Lenovo Breaks Even On Datacenter Hardware, Makes It Up In Services

Here is how you know you are in a tough business: No matter what you do, no matter how hard your people work and how smart they are, no matter that you are riding the wild tiger of AI growth and revenues have grown marvelously, you can’t make any money.

This has happened to most of the remaining OEMs who make servers and now rackscale systems, and we think also to the ODMs who make custom gear for the hyperscalers and cloud builders at a much larger scale per customer than the OEMs can usually handle. Lenovo, which acts as an OEM for hundreds of thousands of customers worldwide and also as an ODM for dozens of tech titans – mostly in China – as well as an HPC system supplier all around the world, gets its operating income hit on all three fronts.

It is not clear why Kirk Skaugen, who was a long-time Intel datacenter executive and who was president of Lenovo’s Infrastructure Solutions Group, left back in June 2024, but it seems pretty clear why the Sino-American company hired Ashley Gorakhpurwalla to fill in that role back in November last year. Gorakhpurwalla led workstation development at Compaq back during the Dot Com boom, and moved over to tell to head its server and infrastructure systems for two decades; he retired for a year and then did four years running the hard drive business at Western Digital and now comes back to the systems world he knows so well.

It’s a tough job, and this chart showing annual revenues for ISG lays it pretty bare:

Part of the problem is that almost all of the operating income and certainly all of the net income from building systems goes to Nvidia, AMD, and Intel these days, with a little bit left over for Samsung, SK Hynix, Micron Technology, and various flash dive and network adapter makers and some for Microsoft and Red Hat for systems software. The OEMs and ODMs can be replaced in several heartbeats, and the largest customers grind them against each other and drive out whatever profits might be culled from long relationships and baseboard management controllers at enterprise, government and academic customers.

It is not clear how you fix this. Perhaps this is just the true nature of modern manufacturing, which is inherently unprofitable but still needs to be done and can at the very least break even, which is an accomplishment in its own right.

Of course Lenovo, like other OEMs and ODMs, has to believe it can be profitable and has to tell Wall Street that it believes it because this drives the stock price, which is how wealth is actually generated for these companies. This seems to be a tough row to hoe as far as we can see, and as we have said many times before, we should all be thankful that Dell, Hewlett Packard Enterprise, Supermicro, Lenovo, and others stay in the game, bending metal and integrating components to make our systems. Someone has to do it.

In the March quarter, which was the fourth one for fiscal 2025 for Lenovo, the company posted $16.98 billion in sales, up 22.8 percent year on year and up 8 percent sequentially. But net earnings were once again under pressure, down 63.7 percent year on year to $90 million and presenting only a half point of the pretty large revenues that Lenovo garnered in the period.

The ISG business has been profitable for two quarters on an operating basis, but it was only $1 million in Q3 and $3 million in Q4, which were miniscule pieces of the revenue stream that made it into Lenovo’s back pocket. Two points make a line, but as the chart showing ISG revenues and operating income over time shows, on would be cautioned on drawing that trend out into the future given the nature of Lenovo’s largest customers and parts suppliers. The company is caught in a pinchers between the two, and the pressure is enough to make diamonds from charcoal. Even the growth in the enterprise and SMB business is not enough to raise profits, thanks to steep competition from Dell, HPE, Cisco Systems, and others.

In the fourth quarter, the ISG had $4.12 billion in sales, up 62.3 percent and importantly up 4.6 percent sequentially. Lenovo used to give out data about the split of its business between cloud service providers (CSPs) and enterprise/SMB customers, but stopped doing that in the third quarter of 2023. We have done our best to estimate the revenues of these two groups based on vague comments made by the top brass at Lenovo since then.

On a call with Wall Street analysts going over the numbers, Yuanqing Yang, Lenovo’s chief executive officer, said that the enterprise/SMB part of the ISG business was up 20 percent in Q4, and set new record highs for the company. Our model shows that Lenovo drove $1.62 billion in revenues, up 3.4 percent sequentially from fiscal Q3’s 1.56 billion. Do the math, you back that out to $2.5 billion in sales to the CSPs, which was more than double. (Lenovo’s chart presentation says “nearly doubling CSP revenue YTY, but that math can’t work. It has to be more than double.)

We think that the vast majority of the sales to CSPs was, in fact, for AI systems and that the bulk of these were for liquid cooled machinery.

Lenovo used to talk about its AI revenues and its AI pipelines, like the other OEMs do, but it stopped two years ago when things were just starting to get interesting. However, Lenovo is still talking about revenues for systems using its “Neptune” liquid cooling, which helps us make some reasonable guesses.

“One proxy perhaps I can offer for accelerated infrastructure and AI capability is with our industry-leading Neptune liquid cooling capability,” Gorakhpurwalla said on the call. “We believe that enterprise AI, training AI, and hyperscale service provider, GPU-as-a-service and AI installations all have a common denominator, which is customers having to deal with server power and server cooling demands. And that is where we see a very direct application of something that Lenovo has been steadily building hundreds of patents across a 10-year period in Neptune liquid cooling. And so as a proxy for that growth, for instance, just in Q4, we saw almost 250 percent year-over-year growth in our Neptune cooling solutions offered to customers.”

Now, don’t get too excited. A lot of the AI systems being sold out there are with air-cooled Nvidia “Blackwell” B100 and B200 GPUs or air-cooled AMD “Antares” MI300X and MI325X GPUs. Not everyone is ready for liquid cooling, but when it comes to AI training and inference, we have this piece of advice: You had better get ready, because it is unavoidable at any reasonable scale.

Our model, which admittedly has a bit of witchcraft in it, has Lenovo selling $2.5 billion in AI systems in Q4 F2025, nearly double. (Perhaps Lenovo meant to say it nearly doubled its AI sales to CSPs?) These AI systems represented 61 percent of ISG revenues, which is why the operating income was hit so hard. Lenovo did say that the CSP business was now at a $10 billion run rate (which our numbers match).

Our model shows AI server revenues in fiscal 2025 were $5.7 billion, up 52 percent over fiscal 2024, and CSP revenues were $8.58 billion, up 77 percent from the prior fiscal year.

The thing to keep an eye on is the Solutions and Services Group, which rides herd with the datacenter hardware business. SSG is profitable at an operating level, and it is increasing its profitability. In Q4, SSG had sales of $2.15 billion, up 18.1 percent, and operating income was $487 million, up 25.3 percent and represented 22.7 percent of revenues. Among the many things that SSG peddles is the TruScale utility-priced server and storage, akin to HPE GreenLake and Dell APEX and growing fast.

This combination of datacenter hardware at breakeven and services at a profit is why Lenovo stays in the game.