Lenovo Group Ltd
HKEX:992
Earnings Call Analysis
Q2-2024 Analysis
Lenovo Group Ltd
The company has a robust strategy to adapt its portfolio to the evolving needs of customers, which includes the establishment of AI-empowered services such as the Care of One platform and the Lenovo Intelligent Sustainability Solution Adviser. These initiatives are designed to address lead time reduction and optimization for clients, as well as to align IT environments with sustainability goals. Despite challenges in transitioning to DDR5-based platforms and GPU supply shortages, the Infrastructure Solutions Group (ISG) has shown a stabilized demand with a quarter-to-quarter revenue increase of 5% and improved operating profits. There's an expectation for the global PC market to stabilize and exhibit year-on-year recovery by late 2023.
The Intelligent Devices Group (IDG) has solidified its leading position in the global PC market, achieving #1 rank in four out of five geographies and a seasonal average performance despite a 16% year-on-year decline. IDG is expected to experience positive revenue growth shortly and reported an operating margin of 7.4%, which is at the high end of the historical range. The company also emphasizes growth beyond PC products, marking a 2.4 percentage point increase year-on-year in non-PC sales, accounting for 20% of IDG's revenue. Additionally, Lenovo's smartphone business continues to gain market share, with high expectations for foldable phones to attract customers even from competitive platforms like iOS.
Lenovo endeavors to drive the PC replacement cycle with the upcoming AI PC, anticipated to be a major growth driver from the second half of 2024. The AI PC is termed as a 'personal twin', designed to perform AI tasks efficiently on-device, thus addressing privacy concerns by processing sensitive data locally to ensure security and low latency. This approach is expected to appeal to consumers and form part of Lenovo's strategic positioning in AI from handheld devices to cloud-based solutions.
The company projects a stable PC market by Q4, with low single-digit growth expected for the calendar year 2024. Lenovo focuses on delivering profitability on the high end of its pre-COVID range and beyond, with an emphasis on higher average selling prices driven by a market shift towards premium configurations and rich-feature devices like AI PCs. Estimates suggest single-digit market share penetration for AI PCs in 2024, escalating to potentially 50%-60% in 2026, a testament to the growing demand for advanced computing solutions.
Lenovo emphasizes operational excellence by leveraging its research and development capabilities to maintain a cost-effective design process, which enables the delivery of superior margins in the PC industry. The blended Average Selling Price (ASP) and margin for AI PCs are expected to be higher due to richer configurations, thereby increasing profitability. Additionally, the inclusion of neural processing units (NPUs) will allow AI workloads to be managed more efficiently, signaling advancements in AI device capabilities. Despite early uncertainties, the company continues to navigate U.S. export restrictions on AI server GPUs, pursuing product integration within markets where export is not required.
Lenovo has received accolades for its Environmental, Social, and Governance (ESG) performance, including its recent inclusion in the 2023 Hang Seng Corporate Sustainability Index with the highest score in the IT industry. The company has been recognized for its corporate sustainability efforts and best practices for disability inclusion for the third consecutive year. Furthermore, Lenovo is actively involved in initiatives like the UNGC Forward Faster initiative to support the United Nations Sustainable Development Goals by 2030.
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Good morning, good afternoon and good evening. Welcome to Lenovo's Investor Earnings Webcast. This is Jenny Lai, Vice President of Investor Relations at Lenovo. Thanks, everyone, for joining us.
Before we start, let me introduce our management team joining the call today. Mr. Yang Yuanqing, Lenovo's Chairman and CEO; Mr. Wong Wai Ming, Group CFO; Mr. Kin Wong, President of Solutions and Services Group; Mr. Kirk Skaugen, President of Infrastructure Solutions Group; Mr. Luca Rossi, President of Intelligent Devices Group; Mr. Sergio Buniac, President of Mobile Business Group and President of Motorola.
We will begin with earnings presentations. And shortly after that, we open the call for questions.
Now let me turn it over to Yang Yuanqing, please.
