Brian BollenIf the future of Chinese technology specialist Lenovo is as clear to its senior executives as their attempts to explain it, then heaven help it.
The question and answer session at the end of the webinar that followed the publication of the 2016/17 annual results was surely meant to illuminate and elaborate upon the 2016/17 fiscal year performance and spell out the vision for the future.
For this observer at least, there was mostly only confusion and bafflement. A feared switch by PC users to Mac is not happening and there is no reason why it should, according to one of the senior executives (without a video link it was impossible for me to tell who was who).
The PC is not dead
The slowdown in decline of PC use is hailed as a positive. The definition of PC is being stretched to include tablets, virtual reality and augmented reality devices. And this will be good for Lenovo as a business, as far as I can tell.
What seems to be clear is that the company is focussed on managing cash. This jumps out from the balance sheet and profit and loss account. It reduced the cost of sales in 2016/17 by more than $1bn, helping the company to post a stated 1.2% net income margin.
This compared with a loss the previous year. Net income in 2016-17 was $535m on total revenue of $43bn. These are figures that make English professional football look like a bastion of fiscal prudence.
Squeeze on cash a cause for concern?
But there is a suspicion that this might have been achieved by reducing investment, surely a cause for concern in a very high technology business. This squeeze sounds as if it is likely to continue.
According to the senior executives, they will continue to seek to generate cash by monetising non-core businesses (ie selling stuff on the periphery). They are also looking at raising capital to maximise value for shareholders, they say.
Asked about plans to turn the company's mobile business into a profitable business, they sounded confident when they stated that they want to turn it round in the second half of the new fiscal year.
Smartphone growth resumes
When asked about a smartphone target, the answer came that Lenovo last year resumed year-on-year growth for the first time in six years. Some might question if this inspires confidence or not.
Asked about tax credits, the senior executives robustly pointed out that Lenovo had bought two businesses with accumulated tax losses which can be set off against future profits. Not so robustly they said the value of these credits cannot be easily calculated.
Moving on to more solid ground, Lenovo expects greater profitability than in previous years. That will surely not be too demanding given the 1.2% net income margin in 2106/17 and the loss the year before that.
Supercomputing the future
The senior executives sounded much more sure-footed when discussing supercomputing and hyperscaling. Lenovo claims to be the fastest-growing supercomputer company in the Fortune 500 and that China is the fastest-growing supercomputer country in the world.
Tesla price jump. Don't miss your trading opportunities.
Supercomputers are vital to weather modelling and the search for cancer cures. Lenovo says it intends to build in supercomputing and build a bridge from there into artificial intelligence.
Mixed bag
In the meantime, as reported here earlier today, the Lenovo 2016-17 figures were something of a mixed bag. While revenue fell, net income recovered from the previous year's loss. For the fourth fiscal quarter, Lenovo’s revenue was US$9.6bn, up 4.9% year-on-year.
It says this was fuelled in part by a good performance in the PC/smart devices and mobile businesses. For the full year ended 31 March revenue fell to $43bn, down 4.2%.
The company says its gross profit for the fourth fiscal quarter fell 9.8% to $1.4bn.
For the full year, gross profit fell 7.8% to $6.1bn. Operating profit for the fourth fiscal quarter was $74m.
The key numbers
- Fourth quarter revenue $9.6bn; full year revenue $43bn
- Fourth quarter net income $107m; full year net income $535m
- Full year basic earnings per share of 4.86 US cents, or 37.71 HK cents
- Full year operating profit $672m
- Net income for the full year $535m, up $660m year-on-year
Beyond the numbers
Going beyond the numbers, Lenovo says it made good progress in implementing and executing its new “three-wave strategy,” designed to meet the critical business challenges of today, while positioning it for continued long-term profitable growth.
As part of its transformation, Lenovo says it put in place an aggressive new end-to-end ownership model to manage each business differently, led by strong new leaders. It says it is seeing improvements as a result.
“Despite challenging market conditions, Lenovo saw revenue resume to growth in the fourth quarter, after five quarters of decline,” said Yang Yuanqing, Lenovo Chairman and CEO. “To drive further growth, we have clearly defined the three-wave strategy.
Three waves explained
“We will maintain PC leadership in scale, profitability and innovation in the first wave, while building our second wave, mobile and data center businesses into growth engines. Simultaneously, we will execute our third wave of Device + Cloud and Infrastructure + Cloud.”
He says this will enable the company to capture the opportunities brought by new technologies and achieve long-term, sustainable growth.
It will be fascinating to hear what the experienced sector analysts make of the results. We will of course aim to communicate them when available, even if they are at variance with this analysis.
