Hello, and welcome to the Lenovo AI chip update call. Good morning, good evening. Thanks, everyone, for joining me. Jenny Lai, I'm the Vice President heading Lenovo's Investor Relations. Today, I'm very pleased to be joined by two great colleagues, Laura Quatela, who is our Chief Legal and Corporate Responsibility Officer, and Shama Patari, our Executive Director of Government Relations and Trade Regulation. The dynamics of advanced AI chip control continue to evolve, and we thought it might be useful for you, the audience, to hear from the real experts. We are planning to let Laura and Shama lay out their thoughts, focusing on the recent development. This will be the focus of our call today, and we are not planning to provide any other business updates as we are in quiet period. This call will be English only, and after Laura's discussion, we'll open the call for Q&A, and you should be able to find a question box on the screen. Please remember to put in your name and company so we could accept the question. Without further ado, Laura, please go ahead. Jenny, thank you so much, and welcome, everyone. Thank you for joining. I know that you understand this is a very rapidly evolving and dynamic situation, and it's quite complex. I just want to make a few key points up front before I introduce the real expert, Shama Patari. So we at Lenovo feel that compliance is job number one. In fact, Kirk Skaugen, who runs the server and data infrastructure business, commented on a call on this topic the other day. The important priorities are, number one, compliance, number two, compliance, and number three, compliance. So we strictly comply with all laws and regulations in every jurisdiction in which we do business. As most of you know, Lenovo serves over 180 markets, and we carefully monitor the requirements in each of those locations to make sure that we are fully compliant. In this particular case, with the updates to the semiconductor rule, which Shama will discuss in greater detail, we're working very closely with our partners to understand the application of the updates to the rule. This has involved daily contact with our suppliers, daily discussion with their trade compliance counterparts, often multi calls a day, with my counterparts, and so we are very much on top of things and very much, in, in working collaboration with, with these partners. All of them, all of the relevant partners that are affected by this rule and its updates are supportive of Lenovo and are collaborating with us. As a really great example of this, if you've had the opportunity to watch yesterday's keynote at Lenovo's Tech World event in Austin, Texas, you saw that YY was joined on stage or virtually by all of the key players, CEOs, including Jensen, Satya, Pat, and Lisa. So if you haven't looked at that video, Jenny, perhaps you can share it with investors after the call if it already hasn't gone out. I would expect that it has. But each of the CEOs' teams are very involved with us in navigating the course, and they expressed their support from the stage. I think generally you're aware that we have a global supply chain and development footprint, which we rely on to make us nimble and able to navigate regulatory complexities easily. This particular situation is no exception. We're very confident that together with our partners, Lenovo will be able to continue to meet our customers' needs. So those are the headline messages that I'd like to share with you. I'd like to also introduce Shama, who heads Global Trade Compliance, among other key and significant responsibilities for Lenovo. Shama has a long career of trade work. She is an expert in the area. She's been with us. Shama, you'll have to say five years, I believe? Six years. Six years, and we rely on her so heavily around the company. So Shama? Sure. So I will go ahead and start answering some of the questions that you have, and I see one in the question box right now: "What is the license requirement process? How long will it take, and how likely is it to get approval from the U.S. government?" And I think it's part of the same question or the two-part question: "Do we see impact from the U.S. restriction to our ISG segment business?" So with respect to the licensing requirement process, you know, the process essentially is a license application that's submitted to the agency called the Bureau of Industry and Security, under the Department of Commerce. It's done so through an electronic portal. The application will contain specific details around various transactions that we might have. Any part of the rule that applies that requires us to get a license will require transaction-level detail that we would then provide through the application process. It is then submitted to BIS. Once it's submitted through BIS. BIS will review it along with other relevant agencies, including the Department of Defense, NSA, and so on, to determine whether an application will be granted. Within the regulations for license applications, there is an indication that license applications can take up to 90 days for a review, and then a decision generally made shortly thereafter. Sometimes there are additional questions back and forth, a need to speak with the applicant, and additional information that may be requested, which could potentially prolong the period. But, for the most part, it's generally a 90-day period per regulations. I hope that answers the question. With respect to impact, we continue to assess the situation with our suppliers, and of course, we'll take any necessary steps to ensure compliance, as Laura has mentioned. Given that our supply chain and development footprint is rather flexible and resilient, we believe we should continue to be able to fulfill some of our customers' requirements. Thank you, Shama. And, Shama, if you could look at the, Sure. Question box. We now have second question, and I just want to remind the participants of the call that please on the screen you should be able to see a question box. If you want to ask question, please submit, and Shama will get to your question. And if we are unable to answer your question now, we'll get to you eventually after the call. So the second question- Go ahead. Sorry. Yes. Yes, please. So the second question says: Does the restrictions impact only China production and China sales, or does it impact the entire operations? It, you know, the restrictions, of course, the rule is rather complex. We continue to review it. Our understanding is that there are restrictions based on end use as well as end user and