Lenovo Group Ltd

HKEX:992

Earnings Call Analysis

Lenovo Sees Growth and Profitability Amid AI Focus

Lenovo's fiscal Q3 earnings show resilience and growth, with a year-on-year revenue increase of 3% and quarter-to-quarter profitability improvements across all business groups. Group revenue rose by 9% sequentially to $15.7 billion, and net profit increased by 35% sequentially to $337 million, despite a year-on-year drop of 23%. Strong performance in the Solutions and Services Group (SSG) and the Intelligent Devices Group (IDG) drove revenue, with SSG's operating margin reaching a record 20.4%. Rapid adoption of hybrid AI technologies and strategic investment in innovation fuel further growth despite continued global economic challenges. Lenovo targets greater R&D investments, maintaining its trajectory for record R&D expense to revenue ratio in the fiscal year '23-'24.

Returning to Growth Amidst Global Challenges

Lenovo has shown signs of strength and resilience, signaling a turnaround from previous stagnation. The company witnessed a 3% increase in group revenue year-on-year, underlining its capability to grow despite numerous macroeconomic headwinds. Simultaneously, profitability saw an upward trend for two straight quarters. A pivotal change in Lenovo’s growth strategy has been the shift towards non-PC revenue, which now comprises 42% of the group's total revenue, evidencing a successful diversification beyond their traditional core business.

Embracing the AI Revolution

Lenovo is positioning itself at the forefront of the artificial intelligence (AI) wave with analysts predicting that over 50% of PCs will be AI-capable by 2026. The company capitalizes on growth opportunities created by hybrid AI, including anticipation of increased demand for AI infrastructure and client devices, thus driving a new cycle of industry refreshment and potentially improving margins.

Record Highs in Revenue and Profitability in Services

The Solutions and Services Group (SSG) in particular has reached a significant milestone with revenues surpassing $2 billion, and boasting a high operating margin above 20%, indicative of strong year-on-year growth and profitability. This success story is highlighted by the SSG’s operating margin expansion by 22 basis points from the previous year, underscoring its essential role as a growth engine and profit center for Lenovo.

Infrastructure Group Leveraging Strategic Shifts

Lenovo's Infrastructure Solutions Group (ISG) continued its positive trajectory with consecutive quarter-to-quarter revenue growth and combined revenue from storage, software, and services reaching a record $1 billion. Maintaining its position as the third-largest global entity in storage and AI infrastructure, ISG is poised to capitalize on market trends, with AI server growth projected to be nearly double the rate of the total server market.

Net Profit and Segment Margin Improvements

The Group's net profit climbed 35% sequentially to $337 million, although there was a year-on-year decrease of 23%. Nonetheless, segment margins for the IDG and SSG expanded, demonstrating a robust performance in the face of economic challenges.

Operational Efficiency Amid Economic Pressures

Despite experiencing smaller operating leverage and increased investment in R&D, ISG effectively implemented a recovery plan, improving its operating performance by $16 million compared to the previous quarter. In a high-interest rate environment, Lenovo balanced finance costs and liquidity admirably, decreasing Q3 finance costs by $60 million quarter-on-quarter.

Investing in Innovation for Long-Term Growth

With an eye on the future, Lenovo is steadfast in its commitment to innovation, on track to allocate the most significant portion of its revenue towards R&D for the fiscal year 2023-24. Operational efficiencies have improved, as evidenced by a shortened cash conversion cycle to 1 day, with inventory management playing a crucial role in this achievement.

Earnings Call Transcript 2024-Q3

[Jenny Lai, executive]

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

[Yang Yuanqing, executive]

