Why Lenovo’s data center revenue dips again

Lenovo TechWorld 2016Lenovo’s data center financial performance reflects a company seeking to keep pace in a turbulent, highly competitive IT infrastructure marketplace, says Krista Macomber, senior analyst at TBR.

The speed at which enterprise customers are migrating to next-generation technologies, such as hyper-converged platforms that fundamentally disrupt foundational data center architectures, has accelerated since Lenovo launched its attack to become one of the world’s largest data center infrastructure providers, which effectively began with its October 2014 acquisition of IBM’s x86 server business.

Lenovo revenue at a glance

Total revenue $11.2 billion (–8% year-over-year)
PC and tablets business $7.8 billion (–8 percent)
Phone business $2 billion (–12 percent)
Data Center business $1.1 billion (–8 percent)
Net income $157 million

“Our PCSD business maintained leadership and strong profitability, our Mobile business had good quarter-to-quarter volume growth and margin improvement, and our Data Center business is actively addressing its challenges,” said Yang Yuanqing, chairman and CEO, Lenovo.

Lenovo has hired Kirk Skaugen EVP and president of Data Center Group (DCG). Kirk was previously Senior Vice President (SVP) of the Client Computing, Datacenter and Connected Systems groups for Intel.

Lenovo also hired Yong Rui as chief technology officer and SVP from his role as deputy managing director leading Microsoft Research Asia.

Shipments in mobile phones grew almost 25 percent compared to the previous quarter to 14 million. Lenovo said mobile shipments in India increased 15 percent. Moto shipments were up almost 40 percent from the previous quarter due to Moto G and launches of new Moto Z and Moto Mods.

Lenovo generated $3.2 billion from China, $1.9 billion from Asia Pacific, $2.7 billion from Europe, Middle East and Africa (EMEA) and $3.4 billion from the Americas.

TBR said Lenovo proceeds in a far more volatile competitive landscape characterized by quickening commoditization of underlying data center hardware systems and a steady shift to longer-term, solutions-oriented and outcomes-supported selling models to a hybrid base of IT and line-of-business (LOB) decision makers.

Lenovo is adapting its portfolio to facilitate the scalable, software-defined and service-oriented IT environments required by today’s ecosystem of modern workloads. Notably, the company is evolving from a partner-led software strategy to a hybrid base of third-party and, from an infrastructure software standpoint, Lenovo-owned infrastructure software capabilities.

Lenovo is also evolving its go-to-market approach, for example adding data center infrastructure experts in lieu of generalist sales representatives, to shift from its historically server-centric and transactional tactics and position as a broader IT modernization enabler for customers. These initiatives helped Lenovo continue to grow revenue from its top 500 customers, which it calls Global Accounts, by double digits during 3Q16. It also helped Lenovo expand its presence in large-scale hyperscale data centers from its concentration in China, Lenovo’s domestic market, into North America.

However, Lenovo’s overall Data Center Group (DCG) revenue shrank 8 percent in 3Q16 to $1.1 billion, per Lenovo reporting. This attrition is largely due to overall challenges in mature markets in EMEA and North America.

Lenovo is still refining and remains in relatively early stages executing on its future-forward portfolio and go-to-market initiatives, and in these regions it faces particularly stiff, entrenched competition from peers such as Dell Technologies and Hewlett Packard Enterprise (HPE).

More substantially, Lenovo’s ongoing investments are weighing on the DCG bottom line, with operating losses increasing from 3.7 percent and 5.9 percent of revenue in 3Q15 and 2Q16, respectively, ($40 million and $64 million) to 12.9 percent in 3Q16 ($140 million), the segment’s largest to date according to TBR financial modeling. Lenovo’s ability to turn a profit from its DCG and maximize its footprint in modern data centers will be largely predicated on its ability to increase the clarity and improve the cohesiveness of its value proposition.

Lenovo bolsters its push into the strategic, disruptive converged infrastructure market with ThinkAgile

For Lenovo, bolstering its traction in the crowded and disruptive converged infrastructure market is crucial to solidifying its go-forward position in customers’ data centers. To more effectively address customers’ shift from deployments of siloed, legacy infrastructure, Lenovo has been complementing its broad server portfolio with alliance and R&D investments in adjacent storage and networking areas as well as the development of traditional converged and hyperconverged platforms solutions.

Lenovo is late in providing more holistic infrastructure solutions compared to several competitors, such as Dell EMC, HPE and Huawei, and is playing catch-up to these vendors and others in some key technology areas such as OpenStack and flash storage. Lenovo took substantial steps toward closing these gaps with the Oct. 2016 launch of its new ThinkAgile-branded converged infrastructure portfolio. ThinkAgile balances configurability for flexibility and optimization, with comprehensive integration for fast time to value – targeting what TBR research indicates are key use cases for converged systems, including database processing, high-performance computing (HPC), private cloud hosting and VDI hosting.

Through ThinkAgile, Lenovo is tapping flash storage capabilities from its new partner Nimble Storage to speed performance for the fast-growing ecosystem of latency-sensitive applications, as well as to further automate, centralize and streamline the management for customers. Nimble also provides predictive analytics competencies that refine Lenovo’s ability to improve internal process efficiencies for customers – a key pain point and driver behind customers’ decisions to migrate to new IT architectures, per TBR research.

ThinkAgile immediately adds go-to-market clarity and enhances technological competitiveness for Lenovo in the converged infrastructure market, better positioning the vendor to protect its installed base, expand share-of-wallet and target competitive displacements. However, competitive pressures remain high. For example, the heritage VCE organization – wholly dedicated to competing in the converged infrastructure – now has massive improvements to configurability and scalability as a result of its acquisition by Dell in Sept. 2016.

This pressures Lenovo in a core strength – efficient and effective supply chain management. For Lenovo, coupling its flexible architecture approach with its increasingly services-supported, consultative selling strategies will be needed to maximize its opportunities across the converged infrastructure space, as data center customers seek a long-term partner for infrastructure and process modernization.

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