Lenovo Group Ltd

HKEX:992

Earnings Call Analysis

Earnings Call Transcript 2025-Q2

[Jenny Lai, executive]

Good morning, good afternoon and good evening. Welcome to Lenovo's earnings investor webcast. This is Jenny Lai, Vice President of Investor Relations. Thanks, everyone, for joining us.

Before we start, I would like to introduce our management team joining the call today. Lenovo's Chairman and CEO, Yuanqing Yang; Group CFO, Wai Ming Wong; President of Solutions and Services Group, Ken Wong; Senior Vice President of Infrastructure Solutions Group, Vlad Rozanovich; President of Intelligent Devices Group, Luca Rossi; and Senior Vice President of Mobile Business Group and President of Motorola; Sergio Buniac.

We will begin with earnings presentations. And after that, we will open the call for questions.

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

[Yang Yuanqing, executive]

Hello, everyone and thank you for joining us. Last quarter, Lenovo delivered accelerated revenue year-on-year growth for the fourth consecutive quarter with all of our businesses achieving strong double-digit growth. The group's net income increase is even more significant. This is driven by strong execution of our clear strategy, leading innovations in hybrid AI, operational excellence and the global footprint. And we are optimistic that this momentum will sustain for the remainder of the fiscal year.

Last quarter, our group revenue grew almost 24% year-on-year. Net income increased 48% year-on-year on our non-Hong Kong FRS basis. Our diversified growth engines further accelerated with the non-PC revenue mix, increasing more than 5 points year-on-year to nearly 46%.

At our Tech World event last month, the hybrid AI trend that we put forward at the same time last year has gained industry-wide consensus as it creates real growth opportunities across devices, infrastructure and services. Lenovo has long been a pioneer of the hybrid AI vision. And now our continuous investment over the years and expanding innovations have started to pay off.

For personal AI, the first bench of our 5 feature AI PC that launched in May in China, has already reached almost 14% of our total notebook shipment in the China market. Thereafter, we have also launched the AI PC with AI Now Agent for global markets, which we believe will follow a similar growth track. For enterprise AI, we are leveraging our full stack hybrid infrastructure as well as Lenovo hybrid AI Advantage to capture the opportunities.

At this early yet critical stage of the hybrid AI era, Lenovo will continue to proactively establish our market differentiation and the industry leadership through relentless innovation. Last quarter, we enhanced our innovations around both personal AI and enterprise AI with a 10% year-on-year increase in R&D investment. We remain committed to our vision of delivering AI for every individual and every enterprise.

Now I will talk about each of our businesses. Let's start with our Intelligent Devices Group, or IDG. We delivered a 17% year-on-year revenue growth. For PC, we expanded our market leadership to almost 24% market share, enlarging the gap with the second player to more than 4 points while maintaining the industry-leading profitability. Our smartphone business and the tablet business both delivered a high double-digit year-on-year revenue growth by 43% and 19%, respectively. Particularly in smartphones, we saw hyper growth ranging from 20% to triple digit in North America, EMEA and the Asia Pacific markets.

Looking ahead, we expect the PC market to steadily recover and enter a new refresh cycle driven by AI PCs which will gradually grow to represent around 80% of the PC industry landscape by 2027. The new development of AI technology is also expected to drive the refreshment of the smartphone markets. We will continue to leverage our 5 feature AI personalized computers and the newest lineup of next-generation Copilot+ AI PC to establish leadership in the AI PC market, while at the same time, build a rich AI device portfolio.

Next, our Infrastructure Solutions Group, or ISG. Last quarter, driven by the hyper growth of our cloud service provider business, ISG delivered a 65% year-on-year growth in revenue, breaking record for the second time in a row. Operating losses continue to narrow, heading to breakeven soon. The combined revenue from storage, software and services achieved a 35% year-on-year growth to record high.

Revenue from our Neptune liquid-cooled servers increased by 48% year-on-year. Looking ahead, we will continue to strengthen our enterprise SMB business model, including simplifying portfolios and improving operations as well as diversified cloud service provider customers. We will continue to build a differentiation with our industry-leading liquid cooling technology to meet the increasing performance and energy efficiency demand of AI workloads. And we will continue to grow key strategic partnerships to develop smarter infrastructure solutions.

