The Six Five team discusses the Lenovo 2023 analyst event.
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Daniel Newman: The Lenovo analyst event. Pat, you and I spent the better part of what two and a half days in a beautiful, green Raleigh Durham, RTP at Lenovo’s headquarters, and we were joined by really their entire global executive team from overseas. We had the honor of hearing from their CEO who goes by YY, literally the two letters, YY, that’s how he presents and that’s how everyone calls him when we talk to him. And he was really generous Pat with his time. Not only did he spend some hours with a small group of analysts, but he also took us for pretty remarkable dinner in Raleigh. Entire menu that was created just for this particular event. And Pat, I don’t know about you, but I’m still full.
Patrick Moorhead: No, I am. I mean I made the mistake of thinking we were done. We were halfway through and I had eaten so much Peking duck that I couldn’t even eat any of that lobster.
Daniel Newman: Oh, but it was so good. It was so good. Yeah, I did the exact same thing, the fifth, sixth, seventh, and eighth courses. I was like, “Oh my gosh, I shouldn’t have eaten so much of the first four”, but really great dinner. But that’s a small fraction of what we experienced during these few days. Look, Lenovo is a very diverse company that covers a immense amount of ground. It’s everything from the PCs and devices, which is what it’s probably most well known for. And whether you talk to YY president of international markets, Matt Zelinsky, head of infrastructure, Kirk Skaugen, and they would all tell you that when you had talked to people, they’re going to say they’re known for the device, the ThinkPads. That’s what Lenovo’s known for. But over the last few years, it has seen its revenue distribution change substantially above 40% of its revenue now coming from its infrastructure and services group.
And while I really focused on a, that the company’s core PC business is likely turning the corner. You heard him say the market had bottomed. And I think we’ve been waiting some time to start to hear that the chip CEOs and the OEM CEOs say that with some level of confidence. And he was able to say with some level of confidence that he thinks that we’ve arrived and that the market recovery is likely going to begin. Now if you listen to Jerome Powell’s fed speak this week, you would hear he still thinks inflation is high. He’s turning the screws on interest rates. And that worries me a little bit. The market took an absolute dive on the comments and with higher rates you would see even lower growth for a lot of companies. But I’m going to stay positive here. The company’s infrastructure business has had about 12 quarters in which it’s run at a really great clip under Kirk Skaugen’s leadership strengthened, storage strengthened server.
He did an absolute victory lap of wins that the company had had both partnership wins, ecosystem wins, and customer wins. The company also really leaned into its One Lenovo and its SSG ISG IDG strategy. Only about 25% of the company’s customers buy more than just the PC, the IDG business. So while the revenues distribution is getting more even, they still have a huge customer swap that are not purchasing across their portfolio. Now, some are consumers and the consumers will never buy infrastructure, but getting to a bigger set of their enterprise customers with their services and infrastructure is going to be a huge opportunity for the company to grow. And then finally, I’ll say this, Pat, I feel like AI was brought up at least a couple of times and by a couple, I mean a couple of thousand times it feels like that was the focus.
And look, there’s this AI continuum right now and every company’s vying for what is our place in the AI world. And companies like Lenovo and HPC have a lot of provenance and pedigree. They have a lot of history selling GPUs for data center, and these are kind of the AI links. But from a service standpoint, building out a vertically integrated solution for retail where you build edge capabilities with AI for computer vision and machine learning using OEM partnerships, cameras and integration and software. I thought that was probably one of the interesting ways that they’re really getting to AI is through vertically integrating, going out to market with solutions and offering it across the portfolio, saying we can put infrastructure services and even devices together to offer a fully integrated AI solution. That’s kind of the One Lenovo that I envision.
Look, I could go on for hours because Pat, we had like 25 hours of content, but these are kind of the big things that were on my mind. I’d like to see more and more tie together of the whole portfolio. And of course I want to see that software data layer addressed a little bit more by Lenovo if they want to be serious about their AI strategy. But when it comes to pickaxes and shovels, the company has a good story brewing.
Patrick Moorhead: Yeah, I need to watch what I say because it was a blend of public information, NDA information and a bar good information. So I’m going to probably say less than more. In fact, even the slides that the company said we could share had Lenovo confidential on it. So it was a bit confusing.
