Lenovo delivers 10th straight qtr of improved profitability YoY, as operational resilience & diversified growth engines continue to drive performance

Last quarter, as we all know, the global economy, pandemic, and geopolitical tensions continue to create uncertainties. But for Lenovo, our strategic foresight, operational resilience and consistent investment in diversified growth engines, have prepared us well for these challenging times. Whether our traditional markets are booming or contracting, Lenovo consistently delivers on its commitments. Last quarter was no different. We delivered solid performance and successfully improved profitability, as our non-PC businesses made great progress to become new growth engines.

New Diversified Engines Driving Growth and Profitability

Today, despite macro environment challenges, the overall trend of digitalization and hybrid work model continue to accelerate, with global spending on digital transformation expected to sustain strong growth through 2025.

Last quarter, thanks to strong execution of our 3S strategy to drive digital and intelligent transformation, we stood up to the challenges and delivered positive Net Income growth and Net Income margin improvement for the 10th consecutive quarter.  All our main businesses contributed positive operating profit, and we are making progress toward our commitment to doubling profitability in medium term. Our revenue was up almost 3% in constant currency year-on-year, and our new diversified growth engines continued to deliver strong performance. Both solutions and services business and infrastructure business saw high double-digit growth year-on-year.

With a healthy cash balance, we remain committed to doubling R&D investments in medium term. Last quarter, our R&D spending grew by 15% and headcount increased by 26% year-on-year.  Meanwhile, we accelerated our ESG efforts, and drove One Lenovo sales platform to support future sustainable growth.

Now I will talk about each of our businesses.

Strong Growth, Higher Profitability

Let’s start with SSG, Solutions & Services Group. The trillion-dollar IT services market continues to grow steadily, with faster growth to be expected in DaaS, as well as Managed Services for datacenter, Cloud and Edge Environment through 2025. Vertical solutions and services spending is expected to remain strong, including in smart education, smart retail, smart city, and smart manufacturing.

Last quarter, SSG’s revenue grew by 26% year-on-year with further improved operating margin. All segments again delivered high profitability and strong growth. For the first time, revenue from non-hardware-tied solutions & services accounts for more than half of SSG business.

At the same time, SSG continued to build comprehensive horizontal solutions for vertical industries. For example, our Digital Store solution embedded with Lenovo A.I. Edge Server is now powering one of the world’s largest grocery retailers to reduce over 75% self-checkout errors without employee intervention. We also further expanded our sustainability offerings. The newly formed Lenovo PCCW Solutions has been running since August this year, achieving initial success on business synergy.

Record Revenue, Record Profitability

Our ISG, Infrastructure Solutions Group, continues to capture significant growth opportunity in the market. By 2025, the server market will reach 134 billion USD. The edge infrastructure, 47 billion USD. The storage, 36 billion USD.

Last quarter, ISG achieved record revenue of 2.6 billion USD, up 33% year-on-year. We delivered the 4th consecutive quarter of profitability, with record high operating profit of 36M USD. Cloud Service Provider (CSP) and Enterprise/SMB(E/SMB) segments both outgrew overall market forecast. Edge revenue almost quadrupled, and storage more than doubled year-on-year, both set new records.

Meanwhile, we continued to enhance our comprehensive infrastructure portfolio and to invest in innovation, particularly in Edge and Services. Our operational resilience was further strengthened, as we ramped up our new factories in Shenzhen, Tianjin China, and in Hungary, as well as expanded our manufacturing facilities in Mexico. We remain focused on being one of the fastest growing and ultimately the largest end-to-end infrastructure solutions provider in the world, while maintaining a sustainable, profitable business model.

Maintained Strong Profitability, Outperformed Competition

For our IDG, Intelligent Devices Group, while the market size of PC and tablets declined in the short term, it is still expected to stably remain at a higher than pre-pandemic level in the long term. Meanwhile, as we move from Smart Devices to Smart Spaces, the scenario-based solution market will continue to grow.

Driven by our operational excellence and consistent investment in innovations, particularly in the high value-added premium segments, our IDG maintained industry leading profitability. Despite PC market softness, we were able to navigate much better and strengthened our #1 position, enlarging the gaps with key competitors. We are the clear #1 in four geographies out of 5, and the undisputed #1 brand in commercial segment, which represents around 65% of Lenovo PC revenue mix.

At the same time, our smartphone business achieved the 10th consecutive quarter of profitability. We remained as strong #2 and #3 player in Latin America and North America respectively and achieved hypergrowth in the expansion markets. We launched a series of innovative products and enriched our product portfolio.

Our scenario-based solutions continued to demonstrate growth potential. Smart Collaboration continued to grow at high double-digit year-on-year, and revenue from Gaming scenario business set a new record. Lenovo Workstation solutions, with artificial intelligence, data science and immersive computing, are enabling our customers in automobile, energy and entertainment industries to improve their Computer Aided Design (CAD) processes.

We continued to focus on innovation to drive the extension from smart devices to smart spaces. We are confident that our success in PC can be replicated to grow our business beyond PC markets and further win in more markets, particularly in Smart Phone.

Outlook and Conclusion

Looking ahead, the current external challenges will likely persist for a while. We must remain agile and stay focused on both pursuing our strategy and ensuring ongoing profitability. We will rebalance resources toward our diversified growth engines, while driving for efficiency and expense reduction throughout the company, especially in areas where we see a softer market outlook.

And we will never lose sight of the long-term opportunities. In this year’s Lenovo Tech World, we drew strong interest from the industry and the public, showcasing our progress in innovation and vision in digital and intelligent transformation.

Lenovo has built capabilities in horizontal solutions across the New IT architecture of “Client-Edge-Cloud-Network-Intelligence” to be embedded into vertical solutions. Each of these building blocks, such as IoT, Metaverse, Edge, Hybrid-Cloud and A.I., can help us not only address customer needs, but also create scalable, repeatable, sustainable, and profitable solutions that will spark new waves of growth beyond our traditional devices business.

Our solid performance last quarter and throughout the past three years has proven that we have the right strategy, strong execution, resilient operation to fulfill our commitment, and transcend the cycle. We are confident that our high-quality and innovative portfolio, unique hybrid manufacturing model driven strong supply chain, and global/local principle and capability, as well as healthy liquidity will help us capture the opportunities, deliver sustainable growth, and improve profitability.

 Read our earnings press release here.