Lenovo Group Ltd (聯想) reported a smaller-than-expected profit decline after PC demand showed signs of recovering from a bout of post-COVID-19 weakness.
The world’s largest PC maker reported a 54 percent fall in net income to US$249.2 million for the three months ended September, compared with analysts’ average estimate of US$224.9 million. Revenue was US$14.4 billion, matching the average projection.
It was the fifth straight decline in quarterly revenue and the fourth straight fall in net income, as an anticipated Chinese economic recovery fell short of expectations.
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Lenovo, HP Inc and Dell Technologies Inc are grappling with an industry downturn that emerged after the COVID-19 era, driven by rapid inflation and economic uncertainty around the globe.
However, that downward spiral slowed in the third quarter, research firm International Data Corp (IDC) said.
Lenovo, whose shipments fell 5 percent, managed to keep the top position, despite HP narrowing the gap, IDC said.
Shipments are “well on track” to begin coming back from the fourth quarter, which would help ease inventory and improve Lenovo’s margins, UOB Kay Hian analyst Johnny Yum wrote in a memo ahead of the earnings release.
“The new replacement cycle should start to kick in in 2024 with the upcoming Windows update,” Yum said.
Lenovo’s shares have gained almost 50 percent this year, driven by anticipation of demand for artificial training (AI) training servers and data center construction in China.
Longer term, the US has expanded restrictions on chip exports to its political rival, a move that could hamstring AI development and affect Lenovo’s server business.
The Chinese company buys advanced processors from US chip suppliers like Advanced Micro Devices Inc to Nvidia Corp for its consumer and enterprise products.
Senior Lenovo executives reassured analysts in a call last month that the company was working with suppliers to determine which products were subject to the rule, Citigroup analyst Carrie Liu wrote.
Lenovo’s net income could fall as much as 5 percent between fiscal 2024 and 2026 if US curbs hit its server unit in China, Goldman Sachs analysts Verena Jeng and Allen Chang estimated ahead of the earnings release.
The Infrastructure Solutions Group accounted for less than 15 percent of the company’s sales last fiscal year, but is more profitable than consumer electronics, such as PCs and smartphones.
“Lenovo’s diversified customer base could support the company’s AI server customer base diversification, managing the negative impact,” Jeng and Chang said.
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