Lenovo Sees ‘Signs Of Recovery’ In PCs And Servers, Bets Future Growth On AI
The main culprits for Lenovo’s 16 percent decline in second-quarter revenue were double-digit sales drops in its data center and client device businesses, which offset double-digit growth for solutions and services revenue. However, the vendor believes demand for AI capabilities in these areas will drive sustainable growth and profitability for the long term.
Lenovo CEO Yuanqing Yang said the Chinese IT giant is seeing “signs of recovery” in the PC and server markets as the company bets future growth on a growing portfolio of products with AI capabilities.
Yang delivered the remarks in Lenovo’s second-quarter financial results, which saw the Beijing-based company’s revenue decline 16 percent year-over-year to $14.4 billion for the three-month period ending on Sept. 30. The main culprits were double-digit sales drops for the vendor’s data center and client device businesses, which offset double-digit growth for solutions and services revenue.
Despite revenue falling from the previous year, Lenovo’s sales were higher than the previous quarter while its gross profit margin improved year-over-year to 17.5 percent, which it said was a record high for the company in the second quarter of its 2024 fiscal year.
To Yang, these are signs that the company is headed toward better times.
“Last quarter, despite macro challenges, we saw clear signs of recovery across the technology sector. Thanks to our strong execution, operational excellence, and continuous investment in innovation, we delivered consecutive quarter-on-quarter performance improvements, indicating an encouraging trajectory to recovery,” he said in a statement.
Lenovo is hoping that its strategic focus and a recently announced $1 billion investment in AI-related products and services across the company’s Intelligent Devices Group, Infrastructure Solutions Group and Solutions and Services Group will drive sustainable growth and profitability for the future.
“With continuous execution of our intelligent transformation strategy, and with our AI ecosystem and partnership further strengthened, we will leverage our full-stack AI capabilities from pocket to cloud to enable hybrid AI applications for every enterprise and every individual, ultimately driving sustainable growth for our business,” Yang said.
PC Sales Suffer From Channel Inventory Build-Up
Lenovo’s largest business, the Intelligent Devices Group, saw revenue decline 22 percent year-over-year to $11.5 billion in the second quarter while operating profit fell 27 percent to $847 million.
The company said this decrease was largely the result of an excess in PC inventory that channel partners had accumulated from earlier this year and have been working to sell through.
However, the vendor said there are “positive signs of recovery,” with the business unit’s revenue increasing 12 percent from the previous quarter. This was higher than the “historic average” of 8 percent quarter-over-quarter growth since the group’s formation in its 2019 fiscal year.
For the final quarter of 2023, Lenovo said its PC business is “stabilizing and well-positioned for a year-on-year recovery.” While the company is seeing the total available market for PCs falling to levels from before the COVID-19 pandemic in 2020, it said the market could “remain at a level structurally higher than the pre-pandemic period in the long term.”
One significant factor in Lenovo’s long-term optimism is the emergence of the AI PC, personal computers that come with advanced AI capabilities to improve productivity.
“This holds significance for enterprise customers as the increased adoption of AI PC will uniquely optimize their workforce experience and boost productivity in multiple ways, thereby driving additional growth opportunities” for the Intelligence Devices Group in the PC sector, Lenovo said.
Server Sales Suffer From ‘Industry-Wide Correction’
The Infrastructure Solutions Group, which contains Lenovo’s servers and storage systems, saw revenue decline 17 percent year-over-year to $2 billion.
The company said this was due to an “industry-wide correction in IT spending, within the broader infrastructure sector” that “dampened customer demand.”
However, the vendor said there were signs of “industry demand stabilizing” with second quarter revenue growing 5 percent from the previous three-month period.
The company also said it had achieved all-time revenue records for services and storage across multiple customer segments and solutions. Edge revenue was the second highest it’s ever been.
In the long term, Lenovo views AI as a “major growth catalyst” for the business unit and, as a result, is spending significant sums of money to develop hardware, software and services in this area.
Solutions And Services Remain Lenovo’s ‘Growth And Profit Engine’
The bright spot in Lenovo’s earnings was the Solutions and Services Group, which it said “remained the growth and profit engine” for the company.
The Solutions and Services Group grew revenue 14 percent year-over-year to $3.6 billion while operating profit increased 7 percent over the same period to $745 million for the second quarter. The division’s operating margin was a “resilient” 21 percent, topping all business groups,” according to Lenovo.
Helping drive this growth was its managed services offerings, including the TruScale as-a-service solutions, with sales increasing 41 percent in the quarter from the same period last year. Support services grew 6 percent while project and solution services increased 9 percent.
A significant part of the unit’s long-term prospects revolve around “new AI-embedded services” Lenovo said it plans to launch in the “areas of digital workplace, hybrid cloud and sustainability solutions.”