Hello, everyone, and thank you for joining us today. Last quarter, despite the macro challenges, we saw clear signs of 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 the growing portfolio of AI technologies over the years, we received a wide 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 partnerships, positioning ourselves well to capture the exponential growth in the AI era. Last quarter, global revenue achieved a quarter-to-quarter improvement for the second time in a row, indicating an encouraging trajectory to recover. Leveraging our innovative technologies and products, our gross profit margin improved year-on-year to a record high for fiscal Q2. Our non-Hong Kong FRS net income also improved quarter-to-quarter.
Our diversified growth engines continued to deliver strong performance with non-PC revenue mix growing nearly 3 points year-on-year to account for more than 40% of group revenue. As predicted in the last 2 quarters, while the macro context continue to bring uncertainties, the PC market has bottomed out with another round of potential growth brought by AI PC on the horizon. AI will also be the most important growth driver for infrastructure and solutions as a hybrid AI that leverages both public and private foundation models will create new demand for computing infrastructure and services presenting huge growth opportunities.
For Lenovo, AI has long been a key focus of our digital and intelligent transformation strategy. Following the announcement last quarter of our additional $1 billion investment in AI innovation over the next 3 years. We unveiled our vision for our full stack AI portfolio from pocket to cloud at the Tech World at the end of last month, including AI-ready, AI-optimized and AI-enabled devices, infrastructure and solutions. We are committed to furthering our investment in innovation so that AI for all can be realized for every enterprise under every individual, ultimately 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 and operating profit both reached historical highs. Again, we protected Support Services & Software as our core profit engine and further expanded the Managed Services and the Project & Solutions Services. The revenue mix of which has grown 3 points year-on-year to account for 56% of SSG total business, leveraging the strong momentum of our hero offerings such as Digital Workplace solutions, Hybrid Cloud and Sustainability. We have been integrating these horizontal building blocks into smart 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 the 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 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 Device Group, or IDG, despite the tremendous market challenges last quarter, we maintained our global #1 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, and 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 delivering 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 road map 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 chart, please. In Q2, the group began to yield benefit from accelerating demand momentum and improved profitability. Despite last year 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 service business. Group E/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 USD 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 service-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 3 business groups. Sales of IDG and ISG make 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 chart, please. The group's efforts to optimize operational efficiency help to shorten the cash conversion cycle to negative 4 days. Days of accounts receivables and inventory together improved by 9 days year-on-year, of which 6 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 least, S&P Global Rating 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 chart, please. SSG has once again achieved record high performance with revenue growing 11% year-on-year to $1.9 billion and operating margin of 20%, which is a few times higher than our corporate average showcases our business strength. This was achieved despite a mix shift and a high base comparison that resulted in a slightly lower margin year-on-year. Managed Services grew 31% year-on-year on strong demand for as-a-service solutions and accelerated geographic expansion, which includes TruScale breakthrough win in Japan this quarter. Premier Support and Sustainability solutions, such as CO2 offset and reduce carbon transport, continue to boost our penetration rate. SSG is also leveraging AI to enrich its 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 a hybrid environment. And Lenovo Intelligent Sustainability Solution Adviser is another AI-powered service that assist our clients in aligning their IT environment with their sustainability growth.
Next chart, 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 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 $25,000 and below, Lenovo has held #1 position for 4 consecutive quarters. Moreover, we also achieved double-digit revenue growth in high-performance computing with 5 consecutive quarters of year-to-year growth. Our edge and software revenue both achieved an all-time quarterly record with 10 and 4 consecutive quarters of year-to-year growth, respectively.
ISG is investing in the development of differentiated technology solutions in general purpose service, 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 solidified its global PC market leadership, ranking #1 in 4 out of 5 geos with expanded market share. This revenue was up 12% sequentially. Our performance is seasonal average of last 6 years despite a decline of 16% year-on-year on high comparison base. With the confirmed recovery trend, IDG revenue growth is expected to turn positive in the near future. IDG achieved an operating margin of 7.4%, returned 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 percentage points 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 as 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 chart, 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 sees to expedite private sector actions in realizing the SDGs outlined in the 2030 agenda.
