Lenovo Group Ltd S/Adr

Good morning, good afternoon, and good evening. Welcome everyone to Lenovo's earnings media webcast. This is Jenny Lai, Vice President of Investor Relations at Lenovo. By now, you should have received a copy of our earnings release and earnings presentation. Before we start, let me introduce our management during the call today, Mr. Yang Yuanqing, Lenovo's Chairman and CEO, Mr. Gianfranco Lenci, Corporate President and COO, Mr. Wang Wai-Ming, Group CFO, Mr. Kurt Skaugen, President of Infrastructure Solutions Group, and Mr. Sergio Buniak, President of Latin America and Mobile Business Group, and President of Motorola. We will begin with Ernie's presentations, and shortly after that, we will open the call for questions. Now, let me turn it over to Yanqing Yuanqing, please.

Hello, everyone. Thank you for joining us. A year ago, as we faced great uncertainty, I told you we would continue to be resilient and strive for new heights. Today, I am pleased to say that we have indeed seen phenomenal growth in every part of our business. and have achieved both a record fourth quarter and a new milestone for our fiscal year. Starting with our historical fourth quarter results, growth revenue reached $15.6 billion, growing 48% year-on-year, fasted growth in almost a decade. Pre-tax income sold to US$380 million. Net income reached US$260 million, both around five to six times as much as last year. All our core businesses achieved high double digital growth in revenue at the same time for the first time in six years, demonstrating our progress in diversification of our businesses. For Intelligent Device Group, PC and smart devices had its best fourth quarter ever, with 12.4 billion US dollars, up 46% year-on-year. Even more, profitability hit an all-time high at 6.7%. All of our geographies realized high double-digit growth in revenue. Particularly in China, we grew 80% year-on-year. Our PC volume outgrew the market to further strengthen our leading position. Tablet volume also had a breakthrough growth of 157% year-on-year, around three times as fast as the market. Our consistent strategy to focus on and invest in high-growth and premier segments keeps delivering strong results, as gaming PCs, thin and light, Chromebooks and visual volumes each grow at more than double-digit rates and outgrow the market. Our mobile growth continues its momentum of profitable growth with terrific results. Revenue achieved hyper-growth, up 86% year-on-year. Pre-tax income reached 21 million US dollars, record high since the Motorola acquisition. With expanded carrier relationships and a strong product portfolio, particularly 5G products, our volume grew at a triple-digit rate in North America. Europe, and Asia Pacific. Latin America remains a stronghold with market share reaching a new record of nearly 21%. Our data center group had a tremendous quarter. Revenue grew at a strong 32% year-on-year, the fifth straight quarter of premier-to-market growth. Profitability improved 4.4 points year-on-year, the biggest increase in over two years. Both our cloud service provider segment and enterprise SMB segment achieved year-on-year growth. In particular, the CSP business grew 73% year-on-year. Our storage software-defined infrastructure, and software business all had record fourth-quarter revenue. Particularly, storage revenue achieved a high growth of 73% year-on-year. Our service-led transformation accelerated, fueled by ongoing strong growth in software and services, with revenue up 44% year-on-year. Managed service revenue, including DAS and TrueScale, nearly doubled, and solution revenue grew 65% year-on-year. This historical quarter ensured we reached a significant fiscal year milestone. For the first time, group revenue surged to over $60 billion adding more than US$10 billion in just one year. Profit grew even faster to reach new records, with a pre-tax income of almost US$1.8 billion and a net income of almost US$1.2 billion. Both were up more than 70% year-on-year. Our intelligent device group and data center group achieved revenue growth of 20% and 15%, respectively, as both reached historical highs. Our software and service revenue grew twice as fast as the overall group revenue, at almost 40% year-on-year, to a record US$4.9 billion, which now makes up 8% of overall company revenue. This demonstrates our solid progress in service-led transformation. These results come from excellent performance across all our businesses, delivering to the new needs in a new normal, leveraging our clear strategy, innovative product, operational excellence, and our global local model. While we completed a true historical and record year, we are not stopping here. Looking forward, we will further drive our service-led transformation to capture growth opportunities created by both the new normal and the new technologies. We see three important industry trends now and post-pandemic. The first trend is consumption upgrade as people spend more time on their devices, leading them to buy more