U.S. Markets close in 5 hrs 36 mins

Edited Transcript of 992.HK earnings conference call or presentation 23-May-19 10:15am GMT

Full Year 2019 Lenovo Group Ltd Earnings Presentation (Chinese, English)

May 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Lenovo Group Ltd earnings conference call or presentation Thursday, May 23, 2019 at 10:15:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Gianfranco Lanci

Lenovo Group Limited - Corporate President & COO

* Jenny Lai

Lenovo Group Limited - VP of IR

* Kirk B. Skaugen

Lenovo Group Limited - Executive VP & President of the Data Center Group

* Sergio Buniac

Motorola Mobility LLC - Corporate VP of Latin America

* Wai Ming Wong

Lenovo Group Limited - Executive VP & CFO

* Yuanqing Yang

Lenovo Group Limited - Chairman & CEO

================================================================================

Conference Call Participants

================================================================================

* Gokul Hariharan

JP Morgan Chase & Co, Research Division - Head of Taiwan Equity Research and Senior Tech Analyst

* Robert Cheng

BofA Merrill Lynch, Research Division - Head of Taiwan Research and Head of Asia Tech Hardware Research

================================================================================

Presentation

--------------------------------------------------------------------------------

Jenny Lai, Lenovo Group Limited - VP of IR [1]

--------------------------------------------------------------------------------

Good afternoon, ladies and gentlemen. Welcome to Lenovo 2018 to '19 Annual Results Investor Presentation. First, let me introduce to you the management with us here today. They are Mr. Yang Yuanqing, Chairman and CEO; Mr. Gianfranco Lanci, Corporate President and COO; Mr. Wong Wai Ming, Executive Vice President and CFO; Mr. Kirk Skaugen, Executive Vice President and President of Data Science Group; also we have Mr. Sergio Buniac, President of Motorola and Senior Vice President of Lenovo.

Now may I invite Yuanqing to start the presentation, followed by Wai Ming. Yuanqing, thank you.

--------------------------------------------------------------------------------

Yuanqing Yang, Lenovo Group Limited - Chairman & CEO [2]

--------------------------------------------------------------------------------

Good afternoon, everyone. Thank you for joining us today. Over the last 4 years, Lenovo has been on a journey to build a customer-centric, multi-business company that can thrive in the transforming world. We have built many new capabilities along the way. Now our multi-business operating system is in place, and the new foundation of the company has been built. I can proudly say that this is the most promising time in Lenovo's history.

Let me start with our strong fourth quarter. As revenue and the profit improved across all businesses for the first time since x86 and the Motorola acquisitions, our revenue grew by double digits year-on-year and reached USD 11.7 billion. We also significantly improved profitability with a pretax income of $180 million, up almost 4x year-on-year. Net income was USD 118 million, up more than 260% year-on-year.

This strong performance starts with our Intelligent Device Group, where PC plus smart devices revenue grew more than 10%. In PC, our volume grew 9% year-on-year, nearly 12-points premium to the market. And we were the fastest-growing PC company among the top 5. We returned to #1 in consumer. And our focus on premier segments led us to 34% year-on-year growth in commercial notebook above USD 800, further strengthening our #1 position.

In our Mobile business, we were profitable for the second consecutive quarter, improving pretax income by USD 146 million year-on-year. Revenue returned to year-on-year growth for the first time in 5 quarters at over 15% year-on-year and outgrew the market by almost 27 points. Our focus on selected markets led to our revenue outgrowing the market year-on-year: in Latin America, by 17 points; in North America, by almost 60 points; and in Europe and in China, by more than 230 and 600 points, respectively. We also successfully launched the world's first 5G mobile product in store with Verizon.

Our Data Center business revenue and profit continue to be improved year-on-year despite the tough market condition. The joint venture with NetApp in China is now operational. Our Software & Services revenue also improved by over 18% year-on-year, reaching nearly USD 620 million.

This strong fourth quarter completed our record fiscal year. Our full year revenue exceeded USD 50 billion for the first time, reaching USD 51 billion, up almost to 13% year-on-year. Our pretax income was almost USD 860 million, up more than 4.5x; and net income was almost $600 million, up almost $800 million year-on-year.

Driven by our Smart IoT strategy, Intelligent Device Group revenue grew by almost double digits and significantly improved the pretax income by almost $1 billion, more than double year-on-year. Our PC and Smart Devices Group delivered a record revenue of nearly USD 39 billion and a pretax income of almost USD 2 billion. In PC, we returned to #1 with a record market share of over 23%. In addition, we are also the fastest-growing PC company out of the world's top 5 players. These strong results against the industry trend were driven by our focus on the innovation, in the high-growth and the premier segments as well our operational excellence.

