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Companies

Lenovo rebounds to profit by snapping up struggling rivals

President Lanci discusses future steps as Motorola finally dials profit

Lenovo reported a net profit of $233 million for October-December.   © Reuters

BEIJING -- Lenovo Group celebrated a return to black ink for the quarter through December, earnings out on Feb. 21 showed, enjoying the fruits of a leading PC market share amassed by acquiring flagging players.

Mobile phone operations also turned a profit for the first time since the Chinese company purchased the Motorola brand from Google in 2014.

"Our strength and position as the industry's most prolific global technology organization is firmly established," Chairman and CEO Yang Yuanqing wrote in an earnings announcement, adding that the company is "only getting stronger."

Once an icon of China's information technology sector, Lenovo's profile has faded over what one investment firm official called the "four lost years" since the Motorola purchase.

With earnings back on stable footing, Lenovo now faces a long-term question: Can the company use its cash piles to build a new profit stream, or will it be stuck making lunch from the leftovers of the PC market?

Lenovo reported a net profit of $233 million for October-December, rebounding from a $289 million loss a year earlier. The company also logged record pretax income -- its yardstick for earnings power -- while operating profit more than doubled on the year. Impressed investors sent Lenovo shares soaring by nearly 12% on Feb. 21 on the Hong Kong Stock Exchange.

Robust personal computer operations powered most of the improvement. Lenovo topped the global PC market by shipments with a 24.6% share for October-December, according to U.S. research firm International Data Corp., cementing a lead the Chinese company reclaimed in the previous quarter after ceding it to American rival HP during 2017.

PC shipments worldwide shrank by 0.4% in 2018, IDC said, with the trend expected to continue through 2020. But that decline was gentler than the 4% contraction in the smartphone market, which is suffering whiplash after its rapid growth spurt.

Lenovo President Gianfranco Lanci (Photo courtesy of Lenovo)

Gianfranco Lanci, Lenovo's president and chief operating officer, expects the PC market to be flat, he told Nikkei in a phone interview on Feb. 21. In that context, the company is "focusing on areas where PC is growing," he said, citing examples like "thin and light" models, gaming computers and workstations.

Lenovo and HP now control nearly half the global market for PCs as other international players retreat. Though they have little room for significant growth in the medium to long term, that dominant position yields steady earnings: Pretax income in Lenovo's PC operations rose 40% on the year for October-December.

Lanci attributed the improvement to the focus on growth areas. For example, workstations were a nearly nonexistent segment for the company "three to four years ago," but today are an "almost $2 billion business and running with 20% to 40% growth year-on-year," he said.

As for mobile operations, Lanci cited three reasons for achieving quarterly profit: "serious actions" on expenses, an effort to "review and rationalize the product portfolio" and "focusing on areas where we can be successful."

Lenovo focused on marketing Motorola in the Americas, where it enjoyed strong brand recognition and claimed the No. 2 spot by shipments in Latin America.

Until now, Lenovo has "amassed market share by scooping up the crops left over after the harvest," as one Chinese analyst familiar with the PC industry put it, building a stable profit stream by buying or investing in surviving players.

Such deals include the acquisition of Germany's Medion and the integration of Lenovo's PC business with that of Japan's NEC in 2011, as well as a similar integration involving NEC compatriot Fujitsu completed in 2018.

But Lenovo's long efforts to build a true income pillar outside of PCs have yet to fully bear fruit. The company is laying the groundwork with investments in supercomputers and other aspects of the data center business, which remains mired in red ink despite growing revenue.

The company is now looking toward technologies like artificial intelligence and connected devices, where companies online mall operator Alibaba Group Holding and chat app and digital payments provider Tencent Holdings have taken the lead in China.

"I think it is very clear we are not just a PC company anymore," Lanci said, noting that 30% of Lenovo's revenue comes from outside the PC business. He cited a trend of "infrastructure becoming smarter" and said the company aims to "provide ... smarter infrastructure which is connected to the cloud."

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