Lenovo Group Limited (0992.HK) Earnings Call Transcript & Summary

Good morning, good afternoon and good evening. Welcome to Lenovo's Earnings Investor Webcast. This is Lixi 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. Yuanqing Yang, Lenovo's Chairman and CEO; Winston Cheng, Group CFO; Luca Rossi, President of Intelligent Devices Group, Ashley Gorakhpurwalla President of Infrastructure Solutions Group; Ken Wong, President of Solutions and Services Group; and Sergio Buniac, 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 Young Ching. Young Ching, please.

Hello, everyone, and thank you for joining us. Today, I'm pleased to share that Lenovo has delivered another quarter of record performance, capitalizing on the AI democratization trend we have made significant progress in both personal air and enterprise are driven by our clear strategy, operational excellence and the relentless innovation. The results reflect not only our strong performance today, but also our strength to leading the AI era. First, let's start at the group level. Last quarter, our group revenue reached an all-time high of USD 20.5 billion, growing at almost 15% year-on-year. Our profit grew even faster with adjusted net income increasing more than 25% year-on-year. All business groups and all sales geographies delivered a double-digit year-on-year revenue growth. While our AI-related revenues reached 30% of the group total increasing by 13 points year-on-year. While uncertainties remain in the external environment, we are seeing positive signs of stabilization. We will continue to leverage our unique global local model to navigate uncertainties lead the industry with operational resilience and capture the tremendous hybrid AI opportunities. We are seeing today's AI era and Ford along a clear path. The first wave was marked by the emergence of large language models, which triggered a massive demand for AI infrastructure. and led to our explosion in cloud-based and training intensive computing power. Now as large language models become increasingly commoditized, user priorities are shifting towards personalization and the private domain. This is accompanied by growing emphasis on efficiency, response speed, security privacy and sustainability. This evolution is steering AI development towards a more human and enterprise-centric paradigm unlocking substantial opportunities in AI devices of diverse form factors, carbide infrastructure of public cloud, private cloud, on-prem data center and edge computing as well as AI solutions and services tailored to diverse needs. This very trend, the democratization of AI is now accelerating rapidly across both personal AI and enterprise AI. In personal AI, consumers are increasingly looking for AI outputs that are based on their own experiences memories, behaviors and knowledge. At Lenovo, we are addressing this demand for hyper personalization by landing our vision of 1 personal air multiple devices. You will witness this firsthand at our upcoming tech work on January 6, 2026, where we will launch our personal super agent to the global market. in the [indiscernible] across wearable and ambient devices to see what you see here, what do you hear and memorize what you have experienced. Furthermore, it leverages portable devices and personal trusted computing hubs using personalized algorithms and models to continuously learn from your habits and anticipate your intentions so that you can think as you would think and act as you would act, and ultimately becoming your personal AI team. I invite you to join us for this spectacular event of Sphere in Las Vegas in percent of our life stream. Our IDT or intelligent device group ex the core engine behind the Lenovo's personal AI strategy as demonstrated by strong results from last quarter. Its revenue exceeded USD 15 billion with a 12% year-on-year growth. PC market share exceeded 25% for the first time in our history with a sustained industry-leading profitability. Our AIPC leads the Windows AIPC category as a global #1. We also achieved a record high motor smartphone volumes last quarter. Our momentum in AI device is particularly encouraged with its revenue mix within IDG increasing by 17 points year-on-year to 36% now. In enterprise AI, the infrastructure market is undergoing an important shift from AI trending in public cloud to AI infancy increasingly happening on-prem under the edge. It's significant because the scaling of infrastructure will potentially drive even higher growth of devices and applications, further expanding our total addressable market. At Lenovo, we are driving our enterprise AI strategy by helping businesses turn data and knowledge into insights and value. Specifically, we started with helping enterprises collect and process various types of data, organize it into knowledge, leveraging the computing power of our hybrid infrastructure. We then apply AI models and AI agents to turn data and knowledge into insights and outcomes or engage the business processes. These are consolidated into repeatable, scalable solutions for horizontal functions or vertical industries are supported by our full-cycle services. Ultimately, our goal is to create enterprise AI twin for our enterprise customers. ISG or Infrastructure Solutions Group is the key driver of Lenovo's hybrid infrastructure. Last quarter, its revenue grew 24% year-on-year to exceed USD 4 billion. We continue to execute our cloud service provider, or CSP, and the enterprise SMB use trade. For CSP, the business not only delivered a record fiscal Q2 revenue but also demonstrated a robust growth in AI infrastructure with a strong pipeline. For enterprise SMB, we are optimizing and even rebuilding our business models to better serve the distinct needs of enterprise and SMB customers. We are confident our infrastructure business will return to profitable growth soon. SSG, our Solutions and Services group. By leveraging the Lenovo hybrid AI Advantage framework strives to provide the solutions and services for enterprises on their journey of intelligent transformation. Last quarter, SSG achieved 18% year-on-year revenue growth, its 18th consecutive quarter of double-digit expansion with our operating margin over 22%. Projects & Solutions and the managed services revenue mix further advanced to almost 60% of SSG's total revenue. We are accelerating this business further by unleashing the power of Lenovo hybrid AI advantage, combining the AI factory, AI services and the AI library of repeatable, scalable AI solutions for selected vertical industries and horizontal functions. To conclude, we are proud of our record results, confident in our vision and strategy and determined to capture the enormous opportunities ahead. It's our firm belief that by rigorously executing our hybrid AI strategy, we will not only deliver sustainable long-term returns to our shareholders, but also make AI truly personalized for every individual and every enterprise and eventually bring smarter AI to all. Thank you. Now let me turn it over to our CFO, Winston. Winston, please?