In Mobile, thanks to our clear priority, focus on selected markets, competitive products in the portfolio and the expense control, we improved the pretax income by more than USD 460 million year-on-year and were profitable for the second half of the year. We saw rapid growth in our focus regions. Latin America reach a record share of almost 18%. North America volume outgrew the market by almost 60 points; and in China, by almost 190 points. And in the rest of the world, we cleared the inventory, improved the profit and are ready to return to growth.

While driving our smart infrastructure strategy, Data Center business achieved the fastest year-on-year growth since the x86 acquisition, growing almost to 40% with a record revenue growth with profitability improvement. This was led by a strong growth of Hyperscale and the Software Defined Infrastructure, which had a revenue growth of 248% and almost 100% year-on-year, respectively. We remain #1 in the world in performance with 139 world records; #1 in x86 server reliability and customer satisfaction according ITIC, TBR and the various industry benchmarks; and the #1 provider of supercomputers in the TOP500 list.

Our investment to grow LCIG also successfully exceeded 3 investments and contributed more than USD 100 million to the global PTI. For the full fiscal year, our Software & Services revenue reached USD 2.4 billion, up almost 19% year-on-year.

This year's success was guided by clear strategic goals set at the beginning of the year followed by excellent execution. Our 4 primary objectives were: to return PC to #1, achieve Mobile business breakeven, drive faster growth in Data Center and to build our edge in AI. And we delivered.

For the new fiscal year, we have clarified the 3S strategy. We will further drive Smart IoT, smart infrastructure, develop capabilities in big data and advance the algorithm. With these building blocks combined, we will build our smart vertical solutions and become the leader and the enabler of Intelligent Transformation.

Our ambition remains as strong as ever. Besides the primary goal of continuing double-digit revenue growth, we have set specific objectives to drive transformation: quadruple smart devices revenue, double Software Defined Infrastructure revenue, double smart vertical solutions revenue and to grow the Software & Services revenue faster than the company's overall growth.

At Lenovo, we are like mountaineers in the past years. We conquered one height after another. In the new fiscal year, we are ready for even greater height. Thank you.

Now let me turn it over to our CFO, Wai Ming. Wai Ming, please.

--------------------------------------------------------------------------------

Wai Ming Wong, Lenovo Group Limited - Executive VP & CFO [3]

--------------------------------------------------------------------------------

Thank you, Yuanqing. Good evening. I will take you through Lenovo financial and operational performance in Q4 and fiscal year 2019.

Next slide, please. Let me just first share with you the financial highlight for our Q4 performance. Our Q4 results continue to show strong momentum. Revenue came in at $11.7 billion and grew by double-digit year-on-year driven by market share gains in PCSD and MBG. A notable improvement is the double-digit growth in MBG, which is a clear sign of our well-executed turnaround.

Gross profit in Q4 increased by 23% year-on-year and gross profit margin expanded 1.7 percentage points to 16.2%. Group PTI was $180 million, up $143 million from a year ago. We saw PTI improvement across all business group. Key highlights include our industry-leading probability in PCSD. MBG continued to record positive PTI even in the low season as far as improved bottom line of DCG.

For the full -- for fiscal -- well, for FY '19, the group revenue surpassed $50 billion for the first time, setting a new record at $51 billion, up 13% year-on-year. Gross profit increased 16% year-on-year, while gross margin expanded 0.6 percentage point to 14.4%, thanks to the margin expansion at PCSD and MBG.

We remain disciplined in our expense control. That helped improve our operating efficiency. Operating expenses increased by 5% to $6.2 billion. And as a result, our E/R ratio improved by 0.9 percentage point to 12.1%.

Group PTI was $856 million, representing a sharp improvement from $153 million last year, thanks to a record level of PCSD PTI, while losses in MBG and DCG was significantly reduced.

Profit attributable to equity holders for the year was $597 million, reversing a loss of USD 189 million a year before.

Basic earnings per share came in at USD 0.501 compared to a loss per share of USD 0.167 last year. The Board of Directors decided in the meeting today to declare a final dividend of HKD 0.218 per share. Total dividend payout is up 5% year-on-year.

In Q4, our cash used in operations improved year-on-year to $478 million, which was lower than the $1.5 billion net cash generated from operation in Q3, mainly due to the seasonal factor. In Q4, we had a larger amount payable from previous quarters being settled, which resulted in a drop of net cash generated from operations.

