Lenovo Group Ltd S/Adr

Good morning, good afternoon, and good evening. Welcome to Lenovo's Investor and His 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. 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 Yuanqing. Yuanqing, please.

Hello, everyone, and thank you for joining us today. Last quarter, we achieved 12.9 billion US dollars in group revenue with a net income of 191 million on a non-Hong Kong FIS basis. Despite a challenging market with unfavorable macroeconomic conditions, Our service-led business achieved a strong growth and sustained profitability, with the non-PC revenue mix further increasing by 4 points to 41% now, continuously demonstrating the effectiveness of our efforts in building diversified growth engines. As we predicted, with PC channel inventory digestion coming to an end, the trends of shipments and activations have become more consistent. Actually, the year-on-year decline of shipment was lower than PC activations for the first time in six quarters. But the AUR or average unit revenue of PC was under pressure due to declining component price and intensify the competition. And they impacted our revenue. The entire devices market is facing the similar challenge, including smartphone, tablet businesses. Meanwhile, In the short term, the infrastructure market is challenged on multiple fronts and that had downward pressure on our top line and the bottom line as well. In the next two to three quarters, we remain cautiously optimistic about the business recovery as the economy stabilizes and improves. and the component price bottoms out. The client device market is expected to recover and resume growth in the second half of the year. With 850 million US dollars cost savings plan executed more than committed, we will take more actions to keep our E to R ratio more resilient. and we are still committed to continuously improving our profitability. Meanwhile, the booming of the intelligent technologies such as AI-generated content is propelling the wider adoption of AI, accelerating digital and intelligent transformation across industries. For many years, Lenovo has been driving our transformation to become a full-stack intelligent solution provider. And we are well positioned to capture the significant growth opportunities ahead and transcend the cycle. Also, unchanged is our commitment to doubling our investment in innovation in medium term. Over the next three years, we will invest additional $1 billion to accelerate AI deployment for businesses around the world, focusing on AI devices, AI infrastructure, and AI solutions. We will continue to empower our customers and consumers in all works of life to grasp the opportunities in the era of intelligent transformation. Now I will talk more about each of our businesses. Let's start with the SSD solutions and the services group. Last quarter, SSG again delivered a strong growth and a higher profitability. While we protected the support services business as our core profit engine, we made significant progress in expanding our managed services and the project and the solution services. the revenue of which has now grown to account for more than half of SSG business, four points higher year on year. Over the next three years, the trend of digital and intelligent transformation will continue to drive a strong growth of global IT spending, especially in IT services. At the same time, overall demand for vertical solutions including smart city, smart manufacturing, smart education, and smart retail. It's expected to see strong growth through 2026 as well. SSG also continued to scale with our hero offerings, such as digital workplace solution, hybrid cloud, and sustainability. and incubate these horizontal building blocks into vertical solutions to help our customers improve employee experience and productivity. Next, our infrastructure solution group, or ISG. Last quarter, its overall revenue declined year on year for the first time in many quarters. due to overall cloud service provider computer server demand softness, GPU constraint impacting full AR adoption, and the industry is slower than expected transition to the next generation platform. But we achieved hyper growth in storage, software, services, and high performance computing In particular, storage achieved the triple digital year-on-year growth and made us the fourth largest storage provider in the world. In AI, hardware infrastructure business, based on the latest IDC definition, we grew by triple digit and is the number three in the world. Driven by AI-generated content breakthrough, the ICT infrastructure upgrade is accelerating even further. We will continue to invest in developing AI-ready and AI-optimized infrastructure, such as AR Edge, AR Hybrid Cloud, as well as server and storage that support AR-centric workloads. We will persist in differentiated competition, aiming to resume premier to market growth and sustainable profitability as soon as possible. And we remain focused on becoming the most trusted infrastructure partner for our customers in their digital and intelligent transformation. Our intelligent device group, or IDG, is still under a lot of pressure last quarter. Despite all these challenges, we maintained our global number one market share in PCs with inventory normalized to a healthy level. Our smartphone business achieved the record of Q1 activation in 10 years with our improved channel inventory, which will bring even more growth potential for the future. We further strengthened the Premier and the 5G with the successful launch of Motorola Razr. We also demonstrated a great growth potential in smart collaboration and smart home areas. We remain committed to investing in technology innovations to ride on industry trends and build long-term competitiveness. We are driving collaborations on building the next generation AI devices, such as AI PC, AI smartphone, to deliver certain level of