Lenovo Delivers Solid 2nd Quarter FY15-16 Operational Results

In the 2nd quarter, aged inventory was cleared, the product portfolio was streamlined and new competitive products – such as the shatterproof DROID Turbo 2, Moto 360, and Vibe P1— were launched. A redesigned mobile product development cycle will ensure products will be competitive every season and every quarter. With restructuring complete, Lenovo believes the MBG business turn around remains on track to reach its break even goal in one to two quarters.

In Mobile, Lenovo volume was up 11 percent year-over-year with 18.8 million units sold, led by growth outside of China where it saw a 4.3 point increase in market share year-over-year driven by a shift in strategic focus outside of China. In the first half of this fiscal year, outside China accounted for 70 percent of volumes, while one year ago, it was only 19 percent. In key emerging markets of Indonesia, Russia, India and Brazil, Lenovo outgrew the smartphone market by 12, 175, 48 and 4 points respectively.

In the tablet market, Lenovo outgrew the market by almost 14 points with nearly 1 percent growth verses a market decline of 12.6 percent. It strengthened its worldwide #3 position with record high 6.3 percent market share, selling 3.1 million units and taking share from the #1 and #2 players.

In the Enterprise Business Group, or EBG, which includes servers, storage, software and services sold under both the ThinkServer and System x brands, sales were US$1.2 billion, up 5.5 times year-over-year due to inclusion of System x this year. System x had approximately US$900 million in sales. Overall, EBG achieved a major milestone with a two percent revenue increase, on comparable basis, for the first time since System x was acquired. In its fourth full quarter with System x, EBG delivered operational pre-tax income, although its standard PTI – which included non-cash, M&A-related accounting charges – was negative US$33 million.

Major hyperscale wins with Alibaba, Tencent and Baidu drove breakthroughs for the business. With new partnerships, including Nutanix in hyperconverged infrastructure, and other with next generation data center technology providers that will be announced soon, Lenovo has better technologies than its competitors, a great product portfolio, and the right cost structure. Lenovo remains confident that EBG will realize $5 billion in revenue with good margin one year after the close of the System x deal.

Geographic Overview

In China, consolidated sales in the second fiscal quarter, declined by 12 percent year-over-year to US$3.3 billion, accounting for 28 percent of the Company’s worldwide sales. Operating margins fell 1.7 points to 4.1 percent. These declines were a result of performance in mobile as the market continued to see hyper competition, carrier subsidy cuts and continued shift to the online model. In PCs Lenovo maintained stable market share and margin performance. In Enterprise, Lenovo saw 213 percent year-over-year revenue growth driven by strong ThinkServer shipments with wins in a number of key hyperscale accounts, which allowed it to strengthen its #1 position in the China x86 server market.

In the Asia Pacific region, Lenovo achieved sales across the region of US$2 billion or 16 percent of Lenovo’s worldwide sales, while operating margins were down 3.3 points to 1.1 percent because of dampened Motorola performance. Lenovo Asia Pacific PC market share was up 3.2 points year-over-year to a record 19.3 percent, recapturing the #1 position. Remarkably, India grew 99 percent year-over-year, hitting an impressive record-high 27 percent share. In Enterprise, Lenovo is leveraging channel expertise to accelerate the business. In Mobile, Lenovo had strong smartphone shipment growth of 135 percent year-over-year, driven by strong momentum in India and inclusion of Moto.

Lenovo in Europe, Middle East & Africa had consolidated sales in the second quarter of US$3.2 billion, a year-over-year increase of six percent, hit by foreign exchange moves and a soft PC market. EMEA accounted for 26 percent of Lenovo’s total worldwide sales. Operating profit margin was 0.7 percent, a 3.1 points decrease year-over-year. Lenovo was a solid #2 in the PC market overall, growing market share to 19.9 percent, up 0.6 percent year-over-year. In consumer PCs, it was #1 for the seventh consecutive quarter, clocking 21.5 percent share. In Mobile, smartphone shipments registered very strong 101.8 percent year-over-year growth for the combined business, when including Motorola in the quarter one year ago for comparison purposes (when not including Motorola in the quarter one year ago, year-over-year growth was 176.7 percent).

In the Americas, Lenovo saw consolidated sales grow 70 percent year-over-year to approximately US$3.7 billion in the second quarter, driven by the inclusion of the two acquisitions. This represented 30 percent of Lenovo’s total worldwide sales. Operating margin improved to negative 2 percent, driven by improving Motorola performance. In PCs, Lenovo Americas share was up 2.5 points year-over-year to 13.8 percent. Lenovo North America and Latin America had record 13.3 percent and 15.3 percent share, respectively. In Mobile, new Motorola phones drove quarter-to-quarter shipment improvements in North America, with 39 percent growth. In Enterprise, Lenovo is entering attack mode with recently signed partnerships, which will capture opportunities by offering technologies that disrupt entrenched computing models.

* see IDC data 3Q 2015

** As a Hong Stock Exchange-listed company, Lenovo’s official results are presented using the Hong Kong Financial Reporting Standards (HKFRS). This press release also contains a “run rate pre-tax income” figure, which excludes the following items: Q2 restructuring costs of US$599 million; one time charges to clear smartphone inventories of US$324 million; and non-cash, M&A-related accounting charges, such as intangible asset amortization, imputed interest expense of promissory notes and others of US$85 million. This “run rate pre-tax income” is provided as a supplemental metric to enable analysis of the “like-to-like” performance of the underlying business. It is historical in nature, and not meant to predict the rate of future performance.

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