Lenovo Q1A – Breathing space

Improvements give Lenovo more space to invest and execute.

• Lenovo reported good Q1 results as its handset business and PC business both grew share.
• This gives the company more breathing room when it comes to turning around the loss making Motorola Mobility that it is about to acquire from Google.
• Q1 revenues and net income were $10.4bn / $213m compared to consensus forecasts of $9.9bn / $201m.
• Lenovo saw a 15% increase in PC shipments despite a stagnant market and also registered a 16% increase QoQ in smartphone shipments against a market that grew by just 4.6% QoQ.
• Market share in PCs has hit an all-time high of 19.4%, nearly 1% clear of HP while smartphone share has reached 5.1%.
• Including Motorola, smartphone share is now at 7.6% making it comfortably number 3, although it now has Xiaomi snapping at its heels.
• EBIT margin has inched up to 2.7% from 2.5% in Q4 but the revenue increase has driven Q1A operating profit to $283m.
• This combined with the fact that EBIT Losses at Motorola almost halved in Q2 to $99m (Google Q1 10Q) gives Lenovo much more room to effect its strategy.
• Additionally, the IBM server business is more profitable than the Lenovo group which should also help keep the company in the black when the two transactions have closed.
• Lenovo has $5.5bn in the bank much of which will be spent on the transactions to come.
• However, this combined with the improving fundamentals gives Lenovo enough space to give its strategy to become a major player a proper chance.
• That being said, this will not be easy. I have long believed that at least 10% market share is needed before any scale related benefits start to kick in leaving Lenovo 2.4% adrift.
• This means that heavy investments are going to have to be made which could easily push Lenovo into loss making territory.
• Furthermore, sooner or later Lenovo is going to have to contend with the fact that all the value in its industry is migrating to the ecosystem for which it has no answer.
• It claims to have a stake in the digital ecosystem with its SHAREit application but this is merely a tool for transferring content between different Lenovo devices and is not a Digital Life service in its own right.
• Hence Lenovo continues to get a 0% score on the RFM Digital Life Pie analysis but I can see it starting to think about being a contender.
• Historically, I have been concerned regarding Lenovo’s strategic depth but I have to admit that in the last three months it has surprised me.
• Lenovo remains one to watch but I still think that the new strategy will make a dent in earnings and the valuation before it can hope to come good.