Lenovo Q4 15A – Weather-beaten

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Lenovo should be able to weather a stormy 2016

• Lenovo reported a difficult quarter as weakness in the PC market and market share losses in mobile took a heavy toll on financial performance.
• Q4 15A revenues / net income were $9.1bn / $180m compared to consensus at $10.6bn / $204m but it was cash flow that hurt the most with a $700m outflow from operations.
• Lenovo has remained the market leader in PCs and did very well to keep margins broadly stable at 5.0% despite the declines in revenues suffered.
• Mobile was more problematic with both the Lenovo and Motorola brands losing out with combined share falling to 3.3% in calendar Q1 16A compared to 5.1% in Q4 15A.
• The home market of China was also a major problem as market share there is now just 1.5% compared to 2.7% in calendar Q4 15A and 7.4% in Q1 15A.
• Lenovo has suffered at the hands of both Huawei and Oppo, both of whom have made strong share gains in the home market in the last 12 months.
• As a result of the decline in smartphone share, losses widened to 6.1% of sales in Q4 15A compared to 0.9% in Q3 15A.
• This combined with increases in working capital is what led to the $700m cash outflow.
• While Lenovo has done an exceptional job in PCs, the focus needs now to turn to smartphones where it must find a way to differentiate its products.
• The Motorola brand is no longer enough and I think that Lenovo either needs to work on a compelling cross device strategy, develop its own software or look at an alliance with one of the big Chinese ecosystems.
• All of the big three are very strong in their respective segments and I think that the next stage of their evolution will be to try and entice users to spend more time with their services rather than those of the competition.
• I think that this could lead to a greater requirement to be vertical and while all of them except Baidu have their own Android software, no one is yet making the phones.
• An alliance here could help Lenovo as it may be able to negotiate a traffic acquisition fee with the big ecosystems that give it a boost to its profitability.
• I also think that Lenovo needs to take a step forward in its PC business and follow the trend that Microsoft has started with the Surface Pro.
• Huawei has already followed in this vein, but if the market leader was to do so, I think that there would be a better chance of users sitting up and taking notice.
• All of these things will take time to come through and consequently, I see a tough year ahead for Lenovo.
• The one comfort is that I think that the management is fairly accustomed to difficult times and so should be able to weather the storm.