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, despite the macro challenges, we saw clear signs of a recovery across the technology sector. Our strong execution to our strategy, operational excellence, and continuous investment in innovations enabled Lenovo to achieve quarter-to-quarter improvements in our performance, once again, showcasing our business resilience. We are confident in our ability to resume year-on-year growth very soon. Meanwhile, by leveraging our continued investment and growing portfolio for AI technologies over the years, we received a wider recognition for our AI for All vision and the capabilities demonstrated at our annual Tech World event last month. Furthermore, we strengthened our AI ecosystem and partner. The exponential growth in the AI era. Last quarter, global revenue achieved a quarter-to-quarter improvement for the second time in a row. In SSG, Solutions and the Services Group.
Last quarter, SSG revenue and operating profit both reached historical highs again. We protected the support services and the software as our core profit engine, and further expanded the managed services and project and the solutions services. The revenue mix of which has grown three points year-on-year to account for 56% of SSG total business, leveraging the strong momentum of our hero offerings, such as digital workplace solution, hybrid cloud, and sustainability. We have been integrating these horizontal building blocks into smarter vertical solutions and services for different industries, winning breakthrough customer deals in multiple markets. Lenovo's new Hybrid AI professional services practice is also enabling enterprises to use hybrid infrastructure and AI to transform their business. Next, our Infrastructure Solutions Group or ISG.
Last quarter, facing headwinds from global economy slowdown, platform migration, as well as a supply shortage for key components, ISG's overall revenue and profitability were inevitably impacted. But we achieved a strong performance in storage, software, services, edge, and the high-performance computing. In particular, storage achieved our all-time revenue record, which made us the third largest total storage provider in the world. Looking ahead, we expect the development of a hybrid AI to drive the future growth and diversification of the global ICT infrastructure market. It will gradually find a balance between public cloud, private cloud, and the local data centers, between cloud and edge, as well as between AI computing and the traditional computing, with AI being more balanced between training and inferencing. At Lenovo, we are well-positioned to address this trend with our richest infrastructure products and solutions.
We will continue to strengthen our portfolio and the competitiveness, as well as operational excellence. We remain confident to resume growth and profitability as soon as possible. For Intelligent Devices Group or IDG, despite the tremendous market challenges last quarter, we maintained our global number one position in PC shipments and activations. Even though our overall revenue experienced a year-on-year decline, we maintained our profitability resilience with our industry-leading operating margin by taking concrete actions to further strengthen our operational excellence. Meanwhile, our smartphone business achieved a double-digit shipment growth year-on-year, even though the market was flat. We further enhanced the competitiveness of our products and optimized our portfolio with a higher mix of premier products. We will fully leverage generative AI to accelerate the launch of our next generation of AI devices, including AI PC, as scheduled next year.
We remain committed to investing in technology innovations for growth and to build long-term competitiveness. Before I close, I want to emphasize that Rome was not built in a day. While the leap in AI applications, driven by generative AI and large language models, might seem recent, Lenovo has, in fact, been persistently executing our intelligent transformation strategy for many years. This has given us a distinctive head start in building a comprehensive AI product roadmap that includes a rich smart device portfolio, such as AI-enabled PC, smartphone, and tablet, as well as AI-ready and AI-optimized infrastructure, solutions, and services. This unique advantage also enables us to build the strongest partnership in the industry. Together, we are well-positioned to capture the huge opportunities brought by this wave of AI revolution. Thank you. Now, let me turn it over to our CFO, Wong Wai Ming. Wai Ming, please.
Thank you, Yuanqing. I will now take you through Lenovo's financial and operational performance for Q2 in fiscal year 2024. Next slide, please. In Q2, the group began to yield benefit from accelerating demand momentum and improved profitability. Despite last year's peak performance, creating a high base and a 16% year-on-year revenue decline, group revenue grew 12% quarter-on-quarter to $14.4 billion. This marks the second consecutive quarter of sequential growth, confirming a recovery trend with a growth rate faster than our 10-year average of 9%. Gross margin reached 17.5%, the highest for a second fiscal quarter, supported by the group's unwavering investment in innovation and the increasing contribution from our high-margin services business . Group E to R ratio remained higher than our typical target range due to smaller top line.
