Lenovo Group (OTC:LNVGY) Ltd. (0992.HK) has unveiled a strong performance in the first quarter of the fiscal year 2024-2025, with a 20% year-on-year increase in revenue and a 65% surge in net income. The company's focus on artificial intelligence (AI) and services has led to significant growth across its divisions, with non-PC revenue hitting a record high of nearly 47%. Lenovo's strategic partnership with the $100 billion fund Alat aims to further bolster growth opportunities, particularly in the Middle East and Africa region.
Key Takeaways
- Lenovo's revenue grew by 20% year-on-year, and net income increased by 65%.
- Non-PC revenue reached a historical high of almost 47%.
- Intelligent Devices Group (IDG) and Infrastructure Solutions Group (ISG) both saw substantial revenue growth.
- The Solutions and Services Group (SSG) achieved its 13th consecutive quarter of double-digit revenue growth.
- Lenovo has launched a strategic partnership with Alat to target the Middle East and Africa markets.
- AI PCs are forecasted to represent over 50% of the PC industry by 2027.
- Lenovo's Neptune liquid-cooling service and AI GPU server pipeline have seen significant revenue and order increases.
Company Outlook
- Lenovo anticipates a new refresh cycle in the PC market driven by AI PCs.
- The company plans to issue a $2.21 billion bond and warrants to support expansion in the Middle East and Africa.
- Lenovo's commitment to corporate governance and sustainability has been recognized globally.
Bearish Highlights
- Despite growth, the ISG business experienced losses due to investments in new portfolios and R&D.
- The profitability of ISG is a concern, with a focus on returning to profitability through operational improvements.
Bullish Highlights
- Lenovo's IDG maintained market leadership in shipments and activations.
- The ISG division reported a 65% year-on-year growth in revenue.
- Lenovo's strong position in the liquid-cooling market and AI GPU server pipeline indicates momentum in high-tech services.
Misses
- The impact of AI PC on financial results in the first quarter was modest, with significant growth expected later in the fiscal year.
Q&A Highlights
- Lenovo's current AI PC shipments stand at 15%, with expectations to rise to 50-60% by 2026.
- The smartphone business, particularly the premium Edge and Razr franchises, has seen a 30% growth in units and revenue.
- Inventory increase is attributed to enterprise business growth, especially in the Cloud Service Provider segment, and improved PC market conditions.
Lenovo's strategy for leveraging AI and expanding its services portfolio has positioned the company for continued growth. With a focus on innovation and strategic investments, Lenovo is navigating the dynamic tech market while capitalizing on emerging opportunities in AI and cloud services. The company's robust performance in the first quarter sets a positive tone for the fiscal year ahead.
InvestingPro Insights
Lenovo Group Ltd. (LNVGY) has demonstrated resilience and growth potential in its latest financial performance. The company's strategic moves, including the emphasis on AI and services, have been reflected in the strong financial metrics reported. Here are some insights from InvestingPro that provide additional context to Lenovo's recent performance and future prospects:
InvestingPro Data:
- Lenovo's market capitalization stands at 15.37 billion USD, indicating its significant presence in the technology hardware industry.
- The company boasts a P/E ratio of 13.97, suggesting a potentially attractive valuation relative to its earnings.
- Revenue for the last twelve months as of Q1 2025 reached nearly 59.41 billion USD, with a growth of 2.63%, showing the company's ability to increase its sales in a competitive market.
InvestingPro Tips:
- Lenovo is recognized as a prominent player in the Technology Hardware, Storage & Peripherals industry, which aligns with its robust performance in non-PC revenue and strategic partnership initiatives.
- The company has maintained dividend payments for 27 consecutive years, demonstrating a commitment to shareholder returns, coupled with a high shareholder yield.
InvestingPro offers a wealth of additional tips that can provide deeper insights into Lenovo's financial health and prospects. For example, the platform notes that analysts predict the company will be profitable this year, which is a positive sign for potential investors. Additionally, with 11 more tips available on InvestingPro, users can gain a comprehensive understanding of Lenovo's position in the market and make informed investment decisions. To explore these tips and more, visit https://www.investing.com/pro/LNVGY.
Full transcript - Lenovo Group Ltd PK (LNVGY) Q1 2025:
Jenny Lai: Good afternoon, and good evening. Welcome to Lenovo's Earnings Investor Webcast. This is Jenny Lai, Vice President of Investor Relations. Thanks, everyone, for joining us. Before we start, I would like to introduce our management team joining the call today. Lenovo's Chairman and CEO, Yuanqing Yang; Group CFO, Wai Ming Wong; President of Solutions and Services Group, Ken Wong; Senior Vice President of Infrastructure Solutions Group, Vlad Rozanovich; President of Intelligent Devices Group, Luca Rossi; and Senior Vice President of Mobile Business Group and President of Motorola (NYSE:MSI), Sergio Buniac. We will begin with earnings presentations. And after that, we'll open the call for questions. Now let me turn it over to Yuanqing. Yuanqing, please.
