Lenovo swings to surprise first-quarter loss as sales of PCs, smartphones struggle

Senior management hopes for a recovery based on a turnaround in smartphone sales and improved performance of data centre business

PUBLISHED : Friday, 18 August, 2017, 2:41pm
UPDATED : Friday, 18 August, 2017, 10:13pm

Lenovo Group, the world’s second-largest supplier of personal computers, swung to a surprise loss in its fiscal first quarter ended June 30 amid supply constraints and weak global demand for PCs, while its smartphone business struggled against better-known brands.

The company reported a net loss of US$72 million in the three months ended June 30, from a US$173 million net profit in the same quarter last year. Analysts were expecting a US$32.9 million profit, according to the consensus forecast of a Bloomberg survey of market estimates.

Revenue was little changed at US$10 billion during the quarter, in line with forecasts.

Lenovo’s personal computer and tablet business, which made up 70 per cent of total quarterly revenue, was flat at US$7 billion, hurt by weak demand.

Shares of the Beijing-based company fell as much as 4.2 per cent after earnings were announced and closed down 3.4 per cent to HK$4.56 at the end of trading on Friday in Hong Kong.

Higher personal computer prices due to component shortages for dynamic random-access memory, solid state drives and liquid crystal display panels had a negative impact on demand in the second quarter of this year, according to Gartner principal analyst Mikako Kitagawa.

Gartner estimated Lenovo’s shipments of personal computers dropped 8.4 per cent to 12.2 million units in the quarter to June, while global market leader HP saw a 3.3 per cent rise to 12.7 million units in the same period.

Gianfranco Lanci, chief operating officer at Lenovo, said the firm tightened control on shipments of low-end models to help preserve profitability.

Lenovo bought Motorola Mobility’s handset business in 2014, and now sells the brand under the Moto label. Global smartphone shipments for Lenovo declined 4 per cent to 11.8 million units in the quarter to June, according to Counterpoint Research.

Restructuring at its data centre business yielded a US$114 million loss before taxes in that operation.

Still, Lenovo said it is doubling down on its bet to turn around the smartphone business by sharpening its focus on mature geographic markets, such as North America and Western Europe, to improve its profitability.

“We see triple-digit growth in Western Europe,” Lenovo chairman and chief executive Yang Yuanqing said in a conference call on Friday. “We have also expanded into all four [mobile network] operators in the US ... You will see that driving [smartphone sales] growth in the US from the third quarter.”

The top mobile operators in the United States, the world’s third-largest smartphone market after mainland China and India, are Verizon Wireless, AT&T Mobility, T-Mobile and Sprint Corp. Lenovo’s previous sole US carrier partner was Verizon.

“We are very confident of turning around our mobile business in the second half [of the company’s fiscal year to March],” Yang said. “Everything is on track.”