Category Archives: Lenovo

China, Earnings, Emerging markets, India, Lenovo, Motorola, Q4 2015, Smartphones

Lenovo’s Increasingly International Smartphone Business

February 3, 2016 Jan Dawson

Note: For two previous posts on Lenovo on this blog, see here and here. See also this post I wrote for Techpinions a while back. The charts in this post are based on the slide deck on Lenovo’s results available as part of the Jackdaw Research Quarterly Decks Service, which also provides decks for other major consumer technology companies each quarter. Note also that in this and other posts on this blog, I use calendar quarters rather than companies’ fiscal quarters in my discussion and in charts, for ease of comparisons and ease of comprehension for readers not familiar with the quirks of companies’ fiscal calendars.

Lenovo reported its results for the December quarter (its fiscal third quarter) this week, and these results came a year after Lenovo’s strongest quarter by far, in 2014. By comparison to those, this quarter’s results were poor, but they’re actually quite encouraging in the context of the first three quarters of 2015, which showed worsening trends in several areas. Today, though, I wanted to focus specifically on Lenovo’s smartphone business, and its increasingly international character.

The impact of Motorola

First up, it’s important to note the significant impact of Motorola here, something I wrote about a year ago today. The acquisition closed in October 2014, and so the addition of Motorola’s results had a noticeable effect on the company’s overall performance, especially in smartphones. Prior to the Motorola acquisition, Lenovo was selling 2-3 million smartphones outside of China, but afterwards, it was suddenly selling 10-15 million, which obviously had a huge impact.

The rapid decline of Lenovo’s Chinese smartphone business

The subject of another post I wrote a few months ago was the rapid decline of Lenovo’s smartphone business in China, and the way in which the Motorola acquisition was helping to prop up overall sales. Two reported quarters later, and the trend is all the more dramatic. Here’s Lenovo’s smartphone sales in China over the past couple of years:As you can see, smartphone shipments in China peaked right before the Motorola acquisition closed, and have declined steadily since. I discussed the reasons why in that earlier post, so I won’t rehash them here.

Growth elsewhere, especially in emerging markets

At the same time, however, both the Motorola and Lenovo brands have begun selling much better in certain other regions. Lenovo doesn’t provide a consistent or full breakout of smartphone sales by country or region, but it has provided some breakouts for the last three quarters in its earnings slides, and that gives us enough data to interpolate other numbers. On that basis, then, here are some numbers for smartphone shipments in other countries and regions (note that these are not necessarily mutually exclusive, as Brazil is included in Latin America and Russia is included in Eastern Europe):There are a couple of things worth noting here:

Smartphone sales in Brazil (light gray) were very healthy early in the period, thanks largely to the success of Motorola’s lower-cost smartphones in that market. However, that seems to have faded significantly over the past year or so, with sales in Brazil falling over that time. Latin America is still a significant region, but its numbers dropped along with Brazil’s over the past year.
Russia has become increasingly important to Lenovo, and it’s the Lenovo brand that’s used there. It sold over a million smartphones in the December quarter in Russia alone. The Lenovo brand has also done well in Indonesia over recent months, though we don’t have the same amount of historical data for that country, so it’s not included in the chart. But it sold 764,000 smartphones there in Q4 2015, compared with just 183,000 in Q4 2014.
India has arguably been the star of the past year or so, rising from under a million sales in Q4 2014 to almost three million in Q4 2015. Lenovo now claims 9.6% market share in India, and interestingly this growth has come through both the Motorola and Lenovo brands.

Perhaps the most significant thing to note is that both Latin America and EMEA passed China in terms of smartphone sales in Q4 2015 for the first time. And India, at just shy of 3 million sales, was only about 10% behind China, meaning that if current trends continue (rapid decline in China, rapid growth in India), India could well become Lenovo’s single largest country for smartphone sales in 2016. Lenovo’s smartphone business has been radically transformed over the last year or so, from one dominated by China to one where China accounts for less than 20% of sales.