end destination. There are a number of destinations that are called out. You know, they, they go by certain category of country groups, country groups. They're D1, D4, D5. They're, you know, broad categories of control, and each category has a specific level of control based on the type of product or type of GPU we're talking about, and based upon the parameters of the GPU. We continue to review the parameters with our suppliers to determine which sets of products are controlled and which sets can continue to be exported to all countries and which cannot, and which can continue to be exported with a license. Okay, the next question: Several countries other than China have been included in the U.S. restrictions. Some other countries have been included for some time, such as the Middle Eastern countries. Has Lenovo applied for licenses for these non-China countries, and what is the experience so far? This is a very brand-new rule. It was just written, drafted, and published last week. Prior to this time, the Middle Eastern countries that are called out in the rule were not subject to licenses. These products tended to be uncontrolled at the time. We understand, based on what the rule is saying, that with respect to some of these Middle Eastern countries, that there is a licensing policy of approval. So while a license may be required to be submitted, depending on the type of products we're talking about and whether they are controlled, under certain parameters, it could be that a license is required, but it seems the licensing policy is one of approval. So we would expect, in those situations, that we would have to submit a license application, but likely, BIS would consider its licensing policies and make a determination in that way. Okay, so the next question is: The export control restricts shipments to certain AI chips... I'm sorry. The export control restricts shipments to certain AI chips to companies headquartered in China. Does this mean that shipments are automatically denied to Lenovo unless there is a license? We're currently assessing, you know, AI chips is actually a pretty broad term. The export control restrictions apply to specific parameters, and, they involve, performance processing parameters as well as density parameters. So it depends on the chip that we're discussing, where, within the regulation they fall, whether there is a control. There are different controls based on the level of performance processing and as well as the level of the density. And so it, it's, you know, it's sort of a general, calculation. So at this time, we're assessing with our suppliers closely to understand which of their chips fall within which categories. Certain categories have a potential license exception that is applicable, and certain categories do require an export license. Will you focus on more projects in non-restricted countries? At this time, we're actually assessing what, you know, how the rules can apply to the products that we currently have and to the products that we currently buy from our suppliers. It will, you know, depend on that assessment, what projects we pursue. But for the most part, the restrictions are, you know, in some cases require—while they require a license, the licensing application policy is one of approval in certain instances, and so we'll, we will continue to assess, and determine how best we need to comply with the rules and regulations. Are there any of the restricted chips that have a good potential for getting a license for China shipment? A100, H100, L40S, A800, L40S, L40, RTX 4090. So, with respect to licensing, you know, a license request is submitted to the federal government, and then it is up to the federal government to make a decision based on the license application, whether a product can be shipped. So there is in these instances already a license is required for the A100 and the H100 per the rule last year. At this point in time, I think, you know, we would have to see how BIS would review those license applications, given that the rule is brand new. We are unsure. We are assessing how strictly BIS would look at its licensing policies. Okay. Given that our key supplier, NVIDIA, posted the SEC filing that the scrutiny has been taken effective immediately, do we see the consistent situation from our side that there is no grace period anymore? Secondly, two-part question: Are all the subsidiaries from Chinese entities that require the licensing and are subject to screening? So, the SEC filing that NVIDIA had posted yesterday, I believe is what you're talking about, indicated that part of the rule took immediate effect with specific GPUs. That, that indication was done by what's called an as-informed letter. They received an as-informed letter directly from BIS, and the direction is from BIS to NVIDIA only. It does not apply to any third parties. Secondly, with respect to the second part of this question, are all the subsidiaries from Chinese entities that require the licensing and are subject to screening? It's, it's likely that all entities are going to be subject to screening because there are very, specific end-use and end-user requirements. So very likely, you know, screening will be required, and understanding of how these products will be used in downstream, distribution channels and so on, will likely be necessary. Okay. Sorry. Okay. Does the U.S. restrictions apply to China region or to Chinese companies? China is called out as a D5 country. And in the regulations, there are licensing requirements for D1, D4, and D5 countries, which include most of the Middle Eastern countries, the embargoed destinations, and also China, to some degree. H800... For H800, A800, are shipments restricted to Lenovo unless there is a license? At this time, our colleagues and suppliers are reviewing whether chips are restricted to Lenovo worldwide, or if they're restricted in only certain locations. The rule is ambiguous, and our suppliers continue to review and assess. Okay. Okay. Hi, I just want to check on the announcement to develop hybrid AI products with NVIDIA. The license to export these products have been received. Thanks. The rule was just drafted and announced last week. Of course, Lenovo is working together with our suppliers, including NVIDIA, AMD, Intel, to determine whether license requirements need to be met, and we will certainly take any steps necessary to ensure compliance with the law. For countries that are not included in the U.S. restriction list, what kind of KYC procedure Lenovo has in place to ensure clients are not under