The Six Five team discusses Lenovo Q4 Earnings.
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Transcript:
Daniel Newman: Let’s talk about Lenovo Q4 earnings, Pat.
Patrick Moorhead: So every Q4 that Lenovo brings out is hard to dissect, okay? When I ask the company why they focus on the full year versus the quarter, I like their explanation, which is, “Our investors want to see the long term,” which I totally get, but I think it’s very important that we hit the quarter, but probably 98% of the presentation and the release were about the year. So overall for the quarter is exactly what you would expect from a company that’s 57% PC revenue in a really troubled PC market where all elements of the value chain are pulling back. You’ve got soft demand. You have them needing to decrease their finished goods inventory, whip inventory, and everything in between, but I do think it’s important to go peel the onion back.
Overall, the revenue was down 24%, which would make sense given that the PC group is down 33%. EPS was down big time, 73%, but again, let me drill down. We have a chance to talk to Ken Wong, who runs SSG and his team that graciously brief us strategically on what’s happening there. They were up 18%. As you would expect and as we’ve seen the entire year, 50% of that business was outside hardware break fix. So that includes things like managed services. You have all of the as a service fitting underneath here, things like true scale. The company has also created what I think is a fairly comprehensive digital workplace solutions that’s, again, it’s not just PCs. We’re talking phones, we’re talking PCs, we’re talking office UC equipment.
I think if there’s any company who is going to do well in this, it’s likely going to be them if nothing else, given the sheer broad base of what they do. I’m interested to see also, obviously, how HP pulls that together given their acquisition of Poly. You got the chance to talk to Kirk Skaugen. I unfortunately was sick, couldn’t get my butt out of bed that morning…
Daniel Newman: Glad you’re better though, buddy.
Patrick Moorhead: No, it’s going to be back. My nose is starting to fill up here. I’m going to power through this.
Daniel Newman: My allergies are horrible today. I’ve got the itchiest face. It’s Texas allergies, man.
Patrick Moorhead: Yeah, at least you’re not getting bit by a tarantula.
Daniel Newman: Did you see that thing?
Patrick Moorhead: I did now. Yeah. Dan sent me a picture last night of a tarantula, tarantulas and scorpions. If you live in the hill country or anywhere near a forest, you will find them or they will find you. Data center group crushed it, up 56%. Okay, folks, 56%. Now, think about that. Compare that to the supplier base, how AMD and Intel are doing. They’re not growing 56% in the data center group, which clearly means that these guys are taking share. So while it was hard to break out exactly what the puts and takes were in the data center group, it likely continued to gain market share in server, storage, and in software.
Few reminders about the business. Lenovo’s number one in top 500 high performance computing. They actually added more slots to that dominance, which I know we don’t cover a lot of HPC on here, but I think is a big bragging right for a lot of things. They’re number one in entry and mid-level storage. Called the ban one to four price. If I can give IDC some kudos for defining that, but five years ago, people thought that Lenovo Data Center would be dead. Now, they’re crushing it, crushing it in server, crushing it in storage, and doing a really good job in software. I’m interested in the future to see the impact of generative AI given that they’re such a huge supplier to the hyperscalers. Again, I would think that them being inside of every hyperscaler cloud that’s using generative AI, they would almost have to see an uplift based on that.
Daniel Newman: So there you go. Is that all you got? Is that it?
Patrick Moorhead: That’s it, baby. I just talked about the entire company. What more do you want, dude?
Daniel Newman: Listen, Pat, you hit it really well. You could not be a company that has over half your revenue tied to PCs and have a great fiscal year. It just wasn’t possible. It was such a tough year, but this is really a company that in the future here, especially if this AI at the edge and on-device thing takes off will be a massive beneficiary, the company is progressing in its categories, its service categories under Ken Wong, it’s infrastructure categories under Kirk Skaugen, and then, of course, PC is cyclical. I don’t care what the circumstance is, it just maybe has the most cyclical boom, but if you do not believe that AI content is going to drive a huge wave of form factor and new device purchases over the next few years, you’re probably not paying attention. This is a trend line. This is being drawn for you.
So depending on your horizon of when you’re looking for things to happen, we’re probably a year or two out for seeing a really big boom in PCs again because all this generative AI stuff is going to need more horsepower. So that’s the good side of it. I think that overall, the company’s done a good job of maintaining its growth, its margin in the server space. It’s got a story that’s starting to bubble up around generative AI. It’s going to probably look similar in some ways to the stories you’re hearing from the other large hardware OEMs. It’ll be their own version of it. The SSG business is definitely ramping up. I see them pivoting from a core set of service offerings to a bit more of an outcome driven approach for things like digital workplace, for things like on-demand consumption services. I think that we’re going to see that continue to materialize over the next couple of years.
It’s hard to look at the numbers holistically and think it was a great year because as a whole, I think their earnings were down 70% from a year on year basis, but I think when you kind of look at how this year was seeded and where growth came from, growth came in services, growth came in infrastructure. As companies, and we’ve seen this movie play out before, Pat, as companies pivot away from a core business that has been hyperdependent, that has this cyclicality and they build up these second and third moats of higher margin, higher performance, and diversified revenue, they become better companies, they become more capable companies, and that’s what I think we have with Lenovo.
Super excited, by the way, to have president and EVP Kirk Skaugen as one of our day openers. Pat, you and I are going to jet off, and if you’re watching this, maybe it’s today, but we’re going to jet off and actually capture that content in the near future. I think Lenovo is a very interesting company. It’s one to watch. Pat, it was one that, like I said, there were bright spots, but you definitely had to pick them out between some tougher numbers that were mostly driven by this year’s very steep PC decline.
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.
