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 at Lenovo. Thanks, everyone, for joining us. Before we start, let me introduce our management team joining the call today. Yanqing Yang, Lenovo's Chairman and CEO. Winston Chang, Group CFO. Luca Rossi, President of Intelligent Devices Group. Ashley Goro-Poala, President of Infrastructure Solutions Group. Ken Wong, President of Solutions and Services Group, and Sergio Buniak, 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, I'm very pleased to report that our performance in the past fiscal year has been one of the best in Lenovo's history. It was particularly remarkable that we achieved such results amid a volatile and challenging geopolitical landscape and industry environment. By firmly executing our clear strategy, we have delivered significant growth in both revenue and profit. All our main businesses are healthy and strong. each fulfilling its strategic intent and financial goals. And more importantly, we have made significant progress in both personal AI and enterprise AI, laying a solid foundation for our leadership in the AI era. Now let's first look at our full-year performance at the group level. Group revenue saw robust growth of more than 21% year-on-year to reach $69 billion U.S., the second highest ever. Profit grew even faster, with net income up 36% year-on-year on a non-Hong Kong FIS basis. While our core PC business continued to grow and expand market leadership, our diversified growth engines also accelerated, with non-PC revenue mix reaching 47%, up almost 5 points year-on-year. And we are especially encouraged by the ongoing balanced footprint across our sales geographies, with all geographies gaining double digital growth year on year, fully reflecting the vitality and the resilience of Lenovo as a truly global company. Like everyone else in our industry, we are navigating the uncertainties brought by the dynamic tariff policies and the geopolitical environment. But at Lenovo, we have dealt with these kinds of challenges throughout the past 20 years of operating a global business. We have confidence in not only building, but constantly enhancing our market competitiveness. And our confidence comes from two fronts, our operational excellence and our continued investment in innovation. On the one hand, we have successfully built end-to-end integrated global operations from product design to demand forecasting, from procurement to manufacturing, and from sales to services. What's more, our unique ODM Plus model with 30 plus manufacturing sites, either in-house or outsourced in 11 different markets, also inspires our global local model with global resources and local delivery. All these provide us maximum flexibility and resilience in times of uncertainty, allowing us to be more reliable and adaptive than our competitors. On the other hand, our commitment to increasing R&D investment has prepared us well to grasp the opportunities that are the certainty in the era of AI. Two weeks ago, we held our Shanghai Tech World event. After our first launch of AIPC one year ago, we took the next step in defining AI superagent and launching Lenovo's first personal AI superagent and enterprise AI superagent. So that was at the group level. Now I will talk about each of our businesses. Let's start with IDG, Intelligent Device Group, which delivered a fantastic performance this year. Overall revenue grew double-digit year-on-year, with operating margin in a historically higher range. For PCs, we expanded our market leadership, enlarging the gap to the second player to 3.6 points, up one point year-on-year. While maintaining the industry-leading profitability, our AI PCs exceeded our volume target in the first year. Our products with innovative form factors such as affordable, rollable, and 2D, 3D hybrid laptop are setting market trends. For smartphones, the revenue reached a historical high since our acquisition of Motorola Mobility with a hyper growth of 27% year-on-year. This was driven by the particularly robust growth in Asia-Pacific and the EMEA markets, which now complement our traditional stronghold in Latin America and North American markets, forming a more balanced global momentum. Our premier products, especially the Razor foldable cereals, own higher price with commercial success. For tablets, we achieved a 15% year-on-year growth in sales volume. Looking ahead, we will continue to develop products with a personal AI super agent while building our AI-driven application ecosystem and delivering seamless cross-device, cross-ecosystem experience with one AI, multiple devices. Our infrastructure solution group, or ISD, concluded a year of hybrid growth with record revenue and a significant operating margin improvement. Breaking even in the second half of the fiscal year, we have successfully built our cloud service provider or CSP business into a scale of $10 billion and self-sustained profitability. Meanwhile, our traditional enterprise SMB business also gained strong momentum with 20% year-on-year growth, driving the revenue to a record high. Our AI server business started to land in the market and achieve the hyper growth