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Lenovo Group Ltd. just reported March quarter profit that climbed threefold to beat the highest analyst estimate.
The Chinese computer maker’s focus on higher-margin products will offer investors some comfort that management’s turnaround strategy has been successful. That’s not wrong.
But a lot has changed in the past year. The world is facing a tougher economic outlook, which will impact consumer devices such as
PCs and smartphones, and the US-China trade war has escalated. Since Lenovo last reported earnings, tariffs have become a secondary concern to the broader tech Cold War initiated by US President Donald Trump.
Huawei Technologies Co. was the first target. A handful of Chinese surveillance companies were next. While there’s no evidence to suggest Lenovo has committed any infractions worthy of US wrath, the White House’s new offensive isn’t entirely predictable.
Which makes the Beijing-based company’s $5 billion spending spree half a decade ago look increasingly less justifiable. Management rationalised those deals with a series of performance targets that it’s consistently failed to hit. And this isn’t just some
esoteric rifling through the past.
Lenovo continues to hold more than $4.9 billion of goodwill on its books, trimming that figure by just 2.9% last year. Goodwill is a measure of the premium a company pays over a target’s tangible assets when it makes an acquisition. A third of Lenovo’s goodwill sits in its mobile business group, a division that once again posted a loss last year. To its credit, the unit turned to a pretax profit in the second half of the fiscal year ended March 31 after narrowing its focus to core markets and slimming the product catalog.
Still, almost all of that improvement came from cost cuts, not some fundamental turnaround. Annual expenses declined to $1 billion from around $1.5 billion, while the pretax loss narrowed to $139 million from $603 million. Revenue fell 11 percent, Lenovo said. With these structural costs now out of the way, the company has no excuse to keep losing money in mobile.
The $1.5 billion of goodwill still held on Lenovo’s balance sheet looks ever more flimsy, given the shaky ground on which its long-awaited profit stands. The drawing of a digital Iron Curtain between the US and Chinese technology spheres now makes that valuation little more than wishful thinking.
—Bloomberg