Len­ovo tum­bles as sput­ter­ing PC, phone de­mand ham­mers sales

The Pak Banker - - COMPANIES/BOSS -

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."

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