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 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 today. Last quarter, despite the macro challenges, we saw clear signs of recovery across the technology sector. Our strong execution to our strategy, operational excellence, and continuous investment in innovations enabled Lenovo to achieve quarter-to-quarter improvements in our performance, once again showcasing our business resilience. We are confident in our ability to resume year-on-year growth very soon. Meanwhile, by leveraging our continued investment and growing portfolio of AI technologies over the years, we received a wider recognition for our AI for all vision and capabilities demonstrated at our annual Tech World event last month. Furthermore, we strengthened our AI ecosystem and partner the exponential growth in the AR era. Last quarter, global revenue achieved a quarter to quarter improvement for the second time in a row. SSG Solutions and Services Group. Last quarter, SSG revenue and operating profit both reached historical highs again. We protected the support services and the software as our core profit engine and further expanded the managed services and the project and the solutions services. the revenue mix of which has grown three points year on year to account for 56% of SSG total business, leveraging the strong momentum of our hero offerings, such as the digital workplace solution, hybrid cloud, and sustainability. We have been integrating these horizontal building blocks into smart vertical solutions and services for different industries. winning breakthrough customer deals in multiple markets. Lenovo's new hybrid AI professional services practice is also enabling enterprises to use hybrid infrastructure and AI to transform their business. Next, our infrastructure solution group, or ISG. Last quarter, facing headwinds from global economy slowdown, platform migration, as well as a supply shortage for key components. ISG's overall revenue and profitability were inevitably impacted, but we achieved a strong performance in storage, software, services, edge, and the high performance computing. In particular, storage achieved our all-time revenue record which made us the third largest total storage provider in the world. Looking ahead, we expect the development of a hybrid AI to drive the future growth and diversification of the global ICT infrastructure market. It will gradually find a balance between public cloud, private cloud, and local data centers, between cloud and edge, as well as between AI computing and traditional computing, with AI being more balanced between training and inferencing. At Lenovo, we are well positioned to address this trend with our richest infrastructure products and solutions. We will continue to strengthen our portfolio and competitiveness as well as operational excellence. We remain confident to resume growth and profitability as soon as possible. For Intelligent Device Group or IDG, Despite the tremendous market challenges last quarter, we maintained our global number one position in PC shipments and activations. Even though our overall revenue experienced the year on year decline, we maintained our profitability resilience with our industry leading operating margin by taking concrete actions to further strengthen our operational excellence. Meanwhile, our smartphone business achieved a double-digit shipment growth year on year, even though the market was flat. We further enhanced the competitiveness of our products and optimized our portfolio with a higher mix of premium products. We will fully leverage generative AI to accelerate the launch of our next generation of AI devices, including AI PC, as scheduled next year. And we remain committed to investing in technology innovations for growth and to build long-term competitiveness. Before I close, I want to emphasize that Rome was not built in a day. While the leap in AI applications driven by generative AI and large language models might seem recent, Lenovo has in fact been persistently executing our intelligent transformation strategy for many years. This has given us a distinctive head start in building a comprehensive AI product roadmap that includes a rich smart device portfolio, such as AI-enabled PC, smartphone, and tablet. as well as AI-ready and AI-optimized infrastructure solutions and services. This unique advantage also enables us to build the strongest partnership in the industry. Together, we are well positioned to capture the huge opportunities brought by this wave of AI revolution. Thank you. Now let me turn it over to our CFO, Huang Weiming. Weiming, please.

Thank you, Yuanqing. I will now take you through Lenovo's financial and operational performance for Q2 in fiscal year 2024. Next slide, please. In Q2, the group began to yield benefit from accelerating demand momentum and improved profitability. Despite last year peak performance creating a high base and a 16% year-on-year revenue decline, group revenue grew 12% quarter-on-quarter to 14.4 billion. This marks the second consecutive quarter of sequential growth, confirming a recovery trend with a growth rate faster than our 10-year average of 9%. Gross margin reached 17.5%, the highest for a second fiscal quarter, supported by the Group's unwavering investment in innovation and the increasing contribution from our high-margin surface business. Group E2R ratio remained higher than our typical target range, due to smaller top line. On non-HKFRS standard, group profit attributable to equity holders was 273 million, representing a 40% quarter-on-quarter increase, although still down 54% compared to our nearing peak profit set a year ago. Basic earnings per share came in at 2.09 US cents, Today, the Board of Directors declare an interim dividend of HK$0.08, same as last fiscal year. SSG is the high priority growth engine that spearheads the Group's surface-led transformation and margin expansion. Its revenue and operating profit both reach all-time highs. The share of non-PC sales improved to 40% of the combined sales of the Group's three business groups. Sales of IDG and ISG make sequential and robust improvement, signaling momentum in demand recovery after a few challenging quarters. The group will continue to focus on accelerating transformation, driving demand recovery and seizing new growth opportunities in order to expedite business recovery. We are committed to restoring target profitability with our priority being to double net margin in the medium term. Next chart, please. The group efforts to optimize operational efficiency helped to shorten the cash conversion cycle to negative four days. Days of accounts receivables and inventory together improved by nine days year on year, of which six days came from inventory days improvement alone. A reduction of 2.2 billion in inventory level was achieved through our active management in raw materials. Q2 finance cost was down 7 million quarter to quarter, thanks to prudently lowered borrowings offsetting the higher base interest rates. Last but not the