According to the news report by Reuters, Chinese PC manufacturer Lenovo Group Ltd. has turned things around and has produced positive operating profits after its 2017 losses. The company beat estimates in its first quarter thanks to its big jump in revenues.
Lenovo’s net profits were at $77 million for the quarter that ended in June. Market analyst expectations for the quarter were $59.37 million. In contrast, last year at this time, the company reported losses to the tune of $72.3 million, due a shortage of components and highest operating costs. Additionally, PC maker had had to take a one-time hit of $400 million in asset charges thanks to the new taxation laws rolled out in the US at the beginning of this year. The company thus was able to make a $186 million turnaround.
Revenues jumped up sharply by 19% to $11.91 billion, making it the company’s second consecutive quarter of 2-digit revenue growth.
Thanks to such a great performance, the PC company’s shares went up by 3.4% in trading on Thursday.
The 19% jump in sales for the ThinkPad maker played a large part in helping with the company’s turnaround. Lenovo became the largest supplier of PCs back in 2013 and continued to hold that title till last year, when HP once again became the number one PC maker in the world.
Then, last quarter, the Chinese PC maker announced that it had created a new business division called Intelligent Devices Group (IDG), which put the company’s Smart Devices Group, its PC group and Mobile Business Group under one umbrella. This earnings report revealed that the IDG’s revenues were at $9.95 billion, a 14% jump from the quarter before.
According to Lenovo’s Chief Executive Officer and Chairman Yang Yuanqing, Lenovo has finally passed its turning point and is now entering the acceleration phase of executing the company’s transformation strategy as well as business performance.
Bloomberg points out that while the PCs sales were a big contributor, the lion’s share of the company’s profit have come from some serious cost cutting, especially in mobiles. According to the data, had operating expenses had stayed the same, then the company’s operating income would have been about $1 million, instead of the reported $180 million that Lenovo reported now.
Lenovo showed that it had been able to cut down $105 million in operating expenses from its mobile division in the June quarter vis-à-vis last year. The company also said that it was on target in reducing costs in its Motorola unit by $800 for the year. Lenovo had acquired the failing Japanese brand in 2014 for its mobile phones unit.
And while cutting down on expenses is a valid way to increase profits, the concern then is that such savings are not easily repeatable. Additionally, reducing costs too much could also hurt the company as it would impact research into the development of new products, investing in sales and production.
There has been noise that the company’s management is confident that it will be able to make its data center and mobile business profitable. However, those claims have not been too convincing, especially since the company insists on showing rather inflated goodwill figures. If Lenovo were to write down those numbers, it could actually swing the company towards massive losses.
Chairman Yang Yuanqing said in a statement that Lenovo Group still remains confident about its core business of PC making, and also is targeting to grow at a premium to the market in relation to revenue – without having to compromise on its profitability.