Share prices plunge: Lenovo's size and profit-making pains

Recently, Lenovo released its 2014 interim results, from the end of June 2014 to the end of September, Lenovo revenue reached 10.475 billion U.S. dollars, a 7% increase from the same period last year, net profit rose 19% from the same period last year, reached 262 million U.S. dollars, despite outstanding performance, but its share price is still down about 5%. So the question is, what is the reason for the stock price to plummet after Lenovo's seemingly stellar earnings?

The results suggest that, although Lenovo's revenue has risen year-on-year, it has fallen below Wall Street's expectations and the lowest rate in 6 quarters, the main reason for its revenue shortfall is that its PC strategic component of smartphone and tablet-owned mobile revenues fell 6% year-on-year. But in contrast to the year-on-year decline in revenue, Lenovo's smartphone and tablet shipments grew by 38% and 30% respectively in the same quarter. Shipments have risen sharply, but revenues are falling, on the one hand suggesting fierce competition in the smartphone and tablet markets, on the one hand, and Lenovo's use of revenues (including profits) in exchange for market-sizing strategies.

Still, in terms of size, Lenovo's smartphone shipments and market share, excluding Motorola's mobile phone shipments from mergers and acquisitions, have been overtaken by Chinese manufacturers in the past quarter of China and the global smartphone market. This explains Lenovo's own mobile phone business in terms of the scale of the challenges, but also from the side to prove the merger and acquisition of Motorola Mobility of the necessity and timeliness. Because if you take into account the acquisition of Motorola mobile phone business shipments, Lenovo still 8.7% of the market share of the global smartphone market, and on the size of the gap again.

We have been emphasizing that Lenovo's size advantage in the smartphone market is that it is the best strategy for Lenovo to succeed in size, or to scale up and then to improve profits through supply chain management, integration, and so on, and ultimately dominate the industry. This has been amply demonstrated by its rise in the PC industry. Therefore, the ability to grasp the advantages of industrial scale in the competition to some extent, Lenovo's development prospects in the industry, or even success or failure. Especially in relation to Lenovo PC strategic transformation success or failure of the smartphone as the representative of the mobile business.

According to a summary and forecast of operating profit margins for smartphone makers released by investment bank Merrill Lynch in October this year, Lenovo's operating margins are only 1% per cent this year, far below the main rivals Millet and Huawei (operating margins are at single-digit highs), and this trend will continue into 2015-2017 years. More worrying for investors is that the Motorola mobile business it buys from is now in a loss-making state, even if it is likely to lose money by 2015-2017, with optimism expected to be break-even. The future challenges of Lenovo's mobile phone business, therefore, suggest Lenovo's strategic significance in the next few years to maintain the size of its mobile phone business (the growth of shipments and market share, and ahead of rivals). That is, to increase the volume of shipments and the share of the market to make up for low profit margins, thereby ensuring the overall profit growth (small profits but quick turnover).

Of course forecasts are predictable, and Lenovo itself is not unaware of the challenge. For example, the fastest in the first half of next year to move Motorola mobile phone production to its Lenovo mobile interconnection industry base in Wuhan production, the establishment of a new subsidiary to launch the Internet marketing independent terminal brand, is undoubtedly in reducing costs at the same time, improve the scale, improve profitability. For example, the Lenovo Internet industry base in Wuhan, while greatly enhancing Lenovo's independent manufacturing capabilities, can make the supply chain work faster and more efficient, cost and innovation more competitive. But all of this requires a process, and in this process, Lenovo must maintain the momentum of growth to win time from scale to profit. Lenovo Mobile's performance is bound to be in the process of pressure, that is, revenue and profits, especially profits may appear consecutive quarterly losses, and thus drag the overall performance of Lenovo.

Also in the enterprise-class business of Lenovo PC strategy, with the completion of the IBM X86 Server business acquisition, it has become the world's third largest and China's largest server manufacturers, already have their own best at the scale advantage. But like mobile internet smartphones, as the revenues and profits of IBM's X86 server business have been slipping in the past, and its revenues and profits, especially those of Wall Street, have suffered as a result of the transition in its own smartphone industry, as well as its previous performance in server market revenues and profits.

According to Lenovo's latest quarterly earnings each business block revenue ratio estimate, its business (including cloud services) accounts for only 2% to 6% of its total revenue, or between 210 million and 630 million dollars, and the IBM X86 server business, which is based on Lenovo's plan for the next year, will reach $5 billion trillion ( The average quarterly revenue of $1.25 billion trillion is calculated and measured, and it's not hard to see that the IBM X86 server business is 2-6 times more revenue than Lenovo's own enterprise-class business. It can be said that without the IBM X86 Server business mergers and acquisitions, Lenovo's enterprise-class business can be almost negligible, regardless of market share, shipments, revenue and so on are unspeakable scale. This also shows from the side, Lenovo mergers and acquisitions IBM X86 Server Business core and the first purpose is to make their business scale. But given the current decline in shipments, revenues and profits for IBM's X86 server business, Lenovo still faces the challenge of keeping and expanding in the future, reducing costs, optimizing supply chains and boosting profits, which also takes time.

To sum up, given the stability of the PC industry and Lenovo's leading position in the PC industry, its future profit growth will depend more on mobile (such as smartphones) and business. With the completion of the Motorola Mobile and IBM X86 Server business mergers and acquisitions, Lenovo in the two industries already has the scale advantage, but since the acquisition of the target has been in the revenue and profit decline, or even losses, to gain the scale advantage of Lenovo is bound to enter the labor cycle of scale and profit transformation, And this throes will create negative pressure and uncertainty about the performance of Lenovo for a certain period of time, which is why Lenovo's latest fiscal quarter did well, but its share price plunged. However, from the previous Lenovo PC development to the final summit of the process and experience, large-scale operation or to say the first large-scale, and then seek profit or profit margin growth is Lenovo's killer, this also reminds Lenovo, its future integration strategy should first of all to expand business scale.