On August 13, Lenovo Group released its results for the first quarter of FY 2026/27 (ending June 30, 2026).

During the reporting period, the company's revenue reached $26.943 billion (approximately RMB 183.4 billion), a 43% YoY increase, marking a new single-quarter high. Adjusted net profit hit $1.075 billion, a 176% YoY increase, surpassing the $1 billion mark for the first time. The adjusted net profit margin rose to 4%, nearly doubling YoY.

The capital markets responded positively. On the day of the earnings release, Lenovo's stock price surged by 20.18% to HKD 34.9, with a market capitalization of approximately HKD 440 billion. Both Citi and Goldman Sachs maintained a "Buy" rating for Lenovo.

For a veteran PC manufacturer with over 40 years of history, demonstrating such robust vitality in the new AI era is no small feat. Firstly, Lenovo's AI transformation has yielded significant results, with ISG driving the group's growth. Secondly, IDG has maintained steady growth, providing a stable foundation, while SSG has advanced steadily.

Objectively, part of this bountiful harvest is a passive "ripening" due to a series of external environmental changes—especially driven by the global AI computing arms race, rising storage chip prices, and the complex market dynamics of the PC industry, where volumes decrease while prices rise. These factors combined to create such impressive results.

Now, the question is: as the dividend period (bonus period) of the new era fades, can Lenovo plan ahead?

I. Initial Success in AI Transformation

The most eye-catching part of this earnings report is ISG, the core variable driving Lenovo's stock price higher.

This quarter, ISG (Infrastructure Solutions Group) reported revenue of $8.5 billion (approximately RMB 57.9 billion), a 98% YoY increase, nearly doubling. Operating profit reached $770 million, with the operating profit margin jumping to 9.1%, a significant 5.5 percentage point increase sequentially.

Notably, just last fiscal year, Lenovo spent $285 million restructuring this division, cutting some traditional computing organizations and expenses while shifting resources further toward AI. At the time, the market was concerned about whether ISG could sustain profitability. With these results, ISG's growth has alleviated some of those doubts.

The driving force behind ISG is AI servers. This quarter, Lenovo's AI server backlog surged from approximately $21 billion (RMB 140 billion) in the previous fiscal quarter to $54 billion (RMB 360 billion), a 157% sequential increase, covering opportunities with hyperscale cloud service providers, AI clouds, and enterprise AI. Lenovo's traditional x86 server business remains the world's second largest.

However, Yang Yuanqing admitted at the earnings call that AI still accounts for a small portion of ISG's revenue, with traditional computing remaining the dominant segment. In other words, ISG's profit margin surge results from the combined effect of AI server growth and the recovery of the traditional computing base. While the AI narrative has played a role, its impact remains relatively limited.

Beyond ISG, IDG (Intelligent Devices Group) and SSG (Solutions and Services Group) performed steadily this quarter. IDG reported revenue of $17.1 billion (approximately RMB 116.4 billion), a 27% YoY increase, with an operating profit margin of 7.1% and an absolute profit of approximately $1.2 billion, remaining the group's primary profit source. While ISG has taken on the growth mantle, the profit foundation still belongs to IDG.

IDG's stability did not come easily. According to IDC data, global traditional PC shipments in Q2 2026 reached 68.2 million units, a 4.9% YoY decline, while Lenovo's global PC market share rose to 24.2% against the trend. Despite overall shipment contraction and rising memory prices, Lenovo achieved revenue growth against the trend through AI PCs and high-end product mix upgrades.

SSG represents stability in another sense. This quarter, the business reported revenue of $2.9 billion, a 28% YoY increase, marking 21 consecutive quarters of double-digit growth. The operating profit margin climbed to a record high of 24.2%, with AI service revenue surging by 141% YoY.

The majority of growth across the three segments came from overseas markets.

Regionally, revenue in the Americas grew by 58% YoY, the highest among all regions. Europe, the Middle East, and Africa saw 53% growth, while the Asia-Pacific market (excluding China) grew by 28%. The Chinese market grew by 25%.

The value of Lenovo's global supply chain built over the past two decades has been amplified amid the surge in AI server orders. This closely relates to how much of Lenovo's $54 billion backlog can be converted into actual revenue.

