Lenovo Group Ltd S/Adr

Good morning, good 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, Wai-Ming Wang. President of Solutions and Services Group, Ken Wang. Senior Vice President of Infrastructure Solutions Group, Vlad Rosanovich. 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 Yuanqing. Yuanqing, please.

Hello, everyone, and thank you for joining us. Last quarter, Lenovo delivered accelerated revenue year-on-year growth for the fourth consecutive quarter, with all of our businesses achieving strong double digital growth. the group's net income increase is even more significant. This is driven by strong execution of our clear strategy, leading innovations in hybrid AI, operational excellence, and the global footprint. and we are optimistic that this momentum will sustain for the remainder of the fiscal year. Last quarter, our group revenue grew almost 24% year-on-year. Net income increased 48% year-on-year on our now Hong Kong FRS basis. Our diversified growth engines further accelerated with the non-PC revenue mix, increasing more than five points a year to nearly 46%. At our Tech World event last month, the hybrid AI trend that we put forward at the same time last year has gained industry-wide consensus as it creates real growth opportunities across devices, infrastructure, and services. Lenovo has long been a pioneer of the hybrid AI vision, and now our continuous investment over the years and the expanding innovations have started to pay off. For personal AI, The first batch of our five-feature AI PC that launched in May in China has already reached almost 14% of our total notebook shipment in the China market. Thereafter, we have also launched AI PC with AI Now agent for global markets, which we believe will follow a similar growth track. For enterprise AI, we are leveraging our full-stack hybrid infrastructure, as well as Lenovo hybrid AI advantage to capture the opportunities. At this early yet critical stage of the hybrid AI era, Lenovo will continue to proactively establish our market differentiation and the industry leadership through relentless innovation. Last quarter, we enhanced our innovations around both personal AI and enterprise AI with a 10% year-on-year increase in R&D investment. We remain committed to our vision of delivering 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 17% year-on-year revenue growth. For PC, we expanded our market leadership to almost 24% market share, enlarging the gap with the second player to more than four points, while maintaining the industry-leading profitability. Our smartphone business and tablet business both delivered a high double-digit year-on-year revenue growth by 43% and 19%, respectively. Particularly in smartphones, we saw hypergrowth ranging from 20% to triple-digit in North America, EMEA, and the Asia-Pacific markets. Looking ahead, we expect the PC market to steadily recover and enter a new refresh cycle driven by AI PCs, which will gradually grow to represent around 80% of the PC industry landscape by 2027. The new development of AI technology is also expected to drive the refreshment of the smartphone markets We will continue to leverage our five feature AI personalized computers and the newest lineup of next generation co-pilot plus AIPC to establish leadership in the AIPC market while at the same time build a richer AI device portfolio. Next, our infrastructure solutions group, or ISG. Last quarter, driven by the hypergrowth of our cloud service provider business, ISG delivered a 65% year-on-year growth in revenue, breaking record for the second time in a row. Operating losses continue to narrow, heading to breakeven soon. The combined revenue from storage, software, and services achieved 35% year-on-year growth to record high. Revenue from our Neptune Liquid Code servers increased by 48% year-on-year. Looking ahead, we will continue to strengthen our enterprise SMB business model. including simplifying portfolios and improving operations, as well as diversify cloud service provider customers. We will continue to build differentiation with our industry-leading liquid cooling technology to meet the increasing performance and energy efficiency demands of AR workloads. and we will continue to grow key strategic partnerships to develop smarter infrastructure solutions. Our SSG Solutions and Services Group has extended its double digital growth streak to 14 quarters with operating margin of 20%. We further expanded the managed services and the project and the solutions services. The revenue mix has grown three points year on year to account for almost 60% of total SSG business, a historic high. Our hero offerings such as the digital workplace solutions, hybrid cloud, and the sustainability solutions also deliver the strong growth Over the next three years, the global IT services market is expected to see double-digit steady growth and AI services will grow more than twice as fast as the market in general to become one of the key drivers. We will continue to embed AI in our key hero offerings while at the same time developing more AI-native services for our customers to adopt AI use