Why is AI supporting Lenovo’s second curve?

At the 2024 MWC (Mobile World Congress), Lenovo's booth attracted the attention of global exhibitors, and a "transparent" notebook became the focus of the audience. This is the world's first 17.3-inch Micro-LED transparent screen notebook concept machine. Its appearance is expected to revolutionize the interactive and creative experience of PC users.

Of course, Lenovo not only continues to launch new products, but its performance is also back on track. In the recently announced third quarter results of Lenovo's 2023/24 fiscal year, we saw signs that Lenovo's performance continues to resume growth: Lenovo's quarterly revenue was US$15.721 billion, a year-on-year increase of 3%; net profit was US$337 million, a significant increase of 35% from the previous quarter. %, profitability improved sequentially for two consecutive quarters.

(Graphic: Lenovo Group’s overall performance revenue and net profit in the past five quarters)

In fact, in the past fiscal year, Lenovo still faced considerable internal and external pressure.

Externally, since the third quarter of 2021, PC shipments have declined year-on-year for eight consecutive quarters, and it was not until the fourth quarter of last year that positive growth appeared for the first time. Under this circumstance, Lenovo's performance in the past two years has naturally been affected to a certain extent.

But only in adversity can we see the resilience of a company. Whether it is innovative R&D investment or the pace of expanding globalization, standing at the crossroads of its 40th anniversary, Lenovo Group has regained new vitality.

Smart devices lead industry recovery

Breaking down the data of each business group, the IDG business group with PC as the core is still Lenovo's basic market.

Among them, IDG (Intelligent Device Business) Group’s single-quarter revenue was US$12.3 billion, a year-on-year increase of 6.7%. Specific to the PC business, according to IDC statistics, Lenovo's PC shipments in the last quarter of 2023 were 16.1 million units, a year-on-year increase of 3.9%, which was 5.8 percentage points higher than the market. While returning to the growth track, the 24% market share also hit a new high since the epidemic.

(Lenovo IDG Business Group’s performance income in the past five quarters)

In fact, in the past two years, due to the overall sluggishness of the smart device market, Lenovo has also thought of many ways to make adjustments. For example, the cost-saving plan mentioned by Yang Yuanqing before has produced certain effects, but it does not quench the thirst, because judging from the financial report , the main reason for poor performance lies not in operations, but in the growth of the business itself.

Or more specifically, the decline in Lenovo's performance stems from the fact that demand in the PC market is still sluggish. An important reason here is that PC suppliers and dealers increased inventory levels during the epidemic, and the subsequent weak overall demand caused inventory to be higher than normal levels for a longer period of time. Therefore, strategically, Lenovo is still destocking.

At present, Lenovo's destocking strategy has achieved initial results. According to Lenovo's chief financial officer Huang Weiming at the recent performance release media communication meeting: "Because we have managed our inventory more actively, the number of inventory days and Accounts receivable have all improved.”

On the other hand, after nearly 40 years of development, Lenovo has become the leader in the global PC market. Standing at the crossroads of the next decade, Lenovo begins to think about new opportunities in the traditional PC business.

The answer given by the market is artificial intelligence.

With the rapid iterative upgrade of large AI models, computing power-related hardware has become the new favorite in the technology industry. Especially in February, Open AI released the Sora Vincent video model, which once again subverted the perception of the AI ​​industry and once again told relevant manufacturers in the industry chain a fact: the development of AI in the future will only require higher hardware computing and storage. As a productivity tool with high popularity and computing power, PCs naturally have to align themselves with the AI ​​track. This means that the industry will produce innovative products that adapt to AI needs, providing new growth points for technology companies.

Lenovo has also been promoting the "All in AI" strategy internally in the past few years. As early as 2018 Tech World, Lenovo proposed the concept of "smart PC" and took the lead in launching the world's first-generation smart PC.

In 2023, Lenovo took the lead in defining the five major characteristics of AI PC. It released dozens of innovative AI PC products at the CES that ended not long ago. At the MWC that is about to end, Lenovo’s innovative PC product “transparent” notebook has become a global The focus of the field.

