Lenovo Group Restricted (LNVGY) Q3 2023 Earnings Name Transcript

Lenovo Group Restricted (OTCPK:LNVGY) Q3 2023 Earnings Convention Name February 17, 2023 1:00 AM ET

Firm Members

Jenny Lai – Vice President-Investor Relations

Yang Yuanqing – Chairman & Chief Govt Officer

Wong Wai Ming – Chief Monetary Officer

Ken Wong – President-Options & Companies Group

Kirk Skaugen – President-Infrastructure Options Group

Luca Rossi – President-Clever Units Group

Sergio Buniac – President-Cell Enterprise Group & President-Motorola

Convention Name Members

Jenny Lai

Good morning, good afternoon and good night. Welcome to Lenovo’s Investor Earnings Webcast. That is Jenny Lai, Vice President of Investor Relations at Lenovo. Thanks, everybody for becoming a member of us.

Earlier than we begin, let me introduce our administration staff becoming a member of the decision at present. Mr. Yang Yuanqing, Lenovo’s Chairman and CEO; Mr. Wong Wai Ming, Group CFO; and Mr. Ken Wong, President of Options and Companies Group; Mr. Kirk Skaugen, President of Infrastructure Options Group; Mr. Luca Rossi, President of Clever Units Group; Mr. Sergio Buniac, President of Cell Enterprise Group and President of Motorola.

We’ll start with earnings displays. And shortly after that, we are going to open the decision for questions.

Now let me flip it over to Yuanqing. Yuanqing, please.

Yang Yuanqing

Hiya, everybody and thanks for becoming a member of us. Final quarter, all the PC and the cellular market skilled a extreme downturn [indiscernible] within the outcomes of different gamers in our {industry}.

Inevitably, Lenovo was largely impacted too. However with our diversified development engines of infrastructure, options and providers over 40% of our income now’s pushed by non-PC companies. This additionally helped us to take care of stable profitability.

Even in PCs, we proceed to maintain our market management and industry-leading profitability. We imagine the PC market would possibly stabilize prior to many anticipate and we proceed to drive the effectivity in our already linked operations, preserve wholesome money place and put money into innovation and sustainability.

Regardless of the low IT market development within the short-term, complete IT spending is anticipated to get better to our moderated development charges within the mid to long-term. In the meantime, the mega development of digital and clever transformation continues to speed up.

Final quarter impacted primarily by a big decline in machine enterprise. Our group income was down by 24% year-on-year or 18% in fixed forex. Each Options and Companies enterprise and the Infrastructure enterprise grew by excessive double-digit year-on-year to historic data. With constructive working revenue contributed by all our essential companies for the fifth consecutive quarter, we stay dedicated to doubling profitability within the mid-term.

Final quarter, we took proactive actions to cut back bills and enhance effectivity to make sure our price competitiveness, particularly, in areas the place we see a softer market outlook. Our money steadiness remains to be sturdy. Money conversion cycle continues to enhance and the channel stock is diminished, which permit us to proceed investing in R&D centered across the new IT applied sciences.

Now I’ll discuss every of our companies. Let’s begin with the SSG, Options and Companies Group. Though, adjusted to slower development this 12 months, the $1 trillion IT service market is anticipated to stay sturdy for the mid to long-term.

By 2025 Managed Companies for cloud on-prem and edge is anticipated to extend at a 7% CAGR, whereas hybrid infrastructure options is changing into important. Vertical Options and Companies spending can be anticipated to stay at nearly a double-digit CAGR development in schooling, sensible retail, sensible metropolis and manufacturing from 2023 to 2025. Final quarter, our SSG income grew by 23% year-on-year to USD 1.8 billion, setting a brand new document.

All segments, once more, delivered the excessive profitability and a powerful income development. The income combine from non-hardware tied options and providers achieved a document excessive of 53% with the Managed Service enterprise nearly doubled year-on-year. Lenovo’s Hefei manufacturing unit has been added to World Financial Discussion board’s World Lighthouse Community for its sensible manufacturing answer.

SSG continued to put money into constructing scalable and repeatable horizontal and vertical options with Lenovo IP. We additionally enriched our digital office options strengthened our hybrid cloud portfolio and additional expanded our sustainability choices.

Our ISG, Infrastructure Options Group continues to learn from ICT infrastructure improve. By 2025, the server market will attain US$135 billion, edge infrastructure $37 billion and storage $35 billion. Final quarter, our ISG income, elevated by 48% year-on-year to a historic excessive of US$ 2.9 billion beating data for 3 consecutive quarters. Working revenue greater than doubled year-on-year to a brand new document.