In 2026, Lenovo ranked 5th on Gartner's Global Supply Chain Top 25, the highest among Chinese companies. As geopolitical disruptions become the norm, Lenovo's supply chain advantages are reflected in its order conversion, which may be its most difficult-to-replicate moat compared to other server manufacturers.

II. How Long Can the Infrastructure Goldmine Last?

The most pressing question behind this earnings report is whether OEM profit margins can be sustained once the arms race cools and AI servers shift from "supply shortage" to "supply-demand balance."

From the earnings report, ISG's revenue increased by approximately $4.2 billion YoY this quarter, accounting for more than half of the group's total revenue growth. Revenue from CSP and ESMB infrastructure businesses nearly doubled YoY, with gross profits surging by 1004% and 402%, respectively.

Lenovo did not disclose the business mix between CSP and ESMB, but a key variable in the AI server market this quarter was the capital expenditure arms race among cloud giants.

During the Q1 earnings season, Alphabet and Meta raised their 2026 capital expenditure forecasts, Amazon maintained high levels, and Microsoft provided a full-year guidance of approximately $190 billion. The combined capital expenditure expectations of the four giants exceeded $700 billion. Lenovo's near-doubling growth in ISG came from scooping a portion of this vast ocean of cloud giant spending.

Lenovo expects the global AI infrastructure market to reach $1.3 trillion by 2030. Based on this timeline, Lenovo will likely seize the window of AI server demand over the next four to five years, fulfilling its mission as an AI infrastructure provider.

However, the server business inherently has structural tensions.

First is pricing power squeezed between upstream and downstream players.

Upstream, GPUs are highly monopolized by NVIDIA. Lenovo is advancing GB300 platform deployment and Vera Rubin rack-scale solutions, deeply binding with NVIDIA's ecosystem. This is both a dividend and a dependency—once NVIDIA adjusts its cooperation model or extends downstream, OEMs' flexibility will be compressed.

Downstream, hyperscale cloud service providers are financially powerful and often exert price pressure. More Long term perspective (in the long run), Google TPU, Amazon Trainium, and Microsoft Maia self-developed chips continue to advance, potentially eroding the general-purpose server market cake over time.

Second is vulnerability to supply chain shocks.

Rising memory and storage prices are barometers of AI demand. Lenovo, with the world's largest procurement scale and end-to-end operational system, has strong bargaining, inventory scheduling, and cost-passing capabilities. However, Yang Yuanqing explicitly stated that storage supply tightness is expected to persist this year and next.

For IDG, cost increases must ultimately be passed on to end-user price hikes, which may suppress consumer demand. For ISG, high-end storage like HBM is prioritized by large manufacturers, putting long-term gross margins under pressure.

A significant portion of Lenovo's current performance "ripening" comes from this pricing cycle, which has boosted revenue but also tested the profitability of its two major business segments.

Third, orders from cloud service providers—large customers with high order values, long delivery cycles, and much longer payment terms than consumer-end businesses—are reflected in Lenovo's cash flow.

This quarter, Lenovo's operating cash flow was $382 million, down about 69% from $1.219 billion YoY. Upstream NVIDIA, SK Hynix, and downstream cloud giants all wield strong bargaining power, squeezing Lenovo's working capital from both directions.

According to earnings data, the company's net trade receivables were $18.844 billion this quarter, with $1.143 billion past due by over 90 days, doubling sequentially. Meanwhile, inventory reached $15.742 billion, a 34.3% sequential increase, while trade payables and bills reached $24.398 billion, a 26.83% sequential increase.

In other words, to sustain ISG's growth momentum, Lenovo has converted significant cash flow into inventory for future orders.

Nevertheless, Lenovo is trying to maintain cash reserves. Earnings show that cash and bank deposits increased by approximately $1 billion from last quarter's end to $6.081 billion this quarter's end.

This essentially reflects the inevitable cost of Lenovo's shift from the fast-moving PC model—characterized by advance stocking, rapid turnover, and quick cash recovery—to the long-cycle, high-order-value, and long-payment-term infrastructure project model. As long as the $54 billion order backlog continues converting into revenue, the occupied funds will eventually flow back.

