The Six Five team discusses Lenovo’s Q1 2024 earnings.
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Patrick Moorhead: What do we see from Lenovo Q1 ’24? You got exactly as you would expect with, I don’t know, a few head turns. So first of all, lousy PC market, SSG did well. ISG was a bit of a surprise, but was it really? So overall revenue off 23%, the personal systems group, IDG, was off 28%. And as a percentage of revenue, if half of that revenue is off 28%, even if you’re up in certain areas, you’re going to be off. So the company, not to put the best performing first, they always start with SSG now, which by the way I still think is awesome and risky because it’s just so new, they had double-digit growth, 18%. They did a really good job. And as you would expect, we’ve seen a lot of these different types of metrics, very consistent metrics. First of all, the percentage year to date in managed services, 54% growth.
But I think the one that still impresses me the most is that 50% of SSG revenue is not directly related to the hardware they sell. Because with hardware, comes a lot of services. You plan, you install, you get rid of the equipment. Sometimes you’ll do help desks, sometimes you’ll do PC as a service. So that’s the one that impresses me the most. So true scale is a hardware related services business, so 50% of that, and that comes to managed services. And you’re like, wait a second, isn’t that like the land of GSI? What Lenovo has done is it has invested in areas that you would expect them to have core competencies in. Which by the way, like hybrid cloud and some of the industry verticals like manufacturing and retail. So it makes sense to me. They also operate very heavily in Southeast Asia. So again, good job, a lot of what we had seen prior, just a little bit more.
So ISG, data center and the data center edge, off 8% top line. And the quote, and you and I are going to be talking to Kirk later in the day I think, sluggish infrastructure sector demand and slow platform transition. And it’s interesting, a lot of ISG’s business is dependent on the hyperscalers. And what we’ve seen is that again, there’s not always a direct correlation in the same quarter between the hardware folks and the hyperscalers in terms of their numbers, but the hyperscaler numbers are down. I think we saw what, AWSs is 12% growth or something like that, and Azure wasn’t that impressive historically either as a percentage. And you and I talk a lot of large numbers, but I need to dig into this.
I do have a hypothesis that says, there’s not enough GPUs to go around. And what’s happening is, Nvidia is selling a bunch of GPUs and putting them into old servers, or older servers, so you don’t need a new server to do this. That’s a hypothesis and I’m sticking to it until somebody can prove me wrong.
But hey, big bright spots, right? I mean, storage revenue more than doubled year over year. ThinkEdge, which we talk about Web Four and on the edge, smart manufacturing, smart retail, nine consecutive quarters of growth.
So let’s move to IDG, which is personal systems. As I said before, revenue off 28%, which obviously impacted the entire company because it’s 50% of its revenue, but also their profits. Profit margin was down, and it’s gone from 7.5% a year ago, 7.4, 7.3, 6.7, down to 6.3%. And looks like there’s inventory pressure, and possibly also pricing. The stuff that people do to clear out inventory in the PC market is incredible. Like ISG, bright spots too, record premium smartphone mix. Sometimes we forget that Motorola is the number three market share leader in the United States in smartphones and they’re up 8%, eight points year to year, 10 year record activation. So all is not down, some bright spots.
That’s all I got buddy. What do you got for Lenovo?
Yeah, I mean it was on the surface a bit of a tougher sled after several quarters. It’s been really easy, Pat, to just say, PC is PC and everybody’s off. But what the last several quarters for Lenovo have been is, oh, look at our huge growth in infrastructure, look at our huge growth in services. This quarter was a bit more modest, services had a small growth, infrastructure actually saw a pullback for the first time in several quarters. And I tend to be aligned with you, I think the purchase mix has shifted substantially from CPU to GPU in the data center. And I do think that next week, we’re going to get the real number, Pat, when we see what Nvidia after its massive guide last year-
Patrick Moorhead: What do you think man, up 4, up 5?
Daniel Newman: I think it’s 4.5 up. And this goes back to just what I said, I don’t see why they would’ve guided 4 up to just barely make that. I think they had the orders in hand, if I’m being honest at that time. But Nvidia’s kind of, it gets to play God a little bit right now in terms of deciding who gets what and then of course who’s willing to be the highest bidder. I can’t wait to see the margins, just as to what people were willing to pay to get the supply that was available.
But yeah, back to Lenovo, the company is having to continue to strategically address the growth while having to play in this AI space. Its services was the most capable of doing that, because it’s able to focus on managed services, it’s not as hardware dependent, it’s got infrastructure that’s already been stood up to support that. And then of course, it’s got soft services that don’t require hardware. And so that team, and we did talk to the head of that business, Ken Wong, there’s confidence. It’s going more vertical, more industry solution based, company’s investing big time in multiple years in AI to be a player in that space.
And listen, for OEMs it’s going to be a challenge. As the AI experience moves to the application layer, the infrastructure providers, you mentioned this with Chuck and networking, and we’ll mention this here, you got to have data, you got to have storage, you got to have compute. And by the way, with inference it’s not going to be all GPU. Even though we like to make the GPU everything, there’s still going to be demand for traditional acceleration on CPU. Also, there’s going to be a pretty big swing at some point to edge in devices where AI is going to have to have an on device. And that’s something that I think Lenovo will be well positioned to deal with.
So I’m not going to say much about the device market, Pat, let’s just say based on what I said in the last segment about Cisco and the overall macro, it’s still murky. It’s opaque to me whether we’re really out of it. It kind of felt for a while, everything started feeling frothy again, felt like maybe we’re going to head for a soft landing. Every stock had started running up to almost near highs, we were almost back to the highs of 2021, and we got a bit of a gut reality check this quarter. Seeing the numbers from Cisco on infrastructure was promising for enterprise spend, seeing some of the numbers here from Lenovo to me is indicative of, it could be a supply issue, it could be a demand issue. That’s not entirely clear on the PC side. I still think we’re a couple quarters away from seeing.
But I do think AI was going to create a new kind of product, new demand for a new profile. And then just doubling down on infrastructure, there were some bright spots, there were some good numbers in there, you mentioned this. And the company did announce it’s what, the number three on infrastructure for AI now, that’s what they’re claiming. So strong there, and even still the number one on PC, with inventory now. So we see the tide turn, this could be a good thing for Lenovo. Not the easiest quarter for any CEO or for any leadership team to tell the market, but there’s still a lot of good things happening there. And I do think the corner will be turned, most likely not until really into probably the first, second quarter of ’24.