Lenovo Posts Narrower-Than-Expected Loss Amid Phone Restructure

  • China revenue drops 12 percent amid slumping economic growth
  • Focus changed after `fierce' competition in China: Yang

Lenovo Group Ltd. posted a second-quarter loss that was narrower than estimates, boosted by stronger sales growth and an improvement in its smartphone business. Shares rose.

Net loss for the fiscal second-quarter ended September was $714 million compared with the $803 million average expected by analysts. Sales climbed 16 percent and also beat estimates.

Last year’s acquisition of server and smartphone units is dragging down Lenovo’s slowing, yet profitable, PC business. Job cuts and a shift away from aggressive competition in China will help the company meet its stated timeline to turn the smartphone unit profitable, Chairman and Chief Executive Officer Yang Yuanqing said.

“We significantly grew our smartphone business in the rest of the emerging markets, that’s our strategy,” Yang said in a phone interview after the earnings announcement. “We know our China competition is too fierce, so we just shift our focus.”

The shares closed almost 6 percent higher at a three-month high of HK$7.70. They remain down about 25 percent for the year.

Motorola Turnaround

Lenovo is committed to meeting the goal of turning the smartphone business profitable in the next one to two quarters, or six quarters after acquiring the Motorola brand, Yang said Thursday. It will be more aggressive in boosting market share in mature markets such as the U.S. and Europe next year, he said.

Yang is “more confident” the enterprise business, which was bolstered by the purchase of a unit from IBM last year, will reach its target for $5 billion in annual sales within a year of that acquisition, he said.

Without one-time costs, profit would have been $166 million in the fiscal second quarter, 50 percent lower than a year earlier, Lenovo said in a statement. The loss margin from its smartphone unit narrowed from the prior quarter.

Revenue for the period climbed to $12.2 billion, compared with estimates for $11.8 billion. Sales in China dropped by 12 percent from a year earlier, it said.

“Revenue was ahead as Lenovo shipped more smartphones than expected, but recurring profit appears to be slightly below what consensus numbers implied,” Jefferies Inc. analyst Ken Hui wrote in a note after the earnings announcement.

Restructuring costs including layoffs and impairments to clear smartphone inventory totaled $923 million during the period. Lenovo expects to complete its restructuring by the end of the fiscal year and exceed its previous target for $1.35 billion in annual cost savings from the move, it said.

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