Editor’s note: Jack Narcotta is an analyst with Technology Business Research in Hampton, N.H. He offers his analysis of Lenovo’s latest earnings report which showed growth in geographies outside of China and across a variety of devices.

HAMPTON, N.H. – Sustained success in mobile devices and surging revenue from regions outside China show Lenovo will be a force to reckon with in 2014 and beyond.

Lenovo’s precise execution, clear strategy and savvy resource management led to record revenue and solid performance across all business lines in its 2014 fiscal year, cumulating in a strong performance in the 1Q14 calendar quarter. Total revenue for Lenovo’s fiscal year climbed 14.4% from the prior year to a record $38.7 billion, and revenue in calendar 1Q14 increased 19.5% year-to-year to $9.4 billion, a first-calendar-quarter record.

Lenovo’s well-timed forays into Android smartphones and tablets in APAC, its willingness to tolerate low margins to boost market share, and its strategies of positioning its Think and Yoga PC brands by expanding its lineup of multimode — or 2-in-1 PCs — served to strengthen its leading position. As of calendar 1Q14, Lenovo is the leading global PC maker, second in the global PC-plus-tablet market and third globally in mobile devices.

TBR believes that sustained, strong growth from its PC and mobile device businesses, and a continued tendency to outperform the worldwide PC, smartphone and tablet markets, will continue to increase Lenovo’s revenues and operating profits, while the efficient infrastructure that underpins its supply chain and manufacturing operations will help expand its margins.

With the acquisitions of Motorola’s handset business from Google and IBM’s x86 server business expecting to close in 2H14, Lenovo is primed to strengthen its already prominent role as an influencer in the devices market and launch headlong into its plans to become an end-to-end solutions provider. Integration of these new units will drive short-term reductions in corporate margins, but Lenovo has prepared for that by extracting greater operating profit from its entire PC business.

  • Lenovo’s successful China PC business is a springboard to leap to new heights in the U.S. and EMEA

Lenovo continued to outperform the market by growing PC unit shipments 5% year-to-year to a record-high level of 55 million, the fastest among top-five PC vendors in TBR’s Devices ecosystem. In contrast, TBR estimates the global PC market declined 8% over the same time frame, further illustrating the degree to which Lenovo outperformed the worldwide PC market.

For the calendar 1Q14 quarter, notebook PC revenue grew 15.7% year-to-year as the company’s premium Windows PCs and tablets were easily able to meet increased demand from enterprises for touch-screen-ready Windows 8.1 applications and services. In this market, Lenovo has typically leaned on the strength of its traditional clamshell Think-branded PCs, but TBR believes multimode PCs such as Yoga, Helix and Twist are accounting for a larger portion of its overall product mix, helping increase ASPs. Desktop PC revenue grew 13.8% year-to-year in tandem with a 6.8% increase in unit shipments, lifted from a year ago as Lenovo extended its leading market shares in both consumer and commercial all-in-one PCs.

The surge in notebook revenue growth helped Lenovo to not only outperform the market and its peers, but its decision to keep and investments to expand its manufacturing capabilities helped propel gross margin in 1Q14, up 70 basis points from the prior quarter to a near-record 13.1%. Additionally, stringent management of its operating expenses supported first calendar quarter record operating profit. Operating income climbed 37.7% year-to-year to $232 million as Lenovo’s total revenue increase easily countered a 14.7% year-to-year increase in operating expenses.

Despite a slowdown in China’s PC market — Lenovo’s China PC revenue contracted 0.8% year-to-year to $3.1 billion in 1Q14 — Lenovo’s success in its home country is spreading to other regions. For the first time, Lenovo’s EMEA revenue surpassed its China PC revenue in a quarter. In the U.S., Lenovo surpassed Apple to take the number three position in PC shipments. TBR believes these trends, in addition to the 20 consecutive quarters that Lenovo’s year-to-year PC growth rates have outperformed the global PC market, will grant Lenovo the ability to maintain itself at the top of the PC marketplace.

  • The growing strength of Lenovo’s brand will provide it with the fuel necessary to sustain the skyrocketing growth of its mobile devices business

TBR believes the high profile of the Lenovo PC brand in APAC is creating a positive halo effect for its mobile device business and, while unit shipment and revenue growth rates are not expected to remain on steep, upward trajectories, the scale of Lenovo’s retail and sales channels will easily sustain double-digit growth through 1H15. The Motorola acquisition is a key component of Lenovo’s plans to expand its mobile device business into EMEA and the U.S., but even without that asset Lenovo is among the fastest-growing mobile companies in the world. Lenovo trails only Samsung in China, and has established footholds in Brazil, India and the U.K.

TBR believes Lenovo’s goal in the mobile device market — surpassing 100 million mobile devices shipped a year after the Motorola acquisition is approved — is achievable given the current ramp up of its smartphone and tablet businesses. While the addition of a range of new devices from Motorola will help bolster Lenovo’s product portfolio, TBR expects the increasingly competitive mobile device market to limit Motorola’s contributions to that milestone as the Lenovo brand eclipses Motorola in important regions such as China and India.

Combined shipments of smartphones, tablets and PCs together for Lenovo’s fiscal 2014 climbed 37% year-to-year to a record 114 million, the fourth consecutive quarter that Lenovo sold more tablets and smartphones than PCs. TBR estimates Lenovo’s smartphone and tablet revenues in 1Q14 increased 25% year-to-year and 250% year-to-year to $750 million and $505 million, respectively. Unit shipments for smartphones increased 59.4% year-to-year to 10.5 million, and tablet shipments climbed two-fold from 1Q13 to 2 million, the third consecutive quarter Lenovo’s tablet business has grown year-to-year in excess of 200%.

[LENOVO ARCHIVE: Check out nine years of Lenovo stories as reported in WRALTechWire.]
 

(C) TBR