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Lenovo net income sinks 67% on higher costs, expansion; revenue declines 6%

Chinese technology company Lenovo Group announced Thursday that its net income for the quarter ended December 31, 2016 slumped 67 percent to $98 million, mainly due to increased costs of main components, business transformation and overseas expansion.

 

Revenue fell 6 percent to $12.17 billion, according to a statement to the Hong Kong Stock Exchange.

Pre-tax profit plummeted 68 percent to $101 million due to the transformation of its mobile and data center business, said Lenovo, noting that the move is expected to drive profit growth.

The limited supply of many products drove up costs for components, the company said.

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The explosion of Samsung’s Galaxy Note 7s sent a warning to smartphone manufacturers to use high-quality components, leading them to use powerful suppliers. That meant limited supplies and higher prices, said Xiang Ligang, chief executive of telecom industry portal cctime.com.

“In addition to Lenovo, domestic smartphone manufacturers such as OPPO and Huawei also reported higher component costs,” he told the Global Times on Thursday.

Marketing expenses for new smartphones increased as the group sought to expand the Moto smartphone brand to other countries and regions, according to the statement.

Though the expansion of the smartphone business is costly, it is the right strategic choice, as intelligence is the direction of the information and telecommunications industry, Xiang said.

In October 2014, Lenovo acquired Motorola Mobility for $2.91 billion, after which the company became the world’s third-largest smartphone manufacturer.

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The sales of Moto products steadily grew, with volume increasing 20 percent from the previous quarter.

The market share of the group’s personal computer (PC) and tablet PC business ranked the top in the world, with the market share of its PC business rising 0.8 percentage point to 22.4 percent, said the statement.

Sales of its gaming PCs increased 70 percent year-on-year and PCs targeted at millennials saw growth of 258 percent.

The mobile business posted strong growth in key markets.

Geographic Overview
In China, in the third fiscal quarter, Lenovo recorded consolidated sales of US$3.5 billion, a two percent decrease year-over-year, but an eight percent increase quarter-to-quarter. China represented 28.5 percent of the Company’s total worldwide third quarter sales. Pre-tax income in China increased eight percent to US$180 million year-over-year, with pre-tax income margin gaining half-a point to 5.2 percent.
In Asia Pacific, Lenovo had consolidated sales in the third fiscal quarter of US$1.7 billion, a decrease of 14 percent year-over-year, representing 14 percent of the Company’s total worldwide sales. The region had a pre-tax loss of US$41 million and a pre-tax loss margin of 2.4 percent.
In Europe, Middle East and Africa, consolidated sales in the third fiscal quarter declined 2.7 percent year-over-year to US$3.4 billion, but increased a robust 23 percent quarter-to-quarter, or 27.6 percent of the Company’s total worldwide sales. The pre-tax loss was US$102 million with a pre-tax loss margin of three percent.
In the Americas, consolidated sales were US$3.6 billion, down eight percent year-over-year, or 29.9 percent of Lenovo’s total worldwide sales during the third fiscal quarter. Pre-tax income was US$39 million, with a pre-tax income margin of 1.1 percent.

The company forecast that uncertainties in macroeconomic environment and limited supply of major components will continue to pose challenges.

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