inferencing. For our smartphone business, we will continue to execute on our three-year growth plan, which has helped us achieve a premier growth in our traditional strongholds in North America and Latin America. and make solid progress expanding into EMEA and the Asia Pacific. Meanwhile, we also expanded our smart devices for a more diversified portfolio and the enriched software and the services to build the IDG ecosystem. Lastly, at Lenovo, we believe our challenging business environment Online makes innovation more important. AI and computing are our anchor technologies and the critical pillars of our intelligent transformation strategy. We will continue the hard work and drive innovations. Here, I would like to take this opportunity to invite you to Lenovo Tech World, our annual flagship event in October. where we will showcase our AI devices, AI infrastructure, and AI solutions, all for individuals, enterprises, and the vertical industries. Looking ahead, we will more effectively control expenses and mitigate risks so that we can deliver sustainable profitability improvement. and continue to drive transformation and innovation to build a smarter future for all. 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 fiscal year 2024. Next slide, please. Despite the persisting macroeconomic headwinds, the group accelerated service-led transformation with our SSG revenue up 18% year-on-year and our non-PG sales improved to 41% of the combined sales of its three business groups. Our progress in inventory reduction and strong balance sheet has bolstered agility to capture the future growth opportunities, including AI. We are committed to returning to target profitability. doubling the net margin in the medium to long term remains the group's priority. The group's strong gross margin reached 17.5%, driven by the increasing contribution from the high margin service business. The group was disciplined in streamlining its operating expenses structure. Operating expense was reduced by 11% year on year, ahead of our committed 850 million run rate savings targets. However, Persistent headwinds remained in the quarter and impacted IDG and ISG, resulting in a 24% decline in group revenue to $12.9 billion or down 22% in constant currency. The magnitude of the revenue decline was heavier than expected, which led to a higher E2R ratio. The quarter saw a recent low in net profit margin on non-HKFRS standard, Group profit attributable to equity holders was 191 million, down 66% year on year. Global economy starts to stabilize, although challenges remain. The group will continue to focus on controlling expenses, enhancing product competitiveness, and identifying new growth catalysts in order to expedite business recovery and expand profitability. Next slide, please. We continue to optimize the efficiency of group operations for greater responsiveness to challenges and long-term growth opportunities. Cash and cash equivalent balance reached 4.4 billion in June, up 15% year-on-year. For the seventh consecutive quarter, the group delivered a net cash with a balance of 454 million, 15% higher than a year ago. Infantry was reduced by nearly 3 billion. or days of inventory reduced by seven days in the quarter, attributable to accelerated adjustment in raw materials. Days of accounts payable and receivable together improved 17 days. The group shortened its cash conversion cycle by 24 days to negative 11 days. All of these are critical steps in ensuring a prudent capital management to support future growth and accelerate business transformation. Successful service-led transformation positioned SSG to be a key beneficiary of the new IT era. SSG delivered a year-on-year revenue growth of 18% to $1.7 billion, highest for any first fiscal quarter in SSG history. Operating margin of 21% demonstrated business resilience and robust profitability. operating profit of $361 million was up 10% year-on-year. SSG continued to enrich its service portfolio across all three sectors to meet evolving customer needs and to drive scale and profitability. Management service grew 54% year-on-year, capitalizing on strong demand for true-scale as-a-service solutions, including first true-scale wins in Gulf countries in the quarter, Revenue of support service increased 9% year-on-year thanks to rising penetration rates that came with greater popularity of test services such as premium support and sustainability offerings. Project and solution services revenue rose 9% year-on-year, supported by strong demand for vertical solutions. Next chart, please. After outperforming the sector in growth for past three fiscal years based on server revenue, ISG was ultimately impacted by accelerated weakness in cloud server compute spending combined with global GPU constraint impacting the AI server supply chain and a slower than expected transition to the next generation platform. ISG reported Q1 revenue of 1.9 billion, down 8% year-on-year. Its segment operating performance turned into a loss of 60 million as a result of its smaller-scale operations. Despite its surface sales being impacted by these short-term sector-wide headwinds, ISG achieved multiple sales records across several product categories, showcasing its success in portfolio expansion. Its storage revenue more than doubled year on year. Sales of edge product and software increased by strong double digits. In high performance computing, ISG continued to reign as the top global player, growing at 45% year on year in Q1. In terms of server product, since cloud orders tend to be bulky in nature, its sales pattern can be more accurately assessed on a semi-annual basis. ISG's first half-year run rate growth in calendar year 2023 reached negative 4%, which is at a premium to sector growth. This product strategy plays an important role in enabling a broader adoption of AI by simplifying the deployment of AI solutions for businesses. The group has an AI-ready