Good morning and good evening. Welcome to Lenovo's Quarter 1 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. Gianfranco Lanci, Group CFO, Mr. Wong Wai Ming, President of Data Center Group, Mr. Kirk Skaugen, and President of Motorola, Mr. Sergio Buniac. 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 bottom-line growth. Our group revenue grew year-over-year for eight consecutive quarters and reached $12.5 billion. Our pre-tax income was $240 million, and the net income was $162 million, both more than double the year-over-year. This quarter's solid results start with our intelligent device growth. Our PC and 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 20% and 40% year-over-year growth in revenue respectively. All four geographies delivered over $2 billion revenue, demonstrating the geographic balance and sustainability of our business.
In PCs, our volume outgrew our already recovering market by over 13 points to reach an 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. PC revenue grew over 14% year-on-year. PC unit grew 18% year-on-year. These strong results are driven by innovation, a customer-centric product portfolio, and a continuing focus on operational excellence. This strategy enables us to significantly outgrow the market across the high growth and premier categories, including workstation, thin and light, Visuals, 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 smarter IoT area.
Smartifying PC, like the world's first foldable PC and the 5G PC we announced the 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 pre-tax income year-on-year by $100 million for the fourth consecutive quarter. In North America, our volume outgrew the market by more than 37 points, and the pre-tax income margin improved over 14 points year-on-year. In our stronghold, Latin America, our volume has grown with or above the market for 11 quarters. Going forward, our mobile business will continue to maintain profitability and seek opportunities to drive profitable growth in new markets with new innovative products. Our Data Center Group continued to improve profit year-on-year, and we gained share in worldwide server volume.
Our revenue declined because a few larger cloud computing customers reduced their purchase due to excessive capacity built in the past quarters. Declining commodity component price drives 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 data center portfolio breadth is correct, and our previous investment has started to drive tangible results. In high-performance computing, we extended our number one position in TOP500 supercomputer list to 173 systems across 20 markets, and continue to support 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 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 manufacturing capability for hyperscale. We will also further improve road to market and 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 set at the beginning of the year. Driven by the newly established Data Intelligence Business Group, or DIBG, smart vertical revenue quadrupled year-on-year last quarter. Our software and service revenue also grew 23% year-on-year, which is almost five times as fast as our overall revenue growth, reaching $732 million. We believe that anything worth pursuing takes time.
Our strong first quarter performance, driven by the right strategy and persistent execution, shows that we are moving beyond 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, Wai Ming. Wai Ming please.
Thank you, Yuanqing. I will take you through Lenovo financial and operational performance in Q1 fiscal year 2020. 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 $12.5 billion, up 5% year-on-year. PCSD had 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 $1.7 billion, and the E/R ratio was 13.6%, up 1.4 percentage point year-on-year, due to more aggressive product promotion amid new model launches, as well as employee bonus in rewarding performance improvements. Group PDI was $240 million, more than double year-on-year. The PDI improvement was consistent across all business groups. PCSD further expanded its industry-leading profitability, while MBG and DCG also improved their bottom line. Net profit attributable to equity holders was $162 million, improved from $77 million in the same quarter of last year. Basic earnings per share came in at $0.0137, up from $0.00065 last year. Next chart, please.
In Q1, our cash use in operation improved quarter-to-quarter but decreased year-on-year to an outflow of $142 million, which was lower than $336 million 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 improve in 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 PCs and Smart Devices business group and Mobile Business Group, had another great quarter with revenue up 8% to $11.2 billion. The stellar performance of PCSD was supported by the continued commercial refresh demand and our strength in the high-growth and premium segments. PDI 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 million being delivered by IDG. Next chart, please. In Q1, our PCSD business group has executed extremely well with strong market share gain across nearly all geographical areas. Its revenue was $9.6 billion, 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 Visuals business. 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 pre-tax income was $524 million, and PDI margin expanded 0.5 percentage points to 5.4% on mix improvement and higher services attach rate. Next chart, please.
For the fourth consecutive quarter, the Mobile Business Group has delivered more than $100 million year-on-year improvement in its PDI. We are pleased to report robust market share gain in core markets. In North America, MBG 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 continual profit expansion. MBG revenue was $1.5 billion, down 9% year-on-year, due to our 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 PDI margin expansion by 6.3 percentage points. Next chart, please. The broader data center sector was widely reported to be suffering from excessive inventory on hyperscale and the commodity price decline.
Our Data Center business in Q1 was unable to be immune from this sector slowdown, and its revenue was $1.4 billion, down 17% year-on-year. However, our strategic direction and continued investment to grow the business with higher margin and position it as a full-stack industry leader remained intact. Sales from storage, service deferred revenue, and SDI all increased high double digits year-on-year in this fiscal quarter. As a result, DCG has further narrowed down its pre-tax loss by $11 million 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 remains the key challenge for global technology sector. Volatility has intensified to one of its highest levels 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 the 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 service and software business. For mobile business, we will soon 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 as a priority for the business while looking for potential growth opportunities. 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 and services, including 5G and edge computing. DCG 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 sales. 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 continue 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, Wai Ming. 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 state 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. To ask a question on the phone, please press star one and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. There will be a short silence while questions are being collated. Our first question comes from the line of Gokul Hariharan from J.P. Morgan. Please go ahead.
