Editor’s note: Analysis: Lenovo’s most recent quarterly earnings report shows that internal, or organic, growth is slowing. That means the world’s No. 1 PC manufacturer is going to have to rely on other business units to maintain momentum, says Technology Business Research analyst Daniel Callahan. Lenovo showed off several new products at its first global technology showcase in Beijing just days after the earnings report then shuffled management in its mobile business.
HAMPTON, N.H. – Without relief from acquisitions, slowing momentum within Lenovo’s base PC business led to single-digit organic growth in the first quarter.
Lenovo’s corporate growth slowed as it faced a perfect storm of business conditions. Its PC unit shipments leveled off, affecting its base business, while revenue from its recent acquisition IBM System x declined. While Motorola’s overall revenue did increase, the acquisition did not provide the expected boost in China as shipments were down in the region. Lenovo’s net sales increased 21.1% year-to-year to $11.3 billion. TBR estimates Lenovo’s organic revenue growth to lower; nearly 7% year-to-year.
Lenovo is excelling at selling basic server technology, with its ThinkServer line, but TBR believes Lenovo faces difficulties pairing System x with its evolving sales methodology for System x. Other factors lending to the difficulties may stem from hesitation from developed countries working with relative newcomer Lenovo amid expertise and security concerns.
Motorola provided little revenue growth to Lenovo’s organic top line, and the brand lost out to both Apple and Xiaomi in China. TBR believes one of Lenovo’s key Motorola problems is a lack of a competitive marketing strategy. With Motorola previously abandoning the region, the company is struggling to regain traction against fierce competitive pressure from Apple and Xiaomi.
Lenovo’s PC business continued growing in 1Q15, but only by 3.7% year-to-year to $7.1 billion. This is in contrast to 3Q14’s and 4Q14’s 10.8% and 4.71% year-to-year growth, respectively. Lenovo’s PC business represents 63.2% of Lenovo’s total revenue. Its declining revenue growth shows why Lenovo seeks to diversify its business.
TBR believes Lenovo will overcome this slow initial start by investing in sales and marketing, on one end by deploying its IBM teams to enhance its solution-selling approach around System x and on the other end fostering its new ShenQi boutique consumer devices brand.
Lenovo will maintain tight controls on costs; however, it will continue to invest in new product. The company began rationalizing its Enterprise Group with headcount reductions in May. TBR expects Lenovo to utilize some of those savings. We expect Lenovo to continue working with customers to determine where it may have portfolio gaps and how it should fill these portfolio gaps — whether through R&D, M&A or alliances.
As a result operating margins will continue to trend downward as Lenovo fuels its R&D and S&M initiatives to position its products above competitors and slowly but steadily erode market share from competitors.
Lenovo will use new brand ShenQi to create an online-only company to compete with Xiaomi’s market strategy
TBR believes Lenovo is creating a new route to market with ShenQi. ShenQi will be an Internet-only brand selling mobile devices and Internet of Things products. TBR expects Lenovo will emulate Xiaomi in brand message, which is similar to Samsung’s and Apple’s early marketing campaigns of being different, consumer oriented and “cool” compared to the global manufacturing megaliths. This brand attitude fostered loyalty and word-of-mouth expansion for Xiaomi.
TBR believes Lenovo attempting to replicate Xiaomi’s success with a new brand, especially in the same market, is risky. Lenovo will need to spend on marketing and release differentiated products from its Lenovo product line to catch consumer attention.
Lenovo augments the System x portfolio to increase midsize to large enterprise sales
TBR expects Lenovo to emphasize data center expansion in 2015 to diversify its business away from PC. Per Lenovo reporting, ThinkServer revenue rose 41% during the fourth quarter while System x declined 5%, compared to the former-IBM business’s 11% year-to-year decline in its last three quarters, per TBR estimates. Lenovo is moving to execute on its goal of building data center hardware revenue and installed base leadership.
Lenovo has integrated IBM’s x86 server business and released software, networking and server portfolio updates over the last two quarters. Lenovo’s goal of achieving $5 billion in Enterprise Group revenue in 2015 will depend on its ability to continue sparking purchases of newly launched offerings through pricing, its global network of channel partners and alliances, such as its January 2015 agreement with EMC for converged systems.