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 Yuanxin. Yuanxin, please.

Hello, everyone. Thank you for joining us. I'm pleased to talk about our record-setting second quarter performance and our vision for further growth in today's fast-changing world. Despite a challenging environment, last quarter, we delivered a record quarter performance in both revenue and profit. Revenue reached a new height of $14.5 billion, growing over 7% year-on-year. As all of our core businesses delivered year-on-year growth for the first time in six quarters, Profit showed even stronger growth, with pre-tax income and net income both up over 50% year-on-year. Pre-tax income reached $470 million, and net income reached $310 million. In addition, the top three credit rating agencies granted Lenovo strong investment-grade rating, further strengthening our ability to finance our growth. In our intelligent device growth, PC and smart devices delivered another historic quarter, revenue up 8%, while pre-tax income improved 18% year-on-year. Both set new records, Although market is shifting to consumer segment, we still maintain our industry leading and record profitability of 6.3% through excellent and high efficient operations. And we return to number one in PC with almost 24% market share. Our focus in high growth and premium segments continued to drive strong growth. Despite the currency volatility in Latin America, our mobile business revenue rose 39% quarter to quarter and returned to year-on-year growth as we continued our strong recovery from the impact of COVID-19. Besides the further solidifying presence in our stronghold market like Latin America and North America. We have accelerated our development in Europe and the Asia-Pacific and saw clear results. In addition to our strong product portfolio, we launched Razer 5G football smartphone and Lenovo Legion gaming phone, and both have been well-received by markets. In data centers, we again saw double-digit revenue growth with improved profitability year-on-year. Our cloud service provider segment continued to grow over 30% year-on-year with strong growth across all geographies, particularly thanks to years of investment in in-house design and manufacturing. We discussed the major ODMs to become the motherboard and system design partners to our top cloud service provider. We have also expanded the capacity of our factory in Montreal, Mexico, to serve data center customers across the Americas. In enterprise and SMB segment, our revenue stayed close to flat year on year. But we did outperform the markets. Our focus continues to drive double-digit growth year-on-year across software-defined infrastructure, storage, software and service segments. Even more, we recently announced an exciting partnership with SAP. Our two-scale infrastructure-as-a-service combined with SAP's HANA Enterprise Cloud enables customers to keep their sensitive data on-premises and secure, while enjoying the flexibility of a pay-as-you-go consumption model. We already see strong customer response to this offering. Our service-led intelligent transformation continues to make solid progress with smart IoT, smart infrastructure, and smart verticals revenue, each growing by strong double-digit year-on-year. In terms of service, our attached service, managed service, and solution service also continued faster growth. Particularly, DAS, device as a service, tripled its total contract value year-on-year. Overall, software and services revenue grow to a new record of over 1.2 billion US dollars, up 39% year-on-year, and now accounts for 8.5% of our total growth revenue, even as total revenue increases. Our e-commerce revenue also grew by over 40% year-on-year. I have talked about the long-term growth of the total technology market in the new normal for two quarters. PCs and tablets are now one device per person, and the cloud infrastructure demand is growing rapidly because of the work, learn, and play from home economy. We believe the total PC market will grow by around 25 million units and reach very close to 300 million units in just the current calendar year. And both device and cloud infrastructure market growth will continue for the long term. To meet the increasing demand of our valued customers, we are committed to further improving our supply going forward. As the pandemic changes customer behavior, Lenovo continues to innovate and lead in this period of rapid change. Last week, we demonstrated our results and vision in innovation at our annual flagship event, Lenovo Tech World. At the climate device level, we are expanding the idea of a computer to a computing everywhere, with new In edge, we offer both hardware and our own AI-enabled edge computing platform. In cloud, we can design, install, and maintain public and private cloud, as well as provide multi-cloud management solutions. And we are extending our infrastructure as a service to attach platform as a service and software as a service. In network, we now have 5G essential patent applications and implement 5G networks and applications with network cloud convergence, virtualization, and network slicing technologies. Finally, With all these technologies combined with intelligence like machine learning and artificial intelligence, we generate insights and provide solutions to customers of various industries and drive intelligent transformation. I believe that technology has never been so essential to humanity as it is today. Customers have new requirements to meeting this new normal. And our success in meeting these needs is demonstrated not only by our strong results this quarter, but also by how our service-led transformation prepares our growth well into the future. Thank you. Now, let me turn it over to our CFO, women. Women, please.

