Lenovo has posted its first quarterly loss since its fiscal Q2 of 2015 as a result of shelling out more on marketing costs to support new product launches.
For its first financial quarter ending 30 June, Lenovo reported a pre-tax loss of $69m (€58.75m) and a net loss of $72m, against a net profit of $173m posted in the same quarter last year. Sales came in flat at $10.01bn.
The vendor's datacentre business - which has been going through something of a renaissance since November - launched its new ThinkSystem and ThinkAgile products this year, while its smartphone segments also introduced new Moto products to the market, including the Moto Z2 Force, which is set for release in August. Lenovo claims that marketing costs related to upcoming product launches have affected group profits for the quarter.
Furthermore, ongoing challenges in Lenovo's datacentre business - which the firm blames on tough competition and higher component costs - have put a strain on both revenues and profitability. Its Datacentre Business Group (DCG) posted an 11 per cent year-on-year decline in sales to $971m and an operational loss of $114m.
Lenovo's Mobile Business Group (MBG) similarly posted an operating loss for the quarter at $129m, but revenues lifted slightly - by two per cent - to $1.75bn.
Despite higher costs draining profitability in Lenovo's mobile and datacentre segments, the firm claims to have continued to "strike a balance between growth and profitability" in its PC business. While the firm acknowledges that the general PC market is in decline, with component costs remaining high, Lenovo managed to turn a $291m profit in its PC business, albeit down 21 per cent year over year. PC and smart device revenues meanwhile remained flat at $7bn.
"We have made solid progress on every front of our strategy. Particularly MBG continued to improve, and is on track to break even by the second half of this fiscal year. DCG gained good momentum as well. As the two new growth engines gain speed, we believe the sustainable results will soon follow," said Lenovo CEO Yang Yuanqing.
Professor of statregy at Warwick Business School Loizos Heracleous said that key suppliers like memory chip makers have the leverage to squeeze manufactuers and make the lion's share of value chain profits.
He said: "It's an industry where sustained high returns cannot be made unless a company has real differentiation and can charge a premium price, such as Apple; but even then, the majority of Apple's profits come from the iPhone, not from its PC products.
"This is why a fluctuating and growing price of memory chips can hit manufacturers' profits considerably, as has happened with Lenovo."
He added: "Despite its manufacturing scale and market share, Lenovo has to absorb the increased costs because the memory chip makers command more negotiating power in the value chain."
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