Lenovo Group 3rd-Quarter Net Profit Rises 18.6%, Beating Forecasts -- 2nd Update

By Eva Dou 

BEIJING--To the chagrin of electronics makers, the world's consumers appear to have decided that they have plenty of gadgets already.

The world's largest personal-computer maker Lenovo Group Ltd. is the latest company grappling with slack demand. It posted sales declines in its PC and smartphone businesses for its fiscal third quarter and warned Wednesday of "market challenges," despite reporting a surprise net profit increase from cost cuts and growth in sales of enterprise products.

For the past few years, electronics makers such as Lenovo have offset a slowdown in PC sales by doubling down on smartphones. But this strategy is reaping diminishing returns.

Worldwide smartphone shipment growth has eased from 80% in 2010 to 11% in 2015 and is expected to slow further, according to market research firm Canalys. Global PC sales have slumped for several years in a row, with vendors hoping for the bottom in 2016.

Consumers have yet to embrace new technologies like smartwatches and virtual-reality headsets on a scale that can replace the slowdown in PCs and smartphones.

"The golden years have passed," said Zhou Hao, an economist at Commerzbank AG, of global electronics sales growth. "We maybe have to wait for the next generation of products that can trigger new consumption."

Even the strongest players haven't escaped the trend. Apple Inc. forecast last month that its revenue in the current quarter would decline for the first time in 13 years, as the world's appetite for iPhones is finally sated. Samsung Electronics Co. posted a sharp slowdown in profit from chips last week and warned that smartphone competition would intensify.

Many smaller vendors have fared worse. Taiwanese smartphone maker HTC Corp. reported Wednesday it swung to a net loss of 3.4 billion New Taiwan dollars ($101.4 million) in the fourth quarter.

Lenovo Chairman Yang Yuanqing said in an interview Wednesday that his company faced a "really challenging market," but aimed to carve out top-line and profit growth this year by taking over market share from PC rivals and redoubling smartphone efforts in emerging markets.

"We think we can win through our efficiency," he said. "How we can make money in this downturn period? Because we have the most competitive cost structure."

Lenovo posted a surprise net profit gain Wednesday for the quarter that ended Dec. 31 due to cost cuts, although its sales fell. The company said its net profit for the quarter rose 18.6% from a year earlier to $300 million, beating the $226.3 million average estimate of 19 analysts surveyed by Thomson One Analytics. Revenue fell 8.5% to $12.9 billion from $14.1 billion a year earlier.

Depreciating currencies in emerging markets have hit gadget makers, which generally pay their suppliers in U.S. dollars and ring up sales in local currencies. Lenovo said its revenue decline in the quarter would have only been 2%, not 8%, without currency depreciation. Chief Financial Officer Wong Wai Ming said on an investor call that Lenovo would consider raising product prices in emerging markets if depreciation continues.

Lenovo reported its Motorola handset business broke even for the first time in the past quarter, meeting its forecast of turning the business profitable within a year and a half of acquiring it from Google Inc. It helped that Lenovo had taken a massive write-down on smartphone inventory clearing and restructuring in its fiscal second quarter, which had dragged it into its first quarterly loss in more than six years.

A bright spot for Lenovo was its enterprise business, which includes servers and networking products. The group's revenue rose 8% in the quarter, while its business groups catering more to regular consumers--PCs and smartphones--saw sales fall.

With the addition of the Motorola business, Lenovo was the world's fourth-largest smartphone maker by shipments in the fourth quarter with 5.1% of the global market, according to market research firm IDC. It trailed Samsung, Apple and Huawei Technologies Co.

Canalys analyst Nicole Peng said much of Lenovo's headway in smartphone sales in recent months has been due to competitively priced devices in emerging markets like India, as the company has lost share in China to rivals like Huawei. Lenovo's smartphone shipments in India rose 75% last year, while they fell 53% in China, she said.

Write to Eva Dou at [e-mail]

(END) Dow Jones Newswires

February 03, 2016 05:59 ET (10:59 GMT)

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