Lenovo Posts Surprise Loss as PC Sales Crater, Costs Climb

Lenovo Group Ltd. posted a surprise quarterly loss after losing its grip on the global personal computer market, while its smartphone unit continues to bleed money.

China’s largest PC maker reported a net loss of $72 million in the three months ended June — its first in six quarters and well below projections for income of $32.9 million. That drove its stock down as much as as 4.2 percent in Hong Kong to its lowest intraday level in more than a year.

Lenovo lost its position as the world’s top PC maker as HP Inc. and Dell Inc. win back customers with new models. Its smartphone and server businesses, bulked up through multibillion-dollar acquisitions, again struggled to make money amid supply constraints, rising costs and aggressive pricing from competitors. Chief Operating Officer Gianfranco Lanci told reporters he expects costs for essential components such as memory chips to keep rising throughout the rest of the year, albeit at a slower pace.

“Lenovo is facing a great deal of performance pressure in its first two quarters of new fiscal year,” said Antonio Wang, associate vice-president for IDC China. It “is facing a transformation period as the executive team tries to reorganize business in major regions and reconstruct its business model.”

Revenue for the period slipped a tad to $10 billion, a whisker above predictions for $9.9 billion.

Its dismal quarter contrasts with HP, which has reported revenue in excess of projections for four straight quarters and this year overtook Lenovo in market share despite lagging its rival in China. Chairman Yang Yuanqing is exploring ways to rejuvenate Lenovo’s core PC business, including a potential tie-up with Fujitsu Ltd. that he said last month is still under negotiation. The company has reenlisted former mobile-unit head Liu Jun to oversee its Chinese business and has joined with e-commerce site JD.com in a bid to push its annual online revenue to 80 billion yuan ($12 billion) within three years.

While the 2005 acquisition of International Business Machines Corp.’s PC division paid off by lifting Lenovo closer to the top of the market, the 2014 purchases of IBM’s low-end server unit and Motorola Mobility haven’t gone as smoothly. The division reported a 6 percent decline in PC shipments to 12.4 million units. Revenue rose slightly to $7 billion.

“Since PC is the only profitable segment, these headwinds will hurt profitability,” Kai Qian and Liping Zhao, analysts at China International Capital Corp., wrote in a report ahead of the earnings.

Lenovo is betting on the Motorola brand and innovative modular designs to revive its mobile unit, and remains outside the top five in its home market, according to IDC. Sales in the division rose 2.4 percent to $1.75 billion. Its datacenter business, which saw revenue shrink 11 percent in the quarter, is on track to become profitable in about two years, Yang told analysts on a conference call.

It’s also sinking money into an effort to catch the next wave of computing gadgets. On Friday, it said it’ll invest $1.2 billion on research into artificial intelligence, the Internet of Things, virtual reality and other emergent fields over the next four years.

“The material cost increase significantly impacted our business, actually it impacted all three business,” Yang said in an interview, referring to the PC, mobile and data center units. “We definitely have to consume the cost increase if we want to keep the decent profitability. It must be reflected into our selling price.”