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. Mr. Sergio Buniac, President of Mobile Business Group and President of Motorola. We will begin with earnings presentations. 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. Last quarter, as shown in the results of other players in our industry, our diversified growth engines of Infrastructure, Solutions and Services now is driven by non-PC businesses. Even in PCs, we continue to keep our market leadership, and we continue to drive efficiency in our already lean operations, maintain healthy cash position, and invest in innovation and sustainability. Despite the slow IT market growth in the short term, total IT spending is expected to recover to a moderate growth rate in the mid to long term. Meanwhile, the mega trend of digital and intelligent transformation continues to accelerate. Last quarter, impacted mainly by a significant decline in device business, our group revenue was down by 24% year-on-year or 18% in constant currency.
Both Solutions and Services business and the Infrastructure business grow by high double digits year-over-year to historical records. With positive operating profit contributed by all our main businesses for the fifth consecutive quarter, we remain committed to doubling profitability in the midterm. Last quarter, we took proactive actions to reduce expenses and improve efficiency to ensure our cost competitiveness, especially in areas where we see a softer market outlook. Our cash balance is still strong. Cash conversion cycle continues to improve, and the channel inventory is reduced, which allow us to continue investing in R&D centered around new IT technologies. I will talk about each of our businesses. Let us start with SSG, Solutions and Services Group. Although adjusted to slower growth this year, the trillion-dollar IT service market is expected to remain strong for the mid to long term.
By 2025, managed services for cloud, on-prem, and edge is expected to increase at 7% CAGR, while hybrid Infrastructure Solution is becoming essential. Vertical solutions and services spending is also expected to remain at almost double-digit CAGR growth in education, smart retail, smart city, and manufacturing from 2023 to 2025. Last quarter, our SSG's revenue grew by 23% year-over-year to $1.8 billion, setting a new record. All segments again delivered high profitability and strong revenue growth. The revenue mix from non-hardware tied Solutions and Services achieved a record high of 53%, with managed service business almost doubled year-over-year. Lenovo's Hefei factory has been added to World Economic Forum's Global Lighthouse Network for its smart manufacturing solution. SSG continued to invest in building scalable and repeatable horizontal and vertical solutions with Lenovo IP.
We also enriched our digital workplace solutions, strengthened our hybrid cloud portfolio, and further expanded our sustainability offerings. Our ISG, Infrastructure Solutions Group, continues to benefit from ICT infrastructure upgrade. By 2025, the server market will reach $135 billion, edge infrastructure, $37 billion, and storage, $35 billion. Last quarter, our ISG revenue increased by 48% year-on-year to a historical high of $2.9 billion, beating records for three consecutive quarters. Operating profit more than doubled year-on-year to a new record. Server revenue grew by 35% year-on-year, making Lenovo the third largest server provider in the world. Storage more than tripled to become number five in the world. The software grew by 52% year-on-year, all reaching an all-time high.
Meanwhile, we continued to enhance our comprehensive infrastructure portfolio and to invest in innovation, particularly in AI-empowered edge computing and hybrid cloud. We strengthened Lenovo's unique advantage to balance the scale and profit. We remain focused on being one of the fastest-growing and ultimately the largest end-to-end Infrastructure Solution provider in the world. Last quarter, our IDG, Intelligent Devices Group, experienced a severe decline in device markets. The real demand reflected by the activation data was actually better than the shipment data seemed to indicate. Some time to digest the inventory to a healthier level. We believe total shipments are likely to stabilize at a higher than pre-pandemic level as early as the second half of this year. In tough market conditions, IDG successfully maintained the number one position in PCs and the industry-leading profitability for the past quarter.
We achieved a solid operating margin at 7.3%. Our strong product competitiveness was further reflected in leading activations and resulted in improved inventory level. Our smartphone business achieved the 11th consecutive quarter of profitability. Our premier product, the Motorola Edge's activation, grew by 74% year-over-year. We expanded the premier product mix for our tablet portfolio as well. Our smart spaces solutions demonstrated growth potential with key wins. In the short term, we will take proactive actions to reduce expense and improve efficiency to ensure business healthiness. In the long term, we will keep investing in innovation, focusing on premier PC and adjacent areas, and drive the evolution from smart devices to smart spaces. Last month at CES, our Yoga Book 9i, as the first full-sized OLED dual screen laptop in the world, won a historic high of 50 awards.
