Lenovo posts profit fall in fiscal Q3

Lenovo Group, the world's biggest personal computer maker by shipments, posted on Tuesday a drop in its fiscal third quarter net income, a result caused in part by its completion of the acquisition of unprofitable handset maker Motorola Mobility.

In the quarter ending December 31, 2014, the company recorded a net income of $253 million, a 5 percent dip from $265 million a year earlier, while its revenue rose 31 percent year-on-year, reaching $14.1 billion, according to a financial report filed to the Hong Kong bourse on Tuesday.

The profit, though it fell from the same period in 2013, still beat Bloomberg analysts' estimate of $182.4 million.

Lenovo attributed the profit fall mainly to two major acquisitions completed during the quarter. Its net income before non-cash acquisition-related accounting charges was $327 million, up 23 percent year-on-year, according to the filing.

In October 2014, the group closed its $2.91 billion purchase of Motorola Mobility from US tech giant Google Inc and a $2.1 billion takeover of International Business Machines Corp's low-end server unit.

"They [the two recently acquired businesses] are definitely becoming our growth engines," Yang Yuanqing, Lenovo's CEO, was quoted as saying in a press release posted on the group website.

The group said it sold more than 10 million Motorola phones worldwide during the fiscal quarter, achieving record shipments.

However, Lenovo's mobile business, including Motorola, recorded a pretax loss of $89 million during the three months through December, much more than the loss of $2 million over the same period in the previous year.

The increased losses in the mobile unit indicate that Motorola, targeting mid- and high-end customers, has yet to be able to offset the losses generated by Lenovo's previous focus on the low-priced segment to snatch market share, said Zhang Yi, CEO of Guangzhou-based iiMedia Research.

"The mid- and high-end segments are a crucial turf for Chinese smartphone makers to raise their profit margin," Zhang told the Global Times Tuesday.

Huawei appears to have already made a dent in the segments with its Ascend Mate series. Xiaomi Inc, famous for its low-budget phones, also jumped into the higher-level battlefields via its newly released flagship Mi Note, which the company claimed could be compared with Apple's devices.

Against the backdrop, Motorola introduced three flagship smartphone models into the Chinese mainland market on January 26, to help Lenovo further woo mid- and high-end phone users.

Despite the efforts, Zhang is concerned that it may be hard for Motorola's newly released smartphones to help Lenovo's money-losing mobile unit return to profitability immediately.

The group should further enhance the brand value via effective marketing so as to undercut foreign rival Samsung in China's fiercely competitive smartphone market, Zhang noted.

By contrast, Li Yi, secretary-general of the China Mobile Internet Industry Alliance, showed more confidence in Motorola's future.

"I think that the Motorola brand will bring profit to Lenovo, given Lenovo's mature distribution channel in China and Motorola's powerful selling network abroad. Motorola's patent portfolio can also facilitate the Chinese phone maker's progress in the overseas market," Li told the Global Times Tuesday.

The group expects Motorola to contribute over 40 percent of its smartphone shipments in the following fiscal year, the Wall Street Journal reported in early January, citing Liu Jun, president of Lenovo's mobile business group.

Lenovo's PC unit continued to be the main contributor to the company's total revenue, although the proportion in the quarter fell slightly to 65 percent from 81 percent of the previous fiscal quarter, while mobile businesses' share of the total revenue during the third quarter increased to 24 percent from 13 percent in second quarter.

As the world PC market is becoming more saturated, Lenovo is pumping up efforts to seek new potential growth in other segments such as smartphones, said Li.

Apart from launching new hardware devices, operations like gaming and clouding also appear to be areas Lenovo wants to bank on. In April 2014, Lenovo announced the launch of its gaming mobile app marketplace for Android smartphones.