Lenovo FQ3 16A – Always uphill.

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Now comes the hard part for Lenovo.

• Lenovo reported a difficult results where market conditions marred what was another quarter of solid execution.
• FQ3 15A revenues / EBIT were $12.9bn / $379m behind consensus revenues of $13.3bn but nicely ahead of consensus EBIT of $360m.
• The PC market did most of the damage with revenues down 8% YoY despite gaining market share to an all-time high of 21.6%.
• However, margins held steady at 5.0% despite the revenue decline.
• Mobile had a steady quarter shipping 20.2m units just short of RFM’s estimate of 20.7m but critically came within a hair’s breadth of breaking even with margins of -0.9%.
• Most importantly of all $393m of cash was generated which allowed the cash balance to remain healthy at $2.5bn.
• Lenovo has executed well and licked its businesses into shape but now it must decide what it is going to do with them.
• The market outlook is difficult this year and in this environment Lenovo needs to take market share to see growth.
• It has two options
  • First. Take so much market share that it is able to earn better margins than its peers despite selling commoditised product.
  • Create differentiation by making a contribution to the ecosystem.
  • This is easier said than done but Lenovo’s strong position in a number of device categories could be used to create cross device experiences that actually work.
• Furthermore, I also see an opportunity for innovation around the use case of the PC to trigger a replacement cycle.
• I have long believed that laptops offer a sub-standard and un-healthy experience by having the keyboard and mouse physically attached to the screen.
• Therefore, I see the possibility for a PC in a tablet form factor to replace the laptop with a 4-5 year cycle.
• This would kick the PC market back to growth once again albeit for a limited amount of time.
• However, for this to happen, Intel, Microsoft and the PC makers have to demonstrate to users how much better this use case is but progress to date has been very poor.
• Laptops have been around for over 30 years and that mind-set is deeply ingrained both with users and within the companies that make them.
• Hence, this will require strong vision and a huge marketing effort by the entire supply chain and movement here has been very slow to date.
• Consequently, I do not see this happening soon but I remain hopeful that it will eventually come to pass.
• For Lenovo, the outlook remains tough but it has a solid base from which to start and it has already shown that it can execute when it needs to.
• Lenovo’s valuation remains unchallenging making it the only PC maker worth considering when looking at a position.