On non-HKFRS standard, group profit attributable to equity holders was $273 million, representing a 40% quarter-on-quarter increase, although still down 54% compared to our nearing peak profit set a year ago. Basic earnings per share came in at $0.0209. Today, the board of directors declared an interim dividend of HKD 0.08, same as last fiscal year. SSG is the high-priority growth engine that spearheads the group's services-led transformation and margin expansion. Its revenue and operating profit both reached all-time highs. The share of non-PC sales improved to 40% of the combined sales of the group's three business groups. Sales of IDG and ISG made sequential and robust improvement, signaling momentum in demand recovery after a few challenging quarters.
The Group will continue to focus on accelerating transformation, driving demand recovery, and seizing new growth opportunities in order to expedite business recovery. We are committed to restoring target profitability, with our priority being to double net margin in the medium term. Next slide, please. The Group's efforts to optimize operational efficiency helped to shorten the cash conversion cycle to negative four days. Days of accounts receivables and inventory together improved by nine days year-on-year, of which six days came from inventory days improvement alone. A reduction of $2.2 billion in inventory level was achieved through our active management in raw materials. Q2 finance cost was down $7 million quarter-to-quarter, thanks to prudently lowered borrowings, offsetting the higher base interest rates.
Last but not the least, S&P Global Ratings upgraded the group's long-term credit ratings to BBB with a stable outlook, affirming our operational resilience and the effectiveness of our strategy in diversifying our growth engines. Next slide, please. SSG has once again achieved record high performance, with revenue growing 11% year-over-year to $1.9 billion. An operating margin of 20%, which is a few times higher than our corporate average, showcases our business strength. This was achieved despite a mixed shift and a high base comparison that resulted in a slightly lower margin year-over-year. Managed services grew 31% year-over-year on strong demand for as-a-service solutions and accelerated geographic expansion, which includes a TruScale breakthrough win in Japan this quarter. Premium support and sustainability solutions, such as CO2 offset and reduced carbon transport, continue to boost our penetration rate.
SSG is also leveraging AI to enrich service portfolio to meet the evolving needs of our customers. A newly unveiled Care of One platform service is the first of its kind AI-empowered advisory service that makes it possible for clients to reduce lead time and maximize optimization. Our AI professional services can help customers to deploy Gen AI securely and efficiently in the hybrid environment. Lenovo Intelligent Sustainability Solution Advisor is another AI-powered service that assists our clients in aligning their IT environment with their sustainability goals. Next slide, please. The infrastructure market is currently transitioning to support the growth opportunities in AI. This has resulted in short-term challenges, including supply shortage of key GPU components, but just shifts away from traditional general purpose computing and a slower than expected transition to DDR5-based platforms.
ISG recorded a 5% quarter-to-quarter revenue increase and a $7 million improvement in operating profit, suggesting stabilizing sector demand. Year-to-year revenue declined 23% with operating loss. Despite the headwinds, ISG delivered multiple performance records, including all-time high revenues in storage. According to third-party statistics, Lenovo is now the third-largest storage supplier by global revenue market share, a significant advancement of 5 positions from just a year ago. Within the storage market price bands of 25K and below, Lenovo has held number one position for 4 consecutive quarters. Moreover, we also achieved double-digit revenue growth in high-performance computing, with five consecutive quarters of year-to-year growth. Our edge and software revenue both achieved an all-time quarterly record, with 10 and four consecutive quarters of year-to-year growth, respectively.