devices and upgrade more often as we work, learn, entertain from home. At the same time, the adoption of commercial 5G is driving the shift from computer to computing making more traditional devices intelligent. The second trend is the infrastructure upgrade. The ever-growing use of online applications has not only increased the demand but also raised the bar for ICT infrastructure. Infrastructure not only refers to traditional data center products like server, storage, networking, but also edge or cloud total solutions for computing power from design and deployment to operation and maintenance. The third trend is the application upgrade from digitalization to intelligent transformation with AR at its core. Industry survey by a leading consulting company shows the digitalization and intelligent transformation of enterprises have accelerated by three to four years to enable more productive and efficient processes under remote working conditions. The massive amounts of data from Bin's digitalization and various smart devices are stored, organized, and analyzed with computing power from Edge and Cloud. Then, by combining the data and computing power with algorithms based on industry know-how, we built intelligent solutions to transform industries. At our last earnings call in February, I shared that Lenovo was making changes to align our organizational structure to our 3S strategy. And the new structure, Intelligent Device Group, or IDG, Infrastructure Solutions Group, or ISG, and the Solutions and Services Group, or SSG, will each focus on the unique opportunities created by these three upgrade trends to achieve sustainable long-term growth. In the year ahead, IDG will continue to drive leadership in PC and tablet through innovation and operational excellence and further penetrate in new areas such as embedded computing, smart office, smart edge, and AR VR. And MOBA will continue profitable growth as we take advantage of increased market demand and changing competitive landscape, and maintain strong momentum in North America, Europe, and Asia Pacific, and keep our stronghold in Latin America. ISG will continue premier to market growth. We will further expand our cloud service provider customer base and grow our channel business through our newly integrated one Lenovo sales organization structure. We will drive storage, software-defined infrastructure, software and services to further improve profitability and ramp up true-scale infrastructure as a service. Our new business group, SSG, will strengthen our attached service portfolio and increase attached rates, expand managed services, and develop repeatable solutions in key vertical industries. Meanwhile, we have reduced greenhouse gas emissions by 92% over the past decade, and set new science-based targets to continue making progress in sustainability. In fact, we were being recognized by the annual Corporate Nights Index as one of the world's 100 most sustainable companies. The past year certainly presented many challenges that reminded us of the importance of sustainability adaptability and resilience. But the past year also created opportunities for Lenovo to empower our customers and the society to do more than just survive in the new normal, but to thrive and achieve even greater success. We will continue to turn challenges into opportunities and build even smarter future in the year ahead. 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 Financial and operational performance in Q4 and fiscal year 2021. We had a strong finish to a record fiscal year. For Q4, we delivered $15.6 billion in revenue with a 48% year-on-year growth which is the fastest growth in almost a decade, with net profit increasing by more than five times. Not only did all our three business groups achieve high double-digit sales growth for the first time since Moto and 886 acquisitions, the group's high-margin software and services booking revenue also grew at its highest rate ever since our service-led transformation started. Our core competences of operational excellence, time to market, and innovation are setting us apart in the post-COVID world and accelerating our transformation towards end-to-end solutions. Our e-to-hour ratio was reduced by 1.9 percentage point year-on-year to 14.1 percent as a result of discipline control and economies of scale. Profit attributable to equity holders was $260 million, and the basic earnings per share came in at 2.19 U.S. cents. Q4 marked another exceptional quarter for our PCSD business, which sustained its position as the largest global PC brand by market share. All regions saw year-on-year revenue increases in a range of 29% to 80%, leading to a blended 46% growth and record revenue of $12.4 billion for the group. PCSD delivered a record profit of $831 million in the fourth quarter, with a 58% year-on-year growth. Its pre-tax margin expanded 50 basis points to an all-time high of 6.7%. In addition to the high growth segments, which have been our strong catalyst in past quarters, e-commerce and