Lenovo Group Ltd S/Adr

Good morning, good afternoon, and good evening. Welcome to Lenovo's Earnings Investor Webcast. This is Li Xiyuan, Director 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. Winston Chang, Group CFO. Luca Rossi, President of Intelligent Devices Group. Ashley Grapparala, President of Infrastructure Solutions Group, Ken Wong, President of Solutions and Services Group, and Sergio Buniak, Senior VP of Mobile 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 share that Lenovo achieved extraordinary results last quarter, delivering on every commitment we made. This once again proves that Lenovo not only navigated the market cycle with operational excellence, but also seized growth opportunities through innovation. We are confident we can further build on this momentum to lead in hybrid AI and drive sustainable growth. Now, let's start at the group level. Last quarter, we delivered on our promise of double digital growth with sustained profitability in the second half of the fiscal year. Our group revenue reached an all-time high of US$22 billion, grew over 18% year-on-year, with double digital growth across all business groups. Our adjusted net income expanded 36% year-on-year, doubling the pace of revenue growth. AI is becoming our leading growth engine, as AI-related revenue surged more than 70% year-on-year, now representing nearly one-third of the group total. Our IDG, or intelligent devices, group delivered exceptional performance, with revenue growing 14% year-on-year to almost $16 billion, while maintaining industry-leading profitability. Despite the industry-wide component supply shortages and rising costs, our PC and smart devices business enhanced its competitiveness even further, Its revenue sustained rapid growth at 17% and PC volume growth outpaced the market for 10 consecutive quarters. Our PC market share for the 2025 calendar year was the highest in history. For our mobile business, we achieved both record volume and record activations for mobile business. Our ISG, our infrastructure solution group, continues its hyper growth, delivering record revenue of $5.2 billion, up more than 30% year-on-year, steadily moving the business closer to profitable growth. Just as I shared last quarter, the infrastructure market is undergoing an important shift from AI training on public cloud to AI inferencing increasingly happening on-prem and at the edge for enterprises. To better capture this trend, we carried out a strategic restructure. This initiative is designed to boost productivity by optimizing our cost structure, address market opportunities by refining our product portfolio, and enhance competitiveness by optimizing our BIN models and upgrading our sales force. The restructuring is expected to deliver more than $200 million annualized net savings in the next three years and put ISG on a solid pace of sustainable and profitable growth. SSG, or Solutions and Services Group, achieved over 22% operating margin at 18% year-on-year revenue growth, with accelerated growth in focused vertical industries, including manufacturing, retail, sports, transportation and smart cities. Looking ahead, we firmly believe in the trend of AI democratization, As AI becomes deeply integrated into individuals' daily lives and enterprise operations, it's far from a bubble, but a technological advancement that delivers tangible value. Lenovo will continue driving hybrid AI through personal AI and enterprise AI to capture the significant growth opportunities here. This is not just a vision, we are already delivering significant outcomes for customers. This January, we successfully held Lenovo Tech World at the CES, showcasing the progress in hybrid AI as well as announcing breakthrough innovations and products. In Personal AI, we introduced our AI super agent, Lenovo Kira, to the global market, along with a series of innovative AI devices. In Enterprise AI, within the framework of Lenovo Hybrid AI Advantage, we shared how we bring AI inferencing closer to where data is generated, on-prem and at the edge. We also launched XIQ platforms and announced the AI Cloud Gigafactory in partnership with NVIDIA. We will start shipping Tira embedded devices as soon as the next quarter. to stay tuned for more updates. While leveraging innovation to drive growth, we will also continue leveraging operational excellence to navigate the market cycles and come out even stronger. With our scale, resilient global supply chain and strong partnerships, we have proven we can outperform the market again and again during the pandemic, trade tariffs, and more recently, component cost increase and supply shortage. In each cycle, we have consistently secured components, gained market share and improved profitability. Looking ahead, no matter how the market changes, Lenovo is fully prepared to drive continuous revenue growth and profitability enhancement with even greater resilience and stronger execution. In closing, I'd like to share, we do what we say, we own what we do. This is Lenovo culture. Last quarter, we delivered on our promise and achieved outstanding results on all fronts. Lenovo has entered an accelerated era of growth and profitability, reaching a whole new level of innovation and operational excellence. I have every confidence in our ability to deliver substantial returns to our shareholders and bring smarter AI to all. Thank you. Now, let me turn it over to our CFO, Winston. Winston, please.

