When most consumers or IT buyers think about Lenovo, they likely think of a company best known for its iconic ThinkPad line of PCs. Lenovo is still very much a personal computing device company—it owned the top worldwide market share in the category in 2Q19—but over the past few years, it has moved aggressively to become more than a vendor that ships lots of PCs. It hasn’t always been a smooth ride, but the company’s most recent earnings call show its move to diversify its hardware lineup, its willingness to jump into new categories, and its focus on software and services, are all paying off.
Shifting from High Volume to High Profitability
Everyone knows the PC market has experienced a long-term decline. Today the consumer segment of the market continues to contract, while the commercial segment has largely stabilized (thanks at least in part to the upcoming end of life for Windows 7). For many years, Lenovo focused on shipping as many PCs as it could produce in a quarter, including low-priced boxes with low profit margins that helped drive up its market share.
Over the last few years, Lenovo has aggressively shifted from a focus on pure volume to profitability. It moved to embrace the growth in consumer PC gaming by launching its Legend PC gaming brand to compete with industry stalwarts such as Dell’s Alienware and ASUS’s Republic of Gamers. It refocused its attention on the small-volume-but-high-priced workstation market, with good results. And it redoubled its focus on creating thin-and-light notebooks for both consumer and business users.
The result: Over the past few years the company has, on occasion, ceded the top market-share spot to HP. However, this past quarter it not only regained the top spot, but it did so while growing revenue by 14.3% year over year. Also notable: The company has managed to spread the revenue from its PC and Smart Devices group into four nearly equal buckets across geographies, with about one quarter each in China, Asia Pacific, Americas, and EMEA, with each geography delivering more than $2B in revenue per quarter. That level of balance is hard to achieve and helps insulate the company from volatility in any one region.
Charging into New Categories
While Lenovo has smartly rebalanced its PC portfolio to focus on profitability, it’s also worked hard to fix its deficiencies in key categories and has moved aggressively into new market segments. It famously purchased Motorola from Google in hopes of becoming a major smartphone player. While that acquisition hasn’t yielded the results the company expected, its mobile business has finally reached a low-level of profitability. Motorola likely won’t ever be a top-tier vendor in terms of volumes, but Lenovo has focused its attention on key markets such as Latin America and North America with mid-priced phones it can profitably produce. It’s a strategy that Google echoed with its recent Pixel 3A launch, and it’s working for both companies.
To address the growing Data Center opportunity, Lenovo acquired IBM’s X86 server business. That acquisition has also taken time to pay off, and often rocky market conditions have made that even more difficult. However, Lenovo has made a series of bold moves—including bringing more manufacturing in-house—that has lead to strong growth over consecutive quarters. Moreover, it has positioned the company for success in the long term.
In addition to mobile and data center, Lenovo has moved aggressively into new categories. Three of note: smart home, virtual reality, and augmented reality. In smart home, Lenovo has launched everything from smart speakers to light bulbs. I have the company’s Google-Assistant based Smart Display, and it’s a well-designed, useful product. Lenovo also jumped into the VR pool with both a Windows Mixed Reality tethered product as well as a Google-Daydream based standalone headset called the Mirage Solo. The company also leveraged the consumer-focused Solo into an education product.
Perhaps the most exciting new area of focus for Lenovo is augmented reality. The company has already shipped a consumer-focused AR product (Star Wars Jedi Challenge), but the more interesting play is its upcoming ThinkReality product line. The latter includes both an enterprise headset as well as a software platform that lets companies deploy and manage headsets as well as more easily create purpose-built augmented reality apps. The ThinkReality software platform—due out later this year—is important because it represents a fundamental shift in Lenovo’s thinking as the software will even run on other company’s AR hardware (such as Microsoft’s HoloLens).
Focus on Device as a Service
During the recent earnings call, Lenovo executives noted that software and services now make up about 5% of the PCSD group’s revenue. One of the driving factors for that growth has been a strong focus on Device as a Service. I’ve written extensively about DaaS here and here, and I continue to see this as a strong opportunity in the market. As such, it was good to hear Lenovo’s corporate president and COO Gianfranco Lanci talk about the company’s focus here. Lenovo is uniquely positioned to play in this space as it has a full stack of hardware, from phones, tablets, and PCs, to servers and AR and VR headsets.
Lanci noted that in the quarter just completed DaaS contributed to the company’s software and services revenue number. More importantly, however, he said the company has a big pipeline of DaaS deals in the works that should drive growth for many quarters to come. DaaS represents a great opportunity, as it shifts the business relationship from simply selling a device to one where Lenovo provides ongoing services in exchange for recurring revenue.
The results of all of this work at Lenovo was a record-breaking revenue year. As we head into the back half of this calendar year, I will be watching carefully as the company moves to fully launch its AR platform, navigates the last official months of Windows 7 support, and addresses the ongoing challenges of the U.S and China trade war. Other tech companies’ transformations may get more press, but I’d suggest that Lenovo’s may prove to be equally instructive over time.