Hi, morning. Congrats on the good results, thanks for taking my question. I had two questions. First of all, on the new 10% tariff that has been proposed by President Trump, could we remind investors and us about the preparedness of the three major business groups, PC, DCG, 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? 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 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? 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. I answer first question. Kirk, our President of DCG, 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 show we continue to thrive in this kind of atmosphere. Also, we are very happy to see the U.S. postponed the 10% tariff increase. That means at least this year, that will have less impact in our business. Meanwhile, I wish you know Lenovo has globally a diverse manufacturing footprint with sites 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 that strategy.
In fact, we recently decided to invest more than $300 million in new smart manufacturing facilities in Shenzhen, Southern China. That will not be changed. That's the answer to your first question. The second question, please, Kirk.
Hi, Gokul. This is Kirk. First, we should look at the business in terms of hyperscale customers and then not hyperscale customers. In not hyperscale, I want to note that we did grow in units year-on-year this quarter as Lenovo, 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 not hyperscale, what we mentioned is a few of our hyperscale customers grew extensively in the latter part of last year. We expect those customers to be coming back in the fourth quarter calendar of this year. More exciting for us is the diversification we have as we're growing into the next wave of customers.
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.
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 global number one, and where is the additional shares you can gain from? For second one is on hyperscaler. What's the current progress on diversification since your client base now is not very big? What's your plan going forward? Thanks.
Gianfranco, you answer the first question.
Okay. No, I think when we look at market share, I think we can see still a very good opportunity in some geo, in the sense that we are number one globally. We are not yet the number one in all the geo. Same for the segment. We are number one in consumer. We are number one in commercial. 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 SMB.
Gianfranco, we cannot hear from you.
All right. We'll test second question first.
Sure. This is Kirk. With respect to hyperscale, previously we've 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. 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. 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. We expect significant growth the next wave over the next several quarters. Thank you.
Thank you. Gianfranco.
Operator, could you try to unmute Gianfranco Lanci's line, please? All right. We need to test 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. Thank you for my question. The first question I had was the follow on data center. You mentioned that you are expecting demand to recover at the fourth quarter of the calendar year this year from hyperscale customers. Regarding your new business and this design recovery, is this mostly driven by existing data center replacements or new data center builds from your perspective? Follow up on that is, you are expecting design wins and projects going forward with three new hyperscales entering your top 10 customer list. Do you think that's more of a function of share gain or just overall demand increase in the coming quarters?
For the hyperscaler.
For hyperscale, again I think, we are building capacity internally to build our own motherboards as well as do 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. We're clearly, with our strategy of ODM+, earning business that previously had gone to the ODMs, that's moving now to Lenovo. 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. All of those we continue to see growth on as customers choose to do private cloud or hybrid cloud installations on-prem.
We had again, a 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, so we can move very closely with our partners to software-defined infrastructure for that hybrid cloud.
Thank you.
Gianfranco is online again. Could you please finish your answer to last question?
Yeah. As I said, I don't know where you lost me. When you talk about we are number one globally, we have almost 25% market share. When we look from a geographical point of view, we are number one in some GEO, not yet in all the GEO. We still see good opportunity in terms of geographical growth in some GEO. Also when we do the segment consumer and commercial, we are number one in consumer. We are number one in commercial. When you look at commercial and you split between large enterprise or very large enterprise and SMB, we are by far number one large enterprise or very large enterprise. We are not number one in SMB yet. We also continue to see a very good momentum when we look at the upgrade to Windows 10, the Windows 10 transition.
I think that we will continue to see Windows 10 transition until the end of the year and probably even next year, next calendar year. Last but not least, when you look at our growth in terms of premium segment, workstation gaming, thin and light, Visuals, we have seen in most of the cases last quarter a growth in the range between 30%-40%. We still see very good opportunity in terms of growth there. I mean, growth, for sure, we will continue to see in the next coming quarters, despite the very high market share already achieved.
By the way, we will continue to find an opportunity through innovation. Actually, last quarter, we launched the first portable PC, portable laptop, and the first 5G PC. We think that can drive the growth in the future.
Thank you, Yuanqing. 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.
Thanks. Thank you for taking my questions. I have two questions mainly regarding your data center business. Look, maybe it's not about the business itself, but more from the industry trend. First question I'd like to get your insight is, 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? What's the Lenovo product position on this trend? This is my first question.
