Lenovo Group Ltd Ord

Good morning, good afternoon, and good evening. Welcome to Lenovo's Investor and His 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. 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 today. Last quarter, we achieved 12.9 billion US dollars in group revenue with a net income of 191 million on a non-Hong Kong FIS basis. Despite a challenging market with unfavorable macroeconomic conditions, Our service-led business achieved a strong growth and sustained profitability, with the non-PC revenue mix further increasing by 4 points to 41% now, continuously demonstrating the effectiveness of our efforts in building diversified growth engines. As we predicted, with PC channel inventory digestion coming to an end, the trends of shipments and activations have become more consistent. Actually, the year-on-year decline of shipment was lower than PC activations for the first time in six quarters. But the AUR or average unit revenue of PC was under pressure due to declining component price and intensify the competition. And they impacted our revenue. The entire devices market is facing the similar challenge, including smartphone, tablet businesses. Meanwhile, In the short term, the infrastructure market is challenged on multiple fronts and that had downward pressure on our top line and the bottom line as well. In the next two to three quarters, we remain cautiously optimistic about the business recovery as the economy stabilizes and improves. and the component price bottoms out. The client device market is expected to recover and resume growth in the second half of the year. With 850 million US dollars cost savings plan executed more than committed, we will take more actions to keep our E to R ratio more resilient. and we are still committed to continuously improving our profitability. Meanwhile, the booming of the intelligent technologies such as AI-generated content is propelling the wider adoption of AI, accelerating digital and intelligent transformation across industries. For many years, Lenovo has been driving our transformation to become a full-stack intelligent solution provider. And we are well positioned to capture the significant growth opportunities ahead and transcend the cycle. Also, unchanged is our commitment to doubling our investment in innovation in medium term. Over the next three years, we will invest additional $1 billion to accelerate AI deployment for businesses around the world, focusing on AI devices, AI infrastructure, and AI solutions. We will continue to empower our customers and consumers in all works of life to grasp the opportunities in the era of intelligent transformation. Now I will talk more about each of our businesses. Let's start with the SSD solutions and the services group. Last quarter, SSG again delivered a strong growth and a higher profitability. While we protected the support services business as our core profit engine, we made significant progress in expanding our managed services and the project and the solution services. the revenue of which has now grown to account for more than half of SSG business, four points higher year on year. Over the next three years, the trend of digital and intelligent transformation will continue to drive a strong growth of global IT spending, especially in IT services. At the same time, overall demand for vertical solutions including smart city, smart manufacturing, smart education, and smart retail. It's expected to see strong growth through 2026 as well. SSG also continued to scale with our hero offerings, such as digital workplace solution, hybrid cloud, and sustainability. and incubate these horizontal building blocks into vertical solutions to help our customers improve employee experience and productivity. Next, our infrastructure solution group, or ISG. Last quarter, its overall revenue declined year on year for the first time in many quarters. due to overall cloud service provider computer server demand softness, GPU constraint impacting full AR adoption, and the industry is slower than expected transition to the next generation platform. But we achieved hyper growth in storage, software, services, and high performance computing In particular, storage achieved the triple digital year-on-year growth and made us the fourth largest storage provider in the world. In AI, hardware infrastructure business, based on the latest IDC definition, we grew by triple digit and is the number three in the world. Driven by AI-generated content breakthrough, the ICT infrastructure upgrade is accelerating even further. We will continue to invest in developing AI-ready and AI-optimized infrastructure, such as AR Edge, AR Hybrid Cloud, as well as server and storage that support AR-centric workloads. We will persist in differentiated competition, aiming to resume premier to market growth and sustainable profitability as soon as possible. And we remain focused on becoming the most trusted infrastructure partner for our customers in their digital and intelligent transformation. Our intelligent device group, or IDG, is still under a lot of pressure last quarter. Despite all these challenges, we maintained our global number one market share in PCs with inventory normalized to a healthy level. Our smartphone business achieved the record of Q1 activation in 10 years with our improved channel inventory, which will bring even more growth potential for the future. We further strengthened the Premier and the 5G with the successful launch of Motorola Razr. We also demonstrated a great growth potential in smart collaboration and smart home areas. We remain committed to investing in technology innovations to ride on industry trends and build long-term competitiveness. We are driving collaborations on building the next generation AI devices, such as AI PC, AI smartphone, to deliver certain level of inferencing. For our smartphone business, we will continue to execute on our three-year growth plan, which has helped us achieve a premier growth in our traditional strongholds in North America and Latin America. and make solid progress expanding into EMEA and the Asia Pacific. Meanwhile, we also expanded our smart devices for a more diversified portfolio and the enriched software and the services to build the IDG ecosystem. Lastly, at Lenovo, we believe our challenging business environment Online makes innovation more important. AI and computing are our anchor technologies and the critical pillars of our intelligent transformation strategy. We will continue the hard work and drive innovations. Here, I would like to take this opportunity to invite you to Lenovo Tech World, our annual flagship event in October. where we will showcase our AI devices, AI infrastructure, and AI solutions, all for individuals, enterprises, and the vertical industries. Looking ahead, we will more effectively control expenses and mitigate risks so that we can deliver sustainable profitability improvement. and continue to drive transformation and innovation to build a smarter future for all. Thank you. Now let me turn it over to our CFO, Wei Ming.