Server income grew by 35% year-on-year, making Lenovo the third largest server supplier on the earth. Storage greater than tripled to grow to be quantity 5 on the earth and the software program grew by 52% year-on-year or reaching an all-time excessive. In the meantime, we proceed to boost our complete infrastructure portfolio and to put money into innovation, notably in AI-empowered edge computing and hybrid cloud.

We strengthened Lenovo’s distinctive benefit to steadiness the size and revenue. We stay centered on being one of many quickest rising and finally, the most important end-to-end infrastructure answer supplier on the earth.

Final quarter, our IDG, Clever Units Group, skilled a extreme decline in machine markets. Nonetheless, the actual demand mirrored by the activation information was truly higher than the cargo information appeared to point. Whereas the PC market nonetheless wants a while to digest the stock to a more healthy stage, we imagine complete shipments are prone to stabilize at a better than pre-pandemic stage as early because the second half of this 12 months.

In powerful market circumstances, IDG efficiently maintained the primary place in PCs and the industry-leading profitability for the previous quarter. We achieved a stable working margin at 7.3%. Our sturdy product competitiveness was additional mirrored in main activations and resulted in improved stock stage.

Our smartphone enterprise achieved the eleventh consecutive quarter of profitability. Our premium product Motorola Edge activation grew by 74% year-on-year. We expanded the premier product combine for our pill portfolio as effectively. In the meantime, our sensible areas options demonstrated development potential with key wins.

Within the short-term, we are going to take proactive actions to cut back expense and enhance effectivity to make sure enterprise healthiness. Whereas within the long-term, we are going to maintain investing in innovation, specializing in premium PC underneath adjoining areas and drive the evolution from sensible units to sensible areas.

Final month at CES, our Yoga Guide 9i as a primary full sized OLED twin display laptop computer in world, received a historic excessive of 15 awards. And our enhanced digital office options are enhancing consumer expertise in a hybrid workspace.

Trying forward, whereas the {industry} cycle nonetheless wants a while to run its full course, sturdy execution could make a giant distinction. Our diversified development engines are firing up. Our operational resilience is supporting the outcomes.

Our wholesome liquidity is making certain the soundness of the corporate and our funding in new IT is constructing the NextWave of our aggressive benefits. Due to this, we’re assured to ship sustainable development and enhance profitability.

Thanks. Now, let me flip it over to our CFO, Wong Wai Ming. Wai Ming, please.

Wong Wai Ming

Thanks, Yuanqing. I’ll now take you thru Lenovo’s monetary and operational efficiency for Q3 within the 2023 fiscal 12 months. The persistent macro volatility created a difficult surroundings for us in Q3, with group income declined 24% year-on-year in nominal phrases to $15.3 billion, or down 18% in actual phrases, whereas group web revenue dropped 32% year-on-year.

However difficult market circumstances, our gross margin and working margin improved by 44 and 28 foundation factors year-on-year, respectively, for the third fiscal quarter. The group’s secure profitability is a testomony to its operational excellence and success in its long-term development technique for non-PC funding by supercharging development in SSG and ISG.

Income from non-PC pillars made up 41% of group income, up 9 factors from final 12 months. SSG and ISG set new milestones in gross sales and income. Collectively, their revenue grew by 19% year-on-year and partially mitigated the stress of a smaller scale operation and rising finance prices. Going ahead, the group will proceed to prioritize this medium-term goal of doubling its web margin.

We proceed to optimize the group operations for higher enterprise agility and to assist long-term development. Our money and money equal steadiness exceeded $5 billion on the finish of the quarter, up 34% year-on-year. We elevated our web money by $500 million from the identical interval final 12 months to a steadiness of $581 million.

We improved our money conversion cycle by 13 days year-on-year and three days quarter-on-quarter to destructive six days, going to extension in accounts payable days. Within the meantime, we are going to proceed to drive stock optimization. Final quarter finish, we managed to cut back our stock by over $900 million, each yearly and quarterly.

SSG reported a 23% year-on-year development, with income reaching $1.8 billion, due to sturdy development throughout all service segments. Income of Managed Companies almost double year-on-year, owing to the continuing asset service observe. The financial downturn seems to have accelerated the recognition of asset service options, as our deal pipeline stays regular regardless of macro uncertainties prolonging the conversion cycle.

Our Mission & Resolution Companies section supplies a broad base of options leveraging Lenovo IP. We additionally noticed income growing by 7% from the identical interval final 12 months. In the course of the quarter the mixed income of Managed Companies and Mission & Resolution Companies was 53%, 4 proportion factors greater than final 12 months.