Our SSG, Solutions and Services Group, has extended its double-digit growth straight to 14 quarters with operating margin of 20%. We further expanded the managed services and the project and solutions services. The revenue mix has grown 3 points year-on-year to account for almost 60% of our total SSG business, a historical high.

Our hero offerings, such as the digital worker place solutions, hybrid cloud and the sustainability solutions, also delivered a strong growth. Over the next 3 years, the global IT services market is expected to see double-digit steady growth, and AI services will grow more than twice as fast as the market in general to become one of the key drivers. We will continue to embed AI in our key hero offerings, while at the same time, developing more AI native services for our customers to adopt AI use cases and capture the hybrid AI opportunities.

Looking ahead, we expect to drive continued innovation in hybrid AI and deliver accelerated growth and profitability increases. The strategic partnerships with a lot will bring us the intended strategic benefit in our intelligent transformation, [ mere ] market expansion and the global supply chain enhancement once the deal is completed.

We are confident that our leading innovation, operational excellence, ecosystem partnerships and the globalization capabilities will not only continue to help us navigate macro and micro challenges and opportunities, but more importantly, enable us to realize our vision of smart AI for all.

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

[Wai Ming Wong, executive]

Thank you, Yuanqing. I will now take you through Lenovo's financial and operational performance for Q2 in fiscal year 2025. [indiscernible] please.

In Q2, the group set multiple performance records, thanks to operational excellence and opportunities brought by strong innovations. Group revenue beat expectations with a 24% year-on-year growth, net income rose by 44%, and non-HKFRS net income surged by 48%. Revenue growth accelerated for 4 consecutive quarters with all business groups and geographies achieving double-digit year-on-year growth for the first time in 3 years.

IDG's 17% revenue growth surpassed expectations as differentiated 5 features AI PCs and foldable smartphones led to continued market share expansion in PC with largest lead over the second player in last 2 years and highest smartphone market share.

ISG revenue grew 65% year-on-year, outpacing the market and elevating its global market shares in servers and storage to new records. Key drivers include a strong cloud demand for hybrid infrastructure, enterprise demand recovery and accelerated liquid cooling adoption. This strength in cloud demand supports ISG customer diversification, adding more clients with $1 billion revenue scale. Meanwhile, enterprise demand recovery is crucial for ISG profitability. We saw a 33% year-on-year reduction in operating loss.

SSG achieved record revenues and profit, driven by high demand for asset service and AI-powered solutions. SSG segment profit accounted for 32% of our 3 business segment profits with deferred revenue reaching a historic high of $3.1 billion.

In terms of business group profitability, IDG and SSG both improved profits, while ISG reduced operating losses. However, the group's gross margin was affected by higher growth towards cloud infrastructure, including GPU servers. Despite this, expense control led to net margin expansion. Basic earnings per share were USD 0.0292. The Board declared today an interim dividend of HKD 0.085, a 6% increase as compared to last fiscal year.

Next chart, please. Free cash flow grew by $632 million year-on-year on strong profitability growth, leading to an increase in cash balance. With robust free cash flow, the group further increased R&D investment by 10% year-on-year to support hybrid AI innovation at Tech World and over launch leading AI products including servers, PCs, services and personal AI agents like Lenovo AI Now.

Cash conversion cycle was at 6 days. Higher inventory was driven by rising demand and new product launches. The group's effort in capital management was well recognized, and Lenovo was honored for the 2024 Top Treasury Team Award by Adam Smith, highlighting its strong governance practices.

Next slide, please. IDG bid expectation was a 70% year-on-year revenue growth, driven by solid premium to market growth in both the PC and the smartphone business. The PC market in China was boosted by the government's stimulus measures, as evidenced by reduced year-on-year decline. The business continued delivering industry-leading OP margin of 7.3%, thanks to operational excellence and ASP expansion.

Smartphone and tablet businesses had another strong quarter. Smartphone, in particular, continue to shine with significant double-digit growth in revenue, shipments and activation with hyper growth ranging from 20% to triple digit in Asia Pacific, EMEA and North America. The success was largely due to the focus on AI-powered premium models such as affordable Razr.

