Lenovo’s Profit Beats Estimates Despite Shrinking PC, Smartphone Sales; Stock Slumps

Lenovo Group Ltd. posted a better-than-expected profit for the December quarter as stronger international demand and companywide cost controls made up for falling smartphone sales in China. The world’s fourth-largest smartphone maker announced Wednesday that profit for the third quarter surged 19 percent, even as sales fell 8 percent — the first decline for the company in more than six years.

The company posted a profit of $300 million, beating analysts’ expectations of a $237.7 million net profit, according to Reuters. Overall third-quarter revenue fell 8 percent to $12.9 billion, Lenovo said Wednesday, as its PC shipments fell 4.2 percent and its mobile phone shipments fell 4 percent.

Shares of the company were down 10.46 percent in late afternoon trading on the Hong Kong stock market.

Lenovo is relying on its ongoing belt-tightening measures, which include cutting $1.35 billion from annual costs and eliminating 3,200 jobs, as it promised investors to turn its phone unit profitable within six quarters of purchasing the Motorola brand from Google in October 2014.

“The group’s mobile business regained momentum from the previous quarter and achieved its first time operational breakeven,” Lenovo said in a statement.

The company, also the world’s largest PC maker by sales, is looking to make up for shrinking PC sales by expanding its sales outside China and hopes to bank on profits from its growing enterprise servers business, which it bought from IBM Corp. in 2014. Beijing-based Lenovo earned $1.3 billion in the third quarter from its ThinkServer and System X brand of servers, and said Wednesday it was on track to meet its earlier target to achieve $5 billion in sales from the servers division in the 2015-16 fiscal year, on a constant currency basis.

“Going forward, we should look at its enterprise and server business. That could be an area for profit-making,” Ricky Lai, an analyst at Guotai Junan International Holdings Ltd., told Bloomberg, before the results.

Lenovo CEO Yang Yuanqing highlighted the company’s international push last quarter, announcing that it will try to grab greater market share in the U.S. and Europe this year, to weather intensifying competition in China, where the economic growth is slowing.