Lenovo Group Ltd S/Adr

Good morning and good evening. Welcome to Lenovo's 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 CEO, Mr. Gianfranco Lenci, Group CFO, Mr. Wong Wai-Ming, President of Data Center Group, Mr. Kurt Skaugen, and President of Motorola, Mr. Sergio Buniak. We will begin with a presentation shortly, and after that, we will open the call for questions. Without further ado, let me turn the call over to Yuanqing. Yuanqing, please.

Hello, everyone. Thank you for joining us today. Despite the trade war, currency exchange shock, CPU shortage, and the pandemic, Lenovo still delivered a solid result this past fiscal year. Our full year revenue again exceeded 50 billion US dollars, almost the same as our record revenue the year before. Profitability showed a strong growth with pre-tax income reaching historical high of more than US$1 billion, up 19% year-on-year. Net income was US$665 million, up 12% year-on-year. In our intelligent device group, PC and smart devices again led the way through solid execution. Revenue grew to nearly US$40 billion. Profitability was even better. Pre-tax income reached US$2.3 billion, more than 18% year-on-year growth. And the profit margin was almost 6%, up 0.7 points year-on-year. Both set new records. We solidify the leadership in PCs, improving market share by over one point to 24.5%. This strong sustainable growth is driven by our consistent strategy to focus on and invest in the high growth segments. Workstation, Chromebook, visuals, thin and light, and gaming PC volume all outgrew the market by double digits. Our mobile business was on target for a breakthrough year until the impact in the fourth quarter. Overall, revenue was down to $5.2 billion, and the pre-tax loss was $43 million, greatly narrowed by 96 million US dollars. Our Moto G family reached 100 million lifetime units worldwide. And we launched the first clamshell foldable smartphone, Razr, to re-enter the premier segment. While overall data center revenue declined year on year due to softer hyperscale demand, and a sharp commodity price drop. Now, hyperscale revenue grows more than 5% year-on-year. This is driven by double digital growth in the key growth segments of software-defined infrastructure, storage, other software and services. Particularly, storage revenue grows more than 50% year-on-year. as well as over 14% growth in server volume and nearly 23% growth in China. We also extended number one ranking in high-performance computing with 173 designs worldwide. Our intelligent transformation showed solid progress Smart IoT revenue quadrupled year-on-year, driven by AR, VR, smart office, and smart home. Smart infrastructure grew 37% year-on-year as network function virtualization business started to contribute revenue of more than $70 million. And smart vertical revenue more than doubled thanks to strong growth in data intelligent business growth, smart healthcare, and smart education solutions. Software and services completed a breakthrough year, with revenue reaching 3.5 billion US dollars, up 43% year-on-year, and becoming the catalyst for our overall transformation. These solid results are driven by our core competencies of operational excellence and the global local philosophy. The same strengths also helped us overcome the challenges from the pandemic last quarter. While COVID-19 continues to impact the world, I'm very proud of the way Lenovo responded both as a business and a corporate citizen. While protecting our employees' safety and well-being, Lenovo also continued to provide resources and expertise to help our communities. This includes the donation of IT systems to hospitals, devices to students of low-income families to access e-learning and support to research into cure of the virus. The total donation of Lenovo to that is approaching 15 million US dollars in value. Create a challenge like this is a critical test to any company. At Lenovo, we fully leveraged our strong management and execution capability to mitigate the impact and deliver the results beyond the expectations. While limiting revenue decline year-on-year to less than 10%, we delivered a profit of US$7 million in pre-tax income and a net income of 43 million US dollars. Our PC and smart device business delivered a strong quarter. With our operational excellence, our PC manufacturing in China was one of the first to resume full production in the industry and achieved daily, weekly and monthly production records in March This helped us meet the strong PC demand driven by work from home and study at home due to the lockdown. As a result, we contended the revenue decline of PCSD and greatly improved the pre-tax income by 15% year-on-year and the profitability by a whole point to a record higher of 6.2%. Our PC volume outgrew the market by more than four points, further extending our leadership as the number one PC vendor. Our PC revenue outgrew the market in all geographies. In particular, our volume in North America grew almost 18% in a declining market And the market share improved 3.4 points year-on-year. Our share in EMEA also increased more than 2 points year-on-year. Our mobile business was severely impacted by the pandemic, as our primary smartphone factory in Wuhan remained closed for much of the quarter. However, we still produce 6 million units of smartphones, leveraging our global manufacturing footprint. In data center, our overall server volume continued double digital growth year-on-year. Hyperscale revenue remained a challenge due to commodity price drop, but the now hyperscale revenue continued to grow year-on-year. driven by the 4S software-defined infrastructure, storage, software, and services. And our intelligent transformation continued to show strength. Smart IoT revenue more than doubled, and the smart infrastructure, smart vertical, saw double digital growth in revenue year-on-year. Software and service revenue grow 38% year-on-year, contributing 8% of the group's total revenue. In the new fiscal year, Lenovo will prepare for uncertainty and strive for the best results. Even more, we will capture the opportunities brought by the market changes for long-term sustainable growth. the work from home, study at home, e-commerce, online gaming, and telehealth will become the new normal and expand the total PC and smart devices market size. We will continue to innovate to meet new demand and focus on the high growth segments to drive even stronger growth. Meanwhile, Our new premium and 5G smartphone products will help us capture the opportunity of much anticipated 5G mobile market. As digitalization and smartification accelerate, we will not only address the increasing demand for infrastructure, but also support the total solution needs with our broad product offerings and service capability. This is also highly aligned with our strategy to accelerate intelligent transformation through building services and solutions into our next core competence. Last year presented many challenges, but each time Lenovo leveraged our core competencies operational excellence, and global local philosophy to overcome them effectively. In the year ahead, we will continue to demonstrate resilience and strive to take our business to new heights. Thank you. Now, let me turn it over to our CFO, Wei Ming.

