Lenovo Group (HKSE: 992) (ADR: LNVGY) announced the Results for the third fiscal quarter ended December 31, 2015. Quarterly revenue was US$12,9 billion, down 8% year-over-year, or 2% year-over-year on a constant basis. In the third quarter, pre-tax income, excluding non-cash M&A accounting charges of US$77 million, was US$397 million, while recorded pre-tax income was US$320 million, up 17%. , exceeding analysts' estimates. Net income was US$300 million, with a 19% increase, again beating estimates.
The resolute restructuring steps that Lenovo announced in August of 2015 are proceeding on a schedule to deliver savings of US $ 1,35 billion at a constant annual rate. These savings give Lenovo a cost structure that is significantly lower than its competitors.
Together with the robust implementation and innovation inventory of the program, Lenovo transforms its business model, processes, and organization by placing itself in a position to maintain a healthy operation even in the current environment.
"In the last three months, although we have been affected by the global slowdown, currency fluctuations in key markets and a decline in the PC market, Lenovo has achieved a record of profits and has made our commitment to reverse the trend in mobile telephony "Says Yuanqing Yang, President and CEO of Lenovo. "Then, in order to achieve growth, we will use the trend of unification, replacement of professional PCs and growth opportunities in the category of innovative products. In the field of mobile telephony, we will build a scale of efficiency to accelerate our growth in emerging markets, lead to mature markets with innovative products and premium brands, and expand into the open market of China with a stronger range of products. Finally, in the enterprise area, we will use top technologies and strategic partnerships for profitable growth. "
The company's gross profit margin for the fiscal third quarter fell 10% year-on-year to US$1,9 billion, while gross profit margin increased 14,6%. Operating profit for the quarter was US$379 million. Basic earnings per share for the fiscal third quarter were 2,71 cents USA, or 21,01 Hong Kong cents. The net debt reserve as of December 31, 2015 amounts to US$49 million.
Business Group Overview **
In PC Group, or PCG, which includes computers and Windows tablets, Lenovo's quarterly sales were US $ 8 billion, with 12% reduction, with pre-tax revenue of US $ 405 million, showing a decrease of 18% in a year. Larger than expected, the slowdown in the PC market and exchange rate fluctuations affected the effects of PCG. The pre-tax profit margin 5% was comparatively stable, with a reduction of 0,4 units year-on-year, showing Lenovo's business benefits.
Lenovo remained #1 for 11 consecutive quarter. It achieved a record market share of 21,6%, while widening the lead by the #2 vendor. It provided 15,4 million computers in the quarter, with 6.7 units above the market relative to the total 10,9% decrease in the market. In the global consumer market, Lenovo recorded a record market share of 19,7%. In China, Lenovo's market share increased by 1,7 units, thus allowing it to surpass 40% of its market share for the first time. Lenovo will take advantage of industry integration with a strong trend of renewing professional products due to Windows 10 and impressive new polymorphic and detachable products to grow its market share and achieve the 30% global PC goal , maintaining strong profitability.
In the Mobile Business Group, or MBG, which includes Motorola products, Lenovo mobile phones, Android tablets and smart TVs, Lenovo has fulfilled its commitment to announce balanced results in 4-6 quarters after Motorola acquired, with successful restructuring and strong performance in emerging markets outside of China. Quarterly sales were US $ 3,2, minus 4% from Q3 FY 2014-15, which included Motorola's two month results. Motorola contributed US $ 2 billion to Lenovo's MBG revenues. The total MBG before tax loss was US $ 30 million, with a loss margin of 0,9% before taxes, an increase of 7.2 points from quarter to quarter.
The total volume of smartphones has decreased by 18,1% from year to year, with sales of 20,2 million units. Outside China, Lenovo saw an increase of 15% from year to year, driven by emerging markets. Lenovo has seen over-growth in smartphone shipments in India and Indonesia, with an increase of 206% and 318%, respectively. In the last quarter, 75% of the volume was outside China, this quarter rose to 83%. Also, for Motorola, shipments have jumped 25% quarter-on-quarter, showing further stabilization. In China, Lenovo's restructuring has begun to yield. And a new strong dual-brand strategy - with two major brands Lenovo Moto and Lenovo Vibe - brings coherence and efficiency to smartphones.