Building on IDG's successful innovation records, the business is advancing industry leadership through continuous innovation, expanding its PC market lead by widening the gap over the second place competitors and remaining #1 in 4 out of 5 regions. This new AI PC is setting the industry standard and spearheading innovations, marking a turning point and creating opportunities to further strengthen this market leadership.

IDG is seeing early success as its 5 feature AI PCs with intelligent agent, Salten, reached 14% of total notebook shipments in China, aligning with growth expectations. At Lenovo Tech World last month, IDG launched its latest 5 features and/or additional AI PC, alongside other innovations, including the on-device intelligent agent, AI Now, SmartConnect and Moto AI, IDG aims to add value for users and create differentiations.

Next chart, please. ISG achieved record-breaking quarter revenue in the past quarter, making a [ higher ] growth of 65% year-on-year, driven by strong cloud momentum and enterprise recovery. In addition, storage revenue growth maintained robust, thanks to a strong full stack capability to meet diverse demand, especially from cloud customers. ISG is making steady progress towards sustained profitability, demonstrating confidence in both year-on-year and quarter-on-quarter operational improvements.

In the second quarter, ISG achieved a 33% reduction in operating loss, along with enhanced enterprise profitability across all regions. Moving forward, ISG is well positioned to seize future growth opportunities with ODM+ business model, and we are confident to drive continued profit improvement by strengthening the SMB business.

ISG is also building differentiation with its proprietary Neptune liquid cooling technology. Its liquid cooling server revenue continued to grow at a high double-digit rate. On wider customer adoption, Neptune technology enabled hit removal of 100% with those specialized air conditioning.

On the AI front, ISG is seeing strong demand in AI GPU server pipeline with incoming orders expected to convert into meaningful revenue starting in the second half of this fiscal year.

Next chart, please. SSG continues to benefit from AI cloud services and solutions, reporting record revenue and profits in the second quarter. Revenue grew by 13% year-on-year to $2.2 billion, marking the 14th consecutive quarter of double-digit growth. With an operating margin of 20%, SSG contributed 32% of the combined operating profit across the 3 business groups. Both managed services and project and solution services revenue grew by double digits year-on-year, up 3 percentage to 59% of SSG revenue, and this attributed to strong asset service contract wins and rising demand for AI services, including securing one of the largest gas contracts with rich services.

SSG has ceased opportunity in AI-powered service solution through its AI fast-start service would help customers accelerate AI adoption by providing readily available use cases for faster deployment.

SSG is also enriching its hybrid cloud offerings and developing the next-gen digital workplace solutions to capture the hybrid AI trend.

In support service, the record deferred revenue strengthened growth outlook for support services.

Next chart, please. The group's commitment and achievement in corporate governance and sustainability has been recognized once again as is retained AA rating in the 2024 Han Seng Corporate Sustainability Index. The newly launched AI power sustainability platform, or we call LISA, has won SEAL Sustainable Innovation Award, besides the Neptune liquid cooling technology was honored with the sustainability Product of the Year Award from Business Intelligence Group.

On the D&I front, the group has earned recognition as a 2024 Best Place to Work for Disability Inclusion by the Disability and Quality Index.

These accomplishments highlight the group's balanced approach to sustainability and strategic excellence across its diversified growth engines.

Next chart, please. Hybrid AI presents an unparalleled opportunity for the group to supercharge growth. Further R&D investment will be made to unlock the full potential of hybrid AI and build a full stack AI capability. This will help solidify our leading position in personal and enterprise AI twins. The robust innovation efforts seen across the 3 business groups will enhance the growth competitiveness in next-generation product design and solutions, effectively driving growth and supporting its efforts in achieving its medium-term profitability targets.

Looking ahead, as AI hardware upgrades, AI software and use cases will evolve, adding value for users and making AI PC a mainstream product. IDG approach to AI PC innovations include hardware development, proprietary software and components that enhance differentiation and pave the way for personal AI twin. These innovations will also help drive higher ASP and sustainable profitability. Meanwhile, IDG significant growth in the smartphone sector will continue to protect its premium-to-market growth strategy.

ISG is committed to driving growth and probability by investing in hybrid AI infrastructure, high-performance computing, storage and edge systems. With customer diversification among cloud service providers and optimization of ESMB business structure, ISG is set for balanced growth in revenue and profitability.

ISG latest thing system server on the NVIDIA GB 200 platform with advanced 6th-generation Neptune technology achieved 100% liquid cooling without specialized data center air conditioning.

