Lenovo restructuring bites into profits

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Lenovo, the world’s third biggest personal computer maker, on Thursday said its profitability would not improve until 2007 as it continued to restructure the PC business it acquired from IBM last year.

It said challenges such as aggressive price competition in the global PC industry would weigh on performance, but stressed it was “on the right track” to achieve sustainable profit growth.

“We want our shareholders to be patient with us. Please give us time. We will see results of restructuring in three to five quarters,” said Yang Yuanqing, chairman.

Lenovo, which bought IBM’s PC unit for US$1.75bn last year, said in March it would spend US$100m to reform its international business, including cutting 5 per cent of its workforce.

The company is seeking to improve the competitiveness of its international business by cutting fixed costs and expanding its product portfolio to tap a wider market – the business it acquired from IBM was mainly focused on selling to big corporations.

In February it began shipping Lenovo-branded PCs outside China for the first time, in an effort to capture a bigger share of the lower-end market.

The operation is under pressure because of competition from larger rivals Dell and Hewlett-Packard. Lenovo has been losing market share.

“Although our acquired business has turned profitable in the last year, it is mostly due to synergies and savings. The business itself is still not very competitive,” said Mr Yang.

Lenovo on Thursday said it had booked US$70m of the restructuring cost in its fiscal fourth quarter ended March this year, resulting in a larger-than-expected quarterly loss of HK$903m (US$116m), compared with a profit of HK$365m in the previous quarter. Full-year net profit fell 85 per cent to HK$173m.

The weaker-than-expected results sent its shares in Hong Kong down 3.9 per cent to HK$2.45.

Including Thursday’s loss, Lenovo’s shares have fallen 31 per cent this year, underperforming the Hang Seng index.

Mary Ma, chief financial officer, said the company did not have plans for another restructuring this year, and the total cost would remain at $100m.

Lenovo said its Chinese business remained intact. PC shipments rose 31 per cent in the first three months of 2006, above the market average of 21 per cent.

Lenovo’s full-year turnover jumped 359 per cent to HK$103.6bn, and PC shipments grew 11 per cent.

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