Lenovo Group Ltd S/Adr

Good morning, 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 Yuanxin, Lenovo's Chairman and CEO. Mr. Wong Wai-Ming, Group CFO. Mr. Luca Rossi, President of Intelligent Devices Group. Mr. Chris Galgian. President of Infrastructure Solutions Group, Mr. Ken Wong, President of Solutions and Services Group, and Mr. Sergio Buniyak, President of Latin America and Mobile Business Group, and President of Motorola. 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 Yuanqing. Yuanqing, please.

Hello, everyone, and thank you for joining us. Once again, despite the challenges of the pandemic and supply shortage, Lenovo has delivered another record-breaking quarter. Our clear focus on profitability and innovation, supported by strong execution, has driven historical results across our businesses. We are also pleased that last week, Lenovo has been added to the Hansen Index, providing market recognition of our continued strong results. The accelerated digital and intelligent transformations in the new normal continues to generate significant opportunities. Investments in digital transformation are expected to increase over 16% annually over the next three years. Lenovo's new IT technology architecture of client, edge, cloud, network, intelligence prepares us well to capture these opportunities. Last quarter, Lenovo delivered another quarter of record profit and revenue. Our net income reached an all-time record of $640 million, up 62% year-on-year. This is the sixth consecutive quarter of over 50% year-on-year net income growth. Net margin also increased by almost one point year-on-year. We are on track to doubling within three years. With 17% year-on-year growth, our quarterly revenue achieved $20 billion for the first time. Thanks to double digital growth in all key businesses and the balanced growth across all geographies. Going forward, we will continue to double our R&D investments along the new IT architecture. enhance our digital foundation to support business growth, compete as one Lenovo with pocket cloud offerings, global footprint, and organizational efficiency, and continue to deliver our ESG commitments. Now, I will talk about each of our businesses. Let's start with the solution and the service group. The trillion-dollar global IT services market through 2025 presents big opportunities for growth. Almost half of global workers are currently working remotely, driving demand for premium support and customerized fulfillment. As a service penetration in PC and the data center is only 2%, providing substantial room for growth. And the enterprise spending is expected to grow faster in cloud and digital services. Last quarter, Lenovo SSG continued to deliver high growth with a higher profitability. Its operating margin exceeded 22%, a nearly three-point increase year-on-year. Revenue continued a strong growth of over 25% year-on-year. Support services, 21%. Managed service, 50%, driven by our true scale as a service offerings. Project services and the solutions, 23%. with a breakthrough in smart retail. Looking forward, SSG will capture the remote work trend and leverage our global service footprint to provide accessibility and flexibility to our customers. SSG will also invest in true-scale offerings, hybrid cloud solution, and other software and services with our own IP and expand sustainability offerings. Our infrastructure solution group, ISG, continues to benefit from the ICT infrastructure upgrade, a $250 billion market globally through 2025. By 2025, the edge infrastructure market alone is expected to grow quickly to 41 billion US dollars. Last quarter marked an important milestone. Our ISG became profitable for the first time since the IBM x86 acquisition in 2014. Meanwhile, our revenue grew at a double-digit premium to market for the fourth consecutive quarter. Our cloud service provider and enterprise SMB revenue grew by 38% and 7%, respectively, year-on-year. Over the years, ISG has invested in building a full stack of data center portfolio. as well as the in-house design and manufacturing capabilities. We can now cover customers of all scales from tier 1 CSP to tier 2 Enterprise and SMB. In the long term, this customer coverage will give us unique advantages to balance the scale and the profitability as well as customers demand for security, reliability, and agility, flexibility. We will meet all kinds of customer requirements from on-prem, infrastructure as a service, all the way to private, public, hybrid cloud. For the intelligent device group, IDG, smart device markets continued to benefit from the new normal of a hybrid working model. The PC market is focused to remain strong and stable, shifting to commercial and the premier segments. In smartphone, the market reshuffling will bring more growth opportunity to Lenovo. At the same time, The penetration of 5G and the development of edge cloud network intelligence will provide more growth potential for the emerging smart devices like embedded computing IoT, AR VR driven by Metaverse, as well as smart home and smart collaboration solutions. Last quarter, IDG delivered another record quarter in profit and revenue. Its revenue grew 16% year-on-year, and the profit grew even faster, up 21%. In PCs, premier segments delivered high growth. In non-PCs, smartphone business has been healthy profit for seven consecutive quarters. Last quarter, its revenue grew strongly at 46% year-on-year and was the fastest-growing major vendor. Meanwhile, we saw some emerging smart devices like smart collaboration solutions. Revenue nearly doubled year-on-year. Going forward, in PCs, we will continue investing in innovation. premium segments, and core components. In mobile, we will strengthen our smartphone portfolio and invest in expanding new markets in Europe and the Asia Pacific. We will also continue to invest in IoT, metaverse-driven AR, VR, smart home, and smarter collaboration solutions to capture the emerging opportunities. In summary, Our market coverage is expanding. Potential is growing. Our capabilities are developing. And our performance is stronger than ever. We are on track to doubling both R&D investment and land margin by the end of fiscal year 2023-2024. So we are confident in delivering strong, sustainable, profitable growth while also meeting our ESG commitments. Thank you. Now, let me turn it over to our CFO, Wei Ming. Wei Ming, please.

