Lenovo Group Ltd S/Adr

Hi, ladies and gentlemen, good afternoon. It's my pleasure to introduce to you to the management today for our Lenovo 2023 to 2024 annual results investor presentation. Now may I introduce the senior management to you one by one. Here we have Mr. Yang Qingyan, Chairman and CEO. Mr. Wei-Ming Wang, Executive Vice President and CFO. Mr. Ken Wong, Executive Vice President and President of Solutions and Surface Group. Mr. Kurt Scoggin, Executive Vice President and President of Infrastructure Solutions Group. Mr. Luka Drozde, Executive Vice President and President of Intelligent Device Group. and Mr. Sergio Buniak, Senior Vice President of Mobile Business Group and President of Motorola. Now may I pass the time to Yanqin to start the presentations and followed by Wei Min. Yanqin please.

Hello everyone and thank you for joining us. So today we are pleased to report that since resuming year on year revenue growth and the quarter to quarter profitability improvement last quarter, we have accelerated this momentum further in the first quarter. We have successfully navigated the industry downturn and moved faster to capture the tremendous hybrid AI opportunity. We are optimistic about the outlook of the new fiscal year. Let me start with the strong performance of our first quarter. We accelerated revenue growth across all of our businesses, driving group revenue to increase almost 10% year-on-year and net income to double year-on-year. Filled by our diversified growth engines, our non-PC revenue mix reached a historical high of almost 45%. Last quarter, the PC and the smartphone markets have already returned to growth. Meanwhile, hybrid AI is driving greater demand for hybrid infrastructure. Customers are increasingly asking for customized AI solutions and services, particularly consulting, design, deployment, and maintenance of AI. With our persistent commitment to investment in innovation, Lenovo is well prepared to lead in the hybrid AI era. We are confident to realize our vision of a smarter AI for all, while driving sustainable growth for our business. Now, I will talk about each of our businesses in the first quarter. First is our SSE, Solutions and Services Group. We continued to strengthen its position as both our growth engine and the profit contributor by delivering double-digit year-on-year revenue growth and higher, more than 20% profitability. We expanded the managed service and the projects and solutions service with their combined revenue mix growing five points year-on-year to account for 55% of SSG's total business. In particular, our hero offerings such as digital workplace solution, hybrid cloud, have delivered rapid growth. Looking ahead, we will continue to meet increasing customer demands. by moving faster to build AI-native and AI-embedded solutions and services. For our Infrastructure Solutions Group, or ISG, we achieved double-digit year-on-year revenue growth as we forecasted last quarter. While profitability was still under pressure, We achieved a hyper-growth of storage software and services businesses. The combined revenue of which increased more than 50% year-on-year. Looking ahead, AI servers are expected to grow twice as fast as the broad server market. At Lenovo, we will capture these growth opportunities by building our broader portfolio and converting our extensive pipeline to revenue. By leveraging our strength, we will also capture steady growth opportunities in traditional service, storage software and services. And we have a solid plan in place to drive the business return to profitability shortly. Our Intelligent Devices Group, or IDG, continued to deliver a solid quarter. For PC, we strengthened our global market leadership with a significant premium to the market while maintaining industry-leading profitability. We were number one in four out of five geographies and achieved record high market share in North America as well. Our smartphone business delivered another remarkable quarter with double-digit growth in shipment and revenue with a substantial premiere to the market. Looking ahead, we expect the total volume of the PC market to recover to higher than pre-COVID levels, with the smartphone market already returning to double-digit year-on-year hyper-growth. Lenovo is provided with ample room for growth. We are particularly excited about the huge growth opportunities brought by AI devices, starting from ARPC, which is, in our definition, equipped with a personal AI agent with natural language interface. heterogeneous computing, including CPU, GPU, NPU. And also, we can help users to build themselves personal knowledge base. And they should be connected to our open AI application ecosystem. And the last but not least, so we will have strict privacy and the security protection mechanism. We expect in the next three years, AIPC will gradually grow from premier to mainstream segment, driving a new refresh cycle in the PC market. We strongly believe most consumers of PC, the next PC will be AIPC. or we should say an AI PC will drive next round of the PC replacement. We are also gradually expanding from AI PC to AI phone and AI tablet, while building seamless collaboration among devices. Last month, we announced a new partnership with Meta in mixed reality. And we expect more such collaborations to come. Lastly, let me also briefly cover our full-year performance. Faced with various headwinds in the macro environment, group revenue and profit declined year-on-year. But if we take a closer look, starting from the third quarter, we have already achieved the year-on-year revenue growth and begun to recover net margin from year-on-year decline in the first half to flat in the second half of the fiscal year. Last year, we increased our R&D investment, focusing on our anchor technologies of AI and computing. Our R&D expense-to-revenue ratio, R&D headcount, and its percentage all achieved record highs. Our SSG delivered solid revenue growth and a higher, more than 20% operating margin. For ISG, while we saw full-year revenue decline year-on-year, we achieved quarter-to-quarter growth for three consecutive quarters. Our IDG overcome the challenges of a weaker than expected market and delivered resilient profitability. Our PC, tablets and smartphones businesses all successfully resumed growth for the second half of the fiscal year. Entering the new fiscal year, we are determined to leverage the unprecedented opportunities of hybrid AI to accelerate the growth of our 3S businesses. Supported by our continued investment in innovation, full-stack portfolio, resilient operations and ecosystem partnerships, we have full confidence in our ability to deliver sustainable growth and profitability improvement. Thank you. Now let me turn it over to our CFO, Wei Ming. Wei Ming, please.

