Lenovo’s stellar results in the final quarter of 2021 were buoyed by a robust performance by its new Solutions and Services Group (SSG), which was the company’s fastest growing business unit and the one registering the highest profit margin.
That’s quite a contribution given SSG was set up less than a year ago to take advantage of opportunities in IT services as enterprises expand their operations in the face of rapidly changing business and economic conditions. The service business has emerged as the structural growth engine for Lenovo.
Ken Wong, global president for SSG, said in an earnings call fiscal Q3 was the third consecutive quarter when its revenue growth was faster than the company’s, while maintaining a high level of profitability. “This is once again giving us confidence that our service-led transformation strategy is actually executing well.”
In its earnings release, Lenovo highlighted the unit’s increased importance “boded well to the overall margin profile of the group”.
In the call, chairman and CEO Yang Yuanqing pointed to the accelerated digital and intelligent transformations as part of the new normal which continues to generate significant opportunities. “Investments in digital transformation I expected to increase more than 16% annually over next three years.”
Yang believes SSG will capture the remote work trend and leverage its global service footprint to provide accessibility and flexibility to customers. The unit will also invest in TruScale offerings, hybrid cloud solution, and other software and the services with our its IP and expand sustainability offerings.
SSG revenue increased 25% year-on-year in fiscal Q3 to $1.5 billion, while operating profit surged by 44% to $332 million. Operating margin grew 2.9 percentage points to 22.2%.
Looking ahead, the unit see opportunities stemming from remote working and the way IT resources are deployed. In addition, rising ESG priorities at the CxO level are expected to open up new opportunities.
As technology architecture becomes more complex, customers are demanding more sophisticated IT services. The company forecasts digital and cloud services each to account for 20% of the more than $1 trillion global IT services market by 2025. It also expects robust demand for customized services driven by almost half of the global workforce currently working from home. These factors are expected to continue to fuel high-margin growth across its three service sectors.
The company sees substantial room for as-a-service growth in PC and data centers, coupled with increased spending on digitalization and cloud, which will benefit all service segments. Given the bright outlook for the sector, SSG plans to strengthen its end-to-end offering to address customer pain points in hybrid working, multi-cloud management as well as cybersecurity.
In fiscal Q3, Support Services sales grew 21% as a result of rising service penetration; Managed Services revenue surged 50%, with improved profitability; and Project Services and Solutions posted growth of 23% due to its expanded footprint in EMEA and smart retail contracts.
The brisk growth was supported by hybrid work arrangements fueling strong demand for custom fulfillment and asset recovery services. Its TruScale as-a-service portfolio won a number of deals during the period, expanding its geographic presence and customer base.
On the downside, a new wave of Covid-19 cases created challenges in project delivery, despite strong underlying demand. Total contract value for Project Services more than tripled, with major smart retail deals driven by increasing adoption of in-house IP solutions.
Lenovo’s overall results were also supported by its smartphone division, with the company claiming to be the fastest growing major smartphone vendor in the closing months of 2021. Smartphone sales increased 46% in Q3 to $2.2 billion, with operating profit rising 37% to $89 million compared with the same quarter the previous year.
In addition to targeting new market for its mobile devices, Lenovo plans to boost investment in development of products related to IoT, metaverse, smart home and business collaboration.
Across the company, including Intelligent Devices Group (IDG) and Infrastructure Solutions Group (ISG), net profit in Q3 jumped 62% year-on-year to $640 million, with revenue increasing 17% to $20.1 billion, both all-time records. Its net margin rose nearly 1 percentage point to 3.2%. Net income rose by more than 50% for the sixth consecutive quarter,
Revenue for the nine months to end-December was up 22% to $54.9 billion. R&D spending in the period rose 44.4% to $1.5 billion. For Q3, R&D spend increased 38% to $549 million.