Lenovo's Profit Beats Consensus, Sells Mobile Arm

Lenovo Group beat expectations by nearly tripling quarterly earnings, riding strong demand for PCs in Asia, but the world's No. 4 PC maker faces a tough 2008 as a U.S. slowdown threatens to curb spending.


Lenovo, which commands a third of the booming Chinese market and leads Asia in computer sales, is making inroads into a fiercely fought, unfamiliar U.S. consumer arena even as worries mount of a sharp deceleration in IT spending there.

But analysts say the firm, which bought IBM's loss-making PC arm in 2005, should fare better than larger rivals Hewlett-Packard , Dell and Acer because of its dominant Asian presence.

The firm posted a net profit of $171.75 million from October to December, versus $57.7 million a year ago.

That trumped expectations for HK$1.01 billion (US$130 million), the mean forecast of five analysts surveyed by Reuters Estimates. Gross profit margins edged higher despite cut-throat global competition, to 15.2 percent from 13.5 percent a year ago.

Facing a potentially difficult year, Lenovo said on Thursday it had agreed to sell its cellphone business -- which saw shipments plunge 31 percent in the quarter -- for US$100 million, allowing it to focus on its main PC arm.

Analysts expect weakness in U.S. technology spending, as the world's largest economy teeters on the brink of its first recession in years, and a consequent price war hitting PC makers in 2008. But demand should bounce back in 2009, they say.

"Lenovo remains confident in its ability to deliver higher-than-market growth ... particularly the high-growth China market," the Chinese PC giant said in a statement.

Lenovo racked up 22 percent growth in shipments globally in the October-December period as it rode the industry's peak buying season, but intense competition had been expected to erode margins.

Acer, which usurped Lenovo's global No.3 spot in the same period, managed 60.3 percent growth.

The company is placing long-term hopes on its foray into the U.S. consumer arena. It introduced its first consumer computers for the United States this month, trying to cement its footprint in a market it entered with the US$1.25 billion IBM deal.

But analysts said Lenovo may not see strong market share gains there until the second half of 2009.

Taiwan's Acer leap-frogged its arch-foe after buying Gateway for $710 million last October, according to market researcher IDC. It held 9.6 percent of worldwide PC market in the last quarter of 2007, up from 6.9 percent a year earlier and trumping Lenovo's 7.5 percent.

Shares in Lenovo rose 18 percent from October to December, outpacing a 2.5 percent gain on the main index. But they have fallen 48 percent since early November, walloped along with the rest of the sector.

The firm's shares trade at 16 times prospective earnings, versus Dell's 15 and HP's 13, according to Reuters Estimates.

Lenovo is expected to post a full-year net profit of HK$2.8 billion, more than twice last year's US$161 million, according to Reuters Estimates.