The real concern is that if payables and inventory continue swelling far faster than revenue in the coming quarters while revenue growth slows, cash flow pressure may become apparent.

Technological trends are irreversible. AI has opened Pandora's box, and infrastructure profits will last long, but the easiest money may not. The window of peak supply-demand tension and profit margin elasticity may concentrate in the next two to three years.

This is why Lenovo is accelerating layout (layout) in high-value areas like liquid cooling and storage—shifting revenue models from pure hardware sales to services and solutions is key to preserving profit margins after supply-demand balance.

III. Yang Yuanqing's Long-Term Dilemma

After the earnings release, market attention focused almost entirely on ISG. With $8.5 billion in revenue, a 9.1% profit margin, and a $54 billion order backlog, these figures tightly bind Lenovo to its identity as an AI infrastructure provider.

However, breaking down Lenovo's $9.3 billion in AI-related revenue reveals that AI terminal contributions are equally impressive.

Globally, Lenovo's AI PC shipments grew 86% YoY, AI tablets 83% YoY, and AI phones 22% YoY. In China, AI PCs accounted for over 50% of notebook shipments, with cumulative sales exceeding 5 million units. AI tablet revenue surged over 150% YoY, maintaining third place in the market, while AI phone revenue grew 40% YoY.

"AI terminals have become a key growth engine for the group's IDG business," Liu Jun emphasized.

At the August 13 earnings call, Yang Yuanqing made a noteworthy remark: "In the future, more tokens will be generated locally rather than in the cloud, with an estimated 80% occurring on-device." The Tianxi AI 4.0 launch event also set a goal of keeping 80% of AI token consumption on-device, with only 20% handled through cloud collaboration.

From a narrative perspective, on-device AI aligns closely with Yang Yuanqing's vision of "AI for All." However, on-device AI still faces the critical threshold of moving from increasing market penetration to demand validation.

Some argue that on-device AI tools currently lack competitive alternatives to cloud service solutions. Whether this will affect consumer purchasing will remains uncertain. While Lenovo's AI terminal market share has grown steadily, if AI features merely serve as high-end branding without transforming user workflows, IDG's growth potential may be limited.

From a market trend perspective, the industry has shifted toward on-device AI over the past six months. Not only have PC and phone manufacturers doubled down, but domestic chip firms like Moore Threads and Suiyuan Zhixin have entered the on-device computing market, launching consumer-facing terminal products.

Combined with Yang Yuanqing's token consumption judgment, Lenovo's long-term strategic focus may not remain perpetually tilted toward ISG.

As models shrink, on-device computing power rises, and AI-native applications mature, on-device AI could trigger a new wave of device upgrades and replacement cycles, potentially igniting explosive demand for local deployment. This may become the key factor influencing Lenovo's long-term profit Center of gravity (center of gravity).

Meanwhile, SSG could serve as the link between cloud and on-device demand transitions. According to earnings data, TruScale subscription service revenue grew 35% YoY, IaaS business 142% YoY, with non-hardware-bound solutions and services accounting for 62.4% of revenue and an operating profit margin of 24.2%. Converting computing power and devices into enterprise-subscribable services yields much higher margins than hardware sales.

If Lenovo can link hybrid AI architectures, on-device entry points, and TruScale subscription models into a complete commercial chain, its long-term AI-era value could partially decouple from server orders.

Lenovo doesn't need to answer this immediately.

At its U.S. Investor Day in late June, Lenovo outlined staggered targets: $100 billion in revenue within 1–2 years, net margin above 3%; $130 billion in 3–5 years, net margin rising above 5%; and long-term net margin exceeding 8% beyond five years. The numerical goals are clear, but how to achieve them tests Lenovo's prioritization of its ecosystem position.

The longer-term strategic question for Yang Yuanqing is how to capitalize on the cloud-side server demand boom to further expand profit margins while building product strength and brand momentum for potential on-device opportunities, ultimately converting both into recurring service revenues. This will determine how successfully Lenovo can thrive under AI's new order.