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TBR: Lenovo succeeding but must be leery of bigger vendors 7 July, 2008 With positive results in 1Q08 following a year of improvement, TBR believes Lenovo has weathered the challenges of integrating the larger IBM Personal Computer Division and is now a profitable and growing global PC vendor. TBR expects Lenovo to continue to grow and generate profits throughout 2008; yet, there are signs that the company is more vulnerable to economic downturns and competition than was apparent in recent quarters. Lenovo turned in a fourth consecutive quarter of double-digit revenue growth in 1Q08, increasing sales 12 percent year-to-year. In the seasonally weak first quarter, the company's 1.8 percent operating margin was lower than in the three previous quarters, but still 40 basis points higher than in 1Q07. However, the 1Q08 results failed to perpetuate the positive trend that characterized 2007. Lenovo's year-to-year revenue growth was smaller than the increases in the previous three quarters, and though operating income was 44 percent higher than in 1Q07, it was lower than the remaining quarters of 2007. The slight decline in performance was caused by seasonality, the slowing economy in the United States, and Lenovo's investment in consumer PCs and EMEA expansion. The first calendar quarter is Lenovo's weakest, primarily because of the budgetary cycle for institutional sales in China, but the company's sales are lower in the first calendar quarter across all regions. Americas revenue increased only 3 percent year-to-year, and TBR believes U.S. revenue decreased, offset by growth in Canada and Latin America. TBR believes Lenovo performed well in 1Q08, and demonstrated once again that it is an effective contender in the global PC market. The company also faces some disadvantages: it is smaller than its principle rivals, has smaller economic reserves and operates at a thin margin. TBR believes Lenovo has demonstrated strategic and operational strengths, and will continue to gain share in the global market, but that it could be hurt by global economic changes or increasingly strong competition. www.tbri.com
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