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, 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. I'm pleased to discuss yet another record-breaking quarter. Our innovative product portfolio and operational excellence drove growth across all businesses, and our transformation investments are paying off. For the second straight quarter, we achieved hyper-growth in both revenue and profit. Our group revenue grew over 22% year-on-year, reaching $17.2 billion. This new record is $2.7 billion higher than the previous one we achieved just last quarter. In fact, profit achieved even stronger growth, with pre-tax income and net income both up over 50% year-on-year, reaching new records. Pre-tax income reached 591 million US dollars, and the net income reached 395 million US dollars. All of our core businesses delivered both top-line and bottom-line year-on-year growth. Our record performance starts in our intelligent device group, where PC and smart devices business delivered another historic quarter. Our innovative product portfolio adapted quickly to meet customers' new needs in work, learn and play from home, and captured a strong demand. Our revenue grew over 26%, while pre-tax income improved 35% year-on-year. and industry leading profitability further improved to 6.6%, all achieved new records. We extended our number one position in PCs, growing PC volume to historical market share of 25.3%. Our focus in high growth and premier segments continued to drive double, even triple digital growth in both revenue and volume. We saw strong performance across all geographies. In North America, we achieved almost 60% volume growth year-on-year. In EMEA, we became number one in PC for the first time. In Asia Pacific, profitability reached a new record. In China, we also achieved over 30% year-on-year shipment growth. For several quarters, I have predicted that the total PC shipment will likely reach 300 million units in 2021. Many people thought it was too optimistic. But the latest IDC data has confirmed that the total PC market last year has indeed surpassed 300 million units, driven by strong Q4. Obviously, this proves our view that work-study-play-from-home has become a new lifestyle. So the information consumption upgrade will drive one device per person trend and expand from just smartphones to also include PCs, tablets. And it will continue to drive the demand of PCs, tablets, and smart devices for the long term. So looking forward, we will continue to fulfill customers' new needs with innovative products and leverage our operational excellence to capture the strong demand. Meanwhile, our mobile business delivered double-digit revenue growth year-on-year. and not only resumed profitability since the pandemic, but also achieved record profit since the Motorola acquisition. In Latin America and North America, our stronghold remains solid. Across our expansion markets in Europe and Asia, we had a strong double and triple digital growth. Thanks to expanded carrier relationships and a stronger product mix. Looking forward, we will continue to drive growth with our strong 5G product portfolio. Our data center group achieved record revenue of over 1.6 billion US dollars while improving profitability by almost a point year-on-year. Both our cloud service provider and enterprise SMB segments delivered year-on-year growth at a premiere to the market. Enterprise SMB reached $1 billion in revenue, the highest amount in over three years. In storage, we had record revenue and outgrew the market by 11 points. We also had record revenue in software-defined infrastructure and services. And we extended our number one position in top 500 supercomputers to 182 systems. Our true-scale private cloud infrastructure as a service, combined with SAP's HANA Enterprise Cloud, has been well received and is generating a strong pipeline of demand. Lenovo is a unique player, providing a full range of IT infrastructure, from on-premise data center, private cloud, private cloud infrastructure as a service, to public cloud infrastructure. Looking forward, with our strong in-house design and manufacturing capabilities, we will capture the growing hybrid cloud and infrastructure demand, and continue to outgrow the market while improving profitability. Our service-led intelligent transformation continued to make strong progress as total software and service revenue grew almost 36% to a new record of US$1.4 billion, over 8% of total group revenue. Our attached services, managed services and solution services achieved year-on-year growth of 26%, 73% and 49% respectively. Device-as-a-Service's total contract value achieved a high double-digit growth of 74% year-on-year. In addition, our e-commerce revenue grew 45% year-on-year and continued to set new records. Looking forward, we will further drive service-led intelligent transformation through further driving growth in managed services, particularly device-as-a-service. and leverage our experience and capabilities to build solutions focusing on smart manufacturing, smart education, smart healthcare, and more. Clearly, 2020 was a challenging year that brought remarkable changes to our world. Thanks to our continued innovation, excellent operations, and robust resilience, Lenovo quickly responded to the changing market and delivered excellent results. As we