Lenovo Group Ltd Ord

Good morning and good evening. Welcome to Lenovo's Q1 earnings webcast. Thanks to everyone for joining us. This is Jenny Lai, Vice President of Investor Relations. Before we start, let me introduce our management team joining the call today. We have Lenovo's Chairman and CEO, Mr. Yang Yuanqing, Corporate President and... Hello everyone.

Thank you for joining us today. Last quarter, despite the global geopolitical uncertainties, we kicked off a new year with strong performance. We continue to drive both top-line and bottom-line growth. Our group revenue grew year-on-year for consecutive quarters and reached 12.5 billion U.S. dollars. Our pre-tax income was 240 million U.S. dollars and net income was 162 million U.S. dollars, both more than doubled year-on-year. This quarter's solid results start with our intelligent device group. Our PC and smart device business delivered an exceptional quarter, continuing double-digit revenue growth while achieving the highest fiscal first quarter profit, and further improved our industry-leading profitability. With America's and Asia Pacific achieving 20% and 40% year-on-year growth in revenue respectively, all four geographies delivered over $2 billion revenue, demonstrating the geographic balance and sustainability of our business. In PCs, our volume outgrow our already- recovery in the market by over 13 points to reach our all-time record share of 24% in the portfolio and continuing focus on operational excellence. This strategy enables us to significantly outgrow the market across high growth and premier categories, including workstation, thin and light, visual, gaming PCs, and Chromebook. Looking forward, we are confident that we will continue to drive premier to market growth and industry-leading profitability. We will achieve this by not only focusing on high growth and the premier categories, but also continue to drive innovation in the smart IoT area. Smartifying PC, like the world's first affordable PC and the 5G PC we announced last quarter. Developing new smart devices for homes and offices and capturing the greater opportunity commercial IoT. Our mobile business delivered another profitable quarter and improved pre-tax income year-on-year by US$100 million for the fourth consecutive quarter. In North America, our volume outgrew the market by more than 37 points

and the pre-tax income margin.

Going forward, our mobile business will continue to maintain profitability and seek opportunities to drive profitable growth in new markets with new innovative products. our data center group continued to improve profit year on year, and we gained share in worldwide server volume. Meanwhile, our revenue declined because a few larger cloud computing customers reduced their purchase due to excessive capacity built in the past quarter.

portfolio breadth is correct.

For example, over the past year, 15 countries, including Canada, Korea, Malaysia, already use our solution in weather forecasting and climate research. Moving forward, we will continue executing our strategy to drive software-defined infrastructure, storage, networking, service and solution-led sales, and strengthen in-house design and manufacturing capability for hyperscale. We will also further improve road to market and operation excellence to achieve premier to market growth while improving profitability. In driving intelligent transformation, we established a clear dashboard to monitor the progress and are on track to achieve the goals we have set at the beginning of the year. Driven by the newly established Data Intelligent Business Group or DIBG, Smart Vertical Revenue quadrupled year-on-year last quarter. Our software and service revenue also grew 23% year-on-year, which is almost five times as fast as our overall revenue growth, reaching US$732 million. We believe that anything worth pursuing takes time. But our strong first quarter performance, driven by the right strategy and persistent execution, shows that we are moving beyond last year's success and well on our way to reaching even greater heights. Thank you. Now, let me turn it over to our CFO, Wei-Ming. Wei-Ming, please.

