth, continue to grow share while continuing to improve operating profits. You know, I think we're on our seventh consecutive quarter of year and year operating profit improvement now. So, you know, relative to at least the two largest competitors we have in the market, we still have a ways to go. But hopefully we're showing you continuous momentum there while continuing to have paper growth.

Thank you. Talk about the operation margin. Yeah. Improving every quarter and getting closer to certainly where the people that we compete with on a day-to-day basis are. Okay.

Thank you, Kurt.

And the next question is coming from Jerry Su, Mr. Jerry Su at Credit Suisse, and it's also on ISG. Even the slower IT spending and consensus on software cloud server demand, are you seeing any other adjustment or it's more component inventory management?

Well, again, I would say the Next Wave business, we track over 500 customers. next wave cloud accounts and that is largely a new business for us and that's all brand new share gains for us so independent of any order adjustment at the macro level we're gaining share in there um with the with the largest you know 17 or so cloud providers in the world each is in its own unique situation but i would say that the the new processors from intel from amd and from ampere have compelling value proposition and we have design wins um you know different across each customer but the number of design wins that we have is growing so again um We're probably the beneficiary of market segment share, even in a maybe a softer market that has been well documented in the press. Relative to component inventory management, I'm not sure I fully understand the question, but I would just say, you know, for us, we're largely back to normal channel inventory levels and we're nearly all the way through any kind of supply challenge from a data center perspective. So we're back to normal lead times for the vast majority of our products.

Thank you.

Thank you, Kirk.

And the next question is also on ISG. And this is coming from Mr. Vincent Chong at BOCI Prudential. The question is, do you supply service for AI computing, including AI graphic cards assembly? Do you anticipate AI service will contribute to a lot to ISG segment in coming years?

Yeah, so again, Kirk, so I would say, obviously, we support a lot of different segments. It's the world's largest contributor to the top 500 supercomputers, all of those have more and more of an AI element to them. And we're confident we're going to stay number one in the top 500. And those workloads will continue to drive more to AI. In the edge space with our think edge, we have the most dense AI edge server in the world with four GPUs per edge server. And again, that's driving triple digits for us. We recently announced something called AI Innovators Program. We have now over 40 partners that have certified their software on top of our edge systems. We were public a few months ago. For example, we won the largest grocery chain in the United States, Kroger, where we're doing their self checkouts to help facilitate making sure all the scanning and things like that are done through one of our AI Innovator Program ISP partners ever seen. But we're doing things like queue management, drive-through management, smart cities, smart retail, smart manufacturing, all on AI. And then, of course, in the cloud with Omniverse and Metaverse, we just won one of the largest cloud wins on digital twins as the cloud vendors start building out this capability as well. So I would say it's in supercomputing, it's in edge, and it's in the public cloud as well.

Thank you.

Thank you, Kurt.

And we have next question coming from Mr. Albert Hong at J.B. Morgan. What's the channel PC inventory level compared to the normal times? Should we expect pricing environment to remain tough due to end demand weakness? And when could we see the benefits of decline component cost?

Yeah, Jenny, I'll take the question. Actually, these are three questions in one. So let me start one by one. So first about channel inventory. So to start with, I want to remind all of you that our business is very diversified. So we have a lot of this business that is designed to be without channel inventory. So that includes our relationship business, our public sector business and our global accounts. business. So with these three business model, or for large part of these three business model, there is simply no channel inventory at all. Then you have the transactional models with consumer and SMB, where the channel inventory is still above the pre COVID levels in some region, with the transit inventory that is also slightly higher than pre COVID as, as you probably know, the transit Time has increased and now is getting normalized. So this part is getting better. So generally speaking, we feel comfortable with our inventory position across all channels and geographies. We are, as I said before, we are increasing our sellout share as the demand for our product is at record high levels. And we have a plan. I think we have a detailed sell-out plan, and we forecast to return at or below pre-COVID inventory levels in the coming few months. So I think we are generally comfortable about that. The second question is, shall we expect pricing and environment to remain tough? I think the answer is yes. I think until the the there will be some you know relatively weak demand and weak micro environment i think we we expect the pricing environment and the competition will be intensified and that brings me to the last question when are we seeing the benefit of the commodity cost going down I think you are already seeing that in our ability to maintain a good level of GDP in the last quarter, as we have just demonstrated, by being able to capture the commodity cost decline and not price it at the end to sustain our GDP margin. Thank you.

Thank you, Luca. And the next question is coming from Grace Chen. at UBS. Could you help us understand how the world could maintain margin for PC business given the substantial sales decline with a smaller scale? What's your view for PC margin trend 2023 calendar year? Thank you.

