Lenovo 1st Quarter FY15-16: Tough Markets, Solid Results

The Company’s gross profit for the first fiscal quarter increased 22 percent year-over-year to US$1.6 billion, with gross margin at 15.4 percent. Operating profit for the quarter declined 67 percent year-over year to US$96 million. Basic earnings per share for the first fiscal quarter was 0.95 US cents, or 7.36 HK cents. Net debt reserves as of June 30, 2015, totaled US$0.5 billion.

Business Group Overview***

In the PC Group, or PCG, which includes PCs and Windows tablets, Lenovo’s quarterly sales were US$7.3 billion, with pre-tax income of US$368 million, down 8 percent year-over-year. Pre-tax income margin was strong at 5.1 percent, improving 0.3 points year-over-year. Lenovo remained #1 for the ninth consecutive quarter with record high 20.6 percent market share, widening its lead over the #2 vendor. It shipped 13.5 million PCs in the quarter, down 7.1 percent year-over-year, verses an overall market decline of 12.8 percent. Lenovo saw share gains in every geography, while in the US it achieved the #3 position and saw a record market share of 13 percent, up 1.6 percent year-over-year. Lenovo’s goal is to achieve 30 percent worldwide PC market share in three years.

In the Mobile Business Group, or MBG, which includes products from Motorola, Lenovo-branded mobile phones, Android tablets and smart TVs, Lenovo quarterly sales were US$2.1 billion, up 33 percent year-over-year, due to the inclusion of revenues from Motorola. Motorola contributed US$1.2 billion to Lenovo’s MBG revenues. MBG’s total pre-tax loss was US$292 million, with a pre-tax loss margin of negative 13.8 percent.

Despite strong growth in emerging markets and selling 16.2 million smartphones in the quarter – a 2.3 percent year-over-year increase – tough competition and a rapidly changing technology landscape saw Lenovo’s share of the worldwide smartphone market decline 0.5 points to 4.7 percent, making it the fifth largest smartphone vendor.

Motorola’s contribution to Lenovo’s smartphone shipments stood at 5.9 million units, a 31 percent decline year-over-year. This performance resulted from several factors including intensifying competition, long product development lifecycles with related inventory issues, macroeconomic issues in Brazil (a large market for Motorola), and a fixed cost structure that was out of balance with the losses incurred. With the restructuring actions announced today, management reiterates its commitment to see profitability in Motorola within 4-6 quarters of close (2-3 quarters from now), though this goal is now being extended to the full MBG unit, where Motorola’s results are included.

In the tablet market, Lenovo continued to outpace the market. It solidified its worldwide #3 position with 5.6 percent, growing shipments 3.8 percent year-over-year, to 2.5 million units, while taking share from the #1 and #2 players.

In the Enterprise Business Group, or EBG, which includes servers, storage, software and services sold under both the Lenovo ThinkServer brand and the System x business unit, sales were US$1.1 billion, up 5.8 times year-over-year due to inclusion of System x this year. In its third full quarter with System x, EBG delivered operational pre-tax income, although its standard PTI – which included non-cash, M&A-related accounting charges – was negative US$40 million. The ThinkServer brand that targets small and medium sized enterprises saw strong revenue growth of over 40 percent year-over-year. Lenovo remains confident that EBG will realize $5 billion in revenue with good margin one year after the close of the System x deal.

Geographic Overview

In China consolidated sales in the first fiscal quarter, declined by 16 percent year-over-year to US$3.2 billion, accounting for 30 percent of the Company’s worldwide sales. Operating margins fell 0.7 points to 4.8 percent. These declines were driven by weak performance in mobile. The mobile business in China suffered in the face of intense competition and telecom subsidy cuts. In PCs Lenovo kept steady market share with good margin performance while seeing strong shipment growth from ThinkServer in its China Enterprise business, which allowed it to recapture the #1 position in the China x86 server market.

In the Asia Pacific region, Lenovo achieved sales across the region of US$1.6 billion or 15 percent of Lenovo’s worldwide sales, while operating margins were down 1.9 points to 2.2 percent because of dampened Motorola performance. Lenovo Asia Pacific PC market share was up 0.9 points year-over-year to 15.9 percent. In Enterprise, Lenovo is leveraging channel expertise and ecosystems to accelerate the business. In Mobile, Lenovo branded phones had very strong performance, pushing shipments up 81.7 percent.

Lenovo in Europe, Middle East & Africa had consolidated sales in the first quarter of US$2.6 billion, a year-over-year decline of 5 percent, as PC sales slowed with the broader market. EMEA accounted for 25 percent of Lenovo’s total worldwide sales. Operating profit margin was 1.5 percent, a 1.9 points decrease year-over-year. Lenovo grew PC market share to 19.9 percent, up 1.9 percent year-over-year. In Mobile, smartphone shipments registered very strong 153 percent growth, mainly from Lenovo-branded product. In Enterprise, the EMEA team is attacking more opportunities with an integrated team.

In the Americas, Lenovo saw consolidated sales grow 46 percent year-over-year to approximately US$3.3 billion in the first quarter, driven by the inclusion of the two acquisitions. This represented 30 percent of Lenovo’s total worldwide sales. Operating margin was negative 4 percent, weighed down by losses from Brazil and Motorola. In PCs, share was up 0.6 points year-over-year to 13.1 percent. Lenovo was #3 in the US, with a record 13 percent share and strong 8.8 percent shipment growth. In Mobile, the Americas saw weaker smartphone shipments growth because of slower Motorola product transitions. In Enterprise, the company is poised to capture new opportunities in the future.

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