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 earnings 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, 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 growing portfolio of AI technologies over the years, we received a wider recognition for our AI for all vision and capabilities demonstrated at our annual Tech World event last month. Furthermore, we strengthened our AI ecosystem and partner the exponential growth in the AR era. Last quarter, global revenue achieved a quarter to quarter improvement for the second time in a row. SSG Solutions and Services Group. 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 expanded the managed services and the project and the solutions services. the revenue mix of which has grown three points year on year to account for 56% of SSG total business, leveraging the strong momentum of our hero offerings, such as the digital workplace solution, hybrid cloud, and sustainability. We have been integrating these horizontal building blocks into smart 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 solution 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 made us the third largest total storage provider in the world. Looking ahead, we expect the development of a 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 local data centers, between cloud and edge, as well as between AI computing and traditional computing, with AI being more balanced between training and inferencing. 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 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 the 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 premium products. We will fully leverage generative AI to accelerate the launch of our next generation of AI devices, including AI PC, 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 wave of AI revolution. Thank you. Now let me turn it over to our CFO, Huang Weiming. Weiming, please.

Thank you, Yuanqing. I will now take you through Lenovo's financial and operational performance for Q2 in fiscal year 2024. Next slide, 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 E2R 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 a 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 2.09 US cents, Today, the Board of Directors declare an interim dividend of HK$0.08, same as last fiscal year. SSG is the high priority growth engine that spearheads the Group's surface-led transformation and margin expansion. Its revenue and operating profit both reach 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 make 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 helped to shorten the cash conversion cycle to negative four days. Days of accounts receivables and inventory together improved by nine days year on year, of which six days 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 lowered 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 slide, please. SSG has once again achieved record high performance with revenue growing 11% year on year to 1.9 billion. An operating margin of 20%, which is a few times higher than our corporate average, showcases our business strength. This was achieved despite a mixed 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 as a surface solutions and accelerated geographic expansion would include a true scale breakthrough when in Japan this quarter. Premium support and sustainability solutions such as CO2 offset and reduced 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 CAD of one platform service is the first of its kind AI-empowered advisory service that makes it possible for clients to reduce lead 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 Advisor is another AI-powered service that assists our clients in aligning their IT environment with their sustainability goals. 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, budget shifts away from traditional general purpose computing, and a slower than expected transition to DDR5-based platforms. ISG reported 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 five positions from just a year ago. Within the storage market price bands of 25K and below, Lenovo has held 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 4 consecutive quarters of year-to-year growth, respectively. ISG is investing in the development of differentiated technology solutions in general-purpose servers, hybrid cloud, HPC, data management, AI, and edge computing. As part of these efforts, Lenovo has recently unveiled a new edge surfer with differentiated technology featuring 32% less power consumption. Next slide, please. IDG Solidify is global PC market leadership, ranking number one in four out of five geos with expanded market share. Its revenue was up 12% sequentially, outperforming its seasonal average of last six 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 continual 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 point year-on-year to 20% of IDG's revenue. Our smartphone business continued to accelerate market share gain in its growth and strong whole markets, with double-digit premium to market growth in shipments. Innovations such as AIPC, which features AI computing and private foundation models as smart devices, expected to be a powerful driver for the PC replacement cycle from the second half of 2024. AIPC also bodes well to the group's strategic positioning in AI from pocket to cloud, allowing for provision of end-to-end solutions that effectively harness the power of AI. The group has consistently received numerous recognitions for its ESG performance, such as its recent inclusion in the 2023 Hansen 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 Global Sustainable Ecosystems Leadership Matrix and was ranked 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 seeks to expedite private sector actions in realizing the SDGs outlined in the 2030 Agenda. Next slide, please. The group's continued investment in innovation has diversified our growth engines and unlocked 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 technologies, 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 presents new opportunities for ISG, which is supported by its ODM Plus business model and the new AI Innovators 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 AIPC 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 region expansion and differentiation given rapid 5G adoption. Finally, as always, remain committed to driving sustainable growth and profitability improvements for our shareholders. Thank you. We will now take your questions.

Thank you, Wai Min. 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. And our first question is coming from Mr. Robert Chan with BOA. His first question is, on PC market. What is your expectation on PC market and Lenovo's target goals in the market? And his second question is on AIPC. When do you expect AIPC to tackle? Could you discuss AIPC ASP and how big is it going to be?

