CELLPHONES: Lenovo’s Motorola Flagship Sinking Fast
Bottom line: Lenovo’s attempt to make Motorola the flagship for its smartphone business looks set to fizzle, in a major setback for the company’s drive into mobile devices.
I’ve predicted gloom and doom before for PC giant Lenovo (HKEx: 992), China’s first truly global high-tech brand, and each time the company has proven me wrong. But Lenovo’s latest quarterly financial report really does look like cause for concern once more, showing results that can only be described as terrible. Anchoring the misery was a huge sales plunge for its recently acquired Motorola brand, which was meant to become a cornerstone for Lenovo’s emerging smartphone business.
In some ways this particular cycle looks like deja vu, since Lenovo followed a similar pattern when it burst onto the global stage a decade ago with its landmark purchase of IBM’s (NYSE: IBM) PC business. That acquisition also later created major headaches for Lenovo, and resulted in a massive restructuring that ultimately laid the groundwork for the company to become the world’s leading PC brand.
But this latest cases with Motorola is different in one key way. IBM’s PC business was still in good condition when Lenovo acquired it and was reportedly making small profits, and the IBM brand was still widely respected. By comparison, the Motorola name was well past its heyday when Lenovo acquired it last year from Google (Nasdaq: GOOG), and was probably losing big money. Thus Lenovo’s decision to use the brand as its flagship for the high-end smartphone space always looked problematic.
Lenovo’s latest quarterly results can probably best be described as worrisome, with the company posting a 51 percent profit plunge for its fiscal first quarter through June. (company announcement; English article; Chinese article) Revenue growth was also anemic, up just 3 percent to $10.7 billion — well short of market forecasts for $11.3 billion.
But all the attention was focused on Motorola, which turned in a shockingly bad performance after Lenovo’s purchase of the brand for $2.9 billion last year. Sales of Motorola brand smartphones slide 31 percent in the quarter to 5.9 million handsets. The situation was particularly grim in Lenovo’s home China market, where it was hoping Motorola could differentiate it from an ultra-crowded field of homegrown competitors.
Big Job Cuts
The poor performance led to a $300 million loss for Lenovo’s mobile unit during the quarter, and prompted the company to say it will cut 3,200 non-manufacturing jobs, incurring a one-time cost of $600 million. Investors were clearly spooked by the gloomy performance, sparking a sell-off that saw Lenovo’s shares plunge 9.1 percent to levels not seen for 2 years.
That sell-off extended a slump that has seen Lenovo’s shares lose nearly half of their value since May, when it started becoming apparent that the company’s smartphone business wasn’t making any headway after the Motorola relaunch. Signs of trouble have been brewing for the last few months, including the replacement of Lenovo’s mobile chief in June due to the weak performance. (previous post)
Lenovo CEO Yang Yuanqing previously cited PC makers Hewlett-Packard and Dell as his main rivals, but began changing his tune more than a year ago by setting his sights on smartphone leaders Samsung (Seoul: 005930) and Apple (Nasdaq: AAPL). That shift acknowledged that traditional PCs were a dying business, and that the future would lie in a range of smaller, more mobile devices like smartphones and tablet PCs.
Such a shift certainly seemed prudent, but Lenovo’s failure to make a name for itself with its own-brand smartphones and now with Motorola certainly don’t bode well for the company. Lenovo’s own-brand smartphones sell well in China due to their low prices, but have almost no customer loyalty. Motorola was supposed to address that problem. But these latest figures show that even that brand looks tired and well past its prime, and is unlikely to become the flagship Lenovo was hoping for.
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