ISG is investing in the development of differentiated technology solutions in general purpose servers , hybrid cloud, HPC, data management, AI, and edge computing. As part of these efforts, Lenovo has recently unveiled a new edge server with differentiated technology, featuring 32% less power consumption. Next slide, please. IDG solidify its global PC market leadership, ranking number one in four out of five geos with expanded market share. Its revenue was up 12% sequentially, outperforming its seasonal average of last six years, despite a decline of 16% year-on-year on high conversion base. With a confirmed recovery trend, IDG revenue growth is expected to turn positive in the near future. IDG achieved an operating margin of 7.4%, returning to the high end of its historic range, thanks to continued R&D investment in innovations, operational excellence, and exciting new product launches.
The segment also made great progress in seizing growth opportunities beyond PC products, driving non-PC sales up 2.4 % year-on-year to 20% of IDG's revenue. Our smartphone business continued to accelerate market share gain in its growth and stronghold markets, with double-digit premium to market growth in shipments. Our innovations, such as AI PC, which features AI computing and private foundation models on smart devices , are expected to be a powerful driver for the PC replacement cycle from the second half of 2024. AI PC also bodes well to the group's strategic positioning in AI from pocket to cloud, allowing for provision of end-to-end solutions that effectively harness the power of AI. Next slide, please.
The group has consistently received numerous recognitions for its ESG performance, such as its recent inclusion in the 2023 Hang Seng Corporate Sustainability Index, with the highest score in the IT industry for its environmental and social achievements. The group was also granted the champion status in 2023 Canalys Global Sustainable Ecosystems Leadership Matrix, and was ranked as the best place to work for disability inclusion by the Disability Equity Index for the third consecutive year. Among our various ESG initiatives, Lenovo has taken a significant step towards advancing the United Nations Sustainable Development Goals by joining the UNGC Forward Faster initiative, which seeks to expedite private sector actions in realizing the SDGs outlined in the 2030 agenda. Next slide, please.
The group continued investment in innovation has diversified our growth engines and unlocked new opportunities in intelligent transformation, especially in AI. Our investment goes beyond hardware devices, software, services, and ecosystem to address the challenges in privacy protection and data security management. All in all, the group will seek to harness the full potential of AI from pocket to cloud. Looking ahead, SSG will launch new AI and better services to accommodate enterprise customers' growing demand for AI technologies, while safeguarding its core business with high-value added support services across both PC and infrastructure sectors. Strengthening partnerships and channel tools are also key growth initiatives for SSG to undertake to enhance its contribution to the group's success. ISG has extended its industry-leading full stack offerings to include hybrid cloud, HPC, data management, AI, and edge computing.
AI presents new opportunity for ISG, which is supported by its ODM Plus business model and the new AI innovators program, designed to meet the demand for vertical solutions. The business segment will further diversify its customer base and acquire new accounts, while balancing between general purpose systems and customized cloud offerings. This will ensure scalability, cost efficiency, and the optimization of revenue growth and profitability. The stabilizing global PC market is poised for year-on-year recovery in late 2023. IDG will leverage the commercial upgrade cycle, the premiumization trend, and the AI PC to drive premium to market growth and maintain its PC market leadership. Meanwhile, IDG will prioritize efficiency, cash generation, and non-PC investment. In the smartphone business, we'll focus on portfolio and regional expansion and differentiation, given rapid 5G adoption.
Finally, as always, we remain committed to driving sustainable growth and profitability improvements 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 session will be in English only. Please be reminded to limit yourself to two questions at a time. Operator, please give us your instructions. To submit a question, please type your question in the Q&A box on the right and click Submit. Thank you. Our first question is coming from Mr. Robert Chan with BOA. His first question is on PC market. What is your expectation on PC market and Lenovo's target goals in the market? And his second question is on AI PC. When do you expect AI PC to take off? Could you discuss AI PC ASP and how big is it going to be?
Yeah, so probably, the... This is a question for our IDG leader, Luca. Luca, please.