SSG will use the hybrid AI advantage to deliver fast and reliable AI outcomes, enabling organizations to quickly turn data into business results and accelerated AI adoption. Currently, SSG will focus on safeguarding its core business with high value-added support services across both the PC and infrastructure segments. Through collaboration with ecosystem partners, SSG is well positioned to help customers advance their AI journey while enhancing its financial contributions to the group.

Finally, as always, we stay committed to driving sustainable growth and improving profitability for our shareholders. We will continue to seek both organic and inorganic opportunities to drive optimal growth for the business.

Thank you. We will now take your questions.

[Jenny Lai, executive]

Thank you, Wai Ming. Now we will open the line for questions, and this session will be in English only. [Operator Instructions] Operator, I will now turn it over to you. Please give us your instructions.

[Operator]

[Operator Instructions]

[Jenny Lai, executive]

Thank you, operator. Thank you. Now we have our first question from -- with Maybank Asset Management. What do you expect the impact of new Trump administration to Lenovo? What can you do to address this potential tariff concerns?

[Yang Yuanqing, executive]

So thank you for the question. So actually, today, geopolitical or issue environment is a fact for companies in any industries to operate. So as a global company, so Lenovo is well used to navigate this kind of macro and micro conditions in any markets where we operate. So actually, now it's still too early to speculate or comment on the new administration. But no matter how much tariff, it will be is for everybody, not just for Lenovo.

So actually, if you compare with our competitors, so Lenovo has globalization advantages. So we have a very balanced revenue mix across geographies. We have very diversified sourcing and manufacturing strategy. So we have very unique global resilient and a flexible supply chain.

So we manufacture in China. But meanwhile, we have more than 30-plus manufacturing facility are in 9 different markets as well in the Japan, Germany, Brazil, Argentina, Mexico, U.S. After -- a lot of deal is complete, so we're also planning to open a new manufacturing facility in Saudi Arabia to help us keep resilience and flexibility so in the tough geopolitical situation. So we think -- so this is truly global and multinational position will help us to navigate the situation well, and we'll keep our competitive advantage for sure.

[Jenny Lai, executive]

Thank you, Yuanqing. And now we will move to question number two. And congratulations on your strong goals on smartphone. And what was the key drivers for your smartphone business? And what's the growth outlook?

[Sergio Buniac, executive]

So hello, everyone. Take question. So a very strong quarter for the smartphone business. Record Q2 market share in the last 15 years. The growth is coming, I think it's the most important part from multiple areas.

I think, number one, geographical expansion. So we are growing revenue by almost double-digit, 8% in Latin America, 20% in North America, 50 -- close to 50% in Europe and 35% triple digit in Asia, driven by markets like India and Japan. Actually Japan, we achieved double-digit share, almost 500% growth year-over-year.

Also, we are growing in the premium segment with the Edge and Razr franchise. We doubled the participation on revenue from also 20% a year ago to 36%.

And also not less important, we are seeing the new devices, new segment of the market. So while in the past, our consumers were 90% 25 years more [ mail index ] and above, we are seeing now a significant part of our business coming from 35 years and below. What shows that the things that have been designed in the portfolio are meaning and expanding into new segments that I think it's extremely important.

We run a significant premium to market, 27% in CA, 42% in revenue. And we expect the future market to be above 20% at least in the next few quarters.

[Jenny Lai, executive]

Thank you, Sergio. And now we will move to next question from Howard Kao with Morgan Stanley.

What is your view on PC market goals and also Lenovo's own PC goals for 2025?

[Luca Rossi, executive]

Yes. I think this question is for me, Jenny, and thanks for the question, Howard.

So we are now ramping up calendar '24 with a market that is likely flat year-over-year. And Lenovo is overperforming it in both shipment and Windows activation where we are delivering record market share in all geographies.

Looking at 2025 and beyond, we are optimistic that the market is poised to enter into a new growth phase. We see several positive tailwinds. The first one being Windows 10 end of life that now is confirmed for October 2025. A large installed base, which is 3, 4, 5 years old and now ready for replacement. And certainly, we believe into a replacement cycle driven by AI PC and new experiences or productivity enhancement for users.

