Lenovo Q3 14A – The executioner

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Results augur well for acquisition turnarounds.

• Lenovo reported excellent Q3 14A results despite the first time inclusion of two loss making businesses.
• Q3 14A revenues / net income were $14.1bn / $253m compared to consensus at $13.7bn / $216m.
• These results are particularly impressive as:
  • The PC market remains soft but Lenovo saw growth gaining share to 20%.
  • Inclusion of Motorola Mobility for two months resulted in an operating loss of $89m
  • Inclusion of the Think Server business from IBM resulted in an Enterprise loss of $24m.
• Lenovo has benefitted from economies of scale in its growing PC business which have more than absorbed the losses from the new businesses it is now carrying.
• Indebtedness has risen as Lenovo has paid for its acquisitions with debt but it is far from dangerous levels.
• Consequently, Lenovo’s position and its ability to invest in growing its business has improved yet again.
• Lenovo is now a clear No 1 in PCs, No 3 in smartphones and number 4 in tablets.
• Despite the good news, Lenovo is still only making margins of 2.8% and the scope to move that above 4% remains very limited.
• Lenovo may be executing well but it is still selling commodity products where all it can compete on is price.
• Even in PCs, its innovations around form factor, while interesting, show the same legacy thinking that is hampering the marketing departments of Microsoft and Intel.
• This means that Lenovo must gain significant further share to increase its margins through scale or embrace the ecosystem.
• Embracing the ecosystem will require a whole new mind-set, strategy and heavy investments which could easily not pay off.
• That being said, it does have a wide enough portfolio to be able to offer some exclusive cross device functionality.
• The idea here would be to create stickiness by offering extra functionality to users who own more than one Lenovo product.
• An example of this would be integration of functionality between a television and a smartphone.
• This is not a new idea and Samsung, Apple, Sony, Microsoft and numerous others are all executing the same strategy.
• Consequently, I suspect that Lenovo’s main focus will be to gain market share and improve its margins through the benefits of scale.
• If it can reach 25-30% PC share or over 10% share in smartphones, then margins should begin to be better than its peers but there remains a long way to go.
• Lenovo is showing signs of emerging as a major force in supply of digital devices and so far its execution has been excellent.
• If this continues, then there is a bright future ahead for Lenovo but competition is getting tougher as the end markets slow down.
• If Lenovo presses ahead with its plan to IPO its digital devices division at a valuation of “a couple of billion”, this would represent an excellent entry point.