Lenovo’s Q4 revenue hit a record, but net profit fell by 21%. AI business share rose to 32% | Earnings report highlights

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Lenovo's Hong Kong shares fell more than 5% on Thursday afternoon. Despite AI driving third fiscal quarter revenue to a record high, net profit fell 21% year-on-year, gross margin was below expectations, and the infrastructure business continued to run at a loss, causing market concerns over the quality of its earnings.

On Thursday, Lenovo released its financial report for the third fiscal quarter (for the three months ending December 31, 2025). The company's third-quarter net profit attributable to shareholders fell 21% year-on-year to $546 million, although this was still higher than market consensus (about $451 million).

In contrast to the decline in profit, Lenovo delivered robust revenue this quarter: revenue rose 18% year-on-year to $22.20 billion, reaching a historic high, well above expectations (about $20.76 billion/$20.6 billion). The AI business has become Lenovo’s core growth engine. AI-related revenue rose 72% year-on-year this quarter, accounting for 32% of total group revenue, covering AI PCs, AI smartphones, AI servers, and AI services.

However, gross margin fell to 15.1%, down 0.6 percentage points year-on-year and below the expected 15.4%, reflecting that changes in product mix and cost pressures are still restricting margin improvement. Infrastructure business revenue hit a new record high but remains loss-making, which is a key factor limiting market valuation.

Revenue hits record high, but net profit attributable to shareholders falls 21% year-on-year

Details are as follows:

Revenue: $22.204 billion, +18% year-on-year (beat expectations)Operating profit: $948 million, +38% year-on-yearProfit before tax: $818 million, +58% year-on-yearProfit for the period: $648 million, -8% year-on-yearNet profit attributable to shareholders: $546 million, -21% year-on-year (still beat expectations)Gross margin: 15.1%, -0.6 percentage points year-on-year (below expectations)

Operating profit and profit before tax both increased, but net profit attributable to owners ultimately declined, meaning taxes, one-off items, and minority interest/structural factors had a stronger impact on net profit.

Lenovo’s management emphasized that this quarter’s main adjustments include:

One-off restructuring expenses of about $285 million (related to the restructuring of the infrastructure business)Impairments of intangible assets and projects under construction (with related expenses more prominent under the operating profit line this quarter)There were also offsetting items such as changes in the fair value of derivative financial liabilities related to warrants and fair value changes in some financial assets (accounted for in current profit and loss, but highly volatile)

All three major businesses achieve double-digit growth, “comprehensive recovery” led by AI

Lenovo disclosed that this quarter, all three business units reported double-digit growth in revenue, with AI-related business moving from a “product selling point” to part of the “revenue structure.”

AI-related revenue grew 72% year-on-year, accounting for 32% of total group revenueThe company said that AI-related business has become an important growth engine, covering AI PCs, AI smartphones, AI servers, and AI services

The significance of this structural change for Lenovo is as follows: as the PC industry shifts from a replacement cycle into a new wave driven by “AI capabilities + Windows replacement,” leading players are better positioned to benefit both in ASP and market share. On the server side, as AI shifts from training to inference, new requirements for hardware form factors and delivery capabilities arise, giving comprehensive vendors new entry points.

Intelligent Devices (IDG): PC market share continues to expand, high-end smartphones fuel growth

The Intelligent Devices Group saw: revenue up 14% year-on-year, operating profit up 15% year-on-year.

PC business continued to consolidate global leadership: the company disclosed that global market share reached 25.3%, emphasizing that it is the only PC manufacturer in 30 years to break 25% global share for two consecutive quarters. The company attributed growth to: double-digit growth in AI PC revenue, balanced commercial and consumer portfolio, and upgrade opportunities as Windows support ends. For smartphones, Motorola set new sales and activation records, with revenue growth outpacing the broader market in key regions, expanding bandwidth with foldables and ultra-premium models.

Infrastructure Solutions (ISG): Record high revenue but still loss-making, restructuring aims for “profit inflection point”

The Infrastructure Solutions business group had revenue of $5.2 billion this quarter, up 31% year-on-year and setting a new quarterly record; but still recorded an operating loss of about $11 million, an improvement from the previous quarter.

Highlights included robust demand for AI servers, with a $15.5 billion project pipeline; liquid-cooling “Neptune” business revenue jumped 300% year-on-year. The pressure comes from thinner margins in this segment and ongoing structural adjustment.

Solutions and Services (SSG): Double-digit growth for 19 consecutive quarters, margins near highs

The Solutions and Services Group continues to act as the “ballast” for profits: revenue up 18% year-on-year (19th consecutive quarter of double-digit growth), operating profit up 30% year-on-year, operating margin at 22.5%, near record highs; operations and project/solution revenue share rose to 59.9%.

Against the backdrop of large fluctuations in the hardware cycle, SSG’s continued growth and high profitability are typically seen by the market as important evidence of Lenovo’s transition from a hardware company to a hardware + services company.

Gross margin under pressure, improved cash flow provides a buffer

This quarter’s overall gross margin of 15.1% was below the expected 15.4% and down 0.6 percentage points from a year earlier. The company attributed this to an increased share of the lower-margin infrastructure business, rising component costs, and tariff uncertainty.

Lenovo’s operating cash flow for the third fiscal quarter was $952 million, and free cash flow was $451 million. As of the end of the period, cash and equivalents stood at $5.221 billion, with net cash of about $710 million—an obvious improvement from the net debt status at the end of the last fiscal year. Loan-to-equity ratio fell to 0.59.

R&D expenses in the quarter were $638 million, about 3% of revenue. The improvement in cash flow and net cash position provides a greater buffer for the company’s capital expenditures and supply chain turnover related to expanding in AI PCs, AI servers, and services, and also reduces financial vulnerability in the face of rising external uncertainty.

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