Lenovo defies market doldrums with 64pc rise in quarterly net profit

PUBLISHED : Thursday, 18 August, 2016, 12:10pm
UPDATED : Thursday, 18 August, 2016, 11:00pm

Lenovo Group reported solid net profit growth in the three months ended June 30, defying market estimates after two consecutive quarterly misses, sparking hopes for a speedier turnaround.

Yang Yuanqing, Lenovo chairman and chief executive, said at a media conference call on Thursday that the company’s personal computer operation delivered strong profits in its fiscal first quarter, while its smartphone business has stabilised.

In a filing before the Hong Kong market opened, Lenovo said its quarterly net profit rose 64 per cent to US$173 million, up from US$105 million in the same period last year, mainly due to decreased operating expenses from its recent corporate restructuring initiatives.

Revenue was down 6 per cent to US$10.06 billion from US$10.72 billion a year earlier.

Lenovo, the world’s largest supplier of personal computers, said its turnover in the three months to June represented a 10 per cent increase from the previous quarter.

Its quarterly net profit and revenue were both above the market’s consensus estimates of US$141 million and US$9.79 billion, respectively.

Shares of the company rose to a high of HK$5.56 in early trading, finishing up 2.24 per cent to HK$5.47 at the close of trading on Thursday, following its earnings announcement.

Lenovo has struggled in the past few quarters as a result of a tepid global personal computer market and increased competition in smartphones, as well as falling commodity prices and weak international currencies.

“Although the macroeconomy and our industries remain challenging, causing a decline in our revenue, we significantly improved our profit year on year through innovative products and strong execution,” Yang said.

The firm 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 in various overseas markets.

That followed its restructuring effort in August last year, which included cutting 3,200 non-manufacturing jobs and writing off smartphone inventory worth US$300 million.

Execution of those actions resulted in total savings of US$1.35 billion at the end of June, according to Lenovo.

Ken Hui, an equity analyst at Jefferies, said Lenovo’s better-than-expected revenue in the past quarter showed that its business struggles are “bottoming out as we expected”, which means a turnaround could be underway.

“We expect some short-term recovery in overseas smartphone shipments in the current quarter due to inventory replenishment ... However, we do not expect meaningful improvement in China given its continuing strategy shift,” Hui said.

Sales at Lenovo’s mobile business group, which includes smartphones under the Motorola and Lenovo brands, were down 6 per cent year on year to US$1.7 billion in the quarter to June.

Yang said the company was streamlining costs and expenses at this business group, while sharpening sales and marketing through multiple retail channels, including mobile network operators, online and in physical stores.

He said Lenovo expected its premium Phab 2 Pro smartphone could make Pokemon Go and other games based on augmented reality (AR) technology “more exciting to play”.

The Phab 2 Pro, which Lenovo co-developed with Google’s Tango AR technology group, is due for commercial release next month with a US$499 price tag.

Analysts at Bernstein forecast last month a “super bullish” scenario for Lenovo, seeing a US$1.5 billion windfall based on the company’s ability to ship three million of its AR-capable smartphones in the next 12 months.

Lenovo reported quarterly sales at its personal computer and smart device group were down 7 per cent year on year to US$7 billion, while its data centre business group saw flat year on year revenue growth at US$1.1 billion.

China accounted for 28.4 per cent of Lenovo’s total revenue in the past quarter. Its sales on the mainland declined 9.8 per cent year on year to US$2.9 billion.