Hooked up and Assist Companies income additionally elevated 12% year-on-year, with a document PC service penetration charges, regardless of declining gross sales for brand new units. SSG working margin of 20% dropped 2 proportion factors year-on-year was as a result of a mixture shift. However total, it stays considerably increased than the group common, increasing Lenovo long-term revenue margin.

SSG reported an all-time excessive working revenue of $370 million, up 12% year-on-year. Deferred income grew by 8% year-on-year to $3 billion. This echoed the success of the group transformation journey to enlarge and maintain its recurring income base.

ISG continued to ship distinctive outcomes, as income and working revenue each set new data. This Q3 income grew by 48% year-on-year to $2.9 billion, whereas working revenue elevated by 156% year-on-year to $43 million. ISG was in a position to construct a complete product portfolio to attain important premium to market development. This product technique, together with a rise in buyer base and design-in initiatives was efficient in driving all-time excessive income of server, storage software program and AI edge. The newest quarterly third-party statistics indicated that ISG market share by income within the international storage market almost doubled year-on-year.

By buyer section, ISG publicity to CSP and ESMB segments gave the group a singular benefit in balancing scale and income. Each segments noticed double-digit income development to document ranges. IDG was impacted by sector-wide headwinds together with decrease demand and extreme stock.

Regardless of income and working revenue every declining by 34% and 37% year-on-year, working margin was effectively sustained at 7.3%. This industry-leading profitability mirrored the group’s efforts in stepping up operational effectivity and in expense management to mitigate market challenges. We work with our distribution companions to extend their gross sales exercise and regarded on the decline in sell-out is lower than the sell-in would result in a decrease channel stock.

IDG continued to put money into innovation for non-PC and adjoining areas to drive long-term development. The smartphone section was worthwhile for 11 consecutive quarters. Within the pill section, almost one-third of gross sales was from premium section and in sensible collaboration options, development remained sturdy, with key wins throughout geographical and international accounts.

We proceed R&D funding to drive innovation. The group’s R&D spending elevated by 5% year-on-year to view varied development engines, enterprise transformations and ESG initiatives. The group persevering with funding in R&D and along with rebalancing our working bills and mitigated the opposed impression from demand volatility within the close to time period, whereas addressing long-term buyer calls for past expertise {hardware} to drive sustainable development.

The group is now effectively acknowledged by its accelerated ESG funding and has acquired many accolades. MSCI upgraded our ESG score to the very best stage of AAA. The group additionally ranked twenty fourth within the Boston Consulting Group’s most revolutionary firm record of over 1,500 international corporations. Moreover, Lenovo was highlighted within the Bloomberg Gender-Equality index for the fourth consecutive 12 months and featured as a pacesetter in local weather change and water safety by CDP.

Final month, the group’s dedication to achieve web zero by 2050 was validated and accepted by the Science Primarily based Goal initiative or SBTI, a partnership between the UN World Compact, CDP World Assets Institute and Worldwide Fund for nature, choosing its the primary PC and smartphone maker and certainly one of solely 139 corporations on the earth, with a web zero goal validated by SBTi.

Exterior challenges prevailed within the international market and will lengthen effectively into future intervals. The convention of world financial challenges and dynamic shift in market demand, signify new long-term alternatives. The group continues to additional strengthen its price competitiveness to attain its medium-term objective of doubling web margin. We’ll do that by investing in high-margin development engines and taking proactive steps to cut back run charge operational bills by roughly $850 million. This consists of total discount in operational spending, in addition to workforce changes, the place needed and applicable.

We’ll take a complete view to maximise operational effectivity, preserve momentum in our diversified companies and proceed to put money into new IT Applied sciences to drive sustainable worthwhile development for the group.

The group will foster the event of recent IT structure with the Consumer, Edge, Cloud, Community-Intelligence framework. These investments, coupled with the expansion plan to taking out working bills, to take care of our operational excellence and international footprint are the important thing to mitigating exterior challenges and supporting its service-led transformation enabling the achievement of our medium-term objective of doubling web margins.

Trying ahead SSG ought to profit from an inventory of demand for premium TruScale as-a-Service, sustainability and vertical options. Though, macro headwinds might delay the due conversion cycle within the near-term, the necessity to lengthen asset usability with supercharge long-term demand for upkeep providers. SSG will additional broaden its service choices together with asset restoration providers, whereas strengthening channel instruments and cooperation with enterprise companions to increase its Hooked up and Assist Companies.

