Solid Lenovo 1st Quarter FY16-17 in Face of Industry & Currency Headwinds

  • Revenue was US$10.1 billion, down 6% (down 4% excluding foreign exchange impacts) YoY
  • Pre-tax income of US$206 million, up 297% YoY
  • Net income of US$173 million, up 64% YoY
  • Positive developments across every business show transformation strategy’s traction
  • Disruptive innovation balanced with operational efficiency accelerates Lenovo’s transformation into a high-growth, “Device + Cloud” company
  • Basic EPS of 1.57 US cents, or 12.19 HK cents

HONG KONG — (BUSINESS WIRE) — August 17, 2016 — Lenovo Group (HKSE: 0992) (PINK SHEETS: LNVGY) today announced results for its first fiscal quarter ended June 30, 2016. Quarterly revenue was US$10.1 billion, a six percent decrease year-over-year (or four percent decrease in constant currency). Quarter-to-quarter, this represented a 10 percent increase. First quarter pre-tax income increased 297 percent year-over-year to US$206 million. Net income increased 64 percent year-over-year to US$173 million.

Lenovo’s first quarter financial performance occurred during a period when the core markets saw either slow growth or year-over-year industry declines: PCs were down 4.1 percent and tablet shipments fell 11.1 percent, while server industry shipments were essentially flat with smartphone markets growing 0.7 percent. At the same time, the RMB continued its depreciation, capping overall growth potential during the quarter.

“Although the macro-economy and our industries remain challenging, causing a decline in our revenue, we significantly improved our profit year-on-year through innovative products and strong execution. Our PC business delivered strong profits and our smartphone business stabilized compared to last quarter,” said Yuanqing Yang, Chairman and CEO of Lenovo. “Going forward, in PCs we will focus on high growth segments and leverage industry consolidation to resume growth. In smartphones, we will leverage innovative, differentiated products and continue to shift to higher price bands to drive growth and turn around this business. In data centers, we will continue to expand in hyperconverged technology, and improve profitability in the hyperscale business.”

The Company’s gross profit for the first fiscal quarter decreased 7 percent year-over-year to US$1.5 billion, with gross margin at 15.3 percent. Operating PTI for the quarter increased 97 percent year-over-year to US$281 million. Basic earnings per share for the first fiscal quarter was 1.57 US cents, or 12.19 HK cents. Net debt as of June 30, 2016, totaled US$1.2 billion.

Business Group Overview

In the PC and Smart Device Business Group, or PCSD, which includes PCs and tablets, Lenovo’s quarterly sales were US$7 billion, down seven percent year-over-year. Pre-tax income was US$370 million, an increase of 2.4 percent year-over-year. Pre-tax income margin was strong at 5.3 percent, improving 0.5 points year-over-year, aided by good margins in China and increased profitability of the Latin America and Brazil PC businesses. Lenovo remained #1 worldwide for the 13th consecutive quarter with 21.1 percent market share, with gains in every geography except EMEA. It shipped 13.2 million PCs in the quarter, a 2.3 percent decline, which represented a 1.8 point premium to the overall market, which saw a 4.1 percent decline. The tablet business was profitable with a double-digit growth premium to market. Lenovo continues to make steady progress towards its goal of achieving 30 percent worldwide PC market share.

In the Mobile Business Group, or MBG, which includes products from Motorola and Lenovo-branded mobile phones, Lenovo quarterly sales were US$1.7 billion, down 6 percent year-over-year, but nearly flat in constant currency. MBG’s total pre-tax loss was US$206 million, with a pre-tax profit margin of negative 12.1 percent. The transition to higher priced products drove pre-tax profit margin up 2.9 points year-over-year.

In mainstream price bands, MBG is streamlining costs and expenses, while at the high end it is focusing on innovation. Overall, the group is strengthening its cohesiveness and building a more consistent culture within its global team. With the enhanced product portfolio that includes Moto Z and Moto Mods and further expanding channels in China, the Mobile business is making steady progress.

In the Data Center Business Group, or DCG, which includes servers, storage, software and services sold under both the Lenovo ThinkServer and the System x brands, sales were US$1.1 billion, up 1 percent. DCG's reported PTI – which included non-cash, M&A-related accounting charges – was negative US$64 million with a pre-tax profit margin of negative 5.9 percent. DCG continues to face stiff challenges in mature markets, but it strengthened its #1 market share position in China, increasing revenue 14 percent year-over-year, driven by growth in the hyperscale business. DCG’s global accounts sales group, which services Fortune 500 clients, saw a 45 percent year-over-year increase in revenue, driven by a significant increase in customers who had not previously purchased from Lenovo.

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