Yuanqing Yang: Hello, everyone, and thank you for joining us. Today, we are pleased to report a great start to our fiscal year 2024-2025, driven by our clear strategy and strong execution, our persistent innovation and operational excellence as well as our globalization advantages. We delivered a solid performance in our first quarter, with all of our businesses improving profitability and growing faster than the market. As the trend of hybrid is becoming more clear, we also made important progress in strengthening our capabilities to capture this major opportunity. This performance and the progress together with, recovering global IT market significantly boost our confidence to accelerate our transformation and further improve our performance in the coming quarters. Last quarter, we delivered a strong year-on-year revenue growth of 20%. Profit improvement was even more robust. On a non-Hong Kong FRS basis, our net income increased by 65% year-on-year to $350 million. Our diversified growth engines continued to accelerate with non-PC revenue mix up 5 points year-on-year to a historical high of almost 47%. Regarding AI, now more clearly than ever, we are seeing that the public AI alone cannot address the increasing needs of either individuals or enterprises. Hybrid AI, which is formed by personal AI enterprise AI, together with public AI is indeed the way forward. As the outlook becomes more evident, major ecosystem players are accelerating the development and the application of personal AI agent and enterprise AI agent, which is creating enormous growth opportunities across devices, infrastructure, solutions and services. By pioneering our hybrid AI vision and continually investing in AI and computing across personal and enterprise AI agents, Lenovo has already built a full stack AI portfolio and capability. This features our AI devices like AI PC, our AI servers that support all major architectures, as well as our rich AI native and AI embedded solutions and services. Last quarter, our R&D investment further increased year-on-year. We will continue to innovate to deliver AI for every individual and every enterprise. Now I will talk about each of our businesses. Let's start with our Intelligent Devices Group, or IDG. We delivered a strong quarter with double-digit revenue growth and almost 1 point improvement in operating margin year-on-year. For PC, we maintained our market leadership in both shipments and activations with a premium to the market. We also succeeded in maintaining our industry-leading profitability. Moreover, we are very encouraged by the positive user feedback on our five feature AI PC, which was launched first for the China market in May. We will launch more AI PC products for the global market at the IFA and the Tech World, and we are confident with leading market share in next-gen AI PCs. Our smartphone business and tablet business both delivered strong revenue year-on-year growth of around 30% with a particular type of growth in smartphones in Asia Pacific, EMEA, the North America markets. Looking ahead, we expect the PC market to enter a new refresh cycle, driven by AI PCs, which will gradually grow to represent more than 50% of the PC industry landscape by 2027. We will continue to deliver groundbreaking innovations to achieve the full potential of personal AI agent while leveraging our deepened strategic partnerships to build a more diversified portfolio and rich ecosystem. Next, our Infrastructure Solutions Group, or ISG. Last quarter, driven by the strong growth of our Cloud Service Provider business, ISG delivered a 65% year-on-year growth in revenue, a historical high. Profitability saw improvement both quarter-to-quarter and year-on-year. The combined revenue from Storage, Software and Services achieved a significant growth of almost 60% year-on-year and set a new record. Moreover, revenue from our Neptune liquid-cooled service with unique sustainability benefits grew more than 50% year-on-year to a record high. Looking ahead, we will continue to drive the recovery of profitability for this business through optimizing the business model for Enterprise and SMB business, including simplifying portfolios and improving operations. We will continue to leverage our industry-leading liquid cooling technology to meet increasing demand for AI workloads while, at the same time, capture the growth opportunities in AI servers and storage markets. And we will continue to grow key strategic partnerships and build infrastructure platforms that support hybrid AI solutions. Our SSG, Solutions and Services Group, has delivered the 13th consecutive quarter of double-digit year-on-year revenue growth since its establishment with operating margin of 20% or above, further strengthening its position as our growth engine and a profit contributor. We expanded Managed Services and Project & Solution Services. The revenue mix has grown 3 points year-on-year to account for 55% of SSG's business. Over the next three years, the global IT services market is expected to grow steadily and AI services will grow almost twice as fast as the market in general to become the primary driver. Lenovo will continue to embed AI in our key hero offerings such as Digital Workplace Solutions, Hybrid Cloud, and Sustainability Solutions while, at the same time, developing more AI native services to drive the adoption of AI for our customers and accelerate their transformation journey. Before I close, I would like to share that the hybrid AI era has only just begun. As the ecosystem evolves along with the changing industry landscape, Lenovo is uniquely positioned and well prepared to lead with our full-stack AI capabilities. Meanwhile, our globalization advantages consistently help us to seize opportunities and mitigate potential macro risks. Two months ago, we announced a strategic partnership with Alat. This collaboration will greatly benefit our efforts to go deep with our intelligent transformation, leveraging the growth momentum in the Middle East and further strengthen our supply chain. Looking ahead, we are confident that through capturing the hybrid AI opportunities and leveraging our globalization advantages, we will continue to achieve sustainable growth and profitability increases. Thank you. Now let me turn it over to our CFO, Wai Ming. Wai Ming, please.
