Lenovo Posts First Loss in 3 Years, CEO Amelio Resigns

Lenovo Group, the world's fourth-largest PC firm, posted a bigger-than-expected quarterly loss, its first in nearly three years, as weak demand and tough competition crushed earnings, and its CEO resigned.

Analysts expect the current fourth quarter to be even bleaker, predicting a net loss of up to $273 million to include most of the $150 million in restructuring costs announced last month.

The market does not expect any significant recovery at Lenovo before the latter part of the business year to end-March 2010.

Analysts say the key to recovery is how Lenovo, which competes with Hewlett-Packard , Dell and Acer, executes a strategic switch from an elite corporate clientele, which made up 56 percent of total second-quarter revenue, to the low-priced consumer market.

"The market already knows the outlook for the company is not good. The stock is going to continue to underperform. What may be a positive sign is that in January, China's consumption demand looked fine -- that's encouraging," Charles Guo, an analyst at JPMorgan, said ahead of the results.

Lenovo's October-December loss of $96.7 million was in line with the most pessimistic forecasts in a wide range of an $8 million loss to a $96 million loss.

Sales fell by a fifth and Lenovo's gross profit margin was squeezed by a continued market shift to entry level PCs, aggressive pricing and currency fluctuations, the company said.
     
The quarterly loss was Lenovo's first since January-March 2006, when it posted an $89 million loss on restructuring costs. 

"The next several quarters will remain very challenging for Lenovo and the rest of the PC industry," the company said.

Its shares have lost 77 percent from a 52-week high of HK$6.75. At the midday break, the stock was up 2.7 percent at HK$1.54.
     
Restructuring

Lenovo expects to save $300 million in the year to March 2010 from a restructuring involving axing 2,500 jobs worldwide, slashing executive pay and consolidating its China and Asia-Pacific operations into a single division.

Lenovo, whose operations were previously all in China, inherited its corporate client focus when it bought IBM's PC business in 2005 for $1.25 billion.

"The real challenge is to modify its business model to support the low-margin consumer business, which will take a longer period of time and is subject to its execution capabilities," Morgan Stanley said.

As part of a senior management reshuffle, Lenovo said William Amelio will be replaced as chief executive by chairman Yang Yuanqing, while the company's founder, Liu Chuanzhi, will be non-executive chairman. 

Amelio, formerly a senior vice president for Asia-Pacific and Japan at Dell, was named as Lenovo's CEO in December 2005. His 3-year contract has expired and he will act as special adviser at the company until end-September.

Rory Read was appointed president and COO.

Amelio said at the World Economic Forum in Davos last weekend that Lenovo will release a stream of new products in China and elsewhere in different price ranges, as many users turn to cheaper PCs in the face of the economic slowdown.

But some analysts doubt the move would create enough demand to avert further losses.

"Although we agree this move is logical, we are concerned whether Lenovo's product portfolio and brand image is suitable for the segment and emerging markets," DBS said.

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Lenovo had around 7.5 percent of the global PC market in 2008, when it was overtaken as the No.3 player by more aggressive rival Acer, according to datatracker IDC.

Of the world's top four PC names, Lenovo posted the smallest growth last year, with shipments up 8 percent, compared with a 53 percent gain for Acer, 13 percent for HP and 11 percent for Dell.

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