Lenovo Sales Flat, Pledges Supply Chain Improvements

The Raleigh, N.C.-based company, reporting its earnings from Hong Kong in a presentation that was webcast, suffered from an inability to deliver products quickly enough -- an issue CEO William Amelio said was being corrected.

"While we are making progress, there's a ton of work we need to do," Amelio said. "We have great innovations our customers want to buy and pay for. We get frustrated because we're not able to deliver on the demand because of some of the stubborn supply problems we have in place."

Overall, Lenovo reported revenue of $3.7 billion for its quarter, almost flat when compared with the $3.65 billion for the same quarter a year earlier. Lenovo's profit attributable to shareholders was $38 million, compared with $45 million for the year-ago period.

"It was not an easy quarter," said Mary Ma, Lenovo's chief financial officer, during its earnings presentation. "We experienced increased competitive pressure with depressed margins."

Lenovo's worldwide market share grew during the quarter, from 7.7 percent to 7.8 percent. A lot of the company's strength remains in China, where much of its operations are located and where Lenovo maintains its deepest presence and corporate heritage.

Amelio told analysts that the company would work to drive worldwide supply chain improvements over the next 18 months, including further rollout of an SAP system, a reduction in the number of product models and SKUs in Lenovo's lineup, and "revamping our design process as well to make sure our reliance on sole source components is a lot less."

It was also the first quarter when Lenovo was able to make an apples-to-apples comparison to its financial performance from a year ago, with the combined operations of the former IBM PC Co. And it did so during a quarter when pressure in the U.S. market increased, and Lenovo's revenue in the market decreased. Amelio said Lenovo was about to be more competitive in the region, telling analysts that this "is the quarter where we're going after the Americas' market."

Lenovo executives said they continued to make strides in boosting its brand recognition outside of China, pointing to its recent marketing and partnership deal with the National Basketball Association as well as its corporate sponsorship of the 2008 Olympics in Beijing. They did not, though, provide any indication of the company's plans for continued use of the IBM brand on the product lines it acquired from the company last year. Lenovo has the right to use the IBM logo on some products for up to five years following the close of its deal to buy the former IBM PC Co.

Additionally, Amelio said:

*The company was experiencing only typical component supply issues from its vendors, even in the face of a global recall of millions of Sony batteries and complaints of processor shortages in some areas;

*Lenovo would not be affected dramatically during the current quarter as the market awaits the launch of the Microsoft Vista operating system in early 2007. Amelio said the company's broadest markets are in the commercial space which traditionally migrates more slowly to new operating systems;

*The PC maker would largely stay out of the market for sub-$300 desktops, noting "our strategy is to not dive down into the lowest price bands."

Lenovo Chairman Yang Yuanqing told analysts during the financial presentation that the company's directors continue to have confidence in the management team while it continues to undergo a change from a largely China-based business to a worldwide PC leader.

"We would like to remind our investors that transformation takes time," the chairman said. "I hope you can remain patient with our management team. . . The board will continue to fully support management, and we sincerely hope investors can do the same."