Bloomberg News

Lenovo Profit Surges on Smartphones, Computer Sales

August 14, 2014

Lenovo Group Ltd. CEO Yang Yuanqing

Yang Yuanqing, Chairman and Chief Executive Officer of Lenovo Group Ltd. Photographer: Brent Lewin/Bloomberg

Lenovo Group Ltd. (992) reported a 23 percent surge in first-quarter profit as the world’s largest maker of personal computers gained a greater portion of the global market for desktop models and mobile devices. Shares rose.

Net income climbed to $213.5 million in the three months ended June from $173.9 million a year earlier, the company said today in beating analysts’ estimates. Chief Executive Officer Yang Yuanqing also said in an interview the company is negotiating with “multiple” U.S. government agencies to win approval for more than $5 billion of planned acquisitions.

With the PC market in contraction, Yang has kept the company growing by winning share as he expands the smartphone and tablet-computer businesses. After rapidly expanding mobile-phone sales in its home base of China, the company is extending sales into the Middle East, Africa and Latin America while pursuing deals to bolster expansion.

“Looks like strength everywhere -- their emerging markets business in both smartphones and PCs seemed relatively strong,” said Alberto Moel, an analyst at Sanford C. Bernstein & Co. in Hong Kong. “The PC contraction is now heading into the late stages, and Lenovo is driving the consolidation to its advantage.”

Lenovo rose as much as 2.1 percent in Hong Kong, while the benchmark Hang Seng Index was little changed. The stock has gained 22 percent this year.

IBM, Motorola

In January, the company announced plans to buy Google Inc. (GOOG:US)’s Motorola Mobility unit for $2.91 billion in cash and stock. The same month Lenovo agreed to buy International Business Machines Corp. (IBM:US)’s low-end server unit for $2.3 billion. The purchase will add a business with wider profit margins than PCs and give it about 14 percent of that market, the company has said.

Both transactions are in the process of getting regulatory approval, and the company hopes they can close by the end of this year, Yang said in an interview today after earnings.

“We are making progress, but we definitely still have some things to do with multiple government agencies,” Yang said without elaborating on the remaining issues.

Lenovo, which has its headquarters in Beijing and Morrisville, North Carolina, reported sales climbed to $10.4 billion in the period from $8.79 billion a year earlier. That beat the $9.9 billion average of 17 analysts’ estimates compiled by Bloomberg.

Shipments Jump

While industrywide global PC shipments gained 0.1 percent in the three months ended June, Lenovo posted a 15 percent increase, researcher Gartner Inc. reported last month. Lenovo’s share of the market expanded to 19.2 percent from 16.7 percent a year earlier, Gartner said. Hewlett-Packard Co. (HPQ:US) was in second place with 17.7 percent of the market.

Global PC shipments are projected to decline 2.9 percent this year, following a 9.5 percent drop last year, Gartner reported last month.

“The company beat estimates with strong product shipments as their PC sales outpaced the global average,” Ricky Lai, an analyst at Guotai Junan International Holdings Limited in Hong Kong, said by phone today after results. “The smartphone business is also showing very strong growth in the second quarter.”

Lenovo’s smartphone shipments jumped 39 percent in the period to 15.8 million units, researcher International Data Corp. reported last month. That lifted its global market share for the devices to 5.4 percent from 4.7 percent a year earlier, IDC said.

Samsung, Xiaomi

Lenovo passed Samsung Electronics Co. (005930) as China’s smartphone market leader for the first time, IDC said.

Still, surging domestic peers including Xiaomi Corp. and Huawei Technologies Co. are increasing competition in China. Lenovo will adopt more of the online distribution strategy favored by Xiaomi, using Lenovo’s websites and e-commerce platforms run by JD.com Inc. and Alibaba Group Holding Ltd. (BABA:US), Yang said.

“China is a very chaotic market and the top three are very close,” Yang said in the interview. “The current competitive situation is hard for everyone to make money. For mobile phones, our focus is outside of China, particularly emerging markets.”

Lenovo ranks No. 4 globally in smartphone shipments, behind Samsung, Apple Inc. (AAPL:US) and Huawei, respectively, IDC said. Lenovo will look to Southeast Asia, eastern Europe and Latin America for growth, Yang said in the interview.

“Lenovo is doing very well on the mobile side,” Jean-Louis Lafayeedney, an analyst at JI Asia in Hong Kong, said before the results were announced. “They have a rapidly growing business in terms of sales, although it’s still not growing as much in terms of profit.”

To contact Bloomberg News staff for this story: Edmond Lococo in Beijing at elococo@bloomberg.net

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


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