Wai Ming Wong: Thank you, Yuanqing. I will now take you through Lenovo's financial and operational performance for Q1 and fiscal year 2025. Next chart, please. In Q1, the group achieved significant milestones, driven by unprecedented opportunities in hybrid AI. Group revenue reached $15.4 billion, up 20% year-on-year, with a net profit up 38% and non-HKFRS net profit surging 65%. A continued expansion in net margin was capitalized by a combination of factors, including clear strategy, strong execution, operational excellence, innovation and globalization. The group achieved premium-to-market growth across its operating regions and all the business groups delivered double-digit growth. The group focuses on delivering a comprehensive full stack portfolio to drive innovation through personal and enterprise AI twins, increasing R&D expenses by 6% year-on-year. IDG benefited from growing AI investment and commercial demand, lifting revenue by 11%, which is better than expected. The introduction of its AI PC line with five distinct AI features marked an important milestone in the group AI journey. Premium sales emerged as another bright spot with its PC and smartphone premium sales growing 21% and 142% year-on-year, respectively. ISG revenue grew 65% year-on-year, exceeding $3 billion in quarterly sales for the first time. With its comprehensive hybrid AI capabilities and introduction of new AI infrastructure products, services and partnerships, ISG explored new opportunities in generative AI infrastructure systems while collaborating with the key GPU suppliers and utilizing Neptune liquid-cooling technology. The non-PC business made up a record 47% of the combined revenue of the three business groups, mainly driven by the hyper growth in ISG. SSG delivered its record first quarter revenue and profit. This segment profit now accounts for one-third of the combined segment profit across the three business groups. Another milestone is the strategic collaboration framework agreement signed with Alat. This partnership will help the group leverage the growth momentum in the Middle East and Africa region to further globalize its supply chain and support the group's transformation. This is an important strategic initiative and more details will follow in the later slide. Next chart, please. Our solid cash flow management and profitability gains led to a 33% year-on-year increase in free cash flow, contributing to a strong cash balance. This also facilitated continued investment in hybrid AI innovation and IP generation. The group's total borrowing reduced from a year ago due to strong profit growth, healthy cash flow generation and full conversion of 2024 convertible bond. At the same time, we continue to maintain a healthy cash balance exceeding $3.6 billion. Cash conversion cycle lengthened 11 days from a year ago. This is primarily driven by the longer inventory days, which is in response to rising demand, new product launches and preparation for strong seasonality. IDG bids expectation with an 11% year-on-year revenue growth, driven by solid premium-to-market growth in both PC and non-PC segments. This growth resulted from a commercial sales recovery and the demand shift towards higher value-added models. OPM reached 7.3%, up 92 basis points year-on-year and approaching historic peak levels. Operational excellence, along with ASP expansion, and higher premium mix make it possible for a 27% profit growth. IDG is spearheading the AI PC revolution, which marks an industry turning point, creating opportunities to further strengthen its leading position. IDG's approach to AI PC innovation spend, hardware development, proprietary software and components driving product differentiation. Our five feature AI PCs have received encouraging user feedback in China and we are now preparing for worldwide launch. On the non-PC front, smartphone and tablet businesses delivered strong revenue year-to-year growth. Smartphone continued to shine with notable premium-to-market growth across Asia Pacific, EMEA and North America. The strong performance of the smartphone business stems from our continued effort to enhance the product portfolio with a focus on AI featured premium models such as the foldable Razr phone. Next chart, please. ISG achieved record-breaking quarterly revenue with a 65% year-on-year hyper growth, driven by surging demand from cloud service providers. ISG also delivered a new record high for the combined revenue from Storage, Software and Services in the first quarter. Operating performance improved by $23 million year-on-year and $59 million quarter-on-quarter, reflecting enhanced operational performance. ISG quarterly revenue from liquid-cooling service reached a new height with more than 50% year-on-year increase. Our proprietary Neptune technology, backed by over 10 years of experience, has established our leading position in this area and allows us to benefit from higher cooling requirements of more powerful GPU platforms in the future. On the AI front, ISG continued to see strong momentum with the AI GPU server pipeline increasing by more than 20% quarter-on-quarter, while order growth was faster at over 30% quarter-on-quarter. Next chart, please. SSG continued to benefit from AI-powered services and solutions, reporting record first quarter revenue and profits. Revenue grew 10% year-on-year to $1.9 billion, the 13th consecutive quarter of double-digit revenue growth. With a leading operating margin of 21%, SSG contributed one-third of the combined operating profit across the three business groups. Both