So we are modeling a mid-high single-digit growth in units for the fiscal '25 '26. We expect Lenovo to outperform the market with positive premium to market and with differentiation opportunities driven by our innovation, AI Now or Edition, and our unique 5 features AI PC.

Additionally, for next year, we anticipate that revenue growth should be slightly higher than the unit growth with anticipated higher average selling price, driven by more premium configurations. We also expect for next year a strong commercial PC market that should help to further beef up our margins and our ASP. Thank you, Howard.

[Jenny Lai, executive]

And the next question is coming from Edison Lee with Jefferies. What is the long-term margin outlook for ISG?

[Vladimir Rozanovich, executive]

Thank you for the question, Edison. So from an ISG perspective, what we see is the investments that we have made over the years from an ODM+ model, from a focus on ESMB is leading us to a position where profitability is goal #1 for ISG. We do believe we are very well positioned with the investments that we have made and making sure that we're looking at the key markets that we operate into to really drive that profitability into the second half of the year. And so this is something that we are maniacally focused on and expect to deliver results soon.

[Jenny Lai, executive]

Thank you, Vlad. And another question on ISG coming from Howard with Morgan Stanley.

With the recent accounting issues for one of your competitors listed in the U.S., are you seeing any new opportunities as a result of their customers looking to find new suppliers? And if so, how long do you think this new qualifications for new customers would take? And when can we see this potential revenue upside?

[Vladimir Rozanovich, executive]

Yes. Thanks for the question, Howard. So we are very well aware of the situation of one of our competitors in the marketplace. And I would say that this is creating an opportunity for Lenovo because we are prepared for it. In fact, when you look at the portfolio that we have created, both in the CSP space as well as the GPU space, we have created the portfolio and the products to really go after the market that, that competitor has been positioned to.

So for instance, if you look at some of the results that Lenovo has where you see 48% year-on-year growth in our Neptune water cooling, in addition to the products that we announced at our Tech World event, including the N1380-Neptune product with 100% heat removal as well as our SC777V4 with the upcoming GB 200 from NVIDIA, we believe that the portfolio we have put in place, especially in the GPU as well as the CSP space, is very well positioned to take on the AI opportunity in front of us.

In fact, we have over 80 AI-optimized platforms that we have introduced. And so as we look to customer acquisition, which will be a very, very big part of our focus moving forward, we do believe we have the portfolio, the right products and the right customer relationships to see a benefit from this market opportunity.

[Jenny Lai, executive]

Thanks, Vlad. And the next question is our gross margin. Albert Hung from JPMorgan.

Could you share more color on the sequential gross margin decline in this quarter, specifically on IDG? While revenue grew meaningfully and outperformed peers, why its operating margin only staying flattish quarter-to-quarter?

[Wai Ming Wong, executive]

Yes. So I can actually take on that. I think the margin -- the revenue growth, I think, obviously, is an evidence of us outperforming market, especially, I think, extending the lead over our competitors in terms of market share. But at the same time, the margin also, being impacted by the mix of our revenue.

I think generally, I think that we -- I think in this quarter, I think we obviously have a higher mix of lower-margin consumer segment. And therefore, as a whole, I think that our gross margin actually sort of come down a little bit. But it is more important to look at because different customers in actually, I think we have different expenses, I think, to support the growth.

I think more importantly, if you actually look at ourself, I think the overall expenses to revenue ratio, I think that also come down. And as a result, I think that we probably have a minimal impact of, in fact, our operating margin -- net operating or operating margin percentage, I think probably, I think, improved.

All in all, I think that it is important to actually balance I think what business opportunity we get. I think we continue to be able to gain market share. But at the same time, we actually manage the business to grow, I think, in a very diligent way. As a result, I think the margin, overall margin improved.

[Jenny Lai, executive]

All right. Excellent. So now the next question is, what's the [ gross ] outlook for SSG in terms of contract value and future potential revenue goals?

[Kin Hang Wong, executive]

Thank you, Jenny. So this is Ken Wong from Solutions & Services Group. First of all, I think this is another encouraging quarter for SSG. It's a record revenue quarter of more than USD 2.1 billion, and this is indeed the 14th consecutive quarter of year-to-year growth in revenue. And also with an industry-leading profitability, we see strong momentum and continue to outperform the market.

