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. Ken 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 Yuanqing. Yuanqing, please.
Hello everyone, and thank you for joining us today. Last quarter, Lenovo delivered on its promise to resume year-over-year revenue growth despite multiple macro challenges. Profitability has improved quarter-over-quarter for two 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 where we received industry-wide recognition for more than 14 new devices and solutions. As I shared with you in Q2, Lenovo has been consistently improving quarter-over-quarter, and we have entered a trajectory to recover. Now, for fiscal Q3, we successfully achieved year-over-year growth.
Global revenue increased 3% year-on-year, and global profitability improved quarter to quarter for two 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 global 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 solutions and 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, NPU, privacy and security protection, and a rich AI application ecosystem.
We believe this trend will stimulate another industry refresh cycle as 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 percentage of R&D headcounts 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 the $2 billion milestone, growing double-digit year-on-year to another record high. Operating profit also hit a record with a high operating margin above 20%. We protected support services and software as our core profit engine. We further expanded managed services and project solutions services. Together, revenue mix for these two areas now accounts 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 service segment within the trillion-dollar IT service 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 a quarter-to-quarter revenue growth for the second consecutive quarter, and the combined revenue from storage, software, and services reached a record high of $1 billion.
We remain a solid number 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 No. 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 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 refresh 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 challenge the industry, we have all seen the potential of the revolutionary AI technology and its 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.
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, representing the third consecutive quarter of sequential growth, while revenue and operating profit improved sequentially across all three business groups. This quarter also marked a new milestone for the group's service-led transformation, with SSG achieving record-breaking double-digit growth in segment revenue and operating profit. Its total contract value, a strong indicator for a 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 to new highs 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 $2.81. The group showed greater resilience by balancing finance costs and liquidity amid a higher interest-rate environment.
Q3 finance costs were down $16 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 2023/24. SSG has once again achieved record high performance, with revenues surpassing the $2 billion milestone. SSG's pivotal role as the group's 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 TruScale services continue to gain traction with double-digit year-on-year growth. Its contract signings.
The third fiscal quarter also saw the signing of SSG's largest-to-date Infrastructure as a Service deal on an extensive partner ecosystem, as well as largest-to-date Asset Recovery Services 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 entails 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 world 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 is expanding its hybrid AI solutions to be time-to-market across GPU platforms and remains the number one provider for high-performance computing on the TOP 500 supercomputer list, as well as the number one most sustainable supercomputer on the Green 500 list. ISG's in-house engineered Neptune water-cooling technology was honored with the top award at the United Nations Energy Efficiency Competition. Neptune technology allows 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's storage business continues its hypergrowth in sales with a 48% year-on-year increase.
Within the storage market price band of $25K and below, Lenovo is well-positioned to retain the number one position for six 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 high premium mix. As a result, IDG is now holding the number one spot in four out of five geographical regions. IDG further solidified leadership in the global commercial PC segment, achieving the highest market share of 27% in three years. AI PCs represent 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 four percentage points year-on-year. Meanwhile, its 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 examples is the newly awarded Climate+ Champion status by EPEAT. It 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 Campaign Foundation for six years in a row, while receiving its all-time high score in the annual Workplace Pride Global Benchmark. The group's 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 goes on. These achievements are a testament to the group's ongoing pursuit 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 three 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 targets. 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+ business model, an industry-leading full-stack offering 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 EPS, and sustainable profitability for IDG. Following the successful launch of its first AI PC at CES, IDG is on track to launch next-gen 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.
Thank you, Wai Ming. Now we'll open the line for questions, and this section will be in English only. Please be reminded to limit yourself to two questions at a time. Operator, please give us your instructions.
To submit a question, please type your question in the Q&A box on the right and click Submit.
Thank you. Our first question is coming from Morgan Stanley's Mr. Howard Kao . First question is on our view regarding 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? Second question is regarding our market share in North America for PC.
Yeah. Let me first answer, then I'll probably look again and follow up. As you know, today, AI is mainly public AI. It runs on public cloud, it has its limitations in terms of network speed, efficiency, cost, security, and privacy, etc. There are many use cases where public AI is not the best choice. In certain industries like financial services, public AI may not even be an option. Customers need better ways to bring AI from the cloud to their fingertips and into their own organizations. 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 path.
