Good morning, and good evening. Welcome to Lenovo's Quarter one Earnings Webcast. Thanks to everyone for joining us. This is Jenny Lai, Vice President of Investor Relations. Before we start, let me introduce our management team joining the call today.
We have Lenovo's Chairman and CEO, Mr. Yang Yuanqing Corporate President and COO, Mr. John Franco Lengxi Group CFO, Mr. Wang Ymin President of Data Center Group, Mr. Chris Gaojun and President of Motorola, Mr.
Sergio Buniak. We will begin with a presentation shortly. And after that, we will open the call for questions. Without further ado, let me turn the call over to Yuanqing. Yuanqing, please.
Hello, everyone. Thank you for joining us today. Last quarter, despite the global geopolitical uncertainties, we kicked off a new year with a strong performance. We continue to drive both top line and the bottom line growth. Our global revenue grew year on year for eight consecutive quarters and reached US12.5 billion dollars Our pretax income was US240 million dollars and the net income was million dollars both more than doubled year on year.
This quarter's solid results started with our Intelligent Device Group. Our PC and the Smart Device business delivered an exceptional quarter, continuing double digit revenue growth, while achieving the highest fiscal first quarter profit and further improved our industry leading profitability. With Americas and Asia Pacific achieving 2040% year on year growth in revenue, respectively. All four geographies delivered over billion dollars revenue, demonstrating the geographic balance and the sustainability of our business. In PCs, our volume outgrow our already recovering market by over 13 points to reach our all time record share of 24.9%, a clear number one position.
This means one out of every four PCs built in the world is a Lenovo product. Also, PC revenue grew over 14% year on year. PC unit grew 18% year on year. These strong results are driven by innovation, our customer centric product portfolio and the continuing focus on operational excellence. This strategy enables us to significantly outgrow the market across the high growth and the premier categories, including workstation, single light, visual, gaming PCs and the Chromebook.
Looking forward, we are confident that we will continue to drive premier to market growth and the industry leading profitability. We will achieve this by not only focusing on high growth and the premier categories, but also continue to drive innovation in the smart IoT area. Smartifying PC, like the world's first foldable PC and the five gs PC we announced last quarter. Developing new smart devices for homes and offices and capturing the greater opportunity in commercial IoT. Our mobile business delivered another profitable quarter and improved the pretax income year on year by US100 million dollars for the fourth consecutive quarter.
In North America, our volume outgrew the market by more than 37 points and the pretax income margin improved over 14 points year on year. In our stronghold, Latin America, our volume has grown with or above the market for eleven quarters. Going forward, our mobile business will continue to maintain profitability and seek opportunities to drive profitable growth in new markets with new innovative innovative products. Our data center group continued to improve profit year on year, and we gained share in worldwide server volume. Volume.
Meanwhile, our revenue declined because a few larger cloud computing customers reduced their purchase due to excessive capacity building in the past quarters. And declining commodity component price drives the lower server average unit revenue. While the server business slowed, storage networking continued to show clear growth. In the first quarter, our storage revenue grew more than 80% year on year. And the software defined infrastructure continued to grow at a double digit rate year on year.
This shows our strategy to extend the full stack that is in the portfolio breadth is correct. And our previous investment has started to drive tangible results. Meanwhile, in high performance computing, we extended our number one position in top 500 Tubercomputer list to 173 systems across 20 markets and continue to support the scientific research and applications around the world. For example, over the past year, 15 countries, including Canada, Korea, Malaysia already use our solution in weather forecasting and the climate research. Moving forward, we will continue executing our strategy to drive software defined infrastructure, storage, networking, service and solution led sales and strengthen in house design and the manufacturing capability for hyperscale.
We will also further improve our road to market and the operation excellence to achieve premier to market growth, while improving profitability. In driving intelligent transformation, we established a clear dashboard to monitor the progress and are on track to achieve the goals we have beginning of the year. Driven by the newly established Data Intelligent Business Group or DIBG, Smart Vertical revenue quadrupled year on year last quarter. Our software and services revenue also grew 23% year on year, which is almost five times as fast as our overall revenue growth, reaching million dollars We believe that anything was pursued takes time. But our strong first quarter performance, driven by the right strategy and the persistent execution shows that we are moving beyond the last year's success and well on our way to reaching even greater heights.
