Lenovo's Q3 profits climb despite flat sales

Lenovo reported third-quarter profit jumped sharply, despite flat sales

Lenovo Group Thursday reported a jump in third-quarter profits, even as its turnover during the period remained flat compared to one year ago.

Lenovo reported a profit attributable to shareholders of US$57.7 million on sales of US$4 billion during its fiscal third quarter, which ended on Dec. 31, 2006. That's a 23 percent increase in profits compared to the same period during the previous fiscal year, when Lenovo reported a profit of US$46.8 million on sales of US$4 billion, the company said in a filing with the Hong Kong stock exchange.

On a sequential basis, the results show good news for Lenovo. The company saw its profit fall by 53 percent during the first half of its fiscal year -- from US$91.2 million to US$43.1 million -- compared to the year-ago period.

Lenovo's PC shipments during the quarter increased 8 percent over the previous year, outpacing the industry average, which the company pegged at 7 percent, the filing said.

As usual, China was a strong market for Lenovo, with PC shipments up 19 percent. The company also saw shipments rise by 3 percent in Europe, the Middle East and Africa. But Lenovo's PC shipments slipped 4 percent in North and South America due to weaker demand from large companies. Shipments fell by 1 percent in the Asia-Pacific region, excluding China, Hong Kong and Taiwan.

Greater China accounts for 39.6 percent of Lenovo's sales, the Americas for 26.1 percent, and Europe, the Middle East and Africa for 22.8 percent.

Around 52 percent of Lenovo's revenue came from notebook PCs, as unit shipments rose 20 percent over the previous year, Lenovo said in a press statement. Desktop shipments rose 2 percent, contributing 43 percent of the company's total revenue.

Despite the growth in shipment volumes, the company's share of the PC market fell slightly, to 7.4 percent, said Chief Financial Officer Mary Ma. That's because the company is dependent on sales to corporate buyers, and has a smaller presence in the fast-growing consumer PC market than its competitors, she said.

Over the next year, Lenovo will put more emphasis on direct sales to consumers through its Web site, a sales model the company calls "transactional," she said. At the same time, it will continue to develop it's "relational" sales model with enterprise buyers of equipment and ongoing services, as it seeks to eliminate its reliance on IBM Corp.'s sales force in that market.

President and CEO William Amelio said the company has already established the transactional PC sales model in three countries outside China. Sales rose 50 percent in Germany following its introduction, 18 percent in Hong Kong and 16 percent in India, he said.

Lenovo's investment in revamping its U.S. Web site is already bearing fruit: conversion rates have increased 30 percent, and the average purchase value has increased 10 percent, he said. The company will also introduce the model to Eastern Europe and Japan this year.

The company will launch new advertising campaigns this year to raise awareness of its brand, including one due to open this quarter, portraying Lenovo as the source of the best-engineered PCs in the world, he said.

In the year ahead, the company will maintain its focus on cost-cutting. The company has already invested US$100 million in cost-reduction initiatives, Amelio said, but for company Chairman Yang Yuanqing that's not enough: the initiatives have to start working. "Our board hopes management can manage expenses more tightly in future. ... We need to improve our efficiency and product competitiveness significantly," he said.

The remainder of Lenovo's revenue came from the sale of mobile phones, which contributed 4 percent of revenue. Handset shipments fell by 6 percent compared to the previous year, Lenovo said.

(Peter Sayer, in Paris, contributed to this report.)

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