Thank you, Young Ching. I will now go through the Lenovo's fiscal year 2025, '26 2nd quarter financial and operational results. The group continued its strong performance into the second quarter, maintaining strong momentum across our business groups and sales geographies. We delivered record fiscal quarter revenue of $20.5 billion representing 14.6% year-on-year increase with balanced double-digit growth across all business groups. Our adjusted net income grew 25% year-on-year to $512 million. and adjusted net income margin expanded to 2.5%, driven by higher revenues. Our second quarter results demonstrate our strategic potential to capture substantial AI opportunities. AI-related revenues now account for 30% of the group's total with high double-digit revenue growth year-on-year in AI servers and triple-digit revenue growth in AIPC, AI smartphones and AI services. Our PC business continued strong growth momentum and continue to grow share, reaching historic high of 25.6% global market share. Our smartphone business achieved a record high concurrent quarter activations underpinned by solid end-user demand. ISG delivered strong revenue growth year-on-year and improved operating performance driven by growth in AI infrastructure and related industry demand. SSG delivered a record revenue quarter while continuing to expand operating margin. All reported geographies delivered double-digit year-on-year revenue growth, reinforcing our balanced strength across 180 markets supported by our global local strategy and resilience and agility of our supply chain. Turning to liquidity and cash position. Our growth continues to be supported by disciplined financial management. In the second quarter, we delivered operating cash flow of USD 1.5 billion, while free cash flow climbed to $1.1 billion, supporting continuous investment in focused growth areas. This was driven by robust operational cash and effective working capital management with days of inventory reduced by 10 days year-on-year as well as disciplined expenditure. We also achieved a 31% year-on-year reduction in adjusted net finance costs, reflecting ongoing cost optimization and working capital efficiency initiatives. Our HKFRS net income this quarter was $314 million, primarily impacted by noncash items related to warrants and 0 coupon convertible bonds associated with our strategic transaction with a lot, a wholly owned subsidiary of PIS. Key adjustments to reported figures include $148 million noncash fair value loss from warrant revaluation and $28 million notional interest from the convertible bonds. Further details on other noncash items can be found in the supplementary financial materials at the end of this presentation. We encourage investors and analysts to focus on adjusted operating profit and net income which excludes these noncash nonoperating impacts and better reflect our core operational performance. Now let's turn to the performance of our business groups. IDG delivered another strong quarter. revenue up 12% year-on-year to CNY 15.1 billion, and operating profit climbed 11% to CNY 1.1 billion. This performance reflects expanded PC leadership globally obtaining a record high global market share of 25.6%. Growth was driven by high-margin segments premium PC shipments grew 25% year-on-year, and AI PCs are now a major contributor, accounting for 33% of Lenovo PC shipments, solidifying our #1 position with 31.1% market share in the global Windows AIPC market. In China, AIPC with 5 key features now make up 30% of notebook shipments. Our cross-device AI ecosystem is creating a strong foundation for our personal AI vision, delivering a seamless one AI multiple devices experience that connects PCs, tablets and smartphones. Our continued investment in AI-driven innovation and R&D are delivering strong results. Lenovo remains the clear leader in the PC industry across all major categories. Globally, we hold the #1 position in both consumer and commercial segments, and we continue to expand market share in the second quarter. Within our PC portfolio, our leadership further extends into strategic categories, such as Windows AIPC, gaming and premium PCs. These are critical growth drivers as the industry transitions to a more intelligent and immersive computer experiences. Our global leadership is balanced across the world with #1 market leadership in 4 out of 5 geographies and market share gains in every region during the quarter. This broad-based growth underscores the strength of our manufacturing footprint and resilience of our global supply chain. Turning to our Infrastructure Solutions Group performance in the second quarter. ISG continues to benefit from the strength of AI infrastructure spend and our leading product and technology for advanced computing, delivering 24% year-on-year revenue growth to $4.1 billion with improved operating performance, driven by new customer acquisitions in cloud service providers and advancing enterprise and SMB transformation. ISG continued to experience strong growth in our Neptune Liquid Cooling technology, which grew 154% year-on-year, reinforcing our leadership in sustainable high-performance infrastructure. We continue to drive sustainable growth in high potential