Lenovo Group Ltd S/Adr

Good morning, good afternoon, and good evening. Welcome to Lenovo's Earnings Investor Webcast. This is Lisi Yuan, Director of Investor Relations at Lenovo. Thanks everyone for joining us. Before we start, let me introduce our management team joining the call today. Yuanxin Yang, Lenovo's Chairman and CEO. Winston Cheng, Group CFO. Luca Rossi, President of Intelligent Devices Group. Ashley Grapparala, President of Infrastructure Solutions Group, and Sergio Bruniak, Senior VP of Mova Business Group and President of Motorola. We will begin with earnings 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 pleased to report that Lenovo has started the 2025-2026 fiscal year strong, with record-breaking first quarter results. This is a remarkable achievement amidst the challenges of terrible volatility and geopolitical landscape. Our group revenue grew by 22% year-on-year to $18.8 billion, an all-time high for our first fiscal quarter. Net income on a non-Hong Kong FIS basis also increased 22% year-on-year. On a Hong Kong FIS basis, our net income more than doubled year-on-year, reaching more than US$500 million. The difference is mainly due to the non-cash failed value gain on warrants as a result of the share price movement. In the coming quarters, this factor may continue to have either a positive or negative impact. so we encourage the stakeholders to focus more on our actual operating performance and non-Hong Kong FIS measures. All of our main businesses achieved solid double-digit revenue growth year-on-year. Our PC business, in particular, delivered over 20% revenue growth, the fastest pace in 15 quarters. Our non-PC revenue mix now reached 47%. and all of our sales geographies delivered high or relatively high revenue growth. To capitalize on the unprecedented AI opportunities, we have been firmly executing our hybrid AI strategy towards the vision of Smart AI for All. Last quarter, we continuously drove innovations in both personal AI and enterprise AI, with our R&D spending increased by double digits. By leveraging our ODM Plus-based end-to-end operation, as well as our unique global local model, we have successfully overcome macro challenges, including paraffin impacts. In the past two quarters, we have committed to preserving competitiveness, maintaining market share, and sustaining profitability against the challenging external environment. I'm proud to say that we have delivered on our promises. we are well positioned to continue navigating future uncertainties. Last quarter, our IDG, Intelligent Device Group, delivered a revenue of $13.5 billion with 18% year-on-year growth. For PCs and related businesses, our revenue grew 19% year-on-year, and we maintained industry-leading profitability at more than 80%. All geographies achieved double-digit year-on-year revenue growth. Especially in China, our business returned to rapid double-digit growth. AIPC penetration continues to accelerate, now accounting for more than 30% of Lenovo's total business shipments, strengthening our number one position in the global Windows AIPC market. For smartphones, we also achieved relatively higher revenue growth at 14% year-on-year, with sales volume outgrew the market for eight consecutive quarters. In markets outside of China, our market share reached record high, and we are number one in foldable with over 50% market share. Looking ahead, we will continue to build agent-native devices of various forms while enriching application ecosystem for AI super-agent to boost agent-user engagement. This will drive towards one AI, multiple devices, positioning agent-native devices as the entry point for personal AI. Our infrastructure solution groups, or ISGs, delivered a solid 36% year-on-year revenue growth through strong execution of our CSB and enterprise SMB dual strategies. We are firmly increasing investment on AI infrastructure, marketing, and R&D, as well as enhancing our enterprise SMB competitiveness. even as the profitability was impacted in the short term. Our AI infrastructure business doubled its revenue year-on-year with a strong pipeline. Revenue from our industry-leading liquid cooling solutions grew 30% year-on-year. In China, we achieved hyper-growth in revenue and significant operating margin improvement. The enterprise IT infrastructure market is a rapidly evolving market from traditional enterprise computing to cloud computing, and now to artificial intelligence computing. While each technology revolution has brought new demand and greatly expanded the market, it has also brought new requirements for corporate investment and commitment. For Lenovo, we have always been able to anticipate these major shifts and proactively adapt increasing our investments to these opportunities. This has been