Bloomberg News

Lenovo Projects End to Motorola Losses With China Phone Plan (2)

February 13, 2014

Lenovo Store

An employee delivers Lenovo Group Ltd. computers at a Lenovo store in the Sha Tin district of Hong Kong. Lenovo’s sales climbed 15 percent to $10.8 billion from $9.36 billion a year earlier. That beat the $10.5 billion estimate of 19 analysts compiled by Bloomberg. Photographer: Brent Lewin/Bloomberg

Lenovo Group Ltd. (992), which posted a 29 percent surge in profit today, expects to end losses at Motorola Mobility within quarters of completing a deal as it reintroduces the smartphone brand to China.

“In a few quarters we can turn around the business,” Chief Executive Officer Yang Yuanqing said in a phone interview today. The Beijing-based company has spoken to U.S. regulators and is working to get approval to buy Motorola from Google Inc. (GOOG:US) for $2.91 billion in cash and stock.

Yang led more than $5 billion of deals last month to help withstand shrinking demand for personal computers, a market that accounts for about 80 percent of Lenovo’s sales. In addition to the Motorola acquisition to boost smartphones, the company agreed to buy International Business Machines Corp. (IBM:US)’s low-end server unit for $2.3 billion to add corporate customers.

The acquisition of Motorola, which had operating losses of more $1 billion last year according to data compiled (GOOG:US) by Bloomberg, adds new risks and challenges to Lenovo as the company seeks to integrate the deal and revive sales, Yang said.

“They basically are taking on a material headwind to profitability which will impact their results,” said Alberto Moel, an analyst at Sanford C. Bernstein & Co. in Hong Kong. “For the next few quarters we will be seeing earnings coming down. The question is how bad those earnings will drop and how low they will go before they start rising again.”

Shrinking Market

Net income climbed to $265.3 million in the three months ended December from $204.9 million a year earlier, Lenovo said in a statement today. That beat the $243.7 million average of 12 analysts’ estimates compiled by Bloomberg.

Sales climbed 15 percent to $10.8 billion from $9.36 billion a year earlier, beating the $10.5 billion estimate of 19 analysts compiled by Bloomberg.

Lenovo fell 0.6 percent to HK$8.63 at the close of trade in Hong Kong. The stock has lost 8.5 percent this year, compared with the 4.9 percent drop in the city’s benchmark Hang Seng Index.

The company maintained the No. 1 spot with 18.1 percent of the global PC market in the fourth quarter of last year, helped by a 6.6 percent increase in shipments, researcher Gartner Inc. announced last month. Hewlett-Packard Co. was second with a 16.4 percent share.

Worldwide shipments last year dropped to levels not seen since 2009, making it the “worst decline in PC market history,” Gartner said.

Record Shipments

Yang has helped Lenovo outpace industry growth by expanding share in markets across Europe, Japan and South America through acquisitions. In the past three years, the company’s purchases include Germany’s Medion AG, NEC Corp.’s PC division in Japan and Brazilian PC maker CCE.

At the same time, Yang diversified the company through sales of mobile devices.

Lenovo, which built its smartphone sales with inexpensive devices, is now pushing into the premium market with models such as the Vibe X smartphone that went on sale in China in October.

Smartphone shipments rose 47 percent to a record 13.9 million units in the quarter, the company said today.

The company will expand its share of the global smartphone market through the purchase of Motorola that was announced Jan. 29. The acquisition adds a brand established in the U.S. mobile market and would create the world’s No. 3 vendor. Motorola has reported falling sales as it lags behind Apple Inc. and Samsung Electronics Co. in smartphone shipments.

“We will relaunch and reintroduce the Motorola brand back to China and other emerging markets,” Yang said in a phone interview. “We will compete in the premium market, but this is not enough, we will also compete in the entry level.”

About 3,500 Motorola workers will transfer to Lenovo, Yang said.

Yang last month said the plan to buy the IBM server business, which was announced Jan. 23, would add a business with wider profit margins than PCs and give it about 14 percent of that market.

The company is looking at six to nine months for regulatory approval of the deals, Yang said.

To contact Bloomberg News staff for this story: Edmond Lococo in Beijing at elococo@bloomberg.net; Lulu Yilun Chen in Hong Kong at ychen447@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net


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