Profits Blow Past Expectations
HONG KONG, Nov 10 (Reuters) - A return to profitability in mature markets helped Lenovo (HK:0992) beat expectations to post its best profit growth in a year, and it may follow rivals Dell (NASDAQ:DELL) and HP (NYSE:HPQ) in using M&A to fuel growth.
The world's No. 4 PC brand is looking for merger and acquisition opportunities in the sector, Chief Financial Officer Wong Wai Ming said, but declined to give details.
"We will be looking for opportunities that will relate to our core business, which is the PC," Wong said on a conference call. "We keep on looking at that, but it's difficult to give you any specifics now."
Dell and HP have both been active in the M&A space in their push to look for new growth areas, most recently engaging in a $2.4 billion bidding battle with each other for high-end storage maker 3PAR.
By comparison, Asian PC brands such as Lenovo have been relatively quiet in the space despite its $2.5 billion dollar warchest.
PC companies have increasingly been looking to mobile devices and IT services to diversify away from the heavily commoditised personal computer, where net margins can fall to the low single digits for brands such as Acer (TW:2353).
Lenovo had seen the biggest improvement among the top PC brands in the third quarter of this year, with shipments up 33 percent during those three months, according to research firm IDC.
This was better than rivals Hewlett-Packard, Acer and Dell, and also about three times the speed of the overall market's 11 percent growth.
"Whatever slowdown in Chinese growth can be offset by improved corporate demand," said Steven Zhang, an analyst at DBS Vickers in Hong Kong. "Equipment like enterprise servers usually have higher profit margins and will help the company overall."
The PC brand's earnings also top off a string of better-than-expected earnings from technology peers such as Microsoft (NASDAQ:MSFT) and Google (NASDAQ:GOOG), pointing to continued strength in the sector.
"PC demand growth in China will likely be moderate given the high comparison base," Lenovo said in a statement. "Lenovo remains cautiously optimistic that the worldwide PC market could continue the growth trend shown in the last several quarters."
Lenovo posted a net profit of $76.6 million in its fiscal second quarter through September, up from the $53.1 million recorded a year ago, according to Reuters calculations based on data supplied to the Hong Kong stock exchange.
That also beat market expectations for a $66.75 million net profit, according to a poll by Thomson Reuters I/B/E/S.
China continued to make up the largest portion of Lenovo's sales, accounting for 47 percent of its total revenue in the second quarter, down from 48.7 percent in the April-June quarter.
Its mature markets business, much of which it inherited from IBM (NYSE:IBM), returned to profit for the first time since the global financial crisis with shipments growing 43.8 percent and making up for about a third of its total sales.
Operating profit margin, a key indicator for profitability in the sector, clocked in at 1.9 percent, better than the 1.58 percent it recorded in the April-June quarter.
Lenovo announced its results after the Hong Kong stock market closed on Wednesday. Its shares are up about 10 percent so far this year, lagging a 13 percent advance on the benchmark Hang Seng Index .HSI. (Editing by Muralikumar Anantharaman))