Hello, everyone, and thank you for joining us today. Last quarter, Lenovo delivered on its promise to resume year-on-year revenue growth despite multiple macro challenges. Profitability has improved quarter-to-quarter for 2 consecutive quarters, a testament to both the resilience of our core business and the effectiveness of our transformation. In addition, we have also been focusing on the growth opportunities brought by hybrid AI. This includes continuous investment in innovations to fuel sustainable growth into the future, a part of which we demonstrated last month at the Annual CES event, well, we received industry-wide recognition for more than [ 40 ] new devices and solutions. As I shared with you in Q2, Lenovo has been consistently improving quarter-to-quarter, and we have entered our trajectory to recover.Now for fiscal Q3, we successfully achieved year-on-year growth. Group revenue increased 3% year-on-year, and the global profitability improved quarter-to-quarter for 2 consecutive quarters. Thanks to the strong execution of our transformation strategy, our non-PC revenue mix further expanded year-on-year to 42% of the Group revenue.In the AI era, hybrid AI, leveraging both public and private foundation models is creating significant growth opportunities for the industry across devices, infrastructure and the solution services. Among the continued signs of recovery in the PC market, we are particularly excited to see the emerging trend of hybrid AI directly driving the future demand for the coming AI PC.AI PC comes with a personal intelligent agent using natural language user interface, a compressed local large language model, heterogeneous computing with CPU, GPU, MPU, privacy and security protection and our reach AI application ecosystem. We believe this trend will stimulate another industry refresh cycle, as the users require devices designed for more creativity and productivity. According to [ analysts ] projection by 2026, it is expected that more than 50% of PCs will be AI capable.In the meantime, hybrid AI is also driving increased demand for hybrid infrastructure. On top of that, we are seeing increased customer demand for AI native applications, solutions and services such as consulting, design, deployment and maintenance, fueling AI services growth across different verticals. Lenovo is in a unique position with many advantages to lead this hybrid AI revolution. We stay committed to furthering investment in innovation, focusing on AI and computing.Our number and the percentage of R&D headcount keep increasing, and we are on track for a record year of R&D expense to revenue ratio. We have long embraced AI in all our businesses and have built computing capabilities from pocket to cloud. This relentless focus means we now have a full portfolio that includes AI enabled, AI ready and AI optimized devices, infrastructure solutions and services. We are realizing our vision of AI for All for each individual and enterprise, changing the way they live and work, while at the same time, driving sustainable growth for our business.Now I will talk about each of our businesses. Let's start with SSG Solutions and Services group. Last quarter, SSG revenue reached USD 2 billion milestone, growing double digit year-on-year to another record high. Operating profit also hit a record with high operating margin above 20%. We protected the support services and software, as our core profit engine. We further expanded managed services and the project and solutions services. And together, revenue mix for these 2 areas now account for 55% of SSG's total business growing year-on-year for 11 consecutive quarters.In particular, strong growth momentum continued for our hero offerings such as digital workplace solutions, hybrid cloud and sustainability, each winning major customer deals in key markets. Looking ahead, the new IT services segment within the [ $1 trillion ] IT services market is expected to see stable midterm growth. The rise of hybrid AI is opening up new opportunities for our AI native solutions and services. Additionally, we are proactively embedding AI into the vertical solutions that we are building for various industries to strengthen value proposition and enhance differentiation for our customers.Next, our Infrastructure Solutions Group or ISG. Last quarter, while industry and market headwinds continued to impact the overall ISG performance, we delivered our quarter-to-quarter revenue growth for the second consecutive quarter and the combined revenue from storage, software and services reached a record high of USD 1 billion. We remained a solid #3 for both storage and AI infrastructure on the global market.Looking ahead, we expect the market will continue to shift to AI infrastructure with AI server expected to grow nearly twice as fast as the total server market. At Lenovo, we are growing key strategic partnerships and building more sophisticated AI infrastructure solutions to strengthen our portfolio competitiveness, as well as securing major customer deals and a stable pipeline. We remain confident that we will resume year-on-year growth, as soon as the coming quarter.Our Intelligent Devices Group, or IDG delivered a strong quarter with revenue resuming growth, thanks to our clear strategy, consistent investment in innovation and operational excellence. As the PC market continued to recover, our PC business excelled and outperformed the market. We returned to year-on-year shipment growth with leading profitability. Our global #1 position in PC was further strengthened with a significant premium to the market, winning the highest market share since COVID.Last quarter, our non-PC device businesses made encouraging progress in building a more diversified portfolio. Both the smartphone and the tablet business returned to high double-digit growth with a significant premium to the market of more than 20 points. Particularly, we see smartphone hypergrowth in Asia Pacific, EMEA and the North American market. Looking ahead, we expect the trend of hybrid AI to drive the demand for AI client devices, driving another refreshment cycle, creating more growth potential and improving margin for us.Before I close, I want to point out that even though global economic headwinds still challenging the industry, we have [ all three ] the potential of the revolutionary AI technology and these applications. Our commitment to AI innovation and partnerships with other key leaders in AI ensures that we are well positioned to capture the tremendous growth opportunities in AI. 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 Q3 in fiscal year 2024.The Group's operating performance continued to expand in Q3. While still navigating the ongoing market challenges, our core business has returned to a healthy growth trajectory fueled by strong diversified growth engines and resilient profitability.Group revenue increased by 9% sequentially to $15.7 billion, represents the third consecutive quarter of sequential growth, while revenue and operating profit improved sequentially across all 3 business groups.This quarter also marked a new milestone for the Group service-led transformation with SSG achieving record-breaking double-digit growth in segment revenue and operating profit. This total contract value, a strong indicator for long-term pipeline [ soared ] by over 50% year-on-year.IDG strengthens its business cadence to achieve 7% year-on-year and quarter-on-quarter revenue growth. Its market share by shipment advanced new high across multiple geographic markets and its premium sales mix was the highest since COVID.ISG reported a 24% quarter-on-quarter revenue growth and record high sales across multiple growth products, although it is still shy of its best-performing quarter last year.Group net profit rose by 35% sequentially to $337 million despite a decline by 23% year-on-year. The segment margins of IDG and SSG expanded year-on-year