Lenovo pre-tax income drops 80 percent with 3,200 jobs to go

As a result of 'severe challenges', Lenovo has said that it cut approximately 5 percent of its global workforce after a massive drop in its net income.
Written by Chris Duckett, Contributor

Despite an increase in its first-quarter revenue, Chinese computing giant Lenovo has seen a significant drop in its profit, and in response will be restructuring its business.

For the quarter, revenue improved by 3 percent, to come in at $10.7 billion, but pre-tax income fell 80 percent year on year to be reported at $52 million, with operating profit taking a 67 percent year-on-year cut to $96 million.

The company said its numbers were a result of "severe challenges" as it saw significant declines in PC and tablet sales across the world, and faced a slower growth and increased competition in China.

As a result, Lenovo said it would be removing 3,200 non-manufacturing jobs, around 10 percent of its non-manufacturing workforce. The company expects to incur $600 million in restructuring costs to lower expenses by $650 million in the second half of the year.

The jobs would go as soon as possible, Yuanqing Yang, chairman and CEO of Lenovo, said in a letter to employees.

"We do not make these moves lightly," Yang said. "We will act with logic and respect, speed and precision, clarity and consistency as we make these changes."

In divisional terms, its mobile group will have fewer products and will be relying on its Motorola arm for the smartphones; the company is slated to spend $300 million clearing out its smartphone inventory. Its PC group will trim costs while aiming at a 30 percent market share, and its enterprise group will "attack the most relevant and attractive market segments".

"Last quarter, we faced perhaps the toughest market environment in recent years, but we still achieved solid results," said Yang in a statement. "But to build long-term, sustainable growth, we must take proactive and decisive actions in every part of the businesses. We will further integrate elements of the acquisitions with our legacy businesses in mobile and enterprise, while building the right business model and cost structure.

"We will reduce costs in our PC business and increase efficiency in order to leverage industry consolidation increase share and improve profitability. We will come through these efforts as a faster, stronger, and better-aligned global company."

Lenovo's PC group shipped 13.5 million PCs during the first quarter, a decline of 7 percent year on year, with the company saying it performed better than the overall market, which declined by 12 percent, and gained market share in every geography.

Its mobile group increased sales by 33 percent to $2.1 billion, with $1.2 billion coming as a result of its Motorola acquisition. The group sold 16.2 million smartphones for the quarter, an increase of 2 percent, but it meant a half-percentage point drop in market share to 4.7 percent. For its part, Motorola shipped 5.9 million smartphones, a drop of almost one-third year on year.

"With the restructuring actions announced today, management reiterates its commitment to see profitability in Motorola within four to six quarters of close (two to three quarters from now)," the company said. "Though this goal is now being extended to the full MBG [Mobile Business Group] unit, where Motorola's results are included."

For tablets, the company shipped 2.5 million units, a jump of 5.6 percent.

Thanks to the inclusion of IBM's former x86 server business, Lenovo's enterprise group saw its sales multiply almost six times over, coming in at $1.1 billion; however, it posted an operational loss of $40 million.

During the first half of this calendar year, it was revealed that Lenovo had been shipping adware and using its own software in BIOS to replace certain Windows system files.

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