Service-led business achieving strong growth; Group investing further US$1 billion in AI innovation

Group View: Rise to the Challenges & Persist in Transformation

Last quarter, we achieved $12.9B in group revenue with net income of $191M on a non-HKFRS basis, despite a challenging market with unfavorable macroeconomic conditions. Our service-led business achieved strong growth and sustained profitability, with non-PC revenue mix further increasing by 4 points to 41% now, continuously demonstrating the effectiveness of our efforts in building diversified growth engines.

As we predicted, with PC channel inventory digestion coming to an end, the trends of shipments and activations have become more consistent. Actually, the year-on-year decline of shipments was lower than PC activations for the first time in 6 quarters. But the AUR, or Average Unit Revenue of PC was under pressure due to declining component price and intensified competition, and impacted our revenue. The entire devices market is facing the similar challenge, including smartphone and tablet businesses. Meanwhile, in the short-term, the infrastructure market is challenged on multiple fronts, and that had downward pressure on our topline and bottom-line as well.

In the next two to three quarters, we remain cautiously optimistic about the business recovery. As the economy stabilizes and improves, and component price bottoms out, the client device market is expected to recover and resume growth in the second half of the year. With the $850M cost savings plan executed more than committed, we will take more actions to keep our E/R ratio more resilient and we are still committed to continuously improving our profitability.

Meanwhile, the booming of intelligent technologies such as A.I. Generated-Content is propelling the wide adoption of A.I., accelerating digital and intelligent transformation across industries. For many years, Lenovo has been driving our transformation to become a full-stack intelligent solutions provider, and we are well positioned to capture the significant growth opportunities ahead and transcend the cycle.

Also unchanged is our commitment to doubling our investment in innovation in medium term. Over the next three years, we will invest an additional $1 billion to accelerate A.I. deployment for businesses around the world, focusing on A.I. devices, A.I. infrastructure and A.I. solutions. We will continue to empower our customers and consumers in all walks of life to grasp the opportunities in the era of intelligent transformation.

Now I will talk about each of our businesses.

SSG: High Margin, Strong Growth

Let’s start with SSG, Solutions & Services Group. Last quarter, SSG again delivered strong growth and high profitability. While we protected Support Services business as our core profit engine, we made significant progress in expanding our Managed Services and Project & Solutions services, the revenue of which has now grown to account for more than half of SSG business, 4pts higher year-to-year.

Over the next three years, the trend of digital and intelligent transformation will continue to drive strong growth of global IT spending, especially in IT services. At the same time, overall demand for vertical solutions, including smart city, smart manufacturing, smart education and smart retail is expected to see strong growth through 2026 as well. SSG also continued to scale with our hero offerings, such as Digital Workplace Solution, Hybrid Cloud and Sustainability, and incubate these horizontal building blocks into vertical solutions to help our customers improve employee experience and productivity.

ISG: Delivering Growth in Key Areas

Next, our Infrastructure Solutions Group, or ISG. Last quarter, its overall revenue declined year-on-year for the first time in many quarters due to overall Cloud Service Provider compute server demand softness, GPU constraint impacting full AI adoption, and industry’s slower than expected transition to the next generation platform. But we achieved hyper growth in Storage, Software, Services and High Performance Computing. In particular, storage achieved triple-digit year-on-year growth, and made us the fourth largest storage provider in the world. In A.I. hardware infrastructure business, based on the latest IDC definition, we grew by triple-digit and is number 3 in the world.

Driven by A.I. Generated-Content breakthrough, the ICT infrastructure upgrade is accelerating even further. We will continue to invest in developing A.I.-ready and A.I.-optimized infrastructure, such as A.I. Edge, A.I. Hybrid Cloud, as well as server and storage that support A.I.-centric workloads. We will persist in differentiated competition, aiming to resume premium-to-market growth and sustainable profitability as soon as possible. And we remain focused on becoming the most trusted infrastructure partner for our customers in their digital and intelligent transformation.

IDG: Maintaining Leadership

Our Intelligent Devices Group, or IDG, is still under a lot of pressure. Last quarter, despite all these challenges, we maintained our global No.1 market share in PCs, with inventory normalized to a healthy level. Our smartphone business achieved record Q1 activation in 10 years, with an improved channel inventory which will bring even more

growth potential for the future. We further strengthened premium and 5G with the successful launch of Motorola Razr. We also demonstrated great growth potential in Smart Collaboration and Smart Home areas.

We remain committed to investing in technology innovations to ride on industry trends and build long-term competitiveness. We are driving collaborations on building the next generation A.I. devices, such as A.I. PC, A.I. Smartphone, to deliver certain level of inferencing. For our smartphone business, we will continue to execute on our three-year growth plan, which has helped us achieve premium growth in our traditional strongholds in North America and Latin America, and make solid progress expanding into EMEA and AP. Meanwhile, we also expanded our smart devices for a more diversified portfolio, and enriched software and services to build IDG ecosystem.

Outlook and Conclusion

Lastly, at Lenovo, we believe a challenging business environment only makes innovation more important. A.I. and computing are our anchor technologies and critical pillars of our intelligent transformation strategy. We will continue the hard work and drive innovations. Here I would like to take this opportunity to invite you to Lenovo Tech World, our annual flagship event in October, where we will showcase our A.I. devices, A.I. infrastructure, and A.I. solutions, all for individuals, enterprises and vertical industries.

Looking ahead, we will more effectively control expenses and mitigate risks so that we can deliver sustainable profitability improvement, and continue to drive transformation and innovation to build a smarter future for all.

*Read our earnings press release here.