with IDG profitability nearing its historic peak and SSG scaling segment margin to 20.4%, around 2.3x of the Group's average. Impacted by smaller operating leverage and higher R&D investment, ISG still operated at a loss, but its recovery plan has already helped to improve its operating performance by $16 million quarter-on-quarter.Basic earnings per share came in at USD 0.28.The Group showed greater resilience by balancing finance cost and liquidity amid a higher interest rate environment. Q3 finance costs were down $60 million quarter-on-quarter and $10 million year-on-year, thanks to a prudent reduction in interest-bearing borrowings. Meanwhile, the Group continued to optimize operational efficiency with days of accounts receivable and inventory together improved by 14 days year-on-year. Of these 10 days come from inventory days improvement alone despite lower accounts payable days, leading to a cash [ conversion ] cycle of 1 day. Despite a constrained spending environment, the Group remains resolute in its dedication to innovation and is on track to invest the largest share of its revenue in R&D for fiscal year '23, '24.SSG has once again achieved record high performance with revenues surpassing the $2 billion milestone. SSG pivotal role as the Group growth and profit engine is further highlighted by its 20.4% operating margin, expanding 22 basis points year-on-year. The Pay-as-you-go TrueScale services continue to gain traction with double-digit year-on-year growth in contract signings. The third fiscal quarter also saw the signing of SSG largest to date. Infrastructure as a service deal on an extensive partner ecosystem, as well as largest today asset recovery surface deal on superior data security assurance.SSG is also leveraging AI to enrich its service portfolio to meet the evolving needs of our customers. One strong use case [ enters ] embedding AI into our offerings. For example, our care of one platform uses AI to improve employee experience and productivity. On the other hand, we are also rolling out our new AI native service called AI professional services to help customers deploy AI technology securely and efficiently in a hybrid environment.For ISG, we have seen record breaking sales across [ all ] products and order recovery from key cloud and enterprise customers. This has helped ISG in achieving a 24% quarter-on-quarter revenue increase. Its recovery plan was also effective in improving segment profitability by $16 million quarter-on-quarter, reducing loss to $38 million.ISG expanding its hybrid AI solutions to be time to market across GPU platforms and regained the #1 provider for high-performance computing on the top 500 supercomputer list, as well as the #1 most sustainable supercomputer on the Green500 list.ISG in-house engineered Neptune water cooling technology was honored with the top award at the United Nations Energy Efficiency competition. Neptune technology allow our customers to operate their data centers without the need for specialized and power-intensive cooling infrastructure, thereby reducing their ongoing operating costs and providing unmatched sustainability benefits.Combined revenue from storage, services and software achieved [ 36% ] year-on-year growth, while edge revenue increased by 12% year-on-year to an all-time high. ISG storage business continued its hypergrowth in sales with 48% year-on-year increase. Within the storage market price band of [ 25,000 ] and below, Lenovo is well positioned to retain the #1 position for 6 consecutive quarters.IDG has shown resilience with a 7% revenue growth, both year-on-year and quarter-on-quarter, driven by premium to market growth, while maintaining an industry-leading operating margin at 7.4%. This is made possible with our operational excellence and higher premium mix. As a result, IDG is now holding the #1 spot in 4 out of 5 geographical regions.IDG further solidified leadership in the global commercial PC segment, achieving the highest market share of 27% in 3 years. AI PC represents an inflection point for the PC industry, driving a new product cycle with premium pricing. To capitalize on this structural trend at CES, IDG won a total of 105 product awards, 61 of those awards went to the ThinkBook Plus Gen 5 hybrid, an innovative product that comes with a unique dual system and is powered by cutting-edge AI computing capability.Finally, IDG continues to accelerate momentum on the non-PC front. Its non-PC sales accounted for 21% of revenue, up more than 4 percentage points year-on-year. Meanwhile, the smartphone business delivered high double-digit revenue growth and its premium products now accounted for a record of 25% of the mix.The Group has consistently upheld numerous recognitions for its ESG performance. One of the great example is the newly awarded Climate Plus Champion Status by EPEAT, EPEAT, has acknowledged the Group's sustainable investments in incorporating climate considerations into over 400 products.In terms of diversity and inclusion, the Group has been included in the Corporate Equality Index, CEI, by Human Rights Champion (sic) [ Campaign ] Foundation's for 6 years in a row, while receiving its all-time high score in the annual Workplace Pride Global Benchmark.The Group drive for environmental sustainability was also recognized with the MSCI ESG rating of AAA for the second year, as well as the first place in the most sustainable companies' category as HKICPA's Best Corporate Governance and ESG award for the 11th consecutive year and the list go on. These achievements are a testament to the Group's ongoing suit of excellence in product design innovation and dedication to environmental sustainability.Hybrid AI represents a significant and unique opportunity for the Group to supercharge growth. Investment in innovations will be made to unlock the full potential of hybrid AI and build pocket to cloud capabilities. The robust innovation across the 3 business Groups will enhance the Group's competitiveness in next-generation product design and solutions. This will, in turn, drive profitable growth and support the Group in meeting its medium-term profitability target.Looking ahead, SSG will launch new AI native services and embedded AI functions across our service offerings to accommodate enterprise customer growing demand for AI technologies. SSG will concurrently focus on safeguarding its core business with high value-added support services across both PC and infrastructure segments. Through collaborating with ecosystem partners, SSG is well positioned to help customers accelerate their digital transformation journey and further enhance its financial contribution to the growth.ISG is well positioned to capture new hybrid AI opportunities with the ODM plus business model and industry-leading full stack offerings, including hybrid cloud, HPC, data management, AI and edge computing. 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.AI PC could represent an inflection point for the PC industry. It could drive a new product cycle with premium pricing, which is key to delivering premium to market growth, strong ASP and sustainable profitability for IDG. Following the successful launch of its first AI PC at CES, IDG is on track to launch NextGen AI PC in the later part of the calendar year. This will offer industry-leading computing power to the market, optimizing AI workload efficiency and user experience. Meanwhile, IDG will prioritize efficiency, cash generation and non-PC investment. In its smartphone business, the Group will focus on product premiumization, regional expansion and product differentiation.Finally, as always, we stay committed to driving sustainable growth and profitability improvement for our shareholders. 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 section will be English only. Please be reminded to limit yourself to 2 questions at a time. Operator, please give us your instructions.