Yeah. So thank you, Yuanqing, and thanks for the question, and good morning, afternoon to everyone. So the first half was the bottom of the PC demand, and we are looking cautiously optimistic at the second half, and we, where we see some early signs of stabilization, with Lenovo performing better than the market, driven by our record activation share and our balanced market position with the leadership in PC in four out of five geographies globally. And we believe in 2024, the growth of the market will solidify, driven by a large install base to be refreshed post-COVID, Windows 11 replacement cycle, and the new exciting product launches such as AI PC. We are modeling 2024 with a low single-digit growth for the total available market from 2023.
Moving to AI PC, we believe that AI PC will be an inflection point for the PC industry, starting from 2024 and accelerating in 2025 and 2026. When we start, I would say AI on PC is not something new for Lenovo, because in the last two years, we already invested in AI techniques to make our PC smarter and adaptive to the user needs. So we believe we have a head start on the AI technology there. There will be the beginning in 2024, accelerate in the second half of 2024. I think there was a question on the AUR. Definitely, the configurations will become richer, and the demand for those devices will require more memory, more storage, and also more CPU computing power.
We are still modeling how much will be the AUR growth, but definitely, there will, there will be a good upside there. What percentage? So, regarding the percentage of, percentage of AI PC, I believe it's a little bit early to give a final number. We are thinking that 2023 will be, sorry, 2024 will be a one-digit percentage of the market, and the acceleration for AI PC is going to be in 2025, with many more and new designs to be launched. Thank you.
Thank you, Luca. The next question is coming from Mr. Desmond Ling with Spring Semiconductor Control. How will the new U.S. regulations impact the business and the company's AI strategy?
Yes. So we are still tightly communicating with the US government to assess the relevant impact to our customers and to our business operation. But anyway, Lenovo will continue to comply with all applicable laws and regulations, so in every market we do business. Meanwhile, I want to, let's say Lenovo is a global and diversified business. So we have a strong global and resilient supply chain and manufacturing footprint. And I believe we can navigate this and continue to support our customers' needs in all the markets we do business.
Thank you, Wanlin. The next question is coming from Anthony with J.P. Morgan on ISG performance. How quickly can server markets recover? And is there any update on China AI server business, given the H100 quantity call?
Yeah. So probably, Kirk is the best person to answer this question.
Yes, thank you. So I think as we look at the future, we believe that as we go into the next calendar year and next fiscal year, we'll have a more balanced market between what today is largely driven by large language models, and becoming more balanced between storage, compute, large language models, and AI inferencing. So that's number one. I think our profit growth drivers are continuing to be strong, with records in storage and then records in services and growing quarterly software numbers. The other thing that will help our profit is as the DDR5 transition continues to happen, those motherboards move in-house for both Intel and AMD at Lenovo. So that improves our costs, delivers higher utilization in our factories, and ultimately will improve our profit.
Then lastly, you know, we'll continue to manage our costs and expenses so that we can get profitable as quickly as possible. I think a more balanced market and recovery. We saw quarter-on-quarter improvement going into this quarter, and we expect quarter-to-quarter improvement going into the current quarter as well. Relative to the China AI market, we're continuing to evaluate new chips that are coming to market from our suppliers, and we'll have updates in the future. But as Wong said, we'll comply with all export regulations as new chips come out for all the markets we do business in. Thank you.
Thank you, Kirk. The next question is coming from Veda Kumar from Tech Insights. What's the future for Motorola's smartphone in 2024? And what is your strategy to tackle the India smartphone market?
Yeah. So, Buniac, so please answer the question.
Yeah. So I mean, very clear. I think, first, our strategy is to become double the business in the next three years. We are now on track to achieve that goal. I mean, that's the middle of the first year. That means in India, we need to become a top-three player in the next three years. Last quarter, we grew in Asia close to 50%, and in the October months, that's probably the biggest month in some festivals in India, we are seeing triple-digit growth year-over-year. We in partners online, we have already achieved double-digit market share in October, which shows very good progress. We are expanding offline, and we are seeing also our premium franchises growing much faster than the mainstream.
