Lenovo Group Ltd S/Adr

Good morning, good afternoon, and good evening. Welcome to Lenovo's Investor and its webcast. This is Jenny Lai, Vice President of Investor Relations at Lenovo. Thanks to 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 Ernie's presentations and shortly after that, we'll open the call for questions. Now, let me turn it over to Yuanqing. Yuanqing, please.

Hello, everyone. And thank you for joining us today. Last quarter, despite the increasing challenges such as the ongoing pandemic rising inflation currency volatility geopolitical tension and the supply shortages we successfully grow our business and improve the profitability for the ninth consecutive quarter meanwhile our years of persistent investment and efforts paid off as our revenue mix from non-PC businesses reached the highest level of over 37% in our history. Two factors were crucial for our strong results last quarter. First, the strategic foresight and the strong execution. second our operational resilience through our unique global local operating model today the digitalization trend continues to accelerate the hybrid work model is here to stay creating strong and sustainable demand for smart devices iot smart infrastructure and intelligent applications and services. Thanks to our strong execution of digital and intelligent transformation strategy with years of investments in diversified growth engines, our net income grew almost 11% year-on-year and 35% before now hong kong frs basis still on track to meet our commitment of doubling profitability in the midterm revenue grew to 17 billion us dollars and was up five percent year-on-year in constant currency we saw strong performance in our new growth engines solutions and services infrastructure, and mobile businesses. Also, double digital revenue growth year-on-year. We also made strong progress toward doubling R&D investment commitment by growing R&D spending by 10% and headcount by 29% year-on-year. Meanwhile, we further strengthened our One Lenovo platform and realized our ESG goals. Now, I will talk about each of our businesses. Let's start with the SSG solution and the services growth. The trillion dollar IT services market continues to see strong growth. By 2026, 75% of workers will adopt a hybrid working model, driving higher demand for premium and the customer fulfillment services digital workplace expansion has increased demand for other services for devices infrastructure and the workplace management vertical solutions including smart cities smart manufacturing smart education and smart retail is expected to grow double digital categories through 2025 Last quarter, SSG again delivered high growth and high profitability. Revenue grew 23% year-on-year. Operating margin was further improved to almost 23% as well. We saw double digital growth in revenue across all segments. Revenue from now hardware-tired management service and the project and the solution services now accounts for almost half of SSG business. At the same time, SSG continued to invest in software tools, platforms, and repeatable vertical solutions. That includes continued expansion of TrueScale as a service portfolio. to the broader digital workplace. We also launched the hybrid multi-cloud solutions and continued to develop our sustainability offerings. With the new strategic partnership with PCCW, we will expand our footprint in Asia Pacific. Our infrastructure solution group, or ISG, continues to benefit from strong infrastructure market growth. The server market is expected to grow at a double digital category through 2025. The edge infrastructure market will exceed 41 billion US dollars and the storage will reach 36 billion US dollars by 2025. Last quarter, ISD revenue exceeded $2 billion for the first time, up almost 14% year-on-year, the third consecutive quarter with positive operating profit. Cloud service provider segment, as well as the server and the storage revenue, all reached all-time records and outgrew the market. Edge computing revenue almost doubled year-on-year. In high-performance computing, we maintained our leadership in the top 500 list by adding more units with our Neptune liquid cooling technology. We will continue to invest in our comprehensive portfolio and innovation, particularly in edge and services. We will continue to balance the scale and the profitability as we remain focused on being one of the fastest growing end-to-end infrastructure providers. For our intelligent devices group, or IDG, the PC market currently is experiencing a short-term challenge. But other people recognize the necessity of PC as a key productivity too. The PC temp is expected to be much higher than pre-pandemic levels in the long term. Meanwhile, the scenario-based solutions market grow faster. Smart collaboration is one of them and expected to surpass 80 billion US dollars by 2025. Driven by our operational excellence, IDG overcome challenges while capturing opportunities. We maintain the industry leading profitability with operating profit of over 1 billion US dollars. We outgrow the market to strengthen our number one position in PCs, driven by strong growth in premier segments such as gaming and the workstations. At the same time, our smartphone revenue increased by more than 20%. The most impressive part is that such a growth not just come from our traditional stronghold market of Latin America and North America, but also expansion markets of Europe and Asia Pacific. Our expansion beyond the PCs continues. And now nearly 22% of IDG revenue comes from non-PC smart devices, embedded computing, IoT, and the scenario-based