Lenovo's EMEA sales shrink as it focus on cleaning channel inventory

Vendor says it is continuing to peruse potential deal with Fujitsu's PC business as it posts Q2 results

Lenovo saw its top-line shrink in its second financial quarter of 2016, as PC sales continue to struggle.

For the three months ending 30 September, overall sales amounted to $11.2bn (€10.1bn), almost $1bn lower than the $12.1bn reported during the second quarter a year earlier. Net profit, however, reached $157m, a vast improvement on last year's second quarter, when the costs incurred through restructuring and integrating the acquired Motorola mobile business blew a $714m hole in its bottom line.

The overall sales dip stemmed from an eight per cent decline in the firm's PC and Smart Devices Business Group (PCSD) which posted sales of $7.8bn. Lenovo managed to grow pre-tax profits slightly by three per cent year over year to $405m. This meant margins increased by more than half a point, from 4.6 to 5.2 per cent.

Lenovo claims that its second quarter marked its 14th consecutive quarter of retaining the number one spot in worldwide PC market share, with a 21.5 per cent slice.

The firm has announced proposed plans to invest in its PC business through merging with Fujitsu. The deal would see Lenovo taking on board Fujitsu's sales, customer support and R&D capabilities. The firms will cooperate in designing and manufacturing PCs but Lenovo claims Fujitsu will continue to offer its own branded PCs and after-sales support through the deal.

Although the deal has not been confirmed, Lenovo said it "will continue their discussion in pursuit of a mutually beneficial collaboration".

Lenovo's Data Centre Group (DCG) which includes servers, storage, software and services, posted $1.1bn in sales, an eight per cent decrease year-over-year. The remaining Mobile Business Group (MBG) which comprises Motorola products and Lenovo branded phones, saw sales dwindle by 12 per cent year over year and posted a $156m pre-tax loss.

In a filing on the Hong Kong Stock Exchange, Lenovo insisted that it has a "focused execution plan" to grow its server business.

"We are strengthening our field capabilities and channel engagement, investing in training and overhauling our sales structure to better engage with our customers," the filing read. "We are also forging new industry partnerships and building next-generation IT to improve our competitiveness, as we have shown in our hyper scale business."

From a geographical perspective, EMEA sales plummeted by 14 per cent year over year and made a pre-tax loss of $65m. Lenovo said EMEA's poor performance was down to a decline in PC and smartphone shipments.

"The group focused on actions in clearing channel inventory in EMEA, thus its PC unit shipments were subdued and declined by five per cent year-on-year, against a market decline of four per cent year on year," the firm said in the filing.

"Smartphone shipments were down year-on-year largely due to product transitions but saw improvement quarter-by-quarter driven by the effective transformation actions. The group continued its actions in enhancing its sales force and investment in product portfolio in its datacentre business to pursue better growth over time."

Lenovo's Americas business segment saw sales shrink by seven per cent year over year to $3.4bn, but made a $20m pre-tax profit compared to a $73m loss posted last year. Its native Chinese market posted pre-tax profits of $158m on sales of $3.2bn, while its APAC sales declined by 17 per cent to $1.9bn, with pre-tax profits drooping to $2m.

Lenovo's CEO Yang Yuanqing, said: "Market conditions remained challenging but we delivered solid results. Our PCSD business maintained leadership and strong profitability, our mobile business had good quarter-to-quarter volume growth and margin improvement, and our Datacentre business is actively addressing its challenges."

The firm has added new executives to its team. Kirk Skaugen has taken over from Gerry Smith as president of the Data Centre Group after holding a post at Intel as senior vice president of client computing, datacentre and connected systems. Smith has subsequently been appointed as chief operating officer of the firm's PC and smart devices division.

Laura Quatela has taken a position as chief legal officer, joining from Alcatel-Lucent where she was vice president of intellectual property. Lastly, Youg Rui has been appointed as chief technology officer after a stint as deputy managing director at Microsoft Research Asia.