This week, Lenovo (LNVGY +1.66%) shocked analysts and technology followers alike when it reported earnings. On the surface, things looked really good this quarter, with revenue growth of 18% on a year-over-year basis, operating profit up 40%, and diluted EPS up 23%.
But growth for the world's largest PC maker didn't come from PC sales -- it was due to its smartphone business, which reported a sales increase of 32% on a year-over-year basis. Analysts have declared "the death of the PC" for the greater part of a decade now, but when the largest PC maker starts to diversify, investors should take notice.
Outperforming in PC's, but it appears to be a tough market
Lenovo performed well in PC sales by reporting a 15% year-over-year unit shipments growth. For comparison, that's the fastest of the larger manufacturers during this period. Even better, the overall global PC market declined 1%, leading Lenovo to a 16 percentage point premium over the market. That led to a record market share of 19.4% according to the company.
However, what's a little concerning is Lenovo's overly optimistic tone in regards to the PC market. In its report, it said the worldwide PC market "continued to show signs of stabilization..." While some puffery is to be expected in a financial report, this may be a step too far. As a counterpoint, Gartner reported that global PC shipments will decline nearly 3% this year, and that's on the back of a massive 9.5% drop last year. Better, yes, but not exactly what one considers a "stable" market.
And there's a reason for this optimism: Right now, Lenovo is still heavily dependent on PC's for revenue. Of the recently reported quarter, its PC segment was responsible for $8.5 billion of its $10.4 billion quarter. Its PC business is still more than 80% of the company's revenue.
But that's quickly changing
With unit shipment growth of nearly 40%, and sales growth of 32%, the company's mobile division was its standout performer. Driven by excellent performance in China, the company exceeded expectations by a great deal. However, the shocking takeaway was that this quarter, it actually shipped more smartphones than PC's, albeit at lower average selling prices than PC's. Lenovo sold 15.8 million smartphones in this quarter versus 14.5 million PC's.
Not only that, the company's smartphone growth should continue. The company recently announced it would buy Google's Motorola Mobility unit for $2.91 billion. This was a good deal for both parties. Google, for the most part, never put a dent in the smartphone market from the hardware side, instead opting for working with a host of OEMs by providing the Android operating system.
Lenovo continues its modus operandi of buying non-core technology assets and increasing efficiencies, building upon its purchase of IBM's PC business in 2005 that's been widely considered a success. The deal hasn't closed yet, but will add on to Lenovo's mobile shipments as soon as it's completed. This gives Lenovo a higher-end line of phones to compliment the lower-priced versions that it's been selling like hotcakes in emerging markets.
Final thoughts
Lenovo is one of the more interesting stories in tech that's been flying below the radar. In addition to buying Google's Motorola line, the company struck a deal with its old partner IBM: This time, it purchased IBM's x86 server business. If any of these purchases yield the type of results IBM's PC business has for Lenovo, growth will continue.
More broadly, this brings us to a question of the PC's demise. In the event that the No. 1 PC maker reports results that show the PC isn't even its best-selling product from a unit standpoint, perhaps PC bears are onto something. Although computing in some way or another will always be needed, it may no longer be the growth market it once was.