So the Edge franchise, the Razr. So, high expectations on India. We are on track on the plan, and not different in the rest of the globe. Very similar strategy, growing faster in premium and, and especially in foldable. Foldable is the first form factor, in a long time, attracting, consumers from iOS. 20% of our Razr consumers are coming from iOS, and, we expect that growth to continue. Expect to sell in the current generation, 5X, what we sold in the previous generations of the original launches.
Thank you. The next question is coming from Mr. Jeffrey Kwan from BNP. The question is, AI workload versus AIPC. What kind of AI workload could be transferred to, from data center to AIPC at its launch in 2024, such that it creates enough value for our customers to consider upgrading from older PC to AIPC? In other words, if most workload will still be done at data centers, and how will AIPC add value to customers?
Yeah.
Yeah, I think this question for me. So we are confident that AIPC value added will be significant and transformative for end users. That will be both in commercial and consumer segment, with significant productivity gain for the user. We are investing in R&D to deliver unique and exclusive features to further differentiate and expand our leadership, and more specifically, natural language interaction, processing speed for the AI workloads at the edge, security, privacy, low latency, and low power consumption will be all the characteristic of the AIPC, which we believe will deliver such value. As a last point, obviously, this will not be only at the edge, but will be a hybrid blend of client, edge, and cloud. So this also further give us an opportunity, given our exclusive access to the cloud offering, to you know, to further differentiate in the market. Thank you.
Yeah. So I want to add a couple points here. So, definitely, as AI, AI PC will help to protect the customer's data, personal data, privacy. So that's the most important factor that in the future, people would need AI PC. But, additional to that, so today, AI workload is mainly for the training. So, that's the advantage of the cloud, but, over time, so the workload will shift to the inferencing. So if all the inferencing still happens in the cloud, so, definitely, it will impact the efficiency and the cost.
So we think, with the workload shift, so probably, between client devices, Edge and the cloud, you will see more balanced workload among these three areas. So that's our view. So that's also why we needed a AI PC to do some inferencing work.
Great.
With the more efficiency and the lower cost.
Great. The next question is coming from Anthony with JPMorgan. What is your PC market outlook in the calendar quarter four and next calendar year? How sustainable is your PC margin? Is there any one-off items this quarter? And what is Lenovo's view on AI PC? Is it accounted for spec upgrade, or is it a unique driver? And what's the expectation on AI PC penetration in the next few years?
Yeah. So this is also for me. PC market outlook, calendar Q4, we are now modeling flat year-over-year, and 2024 calendar year, we are modeling low single-digit growth. There are no one-off income, obviously, for this quarter. How sustainable is the margin? I think you definitely have a very competitive market as usual, but we think we can still drive the profitability for this business in the high range of pre-COVID and even beyond that, with the following rationales. I'm trying to summarize. Higher average selling price with the market shifting toward premium. Our ongoing share gain in the premium and commercial segment. Richer configuration, as I mentioned, for AI PC, you will require a richer configuration.
We believe this trend will be visible in 2024, but accelerate further in 2025. Our focus on efficiencies and services and software, and I would conclude with our strong competence in what we call design to cost, given our leadership in R&D and innovation. And then on the last item, the expected AI PC penetration, as I said before, for 2024, we are modeling a single digit share of the AI PC in the total market, growing 2025. And according to many analysts, it could be 50-60% of the market in 2026. Thank you.
Yeah. So simply put, we are very confident to not just keep or even improve the profitability in our PC business. You should know, the past year probably was the toughest period in our PC history. So we still kept the very, very good GP margin, so and operation profit. So with our competitive products and operational excellence. So we definitely believe with further investment in the AI and the innovation, further sharpening our operation excellence, so we will further improve the GP margin as well as the operation profit. Thank you.
Okay, next question is coming from Mr. Don Pan, with Nomura. So NVIDIA is trying to integrate its own CPU and GPUs, in order to, widen its, dominant position in AI server market, not just for training, but also for inferencing. So what is going to the impact to x86 server ecosystem? Could you discuss it?
Yes. So probably, yeah, Kirk, you can talk first.