Our inventory days improved 4 days year-on-year, yet the receivable days worsened 5 days due to the timing difference in receivable collection. Overall cash position improved as reflected in our lower net debt.

For fiscal year '19, improving operational performances of the 3 business unit groups along with better working capital management led to a $2.2 billion year-to-year improvement in operating cash flow. Operating cash flow improved at $1.5 billion at the end of the fiscal year. We'll continue to deploy our cash resources to invest in business growth opportunities.

Our Intelligent Devices business group, which include PC and Smart Devices business group and Mobile Business Group, recorded double-digit revenue growth of 11% to reach $10.5 billion in Q4, mainly driven by share gain and increase in the mix of premium and high-growth products in PC and Mobile business resuming growth.

For fiscal year '19, IDG revenue increased almost by 10%, and PTI margin of IDG was enhanced significantly by 2.1 percentage points year-on-year to 4.1%, thanks to the improved profitability in both PCSD and MBG.

In Q4, we continued to show double-digit revenue growth of our PCSD business, and this is the fifth consecutive quarter that PC grew at a premium to the market thanks to the share gain in the commercial premium and high-growth segments. Our focus strategy has made us the top player in the $800-plus price segment in commercial notebook PCs for the third consecutive quarter. We also saw double-digit improvement in our workstations, thin and light and visual business.

PCSD revenue in Q4 was $8.9 billion, up 10% year-on-year. Pretax income was at $458 million, and PTI margin expanded 0.4 percentage point to 5.2%.

This fiscal year turned out to be a record-setting year for our PCSD business. We achieved record revenue and PTI for the business group by leveraging our growth strategy to focus on high-growth and premium segments. We're the fastest-growing PC OEM among the global top 5 players, and our share gain span across all regional markets. In addition, our consumer-centric strategy has helped us to drive our share gain in the commercial segment.

PCSD revenue in the year was $38.5 billion, up 14% year-on-year versus a 4-year CAGR of 4%. PTI increased 34% year-to-year to a record-breaking $2 billion, while PTI margin expanded to 5.2% boosted by favorable product mix and higher services attach rates.

In Q4, our Mobile business resumed in growth in revenue and shipment. Sales were up 15% year-on-year to $1.5 billion. Share gain in our core markets including North America and Latin America as well as strong revenue growth in China contributed to the growth in the Mobile business.

In the meantime, we're expanding our carrier and open-channel sales and had several successful product launches during the quarter. Indeed, activation rate for our 7th Gen Moto G is higher than the 6th Gen in its first month of launch. Motorola One franchise has fared better than expected, and MBG contributed to record profit despite Q4 being a typical low season. Our PTI margin improved 10.9 percentage points year-on-year.

For the full year, MBG turned profitable in the second half of the year, thanks to the solid strategy execution to focus on selected markets, product portfolio enhancement and expense reduction. We managed to achieve an expense saving of $433 million for the whole year and bring down our annual operating expenses to around $1 billion without compromising investment in marketing, research and development, which are vital to our future competitiveness. Loss in MBG was narrowed by $464 million year-on-year to $139 million for the fiscal year. The efficient expense structure, coupled with reviving revenue growth has established an important milestone for MBG and it resumes profit for the long-term growth.

In Q4, margin of our Data Center Group continued to expand year-on-year. PTI profitability improved by 1 percentage point year-on-year. The industry has been hit by a short-term demand dip as the cautious customer await launch of the next Intel x86 platform. Inevitably, DCG revenue growth slowed to a single-digit rate in the quarter to $1.3 billion. Nevertheless, our Hyperscale business still achieved a very strong double-digit growth year-on-year, while our software-defined business outpaced the market with high double-digit revenue growth for the sixth consecutive quarter.

For fiscal year '19, Data Center Group concluded the fiscal year with a record revenue of $6 billion. Revenue grew by 37% year-on-year, the highest rate in the last 3 years. We have strengthened our business model, product leadership, sales and marketing to drive share gain and product expansion. Our Hyperscale recorded triple-digit growth and Software Defined Infrastructure business almost doubled. Loss was narrowed by $194 million year-on-year thanks to the margin improvement across all DCG segments and geographies.

Last but not the least, I want to highlight the progress we have made in our Intelligent Transformation. Our Software & Services revenue increased by nearly 20% year-on-year to $2.4 billion, representing almost 5% of our group revenue. The device and service business continue its rapid growth with booking revenue up by more than 20% during the year as our footprint stretches across the global markets. Our big data and AI-powered smart vertical solution business also tripled compared to last year.