services upselling emerged as a new growth engine to propel hyper-revenue growth of 42% to 58%, as well as higher profitability. Enterprise demand recovery was also encouraging, as evidenced by double-digit growth in shipments. Our MBG business levered a hyper-sales growth of 86% year-on-year, while improving its pre-tax profit by $80 million year-on-year to a record $21 million since acquisition. We achieved premium-to-market growth across our major geographies and outperforming the market. We have grown our MBG business by strengthening its product portfolio via a 5G for all strategy, and broadening its carrier ranging across key focus markets. Data Center Group concluded the quarter with a 32% year-on-year growth to 1.6 billion sales, thanks to the robust hyperscale demand and new customer acquisitions. Revenue of enterprise SMB business reached three-year high despite continuous soft demand from enterprise. Their higher margin boded well to the sales mix, along with more profitable cloud service provider projects. DCG pre-tax improved by $45 million year-on-year, the largest expansion in the last 10 quarters. It has been three years since we started our software and services-led transformation. The high-margin software and services business continues to see accelerated growth in invoice revenue to its highest ever rate of 44%, contributing 7.9% of group sales. deferred revenue increased 32% year-on-year, which further secured our future growth by building a sticky business model. Many services enjoyed 91% growth in invoice revenue, supported by upselling opportunities leveraging the growing popularity of our as-a-service solution. Our group generated an additional $10 billion revenue for the full year, capping off a record year with the highest rate in almost a decade. Our revenue grew 20% to $60.7 billion. Profit attributable to equity holders increased 77% to $1.2 billion, and basic earnings per share came in at $9.54 US cents. PCSD, DCG, and software and services businesses each score all-time annual revenue or record profit. Challenges from the pandemic impacted MBG first-half performance, but its swift recovery in second half led to its high half-year profit since acquisition. Our E-to-R ratio was reduced by 110 business points year-on-year to 12.5% on disciplined expense control. Pre-tax income was $1.8 billion, up 74% year-on-year, while pre-tax margin reached 2.9%, its highest level in the last 13 years. All of our business reported margin expansion will have repositioned Lenovo to take advantage of the high demand for computing power, data, and end-to-end solutions. The consistent and strong earnings trajectory across our business units had underscored our company achievement after the intelligent transformation. Today, the Board declared a final dividend of 24 Hong Kong cents per share. Taking into consideration of the interim dividend of 6.6 Hong Kong cents per share, total dividend will be 30.6 Hong Kong cents per share, a 10% increase compared to dividend paid in FY19-20. For the fiscal year, our operating cash flow improved by 1.4 billion to 3.7 billion thanks to strong earnings and working capital management. To optimise our capital structure, we reduced our net debt and repurchased perpetual securities amounting to a total of 1.4 billion. In the fiscal year, we obtained our first investment credit rating with a subsequent upgrade. All of these actions together save us 13% in financing costs and perpetual securities dividend. We expect more cost saving in the next fiscal year. PCSD business achieved many performance records as industry demand continued to exceed expectations throughout the year. Its revenue grew 22% to an all-time high of $48.5 billion, while pre-tax profit advanced 34% to $3.1 billion. Since the outbreak of the pandemic, there have been many unexpected lifestyle changes, including the one-PC for-person trend, rising usage intensity, and e-commerce revolution. The group has leveraged our operational excellence, product innovation, and quick time-to-market capability to address these new demand tailwinds. We maintained a solid worldwide number one position for the third consecutive year and became number one in EMEA in the second half of the year for the first time in our history. We made the strategic decision to drive high-growth segments and expect segment profitability. We also deploy our capital and resources under PCSD to grow the high-value active services business. As a result, the business further extended its industry-leading profitability to set a new milestone at 6.5%. In the earlier part of the fiscal year, MBG operation was negatively impacted on both supply and demand side by the pandemic. Nevertheless, our commitment to strategic action has helped us stage a swift recovery in the second half of the year. Thanks to the strong momentum across key markets, the business delivered a 39% revenue growth in the second half and a 9% for the full year. Similarly, the pre-tax performance reversed from a loss in the first half