Lenovo’s net profit increased by 64% due to sale of assets and cost cutting measures
Lenovo has been a PC market leader for quite some time but its mobile business has not done so well despite the acquisition of Motorola in 2014. The company reported its first quarter of fiscal year 2017 financial results with net income of $173 million on revenue of $10.1 billion. The accounted slow growth in the smartphone division was offset by PC sales.
The company also beat analyst estimates. According to a poll of 13 analysts conducted by Thomson One Analytics, the company was expected to earn net income of $133.4 million in the quarter on revenue of $9.7 billion. Lenovo has already said that it would now shift its focus toward smartphones with heavy marketing expected in China and the US.
“Our PC business delivered strong profits and our smartphone business stabilized compared to last quarter,” said Yuanqing Yang, Chairman and CEO of Lenovo. “Going forward, in PCs we will focus on high growth segments and leverage industry consolidation to resume growth. In smartphones, we will leverage innovative, differentiated products and continue to shift to higher price bands to drive growth and turn around this business.”
Lenovo’s revenue during the first quarter was down 6% on a year-over-year (YoY) basis. Despite the decrease in revenue, the company’s net profit increased 64% YoY as a result of the sale of property and cost cutting measures
Lenovo had announced last year that it would cut down cost by $1.35 billion and also lay off 3,200 employees as part of its restructuring process. The decision taken earlier is now paying dividends. Also, the sale of its Beijing property in which it gained $132 million, played a pivotal role in boosting its net profit. Such gains are reported as one-off gains.
Operating profit for the period came in at $245 million, more than double of what it reported in the same quarter last year. Operating profit is considered to be an important element to review a company’s performance. However, for Lenovo, the problem was that operating profit included the gain from the sale of assets, which is not its core business.
PC and tablets sales were reported at $7 billion, down 7% YoY. During the quarter, 13.2 million PCs were shipped, which represents a decline of 2.3% YoY with the overall PC market shrinking by 4.1% during the same period. Despite the decline, it managed to be the number one PC manufacturer with 21.1% market share for the 13th straight quarter.
Lenovo will do whatever it takes to achieve its aim of 30% global market share. Profit margin from PC sales was mainly driven from high margins reported in China, Latin America and Brazil. Tablet business was profitable with double digit growth, though Lenovo did not give out any numbers on it.
Mobile division continued to report losses as sales went down by 6% on a YoY basis to $1.7 billion in the recently closed quarter. Global smartphone shipments during the period were down 31% compared to the same quarter last year despite the acquisition of Motorola. Lenovo does not expect its mobile division to turn profitable before October 2017.
The company hopes that its smartphone division will turn around soon as it has made significant progress. It has also incorporated many organizational changes which will be visible in the next quarter. Lenovo will ramp up its marketing expenses to sell high end premium phones, marking the US and China as its main markets.
With the global smartphone market shrinking and increased competition, it might be difficult for the company to meet its target. Lenovo is currently ranked seventh in the global smartphone market with a market share of 4.5% only. Samsung and Apple currently lead the race with 24% and 15% market share, respectively.
To counter the problem, Lenovo had been eyeing the Chinese market with low-cost phones. However, a slowdown in the Chinese economy didn’t help its cause. After the extension in its portfolio with the inclusion of Moto Z and Moto Mods, Lenovo now expects to not only save its mobile division but also make it profitable.
Revenue from Data Business Group, which includes storage, software services and servers, came in at $1.1 billion. The company has been struggling to strengthen its footing in mature markets due to the presence of stronger players. However, it has finally achieved its number one market position in China.
China has been a strong region for the company, which accounts for almost 30% of the total revenue earned during the recently closed quarter. Asia was the next biggest region in terms of sales, accounting for 16.7% of its worldwide sales. Sales in America declined by 6.6% YoY but with heavy marketing investment expected, we might just see a turnaround in the region.