Lenovo Q1 2022-2023: Finding New Engines to Drive Growth and Profitability

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The News: Lenovo Group (HKSE: 992) (ADR: LNVGY) announced first quarter (Q1) results for the Group, improving both revenue and profitability for the ninth consecutive quarter. First quarter net income grew 11% year-on-year to US$516 million and 35% year-on-year to $556 million on a non-HKFRS basis. Revenue grew to US$17 billion, up 5% year-on-year in constant currency. The Q1 2022/23 results are Lenovo’s ninth straight quarter of improved revenue and profitability. Read the Lenovo Press Release here.

Lenovo Q1 2022-2023: Finding New Engines to Drive Growth and Profitability

Analyst Take: The Lenovo Group saw revenue from non-PC businesses reach 37%. The Group remains committed to doubling investments in Research and Development (R&D) and grew R&D spending 10% year on year and increased R&D headcount by 29% year on year.

We believe Lenovo’s non-PC business performance validates the company’s services-led transformation strategy and persistent investments in diversifying the business are fueling positive business outcomes and powering future growth opportunities. From our view, Lenovo has successfully identified new growth engines of solutions and services, infrastructure solutions, and mobile businesses as all grew revenue by double digits year-on-year – contributing to both topline growth and Lenovo’s wider commitment to double profitability in the midterm.

Specifically, we see Lenovo capitalizing on accelerated digital and intelligent transformation opportunities consisting of enduring hybrid work models and strong, sustainable demand for smart devices/IoT, smart infrastructure, and intelligent applications and services. As a result, the new growth engines all saw double-digital year-to-year (YTY) growth including:

  • Solutions & Service Group (SSG): Up 23% YTY – Q1 22/23 revenue of 1.456 M up from Q1 21/22 revenue of 1.184M
  • Infrastructure Service Group (ISG): Up 14% YTY – Q1 22/23 revenue of 2.068M up from Q1 21/22 revenue of 1.835M
  • Mobile Infrastructure Group (MSG): Up 21% YTY – Q1 22/23 revenue of 2.175M up from Q1 21/22 revenue of 1.797M

Lenovo Q1 2022-2023: SSG Surging

For its SSG, Lenovo identified its main opportunity as distributed across the trillion-dollar IT services market that continues to see strong growth, and especially including the growth of hybrid working which is driving higher demand for premier and customer fulfilment services. We also see the expansion of digital workplace solutions as fueling demand for as-a-Service for devices, infrastructure, and workplace management. In parallel, the market for vertical solutions including smart city, smart manufacturing, smart education, and smart retail is expected to grow at double-digit CAGR through 2025.

In Q1 FY 22/23 SSG delivered high profitability and high growth, with revenue growing 23% year on year. Operating margin remained high at almost 23%. Of note, SSG generated strong double-digit revenue growth across all segments, with revenue from non-hardware dependent managed services and project and solutions services now accounting for almost half of SSG’s business.

Lenovo SSG is prioritizing investment in software tools, platforms, and vertical solutions including expanding the TruScale portfolio to Digital Workplace solutions market, launching hybrid/multi-cloud solutions, developing sustainability offerings, and expanding its footprint with PCCW strategic alliance.

Lenovo ISG Q1 2022-2023: Record Revenue, Steady Profit Improvement

For its ISG, Lenovo identified its main opportunity as continuing to benefit from robust ICT infrastructure market growth. Lenovo sees the server market alone as expected to grow at double-digit CAGR through 2025, the Edge infrastructure market is poised to exceed US$41 billion by 2025, while the storage market will reach US$36 billion within the same timeframe.

Key highlights of ISG’s Q1 FY 22/23 performance included:

  • ISG revenue exceeded US$2 billion for the first time, up 14% year on year and now profitable for three consecutive quarters.
  • The Cloud Service Provider segment, as well as server and storage reached all-time revenue records, and Lenovo asserts all significantly outgrew the market.
  • Revenue from Edge Computing almost doubled year on year, and in High Performance Computing the ISG business maintained its #1 leadership position on the Top500 list by adding more Lenovo systems using its Neptune liquid cooling technology.