Our enhanced digital workplace solutions are improving user experience in a hybrid workspace. Looking ahead, while the industry cycle still needs some time to run its full course, strong execution can make a big difference. Our diversified growth engines are firing up. Our operational resilience is supporting the results. Our healthy liquidity is ensuring the soundness of the company. Our investment in new IT is building the NextW ave of our competitive advantages.
I will now take you through Lenovo's financial and operational performance for Q3 in the 2023 fiscal year. The persistent macro volatility created a challenging environment for us in Q3, with group revenue declined 24% year-over-year in nominal terms to $15.3 billion, or down 18% in real terms, while group net income dropped 32% year-over-year.
Notwithstanding challenging market conditions, our gross margin and operating margin improved by 44 and 28 basis points year-on-year respectively for the third fiscal quarter. The group's stable profitability is a testament to its operational excellence and success in its long-term growth strategy for non-PC investment by supercharging growth in SSG and ISG. Revenue from non-PC pillars made up 41% of group revenue, up nine points from last year. SSG and ISG set new milestones in sales and profits. Together, their profit grew by 19% year-on-year and partially mitigated the pressure of a smaller scale operation and rising finance costs. Going forward, the group will continue to prioritize its medium-term target of doubling its net margin.
We continue to optimize the group operations for greater business agility and to support long-term growth. Our cash and cash equivalent balance exceeded $5 billion at the end of the quarter, up 34% year-on-year. We increased our net cash by $500 million from the same period last year to a balance of $581 million. We improved our cash conversion cycle by 13 days year-on-year, and three days quarter-on-quarter to -6 days, owing to extension in accounts payable days. In the meantime, we will continue to drive inventory optimization. Last quarter end, we managed to reduce our inventory by over $900 million, both annually and quarterly. SSG reported a 23% year-on-year growth, with revenue reaching $1.8 billion, thanks to robust growth across all service segments.
Revenue of managed services nearly double year-on-year, owing to the ongoing as-a-service trend. The economic downturn appears to have accelerated the popularity of as-a-service solutions, as our deal pipeline remains steady despite macro uncertainties prolonging the conversion cycle. Our Product and Solution Services segment, which provides a broad base of solutions leveraging Lenovo IP, also saw revenue increasing by 7% from the same period last year. During the quarter, the combined revenue of managed services and product and solution services was 53%, four percentage points more than last year. Attach and support services revenue also increased 12% year-on-year, with a record PC service penetration rate despite declining sales for new devices.
SSG operating margin of 20% dropped two percentage point year-over-year was due to a mix shift, but overall, it remains significantly higher than the group average, expanding Lenovo long-term profit margin. SSG reported an all-time high operating profit of $370 million, up 12% year-over-year. Deferred revenue grew by 8% year-over-year to $3 billion. This echoed the success of the group's transformation journey to enlarge and sustain its recurring revenue base. ISG continued to deliver exceptional results as revenue and operating profit both set new records. Its Q3 revenue grew by 48% year-over-year to $2.9 billion, while operating profit increased by 156% year-over-year to $43 million. ISG was able to build a comprehensive product portfolio to achieve significant premium to market growth.
This product strategy, along with an increase in customer base and design in projects, was effective in driving all-time high revenue of server, storage, software, and AI edge. The latest quarterly third-party statistics indicated that ISG market share by revenue in the global storage market nearly doubled year-on-year. By customer segment, ISG exposure to CSP and ESMB segments gave the group a unique advantage in balancing scale and profits. Both segments saw double-digit revenue growth to record levels. IDG was impacted by sector-wide headwinds, including lower demand and excessive inventory. Despite revenue and operating profit each declining by 34% and 37% year-on-year, operating margin was well sustained at 7.3%. This industry-leading profitability reflected the group's efforts in stepping up operational efficiency and in expense control to mitigate market challenges.
We work with our distribution partners to increase their sell activity and note that the decline in sell-outs is less than the sell-in, which leads to a lower channel inventory. IDG continued to invest in innovation for non-PC and adjacent areas to drive long-term growth. The smartphone segment was profitable for 11 consecutive quarters. In the tablet segment, nearly one-third of sales was from premium segment, in Smart Collaboration solutions, growth remained robust with key wins across geographical and global accounts. We continue R&D investment to drive innovation. The group's R&D spending increased by 5% year-over-year to view various growth engines, business transformations, and ESG initiatives. The group continuing investment in R&D, and together with rebalancing our operating expenses, can mitigate the adverse impact from demand volatility in the near term, while addressing long-term customer demands beyond technology hardware to drive sustainable growth.