Thank you, Yuanqing, and a good day, good afternoon, and good evening, everyone. I'm pleased to walk you through Lenovo's results for the third quarter of fiscal year 25-26, a quarter that delivered record revenues, accelerating profitability, and continued AI revenue expansion. We deliver record-high fiscal quarter revenue of $22.2 billion, up 18% year-on-year, with double-digit year-on-year revenue growth across all business groups. Despite a year of tariffs and component supply-demand imbalances, Lenovo continues to demonstrate resilience. In the third fiscal quarter... Our strong top-line growth was driven by expanding market leadership in PCSD, record volume and activation in smartphones, and all-time high revenues from both ISG and SSG. AI is a multi-year growth engine for Lenovo, underpinned by our unmatched scale, diversified global portfolio, and continued investment in innovation. Our AI-related revenue grew 72% year-on-year and now represents 32% of total group revenue, driven by strong demand across AI devices, infrastructure, services, and solutions. Adjusted operating income was $903 million, an increase of 28% year-on-year, demonstrating operating leverage, efficiency gains, and a higher revenue contribution from premium offerings. Adjusted net income grew to $589 million, while adjusted net margin expanded to 2.7%, excluding one-time gains in charges for third quarter fiscal 24-25 and third quarter fiscal 25-26. On an operating basis, adjusted net income for the quarter increased by 36% year-on-year, doubling growth of revenues. Key exclusions from adjusted operating and net income include a $285 million one-time restructuring charge relating to ISG and enterprise sales, a $186 million non-cash fair value gain on warrants, and $29 million notional interest mainly from zero-coupon convertible bonds related to our strategic partnership with PIF Allot. Now let me walk you through the key highlights of our business groups. IDG delivered another exceptional quarter, strengthening Lenovo's position as the world's PC leader with continued market share gain. We expanded our global PC market share to 25.3%, up one percentage point year-on-year, extending our lead over our closest competitor by five percentage points and marking our second consecutive quarter as the only vendor to surpass 25% global PC market share since IDC data became available. Despite supply shortages and component cost pressures, PCSV delivered double-digit revenue growth year-on-year and stable operating margin, driven by operational excellence and continued innovation. AI PC momentum continued to accelerate, with revenue growing at high double digits year-on-year. Non-PC adjacencies also posed a strong double-digit growth with a clear margin uplift. On the mobile side, our Motorola business also deliver a record quarter. Volume and activation reach an all-time high with above-market growth across major sales geographies. At Tech World at CES, we extended our AI-native device portfolio with some of our most innovative product launches yet. We introduced the new Aura lineup, including the latest ThinkPad X1, 2-in-1, and Yoga Pro 9i. bringing next-gen personalized AI features to our flagship premium notebooks. We also debuted the ThinkBook Plus Gen 7 AutoTwist, featuring an adaptive motorized dual rotation hinge designed to seamlessly shift between work and presentation modes. In desktops, our new ThinkCentre X series delivers modern AI-ready performance, complete with a dual screen setup for connected content creation. And in mobile, Motorola unveiled the Moto Signature, our new ultra-premium franchise and first thinnest smartphone in its class, and the Moto Razr Fold, the first book-style foldable featuring an expansive display and advanced AI capabilities. Together, these launches demonstrate how Lenovo is redefining the future of hybrid AI across PCs, desktops, and smartphones. At Techworld CES 2026, we also unveiled Kira, a cross-device AI superagent that brings our one personal AI, multiple devices vision to life. Kira is a unified entry point for LLMs to engage directly with end users and serves as the intelligence layer across the Lenovo ecosystem. is a user's personal assistant and AI twin across devices, capable of executing tasks using both on-device and cloud AI and continuously learning from user context while maintaining privacy by design. With Kira at the center of our end-to-end super agent ecosystem, we're elevating device value, deepening our integration with partners and developers, and expanding opportunities for services and subscription models. Together, Kira and our hybrid AI architecture enable a seamless, unified, intelligent experience that strengthens our competitive advantage across both personal and enterprise AI. Moving on to ISG, ISG delivers a record quarter generating revenue of $5.2 billion, up 31% year-on-year. We saw strong momentum across the business, driven by record CSP revenue from expanding customer base, enterprise and SMB transformation, and accelerated AI server momentum. Operating performance improved sequentially. Our AI server business achieved high double-digit revenue growth with a robust $15.5 billion pipeline. We also deployed the first Lenovo GB300 MVL72-based rack-scale solution, marking a significant milestone in next-generation AI infrastructure. Our Neptune liquid cooling revenue grew 300% year-on-year, supported