Editor’s note: Analysis: Lenovo reported a “milestone quarter” in terms of revenue on Thursday with sales of mobile devices leading the way. For the first time, Lenovo – the world’s No. 1 PC manufacturer – sold more smartphones than PCs. And more business is in the pipeline with the looming IBM x86 server deal, writes analyst Jack Narcotta of Technology Business Research.

HAMPTON, N.H. - Sustained success in PCs and a surging mobile device business will help fuel revenue and profit growth through 2015.

The growing strength of Lenovo’s brand in mobile markets, its prior investments to prepare its supply chain for tremendous increases in smartphone and tablet shipment volume, and its cachet in enterprise and consumer markets helped Lenovo boost revenue and profits year-to-year in the 2Q14 calendar quarter. Total revenue for Lenovo’s first quarter in FY15 climbed 18.3% from the prior year to $10.4 billion, a record for a second calendar quarter.

Lenovo’s milestone quarter — 2Q14 was the first time that its smartphone shipments, at 15.8 million, surpassed its PC shipments, at 14.5 million — highlights the rapid growth of not only the Lenovo brand in mobile, but also the strength of its mobile device business, even without the Motorola acquisition. The halo effect generated by the success of its smartphone business is helping boost unit shipments of tablets as well as propel revenue growth in its total mobile device business.

Tablet units sales climbed 67% year-to-year in 2Q14 to 2.5 million, and combined smartphone and tablet revenues increased 32% year-to-year in 2Q14 to $1.6 billion, as Lenovo prices tablets aggressively to expand its market share.

Extremely strong revenue growth in EMEA, coupled with a healthy year-to-year revenue gain in the Americas, illustrates the degree to which Lenovo is exerting control over the devices marketplace. EMEA revenue in 2Q14 grew 49% from the prior year, eclipsing $2.8 billion, while Americas revenue climbed 19% year-to-year in 2Q14 to $2.2 billion.

Record highs in PC market share in both regions reflect Lenovo’s clear strategy for commercial and consumer PC markets: Communicate the benefits of Think-branded 2-in-1 PCs for personal and professional use – or both – which helps drive sales of higher ASP devices such as the ThinkPad Yoga that generate greater profits and produce higher margins.

TBR believes that Lenovo’s increased manufacturing scale, largely due to the maturation of the $600 million facility based in the central China province of Wuhan that opened in late 2013, as well as its massive global retail networking will help it continue to outperform the worldwide PC, smartphone and tablet markets.

As a result, TBR expects Lenovo’s revenues and operating profits to climb between 15% and 20% each quarter through 2015 as the efficient infrastructure that underpins its supply chain and manufacturing operations fuels its expansion into the U.S. mobile markets and helps expand margins despite lowering device ASPs to levels it deems best to sustain PC and mobile market share growth.

  • Lenovo is primed to upset the established order in the data center marketplace, but the U.S. government continues to consider the acquisition of IBM’s x86 business

In 2Q14 Lenovo executives stated that upon closure of the acquisition of IBM’s x86 server business, it aims to rapidly transform that struggling product line into a revenue and profit center for its new owner. Lenovo projects that, within one year of the completion of the acquisition, the combined organic Lenovo data center business and IBM x86 server business will be a $5 billion data center business annually. Based on the results in TBR’s Data Center Benchmark report and data set for 1Q14, this would represent phenomenal growth. TBR estimates project that the annual run rate of the new Lenovo data center business is $3.4 billion, leaving a gap of $1.4 billion in revenue. The scale of Lenovo’s indirect sales channel will be a critically important factor in achieving this growth, as it will enable Lenovo to quickly funnel servers and storage products to its global enterprise customer base.

TBR believes the pending acquisition of IBM’s x86 server business will give Lenovo instant data center brand recognition in mature markets as well as a more expansive portfolio it can leverage to drive rapid growth. However, while TBR expects Lenovo to become a top player in the x86 server market and a serious competitor of Dell and HP in the data center post-acquisition, the fact that Lenovo is based in China has complicated the acquisition.

While TBR expects the officials in China and the U.S. to ultimately approve the transaction, intense scrutiny of China-based companies such as Huawei and ZTE, and now Lenovo, by the U.S. government is likely to delay the close date until late 2014, limiting the influence the data center business will have on Lenovo’s total revenue, profits and enterprise market share.

(C) TBR