MORRISVILLE – Lenovo, a strong quarter behind it, is not taking a victory lap. Instead, the world’s largest PC manufacturer is aiming to further improve its performance by pouring more money into research and development as the world continues to embrace digitalization in the turmoil created by the global COVID-19 pandemic.

“The accelerated digital and intelligent transformation has created significant market opportunities globally. Lenovo is successfully seizing these as we transform from a device company to a services and solutions provider,” said Lenovo Chair and CEO Yang Yuanqing in a statement after Lenovo disclosed its latest quartertly financials early Wednesday in Hogn Kong where its stock is traded.

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“The proof is in our performance – this quarter alone we’ve doubled profitability year-on-year while net income margin reached the highest in many years.”

While revenue surged 27%, earnings soared 119%, underlying Yang’s comments.

Lenovo graphic

Lenovo, which operates dual headquarters in Morrisville and Beijing, not only delivered revenues and earnings that topped analysts’ expectations it also improved operating margins to 2.8%.

The company’s growth earned it a 65-place rise in the new Fortune Global 500 to No. 159 – its best ranking to date.

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The quartertly performance came after Yang reorganized much of the company’s infrastructure and Lenovo continued to capitalize on growing demand for PCs – work-from-home and education at home being big drivers – as well as smart internet of things devices, servers and high-performance computing for cloud and supercomputing.

Yang remolded Lenovo into three groups: Solutions and Services Group (SSG), Infrastructure Solutions Group (ISG), and Intelligent Devices Group (IDG) as the year began.

PC sales, meanwhile, surged in the second quarter by nearly 15% to just over 20 million. Its global marketshare is up to almost 24%, topping No. 2 HP by just short of 2 percentage points.

More R&D

To capitalize on the company’s momentum, Yang said Lenovo would pour more money into R&D. Investments were already up 40% from a year earlier, Lenovo noted. Yang wants more.

“Going forward, we will continue to increase R&D investment, aiming to double it over the next three years,” he said, adding: “We will further improve our operational excellence; and we remain committed to green innovation and corporate citizenship to achieve long-term sustainable profitability increases.”

Lenovo’s earnings soared 119% year-over-year to $466 million from $213 million. Earnings came in at 4 cents a share, more than double the 1.8 cents of a year ago.

The earnings exceeded analysts’ projections of $345 million, Reuters reported.

Revenue climbed 27% to $16.9 billion from $13.3 billion.

Analysts had expected $16 billion, according to Reuters.

Here’s how Lenovo summarized the performance of each of the three groups:

Solutions and Services Group (SSG): driving increased Group profitability in rapid growth sectors

The industry is transforming with customers needing more sophisticated IT services, creating huge opportunities for solution services and managed services, including the subscription-based as-a-Service model. It’s estimated that the IT services market will be worth over US$1 trillion through 2025.

Q1 performance:

  • Significant Q1 revenue growth (38% year-on-year to US$1.18 billion) across three key segments of SSG (support services, managed services/as-a-Service, vertical solutions) with an operating margin of 22%, much higher than the traditional hardware businesses.
  • Support services profitability was up almost three points year-on-year; revenue from managed service/as-a-Service achieved double-digit growth year-on-year, and contract value for vertical solutions achieved triple digit growth year-on-year.
  • Success has come from several new high profile smart city and smart retail deals, as well as hybrid cloud solutions using Lenovo IP.

Looking ahead:

  • Against this backdrop, Lenovo will improve penetration rates for support services and leverage the increasing device install base, especially as the commercial sector rebounds to growth. For as-a-Service the company is aggressively investing in capabilities, platforms, and tools, as well as driving scale through building more repeatable vertical solutions using Lenovo’s own IP and through strategic partnerships.
  • The significantly higher margins of the three key segments for SSG will drive higher profitability for the Group overall in the quarters and years to come.

Infrastructure Solutions Group (ISG): accelerating profitability and significantly outgrowing the market quarter after quarter

ICT infrastructure is the foundation to digital and intelligent transformation, with ICT infrastructure predicted to be a near US$250 billion market through 2025. After investing in building a strong foundation, Lenovo is well positioned as a “full-stack” ICT provider.

Q1 performance:

  • ISG delivered record revenue of US$1.8 billion, has outperformed the market for six straight quarters, while achieving the best results in five years.
  • Now #3 in the global x86 Server market and #2 in mainstream storage.
  • Higher margin businesses – storage, software, and Hybrid Cloud solutions – continue strong growth year-on-year, with Hybrid Cloud Solutions growing high double-digit year-on-year.

Looking ahead:

  • The Group will continue to invest to grow the business with a vision to become the largest data center infrastructure solutions provider, by increasing investments in edge computing, Hybrid cloud solutions, and 5G cloud-network convergence. The company will continue to strengthen in-house design and manufacturing capabilities, improve efficiencies, and expand strategic partnerships to enable more solutions.
  • Ongoing investment in overall ISG competitiveness will further drive profitability and overall competitiveness for the business group.

Intelligent Devices Group (IDG): record profit, further growing non-PC businesses

The pandemic has changed how people live and work, with PCs returning to the center of digital lives. The PC refreshment cycle has shortened, the penetration rate has increased and the total PC demand until 2025 will at least remain at current levels, with commercial demand rebounding quickly. At the same time, the IoT market is expected to surge by 11% CAGR through 2025. And new opportunities in non-PC businesses are growing rapidly.

Q1 performance:

  • Record first quarter for both profit and revenue. Profit of US$1.1 billion, up 43% year-on-year and revenue of US$14.7 billion, up 28% year-on-year – driven by a combination of strong performance in PCs and growing performance of non-PC segments, which now account for 18% of IDG’s total revenue.
  • Average Selling Price and profitability continue to trend up, thanks to ongoing investment in premium and high growth PC segments like Gaming, Workstation, Thin & Light.
  • Lenovo strengthened its #2 position in the global Android tablet market, and the smartphone business delivered over 60% revenue growth year-on year and is now a self-sustainable healthy business, with record operating margin for the quarter of almost 5%.

Looking ahead:

  • Lenovo will further invest in smarter devices, core component technologies, and next generation computing platforms.
  • Lenovo will leverage its broad customer base to cross sell non-PC products, to drive sustainable profitability increases.