Lenovo Group (OTC: LNVGY) develops, manufactures and markets technology products and services globally. The company’s product groups include Think Product Group and Idea Product Group. The Think Product Group focuses on commercial customers, while the Idea Product Group focuses on the consumer and small and medium-sized business (SMB) products.
Lenovo's products include laptops and netbooks, desktops and all-in-ones, workstations, servers, accessories and upgrades, and software. The Company operates in three segments: China, Emerging Markets (excluding China) and Mature Markets. During the fiscal year ended March 31, 2010 (fiscal 2010), the Company completed the acquisition of Lenovo Mobile Communication Technology Ltd.
First Quarter 2010 Results
During the third quarter, Lenovo’s worldwide PC shipments increased 42 percent year-over-year, helping the Company to achieve for the third straight quarter its highest market share ever at nine percent. Comparatively, industry PC shipments increased 17 percent worldwide during the same period.
Consolidated sales for the third fiscal quarter increased a record 33 percent year-over-year to US $4.8 billion. The Company’s gross profit for the third quarter grew 45 percent year-over-year, with gross margin at 11.1 percent. By comparison, gross margin for the same reporting period last year was 10.2 percent.
Operating profit for the third fiscal quarter was US$99 million, double the profit of the previous quarter. The Company recorded one-off expense items of US $43 million as well as a net gain of US $43 million from the disposal of its investments during the quarter. As a result, the Group recorded a profit before tax of US $94 million. Profit attributable to equity holders for the quarter was US $80 million, almost a complete reversal year-over-year, when compared to the Company’s 2008/09 third fiscal quarter’s loss attributable to equity holders of US$97 million.
During the third fiscal quarter, Lenovo announced its intention to acquire the entire interest of Lenovo Mobile Communication Technology Ltd. from a group of investors led by Hony Capital, the private equity arm of Legend Holdings, for consideration of approximately US$200 million in cash and Lenovo shares. This acquisition, which has since been approved by the independent shareholders of the Company, signaled Lenovo’s intention to immediately expand its participation in the rapidly expanding mobile Internet device market in China.
Lenovo divides its business segments by geography: China, Emerging Markets (excluding China), and Mature Markets.
China’s economic stimulus packages and its rural subsidy program for PCs aided in driving demand in both commercial and consumer segments in 2009, especially for consumer notebooks. With growth momentum further improving in the second half of the year, the China PC market posted 31.9 percent year-on-year growth in unit shipments. Lenovo further expanded its leadership with 37.4 percent year-on-year increase in unit shipments by: focusing on capturing high growth opportunities in the rural market and government stimulus projects, refining the small-and-medium-sized business (SMB) model, strengthening cross-selling capability in the large enterprise segment, and enhancing storefront competitiveness.
Lenovo’s market share rose 1.2 percentage points year-on-year to 30.0 percent based on preliminary industry estimates, and achieved a historic high market share at 33.4 percent in its traditional peak season at the quarter’s end in December 2009.
Economic growth in emerging and developing economies was affected by the financial crisis. As a result, growth in the PC markets in certain emerging markets declined substantially in the first half of 2009, while rebounding in the second half of the fiscal year. Lenovo showed a strong growth momentum in the region in the last fiscal year, and grew by 34.5 percent in unit shipments compared to last year.
According to initial industry estimates, Emerging Markets showed a year-on-year increase of 1.0 percentage points to 4.8 percent for the fiscal year. To gain better efficiency and speed to market, Lenovo set up distinct end-to-end business models for each key country in the region. The Group launched a series of innovative and popular Idea branded products into 18 countries to address the needs of consumer segment. Meanwhile, the Group also kick-started its efforts to develop core channels across the region, resulting in increased share of wallet and stronger bonds with core business partners.
Impacted by sluggish commercial demand in mature markets, Lenovo started off in a low growth environment in the first half of 2009, but greatly improved its performance during the second half. The improvement in second half performance was largely attributed to the strong growth in SMB and consumer segments. Strong notebook growth was seen consistently across all key geographies within the region which helped offset a continuing decline in the desktop PC business.
Lenovo grew by 8.9 percent in unit shipments in Mature Markets compared to last year. The Group’s overall market share increased in all countries within the region with exception of those in North America, and reached 4.4 percent according to the latest industry estimates. With relatively limited retail presence in this region, Lenovo’s share gains highlight its strong execution in the market segments in which it has presence.
As technology evolves, companies often upgrade or replace their computer systems to take advantage of new technologies, an occurrence known as the upgrade cycle. Technological innovations can trigger the upgrade cycle and increase demand for Lenovo products, while a lack of new developments can discourage companies from upgrading their computer systems. This cycle occurs primarily in the commercial market, where companies tend to replace all their computers at once.
The release of a product like Microsoft’s Windows 7 operating system could trigger an upgrade cycle in Lenovo's commercial segment. As seen with Vista, compatibility issues will occur, encouraging companies to upgrade their systems to take advantage of Seven's new features. This potentially increased demand in the higher-margin commercial segments could positively impact Lenovo's total sales.
PC sales and prices are declining. As it stands, IDC already expects PC sales to be down 5.3 pct in 2009 as consumers search for cheaper units in a bad economy. Netbooks are a new type of portable computer, that are cheap, light weight, and easy to use. In Q3 2008, shipments of netbooks grew 160%, overtaking iPhone sales by 900,000 units.  Consequently, the sales of netbooks are driving notebook prices down. The average selling price for a portable computer is $1,106, and IDC predicts that this will drop 8% to $1,018 in 2008, and an additional 12% next year, partly because of netbooks.