SMARTPHONES: Lenovo Smartphones Bottom Out Amid Slim-Down

Bottom line: Lenovo’s latest results show a company in transition as it overhauls its struggling smartphone business, and could presage a fledgling turnaround as it focuses on mid-range models with its young Zuk brand.

Lenovo at a turning point?

Newly released quarterly results from the struggling Lenovo (HKEx: 992) are showing some early positive signs, as the company seeks to turn around its miserably performing smartphone business. Lenovo stumbled badly in smartphones, which will play a vital role in its future as its older PC business rapidly matures. The company bet heavily on cheap, low-end models that initially gained big market share, especially in its home market, but then later fizzled due to lack of brand recognition and a reputation for poor quality.

As part of the turnaround strategy rolled out by embattled longtime chief Yang Yuanqing, Lenovo has been dumping the low-end of the business and focusing on the mid-range through its recently launched Zuk brand and its previously acquired Motorola. Reflecting the state of transition now taking place, Lenovo reported its overall revenue actually fell 6 percent in the quarter to about $10 billion. (company announcement)

Lenovo’s core PC sales, the single largest part of its business, actually fell slightly during the quarter, mirroring a global trend. But the bigger drag came from Lenovo’s mobile unit, which accounts for 17 percent of the company’s revenue. Smartphone shipments plunged 31 percent during the quarter, even as the company pointed out the figure was up slightly on a quarter-to-quarter basis.

While that latest sales figure may look bad, the declines were even worse last year, especially in Lenovo’s home China market, where shipments plunged by as much as two-thirds in last year’s fourth quarter. All the misery led me to call for Yang’s resignation, but instead he sacked the company’s mobile chief and launched a major corporate overhaul earlier this year. (previous post)

Cost cutting appears to be part of that overhaul, as the latest quarterly report shows that Lenovo’s operating expenses fell by 17 percent in the three months through June, the company’s fiscal first quarter. That cost cutting actually helped Lenovo to post a strong profit gain, with net profit rising 64 percent to $173 million.

Beaten-Down Shares

Lenovo’s shares have taken a beating over the past 18 months, losing two-thirds of their value between a peak in April 2015 and a low in June this year. Since then they’ve staged a bit of a rally and are up around 18 percent from that low. These latest results may encourage some investors who believe in the company and its new mobile strategy.

As a long-time company watcher, I’m still a bit skeptical and will need to see more positive results before we can declare that Lenovo is back on solid footing. The discarding of its low-end smartphone strategy was a good move, but one could also argue that Lenovo never should have started down that road to begin with. I also disagreed with Lenovo’s purchase of Motorola 2 years ago, arguing the once-storied brand had lost most of its luster by then and only appealed to a sentimental generation of older consumers.

We have yet to hear Lenovo say it will write off the Motorola purchase, even though such a move would probably be prudent despite the huge cost. I have yet to see anyone here in China using a smartphone from Lenovo’s newer Zuk line, which will be its main focus going forward. But I do like its strategy of starting from scratch with this new brand rather than trying to salvage its tarnished Lenovo name or pumping more money into Motorola.

At the end of the day, these latest results could mark a turning point for Lenovo, which is likely to post more revenue declines in the second half of 2016 as it repositions its mobile unit and PC sales continue to decline. But investors will also be looking for a bottoming out in the decline of its smartphone business, which should come by the end of this year if its turnaround strategy is really working.

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