Another dismal quarter, but Lenovo thinks the worst of the PC slump is over

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• Lenovo saw its net income fall by 66%, indicating that the PC market is sliding more profoundly into a demand slump.
• The PC maker saw shipments shrink by 18.4%, according to IDC.
• Lenovo said the unusual action of clearing inventory weakened profitability for its central business unit.

Worldwide shipments of mobile phones, tablets, and personal computers (PC) have been on a downward trajectory since last year, impacting most players in the industry. Unfortunately, Lenovo Group Ltd, the world’s largest PC maker, is equally affected, if not worse, by the slump in demand. The Chinese PC giant’s June quarter financial results fell short of analysts’ expectations.

Although Lenovo continued to lead the worldwide PC market, it underwent a significant shipment decline of 18% year-on-year (YoY), dropping to 14.2 million units. Lenovo also saw a 24% decline in revenue — far worse than analysts expected. In total, the company’s quarterly revenue has declined for four consecutive quarters, and in its most recent fiscal year, Lenovo ended its first 14% earnings decline since 2019 in March.

On the other hand, net income fell by a staggering 66% to US$176.5 million in the three months ended June, compared with the average analyst estimate of US$235 million. According to a company filing, revenue fell to US$12.9 billion, below outside experts’ $13.84 billion forecast.

The company even shared that the unusual action of clearing inventory weakened profitability for its central business unit. Chinese consumers are increasingly reluctant to buy smartphones, laptops, and other devices as the world’s second-largest economy slides into deflation.

Before the release of Lenovo’s results, Bloomberg Intelligence analyst Steven Tseng wrote in a memo that he anticipates “The intelligent devices group, which sells PC and smartphones and is the biggest source of revenue, is poised to be the main drag due to sluggish consumer demand and ongoing inventory digestion.”

Despite the past quarter’s challenging market and unfavorable macroeconomic conditions, Lenovo’s Chairman and CEO Yuanqing Yang sees signs of market stabilization and improvement, component prices bottoming out, and believes the client device market can be expected to recover and resume growth in the second half of this fiscal year.

“Last quarter, the macro environment presented challenges, and our hardware business remained in a phase of adjustment, but we persisted in executing our strategy. Our service-led business achieved strong growth and sustained profitability. Our non-PC revenue mix of the group revenue further increased YoY– demonstrating the effectiveness of our diversified growth engines,” Yang noted, adding that he is cautiously optimistic about Lenovo’s business recovery over the next several quarters.

What’s pushing Lenovo higher amidst the global PC slowdown?

The world’s largest PC maker is pinning hopes on a new artificial intelligence-powered device to break the deadlock while its core personal computer business remains depressed. “AI could be a silver lining,” Yang told reporters Thursday during a quarterly earnings call. He added that Lenovo has been “embracing AI for years.” 

Over the next three years, the company has earmarked US$1 billion for mainly AI-driven innovation to spur new growth. In a blog post, Lenovo said it continues to embrace all aspects of AI, having built its advantages in computing power from client to edge to cloud and network. 

The PC giant also shared that the US$1 billion in investment for AI in the next three years will focus on providing AI devices, AI-ready and AI-optimized computing infrastructure, and embedded AI-generated content into the intelligent solutions of vertical industries to help customers improve their productivity.

“Looking ahead, Lenovo is leading the transformative shift in personal computing – where to meet the needs of new generative AI workloads, the PC will also need to transform itself into an AI PC. Lenovo sees the future of AI PCs as a disruptive, hybrid blend of client, edge, and cloud technologies, ushering in enhanced functionality, speed, creativity, and immersive, realistic experiences,” the company concluded.