Editor’s note: With its PC growth continuing and margins expanding, Lenovo now has Motorola on board for more mobile device growth. Next comes servers as the world’s No. 1 PC maker and No. 3 smartphone seller takes aim at Dell and HP with IBM’s x86 group as part of its arsenal. Analyst Jack Narcotta of Technology Business Research likes what he sees based on Lenovo’s earnings report last week.
HAMPTON, N.H. - A sound strategy for emerging markets and its ability to adapt to a changing IT market sustained Lenovo’s revenue and profit growth.
Lenovo’s growing scale in the IT marketplace, bolstered by the completions of its acquisitions of Motorola Mobility from Google and IBM’s System x server business, speak to the degree to which Lenovo is pursuing its goals aggressively to become the leading PC and mobile device vendor and upset the established order in data center markets. Even without the additions of its two new business units, Lenovo’s revenue grew 7% year-to-year to $10.5 billion in calendar 3Q14, the third time in the last four calendar quarters that Lenovo’s revenue exceeded $10 billion.
In 3Q14 Lenovo’s hallmark “protect and attack” strategy for its devices business was on full display: It successfully protected its PC segment, widened its lead in PC market share against HP and Dell and improved PC segment operating profitability across all regions, and attacked the mobile device market, leveraging the Motorola acquisition to vault into third place overall in global unit shipments, behind Samsung and Apple.
- The Halo Effect of PCs
Lenovo’s success in emerging markets, particularly in EMEA, where Lenovo posted a company-record regional operating margin of 3.8%, up 230 basis points year-to-year, illustrates the impact of 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 help drive sales of higher ASP devices, such as the ThinkPad Yoga, that will generate greater profits and produce higher margins.
Additionally, the halo effect generated by the success of its PC business is propelling growth in its mobile device business throughout EMEA and other regions outside China. Smartphone unit shipments climbed 120% year-to-year in 3Q14 in India and Southeast Asia, 150% year-to-year in Latin America and a phenomenal 400% from a year ago in Russia and eastern Europe. Heightened competition from Xiaomi, Huawei, LG and Samsung pressured smartphone ASPs and drove down Lenovo’s smartphone revenue, but Lenovo’s massive global retail network and roster of indirect sales partners maintained the skyrocketing unit shipment growth displayed in 3Q14.
- Targeting Server Markets
With the integration of IBM’s System x business complete, Lenovo is set to take aim at HP and Dell in data center markets.
TBR believes Lenovo will work to grow the business through a combination of leveraging its scale and global enterprise channel reach now that Lenovo’s acquisition of IBM’s x86 server business is finalized. Whether Lenovo can differentiate the high-end System x portfolio in an increasingly commoditized server market remains in question, but the 35% year-to-year unit shipment volume growth of Lenovo’s ThinkServer segment is a positive sign. TBR expects Lenovo will leverage its existing R&D capabilities, as well as leveraging its close relationship with Intel, to help its server business become competitive.
TBR believes that if Lenovo can weave innovative technology into the platform while making it more cost-effective for customers, it will prove a larger threat to HP and Dell than IBM currently is. However, while Lenovo aims to accommodate customers’ growing requirements for cloud, mobile computing and big data warehousing and analysis, it will take time for Lenovo to establish itself in these new markets. As a result, HP and Dell will be granted additional opportunities to earn new customers and shield its installed bases, which will shrink Lenovo’s addressable market and hamper efforts in the short-term to gain market share.
While the IBM x86 server acquisition will help Lenovo accelerate data center market share growth, a legion of white box ODMs will utilize aggressive pricing strategies to impede Lenovo’s efforts to establish this piece as a new high-growth profit center.
TBR believes Lenovo’s manufacturing and supply chain will help shield it from profit-denting effects of price wars and allow it to quickly enter new (for Lenovo) data center markets, but efforts to undercut HP’s and Dell’s prices will slow the impact IBM’s x86 servers will have on Lenovo’s corporate profit growth.