A year after spending almost $5 billion to buy IBM’s x86 server business and Motorola Mobility from Google, Lenovo’s bets are paying off.
This week, Lenovo reported third quarter revenues of $14.1 billion, a 31 percent jump over the same period in 2013. The revenue figure shows the impact of the acquisitions, which were part of a larger plan — called PC Plus by company executives — to become a leader in multiple computing markets.
In the previous quarter a year earlier, PCs accounted for 81 percent of Lenovo’s revenues compared to 65 percent in the most recent reported quarter. Another 24 percent of revenue came from the mobile business, and 9 percent from the enterprise business.
Also, Lenovo shipped more than 10 million Motorola smartphones in the quarter that ended Dec. 31, double what Motorola shipped the year before.
At the time Lenovo bought the server and smartphone businesses in 2014, the Chinese tech company already was the world’s largest PC maker, having surpassed Hewlett-Packard. Its aim was to gain ground in the server and smartphone markets.
Both deals closed last fall, and the quarterly financial earnings that executives announced this week were the first to include the two new businesses acquired from IBM and Google.
It was good news for the company. With the acquisitions, Lenovo immediately became the world’s third-largest vendor of both smartphones and servers, though some industry observers worried that the new businesses—particularly Motorola—would hurt the company financially, at least initially.
However, CEO Yang Yuanqing said that, “for the Motorola business, we are very satisfied with the progress,” according to the Wall Street Journal.
Yang later told the news organization that he expects that within a year, the smartphone business will account for 30 percent of the company’s revenues. Lenovo officials also said they expect the Motorola subsidiary to be profitable within four to six quarters after the close of the deal in October 2014.
With Motorola as a subsidiary, Lenovo reportedly also saw a sharp shift in where it’s selling smartphones. Before the acquisition, the company had sold 80 percent of its smartphones into the booming Chinese market. In the last quarter, only about 40 percent were sold in China, with the other 60 percent being sold outside of the country.
However, at the end of January, the Motorola brand was reintroduced into China as Lenovo looked to protect its share of the home market and compete with rivals from both inside of China—such as fast-growing Xiaomi—and outside, in the form of Apple and others. In a statement announcing the quarterly earnings, Lenovo officials noted that “fierce competition in the China mobile phone business was a drag on the performance of Lenovo-brand smartphones.”
In the Enterprise Business Group, the company saw x86 server sales hit $986 million, and is on track to be a $5 billion business for the company with better profit margins that the PC business in one year. Combined, the new System x business and Lenovo’s ThinkServer business grabbed 10.4 percent of the global server market in the quarter, making it number three behind HP and Dell. It’s also number one in China, Lenovo officials said.
Lenovo: Motorola, IBM x86 Server Deals Already Paying Off
The real test for Lenovo will be how well the company is able to bring these three businesses—PCs, servers and smartphones—together to form a more complete end-to-end solution for businesses, according to Rob Enderle, principal analyst with the Enderle Group. In a research note following a recent Lenovo meeting with analysts, Enderle noted that other OEMs that sell Intel-based PCs and servers has had difficulty creating solutions that blended the technologies together. That can be a problem for these vendors because if they can’t offer end-to-end solutions, cloud providers will fill the need, which could help sink server sales over the next few years.
“Both Amazon and Google are demonstrating an increasing capability to supply computing as a service in a similarly beneficial model,” Enderle wrote. “Google with its Chrome and Android OSs and Docs productivity products are increasingly wrapping these offerings with back end services so that users shouldn’t need to run local content. Amazon has mostly separately focused on the data center via its AWS services and the consumer market with its Kindle and Fire TV. But those offerings could increasingly be blended and moved to desktop and laptop configurations and supply, for a very low entry price, what many may come to believe is a complete PC experience.”
Server vendors looking to challenge Amazon, Google and others need to offer on-premises options that can be leased and includes servers, networking, storage and clients, including PCs, tablets and smartphones, he wrote. Many businesses and government agencies would be willing to accept the slightly higher costs if it meant keeping local control.
Lenovo could be that business, Enderle wrote.
“With both Dell and HP currently lacking viable phone products, only Lenovo has the full breadth of end-to-end offerings ranging from smart phones (Motorola), tablets and PCs to storage, networking, and servers, at least on paper,” he wrote. “Right now, the company’s networking and storage portfolios are light. But Lenovo is far better equipped with mobile devices than any other player in their class, and they can and do partner with companies like EMC and IBM to close product line gaps in other areas.”