proven by our quadruple ISG business in 10 years. So even though there is a short-term pressure on profitability, we remain firmly committed to investing in the transformation of the traditional enterprise SMB business model in cloud computing and in AI infrastructure innovation and product development. By persistently executing our hybrid infrastructure strategy, we are confident that the ISG business will not only sustain mid- to long-term growth, but also deliver stronger profitability returns. Last quarter, as our key profit engine, Solutions and Services Group, or SSG, delivered another record revenue quarter, growing 20% year-on-year with more than 22% operating margin. Support services business achieved double-digit growth. The managed services and projects and solutions businesses grow even faster, driving their combined mix to nearly 60% of SSG's total revenue, an increase of almost 3 points year-on-year. Our AI solutions have experienced strong momentum, especially in manufacturing and supply chain. Looking ahead, we will continue to build capabilities in Lenovo Hybrid AI Advantage Framework as our key differentiator, we will focus on developing horizontal building blocks such as digital workspace solutions, hybrid cloud, sustainability solutions, while at the same time building simple and scalable vertical solutions powered by AI so that we can help solve customers' biggest needs and unleash Lenovo Hybrid AI advantage. On top of the business performance, let me also cover some of the major progress specific to landing our AI strategy across our businesses. In personal AI, we led the global AIPC market and launched Tianxi AI Super Agent in China in May. Now, we are building highly personalized user experience through agent-native devices and applications, so as to boost user engagement, and we are encouraged by the steady growth momentum since Tianxi went live. with a weekly active users rate averaging 40%. Ultimately, we will realize a highly personalized user-centric experience operating seamlessly across devices, ecosystems, and orchestrated across the client-edge cloud architecture. In Enterprise AI, after launching Le Xia, our first Enterprise AI super-agent in China, We are building AI model factory and developing AI agent platform to make Lenovo hybrid AI advantage real. We will showcase our latest innovations at the Lenovo Tech World at the CES held at the Sphere in Las Vegas on January 6th next year. So stay tuned for more updates. Before I close, I'd like to reaffirm our commitment to delivering more breakthrough innovations for our customers. generating higher returns to our shareholders, and creating lasting value for our stakeholders and communities. Regardless of market cycles or geopolitical uncertainties, when we make a promise, we deliver. You can count on Lenovo's track record and join us in building a smarter future for all. Thank you. Now let me turn it over to our CFO, Winston. Winston, please.

Thank you, Yuanqing. I will now go through Lenovo's fiscal year 2025-26 Q1 financial and operational results. Our group started the year with exceptional momentum, delivering strong growth across all our business groups. We achieved a record high first quarter revenue of $18.8 billion, a robust 22% year-on-year increase, surpassing the previous record set during the pandemic. Net income attributable to equity holders on an HKFRS basis, reached 505 million, up 108% from last year. On a non-HKFRS basis, net income grew by 22% to 389 million. Our robust Q1 results highlight the success of our ongoing transformation driven by diverse growth engines. Non-PC revenues account for 47% of group revenues. AI revenues continue to grow significantly, increasing as a percentage of overall group revenues. All key revenue streams, PCs, smartphones, infrastructure, and services and solutions achieve double-digit year-on-year growth. Notably, our PC business secure a record high global market share of 24.6%, while our smartphone business sustain year-on-year double-digit revenue growth for seven consecutive quarters. Our AI infrastructure business, supported by industry-leading liquid cooling technology, saw its revenue more than double year-on-year. Solutions and Services Group, SSG, revenues grew 20% year-on-year, reaching an all-time quarterly high revenue with operating margin expansion. The strong performance highlights our transformation into a diversified global tech leader, well-positioned to benefit from AI industry trends underpinned by relentless innovation and agility and the resilience of our global supply chain. All key regions deliver strong year-on-year growth in the first quarter, validating the strength of the group's global footprint in over 180 markets, supported by a global local strategy