Lenovo’s profit beat came from accounting gains

Lenovo Group Ltd.’s net income beat analysts’ expectations by $53 million, or 45 percent.
While that upside surprise was helped by slightly stronger revenue and a slimmer operating-expense margin – from a reduction in sales and distribution costs – operating income benefited a lot from one-time accounting items.
A fall in gross margin by 0.3 percentage points from a year earlier to 13.4 percent is a hint that profitability isn’t as solid as it looks. It missed estimates of 13.9 percent.
Going through the P&L, we can see that various valuation metrics were the primary contributors to stronger-than-estimated numbers.
Chief among them: fair value gains on financial assets at fair value through profit or loss boosted the operating line by $42.4 million. Another line item, dilution gain on interest in an associate, added $18 million. All up, Lenovo gained $61.3 million from these accounting tweaks. That’s more than the scale of the company’s net income beat, and accounts for 90 percent of the $68.4 million by which expected operating income surpassed reported operating income.
While investors are keen to see a turnaround at Lenovo, this may not be it.
—Bloomberg