The big question now is whether these other new markets will experience sustained growth for Lenovo, or whether they’ll be flashes in the pan as Brazil appears to have been. In Brazil, local economic conditions have likely had an impact, but economic instability is a feature of many of the markets where Lenovo is doing well now, so it will have to demonstrate consistent improvements over time if it’s to continue to grow as it has in these markets.

Better margins

In that earlier post on the impact of Motorola, I pointed out that for all that Motorola was benefiting Lenovo’s smartphone growth, it was also dragging down margins. Lenovo has long promised to turn that trend around, and this quarter it came very close to breakeven in its mobile group for the first time in two years.That’s an impressive turnaround, and a sign that – for all Lenovo’s challenges in China – it’s able to exercise enough financial discipline and generate enough scale to build a successful and eventually profitable smartphone business. Given the state of Android smartphone vendors at the moment, that’s quite an achievement.

Android, Earnings, Lenovo, Motorola, Q2 2015, Smartphones

Lenovo’s tough quarter

August 13, 2015 Jan Dawson

Lenovo reported this week that it had just concluded a tough quarter, and was going to be taking actions to streamline its business and operations, including laying off a significant number of employees and cutting costs in the mobile business in particular. This post runs through some of the components of Lenovo’s tough quarter and examines where the business is likely to go from here.

Note: this is my second post on Lenovo – the first was on its Q4 2014 results, the first it reported after acquiring Motorola. Please note also that in this post as elsewhere on this blog I use calendar quarters for ease of comprehension and comparison, even when companies’ fiscal years are different.

Motorola has been a great defense against shrinking sales in China

I believe the Motorola acquisition was originally contemplated as a way for Lenovo to build scale and especially to break into some new markets. However, it’s turned out to be a phenomenal defensive strategy against some significantly worsening trends in Lenovo’s largest smartphone market, China. As part of Lenovo’s quarterly results presentation, it shared these numbers – sourced to SINO – on smartphone sales in China, and they provide a great context for Lenovo’s problems domestically (this is my chart, based on the same numbers):

There are two important trends to note here: firstly, total sales (shown in red) have declined in the past year; secondly, subsidized sales (shown in blue) have declined even more strongly, and are shrinking as a share of total sales. The fact that the Chinese smartphone market is shrinking is bad enough, but Lenovo is particularly exposed to that carrier-subsidized segment, which is rapidly going away as carriers discontinue subsidies under pressure from the government. The result is that Lenovo’s Chinese smartphone sales are shrinking rapidly:Lenovo’s smartphone shipments in China peaked at almost 14 million in Q3 2014, and have fallen steadily since, to just under 5 million in Q2 2015. Were it not for the addition of Motorola’s smartphone sales, Lenovo would have seen a serious dent put in its overall sales. As it is, things don’t look quite so bad overall from a shipment perspective, though sales have still declined over the past two quarters:Without the Motorola business, Lenovo’s smartphone shipments overall would have fallen from 15.8 million in Q2 2014 to just 10.3 million a year later.

But Motorola is also dragging down profits

The problem is that, while Motorola’s shipment numbers have been a great benefit to overall shipments, its financials continue to be a drag on the business. It’s hard to isolate Motorola’s performance within the overall numbers reported by Lenovo, but there are hints when you look at Lenovo’s operating margins by geography and by segment, where Motorola’s results disproportionately affect the Americas and Mobile respectively:Note: Lenovo changed its reporting segments in Q4 2014, and as such we’re missing operating income by segment for Q3 2014 until it reports them with Q3 2015 figures next quarter.

As you can see, both the Americas and the Mobile segment saw significant declines over the last few quarters as Motorola joined the company. Economic conditions in Brazil particularly impacted the Motorola business but also affected other parts of the business, so that’s part of the reason for the sudden drop in Americas margins. However, Motorola was unprofitable when it joined, and it continues to be so. In fact, Lenovo just subtly changed its profitability target from having the Motorola business be profitable in 4-6 quarters after acquisition to having the total Mobile segment of which Motorola is a part be profitable, a recognition that it’s going to take longer to turn the Motorola business around.

