Lenovo Posts Lower Profit -- 2nd Update

By Eva Dou 

BEIJING--After the buying spree, now comes the hard work for Lenovo Group Ltd.

Lenovo Chairman and Chief Executive Yang Yuanqing warned of challenges ahead, after the Chinese computer maker posted a 37% profit slump, missing analyst expectations, in its first full quarter after acquiring unprofitable smartphone maker Motorola Mobility and International Business Machines Corp.'s low-end server business.

Mr. Yang faces slowing demand, fierce competition and U.S. security concerns as he integrates the two U.S. businesses. But if he succeeds, he will create the first Chinese brand with such broad and deep roots in the U.S.

"We will see some bottlenecks to further growth in the Motorola business, " said Mr. Yang in a telephone interview on Thursday, adding the company still planned to make Motorola profitable within six quarters by cutting costs and selling more phones in emerging markets.

Lenovo faces a slowing China smartphone market, lower operator subsidies and fierce competition from upstart rivals, such as Xiaomi Corp., who are willing to sell phones near cost on the bet they can make more money off services.

"The market has become more saturated," said Mr. Yang, referring to China's smartphone market. "And the competition is unreasonable sometimes." He added that some players "don't want to make money."

IBM's System X server line has lost sales during the integration, Mr. Yang told investors at a Hong Kong conference, but Lenovo says it expects growth in sales in China to offset losses in the U.S.

T he U.S. Navy is looking at dropping IBM servers from some weapons systems after the Lenovo acquisition because of concerns over the security of Chinese gear, a Navy spokesman told The Wall Street Journal this week.

Mr. Yang said at the conference that there were no security issues with Lenovo products and the company continues to sell to the U.S. government. "We have never received complaints," he said. "If there are such rumors, we are willing to communicate with the U.S. government, but it would not affect Lenovo's business in the U.S., nor would it affect our reputation around the world."

Some analysts weren't convinced by the prospects for Lenovo's new businesses. "System X is losing market share both in China and globally, " said Yuanta Securities analyst Vincent Chen. Referring to Motorola and the server business, he said, "the outlook of Lenovo really hinges on the outlook of the two merged businesses."

Lenovo in October closed its $2.91 billion acquisition of Motorola from Google Inc. and the $2.1 billion purchase of IBM's System X server line.

Founded in Beijing, Lenovo acquired IBM's PC business in 2005. The company now has headquarters in both the U.S. and China and surpassed Hewlett-Packard Co. to become the world's No. 1 PC maker by shipments last year.

Lenovo was the world's third-largest smartphone maker by shipments in the first quarter, with 5.6% market share, boosted by the acquisition of Motorola, according to market research firm IDC.

Lenovo's net profit in the quarter ended in March fell to $100 million from $158 million a year earlier, while revenue rose 20.7% to $11.3 billion.

Mr. Yang said cost savings from integrating new units will help the company's profit grow this year from last year. He said Lenovo would meet its previous forecasts to build a profitable $5 billion enterprise business within a year and turn around Motorola in six quarters.

"No integration is without obstacles," said Mr. Yang. "We are definitely ready to meet the challenges."

Write to Eva Dou at [e-mail]

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