Lenovo Group Ltd S/Adr

Good morning, good afternoon, and good evening. Welcome to Lenovo's Investor Earnings 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, Yuan Qingyang, Lenovo's Chairman and CEO, Wai Ming Wang, Group CFO, Luca Rossi, President of Intelligent Devices Group, Ashley Gorakhowala, President of Infrastructure Solutions Group, Ken Wong, President of Solutions and Services Group, and Sergio Bonillac, Senior Vice President of Mobile Business Group and President of Motorola. 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 today. Last quarter, thanks to our strategic foresight, continuous innovation and operational excellence, Lenovo delivered strong growth across all core businesses, driving significant increase of overall group revenue and profit. We are also pleased that the adoption and the application of AI is accelerating, driven by innovative technologies that are more efficient and lower cost, creating huge growth opportunities. We continue to lead in personal AI with our AI device innovations while proactively leverage hybrid infrastructure and our hybrid AI advantage to build enterprise AI so as to further drive sustainable growth and profit improvement. Last quarter, our group revenue grew double-digit year-on-year for three quarters in a row. Profit growth was even stronger, with group net income more than doubled year-on-year on a Hong Kong FRS basis. Such a fantastic result is attributed to the excellent performance of all core businesses. From the successful turnaround of ISG, driven by its continuous fast growth, to the double-digit E&E revenue growth momentum of both IDG and SSG. Our diversified growth engines continued to accelerate, propelling our non-PC revenue mix to more than 46%. We continued to increase investment in R&D with a focus on AI, dedicated to building a foundational AI technology platform, exploring use case breakthroughs in agentic AI, as well as continuously developing technologies and their applications into products. At CES 2025, held last month, we launched a series of innovative products, including the world's first rollable AI laptop, the world's first gaming device that allows gamers free choice of Windows OS or Steam OS, as well as Moto Air, winning wide attention and high praise. Right now, the AI boom is clearly creating enormous opportunities for continued growth in the markets of device, IT infrastructure, and IT services. The recent phenomenon rise of the new model with its higher inferencing efficiency and lower computing power cost is providing a more realistic path for the democratization and application of AI. This will not only accelerate the maturity process of on-device AI and edge AI, but also promote and accelerate the deployment and customization of enterprise AI, which aligns seamlessly with the vision of hybrid AI that Lenovo pioneered. With our constantly improving full-stack AI capabilities and portfolio, Lenovo is well-prepared to drive the realization of personal AI and Enterprise Air. Now, let me talk about each of our businesses. Let's start with our Intelligent Device Growth, or IDG. Its revenue once again achieved double digital growth year-on-year. For PC, we strengthened our market leadership position, with the gap with the second player further enlarged to almost five points, while maintaining the industry-leading profitability. Within six months, of its launch in the China market, our five-feature AIPC has exceeded our expectations of its mix in the total notebook volume, well ahead of the original plan. For smartphone, we continued the momentum of double digital revenue growth, with particularly hyper growth in the Asia Pacific and the EMEA markets, which significantly drove up our shares in many markets. Looking ahead, we will continue to drive the convergence of more powerful computing and more efficient models into various types of devices, while driving device form factor innovation. We will also optimize our AI agent capabilities, enhance our multi-device connectivity, build our key applications ecosystem, so as to provide a seamless user experience across devices and across ecosystems. Next, our infrastructure solution group, or ISG. Last quarter, ISG delivered almost 60% year-on-year growth in revenue and achieved a break-even. This was driven by the continued hybrid growth of our CSP, or cloud service provider business, that reached a historical high, as well as the steady growth of our enterprise SMB business. Our AI server business started generating steady revenue, and our industry-leading Neptune liquid cooling solutions also made headway beyond supercomputing and academy into wider vertical industries. Indeed, it was no small feat turning around our ISG business. The credit here has to go to the firm execution of our right strategy. Back when the market started shifting to cloud computing, we had set our minds to developing both the traditional ESMB and the emergent CSB businesses and never to lose sight of one or the other. Over the years, we have built a CSB business from the ground up with a unique ODM Plus model. Sticking with it, despite its impact on our overall profitability at certain phases, Today, we are on the way to building a 10 billion CSP business with self-sustained profitability. We are leveraging the scale that we built with CSP to improve the cost effectiveness of our ESMB business and ultimately secure the sustainable profitability of our overall ISG business. Looking ahead, as hybrid AI needs to be supported by hybrid infrastructure, there will be a lot of demand for public clouds as well as on-prem data centers, private clouds, and edge computing. We are confident that by continuing with our strategy and through further simplifying our product portfolio, strengthening our go-to-market capabilities, and optimizing our ES&B business model, we will achieve sustainable, profitable growth with our ISG business. Our SSG solution and service growth has continued its double-digit revenue growth to a record high with operating margin of 20%. While support services