Next chart please. The group continued investment in innovation to diversify our growth engines and unlock 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 embedded 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 segments. 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 present new opportunity for ISG, which is supported by its ODM+ business model and the new AI innovations 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. The smartphone business will focus on portfolio and regional expansion and differentiation given record 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. [Operator Instructions]
And this session will be English only. [Operator Instructions]
[Operator Instructions]
And our first question is coming from Mr. Robert Cheng with BofA. 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 tackle? Could you discuss AI PC [indiscernible]? And how is it going to be?
Yes. So probably this is a question for our IDG leader, Luca. Luca, please.
Yes. So thank you, Yuanqing, and thanks for the question. So the first half was the bottom of the PC demand, and we are looking cautiously optimistic in the second half and 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 4 out of 5 geographies globally. And we believe, in 2024, the growth of the market will solidify, driven by a large installed base to be refreshed post COVID. We do see level replacement cycle and the new exciting product launches, such as AI PC. We are modeling 2024 with a low single-digit growth from 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 2 years, we already invested in AI techniques to make our PC smarter and adaptive to the user need. So we believe we have enhanced start on the AI technology there.
There will be, the beginning in '24, accelerate in the second half of '24. 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. And we are still modeling how much will be the AUR growth. But definitely, there will be a good upside there.
What percentage? So regarding the percentage of AI PC. I believe it's a little early to give us a final number. We are thinking that 2023 will be -- 2024 will be a 1-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. And the next question is coming from Mr. Desmond Lim, with different semiconductor controls. How will the new U.S. regulations impact business and the company's AI strategy?
Yes. So we are still cordially communicating with the U.S. 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 in every market we do business. Meanwhile, I want to 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 customer needs in all the markets we do business. .
Thank you, YY. And the next question is coming from Anthony with JPMorgan. I'll ask it for him. How quickly can server losses recover? And is there any update on China AI server business given the edge quantity?
Yes. 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 cost, delivers higher utilization in our factories and ultimately will improve our profit.
And then lastly, we'll continue to manage our costs and expenses so that we can get profitable as quickly as possible. So 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 YY 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. And the next question is coming from Mr. [ Kuma ] from [indiscernible]. What's the future for Motorola's demand in 2024? And what is your strategy to take on India smartphone market?
Yes. So Buniac, so please answer the question.
Yes. So very clear. I think, first, our strategy is to become double the business in the next 3 years. We are now on track to achieve that goal. I mean, that's the mid of the first year. That means in India, we need to become a top 3 player in the next 3 years. Last quarter, we grew in Asia close to 50%. And in the October month, that's probably the biggest month in some festivals in India. We are seeing triple digit grow year-over-year.
We -- in partners online, we have already achieved double-digit market share in October, what shows very good progress. We are expanding offline, and we are seeing also our premium franchises growing much faster than the mainstream. So the 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 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 to expect to sell in the current generation 5x what we sold in the previous generation of the razr launches. .
Thank you. And the next question is coming from [ Mr. Jeffrey Kwan ] from BNP, and the question is, AI workload versus AI PC. What kind of AI workload could be transferred to a data center to AI PC at its launching in 2024 such that it creates another value for our customers to consider upgrading from older PC to AI PC? In other words, if most workload well, they will be down at data centers and how well AI PC add value?
Luca, please.
So we are confident that AI PC 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 and the edge, security, privacy, low latency and low power consumption will be all the characteristic of the AI PC, 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 pocket to the cloud offering to further differentiate in the market. Thank you.
Yes. So I want to add a couple of points here. So definitely, so AI PC will help to protect the customer's data -- personal data, privacy. So that's the most important factor 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 comp part. But over time, the workload will shift to the inferencing. So all the inferencing still happens in the cloud, so definitely, it will impact the data efficiency and the cost.
So we think with the workload shift, so probably between client, devices, edge and the cloud, you will see more balance workload among these 3 areas. So that's our view. So that's also why we need to have PC to do some inferencing work with the more efficiency and the lower cost.
