Analyst(s): Olivier Blanchard
Publication Date: August 19, 2024
The News: Lenovo Group Limited (HKSE: 992) (ADR: LNVGY) and its subsidiaries (‘the group’), announced Q1 results for fiscal year 2024/25, reporting profitability improvements across all areas of the business and making significant progress in capturing hybrid AI opportunities. Group revenue increased 20% year-on-year (YoY) to $15.4 billion, net income was up 65% year-on-year to $315 million, and non-PC revenue mix was up five points YoY, reaching a historic high of 47%. The group’s results reflect its clear strategy and strong execution, persistent focus on innovation and operational excellence, as well as the advantages it reaps from being a globalized business.
Lenovo FY Q1: Hybrid AI Opportunity Delivers Profitability and Growth Across All Segments
Analyst Take: Capitalizing on the expanding hybrid AI opportunity and steady momentum in service-led transformation, Lenovo Group revenue reached $15.4 billion for the quarter ending in June—a 20% YoY increase—with net profit rising 38% to $243 million. The group’s full-stack portfolio of (device-to-cloud) enterprise and personal AI solutions continues to position it well as the broad AI opportunity in the IT space matures into a hybrid AI model. More on that in a moment.
Per Lenovo Chairman and CEO Yuanqing Yang, “The great start to our fiscal year has been driven by our clear strategy and strong execution, our persistent innovation and operational excellence, as well as our globalization advantages.” Lenovo’s strategic focus on AI is also highlighted by the appointments of Doug Fisher as Chief Security and AI Officer (expanding his security purview to include overall AI governance and the championing of the group’s responsible corporate AI policy) and Dr. Tolga Kurtoglu as the group’s new CTO during the quarter.
Now let’s take a closer look at Lenovo’s individual units and how the hybrid AI opportunity is helping drive growth across Lenovo’s business ecosystem:
Intelligent Devices Group (IDG): IDG posted a strong Q1 FY24/25 quarter, with double-digit YoY revenue growth to $11.4 billion and improved operating margins. Lenovo’s PC business held on to its 23% global market share advantage both in shipments and in device activations, and both IDG’s smartphone and tablet businesses also faired remarkably well, coming in at roughly 30% revenue growth YoY, with hypergrowth in the premium smartphone segment (142% YoY growth).
IDG reports being encouraged by very positive feedback from the initial launch of its Snapdragon X-powered AI PCs for the China market—which aligns with our own market data. Additional global launches at IFA and Tech World later this year, presumably involving Qualcomm, AMD and Intel AI PC platforms, are expected to accelerate that momentum.
I have written at length about the inbound PC segment refresh being driven by the new generation of AI PCs (Copilot+ PCs) and join other analysts in expecting that this new subsegment of the PC market could account for as much as half of all new PC shipments by 2027. Whether the pace of adoption lands a bit short or long of that expectation, Lenovo has every right to feel bullish about the opportunity for IDG: Given Lenovo’s strong partnerships with AI PC semiconductor vendors (most critically for AI PCs—Qualcomm, AMD, Intel) and its market share, I have no doubt that Lenovo will continue to deliver groundbreaking innovations across its AI PC (and other devices) portfolio at scale and at pace, particularly in the enterprise.
Additionally, I am encouraged by the inclusion of the terms “personal agent” and “hybrid AI” in Lenovo’s earnings comms, which confirms that the company’s thinking on the value proposition and future of AI PCs and AI-powered UX is dead on target. Speaking of hybrid AI, the group also looks well positioned to leverage its full-stack of solutions—from AI devices to AI-native and AI embedded solutions and services—to make the most of what is shaping up to look like a multilayered “chip-to-cloud” (or in this case the device-to-cloud) hybrid AI opportunity. On that note, Lenovo doubled-down on its commitment to innovation with up a 6% YoY increase in R&D spending (bringing the amount to US$476 million).
Premium sales in PCs and smartphone grew by 21% and 142% YoY respectively, outpacing blended revenue growth of 11%.
Also worthy of note for IDG is Lenovo’s May announcement of a strategic collaboration with Alat (a subsidiary of PIF), which could give the group more financial flexibility to expand operations and its supply chain footprint in the Middle East.
