Lenovo 1st Quarter FY15-16: Tough Markets, Solid Results

Decisive actions being taken to meet challenges and accelerate business transformation

HONG KONG — (BUSINESS WIRE) — August 12, 2015 — Lenovo Group (HKSE: 992) (ADR: LNVGY):

Revenue was US$10.7 billion, up 3 percent; excluding foreign exchange impacts, revenues were up 10 percent year-over-year
Lenovo grew its PC market share in all geographies for record high 20.6 percent share*
Pre-tax income before non-cash, M&A-related accounting charges** of US$143 million; pre-tax income of US$52 million
Net income before non-cash, M&A-related accounting charges** of US$196 million and net income of $105 million
Basic EPS of 0.95 US cents, or 7.36 HK cents

Lenovo Group (HKSE: 992) (ADR: LNVGY) today announced results for its first fiscal quarter ended June 30, 2015. Quarterly revenue was US$10.7 billion, a three percent increase year-over-year. First quarter pre-tax income decreased 80 percent year-over-year to US$52 million. Net income declined 51 percent year-over-year to US$105 million.

Lenovo saw severe challenges in its main markets. It faced significant declines in the global PC and tablet markets, as well as slowing growth and increasing competition – especially in China – in smartphones. There were macroeconomic challenges in Brazil and Latin America and large currency fluctuations, intensifying competition, which hurt Motorola’s profitability in particular. Finally, Lenovo saw a rapidly shifting technology demand landscape in the enterprise business.

Despite this tough environment, Lenovo continued to deliver solid results. Its PC business reached record worldwide share of 20.6 percent. It gained share in every geography and achieved the # 3 position in the critical U.S. market, with record high share of 13 percent. Lenovo gained nearly one point of share and strengthened its #3 position in the tablet market. For the third consecutive quarter, the enterprise business had positive operating margin, before non-cash M&A-related accounting charges. In smartphones the company accelerated its shift from a carrier-focused business model in China to the open market in the rest of the world, which drove Lenovo brand smartphone volume outside China up 68 percent year-on-year.

Nevertheless, in the face of financial results that did not meet expectations, Lenovo is undertaking broad, decisive actions – including better aligning its businesses and significantly reducing costs – to return to profitable, sustainable growth and achieve its long-term goals.

"Last quarter, we faced perhaps the toughest market environment in recent years, but we still achieved solid results. Our PC business remained number 1 for the 9th straight quarter. In the smartphone business, our strategic shift from China to the rest of world has paid off. And our combined enterprise business achieved operational PTI for the third consecutive quarter," said Yuanqing Yang, Chairman and CEO of Lenovo. "But to build long term, sustainable growth, we must take proactive and decisive actions in every part of the businesses. We will further integrate elements of the acquisitions with our legacy businesses in Mobile and Enterprise, while building the right business model and cost structure. We will reduce costs in our PC business and increase efficiency in order to leverage industry consolidation increase share and improve profitability. We will come through these efforts as a faster, stronger and better aligned global company."

Specific realignment actions Lenovo is undertaking to return to growth include:

Restructuring the Mobile Business Group (MBG) to align smartphone development, production and manufacturing and better leverage the complementary strengths of Lenovo and Motorola. There will be a more-simple, streamlined product portfolio, with fewer, more clearly-differentiated models. A faster, leaner business model will better leverage Lenovo’s global sales force and accelerate the efficiency actions already underway in its global supply chain. MBG will continue to drive the overall mobile business, but will now rely on Motorola to design, develop and manufacture smartphone products.
Focus and repositioning the Enterprise Business Group to attack the most relevant and attractive market segments, while increasing overall speed and cost-competitiveness.
Accelerating the drive for 30 percent share in PCs by better taking advantage of consolidation, while becoming even more efficient and reducing costs to ensure sustainable, profitable growth.
Drive for greater efficiency across all of Lenovo’s functions. Lenovo will better leverage technology, the internet and innovative approaches in every function to drive transformation and become faster and more customer-centric.

This effort will reduce expenses by about $650 million in the second half of this year and about $1.35 billion on an annual basis. These actions will include a reduction of 3,200 people in our non-manufacturing workforce around the world. This equates to about 10 percent of non-manufacturing headcount and about 5 percent of our total population of around 60,000 people. The company will incur restructuring costs of approximately $600 million and additional spending to clear smartphone inventory of approximately $300 million.

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