Lenovo Delivers Solid 2nd Quarter FY15-16 Operational Results

Restructuring completed, driving traction in Mobile and Enterprise; PC business is strong as ever

HONG KONG — (BUSINESS WIRE) — November 11, 2015 — Lenovo Group (HKSE: 0992) (PINK SHEETS: LNVGY):

  • Revenue was US$12.2 billion, up 16% year-over-year, up 23 percent in constant currency
  • Lenovo grew its PC market share for record high 21.2% share*
  • Lenovo is successfully executing its business realignment plan and is on track to deliver US$ 650 million in the second half of the year and US$ 1.35 billion annually
  • As announced in Q1 earnings report, Lenovo incurred US$599 million in restructuring costs and a US$324 million one-time charge to clear smartphone inventory in Q2
  • Run rate pre-tax income** was US$166 million, up 16% quarter-to-quarter; a strong operational performance
  • Hong Kong Financial Reporting Standards (HKFRS) pre-tax loss** of US$842 million driven by restructuring costs and one time charges
  • Basic loss per share of 6.43 US cents, or 49.84 HK cents

Lenovo Group (HKSE: 0992) (PINK SHEETS: LNVGY) today announced results for its second fiscal quarter ended September 30, 2015. Quarterly revenue was US$12.2 billion, a 16 percent year-over-year increase or 23 percent year-over-year in constant currency. Second quarter run rate pre-tax income**, which excludes restructuring costs, one time charges, and non-cash, M&A-related accounting charges, was US$166 million, up 16 percent quarter-to-quarter, while Lenovo’s official reported Hong Kong Financial Reporting Standards (HKFRS) pre-tax loss was US$842 million**. Second quarter net loss was US$714 million.

Lenovo’s second quarter run rate pre-tax income shows a strong operational performance. The official HKFRS losses were driven by the realignment plans Lenovo disclosed during its Q1 results, including worldwide expense reduction actions across all businesses, the integration of the System x Business, the organization and brand alignment of Motorola and the Lenovo Mobile Business Group and clearance of smartphone inventory. Going forward these actions are intended to drive meaningful run-rate cost savings of about $650 million in the second half of this year and about $1.35 billion on an annual basis. Lenovo’s cost structure, across all of its core businesses, is now among the most competitive in the industry. The company is in a position to invest in new areas, while aggressively attacking competition.

“With strong execution, Lenovo acted swiftly and decisively to address challenges, while still delivering better-than-previous-quarter results,” said Yuanqing Yang, Lenovo chairman and CEO. “Now, not only are we building a more competitive business model, but we are growing. In PC we hit record share with good profitability. In mobile, our strategy to shift our growth focus to outside of China continued to pay off, and we gained share and improved margin. The realignment of our organization and the restructuring of our cost structure will deliver results in the 2nd half of the year. In Enterprise, we reached an important milestone, growing revenue for the first time since our acquisition of System x. Digesting acquisitions and making transformations take time, but I am greatly encouraged by our strong results, and confident in both our near and long-term future.”

The Company’s gross profit for the second fiscal quarter increased 8 percent year-over-year to US$1.6 billion, while gross margin stood at 13 percent. Operating loss for the quarter was US$784 million. Basic loss per share for the second fiscal quarter was 6.43 US cents, or 49.84 HK cents. Net debt reserves as of September 30, 2015, totaled US$140 million. Lenovo’s Board of Directors declared an interim dividend of 6 HK cents per share, the same level as last year.

Business Group Overview***

In the PC Group, or PCG, which includes PCs and Windows tablets, Lenovo’s quarterly sales were US$8.1 billion, with pre-tax income of US$406 million, down 17 percent year-over-year with foreign exchange fluctuations hurting demand in EMEA and Brazil. Pre-tax income margin of 5 percent, was comparatively stable, declining 0.6 points year-over-year, showing Lenovo’s operational strengths.

Lenovo remained #1 for the tenth consecutive quarter with record high 21.2 percent market share, widening its lead over the #2 vendor. It shipped 15 million PCs in the quarter, with a 6.6 point premium to the overall market decline of 11.1 percent. In the worldwide consumer segment, Lenovo had record 19.7 percent market share. Lenovo saw record share in North America, at 13.3 percent; Asia Pacific, 19.3 percent; and Latin America at 15.3 percent; each outperforming the market by 24, 19, and 15 points, respectively. Lenovo’s goal is to achieve 30 percent worldwide PC market share, while maintaining strong profitability.

In the Mobile Business Group, or MBG, which includes products from Motorola, Lenovo-branded mobile phones, Android tablets and smart TVs, Lenovo quarterly sales were US$2.7 billion, up 104 percent year-over-year, due to the inclusion of revenues from Motorola. Motorola contributed US$1.4 billion to Lenovo’s MBG revenues. MBG’s total pre-tax loss was US$217 million, with a pre-tax loss margin of 8.1 percent.

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