Lenovo Posts Higher Profit After Cutting Costs

Lenovo Group Ltd.'s earnings increased by 6% after the company relied on cost reductions and new businesses to weather an unprecedented slump in global computing demand.

Net income rose to $541 million in the quarter ended September, the company said Thursday. This was higher than the average analyst estimate of $473 million. Sales declined for the first time in more than two years to $17.1 billion, but this still beat the $16.8 billion analysts predicted.

Lenovo, Dell Technologies Inc. and HP Inc. are all struggling in the global PC market, which saw its steepest quarterly drop on record in the fourth quarter of 2020. In Lenovo's home market of China, Beijing appears to be prioritizing Covid Zero over the economy, triggering lockdowns in major cities and disrupting manufacturing. This has had a negative impact on retail demand, further exacerbating the decline in PC shipments.

An extended macroeconomic downturn is likely to lead to another down year for the PC market in 2023, though there may be some rebound later in the year and potential for growth in 2024. Our 2023 PC-shipment target has been trimmed by 1% to 281 million, which implies a 3% unit drop.

Woo Jin Ho is an analyst who specializes in the stock market. He has worked for several major investment firms and has been featured in numerous financial publications.

The global tech outlook is clouded by a plethora of restrictions Washington imposed on chip and technology exports to China last month, which threaten to further curtail shipments to the world’s largest PC and semiconductor market. Industry bellwether Intel Corp. is planning a major reduction in headcount, likely numbering in the thousands, Bloomberg News has reported.

Lenovo's Chairman Yang Yuanqing has stated that the company is unable to sell some of its most advanced computers to clients in China due to the latest US chip curbs. However, he notes that the impact to Lenovo's sales is limited because such products only make up a small part of the company's business in China. Yang adds that the curbs will not impact Lenovo's sales of general-purpose servers, storage, or other infrastructure products.

Lenovo's CEO Yang Yuanqing has said that cost management will be a priority for the company in the coming quarters, as the global electronics market sees signs of contraction. Last quarter, Lenovo lowered spending on advertising and promotions to support its profit margins. It also spent less on employee benefits and rent. Yang however said Lenovo wasn't contemplating large-scale layoffs, without elaborating.

"It is essential that we make our business competitive. We need to make sure that our expenses are in line with our revenue," Yang said.

Lenovo shares closed largely unchanged in Hong Kong, down 33% for the year.

The company is hoping that its other divisions, such as servers, cloud computing and data storage, will help offset declining PC sales. However, its core division still accounts for around 80% of its revenue.

According to Morgan Stanley analysts, demand cracks are spreading to enterprise hardware end-markets, including PCs and data center infrastructure. This could have a negative impact on the overall market.