Lenovo Group Ltd S/Adr

Afternoon and good evening. Welcome to Lenovo's Earnings Investor Webcast. This is Jenny Lai, Vice President of Investor Relations. Thanks, everyone, for joining us. Before we start, I would like to introduce our management team joining the call today, Lenovo's Chairman and CEO, Yuan Qingyang. Group CFO, Yiming Wang. President of Solutions and Services Group, Ken Wang. Senior Vice President of Infrastructure Solutions Group, Vlad Rosinovich. President of Intelligent Devices Group, Luca Rossi. And Senior Vice President of Mobile Business Group and President of Motorola, Sergio Buniak. We will begin with Ernie's presentations and after that, we'll open the call for questions. Now, let me turn it over to Yuan Qing. Yuan Qing, please.

Hello, everyone, and thank you for joining us. Today, we are pleased to report a great start to our fiscal year 2024-2025, driven by our clear strategy and strong execution. our persistent innovation and operational excellence, as well as our globalization advantages. We delivered a solid performance in our first quarter, with all of our businesses improving profitability and growing faster than the market. As the trend of hybrid AI is becoming more clear, we also made important progress in strengthening our capabilities to capture this major opportunity. This performance and progress, together with a recovering global IT market, significantly boost our confidence to accelerate our transformation and further improve our performance in the coming quarters. Last quarter, we delivered a strong year-on-year revenue growth of 20%. Profit improvement was even more robust. On a non-Hong Kong FRS basis, our net income increased by 65% year-on-year to $315 million. our diversified growth engines continued to accelerate with non-PC revenue mix up five points year-on-year to a historical high of almost 47%. Regarding AI, now more clearly than ever, we are seeing that the public AI alone cannot address the increasing needs of either individuals or enterprises. Hybrid AI, which is formed by personal AI, enterprise AI, together with public AI, is indeed the way forward. As the outlook becomes more evident, major ecosystem players are accelerating the development and application of personal AI agents and enterprise AI agents. which is creating enormous growth opportunities across devices, infrastructure, solutions, and services. By pioneering our hybrid AI vision and continually investing in AI and computing across personal and enterprise AI agents, Lenovo has already built a full-stack AI portfolio and capability. This features our AI devices like AIPC, our AI servers that support all major architectures, as well as our rich AI-native and AI-embedded solutions and services. Last quarter, our R&D investment further increased year on year. We will continue to innovate to deliver AI for every individual and every enterprise. Now I will talk about each of our businesses. Let's start with our Intelligent Devices Group or IDG. We delivered a strong quarter with double digit revenue growth and almost a one point improvement in operating margin year on year. For PC, we maintained our market leadership in both shipments and activations with premier to the market. We also succeeded in maintaining our industry-leading profitability. Moreover, we are very encouraged by the positive user feedback on our five-feature AIPC, which was launched first for the China market in May. We will launch more AIPC products for the global market at IFA and Tech World. And we are confident with leading market share in next-gen AIPCs. Our smartphone business and tablet business both deliver strong revenue year-on-year growth of around 30%, with particular hyper-growth in smartphone. in Asia Pacific, EMEA, and the North American markets. Looking ahead, we expect the PC market to enter a new refresh cycle driven by AI PCs, which will gradually grow to represent more than 50% of the PC industry landscape by 2027. We will continue to deliver groundbreaking innovations to achieve the full potential of personal AI agents while leveraging on deepened strategic partnerships to build a more diversified portfolio and a richer ecosystem. Next, our infrastructure solution group, or ISG. Last quarter, driven by the strong growth of our cloud service provider business, ISG delivered a 65% year-on-year growth in revenue, a historical high. profitability saw improvement both quarter-to-quarter and year-on-year. The combined revenue from storage, software, and services achieved a significant growth of almost 60% year-on-year and set a new record. Moreover, revenue from our Neptune liquid-cooled servers with unique sustainability benefits, grow more than 50% year-on-year to a record high. Looking ahead, we will continue to drive the recovery of profitability for this business through optimizing the business model for enterprise SMB business, including simplifying portfolios and improving operations. We will continue to leverage our industry-leading liquid cooling technology to meet increasing demands for AI workloads, while at the same time capture the growth opportunities in AI servers and storage markets. And we will continue to grow key strategic partnerships and build infrastructure platforms that support hybrid AI solutions. Our SSG Solutions and Services Group has delivered the 13th consecutive quarter of double-digit year-on-year revenue growth since its establishment, with an operating margin of 20% or above, further strengthening its position as our growth engine and profit contributor. We expanded managed services and project and solution services. The revenue mix has grown three points year-on-year to account for 55% of SSG's business. Over the next three years, the global IT services market is expected to grow steadily. And AI services will grow almost twice as fast as the market in general to become the primary driver. Lenovo will continue to embed AI in our key hero offerings such as digital workplace solutions, hybrid cloud, and sustainability solutions. while at the same time developing more AI-native services to drive the adoption of AI for our customers and accelerate their transformation journey. Before I close, I would like to share that the hybrid AI era has only just began. As the ecosystem evolves along with the changing industry landscape, Lenovo is uniquely positioned and well-prepared to lead with our full-stack AI capabilities. Meanwhile, our globalization advantages consistently help us seize opportunities and mitigate potential macro risks. Two months ago, we announced our strategic partnership with Allat. This collaboration will greatly benefit our efforts to go deep with our intelligent transformation, leveraging the growth momentum in the Middle East and further strengthen our supply chain. Looking ahead, we are confident that through capturing the hybrid AI opportunities and leveraging our globalization advantages, we will continue to achieve sustainable growth and profitability increases. Thank you. Now let me turn it over to our CFO, Wei Ming. Wei Ming, please.

