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5 Key Takeaways From Lenovo’s Latest Earnings

Lenovo Group Ltd (SEHK: 992) develops, manufactures and markets technology products such as PCs, servers, smart televisions, and tablets. The company recently reported mixed quarterly earnings for the three months ended September where profit beat estimates but the top line missed.

For Lenovo’s latest quarter, sales grew 1% to US$13.52 billion while net income jumped 20% year-on-year to US$202 million.

After not reacting much to the earnings release, shares of Lenovo have subsequently declined. Here are five key takeaways for investors.

Resilient PC business

Lenovo’s PC business is pretty resilient. Despite the trade tensions between China and the US, its PC sales rose 7.1% year-on-year to a record shipment volume of 17.3 million units for the quarter.

Even better, Lenovo’s premium segment recorded double-digit volume growth year-on-year. As incomes in China rise, the trend of buying more premium items could help Lenovo’s margins in the future.

Lenovo doesn’t see the trade tensions being too big of a problem in the near future. The company said at its results presentation that:

“Although global trade and geo-political uncertainties persist, they continue to have a negligible material impact on the financial performance of the company…

Going forward, Lenovo is well-positioned to manage complex and dynamic market conditions, while continuing to deliver sustainable long-term results”.

Largest PC maker worldwide

As a result of its PC sales growth, Lenovo is now the largest PC maker in the world with 24.4% market share of the global PC market.

HP Inc. and Dell Technologies were second and third, respectively, with 23.8% and 17.1% market share. With its leadership position, Lenovo has greater economies of scale and more bargaining power with suppliers.

More near-term growth due to Windows 10 upgrade cycle

Lenovo’s 7.1% growth for the September quarter was better than the overall global PC shipment market growth of around 3% for the same time period.

Analysts believe there could be more PC growth ahead due to Microsoft stating that it will stop releasing updates for Windows 7 on 14 January, 2020.

Lenovo’s data centre division still lagging

Despite secular growth in the cloud and Lenovo purchasing IBM’s x86 data centre business in 2014, Lenovo has struggled in the datacenter market as its new products fail to match competitor offerings.

The second quarter was no exception as Lenovo’s data centre group sales decreased 13.8% year-on-year due to lower prices and softness in demand for hyperscale products. Although revenue is shrinking, the good news is that Lenovo’s data centre division losses are narrowing. The second quarter was the ninth consecutive year-on-year quarter of narrower losses.

Software and services growth

For the quarter, Lenovo’s software and services sales rose 35% year-on-year to US$883 million. Lenovo believes that the division will surpass US$1 billion per quarter “very soon”.

Foolish conclusion

Overall, Lenovo’s quarterly results weren’t too surprising given the normal variations quarter to quarter.

Given that Lenovo trades at 12.5x earnings and HP Inc trades for 7.4x earnings, Lenovo shares will likely need the Chinese economy to rebound in order to rally substantially. The PC market is mature and the data centre business will take time to turn around.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Jay Yao doesn’t own shares in any companies mentioned.