Lenovo Group Ltd S/Adr

Good afternoon and good evening. Welcome to Lenovo's Earnings Investor Webcast. This is Jenny Lai, Vice President of Investor Relations at Lenovo. Thanks everyone for joining us. Before we start, let me introduce our management team during the call today. Mr. Yang Yuanqing, Lenovo's Chairman and CEO. Mr. Wong Wai-Ming, Group CFO. Mr. Luca Rossi, President of Intelligent Devices Group, Mr. Chris Galgen, President of Infrastructure Solutions Group, Mr. Ken Wong, President of Solutions and Services Group, and Mr. Sergio Buniak, President of Latin America and Mobile Business Group, and President of Motorola Group. We will begin with an earnest presentation, and shortly after that, we will open the call for questions. Now, let me turn it over to Yuanxin. Yuanxin, please.

Hello, everyone, and thank you for joining us. While the pandemic and the industry-wide supply shortage continues, thanks to our operational excellence, innovation, and strong execution, our momentum continues. grow even stronger across all our key businesses. Again, this quarter we will look at the significant opportunities in the market, our strong performance capturing these opportunities, and our plans for sustained profitability increase and growth over time. Lenovo's new IT technology architecture of Client, Edge, Cloud, Network, Intelligence is helping us win more opportunities in the market. Based on this architecture and our 3S strategy, we will combine our smart device IoT, smart infrastructure, and smart vertical solutions capabilities to help our customers realize their digital and intelligent transformation. Lenovo is well positioned to capture this growing opportunity and continue improving profitability. With strong execution of this strategy, last quarter, we delivered another phenomenal quarter with both historical high profit and revenue. Group net income grew 65% year-on-year, to 512 million US dollars. And net income margin improved 0.7 points on track to doubling in three years. Group revenue continued a strong growth of over 23% year-on-year to 17.9 billion US dollars. And our operating cash flow doubled year-on-year to 1.6 billion US dollars. At the same time, our R&D spending increased nearly 60% year-on-year as we increased investment in innovation. Going forward, we will continue to focus on high-margin businesses and segments. We aim to double our R&D investments over three years and develop more core technology along our new IT structure. We will also further drive our internal digital and intelligent transformation to improve efficiency and consistently improve our profitability. Now, I want to discuss the details of each business group. Let's start with the solution and service group. As the technology architecture becomes more complex, customers demand more sophisticated IT services. IDC estimates this rapidly growing opportunity to be over one trillion U.S. dollars through 2025, within which the device and the service market is estimated to be $67 billion by 2025. These service businesses have much higher margin and faster growth than devices alone. So we expect SSG's growth to continue driving higher profitability for the group. Last quarter, SSG continued to deliver high growth with high profitability. Its revenue grew 30% year-on-year, with operating margin of almost 21%. Support service improved penetration rate in both PC and infrastructure. Managed service saw revenue growth of almost 90% year-on-year, We have launched our as a service brand to scale at our flagship event, Lenovo Tech World. And we now have even broader as a service portfolio for our customers. Project services and solutions achieved almost a 22% year-on-year revenue growth as we gained more traction with the repeatable solutions based on Lenovo IP. Looking forward, SSG will continue to drive both growth and profitability. We have integrated our internal IT function into SSG to enhance our service R&D and delivery capabilities and turn our proven internal digital capabilities into solution offerings. In managed services, we will continue to build the platforms, tools, and go-to-market capabilities to enhance our true scale of the service offerings. In support services, we will continue to improve penetration rates, especially as the commercial segment rebounds. For our infrastructure solution group, ISG, The opportunity keeps expanding as the ICT infrastructure upgrade continues. IDC expects the ICT infrastructure to become a $250 billion market globally through 2025, which is as big as the PC market. Last quarter, ISG delivered a record performance led by an all-time high revenue of almost $1 $2 billion, up almost 34% year-on-year. Profitability continued to improve by $24 million year-on-year, nearing break-even. We outgrew the market in nearly every segment. Cloud service provider reached a historical high revenue with over 50% year-on-year growth. And enterprise SMB revenue had a strong growth of almost 20% year-on-year. In the high-margin segments, storage revenue also grew over 50% year-on-year to a new record. In high-performance computing, we deliver the fastest university high-performance computer in China today, which is also powered by Lenovo Neptune. water cooling technology. Looking forward, we will continue to invest in ISG's competitiveness and increase investments in faster-growing segments such as edge computing, hybrid cloud solutions, and 5G cloud network convergence. We will further enhance our in-house design and manufacturing capabilities to drive profitability improvements as we drive to break-even and beyond. Our vision remains to become the largest and most trusted ICT infrastructure solution provider. For the Intelligent Device Group, IDG, the demand for PCs and devices remains strong. IDC reports that commercial demand excluding Chromebook, grew 18% year-on-year last quarter. In addition, the Windows 11 launch is expected to increase PC demand. We agree with IDC's assessment that annual PC volumes will maintain at 340, 355 million units level for the next few years. Meanwhile, the reshuffling continues in the global smartphone market, giving Lenovo more room to grow. At the same time, the IoT market is expected to surge by 11% CAGR through 2025. Last quarter, our IDG continued to deliver excellent revenue growth of nearly 