Great. The next question is coming from Anthony with JPMorgan. And what is your PC market outlook in the calendar quarter 4 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 a catalyst for spec upgrade? Or is it a unique driver? And what's the expectation on AI PC penetration in the next few years?
So this is also for me. So PC market outlook calendar Q4, we are now modeling flat year-over-year. And 2024 calendar year, we are modeling low single-digit growth. No, there are no one-off income only for this quarter. Obviously 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 duration as I'm trying to summarize higher average selling price with the market shifting toward premium. Our own Lenovo share gain in the premium and commercial segment rich configuration. As I mentioned for AI PC, you will require a rich reconfiguration. We believe this trend will be visible in '24, but accelerate further in '25.
Our focus on efficiencies and services and software. And I will 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 '24, we are modeling a single-digit share of the AI PC in the total market, grow in '25. And according to many analysts, it could be 50%, 60% in the market in 2026. Thank you.
Yes. So simply put, we are very confident that not just a key, you may 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 keep a very good GP margin and operation profit 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. Donnie Teng 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 be the impact to take in server ecosystem? Could you discuss it?
Yes. So probably, 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 3 years as Lenovo. Our AI strategy drives a very broad portfolio from edge to cloud with our unique ODM+ 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 announced. 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, 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 GPU. So I think we believe in customer choice will be customer-driven and relative to both the CPU and the GPU from NVIDIA we will be supporting. Thank you.
Thank you, Kirk. And [ Benz ] Business Research, has a question. Our services business with some workers now returning to the offices, have you seen a shift in organization consumption of PC services like that and/or traditional life cycle services?
Yes. So Kin Wong, our SSD leader, will answer the question.
Thank you, Ben, for the question. So through our interaction with our customer, I think, we continue to see a couple of support needed and also trend in the market. Number one is hybrid work is no longer a one-off phenomenon but more becoming a new normal, 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 hence, we continue to see strong double-digit demand growth in the as-a-service segment of the IT services. And also some of the data points that we are seeing is suggesting that 1 in 5 commercial PCs in the coming 3 to 5 years will be consumed in as-a-service manner.
Last, but not least, this is another phenomenon that we see in terms of our customer demand change is they're looking for a new technology that could transform user experience. 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. And Mr. Conor O'Mara from Jefferies. He is raising a question regarding the AI. Can you please help us understand for your AI business China? Would it be possible to share your [indiscernible] exposure for your AI server business?
Yes. I think this is still under the ISD, mainly ISD, so probably Kirk will answer first.
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 situation. Thank you.
And also while we are committed to comply to the regulation, we also we meet the customer demand. So definitely, so even for China market, for China users, we have the different portfolio part to meet that requirement.
Thank you. And the next question is coming from Mr. Robert Cheng with BofA. What are the key reasons for the decline in terms of cash from March 2023 later on? And what's the other receivables in the [indiscernible] so much?
Yes. So probably, Wai Ming, our CFO, can answer the question.
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 rate remains pretty high, and we've actually been trying to optimize our cash level by managing our 3 components of working capital. I think mainly our receivable inventory as far as our payable. I think we are actually in a very comfortable position. Our cap remained pretty strong. You will know that lately, I think Standard & 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 try to optimize between a very healthy balance sheet, a healthy cash flow against the expenses we pay for the interest. Thank you.
Thank you, Wai Ming. And [indiscernible] from [indiscernible] is asking, regarding to what is Motorola's strategy to several classified 5G smartphone and by which year Motorola plans to make its portfolio 100% 5G?
Yes. So Buniac?
Yes. So I think, number one, our 5G mix is growing slightly faster than the market. Of course, the different maturity levels, some markets like North America 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 2 years, also in line with the market, what is democratizing 5G over the place.
And probably, normally, the 3G to 4G, 2 to 5 years, at least 90% of the portfolio should be 5G between the next 24 to 36 months, but we'll go in line with the market. So that also depends on the deployment from the carriers in each market. So some markets probably we will see that next year like North America, more than 18 months, and the others, 18 months [indiscernible].