and ODM Plus model. In the PRC, revenue surged by 36% year-on-year, fueled by robust momentum across all business groups, with higher contributions from AI PC shipments and our leadership in the commercial segment. In Asia Pacific, excluding China, revenue grew by 39% year-on-year with strong growth. PC and smartphones saw market share gain in key markets such as Japan and India. In the Americas, we saw PC market share gains for the ninth consecutive quarter, and in India, record bookings in device-as-a-service and software solutions, driving services revenue. Our growth is supported by strong liquidity management. In Q1, our cash flow from operations reached $1.2 billion, marking the highest level in the past 11 quarters. Free cash flow rebounded strongly to $751 million despite a higher capex. This was driven by robust operational cash flow and ongoing finance cost reductions. Net finance costs reduced by 9% year-on-year through optimization initiatives. Excluding the notional interest on convertible bonds, our net finance costs on a non-HKFRS basis dropped by 23% year-on-year. As a result, our Q1 cash balance was $4.5 billion, up 15% year-on-year, reflecting operational excellence and our disciplined approach to optimizing finance costs. This strong liquidity gives us the flexibility to navigate dynamic market conditions while continuing to invest strategically in innovation and growth opportunities. Our R&D investment increased by 10% year-on-year to $524 million, reinforcing our long-term commitment to driving innovation to support our hybrid AI strategy. Our R&D technical performance workforce reached nearly 20,000 employees, representing 28% of our total headcount. Our continuous investment in R&D not only strengthened our technology leadership but also positioned us to capture structural growth opportunities across personal and enterprise AI. As part of our commitment to driving innovation, we continue to develop next-generation products that showcase Lenovo's engineering strength as well as customer-centric design. Our concept devices leverage advanced solar technology to extend battery life, while our industry-first rollable display PC that enhances multitasking goes from concept to production. On the infrastructure side, our proprietary Neptune liquid cooling technology offers 100% heat removal to enable customers to operate high-performance server racks without specialized air conditioning. This is a critical differentiator for AI servers with rising cooling requirements. Each of these innovations reflects our strategy of combining performance, design, and real-world use cases to drive differentiation across the most diverse portfolios. Before we move on to our business group performance, I would like to bring your attention to our non-HKFRs reporting measures. which excludes the impact of non-cash items related to warrants and convertible bonds as part of our Middle East Allot Strategic Transaction. We encourage investors and analysts to focus more on the non-HKFRS measures, which offer a clearer view of our core operational performance, as the non-cash items related to warrants and the notional interest on the convertible bonds are expected to persist through the end of fiscal year 2027 and 28. For the quarter, the adjustments to HHFRS figures primarily include non-cash fair value gain of 152 million from Warren revaluation and a notional interest of $28 million from convertible bonds. For further details on other non-cash items, please refer to the supplemental financial materials included at the end of this presentation. Now, let's turn to the performance of our business groups. The intelligence devices group delivered another outstanding quarter. Revenue reached 13.5 billion U.S. dollars, up 18% year-on-year, with PCs, tablets, and other smart devices delivering the fastest revenue increase in the past 15 quarters. The PC business achieved market share gains across all key sales geographies in the fiscal first quarter, despite the ongoing tariff volatility, demonstrating our product excellence scale advantages, agility, and supply chain strength. Offering profit reached $950 million for the quarter, fueled by a strategic shift toward premium products. Our smartphone business continues to be one of the fastest-growing OEMs globally, with seven consecutive quarters of double-digit year-on-year revenue growth. Our premium smartphone segment also outperformed with its revenue smartphone, together with strong presence in tablets enabled by our cross-device AI ecosystem, gives us a strategic advantage as we drive a seamless one AI, multiple devices experience to enhance user AI interactions. Our strength in driving innovation through continuous R&D investment in AI capabilities is reflected in our leadership