areas, advancing enterprise and SMB transformation to capture opportunities in AI infrastructure and inferencing. Our AI server business achieved high double-digit revenue growth, fueled by rising AI adoption and supported by clear product launch road map. In China, our operations delivered consistent operating margin improvement, leveraging uniquely localized offerings and our ODM plus model to drive differentiation. In the second quarter, ISG broaden its customer base across CSP, enterprise and SMB segments with wins in the AI infrastructure, cloud computing and high-performance computing. These deployments include AI training clusters, GPUs as a service and liquid cooling solutions, reinforcing our position in next-generation infrastructure. We also continue to see growing traction in AI inferencing workloads as customers deploy and scale AI applications across hybrid infrastructure, and we are actively accelerating our capabilities in this area. The enterprise server and storage industry has evolved over the last few decades and benefited from the infrastructure spend behind some of the largest industrial revolutions underpinned by data compute and storage. Lenovo's ISG business has an industry-leading technology and product excellence from its IBM x86 server heritage. Our leadership in high-performance compute and in liquid cooling positions in Lenovo well for the recent growth in demand due to AI training, and we are aligning our resources to capture the next future for AI inferencing in enterprise and SMB to traditional CSP and most recently, the emerging AI opportunities from CSPs. Echoing Young Ching's remarks, we're entering the next stage enterprise and SMB AI. This represents a significant opportunity as the AI transitions from training to inferencing, driving increased demand towards on-premise hybrid environments. We've delivered another record revenue quarter marking SSG's 18th consecutive quarter of double-digit year-on-year revenue growth. Revenue rose 18% year-on-year to CNY 2.6 billion, and operating margin expanded near historical high. SSG grew at twice the pace of addressable market driven by robust demand in high-growth areas such as hybrid cloud, AI and digital workplace solutions. Growth in Project & Solutions was driven by enhanced AI solutions targeted at key verticals such as manufacturing and retail. Revenue from true scale DAS and Infrastructure as a Service also increased year-on-year with notable customer wins across global markets. In addition, both support services revenue and bookings growth accelerated. Overall, SSG deferred revenue grew 17% year-on-year to $3.6 billion, providing strong visibility into future performance. With combined revenue for Managed Services and Project & Solutions now accounting for 59.9% of SSG's total revenue and AI services tripling year-on-year, we are capturing higher-value AI-led services business models. Over the past 4 years, Managed Services and Project Solutions have grown at a 25% compound annual rate significantly outpacing the addressable market. Our tech-driven offerings enable customers to optimize cost and deepen engagement, aligning with the industry shift towards subscription and consumption-based models that are gaining strong traction. Meanwhile, support services remain a solid profit growth driver, supported by rising attach rates from devices and sustainable recurring revenue streams. We are proud to share that group continues to be recognized globally for our leadership in ESG. In 2025, Gartner Supply Chain Top 25, we ranked eighth highlighting our strong performance in building sustainable, resilient supply chains. Lenovo's factory in Monterrey, Mexico was recently added to the World Economic Forum, Global Lighthouse network, the second for Lenovo, among only 201 leading manufacturing facilities worldwide. Our ESG scores also improved across CDP and S&P Global, and we maintain our AAA rating in the MSCI ESG ratings for the fourth consecutive year. We've continued to build on our strong foundation of inclusion, the group was recognized as the best place to work for disability inclusion in the U.S., the U.K. and Brazil. We're also honored as an ambassador in the Workplace Pride global benchmark, reflecting our ongoing commitment to LGBTQ plus inclusion. In addition, we've deepened our collaboration with the United Nations industrial development organization, focusing on circular economy initiatives. We also joined the coalition for sustainable AI, an initiative led by French government in partnership with O&EP, demonstrating our commitment to responsible innovation and environmental stewardship. These achievements reinforce our long-term commitment to sustainability, innovation and building a more inclusive future. Looking ahead, we are hopeful of global trade improvements. Our global local model remains a key source of resilience and differentiation. We're also elevating our brand through major initiatives like the upcoming FIFA partnership and Tech World at CES 2026. With strong execution and continued focus on personal and enterprise AI, we are confident in translating our strategy into sustained profitable growth. Thank you. We will now answer any questions you may have.