Managed Services and Projects & Solutions Services revenue grew double digits year-on-year, reaching 55% of SSG revenue, up 3 percentage points. As-a-Service remains a bright spot for Managed Services. Its total contract value of Device-as-a-Service and Infrastructure-as-a-Service increased by strong double digits, reinforcing long-term growth. SSG also expanded key vertical wins with the group's AI-powered solutions, including smart factory IoT and smart warehouse solutions. Lastly, SSG is actively and continuously embedding AI into existing offerings to enhance value proposition. Meanwhile, we are developing AI services to meet customer demand at every stage of their AI journey from IT transformation to data modernization to AI adoption. Next chart, please. The group has introduced Alat, a $100 billion fund wholly owned by the public investment fund as a long-term strategic investor. This collaboration enables the group to capitalize on the strong growth momentum in the MEA region, which offers identifiable and incremental revenue and profit opportunities for all our business groups. In addition, go-to-market partnership with Alat will help accelerate market entry in the region. Our collaboration includes establishing a new manufacturing facility to serve the regional market, adding to our existing global footprint of over 30 sites around the world. This expansion will enhance our global supply chain resilience and flexibility, while leveraging the region's extensive clean energy initiatives. As part of the collaboration, the group will issue a comfortable bond and warrants totaling $2.21 billion, which will be used for zero interest cost debt refinancing, supply chain investments, and expansion into the MEA region. The bond is earning accretive in the first three years and it will only be converted at the end of the 3-year period. The warrants allowing existing and new investors to participate and maintain their shareholding. Our Chairman and CEO's subscription for 19.1% of the warrant endorses to grow future prospects. Additionally, the group will achieve $100 million of annual interest savings for the three years without dilution from convertible words. The above-mentioned resolutions are subject to shareholders' approval at an EGM. The group's steadfast dedication to corporate governance and sustainability has been recognized once again and it has secured 10th place in Gartner (NYSE:IT)'s prestigious Global Supply Chain Top 25 for 2024. Our environmental efforts remain on track to help us reach our SBTi aligned 2030 emissions reductions goals with 94,000 metric tons of products recycled since 2020. The group has also made significant strides in promoting diversity and inclusion with an industry-leading 29% representation of women in technical roles. These accomplishments highlight the group's balanced approach to sustainability and strategic excellence across its diversified growth engines. Next chart, please. Hybrid AI presents a significant and unique opportunity for the group. To supercharge growth, further R&D investment will be made to unlock the full potential of hybrid AI and build a full stack AI portfolio. This will help solidify our leading position in personal and enterprise AI twins. The robust innovation efforts seen across the three business groups will enhance the group competitiveness in next-generation product design and solutions, effectively driving growth and supporting its efforts in achieving its medium-term profitability targets. Looking ahead, AI PC is about to kickstart a new demand cycle for products with premium pricing and attractive features for commercial uses. This is critical for IDG to drive premium-to-market growth, high ASP and sustainable profitability. IDG has unveiled its first batch of five-feature AI PCs in China, incorporating proprietary technologies as well as Copilot+ AI PC. An extensive lineup of these five-feature AI PCs is set to launch for the rest of world in the second half of this fiscal year. At the same time, our significant growth in the smartphone sector will continue to be a driver for our premium-to-market growth strategy. ISG aims to continuously drive growth and improve profitability by leveraging its investment in differentiated technology solutions in hybrid AI infrastructure, high-performance computing, storage and edge systems. ISG has introduced its sixth generation industry-leading Neptune liquid-cooling technology to meet increasing demand for AI GPU service and capture business opportunity in this rapidly growing segment. The water-cooling trend is just beginning and we are well-positioned to capitalize on this growth. SSG will roll out new AI-native service and embedded AI functions into its service offerings to address growing enterprise demand for AI technologies. Concurrently, SSG will focus on safeguarding its core business with high value-added support services across both the PC and infrastructure segments. Through collaboration with ecosystem partners, SSG is well-positioned to help customers advance their digital transformation journey and further enhance its financial contribution to the group. As mentioned earlier, our proposed strategic collaboration with Alat will form an important part of our sustainable growth plan. We'll put forward the relevant resolutions in an EGM expected to be held soon. We hope shareholders can support this exciting opportunity. Finally, as always, we stay committed to driving sustainable growth and improving profitability for our shareholders. Thank you. We will now take your questions.