The group is now well-recognized by its accelerated ESG investment and has received many accolades. MSCI upgraded our ESG rating to the highest level of triple A. The group also ranked 24th in the Boston Consulting Group's most innovative company list of over 1,500 global companies. Lenovo was highlighted in the Bloomberg Gender-Equality Index for the 4th consecutive year and featured as a leader in climate change and water security by CDP. Last month, the group's commitment to reach net zero by 2050 was validated and approved by the Science Based Targets initiative or SBTi, a partnership between the UN Global Compact, CDP, World Resources Institute, and World Wide Fund for Nature. Making it the first PC and smartphone maker, and one of only 139 companies in the world with a net zero target validated by SBTi.
External challenges prevailed in the global market and could extend well into future periods. The confluence of global economic challenges and dynamic shift in market demand will present new long-term opportunities. The group continues to further strengthen its cost competitiveness to achieve its medium-term goal of doubling net margin. We will do this by investing in high-margin growth engines and taking proactive steps to reduce runway operational expenses by approximately $850 million. This includes overall reduction in operational spending as well as workforce adjustment where necessary and appropriate. We will take a comprehensive view to maximize operational efficiency, maintain momentum in our diversified businesses, and continue to invest in new IT technologies to drive sustainable, profitable growth for the group. The group will foster the development of new IT architecture with a client edge cloud network intelligence framework.
These investments, coupled with the growth plan to taking our operating expenses to maintain our operational excellence and global footprint, are the key to mitigating external challenges and supporting a surface-led transformation, enabling the achievement of our medium-term goal of doubling net margin. Looking forward, SSG should benefit from unleashed of demand for premier TruScale as-a-service, sustainability, and vertical solutions. Although macro headwinds could delay the due conversion cycle in the near term, the need to extend asset usability could supercharge long-term demand for maintenance services. SSG will further broaden its service offerings, including asset recovery services, while strengthening channel tools and cooperation with business partners to expand its attach and support services. Managed services is well-positioned to capture the long-term structural growth in as-a-service. ISG builds industry-leading end-to-end Infrastructure Solutions and expand it to full stack offerings, including server, storage, and software.
The ESMB segment will capitalize on growth opportunity in AI power edge, hybrid cloud, high-performance computing, and solutions for the telco communication sectors. The CSP segment, ISG has a unique ODM+ business model to address the growing demand for vertically integrated supply chains. The business will continue to diversify its customer base and capture new accounts through design wins across technology platforms. The approach will achieve the optimal balance between general purpose and customized offerings while ensuring the appropriate scale and an efficient cost structure to enable revenue and profitability growth. For IDG, we're striving to reinforce our number one position in the PC sector while maintaining leading profitability. IDG will continue to lead the race in device innovation by enhancing features for hybrid working, gaming, entertainment, and ESG designs.
IDG will further invest to score wins in non-PC areas, including fast-growing accessories, Smart Collaboration, and smart home devices. In the short term, the total addressable market for PC could return to its pre-COVID level, but we anticipate it should be structurally higher in the long term as PC becomes the center of digital life. In terms of our smartphone business, we will focus on portfolio expansion and differentiation to take advantage of the accelerated 5G adoption. Our strong financial position provides a solid foundation for us to proactively pursue growth opportunities ahead. Finally, as always, we remain committed to driving sustainable growth and profitability for our shareholders. Thank you. We will now take your questions.
Thank you, Wai ming. Now we are open the line for questions. This session will be in English only. Please be reminded to limit yourself to two questions at a time. Operator, I'll now turn it over to you. Please give us your instructions.
To submit a question, please type your question in the Q&A box on the right and click submit.
Operator, can you give us the instructions, please? Jenny, please go ahead and take the first.
To submit a question, please type your question in the Q&A box on the right and click Submit.
