Diversification and operational resilience drive stable profitability – as Lenovo continues service-led transformation

Among all the uncertainties over the past year, the market conditions have evolved relatively in line with our expectations. Despite the challenging economy and soft device market demand, we continue to make steady progress in our service-led transformation and technology-driven innovation. For the full fiscal year, we maintained stable profitability, thanks to our diversified growth engines and operational resilience.

Full Year Group: Stable Profitability and Steady Transformation

We believe that, overall channel inventory digestion will come to an end, and the trends of shipment and activation will become more consistent. The entire smart devices market is expected to resume growth in the second half of this year. And the IT service market will resume relatively high growth, driving the total IT market in 2023 full year back to moderate growth. In the mid to long term, digital and intelligent transformation will continue to accelerate, leading to big growth potential for cloud and the entire computing infrastructure.

Last year, we overcame tremendous challenges, and achieved stable profitability. From full year point of view, our revenue was impacted due to device market softness, but thanks to our strong growth of solutions, services and infrastructure businesses, our net margin was keeping flat year-on-year on a non-HKFRS basis. Non-PC revenue mix increased to nearly 40%, demonstrating the effectiveness of our efforts in building the diversified growth engines.

At the same time, our cash position remains strong and we significantly improved our cash conversion cycle. With a healthy liquidity, we have been able to remain committed to our investments in R&D around New IT to build our future core competencies. And we continued to deepen our commitment to ESG.

In fact, anticipating the decline in PC and smartphone demand over the past few quarters, we proactively took actions to mitigate the risks. With our solid profitability, strong market position, resilient operations, and more importantly, reaching new milestones in our transformation from a device/hardware company to a solutions and services company, we are well-prepared to achieve sustainable growth in the future.

Now I will talk about each of our businesses.

Full Year SSG: High Margin, Strong Growth

Let’s start with SSG, Solutions & Services Group. The “New IT” services segments within the trillion-dollar IT services market continue to expand. By 2025, Device-as-a-Service market and Cloud solution market are both expected to grow at double-digit CAGR. Vertical solutions and services spending will also keep strong growth.

Last year, SSG delivered strong revenue growth and high profitability to become both our growth engine and an important profit contributor. Revenue broke record to reach $6.7 billion, with operating margin standing high at 21%. Revenue mix of the non-hardware driven solutions and services has increased to more than half of our SSG business.

Meanwhile, SSG has consistently invested in building scalable and repeatable horizontal solutions or building blocks that can be deployed in vertical industries, leveraging our own IP. In addition, we have been continuously enhancing our Digital Workplace Solutions and developing TruScale Hybrid Cloud solutions portfolio.

Full Year ISG: Record Revenue, Record Profit and Hypergrowth

Our Infrastructure Solutions Group, or ISG, continues to benefit from the ongoing ICT infrastructure upgrade. By 2025, the server market will surpass 132 billion USD; storage, 36 billion; and edge infrastructure, 37 billion.

Last year, ISG delivered historic full year performance and became a profitable high-growth engine. Its total revenue grew 37% YTY to $9.8B, and achieved all-time high. We also achieved record-high revenue in server, storage and software respectively. We have moved up from the fourth to be the third largest server provider in the world, and have jumped from No. 8 to No. 5 in global storage market.

Meanwhile, we have been consistently improving our in-house manufacturing capabilities, cost competitiveness as well as the full stack products capabilities that cover both CSP and Enterprise & SMB segments. We have also made significant investment in infrastructure innovations empowered by artificial intelligence, such as A.I.-powered edge computing, hybrid cloud and intelligent operation.

Full Year IDG: Leading Market Position and Profitability

For our Intelligent Devices Group, or IDG, its business performance was impacted by continued device market softness and channel inventory digestion in the first half of 2023. But given PCs are still the essential productivity tool in this digital era, we anticipate the PC market will return to year-on-year growth in the second half of 2023, with accelerated growth in 2024. Meanwhile, driven by digitalization trend and hybrid work model, Smart Spaces solutions continue to see steady growth.

Faced with severe market headwinds, IDG revenue declined year-on-year, but successfully maintained our PC market leadership and industry leading profitability. We increased the revenue mix of premium products to 30%. Our mobile business continues to be profitable for three consecutive years and achieved premium-to-market revenue growth in most of the markets. And our smart spaces solutions continued to demonstrate great growth potential.

We will continue to take actions to manage expense and further sharpen our operational excellence. And we will keep investing in innovations focusing on premium offerings and adjacent areas, while enhancing smart space solutions for hybrid work model.

Holding Strong in a Challenging Market

Let me also briefly cover our fourth quarter performance. It was?the most challenging quarter of the year, facing pressures from both device market and global economy.??Our IDG revenue declined due to severe downturn in both PC & smartphone markets. But both?SSG and ISG?maintained?high double digits year-on-year growth momentum, which helped to offset the device market softness.?Now, our non-PC revenue mix reached a historic high of 43%.

Furthermore, we have recognized a one-time restructuring and other charges, along with various other actions, to deliver about $850M annual run-rate group expense savings onwards, helping to establish a solid foundation for our operation in a challenging market, and position ourselves for future growth.

Outlook & Conclusion

Finally, I’d like to highlight Lenovo’s solid performance in the face of an industry downturn over the past year. We are already seeing positive signs of market stabilization. Our strategy has been proven to be working, and our operations continue to demonstrate resilience. And most importantly, even in a challenging market, we have increased, rather than decreased, our commitment to innovation, solutions, and services. Lenovo is now fully prepared, in a stronger position than ever before, to capture the next wave of growth opportunities.

*Read our earnings press release here.