Looking ahead, despite some geopolitical uncertainties ahead of us, we will leverage our extensive experience in managing a multitude of macro risks in order to drive growth and thrive as a business. Our goal is to lead in Intelligent Transformation era and drive service and software to become a key profit contributor in the long term. We aim to deliver premium to market growth on our top line and we target to set new profit record.

On PCSD, we are confident to achieving this with leading profitability and premium to market revenue growth. We'll continue to improve user experience, expand innovative product lineup and grow our service and software business.

For Mobile business, we will establish a profitable business model and we'll expand this framework to our existing focus market and other high-growth potential markets where we have synergies to leverage from other Lenovo franchise. We will hold onto our strategy in enhancing our product portfolio and investment in innovation.

For our Data Center business, despite near-term demand softness as customer await for the next Intel platform, we will continue to invest for the future. We'll improve our profitability and grow our premium to the market, and we expect demand to recover strongly in the second half of the year. We'll further strengthen our core capacity -- our core capability, including in-house manufacturing, in order to expand in the high-growth segments, including Software Defined Infrastructure and Hyperscale, and further enhance our product portfolio and optimize our end-to-end solutions tailor-made for the local markets. We will accelerate our market share gain in high-growth segments such as in Hyperscale, Software Defined Infrastructure, high-performance computing and AI and IoT solution.

We will accelerate our Intelligent Transformation by bringing smarter technology to all in the connected world. In Smart IoT, to accelerate transformation, we will focus on building intelligence in our PC and smart devices. We will further improve our profitability through higher average user selling price. In smart infrastructure, we will continue to strengthen our capabilities and solutions and grow our services attach rates. In the smart vertical business, we'll continue to optimize our business capabilities to accelerate our growth across software, services and solutions.

Thank you. Now we can take your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Jenny Lai, Lenovo Group Limited - VP of IR [1]

--------------------------------------------------------------------------------

Thank you, Wai Ming. May I invite the 4 gentlemen to come back to the stage? Wai Ming as well. Thanks, Wai-Wai. Thank you, Gianfranco.

Now we move to the Q&A sessions. We will take questions from the floor. If you wish to ask questions, please raise your hand and we'll pass over a mic to you. To make sure all of us, including our participants in the live webcast, can hear your question, please wait for the microphone before you speak. Also, please try to limit your questions to 2 questions at one time and please state your name and the company that you represent.

So may we start the Q&A now? Any questions from the floor, please? Yes. No, the gentleman at -- yes. Thank you.

--------------------------------------------------------------------------------

Gokul Hariharan, JP Morgan Chase & Co, Research Division - Head of Taiwan Equity Research and Senior Tech Analyst [2]

--------------------------------------------------------------------------------

It's Gokul Hariharan from JP Morgan. Maybe I'll start off with the most topical question, I think. A lot of geopolitical challenges in the last couple of weeks. Could we share what Lenovo is thinking, preparing for, especially in terms of like additional tariffs, et cetera? I think you've been preparing for some supply chain realignment already over the last 12 to 18 months. Could you talk about the preparedness of Lenovo if we see further tariffs? And how do you compare yourself with some of your competitors as well? Because it's going to be -- it looks like an industry-wide issue because of pretty much everybody ships a lot of their products from China. That's my first question.

--------------------------------------------------------------------------------

Yuanqing Yang, Lenovo Group Limited - Chairman & CEO [3]

--------------------------------------------------------------------------------

Thank you for the question. So I know that they say the question must be asked. So we are pure global company. So we have very balanced business across the geographies and a very sophisticated supply chain across the geography as well.

And the difference from other players, actually, we do a lot of in-house manufacture -- our in-house manufacturing facilities across the world as well. We have a factory not just in China, but in India, in Brazil, in Mexico, in Hungary. So -- Hungary is not in-house. It's third-party. So compared with our competition, so we have more flexibility to adjust the supply chain so that we can better meet the competition.

So definitely today, PC and the smartphones haven't been tariffed yet. So manufacturing in China still give us a certain advantage if the situation won't be changed. So definitely, I think that we are in a better position than our competition to make the supply chain adjustment.

So another point is so we actually have less exposure in U.S. than our competitors -- key competitors, so particularly in the PC areas. So my conclusion is we're in a better position than our competition. And we'll try our best to mitigate the impact to our performance.

--------------------------------------------------------------------------------

Jenny Lai, Lenovo Group Limited - VP of IR [4]

--------------------------------------------------------------------------------

Thank you, Yuanqing.

--------------------------------------------------------------------------------

Yuanqing Yang, Lenovo Group Limited - Chairman & CEO [5]

--------------------------------------------------------------------------------

Gianfranco, you want to...