across commercial, consumer, and gaming PC segments, as well as the new Windows AI PC category. In the commercial PC segment, we leave the market with a 27.9% share, up 2.2 points year-on-year. Our workstation, including our flagship ThinkStation portfolio, drives strong demand with its superior reliability and processing power. On the consumer PC side, We also rank number one globally with a 20.2% market share up 1.1 points year on year. The premium segment of our consumer business is experiencing strong growth led by our signature yoga series with its innovative two-in-one convertible design. We also lead the gaming segment with 18.5% market share and our focus on sustaining this leadership with innovative products such as the award-winning Legion Pro 7. In Windows AI PC category, we have a leading global market share of 30.6%. These results underscore the balance of our IDG business and our leadership position. The Infrastructure Solutions Group delivers strong revenue growth in first quarter, with revenue rising 36% year-on-year to $4.3 billion. Propelled by strong momentum in both CSB and ESMB segments, both achieved over 30% year-on-year revenue growth. Our PRC business achieved hyper growth during this quarter in terms of revenues. Our full-stack AI-driven infrastructure product strategy successfully translates into a unique proposition despite regulatory challenges and continue to fulfill the rapidly rising local customer demand in the market. ISG recorded an operating loss of $86 million in the first fiscal quarter. Possibility was temporary affected by strategic investments to enhance our long-term AI capabilities and accelerate the transformation of our ESMB business. Continuous investments in AI infrastructure, R&D, and sales capabilities are crucial for ISG to capture this rapidly growing opportunity as global demand for AI server surges. We have seen our enterprise segment under the high-velocity programs with channel enhancement is delivering double-digit revenue growth. We are confident about the upcoming launch of our next-generation LLM-based AI training servers in the second half of the calendar year of 2021. 2025, which will further strengthen our competitiveness in this high-growth market. ISG continued to broaden its customer base across both the CFP and the SMB segments in the first quarter, with wins in cloud computing, security, content delivery, high-performance computing, and AI server offerings applied across a range of leading educational institutions, financial companies, and AI infrastructure providers. Our solutions and services group continues a consistent growth trajectory in Q1 and achieved a record high quarterly revenue of $2.3 billion. This marks the 17th consecutive quarter of year-on-year revenue growth. Operating profit climbed 26% year-on-year to $501 million. With our operating margin expanding by 1.2 percentage points to 22%. Strong growth momentum in high-demand sectors, mainly hybrid cloud, AI, and digital workplace solutions through FSG's revenue growth, more than doubling IT services industry growth rate. Our as-a-service offerings gain significant traction with managed services and project and solution services contributing 58% to FSG revenue, up three percentage points year-on-year. Notably, bookings in TruScale infrastructure as a service surged with triple-digit year-on-year growth. We also saw deferred revenue on our balance sheet, a key indicator of future revenues for SSG support services, reached $3.5 billion. Looking forward, SSG's hybrid AI framework sets us apart by delivering a comprehensive suite of AI-driven solutions across the entire hardware lifecycle, extending into value-added services. In issue one, SSG secured significant customer wins across key verticals, including financial services, technology, logistics, construction, and other sectors. For example, we deployed comprehensive AI solutions including our LLM in a box to enhance AI capabilities in the financial sector. In construction and logistics, we delivered advanced multi-cloud platform management services infused with AI technology. Additionally, our end-to-end DWS enriched with AI features have been enthusiastically adopted by global technology leaders. further solidifying our ability to deliver impactful industry-specific outcomes. Amidst the world's current evolving macroeconomic challenges and shifting policy landscapes, the group remains focused on executing our strategy to expand market share and profit. Our globally recognized supply chain and our manufacturing footprint continue to support sustainable growth strengthen our competitive position, and enhance the group's resilience in adapting to changing market conditions. Thank you, and we will now answer any questions you may have.