I will take you through Lenovo financial and operational performance in Q1 fiscal year 2020. Let me first share with you the financial highlights. Our Q1 results again demonstrated that we have built a resilient growth engine that is firing on multiple cylinders. We delivered profitable improvements across all businesses, strong margins, stellar earnings per share growth and continued market share gain. ...year-on-year, making up almost 6% of group revenue at an exciting margin profile. Our big data and AI-powered smart vertical... The solution business also quadrupled compared to the same quarter in last year. Product promotion amid new model launches as well as employee bonus in rewarding performance improvements. Group PDI was 240 million, more than double year-on-year. The PDI improvement was consistent across all business groups. PCSD further expanded its industry-leading profitability, while MBG and DCG also improved their bottom line. Net profit attributable to equity holders was $162 million, improved from $77 million in the same quarter of last year. Basic earnings per share came in at 1.37 US cents, up from 0.065 US cents last year. Next chart, please. In Q1, our cash use in operation improved quarter to quarter but decreased year on year to an outflow of $142 million, which was lower than $336 million in net cash generated from operation a year ago, mainly due to the temporary impact from the transition program of AR factoring. With the completion of transition program, AR will be back to normal and improve in next quarter. Our infantry days improved six days year to year thanks to better infantry management in reducing the component infantry across all business groups. Next chart please. Our intelligent device business group which include PC and smart device business group and mobile business group had another great quarter with revenue up 8% to $11.2 billion. The stellar performance of PCSD was supported by the continued commercial refresh demand and our strength in the high growth and premium segments. PDI margin of IDG expanded significantly by 1.6 percentage point year-on-year to 4.7%. There was also a notable year-on-year profit improvement over $200 million being delivered by IDG. In Q1, our PCSD business group has executed extremely well with strong market share gain across nearly all geographical areas. Its revenue was $9.6 billion, up 12% year-on-year, driven by the solid commercial orders and strong momentum across the premium and high growth segments. We continue our double-digit revenue improvement in workstation. thin and light, gaming, and visual business. Furthermore, PCSD set a new record on its global market share, and again, its revenue grew at premium to market. The premium growth to the market reached 13 percentage points in the quarter, representing its highest level in more than five years. The business group pre-tax income was $524 million, and PDI margin expanded 0.5 percentage points to 5.4% on mixed improvement and higher services attach rate. For the fourth consecutive quarter, the Mobile Business Group has delivered more than 100 million year-on-year improvement in its PPI. We are pleased to report robust market share gain in core markets. In North America, MBG premium to market growth reached 37 percentage points in the fiscal quarter, benefiting from the successful expansion of its distribution network and success in new products. Latin America remained the business stronghold with continual profit expansion. MBG revenue was $1.5 billion, down 9% year-on-year, due to our prioritization of core markets. Despite the weaker top line, the focus on profitable market, cost efficiency and improved portfolio contributed to a significant year-on-year PTI margin expansion by 6.3 percentage points. The broader data centre sector was widely reported to be suffering from excessive interest rate on hyperscale and the commodity price decline. Our data centre business in Kewan was unable to be immune from this sector slowdown and its revenue was $1.4 billion, down 17% year-on-year. However, our strategic direction and continued investment to grow the business with higher margin and position as a full-stack industry leader remain intact. Sales from storage, service deferred revenue, and SDI all increased high double-digit year-on-year in this fiscal quarter. As a result, DCG has further narrowed down its pre-tax loss by $11 million year-on-year, and it was its eighth consecutive quarter of PDI improvement despite the industry-wide challenge on revenue growth. Next chart, please. Looking ahead, macro risk remains a key challenge for the global technology sector. Volatility has intensified to one of its highest levels in recent history due to continued trade negotiations and geopolitical power tensions. We will leverage our extensive experience in managing a multitude of macro risks to drive growth and thrive as a business. Our goal is to lead an intelligent transformation era and drive surface and software to become a key profit contributor in the long term. On the group level, we aim to deliver premium-to-market growth on top line and will remain confident to deliver profitable growth for the long term. On PCSD, we target to secure our industry-leading profitability and premium-to-market revenue growth. We will continue to improve user experience, expand innovative product lineup, and grow our surface and software business. For mobile business, we will soon launch more new models with new innovations and will continue to strengthen its competitiveness in its target markets. We will hold on to our strategy in sustaining financial health as a priority for the business while looking for a potential growth opportunity. For the data center business, despite a market pullback, we believe the secular trend of data growth will accelerate the data center demand amid the launch of new technology and services including 5G and edge computing. continue to build its capabilities and position as a full-stack industry leader, while continuing to drive its growth in SDI, storage and networking, services and solution-led sales. In hyperscale, the Group will further strengthen its in-house design and manufacturing capabilities and build a profitable business model. We aim to further improve our profitability Group's core competence. These investments should strengthen Lenovo's capability as a competitive end-to-end solution provider in the era of intelligent transformation. Thank you. Now we can take your questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session.