[Operator]

[Operator Instructions]

[Jenny Lai, executive]

Thank you. And our first question is coming from Morgan Stanley's, Mr. Howard Kao. First question is the -- our view regarding to AI PC and how much ASP uplift do we expect from AI PC versus a normal PC? And what does this mean to our profitability?And second question is regarding to our market share in North America for PC?

[Yang Yuanqing, executive]

Yes. So let me first answer, then probably Luca can follow up. So as you know -- so today, AI is mainly public AI, so it runs on public cloud. So it has its limitations by -- in terms of network speed, efficiency, cost, security and privacy [ case ], et cetera. There are many use cases, where public AI is not the best of choice. And in certain industries like financial services, public AI, that may not even be an option. So customers need better ways to bring AI from the cloud to their fingertips and into their own organizations. So we believe hybrid AI is the future.But how to lend this hybrid AI into every individual life and every enterprise. I think integrating AI with personal computing devices is a possible task. So today, everyone has a PC or a smartphone, which are the vehicles for us to bring AI to all, making AI available and accessible. So it definitely goes to the number of strengths, we are using BLP framework to establish our competitiveness, B means build, leverage means -- and L means leverage and P means [ pun ]. So we can certainly leverage our existing market leadership in PCs. So we design and manufacture our devices [ in costs ], so we can build a personal foundation model into HPC through our model or compression technology to perform AI referencing the device.So -- and also with our large scale, so it's easy for us to build a natural platform together all AI apps or ecosystem similar to Apple Store. So all these are our existing strengths to leverage. But so meanwhile, we are partnering with key leaders in the AI area to access critical technologies and the suppliers created the most robust ecosystem. So already, we have built strong allies with NVDIA, Microsoft, AMD, Qualcomm, Intel.But definitely, the most important part, so we understand this web AI revolution is not limited to current technologies [indiscernible] part. We are not satisfied with just the successfully integrating others' innovation and components, as they don't guarantee our future success. So we must build our own IPs, starting from the first-generation AI PC part -- that eventually transition into our personal [ AI team ] vision.So actually, following our AI PC initial definition of [indiscernible] [ MEMS ] features. So our personal intelligent agent using natural language user in the past, compress the local large language model, heterogeneous computing with CPU, GPU MPU, privacy security protection and rich AI application ecosystem. So in each of these domains, so we are doing innovation work, make breakthroughs, create our unique advantages.So for example, with our model of compression and the enhancement technology, our large language model, our influencing framework can save [ 38% ] memory versus before optimization on both Intel and AMD platform. So another example is our resource aware, workload schedule, which can optimize heterogeneous XPU management.Similarly, so in infrastructure, we are doing this BLP as well. So that's -- what I want to talk with you first. So probably, Luca, you can talk about the price -- the market share as such.