Thank you. Now, let me turn it over to our CFO, Wei Min. Wei Min, please.
Thank you, Yunqing. I will take you through Lenovo financial and operational performance in Q1 fiscal year twenty twenty. Next chart, please. Let me first share with you the financial highlights. Our Q1 results again demonstrated that we have built a resilient growth engine that is firing on multiple cylinders.
We delivered profitable improvements across all businesses, strong margins, stellar earnings per share growth and continued market share gain. Group revenue was $12,500,000,000 up 5% year on year. PCSC has another great quarter with double digit revenue growth and set a new record in global PC market share. Our transformation actions continue to show accelerated results. During the first quarter, the software and services revenue grew double digit year on year, making up almost 6% of group revenue at an exciting margin profile.
Our big data and AI powered smart vertical solution business also quadrupled compared to the same quarter in last year. Gross profit in Q1 increased by 26% year on year and gross profit margin expanded 2.7 percentage points to 16.4%, thanks to sales mix improvement. Operating expenses increased by 18% to billion and the E to R ratio was 13.6%, up 1.4 percentage point year on year due to more aggressive product promotion and new model launches as well as employee bonus in rewarding performance improvements. Group PDI was $240,000,000 more than double year on year. The PDI improvement was consistent across all business group.
PCSD further expanded its industry leading profitability, while MBG and DCG also improved their bottom line. Net profit attributable to equity holders was 162,000,000 improved from $77,000,000 in the same quarter of last year. Basic earnings per share came in at $0.01 $37 up from $0.065 last year. Next chart, please. In Q1, our cash used in operation improved quarter to quarter but decreased year on year to an outflow of $142,000,000 which was lower than $336,000,000 in net cash generated from operation a year ago, mainly due to the temporary impact from the transition program of AR factory.
With the completion of transition program, AR will be back to normal and improving next quarter. Our inventory days improved six days year to year, thanks to better inventory management in reducing the component inventory across all business groups. Next chart, please. Our Intelligent Device business group, which include PC and Smart Device Business Group and Mobile Business Group, had another great quarter with revenue up 8% to $11,200,000,000 The stellar performance of PCSD was supported by the continued commercial refresh demand and our strength in the high growth and premium segments. PTI margin of IDG expanded significantly by 1.6 percentage point year on year to 4.7%.
There was also a notable year on year profit improvement over $200,000,000 being delivered by IDG. Next chart, please. In Q1, our PCSD business group has executed extremely well with strong market share gain across nearly geographical areas. Its revenue was $9,600,000,000 up 12% year on year, driven by the solid commercial orders and strong momentum across the premium and high growth segments. We continue our double digit revenue improvement in workstation, thin and light, gaming and visual business.
Furthermore, PCSD set a new record on its global market share, and again, its revenue grew at premium to market. The premium growth to the market reached 13 percentage points in the quarter, representing its highest level in more than five years. The business group pretax income was $524,000,000 and PDI margin expanded 0.5 percentage points to 5.4% on mix improvement and higher services attach rate. Next chart, please. The fourth consecutive quarter, the Mobile Business Group has delivered more than $100,000,000 year on year improvement in its TTI.
We are pleased to report robust market share gain in core markets. In North America, MVG premium to market growth reached 37 percentage points in the fiscal quarter, benefiting from the successful expansion of its distribution network and success in new products. Latin America remained the business stronghold with continued profit expansion. MBG revenue was $1,500,000,000 down 9% year on year due to prioritization of core markets. Despite the weaker top line, the focus on profitable market cost efficiency and improved portfolio contributed to a significant year on year PTI margin expansion by 6.3 percentage points.
Next chart, please. The broader data center sector was widely reported to be suffering from excessive interest rate on hyperscale and the commodity price decline. Our data center business in Q1 was enabled to be immune from the sector slowdown, and its revenue was $400,000,000 down 17% year on year. However, our strategic direction and continued investment to grow the business with higher margin and Poseidon as a full stack industry leader remain intact. Sales from storage, service deferred revenue and SDI all increased high double digit year on year in this fiscal quarter.