Sure. As I mentioned, I think as we look at AI, we've established a strong position with the initial $1.2 billion we invested, and now an additional $1 billion we've committed to invest over the next three years as Lenovo. Our AI strategy drives a very broad portfolio from edge to cloud, with our unique ODM Plus development model, where we're building our own motherboards and putting them in our own factories. The second thing we're doing on AI is delivering simplified solutions through our AI Innovators program, so that regardless of what your business size is, you can easily deploy AI technology. And then the third is the services we announce. So relative to NVIDIA, I think you saw the strong support from all our partners at Lenovo's Tech World.
We had Jensen on stage, Lisa, Pat Gelsinger, and Cristiano from Qualcomm, and we plan to support all of those accelerators going forward. In addition, you know, we will be the reference design partner for several of those partners as we look at next generation form factors that start optimizing the system around the GPU. So I think we, you know, we believe in customer choice, we'll be customer driven, and relative to both the CPU and the GPU from NVIDIA, we will be supporting. Thank you.
Thank you, Kirk. And, Ben from Technology Business Research has a question on our service business. With some workers now returning to the offices, have you seen a shift in organization consumption of PC services like DaaS and or traditional lifecycle services?
Yeah, so Ken Wong, our SSE leader, will answer the question.
Hey, thank you, Ben, for the question. So throughout our interaction with our customer, I think, we continue to see a couple of, you know, support needed and also trend in the market. Number one is, you know, hybrid work is no longer a one-off phenomenon, but more a becoming a new normal, right? Especially when we talk about the whole workplace, technologies, right. The second one is we continue to see a strong demand in terms of, as a service, right? Because this is the agility, and also the facility, the flexibility that the customers are looking for. And, and hence we continue to see, you know, strong double-digit, demand growth in the as a service segment of the IP services.
Also some of the data that we are seeing is suggesting that, you know, one in five commercial PCs in the coming three to five years will be consumed as in a service manner. Last but not least, this is another phenomenon that we see in terms of our customer demand change: they're looking for new technology that could transform user experiences, right? And that is why, for example, we just announced our Care of One platform, which is a highly automated, hyper-personalized technology to help deliver the next level of employee experiences to our digital workplace solution. Thank you.
Thank you. Mr. Conor O'Mara from Jefferies is raising a question regarding to AI. Can you please help us understand the exposure of your AI business to China? Would it be possible to share your geographical exposure for your AI server business?
Yeah, I think it is still about the ISG. Mainly on ISG, so probably Kirk, you can answer first.
Yeah, we don't disclose the split by geography, but I think we're seeing good demand globally for AI technology. And a lot of the AI, as it balances out between large language models and inferencing, we're seeing a lot of demand, even at the CPU level, not just the GPU level, as the world starts to drive inferencing more, from the early demand in large language models. So, I think that's our, that's our situation. Thank you.
Thank you.
Also, while we are committed to comply to the regulation, we also will meet the customer demand. So definitely, even for China market, for China users, we will have the different portfolio to meet their requirements.
Thank you. Thank you. And, the next question is coming from Linda Stevens Chan with BOA. What are the key reasons for the decline in terms of cash from March of 2023 levels, and what the other receivables increased so much?
Yeah. So probably, Wai Ming, our CFO, can answer the question.
Okay. Thank you. Thank you for the question. The decline in cash, I think, is primarily the way how we manage working capital. As most of you know that, I think interest rates remain pretty high, and we actually been trying to optimize our cash level, by managing our three components of working capital. I think namely our receivable, inventory, as well as our payable. I think we are actually in a very comfortable position. Our cash remains pretty strong. You will know that, lately, I think Standard and Poor's actually upgraded our investment brand rating.
So, again, this is primarily driven from the external environment because of the continuously high interest rate environment. And therefore, we are trying to optimize between a very healthy balance sheet, a healthy cash flow, against the expenses we pay for the interest. Thank you.