portfolio of smart devices and edge-to-cloud infrastructure And Lenovo and ISG will invest an additional $1 billion to further expand its portfolio to provide one-stop, state-of-the-art AI enablement and solutions. Most recently, ISG's new Think System model utilizes the most powerful universal GPU accelerator to deliver breakthrough performance for large language model inference and retraining, and graphics and video applications including 8 GPU supports. Another focus area is our investment in building an AI ecosystem. The Lenovo AI Innovators program is now delivering 150 plus turnkey solutions, helping businesses implement generative AI, immersive metaverse simulations, and cognitive decisions at scale. Next slide, please. Having navigated through the final phase of inventory digestion in the sector, the magnitude of IDG shipment decline was substantially moderated in Q1. The trends of PC shipment and activations are now more consistent. Nevertheless, our actions to clear inventory across the sector led to more competitive pricing pressure. And as a result, IDG's revenue declined 28% year on year. Its segment operating profit decreased by 39% to $650 million. IDG maintained its leadership position in global PC sector. The business made a great progress in seizing growth opportunities beyond PC products, with non-PC sales making up 21% of IDG's revenue. Its smartphone revenue declined at the beginning of the quarter, but its activation rate would represent the actual customer demand rose double-digit year-on-year towards the end of the quarter. Overall, the group's quarterly smartphone activation set a 10-year record for fiscal year first quarter to support demand recovery, and the trend is particularly strong across EMEA, Asia Pacific, and North America. Smartphone premium makes achieve a record height of 18% driven by successful recent launch. Next slide, please. Now let me shift gears and talk about R&D investments. As we continue to invest in innovation to foster diversified growth engines, R&D spending as a percentage of revenue rose to 3.5% from 3% last year. AI has become a key enabler for many technologies and will unleash higher operating efficiency for us. More importantly, AI has created tremendous opportunities given the group's comprehensive and diversified exposure across devices, infrastructure, and services. As mentioned earlier, we announced in June this year to invest an additional $1 billion over the next three years in AI. We have also extensively collaborated with many key partners to develop next generation product roadmap and solution portfolios together. This strategic investment and collaboration will build our competitiveness in the long run. Next slide, please. The group was consistently recognized for its ESG performance with numerous accolades, including the Best Employer for Diversity Award by Forbes. MSCI upgraded the company's ESG rating to AAA, while Ecovadis acknowledged the group's excellence in sustainable procurement with an Outstanding Program Leadership Award. Lenovo has once again been named in the Gartner Supply Chain Top 25 for 2023, ranking eighth in the list of global companies with supply chain operations. The company has fully embraced digital transformation across its complex, extensive supply chain network. Additionally, Lenovo was highlighted in the Bloomberg Gender Equality Index for the fourth consecutive year. Next chart, please. The trend of digitalization will unlock new opportunities in computing and AI solutions. AI is incredibly powerful, and we are leveraging our group's full capabilities to unlock the potential of AI. And these opportunities should benefit all business groups, from infrastructure to services and devices. Looking ahead, SSGC promising prospect for digital transformation and will continue to scale with next generation offerings. including digital workplace, hybrid cloud, and sustainability solutions, while safeguarding its core business with high value added support services. Strengthening partnership and channel tools are also key growth initiative for SSG to enhance its contribution to the growth success. ISG has built industry-leading full stack offerings and expanded to end-to-end infrastructure solutions that include hybrid cloud, HPC, data management, AI, and edge computing. AI provides new growth opportunities for ISG and its unique ODM Plus business model addresses the growing demand for vertically integrated supply chains. The business will continue to diversify its customer base and drive new account acquisitions. The approach will achieve an optimal balance between general purpose and customized cloud offerings, while ensuring an appropriate scale and efficient cost structure to drive revenue growth and profitability. The global PC market is stabilizing and well positioned for year on year recovery in the later part of 2023. In addition, the increasing popularity of a digital life centered around PC will drive demand structurally higher than the pre-pandemic level. The commercial upgrade cycle and the premiumization trend will help IDG drive premium to market growth. IDG will continue to drive efficiency with its lean operations, maintain healthy cash generation, and invest in non-PC areas, including fast-growing accessories and work collaboration solutions. is my phone business will focus on portfolio and regional expansion as well as differentiation to dig a foundation of accelerated 5G adoption. Meanwhile, the group tries to reinforce its number one position in the PC sector with leading profitability and accelerate innovation-led growth in non-PC and adjacent areas, including accessories. Our strong financial position provides us a solid foundation to proactively pursue growth opportunities ahead. Finally, as always, we remain committed to driving sustainable growth and profitability improvement for our shareholders. Thank you. We will now take your questions.