21% year-on-year, and profitability grew even stronger, up 34% year-on-year, on top of its already high basis. In PCs, premier segments delivered high growth. Premier yoga and workstation revenue each more than doubled year-on-year. Commercial PC revenue grew 29% a year, with SMB growing 48% a year. In non-PCs, smartphones had its best quarter ever. Profit reached a new historical high, while revenue grew 27% a year, to the highest in 15 quarters. All geographies delivered high double-digit profitable growth. Not only our strongholds, Latin America and North America, even in the expansion markets of EMEA and Asia Pacific, our revenue grew by strong double digits. Tablet revenue continued to grow 20% year on year. our accessory business revenue also grew 31% year-on-year. Going forward, IDG will continue to invest in premier segments to increase profitability and average selling price. We will leverage our PC leadership to cross-sell adjacent non-PC products like smartphones, tablets, smart meeting collaboration, embedded computing, and further increase our non-PC business mix. Through our clear strategy, strong execution, and increased investment in technology, we are confident that we will continue to deliver sustainable growth and our commitment to double profitability in three years. Thank you. 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 Q2 fiscal year 2022. We achieved the best quarter in our history. Our new financial records included all-time high in revenue, pre-tax income, and net income. Q2 revenue grew at a healthy rate of 23% year-on-year, to $17.9 billion and net income margin expanded 0.7 points to boost a 65% net profit year-on-year growth. All of our three business groups set new milestones in revenue and contributed to improved profitability. Profit attributable to equity holders was $512 million and the basic earnings per share came in at $4.42 U.S. cents. representing 71% growth year-on-year. The Board of Directors declared today an interim dividend of HK$0.08, representing an approximately 21% increase on the interim dividend paid in the last fiscal year. We continue to drive innovation and differentiation in supporting our goal to raise long-term profitability and capture the opportunities brought by digital transformation from new IT. Our research and development investment grew 57% year-on-year. These investments included talent acquisition and development, intellectual properties, as well as projects in premium gaming and workstation PCs, edge servers, storage, high-performance computing, and Lenovo Brain AI. We kept the annual increase of our E2R ratio at 0.7 points as we exercised discipline control of expense in other areas. Our operating margin is up 0.7 points year-on-year. This accelerating innovation strategy reflects the value created by R&D to support our gross margin expansion of 1.3 points year-on-year to 16.8%. Our cash flow generation has shown marked improvement since nine quarters ago as we continue to improve efficiency and profitability. For fiscal Q2, we boosted operating cash flow by $790 million year-on-year to $1.6 billion, driven mainly by our strong profitability. To optimize our capital structure, we further reduced our net debt by over $1 billion year-on-year to $60 million and lowered our finance costs correspondingly. In the past three and a half years, we cut our net debt by more than $2.5 billion, including the repurchase of perpetual securities. We are pleased to see the net debt approaching nearly zero. Going forward, we are confident our continual operating trajectory will result in net cash in the near future. Riding on the fast-growing new IT service opportunities and commercial upgrade cycle, SSG delivered a stellar second quarter with strong revenue and profit growth. SSG revenue increased by 30% year-on-year to $1.4 billion. supported by consistent strong double-digit growth across its three segments. Operating profit advanced by 32% year-on-year to $285 million. SSG continues its growth trajectory by focusing on advantages offered by the Group's strong platform, leveraging its partnerships and launching new services to tap into new opportunities, including ESG-related end-to-end lifecycle management. All of these moves will ensure the group's thriving future and sustainable growth. By service segment, support services revenue rose 23% year-on-year. Our service traction with commercial customers is encouraging and they are taking full advantage of our advanced services capability to optimize their hybrid working model and give ESG deployment a higher priority. We are not only seeing a rising service penetration rate towards industry best practices, but also the accelerating growth in our high-value added services. Managed services and as-a-service posted a remarkable 88% revenue growth year-on-year thanks to phenomenal as-a-service growth and enriched portfolio. SSG integrates all 18 as-a-service solutions under Lenovo TrueScale brand, offering customers the best tools with flexibility and simplicity. Our next action in line is to launch these services in more geographies, which will further accelerate TrueScale's growth momentum. Project and Solutions also reported solid revenue growth of 22% year-on-year as we continue to expand in-house intellectual properties and repeatable deals. These achievements, all together, contributing to a 34% year-on-year growth in booking revenue. while deferred revenues recorded another quarter of strong growth, up 31% year-on-year to $2.6 billion. ISG continued to take advantage of infrastructure upgrade opportunities, expanding market share in nearly every business segment. For the second quarter, ISG revenue grew strongly by 34% year-on-year to an all-time high of $2 billion, while its operating loss significantly narrowed by 80% to a mere $6 million. A combination of customer-based expansion in CSP and improved sales mix in the ESMB business drove further improvement in profitability. In Q2 CSP, sales reached another record on the back of strong cloud demand and a broader client base. Its unique ODM Plus model provides a full stack of solutions across motherboard, system, and rack integration for server and storage. This business model provides greater flexibility, responsiveness, and resilience for our customers who need strong support from infrastructure