Thank you, Wani. Kumar from Tech Insights is asking regarding to what is Motorola's strategy to democratize 5G smartphone, and by which year Motorola plans to make it its portfolio 100% 5G?
Yeah, sergio Buniac.
Yeah. So, I mean, I think number one, our 5G mix is growing. It's slightly faster than the market. Of course, different maturity levels. Some markets like North America are growing faster just because the carrier deployments are coming faster. We are seeing our price ranges going down by almost 30-40% in the last two years, also in line with the market. What is democratizing 5G over the place. And probably, you know, normally the 3G to 4G took three to five years. At least 90% of the portfolio should be 5G between the next 24-36 months. But we'll go in line with the market, so that also depends on the deployment from the carriers in each market.
Some markets, probably you'll see that next year, like North America, more 18 months, and the others, 18-36 months.
Thank you. And, next question coming from Mr. Conor O'Mara, with Jefferies. "Can you please talk about the benefit of AI on both PC and smartphone? This could be a good replacement driver if it captures con, consumer imagination. When you talk about low latency , et cetera, what is the use case you have in mind?
So, so think it this way, AIPC will be... Now, you are talking about consumer, will be your personal twin. So he will, the AIPC will know everything about you, will be able to process the data about you in your device, so without the need to load it into the cloud, because I'm sure nobody want to put on the cloud certain private data. So that is a very powerful use case where you will have the AI workload capability at very high speed. You need to think about, several trillions of operation per second, will be the capability of this new generation of PC to elaborate AI workloads, but doing it on your device without moving your data to the cloud. I think that will guarantee privacy, security, low latency. Certain things are also requiring low latency.
This is one of the use cases we have in mind in consumer, so personal twin. You can imagine in commercial, you have the productivity use case, where the PC will be able to do things that were just unimaginable today with this new computing power that they will have.
Yeah.
Thank you.
So basically, you can enjoy the advantage of today's large language model. So to write a paper, prepare a PowerPoint, or prepare a picture, et cetera, et cetera. Meanwhile, you don't need to share all your personal data with the public cloud. So that's the advantage of the... So we have a survey to our customers, and most of them like the idea. So that's for sure. But as Luca said, gradually, it will become your personal assistant, or we call it personal twin. So what does personal twin mean? It means only you can use this device.
Meanwhile, only this device or your personal twin can understand you better. So, if you ask that, ask it to do something for you, they will always give you the best answer than any other large language model.
Okay. We'll move to the next question, coming from Mr. Jeff Pu with Haitong International . What are the key cost drivers for an AI PC? How does Lenovo address the entire cost structure of this new generation of machine?
So I think I believe that you can just think the configurations will be richer, so more premium. Then also the selling price, the market will shift toward the more premium. There is no issue on managing the cost. I will tell you instead, that given our R&D efforts in the last two or three years, we are very confident that we have and we will have the best design to cost. So that is why we want to deliver superior margin in the PC industry.
Thank you.
Thank you.
Thank you. The next question is coming from Jeffrey Kwan with BNP Paribas. What's your view on H20 and the equivalent, which is the new NVIDIA GPU targeted at Chinese customers? Are you going to ship servers equipped with H20 in China in 2024?
They could.
Yeah. So I think right now we're evaluating the technology. We plan to be compliant, as we said, with all export control regulations in all the countries we do business with, including China. Our understanding right now is there are new NVIDIA chips that are not on the restricted list, and so for that, those kind of chips, we will certainly want to be time to market with our key partners, whether it's NVIDIA or others. So it's still early days, but certainly there's chips that are going to be targeted at that market, and we'll continue to use our flexible supply chain to meet customer needs.
Thank you. The next question is coming from Susanna Chu with BEA Union. How is general IT services outlook in 2024? What will be the blended ASP margin upside for AI PC versus normal PC? There are actually two different questions.
Okay.
