Lenovo's Slowdown Spells Trouble

Lenovo’s earnings results showed it is not much better off than Hewlett-Packard Co. (NYSE: HPQ) in the personal computer (PC) market, and a slew of competitors in the tablet and smartphone industries. One of Asia’s big company growth stories has begun to wear down.

For the second quarter of its 2014/2015 fiscal year, revenue rose only 7% from the same period a year ago to $19.5 billion. Net income also rose modestly, at least for a rapidly growing public corporation, from $220 million to $262 million. It is worth noting these are small margins.

In its home market of China, revenue dropped $94 million to $3.8 billion. It is a sign that both home-grown products and imports have damaged it more than many analysts would have expected. Lenovo’s bright spot was Europe, including Germany, Eastern Europe and Russia. Revenue in the region rose $763 million to $3.0 billion.

Notebook sales rose 9% for the period. PC sales rose 11%. However, in the critical mobile device market, revenue actually dropped 6%. It can be argued that this last segment is the most important, since the world is rushing to these devices as their primary means of communication, information gathering and entertainment. Lenovo’s global smartphone market share of rose only 0.5 points year-over-year to 5.2%, putting it well behind market leaders.

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Lenovo management made a forecast not supported by its figures. It will win more of the markets in enterprise computing and smartphones worldwide by attacking the “top two players” worldwide.

In summing up the quarter, Yuanqing Yang, chairman and CEO said:

Lenovo had another strong quarter that saw excellent market share gains and profit expansion. Not only did we reach nearly 20 percent share in PCs, but we became #1 in the broader PC+ tablet market for the first time.  In May, we set this as a two year goal, but achieved it in two quarters. And in the last month, we successfully closed both our Motorola Mobility and IBM x86 acquisitions.  With these two deals, we are now #3 in both businesses, but we are not satisfied.  We will replicate our success in PCs by outgrowing the market to challenge the top two.  Mobile and Enterprise are now our new growth engines, and over time, like PCs, they will become our profit pool as well.

“In time” is not a phrase investors want to hear because it means nothing. Lenovo has a very long road to travel to keep its promise.

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