Jenny Lai: Thank you, Wai Ming. Now we will open the lines for question. And this session in English-only. [Operator Instructions] Operator, I will now turn it over to you. Please give us your instructions.
Operator: [Operator Instructions] The first question is coming from Conor O'Mara at Jefferies. Sandy from our team will announce the question.
Sandy Niu: The increase in IDG margins is quite a positive surprise given many others are talking about margin pressure from increased component costs. Were you able to offset the component cost increase with a significant improvement in product mix? How much did your ASP rise quarter-on-quarter?
Yuanqing Yang: So Luca, could you please answer this question?
Luca Rossi: Yes. That's for me. Thank you, and hello to everyone. Good morning, and afternoon. So thanks for the question. We are very satisfied with our ability to maintain margins, balancing growth, as we kept the number one spot globally and we expanded our market share year-over-year this quarter, while delivering industry-leading profitability, as you know. Our AUR expanded actually a couple of percentage points year-over-year, and also sequentially quarter-on-quarter to a lower extent. When I look at the pre-COVID versus today, as a data point, our AUR, in fact, has grown significantly in the double-digit percentage way. It's true that certain component costs are increasing, but some others are decreasing as well, and we feel very good about our procurement power and our design to cost in the platform, enabled by our R&D efforts. Combined with a strong pricing discipline, improved premium product mix, and also segment mix towards commercial, particularly SMB, we have been able to maintain and even slightly improve our GP year-over-year in percentage, and with higher operating leverage, and we maintained tight expense management, we were able to grow our profitability, as shown, by more than 1 point year-over-year. Thank you.
Yuanqing Yang: So look, I think our operational excellence also matters. So definitely, we know when we should buy more and when we should stop purchasing.
Luca Rossi: Yeah. For sure. Thank you, Yuanqing.
Sandy Niu: Thank you. Our next question comes from Donnie Teng at Nomura. Is there any specific project wins after we strategically work with Alat in the Middle East? When can we see sales and profit contribution?
Yuanqing Yang: So I think probably, Wai Ming, you are the best person to answer the question.
Wai Ming Wong: Okay. Thank you, YY. Thank you, Donnie. We are obviously doing -- the deal is still subject to the shareholders' approval, which we hope that, as I mentioned in the presentation, that we will hope to have the EGM soon. So we have already started -- I think before the deal was actually approved, we have been working, I think, with the help of Alat to approach many corporates in Saudi Arabia. So far, I think that coverage work we've done, but we are just waiting for the deal to be voted by shareholders at the EGM.
Sandy Niu: Our next question comes from Grace Chen at UBS. What's the AI server sales mix of total ISG? What's the margin for AI server versus the margin for general purpose servers? And finally, what's Lenovo's strategy to improve the profitability of the loss-making ISG business?
Yuanqing Yang: Yes. So Vlad, could you please answer the question?
Vladimir Rozanovich: Yes. Thank you, YY, and good morning, good afternoon, everyone. So thank you for the question. One of the things that Lenovo is extremely proud of is how we prepared for this hybrid AI era given the investments that we've made across our infrastructure products, solutions and services. We have seen a robust traction in our AI server pipeline. We've seen double-digit growth across our pipeline. And in fact, we have seen higher growth across orders from a variety of customers. We've seen orders coming from industries such as banking and financial services for high frequency trading. We've seen traction in research institutions, energy companies, manufacturing companies, and also in GPU-as-a-Service companies. So the AI traction we see in the market is strong, and we will continue to focus on that part of the market. To unpack the question on profit recovery, that is something that we are going to continue to focus on. Recovery of profitability for the ISG group is the priority for our business. And the way we are going to do that is a few ways. Lenovo has always been strong with our enterprise and global channel partners. We're going to continue that deeper engagement with that customer base to drive further profit enhancement for ISG. But we're also going to optimize our business model, continuing to look at improvements in simplifying portfolio, improving operations, and making sure that we are putting the right R&D into our portfolio to ensure we are ready for this hybrid AI era. Thank you.
Sandy Niu: Thank, Vlad. Our next question comes from Ishan Dutt at Canalys. Can you give some early insights into how AI PC is contributing to premium segment share and growth? And what is the expected impact over the coming quarters?
Yuanqing Yang: Luca?