Thank you, Yang Jing. I will now take you through Lenovo financial and operational performance in Q4 and fiscal year 2020. Next chart, please. Thank you, Yang Qing. I will now take you through Lenovo financial and operational performance in Q4 and fiscal year 2020. Next chart, please. The group set a historic record year in Lenovo history with 1 billion PDI, up 19% year-on-year. thanks to strength in PCSD and profit improvement of MBG and DCG. For the full year, we generated $50.7 billion in revenue, largely stable year-on-year despite challenges affecting sector demand and supply. Our PCSD business gained 1.2% of worldwide share and maintained its number one position in the sector while setting all-time records on shipment, revenue, and pre-tax profits. Both DCG and MBG improved their annual profitability for the third consecutive year, although their revenue declined due to COVID-19 impact and change of sector dynamics. Our transformation actions led to accelerated growth in high-margin software and services business. After consistent double-digit growth throughout the year, software and services business grew to become a 7% revenue contributor. The group gross margin expanded 2.1 percentage points to a new record of 16.5% for the year, primarily due to profitability of PCSD and further boosted by high-margin software and service business. Operating expenses increased by 12% to $6.9 billion, and the year-to-hour ratio rose 1.5 percentage points to 13.6%, as we continue to invest in sales, marketing, research, and provide incentive to reward performance. Profit attributable to equity holders was $665 million, and the basic earnings per share came in at 5.58 U.S. cents. Today, the Board declared a final dividend of 21.5 Hong Kong cents per share. Taking into consideration of the interim dividend of 6.3 Hong Kong cents per share, total dividend will be the same as last fiscal year. Next chart, please. In Q4, our cash flow generated from operations was $432 million, a year-on-year improvement of $910 million. For the fiscal year, we generated a total of $2.2 billion in operating cash flow, representing a year-on-year increase of $737 million and net debt was reduced by $404 million year-on-year. The strong profit improvement and better working capital management are positive catalysts. Our infantry days increased by 15 days year on year as we started to buy ahead of strategic paths in Q3 and accumulated more paths towards the end of Q4 in preparation for future orders. We recently issued a five-year U.S. dollar bond amounting to $1 billion, partly to repay a $4 billion RMB bond and partly to boost our cash pool as it is prudent to strengthen liquidity in light of the uncertain economic outlook. Let's move to segment performance for the last fiscal year. Next chart, please. Our intelligent device business group, consisting of PCSD and MBG, delivered an outstanding year in the midst of several macro events. Its PDI improved 25% year-on-year to set an all-time record of $2.3 billion. Both PCSD and MBG contributed to the profit improvement. IDG's revenue was up 0.5% year-on-year or up 3.1% in constant currency. The most significant macro event in the year was the pandemic. As one of our MBG factories is in Wuhan, China, the extended closure of the factory caused a severe shortage in its supply and resulting in a 10% year-on-year revenue decline for IDG in Q4. Next slide, please. This is another record-setting year for our PCSD business. We achieved record-breaking revenue, shipments, and PPI. By leveraging its operational excellence, portfolio optimization, and sales execution, PCSD remained as the fastest-growing PCOEM among the global top five players for two consecutive years with record-high market share. The business revenue reached an all-time high at $39.9 billion, up 4% from the prior year. The high growth and premium segments including workstation, thin and light, visual, and gaming PC all report year-on-year units growth of 28% to 38%, helping the business to deliver premium-to-market growth and to reinforce its global number one position in the PC market. PCSE reported a record PTI of 2.3 billion, up 18% year-on-year, and its PDI margin expanded 73 basis points to 5.9%, boosted by strategic investment to drive sustainable return in high-growth and premium segment sales and double-digit growth in its software and service business. Next slide, please. MBG's strategy has proven to be a success in driving a balance between profitability and regional growth to turn the business profitable in the first three quarters until COVID-19 in quarter four. MBG protect loss improved by 96 million year-on-year, thanks to its solid strategy execution and focus on profitable core markets, product portfolio enhancement, and expense reduction. Its revenue declined 90% year-on-year due to its focused market strategy. In return, its two core markets, Latin and North America, deliver healthy profitability and year-on-year profit expansion. Next slide, please. Group concluded the fiscal year with a 9% year-on-year revenue decline and the third consecutive year in PPI improvements. Softness in hyperscale revenue was driven by customer inventory digestion and commodity price erosion, partially offset by strength in non-hyperscale business. However, starting Q4, DCG hyperscale shipment growth recovered to double-digit year-on-year. The growth trajectory of non-hyperscale revenue started to improve in Q2. For the last three quarters of the fiscal year, DCG non-hyperscale shipments grew by consistent double-digit year-on-year, owing to strong momentum in storage, software-defined infrastructure, and software and