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Lenovo Q1FY24: Service-Led Solutions and AI Are Primary Growth Vectors

Lenovo Q1FY24: Service-Led Solutions and AI Are Primary Growth Vectors

The News: Lenovo Group (HKSE: 992) (ADR: LNVGY) announced first quarter (Q1FY24) results, reporting Group revenue of US$12.9 billion and net income of US$191 million. Group revenue from the non-PC businesses again accounted for 41% of overall revenue, with the service-led business achieving strong growth and sustained profitability, further demonstrating the continued effectiveness of Lenovo’s intelligent transformation strategy. Lenovo’s Solutions and Services Group (SSG) continued to deliver strong growth and high profitability, with revenue of US$1.7 billion, up 18% year-over-year (YoY) with a high operating margin of more than 21%. The quarter also saw an expansion of Managed Services and Projects and Solutions services, which together now make up more than half of SSG’s revenue. Read the full Q1FY24 Press Release on Lenovo’s website.

Lenovo Q1FY24: Service-Led Solutions and AI Are Primary Growth Vectors

Analyst Take: The Lenovo Group reported a 24% YoY revenue decline in Q1FY24, as last year’s worldwide slowdown in demand for electronic devices, such as personal computers (PCs), persisted into the new fiscal year. Both revenue and profitability appear to remain impacted by device market decline, but Lenovo’s slight uptick in revenue from $12.4 billion in Q4FY23 to $12.9 billion in Q1FY24 is encouraging and suggests that despite enduring market headwinds, Lenovo’s diversification strategy continues to pay off.

As non-PC businesses continue to make up more than 41% of total group revenue, our view remains that Lenovo remains well positioned to capitalize on key industry-wide trends of digitalization and intelligent transformation (including artificial intelligence) driving enterprise IT spending in the mid-to-long term. Lenovo looks especially well positioned to capitalize on AI tailwinds as AI-generated content (AIGC) continues to boost AI adoption and intelligent transformation. Lenovo’s focus on this market opportunity is evident from the company’s doubling of R&D investment in the mid-term and its additional $1 billion investment over 3 years on AI deployments. From our view, bringing on-device AI capabilities to market will accelerate the client device market’s recovery, with end-user demand expected to return to pre-COVID levels sometime in the next 18 months.

Image Source: Lenovo

Lenovo Q1FY24: SSG Continues To Deliver Strong Growth, High Margins

Lenovo’s Solutions and Services Group strategy is anchored in the belief that intelligent digital transformation trends will continue to drive strong growth in global IT spending through 2026, especially in IT services, and that investments will continue to be bolstered by demand for intelligent vertical solutions like smart cities, smart manufacturing, smart education, and smart retail technology deployments.

So far, Lenovo’s bet has proven to be not only an effective insulation from the global dip in demand for devices but a strong growth vector for the company as well. SSG continued to build a strong pipeline of business for Digital Workplace Solutions into Q1FY24 to again deliver strong growth and high profitability, with revenue of $1.7 billion for the quarter, up 18% YoY. SSG’s healthy operating margin of >21% speaks to the viability of SSG’s as-a-Service (aaS) focus, which leverages digital workplace, sustainability services, and hybrid cloud IT trends to help scale its hero offerings into attractive low-friction vertical solutions for its customers. Lenovo’s portfolio of Managed Services (which grew an impressive 54% YoY) and Projects and Solutions services now make up 51% of SSG’s revenue (+4 points YoY). This marked the ninth consecutive quarter of double-digit revenue growth and profit margin for the group.

Lenovo SSG Performance

Image Source: Lenovo

SSG continuing its track record of delivering strong revenue growth and high profitability in Q1FY24, and the accelerated growth in Managed Services and Project & Solution Services (which now account for 51% of SSG revenue), highlight Lenovo’s ability to not only identify device-adjacent growth opportunities but execute on these strategic initiatives despite global economic headwinds. Lenovo expects to see double-digit compound annual growth rate (CAGR) in its IT services through 2026, as it continues to focus on building repeatable solutions with Lenovo IP in high-growth segments like smart technology verticals, digital workplace solutions, hybrid cloud solutions, and sustainability solutions.