Thank you, Yanqing. I will now take you through Lenovo's financial and operational performance for Q1 in fiscal year 2025. Next chart, please. In Q1, Thank you very much. was catalyzed by a combination of factors, including clear strategy, strong execution, operational excellence, innovation, and globalization. The group achieved premium-to-market growth across its operating regions, and all the business groups delivered double-digit growth. The group focused on delivering a comprehensive full-stack portfolio to drive innovation through personal and enterprise AI twins increasing R&D expenses by 6% year-on-year. IDG benefited from growing AI investment and commercial demand, lifting revenue by 11%, which is better than expected. The introduction of its AI PC line with five distinct AI features mark an important milestone in the group AI journey. Premium sales emerged as another bright spot. with its PC and smartphone premium sales growing 21% and 142% year-on-year, respectively. ISG revenue grew 65% year-on-year, exceeding $3 billion in quarterly sales for the first time. With its comprehensive hybrid AI capabilities and introduction of new AI infrastructure products, services and partnerships, ISG explored new opportunities in generative AI infrastructure systems, while collaborating with the key GPU suppliers and utilising Neptune liquid cooling technology. The non-PC business made up a record 47% of the combined revenue of the three business groups, mainly driven by the hybrid growth in ISG. SSG delivered its record first quarter revenue and profit. Its segment profit now accounts for one-third of the combined segment profit across the three business groups. Another milestone is the Strategic Collaboration Framework Agreement signed with Allat. This partnership will help the group leverage the growth momentum in the Middle East and Africa region, further globalise its supply chain and support the group's transformation. This is an important strategic initiative and more details will follow in the later slide. Next chart, please. Our solid cash flow management and profitability gains led to a 53% year-on-year increase in free cash flow, contributing to a strong cash balance. This also facilitated continued investment in hybrid AI innovation and IP generation. The group's total borrowing reduced from a year ago due to strong profit growth, healthy cash flow generation, and full conversion of 2024 convertible bond. At the same time, we continue to maintain a healthy cash balance exceeding $3.6 billion. Cash conversion cycle lengthened 11 days from a year ago. This is primarily driven by the longer inventory days, which is in response to rising demand, new product launches and preparation for strong seasonality. IBG bids expectation with an 11% year-on-year revenue growth, driven by solid premium-to-market growth in both PC and non-PC segments. This growth is resulted from a commercial sales recovery and a demand shift towards higher value-added models. OPM reached 7.3%, up 92 basis points year-on-year, and approaching historic peak levels. Operational excellence, along with ASP expansion and higher premium mix, make it possible for a 27% profit growth. IDG is spearheading the AIPC revolution. would mark an industry turning point creating opportunities to further strengthen its leading position. IDG's approach to AI PC innovation spans hardware development, proprietary software and components, driving product differentiation. Our five feature AI PCs have received encouraging user feedback in China and we are now preparing for a worldwide launch. On the non-PC front, Smartphone and tablet businesses deliver strong revenue year-to-year growth. Smartphone continue to shine with notable premium-to-market growth across Asia Pacific, EMEA, and North America. The strong performance of the smartphone business stems from our continued effort to enhance the product portfolio with a focus on AI-featured premium models such as the foldable Razer phone. Next slide, please. ISG achieved record-breaking quarterly revenue with a 65% year-on-year hyper-growth driven by surging demand from cloud service providers. ISG also delivered a new record high for the combined revenue from storage, software and services in the first quarter, operating performance improved by 23 million year-on-year and 59 million quarter-on-quarter, reflecting enhanced operational performance. ISG quarterly revenue from liquid cooling service reached a new height with more than 50% year-on-year increase. Our proprietary Neptune technology, backed by over 10 years of experience, has established our leading position in this area and allow us to benefit from high cooling requirements of more powerful GPU platforms in the future. On the AI front, ISG continued to see strong momentum, with the AI GPU server pipeline increasing by more than 20% quarter-in-quarter, while order growth was faster at over 30% quarter-in-quarter. SSG continued to benefit from AI power services and