Managed Companies is effectively positioned to seize the long-term structural development in as-a-Service. ISG group’s industry-leading end-to-end infrastructure options and expanded to full stack choices together with Server, Storage and Software program. The ESMB section will capitalize on development alternative in AI Powered Edge, hybrid cloud, Excessive Efficiency Computing and options for the Telco/communication sectors.

For the CSP section, ISG has a singular ODM+ enterprise mannequin to deal with the rising demand for vertically built-in provide chains. The enterprise will proceed to diversify its buyer base and seize new accounts by means of design-wins throughout expertise platforms. The strategy will obtain the optimum steadiness between normal goal and customised choices, whereas making certain the suitable scale and an environment friendly price construction, to allow income and profitability development.

For IDG, we’re striving to bolster our primary place within the PC sector, whereas sustaining main profitability. IDG will proceed to steer the race in machine innovation by enhancing options for hybrid working, gaming, leisure and ESG designs. IDG will additional make investments to attain wins in non-PC areas, together with fast-growing equipment, sensible collaboration and sensible house units.

Within the short-term, the overall addressable marketplace for PC would return to its pre-COVID stage however we anticipate it needs to be structurally increased within the long-term as PC turns into the Middle of Digital Life. By way of our smartphone enterprise we are going to give attention to portfolio enlargement and differentiation to benefit from the accelerated 5G adoption.

Our sturdy monetary place supplies a stable basis for us to proactively pursue development alternatives forward. Lastly, as all the time, we stay dedicated to driving sustainable development and profitability for our shareholders.

Thanks. We’ll now take your questions please.

Jenny Lai

Thanks, Wai Ming. Now we are going to open the road for questions and this session might be in English solely. [Operator Instructions] Operator, I’ll now flip it over to you. Please give us your directions.

Query-and-Reply Session

Operator

[Operator Instructions]

Jenny Lai

Thanks, Operator. We’ve a number of questions coming in. And our first query is approaching Conor O’Mara from Jefferies. There are three elements of the query. First one is a number of cloud CapEx corporations within the U.S. have tempered their budgets this 12 months. Have you ever seen the identical, together with your shopper base? And if not, why not, that is the primary a part of the query.

And the second half is concerning the money conversion cycle. Our money conversion cycle improved 13 days this quarter. How a lot of that’s sustainable and the way a lot — simply because PC downturn price rise, working capital wants. And the final a part of the query, what offers you the arrogance to foretell PC gross sales will stabilize in second half of 2023 and at pre-COVID ranges?

Yang Yuanqing

Sure. So in all probability a few questions, so we’d like completely different folks to reply that. Concerning of the cloud CapEx firm, so Kirk, so in all probability you may reply the query.

Kirk Skaugen

Sure. Hiya, that is Kirk talking. So I’d say usually sure, in a broad sense the general complete out there spend might be down. Nonetheless, largely Lenovo is resistant to that tendencies and I will offer you some colour on why. Clearly, we simply introduced a document in our cloud enterprise. And for a lot of quarters I have been speaking about our new ODM+ mannequin, the place we’re delivering customized designs for the most important Hyperscalers on the earth. These designs have been ramping for a lot of quarters not simply within the server house however we’re additionally increasing very aggressively into the Space for storing as effectively.

So even though the overall market of spend is likely to be down, Lenovo is certainly recognized for a few years and the final a number of quarters that we have gotten the designs for these motherboards, these techniques and people racks as a result of we have been designing these in for the final 12 months plus not less than.

Secondly, we’re increasing our alternative as a result of we have expanded past simply Intel to incorporate AMD and likewise Ampere as an ARM supplier to the cloud. So we’re increasing the quantity of designs we are able to get not simply by going from server to Storage, not simply by doing the design but additionally increasing our CPU suppliers.

Subsequent we additionally expanded to our NextWave and created a whole new gross sales power a couple of 12 months in the past to deal with the NextWave of Hyperscalers, which is rising considerably once more branding design wins for Lenovo. After which final however not least, we now have new manufacturing unit capability in new factories in Mexico and Budapest which are considerably enhancing our logistics prices and that is positively driving us to be extra agile and getting extra design. So whereas there could also be some softness within the total market, we’re dramatically growing our presence for these causes I said. Thanks.

Yang Yuanqing

Thanks. So concerning of the PC demand, so for my part if you wish to perceive the long run so in all probability you want to perceive the previous three years. So if we – in all probability most of individuals except see the cargo information given by IDC however I do not assume the cargo information can exactly mirror the actual market demand. However the actual demand could be mirrored by the machine activation information.

