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Profit grows in latest quarter, helped by cost cuts, but PC demand slows. The company will also launch two new smartphones in the U.S., Yang Yuanqing says
HONG KONG—A year and a half ago, Lenovo Group Ltd. spent $5 billion to buy itself into growth sectors like smartphones and servers as the personal-computer market slowed. But return to growth hasn't come easy.
The Chinese PC maker, which bought International Business Machines Corp.’s computer business more than a decade ago and grew to become the world’s largest PC maker by shipments, underestimated how difficult it would be to integrate its 2014 acquisition of Motorola Mobility’s handset business, Lenovo Chief Executive Yang Yuanqing said in an interview Thursday.
“We are definitely facing some challenges” in the mobile phone business, he said, after Lenovo reported its first annual loss in six years. The company attributed the weak performance to slowing PC demand and costs related to integrating Motorola’s handset business, which it bought for $2.91 billion from Alphabet Inc.’s Google unit.
Mr. Yang said in the interview that he expects losses to continue at the company’s mobile unit in the “short-term” but added he was optimistic he could turn it around and “pursue profitable growth over time.”
As part of its strategy, Lenovo will be pushing high-end smartphones in the U.S. market. Mr. Yang said on June 9 in Silicon Valley, Lenovo plans to launch a new smartphone based on the Motorola’s brand and another with Google’s Tango, which adds smartphones features such as motion tracking and depth perception.
Lenovo purchased Motorola’s smartphone business and IBM’s low-end server business in 2014 to bolster itself against contraction in the global PC market. But Lenovo has struggled to hold ground against Chinese smartphone rivals like Huawei Technologies Co. and Oppo, which gained market share in the first calendar quarter, while Lenovo fell out of the top five rankings, according to market research firm Gartner. Lenovo’s server market share fell to 7.5% from 7.9% in the fourth calendar quarter, while IBM and Cisco Systems gained, according the most recent figures from Gartner.
In the U.S., Lenovo barely had presence in the smartphone market but through its acquisition of Motorola, it boosted its market share to 5.2% last year, according to market research firm International Data Corp. That compares with 22.7% for Samsung Electronics Co. and 16.2% for Apple Inc. Lenovo said the company’s world-wide smartphone shipments fell 13% in its fiscal year ended March from a year earlier due to weaker demand in China and the U.S. It added that its world-wide market share for smartphones dropped 1.1 percentage points to 4.6%. Meanwhile, it mobile business booked a loss of $469 million for the fiscal year ended in March.
In the competitive China market, Mr. Yang pointed to a shift in the handset business model where smartphones that were once sold through wireless carriers only are now sold directly to consumers.
Advertisement “The market is shifting from the operator’s market to an open market, and, unfortunately, we haven’t built that solid foundation,” Mr. Yang said.
Lenovo did meet its target to turn Motorola profitable in its fourth fiscal quarter, but it came at the price of steep cost cuts. The company said last August it would cut $650 million from expenses at the unit over the second half of last year, which included staff reductions.
Mr. Yang said that as long as the smartphone market didn’t deteriorate further, there wouldn’t be the need for more cost cuts.
Lenovo said its fiscal fourth-quarter net profit rose to $180 million from $100 million a year earlier thanks to lower operating expenses and employee benefit costs. Operating costs dropped by 23% in the quarter compared with a year earlier and employee benefit costs were lower due to the reduced head count, the company said. Revenue fell to $9.13 billion from $11.3 billion a year earlier, as sales fell across all regions.
Shortly after Lenovo’s annual results were posted, Mr. Yang sent out an email to his employees pledging not to accept any bonuses offered to him because of the company’s financial performance last year, according to the company. Lenovo’s shares are down 37% since the start of the year.
“We all share in our success, and with our culture of commitment and ownership, we must all understand that in tough times we share the responsibility too,” he wrote.