Editor’s note” Lenovo disclosed revenues today that fell below analysts’ expectations, triggering an 11 percent drop in its stock. But the company did report a bigger-than-expected profit, something the world’s No. 1 PC seller attributed largely to cost cuts. So what’s happening to Lenovo? Our Insiders get an in-depth analysis from Krista Macomber of Technology Business Research.
HAMPTON, N.H. – Lenovo is focusing current year efforts on sustaining Enterprise Group revenue growth and improving cost discipline to drive corporate profits.
Lenovo’s Enterprise Group (EG) remains a bright spot for the company, with segment revenues rising 8% year-to-year to $1.3 billion in C4Q15, and operating losses shrinking from $42 million to $14 million during the time period.
C4Q15 was an important quarter for Lenovo’s EG, marking the first continuous year-to-year compare following the acquisition of IBM’s x86 server business in October 2014. Successful integration and turnaround of the previously struggling System x business is critical to Lenovo’s ability to meet its aggressive goal of $5 billion in EG revenues during its fiscal year, ending in C1Q16; the acquisition has offered a fast onramp to enhancing Lenovo’s cachet in large enterprise data centers. Lenovo noted System x revenues of $1 billion in 4Q15, increasing by low single digits from the $986 million reported in 4Q14.
Per TBR estimates, 4Q15 marks the second consecutive quarter of year-to-year revenue growth for the System x business following continuous declines from C2Q12 to C2Q15. Lenovo has reduced prices, integrated the unit into its vast channel network globally, and increased emphasis on innovation in fast-growing markets to turn the System x business around.
Meanwhile, Lenovo noted continued hyperscale wins in China for a second consecutive quarter during 4Q15. In addition to stabilizing the core System x business, TBR notes Lenovo applying its hallmark “attack” strategy to pursue fastest-growing areas of server hardware demand, including around cloud-enabling infrastructure, hyperconverged platforms and converged systems.
Lenovo’s pureplay focus on hardware enables the company to bolster this strategy through alliances; Lenovo pursues new, opportunistic relationships with ISVs such as Nutanix, and deepens relationships previously formed by the legacy IBM team with other ISVs such as SAP. Lenovo’s next step to sustaining EG growth and monetizing these new solutions is working alongside its technology and selling partners to improve its ability to message improved business outcomes. In addition to sustaining top line growth,
TBR expects Lenovo to shift its focus towards a more disciplined expense structure for its EG starting in 2H16, to move the segment toward operating profitability. This is especially critical to Lenovo’s overall top and bottom lines moving forward, as the company grapples with the impact of PC ASP declines that return thinner profits, longer PC lifecycles that delay device refreshes, and intense competition in a crowded APAC mobile device market.
Lenovo builds from its commodity hardware roots to address customers’ IT modernization requirements
Lenovo remains focused on maximizing its traction in today’s evolving data center hardware market. This strategy provides clear differentiation and focused execution, aligning Lenovo with customers’ shift toward industry-standard hardware. It also reduces Lenovo’s potential for conflict with ISV partners that bring increasingly critical functionality to areas such as virtualization and analytics.
However, peers including Cisco, Dell and HPE have longer-standing experience in leading engagements with IT decision makers, and adapting as conversations increasingly include line of business executives. Simultaneously, they too are evolving to address IT architecture shifts toward cloud-based resources, convergence and software-defined functionality.
Additionally, IBM is focusing its Power business, with the support of its OpenPOWER foundation, squarely on the System x wheelhouse: high-end, mission critical workloads.
Lenovo’s expertise in competing around industry-standard, increasingly commoditized hardware provides a natural segue into low-priced and flexible infrastructure. As a result, Lenovo is well-aligned with customer requirements as customers modernize legacy workloads, such as high-performance computing (HPC), and build out emerging workloads, such as analytics. Lenovo is positioning to protect its installed base and expand its roster of customers by messaging comprehensive cost savings.
Emphasizing competitive total cost of ownership (TCO) and high return on investment (ROI) – alongside its focus on expanding and accelerating its R&D processes and innovation – will position Lenovo to address entrenched competitors.