solutions, reporting record first-quarter revenue and profits. Revenue grew 10% year-on-year to $1.9 billion, the 13th consecutive quarter of double-digit revenue growth. With a leading operating margin of 21%, SSG contributed one-third of the combined operating profits across the three business groups. Both managed services and project and solution services revenue grew double digits year-on-year, reaching 55% of SSG revenue, up 3 percentage points. As a service, remains a bright spot for many services. Its total contract value of devices as a service and infrastructure as a service increased by strong double digits, reinforcing long-term growth. SSG also expanded key vertical wins with the group's AI-powered solutions, including smart factory IoT and smart warehouse solutions. Lastly, SSG is actively and continuously embedding AI into existing offerings to enhance value proposition. Meanwhile, we are developing AI services to meet customer demand at every stage of their AI journey, from IT transformation to data modernization to AI adoption. Next chart, please. The group has introduced ALAT, a US dollar 100 billion fund wholly owned by the Public Investment Fund. as a long-term strategic investor. This collaboration enables the group to capitalize on the strong growth momentum in the MIA region, which offers identifiable and incremental revenue and profit opportunities for all our business groups. In addition, go-to-market partnership with LUT will help accelerate market entry in the region. Our collaboration includes establishing a new manufacturing facility to serve the regional market adding to our existing global footprint of over 30 sites around the world. This expansion will enhance our global supply chain resilience and flexibility while leveraging the region's extensive clean energy initiatives. As part of the collaboration, the group will issue a convertible bond and warrants totaling $2.21 billion, which will be used for zero-interest-cost debt refinancing, supply chain investments, The President Additionally, the Group will achieve $100 million of annual interest saving for the three years without dilution from convertible bonds. The above-mentioned resolutions are subject to shareholders' approval at an EGM. The Group's steadfast dedication to corporate governance and sustainability has been recognised once again. at its secure 10th place in Gartner's prestigious Global Supply Chain Top 25 for 2024. Our environmental efforts remain on track to help us reach our SPTI-aligned 2030 emissions reductions goals, with 94,000 metric tonnes of products recycled since 2020. The group has also made significant strides in promoting diversity and inclusion, with an industry-leading 29% representation of women in technical roles. These accomplishments highlight the growth balance approach to sustainability and strategic excellence across its diversified growth engines. Hybrid AI presents a significant and unique opportunity for the group to supercharge growth, further R&D investment Thank you very much. Looking ahead, AIPC is about to kick-start 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. IDG has unveiled its first batch of five-feature AIPCs in China, incorporating proprietary technologies as well as co-pilot plus AIPC. An extensive lineup of these five feature AI PCs is set to launch for the rest of the world in the second half of this fiscal year. At the same time, our significant growth in the smartphone sector will continue to be a driver for our premium-to-market growth strategy. ISG aims to continuously drive growth and improve profitability by leveraging its investment in differentiated technology solutions in hybrid AI technologies. infrastructure, high-performance computing, storage, and edge systems. ISG has introduced its sixth-generation industry-leading Neptune liquid cooling technology to meet increasing demand for AI GPU servers and capture business opportunity in this rapidly growing segment. The water cooling trend is just beginning, and we are well positioned to capitalize on its growth. SSG will roll out new AI native servers and embedded AI functions into his service offerings to address growing enterprise demand for AI technologies. Concurrently, SSG will focus on safeguarding its core business with high value-added support services across both the PC and infrastructure segments. Through collaboration with ecosystem partners, SSG is well positioned to help customers advance their digital transformation journey and further enhance its financial contribution to the growth. As mentioned earlier, our proposed strategic collaboration with the LAT will form an important part of our sustainable growth plan. We will put forward the relevant resolutions, and an EGM is expected to be held soon. We hope shareholders can support this exciting opportunity. Finally, as always, we stay committed to driving sustainable growth. and improving profitability for our shareholders. Thank you. We will now take your questions.