I think when we look at what are the growth engines that contribute to the encouraging result, I think there are 3, right? First is our standard services. This is the value-added services around our hardware across the bucket to the Edge and cloud.

Second is our true scale as a service across our digital operation, our hybrid cloud and as well as our sustainability offering. We continue to see a very strong momentum across all the offerings.

Last but not least, we just announced in our Tech World in Seattle the Lenovo hybrid AI Advantage framework. We have received a lot of positive feedback from our customer because the offering is to address one of the most pressing issue from our customer, which is about how to achieve ROI from AI, right?

So the offering is actually to look at how we encompass the full stack of portfolio of Lenovo from infrastructure to devices to data and services to help our customer to deliver a solution with speed, ease and expertise.

So in a nutshell, we continue to see strong momentum in our business. Contract signing is on track. And our book-to-revenue ratio is continuing to be bigger than 1, right? So we are confident that in the coming quarter, we'll continue to outperform the market for SSG. So thank you, Jenny.

[Jenny Lai, executive]

Thank you, Ken. Next, we move to our AI PC. Howard from Morgan Stanley again. With x86 AI PC chips now out in the market, can you talk about your view on Intel's Lunar Lake versus AMD Strix Points? Which chips do you see better feedback and performance? Also, are you seeing any performance issue that is delaying the deployment, especially with Lunar Lake?

[Luca Rossi, executive]

Thank you, Jenny, and thanks, Howard. So obviously, we are very pleased to see new entrants into the 40-plus tops devices that will be also able to run Copilot+ PCs.

We -- at Lenovo, we have a very broad and full lineup. We -- that is including Qualcomm, Lunar Lake and Strix. And I'll be honest, we think both Lunar Lake and Strix are very well positioned with strong performance, good thermal design, long battery life. So when I look at 2025, I'd probably say that Lunar Lake is very well positioned and will be strong on the very premium devices.

Technically, Lunar Lake has memory embedded in the chip. So it's very, very powerful, maybe a little bit too expensive could be. So that will be on the high end. While I think Strix and the following one, which is called Kraken from AMD, will be very suitable for the mid-range.

So I think we do not see any problem. You are referring to technical issue. No, we are not seeing any technical issue. What is fair to say is that for as of now, Copilot+ is not yet available for those 2 CPUs and will come available. Microsoft is guiding late Q4, early calendar Q1. So for that, we have to wait a little bit.

Maybe an interesting note, apart from the technical view, is that right now on the on the Qualcomm Copilot+ world, we are executing very well, and our market share, as recorded by IDC, is around 40%. So we are also taking a very strong position in this segment from day 1. Thank you, Howard.

[Jenny Lai, executive]

Thank you. The next question coming from Edison Lee with Jefferies. How should we think about the profitability for your smartphone business given the strong top line performance?

[Unknown Executive]

I mean, look, we have been profitable for the last 4 years. Our growth are coming from profitable -- profitable growth. So we do not see any change in our profitability path. We are very, very comfortable with the way we are funding the growth organically through multiple channels. So we see the profitability continue on the same track that has been in the last quarters. Thank you.

[Jenny Lai, executive]

And coming to next question from Lin Mark Lau with EFG Bank. What's the reason behind of your inventory increase this quarter?

[Wai Ming Wong, executive]

Thank you for the question. The inventory increase, [indiscernible] primarily for 2 reasons. I think number one, I think Q3 is our biggest quarter, and therefore, we are actually having, I think, more inventory for another successful quarter ahead of us.

And secondly, I think in particular, I think a lot of the increase coming out from the significant growth of our ISG business. I think if you look at our Q2 results, our ISG business actually grew 65%. I think we continue to see very strong growth coming from ISG, and we are actually preparing to capture the opportunities to capture the growth.

[Jenny Lai, executive]

Thank you, Wai Ming. And next question is coming from June May with Maybank Asset Management. What is the status of the strategic cooperation with Alat? Can you give us some updates regarding to the use of your proceeds?

[Wai Ming Wong, executive]

Okay. Thank you for your questions. I think we will continue to, I think, finalizing the process of getting all the necessarily, I think, from approval from various regulatory authorities. And we should expect that I think it should be, I think, coming, I think, in the near -- well, coming soon.