In PCs and tablets, growing share in shrinking markets

I’m not going to spend as much time on PCs and tablets as on smartphones, but I did want to note that in these two categories Lenovo’s challenge is a bit different. The markets themselves are shrinking, so even though Lenovo’s share of both markets is growing, that’s not delivering strong growth overall. In fact, PC shipments dropped several percentage points year on year, while tablet shipments only grew modestly. If growth trends in the PC market continue to worsen, even Lenovo’s significant outperformance of the market won’t help it, while its tablet sales are too small to help offset the challenging conditions in smartphones and PCs.

Lenovo’s proposed solution is familiar

We’ve heard it so many times over the last several years from different Android vendors that Lenovo’s proposed solution to what ails it in in the smartphone market is very familiar: streamlining and simplifying the product portfolio, while making the smaller number of models more compelling and better differentiated. Samsung, HTC, LG, Sony and others have all embraced this strategy over the last few years, and while it’s likely a good idea, none of those companies have seen significant turnarounds as a result, and all continue to struggle to a greater or lesser extent in selling smartphones.

However, Lenovo is also taking some other steps to turn its performance around, cutting its workforce, and moving to what sounds like single sales and product organizations. Interestingly, it’s largely focused on the Lenovo sales organization (though it’ll presumably keep some Motorola staff on in key markets like North America where Lenovo has never had a presence), and the Motorola product design, development, and manufacturing organization. Earlier, it was cautious about consolidating the two manufacturing organizations in particular, and it’s intriguing to see the company consolidating around the Motorola function rather than the Lenovo equivalent. It will be interesting to see to what extent the Lenovo and Motorola brands continue to be marketed distinctly if both sets of devices are coming from the same team.

At the same time, Lenovo is also embracing new channels domestically, mimicking Xiaomi in its pursuit of the online model with the launch of the ShenQi online store this past quarter and the ZUK Z1 phone in August through that channel. This makes tons of sense given the shift in purchasing from one channel to the other, but it’s not yet clear that Lenovo has the competencies required to pull this model off.

There are also hints in Lenovo’s press release that it might seek to acquire other PC businesses as a way to further grow scale while driving cost efficiencies. The key quote here is:

Accelerating the drive for 30 percent share in PCs by better taking advantage of consolidation, while becoming even more efficient and reducing costs to ensure sustainable, profitable growth.

That may mean something else, but it certainly sounds as if it could be referring to an acquisition strategy in the PC market.

Where does Lenovo go from here?

Given the tough domestic conditions, it’s going to be hard for Lenovo to turn its performance in China around dramatically, which makes its rest-of-world strategy all the more important. But though the addition of Motorola made for favorable year on year comparisons, the Motorola business itself actually shrank year on year in terms of shipments, from 7.7m in Q2 last year to 5.9m this quarter. Motorola has had real success with its low end devices, the Moto E and Moto G, but that success has come to a great extent in certain markets that are now facing challenging conditions too. Brazil is perhaps the best example – Lenovo sold just 167,000 smartphones there in Q2 last year, but the combined company sold around 2.5 million smartphones there in Q2 2015, and yet this turned out to be something of a liability this quarter as conditions worsened. Latin America as a whole accounted for 3.7 million shipments, and if the economies there continue to struggle, that likely doesn’t bode well for Lenovo.

With these headwinds in key markets like China and Latin America, Lenovo needs to do better in other regions, but those regions are relatively small for the company today, with just 1.4m shipments in North America and 2.8m in EMEA in Q2. Lenovo is heavily dependent on the BRIC countries, which account for over 60% of its smartphone shipments today. And yet the Motorola brand has been struggling in the US, its erstwhile stronghold, for several years now. What’s selling is the low-end smartphones, with an average selling price for Lenovo as a whole of a little over $100, and Motorola’s ASP around $200.

I’ve been quite bullish about Lenovo until now, but at the moment I’m less certain on its prospects for the short to medium term, especially if things don’t change domestically. But Lenovo isn’t alone in this – it’s been caught up in the perfect storm that’s affecting many of the major Android vendors, and that’s been causing a number of them to announce significant cuts in their businesses in recent weeks. The good news is that PC margins continue to be relatively healthy (at least in the context of the broader Windows PC market), and PCs represent the majority of Lenovo’s business today. But if Lenovo really wants to follow through on its strategy of becoming a major player across these device categories, it’s going to have to find a way to turn its smartphone performance around.

