Lenovo comes up short on smartphones

Bloomberg

Lenovo Group Ltd.’s mobile-phone business continues to shrink, while its personal-computer division managed anaemic growth in the face of brutal holiday-season competition.
The world’s largest PC maker’s profit plummeted more than two thirds in the December quarter, missing analysts’ projections after HP Inc. threatened its position in North America. Smartphone sales declined almost a quarter globally as Lenovo bled market share to rivals such as Huawei Technologies Co. — both at home and abroad.
Lenovo remains the leader in a PC market struggling through a prolonged downturn as people opt for smartphones to handle everyday tasks. But it barely maintained pole position over HP as its chief rival widened its share in North America, according to research firm IDC. In mobile, Lenovo is pinning its hopes on premium phones, such as the one with augmented reality capabilities, to breathe life into the loss-making division. Yet it’s still ceding ground to rivals that’re winning users over with aggressive sales tactics.
Shares of Lenovo had fallen 6.7 percent by 3:27 p.m. in Hong Kong, on track for their biggest fall since May. A rise in memory chip prices pressured margins in Lenovo’s main business. While the industry isn’t yet out of the woods, it’s showing signs of stabilization, executives said on a post-earnings conference call. Worldwide PC shipments fell 1.5 percent in the fourth quarter, a slimmer decline than the previous period’s 4 percent, according to IDC.
“The component price remains high, which could be a headwind for them,” said Chris Yim, an analyst with BOCOM International. But “their net income should get better. The global PC market is stabilizing, that’s a good sign for them.”
Net income fell 67 percent to $98 million in the quarter that ended in December, well below the the $145.9 million average of analysts’ estimates compiled by Bloomberg. Revenue fell 6 percent to $12.2 billion, compared with estimates for $11.7 billion. The Chinese company warned Thursday its market will remain challenging because of macroeconomic uncertainty and rising component prices.
Lenovo is cutting jobs, selling assets and pushing into higher-end devices to weather shrinking demand and competition. Three years after Lenovo closed its $2.9 billion acquisition of Motorola Mobility, the smartphone business remains well behind Vivo, Oppo and Huawei in terms of market share. Its mobile business turned in an operating loss of $112 million after sales slid 23 percent to $2.2 billion. Worldwide smartphone shipments dived 26 percent as its market share slipped to 3.5 percent, the company said.
In 2016, it appointed long-time human resources director Gina Qiao to lead smartphone sales in China, the third executive in the position since the Motorola takeover. She hasn’t outlined how she intends to revive the business. Chief Executive Officer Yang Yuanqing said he remained confident the division will achieve break-even by the second half of the next fiscal year ending March 2018.
“We’ll start from scratch to rebuild our China business,” Yang said in a telephone interview. “You probably can’t see the progress from the financial data but she’s building a stronger team and a better business model.”
Phone shipments, including Motorolas, dived more than 30 percent in 2016, Counterpoint Research estimates. The company was ranked ninth globally during the holiday quarter, ahead of Alcatel but behind S Korea’s LG. Lenovo has said it expects the smartphone business to turn profitable this year, though a paucity of new models cast doubt on its outlook, Yim wrote in a note ahead of the earnings. Lenovo’s PC business — still 70 percent of its revenue — managed growth in the quarter, as both revenue and shipments edged 2 percent higher. The Beijing-based company is now negotiating a deal to tie up with Japan’s Fujitsu Ltd. and shore up its position, an imperative given the smartphone business it bought with Motorola remains unprofitable.
The data center unit, built up around the 2014 acquisition of International Business Machines Corp.’s low-end server business, didn’t fare as well. Revenue there slid 20 percent to $1.1 billion. “Lenovo is as keen as Fujitsu to close a deal soon, so that it can comfortably retain its No. 1 PC crown,” Ken Hui, an analyst at Huatai Financial Holdings, wrote in a note ahead of the earnings release.