I think so far as the use of proceeds, I think it probably remains the same at least initially, the same as we stated in the document we sent to shareholders. There is no further update. We obviously, I think, will be able to -- after the repayment of the debt, I think we actually will have excess capacity for us, I think, to deploy the capital to grow our business. Definitely, there are a lot of opportunities for us to grow our business. I think in the MEA region in particular, Saudi Arabia, especially, I think, with the participation of the minority shareholder [indiscernible]. Thank you.

[Jenny Lai, executive]

Thanks. And next question is coming from Ben with Technology Business Research. And with respect to your AI server business, can you shed light on how much of that is coming from your Edge side of the business versus your core data center side of the business?

[Unknown Executive]

Yes, I'll take that. Thanks for the question, Ben. So when we look at our Edge portfolio, one of the things that we recognize is as AI starts moving from a business where it is large language models typically held by CSPs- and GPU-as-a-service companies, we are going to start seeing momentum and traction where you're going to see more inference and retrain at the Edge or within corporate data centers.

In fact, the portfolio of products that Lenovo has created, especially our ThinkEdge portfolio as well as our ThinkAgile portfolio, has really put a focus on this Edge business. In fact, some of the large opportunities that we've recently won in our ThinkAgile business, along with Microsoft Premier, has really shown that GPU-enabled servers at the Edge that actually do inference work. And other areas of implementation for things like smart retail or fast food has become an emerging area where we are starting to see momentum.

So I would say that Edge, not only far edge, but also on-prem is going to be an area that we're going to continue to see market momentum, and it's one of the reasons that we've put such a robust focus into our ESMB portfolio as well as our strategy to really focus on enterprise and SMB, not just the CSP market.

[Jenny Lai, executive]

Thank you. And the next question, a follow-up question is on smartphone business. Can you share with us your AI smartphone strategy?

[Sergio Buniac, executive]

Yes. So I think number one, we are excited about the opportunity AI is going to bring, make the portfolio more premium. We can leverage a lot of the work Lenovo has been doing to multiple areas, including PC, we're a year ahead. Our vision is to deliver interactions that anticipate intent. So we believe that will change fundamentally the way consumers interact with the phone by building the Moto AI advanced solutions, partnering with industry leaders like Google, Microsoft, many others.

And generally speaking, Moto AI is aiming to transform the smartphone user experience through applying generative AI across 3 core experiences, capture, create and assist. And you'll see a lot of announcements on these 3 areas in the next few months. But we are very optimistic about the opportunities that they are going to bring to the portfolio.

[Jenny Lai, executive]

Thank you.

[Luca Rossi, executive]

Jenny, if I may just add one thing to what Sergio is saying. I just wanted to elaborate that we are also working to leverage our unique position in the industry, meaning we have phones, PCs, tablets and other IoT devices. Last year, we launched SmartConnect, and we are continuing to drive on this front. You will see us. We want to offer an ecosystem with personal knowledge base, with the vision to deliver, over time, what we call personal twin. So I think we intend to leverage on the fact that we are probably one of the very few companies that have these multiple devices that can build an ecosystem with a common consistent experience for the end user. Thanks, Jenny.

[Jenny Lai, executive]

Thank you, Luca. And the next question is SSG. Could you share more details about your AI services and solutions? And how are this going to help your customers?

[Kin Hang Wong, executive]

Well, thank you, Jenny. Ken again from SSG. Well, first of all, AI is not a new thing to Lenovo. We have been offering AI services for many years. I think roughly speaking, there are 2 directions or 2 focus that we are working on. One is how can we put AI into our current offerings, right, from our digital workplace solution to hybrid cloud and to sustainability, right? This is embedding AI into our current solution. And IT services from Lenovo instead of a labor-focused services, we leverage a lot of technology to deliver the design outcome for our customer.

I can give you one example. For example, our -- the digital workplace solution. We have a lot of Gen AI capability built in so that we can leverage the telemetry data that we get from our hardware as well as the multi years of services experience data that we have accumulated to make sure we have -- we can deliver the best employee experiences and also efficiency to our customers, right? So this is part 1.

Part 2 is, I think when we talk to our customers, there's a lot of feedback around how can we achieve ROI fast, right, in terms of AI investment. So this is what exactly we have announced this month in Tech World in Seattle earlier on is the Lenovo Hybrid AI Advantage. The objective is to help our customer to stand AI use cases with speed, ease and expertise.