--------------------------------------------------------------------------------

Gianfranco Lanci, Lenovo Group Limited - Corporate President & COO [6]

--------------------------------------------------------------------------------

No. I think you said -- we also have a factory in Japan.

--------------------------------------------------------------------------------

Yuanqing Yang, Lenovo Group Limited - Chairman & CEO [7]

--------------------------------------------------------------------------------

No. Yes, I forgot that.

--------------------------------------------------------------------------------

Gianfranco Lanci, Lenovo Group Limited - Corporate President & COO [8]

--------------------------------------------------------------------------------

So we are really -- we have factory and -- a small factory in U.S.

--------------------------------------------------------------------------------

Jenny Lai, Lenovo Group Limited - VP of IR [9]

--------------------------------------------------------------------------------

Thank you. Next question, please? Yes.

--------------------------------------------------------------------------------

Robert Cheng, BofA Merrill Lynch, Research Division - Head of Taiwan Research and Head of Asia Tech Hardware Research [10]

--------------------------------------------------------------------------------

This is Robert Cheng from Bank of America Merrill Lynch. I think my question is -- because I feel right now that probably the profit is beyond only tax because of probably, the reason -- because in the past few days, you probably heard press release of Huawei. I mean they start to ban there, I mean, talking about component and even operating system.

And then next, I think, the day before I spoke about Hikvision. And I think right now there is a lot of the other company coming out. Basically pretty much all the leading company in China has been named as offenders. I mean, of course, I think Lenovo is one of the leading company. I mean, right now, it's globally. But of course, they have lot of facility and a lot of technology from -- especially the impressive China spread. And the people is experiencing -- and some of the area, I feel, is probably more sensitive, especially on server -- especially you guys involved in so many supercomputing project. And you also have a lot of exposure to U.S. hyperscale data centers.

And also another one is in mobile side. Because in mobile, actually, you guys do very good in -- a lot of market share picking up in North America. So I don't know if the supply chains disruption become the issue. How do you guys would [react] here with this kind of situation?

--------------------------------------------------------------------------------

Yuanqing Yang, Lenovo Group Limited - Chairman & CEO [11]

--------------------------------------------------------------------------------

So thank you for the question. So Lenovo has always been a global company originated from China. We have always been a trusted player across the world. So we have never had the problem on security, on the compliance. So actually, we always comply with the law and regulations everywhere we do business. So -- and also Lenovo, we are a very transparent company with a very high level of standard -- high-standard governance. So if you consider our Board and our executives, we are probably the most diversified company in those multinational companies. So I don't think that we have a reason to be targeted.

--------------------------------------------------------------------------------

Jenny Lai, Lenovo Group Limited - VP of IR [12]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Kirk B. Skaugen, Lenovo Group Limited - Executive VP & President of the Data Center Group [13]

--------------------------------------------------------------------------------

I think for supercomputing, as you mentioned, right, we're very proud now. We're on the TOP500 list. We're actually in 17 countries, which is more than the next 3 of our competitors combined, and the most supercomputers in 10 countries, the fastest in 10 countries. So we actually see ourselves now as globally diversifying in supercomputing as well. And on Hyperscale, we've been public that we're in 6 of the top 10. But I can tell you, our design win rate is growing. So we're getting more customers. We're expanding into the next set of customers beyond the top 10, which represents about 40% of the worldwide hyperscale market. About 40% is not in the top 10, and we are just now starting to focus on them this year after the success in the Tier 1.

--------------------------------------------------------------------------------

Sergio Buniac, Motorola Mobility LLC - Corporate VP of Latin America [14]

--------------------------------------------------------------------------------

Yes. And just to complement, on the mobile side, we see like continued momentum in North America. Our ranging, that's a very good indication in North America about future business. It has increased significantly year-over-year. And our supply chain, as we mentioned, we have a flexible supply chain. So we see momentum continue in the North America business for the mobile side. There is also a lot of innovation as we launch the first 5G device. And for the second half, there is a lot also coming from innovation. So we see a lot of buckets of growth in North America, still.

--------------------------------------------------------------------------------

Jenny Lai, Lenovo Group Limited - VP of IR [15]

--------------------------------------------------------------------------------

Thank you. Next question, please? I'm sure the results are doing very good. So any more questions from the floor?

Okay. The gentleman again, please?

--------------------------------------------------------------------------------

Gokul Hariharan, JP Morgan Chase & Co, Research Division - Head of Taiwan Equity Research and Senior Tech Analyst [16]

--------------------------------------------------------------------------------

A couple of questions. First, on the gross margins. I think this is probably a 3-year high in terms of gross margins at 16-plus percent. Could we have a little bit more detail in terms of why we saw such a big jump in gross margins typically during a weaker than -- a weaker quarter in terms of seasonality for the China business as well? And could we have some view on how we should think about gross margins over the next fiscal also?