As a result, BCG has further narrowed down its pretax loss by $11,000,000 year on year, and it was its eighth consecutive quarter of PDI improvement despite the industry wide challenge on revenue growth. Next chart, please. Looking ahead, macro risk remained a key challenge for global technology sector. Volatility has intensified to one of its highest level in recent history due to continued trade negotiation and geopolitical power tensions. We will leverage our extensive experience in managing a multitude of macro risks 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. On the group level, we aim to deliver premium to the market growth on top line, and we remain confident to deliver profitable growth for the long term. On PCSD, we target to secure our industry leading profitability and premium to market revenue growth. We'll continue to improve user experience, expand innovative product lineup and grow our Surface and Software business. For mobile business, we will soon to launch more new models with new innovations and will continue to strengthen its competitiveness in its target markets.
We will hold on to our strategy in sustaining financial health business, while looking for potential growth opportunity. For the data center business, despite a market pullback, we believe the secular trend of data growth will accelerate the data center demand amid the launch of new technology services, including five gs and edge computing. BCG will continue to build its capabilities and position as a full stack industry leader, while continuing to drive its growth in SDIs, storage and networking, services and solution led sets. In hyperscale, the group will further strengthen its in house design and manufacturing capabilities and build a profitable business model. We aim to further improve our profitability and grow at premium to the market as we expect demand to recover in the second half of the fiscal year.
The group continued to invest across the smart infrastructure, smart IoT and smart verticals to accelerate our transformation and to sharpen the group's core competence. These investments should strengthen Lenovo capability as a competitive end to end solution provider in the era of intelligent transformation. Thank you. Now we can take your questions.
Thank you, Wanning. Now we will open the line for questions and this session will be in English only. Please be reminded to limit yourself to two questions at a time. Please also take your name and company before asking questions. Operator, please give us your instructions.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Our first question comes from the line of Gokul Hariharan from JPMorgan. Please go ahead.
Hi, good morning. Congrats on the good results and thanks for taking my question. I had two questions. First of all, on the new 10% tariffs that has been proposed by President Trump. Could we remind investors and us about the preparedness of the three major business groups, PC, PCG and Mobile Business Group in terms of how prepared Lenovo is in terms of moving supply chains to other locations other than China, specifically for The U.
S. Market? And when do we expect most of that supply chain relocation to be completed? That's part one. Second question I had is on data center business group.
I think because of the industry weakness, we've seen growth slip to negative territory for the last couple of quarters. When do we expect growth to come back to positive territory for DCG? And specifically for hyperscale, what does the outlook look like? Do we expect to break into any more of the big four hyperscale customers in addition to the one customer that we have in the next Intel CPU design cycle? Thank you.
Thank you, Gokul. So I'll answer the first question. Kirk, our President of DCC will answer your second question. As you have seen our last quarter performance, to date, there has been negligible material impact on our business and our results. Our last quarter results should we continue to apply in this less impact in our business.
Meanwhile, I wish you know Lenovo has globally diverse manufacturing footprint with the size in multiple locations around the world, which give us a lot of flexibility compared with our key competitors in current atmosphere. Meanwhile, we remain committed to China as a part of the strategy. So in fact we reasonably decided to invest more than US300 million dollars in new smart manufacturing facility in Shenzhen, Southern China. So that will not be changed. So that's the answer to your first question.
So the second question please, Kirk, please. Hi, Gokul. This is Kirk. So first we should look at the business in terms of hyperscale customers and then non hyperscale customers. In non hyperscale, I want to note that we did grow in units year on year this quarter as Lenovo.
So we expect in the existing quarter, we'll grow even faster in units year on year. We expect from a unit perspective, we are growing our positions by probably one or two relative to our competition year on year given that unit growth. In non hyperscale, what we mentioned is a few of our hyperscale customers grew extensively in the last part of last year. We expect those customers to be coming back in the fourth quarter calendar of this year. But more exciting for us is the diversification we have as we're growing into the next wave of customers.