Lenovo ISG Q1FY24: Triple-Digit Growth and AI-Ready Infrastructure

Despite softness in cloud service provider (CSP) server compute demand and GPU constraints in the past year, Lenovo’s Infrastructure Solutions Group (ISG)’s core bet is that information and communications technology (ICT) infrastructure upgrades will be driven by the transition to AI with splash-over growth in services, edge, and enterprise software. While the industry’s transition to AI has failed to meet velocity expectations (which were arguably too aggressive), the strategy as a whole remains solid. Despite industry softness driving revenues down 8% YoY to $1.9 billion, ISG achieved excellent growth in storage, software, services, and high-performance computing (HPC) in the quarter. Storage delivered impressive triple-digit growth with 120% YoY, securing Lenovo’s ranking of fourth-largest storage provider in the world. Software revenue was up 50% YoY, HPC revenue grew 45% YoY, services revenue was up 11% YoY, and Lenovo’s AI-ready portfolio of smart devices and edge-to-cloud infrastructure makes it the world’s third-largest provider of AI hardware infrastructure.

ISG’s ongoing winning streak with AI was bolstered during the quarter by its launch of new ThinkSystem models (with 8 GPU support), which put Lenovo over 65 AI systems despite persisting market-wide GPU constraints, and makes the company NVIDIA AI Omniverse Platform’s lead hardware partner on the Microsoft Azure cloud.

Despite a disappointingly slow initial transition to AI thus far, the server market remains a prime opportunity for Lenovo alongside edge infrastructure and storage. We expect Lenovo to continue investing in its AI trajectory (including its pledged $1 billion for AI deployments) with a focus on AI-ready and optimized infrastructure in support of AI-centric workloads, bolstered by differentiated technology solutions in hybrid cloud, HPC, data management, AI, and edge computing, all featuring “as-a-service” options. ISG’s strategy to continue establishing itself as the most trusted infrastructure partner for customers in their digital and intelligent transformation will continue to drive the group’s end-to-end infrastructure investment focus.

Lenovo IDG Q1FY24: Maintaining Leadership as Headwinds Soften

The global slowdown in demand for electronic devices, including PCs, persisted into the new fiscal year, driving a 28% YoY revenue decline for the Intelligent Devices Group (IDG). Down to $10.3 billion from $14.3 billion a year ago, IDG revenues nonetheless saw a slight uptick from last quarter’s $9.8 billion, suggesting the beginning of a wind change in the market. Operating margins dropped to 6.3%, however, amid lagging pricing pressures resulting from inventory clearance.

Despite softness in demand, Lenovo maintained its global number-one market share position in PCs, with 23.2% of the global market. Another signal that the slump in demand for devices may be stabilizing (and even reversing) were smartphone activations, with Lenovo posting a 10-year record for Q1 activations (premium mix at 18% with +8 points YoY growth), strengthened by its premium and 5G offerings within the new Motorola Razr family. IDG’s shipment decline saw substantial moderation in 1Q, with PC shipments and activations trending toward consistency. This outcome syncs with earlier expectations that the market would stabilize in H2 2023. We anticipate that a bounceback in PC and mobile handset shipments should begin to accelerate in H1 2024 as inventories smooth out from the past year’s demand slump. We also anticipate strong traction in digital workspace solutions as IT ramps up spending to address transition to AI-powered workloads.

Market cycles aside, Lenovo’s strategic approach to sustainable growth for its IDG business continues to look strong, with consistent investments across value-added premium segments and a strong focus on AI-powered solutions. The group remains profitable, and margins have remained healthy despite market headwinds, but we note a steady downward trend in operating margins, from 7.5% in Q1FY23 to 6.3% in Q1FY24. These trends are something to keep an eye on as Lenovo expands its vision from smart devices to smart spaces and hybrid workspaces.