So in the event you use 2019 as a base 100%. So truly 2020, the activation elevated by in all probability 15%. The true demand – I’d say actual demand in all probability elevated by 15% however the cargo solely elevated 7%, 8%. In order that generated a whole lot of provide scarcity. Then since then in 12 months 2021, positively channel began to push stock.

So you may see in 12 months 2021, the cargo elevated by 15%. However the precise machine activation was truly flat to 2020. In order that’s positively amassed a whole lot of stock. Then you may see in 12 months 2022, channel began to digest the stock. So the cargo declined considerably. However the actual machine activation didn’t decline as a lot as cargo final 12 months, in all probability solely 6% year-on-year. So, by the top of final 12 months. So the – so let me say, November, December. So, the actual activation quantity in all probability is – the actual cargo quantity in all probability is in line with the activation quantity. So, for my part subsequent 12 months, so the actual demand mirrored by the activation may very well be flat to this 12 months. So which is now 5% to eight% increased than 2019. However in all probability we nonetheless want one or two quarters to digest the stock within the channel.

Then from the second half of the 12 months, you may see PC market resumed the expansion. That can drive all the 2023 cargo drop extreme drop by 5%, however it’s nonetheless increased than 2019. Then since 2024, I feel the market will resume the expansion. So, that may guarantee the general the general demand might be 5% to 10% increased than 2019 and each cargo activation might be constant in that 12 months, hopefully. In order that’s why – so we’re relatively assured for the second half of the 12 months. So, I do not know, Luca, our IDG leaders have one thing so as to add.

Luca Rossi

Yeah. So, Yuanqing, I feel you could have already offered the information view for which clearly, I’m completely aligned. And I feel perhaps I can, simply add that, we really feel assured in regards to the long-term trajectory, as a result of merely due to digital transformation, hybrid work, digital life, all these are secular tendencies. PC is certainly on the middle of all these tendencies. And moreover, there’s out out there alternative for greater than 400 million PC which are greater than 4 years previous to get replaced.

So I feel all these elements are giving us sure optimism that after the digestion of the channel stock, which as Yuanqing talked about might be accomplished within the coming months. The second half of this calendar 12 months, will begin to resume development. And moreover, wanting on the activation, it’s best to know that our activation share – market share is at document ranges within the final six, eight months. So, we’re gaining share, as an indication of the appreciation of the shopper for our merchandise and our innovation. So even to illustrate, weaker market, we wish to carry out higher than the market. We’ll proceed to carry out higher than the market. Thanks.

Yang Yuanqing

Thanks. Yeah. So over the previous – so truly over the previous three years, our activation numbers improve have all the time been increased than the market, however our cargo quantity truly are extra conservative than the market. So meaning, we even have generated much less stock than our competitors. And possibly, we’re resulting in digest the stock as effectively. In order that’s why we’re fairly assured for Lenovo’s future within the PC space.

And in addition I wish to echo, Luca. So truly, COVID truly has modified the PC panorama. So from one PC per family to at least one PC per individual, and likewise as a result of folks spend extra time on the PC in all probability double the time, so that may drive the sooner alternative cycle. In order that’s our view on the PC demand. Concerning of the – Kirk, so in all probability perhaps, you reply the money conversion cycle.

Kirk Skaugen

Sure, money part cycle, we now have destructive six days and 13 days enchancment. Clearly, that is sustainable. I feel relatively than core sustainable I truly would say, that there are additional room for enchancment. I feel clearly, when the economic system getting, I’d say, a extra regular logistics and every thing getting higher. I feel the stock stage will proceed to come back down. We positively see that there are room for enchancment.

As you may even see, I feel the {industry} common I imply clearly, completely different corporations may have completely different enterprise mannequin is about 20 — destructive 20 days, so I positively assume that we’ll — I feel the destructive six days is sustainable or greater than sustainable that we’ll see, by means of our operational effectivity. We will see additional enchancment, I feel is the destructive money conversion cycle. Thanks.

Jenny Lai

Thanks, Yuanqing. Now we transfer to the subsequent query, from Mr. Howard Kao, at Morgan Stanley. It looks like desktop and pocket book ASP declined 5% to 10% quarter-to-quarter within the December quarter. How does administration view ASP, as we transfer all through calendar 12 months 2023? That is, his first query, primary.

Yang Yuanqing

Sure. Luca, will reply the query.

