Lenovo annual profit rises 29 percent as smartphone surge offsets weak China

[May 21, 2014] By Paul Carsten

BEIJING (Reuters) — China's Lenovo Group Ltd, the world's fourth-biggest smartphone vendor, saw net profit grow 29 percent for the business year ended March, as strong smartphone sales helped shore up weak growth in China.

Lenovo is expanding into smartphones to offset a decline in its once-mainstay personal computers (PC) as consumers switch to mobile devices, to the extent that it agreed in January to buy the Motorola Mobility smartphone unit of Google Inc for $2.9 billion.

The company, which became a global brand in 2005 after buying the PC unit of International Business Machines Corp (IBM), also in January agreed to buy IBM's low-end server unit for $2.3 billion as another way to combat slow PC sales.

Chief Executive Yang Yuanqing said the acquisitions would weigh on finances in the near term. But observers will now be watching to see whether a U.S. move to indict Chinese military officers for cyber espionage on Monday will affect the acquisitions, as they are still subject to U.S. regulatory scrutiny.

However, the acquisitions did not have an impact on net profit for the year through March, which rose 28.7 percent to $817.2 million, Lenovo said in a statement on Wednesday.
 

That was in line with the $819.7 million SmartEstimate of 34 analysts according to Thomson Reuters Eikon. SmartEstimate's give greater weighting to estimates of the more accurate analysts.

Revenue rose 14.3 percent to $38.7 billion. Overall weakness in China was offset by growth outside Lenovo's home market - particularly Europe, the Middle East and Africa (EMEA) and the Americas - as well as a surge in the company's mobile Internet unit, home to its smartphone business.

"Lenovo's smartphone unit shipments achieved a record-high level of over 50 million for the fiscal year, growing by 72 percent year-on-year, driven by the strong growth in China and emerging markets outside of China," the company said in the statement.

Shares of Lenovo were trading 2.5 percent higher after the results, versus a near-flat benchmark Hang Seng Index. The stock has fallen 1.3 percent since the start of the year, recovering from a late-February low.

Analysts see tough times ahead for Lenovo, saying it may take at least until the end of 2014 to make the acquisitions profitable. In the meantime, smartphone leaders Samsung Electronics Co and Apple Inc will only intensify competition, they say.

Sales in China, though still Lenovo's largest market accounting for almost two-fifths of revenue, rose a mere 1.3 percent to $14.7 billion during the fiscal year.

That was offset by jumps of 27.1 percent for sales in the EMEA region and 31.1 percent in the Americas. The mobile Internet and digital home business unit saw an 86.1 percent rise to $5.7 billion.

"Stronger growth in ex-China markets should be a key driver of sales in (the smartphone) segment," wrote Daiwa Capital Markets analyst Steven Tseng in a note on Monday, before Lenovo's earnings.

(Editing by Christopher Cushing)

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