Lenovo CEO: "I don't think we have a reason to be targeted"

Lenovo delivered a positive set of financial results for the latest quarter and fiscal year, but a geopolitical cloud hangs over the company.
Written by Charles McLellan, Senior Editor

Company financial results can be pretty dry affairs, as the CEO makes some high-level comments, the CFO immerses everyone in the details of the balance sheet, and analysts ask routine questions. But when the company is one of the world's top PC manufacturers and a significant player in the mobile and datacentre markets, and is headquartered in China, things become much more interesting in these turbulent geopolitical times.

So it is with Lenovo, which is currently embarked on its mission to  become the "leader and enabler in the Intelligent Transformation era while driving customer centricity and leveraging Smart IoT/Smart Infrastructure/Smart Vertical" -- a strategy it hopes will elevate the company to new heights.

The figures for the 2018/19 financial year, ended on 31 March 2019, look good. But will fallout from the US-China trade war affect Lenovo's future prospects?

MUST READ: Beyond the PC: Lenovo's ambitious plan for the future of computing

Financial results in perspective

With $38.5 billion out of its $51bn revenue for FY18/19 coming from the PC and Smart Devices (PCSD) group, it's clear that, for now, Lenovo remains primarily a PC company. The remaining 25 percent of revenue is evenly split between the Mobile Business Group (MBG) and the Data Centre Group (DCG).

Data: Lenovo / Chart: ZDNet

The current financial year is the first time Lenovo has exceeded $50bn in revenue. The fourth quarter of FY18/19 generated $11.7bn in revenue, up 10.1 percent year on year.

Data: Lenovo / Chart: ZDNet

Profitability is looking good too, with operating profit of $273 million, pre-tax income of $180m and net income of $118m — three-figure year-on-year growth in each case.

Data: Lenovo / Chart: ZDNet

Lenovo chairman and CEO Yang Yuanqing's prepared statement on the results referenced climate, but not the geopolitical one: "Lenovo's solid financial performance is the result of persistent execution of our transformation strategy. At a time of great global change -- economically, socially and environmentally -- we continue to focus on how we 'intelligently transform' ourselves and enable our many customers around the world successfully to do the same," he said.

Here's how Lenovo's main business groups performed, in the fourth quarter and the full 2018/19 financial year.

PC and Smart Devices Group (PCSD)

Lenovo's core PC business continues to perform well in a declining market, with its success in $800+ commercial notebooks validating the company's strategy of concentrating on high-value market segments.

Images: Lenovo

Mobile Business Group (MBG)

The mobile business group saw its second consecutive profitable quarter, suggesting that Lenovo's turnaround strategy of cost cutting, selective geographical focus and portfolio rationalisation is bearing fruit.

Images: Lenovo

Data Center Group (DCG)

Although revenue and profitability are improving, the data centre group's turnaround still has some way to go. High-growth areas such as hyperscale and software-defined infrastructure will be important going forward, while Lenovo's joint venture with NetApp strengthens its offering in the storage and data management sector.

Images: Lenovo

Services and LCIG

Software and services revenue increased by 18.6 percent in Q4 18/19 to $619 million, and by 18.9 percent to $2.4 billion for the full year.

Meanwhile, Lenovo's investment group, LCIG (Lenovo Capital and Incubator Group) successfully exited three investments, adding $107m to the company's pre-tax income.

Lenovo and the geopolitical climate


Yang Yuanqing, chairman and CEO of Lenovo

Image: Lenovo

Lenovo's chairman and CEO Yang Yuanqing has been sanguine in recent months about the state of US-China relations and the likelihood of Lenovo's businesses being affected. Despite Huawei's 15 May placement on the US Commerce Department's Entity List, which prohibits US companies from exporting technology products and software to the Chinese company, Yang remained optimistic at the 23 May earnings call -- going so far as to say that "this is the most promising time in Lenovo's history."

However, it's not inconceivable that US suspicion of Chinese companies will broaden to include Lenovo, and that the current trade war will escalate, with Chinese-manufactured PC products receiving higher tariffs. Several questions at yesterday's earnings call explored the company's preparedness for such developments.

"We are a global company with a balanced business across geographies and a very sophisticated supply chain," Yang said. "We have in-house manufacturing facilities across the world...so compared to our competition, we have more flexibility to adjust our supply chain. PCs and smartphones haven't been tariffed yet, and so manufacturing in China still gives us certain advantages."

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When asked whether Lenovo might get the Huawei treatment from the US, Yang Yuanqing responded: "Lenovo has always been a global company, originated from China. We have always been a trusted player across the world. We have never had a problem with security and compliance, and we always comply with the law and regulations everywhere we do business. We are a very transparent company with a high standard of governance...I don't think we have a reason to be targeted."

That optimism undoubtedly informs the response to a question about whether Lenovo might seek to future-proof itself, as Huawei has done, by developing its own chips and operating systems. "We still believe globalisation is a trend, so we don't need to do everything ourselves. We have no plans to build chips or operating systems: we provide the best product for our customers using the latest technology, partnering with trusted partners. That's our strategy," said Yang.

Taking a sledgehammer to another large Chinese technology company's business would be a bold move, even for the Trump administration. But that doesn't mean it won't happen. That said, the latest noises coming from the US suggest a more conciliatory approach, so perhaps Yang Yuanqing's optimism is justified.

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