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Lenovo's profit misses estimates after PC rivals erode lead

Thursday, February 16, 2017 - 13:51

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Lenovo Group Ltd's quarterly earnings missed projections as the world's largest personal computer maker struggles to reboot a floundering PC and smartphone business.

[BEIJING] Lenovo Group Ltd's quarterly earnings missed projections as the world's largest personal computer maker struggles to reboot a floundering PC and smartphone business.

Net income fell 67 per cent to US$98 million in the quarter that ended in December, Lenovo said in a filing. That compares with the US$145.9-million average of analysts' estimates compiled by Bloomberg. Revenue was down 6 per cent to US$12.2 billion compared with estimates for US$11.7 billion. The Chinese company warned Thursday that its market will remain challenging because of macroeconomic uncertainty and rising component prices.

Lenovo remains the world leader in a personal computer market struggling through a prolonged downturn as people opt for smartphones to handle everyday tasks. But it barely maintained pole position over HP Inc. during the quarter as its chief rival widened its share of the North American market, according to research firm IDC. A rise in component prices also pressured margins. The Beijing-based company is now negotiating a deal to tie up with Japan's Fujitsu Ltd and shore up its position, an imperative given the smartphone business it bought with Motorola remains unprofitable.

"Lenovo is as keen as Fujitsu to close a deal soon, so that it can comfortably retain its No 1 PC crown," Ken Hui, an analyst with Huatai Financial Holdings, wrote in a note ahead of the earnings release. Lenovo is cutting jobs, selling assets and pushing into higher-end devices to weather shrinking demand and competition in PCs. Three years after Lenovo closed its US$2.9 billion acquisition of Motorola Mobility, the smartphone business remains well behind Vivo, Oppo and Huawei Technologies Co in terms of market share.

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Its mobile business turned in an operating loss of US$112 million after revenue slid 23 per cent to US$2.2 billion. Worldwide smartphone shipments dived 26 per cent as its market share slipped to 3.5 per cent.

Lenovo had pinned its hopes on premium phones, such as one with augmented reality capabilities, to help stabilise the division in the second half and revive its faltering consumer business. Yet it's relinquished smartphone market share at home to rivals that're winning users over with aggressive sales tactics and nationwide store coverage.

Phone shipments, including Motorolas, dived more than 30 per cent in 2016, Counterpoint Research estimates. The company was ranked ninth globally during the holiday quarter, ahead of Alcatel but behind South Korea's LG. Lenovo has said it expects the smartphone business to turn profitable this year, though a paucity of new models cast doubt on its outlook, BOCOM International analyst Chris Yim wrote in a note ahead of the earnings.

In 2016, it appointed long-time human resources director Gina Qiao to lead smartphone sales in China, the third executive to have taken up the position since the Motorola takeover. She hasn't outlined how she intends to revive the business. Chief executive officer Yang Yuanqing said in Thursday's filing that he remained confident Lenovo will achieve break-even in both its mobile and datacenter businesses, though he didn't mention a timeframe.

Lenovo's PC business - still 70 per cent of its revenue - managed growth in the quarter, as both revenue and shipments edged 2 per cent higher.

Shares of Lenovo fell 2.1 per cent to HK$5.12 at the trading break in Hong Kong before the results were released.

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