Thank you, operator. We have several questions coming in. Our first question is coming from Leping Huang from Jefferies. There are three parts of the question. First one is, several cloud CapEx companies in the US have tempered their budgets this year. Have you seen the same with your client base? If not, why not? This is the first part of the question. The second part is regarding to cash conversion cycle. Our cash conversion cycle improved 13 days this quarter. How much of that is sustainable and how much just because PC downturn requires less working capital needs. The last part of the question, what give you the confidence to predict PC sales will stabilize in second half of 2023 and at pre-COVID levels?
Yeah. Probably, yeah, a couple of questions, so we need different people to answer that. Regarding of the cloud, type of company. Kirk. Probably you can answer the question.
Yes. Hello, this is Kirk speaking. I would say in general, yes, in a, in a broad sense, the overall total available spend is probably down. However, largely Lenovo is immune to that trend, and I'll give you some color on why. Obviously, we just announced a record in our cloud business. For many quarters I've been talking about our new ODM+ model, where we're delivering custom designs for the largest hyperscalers in the world. Those designs have been ramping for many quarters, not just in the server space, but we're also expanding very aggressively into the storage space as well.
Despite the fact that the total market of spend might be down, Lenovo is definitely known for many years and the last several quarters that we've gotten the designs for those motherboards, those systems and those racks, because we've been designing those in for the last, you know, year plus, at least. Secondly, we're expanding our opportunity because we've expanded beyond just Intel to include AMD and also Ampere as an ARM provider to the cloud. We're expanding the amount of designs we can get, not just by going from server to storage, not just by doing the design, but also expanding our CPU providers.
Next, we also expanded to our Next Wave and created an entire new sales force about a year ago to address the NextW ave of hyperscalers, which is growing significantly, again, brand-new design wins for Lenovo. Last but not least, we have new factory capacity and new factories in Mexico and Budapest that are significantly improving our logistics costs. That's definitely driving us to be more agile in getting more designs. While there may be some softness in the overall market, we're dramatically increasing our presence, for those reasons I stated. Thank you.
Thank you. Regarding of the PC demand. In my view, if you want to understand the future, probably you need to understand the past three years. Probably most of people only see the shipment data given by IDC. I don't think the shipment data can precisely reflect the real market demand. The real demand can be reflected by the device activation data. If you use 2019 as a base, 100%. Actually, 2020 the activation increased by probably 15%.
The real demand-- I would say the real demand probably increased by 15%. The shipment only increased 7%, 8%, 7%, 8%. That generated a lot of supply shortage. Since then, in year 2021, definitely, channel started to push inventory. You can see, in year 2021, the shipment increased by 15%, but the actual device activation was actually flat to 2020. That definitely accumulated a lot of inventory. You can see, in year 2022, channel started to digest the inventory. The shipment declined significantly.
The real device activation did not decline as much as the shipment last year. Probably only 6% year-on-year. By the end of last year, let me say November, December. The real activation number probably or the real shipment number probably is consistent with the activation number. In my view, next year, the real demand reflected by the activation could be flat to this year, which is still 5%-8% higher than 2019. Probably we still need one or two quarters to digest the inventory in the channel.
From the second half of the year, you can see PC market resume the growth. That will drive the entire 2023 shipment drop, still drop by 5%, but it is still higher than 2019. Since 2024, I think the market will resume the growth, so that will ensure the overall demand will be 5%-10% higher than 2019. Both shipment and activation will be consistent in that year, hopefully. That's why so we are rather confident so for the second half of the year.
I don't know, Luca, our IDG, leader, have something to add.
Yeah. So, Yuanqing, I think you have already presented the data view for which obviously I am totally aligned. I think maybe I can just add that we feel confident about the long-term trajectory because, simply because digital transformation, hybrid work, digital life, all these are secular trends. PC is definitely at the center of all these trends. Additionally, there is, out in the market, an opportunity for more than 400 million PC that are more than four years old to be replaced. I think all these factor are giving us certain optimism that after the digestion of the channel inventory, which, as Yuanqing mentioned, will be completed in the coming months. The second half of this calendar year will start to resume growth.
Additionally, looking at the activation, you should know that our activation, share, market share, is at record levels in the last, six, eight months. We are gaining share as a sign of the appreciation of the customer for our products and our innovation. Even in a, let's say, weaker market, we want to perform better than the market. We will continue to perform better than the market. Thank you.