In the Enterprise Business Group, or EBG, which includes servers, storage units, software and services sold under the ThinkServer and System x brands, sales were US $ 1,3 billion, up to 8% year on year year and 12% quarter-on-quarter. System x had about US $ 1 billion in sales. The recorded PTI - which included non-floating, accounting charges related to mergers and acquisitions - was negative at US $ 14 million, improving both from time to time and successively. EBG was profitable in the quarter. In addition, it has reported revenue and operating earnings improvements every quarter since System x was acquired.
This performance is driven by a victory in the hyperscale sector in China. EBG has stabilized its activity in the traditional data center segment, while dynamically turning to fast-growing cloud, and hyperscale and hyperconverged opportunities. At the forefront of partnerships, promising new collaborations with software and hyperconverged factors - such as Nutanix, Red Hat, and just recently SAP - differentiate Lenovo's offerings and enhance its competitiveness. Lenovo continues to target US $ 5 billion for Enterprise Business in the financial year of 2015-16, on a stable basis.
Geographical overview
At China, consolidated sales of the third financial quarter, reduced 14% from year to year to US $ 3,5 billion, representing the company's 27% worldwide sales. Earnings before tax decreased by 1 to 4,7% year-on-year.
On computers, China saw a record market share of 40%. In the mobile sector, actions have been taken to improve channel performance. With the new dual brand strategy and a better range of products, mobile performance improves. EBG revenues increased 30% from major ThinkServer orders to hyperscale customers Baidu, Alibaba and Tencent, allowing Lenovo to maintain the number one position in China in the x86 server market.
At region Asia-Pacific, Lenovo has made sales across the region, some US $ 2 twice. or 15% of Lenovo's global sales while operating margins decreased by 4,4 units to 1,0% year-on-year, mainly due to the shrinking PC market in Japan and the impact of exchange rate fluctuations.
To computers, Lenovo kept the #1 position with 18,9% market share, increasing 2,8 points from year to year. This performance was guided by India, which increased 55% year-on-year. On mobile, we saw an increase in 123% smartphone shipments across the region, mainly from a strong push in India and Indonesia where there was an increase of 206% and 318% respectively. Finally, EBG market share increased and profitability improved.
Η Lenovo in Europe, Middle East & Africa had consolidated sales of US $ 3,5 billion in the third quarter, down 15% year-on-year due to the exchange rate shock and a declining PC market. EMEA achieved 27% of Lenovo's global sales. The pre-tax profit was 1,7%, down 1,3 points from year to year.
Lenovo retained the #2 position on the PC market in this geographic area with a share of 19,4%. On the consumer PC, it was #1 for the eighth consecutive quarter. On mobile phones, Lenovo had a record of 4,7 million missions, an increase of 48% from year to year. In the enterprise sector, Lenovo's investments aimed to stabilize its top line products.
At America, Lenovo saw a 7% decline in year-over-year consolidated sales of about US$3,9 billion in the third quarter. This accounted for 31% of Lenovo's global sales. The functional profit in the region was US$76 million, against a loss of US$22 million recorded during the same period last year. The operating margin was 1,9%. The improved performance was a result of recent overall business realignments and restructuring moves in Brazil and Latin America.
At a regional level, the PC market grew by 1,9 percentage points from last year, reaching 13,1%, according to the industry's preliminary estimate. Steady performance is driven by the sharp rise in the critical US PC market, where shipments increased by 21% year-on-year despite the market decline of 4%. Thus, Lenovo's market share reached 12,5%, 2,6 percentage points over, year-on-year. In mobile telephony, the new Motorola phones have delivered a strong 52% increase in trimester quarterly shipments to North America while some hyperscale opportunities have produced good results in the EBG sector.
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* see IDC data 4Q 2015
** the company provided a financial breakdown per product from Q2 FY14 / 15. After completing investments in Motorola and System x under Lenovo Q3 FY14 / 15, Lenovo launched communications per business group to help understand the performance of these activities.
