The News: Lenovo, together with its subsidiaries, announced third quarter (Q3) results reporting Group revenue increasing 3% year-over-year (YoY) to $15.7 billion, and Group profitability improving quarter-over-quarter (QoQ) for the second time in a row. Net income was $357 million on a non-Hong Kong Financial Reporting Standards (non-HKFRS) basis, with net income margin up 0.4% QoQ to 2.3%. The Group’s diversified growth engines continued to deliver strong performance, with revenue from non-PC businesses accounting for 42% of Group revenue, up 1.3 points YoY. The full press release is available on Lenovo’s financial results hub.
Lenovo Q3 Earnings: The AI-Accelerated Tech Sector Recovery Is Here
Analyst Take: The recovery is here, and Lenovo’s Q3 FY 23/24 numbers can shed a valuable light on the how and why of it. As observed across the tech sector, AI continues to be a critical growth driver for tech companies, including Lenovo. Hybrid AI specifically seems to present Lenovo with a breadth of opportunity, including driving demand for AI PCs, which is increasingly expected to reboot demand for the PC category after several quarters of disappointing demand. Lenovo also rightly expects the emerging hybrid AI trend to stimulate industry refresh cycles both on the device side and with regard to hybrid infrastructure.
To leverage this opportunity, Lenovo’s R&D headcount is up YoY at more than 25% of Group headcount “with R&D expenses-to-revenue ratio for the full fiscal year on track to hit an all-time high,” per the company. That investment, along with Lenovo’s growing portfolio of “AI-enabled, AI-ready, and AI-optimized devices, infrastructure, solutions, and services” is at the heart of Lenovo’s AI for All strategy.
Recent Lenovo announcements touching on AI include an expansion of its hybrid cloud platform for AI with new ThinkAgile hyperconverged solutions and ThinkSystem servers, a newly launched cyber-resiliency as a service (CRaaS) offering, a partnership with Anaconda to accelerate AI development, the deployment of Lenovo’s high-performance data science workstations, and a suite of AI-powered devices and solutions (announced at this year’s CES).
Let’s take a look at Lenovo’s three critical business units: Solutions and Service Group (SSG), Infrastructure Solutions Group (ISG), and Intelligent Devices Group (IDG).
SSG: Record Revenue, Record Operating Profit, and AI Everywhere
Lenovo’s SSG saw record revenue of $2.0 billion for the quarter, with double-digit YoY growth and operating margins of 20.4%. Protected support services and software were the core profit engines for the group, which continued its expansion of managed services and project and solutions services. These now make up 55% of SSG’s revenue, up 1.5 points YoY, with 11 straight quarters of YoY growth. The group also showed strong momentum for its “hero offerings,” which include Digital Workplace Solutions (DWS), Hybrid Cloud, sustainability solutions and services, and natural AI technology opportunities such as advisory, design, and deployment.
The company’s stated goal for SSG is to serve as a growth engine with high margins, and with the new IT services market expected to enjoy a fairly stable CAGR of 11.2% between 2023 and 2026, the hybrid AI opportunity may just deliver. Lenovo’s efforts will focus on capturing demand from hybrid work, hybrid cloud, and sustainability services. Given Lenovo’s enviable market position in the PC segment and the transition to AI PCs, the company has an opportunity to increase penetration in the commercial PC and ESMB infrastructure segments while expanding its TruScale footprint. (Lenovo reported a 50% YoY growth for TruScale in the quarter, so momentum continues to show health.)
ISG: Capturing AI Infrastructure Opportunities
Combined revenue from storage, software, and services for Lenovo’s ISG reached a record high of $1 billion, delivering sequential profitability and revenue growth for the second consecutive quarter (24% and $16 million QoQ), driven by order recovery from key cloud and enterprise customers and by successes in strategic products. Storage revenue specifically reached an all-time record, up 48% YoY, while Edge revenue, which also achieved an all-time record, was up 12% YoY with 11 consecutive quarters of growth. Storage, services, and software revenue combined delivered 36% growth YoY.