To ask questions on the phone, please press star 1 and wait for a name to be announced. If you wish to cancel your request, please press the pound or hash key. There will be a short silence while questions are being collated. Our first question comes from the line of Koku Hariharan from J.P. Morgan. Please go ahead.

Hi, morning. Congrats on the good results and thanks for taking my question. I had two questions. First of all, on the new 10% tariffs that has been proposed by President Trump, could we remind investors and us about The preparedness of the three major business groups, PC, PCG, and mobile business group, in terms of how prepared Lenovo is in terms of moving supply chains to other locations other than China, specifically for the U.S. market. And when do we expect most of that supply chain relocation to be completed? That's part one. Second question I had is on data center business group. I think because of the industry weakness, we've seen growth slip to negative territory for the last couple of quarters. When do we expect growth to come back to positive territory for DCG? And specifically for hyperscale, what does the outlook look like? Do we expect to break into any more of the big four hyperscale customers in addition to the one customer that we have in the next Intel CPU design cycle? Thank you.

Thank you, Gokul. So I answer the first question. Kirk, our president of ETCG, will answer your second question. As you have seen our last quarter performance, today there has been an ecological material impact on our business and our results. Our last quarter results show we continue to thrive in this trade war. And also, we are very happy to see the U.S. postponed the 10% increase. So that means that we are less impacted in our business. Meanwhile, I wish you know Lenovo has a globally diverse manufacturing footprint, with sites in multiple locations around the world, which gives us a lot of flexibility compared with our key competitors in the current atmosphere. Meanwhile, we made a commitment to China as part of the strategy. So, in fact, we recently decided to invest more than $300 million in new smart manufacturing facilities in Shenzhen, southern China, so that would not be changed. So...

year-on-year this quarter as Lenovo and we expect in the existing quarter we'll grow even faster in units year-on-year. We expect from a unit perspective we are growing our positions by probably one or two relative to our competition year-on-year given that unit growth.

In non-hyperscale, what we mentioned is a few of the applications we have as we're growing into the next wave of customers.

So we expect three new hyperscale customers to be in Lenovo's top ten customer list very shortly, in addition to seeing the recovery in the fourth quarter calendar of this quarter. Thank you.

Okay, thank you. Thank you for the questions. The next question comes from the line of Abel Lee from Bank of America. Please go ahead.

Congratulations for the good result. Can I ask for the PCE market share? Now you are the global number one, and where is the additional shares you can gain from? And for second one, you are a hyperscaler. What's the current progress on diversification It seems your client base now is not very big. What's your plan going forward? Thanks. We'll jump back off to you. You answered the first question.

Okay, we won't. I think when we look at market share, I think we can see still a very good opportunity in some geo, in the sense that we are number one globally. But we are not yet number one in all the geo. Same for the segment. We are number one in consumer. We are number one in commercial. But when we look at commercial, and we split between large business and SMB, we are by far number one on very large business or enterprise. We are not yet number one in enterprise.

Gianferno?

John, I thought we .

All right, we'll cut to second-class transfer.

Sure, this is Kirk. Respect to hyperscale, previously we stated that we have design wins in business in six of the top ten hyperscalers. Roughly speaking, that represents about 60% of the total available market of the public cloud providers, which I think we're excited that, again, as I said earlier, three of those six customers will enter our top ten customer list as we grow new design wins in the marketplace. And a couple of our existing customers that built it,

Thank you.

Operator, could you try to unmute Gianfranco Lanci's line, please?

Okay. We are ready to test the NESS patching operator.

Certainly. The next question comes from the line of Howard Gao from Morgan Stanley. Please go ahead.