U.S. restrictions, i.e., overseas subsidiaries of Chinese companies? Lenovo takes compliance seriously. We have various screening mechanisms in place to screen for restricted party, as well as additional due diligence to screen for ethics, clients, and anti-bribery and corruption. In all of those cases, we've deployed automated screening, and all of our third parties and business partners are screened at various points in every transaction. Do you think it's possible BIS approved the license and still export to restricted country as long as the end use is compliance? So the time from submit license request to approved is 90 days. So, you know, it depends on BIS' licensing policy. It also depends on the extenuating circumstances in which a license may be required, as well as the extenuating circumstances in which BIS should issue a license. I don't have a crystal ball as to how BIS would handle license applications to restricted parties or restricted countries, but they have indicated that in some instances, the licensing policy is one of approval. The 90-day period is something that's written in the regulations. So it could take up to 90 days, it could take less time, it could take more time. It really depends on the process, the number of questions BIS may have for the applicant. Perhaps a request for a meeting may be necessary. There could be many things involved that could prolong the period, but there also could be many areas involved that shorten the period. So it really depends on each license application and the facts and circumstances associated with it. Who should apply the license, NVIDIA or Lenovo? When NVIDIA sells AI chips to Lenovo, who build the servers and sells to Chinese enterprises. So we are working with our suppliers today to determine first an assessment of which products, if any, are subject to the rules, and to the extent that they are, who should submit the license application, who's in the best position to do so. We are working together to determine that right now, and we'll have to come back on that question. The second SEC filing that NVIDIA posted yesterday did not include the L40 and the RTX 4090 as being restricted immediately, while the first SEC filing for last week did include these two chips in its listed list of restricted chips. When do the restrictions for these two chips kick in, and why were they not included in the second SEC filing by NVIDIA? I would have to talk with NVIDIA about whether why those two chips were not included. It really, as far as whether they will be restricted, the restriction for the whole rule applies within 30 days, so by November, by midnight on November 17th, the rule will be effective. It would depend on whether the L40 and the RTX 4090 meet the specific parameters of the rule. As I said, there are specific performance processing parameters as well as density parameters that need to be met. So it will depend on whether, based on NVIDIA's assessment, those two chips are meeting those parameters or not, and in which parameters they do fit, and whether a license is required for one or the other or neither. If Lenovo produces a server using the A100 H100 for a customer in the U.S., but the manufacturing process is supposed to be done in a Chinese factory, does the new regulation mean AI chips can no longer be shipped to Lenovo Chinese factories? We're assessing the regulations on what kinds of manufacturing can be done where. You know, generally speaking, we tend to produce some of our servers for the United States in other locations. But it really depends on, you know, how these chips will ultimately be used in the U.S., and whether the chips are... and, in this case, they are controlled, so whether a license would be issued for the China factory. There are other sort of areas that we do consider from a supplier and manufacturing standpoint, some specific details around tariff classification as well as duty rates. So we do try to ensure that when we supply our products, we're producing in the best location for our customers. And so we will take all of that into consideration before producing in a specific factory. Has Lenovo seen cases where BIS approves a license for products destined for a country under presumption of denial? Any reasons why these cases might have been approved? Yes, we have. You know, I personally have seen cases where BIS approves export licenses when there is a presumption of denial. I know that others probably have as well. There are great examples publicly available already today that we've seen where approvals have been given. It honestly is based on BIS' evaluation and any extenuating circumstances that might exist. For the restricted chips, does the export control restrict shipments to Taiwan, U.S. server companies with production sites in China? My understanding of the rule is that at this point in time, of course, it depends on the parameters of the chips, but you know, country groups D1, D4, and D5 are called out in the rule, which includes China. I don't think the country groups include Taiwan, but they do include China, and so I think they are restricting certain chips for export to China. Of course, the rule is quite ambiguous. There are different license requirements as well as license exceptions and potential licenses that have a licensing policy of approval and those of denial. So it really depends on the chip and how it's going to be used both within China and outside of China. All right. Due to time constraint, we will now take the last question, please. Okay. How much operating costs for further KYC license applications, compliance stuffs, will be increased because of this new rule? Well, you know, there's definitely additional due diligence requirements that need to be conducted and user certifications that might need to be obtained. And certainly an increase in the scope of work that needs to be done by trade compliance teams and ethics teams across all organizations. So I imagine there would be some increase to the costs associated for this and submitting a license application. I think it's a, you know, you know, it's a time-consuming task, so there certainly is a time element here. Thank you, Shama, and thank you, Laura, for the very detailed responses. Thank you all for participating at the call. This is the end of the call. If you have any questions, please let us at Lenovo IR team know, and we'll try to respond to your end questions. Thank you, and we hope to hear from you again in the near future. Thanks. Bye-bye now. Thanks so much. Bye-bye. Thank you, everyone. Bye-bye.