by higher customer adoption across CSP, enterprise, and SMB businesses. We announced a one-time restructuring program this quarter in ISG, which we believe is a crucial step to realigning the cost structure and accelerating the transformation towards a sustained improved profitability in the business. Through cost structure realignment and operating model optimization, we are investing in our highest priority growth areas and positioning ourselves to capture the enterprise AI wave. ISG Transformation Program provides a clear path to profitability as early as next quarter and is targeted to achieve over $200 million annual runway net savings over the next three years. By scaling customer value, innovation, and driving one Lenovo execution, we're well prepared to capitalize on expanding opportunities. Our high-velocity transaction model simplifies the engagement, deployment, and maintenance experience for our customers and partners. These initiatives will boost sales efficiency and accelerate time to market, unlocking customer acquisition and positioning us favorably to capture multi-year CSV training and ESMV inferencing tailwinds. Our AI infrastructure portfolio continues to differentiate Lenovo across every major segment of the market. In CSP, our strategic collaboration of NVIDIA on the AI cloud gigafactory positions us at the forefront of hyperscale AI deployments. In enterprise and SMV, we expanded our AI inferencing portfolio with newly launched servers and solutions designed for various workloads, enabling enterprise customers to achieve accelerated deployment and scalability. In high-performance computing and AI, our Neptune liquid cooling technology continues to set the industry benchmark. Processor-level warm water cooling, for example, now enables reliable live Formula One broadcasts. SSG delivered a record revenue quarter, growing 18% year-on-year, marking the 19th consecutive quarter of double-digit year-on-year growth. Operating margin reached 22.5% near a historical high. Revenue mix continued to shift toward high growth areas this quarter. Managed services and project solutions together grew to 59.9% of SSG revenue. By enabling faster deployment and offering greater cost predictability, true-scale device-as-a-service and infrastructure-as-a-service saw accelerated growth this quarter, driven by GPU and AI workloads. Our AI-enabled services, which have reduced cloud costs by more than 70% for Shishido and enabled 98% on-time delivery for ELEE, are driving measurable outcomes for leading global organizations that trust Lenovo to support their strategic AI initiatives. Our hybrid AI advantage, which powers iChain, Lenovo's AI-driven supply chain orchestration platform, and Football AI Pro, the FIFA co-developed AI knowledge assistant that delivers real-time performance analytics, continues to accelerate enterprise AI at scale, enabling the creation of next-generation superagents. SSG is a strategic position in the fastest-growing areas in the IT services industry, capturing a total addressable market of $360 billion and lever to the growing opportunities in managed services and project and solutions. In areas such as digital workplace services, hybrid cloud AI, and sustainability, SSG is growing at double the rate of market growth. These offerings allow us to scale the revenue at four-year CAGR of 23.9%, enabled by our differentiated technological expertise, long-term engagement models, and strength of our hybrid AI advantage. At Tech World at CES, we've announced the next phase of our hybrid AI advantage with the launch of Lenovo Agenic AI, a new full lifecycle enterprise solution for creating, deploying, and managing AI agents. And Lenovo XIQ, a new suite of AI-native delivery platforms designed to simplify and accelerate AI across the enterprise. Lenovo, Agentech AI, and XIQ seamlessly extend our solutions and services portfolio, strengthening our role as the execution engine to enable organizations to rapidly move from strategy to deployment. Before concluding, I want to highlight our success at Tech World at CES 2026. Lenovo won a record number of over 200 awards, including three of the prestigious CTA official Best of CES 2026 awards. With 14,000 attendees at the Sphere in Las Vegas and millions more viewing online, we brought together key industry partners such as Intel, AMD, NVIDIA, Qualcomm, Microsoft, FIFA, and, of course, the Sphere. This showcased the industry's broadest product portfolio at scale and our latest innovations for the global AI ecosystem, reinforcing our leadership in innovation and our unwavering commitment to hybrid AI. Along our success at CES, we continue to advance our sustainability agenda. We received a Global Lighthouse Network Award from the World Economic Forum with our Mexico manufacturing site added as our second lighthouse, a clear recognition of how we are applying innovation to strengthen our resilience, boost efficiency, and reduce environmental impact. Looking ahead, our strategy remains sharply focused and highly disciplined. With our global scale and proven operational excellence, we continue to execute reliably and outperform even in volatile markets. As we enter an accelerated era of growth with improved profitability, our hybrid AI strategy positions us to drive sustained profitable growth for our stakeholders with even greater resilience and executional strength.