Thank you, Winston. Now we will open the floor for questions, and this session will be English only. [Operator Instructions] While we are waiting for the questions, allow me to introduce the management team again. Other than our Chairman, Young Ching and CFO Winston Chen, we will also have the following business leaders with us today for Q&A. Luca Rossy, President of Intelligence Devices Group, Ashley Graal President of our Infrastructure Solutions Group; Ken Wong, President of our Solutions and Services Group; and Sergio Buniac, Senior VP of Mobile Business Group and President of Motorola. Our first question is from Albert Hung from JPMorgan. How big will the memory price impact on margin? What is our strategy to go through the memory cost hikes -- and when do you expect to see the impact from inflated memory price? And what will the memory impact on our business segments. For these questions, I would like to invite our Chairman and CEO, Young Ching to give some remarks. Thanks. Young Ching, please?

Thank you, Albert, for the question. So if you look at the industry of the market, 2 key -- 2 key dynamics top of my. First is top of bubble. And the second is the concerns about the supply shortages and the rising component prices. And I believe these 2 topics are related to each other. So let me give you my opinion. First, on the so-called AI bubble. My opinion is -- as with any major innovation, there will be intense investment and the competition at the beginning particularly in certain areas, such as large language models. But overall, we do not see above the substantial investments in AI infrastructure are laying the groundwork for the next major technology way much like the early Internet and under the explosive growth in PCs, particularly actually triggered the smartphones, for sure, more PC and the mobile applications as well. What's happening now is the next wave of AI democratization spreading across both personnel and enterprise use, which is perfectly aligned with Lenovo's strategy. So we are trading person corporate where the enterprises are hybrid. So because these are adoption accelerates to supply shortages and high component costs, natural consequences rising demand addressing this issue. So First, this is not new for our industry supply shortage or supplies cost up and down the normal situation for the industry. But I believe Lenovo is a better positioned and the more flexible and resilient than our peers to manage it effectively. So this is not adjusted because of our scale. So indeed, we are probably one of the largest buyers in our industry combining PC, smartphone, server, storage business together. But also, we have the best supply chain in our industry. So we are very proud of that. So actually, we are ranked the number 8 the current global supply chain to supply Charles, #1 in the Asia. And we have a much stronger and a better relationship with the suppliers typically, we signed a long-term contract with some top upstream suppliers. So that we are very confident we can manage this situation better than our competition to ensure not only we have enough supply, not just for short term, but for the entire year next year. But for sure, hopefully, the demand will not grow too faster than we forecasted. But also -- so we believe we can get the most competitive cost so that we can remain competitive in the market while protecting our profit and the margin. More specifically, for the next 2 quarters, we are very confident we can continue to drive double-digit growth in both our PC business as well as our server and the infrastructure solution business. Meanwhile, we are confident that our margin and profitability will not be impacted during this period. Last but not least, from a longer-term point of view. So we have the mechanics in place to adjust the price and to continue delivering on our commitment to ensure the market competitiveness while maintaining our margin and profitability.