Thank you, Yuanqing. I will take you through Lenovo's financial and operational performance in Q3 fiscal year 2022. We delivered more than $20 billion in revenue this quarter with multiple financial records. Our net profit grew 62% year-on-year to an all-time height of $640 million, with 17% revenue growth year-on-year. We are excited to see balance growth across different markets. Our growth net margin advanced 89 basis points year-on-year to near record level. All three of our business groups contributed to profit expansion. ISG, in particular, turned profitable for the first time since its acquisition in 2014. IDG and SSG continue their strong double-digit growth trajectory. With profit expansion, we are on pace to achieve our medium-term target of doubling our net margin. The basic earnings per share came in at 5.50 US cents, representing 66% growth year-on-year. In line with the digital transformation and new IT opportunities, we leverage our Climb, Edge, Cloud, Network, Intelligence architecture to create devices, services, and infrastructure to enhance our digital foundation to support business growth. As part of our commitment to double our R&D investment, during the quarter, our R&D expenses grew 38% year-on-year. This includes investing in talent acquisition and development, our R&D headcount was up 40%. We also invested in broadening services and intellectual property, driving innovation with a focus on ESG, and designing for premium segment and edge computing. Every aspect of our R&D investments, ranging from devices, services, infrastructure, to AI and operation efficiency, has helped contribute to the 36 basis point increase in both our record operating margin as well as our long-term competitiveness. For fiscal Q3, our operating cash flow remains strong at 606 million. This is in spite of the higher working capital requirement due to our buy-ahead action of strategic component in response to supply challenges. Q5 sales were also unusually back-end loaded because of late arrival of components and longer logistic lead time, leading to higher balances in both account receivable and payables. Receivable credit conditions remain healthy, although Q4 will also see similar sales skew towards the end of the quarter. Nearly 80% of account receivable are within 30 days, and the overdue ratio is at record low, We expect to mitigate the impact from the above factors gradually and continue to accelerate our cash flow. The group financial position continued to be strong. In Q3, finance costs were down by 17% year-on-year, and we finished the quarter with net cash position. This was achieved by reducing our net debt and perpetual securities by $3.2 billion over the past 10 quarters. Going forward, we are confident in our ability to stay in a net cash position. SSG reported another stellar quarter with strong revenue and profit growth. Structural catalysts, including opportunities arising from the new IT trend, hybrid work model, a motor recovery, and increasing ESG awareness are powerful drivers to our service expansion. its revenue increased by 25% year-on-year to US$1.5 billion. Booking and deferred revenue grew a strong double-digit, indicating a larger recurring revenue base. SSG boosted operating profit by 44% year-on-year to $332 million, and operating margin revised 2.9 points to 22.2%. By segment, Support services revenue rose 21% year on year, posting the highest profitability in the group. Working alongside with other business groups, SSG is broadening service penetration in PC. We made significant progress in premier and customer fulfillment services, while customer interest continue to grow for sustainability services, such as asset recovery. We are actively developing six more sustainability service solutions. Many services posted a strong 50% revenue growth with improved profitability. On the back of the increasing popularity of as-a-service model branded under TrueScale, we won a number of deals while also expanding its geographic presence and customer base. Project services and solutions also reported solid revenue growth of 23% year-on-year. Despite the pandemic creating challenges in project delivery, the total contract value more than tripled with important deals signed for smart retail amid increasing adoption of our in-house IP solutions. ISG staged a successful turnaround, leveraging its enriched architecture and technology solution, as well as successful project wins and industry partnerships. As a result, its operating profit increased $28 million year-on-year. ISGL grew the market with new projects and acquisition of new Next Wave customers looking to build their cloud platform. In response to increased emphasis on a streamlined, fully integrated supply chain, our unique ODM Plus business model provides a holistic solution encompassing a vertically integrated operation. ESMB revenue reached