Thank you, Susanna. So regarding the IT services outlook, you know, number one, I think even though there are a lot of dynamics happening in the market, but through our conversation and interaction with our customer, I think our customer is more relying on leveraging technology to create competitive edge for their business. And that's why if you look at the overall IT services market, you continue to see resilient demand from the IT services market, right? That's number one. Number two, among all the IT services market segment, we definitely see a pocket of, you know, faster growing segment. The first one is definitely the as a service demand, right? Across devices as a service and also infrastructure as a service.
That is also reflected in our strength in our TruScale as-a-service business, which has been consistently growing at double-digit year-over-year basis, you know, for a couple of quarters, right? The other part is, you know, AI, right? A lot of our customer, uh, on one hand, you know, they are trying to, you know, understand the how to leverage AI to build competitive edge for their businesses. On the other hand, they're looking for a partner, for example, like us, to help them to understand the technology, to help them to deploy the technology in an efficient and most importantly, in a secure manner.
This is why I think in just our Tech World, which is an annual flagship event of Lenovo, we announced the AI professional services in partnership with NVIDIA, which is to help our customer accelerate their journey and also time to market for their AI solutions. Thank you.
So in regards of the second part of the question, the blended ASP and margin upside, I, as I said before, we are still modeling how much will be the upside in AUR or ASP. Definitely, we think with richer configuration, there will be a meaningful upside. In regards of the margin upside, I can only reiterate, we are confident we will deliver margin or profitability on the high side of the pre-COVID and even beyond. Thank you.
Thank you. And the next question is coming from Yi Han Lee with Kai Yuan Securities. Will NPU be a very crucial part in AITC? Is it embedded within a GPU or it's a separate chip?
Okay. So there will be different classes of AI PC, with and without NPU. AI workloads can be processed also by the combination of CPU or CPU plus GPU, but clearly there will be a new class of devices that will ask an NPU, neural processing unit, within the CPU, and that will help to drive AI workloads with more efficiency, speed, and energy, you know, saving. So I think there will be the two cases, with NPU and without NPU. Thank you.
... I think. All right, the next question, which is also our last question, is from Wes Chan with UBS. Could you share your definition of AITC, and how would the Lenovo address the impact from U.S. government's expanded restriction on AI server GPU? So those are two separate questions.
Yeah. So, on the definition of AITC, I think the industry is still maturing on this front. Probably if you ask several, you know, silicon vendor, they will have a different definition of AITC for now. I believe this will, you know, will mature over time.
Mm.
From a usage perspective, this AITC will have the natural language interaction with the end user. We'll have this kind of personal twin, personal assistant approach or mode. We'll be able to execute those AI workloads in a hybrid way, so partially on device and partially on the cloud. When it's on device, you will have your personal foundation model and the knowledge base that contains your data on the device, and then you will be able to go to the cloud on demand, and the user will be able to switch when he wants to also share the cloud data and when he only want to process on the device.
Mm.
In general, as I mentioned in the previous question, there will be a combination of CPU, GPU, and NPU, and well, I believe this is just the beginning, so we will see more, you know, more clarity over time in 2024. And in 2025, where is the year where that we believe will be, you know, a very big acceleration of those AITC shipments. Thank you.
Yeah. So probably, Kirk, you can answer the second part of the question, please.
Could you repeat the second part, please?
Yeah, sure. How would Lenovo address the impact on the U.S. government's expanded restrictions on AI server GPUs?
How will Lenovo what?
Address, address the impact from U.S. government's expanded restriction on AI server GPUs.
Yeah. Yeah, so I think as we said earlier, we're still evaluating the impact because it's too early. It's a multi-hundred-page document, and we're still working with our suppliers and with the U.S. government. Having said that, we're continuing to buy and integrate products in the United States, which is not requiring export. So we'll give you more updates as we get further along, but right now we're still evaluating.
Thank you, Kirk, and thank you, everyone. This is our last question due to time constraints. We thank you very much for joining today's call. If you have any further questions, please feel free to contact our investor relations team. The replay of this webcast will be available in the next couple of hours on our investor relations website. Thank you again for joining us. Thank you. Bye-bye now.
Thank you. Bye-bye.