So, Jenny, thank you. So I think I partially responded to this one with the last one, meaning we are obviously seeing a favorable commodity trend for several commodities, and we are leveraging that to sustain our GP and not pricing these advantages away on the one hand. On the other hand, we have been very disciplined in Q3 and definitely we will continue in the future to manage our expense from every angle so that we mitigate the impact of the smaller scale and eventually the risk of a slightly or lower GP margin. And regarding the GP margin, the question was what is our view for the margin trend in 2023? I would say if the competition continues to intensify, there is objectively a risk of a slightly declining GDP margin. We will do all possible efforts to cope with it, leveraging the commodity decline and obviously managing in a very disciplined way expenses so that we mitigate any possible impact to the bottom line. I would say that. Thank you.

Hey Luca, Ken here. If I may add, I think our service-led transformation strategy, I think also provides significant help to maintain our PC margin rate. If you look at the SSG services portfolio today, I think we have a comprehensive catalog uh from around the box for example premier support services uh to beyond the box where we have a whole suite of professional and managed services via our true scale device and service right and because we are adding value from a hardware software and services perspective so we're becoming more sticky and that will help us to maintain our relationship with our customer and also maintain our margin

So I want to add that, Luca. Thank you, Ken.

Thank you, Luca. Thank you, Ken. And so we have our next question coming in from Mr. Jerry Hsu again. For the mobile and tablet business, what is the sales mix now and outlook for 2023? So

So for the mobile business, the mix in terms of the revenue is, let's say, within 15%. And I will not give a precise number, but within 15%. And the tablet is within 5% of the IDG total revenue.

Thank you, Luca. So now we have a question on SSG. from Mr. Robert Chan at Merrill Lynch. SSG group has 3 billion US dollar recurring sales. Is this mostly from managed service or project solution services? When do you expect this 3 billion sales to be recognized?

Thank you, Robert. Ken here, head of SSG. So one thing we're very happy about is the momentum of our backlog. We continue to see an increase in our backlog and making record quarter after quarter. Regarding the question about where does it come from, I think it's been across all our three pillars of services, right, around the box, professional and managed services. I don't have an exact number about how long will it take to be recognized, but normally our services around the box and beyond the box span across from two years to five years. Thank you, Robin.

Thank you, Ken. Now, if you would like to ask more questions, please submit online, and please press the submit button, then we'll be very happy to answer your questions here. Yes, thank you. And our next question is coming from Robert, again, from Merlin. A lot of discussion and concerns are on channel inventory on smartphones. PC and consumer tech product, how is Lenovo's inventory level currently versus two to three months ago and expectations in coming two to three months? When do you expect channel to clean up and market to rebound?

No, maybe I can answer it this way because if you compare with three months ago, maybe you also need to consider the seasonality that might be not the right thing to do. So what I can say is within the last four quarters, we have consumed a very significant portion of the inventory. And as I said before, in the coming months, we know we will be back at the pre-COVID level of the inventory. As for the phone, I don't know whether Sergio wants to have a comment on the inventory. Thank you, Sergio.

Yeah, it's very similar, Luca. Last quarter, our activations were 20% higher than our selling, what led to a 15% decline in inventory. This has been happening the last six to nine months. And I expect that between now and the end of June, the inventory will be to a very healthy level, even lower than pre-COVID. just because the channel, given the interest rates, are taking less inventory. So it was a very healthy quarter, and I expect that cycle to complete around the May timeframe. With now the opposite happening as the second half, we expect some rebound in the market. But the progress in inventory has been very healthy, especially the last six to nine months, including last quarter.

Thank you. Thank you, Sergio. Thank you, Luca. And we now only have time to take the last question. And last question is from Mr. Albert Hong from JP Morgan. How big is Venable's AI servers and who are the customers and how should we think about the segment goes in two to three years time frame?

Yeah, so this is Kirk. I think, again, when you say how big are the servers, I think you have to look at our vision is that AI will be an essential element in everything we do. So the way to think about the TAM over time is I think AI will become a fundamental element of almost every server machine out there. And you're right, the average selling price is given the number of GPUs or accelerators growing significantly. So relative to the margin, I think it will improve the margin. And also, because we're building strong relationships on the software side as well, we will be increasing our margin as we sell more AI servers.

Thank you.

Thank you. Thank you, Kirk. And thank you, everyone. This is our last question for this quarter's UNESCO We thank you very much for joining today's call. If you have any further questions, please feel free to contact me directly. And the replay of this webcast will be available in the next couple of hours on our investor relations website. Thank you again for joining us today. Bye-bye now.

Bye-bye.