Lenovo Expects to Finally Slow Smartphone Bleeding Next Year

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Lenovo 1Q Profit Beats on Cost Cuts, New Smartphones
  • CEO Yang Yuanqing predicts a complete turnaround in 2017/18
  • Net income exceeded estimates due to cost cuts, asset sales

Lenovo Group Ltd. expects its loss-making smartphone business to turn a corner next fiscal year as it shifts toward higher-end devices and ramps up marketing in the U.S. and China.

The world’s largest PC maker is counting on a revival of the Motorola smartphone business it bought for $2.8 billion to make up for a declining computer industry. The Chinese company emphasized that premium gadgets -- such as an upcoming smartphone with augmented reality capabilities -- should help stabilize the division in the second half and revive its faltering consumer business.

Yang Yuanqing
Yang Yuanqing
Photographer: Justin Chin/Bloomberg

“I hope we can completely turn around the business in the next fiscal year,” Chief Executive Officer Yang Yuanqing told analysts on a call. But he stopped short of saying the unit will finally make a profit -- a target that’s consistently eluded Lenovo since its 2014 acquisition of the U.S. name.

“Integrating the mobile business needs time, it took several years for us to integrate the PC business” after acquiring it from IBM, he told Bloomberg News before the call. “But writing down Motorola is never an option.”

In the interim, Lenovo has slowly relinquished smartphone market share in its home market to aggressive rivals from Huawei Technologies Inc. to Oppo and Vivo. But it’s now willing to spend “heavily” on advertising and marketing to try and fulfill an ambition of becoming a top-three player in global smartphones, Yang said without specifying a timeframe.

To read a Gadfly column on Lenovo’s earnings, click here.

Lenovo posted a first-quarter profit that exceeded estimates. But that came mainly on the back of cost cuts and asset sales, which helped to make up for sluggish demand for smartphones and personal computers. Net income rose 64 percent to $173 million in the period ended June, outpacing the $111 million average of analysts’ estimates. Sales fell 6.2 percent to $10.06 billion.

Shares of Lenovo rose 5.2 percent in Hong Kong to close at their highest in more than three months. The stock remains down about 30 percent this year.

The company had embarked on a plan to cut $1.35 billion from annual costs and eliminate 3,200 jobs, an effort that is now showing up in quarterly results. The challenge now will be to expand internationally, while investing in key technology such as cloud computing, artificial intelligence, robotics and internet services, the company said.

“They reduced some employee benefits costs and they unloaded some non-core assets and made some money off that,” said Alberto Moel, an analyst at Sanford C. Bernstein. “It’s consistent with what they said they were going to do.”

The world’s biggest PC maker decreased headcount costs by $76 million and also shed non-core assets, helping to make up for fewer shipments in its top two divisions. While Lenovo introduced new Motorola handsets, it sold 31 percent fewer units in the latest quarter. Total PC shipments declined 2 percent. Many of the efficiencies came out of Lenovo’s American division, the company said.

— With assistance by David Ramli, and Yuan Gao

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