remained our strong profit engine with improved profitability. The revenue mix, combined from managed services and project and solution services, as our growth engines, has grown 5 points year-on-year to a record high of almost 60% of SSG's total business. Our AI solution business also started to build lighthouse cases for top customers. For example, we delivered our enterprise AI agent platform for our leading diary company that can seamlessly integrate diverse AI applications. Looking ahead, we will continue to build capabilities and hybrid AI advantage framework and establish advanced AI tech center to empower our enterprise customers with intelligence. Before I close, I want to emphasize that to succeed in large-scale high-tech manufacturing industry that we are in, scale is the key. In PCs, we drove the expansion of consumer business as a complementary to our stronghold in commercial business and become the global leader and firmly stay there. In mobile phones, we refused to settle for the Latin American and North American markets and made our move firmly into the Asia Pacific and the Emirates, even if we need to invest a lot of resources, both financially and time-wise, all with the aim to build our most scaled business foundation for sustainable and profitable growth. The same can be said of our infrastructure business, where we endured temporary losses for our strategic intent, just as I explained earlier. Therefore, you can say that through the years, for each of our core businesses, we have consistently chosen to be flexible and adaptable, scaling to secure a win first, and a greater profitability will naturally follow as a result. Looking ahead, equipped with our continuous investment increase on AI innovation, our global footprint expansion with our allotted strategic partnership, our brand equity through FIFA and Formula One partnerships, and our excellent and resilient global operation, we will continuously navigate macro uncertainties and realize our vision of smarter AI to all in the near future. 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 performances for Q3 in fiscal year 2025. Next chart, please. Q3 has been a period of strong growth and innovation. The group beat market expectations with net income surging by 106% year-on-year and revenue up by 20% to a three-year record of $18.8 billion. Revenue grew by double digits across all business groups and geographies, showcasing the company's strategic foresight, continuous innovation, and operational excellence. Non-PC sales rose 4 percentage points year-on-year, to account for 46% of sales across the three business groups. The smartphone segment achieved a record market share of FYQ3 and elevated its industry ranking to become a top five vendor in global market outside of China. ISG's new sales record demonstrated remarkable 59% year-on-year growth, achieving profitability driven by the continual hyper-growth of our CSP business. we are progressing towards establishing a 10 billion businesses with sustainable profitability. By optimizing scale in the profitable CSP segment and enhancing cost efficiency for ESMB, ISG is building a sustainable and profitable growth trajectory. In tandem with this growth, the strategic initiative in capturing the full potential of hybrid AI have unlocked significant innovations, including the award-winning five-feature AI PC at CES, further solidify Lenovo's leadership in personal AI, while they enrich AI advantage and hybrid infrastructure help to drive enterprise AI. The ongoing breakthroughs in new large language models, particularly the remarkable inference efficiency and lower computing power cost, should bode well for the takeoff of AI applications. The group is well positioned to benefit from this industry trend with its unique, broad exposure across infrastructure, edge, services, and solutions with a target to drive unified AI agent user experience across multiple devices. There was a one-time non-cash accounting gain of $282 million in the quarter, primarily due to an income tax credit resulting from reorganizing of certain group activities in the quarter. These are operational changes to support future growth and are part of our wider global digital transformation programs designed to better service and support our customers locally, as well as respond to market demand. The growth's basic earnings per share with 5.66 US cents. Next chart, please. The robust business fundamentals and efficient capital management led to solid net cash generation, resulting in a 14% increase year-on-year in cash balance to nearly $4 billion in total. The cash conversion cycle improved by one day year-on-year and by six days from the last quarter. The group's healthy liquidity is critical to supporting a 14% year-on-year increase in R&D investment, driving hybrid AI innovations. Finance costs were reduced by 3% from the last quarter, but increased 10% year-on-year. Both changes were smaller than the growth in revenue, highlighting the importance of several cost-saving initiatives. These initiatives include the optimization of supply chain management, which enhance our liquidity management. Next slide, please. IDG revenue surpassed expectation with a 12% annual growth, while segment profitability reached 7.3% at the high end of its historical range. This performance is a testament of IDG ability to sustain industry leading profitability. In the PC segment, IDG achieved the highest market share over the past five years, and extended its lead over the next two competitors. The premium mix improved on strong gaming demand and recovery in commercial sales, driven by the Windows 11 refresh and premium workstation sales. Smartphone revenue posted double-digit growth, setting a record for fiscal third quarters in the last nine years. Its market ranking reached a five-year high in market outside of China driven by strong growth in Asia Pacific and EMEA regions. High-end Razer and Edge models perform exceptionally well, pushing the smartphone premium revenue mix to over 30%. The takeoff of personal