[Luca Rossi, executive]

Yes, yes, yes. Thank you, Yuanqing. So I will not talk again about the AI PC. I think you have been explaining it in a very good way. So the other 2 things were ASP, and I think there will be -- we expect there will be a 1-digit percentage, mid- to high 1 digit increase of ASP for the AI PC given the richer configuration.In regards of the margin, we remain very confident to deliver industry-leading margin also on AI PC, and we have the plan to expand those margins towards attached services. And like Yuanqing was mentioning, also leveraging certain unique IPs that we are building over time, and we want to use to differentiate our offering from our competitors.In regards of our NA business, I think I can just say, it's healthy, doing very well. Last quarter alone, we had a revenue growth of 23%, I think. And looking at our activation share, which we used to measure our competitiveness without giving confidential that I can tell you that we have gained 2 points to 3 points of activation share since the pre-COVID period benchmark, which we normally use. So I think we are confident and committed to this important market. Thank you.

[Jenny Lai, executive]

Thank you. And now we will move to question #2 from Dino Chen with Grand Alliance Asset Management. Could you share some colors on the future revenue growth and margin for ISG?

[Yang Yuanqing, executive]

Yes. So Kirk...

[Kirk Skaugen, executive]

Yes. So I think our strategy is working. We have a diversified portfolio of servers, storage, software and services. So as you saw, we were able now to, I think, put the worst behind us and grow 24% quarter-to-quarter for the second straight quarter. And our ODM plus model is enabling us to balance revenue scale at the cloud providers with profitable growth in ESMB. So we saw 34% quarter-to-quarter growth in cloud and 11% quarter-to-quarter growth in ESMB.And our profit drivers, specifically around storage, software and services was able to grow 36% year-to-year. And you heard YY talk about that hitting an all-time high of $1 billion. So I think most importantly, is the market shift to AI infrastructure. So AI servers are expected to grow 2x the market in 2024. And we have now climbed from the #6 provider of AI server and storage in 2020 to become the #3 provider in 2023, up until now with 50% year-to-year growth and a 20-point premium in the market.So as we look forward, we'll be time to market with all the major GPUs from NVIDIA, Intel, AMD. We've already driven $2 billion in AI infrastructure. We're tracking over a $2 billion pipeline. And we've signed another $1 billion cloud customer that will be shipping later this year. So I think AI server is definitely, where the market is driving, and we'll be well positioned to recover further in both revenue and margin and are expecting to see year-to-year growth in the current quarter. Thank you.

[Jenny Lai, executive]

Thank you, Kirk. And the next question is coming from Ms. [ Grace Chen ] from UBS. And the question is regarding to our timing of shipping AI PC and the penetration rate in 2024 and 2025?

[Yang Yuanqing, executive]

Yes, still, Luca.

[Luca Rossi, executive]

Yes. Thank you for the question. So we are starting to ship AI PCs in the first half of 2024, and our product portfolio will expand towards the second half of '24 and then in '25. There will be several generations of AI PC with evolutionary and more sophisticated feature going forward. We are confident that Lenovo will have the broadest and most competitive AI PC offering in the industry. So we do not expect a very significant mix of AI PC in 2024, given the time of availability of the product. But it will grow gradually, particularly in the second half and then towards '25 and '26, where we expect it will go up to 60% of the mix.I also want to note that the definition of AI PC probably will further evolve going forward. So we will be able to give a more precise guidance of the mix, which is probably not possible today. Thank you.

[Jenny Lai, executive]

Thank you, Luca. And the next question is coming from Mr. Donnie Teng from Nomura. For the server business, what regions and customers are your primary targets this year? And if we increase the exposure to China market rather than the U.S. and EU market, would that prolong profit turnaround schedule. When do you expect the server business can turn profitable and how to achieve that?

[Yang Yuanqing, executive]

Yes. Still, Kirk, right?