by capturing the rising demand for AI infrastructure. Our industry leading Neptune liquid cooling solutions are the indispensable technological force behind this rapid growth. Looking ahead, we will continue to execute our CSP plus enterprise SMB strategy, simplify our product portfolio, strengthen our go-to market capabilities, and enhance our operational resilience to drive high growth and sustainable profitability. For ISG, our solutions and services group, or SSG, has further solidified its role as our transformation engine. Revenue grew at a double digital year-on-year with an operating margin of 21%. Our support services business continued its steady growth alongside our hardware business. Our solutions and other service business grow even faster with the revenue mix of SSG's total business increasing four points to nearly 60%. In particular, our AI-driven offerings and solutions have started to generate momentum for the SSG's growth. Looking ahead, we will continue to build capabilities in Lenovo hybrid AI advantage framework. Building upon the successful launch of our first enterprise AI super agent, we will continue to develop and enrich our hybrid AI solution and service offerings for enterprise customers. So that was for last fiscal year's business results. And let me also briefly cover our strong fourth quarter performance. The global revenue grew 23% year-on-year, with double digital growth across all businesses. Despite the unexpected impact from tariffs, we still delivered a strong profit increase, with net income up 25% year-on-year on a non-Hong Kong FIS basis. In particular, for IDG, While we further enlarged our PC market leadership, our smartphone revenue outgrew the market by 12 points, raising our global ranking to No. 4 place in the outside of the China market. Our ISG business achieved profitability for the second consecutive quarter with revenue hypergrowth of more than 60% year-on-year. Our SSG delivered revenue growth and operating margin either close to or exceeding 20%. Finally, I'd like to close by once again sharing my pride in what Lenovo has accomplished in the past year, despite a challenging environment. No matter what the future may hold, remember, while the tides answer to forces beyond us, how we sail the ship is always our decision. Thank you. Now, let me turn it over to our CFO, Winston. Winston, please.

Thank you, Yuanqing. I will now go through Lenovo's fourth quarter and full-year financial and operational performances for the fiscal year 2024 and 2025. Next chart, please. In fiscal year 2024 and 2025, the group's revenue increased by 21% to $69 billion, the second highest in the company's history. Non-HKFRS net profits surged by 36% year-on-year to $1.4 billion. The strong results reflect Lenovo's strategic position with industry-leading products across devices, infrastructure, and services to capture AI-driven demand. The strategic positioning is supported by a relentless execution, continuous operational improvement, our scale and balanced global exposure, and strong market positioning across all business groups. Clear strategic initiatives, particularly in hybrid AI, driven strong growth in all business units of the group delivering premium to market growth double digit sales increases and profitability while we are in an early innings of the ai industry's development and monetization lenovo is capturing the initial industry opportunities and we are well positioned for the future in both personal and enterprise ai our efforts are beginning to bear fruit setting a solid foundation for future leadership in hybrid AI. ISG experienced hypergrowth and achieved two quarters of sustained profitability for the second half, driven by record CSP revenues and momentum in ESMB, along with rising contribution from AI server. SSG generated record operating profits, while IDG achieved market share gains in PCs and smartphones, with PCs sustaining our industry-leading profitability. The group's global local strategy delivers uniform group initiatives with local knowledge coupled with agile execution of the group strategy is reflected in our group results. Our agility have enhanced our growth profiles globally with double-digit revenue growth year on year across all regions. Our concerted effort in driving hybrid AI innovations across all business groups was supported by 2.3 billion spending on R&D, an increase of more than $260 million in the year, aiming at fully capturing any hybrid AI opportunities presented. In January, our strategic partnership with PIF Allat took an important step forward as we gained overwhelming shareholder support and obtained all regulatory approvals to close on this landmark transaction. For the first time, Lenovo opened up its shareholder base of greater than 10% to a single shareholder since its founding over 40 years ago. Upon conversion, PIF Allot will be the largest sovereign wealth fund in the shareholder base. The successful issuance of the $2 billion U.S. zero-coupon convertible bond to Wallat and the $210 million of warrants marks a significant milestone, enabling the group to broaden its shareholder base, expand its global