Thank you, Yuanqing. Good afternoon, everybody. Now, I will now take you through Lenovo Financial and operational performance for our quarter four in fiscal year 2024. So in quarter four, the group benefited from better than expected demand and achieved several new milestones. Group revenue grew by 90.5% and net profit more than doubled, boosted by consistent strength across all three business groups. Despite the setback in business performance in early part of the year, the group doubled down on its investment in hybrid AI to unlock growth opportunities while boosting its profitability. Gross margin reach its second highest level in the fourth fiscal quarter at 17.6%. The non-PC business made up a record height of nearly 45% of the combined revenue of the three business groups, showcasing our success in building a diversified growth engine. SSG delivered its record fourth quarter revenue and boosted a 20% year-on-year profit growth. IDG segment profit increased by 17% year-on-year, fueled by operational excellence and profitable and fast-growing premium segments. ISG regained strong revenue momentum, delivering a 15% year-to-year increase thanks to a strong recovery in cloud customer demand and expanded general AI portfolio and record sales across storage, software, and services. ISG profitability was dented by market transition, but timely initiatives are in place to drive future improvements. The group recorded a one-time non-cash accounting gain of $143 million from a fair value assessment of a put option liability. This gain was largely offset by restructuring and other charges totaling $132 million. Those charges resulted from various measures to further enhance the Group's efficiency and competitiveness. For the fiscal year 2024, the Group successfully navigated through a dynamic market environment marked by shifting demand and technology trends. The challenges experienced in the first half year weighted heavily on the Group's full year's number, resulting in an 8% decline in revenue and a 37% decline in profit attributable to equity holders. Nevertheless, with rising investment to drive innovations, including AI, the full-year gross margin rose to an all-time high thanks to strong R&D investment, with R&D expenses to revenue ratio reaching a record high at 3.6% for the full year. By seizing the market opportunities through its operational excellence, the gross revenue growth recovered swiftly, with a 6% year-to-year increase in the second half of the year. SSG spearheaded the group's service-led transformation and delivered multiple revenue and profit records for the third consecutive quarter, helping the group to transcend the market cycle. SSG's segment profit rose 11% year-on-year, represent 35% of the combined segment profit across the three business groups. ISG revenue declined 9% year-on-year amid sector-wide challenges early in the year, including a demand shift towards AI, but quickly regained its momentum in Q4. IDG made further market share gains in the PC and smartphone sectors, bolstering its profitability. His segment profitability remained high within the upper range of his historical trend, demonstrating his resilience and agility. Basic EPS came in at 8.41 US cents. Today, the Board declared a final dividend of 30 Hong Kong cents per share, taking into account the interim dividend of 8 Hong Kong cents per share. Total dividend for fiscal year 24 will be 38 Hong Kong cents per share. The group efforts to optimize operational efficiency helped shorten the cash conversion cycle to negative four days for the full year. Days of account receivable and inventory together improved by 12 days year on year, offsetting the lower accounts payable days. The group robust free cash flow also facilitated continual R&D investment. Lastly, total borrowing reduced due to strong working capital management and the full credential of our 2024 convertible board. SSG has once again achieved record high revenue performance for both the fiscal year and Q4. Its full-year revenue and operating profit grew 12% and 11% year-on-year, respectively. The contribution from SSG to the three business group combined profit, rich and historic high, underscoring his pivotal role as the group primary profit driver. SSG maintained its growth momentum in the fourth fiscal quarter, delivering double-digit year-on-year revenue growth for the 12th consecutive quarter. The pay-as-you-go through-scale services continued to gain traction and posted double-digit year-on-year growth in contract signings. The fourth fiscal quarter also saw the signing of device-as-a-surface mega-deal as the largest win to date for digital workplace service. During the year, SSG won its largest infrastructure-as-a-service deal on extensive partner ecosystem, as well as its largest asset-recovering service deal on superior data security assurance. SSG is actively leveraging AI to enrich its service portfolio to meet the evolving needs of its customers. Two notable additions to the portfolio are AI Discover and AI Fast Start, which are AI-native services aimed at helping customers to deploy AI technologies securely and efficiently in a hybrid environment. ISG achieved its second-highest annual revenue despite a 9% year-on-year decline due to a shift in global IT budgets away from traditional general-purpose computing. Revenue in the fourth fiscal quarter rebounded by 50% year-on-year, achieving a new Q4 revenue record and three consecutive quarters of quarter-on-quarter growth. New sales