A look inside Lenovo’s recent earnings report reveals that the world’s No. 1 PC maker is improving its margins as well as sales, thus helping provide the capital it needs to expand its non-PC offerings such as smartphones and PCs. New products, including a smartphone, were announced today at a trade show in Germany. WRALTechWire has reports about plans to drive hybrid PC sales and the new {smartphone called the Vibe X. Matthew Bowden, research analyst with Technology Business Research, provides the inside story about Lenovo’s financial performance.

HAMPTON, N.H. – Lenovo in its earnings report for the quarter ending July 31 grew revenue year-to-year on strong demand for its PCs in a down market while further fueling revenue with its smartphone and tablet devices

Lenovo experienced strong growth in the declining PC market as revenue increased 9.7% year-to-year to $8.8 billion. Lenovo became the largest PC manufacturer in the world, pulling ahead of HP, as it increased unit shipments despite weakening demand in the industry. Notebook sales helped drive corporate revenue with a 4.7% year-to-year increase in 2Q13 to account for $4.5 billion or 52% of Lenovo’s corporate revenue.

Growth in the segment was driven by strong demand for commercial notebooks from Lenovo’s ThinkPad portfolio in addition to increasing demand in mature markets such as the U.S. for its expanding portfolio of consumer notebooks such as the Yoga convertible PC.

In 2Q13 Lenovo’s revenue growth helped improve gross margin and operating margin sequentially. Gross margin climbed 130 basis points as scale helped Lenovo reduce its cost of goods percentage. Strong revenue growth helped offset Lenovo’s growing operating expense, which resulted in operating income increasing 10 basis points. Increased sales of smartphones and tablets, which now make up 13.7% of corporate revenue, provide Lenovo an opportunity to increase margins as these devices become more profitable in the long-run.

TBR believes Lenovo’s ability to grow revenue while increasing operating margins will allow Lenovo to continue to invest in growth markets such as mobile devices and data center products.

Smartphones, tablets and smart TVs offer Lenovo the opportunity to accelerate growth and diversify its revenue mix

During 2Q13 Lenovo increased its smartphone, tablet and smart TV revenue by 105% year-to-year on strong sales of smartphones and tablets in emerging markets such as China, which accounted for 11 million of Lenovo’s 11.5 million smartphone units shipped in 2Q13. Smartphones continue to gain traction in markets such as China and India, helping Lenovo to climb the ladder toward becoming a major smartphone vendor worldwide despite lacking presence in mature markets. Lenovo grew smartphone unit shipments 130% year-to-year and will continue to invest in expansion into new countries and improvements to its product portfolio to maintain a high level of growth.

Tablets are also a growing segment for Lenovo as unit shipments increased 310% compared to the year-ago quarter on strong sales of its Android IdeaPad tablets. With the tablet market rapidly growing and adoption of Windows 8 beginning to build momentum, Lenovo’s navigation of the tablet market space in the coming quarters will be critical to its success.

TBR believes that Lenovo’s balanced portfolio of low-cost android tablets and high-end Windows 8 tablets positions the company well to take advantage of growing demand and increase corporate profitability with these higher-margin devices.

Lenovo’s ability to grow margins while increasing investments separates it from its competitors

Lenovo continues to experience improvements to its margins despite ramping up investments in improving its product portfolio and expanding its global presence. During 2Q13 Lenovo grew gross margin 130 basis points sequentially while increasing operating margin by 10 basis points over the same period. Lenovo’s ability to improve its margins reflects the momentum the company gained in the PC, smartphone and tablet markets.

Lenovo leveraged increased brand awareness from its PC business to drive sales of consumer PCs in mature markets and its strong commercial Think brand to boost revenues and offset increased operating expense. As a result, Lenovo sustained margin stability while investing in mobile devices to augment revenue opportunities as the global PC market becomes increasingly stagnant.

Going forward, Lenovo will continue to invest in R&D especially for smartphones and tablets as it seeks to diversify its revenue mix and reduce dependency on the declining PC market. TBR believes that Lenovo will continue to tolerate low margins from these business segments as they grow and Lenovo executes its “protect-and-attack” strategy to ensure its success. Lenovo sets itself apart from other PC vendors as it achieves margin gains by exploiting its scale in the commercial and consumer PC markets, while also strengthening its presence in mature markets.

However, Lenovo still lags other PC vendors such as HP in PC profitability, as Lenovo is willing to endure lower profits to drive share and brand awareness, particularly as it looks to expand in the smartphone and tablet markets. While Lenovo is unlikely to see tremendous margin growth, the improvements it is making will give it an advantage in creating increased cash flow. Lenovo will invest in expansion, helping it to protect its lead in PCs and attack the smartphone and tablet markets.


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