Hi. Congratulations on the quarter, and thank you for my question. So the first question I had was the follow-on on data center. You mentioned that you are expecting man to recover the fourth quarter of the calendar year this year. from Hyperscale customers. And regarding your new business and this demand recovery, is this mostly driven by existing data center placements or new data center builds from your perspective? And then a follow-up on that is you are expecting neat design wins and projects going forward with three new Hyperscales entering your top ten customer list. Do you think that's more of a function of share gain or just overall demand in the coming quarters?

For hyperscale, again, I think... We are building capacity internally to build our own motherboards as well as through system and rack level integration, and we're doing that globally in factories around the world. That new business model is helping us deliver better economics to both us and to our customers, which is resulting in those design wins. So we're clearly, with our strategy of ODM Plus, earning business that previously had gone to the ODM that's moving now to Lenovo. And in the non-hyperscale space, we continue to see hybrid cloud. and we're supporting all the major hybrid cloud providers. We made an announcement with Google this quarter for the first time on Google Anthos. We've got support for Nutanix, for Azure, HCI, and for VMware. So all of those we continue to see growth on as customers choose to do private cloud or hybrid cloud installations on-prem. As a result, we had, again, a ninth consecutive quarter of software-defined double-digit growth rates, and we think that will continue in the future. You know, we view ourselves as legacy-free, so we can move very closely with our partners to software-defined infrastructure for that hybrid cloud.

Thank you. So, John, John is online again, so

Well, you lost me. But when we talk about, we are number one globally, we have almost 25% market share. But when we look from a geographical point of view, we are in terms of geographical growth. in some geo, and also when we look at segment consumer and commercial, we are number one in consumer. We are number one in commercial, but when you look at commercial and you split between large enterprise or very large enterprise and SMB, we are by far number one in large enterprise or very large enterprise. We are not number one in SMB yet. And we also continue to see a very good momentum transition. I think that we will continue to see Windows 10 transition until the end of the year and probably even next year, next calendar year. And last but not least, when you look at our growth in terms of premium segment, host station gaming, thin and light, visual, we have seen in most of the cases last quarter a growth in the range between 30 to 40%. And we still see very good opportunities in terms of growth there. So, I mean, growth, for sure, we will continue to see in the next coming quarters, despite the very high market share already achieved.

So, by the way, we will continue to... to find an opportunity through innovation. So actually last quarter we launched the first portable PC, portable laptop and the first 5G PC. So we think that can drive the growth in the future.

Thank you, Yanqin. Operator, we are now ready for the next question.

Thank you. The next question comes from the line of Sebastian Ho from CLSA. Please go ahead.

Thank you for taking my questions. I have two questions mainly regarding your data center business. Maybe it's not about the business itself but more from the industry trend. First question I'd like to get your insight is how do you see the software-defined infrastructure The more adoption for container, multi-cloud, serverless computing will impact a Lenovo data center business, particularly in your compute and storage. And what's the Lenovo product position on this trend? This is my first question.

Yeah, so this is Kirk. On software-defined infrastructure, again, we've had nine consecutive quarters of double-digit growth. We think we're growing significant market share. If you look at analysts like IDC, they've traditionally shown Lenovo is fastest-growing OEM in hybrid cloud. If you look at both public and on-prem cloud, again, we think we have a very diverse set of partnerships with with Google, with VMware, and with Microsoft that are enabling us to be customer-centric and deliver the best solution based on the customer needs. So I think we will continue. Our goal is to continue to grow at double the market, at 100% premium in the market and software-defined. So I think it will continue to be a strong growth area for us. Obviously, if you look at software-defined storage and things like that, we've publicly said now we're growing at 80%. So depending on which analysts we look at, you know, that could be a very, very significant premium to market. With the relationship we have now with NetApp, we're covering over 92% of the storage market, where a year ago we were only covering 15%. So I think you're going to see us now not only as the third largest storage company in China, but one of the fastest growing, if not the fastest growing storage company in the world taking share in that area as well. You had a second question?