[Kirk Skaugen, executive]

Sure. So far, I think the China market, we're seeing recovery in the business, driven by both cloud and ESMB. We've also, this last year, launched our Wentian product offering, which is a specific product designed in China for China, and we're seeing tremendous growth on that for both cloud and the ESMB business.If you look at our geographic mix, I would say, as you saw, we grew double digit quarter-on-quarter in both ESMB and cloud. And we're confident given the design wins we have for next-generation AI solutions that we'll see strong growth for both ESMB and cloud, as we go into 2024 throughout the year. I guess, the most important indicator for you is the $2 billion of AI pipeline that we have and the 50% year-to-year growth we've seen in AI infrastructure through the first half of 2023, which is what's publicly announced from IDC. And again, we have confidence that we'll be time to market in all the next-generation AI GPUs, as they go into the middle of the year and hit major shows like NVIDIA's GTC, so that gives us confidence in the growth.Lastly, storage, again, we've become #1 in entry storage and #3 overall. That's a growth from #11 just a few years ago, and we're still seeing 48% year-to-year growth. So the [ 3 S ] of storage, software and services is growing significantly and will help our profit recovery. So our goal is to continue to grow premium to market, while increasing our profit, as we go through our next fiscal year. Thank you.

[Jenny Lai, executive]

Thank you, Kirk. And now we'll move to the next question, which is from Mr. Howard from Morgan Stanley. And for ISG, can you provide some color on what is the mix of AI server, as percentage of the total revenue today? And what is your expectation for that by the end of FY 2025?

[Luca Rossi, executive]

Sure. So the overall market is growing double digit, around 10%. The AI market should grow [ about ] double that. We've already announced, and IDC has confirmed that we went from #6 to #3 in AI server, and we publicly stated we're driving over $2 billion now annually in AI infrastructure revenue. We're seeing tremendous growth in our AI innovators program. We invested $1.2 billion of the company a few years ago and another $1 billion commitment recently.So these 4 AI innovation centers have driven 165 AI solutions, and we have now more than 80 AI-ready infrastructure platforms in the market. So as I said, as you look forward, we have more than a $2 billion AI pipeline now globally. And we've recently signed another $1 billion customer for our AI solutions that we'll be shipping over the next year.And then lastly, again, we're time to market on all the next-generation platforms. As an example, we've been Microsoft and NVIDIA's exclusive partner for the OVX Cloud in the Microsoft Azure Cloud, is just as one example. So hopefully, that's helpful for you.

[Jenny Lai, executive]

Thank you, Luca. The next question is also on server. So Ms. [ Grace Chen ] from UBS is asking what's our view for the outlook of general servers in calendar year 2024?

[Luca Rossi, executive]

No, you said general servers or Genoa servers?

[Jenny Lai, executive]

It's general servers, the traditional server.

[Luca Rossi, executive]

Sure.

[Yang Yuanqing, executive]

General purpose servers probably.

[Kirk Skaugen, executive]

Yes. So I believe that, obviously, a lot of the growth up until now has been driven by large language models, and we're seeing a more balanced portfolio, as we go through the calendar year to include a number of inferencing servers, as well as general purpose servers. So as you know, a lot of the data is moving to the edge, and we believe you should move AI to where the data is.So one of the fastest-growing parts of the business is general purpose ThinkEdge servers at the edge because 75% of data in the future will be computed at the edge. And I think we all know data has been doubling over the next 3 years or so. So we've had 12% year-to-year growth in the edge general purpose servers with 11 consecutive quarters of year-to-year growth there.We also see strong demand in high-performance computing. We're selling 1 of 3 of the world's top 500 supercomputers, and our Neptune technology is the most sustainable technology in the world. So as people worry about energy efficiency, we've seen tremendous growth in our leadership position in the top 500 in HPC as well. So the simple answer to your question is we'll have a more balanced view going forward of inferencing servers, large language models and general purpose servers because general purpose servers is somewhat stalled, while people were spending their money over the last quarter or 2 on large language models. Thank you.

[Jenny Lai, executive]

Thank you, Kirk. And now we'll move to the next question. The next question is from Donnie Teng with Nomura. The question is IDG's margin. How sustainable is your operating margin of IDG business if considering the prices of memories, panels and ICs are all increasing continuously?

[Luca Rossi, executive]

Yes. I think I'll take this question. And obviously, we have the intent to continue to drive our profitability to the high-end of a range of pre-COVID and even beyond that as you saw. There are several rationales to be able to do this and higher ASP as the market and also Lenovo is shifting towards a more premium segment, we plan to increase our share in premium and commercial. AI PC will be -- will help, ASP will help richer configuration. I mentioned before, adjacencies, services, software, and then we have probably a unique, strong competence in what I call design-to-cost given our leadership in R&D and innovation.Now commodity costs up and down, like you mentioned, is that, to be honest, it's a normal trend in the industry. And I think we will be competitive in the market with our offering. So we are confident we are able to mitigate that sector. Thank you.

