Lenovo Group Limited (the “Company”) and its subsidiaries (together, the “Group”) develop, manufacture and market reliable, high-quality, secure and easy-to-use technology products and services. Its product lines include legendary Think-branded commercial personal computers and Idea-branded consumer personal computers, as well as servers, workstations, and a family of mobile internet devices, including tablets and smartphones.
The Group's profit attributable to shareholders for the 6 months ended 30-09-2019 amounted to USD 391.3 million, an increase of 43.7% compared with previous corresponding period. Basic earnings per share was USD 0.0306. An interim dividend of HKD 0.063 per share was declared. Turnover amounted to USD 26.03 billion, an increase of 2.9% over the same period last year, gross profit margin up 2.7% to 16.3%. (Announcement Date: 07 Nov 2019)
Business Review - For the six months ended September 30, 2019
Intelligent Devices Group (IDG)
During the six months ended September 30, 2019, the revenue of Intelligent Devices Group (IDG) - consisting of the PCSD and MBG businesses - grew 6 percent year-on-year to US$23,347 million while its pre-tax profit improved 45 percent year-on-year to reach US$1,149 million. Market share gain especially in the high-growth and premium PC segments were the key growth catalyst for IDG’s revenue performance. This favorable mix shift towards high-growth and premium segments, coupled with the ongoing commercial refresh cycle, enabled the PC business to grow its market share by 0.8 percentage point year-on-year to 24.4 percent of the global market in fiscal quarter two. This sales mix change underscored the record pre-tax profit margin of 4.9 percent achieved by IDG during the period under review. MBG, another key business part of the IDG, also made a turnaround on pre-tax margin from previous losses and contributed to the improved profitability of IDG.
Intelligent Devices Group - PC and Smart Device (PCSD) Business
During the period under review, the PCSD business was not only the largest PC brand in the world by market share but also continued its share gain trajectory. The PC business delivered record shipments and its year-on-year shipment growth outperformed a growing market by 8 percentage points. The PC business is also becoming more balanced, with a stronghold in the commercial segment and further penetration in the consumer segment with its segment share reaching 20.4 percent in fiscal quarter two.
The success of the business is partly rooted in its strategy of investing in high-growth and premium segments, which represented more than 50 percent of PCSD’s revenue for the six months period under review. The business achieved double-digit revenue growth and double-digit shipment growth across Workstation, Thin & Light, Visual, and Gaming PC. The business reported an 8 percent year-on-year growth in revenue to US$20,287 million, representing 78 percent of the Group’s total revenue, for the six months ended September 30, 2019.
Leveraging a well-executed strategy in driving more profitable product mix and a higher attach rate for software and services, the business further expanded its industry-leading profitability to set a new record. PCSD’s pre-tax profit increased 21 percent year-on-year to US$1,135 million and its pre-tax profit margin expanded 0.6 percentage points from the same period last fiscal year to a record 5.6 percent in the six month period under review.
Intelligent Devices Group - Mobile Business Group (MBG)
The Group’s mobile business has delivered on its promise to maintain profitability for four quarters and continued to expand its profitability on a year-on-year basis. The primary driver for this success is its focused strategy to invest and develop in regions and/or countries where it has notable competitive advantages. As a result, its profitability continued to advance year-on-year in core markets including Latin and North America for the period under review. With better portfolio efficiency and margin expansion in its core regions, the MBG’s pre-tax profit increased by US$160 million from the same period last fiscal year.
The strategy to target investments in countries with potential for profitable growth inevitably resulted in smaller operating scale and thus a decline in revenue of 7 percent to US$3,012 million for the MBG business for the six months ended September 30, 2019.
This business group will refine and apply its focused strategy to additional markets in Europe where its competitiveness is enhanced by a host of factors including new carrier relationships and expanded product pipeline. The Group’s well-established PC brand and its historically strong performance in the region will also help drive the cross-selling of its mobile products.
The business continued to deliver innovative products across the portfolio recently announcing the newly introduced Moto G8 family, Motorola One Macro and Moto E6 play. Given that its most important core markets are profitable across the board, an increase of contribution from these core markets is likely to further boost MBG’s long-term profitability.
Data Center Group (DCG)
During the six months under review, the primary challenge to the DCG business was in the hyperscale segment where the commodity price correction has negatively impacted average selling prices (ASP). There was also softness in demand from its hyperscale customers. The business delivered revenue of US$2,687 million for the period under review, representing a 15 percent year-on-year decline and contributing to 10 percent of the Group’s total revenue.
Despite challenges in the hyperscale segment, the business achieved notable success in multiple product segments including storage, Software Defined Infrastructure (SDI) and High Performance Computing (HPC) businesses. Storage revenue grew at a strong, double digit rate during the period under review as the value of DCG’s expanded portfolio earned market recognition. SDI sales also increased at a strong double-digit rate year-on-year as its product performance helped win market share. HPC revenue also grew at a robust double-digit rate during fiscal quarter two thanks to new project wins. The Data Center Infrastructure (DCI) business also started to resume growth year-on-year in fiscal quarter two as the DCG operation in China seized opportunities to broaden its sales coverage and expanded product portfolio.
The strategy to focus on profitability protection continued to pay off for the DCG business, allowing it to balance between return on investment and the need to build a sustainable and profitable business model via additional investments. Losses from DCG narrowed by US$20 million year-on-year to US$103 million for the period under review.
Business Outlook - For the six months ended September 30, 2019
Looking ahead, the global demand for technology products is expected to remain volatile amid a complex macro environment. However, going forward, Lenovo is well positioned to manage complex and dynamic market conditions, while continuing to deliver sustainable long-term results.
The Group will continue to target premium-to-market revenue growth with industry-leading profitability in its PCSD business through further expansion in the high-growth and premium segments. Building capabilities to drive sales growth in software and services will remain a focus. For its Mobile business, the Group will continue to strengthen its competitiveness in target markets to sustain profitable growth while extending its technology leadership.
Despite a cyclical setback in the hyperscale industry since the latter part of last fiscal year, the trend of data growth is expected to accelerate and fuel a subsequent recovery in sales for DCG business with the debut of more products and applications featuring new technologies including 5G. Lenovo will tap into this opportunity to drive premium-to-market growth and to build its DCG business as a full stack industry leader through the introduction of solution capabilities and a reliable end-to-end product portfolio. Moving forward, Lenovo will continue to drive growth in enterprise server, Software Defined Infrastructure, HPC, storage, and services and software. For hyperscale business, the Group will leverage its differentiated in-house design and manufacturing capability to drive large-scale applications, and broaden its customer base to build a profitable business model in the future.
Source: Lenovo Group (00992) Interim Results Announcement