Wei Ming, please. Thank you, Yuanqing. I will now take you through Lenovo's financial and operational performance for Q1 in fiscal year 2024. Next slide, please. Despite the persisting macroeconomic headwinds, the group accelerated service-led transformation with our SSG revenue up 18% year-on-year and our non-PG sales improved to 41% of the combined sales of its three business groups. Our progress in inventory reduction and strong balance sheet has bolstered agility to capture the future growth opportunities, including AI. We are committed to returning to target profitability. doubling the net margin in the medium to long term remains the group's priority. The group's strong gross margin reached 17.5%, driven by the increasing contribution from the high margin service business. The group was disciplined in streamlining its operating expenses structure. Operating expense was reduced by 11% year on year, ahead of our committed 850 million run rate savings targets. However, Persistent headwinds remained in the quarter and impacted IDG and ISG, resulting in a 24% decline in group revenue to $12.9 billion or down 22% in constant currency. The magnitude of the revenue decline was heavier than expected, which led to a higher E2R ratio. The quarter saw a recent low in net profit margin on non-HKFRS standard, Group profit attributable to equity holders was 191 million, down 66% year on year. Global economy starts to stabilize, although challenges remain. The group will continue to focus on controlling expenses, enhancing product competitiveness, and identifying new growth catalysts in order to expedite business recovery and expand profitability. Next slide, please. We continue to optimize the efficiency of group operations for greater responsiveness to challenges and long-term growth opportunities. Cash and cash equivalent balance reached 4.4 billion in June, up 15% year-on-year. For the seventh consecutive quarter, the group delivered a net cash with a balance of 454 million, 15% higher than a year ago. Infantry was reduced by nearly 3 billion. or days of inventory reduced by seven days in the quarter, attributable to accelerated adjustment in raw materials. Days of accounts payable and receivable together improved 17 days. The group shortened its cash conversion cycle by 24 days to negative 11 days. All of these are critical steps in ensuring a prudent capital management to support future growth and accelerate business transformation. Successful service-led transformation positioned SSG to be a key beneficiary of the new IT era. SSG delivered a year-on-year revenue growth of 18% to $1.7 billion, highest for any first fiscal quarter in SSG history. Operating margin of 21% demonstrated business resilience and robust profitability. operating profit of $361 million was up 10% year-on-year. SSG continued to enrich its service portfolio across all three sectors to meet evolving customer needs and to drive scale and profitability. Management service grew 54% year-on-year, capitalizing on strong demand for true-scale as-a-service solutions, including first true-scale wins in Gulf countries in the quarter, Revenue of support service increased 9% year-on-year thanks to rising penetration rates that came with greater popularity of test services such as premium support and sustainability offerings. Project and solution services revenue rose 9% year-on-year, supported by strong demand for vertical solutions. Next chart, please. After outperforming the sector in growth for past three fiscal years based on server revenue, ISG was ultimately impacted by accelerated weakness in cloud server compute spending combined with global GPU constraint impacting the AI server supply chain and a slower than expected transition to the next generation platform. ISG reported Q1 revenue of 1.9 billion, down 8% year-on-year. Its segment operating performance turned into a loss of 60 million as a result of its smaller-scale operations. Despite its surface sales being impacted by these short-term sector-wide headwinds, ISG achieved multiple sales records across several product categories, showcasing its success in portfolio expansion. Its storage revenue more than doubled year on year. Sales of edge product and software increased by strong double digits. In high performance computing, ISG continued to reign as the top global player, growing at 45% year on year in Q1. In terms of server product, since cloud orders tend to be bulky in nature, its sales pattern can be more accurately assessed on a semi-annual basis. ISG's first half-year run rate growth in calendar year 2023 reached negative 4%, which is at a premium to sector growth. This product strategy plays an important role in enabling a broader adoption of AI by simplifying the deployment of AI solutions for businesses. The group has an AI-ready portfolio of smart devices and edge-to-cloud infrastructure And Lenovo and ISG will invest an additional $1 billion to further expand its portfolio to provide one-stop, state-of-the-art AI enablement and solutions. Most recently, ISG's new Think System model utilizes the most powerful universal GPU accelerator to deliver breakthrough performance for large language model inference and retraining, and graphics and video applications including 8 GPU supports. Another focus area is our investment in building an AI ecosystem. The Lenovo AI Innovators program