Actually over the past three years, our activation numbers or increase have always been higher than the market. Our shipment number have actually more conservative than the market. That means that we actually have generated less inventory than our competition. Probably we are leading to digest the inventory as well. That's why we are pretty confident for Lenovo's future in the PC area. Also I want to echo Luca. Actually, COVID actually has changed the PC landscape. From one PC per household to one PC per person.
Also because people spend more time on their PC, probably double the time, so that will drive the faster replacement cycle. That's that's our view on the PC demand. Regarding of the. Probably maybe you answer the cash conversion cycle. Yeah, cash conversion cycle, we have negative six days and 13 days improvement. Clearly this is sustainable. I think rather than quite sustainable, I actually would say that there are further room for improvement. I think clearly when the economy getting, I would say, more normal, logistic and everything getting better, I think the inventory level will continue to come down. We definitely see that there are room for improvement.
As you may see, I think the industry average, I mean, obviously, different company will have different business model. It's about 20, - 20 days. I definitely think that the negative six days is sustainable or more than sustainable, that we will see through our operational efficiency, we can see further improvement, I think in the negative cash conversion cycle. Thank you.
Thank you, Yuanqing. We move to the next question from Mr. Howard Kao at Morgan Stanley. It seems like desktop and notebook HP declined 5%-10% quarter-over-quarter in the December quarter. How does management view HP as we move throughout calendar year 2023? That's his first question, number one.
Yeah. Luca will answer the question.
Look, in general, I will not talk for the market, but I'll talk for Lenovo. I think we are not declining our ASP in that shape. I would say that our ASP has declined slightly in the sequentially quarter-on-quarter. Year-over-year, we continue to record growth of our ASP for the last eight quarters. Probably you can only say that the last one or two quarter it has increased less than the previous quarters. We are not modeling for 2023 a significant decline year-over-year of the ASP. You can think in this way, from how the ASP is built.
From the commodity perspective, there is probably a little bit of downward pressure because obviously the demand is not so great, so the commodity costs are going a little bit down. That does not necessarily reflect on the ASP. We are working hard to increase our premium mix so that we will control and hopefully improve the ASP. Obviously, the other element will be the exchange rate, which obviously is volatile, and that will maybe determine certain up or down of the ASP. I would not anticipate a significant decline of the ASP. At least we are not modeling it for 2023. Thank you.
Thank you, Luca. We also have two follow-up questions from Howard as well. The first follow-up question is the server business in December quarter is stronger than expected. Any color on what's driving this strength? Could you also discuss hyperscale versus ESMB and server versus storage? The next follow-up question is ISG as well. What is the target operating margin for ISG segment in the long term?
Yeah. Kirk.
Yeah. Thanks, Howard. This is Kirk. Well, I would say we are seeing record high fresh order load. Our success was not driven by backlog reduction. We've already largely passed that. We are seeing strong fresh load. I think we are one of the few companies in the market that's very balanced between the cloud and ESMB, and I can say we had records in the cloud and records in ESMB. We had records in server and in storage. Even within storage, we had records for hyper-converged, traditional entry and mid-range, and cloud storage. It was very broad-based.
In addition, as you know, we created a new division back in April around ThinkEdge, and we grew that edge and the artificial intelligence associated with the edge, with many, many end user retail wins, and grew that business triple digits. Definitely edge and the AI at the edge is a strong growth factor for us. Outside of China, we had a record and, you know, North America and Europe were particularly strong within that. I would just say it's broad-based across the board where we saw the new fresh load, and we see that continuing again in the quarter we're in right now. Relative to the operating margin target, I think we want to continue to drive hypergrowth. Hopefully, you know, with almost 50% growth quarter on...
You know, year-over-year rather, our goal is to drive hypergrowth, continue to grow share while continuing to improve, operating profit. You know, I think we're on our seventh consecutive quarter of year-over-year operating profit improvement now. You know, relative to at least the, the two largest competitors we have in the market, we still have a ways to go, but hopefully we're showing continuous momentum there while continuing to have hypergrowth. Thank you.
Yeah. Did you want to talk about the operation margin?
Yeah. Improving every quarter and getting closer to certainly where our, the people that we compete with on a day-to-day basis are.
Okay.
Thank you, Kirk. The next question is coming from Jerry Xu, Mr. Jerry Xu at Credit Suisse. It's also on ISG. Given the slower IT spending and consensus on software, cloud server demand, are you seeing any order adjustment or it's more on component inventory management?
