Record first quarter, as strategy continues to drive sustainable profitability increases and long-term growth

I am pleased to report Lenovo had record fiscal 1st quarter results in our new organizational structure. To demonstrate how Lenovo is transforming in a fast changing market, I want to focus on the great opportunities we see, and how we will deliver growth and sustainable profitability increases well into the future.

The new normal has changed how people live and work. It has accelerated digital and intelligent transformation, as well as upgrades in smart devices, ICT infrastructure, and applications. With our clear 3S strategy and strong execution, Lenovo is confident of capturing these significant opportunities to further grow and improve profitability.

In fact, last quarter, despite the challenging environment, Lenovo delivered a record quarter with significant year-on-year profitability improvement. Group net income more than doubled. Net income margin reached the highest in many years. Group revenue continued hypergrowth of almost 27% year-on-year.

But I want to say this is just the beginning.

In the coming years, we will continue to focus on high margin businesses including solutions and services, particularly, as-a-Service business, infrastructure upgrades, premium PC and adjacent non-PC devices. We will further increase investment in innovation, and consistently improve our gross margin and overall profitability.

Now I want to go into the details of each business group.

Solutions & Services Group: High margin, high growth

Let’s start with our new Solutions & Services Group, or SSG.

Today, the Information Communications Technology, or ICT, infrastructure is transforming to a new architecture of “Client-Edge-Cloud-Network-Intelligence.” This new IT will accelerate digital and intelligent transformation and bring each individual and enterprise higher efficiency and productivity, but also more complexity. This means customers now need more sophisticated IT services.?This shift created huge market opportunities for solution services as well as managed services -- including the subscription-based, all-inclusive business model, which we call “as-a-Service”. This is not only a reshaping of IT services, but also a massive transformation of the entire industry. IDC estimates the New IT service market to be over 1 trillion US dollars through 2025.

While there is potential to grow in traditional support services, even larger growth opportunities lie within Managed Services, as-a-Service, and the vertical solutions. The margins of each service businesses are much higher than devices alone, so SSG’s high growth definitely will drive higher profitability for the group.

SSG addresses these opportunities with 3 service segments and we already see strong initial results. Last quarter, SSG revenue achieved significant growth year-on-year with strong operating margin of 22% which is much higher than our traditional hardware businesses. Support services profitability was up by almost 3 points year-on-year. Managed Services, as-a-Service, and vertical solutions all achieved double- and triple-digit growth year-on-year. We’ve won many more high-profile smart city and smart retail deals and implemented hybrid cloud solutions with our own IP.

Going forward, we will drive further growth and margin enhancement. Our support services business will improve penetration rates, and leverage the increasing device install base, especially as commercial rebounds to growth. For as-a-Service, we will aggressively invest in capability, platform and tools, and drive scale through building more repeatable vertical solutions with our own IP, and through strategic partnership.

Infrastructure Solutions Group: Accelerating profitability, outgrowing the market

Now let’s talk about our Infrastructure Solutions Group, or ISG. ICT infrastructure is the foundation to digital and intelligent transformation. IDC predicts the ICT infrastructure to be a near 250-billion-dollar market through 2025.

We have been investing in ISG for years. Having started with only a global server business from the IBM x86 acquisition, ISG has built storage, software, service, software defined infrastructure capabilities, and become a full-stack Datacenter infrastructure provider. We also have expanded from providing Enterprise IT infrastructure to public cloud, and full hybrid cloud solutions to our customers.

Now years of investments are paying off and this business is close to achieving profitable growth and generating returns. Last quarter, ISG delivered record revenue and has outperformed the market for 6 straight quarters, while achieving the best results in 5 years. We are now #3 in x86 Server and #2 in Mainstream storage worldwide. Our higher margin businesses – storage, software – continue strong growth year-on-year. In particular, hybrid cloud solutions grew high double-digit year-on-year.

Looking forward, we will continue to invest in ISG’s competitiveness and move toward profitability. We will increase investments in edge computing, hybrid cloud solutions, and 5G cloud-network convergence. We will also continue to strengthen our in-house design and manufacturing capabilities, improve efficiency, and expand strategic partnerships to enable more solutions. Our vision is to become the largest ICT infrastructure solutions provider.

Intelligent Devices Group: Strong profit increase, growing non-PC businesses

For Intelligent Devices Group, or IDG, I want to re-emphasize that the pandemic has changed how people live and work, and PCs have returned to the center of our digital life. People now spend much more time on PC. PC refreshment cycle has shortened, and the penetration rate has increased. IDC confirmed that the total PC demand will at least remain at current levels until 2025, while commercial demand is rebounding quickly. At the same time, the IoT market is expected to surge by 11% CAGR through 2025.

IDG is fully leveraging our PC leadership position and synergy across businesses to expand in adjacent non-PC segments such as smart meeting collaboration and embedded computing. We have also been investing in innovation and premium segments like workstation, gaming PC and thin & light to drive sustainable profitability increases.

Last quarter, IDG continued significant topline growth of almost 30% year-on-year, but profit grew even stronger at over 40%! In one aspect, this is driven by strong performance in PCs. Thanks to years of investment in premium and high growth PC segments, we continue to improve both average selling price and profitability. In another aspect, this result is driven by strong performance of non-PC segments, which already accounts for 18% of IDG’s total revenue. Both tablet and smartphone businesses achieved over 50% growth year-on-year with record performance. We strengthened our #2 position in Android tablets worldwide. Smartphone had record operating margin of almost 5% and now has become a self-sustainable healthy business. We are confident to leverage the change in market landscape to continue hypergrowth.

Going forward, IDG will continue to invest in smarter devices, core component technologies and next generation computing platform. ?We will continue to focus on premium segments to improve average selling price and profitability. We will leverage our broad customer base to cross sell adjacent non-PC products and further increase non-PC business mix.

Investing for the Future, continuing sustainable profitable growth

Last quarter, we increased our R&D spending by 40% year-on-year, and we will continue to invest in innovation and aim to double our R&D investment in 3 years. We will further strengthen operational excellence and improve efficiency through more decisive and thorough digital and intelligent transformation internally. And we remain committed to ESG and sustainable, green development.?All these efforts will not only help us deliver long term profitable growth but also bring to life our vision of smarter technology for all.

Lastly, I invite you to attend our annual flagship event, Tech World next month, where we will discuss more about our vision and our future.

*Read our earnings press release here .