cases and capture the hybrid AI opportunities. Looking ahead, we expect to drive continued innovation in hybrid AI and deliver accelerated growth and profitability increases. The strategic partnerships with Allat will bring us the intended strategic benefit in our intelligent transformation, meal market expansion, and global supply chain enhancement once the deal is completed. We are confident that our leading innovation, operational excellence, ecosystem partnerships, and globalization capabilities will not only continue to help us navigate macro and micro challenges and opportunities, but more importantly, enable us to realize our vision of smarter AI 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 Q2 in fiscal year 2025. Next chart, please. In Q2, the group set multiple performance records thanks to operational excellence and opportunities brought by strong innovations. Group revenue beat expectations with a 24% year-on-year growth, net income rose by 44%, and non-HKFRS net income surged by 48%. Revenue growth accelerated for four consecutive quarters with all business groups and geographies achieving double-digit year-on-year growth for the first time in three years. IDG's 17% revenue growth surpassed expectations as differentiated five features AI PCs and foldable smartphones led to continued market share expansion in PC with largest lead over the second player in last two years and highest smartphone market share. ISG revenue grew 65% year-on-year, outpacing the market and elevating its global market shares in servers and storage to new records. Key drivers include the strong cloud demand for hybrid infrastructure, enterprise demand recovery, and accelerated liquid cooling adoption. This strength in cloud demand supports ISG customer diversification, adding more clients with 1 billion revenue scale. Meanwhile, enterprise demand recovery is crucial for ISG profitability, which saw a 33% year-on-year reduction in operating loss. SSG achieved record revenues and profit, driven by high demand for asset surface and AI-powered solutions. SSG segment profit accounted for 32% of our three business segment profits, with deferred revenue reaching a historic height of $3.1 billion. In terms of business growth profitability, IDG and SSG both improved profits while ISG reduced operating losses. However, the group's gross margin was affected by hypergrowth towards cloud infrastructure, including GPU servers. Despite this, expense control led to net margin expansion. Basic earnings per share were 2.92 US cents. The board declared today an interim dividend of 8.5 Hong Kong cents, a 6% increase as compared to last fiscal year. Next slide, please. Free cash flow grew by 632 million year-on-year on strong profitability growth, leading to an increase in cash balance. With robust free cash flow, the group further increased R&D investment by 10% year-on-year to support hybrid AI innovation. At Tech World, Lenovo launched leading AI products, including servers, PCs, services, and personal AI agents like Lenovo AI Now. Cash conversion cycle was at six days. Higher inventory was driven by rising demand and new product launches. The group's effort in capital management was well recognized, and Lenovo was honored for the 2024 Top Treasury Team Award. by Adam Smith, highlighting his strong governance practices. Next slide, please. IDG bid expectation was at 70% year-on-year revenue growth, driven by solid premium-to-market growth in both the PC and smartphone business. The PC market in China was boosted by the government's stimulus measures as evidenced by reduced year-on-year decline. The business continued delivering industry-leading OP margin of 7.3%, thanks to operational excellence and ASP expansion. Smartphone and tablet businesses had another strong quarter. Smartphone in particular continued to shine with significant double-digit growth in revenue, shipments, and activation, with hypergrowth ranging from 20% to triple-digit in Asia Pacific, EMEA, and North America. The success was largely due to the focus on AI powered premium models such as the foldable razor. Building on IDG's successful innovation records, the business is advancing industry leadership through continuous innovation, expanding its PC market lead by widening the gap over the second place competitors and remaining number one in four out of five regions. Its new AIPC is setting the industry standard and spearheading innovations, marking a turning point and creating opportunities to further strengthen its market leadership. IDG is seeing early success as its five feature AIPCs with intelligent agent Xiao Tian reached 14% of total notebook shipments in China, aligning with growth expectations. At Lenovo Tech World last month, IDG launches latest five features and Aura Edition AI PC. Alongside other innovations, including the on-device intelligent agent AI Now, Smart Connect, and Moto AI, IDG aims to add value for users and create differentiations. Next slide, please. ISG achieved record-breaking quality revenue in the past quarter, making a hybrid growth of 65% year-on-year driven by strong cloud momentum and