Lenovo Group Ltd. (LNVGY, Financial), a $39 billion global Fortune 500 company and the world’s leading PC maker, announced a 31% year-over-year growth in revenue in the company’s Q3 2015 results. The revenue surged from $10.78 billion in the prior-year quarter to $14.1 billion, due to the $2.91 billion acquisition of Motorola (MSI, Financial) Mobility that led to a near doubling of Lenovo’s sales in the mobile segment.
The company reported a massive 109% jump to $3.39 billion in overall mobile sales in the third quarter of fiscal 2015. However, net profit was down 3% from $265 million in the prior year quarter to $253 million owing to integration expenses related to the acquisition of Motorola as well as the company’s $2.1 billion acquisition of IBM’s (IBM, Financial) low-end System x server unit.
Motorola Acquisition Pays Off
While Lenovo logged an increase of 54% year-over-year in gross profit for the third fiscal quarter to $2.1 billion, with a 14.9% gross margin, operating profit decreased 3% year-over-year to $325 million, resulting in basic earnings per share for the quarter of $2.32. The company reported net cash reserves of $1.3 billion at the end of the quarter.
The Q3 result, which takes into account two months of Motorola’s performance, reports a historic single quarter sales of over 10 million mobile handsets, up 18% year-over-year. The sales contributed $1.9 billion to the overall revenue of $3.4 billion generated by Lenovo’s Mobile Business Group that comprises Lenovo-branded mobile phones, TVs and Android Tablets apart from products from the Motorola stable.
The Motorola acquisition is expected to set Lenovo apart from rivals Huawei Technologies Co Ltd and Xiaomi Inc in the race to become the third largest global manufacturer of smartphones behind Samsung Electronics Co Ltd (SSNLF, Financial) and Apple Inc. (AAPL, Financial). Combined shipments of Lenovo and Motorola-branded devices contributed towards a 6.6% global market share for the company, up 78% year-over-year. In the tablet market alone, Lenovo saw its market share grow to 4.8%, up 9% year-over-year.
Although Xiaomi has overtaken Lenovo in the Chinese market, the company has not yet made its mark in the global scene. While Lenovo plans to re-enter China with offerings from the Motorola stable that would be primarily distributed online, the company no longer relies on the Chinese marketplace to drive sales. Having entered 67 nations in the past couple of years, 60% of Lenovo’s mobile phone volumes are now generated from global markets other than China.
Robust Sales Continue to Boost PC, Server Segments
Lenovo also continued consolidating its hold on the PC market, piping Hewlett-Packard Co. (HPQ, Financial) to the top post with a record 20% market share during Q3 2015 with around $9.15 billion in sales. While global PC shipments across the broader industry grew by just 1% in the third quarter, Lenovo logged in a 7.5% increase, with a particularly strong growth in Eastern Europe. With the company shipping 16 million PCs in the third quarter alone, a growth of 4.9% over the prior-year quarter, Lenovo logged in a record high of $494 million in pre-tax income. The quarter also marked a historic milestone for the company as Lenovo sold its 100 millionth ThinkPad laptop PC.
In the enterprise segment, combined shipments of the Lenovo ThinkServer and the newly acquired System x helped garner a 10.4% share for the company in the global server market, catapulting Lenovo to the third position behind Hewlett-Packard and Dell Inc (DELL, Financial). Sales of the System x contributed to around $989 million of the overall $1.2 billion sales in the sever segment.
Final Thoughts
With more diversified business segments that boast a better product range as well as geographical spread, Lenovo is no longer dependent solely on PC products or the Chinese market to drive sales. The company has developed the scale, brand assets, distribution and IP portfolio to compete on a global platform and challenge the top two players. Furthermore, as smartphone trends move from mature to emerging markets and from premium to mainstream, Lenovo is best placed to capture the upcoming growth waves.
Consensus estimates drawn by experts predict a steady climb in the company’s earnings per share through FY 2015 to 2016, as Lenovo grabs more market share in the mobile devices space. Consequently, despite the market's pessimism regarding PCs, the Lenovo stock currently looks too good for investors to ignore.