Today, everyone has a PC or a smartphone, which are the vehicles for us to bring AI to all, making AI available and accessible. It definitely goes to Lenovo's strengths. We are using a BLP framework to establish our competitiveness. B means build, L means leverage, and P means partner. We can certainly leverage our existing market leadership in PCs. We design and manufacture our devices in-house so we can build our personal foundation model into each PC. Our model compilation technology to perform AI referencing on the device, and also with our larger scale. It's easy for us to build a natural platform to gather all AI apps or ecosystem similar to Apple Store. All these are our existing strengths to leverage.
So meanwhile, we are partnering with key leaders in the AI area to access critical technologies and suppliers, create the most robust ecosystem. So already, we have built strong allies with NVIDIA, Microsoft, AMD, Qualcomm, Intel. But definitely, most importantly, we understand this web of AI revolution is not limited to current technologies only. We are not satisfied with just successfully integrating others' innovation and components as it don't guarantee our future success. So we must build our own IPs starting from the first-generation AI PC, then eventually transitioning into our personal AI twin vision. So actually, following our AI PC initial definition of five main features, so our personal intelligent agent using natural language user interface, compressed local large language model, heterogeneous computing with CPU, GPU, NPU, privacy, security protection, and a rich AI application ecosystem.
So in each of these domains, we are doing innovation work, make breakthroughs, create our unique advantages. So for example, with our model compression and enhancement technology, our large language model inferencing framework can save 30% memory versus before optimization on both Intel and the 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, etc.
Yeah, yeah, yeah. Thank you, Yang 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 two things were ASP, and I think we expect a one-digit percentage mid- to high one-digit increase of ASP for the AI PC given a richer configuration. In regards to 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 Yang 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 to 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.
Looking at our activation share, which we use to measure our competitiveness without giving confidential data, I can tell you that we have gained 2-3 points of activation share since the pre-COVID period benchmark, which we normally use. I think we are confident and committed to this important market. Thank you.
Thank you. Now we'll move to question number two from Dino Chen with Guotai Junan asks management . Could you share some colors on the future revenue growth and margin for ISG?
Yeah. So, Kirk.
Yeah. 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+ 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, were 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.
We have now climbed from the number 6 provider of AI server and storage in 2020 to become the number 3 provider in 2023 up until now with 50% year-to-year growth and a 20-point premium to market. 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 billion-dollar cloud customer that'll be shipping later this year. I think AI server is definitely where the market's 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.
Thank you, Kirk. The next question is coming from Miss Grace Chen from UBS. The question is regarding our timing of shipping AI PC and the penetration rates in 2024 and 2025.
Yeah. Still Luca.
Yeah. 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 2024 and then in 2025. There will be several generations of AI PC with evolutionary and more sophisticated features going forward. We are confident 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 2025 and 2026 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.
Thank you. 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 the profit turnaround schedule? What do you expect the server business can turn profitable, and how to achieve that? Thank you.
Yeah. Still Kirk, right?
Sure. So for, 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.
Again, we have confidence that we'll be time to market in all the next-generation AI GPUs as we go into the middle of the year and hit major shows like NVIDIA's GTC. That gives us confidence in the growth. Lastly, storage. Again, we've become number 1 in entry storage and number 3 overall. That's a growth from number 11 just a few years ago, and we're still seeing 48% year-to-year growth. That 3S of storage, software, and services is growing significantly and will help our profit recovery. Our goal is to continue to grow premium to market while increasing our profit as we go through our next fiscal year. Thank you.
Thank you, Kirk. Now we'll move to the next question, which is from Mr. Howard Kao from Morgan Stanley. For ISG, can you provide some colors 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?
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 number 6 to number 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 as a company a few years ago and another billion-dollar 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 billion-dollar customer for our AI solutions that'll be shipping over the next year.
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. It's just as one example. Hopefully, that's helpful for you. Thank you.
Thank you, Luca. The next question is also on servers. So Ms. Grace Chen from UBS is asking, "What's our view for the outlook of Genoa servers in calendar year 2024?
Sorry. You said general servers or Genoa servers?
It's general servers, the traditional server.
Sure.
General-purpose servers, probably.
Yeah. 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 three 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 one of three of the world's TOP 500 supercomputers, and our Neptune technology is the most sustainable technology in the world. As people worry about energy efficiency, we've seen tremendous growth in our leadership position in the TOP 500 in HPC as well. 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 have somewhat stalled while people were spending their money over the last quarter or two on large language models. Thank you.
Thank you, Kirk. And now we'll move to the next question. The next question is from Donnie Teng with Nomura. The question is on 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?