So we expect three new hyperscale customers to be in Lenovo's top 10 customer list very shortly in addition to seeing the recovery in the fourth quarter calendar of this quarter. Thank you. Okay. Thank you.
Thank you for the questions. The next question
comes from the line of Abel Lee from Bank of America. Please go ahead.
Congratulations for the good results.
Can I ask for the PC market share? Now you are the go for number one. And what is additional shares you can share from? And for second one is still on hyperscaler. What's the current progress on that expectation since your client base now is not very big?
So what's your plan going forward?
Thanks. So John, I'll talk to you answer the first question.
Okay. I think when we look at market share, I think we can see still very good opportunity in some geo in the sense that we are number one globally, but we are not yet number one in all the geo. Same for the segment, we are number one in consumer, we are number one in commercial. But when we look at commercial and we split between large business and SMB, we are by far number one on very large business or enterprise. We are not yet the number one in it.
All right. We'll take second question first. Sure.
This is Kirk. With respect to hyperscale, previously we stated that we have design wins and business in six of the top 10 hyperscalers. Roughly speaking, that represents about 60% of the total available market of the public cloud providers, which I think we're excited that, again, as I said earlier, three of those six customers will enter our top 10 customer list as we grow new design wins in the marketplace. And a couple of our existing customers that built extensively, we expect to recover by the end of this calendar year and start growing again significantly. We're seeing those early signs.
In addition, we've added this year a new extended sales force to cover the next wave of hyperscalers and we've won several new designs within that next wave, again, which represents about 40% of the total market. That was an area that we previously were not focused on because we were working on earning the business of the top 10. So we expect significant growth in the wave over the next several quarters. Thank you.
Operator, could you try to unmute Jean Francois' line, please? All right. We are ready to tap the next question, operator.
Certainly. The next question comes from the line of Howard Kao from Morgan Stanley. Please go ahead.
Hi, congratulations on the quarter and thank you for taking my question. So the first question I had was the follow on data center. Mentioned that you are expecting band to recover fourth quarter of calendar year this year from hyperscale customers? And regarding your new business and this demand recovery, is this mostly driven by existing data center placements or new data center builds from your perspective? And then a follow-up on that is, you are expecting design wins and projects going forward with the new hyperscales entering your top 10 customer list.
Do you think that's more of a function of share gain or just overall demand in the coming quarters?
Hyperscale, again, I think we are building capacity internally to build our own motherboards as well as the system and rack level integration. And we're doing that globally in factories around the world. That new business model is helping us deliver better economics to both us and to our customers, which is resulting in those design wins. So we're clearly with our strategy of ODM plus earning business that previously had gone to the ODM that's moving now to Lenovo. And in the non hyperscale space, we continue to see hybrid cloud proliferating and we're supporting all the major hybrid cloud providers.
We made an announcement with Google this quarter for the first time on Google Anthos. We've got support for Nutanix, for Azure, HCI and for VMware. So all of those we continue to see growth on as customers choose to do private cloud or hybrid cloud installations on prem. As a result, we had again ninth consecutive quarter of software defined double digit growth rates and we think that will continue in the future. We view ourselves as legacy free, we so can move very closely with our partners to software defined infrastructure for that hybrid cloud.
Thank you. So, Santander is online again. So, could you please finish your answer to last question?
Yes, I said, don't know when where you got me. But when we talk about we are number one globally is we have almost 25% market share. But when we look from a geographical point of view, we are number one in some geo, but not yet in all the geo. So we can see good opportunity in terms of geographical growth in some material and also when we look at segment consumer and commercial, we are number one in consumer, we are number one in commercial. But when you look at the commercial and you split between large enterprise or very large enterprise and SMB, We are by far number one in large enterprise or very large enterprise.
We are not number one in SMB yet. And we also continue to see a very good momentum when we look at more upgraded to Windows 10, the Windows 10 transition, I think that we will continue the Windows 10 transition until the end of the year and probably in next year, next calendar year. And last but not least, when you look at our growth in terms of premium segment, quotation, gaming, thin and light, visual, we have seen in most of the cases last quarter a growth in the range between 30% to 40%. And we see very good opportunity in terms of growth there. So I mean growth for sure we will continue to see in the next coming quarters despite the very high market share already achieved.
