Lenovo’s stock rises following robust Q3 results

Lenovo’s stocklike American depositary receipts rose 9 percent Tuesday after the company reported a 31 percent surge in revenue powered by market share gains and better-than-expected margins.

Nevertheless, accounting changes stemming from two major acquisition totaling $5 billion and the addition of Motorola’s unprofitable smartphone business was a drag on net income, as was expected.

Net income for the fiscal third quarter that ended in December fell 5 percent from a year ago to $253 million, ahead of the $182.4 million projected by analysts polled by Bloomberg News. Net income before merger-and-acquisition charges rose 23 percent.

Revenue for the world’s largest PC maker totaled $14.1 billion; analysts had projected revenue of $13.5 billion. Lenovo is based in China and has a headquarters in Morrisville that employs about 3,500 workers.

During a conference call with analysts, CEO Yang Yuanqing said that the businesses that Lenovo acquired in the fall – Motorola Mobility and a line of servers from IBM – “have shown great momentum” and that the synergies that the company had foreseen were already delivering savings.

“This will become even more significant next year,” he said.

This was the first quarterly results to include the new IBM and Motorola businesses; only two months worth of Motorola results were incorporated into the quarter. The two acquisitions accelerated the company’s diversification strategy, which has been driven by slumping demand for PCs. Thanks to those deals, Lenovo rose from tied at No. 4 to No. 3 in the worldwide smartphone market and also jumped to No. 3 in the global server market.

Revenue from Lenovo’s PC business, which accounted for 65 percent of sales, rose 5 percent to $9.15 billion.

Last month, market research firm IDC reported that Lenovo’s worldwide shipments rose 4.9 percent in the fourth quarter – well ahead of the overall market, which declined 2.4 percent. That boosted Lenovo’s leading market share to 19.9 percent, up from 18.5 percent a year earlier.

Lenovo’s mobile business sales, which includes smartphones and tablets and accounts for 24 percent of revenue, more than doubled to $3.39 billion.

Yang said that Motorola doubled its sales volume from a year ago to more than 10 million units and reaffirmed that he expects the business to become profitable within four to six quarters.

Sales of servers, thanks to the addition of the IBM servers, rose 685 percent to $1.2 billion.

“Lenovo’s business segments now are more geographically diversified, and they have a better range of products,” Ricky Lai, an analyst at Guotai Junan International Holdings in Hong Kong, told Bloomberg. “The company is less dependent on the China market and less dependent on PC products.”

PC shipments in North America rose 6 percent. By contrast, according to IDC, the U.S. market rose 4.7 percent in the quarter.

“The biggest thing this past quarter was our consumer sales,” Jay Parker, president of North American operations, said in an interview. “It was a big holiday season for us. We actually hit record share in the consumer segment here in the U.S., over 8 percent for the first time.”

Parker said that much of the growth was driven by sales of Lenovo’s popular line of Yoga tablets, which also can be used as laptops.

Parker said that North American revenue increased more than shipments thanks to sales of premium-priced products, especially Yoga and Think brand devices, and that profits in the region were more than two-and-a-half times higher than a year ago.

“The results were very strong financially and versus the market,” Parker said.

Lenovo’s ADRs closed Tuesday at $28.45, up $2.39. Its 52-week high, recorded in September, was $32.74.