By Yuanqing Yang, Lenovo Chairman and CEO
Last quarter, the entire PC and Mobile market experienced a severe downturn, as shown in the results of other players in our industry. Inevitably, Lenovo was largely impacted too. But with our diversified growth engines of infrastructure, solutions and services, over 40% of our revenue now is driven by non-PC businesses. These also helped us to maintain solid profitability. Even in PCs, we continued to keep our market leadership and industry leading profitability. We believe the PC market might stabilize sooner than many expect, and we continue to drive efficiency in our already lean operations, maintain healthy cash position, and invest in innovation and sustainability.
Diversified Growth Engines & Operational Excellence Offsetting Headwinds
Despite slower IT market growth in the short term, total IT spending is expected to recover to a moderate growth rate in the mid to long term. Meanwhile, the mega trend of digital and intelligent transformation continues to accelerate.
Last quarter, impacted mainly by a significant decline in device business, our group revenue was down by 24% year-on-year, or 18% in constant currency. Both solutions and services business and infrastructure business grew by high double-digit year-on-year to historic records. With positive operating profit contributed by all our main businesses for the 5th consecutive quarter, we remain committed to doubling profitability in the medium term.
Last quarter, we took proactive actions to reduce expenses and improve efficiency to ensure our cost competitiveness, especially in areas where we see a softer market outlook. Our cash balance is still strong, cash conversion cycle continues to improve, and channel inventory is reduced, which allow us to continue investing in R&D centered around New IT technologies.
Now I will talk about each of our businesses.
SSG: Record Revenue, High Margin
Let’s start with SSG, Solutions & Services Group. Although adjusted to slower growth this year, the trillion-dollar IT services market is expected to remain strong for the mid to long term. By 2025, Managed Services for cloud, on-prem and edge is expected to increase at 7% CAGR, while hybrid infrastructure solution is becoming essential. Vertical solutions and services spending is also expected to remain at almost double digits CAGR growth in education, smart retail, smart city, and manufacturing from 2023 to 2025.
Last quarter, our SSG’s revenue grew by 23% year-on-year to 1.8 billion USD, setting a new record. All segments again delivered high profitability and strong revenue growth. The revenue mix from non-hardware-tied solutions & services achieved a record high of 53%, with Managed Services business almost doubled year-on-year. Lenovo’s Hefei factory has been added to World Economic Forum’s Global Lighthouse Network for its smart manufacturing solution.
SSG continued to invest in building scalable and repeatable horizontal and vertical solutions with Lenovo IP. We also enriched our digital workplace solutions, strengthened our hybrid cloud portfolio, and further expanded our sustainability offerings.
ISG: Record Revenue, Record Profit
Our ISG, Infrastructure Solutions Group, continues to benefit from ICT infrastructure upgrade. By 2025, the server market will reach 135 billion USD; edge infrastructure, 37 billion; and storage, 35 billion.
Last quarter, our ISG revenue increased by 48% year-on-year to a historic high of 2.9 billion USD, beating records for three consecutive quarters. Operating profit more than doubled year-on-year to a new record. Server revenue grew by 35% year-on-year, making Lenovo the third largest server provider in the world. Storage more than tripled to become #5 in the world, and software grew by 52% year-on-year, all reaching an all-time high.
Meanwhile, we continued to enhance our comprehensive infrastructure portfolio and to invest in innovation, particularly in A.I. empowered edge computing and hybrid cloud. We strengthened Lenovo’s unique advantage to balance scale and profit. We remain focused on being one of the fastest growing and ultimately the largest end-to-end infrastructure solutions provider in the world.
IDG: Solid Profitability, Expansion into Growth Areas
Last quarter, our IDG, Intelligent Devices Group experienced a severe decline in device markets. However, the real demand reflected by the activation data was actually better than the shipment data seemed to indicate. While the PC market still needs some time to digest the inventory to a healthy level, we believe total shipments are likely to stabilize at a higher than pre-pandemic level as early as the second half of this year.
In tough market conditions, IDG successfully maintained the #1 position in PCs and industry leading profitability for the past quarter. We achieved a solid operating margin at 7.3%. Our strong product competitiveness was further reflected in leading activations and resulted in improved inventory level.
Our smartphone business achieved the 11th consecutive quarter of profitability. Our premium product Motorola Edge’s activation grew by 74% year-on-year. We expanded the premium product mix for our tablet portfolio as well, meanwhile our smart spaces solutions demonstrated growth potential with key wins.
In the short term, we will take proactive actions to reduce expense and improve efficiency to ensure business healthiness. While in the long term, we will keep investing in innovation focusing on premier PC and adjacent areas and drive the evolution from smart device to smart spaces. Last month at CES, our Yoga Book 9i as the first full-sized OLED dual screen laptop in the world, won a historic high of 50 awards. And our enhanced digital workplace solutions are improving user experience in a hybrid workspace.
Outlook and Conclusion
Looking ahead, while the industry cycle still needs some time to run its full course, strong execution can make a big difference. Our diversified growth engines are firing up. Our operational resilience is supporting the results. Our healthy liquidity is ensuring the soundness of the company. And our investment in New IT is building the next wave of our competitive advantages. Because of these, we are confident to deliver sustainable growth, and improve profitability.
