Lenovo Q4A– The thin red line.

Lenovo can only just afford its strategy

• Lenovo reported reasonable Q4 14A results but the addition of Motorola will almost tip Lenovo into the red.
• Q4 14A Revenues / Net Income were $9.4bn / $158.3m compared to forecasts of $9.0bn / $163.6m.
• On a YoY basis the results look much better with revenue up 19%, and EBIT up 28% but it is clear that margins remain under intense pressure as the company tries to gain market share.
• Lenovo is now the global number 1 in PCs with 17.7% share, No 3 smartphone marker with 6.3% share (including Motorola) and tied with Asustek for the number 3 position in Tablets.
• These leadership positions come at a cost as the company remains barely profitable with operating margins of just 2.5% in Q4A.
• This amounted to $231m, which is very close to the amount the Motorola loses every quarter.
• Lenovo has only $3.9bn in the bank will be meaningfully impacted when it comes to paying $2.66bn for both transactions (Motorola and IBM) as well as the capital that will be required to turn them around.
• In order to make a decent go of its handset and tablet business, Lenovo needs to increase market share meaningfully as Android is a commoditised market where scale is everything.
• In PCs it is showing that it can be much more innovative than its competitors when it comes to form factor innovation to take advantage of the functionality offered by Windows 8.
• If it can do something similar in smartphones and tablets and gain meaningful share then Lenovo has a chance.
• Lenovo has the ambition but I am not yet convinced that it can execute in smartphones and tablets where so many have failed.
• Its cash balance is not huge and investments will have to be made very carefully if management is going to pull this off.
• 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.
• Lenovo is one to watch but things are going to get worse before they get better.