Lenovo is relying on its “protect and attack” strategy to correct the uneven performances of its mobile and PC businesses

Continued decline of its PC segment and growing pains in its smartphone businesses are unfamiliar challenges that Lenovo faces to reinvent itself in the post-PC era. In calendar 3Q15 Lenovo’s overall revenue surged 16% year-to-year to $12.1 billion, but the majority of growth was due to inorganic infusion of revenue from its Motorola mobile segment and System x server business. Components of its hallmark “protect and attack” strategy became prominent in calendar 3Q15, showing that Lenovo is returning to a proven strategy that will allow it to be successful in the current market climate.

Its new focus will not be capitalizing on greenfield opportunities on a global basis, but rather it is seeking to be more focused on operational efficiency and targeted initiatives, as well as being more selective in the markets it attacks in mobile to drive mobile segment operating income into the black. Lenovo’s PC revenue and profits, while declining on year-to-year basis, shrunk slower and generated more profit dollars than its competition.

However, TBR believes there are two obstacles cluttering the path ahead of Lenovo: the global PC market is shrinking; healthy gross margins in the mid-range smartphone segment where Motorola plays are tough to come by, since growth in that segment is driven nearly entirely by lower prices. PC revenue tumbled 6.4% year-to-year to $8.1 billion as shipments declined 3.8% from 3Q14 to 15.1 million. Mobile revenues surged 93.2% year-to-year to $2.7 billion because of the Motorola acquisition, but the segment operating loss widened more than 300% to a loss of $217 million.

Profits generated by the PC business, the margins for which TBR believes remained stable year-to-year, a testament to Lenovo’s supply chain prowess and sales efficiency – were intended to help bankroll much of the long-term initiatives in mobile. However, with that engine sputtering, the ability for Lenovo to reach the aggressive goals it set for itself are very much in question, particularly restoring profitability to the Mobile segment, which posted a $217 million operating loss in 3Q15, more than three times wider than a year ago. Last quarter’s workforce reduction and write-off of nearly $300 million in unsold smartphones are symptoms that Lenovo built for demand that never materialized. Additionally, a $714 million net loss this quarter – the company’s first in more than six years – serves as a stark reminder for it to be more cautious in the future.

Lenovo’s brand strength and global scale ensure it will remain a leading PC and mobile device vendor, and TBR believes its overall revenue will grow 7.2% year-to-year in calendar 4Q15 to $15.1 billion, driven largely by the success of Motorola outside China and its growing stature as a contender in data center markets. TBR expects Lenovo’s devices strategies to remain fluid through calendar 4Q15 as its mobile business gains scale, and it adopts more targeted approaches in consumer and commercial PC markets. However, the workforce reduction and the move to integrate Motorola into its global business infrastructure show Lenovo’s ability to adapt quickly to changing market conditions, positioning it for growth, albeit incremental compared to prior quarters, in the near-term and through calendar 2016.