is now delivering 150 plus turnkey solutions, helping businesses implement generative AI, immersive metaverse simulations, and cognitive decisions at scale. Next slide, please. Having navigated through the final phase of inventory digestion in the sector, the magnitude of IDG shipment decline was substantially moderated in Q1. The trends of PC shipment and activations are now more consistent. Nevertheless, our actions to clear inventory across the sector led to more competitive pricing pressure. And as a result, IDG's revenue declined 28% year on year. Its segment operating profit decreased by 39% to $650 million. IDG maintained its leadership position in global PC sector. The business made a great progress in seizing growth opportunities beyond PC products, with non-PC sales making up 21% of IDG's revenue. Its smartphone revenue declined at the beginning of the quarter, but its activation rate would represent the actual customer demand rose double-digit year-on-year towards the end of the quarter. Overall, the group's quarterly smartphone activation set a 10-year record for fiscal year first quarter to support demand recovery, and the trend is particularly strong across EMEA, Asia Pacific, and North America. Smartphone premium makes achieve a record height of 18% driven by successful recent launch. Next slide, please. Now let me shift gears and talk about R&D investments. As we continue to invest in innovation to foster diversified growth engines, R&D spending as a percentage of revenue rose to 3.5% from 3% last year. AI has become a key enabler for many technologies and will unleash higher operating efficiency for us. More importantly, AI has created tremendous opportunities given the group's comprehensive and diversified exposure across devices, infrastructure, and services. As mentioned earlier, we announced in June this year to invest an additional $1 billion over the next three years in AI. We have also extensively collaborated with many key partners to develop next generation product roadmap and solution portfolios together. This strategic investment and collaboration will build our competitiveness in the long run. Next slide, please. The group was consistently recognized for its ESG performance with numerous accolades, including the Best Employer for Diversity Award by Forbes. MSCI upgraded the company's ESG rating to AAA, while Ecovadis acknowledged the group's excellence in sustainable procurement with an Outstanding Program Leadership Award. Lenovo has once again been named in the Gartner Supply Chain Top 25 for 2023, ranking eighth in the list of global companies with supply chain operations. The company has fully embraced digital transformation across its complex, extensive supply chain network. Additionally, Lenovo was highlighted in the Bloomberg Gender Equality Index for the fourth consecutive year. Next chart, please. The trend of digitalization will unlock new opportunities in computing and AI solutions. AI is incredibly powerful, and we are leveraging our group's full capabilities to unlock the potential of AI. And these opportunities should benefit all business groups, from infrastructure to services and devices. Looking ahead, SSGC promising prospect for digital transformation and will continue to scale with next generation offerings. including digital workplace, hybrid cloud, and sustainability solutions, while safeguarding its core business with high value added support services. Strengthening partnership and channel tools are also key growth initiative for SSG to enhance its contribution to the growth success. ISG has built industry-leading full stack offerings and expanded to end-to-end infrastructure solutions that include hybrid cloud, HPC, data management, AI, and edge computing. AI provides new growth opportunities for ISG and its unique ODM Plus business model addresses the growing demand for vertically integrated supply chains. The business will continue to diversify its customer base and drive new account acquisitions. The approach will achieve an optimal balance between general purpose and customized cloud offerings, while ensuring an appropriate scale and efficient cost structure to drive revenue growth and profitability. The global PC market is stabilizing and well positioned for year on year recovery in the later part of 2023. In addition, the increasing popularity of a digital life centered around PC will drive demand structurally higher than the pre-pandemic level. The commercial upgrade cycle and the premiumization trend will help IDG drive premium to market growth. IDG will continue to drive efficiency with its lean operations, maintain healthy cash generation, and invest in non-PC areas, including fast-growing accessories and work collaboration solutions. is my phone business will focus on portfolio and regional expansion as well as differentiation to dig a foundation of accelerated 5G adoption. Meanwhile, the group tries to reinforce its number one position in the PC sector with leading profitability and accelerate innovation-led growth in non-PC and adjacent areas, including accessories. Our strong financial position provides us a solid foundation to proactively pursue growth opportunities ahead. Finally, as always, we remain committed to driving sustainable growth and profitability improvement for our shareholders. Thank you. We will now take your questions.