Thank you, Yuanqing. I will now take you through Lenovo's financial and operational performance in the second quarter, fiscal year 2021. Next chart, please. The group continued its record performance in the second fiscal quarter. We set a number of performance records while still navigating the ongoing pandemic. Our revenue increased 7% year-on-year to reach an all-time high of $14.5 billion. And all three business groups recorded positive year-to-year revenue growth. Resilient and strong growth was achieved as a result of structural changes in demand of computing devices, which include e-learning, work from home, played at home, and cloud. This also resulted in a gain in market share during the quarter. The group's gross margin improved 0.2 points quarter-on-quarter thanks to high growth and premium segments. The software and services and e-commerce business grew their revenue strongly by 39%, and 42% respectively year-on-year. Their high margin rates continue to support our strong profit trajectory. The segment profitability has improved, including margin rate expansion in consumer, Chromebook, e-commerce, and gaming segments. However, a higher COVID-19-led logistic cost caused a moderate year-on-year decline on gross margin. Our E2R ratio was reduced by 1.2 percentage points to 11.6%. in the quarter, a result of our disciplined expense control and operational efficiency. Next slide, please. Our business group total pre-tax profit grew 15% year-on-year to reach a new record of $654 million. During the quarter, we recognized a fair value gain of $104 million on strategic investment netted by a $53 million provision for intellectual properties in our unallocated headquarter and corporate expenses. Our profit performance has reached a new milestone. Profit actionable to equity holders increased by 53% to all-time height of $310 million, with consistent improvement across all three of our business groups. The basic earnings per share came in at 2.59 US cents, up 53% from the previous year. The Board of Directors declared today an interim dividend of 6.6 Hong Kong cents, representing an approximately 5% increase on the interim dividend paid in the last fiscal year. Next slide, please. We lowered our net debt by 390 million, thanks to the strong cash flow generated from our operations, and our finance costs reduced further by 45 million, or 33% year-on-year. In October, we received strong inaugural investment-grade ratings, from three leading credit rating agencies and successfully completed the first 144A issuance of 1 billion 10-year senior notes. We will use the proceeds to retire a portion of the perpetual securities and secure notes in an effort to improve the efficiency of the group's liability management while further reducing our financing costs and extending our test tenure. Infancy days improved sequentially by two days thanks to strong demand. Its year-on-year increase of 11 days was due to our strategic buy-ahead actions to secure critical parts. Next slide, please. PCUSD revenue grew by 7.6% year-on-year to $11.5 billion in the quarter. Pre-tax margin expanded by 0.6 percentage points to a record of 6.3%. Pre-tax profit increased by 18% year-on-year to $723 million. These record-breaking achievements in the second fiscal quarter are encouraging as peak of seasonality normally occurs in our third quarter. I would like to take this opportunity to discuss our pre-tax margin for PCUSD. The process of managing margins is dynamic. We have enjoyed strong scaling benefits and we have the most competitive profile in each of the segments we are servicing. Even the consumer and Chromebook sales, which traditionally carry lower margins, will focus on higher-margin projects to optimize and improve their segment profitability. For high-margin products such as software, services, e-commerce, and high-growth segments including thin and light and gaming, we have doubled down on our investment to boost the contribution of these segments and hence gain market share. We are confident in maintaining the PDI margin of about 6%, on a sustainable basis. Next chart, please. Thanks for rebounding market demand. The team's continued efforts in expanding portfolio and carrier ranging, MBG average selling prices improved, and the business group delivered strong revenue recovery, resulting in 39% sequential growth, returning to a revenue scale of $1.5 billion, up 1% year-on-year. The sales recovery helped to narrow MBG losses before taxation by $28.25 million to $22 million, and the business was now cash flow positive. The business was impacted by higher freight costs, which showed a decline in profitability by $30 million year-on-year. We expect the business will continue to grow and resume its profit growth track going forward. The business will continue to execute its portfolio expansion to increase global market share, Its 5G for All market strategy is starting to bear fruit. With our flagship Razer 5G phone launches, our 5G products now span across all price segments, which helps to drive ASP expansion. The revenue contribution from 5G models more than doubled quarter-on-quarter. The business will continue to execute its strategy while preparing for more aggressive carrier penetration. Our DCG continues to capitalize on cloud demand, and achieved premium-to-market growth during the second quarter. With strong momentum and continued client diversification, cloud service provider, or CSP, revenue growth accelerated to 34% year-on-year. The prospect for CSP has been promising, thanks to its rich mix of solutions and design wins, supported by our in-house design and manufacturing. Enterprise and SMB, or eSMB, Segment continued to outperform the market. Our revenue posted a small year-on-year decline of 1.7%, a solid performance compared to the sluggish sector. We achieved this superior performance based on the double-digit growth in software-defined infrastructure, storage, and software and services. ECG business continued to improve its operational result by 11 million quarter-on-quarter and 4 million year-on-year to a pre-tax loss of 47 million. The group efforts in product diversification and development of alternative platforms, the availability of high-end systems, as well as storage solutions have started to pay off. With our continual works in more margin wins for profitable projects and advanced configurations, DCG is on track to drive long-term growth and profitability over time. Next slide, please. The invoice revenue of software and services surpassed $1.2 billion in the second quarter with a 39% year-on-year growth, whereas deferred revenue grew 26% to nearly $2 billion. Since our break-off the pandemic, there is a surge of interest in our service capability as clearly reflected in the strong new contract pipeline we have built across attached services, many services and complex solutions. Among all, gas and infrastructure as a service are gaining significant momentum. The recent DCG partnership with SAP was an important landmark deal, highlighting the potential for infrastructure as a service. Next slide, please. Looking forward, the dynamic shift in PC demand will continue to create tailwinds for e-learning, work-from-home, play-from-home, cloud infrastructure, and 5G. We are optimistic that these long-term structural trends could enlarge the addressable market for PCSD and cloud infrastructure, as well as accelerate the development of 5G services. Our PCSD business will continue to drive premium to market revenue growth through investment in the high growth and premium segments. We are confident to increase supply to meet the strong demand. We will continue to build capabilities to drive sales growth in the software and services business and expand e-commerce based on this well-established infrastructure. For the MBG business, the Group will invest in product innovation including offering new and differentiated 5G smartphones. MBG will seek to strengthen its competitiveness in target markets to grow at a premium to the market and improve long-term profitability. For the DCG business, the Group aims to deliver premium to market growth and improve profitability. For its cloud service provider business, the Group's new design wins will expand its wallet share with existing accounts by leveraging its unique strength in the global supply chain and worldwide reach while expanding its portfolio with new product solutions and platforms. Lastly, in the enterprise and SMB segment, the group will grow its high-margin service attach rate, upsell premium services, and expand its hybrid cloud solutions to drive profit improvements. Thank you, and now we can take your questions.