Lenovo Group Ltd S/Adr

Good morning, good afternoon, and good evening. Welcome to Lenovo's Investor Units 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 joining the call today. Mr. Yang Yuanqing, Lenovo's Chairman and CEO. Mr. Wong Wai-Ming, Group CFO. Mr. Ken Wong, President of Solutions and Services Group. Mr. Kurt Skaugen, President of Infrastructure Solutions Group. Mr. Luca Rossi, President of Intelligent Devices Group. Mr. Sergio Buniyak, President of Mobile Business Group and President of Motorola. We will begin with earnings presentations 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. Last year, the world faced multiple challenges, including supply shortages, pandemic disruption, geopolitical uncertainty, and higher inflation. Yet, we successfully overcome these challenges and delivered a record year with historic revenue and profitability improvements. All our main businesses are profitable, and our new growth engines are positioned for even stronger success. The digital and intelligent transformation trend continues to accelerate. IDC reports that more than 50% of enterprises now have digitalization as part of their corporate strategy. The hybrid work model is here to stay, creating strong demand not only for smart devices and data center infrastructure, but also scenario-driven solutions such as smart collaboration, smart home, and smart office. Guided by our clear strategy, we captured these opportunities to deliver all-time record fiscal year profit and revenue for the group. For the first time, net income reached $2 billion, up 72% year-on-year. Revenue also improved by $10 billion for the second year in a row, reaching $71 billion, crossing the $70 billion milestone. All main businesses are now profitable for the first time since the Motorola Mobile and the IBM X86 acquisitions. With a particularly strong growth momentum in our mobile infrastructure and solutions and services businesses. At the same time, we continued to strengthen our competitiveness to drive sustainable, profitable growth. We made strong progress towards doubling R&D investments within three years from fiscal year 2021-2022, up 43% year-on-year last year. And we continued to realize our ESG goals and commitments Now, I will talk about each of our businesses. Let's start with the SSD, Solutions and Services Group. The trillion dollar IT services market continues to expand with the hybrid work model. The demand for digital workplace services is expected to reach 93 billion US dollars by 2025. Also, our studies show more than 90% of CIOs are willing to consider adopting as a service offerings. In the last year, SSG captured these opportunities and delivered high growth and high profitability. Revenue reached an all-time record of 30% year-on-year. Operating margin was 22%. We saw strong double digital growth across all segments, especially managed service revenue grew more than 60% with strong growth from our true scale as a service business. Now, revenue from managed service and project and solution services accounts for almost half of our SSG business. SSG continued to invest in software tools, platforms, and repeatable vertical solutions with our own IP. We are driving deeper in our vertical solution capabilities in key industries, focusing on manufacturing, retail, healthcare, education, and smart city. We continued to expand our true scale as a service to the broader digital workplace solutions and developed our hybrid cloud solutions. In the meantime, we are further exploring metaverse solutions based on our current foundation. Our infrastructure solution group, or ISG, continues to benefit from ICT infrastructure upgrade. The data center market is expected to reach 183 billion US dollars by 2025. And the edge infrastructure market alone is expected to exceed 41 billion US dollars The hybrid cloud market will exceed $120 billion. With data creation expected to nearly double by 2025 from 2022, the opportunities for data processing and storage will continue to expand rapidly. Last year, ISG reached an important milestone, becoming profitable over the full year, with revenue up more than 13% year-on-year to a new record. All the high-value businesses, such as storage, software, services, and high-performance computers set revenue records. We continue to grow at a premium to the market by enhancing our full-stack capabilities that cover both CSP, cloud service provider, and enterprise and SMB segments. We continue to invest in in-house design and manufacturing capabilities while also expanding to faster-growing areas. including edge and cloud services. We further differentiated with green technology, such as our Neptune liquid cooling system. For our Intelligent Device Group, or IDG, smart devices continue to benefit from the hybrid work model. While consumer PC demand may slow in the short term, commercial demand remains strong. Smart collaboration market is expected to surpass 80 billion US dollars by 2025. Meanwhile, the challenges we have faced in the recent past won't disappear right away. By overcoming challenges while capturing opportunities, IDG delivered a fantastic fiscal year, with revenue exceeding $60 billion for