solutions such as smart home and the smart collaboration. We continue to focus on innovation from smart devices to smart collaboration and then to smart spaces. In smart devices, we focus on innovative form factor, extreme performance, adaptive intelligence, security, etc. For the digital workspace, we are working on seamless connection and integration, allowing for the best possible mix of physical and virtual collaboration. In summary, although external challenges may persist in the short term, we continue to see long-term opportunities. We see clear trend from smart devices to smart spaces, from computer to computing, from traditional IT to digitalization across all industries and the new IT architecture, and from serving customers to protecting the planet. We will definitely innovate and capture these opportunities. You will see our vision and the progress in these directions at the Tech Award, our annual flagship event in October. With a solid performance, Lenovo has proven that we have the right strategy, strong execution, the agility and the resilience to transcend the cycle. We are confident in our ability to overcome challenges, continue to transform, diversify our businesses, and deliver sustainable growth and profitability improvements. 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 for Q1 in the 2023 fiscal year. We face a variety of macroeconomic challenges in the quarter, including the ongoing COVID lab disruption, foreign exchange rate volatility, geopolitical uncertainties, and surging global inflation. Despite these, our reported revenue remains steady year on year with a 5% growth in constant currency. thanks to the growth of IT spending arising from digital transformation and our operational excellence in cost control and supply chain management. While China saw demand impacted by the lockdown, all other geographical markets had positive growth. Even though our PC business continued to grow at a premium to market, the group's non-PC revenue has shown significant growth and now contributed over one-third of our group revenue. Our group net income reached a record high for the first fiscal quarter at $516 million. Net margin reached 3%, up 29 basis points from last year, a record for quarter one and the ninth consecutive quarter with year-on-year profit expansion, and we are on track to achieve our medium-term target of doubling our net margin. Basic earnings per share came in at 4.39 US cents. To facilitate a more meaningful evaluation of Lenovo's current operating performance and comparisons to other periods, we have also reported our adjusted profit prepared outside of the Hong Kong financial reporting standards as an additional financial measure. excluding fair value gain or losses from the group's strategic investments, amortization charges of intangible assets resulting from mergers and acquisitions and M&A related costs, our non-HKFRS operating profit and net income jumped 21% and 35% respectively. You may refer to the appendix of our presentation for more information on the supplemental non-HKRFS measures. In Q1, we maintained a net cash position of US$394 million after a 1.1 billion reduction in net debt in the past year. However, the supply disruption caused by the Shanghai lockdown resulted in sales concentrated towards the last month or the quarter, which had driven a higher quarter-end balances in account receivable and also impacted inventory. Two-thirds of our account receivables are less than 30 days, We expect the disruption to be temporary and free cash flow to improve. Contemplating further uncertainty in the capital market, the group successfully completed in July its US$1.25 billion dual-trunk bonds offering, which include our inaugural green bond offering. In addition, a US$2 billion refinancing syndicated loan facility was completed, in the same month with an improvement in margin compared to our existing facility. The two financing transactions together extended the group's total average debt maturity by two years to nearly five years. SSS is a key beneficiary of the growth in new IT, marking another outstanding quarter for the group. Revenue rose 23% to $1.5 billion and operating profit reached $329 million with a year-on-year growth of 25%. SSG further improved its operating margin by 36 basis points from the previous year to 22.6%. Deferred revenue, an indicator for recurring business, grew 20% year on year. The operating margin expansion was a strong driver for the group's continued growth. SSG achieved this by enriching its service offerings across all three of its segments for better profitability and scalability. Revenue of the managed service segment increased 70% year-on-year. Inflation and delivery uncertainties stemming out from macro conditions are triggering a shift in CIO's preference from ownership to services, driving the popularity of as-a-service. The true-scale as-a-service solution extended from server and storage to high-performance computing. Revenue from support services and project and solution services segments rose double-digit year-on-year, thanks to the enhanced portfolio utilizing our intellectual property to address the growing IT workload. ISG continued to report strong quarterly performance. Revenue grew 14% year-on-year to above $2 billion for the first time in its history, making the group one of the fastest growing infrastructure solutions providers globally. Leveraging its expanding solution portfolio, broadened customer coverage, and a unique, fully integrated ODM Plus business model, ISG successfully improved its operating profit by $22 million year-on-year