Lenovo plots turnaround of smartphone business after posting first annual loss in six years

Weighed down by a weak economy and the largest restructuring in its corporate history, Chinese technology giant Lenovo Group Thursday unveiled plans for a more aggressive investment strategy to turn around its flagging smartphone operation after reporting its first annual net loss in six years.

“We hope to improve profit margins and grow our personal computer, data centre and smartphone businesses. I hope the market will be better than last year,” Lenovo chairman and chief executive Yang Yuanqing said at a media briefing in Hong Kong.

Lenovo, the world’s biggest supplier of personal computers, reported a US$128 million net loss in its fiscal year ended March 31, compared with a US$829 million net profit in the previous fiscal year.

The company, which operates in more than 160 countries, mainly attributed that loss to restructuring costs of US$596 million and one-time charges totalling US$327 million, which included a write-off of its smartphone inventories as part of a reorganisation at its mobile unit announced in August.

It estimated that operating expenses rose 20 per cent from a year ago. That included US$2.26 billion in operating expenses after completing its acquisition of IBM’s x86 server business and Motorola Mobility in October 2014.

Total revenue slipped 3 per cent to US$44.91 billion, down from US$46.29 billion, due to a tepid global personal computer market squeezed by economic issues like falling commodity prices and weak international currencies.

“While Lenovo is seeing structural challenges in all key businesses, the smartphone business remains the weakest spot,” Jefferies equity analyst Ken Hui said in a research note.

Lenovo initiated a sweeping organisational revamp in March to help boost sales and drive innovation at its operations, especially in the smartphone business where other Chinese suppliers have overtaken it on the mainland and various overseas markets.

“We have very strong assets that we can build on top of and we have a strong presence in certain geographies, especially Latin America and the Asia-Pacific,” said Aymar de Lencquesaing, the co-president at Lenovo’s Mobile Business Group.

Yang said Lenovo needs to “invest on making our smartphone business competitive, build up the brand and expand our [distribution] channels”.

Lenovo shipped 74 million smartphones worldwide last year to rank fourth behind Samsung Electronics, Apple and Huawei Technologies, according to research firm IDC.

Jefferies’ Hui, however, pointed out that there might be something more needed.

“Although we expect smartphone shipments to be sequentially better in the June quarter, partly because Chinese operators are increasing subsidies, we expect the relief to be temporary as operators will likely cut back in the second half of the calendar year,” Hui said.

“We continue to see that Lenovo holds limited advantages and lacks a coherent strategy in a slowing and competitive smartphone market. Management should explore more drastic options.”

Earlier this month, Lenovo was included in a group of major smartphone suppliers accused by Singapore-based consumer electronics firm Creative Technology of patent infringement.

That prompted the United States International Trade Commission to conduct an investigation of the companies that Creative alleged as patent violators.

Lenovo’s share price fell 0.40 per cent to close at HK$4.98 in trading yesterday.