least, S&P Global rating upgraded the group's long-term credit ratings to BBB with a stable outlook, affirming our operational resilience and the effectiveness of our strategy in diversifying our growth engines. Next slide, please. SSG has once again achieved record high performance with revenue growing 11% year on year to 1.9 billion. An operating margin of 20%, which is a few times higher than our corporate average, showcases our business strength. This was achieved despite a mixed shift and a high base comparison that resulted in a slightly lower margin year on year. Managed services grew 31% year on year on strong demand for as a surface solutions and accelerated geographic expansion would include a true scale breakthrough when in Japan this quarter. Premium support and sustainability solutions such as CO2 offset and reduced carbon transport continue to boost our penetration rate. SSG is also leveraging AI to enrich its service portfolio to meet the evolving needs of our customers. A newly unveiled CAD of one platform service is the first of its kind AI-empowered advisory service that makes it possible for clients to reduce lead time and maximize optimization. Our AI professional services can help customers to deploy Gen AI securely and efficiently in the hybrid environment. and Lenovo Intelligent Sustainability Solution Advisor is another AI-powered service that assists our clients in aligning their IT environment with their sustainability goals. Next chart, please. The infrastructure market is currently transitioning to support the growth opportunities in AI. This has resulted in short-term challenges, including supply shortage of key GPU components, budget shifts away from traditional general purpose computing, and a slower than expected transition to DDR5-based platforms. ISG reported a 5% quarter-to-quarter revenue increase and a $7 million improvement in operating profit, suggesting stabilizing sector demand. Year-to-year revenue declined 23% with operating loss. Despite the headwinds, ISG delivered multiple performance records, including all-time high revenues in storage. According to third-party statistics, Lenovo is now the third-largest storage supplier by global revenue market share. a significant advancement of five positions from just a year ago. Within the storage market price bands of 25K and below, Lenovo has held number one position for four consecutive quarters. Moreover, we also achieved double-digit revenue growth in high-performance computing with five consecutive quarters of year-to-year growth. Our edge and software revenue both achieved an all-time quarterly record. with 10 and 4 consecutive quarters of year-to-year growth, respectively. ISG is investing in the development of differentiated technology solutions in general-purpose servers, hybrid cloud, HPC, data management, AI, and edge computing. As part of these efforts, Lenovo has recently unveiled a new edge surfer with differentiated technology featuring 32% less power consumption. Next slide, please. IDG Solidify is global PC market leadership, ranking number one in four out of five geos with expanded market share. Its revenue was up 12% sequentially, outperforming its seasonal average of last six years, despite a decline of 16% year-on-year on high comparison base. With the confirmed recovery trend, IDG revenue growth is expected to turn positive in the near future. IDG achieved an operating margin of 7.4%, returned to the high end of its historic range, thanks to continual R&D investment in innovations operational excellence, and exciting new product launches. The segment also made great progress in seizing growth opportunities beyond PC products, driving non-PC sales up 2.4 percentage point year-on-year to 20% of IDG's revenue. Our smartphone business continued to accelerate market share gain in its growth and strong whole markets, with double-digit premium to market growth in shipments. Innovations such as AIPC, which features AI computing and private foundation models as smart devices, expected to be a powerful driver for the PC replacement cycle from the second half of 2024. AIPC also bodes well to the group's strategic positioning in AI from pocket to cloud, allowing for provision of end-to-end solutions that effectively harness the power of AI. The group has consistently received numerous recognitions for its ESG performance, such as its recent inclusion in the 2023 Hansen Corporate Sustainability Index with the highest score in the IT industry for its environmental and social achievements. The group was also granted the champion status in 2023 Canalys Global Sustainable Ecosystems Leadership Matrix and was ranked as the best place to work for disability inclusion by the Disability Equity Index for the third consecutive year. Among our various ESG initiatives, Lenovo has taken a significant step towards advancing the United Nations Sustainable Development Goals by joining the UNGC Forward Faster Initiative, which seeks to expedite private sector actions in realizing the SDGs outlined in the 2030 Agenda. Next slide, please. The group's continued investment in innovation has diversified our growth engines and unlocked new opportunities in intelligent transformation, especially in AI. Our investment goes beyond hardware devices, software, services, and ecosystem to address the challenges in privacy protection and data security management. All in all, the group will seek to harness the full potential of AI from pocket to cloud. Looking ahead, SSG will launch new AI embedded services to accommodate enterprise customers' growing demand for AI technologies, while safeguarding its core business with high-value added support services across both PC and infrastructure sectors. Strengthening partnerships and channel tools are also key growth initiatives for SSG to undertake to enhance its contribution to the group's success. ISG has extended its industry-leading full-stack offerings to include hybrid cloud, HPC, data management, AI, and edge computing. AI presents new opportunities for ISG, which is supported by its ODM Plus business model and the new AI Innovators Program designed to meet the demand for vertical solutions. The business segment will further diversify its customer base and acquire new accounts, while balancing between general purpose systems and customized cloud offerings. This will ensure scalability, cost efficiency, and the optimization of revenue growth and profitability. The stabilizing global PC market is poised for year on year recovery in late 2023. IDG will leverage the commercial upgrade cycle, the premiumization trend, and the AIPC to drive premium to market growth and maintain its PC market leadership. Meanwhile, IDG will prioritize efficiency, cash generation, and non-PC investment. In the smartphone business, we will focus on portfolio and region expansion and differentiation given rapid 5G adoption. Finally, as always, remain committed to driving sustainable growth and profitability improvements for our shareholders. Thank you. We will now take your questions.