Acquisitions likely to hit Lenovo's profits in short term

Lenovo reported a 30 per cent jump in its net profit in the fourth quarter of last year

Lenovo reported a 30 per cent jump in its net profit for the fourth quarter of last year, with its earnings driven by a record number of devices shipped.

But the company expects its profit will drop in the short-term with the proposed acquisitions of Motorola Mobility and IBM's low-end server unit, both businesses that are struggling.

In the quarter ended December 31, the Chinese PC maker's net profit climbed to $US265 million, up from $US205 million in the same period a year ago. Its net revenue reached $US10.8 billion, up 15 per cent year-over-year.

Lenovo has consistently reported strong earnings even as demand for PCs has been shrinking. The company is increasingly focusing on mobile devices, including smartphones, tablets, and expanding into enterprise products. Last month, it announced it would buy Motorola Mobility from Google, and the x86 server business from IBM.

Without the Motorola business, the company is already the world's fourth largest smartphone maker on sales mainly to its home market. During the quarter, it sold 14 million smartphones, with 2 million of those sales outside China, said Lenovo's CEO Yang Yuanqing in an earnings call.

Lenovo's division that develops mobile products and smart TVs accounted for 16 per cent of the company's total revenue in the quarter, an increase from 11 per cent a year ago. In addition, Lenovo's tablet sales grew 326 per cent year-over-year to 3.4 million units.

In total, the company shipped 17.3 million mobile devices in the quarter, more than the 15.3 million PCs it shipped in the same quarter. By acquiring Motorola, Lenovo will immediately gain access to mature markets such as the US, Yang said.

Most of the company's revenue still comes from its PC sales. But on Thursday, Lenovo said it's confident it can turn its fledgling server business into a more profitable one than its PCs. The acquisition of IBM's x86 server business, if finalized, will potentially turn Lenovo into a top player in the sector, alongside leaders Dell and HP, according to analysts.

Both Motorola Mobility and IBM's x86 server business, however, have been losing revenue because of competition. But Lenovo's CEO said he believes his company can turn both businesses around.

In handsets, Lenovo wants to focus on higher-end devices, to increase product profit margins. The company's own manufacturing capabilities will also help reduce expenses on making Motorola smartphones, Yang said.

As for servers, Lenovo's CEO said demand for the hardware is growing in China, now one of the world's largest tech markets. But in the short-term, acquiring both Motorola and IBM's server business will have a "negative impact" on the company's earnings, Yang added.

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