records were achieved in multiple segments and products including storage, software, services, high-performing computing, and edge. However, ISG investment for premium-to-market growth and the slower transition to DDR5-based systems had a lingering impact on its bottom line, resulting in a full-year segment loss. Nonetheless, ISG's return-to-profitability plan had laid out strong initiatives to drive profitable growth once again. To capture the opportunities reflected in its AI pipeline of more than $7 billion, ISG announced more than 10 new large-language model AI products, including nine NVIDIA GPU-based systems and several MI300X-based systems. These products are equipped with air and liquid cool solutions, utilizing our award-winning Neptune technology and build off over 80 AI-optimized products already in the market. Additionally, the transition to new V3 systems is now aggressively accelerating with other new products and new partners' go-to-market offerings. Finally, ISG is focused on expense and operational efficiency to further drive improved profitability. IDG ended the year with a 7% year-on-year revenue growth in the fourth quarter, driven by solid premium-to-market growth. This is the second consecutive quarter of year-on-year quarterly revenue growth, indicating a much stronger performance in the second half of the year, despite a 10% decline for the full year. OPM reached 7.1% for the full year and 7.4% for the fourth quarter, up 64 basis points year on year, and close to historic peak level thanks to the operational efficiency, operational excellence, and higher premium mix for the fourth quarter. IDG is aiming to take the lead in the ongoing AIPC revolution. We mark the turning point for the industry, creating opportunities for strengthening IDG's leading position IDG is committed to AIPC innovations, not only for its hardware development, but also in areas of proprietary software and components to drive product differentiation. Smartphone continue to shine with strong double-digit revenue growth in the second half of the year, driven by notable premium-to-market growth, particularly in the Mir region and Asia-Pacific region. The strong performance of our smartphone business is also a result of the continued effort to enable our product portfolio with focus on premium models such as our affordable race reform. The group efforts for environmental sustainability have been well recognised. For the fifth consecutive year, the group has been acknowledged by CDP for our leadership in climate change. Additionally, our Neptune liquid cooling technology, designed to reduce energy consumption and carbon footprint, has been awarded the Best Green Energy Product by CRN Sustainability Tech Award. Adding to our list of achievements was the gold rating awarded by Egovitis for our sustainability performance, placing us among the top 3% of all companies rated by Egovitis. These track records are a testament to the Group's ongoing pursuit of excellence in product design innovation and dedication to environmental sustainability. Hybrid AI presents a significant and unique opportunity for the group. To supercharge growth, R&D investment will be made to unlock the full potential of hybrid AI and build pockets to cloud capabilities. The robust innovation efforts seen across the three business groups will enhance the group's competitiveness in the next generation product design and solutions. This will, in turn, drive profitable growth and support the group in achieving our medium-term profitability targets. Looking ahead, SSG will roll out its new AI native services and embedded AI functions across its service offerings to address enterprise customers' growing demand for AI technologies. Concurrently, SSG will focus on safeguarding its core business with high-value added support services across both PC and infrastructure segments. Through collaborating with ecosystem partners, SSG is well-positioned to help customers accelerate their digital transformation journey and further enhance its financial contribution to the group. ISG aims to drive growth with continuously improving profitability. leveraging its investment in differentiated technology solutions in hybrid AI, high-performance computing, storage, and edge systems and solutions. The business segment will further diversify its customer base, acquire new accounts, and strike a balance between general-purpose systems to drive profit and customized cloud offerings to drive scale and overall synergies and efficiency. This approach will ensure scalability, cost efficiency, and and optimization of revenue growth and profitability. AIPC is about to kickstart a new demand cycle for products with premium pricing and attractive features for commercial users. This is critical for IDG to drive premium-to-market growth, higher ASP, and sustainable profitability. To answer this demand, IDG is developing its own IPs for better performance in areas such as inferencing speed, language model compression, and memory consumption. IDG is also extending its differentiation efforts beyond hardware to components and software, notably with the introduction of Lenovo AI Core chips, Yoga Creator Zone, ThinkShield Security Solution, and AI Now Personal Assistants. IDG is in a strong position to build competitive advantages and lead the AIPC revolution. Finally, as always, we will stay committed to driving sustainable growth and profitability improvement for our shareholders. Thank you. Now we will take your questions.