[Jenny Lai, executive]

Thank you, Luca. And the next question from Tony Zhang with CLSA is also the component price impact to the PC margin. So his question is, how do we see the increase in memory prices impact to our PC margin? How can we mitigate the impact, please?

[Yang Yuanqing, executive]

Yes. I'm afraid, the answer is more or less the same. We are used to inflationary and deflationary cost trends in PC for many different cycles in many years. I think we are able to navigate that, and we'll be competitive in the market, and our objective is to maintain our industry-leading profitability. Thank you, Jenny.

[Jenny Lai, executive]

Thanks. And the next question is [indiscernible] from Technology Business Research. We have seen a close competitor in infrastructure, announced a large networking-centric acquisition. Can you help me understand if and how this trend is impacting Lenovo's view of the data center networking market or strategy in the space?

[Kirk Skaugen, executive]

Yes. So I think as YY said, we have a build partner leverage model. I think our relationships with some of the largest networking companies in the world globally as well as in China has never been stronger. And this is just continuously strengthening our relationship with those powerhouses, as we deliver integrated solutions. A lot more of our business is being sold at the rack level, both for AI and high-performance computing, and we've got very strong partnerships in the industry to address that.In addition, I would say, telco networking and network function virtualization is one of our fastest-growing businesses. In fact, I'm leaving for Mobile World Congress, where next week, you'll see some significant announcements with some of the world's largest telcos and Lenovo to expand our relationships around radio access networks, Open RAN and NFV going forward. So I think we have a great strategy with build partner leverage, and we're confident in our future strategy there. Thank you.

[Jenny Lai, executive]

Thank you, Kirk. And -- we -- operator, could you give us the instruction again for collecting the question, please. Meanwhile, our next...

[Operator]

[Operator Instructions]

[Jenny Lai, executive]

And the last question is regarding to the outlook for IT services market for 2024?

[Yang Yuanqing, executive]

Yes. So that should be Kin.

[Kin Hang Wong, executive]

Okay. Thank you, YY. So a couple of things, right? First of all, if we look at the Solutions & Services Group result in Q3, I think we are very encouraged by the results. It is a record revenue quarter of over $2 billion, and at the same time, growing faster to the market and also maintain a relatively high margin, right? So we definitely see a continuous momentum in our Solutions & Services business.When we look at the demand from our customer, we see a couple of things. One is definitely as a service, continue to be a big sought after from our customers. In Q3, in addition to the financial results that we have achieved, we've also seen a very strong double-digit year-to-year growth in terms of total contract value that we have signed across device as a service and also infrastructure as a service.The second thing is definitely AI. This has continued to be the -- the buzz work in the market and a very strong demand from our customer. And we strongly believe our pocket to cloud portfolio, including AI devices, AI infrastructure, and of course, AI solutions and services has a unique advantage across our Lenovo portfolio, right?So with regard to AI, there are 2 things that we are working on and also see strong demand from our customer. One is how can we use AI in enhancing our offerings, right? One of the example is the care of one platform, which is a Gen AI-powered service orchestration platform to uplift our managed services to deliver a higher customer satisfaction and also another level of productivity for our customer, right? So this is about AI enabled services.The other thing, as YY mentioned, on one hand, AI is super powerful, right? Every of our customers asking a lot of questions around it. However, it is not as simple as it should be, right? So there's a lot of demand for a company like us for Lenovo, where, who is a trusted partner of our customer to help them to understand the technology and also to come up with the optimal AI strategy and offering to achieve the [ desired outcome ].There are a couple of examples, for example, in Q3, we delivered an AI and they both light out warehouse for a major Asia logistics company to help them to significantly improve their productivity. The other example is, we have worked with a couple of automotive companies around the world to help them to implement the AI-enhanced enterprise digital twins, right. So all these are some of the highlights and also momentum that we have seen across our portfolio from hardware, software and services. So in a nutshell, I think we continue to see a strong momentum in our business, and we are confident that our Solutions & Services business will continue to grow faster than the market in the foreseeable future. So, thank you.

[Jenny Lai, executive]

Thank you, Kin. And the next question is on smartphone business. Can you give us update on your smartphone premium mix, which seems to be a major business driver for the quarter?

[Sergio Buniac, executive]

Yes, I'll take that one. So we are seeing -- I mean, we are seeing growth overall in the business [ 21% ] last quarter. Our activations record since acquisition. We are growing in geographies. We are growing segments like B2B, what's driving a better premium mix. And we are also seeing sustainable growth on [indiscernible] edge and foldable devices.This segment, 18 months ago, used to represent 3% to 4% of our sales last quarter, 25%. It's driven by growth in many Asia markets, Europe and in North America, especially on foldable. In foldable, we achieved 10% of the global market share, [ 40% ] in North America, 12x year-over-year from a small base, but 86% quarter-over-quarter.And we are seeing a very high NPS scores from users. So we expect this to continue and sustain a number of growth in the near future. And of course, we will have some AI announcements come in the next 3 month to 6 months that we build upon our premium strategy.

