On August 13, Lenovo Group (HK00992) reported its strongest quarterly performance in its history, unveiling results for the first quarter of fiscal year 2026/27. The company achieved revenue of $26.943 billion (approximately RMB 183.4 billion), marking a 43% year-on-year increase. Adjusted net profit reached $1.075 billion (around RMB 7.3 billion), soaring 176% year-on-year, with an adjusted net profit margin of 4%.

Among its three major business segments, the IDG business maintained growth despite the headwind of rising storage prices. The ISG division, primarily focused on servers, staged a remarkable turnaround, generating revenue of RMB 57.9 billion, a 98% surge year-on-year. According to Chairman and CEO Yang Yuanqing, the group's AI server order backlog surged from $21 billion (approximately RMB 140 billion) in the previous quarter to over $54 billion (RMB 360 billion), a sequential increase of 2.6 times. However, concerns about the sustainability of AI demand and AI server orders persist. In response, Yang noted that AI business currently accounts for a relatively small share of ISG, emphasizing that traditional computing remains the primary driver of the segment's revenue in the last quarter.

Early Achievement of $100 Billion Revenue Target

Commenting on the financial results, Lenovo Chairman and CEO Yang Yuanqing expressed satisfaction during a performance briefing, stating that the company is highly pleased with the first-quarter performance. Looking ahead, Yang expressed confidence in maintaining high growth and improving profitability in the second half of the year. "At the beginning of this year, we set a goal to achieve $100 billion in sales revenue within two years. Given the growth in the first quarter, we believe there is a good chance to reach this target this year. We have also set targets to increase net profit margin to 5% in three years, and to 7% to 8% in five years. We hope to achieve these milestones ahead of schedule," Yang said.

By segment, the IDG Intelligent Devices Group reported revenue of RMB 116.4 billion, a 27% increase year-on-year. Non-PC peripheral business posted double-digit revenue growth. In the PC business, Lenovo's global market share reached 24.2%, up 0.5 percentage points from the previous year. Notably, storage prices have been rising steadily since last year, putting significant cost pressure on hardware, with industry experts generally expecting a squeeze on profit margins. In response, Lenovo Senior Vice President and CFO Zheng Xiaoming stated that Lenovo has pricing power in the market. Despite the headwinds in IDG, the company has managed its operations well. However, he also noted that as some product prices have risen to levels unseen by customers, the company will maintain a cautious approach to the terminal business in the second quarter. The strategy for IDG will focus on gaining market share while preserving profit margins. Regarding balancing customer demand with cost control, Zheng emphasized that under supply constraints, the priority is to secure volume. "In this regard, we lock in volume but not price," he said. Yang Yuanqing also linked storage prices to AI demand, stating that AI demand is still in its early stages and has significant room for growth, suggesting that storage supply tightness is expected to continue through this year and next.

The SSG Solutions and Services Group posted revenue of RMB 19.6 billion, up 28% year-on-year, with an operating profit margin exceeding 24%. AI is increasingly becoming a growth engine for Lenovo. During the reporting period, AI-related revenue surged 60% year-on-year to RMB 63.4 billion, accounting for about 35% of total revenue. AI service revenue jumped 141%, indicating that the hybrid AI strategy is entering a phase of value realization.

Following the release of these stellar results, Lenovo's share price surged, closing up over 20% on August 13, and has risen more than 280% year-to-date, hitting a record high.

ISG Exceeds Expectations with $54 Billion in Server Orders

The ISG Infrastructure Solutions Group, the third major business segment, was the most surprising to the market, also described by Yang Yuanqing as the most noteworthy. The segment reported revenue of RMB 57.9 billion, a 98% year-on-year increase, with an operating profit margin of 9.1%, up 11.1 percentage points from the previous year. Even more striking is the growth of Lenovo's AI server order backlog, which increased from $21 billion in the previous quarter to over $54 billion, a sequential increase of 2.6 times. The market's surprise stems from the fact that just three months ago, the ISG business, primarily driven by servers, had an operating margin of only 3.6%, having just emerged from four consecutive quarters of losses. Yang Yuanqing attributed the ISG segment's strong performance to both the explosive growth of AI infrastructure and the company's sustained investment and efforts over the years, emphasizing that it was not a "windfall" or simply riding a favorable wave. "Our acquisition of IBM's X86 server business in 2014 laid the foundation for our enterprise infrastructure business today. At that time, cloud computing services like those from Microsoft, Amazon, and Alibaba Cloud did not yet exist. We have continued to invest in this business, build customer relationships, operate in preferred models, and expand our product line. We have also invested in edge computing. Today, AI is increasingly moving to the edge, locally, and even on devices due to the high cost of cloud computing. When AI computing emerged, we continued to invest, and AI has not yet become the core driver of our business growth or the most important component of ISG, which is also its growth potential," Yang said.

However, Yang acknowledged that while external demand for AI infrastructure remains strong, AI business currently accounts for a relatively small share of ISG, with traditional computing still being the dominant component in the last quarter. The current order backlog of over $54 billion for Lenovo servers presents a significant conversion opportunity, but the company's ability to convert these orders largely depends on supply chain capabilities. CFO Zheng Xiaoming noted that from a growth perspective, while the business was already sizable last quarter, there is still room for expansion. "We are still negotiating orders and see opportunities. The only potential bottleneck is whether the supply chain can deliver enough products to meet these orders, especially as our conversion rate improves. We need to accelerate our efforts to keep up," Zheng stated.

Regarding the AI bubble, Yang Yuanqing believes that AI may be overheated in some areas, such as the increasing size of foundation models requiring substantial computing power, but AI has not reached a bubble stage. He argues that it is still in its early stages with significant growth potential. "Today, everyone should not just focus on who builds the best model. We need to see who will be the main player in making AI widespread and accessible. Looking back at history, Lenovo was once the king of PCs, but we didn't invent the PC; we popularized and complemented it. I believe that history will repeat itself in the AI era," Yang concluded.