We have our internal tools as well as a proven libraries of AI solution and also because of our hardware excellence from [indiscernible] to edge to the cloud, there's a lot of expertise that we can apply to help our customer to create modern devices and modern infrastructure which is essential and important when deploying AI solution, right?

So those are the 2 focus that we have been working on. And as you can see, our strong results in Q2, I think that strategy and focus really resonate with our customers' requirement. So thank you, Jenny.

[Jenny Lai, executive]

And the next question is what will be the key areas of investment for Lenovo in the next 3 to 5 years?

[Yang Yuanqing, executive]

Yes. So it has been very clear. So the future trend will be hybrid AI. So we're definitely investing more R&D expense in this area. So we will drive more AI-related devices, infrastructure solutions and services. So we have discussed a lot about that. So not only AI PC, so we are driving AI-type smartphone and even more gadget. So not just a stand-alone devices, we are driving the collaboration across devices.

Ultimately, we will drive personal AI train. So everybody will have itself AI which can use the data for all personal devices. We definitely will invest on the embedded large language model so that could be more effective and efficient for this kind of personal AI training. We will drive the better heterogeneous computing. So using CPU, GPU and MPU. We will help consumers to build the personal -- base. Definitely, we will drive -- reach AI ecosystem.

Meanwhile, we will drive security and privacy for the devices. So not just in the personal AI, in the enterprise AI, so we will invest more on the AI server, not just in the cloud, but also in the Edge. So we will drive more AI solutions and services as well. So those are other areas we will invest. So definitely, we believe the hybrid AI will be the future. So we will invest more.

[Jenny Lai, executive]

Thank you, YY. And the next question is coming from Albert with JPMorgan. When do you expect to ship Blackwell GPU server? Could you help quantify the AI server revenue goals in the next year with the more complete product mix and potential market share gains from the U.S. peers? How much of the AI server as a percentage of your total server now? Thank you.

[Vladimir Rozanovich, executive]

Thanks, Albert, for the question. So when we think about time-to-market shipping for GB 200, it is Lenovo's expectation that we will be time to market on all NVIDIA AMD GPU solutions. So whether it's GB 200 or whether it's MI 325, our expectation is that we have the products ready to go from a time-to-market perspective.

Breaking down your question, when I think about what percentage or where we are seeing this progress. In fact, today, Lenovo is selling GPU-enabled servers to research institutions, to financial firms around high-frequency trading, to pharmaceutical firms, to energy companies around the world. So the GPU-enabled servers that we are shipping is something that's not new, but we will continue to expect to see additional growth in all of those markets as well as GPU-as-a-service markets.

So at this point, we think that if you follow what IDC says about the market with 58% year-on-year revenue growth, it is Lenovo's expectation that we grow at least with the market given the portfolio of products that we have across not only AI, but also on the enterprise side.

[Jenny Lai, executive]

Thank you, Vlad. And due to the limited time, we are taking our last question. And last question is from Tony with CLSA. Can you please update on your middle edge business, including the new business opportunities and the capacity and your CapEx plan?

[Wai Ming Wong, executive]

Yes. So let me add. Well, thank you, Tony. Let me just update further about this. We definitely are very excited about our growth opportunity, I think, in the MEA region, in particular, Saudi Arabia. I think currently, I think our business in that region amount to about $1.5 billion. And bearing in mind the growth, the GDP growth, the outlook as far as the government plan, I think for changing the economy, I think to more one of the larger economies in the world, there are a lot of opportunities in terms of IT spending. So we definitely expect that, I think with -- I think upon the completion of the transaction, we actually have a strong, I think, minority shareholder assisting us to grow in that region.

Now in so far as capital expenditure is concerned, we plan to actually to establish a local supply chain operation. The initial amount of capital we actually plan to invest is about $250 million. But clearly, I think as YY just said, I think that for the group investment opportunities, we will continue to, I think, invest in the hybrid AI area, I think, which obviously will be available to us, especially when we become -- after we actually be able to establish our local operation there.

[Jenny Lai, executive]

Thank you. And this is our last question, and we thank you very much for joining today's call. If you have any further questions, please feel free to contact me or the IR directly. 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 now.