suppliers so they can focus on growing their core businesses. ESMB segment revenue in Q2 was the highest in the last five years and made market share gains in several high-growth and high-margin products, with more prominent growth seen in server, storage, and high-performance computing. In mainstream storage markets, The group increased its storage sales by 52% year-on-year and further solidified its number two position by narrowing the gap in market share to the top layer. In high-performance computing, Lenovo recently delivered its larger system to the public sector in North American market and the fast food machine powered by our water cooling technology to a university in China. IDG revenue set a new record in fiscal Q2, up 21% year-on-year. Its operating profit surged 34% year-on-year, and its operating margin reached an all-time high record of 7.6%. Demand is shifting to high-value-added segments, as the use of PC has become an essential aspect of modern life. In the meantime, commercial demand continues to benefit from digital transformation growing at a near-record rate in our history. These two trends positively impact our ASP and profitability. Our ASP increased 17% year-on-year during the quarter, while Q2 marked the 16th consecutive quarter of year-on-year profit margin expansion for IDG. In fiscal Q2, non-PC products contributed to 90% of IDG revenue, and our smartphone profit expanded to a record $89 million. We continue to gain global market share in smartphones across geographies. In North America, we achieved the highest activation rate in our history, and we are closing the market share gap with the number two player. In Europe, our smartphone revenue grew high double-digit year-on-year, while we solidified our number two position in our stronghold market in Latin America. Our latest ESG report is now available from our investor relations website. marking the 15 years of this publication and highlighting our sustainability efforts. We would like to take this opportunity to reiterate our ESG targets. We recognize our leading role in the industry and we commit to make responsible changes to mitigate environmental impact. In the next few years, we aim to accelerate our adoption of clean energy and strengthen our ESG innovation all the way from product design, manufacturing, packaging to product end-of-life management. SSG provides a wide range of asset surface offerings and sustainability services, including asset recovery services. They are not only integral to Lenovo's end-to-end lifecycle services, but also assist customers in meeting their environmental goals through offering secure and responsible disposal of products while maximizing value recovery. On the social side, Lenovo as a global company is proud to continue its efforts in diversity and inclusion. By FY26, we target to increase the executive representation of women within our organization around the world to 27%. Along the way, we are proud to dedicate our continuous efforts towards excellence and inclusion for our global workforce. Looking ahead, Lenovo will continue to innovate in new IT to lead as a transformative engine to the accelerating global trend of digital transformation. We will target to double down our R&D investments. These investments in innovation will support Lenovo's surface-led transformation, take full advantage of enterprise demand recovery, drive sales in high-value-added products, and ultimately expand our gross margin to achieve Lenovo's medium-term financial target of doubling our net margin. SSG is re-riding on the fast-growing new IT service opportunities. The group's extensive exposure to commercial PC and infrastructure growth offers huge solution and service potentials. Furthermore, we proactively reach and serve our customers' demand with integrated and complete solutions to improve our penetration rate. Our newly launched fully integrated true-scale brand is developed to capture the vast growth potential in the as-a-surface segment. Through partnership of global system integrators and channels, enhanced capabilities, and expanded platform, these factors add momentum to SSG existing strength, driving Lenovo profitability to the next level. For ISG, the strong infrastructure upgrade and commercialization of new technologies including edge computing, hybrid cloud solutions, and 5G cloud network convergence we will continue to improve the business profitability and premium to market growth in both ESMB and CSB markets. We will continue to deliver industry-leading end-to-end infrastructure solutions and expansion from server to full-stack offerings. In ESMB, we will expand from servers into storage, software-defined infrastructure, software and services where opportunity exists for higher profitability. In CSB, we will fully integrate our unique ODM Plus model to expand customer base and drive quarter-to-quarter profit improvements. In IDG, the commercial upgrade cycle remains strong. Moreover, Windows 11 launches should provide potential upside to market demand and we lead our competition in new model launches. To efficiently manage the industry-wide component shortage and our demand backlog, We will enhance our leading operational excellence and global supply chain management. We will continue our profit expansion while our R&D investments to drive higher value-added products, accessories, and smarter devices. Our smartphone business will remain an important driver for non-PC growth. We will focus on growing in the premium-to-market in North America and Europe while maintaining market leadership in Latin America. will further push product innovation and accelerate 5G smartphones launches to win more market and stay on track for profitable growth. In other non-PC adjacent areas, we will launch new features such as smart meeting collaboration and embedded computing products. With solid execution on all these strategic actions, we believe IDG's ASP and margin expansion will continue. Our strong financial position and cash flow provide a solid foundation on which Lenovo can proactively pursue growth opportunities ahead, particularly in the fast-growing services area. Finally, as always, we cannot emphasize enough to our shareholders of Lenovo's commitment to drive sustainable profitability. Thank you, and now we can take your questions.