Yeah, so probably this is a question for our IDG leader, Luca. Luca, please.

Yeah, so thank you, Yancheng, and thanks for the question. And good morning, afternoon to everyone. So the first arc was the bottom of the PC demand, and we are looking cautiously optimistic at the second arc, 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 DC in four out of five geographies globally. and we believe in 2024 the growth of the market will solidify driven by a large install base to be refreshed post-COVID, Windows 11 repayment cycle and new exciting product launches such as AIPC. We are modeling 2024 with a low single-digit growth for the total available market from 2023. Moving to AIPC, we believe that AIPC will be an inflection point for the PC industry starting from 2024 and accelerating in 2025 and 2096. When we start, I would say AI on PC is not something new for Lenovo because in the last two years, we already invested in AI techniques to make our PCs smarter and adaptive to the user's needs. So we believe we have a head start on the AI technology there. There will be a 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. So regarding the percentage of AIPC, I believe it's a little bit early to give a final number. We are thinking that 2023 will be, sorry, 2024 will be a one-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, Luca. And the last question is coming from Mr. Desmond Lin with IFRIN Semiconductor Control. How would the new US regulations impact business and the company's AI strategy?

Yes, so we are still tightly communicating with the US 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 a global and diversified 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.

Thank you, YY. And the last question is coming from Anthony with Jeff Morgan, ISG. How quickly can server loggers recover? And is there any update on China AI server business, even the Edge 20?

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

Yes, thank you. So I think as we look at 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 costs, 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'll continue to evaluate new chips that are coming to market from our suppliers, and we'll have updates in the future. But as Wawa said, we'll comply with all export regulations as new chips come out for all the markets we do business in. Thank you.

Thank you, Kirk. And the next question is coming from Weta Kumar from TASC. What's the future for Motorola smartphones in 2024? And what is your strategy to tackle the India smartphone market?

Yeah, so Bunyak, please answer the question.

Yeah, so I mean, very clear. I think first, our strategy is to become double the business in the next three years. We are now on track to achieve that goal. I mean, that's the middle of the first year. That means in India, we need to become a top three player in the next three years. Last quarter, we grew in Asia close to 50%. And in the October months, that's probably the biggest month in some festivals in India. We in partners online, we have already achieved double due to 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. So high expectations on Ninja. 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 foreign factor in a long time attracting consumers from iOS. 20% of our Razor consumers are coming from iOS, and we expect that growth to continue. We expect to sell in the current generation 5X

Thank you. And the next question is coming from Mr. Jeffrey Kwong from BMP. And the question is AI workload versus AIPC. What kind of AI workload could be transferred from data center to AIPC at its launching 2024 such that it creates enough value for our customers consider upgrading from older PCs to AI PCs. In other words, if most workloads will still be down at data centers, then how will AI PCs add value to customers?

Yeah, I think it's for me. So we are confident that AIPC value added will be significant and transformative for end users. That will be both in commercial and consumer segments 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, natural language interaction, processing speed for the AI workloads at the edge, security, privacy, low latency, and low power consumption will be all the characteristic of the AI DC, 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, you know, to further differentiate in the market. Thank you.

Yeah, so I want to add a couple of point here. So definitely, so AIPC will help to uh protect the the customer's data personal data uh privacy so that's the the most important effect that in the future people would need uh ai pc uh but uh uh additional to that uh so today AI workload is mainly for the training. So that's the advantage of the cloud. But over time, so 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 balance workload among these three. So that's our view. So that's also why we needed the IRPC to do some inferencing work. Great. With the more efficiency and the lower cost.

Great. The next question is coming from Anthony with Jackie Morgan. And what is your PZ market outlook in the calendar quarter four and next calendar year? How sustainable is your PZ margin? Is there any one of items this quarter? And what is Lenovo's view on AIPC? Is it a catalyst for spec upgrade or is it a unique driver and what's the expectation on AIPC penetration in the next few years?

Yeah, so this is also for me. So, PC market outlook calendar Q4, we are now modeling plan year over year and 2024 calendar year, we are modeling low single digit growth. No, there are no one-off income, obviously, for this quarter. Obviously, how sustainable is the margin? 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 pre-COVID and even beyond that with the following rationals I'm trying to summarize. Higher average selling price with the market shifting toward premium. Our only novel share gain in the premium and commercial segment. A richer configuration, as I mentioned for AIPC, you will require a richer configuration. We believe this trend will be visible in 24, but accelerate further in 25. Our focus on agencies and services and software And I would 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 in 25. And according to many analysts, it could be 50%, 60% in the market in 2026. Thank you.