Thank you, Wanming. Now we will 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, 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. Our first question is coming from Donnie Tan from Nomura. The first question is, what would be the reasonable operating margin for IDG business? Would it be going back to the pre-COVID level?

Yeah, so can Luca answer the question, please?

Yes, of course. And good morning, good afternoon to everyone. So look, in Q1, our IDG operating margin was 6.3%. Looking forward, we aim to maintain a superior operating margin than what was in pre-COVID. We think this could be driven by improved commercial and also premium mix and higher penetration rate, sorry, of attached services and also a better design to cost, which is helped by our very strong R&D capabilities. Also, higher ASP, average price, will contribute to a better operating scale, paired with a tight expense management.

Thank you. Thank you, Luca.

Luca, I don't know whether 6.3 is higher or lower than the pre-COVID. I think at least is equal. From profitability point of view, I don't think 6.3 is lower than pre-COVID. But definitely we still have room to improve, for sure.

Yeah, I think it's in the range of pre-COVID. And depending on the quarter, also the scale plays a very important role. So, but for sure, we aim to do better than pre-COVID, that's for sure.

Thank you both. And we have the second question also coming from Nomura. Second question is on AI opportunities. Could you elaborate more on the progress of AI server projects by adopting NVIDIA's AI slash edge GPU series? Are we going to have project by using AMD solutions? And AIPC, what would be the incremental content goals? And what kind of new ICs or components would be added or upgraded to?

Yeah, so it was spreading to two answers. So probably, Coco will answer the first part.