prepare for the new fiscal year ahead, we will further align our organization with our strategy and sharpen our execution. Effective April 1, 2021, we will establish a new business group, SSG Solutions and Services Group. by integrating all the existing services and solutions teams across the company into a dedicated organization. Thus, the three business groups could be fully responsible for the execution of each S in the 3S strategy. IDG will be led by Luca Rossi. Senior Vice President and current President of PCSD in EMEA and Latin America. To focus on smart IoT, ISG, Infrastructure Solutions Group, renamed from Data Center Group, will continue to be led by Kirk Scoggin, Executive Vice President and President of Data Center Group, and drive smart infrastructure. And the newly formed SSG Solutions and Service Group will be led by Ken Wang, Senior Vice President and current President of PCSD in Asia Pacific, will be responsible for growing our business in smart vertical and services. At the same time, In order to further improve synergies among business groups and build a unified customer-centric interface, we will integrate the existing Jio model structure into two sales organizations. China Jio, to be led by Liu Jun, Executive Vice President and current President of IDG in China. and the International Sales Organization to be led by Matt Zielinski, Senior Vice President and the current President of PCSD in North America, covering Asia Pacific, EMEA, North America, and the Latin American GEOs. The two sales organizations will assume the same sales function system and drive an integrated go-to-market strategy across all business groups in their respective locations. They will face our customers and partners unified as one Lenovo. As a result, I believe we will be able to respond more quickly to customer needs and market demands and further unlock the company's true value. I would also like to share another news. Mr. Gianfranco Lanci, President and Chief Operating Officer of Lenovo, will be retiring from the company in September 2021. Gianfranco has been instrumental in our success, growing Lenovo into the undisputed number one in global PC market in the past decade. His incredible legacy has led much of the foundation for our future growth. During the transition period to September, he will continue to fulfill his responsibilities while ensuring a smooth transition for the future. In 2021, with our planned issuing of Chinese depository receipts on Shanghai Stock Exchange, We will also further invest in technology and innovation, drive intelligent transformation across industries, and create sustainable growth for our company. Thank you. Now, let me turn it over to our CFO, Wei Ming. Wei Ming, please.

Thank you, Yuanqing. I will now take you through Lenovo's financial and operational performance in 3Q fiscal year 2021. Next chart, please. This quarter, the group again set several performance records. We delivered sales growth across geographies and businesses, robust margin, all-time high group revenue and profits, and strong cash flow generation. Our service-led transformation continued to accelerate, and we further enhanced our service portfolio to build new growth catalysts. Our group revenue increased 22 percent year-on-year to $17.2 billion. PCSD and DCG achieved record sales, while MBG grew its revenue at a double-digit rate. The group's growth margin improved 10 basis points year-on-year, and our e-to-hour ratio was reduced by 0.5 percentage points to 12.1 percent, a result of our operational excellence and optimization in sales mix. Software and services and e-commerce businesses grew their revenue strongly by 36 percent and 45 percent year-on-year, respectively. The high margin rates continue to support our profit trajectory. Our net income grew 53% to an all-time high of $395 million. Record-breaking PCSD profit and consistent profit improvement in MBG and DCG helped in setting this new milestone. The basic earnings per share was 3.31 US cents, up 53% from the previous year. In Q3, Our cash flow generated from operation improved by 1.425 billion year-on-year to 1.963 billion. Our net debt level was reduced by 755 million year-on-year. The supply dynamics remain a challenge for the sector. Our infantry days increased four days year-on-year as we continue to secure critical parts to fulfill strong future demand. Sequentially, infantry days lowered by five days quarter-on-quarter thanks to strong demand. AR days also improved eight days year-on-year thanks to improved efficiency in our factoring program. Next chart, please. PCSD achieved all-time high revenue and profit. The sector demand was strong and above expectation, as supported by lifestyle changes including one PC per person trend and rising usage intensity, leveraging our operational excellence, product innovation, and quick time-to-market capabilities to address new demand tailwinds. PCSD revenue grew by 27 percent year-on-year to US$14 billion in the quarter. Our unique hybrid manufacturing strategy allows us to have greater flexibility and more supply to fulfill strong sector demand. We boosted our share gain to capture 25.3% of global market share and expanded our market share lead to 4.2 points ahead of the number two player. We also became number one in EMEA for the first time. PCSD further scaled up