Lenovo's Q3 Earnings Show Growth Amid Massive Change

Lenovo beat Wall Street estimates for its fiscal third-quarter earnings, but questions remain how the rising Chinese IT giant will handle integrating its acquisitions of the IBM server and Motorola handset businesses into its operations.

Lenovo posted pre-tax income -- before non-cash M&A-related accounting charges -- of $348 million, up 8 percent year over year. However, Lenovo took a hit of $74 million in non-operational, non-cash, M&A-related expenses tied to its Motorola and System x acquisitions, driving down overall income 15 percent to $274 million. Overall quarterly revenue was $14.1 billion, up 31 percent from the same period last year.

This was Lenovo's first reported earnings to reflect its $2.91 billion acquisition of Motorola Mobility and its $2.3 billion purchase of IBM’s x86 server business. Lenovo said PCs now represent 65 percent of revenue compared with last year's 81 percent. Lenovo said 24 percent of revenue is now generated from its mobile business and 9 percent from enterprise.

[Related: Lenovo: Red Dragon Rising]

’This quarter, we are at the starting line of a new race, but the results show that we have the right strategy, we made the right acquisitions and we executed well globally, so I am confident we are ready to win,’ said Yang Yuanqing, chairman and CEO of Lenovo, in a prepared statement.

Yang said the Motorola and IBM business were "achieving great momentum" within their first quarter of integration. He said Motorola has sold 10 million handsets and is preparing to enter the China market.

As for its acquired IBM business, Yang said, "We have a strong start with the System x integration, even while we further refine and develop it, leveraging Lenovo’s operational excellence and efficiency to be even more competitive."

Lenovo's strong revenue was chiefly credited to its PC business, which has seen significant market-share gains. According to Gartner, Lenovo is the global market share PC leader, owning 20 percent of the worldwide market with year-over-year growth of 5 percent. But investors worry whether the PC maker can sustain growth in a PC market that is experiencing contraction.

The mobile space, however, is a greater challenge for Lenovo. Investors have expressed concern over a lack of clear business strategy by Lenovo as to how it will turn around Motorola's unprofitable phone business. It was reported last week that Apple's blockbuster earnings were due largely to iPhone sales in China over the past year, which jumped from 9 percent to 17 percent share in the past year.

Analysts will be pressing Lenovo to address reports it is in talks to buy Marvell Technology Group, a company that makes storage, wired and wireless communication hardware and consumer semiconductors. Lenovo also will face questions about its strategy to attract younger Chinese consumers with plans for the introduction of an online electronics brand, Shenqi, expected later this year.

PUBLISHED FEB. 2, 2015