Despite Lenovo Americas Growth, Partners See Weakness In PC, Server Demand

Lenovo Group Ltd. reported a fiscal first-quarter earnings nosedive, and partners said they have a ground-level view of the softening markets and competitive pressures the Chinese PC giant said are forcing it to cut costs and slash its workforce.

Lenovo Thursday reported a 51 percent earnings decline for its fiscal first quarter, which ended June 30, and the layoff of 3,200 nonmanufacturing employees, equal to about 5 percent of its total workforce, amid a softening global PC market and a struggle to digest large acquisitions.

In the Americas, Lenovo consolidated sales grew 46 percent year over year, to about $3.3 billion, accounting for nearly a third of the company's worldwide sales, the company said in its earnings release. It finished the quarter with 13 percent PC market share in the Americas and a 20 percent market share in PCs worldwide. PC shipments in the Americas were up 8.8 percent, but were down more than 7 percent overall.

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Still, Lou Giovanetti, co-founder of Waltham, Mass.-based Lenovo partner CPU Sales and Service, said that while CPU Sales sells a lot of Lenovo notebooks, revenue growth with Lenovo has been stuck around "a couple percent" a year.

"It's nothing we can say 'wow' about," Giovanetti said.

Giovanetti said Lenovo's channel operation is helpful and supportive, but the company is facing two distinct challenges: The market isn't "ready to accept Lenovo servers," and customers don't feel the need to buy PCs with the frequency they once did.

"The whole desktop arena is shrinking because people are mobile," Giovanetti said, "and machines are so powerful these days, there's no need to upgrade every two years. It's almost like we're slicing our own throat."

Last year, Lenovo acquired for $5 billion the Motorola smartphone business from Google and IBM's x86 server business.

The company said saturation in the Chinese smartphone market kept that business down during the quarter. And Giovanetti said, so far, Lenovo servers have been a tough sell.

CPU Sales is also a Dell and Hewlett-Packard partner, and Giovanetti said switching customers from one of those industry stalwarts to Lenovo has been a challenge both because customers "don't seem to be biting," and because Dell and HP compete aggressively on price.

"I don't think it's the product," Giovanetti said. "I think it's the environment."

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In a report issued Thursday, TBR Inc. analyst Krista Macomber notes that while Lenovo's x86 business, specifically its ThinkServer platform, has seen double-digit, year-over-year growth, its high-end System x line, also acquired from IBM, has been on the decline, sending the company scrambling to lower prices and spark innovation in hot markets like converged and hyper-converged infrastructure where competitors have a head start.

Lenovo has done a good job bringing that portfolio to its channel partners in order to expand routes to market, Macomber wrote, but the company's efforts "have been muted by the larger set of work required compared to peers to align its portfolio and brand with customers' IT transformation initiatives."

Joe Lore, director of sales at Sunnytech, a Woburn, Mass.-based Lenovo partner, said he has noticed a slowdown in Lenovo sales through its resellers. "There's some business, but it's not as robust as everybody would like," he told CRN.

At least some of the responsibility for the slowdown rests with resellers, Lore said.

"The products last seven or eight years," Lore said. "Some resellers have customers on a rotating, five-year cycle. It used to be three. If there was more of that, business would be better, but everybody's looking to save the dollar. They say, 'I can get by for another six months. I can get by for another year.' It's really up to the resellers and the factories to do a better job educating the consumer, the businesspeople that make the purchasing decisions as to why they should be buying newer products."

Lenovo reported a $105 million profit for the quarter compared to $214 million in the same period a year ago. Revenue was $10.7 billion, up 3 percent from a year ago.