Yeah. This is Kirk Skaugen. 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 as the fastest-growing OEM in hybrid cloud, if 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. I think we will continue. Our goal is to continue to grow at double the market, at 100% premium to market in software-defined. I think it'll 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%.
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%. 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?
Thank you. Just one follow-on that is that I think the reason to go for software-defined infrastructure is to simplify the complexity for customers that are dealing with the IT infrastructures and also try to optimize the computing and storage capacity utilization rate. That seems to me a potential negative because the utilization rate of the hardware infrastructure was not optimized, but going to be more optimized. I know that Lenovo has a good product here to grow this business, but how do you see the balance here? Is it a net positive to the industry and to Lenovo still?
Yeah, I think you know I was at a previous company, Intel, for 24 years. I remember people telling me this when virtualization first became popular, that you were 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 the higher utilization of servers. 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. 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, 11-year-old infrastructure. There's that aging infrastructure out there. They're going to move to modern technology, and Lenovo is the best person to support that modern technology.
Okay.
Thank you, Kirk.
Okay. Thank you.
We are ready for next question, please.
Certainly. Next question comes from the line of Arthur Liao from Fubon Securities. Please go ahead.
Okay. Good morning. Thank you. My third question. First question for Kirk. I know the AMD already announced Lenovo have launched several solution for AMD. I just want to consult Kirk, what do you think about for EPYC 2 in data center? From your side, have you seen any progress for AMD? What do you think about AMD at this moment? This is my first question.
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. 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. We're seeing demand, for example, on public safety for city surveillance and in things that need excellent IO. One difference on Lenovo's products is we did deliver purpose-built servers for these new architectures. We're not just doing a drop-in to the old IO architecture. We fully support all the new frequencies, all the new wattages, and PCIe Gen 4, whereas some of our competitors had to support older technology, which is a drop-in.
We think we have the world's best AMD solutions and yes, we're seeing demand.
Okay. From you think that, I'm not sure for next two or three year, both the two giant for Intel, AMD in the server. This is very important, especially cloud will be growth. Do you think the Intel-dominated server association will be broken or something? That is my interesting from the in the future. What do you think about this one?
I think competition is good for the consumer, and based on workload, it'll be a more competitive market than it was in the past. Having said that, we also had Yuanqing and the CEO of Intel announce the 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 to everywhere, so that even smaller clusters can benefit from our warm water cooling technologies. 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. We're seeing demand now in a heterogeneous computing environment across all those architectures.
Thanks. My last question for Gianfranco, Yuanqing, I think it's great that Trump come and delay the tax till December, I think this is just temporary. So much I'm wondering on the next year, probably the smartphone and PC demand will be sluggish because everything the import American will be up to 10%, 20%. What do you think the unit strategy for Lenovo, especially Lenovo most the market in China, I think it's U.S. market is also very important for you, I think this Trump delay is just for Thanksgiving demand and for Christmas. After that, I believe they will increase in the import tax. I'm not sure Lenovo right now have any strategy can share with us for next year. That's my last question. Thank you.
Thank you. As I said, the trade war, so it's not good for globalization. It's not good for all multinational companies. We wish that China and the U.S. can sit down and get an agreement as soon as possible. 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. With multiple manufacturing facilities around the world, which gives a lot of flexibility compared with our key competitors. Actually, most of our key competitors don't do the in-house manufacture by themselves. We do. We think that will give us much more flexibility. We definitely remain committed to China. We will further invest in smart manufacturing facilities in China. Raising the tariff will impact every player equally. Actually, even manufacturing other locations.
Probably that will increase the total cost. That means it will impact the consumption. That's why we think it will be better to get an agreement.
Thank you, Yuanqing. We are now ready to take the last question due to limited time. Please let your last question.
Thank you. We have a 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 mobile phone, Qualcomm and MediaTek, which one you will take as a 5G associate solution? My second question is about memory price. What if a memory price recovery next year, is this going to impact your P&L next year, for your profit margin?
Yes.
5G phone.
Yeah. Yes, of course, we have plans to launch 5G phone. We were first to market with the 5G, launched with Verizon beginning of the year. As the market matures, we'll have some announcements, but today we have nothing to announce. I think we will benefit a lot for being first to market, in very like, so we learn a lot, the technology, RF, power management. We see very good things coming from innovation, including 5G in the near future.
On memory price.
Gianfranco, would you please answer the memory price?
Yes, I think memory price, we have been, friend, through this exercise, many times, also in the past, in the sense that, memory price, it's always relatively unstable. We see memory going up and going down depending on demand. 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've 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. I think we will continue to manage our profitability independently, I would say, from the memory trend. For the time being, frankly speaking, we see quite a stability in terms of memory.
Memory are relatively stable in terms of price, and not really going up, but also not going down anymore. As I said, one year ago, or 18 months ago, it was exactly the opposite trend. When you look at our financial result, 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, Gianfranco. 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 line.