Second question I had is to Gianfranco. If you could talk a little bit about how we should think about PC business, where we are in the enterprise refresh cycle, what do we think about China PC market as well as you highlighted coming back to #1 in consumer. What do you feel about the overall consumer PC market as well?

--------------------------------------------------------------------------------

Yuanqing Yang, Lenovo Group Limited - Chairman & CEO [17]

--------------------------------------------------------------------------------

You want to answer that?

--------------------------------------------------------------------------------

Wai Ming Wong, Lenovo Group Limited - Executive VP & CFO [18]

--------------------------------------------------------------------------------

Okay. So -- well, (inaudible) those. I think if I look at the group on a floor, I think we actually saw improvement in margin in the 2 business unit or the 3 parts of growth: in PCSD, MBG and DCG. Clearly, I think from a percentage perspective, I think PCSD actually is the largest. So I think in terms of answer why we actually will be to actually achieve that results, and I think that will answer the question. But again, I think, from a result perspective, the improvement is across the board. It's not just 1 business group or 1 geography. So I -- maybe I'll pass it on to...

--------------------------------------------------------------------------------

Kirk B. Skaugen, Lenovo Group Limited - Executive VP & President of the Data Center Group [19]

--------------------------------------------------------------------------------

For Data Center, I think a few milestones we hit. Actually storage now, we successfully executed the joint venture with NetApp in China. So remember, in the past, we were the fastest-growing storage company in the world but only covering the entry space, 15%. Now we can cover 92% of the storage space. So for year-on-year, we actually grew 5x the market. And in Flash Arrays, which is obviously, one of the fastest-growing parts of the market, as flash pricing goes down, we're growing twice the market, more than triple digits. So the storage is definitely now more than 80% of our generalist sellers are selling storage, not just server. So we're transforming from a server company to a server storage company. And obviously, we can compete with the large companies when we do that.

The second milestone we hit this quarter is actually our deferred revenue on services. It's the highest it's been since the System x acquisition. So we've been aggressively attaching more professional services and more services to our servers and storage. And as a result now, we have confidence in the future profitability because our deferred revenue is now higher than it's ever been on our balance sheet.

--------------------------------------------------------------------------------

Yuanqing Yang, Lenovo Group Limited - Chairman & CEO [20]

--------------------------------------------------------------------------------

So gentlemen, on the piece of PC?

--------------------------------------------------------------------------------

Gianfranco Lanci, Lenovo Group Limited - Corporate President & COO [21]

--------------------------------------------------------------------------------

PC. No, when we -- if we deliver margin, I think it's coming from, I would say, 3 major things. One is the mix. We have been very careful during the last couple of years to move our mix from low end to mid-end, high end, and this is the reason why today we are #1 on more than $800 price point, right? We are even bigger than Apple. So -- and this, of course, is running with different margin than entry. We've also been very careful on also considering the shortage and some other things, but today commercial is probably 65% of our revenue against the consumer. It doesn't mean that we don't look at consumer. We are back to #1. But commercial is still our strong -- and there we continue to grow share. The gap with #2 is getting bigger.

And also answering to the first -- the previous question, when I look at Fortune 500 customers, probably 70% to 80% of Fortune 500 customer in the world, they are running with our PC. And even the big government administration in U.S., they're running with our PC, talking about a trusted company.

The other reason is the service. We have seen the service on PC growing by more than 20% year-on-year. So we are over $1.5 billion, which is not a small number in PC.

And the last thing is component costs. Component costs for sure is also helping because they have been going down during the last 6 months. My projection is that they will continue to go down at least until the end of the year. There is no sign that components, they should come back to increase the costs. So I would say mix, service, commercial/consumer and some help from component costs.

When we go to PC, how do we see PC? I think when you look at PC, PC, in terms of units probably will continue to go down just slightly, maybe 1%, 2%. And this is in line with IDC. The IDC released a forecast -- a new forecast today. It's a little bit better in terms of revenue. So revenue is almost flat or slightly down. But when I look at revenue, and this is much better indicator than quantity, the market is probably going to be flat.