So definitely, thanks for the question. Lenovo is absolutely committed to deliver real user value on AI from the pocket to the cloud. As we discussed, we've now further invested a billion US dollars to accelerate this AI innovation and deployments. I think we're seeing tremendous demand. So let me share with you a few proof points on why we're excited about AI and the growth. First, per IDC's latest report, our infrastructure AI business grew 139% year on year. And we've now grown over the past few years now to number three in the world for AI infrastructure. And we've said that we now have over $2 billion in revenue from the ISG business on AI. We launched this AI innovators program, and we now have over 65 AI optimized platforms in the market. And to your question, we'll be launching additional products as we get through the fiscal year. We've had 45 ISV partners that are now delivering over 150 AI solutions into the market. And we have now over 100 active proof of concepts into the marketplace. We also were public that we are the leading provider of Omniverse and OVX in the cloud, partnering with NVIDIA and with Microsoft. And we just recently announced a new product called the SR675 with the new NVIDIA L40S GPU, where we're going to further extend our leadership with 8 GPU support for generative AI, for metaverse simulations, and for other parts of AI. And then lastly, yes, you're correct. We are partnering with Microsoft, NVIDIA, AMD, Intel, and Qualcomm and plan to have leading solutions across all these areas. So with that, we expect the AI market to be growing at least twice the market. We plan to extend our leadership position.

Thank you.

Thank you, Kirk. So Luca, can you talk a little bit more on the AIPC?

So AIPC will be an inflection point for the entire PC industry. And we believe it will be driving a significant replacement cycle that is valid for commercial and consumer segments. Today, AI is already present in our devices with our own IP. But what we are talking now for the future AI PC is a new class of devices with a dedicated NPU that will allow a certain level of inferencing at the edge. There will be several innovations with great productivity features, security, privacy, improvements in battery life, improvements in form factor. And we think that we will be a great beneficiary of this AIPC trend, given the possibility for us to leverage our pocket to the cloud offering, including our edge to cloud collaboration, multi-OS, multi-device R&D efforts that we have done now for a long time.

Thank you. Thank you, Luca.

Thank you, Luca. Thank you, Wawai. For now, we have two questions coming from Albert Hong. with JP Morgan. Question one, could you elaborate details regarding to where Lenovo is going to invest in AI? Where does Lenovo see the addressable market to be in AI for data center and PC? And question two, how quickly could Lenovo monetize this AI investment, i.e. its contribution to the total revenue, and what is going to be the growth rate in the next two to three years?

OK, so thank you, Edward, for the question. So actually, AI is not new for Lenovo. So for years. we have been embracing AI from all aspects. So we have built our advantages in computing power from client to edge, to cloud and network. And as Kirk just said, we are investing for the 1 billion US dollars over the next three years in AI driven innovation. No doubt the reason the breakthrough in large language model or AIGC marks major leap in AI development and application, although it's just one part of the AI narrative. But we believe it's a catalyst and accelerator that will boost the adoption of AI. so that it becomes relevant and real to the average person. But this is definitely consistent with our 3S strategy, so more powerful infrastructure with GPUs, NPUs, or heterogeneous computing, and certainly more powerful devices, as Luca just introduced. This is because more inferencing will happen at the device side in the future, whether it's for accessibility or privacy protection. consideration. So we are leveraging this web to drive our business growth, addressing the real market beyond the hype and executing our strategy. So we will spend our money to make our devices more powerful, more air ready and optimized. So like Kirk and Luca just introduced, so AI PC, AI smartphone, AI server and storage, so are definitely our focused area. So actually, we probably will continue to to embed this new AIGC technology into our smart vertical solutions to help our customer, enterprise customer to improve their productivity as well. We are definitely collaborating with the partners like Microsoft, Qualcomm and Media. uh uh in uh intel md uh to build our next generation product uh roadmap and the solution portfolio but together so our partners value value us not just because our road to market capability our design capability but particularly our capability to develop across ecosystems So, Windows, Android, and across the silicones. So, x86 ARM, et cetera, et cetera. So, we definitely believe. So, we are leading company in providing the AR, ready AR optimized devices and infrastructure.

Thank you.

Thank you. And the next question, two questions are coming from Mr. Howard Gao from Morgan Stanley. First question, can you talk about your PC inventory levels and how you view PC margins trending over the next couple of quarters? Also, how do you view the total PC time for 2023 and 2024? And question number two, ISG, can you talk about the challenges you are seeing for the cloud? Any color on why the business went to losses again? Is it due to ASP pressure or mixed change? And where do you think ISG can go back to the profits?