Earnings, Lenovo, Motorola, Q4 2014, Smartphones

Motorola’s impact on Lenovo

February 3, 2015 Jan Dawson

Note: this is part of a series on major tech companies’ earnings in Q4 2014 (click here for previous posts). In this post as elsewhere, I’m using calendar quarters (e.g. Q4 2014) to designate reporting periods, even though Lenovo and certain other companies have fiscal years which use different designations. Q4 2014 in this post and elsewhere refers to the quarter ending December 2014.

Lenovo reported its results yesterday, and although I have not traditionally covered Lenovo in depth here, I wanted to examine something specific: that is, the impact of the Motorola acquisition on Lenovo’s reported numbers. As such, I’m going to highlight a handful of charts here, but I’m also sending a deck on Lenovo with quite a few more charts to subscribers (if you’d like more information or to sign up, click here).

One quick note: the acquisition of Motorola closed in October, but Lenovo also acquired IBM’s server business around the same time. As such, not all the impacts described below are entirely due to the Motorola acquisition, though several are, and I’d estimate the Motorola acquisition had a significantly greater impact than the server business did. Lenovo reported a full quarter of System X (server) results in its reporting, and two months of Motorola results.

Smartphone shipments

The most obvious impact of the Motorola acquisition was a dramatic rise in smartphone shipments reported by Motorola. The chart below shows the trend line, with a very clear bump in Q4:

It’s worth noting, however, that shipments have been growing at Lenovo even before the Motorola acquisition. In my mind, the company has been one of the more successful and stable players in this space over recent years. However, that success has come largely in China, which has dominated shipments in the past. So another impact from the Motorola acquisition is the change in that mix:

Hopefully you’ll notice two things here. First, and perhaps most obvious, is the spike in rest-of-world shipments in Q4, which rose from under 4 million a quarter to over 14 million. Motorola shipped 10.6 million devices in Q4 alone, so it accounts for the majority of those rest of world shipments. Secondly, you may notice that China shipments actually fell year on year and quarter on quarter. Shipments rose from Q3 to Q4 in 2013, and this dip is fairly significant. It’s quite likely that Lenovo, like Xiaomi, suffered from the impact of Apple’s new iPhones in China in Q4. What’s worth watching is whether this recovers in Q1.

Mobile as a contribution to revenues

Until Q3 2014, Lenovo’s business was dominated by revenues from PCs. PCs contributed nearly 90% of Lenovo’s revenues two years ago, and it’s always stayed above 75%. That business, too, has performed well over recent years, despite the difficulties in the overall market, and so this dominance happened despite the growth in Lenovo’s smartphone and tablet businesses. But with the acquisition of Motorola, Mobile Devices suddenly went from around 15% of its revenues to almost a quarter:This is helpful for Lenovo particularly because of the overall headwinds in the PC space. PCs have continued to grow for Lenovo, but lessening its dependence on this business while exposing itself to the upside in smartphones is critical for Lenovo’s future growth, and the Motorola acquisition helps significantly with the balance of these two businesses.

Regional impact

We’ve already looked at the impact of Motorola on smartphone shipments outside the US, but the other big impact from this is the share of revenues from different regions. Motorola’s revenue contribution is essentially recorded in the Americas segment, and you can see the impact in this next chart:

Note the dramatic growth in the size of that Americas block in Q4 2014 (again, the Motorola acquisition wasn’t the only contributor, as the IBM server business is also US-based). EMEA also grew a little, while China and AP remained fairly steady.

Margin impact

The impact of the two acquisitions can perhaps be most clearly seen in the regional segment margins Lenovo reports. The chart below shows these:

Margins in China and AP were essentially unaffected by the acquisitions, with AP rapidly catching up with China’s margin levels. But Americas margins dipped into the red for the first time in a long time in Q4, and EMEA margins also dipped somewhat. This is the downside to adding both the new businesses: neither was profitable under its previous owner. With the significant growth in smartphones year on year at Motorola, and efforts to get the Motorola brand back into China, together with various synergies, Lenovo expects Motorola to become profitable within about 18 months of the close of the deal. But in the meantime, Motorola’s results will be something of a drag on overall results.