enterprise recovery. In addition, storage revenue growth maintained robust, thanks to its strong full stack capability to meet diverse demands, especially from cloud customers. ISG is making steady progress towards sustained profitability, demonstrating confidence in both year-on-year and quarter-on-quarter operational improvements. In the second quarter, isg achieve a 33 reduction in operating loss along with enhanced enterprise profitability across all regions moving forward isg is well positioned to seize future growth opportunities with odm plus business model and we are competent to drive continued profit improvement by strengthening esmb business ISG is also building differentiation with its proprietary Neptune liquid cooling technology. Its liquid cooling server revenue continues to grow at a high double-digit rate of 48% year-on-year. On wider customer adoption, Neptune technology enables heat removal of 100% without specialized air conditioning. On the AI front, ISG is seeing strong demand in AI GPU server pipeline, with incoming orders expected to convert into meaningful revenue starting in the second half of this fiscal year. Next slide, please. SSG continued to benefit from AI powered services and solutions, reporting record revenue and profits in the second quarter. revenue grew by 13% year-on-year to $2.2 billion, marking the 14th consecutive quarter of double-digit growth. With an operating margin of 20%, SSG contributed 32% of the combined operating profits across the three business groups. Both managed services and project and solution services revenue grew by double digits year-on-year, up 3.1% to 59% of SSG revenue. and this attributed to strong as a service contract wins and rising demand for ai services including securing one of the largest dust contracts with rich services ssg have seized opportunity in ai power service solution through its ai fast start service would help customers accelerate ai adoption by providing readily available use cases for faster deployment ssg is also enriching its hybrid cloud offerings and developing the next gen digital workplace solutions to capture the hybrid ai trend in support service the record deferred revenues strengthen growth outlook for support services extra please The group's commitment and achievement in corporate governance and sustainability has been recognized once again as its retained AA rating in the 2024 Hansen Corporate Sustainability Index. The newly launched AI-powered sustainability platform, or what we call LISA, has won the SEAL Sustainable Innovation Award. Besides, the Neptune liquid cooling technology was honored with the Sustainability Product of the Year Award from Business Intelligence Group. On the D&I front, the group has earned recognition as a 2024 Best Place to Work for Disability Inclusion by the Disability Equality Index. These accomplishments highlight the group's balanced approach to sustainability and strategic excellence across its diversified growth engines. Next slide, please. Hybrid AI presents an unparalleled opportunity for the group to supercharge growth. Further R&D investment will be made to unlock the full potential of hybrid AI and build a full stack AI capability. This will help solidify our leading position in personal and enterprise AI twins. The robust innovation efforts seen across the three business group will enhance the group's competitiveness in next generation product design and solutions, effectively driving growth and supporting its efforts in achieving its medium term profitability targets. Looking ahead, as AI hardware upgrades, AI software and use cases will evolve, adding value for users and making AI PCs a mainstream product. IDG approach to AI PC innovations include hardware development, proprietary software and components that enhance differentiation and pave the way for personal AI twin. These innovations will also help drive higher ASP and sustainable profitability. Meanwhile, IDG's significant growth in the smartphone sector will continue to propel its premium-to-market growth strategy. ISG is committed to driving growth and profitability by investing in hybrid AI infrastructure, high-performance computing, storage, and edge systems. With customer diversification among cloud service providers and optimization of ESMB business structure, ISG is set for balanced growth in revenue and profitability. ISG's latest Think System Server built on the NVIDIA GB200 platform with advanced 6th generation Neptune technology achieves 100% liquid cooling without specialized data center air conditioning. SSG will use their hybrid AI advantage to deliver fast and reliable AI outcomes, enabling organizations to quickly turn data into business results and accelerated AI adoption. Currently, 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 ai journey while enhancing its financial contributions to the group finally as always we stay committed to driving sustainable growth and improving profitability for our shareholders we'll continue to seek both organic and inorganic opportunities to drive optimal growth for the business thank you we will now take your questions