It's coming from still Windows 10 refresh because it's not finished. It will be probably complete by the end of the year. But it's still big in most of -- I would say, except probably U.S. and a little bit EMEA, it's still big in all the other geo, including Asia Pacific, including Japan and including all the emerging market, even EMEA in some cases. So I think Windows 10, the refresh, will continue to drive commercial at least until the end of the year. There is even some possibility that some big customer, they will not move and they will wait next year. And when I talk about big customer, I'm mainly talking about government customer, that they are not ready to move. And I'm not talking about emerging market now. I'm talking about mature market. So PC is, as I said, a refresh.

Then what we see, of course, is consumer. They will continue to go down. It's still negative. And commercial is -- probably continue to grow.

If we look at geo by geo, I think the only geo that today is showing some weakness in terms of demand is China. But it's not only on PC. It's showing weakness on PC and phone also. There are some weaknesses in China. The other geo are more or less at the same level. So it's not exciting here, but also it's not -- it's more or less flat in U.S. and more or less flat in EMEA, more or less flat in Asia Pacific.

And we continue to gain share for, in my opinion, for a couple of reason. Because in terms of product, we are in the position to offer better product to our customer in terms of innovation and in terms of...

--------------------------------------------------------------------------------

Yuanqing Yang, Lenovo Group Limited - Chairman & CEO [22]

--------------------------------------------------------------------------------

Quality.

--------------------------------------------------------------------------------

Gianfranco Lanci, Lenovo Group Limited - Corporate President & COO [23]

--------------------------------------------------------------------------------

The quality. And we have today a much better balance between the different geo. So today, I think we have -- when you look at our $38.5 billion, we have 3 geos running around the $10 billion. So it's very, very, very good in the sense that out 5 geos -- well, it's very, very small, we have 3 geo running at around at $10 billion, and the other one -- and the other 2 contributing for the $8.5 billion. And also in terms of profitability, it's coming -- it's now 30% to 40% coming from China. The rest are coming from outside China.

--------------------------------------------------------------------------------

Jenny Lai, Lenovo Group Limited - VP of IR [24]

--------------------------------------------------------------------------------

Thank you for the detailed explanation. Yes, the next question, please?

--------------------------------------------------------------------------------

Unidentified Analyst, [25]

--------------------------------------------------------------------------------

I'm [Fred] from [Evolution Capital]. I have 2 questions. The first question is regarding the Data Center because I've been surprised with the market, that some unlisted company say some facial recognition company are under the spotlight today in front news. And I guess those facial recognition company also installed a lot of servers as they communicated that they sell those servers to their customers as well. Nearly 50% of those facial recognition company, their revenue comes from the hardware sales, including server and storage. So I'm not sure whether -- is this part -- it's also a potential growth for your -- for Lenovo's Data Center business? If that is one of the part of the growth driver, will it affect the coming data center prospects as well? So this question meaning for the camera -- the surveillance camera, they're connecting to server and storage.

The second question is regarding the -- because we are seeing more company are doing vertical integration, designing some in-house -- not only production but also semiconductor line going upstream to those chips. Say that each company also spend enough time and R&D expenses in those semiconductor development so that they have a [fabulous] design methodology to pace order to secure their design in IP. So I'm not sure whether Lenovo has also such kind of plan.

And also regarding the software side, which is the -- controlled by -- dominated by the M company, right? So not sure in the PC or in the smartphone side whether will you consider to develop in-house operating system to -- for long-term development. That's my second question regarding the strategic reason, not necessary for the tariff or not necessarily -- or you already planned this kind of project before. Yes. Those are my 2 questions.

--------------------------------------------------------------------------------

Jenny Lai, Lenovo Group Limited - VP of IR [26]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Yuanqing Yang, Lenovo Group Limited - Chairman & CEO [27]

--------------------------------------------------------------------------------

So I will answer your second question. Probably Kirk will answer your first one. So we still believe a global direction is still on track for our company. We don't need to do everything by ourselves. So we have no plan to build the chips by ourselves, to build the operating systems by ourselves. So we have ourselves positioned so we provided the best product for our customers using the latest technology, partnering with trusted partners. So that's our strategy.

--------------------------------------------------------------------------------

Kirk B. Skaugen, Lenovo Group Limited - Executive VP & President of the Data Center Group [28]

--------------------------------------------------------------------------------

Yes. Relative to video and video analytics, I think I saw some data, almost 75% of data created today is video. So as we expand to the edge, we see the compute going to where the data is. The data will not go to where the compute is. So if you go outside this hall, you'll see our new SE350 edge server. We had over 650,000 YouTube views just in 4 days at MWC when we showcased that technology.