Luca Rossi: Yes. So as you are probably familiar, there are several definitions of AI PC, as we are actually at the infancy of this, that we believe it's inflection point to the PC industry. So based on, say, major industry analyst definition, that is probably a little bit more basic. The mix of AI PC this quarter and probably even next quarter is around 15% of the shipments. But based on our own Lenovo definition, which we call five-pillar definition, and we believe this definition will shape the industry going forward. This number is much lower. It's actually a low one digit number. That is to say that the real impact of AI PC into the industry and also into our financial results is yet to come. And we'll see probably the second half of the fiscal year with more sophisticated product launched globally, that percentage to grow, but still to maintain probably low- to mid-single digit and then gradually ramp. We expect a much stronger contribution of those five-pillar AI PC into 2025 and then growing all the way into 2026 to 50% or even 60% of the mix. So that is to conclude that the impact into our first quarter result is very modest and the best is yet to come. We believe there will be more sophisticated solution user experiences that will attract stronger demand, reenergize the category into stronger growth in the second half and particularly in 2025. Thank you.
Sandy Niu: Thank you, Luca.
Yuanqing Yang: I want to add. So actually, we launched this five-pillar AI PC in China first. We started to ship in middle May. So definitely, we see better results in China. So probably mid-single digit last quarter. So we are on track to achieve around 10% mix by the end of this year. So definitely, the rest of the world is behind of China.
Sandy Niu: Thank you, Yuanqing. Our next question comes from Albert Hung at JPMorgan (NYSE:JPM). Could you please explain the economic scale benefits in ISG business? Why ISG revenue increased to $3.2 billion, but the bottom line stayed at $37 million loss, similar to 3Q '23 when ISG revenue was only $2.5 billion?
Yuanqing Yang: Yeah. So Vlad, this is still your question.
Vladimir Rozanovich: Thanks, YY. So thank you for the question. When I look at -- as I previously mentioned, when we see the profit recovery that ISG is on a journey of, making sure that we are going to continue to look at our ESMB portfolio and drive profit out of that portfolio, we also have the realization that it does take R&D effort to make sure we are positioning the right products, especially with our AI portfolio and where we have shown strength in hybrid AI to really develop that full solution stack. We've invested in our AI innovators program, which is really to make sure that not only are we time to market with all of the GPU suppliers' schedules, but we're also making sure that as we develop and implement a leading new portfolio of products within AI, making sure we're investing in four new AI centers and delivering over 165 state-of-the-art AI vertical and horizontal solutions. We've mentioned previously that we have increased R&D. R&D investments increased over 6% year-on-year to make sure we have that full stack development of AI portfolio across all of our infrastructure devices, solutions and services.
Sandy Niu: Thank you, Vlad. Our next question comes from Robert Cheng, Bank of America (NYSE:BAC). On smartphone side, what's the breakdown by key market for your smartphone business? And what's the profitability and margin?
Yuanqing Yang: Yes, Buniac.
Sergio Buniac: Yes. Hello, everyone. So I think what we're seeing, it's the fastest-growing market being Europe and Asia. Last quarter, we saw North America at 40%, Europe at 43%, Asia at triple digit. Latin America sustained our number two position with lower growth. We are also seeing a growth in our, what we call, premium mix with our Razr and Edge franchise. So last quarter, 33% of our sales came from these premium devices, that's a 3 times improvement year-over-year. Profitability. Our gross profit is on the 20% range. It's 1 point higher than last year. Still, overall profitability low-single digit given that we are increasing significantly the investment, especially in marketing and AI R&D.
Sandy Niu: Our next question comes from Cherry Ma at Macquarie. On the robust ISG revenue growth, can you briefly go through what we saw during the quarter for our general server, AI server and storage business? How's the order book looking for our CSP customers? Any delay to AI server business due to some hiccup in Blackwell supply chain? And finally, are we expecting to gain more CSP customers in the coming quarters?
Yuanqing Yang: Yes. So, Vlad.