Yeah. I think I'll take this question. And obviously, we have the intent to continue to drive our profitability to the high-end range of pre-COVID and even beyond that, as you saw. There are several rationales to be able to do this. A 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 help. ASP will have richer configuration. I mentioned before attachments, 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 cost up and down, like you mentioned, is, to be honest, 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 factor.
Thank you.
Thank you, Luca. The next question from Tony Zhang with CLSA is also on the component price impact to the PC margin. His question is, "How do we see the increasing memory prices impact to our PC margin, and how can we mitigate the impact, please?
Yeah. 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 will be competitive in the market, and our objective is to maintain our industry-leading profitability. Thank you, Jenny.
Thanks. The next question is coming from Technology Business Research. We have seen a close competitor in infrastructure announce 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? Thanks.
Yeah. 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 have 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.
Thank you, Kirk. Operator, could you give us the instruction again for collecting the question, please? Meanwhile, our next.
Please type your question in the Q&A box on the right and click Submit.
The next question is regarding the outlook for IT services market for 2024.
Yeah. So that should be a Ken's question.
Okay. Thank you, Wai Ming. So a couple of things, right? First of all, if we look at the Solutions and Services Group result in Q3, I think we are very encouraged by the result. It is a record revenue quarter of over $2 billion and, at the same time, growing faster to the market and also maintaining a relatively high margin, right? So we definitely see a continuous momentum in our solution and 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 result that we have achieved, we 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 is continued to be the buzzword in the market and a very strong demand from our customer. We strongly believe our pocket-to-cloud portfolio, including AI devices, AI infrastructure, and, of course, AI solution and services, has a unique advantage across our Lenovo portfolio, right? With regard to AI, there are two 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 examples is the Care-of-One Platform, which is a GenAI-powered service orchestration platform to uplift our managed services to deliver a higher customer satisfaction and not the level of productivity for our customer, right? This is about AI-enabled services. The other thing is, as YY mentioned, on one hand, AI is super powerful, right?
Every of our customers are 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, right, 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. A couple of examples. For example, in Q3, we deliver an AI-enabled layout warehouse for a major Asian 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.
In a nutshell, I think we continue to see a strong momentum in our business, and we're confident that our solution and services business will continue to grow faster than the market in the foreseeable future. Thank you.
Thank you, Ken. The next question is on smartphone business. Can you give us an update on your smartphone premium mix, which seems to be a major business driver for the quarter?
Yeah. I'll take that one. So we are seeing—I mean, we are seeing growth overall in the business, 31% 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 what we call our edge and foldable devices. This segment, 18 months ago, used to represent 3%-4% of our sales. Last quarter, 25%. It's driven by growth in many Asian markets, Europe, and in North America, especially on foldable. With foldable, we achieve 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 very high NPS scores from users. So we expect this to continue and sustain global growth in the near future.
Of course, we will have some AI announcements coming in the next 3-6 months that will build upon our premium strategy.
Thank you, Sergio. The next question is dividend payout. Could you kindly update your dividend policy, and what would be the likely payout ratio or dividend yield targets in FY2024 and 2025?
Yeah. Yeah. So what do we do?
Hi. Thank you for the question you're sending here. Our dividend policy is about, I think, payment out of 30%-35%, approximately, I think, of the earnings. 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 are actually one-time issues impacting the company performance, we will take that into consideration as to whether we strictly adhere to that 30%-35%, or our objective is to want to return to shareholders, I think, in line with the performance of the company. Thank you.
Thank you, Wai Ming. The next question is coming from Morgan Stanley's Howard Kao. 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?
Yeah. 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 OpenVINO, 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.
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.
Thank you, Kirk. And the next question is thanks to Jeffrey Kuang 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?
So I'll probably take this one, Jenny. Thank you. So our blended ASP is growing sequentially this quarter, 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. On the one end, you have a better commercial and premium mix, so a combination of the two. And the other one is the non-PC portion of it, meaning the attached services , software, things that come attached with the device. And we have done pretty well. If I look 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 the AI PC, as we mentioned, it should also go up.
I think the trend is and will be sustainable, definitely, in 2024. 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.
Thank you, Luca. We are now ready to take the last question due to limited time. Our last question is on IDG as well. Given that IDG's operating margin has reached a peak level in FY quarter three, what is the expectation for fourth quarter, and what is the expectation of the margin for FY2025?
Yeah. 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.
Thank you. Thank you. We thank you all very much for joining today's call. If you have any further questions, please feel free to contact me 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.
Bye-bye.
Thank you. Bye-bye.