Luca Rossi

Sure. So, look usually, we’re — I can’t discuss for the market, however I will discuss for Lenovo. I feel we aren’t declining our ASP in that form. I’d say, that our ASP has declined barely within the sequentially quarter-on-quarter. However year-over-year, we proceed to document development of our ASP for the final eight quarters. And possibly, you may solely say that the final one or two quarters it has elevated lower than the earlier quarters, however we aren’t modeling for 2023, a big decline year-over-year of the ASP.

Now you may assume on this means, from — how the ASP is constructed from the commodity perspective there’s in all probability, a bit of little bit of downward stress as a result of clearly, the demand shouldn’t be so nice. So the commodity prices are going a bit of bit down, however that doesn’t essentially mirror on the ASP. And we’re working laborious to extend our premium combine, so that we’ll management and hopefully, enhance the ASP.

And the opposite clearly, the opposite component, would be the trade charge which clearly, is unstable and that may perhaps decide sure up or down of the ASP. So I’d not anticipate a big decline of the ASP, within the — not less than, we aren’t modeling it for 2023. Thanks.

Jenny Lai

Thanks, Luca. And we even have two follow-up questions from Howard, as effectively. The primary follow-up query is, the server enterprise in December quarter, is stronger than anticipated. Any colour, on what’s driving this power? Might you additionally focus on Hyperscale versus ESMB and server versus Storage. And the subsequent follow-up query is, ISG as effectively. What’s the goal working margin for ISG section in the long run?

Yang Yuanqing

Sure. kirk?

Kirk Skaugen

Sure. Thanks, Howard. That is, Kirk. Nicely, I’d say, we’re seeing document excessive recent order load, so our success was not pushed by backlog discount. We have already largely handed that. So we’re seeing sturdy recent load. I feel we’re one of many few corporations out there, that is very balanced between the cloud and ESMB. And I can say, we had data within the cloud and data in ESMB. We had data in server and in Storage. After which even inside Storage, we had data for hyper-converged, conventional entry and midrange and cloud storage. So it was very broad-based.

As well as as we created a brand new division again in April round ThinkEdge and we grew that edge and the unreal intelligence related to the sting with many, many end-user retail wins and thru that enterprise triple-digits. So, positively edge and the AI on the edge is a powerful development issue for us.

Outdoors of China, we had a document and North America and Europe have been notably sturdy inside that. However — so I’d simply say it is broad based mostly because the board the place we noticed the brand new recent load and we see that persevering with once more within the quarter we’re in proper now.

Relative to the working margin goal I feel we wish to proceed to drive hyper development, so hopefully with nearly 50% development quarter-on — year-on-year relatively our objective is to drive hyper development proceed to develop share whereas persevering with to enhance working revenue.

So, I feel we’re on our seventh consecutive quarter of year-on-year working revenue enchancment now. So, relative to not less than the 2 largest opponents we now have out there we nonetheless have a methods to go, however hopefully we’re exhibiting a steady momentum there whereas persevering with to have hyper development. Thanks.

Yang Yuanqing

You discuss in regards to the operation margin.

Kirk Skaugen

Sure, enhancing each quarter and getting nearer to actually the place our — the people who we compete with on a day-to-day foundation are.

Yang Yuanqing

Okay.

Jenny Lai

Thanks, Kirk. And the subsequent query is coming from Jerry Su — Mr. Jerry Su at Credit score Suisse. And it is also on ISG. Given the slower IT spending and consent on software program cloud server demand are you seeing any order adjustment or it is extra on part stock administration?

Kirk Skaugen

Nicely, once more I’d say the NextWave enterprise, we observe over 500 NextWave Cloud accounts and that’s largely a brand new enterprise for us and that is all brand-new share positive factors for us. So, unbiased of any order adjustment on the macro stage we’re gaining share in there.

With the most important 17-or-so cloud suppliers on the earth, every is in its personal distinctive scenario. However I’d say that the brand new processors from Intel from AMD and from Ampere have compelling worth proposition and we now have design wins completely different throughout every buyer, however the variety of design wins that we now have is rising. So, once more, we’re in all probability the beneficiary of market section share even in a perhaps a softer market that has been effectively documented within the press.

Relative to part stock administration. I am undecided I absolutely perceive the query, however I’d simply say for us we’re largely again to regular channel stock ranges and we’re almost all over any type of provide problem from an information middle perspective. So, we’re again to regular lead-times for the overwhelming majority of our initiatives — merchandise. Thanks.

Jenny Lai

Thanks, Kirk. And the subsequent query can be on ISG and that is coming from Mr. Vincent Cheng at BOCI-Prudential. The query is do you provide servers for AI computing together with AI graphic playing cards meeting? Do you anticipate AI servers will contribute to loads to ISG section in coming years?