Infrastructure Solutions Group (ISG): ISG’s Q1 FY24/25 performance was characterized by strong growth in its Cloud Service Provider (CSP) business, delivering a record quarterly revenue of $3.2 billion (up 65% YoY)—the first time in Lenovo’s operating history that ISG quarterly revenues have exceeded $3 billion. The group also narrowed operating losses both sequentially and YoY.
Combined revenue from storage, software and services posted 59% YoY growth—a new record for the group, and further indication that AI continues to drive demand for targeted IT solutions. Case in point: quarterly revenue from ISG’s Neptune liquid-cooled servers also grew 55% YoY, driven by a combination of demand for more powerful GPUs and the solution’s thermal efficiency benefits (an important combination of features as growing data center AI workloads apply unprecedented pressure on sustainability goals). Growing demand for AI applications is also fueling strong demand recovery for general-purpose servers.
ISG is still working on improving profitability by optimizing the business model (which includes streamlining portfolios and improving operational efficiency) for both the enterprise and SMB businesses. Lenovo’s liquid cooling technology also looks to be a potent opportunity for AI servers and storage that Lenovo could leverage to drive growth. ISG focusing more on developing strategic partnerships to build infrastructure platforms in support of the hybrid AI solutions market could also be a rewarding on-ramp to growth for the group.
Solutions and Services Group (SSG): SSG just posted its 13th consecutive quarter of double-digit YoY revenue growth in Q1 FY24/25, with revenues of $1.9 billion. It is critical to note that Q1 operating margin landed above 20%, but we also note that the managed services and project and solutions services (PSS) revenue mix grew 3 points YoY, and now accounts for 55% of SSG’s overall revenue. Segment profit also accounted for an impressive 33% of the combined segment profit across the company’s three business groups.
Unsurprisingly, AI services are expected to grow almost 2x as fast as the market to become the primary driver of the IT services market over the next few years. Lenovo continuing to embed AI in key offerings such as Digital Workplace Solutions, Hybrid Cloud and Sustainability solutions is a recipe for growth and success, and so expect SSG to focus on the development of a richer portfolio of AI native services.
ESG: Lenovo ranks tenth in the list of global companies across all industries with the most exceptional supply chains in the world (according to the Gartner Supply Chain Top 25 for 2024), highlighting the group’s continued commitment to sustainability and corporate responsibility.
Summary
Impressive quarter from Lenovo, characterized by strong AI-driven growth across all segments, record-setting growth for ISG, 13 consecutive quarters of double-digit YoY revenue growth for SSG, and an encouraging start to the AI PC refresh supercycle for IDG. Overall, solid execution from all three segments in the effort to capture expanding demand opportunity for devices-to-cloud AI solutions, and build momentum across all segments early in the still nascent AI supercycle.
“Looking ahead,” CEO Yuanqing Yang explains, “I am confident that, with a recovering ICT market, the combination of our solid performance and continued progress in hybrid AI will keep enabling us to achieve sustainable growth and profitability increases.” We agree.
Daniel Newman and his co-host of The Six Five Webcast, Patrick Moorhead of Moor Insights and Strategy discusses Lenovo’s earnings in their latest episode. Check it out here and be sure to subscribe to The Six Five Webcast so you never miss an episode.
Read the full press release on the company’s website.
Disclosure: The Futurum Group is a research and advisory firm that engages or has engaged in research, analysis, and advisory services with many technology companies, including those mentioned in this article. The author does not hold any equity positions with any company mentioned in this article.
Analysis and opinions expressed herein are specific to the analyst individually and data and other information that might have been provided for validation, not those of The Futurum Group as a whole.
Other insights from The Futurum Group:
Lenovo Takes the Intel Path to Simplify AI Journeys for Businesses – The Futurum Group
Lenovo Q4 FY 23/24 Insights – The Futurum Group
Lenovo’s Vision for the Future: Embracing AI PCs – The Futurum Group
Author Information
Olivier Blanchard is Research Director, Intelligent Devices. He covers edge semiconductors and intelligent AI-capable devices for Futurum. In addition to having co-authored several books about digital transformation and AI with Futurum Group CEO Daniel Newman, Blanchard brings considerable experience demystifying new and emerging technologies, advising clients on how best to future-proof their organizations, and helping maximize the positive impacts of technology disruption while mitigating their potentially negative effects. Follow his extended analysis on X and LinkedIn.
