Lenovo warns of cost challenges

Lenovo chief executive Yang Yuanqing said the firm will focus more on fast-growing premium products, such as PCs tailored for millennials and gamers, to protect margins.
Lenovo chief executive Yang Yuanqing said the firm will focus more on fast-growing premium products, such as PCs tailored for millennials and gamers, to protect margins.PHOTO: AGENCE FRANCE-PRESSE

HONG KONG •Chinese personal computer maker Lenovo Group warned of higher costs and margin pressure due to shortages of components such as memory chips, as it posted its first quarterly loss in almost two years yesterday.

Lenovo, which gave up its title as the world's largest PC maker to HP in the quarter to June, lost US$72 million (S$98 million) compared with a profit of US$173 million for the same period last year.

It was the company's first quarterly loss since September 2015 and lagged behind analysts' average forecast of a US$5.29 million profit, sending the stock down as much as 5 per cent to a year-low of HK$4.52 yesterday.

The outlook for the rest of the year was challenging as component shortages would push costs higher, possibly forcing the company to raise its selling price to protect margins, executives said.

Lenovo chief operating officer Gianfranco Lanci said: "Most of the component cost is stabilising except memory... and the price is still going up."

Memory price rises would continue "at least until the end of the year", albeit at a slower rate than the past two quarters, he said, a product of exploding global demand for semiconductors.

Car industry demand was also pushing up the price of batteries, he said.

While personal computer makers around the world are struggling as consumers switch to mobile devices, Lenovo's core PC business is declining more rapidly than many of its competitors'.

Lenovo posted a 6 per cent decline in PC shipments in the quarter, compared with a 3 per cent fall globally. Its PC revenue was flat at US$7 billion.

"Overall, it will be very challenging for them to improve their PC performance in the short-term with the component price rise that's here to stay," said analyst Mo Jia from industry consultancy Canalys.

Despite the challenging outlook, chairman and chief executive Yang Yuanqing was upbeat about the prospects for margins and the struggling mobile business.

He pointed to a US$110 million sequential improvement in operational pretax income, which he attributed to improvement in the mobile and data centre businesses.

He said: "Not only did this gave me more confidence we will turn around our mobile business in the second half of the financial year of 2018, but I also think the entire Lenovo is entering a new phase of growth."

Lenovo has struggled with mobile business since acquiring Motorola in 2015, and as Chinese rivals, such as Huawei and Xiaomi, leapt to global prominence.

Losses from its mobile business narrowed and revenue rose 2 per cent to US$1.75 billion in the quarter. It was the only unit to post a rise in revenue, although it still accounted for just 17 per cent of the total. Total revenue was flat at US$10 billion.

To protect margins, Mr Yang said Lenovo would focus more on fast-growing premium products, such as PCs tailored for gamers and millennials.

It had dropped low-margin deals such as that with Google's Chromebook, and would raise selling prices if component costs continued to climb.

Lenovo's data centre business group recorded an operational loss of US$114 million, versus a loss of US$31 million a year ago.

Despite a 11 per cent drop in revenue, Mr Yang said he expected the group to turn profitable in two years.

REUTERS

A version of this article appeared in the print edition of The Straits Times on August 19, 2017, with the headline 'Lenovo warns of cost challenges'. Print Edition | Subscribe