The Six Five team discusses Lenovo Q3 FY2024 Earnings.
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Transcript:
Daniel Newman: Let’s talk about one of NVIDIA’s biggest partners in the ecosystem. Let’s talk about Lenovo, Pat. So you and I had the chance to sit down with both Ken Wong, the president of the SSG business and Kirk Skaugen, the head of the infrastructure business, and talk a little bit about the company. Now it’s interesting with these large technology OEMs. They’re so much more than that now, and I know they always get frustrated. I don’t know the exact way they’ve been titled because they’re device makers, they’re infrastructure, they’re service providers. We need a new category for these kinds of companies that do so much. They’ve got on-prem cloud consumption services.
And the company did return to growth, which was a really, really good thing, Pat. It’s been a tough couple of years for the likes of the Lenovos, the HPEs, the Dells. And even though a lot of them have managed through very well, you can manage very well when you’re doing $50 billion or $100 billion a year of revenue. It hasn’t been on a growth-oriented. Remember, NVIDIA grew 265% or something like that. Lenovo grew 3%. So 15.3 last year, 15.7 billion this quarter. It has however continued to see, on a quarter to quarter basis, strong sequential growth of income.
And probably another thing, Pat, that I’ve been paying a lot of attention to with Lenovo has been the growth of the company’s non-PC revenue. And the company got a few more bits there on an annual basis. Now 42% of its revenue, non-PC. And why is this so important? Well, you and I both know the PC AI, AI PC boom is coming. Signal 65 will be looking very closely at this. That’s our testing arm by the way. We’re going to be looking at testing what AI PC can do. We are also looking very, very closely at how companies that are dependent on these kind of cyclical technologies that tend to be also under incredible margin pressure are able to perform.
And by being able to move into the non-PC strong growth and SSG, they had a $2 billion service billing. Some strong alignments with companies like ServiceNow. Their AI strategy continues to grow. They’re seeing year-on-year growth in their PC portfolio for the first time in a long time, Pat. And this answers a question about a cycle that everyone’s been worried about, is the PC cycle coming back? So they were able to diversify away from PC. And now that the PC business is returning, they’re able to start to see some growth.
So this is a company that is going to be very instrumental in providing infrastructure to cloud providers. They do that around the world. They’re providing infrastructure to the enterprises. They’re going to enable AI for the enterprises through services. And of course, they will be one of the largest unit movers in the AI PC era, Pat. And so it’s definitely one to watch. It won’t get the number of headlines that NVIDIA’s getting, and that’s why we’re talking about it here. But it’s returning good earnings. It’s creating good income on revenue. It’s growing, albeit steadily, Pat. Overall solid. It’s hard to follow up NVIDIA. It’s just hard because I think they had 467% earnings growth. But yes, good quarter for Lenovo.
Patrick Moorhead: Listen, by the way, I like the overall assessment. It is staggering to me that NVIDIA can go up by that much. And companies that have servers like that won’t go up that much. It’s kind of mind-boggling. Now, we did see a company, Supermicro. By the way, Supermicro’s stock, and it’s interesting, I get hit on this on CNBC on occasion, but their stock is up 215% in the last six months. It’s absolutely mind-boggling to me. $50 billion market cap. Basically, they do ODM servers.
And I think that they are getting a lot of benefit from this lift. Some really positive stuff from Lenovo. Essentially they resumed their year-on-year growth, which again, very positive. They did make an interesting confirmation that, like I said on stage at CES, AI PC stimulates the refresh cycle. 50% of PCs will be AI capable by ’26. And by the way, when you disconnect desktop from notebooks, it probably means that 80% of notebook PCs will be AI capable. And the reason for why it’s not larger overall is essentially that Intel and AMD haven’t decided to put the big NPU in those desktop parts or not.
In the SSG side, Ken, great conversation with him. Huge milestone. That division’s only been in existence for three years, but they’re up $2 billion. And I think that’s a pretty strong milestone. And sure, they didn’t start at zero because they did have a lot of the services that pulled through from the hardware. But when you look at the percentage of it, it’s less than 50%. Actually 55% of SSG’s revenue comes from non-hardware type business. And if you would’ve told me three years ago Lenovo in services would be strong, I would’ve said, “You got to be kidding me. That’s going to be a stretch.” But to their credit, they’ve come out swinging here and really focused on the areas that matter, like hybrid cloud, remote desktop, PC as a service. They’ve got this new AI fast track professional services out there. So hats off to the service group.
ISG, we just got off a video with Kirk Skaugen, looking good sequentially. And by the way, all time record for storage, all time record for edge revenue. It’s that core server that’s been the challenge. And at least, in my channel checks, a lot of the decisions that were made for LLM servers three years ago, it wasn’t supposed to be that big, ended up getting huge. And a lot of times these hyperscalers will do a mixed vendor bid. And there’s the LLM ones and then there’s the standard non LLMs, and that’s where all the cloud guys are putting all their investment.
So IDG, it’s interesting, they came out swinging, right? They claim to be increasing their market share. I mean, they’ve been number one forever. And they also said they got 27% of commercial, which is really a Dell stronghold. And probably the biggest surprise to me is that their operating margin, they said industry leading operating margin. I’m going to check that against Dell, but I’d be very surprised if IDG has a higher operating margin than Dell because Dell does less consumer, which is lower profit. And Dell does more commercial, which is higher profit. Just to summarize, looking forward to meeting with the Lenovo ISG team at Mobile World Congress. We’re going to shoot a half a day of videos there and hope you can tune in.
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.