Vladimir Rozanovich: Yes. Thank you, YY. So a lot to that question that I jotted down. Let me take each of those as certain parts. So the first portion of that question was, on the revenue growth, how did we see general purpose versus storage versus AI. I would say that when you look at our business growing 65% year-on-year, all aspects of our vertical markets saw improvement from a revenue standpoint. When you look at things like Storage, Software and Services as part of the Lenovo 3S strategy, that part of our business was up 59% year-on-year. The enterprise portion or general purpose server part of the market, it's critical for Lenovo, and we did see high double-digit growth year-on-year in those general purpose server offerings. Specifically in growth areas like Edge, when we look at our ThinkEdge portfolio, our ThinkAgile portfolio of HCI solutions, we're at this era of smart AI everywhere. And that goes along the strategy that Lenovo has to look at certain markets like smart retail, smart manufacturing, health care, and smart cities. These are all areas that really drive that general purpose server market. And it's also the area that we continue to engage with our channel partners on a global basis to continue to drive profitability. There was a question there about Blackwell supply chain. I would say that from a Lenovo perspective, our plan to move forward on the ISG group is to make sure we are timed to market, so that as our suppliers' schedules are fulfilled, that we are going to continue to be timed to market with all of our GPU suppliers. And then I think there was more a question there about CSPs. So this is something that we continue to look at. CSP has been one of Lenovo's real bright spots in our ISG business. And we continue to look at recruiting additional customers. I think CSP customers recognize the value that Lenovo brings with our ODM plus approach to the market, where we act not only as an OEM, but also ODM. And when you look at our capabilities from a manufacturing standpoint around the world. CSP customers really appreciate Lenovo's global mindset. So as we look at things like deploying in multiple regions around the world, we are uniquely positioned in a way where we can satisfy large CSP growth all around the world.
Yuanqing Yang: Yeah. So I want to help Vlad to talk about ISG's profitability. So actually, now our CSP business and the ESMB business probably are very balanced in Lenovo ISG portfolio. Actually, our CSP business is a profitable business, although the margin is lower than ESMB. So our ESMB margin is much higher than CSP, but while we still lost the money, because in the past couple of years, so we keep investing in the new portfolio. We are strengthening our server portfolio. We are strengthening our storage portfolio. Then when the market quickly shifted to the AI, so we are strengthening our AI portfolio. So that's probably the key reason for us to still lose money. But I think we have done very good to drive the business back to profitable. But definitely not just the product portfolio, we will sharpen our business model as well, as Vlad just said. So we will drive the stronger, better business model in both relationship business as well as the transactional business. The transactional business will be together with business partners. Last but not least, so we will sharpen our operation as well, so that we can ensure we could leverage our global supply chain to get to the best cost, to have the best demand-supply match. So that will be our action to drive the business back to profit. Thank you.
Sandy Niu: Thank you, Vlad and thank you, Yuanqing. Our next question is on SSG. How's enterprise demand for AI services evolving and how is Lenovo meeting that demand?
Yuanqing Yang: Yes, still, ISG (ph).
Ken Wong: Yes, maybe I can take that, YY. So good morning, good afternoon, everyone. This is Ken from SSG. So first of all, I think we are very excited about the momentum that we have in the Solutions and Services Group. We were able to achieve a premium-to-market growth, and also a healthy margin, largely thanks to the [Technical Difficulty] the 13th consecutive quarter of premium-to-market growth and with double-digit year-to-year revenue growth. Now coming back to the enterprise demand rate. This is definitely one of the most popular discussion whenever we discuss with our customer on a worldwide basis. I think, by and large, there are three kinds of demand from our customers. One is I think more than 50% of our customers are looking at how can they continue to improve their IT infrastructure, and in Lenovo, we call them new IT transformation, right? The second demand is coming from data modernization, right, because I think everyone knows that in order to have a desired outcome for AI use cases, data is very important. And last but not least, once our customers are attracted with more mature once, once they have a modernized IT infrastructure, as well as with all the data available, we're able to help them to implement AI use cases and bring the desired outcome. So at Lenovo, this is covered by our AI fast-track services, which include a consulting POC, scaling of the production environment, all the way to managing AI use cases in order to support our customers to achieve their desired outcome and resolve some of their challenges. One of the examples that I can share is that we just have a project with one of the leading technology customer on a worldwide basis to help them to improve their marketing operation, especially around how can they improve their product launch in terms of marketing campaign. Used to be two months in terms of marketing campaign launch. But with the Lenovo AI fast-track offering, we were able to help them to significantly reduce their time to market to their campaign, leveraging GenAI and AI technology to one to two weeks, and at the same time, a significant saving in cost. And last but not least, is able to keep their IP within the customer premises, which is one of the major requirement for most of the customers that we have encountered, right? So in that I think we still see a very strong demand from our customers with regard to AI, with regard to how to use AI to supercharge their business, and Lenovo can help in all the different stages of journey in order to unleash the full power of AI. All right. Thank you.
Sandy Niu: Thank you, Ken. Our next question comes from Howard Kao from Morgan Stanley (NYSE:MS). ISG business revenue is seeing very strong momentum. Is revenue expected to continue to grow over the next one or two quarters? When can we expect ISG to get back to profitability?
Yuanqing Yang: Yes. So Vlad, could you please?