Well, again, I would say the NextWave business, we track over 500 NextWave cloud accounts, and that is largely a new business for us, and that's all brand new share gains for us. Independent of any order adjustment at the macro level, we're gaining share in there. With the largest, you know, 17 or so cloud providers in the world, each is in its own unique situation. I would say that the new processors from Intel, from AMD, and from Ampere have compelling value proposition, and we have design wins, you know, different across each customer. The number of design wins that we have is growing. Again, we're probably the beneficiary of market segment share, even in a maybe a softer market that has been well documented in the press.
Relative to component inventory management, I'm not sure I fully understand the question, but I would just say, you know, for us, we're largely back to normal channel inventory levels, and we're nearly all the way through any kind of supply challenge from a data center perspective. We're back to, you know, normal lead times for the vast majority of our products. Thank you.
Thank you, Kirk. The next question is also on ISG, and this is coming from Mr. Vincent Chong at Yuanta Financial. The question is, do you supply service for AI computing, including AI graphics cards assembly? Do you anticipate AI service will contribute to a lot to ISG segment in coming years?
Again, this is Kirk. I would say, obviously, we support a lot of different segments, as the world's largest contributor to the top 500 supercomputers. All of those have more and more of an AI element to them. You know, we're confident we're gonna stay number one in the top 500, and those workloads will continue to drive more to AI. In the edge space with our ThinkEdge, we have the most dense AI edge server, in the world with 4 GPUs per edge server. Again, that's driving triple digits for us. We recently announced something called AI Innovators Program. We have now over 40 partners that have certified their software on top of our edge systems. We were public a few months ago.
For example, we won the largest grocery chain in the United States, Kroger, where we're doing their self-checkouts to help facilitate making sure all the scanning and things like that are done through one of our AI Innovators Program, ISV partners Everseen. We're doing things like queue management, drive-thru management, smart cities, smart retail, smart manufacturing, all on AI. Of course, in the cloud with Omniverse and Metaverse, we just won one of the largest cloud wins on, you know, digital twins as the cloud vendors start building out this capability as well. I would say it's in supercomputing, it's in edge, and it's in the public cloud as well. Thank you.
Thank you, Kirk. We have next question coming from Mr. Gokul Hariharan at JP Morgan. What's the channel PC inventory level compared to the normal times? Shall we expect pricing environment to remain tough due to end demand weakness? When could we see the benefits of declining component cost?
Yeah. Jenny, I'll take the question. Actually, these are three questions in one. Let me start one by one. First, about channel inventory. To start with, I want to remind all of you that our business is very diversified. We have a lot of this business that is designed to be without channel inventory. That includes our relationship business, our public sector business, and our global account business. With these three business model or for large part of these three business model, there is simply no channel inventory at all. You have the transactional models with consumer and SMB, where the channel inventory is still above the pre-COVID levels in some regions, with the transit inventory that is also slightly higher than pre-COVID. As you probably know, the transit time has increased and now is getting normalized.
This part is getting better. Generally speaking, we feel comfortable with our inventory position across all channels and geographies. As I said before, we are increasing our sell-out share as the demand for our product is at record high levels. And we have a plan, I think we have a detailed sellout plan, and we forecast to return at or below pre-COVID inventory levels in the coming few months. I think we are generally comfortable about that. The second question is, shall we expect pricing environment to remain tough? I think the answer is yes. I think until there will be some, you know, relatively weak demand and weak macro environment, I think we expect the pricing environment and the competition will be intensified.
That brings me to the last question, when are we seeing the benefit of the commodity costs going down? I think you are already seeing that in our ability to maintain a good level of GP in the last quarter, as we have just demonstrated by being able to capture the commodity cost decline and not price it at the end to sustain our GP margin. Thank you.
Thank you, Luca. The next question is coming from Grace Chen at UBS. Could you help us understand how Lenovo could maintain margin for PC business, given the substantial sales decline with a smaller scale? What's your view for PC margin trend in 2023 calendar year? Thank you.
Jenny, thank you. I partially responded to this one with the last one. Meaning we are obviously seeing a favorable commodity trend for several commodities. We are leveraging that to sustain our GP and not pricing this disadvantages away on the one end. On the other end, we have been very disciplined in Q3, and definitely we will continue the future to manage our expense from every angle, so that we mitigate the impact of the smaller scale and eventually the risk of a slightly or lower GP margin. Regarding the GP margin, the question was whether what is our view for the margin trend in 2023.