Okay, so Luca, first question is yours.

So our channel inventory level has now been corrected and we are operating at the similar level of the channel inventory as the pre-COVID. We are comfortable with this level and then we look cautiously optimistic at the second half to see shipment grow year over year, driven by our record activation share, normalized channel inventory, as I mentioned, and improving underlying demand, and of course, more favorable compared with the second half of last year. In regards of the PC market, we think it will end up at the low end of our guidance for this year, so around 250, 255 million, and then we expect a single digit growth in 2024, helped also by the Windows 10 end of life from Microsoft, and then an accelerated growth in 2025 with a massive AIPC launch. In regards to the margin, despite the competition has intensified, we are working hard to maintain the same or better margin level, and that is driven by several actions, including mix, segment and product mix, procurement scale, our design to cost stability, and also many product portfolio optimization programs that we have launched one and two years ago, as well as a strong operational expense discipline among other sections that we are taking. Thank you.

Yeah, so Kirk, second question for you.

Sure. So regarding the cloud and the dynamics we're seeing there, I think inherently the cloud is a little lumpy because of the large customer base of the hyperscalers. We believe that if you look at calendar first half of the year, we actually executed at a double digit premium to market. But if we look at this current quarter, I think we had some highlights and then some slowdown areas. As you saw, we grew our storage business more than 120% and crossed over to become the fourth largest storage vendor in the world and number one in price bands one through four. So storage is doing extremely well for us. AI infrastructure, like I said, grew 139% year to year. But we are seeing GPU constraints. And in general, there's a move from server compute, like general purpose compute, over to AI workloads that's constrained by GPU. There is inventory consumption happening given the global macroeconomic environment. And we saw a slower than expected transition to the new DDR5 platforms based on the premiums on DDR5. and the overall value proposition of those. So having said that, I think we are highly confident that as we go through our fiscal year, we're going to see an improvement from this quarter's results in the cloud and in enterprise SMB. As the world pivots more to AI and we have these 65 plus platforms launching into the market, as well as our consistent expansion and storage which obviously is well over 100% premium to market.

Thank you.

Thank you, Kurt. And the next question is from Mr. Kumar with Tech Insights. This is on smartphone. What are the key markets for Motorola smartphone business? And what will be the key focus areas for the next one year? how was the foldable phone device performance?

So, Bunyake is online.

Not online.

Yes.

So, the key markets for Motorola are clearly Latin America, where we hold the strong number two position with over 20% of market share. And the second strong hold is North America, where we are number three and we continue to see opportunity to grow. Then in EMEA and AP, Asia Pacific, these are the geography where we are hyper-growing. In the last quarter, we had more than 20 points of premium to the market in each of these two geographies. Then what are the priority in the next year? I think we are putting a lot of focus on premium franchises, like our Edge and the Razor franchisee, which represented close to 20% of our shipments and revenues in Q1, sorry, revenues in Q1. Within this, you were asking on the foldable, and we are very happy with our Razor launch. This is our fourth generation. Just to give you an idea, in the first 120 days from the launch, we have shipped more than three times what we shipped for the three generations of Q1. the previous ransomware combined. We are receiving phenomenal feedback from the channel and end users. So it's giving us a lot of confidence on our strategy to balance the scale with also a presence in the premium segment, particularly in the innovative foldable segment.

Thank you. Yeah, regarding of our smartphone business, although last quarter declined as much as a PC, but I'm less worried about that. So as I said at my opening, so actually from an activation point of view, last quarter was the highest Q1 in 10 years. this business is just consuming the channel inventory. So I think it should leave us more room to grow in the coming quarters.

Thank you, Wanwan. Yes. And the next question is coming from Wes Chen from UBS. Could you comment on the outlook of enterprise server and general servers for 2024?

