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Close but no cigar: Lenovo infrastructure group narrowly falls short of a profit
When IBM sold it back in 2014, it was a breakeven proposition. Seven years later not much has changed
Lenovo has come within $17 million of recording a profit for its Infrastructure Solutions Group (ISG), the enterprise hardware division within the PC giant.
Readers may recall that the ISG has its roots in IBM's 2014 sale of the System X server business to Lenovo.
At the time, IBM described System X – which offered Intel-powered servers – as "a $4 billion business for us last year" that achieved "breakeven on an annual basis".
Lenovo has added new products to the mix – storage, HPC, and kit for hyperscalers – and almost doubled revenue, yesterday reporting Q2 21/22 sales of $1.97 billion. But the ISG remains just about a breakeven proposition, recording a $17 million loss.
Lenovo has spent years promising the group will turn a profit real soon now. Maybe next quarter the dream will come true, as it seems positioned to deliver some black ink. On the company's earnings call, execs claimed the group "outgrew the market in nearly every segment". Sales to clouds "reached a historical high revenue with over 50 per cent year-on-year growth". Storage revenue delivered the same result and enterprise and SMB revenue recorded a 20 per cent year-on-year jump.
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Execs predicted that the ISG's high-margin products and shift into edge and 5G will see it outgrow Lenovo's PC business.
Speaking of which, the Intelligent Devices Group (which includes PCs) saw demand for the machines grow and achieved revenue growth of 21 per cent year-on-year to $15.3 billion. The firm also scored profitability growth of 34 per cent year-on-year, achieving a $1.2 billion profit. Lenovo's leaders predicted PC demand of 340–355 million units a year for the next few years.
The company's smartphone biz, acquired from Google via Motorola, had its best ever quarter and delivered a record $89 million profit. Tablet sales surged, too.
Solutions and Services – Lenovo's ITaaS unit – delivered $1.36 billion of revenue, marking a 30 per cent year-on-year jump, operating margin of "almost 21 per cent" and now accounts for 7.3 per cent of the corp’s revenue. Managed services revenue rose 90 per cent.
Interestingly, Lenovo is integrating its internal IT function into SSG to "improve the business group's R&D delivery capability and turn proven internal digital capabilities into solution offerings for customers."
China has become home sweet home for Lenovo. The Middle Kingdom delivered $9.4 billion of revenue in the first half of 21/22, and grew revenue 44 per cent year-on-year. That performance was reported across all three Lenovo groups.
Supply chains were of course of interest to analysts on the call, and execs admitted to order backlogs and difficulties obtaining parts. But they were also confident that the company's scale makes it a preferred customer for its suppliers, and that the strength of its balance sheet permits some leeway to hold inventory.
CEO Yang Yuanqing wrapped things up with a pledge to drive growth by doubling R&D spend in three years. Lenovo had plans to fund that effort by listing on the Shanghai stock exchange, but after issuing approval for the float the bourse reversed its decision.
On the earnings call, Yang brushed aside investment analysts' concerns that the cancellation would hurt the company, and described the Shanghai listing as "just nice to have". He said losing it "will not impact our business as well".
He beamed, "As you can see our performance is still very strong. We have no problem to further grow in the next couple of quarters." ®