Kirk Skaugen

Sure. So, once more, that is Kirk. So, I’d say clearly we assist a whole lot of completely different segments. It is the world’s largest contributor to the highest 500 supercomputers. All of these have increasingly of an AI component to them. And we’re assured we’ll keep primary within the high 500 and people workloads will proceed to drive extra to AI.

Within the edge house with our ThinkEdge, we now have probably the most dense AI edge server on the earth with 4 GPUs per edge server. And once more that is driving triple-digits for us. We lately introduced one thing known as AI Innovators Program. We’ve now over 40 companions which have licensed their software program on high of our edge techniques.

We have been public a number of months in the past. For instance we received the most important grocery chain in the US, Kroger the place we’re doing their self-checkouts to assist facilitate, ensuring all of the scanning and issues like which are accomplished by means of certainly one of our AI Innovator Program, ISV companions ever seen, however we’re doing issues like key administration, drive-through administration, Good Metropolis, sensible retail, sensible manufacturing all on AI. After which after all, within the cloud with Omniverse and Metaverse, we simply received one of many largest cloud wins on digital twins, because the cloud distributors begin constructing out this functionality as effectively. So I’d say, it is in supercomputing, it is an edge and it is within the public cloud as effectively. Thanks.

Jenny Lai

Thanks, Kirk. And we now have subsequent query coming from Mr. Albert Hung at JPMorgan. What is the channel PC stock stage in comparison with the conventional occasions? Ought to we anticipate pricing enrollment to stay powerful as a result of any demand weak point? And when might we see the advantages of decline part prices?

Luca Rossi

Yeah. Jenny, I will take the query. Really these are three questions in a single. So let me begin one after the other. So first about channel stock. So to begin with, I wish to remind all of you that our enterprise may be very diversified. So we now have a whole lot of this enterprise that’s designed to be with out channel stock. So that features our relationship enterprise, our public sector enterprise and our international account enterprise. So with these three enterprise mannequin or for a big a part of these three enterprise mannequin, there’s merely no channel stock in any respect.

Then you could have the transactional fashions with client and SMB, the place the channel stock remains to be above the pre-COVID ranges in some areas with the transit stock that can be barely increased than pre-COVID, as you in all probability know the transit time has elevated and now it is getting normalized. So this half is getting higher. So usually talking, we really feel snug with our stock place throughout all channels and geographies. We’re — as I stated earlier than, we’re growing our sellout share because the demand for our merchandise is at document excessive ranges. And we now have a plan. I feel we now have an in depth sellout plan and we forecast to return at or beneath pre-COVID stock ranges within the coming few months. So I feel we’re usually snug about that.

The second query is we could anticipate pricing and surroundings to stay powerful. I feel the reply is, sure. I feel till there might be some comparatively weak demand and weak micro-environment I feel we anticipate the pricing surroundings and the competitors might be intensified. And that brings me to the final query when are we seeing the advantage of the commodity prices taking place? I feel you might be already seeing that in our skill to take care of stage of GP within the final quarter as we now have simply demonstrated by with the ability to seize the commodity price decline and never value it on the finish to maintain our GP margin. Thanks.

Jenny Lai

Thanks, Luca. And the subsequent query is coming from Grace Chen at UBS. Might you assist us perceive how Lenovo Group preserve margin for PC enterprise, given the substantial gross sales decline with a smaller scale? What’s your view for PC margin development in 2023 calendar 12 months? Thanks.

Luca Rossi

So Jenny, thanks. So I feel I partially responded to this one with the final one that means, we’re clearly seeing favorable commodity development from — for a number of commodities and we’re leveraging that to maintain our GP and never pricing this benefit away on the one hand. However, we now have been very disciplined in Q3 and positively we are going to proceed the long run to handle our expense from each angle in order that we mitigate the impression of the smaller scale and finally the chance of barely or decrease GP margin.

And concerning the GP margin, the query was, whether or not — what’s our guide for the margin development in 2023? I’d say, if the competitors continues to accentuate, there’s objectively a danger of a barely declining GP margin, we are going to do all doable efforts to deal with it leveraging the commodity decline, and clearly, managing in a really disciplined means bills, in order that we mitigate any doable impression to the underside line. I’d say that. Thanks.

