Lenovo's sharp knife is behind those meaty profits
Congratulations to the team at Lenovo Group Ltd for turning things around and producing positive operating profit for the June quarter after a loss the year before.
Investors should be looking hard at where the US$186mil turnaround came from, however.
There’s no question the ThinkPad maker’s 19% increase in sales played a large role, and it’s an impressive figure given the challenges in PCs and in mobile, where the Chinese com- pany owns the former Motorola Mobility unit.
Yet the lion’s share of that profit recovery came from cost savings, notably in mobile.
Had operating expenses tracked the same rate as a year ago, operating income would have been closer to US$1mil, instead of the US$180mil Lenovo posted.
That’s not to say cutting expenses isn’t a legitimate way to drive profit. Management should always be on the lookout for savings and improved margins. But the risk is that these savings are hard to repeat: There comes a point where reducing expenses also reduces development, production and sales.
We’ve been hearing for years now of management’s confidence that it will make the mobile and data-centre businesses profitable. Its credibility here isn’t strong, and is further eroded by Lenovo’s continued insistence on maintaining inflated goodwill numbers, a writedown of which would trigger massive losses.
Lenovo should crow about its strong financial results this time. Investors need to be assessing the odds of a repeat performance. — Bloomberg