Lenovo mulls layoffs amid PC downturn but expects late 2023 recovery

Its CEO believes shipments will stabilise at a higher than pre-pandemic level as early as H2 2023

Lenovo is contemplating job cuts as part of a roughly $115m cost-cutting initiative in response to a precipitous plunge in sales and profits for the IT giant's PC business, among other market shifts.

The Hong Kong-based company disclosed the plan on Friday in its third-quarter earnings call where CEO Yang Yuanqing said a "severe downturn" in the PC and smartphone markets contributed to Lenovo's revenue declining 24 per cent year over year to $15.3bn for the period, which ended in December.

The vendor's net income took an even deeper dive of 32 per cent to $437m.

Lenovo had about 75,000 employees at the end of its 2022 fiscal year.

The company's stock price was down three per cent on Friday.

Yang noted that while Lenovo is experiencing the same sales crunch felt by competitors, he believes the PC market "might stabilise sooner than many expect."

The expectation is that PC sales will end up growing at a faster rate compared to 2019, before the Covid-19 pandemic prompted an unprecedented IT spending spree and historical shortages in devices and components.

"While the PC market still needs some time to digest the inventory to a healthier level, we believe total shipments are likely to stabilise at a higher than pre-pandemic level as early as the second half of this year," Yang said.

However, Lenovo CFO Wong Wai Ming said the company is still facing a "confluence of global economic challenges and dynamic shifts in market demand."

These factors, combined with the IT giant's hope of doubling its net margin in the next few years, are pushing the company to invest in "high-margin growth engines" and "reduce runway operational expenses by approximately $115m," he added.

This cost-cutting plan includes "workforce adjustment where necessary and appropriate" Wong said.

How did Lenovo's businesses perform in Q3?

The Intelligent Devices Group, which includes Lenovo's PCs and smart devices, saw revenue decline 34.2 per cent year over year to $11.8bn and operating profit drop 37.3 per cent to $848m in Q3.

Despite this, the company said it continued to lead the industry in market share, in profitability and in gross margin, which was 7.3 per cent for the period.

Lenovo's two other business units, on the other hand, grew in the double digits and helped contribute to non-PC sales representing more than 40 per cent of total revenue in the third quarter, Yang said.

Revenue grew 48 per cent year over year to a record high of $2.9bn for the Infrastructure Solutions Group, which includes Lenovo's servers.

Operating profit more than doubled to an all-time high of $43m. The company said server growth reached a new record of 35 per cent while storage growth more than triple and software growth grew by 52 per cent, which were also all-time highs.

The Solutions and Services Group, which includes Lenovo's TruScale as-a-service offering, grew 23 per cent year over year to $1.8bn while operating profit increased 12 per cent to $370m in Q3.

Managed services sales nearly doubled from the same period last year, driven by TruScale and leading non-hardware solutions to account for a record 53 per cent of total group revenue.

"Our diversified growth engines are firing up. Our operational resilience is supporting the results. Our healthy liquidity is ensuring the sum needs of the company. And our investment in new IP is building the next wave of our competitive advantages," Yang said.

"Because of this, we are confident to deliver sustainable growth and improve profitability," he added.