Ken Wong

Hey, Luca, Ken right here. If I’ll add, I feel, our service-led transformation technique, I feel, additionally present important assist to take care of our PC margin charge. Should you have a look at the SSG providers portfolio at present, I feel, we now have a complete catalog from across the field. For instance, Premier Assist Companies to be on the field the place we now have an entire suite {of professional} and managed providers through our TruScale machine service, proper. And since we’re including worth from a {hardware}, software program and providers perspective, so we’re changing into extra sticky, and that may assist us to take care of our relationship with our buyer and likewise preserve our margin. So I wish to add that Luca.

Luca Rossi

Thanks, Ken.

Jenny Lai

Thanks, Luca. Thanks, Ken. And so we now have our subsequent query coming in from Mr. Jerry Su once more at Credit score Suisse. For the cellular and pill enterprise, what’s the gross sales combine now and outlook for 2023?

Luca Rossi

So, for the cellular enterprise, the combo by way of the income is, to illustrate, inside 15%. And I can’t give us exact quantity, however inside 15%. And the pill is inside 5% of the IDG complete income.

Jenny Lai

Thanks, Luca. So now we now have a query on SSG from Mr. Robert Chan at Merrill Lynch. SSG Group has US$3 billion recurring gross sales. It is — is that this principally from Managed Service or Mission Resolution Companies? When do you anticipate this $3 billion gross sales to be acknowledged?

Ken Wong

Thanks, Robert. Ken right here, Head of SSG. So one factor we’re very completely satisfied about is the momentum of our backlog, we proceed to see a rise in our backlog and making a document quarter-after-quarter.

Concerning the query about the place does it come from, I feel, it spend throughout all our three pillars of providers proper across the field skilled and Managed Companies. I haven’t got a precise quantity about how lengthy will that — will it take to be acknowledged. However usually, our providers across the field and past the field spend throughout from two years to 5 years. Thanks, Robert.

Jenny Lai

Thanks, Ken. Now, if you want to ask extra questions, please submit on-line, and please press the submit button, then we might be very completely satisfied to reply your questions right here. Sure. Thanks.

And our subsequent query is coming from Robert once more from Merrill Lynch. Lots of dialogue and issues are on channel stock on smartphone. PC and client tech product highest Lenovo’s stock stage at present versus two to a few months in the past and expectations in coming two to a few months when do you anticipate channel to scrub up and market to rebound?

Luca Rossi

No, perhaps I can reply it this fashion, as a result of in the event you evaluate with three months in the past, perhaps you additionally want to contemplate the seasonality that is likely to be not the suitable factor to do. So what I can say is inside the final 4 quarters we now have consumed a really good portion of the stock. And as I stated earlier than, within the coming months, we really feel we are going to — we all know we might be again at pre-COVID of the stock. As for the cellphone, I do not know whether or not Sergio desires so as to add a touch upon the stock. Thanks, Sergio.

Sergio Buniac

Sure, it is very related Luca. Final quarter our activations have been 20% increased than our sell-in what results in a 15% decline in stock. This has been taking place within the final six to 9 months. And I anticipate to — we anticipate that between now and the top of June the stock might be to a really wholesome stage even decrease than pre-COVID simply because the channel given the rates of interest are taken as stock. So it was a really wholesome quarter, and anticipate that cycle to finish across the Could time-frame. With now the alternative taking place because the second half we anticipate to rebound out there to — however the progress of stock has been very wholesome, particularly within the final six to 9 months together with final quarter.

Jenny Lai

Thanks. Thanks, Sergio. Thanks, Luca. And we now solely have time to take the final query and final query from Mr. Albert Hung from JPMorgan. How large is Lenovo’s AI servers and who’re the shoppers? And the way ought to we take into consideration the section goes in two to a few years’ time-frame?

Kirk Skaugen

Sure. So, that is Kirk. I feel, once more, once you say how large are the servers, I feel you need to have a look at — our imaginative and prescient is that AI might be an important component in every thing we do. So, the best way to consider the TAM over time is, I feel AI will grow to be a basic component of just about each server machine on the market.

And also you’re proper the typical promoting costs given the variety of GPUs or accelerators is rising considerably. So, relative to the margin, I feel it can enhance the margin. And in addition, as a result of we’re constructing sturdy relationships on the software program facet as effectively, we might be growing our margin as we promote extra AI servers. Thanks.

Jenny Lai

Thanks. Thanks, Kirk. And thanks everybody. That is our final query for this quarter’s earnings name. We thanks very a lot for becoming a member of at present’s name. You probably have any additional questions, please be happy to contact me instantly. And the replay of this webcast might be out there within the subsequent couple of hours on our Investor Relations web site. Thanks once more for becoming a member of us at present. Bye-bye now.

Yang Yuanqing

Bye-bye.