I would say if the competition continue to intensify, there is objectively a risk of a slightly declining GP margin. We will do all possible efforts to cope with it, leveraging the commodity decline and obviously managing in a very disciplined way expenses, so that we mitigate any possible impacts to the bottom line. I will say that. Thank you.
Hey, Luca. Ken here. If I, if I may add, I think our service-led transformation strategy, I think also provides significant help to maintain our PC margin, right? If you look at the SSG services portfolio today, I think we have a comprehensive catalog from around the box. For example, premier support services to beyond the box, where we have a whole suite of professional and managed services via our TruScale devices service, right? Because we are adding value from a hardware, software and services perspective, so we're becoming more sticky, and that will help us to maintain our relationship with our customer and also maintain our margin. I want to add that, Luca.
Thank you, Ken.
Thank you, Luca. Thank you, Ken. We have our next question coming in from Mr. Jerry Xu again, at Credit Suisse. For the mobile and tablet business, what is the sales mix now and outlook for 2023?
For the mobile business, the mix in terms of the revenue is, let's say within 15%. I will not give a precise number, but within 15%. The tablet is within 5%.
Of the IDG.
Of the IDG, total revenue.
Thank you, Luca. Now, we have a question on SSG from Mr. Robert Chan at Merrill Lynch. SSG has $3 billion recurring sales. Is this mostly from Managed Service or Project Solution Services? When do you expect this $3 billion sales to be recognized?
Thank you, Robert. Ken here, head of SSG. One thing we're very happy about is the momentum of our backlog. We continue to see an increase in our backlog and making record quarter after quarter. Regarding the question about where does it come from, I think it's spread across all our three pillars of services, right? Around the box, professional and managed services. I don't have an exact number about how long will it take to be recognized, but normally, our services around the box and beyond the box span across from three years to five years. Thank you, Robert.
Thank you, Ken. Now, if you would like to ask a more questions, please submit online, please press the submit button. We'll be very happy to answer your questions here. Hello. Yes. Thank you. Our next question is coming from Robert again, from Merrill Lynch. A lot of discussion and concerns are on channel inventory on smartphone, PC and consumer tech product. How is Lenovo's inventory level currently versus two-three months ago and expectations in coming two-three months? When do you expect channel to clean up and market to rebound?
I think we haven't talked about the PC a lot.
Yeah.
You want to add something on PC? Otherwise, we.
Maybe I can answer it this way, because if you compare with three months ago, maybe you also need to consider the seasonality that might be not the right thing to do. What I can say is, within the last four quarters, we have consumed a very significant portion of the inventory. As I said before, in the coming months, we feel we know we will be back at the pre-COVID level of the inventory. As for the phone, I don't know whether Sergio wants to have a comment on the inventory. Thank you, Sergio.
Yeah. It's very similar, Luca Rossi. The last quarter, our activations were 20% higher than our selling, what lead to a 15% decline in inventory. This has been happening the last six-nine months. We expect that between now and the end of June, the inventory will be to a very healthy level, even lower than pre-COVID, just because the channel, given the interest rates are taking less inventory. It was a very healthy quarter and expect that cycle to complete around May timeframe. With now the opposite happening as the second half, we expect to rebound the market so, the progress inventory has been very healthy, especially the last six-nine months, including last quarter.
Thank you. Thank you, Sergio. Thank you, Luca. We now only have time to take the last question. Last question is from Mr. Gokul Hariharan, from JP Morgan. How big is Lenovo's AI servers, and who are the customers, and how should we think about the segment goals in two-three years timeframe?
Yeah. This is Kirk. I think, again, when you say how big are the servers, I think you have to look at, you know, our vision is that AI will be an essential element in everything we do. A way to think about the TAM over time is I think AI will become a fundamental element of almost every server machine out there. You're right, the average selling price is given the number of GPUs or accelerators that are-
So-
-growing significantly. So relative to the margin, I think it will improve the margin and also because we're building strong relationships on the software side as well, we will, you know, be increasing our margin as we sell more AI servers. Thank you.
Thank you. Thank you, Kirk. Thank you everyone. This is our last question for this quarter's earnings call. We thank you 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 today. Bye bye now.