Lenovo 3Q profits hit $321M, but Motorola buy may impact future earnings

Chinese hardware manufacturer clocks a 30 percent climb in profits on US$10.8 billion revenue for its fiscal third quarter, but warns its recent Motorola handset deal could hurt the company's profitability in the short term.

Lenovo Group has reported a 30 percent climb in profits for its fiscal third quarter, ended December 31, boosted by strong PC and smartphone sales in China. It warns, however, that its move to buy Google's Motorola handset may harm earnings in the short-term. 

The Chinese hardware manufacturer clocked quarterly net profits of US$265.3 million, up from US$204.9 million the year before, beating analyst estimates of US$243 million. Its revenue grew 15 percent year-on-year to US$10.8 billion, surpassing the US$10 billion-mark for the first time, the company said in a statement released Thursday, It shipped a record 32.6 million devices, with its business division that sells Lenovo's PC Plus products--which includes smartphones and tablets--accounting for 16 percent of total revenue, up from 11 percent year-on-year, and 7 percent two years ago.  

It shipped 15.3 million PCs and claimed a market share of 18.5 percent, retaining its position as the market leader, the company said. Lenovo outsold Hewlett-Packard  in 2012 to become the world's largest PC maker by shipment volume. 

The Chinese manufacturer shipped 17.3 million smartphones and tablets, clocking a 47 percent growth in smartphone shipments alone, while its tablet shipment climbed 300 percent year-on-year to hit 3.4 million units. Lenovo said sales in this segment was boosted by the launch of its Yoga Tablet

CEO and Chairman Yang Yuanqing said in the statement: "Lenovo had outstanding performance last quarter, delivering both record revenue and record profit. Leveraging strong execution of our strategy, innovative products and growth in our PC Plus business, we continue delivering on our commitment to improve our profitability and we are confident we will maintain this momentum in our existing businesses.

"Further, the Motorola and IBM server acquisitions that we just announced are a perfect fit with our PC Plus strategy," he said, pointing to the company's US$2.3 billion deal to buy IBM's x86 server business  and another US$2.9 billion purchase of Google's Motorola Mobility handset unit . Both acquisitions were announced last month.

Lenovo, however, warned the Motorola could impact its profitability for at least two quarters. "This acquisition is good for our shareholders for the long term [but] could have a certain negative impact [on earnings] in the short term," Yang told Wall Street Journal. He explained that integration of Motorola and Lenovo's handset business would provide economies of scale and significantly slash material procurement cost as well as other expenses, but this would take time to produce notable results. 

In its fiscal quarter, the Asia-Pacific region accounted for 15 percent of Lenovo's overall revenue, with strong growth of smartphone and tablet sales in Asean markets. China, which accounts for 37 percent of the company's total revenue, booked US$4 billion in revenue for the quarter. It contributed the largest share of its profit with a 5.4 percent operating profit margin, up 4.6 percent year-on-year. The company's worldwide gross profit margin was 12.6 percent.