the first time, up 18% year-on-year. Operating profit improved by almost $1 billion. We maintained the number one position in PCs. The premium segments delivered high double-digit growth, Our mobile business revenue outgrew the market by 30 points, with a doubling operating profit to more than $360 million, a record since the Motorola acquisition. We are expanding beyond PCs. And now, over 18% of IDG revenue comes from other smart devices, embedded computing, IoT, and scenario-based solutions. Meanwhile, we continue to focus on innovation, particularly in premier segments, to extend our leading position in PC, while maintaining industry-leading profitability. We further expanded to beyond PC devices, IoTs, and scenario-based solutions to provide new growth engines as we move from computers to computing. Let me also cover our fourth quarter performance. Despite the disruption to supply and production due to COVID-19 outbreak in China, we still managed to close the year with strong results. Our net income achieved more than 50% year-on-year improvement for the seventh consecutive quarter. Our revenue grew nearly 7%. All three business growths contributed to our profitable growth. SSG revenue grows 28% and improved the operating margin by over a point. ISG sustained profitability for the second quarter, and IDG improved the operating margin for the 18th consecutive quarter. Lastly, there is one particular message I want to share with you. Years of our persistent investment and efforts in infrastructure and mobile businesses have paid off. They have not only turned profitable but also become our new growth engines along with SSG. We will capture these windows of opportunity and drive the entire company to new heights. At the same time, we will continue to decisively invest in innovation, service-led transformation and ESG for continued success. While the world continues to face uncertainty, we will stay flexible and resilient. We will execute our clear strategy compete with the unique advantage of global local model and the balance between innovation and efficiency. We are confident to overcome challenges while capturing opportunities to deliver sustainable, profitable growth in the future. 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 fiscal year 2022 and Q4. For the 2022 fiscal year, our group delivered another historic year with new milestones in profit and revenue. The group revenue exceeded $70 billion for the first time in company history and grew 18 percent, adding $10 billion for the second consecutive year. Profit attributable to equity holders increased 72% to $2 billion, and basic earnings per share came in at 17.45 US cents. This represents an 83% year-on-year growth, a strong accomplishment in a year impacted by severe supply chain and logistical disruptions. Group net income margin improved 89 basis points year-on-year, on track to achieving our target of doubling net margin in three years. Our growth trajectory remains strong and well supported by structural trends such as digital transformation, increasing complexity in cloud infrastructure, and customer preference for value-added solutions. A balanced growth profile underscores the group's business strengths. It is worth noting our growth beyond PC, including our successful turnaround of infrastructure business and strong expansion in smartphone and services. We achieved consistent growth across all three business groups and geographical markets except Asia Pacific due to a slowdown in education sales relative to the high base last year. ISG turned profitable for the first time since our acquisition of IBM 886 business. Both SSG and IDG contributed to another successful year with double-digit revenue increase and profit expansion. Today, the Board declared a final dividend of 30 Hong Kong cents per share. Taking into consideration of the interim dividend of 8 Hong Kong cents per share, the total dividend will be 38 Hong Kong cents per share for fiscal year 2022. Now let me shift gears to talk about our R&D investments. We made a commitment to double our R&D investment in three years, and in fiscal year 22, the group R&D spending grew 43 percent year on year. Digital transformation has never been more important to our growth as we invest in new IT architecture spanning across client, edge, cloud, network, intelligence. Our investments will push the development of high-value added products and key components, including edge, storage, and cloud in response to significant growth in data creation and data consumption. We will also drive innovation to propel our smartphone portfolio, scenario-based solution, ESG initiative, and expand our services scope. Every aspect of our R&D investment has helped contribute to the 71 basis point increase in our record operating margin and long-term competitiveness. In fiscal year 22, our operating cash flow further increased to 4.1 billion, improving over four consecutive years to a record level. Free cash flow reached 2.8 billion. These results were achieved through strong profit expansion and prudent working capital management, while balancing between generating cash and maintaining competitiveness in response to the