Lenovo posts higher than expected profits for Q1-2016

China’s largest personal computer maker Lenovo Group reported recently that net profit for the April-June period surged 64% year-on-year, helped by asset sales and cost cuts, despite a fall in sales.

Lenovo said it expects to return to growth over the next year as it continues to integrate with Motorola, which it acquired two years ago, and focuses on higher-end mobile phones.

Lenovo’s net profit surged 64% in the first quarter from a year earlier to $173 million, beating market expectations. Its Hong Kong-listed shares hit an intra-day high of HK$5.63 before closing up 2.24% at HK$5.47.

The company said revenue declined 6% to $10.1 billion in the three months ended June 30 from a year earlier, dragged down by a 9.8% fall in sales in its core Chinese market –which accounts for roughly 30% of its total sales. PC demand continued to soften in the region.

“Although the current macro conditions and volatile currency environment has put pressure on the company, we believe there is a path for Lenovo to achieve earnings growth and margin expansion and we remain long-term positive on the name,” said Alberto Moel, Bernstein Research senior analyst.

The company had embarked on a cost-cutting exercise over the last year, with the aim of saving $1.35 billion annually. It had then also announced that it would cut staff by 3,200.

“I’m glad to recall that we actually completed the implementation [of the program], and our result was actually better than $1.35 billion,” said Wong Wai Ming, executive vice president and CFO of the company. “We’ll continue to take action to provide to improve the efficiency rather than just stop [the program].”

But Lenovo’s $2.9 billion acquisition of Motorola has yet to yield positive results. The unit recorded a loss of $206 million before tax for the first quarter. Yang Yuanqing, chairman and CEO, said that he hoped to turn around the business over 2017 by focusing on higher-end mobile phones.

Lenovo said in its results statement that new flagship Motorola mobile models, the Moto Z and Moto Z Force and Moto Mods would drive growth in mature markets. In China, it will push the high-end ZUK Z2 model, which cost at least around $270 each, to compete with Apple Inc. and Samsung.

“These Motorola phones are competitive with Samsung,” said Bernstein’s Moel. But he also said that “problem is that they aren’t widely available and their product cycle is slow.”

But Lenovo is no longer only facing competition from established foreign companies. According to the U.S.-based research company, International Data Corp., Huawei, OPPO and Vivo had 47% of the mobile phone market in China at the end of June, up from 45% a quarter ago.

Wong said that the company’s strategy to focus on high-end mobile phones will take time to translate into profit. “We are taking actions to drive the stable growth and profitability improvement, but these actions will take time to see results.”

The company’s PC and smart device business unit which accounts for roughly 70% of total revenue, marked a 7% decline in sales at $7 billion for the first quarter. Gianfranco Lanci, corporate president and COO of the company, said that the market around the globe “will continue to be negative.”

Another possible growth-generator for Lenovo, the data center business, also faces “stiff challenges,” especially in the mature market like the U.S. Global sales only saw 1% increase from a year earlier to $1.1 billion, and Lenovo reported a pretax income loss of $64 million.

 Source: Nikkei Asian Review