Lenovo Group (992) Q2 2018 earnings summary

Executive summary

• Q2 FY2018 revenue was $11.8B, up 5% YoY and 17% QoQ; pre-tax income reached $35M, up $104M QoQ, while net income was $153M, flat YoY.

• Three-wave strategy advanced: PCSD remained profitable across geographies, while Data Center and Mobile losses narrowed and device-plus-cloud investments continued.

• Management expected continued QoQ profit improvement, while warning that component supply constraints and cost increases could weigh on second-half performance.

Financial highlights

• Revenue was $11.8B, up 5% YoY and 17% QoQ; gross profit rose 0.03% YoY and 18% QoQ, and gross margin was 13.7%, higher QoQ.

• Operating expenses increased 10% to $1.5B, reflecting higher smartphone launch marketing and comparison with a prior-year $206M property-disposal gain.

• Pre-tax income was $35M, improving $104M QoQ, mainly on PCSD profit improvement and narrower DCG and MBG losses.

• Net income was $153M versus a $34M net loss in Q1; operating cash flow improved to $364M from a $577M outflow in Q1.

Outlook and guidance

• Management expected continued QoQ profit improvement and said Q3 profitability in MBG and DCG would improve from Q2.

• PCSD momentum was expected to continue into the current quarter; component shortages and rising component costs remained manageable near term.

• DCG aimed to improve revenue and profit QoQ; mobile strategy prioritizes Latin America, mature-market expansion, and controlled investment in emerging markets.

• Management remained focused on sustainable profitable growth, despite fierce near-term competition and cost pressures.