a five-year high led by high-margin storage, surface, and software sales. The group maintained number two in global entry storage market, as well as continued as the largest provider of supercomputers globally. IDG achieved another record quarter, with revenue and operating profit up 16% and 21% year-on-year, respectively. The shift towards commercial and premium segments continue to accelerate. Commercial demand benefited from digital transformation and transition to a hybrid work model on a global scale, growing at the third highest rate since 1998. This commercial strength, together with the strong growth in premium segments, go well for increasing our average selling price and profitability. Our PC business thus saw a 19% increase in ASP and improved margins. marking the 17th consecutive quarter of year-on-year profit margin expansion for IDG. Non-PC products contributed to 19% of IDG's revenue in the quarter. Smartphone revenue grew 46% year-on-year, and its operating profit stayed at a record level of $89 million. Our portfolio expansion strategy to increase product differentiation was well-executed. IDG smartphone shipments increased 53% year on year, according to IDC, substantially ahead of the market, with share gains across key markets. In North America, we posted triple digital growth in revenue, while strengthening our number two position in our stronghold markets in Latin America. Speaking of our ESG initiative, in December 2021, Lenovo was rated at the leadership level for the first time in both the CVB water and climate surveys, respectively receiving an A and A- in these widely recognized surveys. We broaden our sustainability services and true scale portfolio at the ESG related features such as CO2 offset option to our products and increase our adoption of green materials. On the group level, We are exploiting the path to net-zero emissions by 2050, completing the road test of sign-based target initiative methodology and becoming a founding member of the China Net Zero Network. On governance, Lenovo has received recognition from Corporate Knights, Bloomberg, and the Hong Kong Institute of CPA. Other impactful, sustainable initiatives include Lenovo 360 ESG Circle, and the Ecovirus Rating 2. Strategic opportunities in digital and surface-led transformation continue to accelerate. We are investing to build Lenovo's surface-led transformation, take advantage of infrastructure demand proliferation, drive sales in high value at the products, and ultimately achieve the growth medium-term financial target of doubling our net margin. Looking forward, SSG is building a broader service portfolio to take full advantage of remote working environment. New business model of as a service is growing fast and the resulting rapid penetration into PC and infrastructure sectors will support its future hyper growth. SSG will play a key role in driving recurring revenue and increasing Lenovo's profitability. For ISG, the infrastructure upgrade opportunity remains strong, and Lenovo is one of the fastest-growing infrastructure providers globally. We are committed to building full-stack offerings and to surfacing both CSP and ESMB segments. We will continue to develop offerings to meet regional demand and capture growth opportunities, including S-Surfer portfolio to address the proliferation in data and AI accommodation at edge. In CSB, we are migrating to our ODM Plus model for improved profitability and greater supply chain and procurement agility. In ESMB, we will continue to expand our product portfolio from surface into storage, storage-defined infrastructure, software, and services to pursue higher profitability. In doing so, we will create new business opportunities and expand our customer base. IDG will continue to lead and grow at premium to the markets. The global PC sector should remain strong and stable, thanks to the hybrid work model and digital transformation driving demand in commercial and premium segments. PC business will further invest in the premium segment to drive profitability through innovations in the area of ESG features and green materials. The smartphone business will focus on portfolio enhancement and differentiation to take advantage of accelerated 5G adoption and the changing competitive landscape. The group will address the expanding Internet of Things opportunities to grow its non-PC business. The Hansen Index Company announced last week that, effective from 7 March 2022, Lenovo Group will be included as a constituent stock of the Hansen Index. which is a reflective of our stellar operational performance in recent years. Our strong financial position provide a solid foundation on which Lenovo can proactively pursue growth opportunities ahead. Finally, as always, we remain committed to driving sustainable profitability growth for our shareholders. Thank you. And now we can take your questions.