Yang Yuanqing, a first-line |: full of confidence in the doubling of Lenovo's net profit in the next three years

Tencent News "Frontline" Tang Yuanyuan

"The company's strategy continues to bear fruit, and we are confident in our goal of doubling our net profit margin and doubling our R&D investment by the end of the 2023/2024 fiscal year." Lenovo Group Chairman and CEO Yang Yuanqing said after lenovo Group's third quarter 2021/22 financial results meeting released on February 23.

According to Lenovo Group (992. HK) announced results for the third fiscal quarter ended 31 December 2021/22, with Lenovo Group's operating income exceeding US$20 billion, up 16% year-on-year to RMB128.7 billion, and net profit increasing by 62% year-on-year to RMB4.09 billion, another record high.

Among them, all of Lenovo's main businesses in this fiscal quarter achieved double-digit growth year-on-year:

Last year, the newly established SSG Solution Services Business Group had a turnover of 9.58 billion yuan, an increase of 25% year-on-year, and an operating profit of 2.1 billion yuan, a significant increase of 44%.

ISG Infrastructure Solutions Group turnover increased by 19% year-on-year to CNY 12.3 billion and operating profit was RMB108 million. Notably, ISG achieved its first profitability in the fiscal third quarter since its acquisition of IBM's x86 server business in 2014.

IDG Smart Devices Group turnover was RMB112.6 billion, up 16% year-on-year, and operating profit was RMB8.64 billion, up 21% year-on-year.

As an authoritative endorsement of Lenovo Group's transformation strategy, on 21 February, Hang Seng IndexEs Limited announced at a pace that far exceeded market expectations that Lenovo Group will be included as a constituent stock of the Hang Seng Index, a major benchmark stock index in Hong Kong, on March 7. Yang Yuanqing said that this is a further recognition of the market's development of Lenovo Group in the past few years.

After the release of the results, Yang Yuanqing and Lenovo Group Executive Vice President and Chief Financial Officer Huang Weiming, Executive Vice President and President of China Liu Jun, Senior Vice President and President of Solution Services Business Group Huang Jianheng, Senior Vice President and President of Infrastructure Solutions Business Group China Tong Fuyao, Senior Vice President, Chief Strategy Officer and Chief Marketing Officer Qiao Jian and other executives were interviewed by the media.

The following is an excerpt from the Q&A:

Question 1: What are the reasons for Lenovo Group's good results and net profit in the quarter? Will this growth rate be maintained in the future? Is the previously promised goal of doubling the future net profit margin in three years confidently achieved?

Yang Yuanqing: This quarter's net profit increased by 62% year-on-year, which is the sixth consecutive quarter of Lenovo to achieve a growth rate of more than 50%, which is quite difficult to sustain, behind which is the contribution of all Lenovo's businesses. For example, PCSD has continuously improved its profit margins for more than ten consecutive quarters, the smartphone business has maintained a healthy profitability level for seven consecutive quarters, ISG has turned a profit in the last quarter since the acquisition of IBM x86 servers completed in 2014, and SSG Solution Services Group has maintained high profit margins for a long time.

We are also confident in the future. Building on the previous fiscal year, we are confident that we will continue to double our profit margins. First of all, PC is an industry that will continue to grow in the future, on the basis of the demand to maintain the scale of 350 million units, the average unit price will continue to rise, and the increase in the unit price of customers will become the driving force for growth in the same case of the same number of sales.

Secondly, with the trend of computer use shifting from low-end to high-end, gaming computers and workstations will become high-growth areas, and consumer computers will also turn to commercial computers. It is worth noting that even Lenovo's IDG, its growth is not entirely dependent on PCs, more growth depends on non-PC products, such as mobile phones, tablets and emerging smart terminals.

Third, due to the development of 5G, the development of the "end-side-cloud-network-intelligence" system, more new terminal devices have ushered in mushrooming rapid growth, such as embedded computing, Internet of Things, AR and VR driven by the metacosm, smart office, etc., all of which will promote Lenovo's high growth.

Question 2: In this fiscal quarter, Lenovo not only achieved sustained growth in net profit, but also achieved rapid growth in R&D investment, how to maintain the balance between R&D investment and net profit growth in the future? Will the increase in R&D investment affect Lenovo's previous goal of doubling its net profit margin within three years?

