UPDATE 3-Lenovo Q2 slumps on weak tech spend; shares dive

Fri Nov 7, 2008 5:37am EST

* Q2 net profit slumps 78 pct on slower shipments

* outlook gloomy as business, consumers scrimp on gadgets

* Shares plunge by a fifth in strong market (Adds details, executive comments, background)

By Joseph Chaney

HONG KONG, Nov 7 (Reuters) - Lenovo Group Ltd (0992.HK), the world's No.4 PC maker, posted a sharp drop in quarterly profit and warned of tough conditions as consumers and businesses cut back on technology spending, sending its stock down 20 percent.

Margins at China's largest maker of personal computers, which competes with Hewlett-Packard (HPQ.N), Dell Inc DELL.O and Asian rival Acer (2353.TW), slid as intense competition in a global downturn took its toll on overseas business.

"The majority of our customers are large enterprise customers who were hard hit by the global economic crisis," Lenovo Chairman Yang Yuanqing told reporters.

"However, on the other hand, and even more critically, we had our own execution issues," he added, noting the roll-out of new products and control of gross margin fell short of expectations.

Last month, market researcher IDC said July-September personal computer shipments in Asia excluding Japan grew by a smaller-than-expected 12 percent to 20.2 million units, while Gartner Inc, the world's biggest technology research company, has sharply cut its forecast for global technology spending next year. [ID:nN13384635]

Dell has said it is hard to say whether the global PC market will improve heading into the year-end and has cut costs aggressively.

"Companies are collapsing and there's no growth seen in the desktop business," said Kevin Yim, analyst at Dao Heng Securities. "Their operating margin was close to break-even last quarter and there's a big chance Lenovo will make a loss in the third and fourth quarter."

Lenovo's July-September fiscal second-quarter net profit dropped to $23.44 million from $105.26 million a year ago, way below an average forecast for $91.80 million, according to five analysts polled by Reuters Estimates.

Lenovo derived $1.9 billion of its $4.3 billion in quarterly sales from greater China, and $1.1 billion from the Americas, against nearly $1.2 billion last year. In Europe, Middle East and Africa, sales edged up 0.6 percent to $890 million.

Gross margin slid to 12.6 percent from 15 percent.

Six-month sales in the Americas slid to $2.16 billion from $2.33 billion, and sales in Asia Pacific, excluding greater China, fell to roughly $963.5 million from $1.04 billion.

For a full statement, please click here 1107099.pdf

A TOUGH 2009

Like its global rivals, Lenovo faces a tough 2009 as consumers and businesses cut back on technology spending amid an economic slowdown.

Acer, the world's No.3 PC vendor, said last month its quarterly net profit rose just 4 percent, lagging analyst estimates. [ID:nTP328035]

The United States has been Lenovo's second-largest revenue contributor since it bought IBM's PC unit for $1.25 billion in 2005. But its performance in the Americas, where it was barely profitable in the first quarter, was hit by sluggish consumer spending.

"Slowing commercial demand and aggressive pricing impacted profitability," Lenovo said in a statement.

Shares in Lenovo dived 36 percent in July-September, underperforming an 18.5 percent drop on the broader market .HSI. The stock closed down 12 percent on Friday at HK$2.22.

Armed with a strong balance sheet, Lenovo has said it is considering acquisitions after Acer beat it in a race to buy Europe's Packard Bell last year.

In the past two months, sources at Japan's Fujitsu Ltd (6702.T) said the company was in talks aimed at selling Fujitsu-Siemens's PC division to Lenovo, but keeping the server business. Two sources have said talks are ongoing with Lenovo, with key issues centred on personnel cuts and negotiations with Fujitsu Siemens Computers' labour union.

Analysts, however, say a deal could hurt Lenovo if there is an additional downturn in global tech demand.

"As we have been cautious on Lenovo's outsized exposure to the corporate PC market, we believe a new major M&A would increase the downside risk," Goldman Sachs said in a preview. (Additional reporting by Joanne Chiu and Alison Leung; Editing by Anne Marie Roantree & Ian Geoghegan))

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