Analysis: Lenovo’s revamped go-to-market strategy fueled a return to revenue growth, but operating losses in Mobile and Data Center threaten its profitability, says Technology Business Research Analyst Jack Narcotta.

HAMPTON, N.H. – Year-to-year revenue growth in Lenovo’s PC and Smart Devices (PCSD) and Mobile Business Group (MBG) in calendar 1Q17/fiscal 4Q17 shows the potential of the company’s 3-Wave Strategy to return it to consistent financial growth. (The earnings report was released early Wednesday.)

First, the company is refocusing PCSD’s portfolio around premium devices to protect margins and profitably gain scale.

Second, it is ramping up efforts to transform MBG and its Data Center Group (DCG) into growth engines.

And third, it is scaling up investment in growing markets such as digital assistants and hyperconverged that are hybrids of hardware and cloud.

Overall revenue climbed 4.9% in calendar 1Q17 to $9.6 billion, the company’s first such increase since calendar 3Q15, powered by year-to-year revenue gains of 4.9% in PCSD and 14.6% in MBG.

However, while the second wave of Lenovo’ strategy — re-establishing MBG and DCG as growth engines — has propelled overall revenue growth, thinner gross margins from pricing pressures and the increased expenses necessary to compete for new business, as well as protect installed bases, in volatile, price-centric markets such as smartphones and x86 servers risk pushing Lenovo into the red.

For fiscal 2017, MBG operating profit tumbled 11.5% year-to-year to a loss of $738 million and DCG operating profit plummeted more than 350% year-to-year to a loss of $470 million.

Excluding an inventory write-down of nearly $800 million in fiscal 2016, Lenovo’s overall operating profit in fiscal 2017 fell 8.6% compared to fiscal 2016 and fiscal 2017 gross profit shrank 7.8% year-to-year. Overall operating profit of $74 million in calendar 1Q17 – a decline of 70.3% year-to-year – was the company’s smallest amount since calendar 1Q11.

(C) TBR