Lenovo blames ongoing component supply constraints for profit decline
Chairman Yang Yuanqing says group fared well despite macro-economic uncertainties and business transition
Lenovo Group, the world’s largest supplier of personal computers, warned on Thursday that its industry’s component supply constraints would remain challenging for the near term, after reporting weaker-than-expected earnings for the quarter ended December 31 as its three main business lines recorded slow to no growth at all.
The company said net profit declined by 67 per cent to U$98 million in its fiscal third quarter to December, compared with US$300 million in the same period in 2015, as sales of smartphones and data centre systems stagnated.
Revenue declined 3 per cent to US$12.17 billion from US$12.91 billion a year earlier.
Its net profit missed the US$145.9 million consensus estimate of analysts surveyed by Bloomberg, but revenue was ahead of their US$11.69 billion forecast.
Shares of Lenovo tumbled 6.69 per cent to HK$4.88 at the close of trading on Thursday.
Yang Yuanqing, Lenovo’s chairman and chief executive, said in a conference call that “component supply constraints across the industries the group operates in had impacted [its financial]performance”.
“If we had enough supply of DRAM (dynamic random access memory) chips and camera components last quarter, we could have sold two million more smartphones,” Yang said.
Alberto Moel, a senior analyst at Bernstein Research, said this was the first time Lenovo has seen an impact from higher component costs. “Its gross margins were compressed from higher costs for battery, displays and memory,” Moel said.
Lenovo’s gross margin, which represents the selling price of goods less production or acquisition costs, reached 13.1 per cent last quarter, down from 14.6 per cent a year earlier.
Market research service DRAMeXchange has estimated the average selling price of DRAM products for smartphones, personal computers, servers and other applications will rise by more than 30 per cent, on average, during the first three months of this year, compared with the same period a year ago, even as the supply situation remained tight.
Gianfranco Lanci, Lenovo’s chief operating officer, said this industry-wide concern could ease up in the second half of the year.
Yang put a positive spin on the quarterly earnings miss by pointing out that Lenovo’s personal computer business continued to grow, “despite ongoing macro-economic uncertainties”.
The firm’s personal computer and smart devices business posted a 2 per cent year on year increase in sales during the quarter to US$8.6 billion.
Helped by strong growth in North America, where shipments increased by 14 per cent year on year, Lenovo sold 15.7 million personal computers worldwide during the December quarter.
Its data centre business, which includes servers, storage, software and services, saw a 20 per cent drop in sales to US$1.1 billion. The mobile business, comprising Moto and Lenovo-branded smartphones, had a 23 per cent year on year decrease in sales to US$2.2 billion.
Neil Shah, research director at Counterpoint, said Lenovo has done well outside its home market, which led to a global market share of 3.2 per cent last quarter. “It has gained some traction in India, with a 9 per cent share; Russia, with 7 per cent; and 5 per cent share in some Middle East markets,” Shah said.
Yang said Lenovo remained confident of “achieving break-even and profitable growth” in both its mobile and data centre businesses.