Of course, behind this is Lenovo's continuous investment in R&D expenses. In the third quarter financial report, Lenovo Group's R&D expenses were US$546 million, an increase of 8% from the previous quarter of US$498 million. The group has expanded R&D expenditures for two consecutive quarters.

 (Graphic: Lenovo Group’s R&D expenditure/revenue ratio in the first to third quarters of the past two fiscal years)

In short, the innovation of AI PC is highly synchronized with the development of the artificial intelligence industry, and both are long-term investments. At present, while Lenovo is actively investing in research and development, the group's overall revenue situation has not been significantly negatively affected by the AI ​​strategy. All revenue and profits are still growing, which reflects that the group has run through the big model era. Key business paradigms such as AI PC have been adopted, and input and output have entered a positive cycle.

AI brings “second growth curve”

In the original PC Red Sea, Lenovo was the industry leader, and its work was closer to "defending the country" and adapting to the times; in areas other than PC, Lenovo now has an opportunity to actively expand: entering the computing power base construction.

For example, AI servers - in parallel with terminal demand, the demand for computing power in the era of large models has also entered a period of rapid growth, which directly drives the rapid expansion of the server market and further increases customer requirements for server performance. TrendForce predicts that global AI server shipments will reach 2.369 million units in 2026, with a growth rate much higher than that of traditional servers.

Therefore, compared with the increment of AI PCs converted from existing PC market stocks, the intelligent infrastructure, intelligent solutions and services that have emerged due to the expansion of computing power demand have more direct room for growth.

There is still a vacuum in the market. Players who are well prepared and enter the game as early as possible can often make profits as early as possible. Lenovo is trying to seize this window.

Public information shows that Lenovo has cooperated with AMD, Intel and other companies to launch a variety of ThinkEdge series edge computing servers, which take into account performance and data security, and can adapt to complex environmental conditions. At the 2024 CES International Consumer Electronics Show, Lenovo also launched the ThinkAgile hyper-converged solution and ThinkSystem server to further expand the artificial intelligence hybrid cloud platform.

Judging from previous IDC data, Lenovo servers have ranked among the top three in the world for three consecutive quarters, and have performed particularly well in the field of high-performance computing. As of May 2023, they have achieved 463 performance test world records, and have won the title 11 times in a row. Ranked No. 1 on the Top 500 list of global high-performance computers.

Market recognition is directly reflected in the performance level: in the third quarter, Lenovo ISG (Infrastructure Solutions Business) Group's revenue increased sequentially for the second consecutive quarter, and the total revenue from storage, software and services reached a historical high of US$1 billion. And in terms of storage equipment and artificial intelligence infrastructure markets, it has basically stabilized among the top three in the world.

 (Graphic: Lenovo ISG Business Group’s performance and income in the past five quarters)

From the expansion of PC business to supporting hardware for large-scale models, the diversity of products has brought more diversified business space to Lenovo.

Even Lenovo's past shortcomings in non-hardware fields are being made up for in the era of large models.

Recently, Lenovo launched a network resiliency as a service (CRaaS) solution, and an AI service named TruScale will also be launched in the near future. Through TruScale, enterprises can deploy and use the latest artificial intelligence infrastructure at a lower cost, including Lenovo's complete product portfolio from edge to cloud, and flexibly choose payment methods and expansion capabilities.

In the third quarter report, the SSG (Solution Services Business) Group recorded a record-high turnover of US$2 billion in the third quarter. The operation and maintenance services and project and solution services business further expanded, accounting for 1.5% of SSG's overall turnover compared with the same period last year. , reaching 55%, has maintained year-on-year growth for 11 consecutive quarters; non-PC business has accounted for 42% of Lenovo Group's total revenue, a year-on-year increase of 1.3%, and a second growth curve that is highly related to AI demand is taking shape. .

 (Graphic: Lenovo SSG Business Group’s performance and income in the past five quarters)

Obviously, Lenovo has chosen an "expansionary" intelligent transformation: AI innovation in the PC business, a comprehensive layout of AI business software and hardware other than PCs, and seizing the blue ocean of computing power and AI services.