Thank you, Young Ching. The second question is on PCs, and we also have a few questions on PCs as well. So we've got Anthony Land from JPMorgan and Leping Huang asking about the PC outlook for the next year. And from Leping, he mentioned congrats on the industry-leading 7.3% OP margin in ID and looking ahead, how do you assess the headwind from the rising storage memory component prices? Are you confident in maintaining this margin profile via pass-through? Luca, can I invite you to answer the questions.

Thank you, and thanks, Anthony and Leping, thank you, Leping. So maybe I'll start with the demand side. And here, I will say that we are definitely more optimistic than what we are seeing from some of the industry analyst reports. So with the visibility, order visibility we have as of now, I think we are confident to continue -- that we will continue to grow at double digits, at least for the next 2 quarters. And also for the remainder of calendar 2026, we are optimistic that the market will grow mid-single digit, with average selling prices growing also as a consequence of commodity costs going up and mixed AIPC mix going up. And on top of that, Lenovo will continue to grow at a premium to market. So faster than the market while maintaining industry-leading profitability, which brings me to the second point and our Chairman and CEO already mentioned it. So regarding the memory SSD commodity cost up trend, this First of all, I want to remind to all that this is something we have been able to manage several times in the past, in the previous many years, generally being always successfully expanding our market share without impacting our profitability trajectory. And that is coming with a combination of our strong procurement power strategic inventory preparation that you can bet we made. And definitely also the ability to understand each single market globally so that we know how to price correctly. So I think in the combination of all these things, bring me to say that we will price the right way to expand the market share to continue to gain minor shares like we did in the past now it's 9 consecutive quarters that we are gaining market share and maintaining our industry-leading margin and our industry-leading profitability.

Thank you, Luca. The next question is from Terry Ma from Macquarie. So this is on smartphone. She's asking the smartphone outlook for 2026 and what is our strategy for new product launches and the pricing given the component price increases? And what's the market to focus on giving emerging market demand would tend to be weak when home prices go up. So can I invite Sergio to address this question. Sergio, please.

Yes. So thanks for the question. I think different than what Luca mentioned, I think, number one, we expect the market next year to go single digit, a little faster in value for the price adjustments. We are not changing our strategy. So we have been 9 quarters premium to market, I think in the last few years, it's not the first time we see component pressures. We have navigated those cycles very efficiently given Lenovo supply chain position. Our strategy continues the same. I mean we are going to double down in double-digit market share markets and continued expansion in B2B that is growing double digit. And we will continue to accelerate premium. We believe the premium -- the item will be a little less affected by the component costs rising, our Edge and Razr franchises are growing 28% year-over-year, and we continue to see much faster growth in that segment. And we are now further investing in the 400 million to the 700 segment and above EUR 700 million -- you see some announcements. We also will continue to double down on ecosystem with a fast-growing segment for us and not less important, continue invest in monetization. Now market-wise, we are more diversified now. So we believe our footprint is not -- we're not going to change. We are seeing strong growth in markets like India, Japan, Italy, Middle East, Latin America, North America, so I think the footprint is appropriate for what we see ahead of us in the next 9 months. Our expectation is to continue to grow the to market in the next quarters.

Thanks, Sergio. We've also got another question on SSG. So how do you capture opportunities in hybrid AI infrastructure, both in and outside of China? And what medium-term targets do you have for managed AI compute under TruScale? Yes, Ken, would you like to address this question?

Yes. Thank you. Thanks for the question, Jim. Well, so when we look at the deployment of AI, and there's a lot of customer feedback in terms of key consideration, right? I mean those key consideration are cost latency, solvency, privacy. And that's why I think our hybrid AI strategy resonates a lot with our customer. And also, as you can see, it's proven in our performance. So that's number one. Number two, that is why we introduced the hybrid AI advantage, which is basically 3 important components. One is about the AI factory, Second is for the AI factory to power the solution, the AI solution for our customer. And lastly is to put together by all these things by our AI services in order to help our customers to accelerate their AI journey and help them to achieve the fastest time to token, right? I think this is so important in AI deployment and also getting ROI out of it. The other thing that we focus on is that there's a lot of requirement on agility and visibility. And that is why when we put the TruScale as a service on top of our AI factory, I think that is even more resonate with our customer. So with that, if we look at the market and especially on our performance, I think this part of the business is actually growing much faster than the overall market. If you look at the overall IT services market, it's growing at about low single digit, but this part of the business is actually growing at double digit, and we are for sure much faster than the market. So thank you for your question, Jim.