[Jenny Lai, executive]

Thank you, Sergio. And the last question is dividend payout. Could you kindly update your dividend policy? And what would be the likely payout ratio or dividend yield target in FY '24 and '25?

[Yang Yuanqing, executive]

Yes. So Wai Ming that is.

[Wai Ming Wong, executive]

Hi. Thank you for the question. It's Wai Ming here. Our dividend policy is about, I think, payment out of 30% to 35% approximately. I think of the earnings. I mean, obviously, we also adjusted for some non-cash items, so that we would want to achieve a balance between cash flow, as well as reward to our shareholders. There is no -- I think this dividend policy, I think, has been consistent. And we probably will want to, I think, stick with it.I think obviously, when there are, I think, issues that actually one-time issue impacting the company -- impacting the company performance, we will take that into consideration, as to whether we strictly adhere to that 30%, 35%. All our objective is to want to return to shareholders, I think, in line with the performance of the company. Thank you.

[Jenny Lai, executive]

Thank you, Wai Ming. And the next question is coming from Morgan Stanley's Howard. For AI servers, do you think customers want CPU and GPU solutions from the same vendor, which may result in better performance? Or do you see customers wanting to buy CPU and GPU from different chip makers? Which solution do you think will be becoming the future mainstream?

[Kirk Skaugen, executive]

Yes. Good question. So we will be delivering choice in both CPU and GPU architecture, as we're seeing demand for all those different combinations in the market, depending on which vertical market and workload. So as we move forward into the new year, you should expect us to fully support the next-generation Intel, AMD and ARM CPU, as well as next-generation Intel, AMD and NVIDIA GPU solutions, as well as localized products in the China market and in various other markets in the world, where there's new innovation happening.I would say that we're seeing strong demand across our AI innovators program with over 160 AI solutions on frameworks like Open Vino, which can take advantage of just using a CPU as well because the number of parameters that can be used even within a general purpose CPU architecture is growing significantly year-on-year as well. So I think we're getting good exposure to that with the number of ISVs, now over 50 ISVs that are partnering with Lenovo to deliver optimized solutions. Thank you.

[Jenny Lai, executive]

Thank you, Kirk. And the next question is the -- it's -- thanks to [ Jeffrey Kwong ] from BNP. Can you share more about Lenovo's PC blended ASP trend since the AI PC impact was small. Could you quantify the impact from other major drivers such as commercial mix improvement? And how sustainable is this trend going into your fiscal fourth quarter and fiscal year 2025?

[Luca Rossi, executive]

Sure. I'll probably take this one, Jenny. Thank you. So our ASP -- blended ASP is growing sequentially this quarter. It was also growing sequentially last quarter from the previous quarter. So that is the trend. Now the components of the increase of our ASP is twofold, is one, on the one hand, you have a better commercial and premium mix. So a combination of the 2. And the other one is the non-PC portion of it, meaning the agency services, software, things that come attached with the device. And we have done pretty well. If I look at pre-COVID versus today, you have almost up to $100 improvement of the total ASP.I think going forward, obviously, with an inflationary component cost environment, the ASP probably will continue to go up. And with AI PC, as we mentioned, it should also go up. So I think the trend is and will be sustainable, definitely in 2024. And I think I have no reason to believe that it will not be in 2025 unless there is a different deflationary commodity cost environment, which I don't think is the case for what we can see today. Thank you.

[Jenny Lai, executive]

Thank you, Luca. And we are now ready to take the last question due to limited time. And our last question is on IDG as well. Given that IDG's operating margin has reached a peak level in FY quarter 3, what is the expectation for fourth quarter? And what is the expectation of the margin for FY 2025?

[Luca Rossi, executive]

Yes. So I think we do not give a precise guidance for the following quarter. But in general, I think I reconfirm our commitment to deliver a level of operating margin at or beyond the pre-COVID levels. And so, we are confident that we can continue to maintain it, and there are several tailwinds that tell us we should be able to continue to do that.

[Jenny Lai, executive]

Thank you. Thank you. And we thank you all very much for joining today's call. If you have any further questions, please feel free to contact me directly, and the replay of this webcast will be available in the next couple of hours on our Investor Relations website. Thank you, again, for joining us. Bye-bye now.

[Yang Yuanqing, executive]

Bye-bye.

[Luca Rossi, executive]

Thank you. Bye-bye.