industry-wide challenges in supply and logistics. Our strength in cash flow management was maintained throughout the full fiscal quarter. Operating cash flow more than doubled to nearly $1.5 billion, while free cash flow tripled to $1.1 billion. To optimise our capital structure, the Group further reduced net debt by $1.5 billion and financed costs by 18 per cent during the year. including in the repurchase of perpetual securities. We cut net debt by a total of 3.5 billion in the last four years and achieved net cash for two consecutive quarters. It's worth noting that not only did a major rating agency grant Lenovo a credit rating upgrade during the year, Lenovo was also added to the Hansang Index as a consistent stock. SSG closed its first year of business with operating profit up by 40 percent year-on-year, as operating margin widened to 22%. Revenue increased by 30% to $5.4 billion, growing much faster than the industry average. Our recurring revenue base continued to build as our deferred revenue grew by 30% year on year. SSG's solid performance was supported by the strength in its three business segments, among which support services revenue rose 23% year on year, We continue to improve our service penetration with an enhanced portfolio, including services in areas of hybrid work and sustainability, which are vital to our customers. Revenue of our second service pillar, managed services, grew 63 percent with Lenovo TrueScale's launch, which covers a wide range of excess service offerings. The third pillar, project and solution services, which provide industrial vertical solutions, continue to build repeatable solutions and make breakthroughs in smart city and smart retail for contract wins. In Q4, SSG continued its robust growth trajectory from the previous three quarters, reporting nearly 1.4 billion revenue with 28 percent year-on-year growth and an 8 percent contribution to the group revenue. SSG operating margin improved 1.1 points year-on-year to a record 22.5 percent. Let's turn to ISG. The business group delivered a record year. Its revenue reached an all-time high of $7.1 billion, up 13 percent year-on-year, despite supply constraints of semiconductor parts. The business also turned profitable for the first time since the IBM 886 acquisition. ISG operating profit increased by 137 million year-on-year. In Q4, the COVID lockdown in Shenzhen added further pressure on our supply chain, impacting ISG revenue growth. Despite the unprecedented supply impact, ISG was again profitable in this fiscal quarter and reported a year-on-year profit expansion of $36 million, highlighting its strength in weathering through challenges to drive profitability. ISG expanded its client base through a broadened portfolio of product offerings that particularly appeal to next-wave customers in the CSB business that are in need of strong supplier support to expand their own cloud services. CSP revenue grew 20% in a year thanks to design wins in next-gen products. ESMB revenue was up 7% year-on-year as the business expanded high-growth, high-margin solutions across servers, storage, SDI, software, and services. and capture emerging opportunities in AI power edge and hybrid cloud. IDG delivered another record year in performance. Its revenue and operating profit grew 18% and 27% year-on-year, respectively, to all-time highs. IDG added $9.3 billion in revenue in FY22, a strong achievement considering the scale of its business. These results were achieved despite multiple challenges, including supply constraints, weakness in education segment, and the ongoing pandemic. IDG Group continues to be the leader in the global PC sector by both market share and profits. The business is investing in innovations and cultivating a strong commercial demand from the hybrid work model. Premium products continue to enjoy high double-digit sales growth as premium commercial sales grew 30 to 60 percent year on year, while sales among premium consumers were up 30 to 37 percent. We also extended our innovation in the ESG area, including increased use of recycled materials and sustainable packaging. IDG also makes significant progress beyond PC, including other smart devices. embedded computing, and scenario-based solutions. These deliver a combined revenue growth of 26 percent and accounted for 18 percent of IDG revenue in fiscal year 22. The success of IDG's adjacent products is becoming an increasingly important profit contributor, as smartphone sales increased 39 percent year-on-year with double operating profits. Sales of marked collaboration solutions also grew nearly triple the just year-on-year, on the back of strong customer demand, although off a low base. In Q4, IDG achieved a solid 14 percent profit expansion. Its operating margin grew to 7.7 percent, with profitability increased year-on-year over 18 consecutive quarters. Q4 was a quarter of strong performance with a 58% hypergrowth in net profit. The global supply shortage of semiconductor persisted while COVID lockdowns impacted the operations of our Shenzhen factory. Despite these challenges, our revenue grew by 7% and all business groups reported strong profit improvements. SSG continued to post