Friday, 6 November 2009

Lenovo back in the black but little cause for celebration

(By Philip Carnelley, 6 Nov 09, 09:30) This morning’s media report that Lenovo is back in the black. George O’Connor at Panmure Gordon also pointed out this morning that Steve Ballmer claims that Windows 7 sales are “fantastic,” and that NPD Group says that “unit sales of boxed copies of Windows 7 in U.S. stores were 234% higher during the software's first few days than they were for Windows Vista.” Return to the good old days?

Sadly not. The secular trends we have noted are still in place. Lenovo’s recovery is the result of cost cutting and growth in the still developing China market. While net income for the quarter rose 130% – after three quarters of losses – sales fell 5.2% year on year. Lenovo has been overtaken by Acer principally because it was late to move to lower cost models. As we have commented many times, Acer has benefited hugely from the rise in Netbooks. Its President said in London last month that it expected to pass Dell “very soon.” Meantime Lenovo says conditions remain challenging.

Earlier this year, I looked to replace my trusty 7-year old IBM Thinkpad with its up-to-date equivalent, as i really liked it, but the prices were just silly. An Apple MacBook was actually better value for money. Lenovo was over-reliant on the corporate market. But it doesn’t expect corporate replacements to kick in until the second half of next year. The turnaround in sales is due to its introduction of lower-end models: While sales were down 5%, shipments were up 28%. But that shift in sales mix means gross margins have fallen from 13% to 10%. To bring about the return to profit, the cost cuts must have been severe.

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