MORRISVILLE – Hard times have really socked it to Lenovo although executives did their best to put a positive spin on results in press releases about their latest earnings. But in black and white two charts explain why layoffs – or “workforce adjustments” could be coming at the global tech conglomerate.
The fallout from a bad quarter? Lenovo is looking to cut expenses by $850 million, says Chief Financial Officer Wong Wai Ming.
“The group continues to further strengthen its cost competitiveness to achieve its medium-term goal of doubling net margin. We will do this by investing in high-margin growth engines and taking proactive steps to reduce run rate operational expenses by approximately $850 million. This includes overall reduction in operational spending, as well as workforce adjustments, where necessary and appropriate,” he said in a conference call with analysts.
Why? Lenovo’s latest revenues fell more than $1 billion below expectations for the most recent quarter. Analysts at Refinitiv expected $16.39 billion, Lenovo delivered $15.3 billion, according to Reuters.
And revenues plummeted 24% year-over-year as global PC shipments dropped in the wake of less demand following decline of the global COVID pandemic that sparked huge PC and tech spending growth in 2021.
Here’s how Reuters reported the financials: “China’s Lenovo posts worst revenue fall in 14 years as PC demand slumps”
Hurting badly? A report from research firm Gartner released in early January 2023 found that Lenovo shipments plunged by nearly 29%, dropping to 15.6 million units shipped out worldwide during the fourth quarter.
Yet Lenovo’s press release reads: “Lenovo Delivers Solid Results as Diversified Growth Engines and Operational Excellence Drive Profitability”
Let’s look at the charts.
First, the “financial highlights” from Lenovo’s press release which shows across the top five financial categories huge drops – as high as 32%:
Next chart, the “financial summary” from the more detailed presentation for investors, documents just how bad the quarter was.
Lenovo, which employs thousands in North Carolina and operates one of its two global headquarters in the Triangle (the other is in Beijing), is not alone in facing tough times. Its top PC rivals HP and Dell have already cut thousands of jobs. And the tech sector has cut thousands of jobs from Meta to Amazon.
However, in press releases about its latest financial results Lenovo executives made no mention of the word layoff. In a conference call with analysts the acknowledged spending reductions are coming. But again execs avoided the layoff word.
Chief Executive Officer Yang Yuanqing also said the company, which operates headquarters in the Triangle and Beijing, is looking to reduce expenses and improve efficiency, Reuters added.
Before the financial report release on Feb. 17, a Lenovo spokesperson declined to comment on layoffs, either ones already made in December or whether cuts were under discussion or could be announced soon.
In the conference call transcript from financial news site Seeking Alpha, Wang noted:
“In the short-term, we will take proactive actions to reduce expense and improve efficiency to ensure business healthiness. While in the long-term, we will keep investing in innovation, focusing on premium PC under adjacent areas and drive the evolution from smart devices to smart spaces.”
Lenovo has made layoffs recently as WRAL TechWire has reported but denied that it made a 10% in workforce cuts as had been reported.
Yang alluded to recent cost reductions that he said helped cushion the blow of the latest quarter’s performance:
“Last quarter, we took proactive actions to reduce expenses and improve efficiency to ensure our cost competitiveness, especially, in areas where we see a softer market outlook. Our cash balance is still strong. Cash conversion cycle continues to improve and the channel inventory is reduced, which allow us to continue investing in R&D centered around the new IT technologies.”
CFO Wong found some positives, for example in growth outside of PCs: “Revenue from non-PC pillars made up 41% of group revenue, up nine points from last year.”
The news about PCs also was not as bad as raw shipment data indicated, said Yang. “I don’t think the shipment data can precisely reflect the real market demand. But the real demand can be reflected by the device activation data,” he told analysts and those numbers indicated a possible return to grown as inventory is absorbed.
This chart helps explain the execs’ positive views about diversification
‘Our service-led transformation strategy is paying off’
In the press release, Yang chose to accent what he saw as positive news:
“Today’s solid results demonstrate that our service-led transformation strategy is paying off. Our diversified growth engines of non-PC business now account for over 40% of our group revenue and are driving solid profitability. Despite the complex macro environment, we retained our market leadership in PCs. I remain confident that our clear strategy, operational resilience, healthy liquidity, and continued
investment in innovation will ensure we can deliver long-term sustainable growth and improved profitability.”
Yang has in fact increased research and development spending and Lenovo’s diversification away from PCs continues. He is betting that those efforts will lead to a rebound.
Notes the press release:
“While the industry faces significant macroeconomic pressures, Lenovo sees long-term opportunities ahead as the global trends of digitalization and intelligent transformation continue to accelerate and IT spending is expected to recover to a moderate growth rate in the mid-to-long term. In the PC sector, real demand, as reflected by the activation data in 2022, is much better than the industry shipment data
indicates as the channel consumes excess inventory. The Group expects year-on-year growth to resume in the second half of the calendar year with end-user demand to be higher than pre-Covid levels. The Group continues to take proactive actions to further strengthen its cost competitiveness. It will do this by investing in high-margin growth engines as well as reducing run rate operational expenses. Lenovo’s cash balance remains strong, the cash conversion cycle continues to improve, channel inventory has reduced, and the company continues to invest in R&D and sustainability – remaining committed to doubling profitability in the medium-term.”
Read the full report at: https://investor.lenovo.com/en/financial/results/press_2223_q3.pdf