So by the way, we will continue to find an opportunity through innovation. So actually last quarter we launched the first portable PC, portable laptop and the first five gs PC. So we think that can drive the growth in the future.
Thank you, Yanqing. Operator, we are now ready for the next question.
Thank you. The next question comes from the line of Sebastian Hou from CLSA. Please go ahead.
Thank you for taking my questions. I have two questions, mainly regarding your data center business. Maybe not about the business itself, but more from the industry trend. First question I'd like to get your insight is, so how do you see the software defined infrastructure, the more adoption for container, multi cloud, serverless computing will impact Lenovo data center business, particularly in your compute and storage? And what's
the level of
product position on this trend? This is my first question.
Yes. So this is Kirk. The software defined infrastructure, again, we've had nine consecutive quarters of double digit growth. We think we're growing significant market share. If you look at analysts like IDC, they've traditionally shown Lenovo is the fastest growing OEM in hybrid cloud, you look at both public and on prem cloud.
Again, we think we have a very diverse set of partnerships with Nutanix, with Google, with VMware and with Microsoft that are enabling us to be customer centric and deliver the best solution based on the customer needs. So I think we will continue our goal is to continue to grow at double the market at 100% premium to market in software defined. So I think it will continue to be a strong growth area for us. Obviously, if you look at software defined storage and things like that, we've publicly said now we're growing at 80%. So depending on which analyst you look at, that could be a very, very significant premium to market.
With the relationship we have now with NetApp, we're covering over 92% of the storage market, where a year ago we were only covering 15%. So I think you're going to see us now not only as the third largest storage company in China, but one of the fastest growing, if not the fastest growing storage company in the world taking share in that area as well. You had a second question?
Just one follow-up on that is that I think the reason to go for software defined infrastructure is to simplify the complexity for customers. They are dealing with the IT infrastructures and also trying to optimize the computing and storage capacity utilization rate. So that seems to me a potential negative because the utilization rate of the hardware infrastructure will likely to be was not optimized, but going to be more optimized. But I know that Lenovo has a good product here to grow this business. But how do you see the balance here?
Is it net positive to the industry and to Lenovo still?
Yes. I think you know I was at a previous company, Intel, for twenty four years. I remember people telling me this when virtualization first became popular that you're going to have five or 10 or 20 virtual machines and therefore hardware growth would be low. I think if you look at the last decade, as you move to virtualization, it was only an accelerator even with higher utilization of servers. And I think certainly private cloud is enabling better utilization, but I think it's also slowing a bit of the adoption going to public cloud because you now have some better economics with the security of keeping your data in the country or on prem.
So I think it's going to be good for the industry. I think containers will be good for the industry just like virtualization drove an upgrade cycle. I was just with a customer tonight, eleven year old infrastructure. There's an aging infrastructure out there. They're going to move to modern technology, and Lenovo is the best person to support that modern technology.
Thank
you, Thank you.
We are ready for next question, please.
Certainly. Next question comes from the line of Arthur Liao from Fullbond Securities. Please go ahead.
Okay, good morning. Thank you for question. I think I want to first question for Kirk. I know AMD already announced that Novo had launched a simple solution for AMD. I just want to consult with Kirk, what do you think about for APIC-two in data center?
And from your side, are you seeing any progress for AMD? What do think about AMD at this moment? So this is my first question.
Yes. So I think we were strong supporters at the AMD launch. You saw our Chief Operating Officer on stage. We're seeing AMD demand. We've built two new premium one socket servers.
We launched 18 new world records. So on Intel architecture, we have roughly double the number of world record workloads as any other company in the world. We intend to keep that leadership position on AMD. Specifically, we think it's workload driven. So we're seeing demand, for example, on public safety for city surveillance and then things that need excellent IO.
One difference on Lenovo's products is we did deliver purpose built servers for these new architectures. So we're not just doing a drop in to the old IO architecture. So we fully support all the new frequencies, all the new wattages and PCIe Gen four, whereas some of our competitors have to support older technology with just the drop in. So we think we have the world's best AMD solutions and we're seeing demand.