Thank you. And next question comes from Mr. Conor O'Mara with Jefferies. Can you please talk about benefit of AI on both PC and smartphone? This could be a full replacement driver if it captures consumer information. Would you talk about the latency, et cetera? What is the pace we have in China?
So thinking this way, AI PC will be -- now you are talking about consumer -- will be your personal twin. So he will -- the AI PC 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 wants to put on the cloud certain private data. So that is a very powerful use case where you will have AI workload capability at very high speed. You need to think about several trillions of operations 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. So this is the one of the use cases we have in mind in consumer. So personal twin. Then 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.
So basically, you can enjoy the advantage of the large language model to write papers, prepare [indiscernible] or print a picture, et cetera, et cetera. But meanwhile, you don't need to share all your personal data with the public cloud. So that's the advantage of it. So we have a survey to our customers, and most of them like the IT part. So that's for sure.
So as Luca said, so gradually, it will be become your personal assistant or we call it a 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.
We will move to the next question coming from Mr. Jeff Pu with Haitong International. What are the key cost drivers for an AI PC on the trainable and address the entire cost structure of the new generation of machine?
So I think I believe that you can just think that the configurations will be richer. So more premium. Then also the selling price, the market will shift towards more premium. There is no issue on managing because I would tell you instead that given our R&D efforts in the last 2 or 3 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. And the next question is coming from Jeffrey with BNP Paribas What's your view on Edge 20 and the equivalent -- which is the equivalent to NVIDIA GPU covering Chinese customers. Are you going to shift servers equipped with Edge 20 in China in 2024?
Kirk.
Yes. 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 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. And the next question is coming from Susanna Chui with BEA Union. How is general IT services outlook in 2024? And what will be the blended ASP margin set for AI PC versus normal PC? So they are actually 2 different functions.
Kin?
Thank you, Susanna. So regarding the IT services outlook, number one, I think even though there are a lot of dynamics happening in the market, but throughout 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 faster growing segment. The first one is definitely the as-a-service demand, right, across the Devices-as-a-Service and also Infrastructure-as-a-Service. And that is also reflected in our strength in our TruScale as a Service business, which has been consistently growing at double-digit year-to-year basis for a couple of quarters, right?
The other part is AI, a lot of our customer, on one hand, they are trying to 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. And this is why, I think, just in 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 customers to 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. As I said before, we are still modeling how much will be the upside in AUR or ASP. Definitely, within -- with richer configuration, there will be a meaningful upside. And in regards of the margin upside, I can only reiterate we are confident we will deliver margin or profitability on the high side over the pre-COVID and even beyond. Thank you.
Thank you. And the next question is coming from [ Yi Tan Lee ] with Kaizen. Will NPU be a very crucial part in AI PC? Are they embedded within a GPU or is 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 trans 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 savings. So I think there will be the 2 cases, with NPU and without NPU. Thank you.
All right. The next question, which is also our last question, is from [indiscernible] with CBS. Could you share your definition of AI PC? And how was then Lenovo added the impact on U.S. government expanded restriction on AI [indiscernible] those actions over time?
Yes. So on the definition of AI PC, I think the industry is still maturing on this front. Probably if you ask several silicon vendor, they will have a different definition of AI PC for now. I believe this will mature over time.
From a usage perspective, this AI PC 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 he'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 finish where he wants to also share the cloud data and when he only want to process on the device.
And in general, as I mentioned in the previous question, there will be a combination of CPU and GPU and NPU. And well, I believe this is just the beginning. So we will see more clarity over time in 2024 and in 2025, where the year that we believe will be a very big acceleration of those AI PC shipments. Thank you.
Yes. So probably, clearly, you can answer the second part of the question?
Can you repeat the second part, please?
Yes. Don't worry. How would Lenovo had the impact from U.S. government from expanded restrictions on AI server GPUs?
How will Lenovo what?
Address, address the impact from U.S. government's expanded the restriction on AI server GPUs?
Yes. Okay. 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 will 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.