Lenovo sales recover, but still under pressure in Q2

Rising component costs and weak enterprise demand have hit the company, executives said

Lenovo's PC sales began to recover in its latest fiscal quarter, but the world's fourth-biggest PC maker warned that the recession was not over as it posted a net loss Thursday.

Demand for PCs is still suffering in the West, and price competition has combined with rising component costs to pressure Lenovo's margins, executives said in a conference call.

"The operating environment continues to be challenging for PC makers," said Wong Wai Ming, Lenovo's CFO.

Lenovo reported sales of US$3.5 billion in its first fiscal quarter, ended June 30. The number was down 17.9 percent from a year earlier, even though PC shipments were up slightly over the same period.

Lenovo posted a quarterly net loss of $16 million, compared to a net profit of $110 million a year earlier.

The company has been hit by falling PC prices and rising costs for parts like LCD screens and memory, said company CEO Yang Yuanqing. Large enterprises in the U.S. and Western Europe are also continuing to delay new IT purchases, preventing recovery in the biggest market segment in those countries, Yang said.

Lenovo's quarterly sales figure was up about 25 percent from the previous three months, and its net loss was down substantially from $264 million in the previous quarter.

Lenovo this year began restructuring to enhance its focus on China and other rising economies. The company split its product groups into high- and low-end lines to separately target developed and emerging markets.

China is by far Lenovo's biggest market, but the company is also building a focus on India. Lenovo posted sequential sales growth of 23 percent in India, which is "still an underperforming market," Wong said.

Lenovo last month said it would triple its sales coverage in India to reach 300 cities this year.

While Lenovo released a series of netbooks to tap the growing demand for them in the last year, it does not expect that demand to continue rising, said Rory Read, chief operating officer for Lenovo.

The company has instead placed its hopes on a class of laptops powered by Intel's consumer ultra-low voltage (CULV) microprocessors. The laptops are ultra-thin, but bigger and more powerful than netbooks.

Read called CULV laptops "exciting," but said it was too early to speculate if demand for them could surpass demand for netbooks.

"We believe we're going to see significant growth in this segment," Read said.

Lenovo is open to merger and acquisition opportunities that align with its strategic goals, the executives said, declining to give details.

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Owen Fletcher

IDG News Service
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