Tech

Tim Culpan is a technology columnist for Bloomberg Gadfly. He previously covered technology for Bloomberg News.

Lenovo beat earnings estimates with a simple strategy: Don't make an awful situation even worse.

Net income for the June quarter outpaced the street by 56 percent, for the largest upside surprise since 2009, when PCs were last cool.

The Beijing-based PC (and server, and smartphone) maker managed to claw out a 64 percent increase in its bottom line, despite chronic anemia in the top line.

"PC, tablet markets declined; smartphone, server markets flat," Lenovo proclaimed in its investor presentation Thursday morning.

Sales Slide
Lenovo revenue fell for a third straight quarter. Not a surprise when you consider its primary businesses are PCs and smartphones
Source: Bloomberg

Take the PC business, where sales were down 7 percent while the pretax margin climbed 0.5 percentage point. Lenovo explained that the improvement was due to: 

Good margins in China and increased profitability of the Latin America and Brazil PC businesses.

Those aren't exactly the world's most stable economies, especially at the micro level. Meanwhile in Europe, the Middle East and Africa, the one region with relatively consistent GDP growth, Lenovo lost share.

"The Latin America region was still very weak, largely because of political and economic instability," Gartner said of the PC market there, pointing to a 20 percent decline in industry shipments for the period. Globally, Lenovo posted its fifth consecutive decline in unit sales, the research firm said.

Profit Is Profit
It doesn't matter how it got there, Lenovo managed to deliver stronger net income and beat estimates
Source: Bloomberg

Meanwhile in smartphones, where flat is the new up, Lenovo managed to drag its losses into shallower waters by increasing prices and offering an "enhanced product portfolio" -- meaning some new models.

Nevertheless, heroic efforts at "streamlining costs and expenses" helped Lenovo narrow its pretax loss margin by 2.9 points to $12.10 per $100 of sales. (A reminder that Chairman Yang Yuanqing promised to turn the Lenovo-Motorola unit profitable within 18 months of closing the deal to buy the U.S. phone business, which was 22 months ago.)

Then there's the data center business group, another unit saddled with the integration of an acquired subsidiary. Sales were actually up -- just 1 percent, but that still counts -- yet the pretax loss margin was 5.9 percent.

What Lenovo has managed to do is rely once again on the PC business to make up for those two albatrosses it acquired in 2014, then leverage that scale to trim some fat and report a stronger bottom line. It's not pretty, but investors will be happy to take a profit by whatever means Lenovo can deliver it.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tim Culpan in Taipei at tculpan1@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net