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Lenovo rises as mobile, data server player to sidestep PC slump

November 7, 2013

By Paul Carsten and Kenneth Maxwell

BEIJING (Reuters) – China’s Lenovo Group Ltd <0992.HK>, the world’s biggest personal computer maker, is reinventing itself as a growing force in mobile devices and data storage servers to beat the slump in the PC market that is crippling less agile rivals.

Lenovo said on Thursday net profit beat estimates, jumping over a third in July-September to a quarterly record of $219.7 million.

Now the world’s fourth-biggest smartphone maker, the company also said it’s looking for new businesses to buy as it remoulds itself. It has $2.87 billion in cash and equivalents on its balance sheet three decades after it was founded in Beijing with a staff of 11.

The progress at Lenovo, with a 17.7 percent share of worldwide PC shipments according to research firm IDC, is in sharp contrast with that of other PC makers like Acer Incorporated <2353.TW>. Acer’s chief executive stepped down this week after poor results at the Taiwanese firm in a quarter when the PC industry contracted 7.6 percent globally, according to IDC.

Lenovo’s continuing cruise into smartphones, tablets and network storage systems extended its streak of double-digit quarterly growth to over three years. Desktop PCs were its only business line not to grow as July-September net profit surged compared with $162 million a year ago and a $199.12 million consensus forecast on Thomson Reuters Starmine SmartEstimate.

Some of its future acquisition targets will be in the growing market for cloud computing and back-end information storage that’s lured companies from rival IBM <IBM.N> to Internet retailer Amazon.com Inc <AMZN.O>, Lenovo said.

“We don’t have an exact plan, but I hope in five years our new businesses, including mobile, with tablet, and enterprise, will account for 50 percent” of sales, Chief Executive Yang Yuanqing said in a telephone interview with Reuters.

Aside from grabbing headlines by hiring Hollywood star Ashton Kutcher as a part-time product engineer on its Yoga tablet computers, Lenovo stands out from peers for its ability to embrace change.

It began making smartphones in 2010. The 4.7 percent share of the global smartphone market it claimed in the quarter ended September, according to IDC data, means only Apple Inc <AAPL.O>, Samsung Electronics <005930.KS> and Huawei Technologies <HWT.UL> are bigger.

“We definitely have a plan to grow organically but at the same time we have our eyes open for all opportunities available in the market, and have ourselves well prepared,” Wong Wai Ming, Lenovo’s chief financial officer, said in a post-earnings call.

“It’s not just servers, I think for any business, we have the capability to look at opportunities and will definitely do so as and when it adds value to us,” Wong said.

SERVER AMBITIONS

Lenovo also wants to repeat its penetration of the smartphone business in cloud computing, which Amazon Web Services pioneered in 2006.

The technology lets companies rent computing power, storage and other services from data centrcenterses shared with other customers – typically cheaper and more flexible than maintaining their own.

The ambitious company was among a range of suitors to approach BlackBerry Ltd <BB.TO> before the troubled device maker took itself off the market, according to sources familiar with the matter. BlackBerry, with its pedigree in data and the smartphone business, was a potential match for Lenovo’s expansion needs.

Any potential deals, unlike the reported interest in BlackBerry, are likely to match Lenovo’s previous pattern of low-key deal-making. This year’s acquisition of Brazil’s CCE and Indianapolis-based Stoneware in 2012 provide examples, said Alberto Moel, a Hong Kong-based analyst at Sanford C. Bernstein.

“They’re under the radar, doing deals that suit their strategy, paying as little as possible, applying their product portfolio and capabilities and monetizing that,” said Moel, speaking before Thursday’s earnings were released.

“These are small deals, that they can pay for in cash, to meet the needs of a particular geographic coverage or particular product. On the server side they’ll be looking for corporate server capabilities – there are some smaller companies in the server business that could be a good fit.”

The company, based in both Beijing and Morrisville, North Carolina, already works with EMC Corp <EMC.N>, the world’s largest data storage equipment maker, in developing servers and storage products.

But for Lenovo this isn’t enough. The firm is now actively seeking a way to build its small server business as it spins away from a PC market that IDC predicts will continue to shrink, declining 2 percent next year.

(Reporting by Paul Carsten; Editing by Kenneth Maxwell).