presence, diversify its manufacturing footprint, and capture substantial growth opportunities in the Middle East and Africa regions. In addition, we announced the acquisition of Infinidat in January to build out our product offerings in ISG. and further capture the growth opportunities in the enterprise infrastructure space. For fiscal year 24-25, basic earnings per share reached 11.3 US cents. The board declared a final dividend of 30.5 Hong Kong cents per share, combined with interim dividend of 8.5 Hong Kong cents per share. The total dividend for fiscal year 25 will be 39 Hong Kong cents per share. Next chart, please. Operating cash flow remained robust at $1.1 billion, with cash balance reaching $4.7 billion. The group effectively reduced fourth-quarter finance costs by 20% year-on-year. This excluded a $22 million non-cash implied interest from the newly issued zero-coupon convertible bond. Inventory days increased by five year on year, resulting in an increase in the cash conversion cycle to end the year at two days. This was primarily driven by the group's sales mix shift towards ISG business amid strong infrastructure demand by cloud service providers. The infrastructure business requires longer inventory periods, partly due to high value components like AI GPUs. Next chart, please. IDG achieved a 13% year on year revenue growth. Its industry leading operating margin expanded to 7.2%. Despite the tariff impact in the fourth quarter, IDG segment operating margin for the year achieved the historical upper end, underscoring our operational strength in supply chain, scale and balance global market position in weathering uncertainties. IDG continued to grow its dominance in the global PC sector, expanding its market share by another percentage point to 24% and maintaining its top-notch position in both commercial and consumer segments. Notably, IDG also retains the leadership in the gaming PC category. The business remained number one globally and in four out of five global markets, widening its lead over the closest competitor. AI PCs, a new category with significant growth potential, comprise 16% of IDG notebook shipments in China in the most recent quarter. According to IDC report in fourth quarter, we reached the number one position in Windows AI PCs outside of China. The smartphone business continues to gain share globally and grew its operating profit with record revenues. Motorola was ranked the fourth largest smartphone vendor by revenue in the market outside of China in the fourth quarter. Our smartphones revenue reached a record high since our acquisition of Motorola Mobility. Moto's premium models such as foldable Razr and Edge models are experiencing strong demand, boosting premium sales mix. In addition, non-hardware internet services revenues are seeing strong growth with increasing user activation of our smartphones. IDG is positioned to lead the personal AI era by integrating strong hardware innovations with proprietary software to drive enhanced user experience. Within the last 12 months, IDG launched Xiao Tian, a tailored AI agent for the China market, a global version AI Now, which is prime for preloading and shipping, and an advanced personal AI super agent. In the rest of the world market, Lenovo launched AI Now in partnership with leading global LLMs and tech companies. Next chart, please. ISG revenue reached an all-time high of $15 billion, representing a hyper-growth of 63% year-on-year. This growth was driven by a successful dual strategy targeting both the CSP and the ESMB segments. Our ESMB segments reached 20% year-on-year growth. On top of this, ISG also achieved a profitability turnaround in the second half of the fiscal year for two quarters in a row on the back of our product portfolio and COPS optimization initiatives and strategic focus. A key driver of this momentum was the group's unique ODM Plus model and a strong long-standing relationship with leading GPU suppliers. Our ODM Plus model delivers scalable, tailored solutions for CSP customers while maintaining operational efficiency. Going forward, ISG will continue to focus on increasing volume and profitability for its ESMB business through its streamlined portfolio, enhanced channel capabilities, and high-value 3S offerings across storage, software, and services. The ESMB business delivers strong growth and strengthens its competitive position. ISG further solidified its leadership in liquid cooling technology with over 100 patents in this critical area of innovation that enhances energy efficiency and optimizes data center performance. Neptune liquid cooling server revenue saw robust growth of 68% year-on-year. The strong growth is the result of Lenovo's dedication to innovation and technological leadership, operational excellence, and delivering exceptional value to customers in a rapidly evolving market. Next chart, please. SSG achieved record revenues and profits for a fourth consecutive year, with revenue increasing by 13% year-on-year to $8.5 billion, and a record operating profit of 1.8 billion US, up 15% year-on-year. In fourth quarter, SSG delivered a record operating margin of 22.7%. Support