its higher margin and high growth segments to drive expansion of pre-tax margin by more than 40 basis points to a record high of 6.6%. The thin and light gaming PC, e-commerce, and software and services business saw double-digit growth and market share gain. Pre-tax profit increased by 35% year-on-year to $925 million. Next chart, please. MBG revenue grew 10% year-on-year, thanks to the team's continued effort in expanding portfolio and carrier arranging. with launch of new 5G models and gaming phones. The group has improved its average selling price by 19% year-on-year, and such product makes improvement help the business to resume profitability. Its PTI dollar reached US$10 million and could have improved further if it wasn't for the high freight cost and industry-wide component shortages. The revenue contribution from 5G models now represent more than 10% of MBG revenue, significantly growing from the previous quarter. the business will continue to execute its 5G for All strategy to make 5G more accessible in all prices spectrum while continuing to make important carrier penetration to drive profitable growth. Next chart, please. In the third quarter, our DCG achieved record revenue, driven by solid growth across both CSP and ESMB segments. The CSB business continued to capitalize on cloud demand and achieved double-digit revenue growth across regions, except for China, where orders with better profitability were given higher regional priority. ESMB business delivered the highest revenue in three years, thanks to its record performance in software-defined infrastructure, storage, high-performance computing, and services. These high-margin products with higher revenue mix resulted a better profitability profile. The DCG business improved its operation result by 14 million year-on-year to a pre-tax loss of 33 million. The Group's efforts in product diversification and development of alternative platforms, the availability of higher-end systems, as well as storage solutions, have started to pay off. Given our recent design wins for profitable projects and advanced configuration, DCG is on track to drive long-term, top-line growth and profitability expansion. Our teams are executing well on the software and services-led transformation, accelerating our pace further to transitioning into a service model and expanding our service scope. The software and services business, which carries the highest margin profile among all products, reported invoice revenue and deferred revenue growth of 36% and 30% year-on-year, respectively, representing to around 8.1% of the group's revenue. Among the three key business elements, managed service, including devices service, commonly called DAS, enjoyed 73 percent growth because of strong progress in contract wins globally. Complex solution also remained strong and posted 49 percent growth from all verticals. Uptest service continued to grow steadily, up 26 percent. Next chart, please. Looking forward, the Group will continue to leverage its core competence in driving earning growth and business transformation by taking advantage of tailwind opportunities, including e-learning, work from home, play from home, cloud infrastructure, and 5G. We remain optimistic that these long-term structural trends can expand the addressable market for PCSD and cloud infrastructure, as well as accelerate development of 5G services. Our PCSD business will leverage our operational excellence and global franchise to increase supply to meet strong segment demand and drive consistent premium-to-market revenue growth through investment in the high growth and premium segments. We will continue to build capability to drive sales growth in software and services business and expand e-commerce based on our well-established infrastructure. For MBG business, the group will further push product innovation and accelerate 5G smartphone launches to strengthen its stronghold markets. MBG will strengthen its competitiveness in target market, grow at a premium to the sector, and improve long-term profitability. For DCG business, the group aims to deliver premium-to-market growth and enhance profitability. For our cloud service provider business, The group's recent design wins will attract new customers and expand its share with existing accounts by leveraging its unique strength in the global supply chain and worldwide reach and expanding its portfolio with advanced configuration and storage platforms. Lastly, in the enterprise and SMB segment, the group will grow its high-margin surface attach rate, upsell premium service, and expand its hybrid cloud solutions to drive profit improvement. On January 20, Lenovo announced a proposal to list on Shanghai Stock Exchange by way issuance of Chinese depository receipts. The company plans to use the proceeds for R&D in new technologies and products to address the high-growth new IT infrastructure opportunities in one of the fast-growing economies in the world in the future. Together with the new organization structure in the new fiscal year, which enable us to further focus on our strategy execution, and respond quicker to customer needs. We are confident in our ability to drive sustainable and higher growth in our business and expand profitability, and to deliver better return to our shareholders. Thank you. Now we can take your questions.