Daniel Newman: I don’t think I said anything I couldn’t did. I?
Patrick Moorhead: Don’t know. We’ll see, I guess later this afternoon.
Daniel Newman: I don’t remember. I noted things that had the, okay, go ahead.
Patrick Moorhead: I don’t think you did. I’m not saying that for that. I’m just looking through my notes wondering what I can say and what I can’t. So on a macro view, this is the first time I felt there was truly a One Lenovo and I looked at different things for sources of truth and even basic stuff like do the slides look the same and are they supportive of each other between IDG ISG and SSG? And the fact is that they were, and it was very well articulated for the first time, I believe that there’s One Lenovo. And I think that’s powerful, right? And it’s powerful. And there’s a couple of ways you can get synergy. You can get synergy across the sales and marketing plane, you can get synergy across the product plane and then you can get synergy across the solution plane. And I saw collaboration across all three, which was interesting.
And a lot of those technologies came together with AI. How was AI being leveraged in services, the data center and the edge and in devices. So that’s really good and that’s really powerful. And I don’t think right now it comes at the individual products being weaker because that’s always the trade-off. When you’re going for a synergy play, are you still best in breed in the markets that you’re in? IDG is just an absolute runaway success. The leadership that Kirk has provided really is-
Daniel Newman: You mean ISG, right? Just to be clear.
Patrick Moorhead: Sorry, ISG. Yeah, the data center and the data center edge group and the leadership there. I mean, just look at the numbers. I mean 5x, 10x getting back to profits now, it’s not that profitable of a business, but I believe that the company is still in scale mode because it serves the hyper-scalers to get a basis of volume that it could get good commodity prices. But man, I saw some logos that were not Joe’s Gas Station like you would’ve seen five years ago. These were Fortune 500 healthcare companies, these were major retailers out there like McDonald’s. So they’re really making it happen. And then when I look at the devices group, you actually have smartphones, consumer devices and PCs. PCs are still rocking it. Lenovo is still number one and ThinkPad is still number one in commercial, which is pretty amazing. And they really laid out what they wanted to do and leverage AI that I thought was very clever.
I can’t go into, they’re not just aping what Intel and Qualcomm are doing at AMD, they’re coming up with some pretty novel stuff themselves, which you will see soon. And then on the services side, and by the way, this is another reason why the device’s numbers and the data center. Hey, you’ve got background noise that I keep hearing. Oh, where are you going buddy? Come on. Oh, okay. Just mute yourself if you got that. But it’s because the services profits and revenue are taken in SSG, right? And you don’t see any other, you don’t see that at Dell, you don’t see that at HPE. It’s an absolute separate division. So the hardware margins of the hardware margins, which is pretty crazy to me. But SSG is on the move too. When it first formed, I was super skeptical because quite frankly, Lenovo five years ago was a hardware company.
And going from a hardware company to a services company is really hard. The company made acquisitions, the company completely reorganized, and Ken Wong, I think has done a fine job up to this point making inroads into that market. They focus on three specific solutions that they’re prioritizing right now, hybrid, cloud AI and workforce solutions. And those are just low hanging fruit where the company can leverage its premises in hardware and then get really good at the as a service offering. So I would say my view of the company took a tick up if nothing else on the One Lenovo, I agree with you on the data center AI side, it’s something that’s missing from their story. How are these companies going to connect ERP data, SEM data, CX data? What is Lenovo doing to help that? They’re very focused on, I would say in-depart type of solutions, which is how can I do better with the CX data?
How can I do better with the ERP data as it relates to generative AI? And to their credit, they’ve taken all the way to the vertical side of it, partnering with, I would say some of the smaller startups that are killing it in FinTech, in retail, different verticals like that, warehousing, transportation. So yeah, my view definitely went up. I think my last comment is the company needs to re-look at the way it spends its marketing dollars. If 43% of the revenue is non PC, are they actually spending 43% of their marketing dollar on SSG and on ISG? Doesn’t seem like it, but I don’t have the spreadsheet in front of me, but it doesn’t feel like it.
Daniel Newman: All right. And I think that for both you and I’s sake, we believe that if you get the momentum in one particular part of the business, like ISG, you want to lean into that and give our friend Flynn some room to grow, we would say.