services saw accelerated growth in bookings, driven by significant growth in Premier Support Plus with elevated user experiences. Continued momentum in managed services was driven by digital workplace solutions, including DAS with enriched offerings. Meanwhile, hybrid cloud momentum was fueled by true scaled infrastructure as a service to capture the strong customer demand of hybrid infrastructure for AI workloads. Leveraging the Lenovo hybrid AI advantage, we are providing full spectrum offerings to assist our customers in their AI journeys. Our enterprise AI capabilities integrate hardware, data, platforms, models, and services to provide everything customers need to run AI. Next chart, please. In the fourth quarter, group revenues reached $17 billion, up 23% year-on-year, while non-HKFRS net income grew 25% year-on-year to $278 million. Despite a notable tariff impact, this growth reflected strong performances across all business groups and geographies, showcasing double-digit year-on-year revenue increases. with the issuance of the three-year warrants in january which will have a mark-to-market non-cash accounting impact on hkfrs net income we'll focus on non-hkfrs net income which is a better reflection of our operating results idg maintained global pc leadership with premium PCs driving 13% revenue growth. Non-PC growth engines also played a significant role, contributing a record 49% of total sales across three business groups, up by a notable 5 percentage points year-on-year. IDG's smartphone sales grew strongly, particularly in the Asia-Pacific region, EMEA, and North America. Meanwhile, ISG reported record sales and improved profitability year-on-year, driven by both the CSP and ESMB segments. Additionally, SSG delivered its highest ever operating margin, 22.7%. This performance highlighted a group's ability to drive growth amid uncertainty, leveraging our diverse product and services portfolio and balanced global presence in 180 markets. Next chart, please. The group's unwavering, longstanding commitment to top-level corporate governance and sustainability has once again earned global recognition. The group was included in CDP's Corporate A List for 2024, highlighting our commitment to environmental transparency and comprehensive disclosure. In addition, the group retained a AA rating in the 2024 Hang Seng Corporate Sustainability Index. For the third consecutive year, The group achieved a AAA in the MSCI ESG ratings for strong performances in environmental, social, and governance metrics. Additionally, EcoVadis, a globally recognized provider of business sustainability ratings, awarded Lenovo a leader in carbon management for environmental efforts. These track records are a testament to the group's ongoing pursuit of excellence in product design, innovation, and dedication to environmental sustainability. Next chart, please. Amid evolving macro challenges and policy shifts, the group is executing on our strategies to expand market share and improve profitability. Our global supply chain is rated among the world's best by Gartner. Our global manufacturing footprint, spanning more than 30 sites in 11 countries, provides scale and agility. Our strong operational capabilities help us navigate supply chain uncertainties in the fourth quarter. These unique advantages have ensured sustainable growth, strengthen our competitive position, and enhance the group's resilience while adapting to shifting market conditions. We continue to thrive in the early phase of the hybrid AI trend with confidence rooted in our early recognition of industry trends, ability to innovate and execute on our vision. Our R&D investments will unlock the full potential of hybrid AI and the synergy among our three business groups will spark innovation in next generation product designs and solutions. By business segment, IDG has strategic plans to further accelerate smartphone growth. with AIPCs positioned to drive a new demand cycle. Both factors are critical for premium-to-market growth, higher ASP, and improved profitability. IDG is developing proprietary IPs to enhance performance in inferencing speed, language model compression, and memory consumption, while extending differentiation to components and software. ISG aims to drive growth and improve profitability in hybrid AI infrastructure, high-performance computing, storage, and edge solutions. The segment will expand its channel partnerships and customer base, acquire new accounts, and a balance between general-purpose compute and GPU-accelerated systems, ensuring cost-effectiveness and scalable revenue growth. SSG will continue to strengthen its hybrid AI advantage framework to meet rising demand for AI solutions with AI-driven services, generating significant growth. SSG will prioritize high-value-added support services to protect its core business and, through ecosystem and partnerships, support customers' digital transformation, boosting its financial contribution to the group. Finally, as always, we maintain our unwavering commitment to drive sustainable growth and profitability to our shareholders. Thank you. We'll now answer questions you may have.