Vladimir Rozanovich: Yes. Thanks, YY. And Howard, I would say that when you look at the market for data center today, the expected growth rate across AI infrastructure being in the 15% range. When you look at things like storage and general-purpose server, we see those, respectively, growing about 4% and 10%. The viewpoint we have on the market is that we will drive to get to a premium to that market. And so it's our goal based off of the portfolio we're developing, the customer relationships we have, the channel partner relationships, and most importantly, the customer focus that we have, that we will continue with at least market growth. On the question of profitably, I would just say that that's everything that we've talked about so far up until now, that YY has mentioned, the focus that we have as a business group looking to how do we get to profit recovery. It is the number one focus that I have to the business, to make sure that we are improving the operations, making sure we are looking at profit optimization, making sure we're looking at portfolio optimization while continuing to invest in these high-growth areas around hybrid AI is really going to be continued focus we have on how we get back to profitability.
Sandy Niu: Thank you, Vlad. Our next question comes from Edison Lee at Jefferies. What is Lenovo's definition of premium smartphone? What are the regions that contribute the most in the premium growth? And in terms of the IDG's revenue growth of 11%, how much of that is coming from ASP growth versus the volume growth?
Yuanqing Yang: So Buniac?
Sergio Buniac: Yes. So I think there's small correction. Smartphone growth is 30% year-over-year. So units grew 30% and revenue also 30%. What we define as premium is our Edge and Razr franchises. Edge franchise's AUR -- ASP starts at $399, up to $699, $799. And Razr starts at $699 to $9,99 price point. In terms of growth of Edge, we see 2 times growth year-over-year from like around 700,000 units to 2 million. We are seeing growth coming from ODMs and Razr being stronger, especially in North America, but also increasing in Europe and Asia and Latin America. And the Edge growth more focused in Asia in markets like India, Japan, Australia, Europe and also Latin America.
Yuanqing Yang: Yeah. So we have seen strong growth in North America, in Europe, and in key Asia Pacific markets, Japan, India. So actually, in U.S., we have become stronger, number three, with more than double-digit market share, right? So Buniac.
Sergio Buniac: Yes. We are number one in foldable and number one in flip, and drop a percent...
Yuanqing Yang: Yeah, we are number one in foldable with, how much it is, 65% share. So...
Sergio Buniac: Yes, north of 60%, I'd say...
Yuanqing Yang: Yes, 65% share. So we definitely dominated the market in U.S. Okay.
Sandy Niu: Thank you. Our next question comes from Ben Carbonell (ph) at Technology Business Research. With respect to Lenovo's AI advisory and professional services, are you seeing more customer engagements beginning at the AI discovery stage or at the AI fast-track stage?
Ken Wong: I can take it if you're okay?
Yuanqing Yang: Yes, sure, please.
Ken Wong: Yeah. Ken again here. So thank you, Ben. Well, let me answer this question from two fronts, right? When I interact with our customer, I think starting from two years ago, there has been -- especially the pioneer part of the customer segment, there has been a lot of exploration or we call it proof-of-concept projects. Now when I look at the market, I think there are more and more POC finished. A lot of the discussion is actually around whether and how can we scale the POC learnings and results, right? Now I believe when we come back to Lenovo, right, our AI offerings are quite unique in the market for two reasons. Number one is, if you look at our portfolio of offering from pocket to the edge to the cloud, I think we're one of the broadest in the market. The second is that, as Vlad mentioned, I think we have a library of AI solutions. Today, we are about 150-ish, that are either deployed within Lenovo, which we have business across 180 markets, or we have deployed for our customers. So to my point, this is proven, verified and we were able to implement for our customer. So with that, I think our uniqueness is that our broadness and our experience and our tools in terms of able to bring the use cases for our customer to meet with their demand. Thank you.
Sandy Niu: Thank you, again. Due to time constraint, this is our last question from Howard Kao from Morgan Stanley. Can you talk about the inventory increase in June quarter? What does this comprise of?
Yuanqing Yang: So Wai Ming, could you please talk?
Wai Ming Wong: Yes. Okay. Thanks, Howard. The increase of about $1.8 billion, most of which I think is from -- or 50% of which is from our enterprise business, because you can actually see that our significant growth in our Cloud Service Provider, and therefore, I think we are getting ready. Now the other one, probably about, I think, 30%, I think coming out from our PCSD. We have been seeing the significant improvement, I think, in the market. And we'll also be able to actually enjoy the benefit of doing the buy ahead for the quarter. But one thing for sure that a large part of the increase in the inventory I think is really in past, which we're actually going to consume, I think, in the current quarter. Thank you.
Jenny Lai: Thank you, Wai Ming and thank you, everyone. We thank you very much for joining today's call. If you have any other questions, feel free to contact the IR team directly. And replay of this webcast will be available in the next couple of hours at our Investor Relations website. Thank you again for joining us. This concludes the call today. Thank you.
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