So, to put it simply, we are very confident that not just the case, you may improve the profitability of the PC business. You should know that the past year probably was the toughest period. in our PC history. So we still keep the very good GP margin and operation profit. So with our competitive products and operational excellence. So we definitely believe with the further investment in the AI and the innovation, sharpening our operation excellence. So we will further improve the GPU margin as well as the operation profit. Thank you.

Next question is coming from Mr. Don Tan with Nomura. So NVIDIA is trying to integrate its own CPU and GPUs in order to widen its dominant position in AI supermarkets, not just for training, but also for inferencing. So what is going to be the impact to x86 server ecosystem? Could you discuss it?

Yeah, so probably you can talk first.

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 the additional billion dollars we've committed to invest over the next three 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 to 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, you know, 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 GPU. So I think we, you know, 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.

Thank you, Kirk. And Ben from technology business research has question our service business with some workers now returning to the offices. Have you seen a shift in organization consumption of PC services like that and or traditional lifecycle services?

Yeah, so our SSG leader will answer the question.

Thank you, Ben, for the question. So throughout our interaction with our customer, I think we continue to see a couple of, you know, support needed and also trend in the market. Number one is, you know, hybrid work is no longer a one-off phenomenon, but more a becoming a new normal, right? Especially when we talk about the whole workplace technology space. 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, you know, strong double digit demand grow in the asset service segment of the IT services. And also some of the data on this that we are seeing is suggesting that one in five commercial PCs in the coming three to five years will be consumed 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 new technology that could transform user experiences, 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.

Thank you. And Mr. McConnell O'Mara from Jefferies, is raising a question regarding to AI. Can you please help us understand the exposure of your AI business to China? Would it be possible to share your geographical exposure for your AI business?

Yeah, I think it's still about ISG, mainly ISG, so probably, Kefei, you can answer first.

Yeah, 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... That's our situation. Thank you.

Thank you. And also, while we are committed to comply to the regulation, we also will meet the customer demand. So definitely, even for China market, for China users, we will have the different portfolio to meet their requirements.

Thank you. And the next question is coming from Mr. Steve Chan with BOA. What are the key reasons for the decline in the cash from March 2023 legals? And what are the other receivables in March?

Yeah, so probably it means our CFO can answer the question. Okay, thank you. Thank you for the question.

The decline in cash, I think, is primarily the way how we manage working capital. As most of you know that, I think interest rate remain pretty high, and we actually been trying to optimize our cash level by managing our three components of working capital, I think, namely our receivable, our inventory, as well as our payable. I think we're actually in a very comfortable position. Our cap remains pretty strong. You will know that lately, I think Standard & Poor's actually upgraded our investment brand rating. So again, this is primarily driven from the external environment because of the continuously high interest rate environment. And therefore, we are trying to optimize between a very healthy balance sheet, a healthy cash flow against the expenses we pay for the interest.

Thank you.

Thank you, Wani. And Kuma from Tech Insights is asking, regarding to what is Motorola's strategy to democratize 5G smartphones, and by which year Motorola plans to make its portfolio 100% 5G? Yeah, so Bunyak.

Yeah. So, I mean, I think number one, our 5G mix is growing slightly faster than the market. Of course, different maturity levels. Some markets like North America are 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 two years, also in line with the market. What is democratizing 5G over the place? And Probably, you know, normally the 3G to 4G took three to five years. At least 90% of the portfolio should be 5G between the next 24 to 36 months. But we will 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, And the others, they'd be months to like six months.

Thank you. And next question is coming from Mr. Connor O'Mara with Japanese. Can you please talk about the benefit of AI on both PC and smartphone? This could be a good replacement driver if it captures consumer imagination. When you talk about security, latency, et cetera, what is the use case you have in mind?

So thinking this way, AIPC will be, now you are talking about consumer, will be your personal twin. So the IRPC will know everything about you, will be able to process the data about you in your device. So without the need to load it 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 second will be the capability of this new generation of this team 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 one of the use cases we have in mind in consumer, so personal tweaking. Then you can imagine in commercial, you have the productivity use case where the PC will be able to do things that were just unimaginable today with this new computing power that they will have.

