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1/26/2006
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Lenovo Profit, Growth Fall Short; Execs Promise Cuts

Sluggish sales in Japan, and an effort to grow SMB revenue worldwide, were among the areas that took a bite out of Lenovo's profits, executives said.

Lenovo turned in a profit and growth for its most recent quarter that fell short of expectations, and its top executives Thursday promised aggressive cost-cutting and new product introductions to try to turn the trend around.

The Purchase, N.Y.-based PC maker reported a profit of $47 million for its quarter that ended in December, and 12 percent profit growth compared to the same quarter a year earlier. However, some analysts had publicly predicted the company would see as much as a 40-percent growth in profits.

Sluggish sales in Japan, and an effort to grow SMB revenue worldwide, were among the areas that took a bite out of Lenovo's profits, executives said. However, it was the third quarter of profitability since Lenovo completed acquisition of IBM's former PC business last year.

Overall, Lenovo turned in sales of 31.1 billion Hong Kong dollars, or $4 billion U.S., for the quarter that ended Dec. 31. The company reported its financial results during a meeting with analysts in Hong Kong, which was webcast.

"We need to raise the game with respect to our competitive standard," said William Amelio, Lenovo's CEO. It was his first financial report since being tapped last month to replace former CEO Stephen Ward, and Amelio repeatedly emphasized Lenovo's new focus on slashing costs and adding products.

"In this industry, it's required for us to be best of breed when it comes to operational efficiency," Amelio said. "We have to be able to support our business partners and customers in all areas of the world."

Lenovo Chairman Yang Yuanqing also noted the company's new priority on efficiency.

"We can also see the decline of the group's growth margin and profit margin, which on the one hand reflects increased market competition, on the other hand, shows we have not adjusted our cost and expense structure to (that) of a world class company," the chairman said.

The executives, though, did not specify where cost cuts would be targeted.

During the quarter, almost 29 percent of Lenovo's revenue came from the U.S., while almost 40 percent of the company's sales were gained in China. Amelio said the company would look to expand its Chinese operation and sales models into other geographies. Lenovo executives were still sparing in their comments about the company's channel operations, revealing little about channel inventories or strategies.

The PC maker has split its business model into two categories, "relationship" sales to large, enterprise customers, and "transactional sales" to retail and small and mid-sized business markets. Most of its transactional business in the U.S. goes through solution providers.

While Lenovo has historically done well with transactional sales in China, on the low end of the market, and while the former IBM PC Co. was focused largely on the enterprise, the combined company has been experiencing growing pains in the SMB space.

"Our sales team was focusing more of its energy on penetrating the SMB market in order to achieve growth," Amelio said. However, the company had few new products during the last quarter to show in the SMB space – a factor that held it back, he said. "For the SMB sector of the market, it wouldn't due to have only old products," Amelio said. "And that's why we must have a broader product range."

Bright spots for the company included what it said were record ThinkPad shipments in the U.S. during the quarter, and continued quick integration of the former IBM properties into the combined company.

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