Lenovo remained the No.1 High Performance Computing provider in the TOP500 and the No.1 most sustainable supercomputer on the Green500 index. The company also expects to remain firmly #3 globally for both storage and AI infrastructure for the foreseeable future, with AI servers expected to grow nearly 2x as fast as the total server market. The group is also growing key strategic partnerships to strengthen its portfolio competitiveness, particularly as AI continues to drive higher demand for smart infrastructure. Lenovo’s unique approach to delivering a comprehensive edge-to-cloud portfolio is a valuable differentiator and central to the company’s strategy of delivering differentiated technology solutions in general purpose server computing, hybrid cloud, HPC, data management, AI, and edge computing (all of which feature an As a Service option) and lower energy consumption. Another differentiator is Lenovo’s unique ODM+ business and manufacturing model, which the company is leveraging to capture demand and improve profitability for the group.
IDG: Back to Growth (as Predicted)
Lenovo’s IDG delivered a robust quarter with revenue finally resuming growth (up 6.7% YoY), further signaling the stickiness of the PC segment’s recovery. Note that growth did not come at the expense of profitability, with operating margins landing on 7.4%. Lenovo feels that these numbers strengthened its global No.1 PC position, with the company maintaining its No.1 position in 4 out of 5 geographic regions.
Another important point to note here is that while the recovery is a tide that lifts all boats, Lenovo outperformed the market in the quarter, returning to YoY shipment growth with the highest market share since COVID—almost 24% (23.8%), with North America YoY PC revenue growth reaching 20%, and 27% market share in the commercial PC segment, the highest it has been in the past 3 years.
Non-PC devices also made good progress, with smartphones and tablets finding their way back to high double-digit YoY shipment growth: Smartphone shipments were up 32% YoY, with accelerated growth in the APAC, EMEA, and North American regions. For contrast, tablet shipments were up a respectable 1%3. Here too, the hybrid AI opportunity is expected to drive demand for AI-forward client devices, including AI PCs. Lenovo sees opportunity for a reset of the refresh cycle, growth, and margin improvements. As a major PC OEM, Lenovo enjoys a unique opportunity to leverage AI experiences to differentiate itself from competitors and create unique value for its product ecosystem. It also has an opportunity to develop a more “unified” AI experience across its device portfolio, which is on target with industry trends. The company unveiled over 40 devices and solutions at CES, including AI PCs and proprietary AI software and components, signaling equally strong alignment with the AI market opportunity and execution velocity. IDG should continue to benefit from investments in innovation and in the spinning-up momentum in the PC segment’s transition to AI PCs and should see continued premium-to-market growth.
The company’s ambitious smartphone growth plan is also intriguing, which targets growth of the premium mix in the foldable segment with Moto Razr and Moto Edge with next-gen AI features. Reading between the lines, Lenovo having the bandwidth to focus on its non-PC business growth is a very good sign that the PC segment’s recovery is now fully and somewhat reliably in motion.
In Closing
Very strong numbers for Lenovo across the board this past quarter, which speaks to the company’s ability to identify market shifts early and execute at pace, and to the state of the market as AI continues to act as the primary driver of disruption and opportunity. For Lenovo, this translates into opportunities across all three of its core businesses: services, infrastructure, and devices. Based on the past few quarters of results, and particularly looking at where Lenovo is emerging from Q3, the company appears extremely well positioned to take full advantage of every AI-driven opportunity that aligns well with its core competencies across all three business units.
Given how many on-ramps of growth and upside in Lenovo’s services and infrastructure businesses, especially if demand for AI-related services and solutions continues to grow (which we think it will), Lenovo’s trajectory estimates may actually be a bit conservative. On the device side, Lenovo’s enviable PC market share makes the opportunity for AIPCs to both reboot and reset refresh cycles for the PC is especially interesting. On the one hand, the company should carry that advantage into the AIPC transition and could conceivably even strengthen its leadership position and make incremental market share gains in the next couple of cycles. On the other hand, however, lies the inherent risk that a segment reset presents for an incumbent in any sector: Resets often open the door for challengers (in this instance, other PC OEMs) to disrupt otherwise fairly established markets. With the PC segment promising to become much more dynamic and diversified in the next few cycles, Lenovo’s defense and offense games will have to be on their best game for the company to find growth opportunities faster and more effectively than its competitors – especially the small handful that already benefits from rich device ecosystems with strong attach rates. The strategy is sound though, and Lenovo is on the right track with its thinking. Overall, great quarter and a solid start to calendar 2024.
Daniel Newman and his co-host of The Six Five Webcast, Patrick Moorhead of Moor Insights and Strategy discussed 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.
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 Q1FY24: Service-Led Solutions and AI Are Primary Growth Vectors
Lenovo’s AI Milestone: Updates, Announcements, and New AI Capabilities Revealed
Author Information
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.