Thank you. So basically, you can enjoy the advantage of today's large language model to write a paper, prepare a PowerPoint. or prepare a picture, et cetera, et cetera. But meanwhile, you don't need to share all your personal data with the public cloud. So that's the advantage. So we have a survey to our customers, and most of them like the idea. That's for sure. But so as Luca said, so gradually it will become your personal assistant or we call it personal twin. So what does personal twin mean? It means only you can use this device. Meanwhile, only this device or your personal twin can understand you better. So if you ask them to do something for you, they will always give you the best answer than any other large language model.

We will move to the next question coming from Mr. Jeff Poo with Hightone International. What are the key cost drivers for an AICT? How does renewable address the entire cost structure of this new generation of machines?

So I think, I believe that you can just think that the configurations will be richer, so more premium. then also the selling price, the market will shift toward the more premium. There is no issue on managing the cost. I will tell you instead that given our R&D efforts in the last two or three 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.

Thank you. Thank you. Thank you. And the next question is coming by Jeffrey with BMP. What's your view on Edge 20 and the equivalent, which is the equivalent new MPCR-GPU target in Chinese customers? Are you going to ship servers equipped with Edge 20 in China in 2024?

There could. Yeah, 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 NVIDIA 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.

Thank you. And the next question is coming from Susanna Chu with BEA Union. How is general IT services outlook in 2024 and what will be the blended AP and margin upside for AITC versus normal? So there are actually two different questions.

Okay.

Thank you, Susanna. So regarding the IT 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, you know, faster growing segment. The first one is definitely the asset service uh demand right across device 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 you know for a couple of quarters right uh the other part is you know ai right a lot of our customer On one hand, they are trying to understand how to leverage AI to build competitive edge 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 an efficient, and most importantly, in a secure manner. And this is why I think in just in our tech world, which is a annual flagship event of Lenovo, We announced the AI professional services in partnership with NVIDIA, which is to help our customer to accelerate their journey and also time to market for their AI solutions. Thank you.

So in regards of the second part of the question, the blended ASP and multi-upside, as I said before, we are still modeling how much will be the upside in AUR or ASP. Definitely, we think with richer configuration, 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.

Thank you. And the next question is coming from Yihan Li with Kai Yuan. Will MPU be a very crucial part in AI DC? Is it embedded within a CPU or is it a separate chip?

Okay, so there will be different classes of AI DC with and without MPU. AI workloads can be processed also by the combination of CPU or CPU plus GPU. But clearly, there will be a new class of devices that will ask an NPU, neural processing unit, within the CPU. And that will help to drive AI workloads with more efficiency, speed, and energy saving. So I think there will be the two cases, with NPU and without NPU. Thank you.

All right, the next question, which is also our last question is from a question with CBS. Could you share your definition of AI2C and how would the novel address the impact of US government's extended restriction on AI2C? Those are two separate questions.

Yeah, so on the definition of AIPC, I think the industry is still maturing on this front. Probably if you ask to several silicon vendors, they will have a different definition of AIPC for now. I believe this will mature over time. From a usage perspective, AIPC will have the natural language interaction with the end user. we'll have this kind of personal twin, personal assistant approach or mode. We'll be able to execute those AI workloads in a hybrid way. So partially on device and partially on the cloud. When it's on device, you will have your personal foundation model and the knowledge base that contains your data on the device. And then you will be able to go to the cloud on demand and the user will be able to switch when he wants to also share the cloud data and when he only want to process on the device. And in general, as I mentioned in the previous question, there will be a combination of CPU, GPU, and the NPU. And well, I believe this is just the beginning. So we will see more clarity over time in 2024. And in 2025, the year that we believe will be a very big acceleration of those AIMC schematics. Thank you.

Yeah, so probably, Kirby, you can answer the second part of the question.

Could you repeat the second part, please?

Yeah, definitely. How would Lenovo address the impact on U.S. government's expanded restrictions on AI server GPUs?

How will Lenovo what? Address the impact from U.S. government's expanded restrictions on AI server GPUs.

Yeah, so I think as we said earlier, we're still evaluating the impact because 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 products.

Thank you, Kurt. And thank you, everyone. This is our last question due to time constraints. We thank you very much for joining today's talk. If you have any further questions, please feel free to contact our 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.

Thank you. Bye-bye.