I think if you look at our fiscal year and you look at the IDC reports, generally speaking, they're expecting a flat market. I think there'll be another quarter of inventory digestion by the large clouds and a pivot over to ai and as we get into the second half of this year we believe we'll have significantly improving results based on the portfolio and the demand we see as i as i said earlier we're seeing records across the business in general purpose and enterprise so we've had 90 consecutive quarters of growth on our edge server business with another double digit growth quarter we had 45 growth in HPC, retaining our number one position on the top 500 and number one on the green 500. Server-based storage is growing, like I said, for us well over 100 point premium to market. And then our profit drivers underneath that, storage services and software, are all growing at records this quarter as well. So it really is just a pause by the hyperscalers, I think, and that we see in the second half of the fiscal AI

and overall demand coming back. Thank you.

Thank you, Kirk. And the next question is coming from Ben with Technology Business Research. His question is TruScale that deals Since the launch of Syncfone, have you seen the material increase in terms of the number of true-scale dust deals, including the smartphone? Overall, how would your true-scale dust signs trending in the last couple of quarters?

Yeah, so Ken Wong, our SSJD president, will answer the question.

Okay. Hey, thank you, Ben, for your question. And good afternoon, good morning, everyone. So overall, we continue to see a strong demand from overall asset service, which cover from a podcast to the cloud, starting from smartphone, PC, tablet, all the way to infrastructure. And this is also in line with the market data that we have seen from Gartner and IDC. This is continued to be the sweet spot of the market in terms of growth. Now, regarding some of the Demand that we see in the market, right, definitely devised as a service continue to grow. And we see pockets of opportunity around high performance computing and hybrid cloud are even faster, more demand coming from our customer. And especially about phone, right? When we look at the past few porches, right? Even especially when we look at our internal data and also to our interaction with the customer, the demand for phone in the business scenario is getting more, right? So as a result, right? Our true scale offering is exactly addressing the customer requirement because at the end of the day, the customer is looking for a one-stop solution spanning across all devices and infrastructure within the enterprises.

Thank you. Thank you. Thank you, Ken.

Next slide. Yes, the next question is coming from Mr. Desmond Lin from eSpring. The company has been showing strong working capital management in the current quarter. Can you give some guidance on working capital trend going forward?

Yeah, we mean, I was here for the question.

Definitely. Thank you for the question. We definitely put a lot of effort in improving our working capital. And especially if you look at our balance sheet, we at least get the inventory down by nearly three billion year to year as well as continue to improve. That trend will continue. We will continue to improve how we actually manage our capital because one of the key priority for us is to keep the company very liquid. so that we will generate more cash, I think, to invest in the growth area.

Thank you.

Thank you, Huamin. And we have the next question coming from Mr. Dot with Canalys. On commercial PC recovery in end of 2023 and start of 2024, are you seeing any difference in demand strength between SMB and enterprise? Thank you.

Yeah, so Luca.

So we see our commercial relational segment at this point of time to be stronger than the SMB and also with a good outlook for the second half and the pipeline for 2024. SMB has been impacted in terms of the shipment also by the channel inventory correction. SMB is a business model where channel plays a bigger role than the pure commercial. So that is probably a significant difference that shows up in the performance so far year to date. We think SMB will return to grow as well with the inventory, as I said, being normalized and the underlying demand stabilizing in the near term. Luca Marini Pagotto, The demand in SMB, I would probably say that is the one more impacted by the macroeconomical condition, so hopefully we will also see a relaxation in 2024 of that macro to get more natural demand from SMB. So, but commercial at this point of time, we see stronger than SMB.

Thank you.

Thank you Luca. And the next question is coming from Dino Chen from Grant Alliance, ACM Enderman. Could you please share with me the label of both margin and operating margin of the AI server business compared with those of general server business, please? Thank you.

Yeah, Kurt. Hi, Kurt. Yes, I'll answer the question, sure.