Yang Yuanqing: Increasing R&D investment will indeed affect profit growth in the short term, but in the medium and long term, it will promote the enhancement of product competitiveness to promote the improvement of product gross profit, which needs to be well balanced in the short, medium and long term areas where R&D investment can be effective in the short, medium and long term.

R&D investment has doubled, we will not only focus on the short and medium term, we will definitely invest in the long-term benefits of the place. An increase in R&D investment will certainly affect short-term profitability improvements, but it will not affect the promise of long-term profitability improvements.

That is to say, it will not affect the goal of doubling the net profit margin within three years, and we are still very firmly convinced that investing in research and development can be rewarded, but we must balance the short-term, medium-term and long-term interests. Even if it is affected in the short to medium term, we will unswervingly invest to lay the foundation for sustained profit improvement and growth in the future.

Specifically, we divide R&D investment into three areas: the first is the continuous innovation and improvement of products sold in our existing market, such as PCs in high-end products such as computers, thin and light books, workstations, thinkBooks and so on.

The second is the so-called new type of service-oriented business, which will focus on five aspects this year: AR and VR services based on meta-universes, edge computing, private cloud, public cloud and hybrid cloud solutions and operation and maintenance based on products that provide data centers and solutions, cloud-network integration products and other data intelligence services around the industrial Internet and intelligent manufacturing. The third is the research of basic technologies in the longer term, and Lenovo Research Institute is responsible for the planning and investment of this part.

Question 3: What is the key to maintaining the highest profit margins in the SSG business segment while maintaining high growth and high profitability? How will it be maintained in the future?

Huang Jianheng: Indeed, we are very excited about SSG's third-quarter results, which are record-breaking revenues and profits. During the fiscal year, SSG has had three consecutive quarters of growth and profitability above the Group average. This makes the SSG more and more useful to the entire Group, both in terms of growth in size and increased profitability. This also shows that our customers and partners fully recognize the solutions, strategies and execution of the SSG.

How to maintain high growth and achieve high profitability? Our strategy is as follows: First, new IT brings changes and challenges to all walks of life. Therefore, many domestic and foreign customers will find Lenovo, which has a very complete software and hardware supporting manufacturers, through the SSG can better release the software and hardware technology, empowering all our customers.

Second, compared with the traditional high-cost service that relies on manpower, Lenovo considers when building the SSG through intelligence and automation. We believe that our core competencies can bring higher quality, higher viscosity services to our customers, and profitability will naturally increase.

Question Four: Isg achieved its first profitability in the quarter since its acquisition of IBM x86 in 2014, on what grounds?

Tong Fuyao: ISG achieved its first profit in the quarter, which is significant for the entire group. This is a very important milestone for Lenovo to diversify from its traditional PC business, represents the return that Lenovo has seen in its continuous R&D investment in high-tech fields over the past few years, and also proves our strategic determination.

We see that almost all of Lenovo's employees are upgrading further from traditional hardware sales to recommend our high-value products to customers, in addition to servers, storage, software-defined, networking, solutions, value-added services, and more.

These accumulated efforts are now paying off. In the traditional areas where gross profit is very low, we actively invest in our own R&D strength, and work with customers to jointly develop their next-generation products, not only through early intervention to participate in customization and R&D, so that our profits have a reasonable space, more importantly, to bring about business increments. In this way, in the Internet field, business increments are obtained by optimizing costs, and profits are obtained through value sales in traditional industries, and the two sides work well together to ultimately achieve the profitability of ISG.

Question 5: Lenovo recently returned to the Hang Seng Index, what does this mean for Lenovo?

Wong Wai Ming: In addition to its own internal considerations, the Hang Seng Index includes a company, but also mainly takes into account the market's prospects for the selected companies, investors' opinions on this company, the Hang Seng Index has objective indicators, including daily trading volume, the company's prospects, etc. Therefore, from lenovo's point of view, being included as one of the constituent stocks by the Hang Seng Index is a recognition of our prospects, the positive maintenance of our performance in the past few years, and the continuous rise.

Yang Yuanqing: Returning to the Hang Seng Index means that the market, including professional evaluation agencies, recognizes Lenovo's continuous performance improvement and growth in the past few years, has a clear strategy and development ideas for Lenovo's future, invests and promises in our technology, and the culture that promises can be fulfilled. The affirmation of Lenovo in these aspects will get more attention from the market.