to a record pre-tax profit of $31 million in the second half, up $87 million year-on-year. We achieved a record market share in Latin America and North America and nearly doubled our revenue base in Europe. Our strategy remains clear, driving product portfolio enhancement to include more premium models, a 5G for all strategy to make 5G connectivity more accessible and broaden our carrier ranging to drive regional expansion. Looking forward, MBG will target to groom NA to be a significant contributor and embark its Europe business at a faster pace while maintaining LA at a strong whole market. Data Center Group delivered a record high annual revenue at $6.3 billion, up 15% year-on-year. CSP is the largest growth contributor with a strong double-digit increase. Positive catalysts for CSP included public cloud demand and customer and product expansion. We are winning projects knownly utilizing our in-house design and manufacturing, but also high-end design, storage, and HPC to expand the number of growth engines. ESMB revenue was at its highest in the last three years, outperforming the overall enterprise market, even though market demand was sluggish. Storage, SDI, software, and HPC performed well, posting strong double-digit growth and record revenue. Our DCG is now ranked global number two in entries-level storage, advanced from number five last year and extended its number one lead in the HPC segment. On pre-tax, DCG saw improved profitability for the fourth consecutive year by $57 million year-on-year and narrow pre-tax loss to $169 million, driven by board-based improvement across CSB and ESMB. Since this group started its surface-led transformation, The software and services business has made tremendous progress. Its invoice revenue grew accelerated and reached 39% for the year to $4.9 billion, which is nearly twice as high as the group revenue growth rate, now contributing 8% of the group sales. The business has broadened its scope and scale and has won many landmark deals. Many services enjoy a 78% growth thanks to mega as-a-service deals signed around the world with leading technology, retail, and financial institutions, as well as global spot events. Complex solutions posted a strong 58% growth from all verticals. Attached services continued to grow at a fast pace of 28%. Deferred revenue increased 32% year-on-year to $2.2 billion, pointing to a fast-growing recurring revenue base as we make further inroads to build a sticky business model. With regional economy on pace to expand and signs of a rebound in enterprise IT spending, the group will continue to ride on recovery-led opportunities and deliver sustainable growth. With our new organizational structure, we plan to supercharge the growth opportunity arising from our surface-led transformation efforts and capitalize on long-term upgrade cycles. With the investment grade rating, we will further improve our debt capital structure by leveraging current low-interest environment. Our planned CDR listing will also further our market-leading position in China and provide capital for us to invest in technology, hence further support our long-term growth. By business growth, our PCSD business will continue to address opportunities emerging from new smart devices and extend its leading position in both market share and profitability. It will leverage its innovation solution capabilities and further improve its world-class supply chain to meet strong segment demand, partly driven by commercial recovery. For mobile business, the Group will focus on sustaining its strong momentum in North America and Europe while maintaining its leadership in Latin America. MBGU will further push product innovation and accelerated 5G smartphone launches to score wins in more markets and stay on the profitable growth journey. our Infrastructure Solutions Group, or DCG business, will aim to grow the channel business with a one Lenovo platform while delivering premium-to-market growth and profitability. In the ESMB segment, the group will grow high-margin services tax rates, expand high-growth segments, and position its hybrid cloud solution to drive a prudent shift in computing with edge-to-cloud solutions. For the CSP business, the group will continue to expand customer base and gain wallet share among existing accounts. To achieve that, the business will leverage its unique strength, including in-house custom design and worldwide manufacturing capability, and expand its product portfolio with advanced configuration and storage platform. The newly established SSG will bring our service-led transformation to a new level, We will continuously focus on expanding our capabilities in three key priority segments with clear multi-year growth targets. We will raise the attach rate for attach services, drive hybrid growth in many services and as a service by enhancing delivery, differentiation, and platform, and develop end-to-end solutions and our Lenovo IP to support our growth in solutions. Thank you. And now we can take your questions.