services, as well as leadership in high-performance computing. By regional market, DCG China outperformed and its shipment in non-hyperscale segment increased significantly. high double-digit in the year after investment were put in place to drive channel and product expansion while taking advantage of DCG joint venture with NetApp to expand the addressable market in storage products. Now let's shift to Q4 performance. Next chart, please. We deliver a solid Q4 despite the incredibly challenging supply disruption from the pandemic. Our operational excellence and global footprint enable a strong quarter-end supply expansion for PCSD. Riding on the unexpected demand dynamics favouring work from home, our rapid supply recovery helped PCSD to deliver premium-to-market growth in all regions and maintain its global number one position. Other bright spots included the non-hyperscale business of DCG and our software and service business. These strong performances were offset by severe supply constraint of MBG and lingering component price erosion of our hyperscale business, thus resulting in a 9.7% year-on-year revenue decline to $10.6 billion for the quarter. Gross margin expanded 1.4 percentage points to an all-time high of 17.6%, thanks to PCSD's consistent focus to prioritize growth on premium segments. The continuing strength on this high-margin software and service business and improved segment profitability. PDI was 77 million, down from 118 million in the same period last year. The healthy profit expansion by PCSD was partly offset by pre-tax losses from MBG and DCG as COVID-19 kept the supply of MBG and DCG profitability due to the rising freight and shipping cost. Next slide, please. In Q4, the pandemic resulted in a sector-wide factory shutdown in China. Nevertheless, PCSD business was able to leverage its operational excellence and global footprint to snap back the supply faster than its competition and ride on work-from-home demand tailwind to capture market share. Its premium-to-market growth reached 4 percentage points in the quarter. However, the supply disruption in the first part of the quarter weighted on the Q4 revenue, resulting in a 4 percent decline year on year. PCSD business reported a 15% PDI growth, and its PDI margin remains stable at a record level of 6.2%, thanks to premium segment sales, rising software and services contribution, and improved segment profitability due to new growth opportunities such as work-from-home demand. Next chart, please. MBG performance in fiscal Q4 was impacted by a factory shutdown in Wuhan, China, for the most part of the quarter because of COVID-19. MBG was able to leverage the support of our global footprint to deliver 6 million smartphone shipments, but the zero loading of Wuhan factory for most of the quarter resulted in a year-on-year revenue decline of 47%. MBG was able to contain its pre-tax loss at 60 million after expense action partly mitigated the negative impact from revenue shortfall. Next slide, please. In Q4, DCG's server shipments grew double digits year-on-year. Although its revenue growth again was constrained by lingering commodity price erosion in hyperscale business, DCG revenue declined 3% year-on-year to $1.2 billion. The non-hyperscale business continued its momentum thanks to double-digit year-on-year revenue growth in storage and its software and services business. We were ranked global number three in the entry storage market, and started to see storage profitability in expansion. Losses expanded 23 million year-on-year in the quarter due to higher shipping and freight costs amidst COVID-19 city lockdown. Next chart, please. Operating in this complex global environment, our company will leverage its extensive experience in managing a multitude of macro risk, operational excellence, and global footprints to deliver consistent performance. will continue to innovate and promptly add on industry growth opportunities, including the search of work from home and study at home tailwinds. These long-term structured trends could enlarge the addressable market for PCSD and cloud infrastructure demand, as well as accelerate development of 5G services. The group will also exercise disciplined expense control to optimize its liquidity and financial health. Our PCSD business targets to continue its premium-to-market growth and industry-leading profitability. Its consistent focus on high growth and premium segments, investing in software and services business, and expanding e-commerce will all help to drive new growth opportunities. For mobile business, the group will continue to protect its position in its stronghold market and strengthen its competitiveness in target markets to grow at premium-to-market, improve long-term profitability, and reenter flagship segment through product innovation. Now the supply is normalized. On the back of lean channel inventory and pent-up demand, the group is well-positioned for future improvements where uncertainty is off. In DCG business, the group aims to deliver premium-to-market growth while improving profitability. In the hyperscale segment, the group is offering the broadest custom hyperscale server and storage solution in its history. BCG will strengthen in-house design and manufacturing capabilities, bring superior solutions to global and Tier 2 hyperscalers, and build a profitable business model. In the non-hyperscale segment, the group will continue to drive growth in the enterprise servers, SDIs, storage, and the software and services business. The group will also further enhance its capabilities in professional services and solution-based expertise. Thank you. And now we can take your questions.