We anticipate Lenovo has a sound plan for ISG sustainable growth including the strategic goals of becoming an end-to-end infrastructure provider, more investment in portfolio and innovation especially in edge & services, driving more in-house motherboard design and manufacturing, as well as balancing scale against profitability.

Lenovo IDG Q1 2022-2023: Innovation Driving Market Gains

For its IDG, Lenovo acknowledged the global PC market is currently experiencing short-term challenges, however PCs are still recognized as a necessity and key productivity tool. Lenovo highlights that the opportunity for IDG aligns with the total available market for PCs as demand is expected to remain higher than pre-pandemic levels over the long term. Alongside PCs, the scenario-based solutions market is growing fast, with the smart collaboration market expected to surpass US$80 billion by 2025.

Key highlights of IDG’s Q1 FY 22/23 performance included:

  • IDG maintained what it claims as industry-leading profitability, with operating profit of over US$1 billion, outgrowing the market to not only retain but also strengthen its global position as a global top-tier PC company. This success was driven by strong growth in premium segments such as gaming and workstations.
  • Smartphone revenue increased by more than 20% year on year, with growth coming not only from the traditional stronghold markets of Latin America and North America, but also expansion markets of Europe and Asia Pacific.
  • Expansion beyond PCs continues, with 22% of IDG revenue coming from non-PC smart devices, embedded computing/IoT, and scenario-based solutions such as smart home and smart collaboration.

From our view, Lenovo has developed the strategic approach key to IDG sustainable growth encompassing continuous investment in innovation from smart devices to smart collaboration to smart spaces, portfolio development focus on innovative form-factors, extreme performance, adaptive intelligence, security, as well as providing seamless connection & collaboration for digital workspaces.

Lenovo Q1 2022-2023: Key Takeaways

Taken together, we see Lenovo delivering its ninth straight quarter of improved revenue and profitability as validating its strategic business commitment to identifying and capitalizing on its diverse revenue engines as well as overall R&D prioritization. Lenovo’s strong results demonstrate the company has instituted the strategic vision, operations, and business processes needed to produce its winning streak amidst uncertain macroeconomic factors such as inflation, post-pandemic supply chain adjustments, and geopolitical tensions as well as the mixed results coming from some major tech players. Now we look forward to Lenovo to sharing more stories on why the company is making such notable strides and inroads across its major markets.

Disclosure: Futurum Research is a research and advisory firm that engages or has engaged in research, analysis, and advisory services with many technology companies, including those mentioned in this article. The author does not hold any equity positions with any company mentioned in this article.

Analysis and opinions expressed herein are specific to the analyst individually and data and other information that might have been provided for validation, not those of Futurum Research as a whole.

Other insights from Futurum Research:

Lenovo Posts $71.6B Record FY2021/22 Revenue, Up 18% YoY

Lenovo Expands Higher Margin IT Services Strategy in Asia-Pacific with PCCW Lenovo Technology Solutions

Lenovo’s Smartphone Strategy is Paying Dividends to its Intelligent Devices Group

Image Credit: Money Under 30

The original version of this article was first published on Futurum Research.

Daniel Newman is the Principal Analyst of Futurum Research and the CEO of Broadsuite Media 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 Big Data to IoT to Cloud Computing, Newman makes the connections between business, people and tech that are required for companies to benefit most from their technology projects, which leads to his ideas regularly being cited in CIO.Com, CIO Review and hundreds of other sites across the world. A 5x Best Selling Author including his most recent “Building Dragons: Digital Transformation in the Experience Economy,” Daniel is also a Forbes, Entrepreneur and Huffington Post Contributor. MBA and Graduate Adjunct Professor, Daniel Newman is a Chicago Native and his speaking takes him around the world each year as he shares his vision of the role technology will play in our future.

Ron is an experienced research expert and analyst, with over 20 years of experience in the digital and IT transformation markets. He is a recognized authority at tracking the evolution of and identifying the key disruptive trends within the service enablement ecosystem, including software and services, infrastructure, 5G/IoT, AI/analytics, security, cloud computing, revenue management, and regulatory issues.

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