Chinese multinational technology company Lenovo Group (HKG:0992) reported a disappointing 24% decrease in revenue for the period of April to June, underlining the impact of a sustained global downturn in the demand for personal computers. As the world’s leading PC manufacturer, Lenovo has faced a challenging trend of declining sales across four consecutive quarters. This outcome follows a 14% decline in annual profit for the fiscal year concluding in March, marking its initial annual contraction since 2019.
The revenue figure for the April-June quarter settled at $12.9 billion, falling short of the consensus of seven analysts whose estimates averaged $13.84 billion, as compiled by Refinitiv. In response to this announcement, Lenovo’s Hong Kong-listed shares witnessed an initial drop of up to 6% before partially recovering losses to settle at a 2.9% decline, concurrently with the broader benchmark index (.HSI) posting a 0.9% gain.
The advent of the COVID-19 pandemic had initially driven a notable surge in electronics sales, as both consumers and businesses adapted to remote work requirements by either stocking up on devices or upgrading their existing setups. Nevertheless, the momentum of revenue growth began to wane as demand receded last year, influenced by mounting interest rates and escalating inflation.
The trajectory of the recovery remains lackluster, evidenced by substantial unsold inventory held by various retailers. This factor has prompted PC manufacturers and their suppliers, including chipmakers, to recalibrate production volumes and pricing strategies. Lenovo responded to this scenario by stating, “The group’s PC business is stabilizing and well-positioned for a year-on-year recovery in the later part of 2023.”
According to Canalys, a prominent market research firm, global PC shipments saw a decline of 12% during the second quarter of 2023. This data signifies a significant improvement compared to the preceding two quarters, which had witnessed a plunge exceeding 30%. Notably, Lenovo’s sales faced a more pronounced contraction in China compared to other markets, with quarterly revenue down by 29% in comparison to the same period in the previous year. China’s economic resurgence after lifting COVID-19 restrictions last year has been slower than anticipated.
However, Yang Yuanqing, Lenovo’s CEO, expressed his enduring confidence in China’s underlying economic fundamentals over the long term. He also expressed optimism about the government’s current initiatives to stabilize the market and boost consumption. Regarding financial performance, the net income attributed to shareholders experienced a significant 66% decline, reaching $177 million, which contrasts with analysts’ expectations of $212.49 million.
Lenovo’s strategic efforts to enhance profit margins encompass diversification beyond its core PC business. Initiatives include expanding into areas such as server systems and information technology services. However, the device business segment, incorporating PCs, smartphones, and tablets, continues to represent a substantial portion of the overall revenue, accounting for nearly four-fifths of the group’s total.
In an unforeseen development, Lenovo’s infrastructure solutions business, responsible for server and equipment sales, witnessed an 8% decline in revenue during the quarter—a noteworthy shift from the consistent growth observed in preceding quarters. Yang Yuanqing attributed this decline partially to the persistent shortage of AI chips, which has constrained the supply of AI servers. He highlighted that cloud service providers are progressively transitioning from traditional computers to AI servers, thereby straining the collection of graphics processing units (GPUs), an essential component for AI operations.
Featured Image: Unsplash @ Shawn Rain