I’m generally very bullish on Lenovo and the Motorola acquisition. I wrote more about it on Techpinions recently.

Below, I’ve pasted a screenshot of the Lenovo deck which will be going to subscribers shortly.

Google, Lenovo, Microsoft, Motorola, Nokia

Google and Microsoft go in opposite directions

January 29, 2014 Jan Dawson 1 Comment

With Google’s announcement that it’s offloading the Motorola smartphone business onto Lenovo, we face the intriguing picture of Microsoft and Google apparently moving in opposite directions, with one acquiring a handset business and the other divesting one. What explains this difference between the two companies’ strategies? Is one right, and the other wrong, or does it reflect a fundamental difference in their businesses?

The reality is that, since everyone else now gives them away for free, Microsoft essentially captures 100% of its two core businesses of productivity software and operating systems, and both are likely to shrink. Software may be eating the world from a functionality point of view, but hardware is eating the world from the point of view of revenues. The global market for consumer hardware (smartphones, tablets, PCs and gaming consoles) is about twenty times larger than Microsoft’s revenues from Windows and Office combined. And that explains its organic and inorganic forays into hardware as well as its Xbox business. If you have to choose between hardware and software to build a business in the consumer market, hardware is the way to go. Between Surface, Xbox and Nokia smartphones, Microsoft has around a $10 billion annual revenue stream from hardware already, and Surface and Nokia should grow well in the coming years.

On the other hand, those aren’t the only two parts of the consumer technology market where you can make money. Consumer content and online services are another massive and growing market, and that’s where Google plays through search and advertising. Google’s addressable market is growing rapidly as the online population expands and as more and more of the worldwide advertising market shifts to channels in which Google competes, namely online and mobile. As such, Google doesn’t face the same existential challenge Microsoft does.

The key to Google’s future growth is threefold: the ongoing competitiveness of its online offerings (hence the DeepMind acquisition), the ongoing success of Android as a platform for Google services on mobile devices, and a continued ability to create vast data sets about its users and about the world (hence the Nest acquisition). The acquisition of Motorola was clearly intended to serve its goals around Android, whether by bolstering its patent position, providing leverage over its OEMs or pioneering features and functionality that would become part of the overall Android experience. But if Google believed it could turn Motorola around, it failed hopelessly. At this point there’s really nothing left to be gained by hanging onto Motorola. At its present scale, and with the dominance of Samsung in Android smartphones, there was no way Motorola on its own could ever have achieved the significant growth or margins that would have allowed to contribute to, rather than detract from, Google’s overall financial performance. It had become a millstone around Google’s neck, pure and simple, and had to be cast off. If Google was able to extract some concessions from Samsung in return for the sale of Motorola, so much the better.

As the smartphone and tablet markets grow, Google benefits without having any presence in hardware because the majority of Android devices carry embedded Google services. But for Microsoft to benefit more than marginally, it has to be in the hardware business. Both companies see the same trends, but their positions in the market have led them – rightly, I believe – to radically different conclusions about whether they need to be in the hardware business.

As for Lenovo, they’re now in a very strong position to become the third major company in the consumer hardware business after Samsung and Apple. Last quarter they were number four in smartphones, number four in tablets and number one in PCs. It’s one of the few companies in the hardware business that’s grown profits over the last couple of years and the only one to have grown shipments across all three categories. The biggest challenge for Chinese vendors in the smartphone business has been moving beyond the white label business as HTC did a number of years ago. Both Huawei and ZTE have struggled to establish their own brands in the major carriers’ postpaid channels. But Lenovo will be buying both carrier distribution and a known brand, which should dramatically simplify the process. Moving manufacturing to its facilities in China and taking advantage of domestic scale will also be hugely beneficial. Assuming regulatory approvals come quickly and Lenovo is able to make a quick start, it could quickly leapfrog much more established brands like Sony and LG and take a prominent position in the market.

Beyond Devices