Thanks, Ken. So previously, we've also got a question from Randy from UBS, asking can we sustain the strong growth and margins on SSG? And moving forward, are we considering separating the warrant business. Ken, would you like to take this question?

Well, thank you for the question. If you look at our business, I think the 3 parts of our business. One is definitely the attached business, right? The attach service is basically to make sure to elevate and enhance our hardware experience from pocket to the ash to the cloud. The other part of our business is an extension of the cash business, right, into managing all the hardware and software and services in the workplace, which is digital workplace solution. Second is based on our compute leadership, right, we help our customers to build hybrid cloud. And lastly, is the sustainability business. I think this is one of the most sought after all over the world, right? And the last part is our AI services, which is, as I answered earlier on, this is what is every customer is asking for. But when I look at all these businesses, they're actually interrelated, right? If you look at AI services, I think it's AI powered by hardware, powered by compute, right? So you need to make sure you have the world-class hardware as well as the world-class experience in order to deliver AI ROI? So my point of view has to be integrated, and each part of our business plays an important part of the overall AI solution.

Thank you, Ken. The next question also comes from Leping Huang from Huatai Securities. It's on our a lot strategic partnership -- so could you share a time line for the MEA manufacturing hub coming online? And when can we expect material financial contribution? Can I invite Winston, our CFO to answer this question. Winston, please?

Sure. Thank you, Leping. Thank you, Lixi, for the question. I think in February, our Chairman YY actually went to to do the opening ground cereal. And last month, we also visited the Saudi and so now a group over very well development plan. So I think I personally was there as well very much amazed by the progress. I think this is even best for China standards. So amazing progress in the foreign land. The plant is one of the most complete for us in the international market. We'll have desktop PC, mobile and server. So one of the most complete plants. -- that we have in our supply chain. In terms of the timing, we'll start to test next month with volume production really by the middle of next year. I think we are doing quite well in the business, particularly in the PC space, where we have a #2 position there and really continue to gain. And so I think from that basis, 0we're looking to expand our business there by way server and also mobile. And we will now have a more focused opportunity. So a lot of dialogue, lot of excitement for our plants, which have been recognized locally there as most complete end-to-end manufacturing, not just single assembly. So I think we expect to have quite a bit of traction and market expansion opportunity with the made in Saudi products coming out of [indiscernible].

Thanks, Winston. We've got more questions on ISG. So can you update us on the ESMB initiatives on ISG to drive profitability improvement? And how much should we factor offset from the component cost? This question is from Randy Abrams from UBS. Can I invite Ashley to answer this question Ashley, please.

Thank you for the question. Maybe I'll also address the general server market as well as part of that Today, we're experiencing strong momentum in the ISG business. That's mainly driven by accelerated demand for AI infrastructure, various new customer engagements and also definitely our unique dual CSP and SMB strategy. And we think this momentum will provide a strong foundation to our commitment to long-term sustained profitability in our ISG business. If I elaborated in CSP, we're seeing our industry-leading scale and our unique Lenovo R&D delivered strong growth across the customer base of hyperscale to now emerging AI providers. And then ESMB, we saw a solid 30% year-over-year revenue growth reflecting much stronger than market momentum. This is driven by our focus on new transactional models, commercial AI growth and Lenovo's high-performance infrastructure portfolio. We saw Lenovo's AI server growth at high double-digit year-over-year and we are really proud of the growth in our Neptune Direct Liquid Cooling solutions, which grew well over market at 50-plus percent year-over-year. So for all the reasons that while I mentioned earlier, we believe the server and [indiscernible] infrastructure market will expand over the next year by high double digits in year-over-year relative to the CSP segment and by high single-digit percentage year-over-year in the SMB segment. We remain very optimistic that the modeling value of our AI portfolio and services, we continue to drive our ISG growth momentum and improving profit growth.