HONG KONG (Reuters Breakingviews) - Lenovo’s reboot could run low on battery. The world’s top PC-maker more than doubled pre-tax earnings in the December quarter from a year earlier, confirming a turnaround under boss Yang Yuanqing is underway. That’s mostly powered by cost cuts in the $9 billion group’s handset and server units. But with demand cooling for both, a Lenovo comeback may be difficult to sustain.
A combination of healthy PC sales and aggressive cost-cutting lifted earnings at the Beijing-based group to a record $350 million before tax. Sales in Lenovo’s computers, tablets and devices division, which account for more than three quarters of total revenue, were up an impressive 12 percent to $11 billion, defying an industry-wide contraction. That is largely thanks to a renewed focus on the premium segment. The company also stemmed losses from its fast-growing data centre and servers unit. Critically, Lenovo finally managed to eke out a quarterly pre-tax profit of $3 million from its smartphones business - the first since Yang’s disastrous bet on Motorola in 2014.
Shares of the Hong Kong-listed Lenovo leapt 10 percent on the back of Thursday morning’s results. Of the two dozen or so analyst ratings compiled by Refinitiv, the number of “sells” have decreased from 8 to just one since last July.
That much optimism might be excessive, however. Last year proved brutal for smartphone makers including Apple, with global volumes falling back down to 2014 levels, according to data tracker IDC. Yang’s strategy of shrinking Lenovo’s mobile business to focus on fewer markets helped profitability, but will do little to revive growth.
Challenges loom for the data centre division too, where sales of so-called hyperscale servers used for cloud computing were up by triple-digit percent in the recent quarter. Growth in the overall server market worldwide is forecast to slow from 5 percent last year to just 2 percent in 2019, estimates industry analysis group TrendForce. Catching up to market leaders Dell EMC, HPE, and China’s Inspur will only get tougher.
Lenovo must also brawl with rivals over the shrinking PC market. To Yang’s credit, the company has gained share and improved margins. But with shares up over 60 percent over the past 12 months, it needs a more reliable power supply.
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