Lenovo Q1FY24: Key Takeaways

Altogether, we feel encouraged by Lenovo’s overall health, agility, and positioning coming out of a difficult fiscal year that was marked by not only worldwide PC and handset demand softness but significant disruption from generative AI. One of the most remarkable and significant elements of Lenovo’s story as it emerges from the past year is its non-PC businesses growing to more than 41% of total group revenue. This result highlights impressive organization-wide agility and resilience in the face of significant headwinds that are bound to serve Lenovo well as the IT industry’s next upcycle looks for the next generation of AI-ready solutions.

Lenovo’s R&D expense-to-revenue ratio increasing to 3.5% in Q1, up from 3.0% a year ago makes the most sense here, especially given Lenovo’s $1 billion investment over the next 3 years to accelerate AI deployments and inject more value-add into AI-capable devices, AI infrastructure, and AI solutions. Lenovo’s renewed focus on strategic investments in pursuit of driving technology leadership and more robust market differentiation is the right strategy at the right time. We also want to highlight Lenovo’s successful track record of collaboration with leading ecosystem partners to strengthen their next-gen product roadmap and solution portfolios as a clear market advantage as AI’s impact on IT spend moves into the next year, and AI-powered devices begin to shift the spec landscape.

Image Source: Lenovo

Finally, we also see Lenovo leveraging its ecosystem-wide environmental, social, and governance (ESG) credentials to enhance its market leadership status. Lenovo remains number one on Green500’s list of most power-efficient supercomputers in the world for a second time in June 2023 and remains the first PC and smartphone maker to have an SBTi2-validated Net Zero target by 2050. Lenovo is also included in the Bloomberg Gender Equality Index for the fourth year in a row, grew its global philanthropy investments 10x since 2018, and received a top score in the Disability Equality Index from Disability for the second year in a row in 2023. In terms of governance, Lenovo also ranked number eight in Gartner’s Top 25 2023 Global Supply Chain ranking (up a spot from 2022), and received an Outstanding Program Leadership Award from Ecovadis for excellence in sustainable procurement. As ESG initiatives can sometimes find themselves deprioritized during periods of economic headwinds, seeing Lenovo stick to its ESG commitments this past year registers as yet another signal of the company’s forward momentum going into 2024’s rebound.

Daniel Newman and his co-host of The Six Five Webcast, Patrick Moorhead of Moor Insights and Strategy discussed Lenovo 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.

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 Q3 2022-2023: Diverse Growth Engines Aid Weathering Global PC Downturn

Lenovo Q2 2022-2023: Diversified Engines Help Drive Growth and Profitability

Lenovo’s ThinkSmart View Plus Expands Portfolio of Smart Collaboration Solutions with New, 27” Display that Runs Microsoft Teams Display

Author Information

Daniel is the CEO of The Futurum Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise.

From the leading edge of AI to global technology policy, Daniel makes the connections between business, people and tech that are required for companies to benefit most from their technology investments. Daniel is a top 5 globally ranked industry analyst and his ideas are regularly cited or shared in television appearances by CNBC, Bloomberg, Wall Street Journal and hundreds of other sites around the world.

A 7x Best-Selling Author including his most recent book “Human/Machine.” Daniel is also a Forbes and MarketWatch (Dow Jones) contributor.

An MBA and Former Graduate Adjunct Faculty, Daniel is an Austin Texas transplant after 40 years in Chicago. His speaking takes him around the world each year as he shares his vision of the role technology will play in our future.

Olivier Blanchard has extensive experience managing product innovation, technology adoption, digital integration, and change management for industry leaders in the B2B, B2C, B2G sectors, and the IT channel. His passion is helping decision-makers and their organizations understand the many risks and opportunities of technology-driven disruption, and leverage innovation to build stronger, better, more competitive companies.  Read Full Bio.

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