Lenovo Q1 17A – Heavy weather.

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I see opportunity but not without risk. 

• Lenovo is hanging on in the difficult markets that it serves, but I think there is an opportunity for it to be as creative in PCs as it has been in handsets.
• Q1 17A revenues / EBIT were US$10.1bn / $245m nicely ahead of estimates of $10.0bn / $167m.
• This was mostly driven by good profitability in PCs which chalked up 5.3% EBIT margins despite a 7% decline in revenues.
• Handsets increased their losses compared to Q4 16A as sales and marketing expenses have been increased ahead of the new models from Motorola (Moto Z and Moto Mods).
• Here, I am hopeful that these products will be reasonably successful as the Moto Z offers a lot of phone for a very reasonable price and Moto Mods is the most interesting iteration of modularity I have seen for a very long time.
• Motorola has crammed an Android device into a very thin package leaving space for a series of backs that magnetically attach to the device offering a range of functions such as camera, projector and high quality speakers.
• If these devices ship reasonably well, there should be a corresponding improvement in profitability that should be further augmented by steady cost reductions.
• All of Lenovo’s end markets are having a difficult year but Lenovo is continuing to do a good job at making the best of them.
• However, I think it could do more and I would like to see some of the creativity in Motorola spread to the other parts of Lenovo.
• The softest target is PCs where Lenovo’s strategy is to differentiate by addressing certain segments where there is growth such as tablet PCs, Gaming PCs and Chromebooks.
• Unfortunately, its tablet PCs are nothing more than laptops where the keyboard comes off and then instantly stops working.
• What Lenovo needs to do is to go further than even Microsoft and Huawei have gone and make the most of the fact that the laptop form factor is now obsolete.
• Having the keyboard and the screen physically separate allows for the vastly superior, much healthier desktop PC experience to follow the user out of the office.
• I have long argued that this offers the potential to create a 3 to 4 year replacement cycle where laptops are replaced with something that is just as powerful but offers a vastly superior user experience.
• The problem is that the PC industry has been selling laptops for 40 years and seems incapable of accepting the notion that there is now something much better on offer.
• This is the opportunity for Lenovo but it is not without risk, nor will it come cheap as users are even more oblivious of how the tablet PC can improve their portable computing experience.
• Consequently, I do not expect Lenovo to do down this road, but I believe that if it wants to see a return of growth and better than commodity margins, this is where it must go.
• Of all the PC makers, I find Lenovo to be one of the best run and most pragmatic, even if it is a little unimaginative.
• I would back it against almost any of the others.