Release Date: August 15, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Lenovo Group Ltd (LNVGF, Financial) reported a strong start to the fiscal year with a 20% year-over-year revenue growth.
- Net income increased by 65% year on year to USD 350 million, showcasing robust profit improvement.
- The company achieved a historical high of 47% non-PC revenue mix, indicating successful diversification.
- Lenovo's AI investments are paying off, with significant growth in AI PC and AI server segments.
- The Infrastructure Solutions Group (ISG) delivered a 65% year-over-year revenue growth, driven by cloud service provider business.
Negative Points
- Despite revenue growth, the ISG segment still reported a $37 million loss, similar to previous quarters.
- The company faces challenges in balancing component cost increases with product mix improvements.
- Inventory levels increased significantly, which could indicate potential supply chain or demand forecasting issues.
- The smartphone business, while growing, still operates at a low single-digit profitability due to high marketing and R&D investments.
- The full impact of AI PC innovations is yet to be realized, with significant contributions expected only in the latter half of the fiscal year.
Q & A Highlights
Q: The increasing IDG margins is quite a positive surprise, given many others are talking about margin pressure from increased product costs. Are you able to offset the component cost increase with a significant improvement in product mix? How much did your ASP rise quarter on quarter?
A: (Luca Rossi, Executive Vice President and President of the Intelligent Devices Group) We are very satisfied with our ability to maintain margins, balancing growth as we kept the number one spot globally. Our AUR expanded a couple of percentage points year-over-year and also sequentially quarter on quarter. Our procurement power, design-to-cost platform, strong pricing discipline, improved premium product mix, and segment mix towards commercial, particularly SMB, have allowed us to maintain and slightly improve our GP year over year.
Q: Is there any specific project wins after we strategically work with Alat in the Middle East? When can we see sales and profit contribution?
A: (Wai Ming Wong, Chief Financial Officer, Executive Vice President) The deal is still subject to shareholders' approval, which we hope to have soon. We have already started approaching many corporations in Saudi Arabia with the help of Alat. We are just waiting for the deal to be approved by shareholders.
Q: What's the AI Server sales mix of total ISG? What's the margin for AI server versus the margin for general purpose servers? And finally, what's Lenovo's strategy to improve the profitability of the loss-making ISG business?
A: (Vlad Rozanovich, Senior Vice President of Infrastructure Solutions Group) We have seen robust traction in our AI server pipeline with double-digit growth. Our strategy to improve profitability includes deeper engagement with enterprise and global channel partners, optimizing our business model, simplifying the portfolio, improving operations, and ensuring we are ready for hybrid AI.
Q: Can you give some early insights into how AI PCs are contributing to premium segment share and growth? What is the expected impact over the coming quarters?
A: (Luca Rossi, Executive Vice President and President of the Intelligent Devices Group) The mix of AI PCs this quarter is around 15% of shipments, but based on our five pillars definition, this number is much lower. The real impact of AI PCs into the industry and our financial results is yet to come, expected to grow in the second half of the fiscal year and significantly in 2025 and 2026.
Q: Would you please explain the economic scale benefits in ISG business? Why is your revenue increased to $3.2 billion, but the bottom line stayed at $37 million loss similar to Q2 '23 when revenue was only $2.5 billion?
A: (Vlad Rozanovich, Senior Vice President of Infrastructure Solutions Group) The profit recovery journey involves focusing on our ESMB portfolio, investing in R&D for AI infrastructure, and ensuring we are time to market with new products. We have increased R&D investments to develop a full stack AI portfolio across all infrastructure devices, solutions, and services.
Q: On Smartphone side, what's the breakdown by key market for your smartphone business? And what's the profitability and margin?
A: (Sergio Buniac, Senior Vice President of Mobile Business Group and President of Motorola) The fastest-growing markets are Europe and Asia, with North America also showing strong growth. Our gross profit is around 20%, with overall profitability in the low single digits due to significant investments in marketing and AI R&D.
Q: On the robust ISG revenue growth, can you briefly go through what we saw during the quarter for our general server, AI server, and storage business? Are we expecting to gain more CSP customers in the coming quarters?
A: (Vlad Rozanovich, Senior Vice President of Infrastructure Solutions Group) All aspects of our vertical markets saw improvements, with storage, software, and services up 59% year on year. We continue to recruit additional CSP customers, leveraging our global manufacturing capabilities and ODM plus approach.
Q: How is enterprise demand for AI services evolving and how is Lenovo meeting that demand?
A: (Ken Wong, Executive Vice President, President of Solutions and Services Group) We see strong demand for AI services, particularly in IT transformation, data modernization, and AI use case implementation. Our AI faster services include consulting, POC, scaling production environments, and managing AI use cases to support customers in achieving their desired outcomes.
Q: Can you talk about the inventory increase in the June quarter? What does this comprise of?
A: (Wai Ming Wong, Chief Financial Officer, Executive Vice President) The increase of about $1.8 billion is primarily driven by our enterprise business due to significant growth in our cloud service provider segment. We are preparing for strong seasonality and new product launches.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