to $11 million, marking the eighth consecutive quarter with year-on-year profitability improvements. Cloud service provider revenue reached an all-time high, supported by a growing customer base, product portfolio, and design wins. We increased capacity in our plants in Mexico and Hungary to capture future growth opportunities. Despite supply challenges, the ESMB segment sales also continue to grow, with a focus on improving profitability and an expanded footprint in server, storage, edge computing, services, and multi-cloud solutions. ISG product sales broke Q1 records in server storage and AI and edge. IDG revenue declined 3% year-on-year, primarily from the weak consumer PC demand and the COVID-led supply constraint. However, non-PC sales grew 12% year-on-year thanks to several pockets of growth accounting for 22% of the business group revenue. its profitability remained robust at 7.5% thanks to the enriched product mix. In the PC business, the structural shift to the commercial and premium segments is supported by the digital transformation cycle and IDG investment in innovation to leverage the hybrid work model and lifestyle change. Commercial sales in China were impacted by the COVID lockdown and the one for the rest of the world continue to grow. Premium segment sales also grew 8% year on year, including a 28% growth on workstations and a 14% growth in gaming. In the non-PC business, smartphone revenue grew over 20% year on year, supported by a robust growth trajectory across all geographical regions and an accelerated product transition towards 5G, Scenario-based solutions are a new driver for IDG and our smart collaboration solutions maintain hyper-growth rates of key wins in the global markets. Now let's talk about research and development. It is the main driver for innovative growth pillars to meet customer demand despite various challenges. Although our total expense remains flat year-on-year as a result of discipline control, R&D investments still increase 10% year-to-year to drive various growth engines and business transformation to support the group's services, commercial sales, premium mix, and ESG initiatives. These strategic priorities sustain the group operating margin at a record high level for Q1 at 4.6%. and it will enable us to better navigate through the macroeconomic challenges and demand uncertainties. Now let's look at the result of our ESG efforts. Lenovo expanded its use of closed-loop post-consumer recycled content of 103 to 248 products in 2022 fiscal year. Our KPI requires 100% of our PC products to contain PCR content materials and 90% of electricity used in our global operations to be renewable by the 2026 fiscal year. Last month, the issuance of the Group First Green Bond and the establishment of its first ever green finance framework marked an important milestone in our ESG journey. These initiatives support our vision to achieve net zero by 2050, reaffirming our commitment to a more sustainable future. To further accelerate global ESG progress, in November 2021, the company kicked off the first phase of the Lenovo 360 Circle Partnership, which will promote corporate citizenship and facilitate the group's transition to adopting a more sustainable value chain within its business model. While the external business environment continues to be volatile, the strategic opportunities in digital and service-led transformations are substantial and conducive to the growth of our high-value-added products and services. The Group will maintain its agility and resilience in tackling external uncertainties and challenges while implementing a growth strategy. Like every business today, We are actively and prudently managing our cost structure across all elements to ensure Lenovo's long-term growth and sustainability. Looking forward, SSG will drive scalable growth with high profitability. digitalization, and post-pandemic changes in the workplace will increase demand for premier, true scale as a service, sustainability, and vertical solutions. SSG will continue to broaden service offerings with a goal to sustain a stable digital growth and trajectory while actively seeking business opportunity to broaden and deepen the geographical and vertical coverage of our services, especially for managed services and project and solution services. We aim to grow both organically and inorganically through various means, including our strategic partnership with PCCW. ISG has built industry-leading end-to-end infrastructure solutions and expanded from server to full-stack offerings that include storage, SDI, software, and services. ISG will expand its ESMB portfolio for higher profitability and capitalize 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, increasing our customer base and procuring new accounts through design wins. IDG will lead the global race in device innovation by enhancing features that support hybrid working, gaming, entertainment, green materials and ESG design. Within the PC business, we will solidify our number one position with leading profitability. The smartphone business will focus on portfolio expansion and differentiation to take advantage of the accelerated 5G adoption and changing competitive landscapes. IDG will accelerate investment to score wins in new growth engines, including fast growing accessories and scenario based solutions. Our strong financial position provides a solid foundation for us to proactively pursue growth opportunities ahead. Finally, as always, we remain committed to driving sustainable growth and profitability for our shareholders. Thank you. And we will now take your questions.