Lenovo tumbles as sputtering PC, phone demand hammers sales
Lenovo Group Ltd. plunged in Hong Kong trading after quarterly revenue declined for the first time in more than six years on stalling demand for phones and computers.
Shares fell 10 percent in their biggest decline in two years. The world's largest PC maker said revenue dropped 8 percent in the three months ended December, even as broadening cost cuts delivered a surprise rise in net income.
Lenovo is relying on cutting $1.35 billion from annual costs and eliminating 3,200 jobs to shield its earnings from intensifying smartphone competition and a shrinking market for PCs. While it's expanding into other businesses, the company still gets more than half of revenue from a market that Intel Corp. last month warned was off to a "soft" start in 2016 amid tepid economic growth.
"The current fiscal quarter is the usual PC and mobile industry low season, and we expect mid-teen decline in sales on quarter-over-quarter basis," Joseph Ho, an analyst at GF Securities (HK) Brokerage Ltd., said by phone. "2016 global PC shipments are likely to continue to decline, and it is important for Lenovo to continue to gain market share to deliver growth in the PC business."
The cost cuts helped Lenovo increase net income 19 percent to $300 million in the third quarter. That compared with analyst estimates for earnings to fall to $242.5 million. Its smartphone division also broke even on an operational basis for the first time since Lenovo bought the Motorola brand from Google Inc. in 2014. However, if charges including those related to the deal were taken into account, the business would have had a pretax loss of $30 million, down from $217 million in the prior quarter.
The company once hailed as a symbol of global ambitions for Chinese corporations now faces the twin challenges of a competitive global smartphone and PC environment and a home country growing at its slowest pace in a quarter-century. Chief Executive Officer Yang Yuanqing is trying to grab greater market share in the U.S. and Europe this year, pivoting away from intensifying competition back home. The smartphone division should stay profitable in fiscal 2017 after the summer U.S. launch of its "'Tango" augmented-reality phone and a lower-cost structure help it gain market share globally, Yang told reporters on a conference call.
His upbeat comments come as Apple Inc and Samsung Electronics Co warn of moribund demand as markets get saturated and China slows. "Some peers in the industry are warning, but we think the market is shifting in Lenovo's favor," Yang said Wednesday. "We will not give up on China as well -- the situation there has already hit bottom."
Focusing internationally helped Lenovo lift the proportion of smartphone shipments from outside China to 83 percent from 59 percent. Expansion into markets from India to the U.S. helped shore up margins even as its global market share slipped about 1.5 percentage points to 5.1 percent in the period.
While Lenovo is increasing market share in PCs, industrywide PC shipments plummeted 10.6 percent in the fourth quarter according to research firm IDC. Lenovo managed to grow its share of that market to 21.4 percent versus runner- up HewlettPackard Co.'s 19.9 percent. The company on Tuesday predicted a recovery in PCs as more businesses upgrade to adopt Microsoft Corp.' s Windows 10 software.
Lenovo is also banking on global demand for the servers that underpin cloud computing services to prop up its enterprise division.
The enterprise division that sells servers, storage and software was the only major business unit to record topline growth, of 8 percent in the quarter. PC sales dived 12 percent during the three months while smartphone revenue slipped 4 percent, though that included foreign currency impact.
"The market has been under pressure given the current macro environment, as suggested by Intel recently," Ken Hui, an analyst with Jefferies Hong Kong Ltd., wrote in a research note after the results were released. "PC is the major shortfall in the revenue."