Achieving year-on-year growth and seizing hybrid AI growth opportunities

Last quarter, Lenovo delivered on its promise to resume year-on-year revenue growth despite multiple macro challenges. Profitability has improved quarter-to-quarter for two consecutive quarters, a testament to both the resilience of our core business and the effectiveness of our transformation. In addition, we have also been focusing on the growth opportunities brought by hybrid AI. These include continuous investment in innovations to fuel sustainable growth into the future, a part of which we demonstrated last month at the annual CES event where we received industry-wide recognition for more than 40 new devices and solutions.

Group: Growth resumed and transformation accelerating

As I shared with you in Q2, Lenovo has been consistently improving quarter to quarter, and we have entered a trajectory to recover. Now, for fiscal Q3, we successfully achieved year-on-year growth. Group revenue increased 3% year on year, and group profitability improved quarter to quarter for two consecutive quarters. Thanks to the strong execution of our transformation strategy, our non-PC revenue mix further expanded year-on-year to 42% of the group revenue.

In the AI era, hybrid AI, leveraging both public and private foundation models, is creating significant growth opportunities for the industry across devices, infrastructure and solution & services. Among the continued signs of recovery in the PC market, we are particularly excited to see the emerging trend of hybrid AI directly driving the future demand for the coming AI PC. AI PC comes with a personal intelligent agent using natural language user interface, a compressed local LLM, heterogenous computing with CPU/GPU/NPU, privacy & security protection, and a rich AI application ecosystem. We believe this trend will stimulate another industry refresh cycle as users require devices designed for more creativity and productivity. According to Canalys's projections, by 2026, it is expected that more than 50% of PCs will be AI capable. In the meantime, hybrid AI is also driving increased demand for hybrid infrastructure. On top of that, we are seeing increased customer demand for AI-native applications, solutions & services such as consulting, design, deployment, and maintenance, fueling AI services growth across different verticals.

Lenovo is in a unique position with many advantages to lead this hybrid AI revolution. We stay committed to furthering investment in innovation focusing on AI and computing. Our number and percentage of R&D headcounts keep increasing, and we are on track for a record year of R&D expense to revenue ratio. We have long embraced AI in all our businesses and have built computing capabilities from-pocket-to-cloud. This relentless focus means we now have a full portfolio that includes AI-enabled, AI-ready and AI-optimized devices, infrastructure, solutions and services. We are realizing our vision of “AI for All” for each individual and enterprise, changing the way they live and work, while at the same time driving sustainable growth for our business.

Now I will talk about each of our businesses.

SSG: Record Revenue & Profit, Driving AI Solutions

Let’s start with SSG, Solutions & Services Group. Last quarter, SSG revenue reached the US$2 billion milestone, growing double-digit year-on-year to another record high. Operating profit also hit a record, with high operating margin above 20%. We protected Support Services and Software as our core profit engine. We further expanded Managed Services and Project & Solutions Services, and together revenue mix for these two areas now accounts for 55% of SSG’s total business, growing year-on-year for 11 consecutive quarters. In particular, strong growth momentum continued for our hero offerings, such as Digital Workplace Solution, Hybrid Cloud and Sustainability, each winning major customer deals in key markets.

Looking ahead, the “New IT” service segments within the trillion-dollar IT services market is expected to see stable mid-term growth. The rise of hybrid AI is opening up new opportunities for our AI-native solutions & services. Additionally, we are proactively embedding AI into the vertical solutions that we are building for various industries to strengthen value propositions and enhance differentiation for our customers.

ISG: Capturing Opportunities in AI Infrastructure

Next, our Infrastructure Solutions Group, or ISG. Last quarter, while industry and market headwinds continued to impact overall ISG performance, we delivered a quarter-to-quarter revenue growth for the second consecutive quarter. And the combined revenue from Storage, Software and Services reached a record high of US$1 billion. We remained a solid No. 3 for both Storage and AI infrastructure on the global market. 

Looking ahead, we expect the market will continue to shift to AI infrastructure, with AI server expected to grow nearly twice as fast as the total server market. At Lenovo, we are growing key strategic partnerships and building more sophisticated AI infrastructure solutions to strengthen our portfolio competitiveness, as well as securing major customer deals and a stable pipeline. We remain confident that we will resume year-on-year growth as soon as the coming quarter.

IDG: Resumed Growth and Solidified Leadership

Our Intelligent Devices Group, or IDG, delivered a strong quarter with revenue resuming growth thanks to our clear strategy, consistent investment in innovation, and operational excellence. As the PC market continued to recover, our PC business excelled and outperformed the market. We returned to year-on-year shipment growth with leading profitability. Our global No.1 position in PC was further strengthened with a significant premium to market, winning the highest market share since Covid. Last quarter, our non-PC device businesses made encouraging progress in building a more diversified portfolio. Both the smartphone and tablet business returned to high double-digit growth with significant premium-to-the-market of more than 20 points. Particularly we see smartphone hypergrowth in Asia Pacific, EMEA and North American markets.

Looking ahead, we expect the trend of hybrid AI to drive the demand for AI client devices, driving another refreshment cycle, creating more growth potential and improving margin for us.

Before I close, I want to point out that even though global economic headwinds still challenge the industry, we have all seen the potential of the revolutionary AI technology and its applications. Our commitment to AI innovation and partnerships with other key leaders in AI ensures that we are well positioned to capture the tremendous growth opportunities in AI.

*Read our earnings press release here.