double-digit growth in both revenue and profitability. a clear evidence of its ability to increase surface penetration and capitalise on its massive in-store hardware base. ISG was profitable for two consecutive quarters, with an operating profit improvement of $36 million year-on-year. IDG maintained high profitability thanks to its focused strategy in driving growth in segments where demand is strong, including premium and commercial segments as well as opportunities beyond PC. IDG's smartphone business continued its record-breaking performance in focused markets and reached a double-digit market share for the first time in North America since the acquisition of Motorola. On the ESG front, Lenovo achieved a CDB score of A for supplier engagement rating in climate change. We are also listed on the supplier engagement rating leaderboard. an honor we have maintained since 2018. Lenovo was included in the 2022 Bloomberg Gender Equality Index. As a global technology leader, gender equality is a top priority of our social impact efforts. We've set several ambitious goals to enhance gender diversity, including increasing the female representation of our executive population by 7 percentage point over five years to 27 percent by fiscal year ending March 2026. On governance, Lenovo received its highest ever rating and the best overall industry score for the IT industry in the 2021 Hang Seng Corporate Sustainability Index, achieving an AA-plus rating for the first time. It is also the first time we received a 2022 Asia-Pacific top-rated ESG performer rating by Sustainalytics. We are making every effort to improve our supply chain practice by completing the initial ESG risk screening of over 500 suppliers with the EcoVadis Rating 2. Looking ahead, the Group will continue to operate with a larger purpose in mind as it anticipates the technology and innovation needs of a smarter future. While the external environment remains challenging, the strategic opportunities in digital and surface-led transformations should accelerate, filling commercial demand for Lenovo end-to-end user-friendly product and service solutions. Our clear strategy and execution, coupled with committed R&D investment and solid global local franchise, are key to achieving our medium-term goal of doubling net margin. SSG is a new and well-established growth engine for the group, with its rising scale and strong profitability. Structural opportunities will emerge from digitalization and post-pandemic changes in the workplace. This shift will increase the demand for premier, true-scale-as-a-surface, sustainability, and vertical solutions. SSG will continue to broaden its service offering in this area while strengthening channel truth and cooperation with business partners. With our goal to sustain double-digit growth trajectory, we will actively seek business opportunities to broaden and deepen the geographical and vertical coverage of our services, especially by managed and project and solution services. With strengthened customer relationship, SSG will further enhance its financial contribution to the group. The outlook remains strong in ISG as the COVID-led supply shortfall has resulted in unfulfilled customer orders as customers accelerate infrastructure upgrades. ISG has built industry-leading end-to-end infrastructure solutions and expanded from server to full-stack offerings, including storage, SDI, software, and services. For the ESMB segment, ISG will expand its portfolio for higher profitability. The Group will also capitalise on growth opportunities in AI PowerEdge, hybrid cloud, high-performance computing, and solutions for the telco communication sectors. For the CSP segment, the Group has a unique ODM Plus business model to address growing customer demand. The business will continue to diversify its customer base and expand its share of existing accounts through design wins. IDG will lead the global race in device innovation by enhancing features for hybrid working, gaming, entertainment, green materials, and ESG designs. Meanwhile, the total available market of global PC sector should remain at a level higher than the pre-pandemic period, thanks to the strong commercial demand from the hybrid work model. Its smartphone business will focus on portfolio expansion and differentiation to take advantage of the accelerated 5G adoption and changing competitive landscape. IDG will accelerate investment to score wins in new growth engines, a move which has become more important for growth. This includes fast-growing accessories and scenario-based solutions. Our strong financial position provides a solid foundation on which Lenovo can proactively pursue long-term growth opportunities ahead. In the short term, we face headwinds from slowing down economic growth and ongoing pandemic. The entire industry has been impacted by unpredictable developments which will create impact on supply and demand. Nevertheless, we will continue to leverage our operational excellence and pursue innovations to grow faster than the industry and expand our new business opportunities. Finally, as always, we remain committed to driving sustainable growth and profitability for our shareholders.