Okay. From you think that I'm not sure for next two or three year, both the two giants for Intel AMD in the server. This is very important, especially cloud will be growth. So do you think the Intel dominated server situation will be broken or something? That is my interesting from the in the future.
So what do you think about this one?
Well, I think competition is good for the consumer. And based on workload, it will be a more competitive market than it was in the past. Having said that, we also had Yun Ching and the CEO of Intel and also new global HPC alliance for us to be able to lead with exascale class computing, not just for a few large supercomputers, but also we call it exascale everywhere so that even smaller clusters can benefit from our warm water cooling technology. So I think we have strong collaborations with not just Intel, not just AMD, but we're also supporting Ampere on ARM and we're also a great supporter of GPUs with NVIDIA. And we're seeing demand now in that heterogeneous computing environment across all those architectures.
Thanks, Greg. Okay.
My last question for John Franco or Yuanqing, that's I think it's great that Trump comment delayed text to December. But I think this is just temporary. So I'm wondering the next year probably the smartphone and PC demand will be sluggish because everything in the in Polar America will be up to 10%, 20%. So what do you think are you necessary to for Lenovo, especially Lenovo most of market in China? And I think U.
S. Market is also very important for you. But I think this trump of delay is just for the housekeeping demand and for Christmas. But after that, I believe they will increase in the import tax. So I'm not sure Lenovo right now have any strategy I can share with us for next year.
So that's my last question. Thank you.
Thank you. As I said, so the travel, it's not good for globalization, it's not good for all multinational companies. So, we wish China and The U. S. Can sit down and get an agreement as soon as possible.
But even with the worst scenario, I think Lenovo is in a better position than our competition because we actually have a globally diverse manufacturing footprint. So with multiple manufacturing facilities around the world, so which gives a lot of flexibility compared with our key competitors. Actually, most of our key competitors don't do the in house manufacturing by themselves. So we think that will give us much more flexibility. We definitely remain committed to China.
So, we will further invest in smart manufacturing facility in China. So, we're raising the tariff where impact every player equally. So, actually even even manufacturing other locations, so probably we will increase the total cost. So that means it will impact the consumption. So that's why we think it will be better to get the agreement.
Thank you, Yanqing. We are now ready to take the last question due to limited time. Please raise your last question.
Thank you. We have follow-up questions from Abel Lee from Bank of America. Please go ahead.
Hi. Can I have a follow-up question on your mobile business? Are you going to launch five gs mobile phone? And Qualcomm and MediaTek, which one you will take as a five gs SoC solution? And then my second question is about memory price.
What if memory price recovery next year? Is this going to impact your P and L next year, I mean, for your profit margin?
Yes, five gs phone, yes. So I mean, yes, of course, we have plans to launch five gs phones. We were first to market with the five gs launch with Verizon at the beginning of the year. And as the market matures, we will have some announcements, but today we have nothing to announce. But I think we will benefit a lot for being first to market in very light.
So we learn a lot, technology RF, power management. So we see very good things coming from innovation including five gs in the near future.
Shin, I think memory price we have been through this exercise many times also in the past in the sense that the memory price is always relatively unstable. We see memory going up and going down depending on demand. And I think we have been able to show that we can manage memory price in both ways. When you look at our results during the last six or eight quarters on PC, we always been able to show industry leading profitability in the range of 5% or even better than 5% when memory was going up or when memory was going down. And so I think we will continue to manage our profitability independently I would say from the memory trend.
And for the time being, frankly speaking, we see quite a stability in terms of memory. Memory are relatively stable in terms of price, are not really going up, but are also not going down anymore. But as I said, one year ago or eighteen months ago, it was exactly the opposite trend, but when you look at our financial results, you don't see or you cannot see any major impact from the memory. I think it's really a matter of execution and operational excellence and how you drive your AUR based on component cost trend.
All right. Thanks, John Fenco. We thank you very much for joining today's call. If you have any further questions, feel free to contact me directly. The replay of this webcast will be available in the next couple of hours on our Investor Relations website.
Thank you again for joining the call today.
Thank you.
Bye bye. Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation. You may now disconnect your lines.