Thank you. Just one follow-up on that is that I think the reason to go for software-defined infrastructure is to simplify the complexity for customers. They are dealing with the IT infrastructures and also try to optimize the computing and storage capacity utilization rate. So that seems to me a potential negative because the utilization rate of the hardware infrastructure likely to be, was not optimized, but going to be more optimized. But I know that Lenovo has a good product here to grow this business, but how do you see the balance here? Is the net positive to the industry and to Lenovo still?

Yeah, I think you know I was at a previous company, Intel, for 24 years. I remember people telling me this when virtualization first became popular that you were gonna have five or 10 or 20 virtual machines and therefore hardware growth would be low. I think if you look at the last decade as you move to virtualization it was only an accelerator even with the higher utilization of servers. And I think certainly private cloud is enabling better utilization but I think it's also slowing a bit of the adoption going to public cloud because you now have some better economics with the security of keeping, you know, your data in the country or on-prem. So I think it's going to be good for the industry. I think containers will be good for the industry, just like virtualization drove, you know, an upgrade.

Question, please.

Certainly. Next.

I just want to consult with Kirk. What do you think about for Epic II in data center? And from your side, do you see any progress for AMD? What do you think about AMD at this moment?

Any other company in the world, we intend to keep that leadership position on AMD.

We think we have the world's best AMD solutions, and yes, we're seeing demand.

Okay. So, from you think that, I'm not sure, for next two or three years, both the two giants for Intel AMD in the server. This is very important, especially cloud will be growth. So do you think the Intel-dominated server situation will be broken or something? That is my interesting from the in the future. So what do you think about it?

If it takes on workload, it'll be a more competitive market than it was in the past. Having said that, we also had Yang Qing and the CEO of Intel announce a new global HPC alliance for us to be able to lead with exascale class computing, not just for a few large supercomputers, but also we call it exascale to everywhere so that even smaller clusters can benefit from our warm water cooling technology. So I think we have strong collaborations with not just Intel, not just AMD, but we're also supporting Ampere on ARM, and we're also a great supporter of GPUs with NVIDIA. And we're seeing demand now in a heterogeneous computing environment across all those architectures.

Okay, thanks, Glenn. Okay, my last question for John Franco or Yuanqing. I think it's great the Trump government delayed the text to the...

But I think .

But after that, I believe they will increase in the import tax. So I'm not sure right now I have any strategy I can share with SAS for next year. So that's my last question. Thank you.

Thank you, Arthur. As I said, the trade war is not good for globalization. It's not good for all multinational companies. We wish that China and the U.S. can sit down and get an agreement as soon as possible. But even with the worst scenario, I think Lenovo is in a better position than our competition because we actually have a globally diverse manufacturing footprint. That's much more flexibility.

We definitely remain committed to

So probably that will increase the total cost. So that means it will impact the consumption. So that's why we think it would be better to gather the women.

Thank you, Yanqin. We are now ready to pass the last question due to limited time. Please write your last question.

Thank you. We have follow-up questions from Abel Lee from Bank of America. Please go ahead.

Hi, can I have a follow-up question on your mobile business? Are you going to launch 5G mobile phone and Qualcomm and Mediacare, which one you will take as a 5G associate solution? And then my second question is about memory price. What if memory price recovery next year, is this going to impair your P&L next year, I mean, for your profit margin?

Yes, of course we have plans to launch 5G phones. We were first to market with the 5G launch horizon at the beginning of the year. And as the market matures, we have some announcements, but today we have nothing to announce. I think we see very good things coming from innovation, including 5G in the near future.

Yes, I think memory price, you know, we have been through this exercise many times also in the past, in the sense that memory price is always relatively unstable. We see memory going up and going down depending on demand. And I think we have been able to show that we can manage the memory price in both ways.

We will continue to manage our...

Like I said, one year ago or 18 months ago, it was exactly the opposite trend. But when you look at our financial result, you don't see or you cannot see any major impact from the memory. I think it's really a matter of execution and operational excellence and how you drive your AUR based on component cost trends.

All right, thanks, John Penkel.

We thank you very much for joining today's call.

Participation, you may now disconnect your lines.