So I think we're trying to put AI into everything we do in the infrastructure space, from edge server to storage to general purpose to cloud. So the answer is probably based on segment. I think in the edge, we're seeing amazing new use cases with these over 150 solutions and these POCs, where our edge margins are likely improving because of the ai workloads that are getting put on them we now have the densest edge server in the world with more gpu support and we're seeing proof of concepts at more than half of the global fast food chains for example because of that in the cloud i think it's a very aggressive and fierce competitive market but i would say in storage Our growth of 120% year on year is driven, again, because we're putting more and more AI into our storage business as well. And you can see that in the most recent announcement we've had. So I would say it's a mix in the cloud. It's very fierce competition and probably lower margin. But in edge storage and general purpose, we'll be delivering real value to the customer that's helping us improve margins a bit.

Thank you. Thank you. Thank you.

Yeah, thank you, Kurt. This is going to be another question for Kurt as well. It's from Mr. Fung with TBR. He is asking, given ISG's strong storage business over the last year, how should we think about the ghost potential over the median time, specifically one to three year years with regard to the ODM plus contract ramp up versus enterprise?

Yes, I think we're very excited about our storage growth that we've had. Again, in a market that's growing at low single digits, we're well over 100% year on year with 120% growth. So again, we crossed over to be number four in the world. overall, and now number one in price bands one through four under $25,000. So our growth is in the entry, traditional NAS and SAN in the mid-range, in software defined, in cloud, in high-performance computing. So we're seeing records in our storage business, essentially in almost every part of the world and every piece of the segments we participate in. relative to the growth rates, I think we're challenging our segment managers to continue to grow at a premium to market in every piece of the business. So we will have new cloud storage designs that we think will continue to grow at a significant premium marketing cloud. But we've also had new partnerships with partners like Weka, where we're seeing growth as well. So I would say all aspects of our storage business continue to be very exciting for the horizon. Thank you.

Thank you. And now we also have our next question from Mr. Guo with Fullerton Fund Management. His question is on ISG as well, which recorded operating loss of 16 million U.S. Is this related to investment in AI products or revenue bookings?

Yes, I would say we have confidence in our long-term strategy. And we think we'll continue over the long term to ramp our revenue at a significant premium to market while continuing to improve profitability. Again, if you look at the first half of the year calendar, we executed a premium to market So I think this is a temporary issue as the cloud pivots to AI. They're consuming inventory of server compute and pivoting that to storage and AI use cases. So as we get into the second half of the year, that will significantly improve. In the meantime, because of the lower than expected revenue, we're continuing to invest, for example, in AI and in storage, to generate these hundred plus percent growth rates like we've shown in AI and storage, 50% growth in software, 45% growth in HPC, nine consecutive quarters, now double digit growth in the edge. So I think this is a temporary phenomenon and we're confident in our long-term revenue and profit improvement strategy as we go towards the second half of this fiscal year.

Thank you.

Thank you, Kurt. And this is our last question for this webcast. And I would like to invite Yuanqing Wawai to give us a very short remark. Yuanqing, please.

Yeah, so definitely in short term, so the macro economy is very, uh challenging so they impacted our last quarter uh performance uh but uh uh for the remaining quarter of the uh fiscal year so we are still uh uh cautiously optimistic so uh we think uh the the the the overall device market is stabilizing. So we have finished the channel imagery uh digestion uh so uh from now on so shipment will be consistent with the uh with the activation so we are confident uh quarter over quarter so we will uh uh we will see the improved performance, no matter it's in the top line or in the bottom line. So to protect our bottom line, we announced our $850 million cost saving plan. So far, we have been above the track. but probably we will take even more actions to ensure our expense is consistent with the forecasted revenue so that we still can deliver the rather stable profitability to our shareholders. So definitely AI is another opportunity. So we will invest more money in that space. based on our kind edge server edge cloud and network and intelligent architecture. So we think we we will be a leading company in the AI-related devices, AI-related infrastructure, and AI-related vertical solutions and services. So that's my summary for the last quarter and the future. Thank you.

Thank you, Yanqing. And we also want to thank you, everyone, for joining today's call. If you have any further questions, please feel free to contact the IR team 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. Bye-bye. Bye-bye.