We've already been public, for example, that we are helping with city -- safe city for smart city. For example, we did City of Bogotá, Columbia. We worked on the hyperconverged infrastructure so they can detect license plate and the color of -- and the type of car. So someone tries to change the license plate to a different colored car, they can immediately detect it's a problem for the city safety. So this was one example where we used Pivot3, which is a hyperconverged infrastructure company. But there are hundreds if not thousands of camera companies out there. That will not be a deterrent to the growth.

The second case study we did was in smart retail at the edge. Ahold Delhaize has 33,000 grocery stores in Europe. It's the largest retailer in Europe. And we run scale computing, which is their hyperconverged infrastructure at the edge. And there they do point of sale terminals, they do customer loyalty systems, they do video analytics for store safety and theft, this kind of thing. So we have many case studies. It's a very fast-growing part of our market. But I don't see -- I haven't heard of any issues with this deterring our growth with any of the things you mentioned.

--------------------------------------------------------------------------------

Jenny Lai, Lenovo Group Limited - VP of IR [29]

--------------------------------------------------------------------------------

Thank you. Yes, next question?

--------------------------------------------------------------------------------

Unidentified Analyst, [30]

--------------------------------------------------------------------------------

[Louis Wong] from [Investment Management Hong Kong Limited]. So my question is concerning the 5G development of the Lenovo. So as I know, the Mobile business softened or it's just turned around a profit. And my question is about 5G development of Lenovo. So as I know, you already launched 2 kinds of mobile phone. So my question is how is the market share of the 5G phones in the future? And second question is about how is the strategy of the supporting device of the 5G-related device of the Lenovo?

--------------------------------------------------------------------------------

Yuanqing Yang, Lenovo Group Limited - Chairman & CEO [31]

--------------------------------------------------------------------------------

Sergio, will you answer the first question?

--------------------------------------------------------------------------------

Sergio Buniac, Motorola Mobility LLC - Corporate VP of Latin America [32]

--------------------------------------------------------------------------------

Yes. As we announced, we -- the first commercial 5G call globally was made from a Lenovo phone in the U.S. We are keeping that in 5G. We will be launching new models to the end of the year, and we'll see that as people start replacing their phones. What we are not going to do is accelerate, I think, as the carriers deploy their networks. And we'll be very cautious, right? It's still early stage, but we have a small time to market in terms of what we did in terms of learning antennas, streamer. And we're going to continue to deliver on that. So we see 5G probably becoming stronger at the beginning of next calendar year, but you'll see some announcements coming to the second half of the year.

--------------------------------------------------------------------------------

Gianfranco Lanci, Lenovo Group Limited - Corporate President & COO [33]

--------------------------------------------------------------------------------

Well, yes. When we -- if we're talking about devices, I think, for sure the trend is going there. A lot of devices in the world will have will have 5G connectivities and it's simply because they need to be always connected. And it's easy to I think that probably in 3 to 5 years from now even Wi-Fi will be replaced by 5G because it is faster and easy to use, right? And people, they don't need to switch from one to the other. We just announced a show foldable 2 weeks ago, the foldable PC, right? This is a typical example. It's going to be 5G-connected because it doesn't make any sense to have foldable, ultra-portable small device without connectivity. We are working with -- we have another -- part of our product line, still small today, is based on Windows on ARM. All this kind of product, when you think about Windows on ARM is going to be -- and it is today 4G, tomorrow 5G-connected.

--------------------------------------------------------------------------------

Kirk B. Skaugen, Lenovo Group Limited - Executive VP & President of the Data Center Group [34]

--------------------------------------------------------------------------------

And I have to say, the edge server we announced at MWC can also connect on 5G. So it actually has 6 antennas on it. So as you start putting these in your factory, you connect not just with wired but with Wi-Fi, with 4G and with 5G. So it's very interesting to see a server that almost looks like a ThinkPad and has antennas on it. But this is part of the excitement around edge servers as well.

--------------------------------------------------------------------------------

Yuanqing Yang, Lenovo Group Limited - Chairman & CEO [35]

--------------------------------------------------------------------------------

So by the way, we are the member of the [OLRA], so we have the project. We actually have already have the business to develop the NFV, network function virtualization business, so particularly for the 5G. So I think that's a potential growth area for Lenovo as well.

--------------------------------------------------------------------------------

Jenny Lai, Lenovo Group Limited - VP of IR [36]

--------------------------------------------------------------------------------

Thank you for the explanation, very detailed. Anymore question, please?

If there's no further questions, thank you very much for joining our investor presentation today. We have some new products displayed outside of the room. If you have time, please stay a little bit more with us and try to test it and let us know your feedback.

If you have any further question, feel free to contact the IR team. Once again, thank you very much to all of you. Wish you all a good evening.