AI is on track to accelerate support by advancement in computing hardware, efficiency improvements, and rising popularity of AI agents. The IDG remained the industry leader in personal AI, showcasing over 60 innovations at CES in January this year, redefining AI device categories across commercial, gaming, and consumer segments. Within six months of its launch in the China market, Lenovo 5 feature AI PC has exceeded expectation of its mix in a total notebook shipment. Solidify their market leadership in hybrid AI through proprietary AI software and multi-device connectivity among PCs, smartphones, and tablets, adding unique values for users. Next chart, please. ISG has an exceptional quarter, achieving record-breaking revenue with a 59% year-on-year growth and a successful turnaround, resulting in a 39 million year-on-year profit improvements. These milestones reflect the effective execution of the right strategy and lay a solid foundation for sustained profitability. They still focus on CSP and ESMB offer a distinct competitive advantage. ISG focused approach to scaling the CSP business with this unique ODM plus model focused sales strategy is yielding positive results. The CSP segment is not only profitable, but also has seen its revenue more than quadruple from five years ago, now contributing a double-digit percentage to growth sales. The business group plans to leverage this scale to enhance the cost effectiveness of the ESMP business, ultimately securing sustainable profitability. ISG is achieving strong progress in revitalizing the ESMB segment. We saw continuing year-on-year revenue growth for the three consecutive quarters by optimizing ESMB business model, fostering go-to-market partnerships, and identifying cost-saving opportunities through portfolio optimization. Turning to AI, ISG saw increasing revenue contributions from AI service last quarter supporting by robust order load set to convert into future revenue. A key differentiator for ISG in this space, it is Neptune Liquid Cooling Technology. This proprietary solution addresses the growing challenge of managing higher power consumption in advanced AI servers. What's exciting is that Neptune's adoption is expanding. Initially focused on supercomputing and academia, It is now being applied across various commercial industries, including automotive, electronics, finance, and natural resources. To enhance its global enterprise storage offerings, ISG announced definitive agreement to acquire Infinitet, which is subject to regulatory approval before closure. Next slide, please. SSG deliver a strong quarter by leveraging AI-powered services and solutions. Revenue grew by 12% year-on-year to record $2.3 billion, making the 15 consecutive quarters of double-digit year-on-year growth. SSG operating margin remained above 20%, contributing 31% to the overall operating profit of the three business groups. Both managed services and project and solution services report revenue growth rates of nearly 20%. now accounting for 59% of SSG total revenue, up five percentage points from previous years. In support services, hardware growth and improved penetration rates further bolsters its booking, reinforcing SSG ability to deliver future growth. AI-powered portfolio conduit to drive momentum for attached services with elevated hardware user experience. To seize hybrid AI opportunities, SSG actively offers a suite of solutions tailored for customers, enabling self-configured AI agents. Its hybrid cloud and digital workplace solutions continue to improve and expand, incorporating agentic AI and enabling seamless integration across diverse AI applications. Next chart, please. Hybrid AI offers an unparalleled potential And the group at CES 2025 unveiled a range of AI-powered on-device and agentic solutions aimed at enhancing business experiences. The group has shown remarkable resilience, thanks to the strategic expansion into hybrid AI and a robust global manufacturing network. The group addresses challenges and capture growth with continuous increase of investment on AI innovations. the global footprint, and the brand equity through FIFA and F1 partnerships. Our strategic partnership with LARP not only enhances our balance sheet, but also provides robust support for our future growth and expansion initiatives. As AI hardware continues to upgrade and model training efficiency improves, AI software and use cases will evolve, driving growth in personal AI. IDG's AI PC innovations focuses on hardware, proprietary software and components, will enhance differentiation and pave the way for personal AI twin, driving higher ASP and sustainable profitability. Additionally, IDG smartphone growth will continue to propel its premium-to-market growth. ISG is set for sustainable growth and profitability through its dual strategy across CSB and ESMB segments, as well as differentiated full-stack portfolio. In CSB, ISG will leverage its ODM Plus business model to scale operations, capture cloud growth opportunities, diversify its customer base, and optimize cost. In ESMB, ISG focuses on portfolio optimization and channel enhancement to strengthen competitiveness and balance revenue streams. Innovations like Neptune liquid cooling technology further position ISG for efficient, sustainable AI workload deployment. SSG targets to deliver fast and reliable AI outcomes, empowering organizations to transforming data into actionable business results and accelerating AI adoption across industries. Meanwhile, SSG is accelerating its strategic collaboration with ecosystem partners. This dual strategy enhances SSG financial contributions to the group, reinforcing its role as a leader in AI-powered solutions. Our commitment to sustainable growth and enhanced profitability remain as the forefront of our strategy. We actively pursue both organic and inorganic avenues to unlock optimal growth for our business. Through continuous innovation, we are poised to sustain our upward trajectory and deliver exceptional value to our shareholders. Thank you. We now take your questions.