Lenovo Group (992) Q3 2010 earnings summary

Executive summary

• Q3 PC shipments grew 42% YoY versus 17% market growth; worldwide share rose 1.6 points to a record ~9%.

• Returned to profitability for a second consecutive quarter, with improved profitability across all regions and a record-low 9.0% expense-to-revenue ratio.

• Growth was led by China, emerging markets and transactional sales; management will continue investing in consumer, emerging markets, R&D and mobile internet.

Financial highlights

• Q3 revenue was $4.8bn, up 33% YoY; gross profit was $531m, up 45% YoY.

• Operating profit was $99m; pre-tax income was reported at $94m, profit attributable to equity holders was $80m, and EPS was US$0.86 cents.

• Operating expenses fell to $431m from $457m YoY; expense savings totaled $247m over the first three quarters.

• Cash reserves were $3.0bn, bank borrowings $597m and net cash reserves $2.4bn at quarter-end.

Outlook and guidance

• Q4 YoY unit shipment growth was expected to be similar to Q3, despite normal seasonal softness.

• ASP was expected to remain relatively stable in Q4 versus Q3; management also anticipated industry ASP pressure moderating over time.

• Q4 seasonality and component supply constraints were expected to limit margin improvement; the expense-to-revenue ratio is typically higher sequentially in Q4.

• A corporate refresh cycle was expected to begin in H2 calendar 2010, supported by increased RFPs, product testing and stronger interest in Windows 7; activity was expected to build over 24–30 months.

• Continued investment in emerging markets, consumer business and mobile internet was planned to support long-term growth.