Lenovo earnings soar almost 13-fold

Company begins climbing out of IBM's shadow as corporate demand offsets domestic competition. Challenging Dell in U.S. will be tough.
Written by ZDNET Editors, Contributor
Lenovo Group, the world's No. 3 PC maker, posted a much stronger-than-expected, nearly 13-fold surge in quarterly profit as strong corporate demand offset fierce competition at home.

Analysts say Lenovo should now be able to sustain a recovery in its ailing business abroad, noting its second straight profitable quarter in the United States.

But they also warned of a debilitating price war with Dell on its own home turf--the world's second-largest PC market.

Lenovo shares began climbing early in the afternoon on Thursday as investors piled back in after pushing the stock nearly 8 percent lower in the morning, cashing in gains from a 17 percent rise since Monday. The results were posted during the midday market break.

One of a handful of Chinese firms trying to forge a global brand, the PC giant dropped to global fourth place early in 2007 after ceding market share overseas, but reclaimed the No. 3 slot in the second quarter from Taiwan's Acer after a hard-fought battle, according to Gartner and IDC.

"This is a good sign: they're seeing light at the end of the tunnel," said Y.K. Chan, a fund manager with Phillip Capital Management. "And they're stepping out of IBM's shadow."

"Lenovo is now riding macro factors in the global PC industry, especially low component costs."

The firm reported a profit of $66.84 million in its fiscal first quarter ended June, versus $5.21 million a year earlier.

That was more than twice an average forecast for $32 million, according to four analysts polled by Reuters Estimates.

Revenue rose 13 percent to $3.9 billion.

PC shipments jumped 22.3 percent in the quarter to 4.9 million units, giving it an 8.3 percent share of the world PC market, according to research company IDC.

The company ranks third globally in terms of shipments, after leader Hewlett-Packard and Dell, researchers IDC and Gartner said last month. Acer and Japan's Toshiba followed in fourth and fifth place.

Recovery track
Lenovo's shares soared 61 percent in the April-June quarter, versus 10 percent for the Hang Seng Index, as investors cheered improvement in an international business inherited from IBM.

China's top maker of personal computers bought IBM's PC arm for $1.25 billion in 2005 and has been saddled with expenses arising from lay-offs and streamlining as it seeks to compete with the likes of Acer and Hewlett-Packard.

Lenovo posted restructuring costs of $44.8 million for the quarter, in line with expectations and compared with $19.4 million a year ago, partly covering the cost of firing 1,400 workers and shifting jobs to lower-cost countries--such as Mexico and India--to try and save $100 million this year. Much of the savings is expected to be reinvested.

"Strategic initiatives adopted in the past years have already begun to deliver the expected results, but as Lenovo operates in an intensely competitive global marketplace, it must continue to focus on driving global operating excellence," the company said in its statement.

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